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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, 1998
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: NONE
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 $17,275,423.
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 24, 1999 was approximately $2,256,436. On such date, the
closing price of the issuer's common stock was $4.25 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, 1999 was 1,089,551
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement in connection with its Annual
Meeting scheduled to be held on May 27, 1999 are incorporated in Part III. The
Company's Proxy Statement will be filed within 120 days after December 31,
1998.
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SEL-LEB MARKETING, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 1998
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 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis or Plan of Operation 12
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 15
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management 15
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits and Reports on Form 8-K 16
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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(Registered) 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(Registered) line,
and in connection therewith
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acquired from SBC, for approximately $670,000, (i) all rights of SBC in and to
certain trademarks (including the Signature Solutions(Registered) mark and the
Signature Beauty Care(Registered), Giraffe(Registered), Groomer's
Secret(Registered), Lip Set(Registered) and Salon Essence(Registered) 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. On March 31, 1998, the Company, which at that date owned a
90%-interest in Ales, entered into an agreement whereby it sold an additional
10% interest to the minority stockholder for a total consideration of $81,137,
which was paid prior to December 31, 1998. As a result of the completion of this
sale, the minority stockholder has a 20%-interest in Ales, and the Company has
an 80%-interest in Ales.
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(Registered), Zia(Registered), Loud Music(Trademark), Ghoul
Tools(Trademark), Quick Thang(Trademark), Loud Sticks(Trademark), Signature
Solutions(Registered) and Signature Beauty Care(Registered) 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, 1998, no
such supplier accounted for more than 10% 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, 1998, one such contract manufacturer C LPD Packaging, Inc. C accounted for
approximately 75% 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, 1998, 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 Hills Department Stores, which
accounted for approximately 32% and 13%, respectively, of the Company's net
opportunistic sales in 1998. 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 such as purchases of closed-out, overstocked and/or
change-of-packaging brand name items, the Company is generally able to
purchase such merchandise at a discount below wholesale cost. The Company then
sells the merchandise to discount retailers and other mass merchandisers who
seek to purchase products at discount prices in order to supplement their
normal inventory purchases or for special promotions. The merchandise is sold
at prices that are above the Company's cost, although at prices that are still
generally below wholesale. Although the Company typically purchases
merchandise before it has located customers for such merchandise, it has sold
substantially all merchandise acquired by it in each of the last three fiscal
years.
The Company purchases the name-brand and off-brand merchandise which
it sells to retailers from over 50 suppliers, including consumer goods
manufacturers, wholesalers, retailers, financially distressed businesses,
duty-free distributors and other secondary sources. The Company is continually
seeking to locate new sources of merchandise. Generally, the Company will be
contacted by a manufacturer or other supplier when such supplier has excess
merchandise that is available for resale through the secondary market;
alternatively, the Company will also contact a supplier if it becomes aware
that the supplier has merchandise which it desires to sell. Although certain
suppliers may have provided a majority or all of a particular type of product
or particular category of merchandise, no supplier accounted for more than 10%
of the Company's
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total opportunistic merchandise purchases for the year ended December 31,
1998, with the exception of U.S. Electronics Inc., which accounted for 21% of
said purchases. During the year ended December 31, 1998, 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.
Designer Fragrances 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,
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or that future judicial, legislative or administrative agency action will not
limit or eliminate some or all of the secondary sources of supply of prestige
fragrances used by the Company. However, the Company believes that any future
limitation on or elimination of its sources of supply for prestige fragrances
for sale to its customers would not have a material adverse effect on the
Company, although there can be no assurance of such.
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 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.
The revenues generated by the Company=s arrangement with ACI, Inc. accounted
for approximately 20% of the Company=s net sales in 1998. 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(Registered) in connection with the manufacture and distribution in the
United States of a Clueless(Registered) 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. 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. The Company currently manufactures and
sells a line of Clueless(Registered) lipsticks, nail polishes and mascaras. As
in the case of its own proprietary brand name products, the Company manufactures
the Clueless(Registered) products by acquiring the raw materials
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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(Registered) products will continue to meet
with consumer acceptance or that the Clueless(Registered) show will continue
to be broadcast during the anticipated term of the agreement.
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.
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(Registered) 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.
Competition
The areas of business in which the Company engages are highly
competitive businesses. The secondary sourcing business is characterized by
intense competition, both in the products sold and in the retaining of
relationships with suppliers and customers. With respect to its ability to
obtain merchandise, the Company competes with other secondary sources, as well
as with wholesale distributors and retailers. The Company believes that its
ability to purchase a broad array of merchandise at competitive prices is
critical to its success. With respect to sales to its customers, the Company
competes with other secondary suppliers of merchandise, as well as with
manufacturers who sell directly to retail merchandisers. In addition, with
respect to products sold under the Company's Linette(Registered), Quick
Thang(Trademark), Loud Sticks(Trademark), Zia(Registered), Loud
Music(Trademark), Ghoul Tools(Trademark), Signature Solutions(Registered) and
Signature Beauty Care(Registered) 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
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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(Registered) 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 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(Registered), Zia(Registered),Quick Thang(Trademark), Loud
Sticks(Trademark), Signature Solutions(Registered) and Signature Beauty
Care(Registered) trademarks and the Loud Music(Trademark) and Ghoul
Tools(Trademark) marks. The Company has registered the Linette(Registered) and
Zia(Registered) 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(Registered) mark and the Signature Beauty Care(Registered),
Giraffe(Registered), Groomer's Secret(Registered), Lip Set(Registered) and Salon
Essence(Registered) 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(Trademark) and Ghoul
Tools(Trademark), 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(Registered) in connection with the manufacture and distribution in
the United States of a Clueless(Registered) 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).
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Personnel
The Company currently employs approximately 20 full-time salaried
employees and approximately 50 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 $4,000,000
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. 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 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.
-10-
<PAGE>
The Company did not submit any matters to the vote of security
holders during the fourth quarter of the fiscal year ended December 31, 1998.
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, 1997 and 1998
were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year 1997(1)
- - -------------------
Quarter Ended:
March 31, 1997........................................... $54.00 $42.00
June 30, 1997............................................ $44.00 $10.00
September 30, 1997....................................... $22.00 $8.00
December 31, 1997........................................ $20.00 $6.00
Fiscal Year 1998
- - ----------------
Quarter Ended:
March 31, 1998........................................... $7.50 $3.00
June 30, 1998............................................ $3.50 $1.438
September 30, 1998....................................... $1.50 $.750
December 31, 1998........................................ $3.50 $.875
</TABLE>
- - -------------------
(1) All share prices prior to June 19, 1998 have been adjusted to give
effect to a one-for-eight reverse stock split which was effected by
the Company on June 19, 1998.
The prices set forth above reflect inter dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
-11-
<PAGE>
B. Holders.
On March 24, 1999, 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.
The Company did not pay any dividends during 1997 and 1998. 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 1998 Compared to Fiscal Year 1997
Net sales for the year ended December 31, 1998 were $17,275,423
compared to $17,374,041 for the fiscal year ended December 31, 1997.
Cost of sales increased from $13,119,941 in 1997 to $13,337,039 in
1998. In addition, the cost of goods sold as a percentage of net sales increased
from 75.5% in 1997 to 77.2% in 1998. This increase is due primarily to lower
profit margins reflecting the Company's continuing efforts in 1998 to reduce
general inventory levels and eliminate merchandise which generates lower profit
margins for the Company. In addition, senior management spent increased time on
purchases, production and inventory management which resulted in a greater
proportion of expenses being allocated to cost of sales.
Selling, general and administrative ("SG&A") expenses decreased from
$4,052,410 in 1997 to $3,545,248 in 1998. Generally, the principal components
of the Company's SG&A expenses are payroll, rent, commission, insurance,
legal, accounting and other fees paid to third parties and travel and
promotional expenses. During 1998, the Company realigned management and
support responsibilities whereby more time of senior management was spent on
purchasing, production and inventory management. As a result of this
realignment a greater proportion of costs were allocated to production as
opposed to SG&A.
As a result of the decrease in SG&A expenses, offset by the increase in
Cost of Sales, total operating expenses decreased from $17,172,351 in 1997 to
$16,882,287 in 1998. As a result of these decreased operating expenses,
operating income increased from approximately $201,690 in 1997 to $393,136 in
1998.
-12-
<PAGE>
The Company's net interest costs increased from $149,278 in 1997 to
$264,104 in 1998 primarily as a result of additional borrowings under the
Company's revolving line of credit and the term loan.
The Company's provision for income taxes increased from approximately
$23,623 in 1997 to approximately $74,724 in 1998 resulting from the overall
increase in income.
As a result of the above, the Company's net income increased by
$123,240 from approximately $27,644 in 1997 to $150,884 in 1998.
The Company in 1998 sold an additional 10% interest to the minority
stockholder of Ales for the consideration of $81,137. As a result of the sale
the Company recognized a gain of $75,729.
The Company has two principal segments (see note 10 to the Company's
consolidated financial statements); opportunity and cosmetics. Sales of
opportunity merchandise increased from $7,204,000 in 1997 to $7,615,130 in
1998. Sales of cosmetics decreased from $10,170,041 in 1997 to $9,660,293 in
1998. The Management does not believe that the increase or decrease indicates
any trend or that the changes were material.
The cost of sales of the opportunity business was approximately 89% in
1997 and 1998 reflecting lower gross profit margin on the purchase and sale of
branded merchandise other than the Company's own brands. The cost of sales of
the cosmetic products in 1997 and 1998 was approximately 67%, reflecting higher
gross profit margins primarily on the Company's own branded products.
Liquidity and Capital Resources
At December 31, 1998, the Company had working capital of $7,072,503
including cash and cash equivalents in the amount of $504,060. The Company's
principal cash requirements are for the acquisition of inventory and the
financing of receivables. Receivables increased form $2,957,997 at December
31, 1997 to $3,530,312 at December 31, 1998, representing an increase of
$570,315. Inventory increased from $5,814,673 at December 31, 1997 to
$6,496,298 at December 31, 1998, representing an increase of $681,625. This
increase in receivables and inventory was financed by increased borrowings
under the Company's revolving credit arrangement and term loan described
below.
On October 22, 1997, the Company and Ales entered into a Loan and
Security Agreement with Summit Bank which through subsequent renewals was
extended to November 30, 1998. Pursuant to such Loan Agreement, the Company and
Ales also obtained from Summit Bank a three-year, $1,000,000 term loan to
finance the acquisition by Ales of certain assets from SBC Corporation, Inc.
("SBC"), a manufacturer of cosmetics, skin care and treatment products.
In addition, during 1997 the Company received net proceeds from the
exercise of stock options and warrants in the amount of $735,789, which was
used for working capital purposes.
During December 1998, the Company entered into a new credit facility
("Facility") with Merrill Lynch Business Financial Services Inc. ("Merrill
Lynch") which replaced the Company's previous arrangement with Summit Bank. The
Facility consisted of both a revolving line of credit and a $900,000 term loan
(see note 5 to the Company's consolidated financial statements ). The revolving
line of credit provides for maximum borrowings of $3,300,000 (see note 4 to the
Company's consolidated financial statements) against the Company's eligible
accounts receivable and inventories through October 31, 2000. Outstanding
borrowings under the Facility are secured by substantially all of the Company's
assets. Funds available under the loan were used to replace the previous loans
with Summit Bank as well as provide funds for the working capital needs of the
Company. As of December 31, 1998, the outstanding balance of the working capital
facility was $2,328,241 and $900,000 on the term loan. As of March 24, 1999, the
outstanding balance under the working capital facility was $2,496,513 and
$878,571 on the term loan. The Facility contains certain restrictive covenants
which, among other things, require the maintenance of certain financial ratios
and limitation on future indebtedness.
On September 26, 1997, in connection with the previous 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
-13-
<PAGE>
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 were 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
Facility, which expires on October 31, 2000, 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.
The Company recognized the need to assure that its operations will not
be adversely impacted by Year 2000 (Y2K) software failures. The impact on
operations continues to be evaluated. Management has already begun to identify
the revisions needed to be made to ensure that the Company will be able to
process information beyond 1999 without disruption. New hardware and software
has been purchased and the Company's accounting programs are presently being
upgraded and revised to reduce the possibility of Y2K failure. The installation
and testing of the new programs and systems should be completed by the third
quarter 1999. The Company is assessing the Y2K status of its major suppliers to
also reduce the likelihood of Y2K failure. Y2K compliance is not anticipated to
have any material adverse effect to the Company's financial position or results
of operations.
If the Company's computer systems fail with respect to the Y2K
Issue, the Company's internal and external reporting process could be affected
causing a material adverse effect on the business and financial condition of the
Company. In addition, there can be no assurance that the systems of the other
companies upon which the Company's systems rely will be converted or that a
failure to convert by another company would not have a material adverse effect
on the business and financial condition of the Company.
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, 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.
-14-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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, 1999, 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, 1999, which section is incorporated herein by reference.
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, 1999, 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, 1999, 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
-15-
<PAGE>
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, 1999, 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).
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).
-16-
<PAGE>
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).
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).
-17-
<PAGE>
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).
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-KSB 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-KSB 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-KSB 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-QSB 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-QSB for the quarterly period ended March 31, 1997).
-18-
<PAGE>
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-QSB 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-QSB 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-QSB 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-QSB for the quarterly period ended September
30, 1997).
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-QSB 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-QSB 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 (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997).
10.24 Working Capital Management Account (WCMA) and Term Loan
Agreement dated as of November 24, 1998 between Sel-Leb
Marketing, Inc. and Merrill Lynch Business Financial Services
Inc.
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).
23.1 Consent of J.H. Cohn LLP.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
-19-
<PAGE>
21 Subsidiary of the Company
Ales Signature
(an 80% owned subsidiary)
<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, 1999
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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Harold Markowitz Chairman of the Board and Director March 31, 1999
- - ---------------------------------------------
Harold Markowitz
/s/ Paul Sharp President, Chief Executive Officer and March 31, 1999
- - --------------------------------------------- Director (principal executive officer)
Paul Sharp
/s/ Jan S. Mirsky Executive Vice President - Finance and March 31, 1999
- - --------------------------------------------- Director (principal financial and
Jan S. Mirsky accounting officer)
/s/ Jack Koegel Vice Chairman of the Board, Chief Operating March 31, 1999
- - --------------------------------------------- Officer and Director
Jack Koegel
/s/ Jorge Lazaro Executive Vice President, Secretary and March 31, 1999
- - --------------------------------------------- Director
Jorge Lazaro
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Stanley R. Goodman Director March 31, 1999
- - ---------------------------------------------
Stanley R. Goodman
/s/ Edward C. Ross Director March 31, 1999
- - ---------------------------------------------
Edward C. Ross
/s/ L. Douglas Bailey Director March 31, 1999
- - ---------------------------------------------
L. Douglas Bailey
</TABLE>
-21-
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 F-3
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997 F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7/19
* * *
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, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1998, and their results of operations and
cash flows for the years ended December 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
J.H. COHN LLP
Roseland, New Jersey
March 25, 1999
F-2
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 504,060
Accounts receivable, less allowance for doubtful accounts
of $171,456 3,530,312
Inventories 6,496,298
Deferred tax assets 254,095
Prepaid expenses and other current assets 696,855
------------
Total current assets 11,481,620
Property and equipment, at cost, net of accumulated depreciation
and amortization of $590,368 607,650
Goodwill, net of accumulated amortization of $95,236 250,532
Other assets 101,483
------------
Total $ 12,441,285
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 2,328,241
Current portion of long-term debt 150,509
Accounts payable 1,341,602
Accrued expenses and other liabilities 588,765
------------
Total current liabilities 4,409,117
Long-term debt, net of current portion 859,396
------------
Total liabilities 5,268,513
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued -
Common stock, $.01 par value; 40,000,000 shares
authorized; 1,089,083 shares issued and outstanding 10,891
Additional paid-in capital 6,440,095
Retained earnings 766,786
Less receivable in connection with equity transactions (45,000)
------------
Total stockholders' equity 7,172,772
------------
Total $ 12,441,285
============
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 17,275,423 $ 17,374,041
------------ ------------
Operating expenses:
Cost of sales 13,337,039 13,119,941
Selling, general and administrative expenses 3,545,248 4,052,410
------------ ------------
Totals 16,882,287 17,172,351
------------ ------------
Operating income 393,136 201,690
------------ ------------
Other income (expense):
Interest expense, net of interest income of $4,346 and $2,136 (264,104) (149,278)
Unusual item - gain on sale of portion of minority interest
in subsidiary 75,729
Other 20,847 (1,145)
------------ ------------
Totals (167,528) (150,423)
------------ ------------
Income before provision for income taxes 225,608 51,267
Provision for income taxes 74,724 23,623
------------ ------------
Net income $ 150,884 $ 27,644
============ ============
Basic net earnings per share $ .14 $ .03
============ ============
Basic weighted average shares outstanding 1,089,083 1,083,498
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Receivable in
Common Stock Additional Connection
---------------------- Paid-in Retained with Equity
Shares Amount Capital Earnings Transactions
--------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 8,268,477 $82,685 $5,632,512 $588,258 $(60,000)
Net proceeds from exercise
of warrants 293,250 2,932 435,546
Net proceeds from exercise
of stock options 151,000 1,510 295,801
Payment of receivables in
connection with sale of
warrant 15,000
Net income 27,644
--------- ------- ---------- -------- --------
Balance, December 31, 1997 8,712,727 87,127 6,363,859 615,902 (45,000)
Effect of 1-for-8 reverse
split (7,623,644) (76,236) 76,236
Net income 150,884
--------- ------- ---------- -------- --------
Balance, December 31, 1998 1,089,083 $10,891 $6,440,095 $766,786 $(45,000)
========= ======= ========== ======== ========
<CAPTION>
Total
Stockholders'
Equity
----------
<S> <C>
Balance, January 1, 1997 $6,243,455
Net proceeds from exercise
of warrants 438,478
Net proceeds from exercise
of stock options 297,311
Payment of receivables in
connection with sale of
warrant 15,000
Net income 27,644
----------
Balance, December 31, 1997 7,021,888
Effect of 1-for-8 reverse
split
Net income 150,884
----------
Balance, December 31, 1998 $7,172,772
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 150,884 $ 27,644
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 281,452 230,023
Allowance for doubtful accounts 240,000 229,000
Net gain on sale of interest in subsidiary (75,729)
Deferred income taxes (80,440) (78,655)
Changes in operating assets and liabilities:
Accounts receivable (810,316) 58,816
Inventories (681,625) (1,498,549)
Prepaid expenses and other current assets 139,001 (532,921)
Other assets (4,407) 8,470
Accounts payable, accrued expenses and other
liabilities 535,884 (282,454)
----------- -----------
Net cash used in operating activities (305,296) (1,838,626)
----------- -----------
Investing activities:
Purchases of property and equipment (375,892) (317,630)
Proceeds from sale of interest in subsidiary 81,137
Proceeds from adjustments to purchase price for
acquired business 37,500
----------- -----------
Net cash used in investing activities (257,255) (317,630)
----------- -----------
Financing activities:
Net proceeds from notes payable to bank 928,241 430,000
Net proceeds from long-term debt 928,752 1,100,000
Repayments of long-term debt (1,014,464) (4,383)
Loan financing costs (25,606)
Net proceeds from exercise of warrants and stock options 735,789
Collection of receivable in connection with sale of warrant 15,000
----------- -----------
Net cash provided by financing activities 816,923 2,276,406
----------- -----------
Net increase in cash and cash equivalents 254,372 120,150
Cash and cash equivalents, beginning of year 249,688 129,538
----------- -----------
Cash and cash equivalents, end of year $ 504,060 $ 249,688
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 268,450 $ 130,544
=========== ===========
Income taxes paid $ 18,500 $ 400,714
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies:
Organization and principles of consolidation:
The accompanying consolidated financial statements include
the accounts of Sel-Leb Marketing, Inc. (a New York
Corporation) and Ales Signature, Ltd. ("Ales"), its
80%-owned subsidiary (see Note 2). Sel-Leb Marketing, Inc.
and Ales are referred to collectively herein as the
"Company." The Company is primarily engaged in
manufacturing, distributing and marketing 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.
Use of estimates:
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.
Revenue recognition:
Sales are recognized upon the shipment of the related
product.
Cash equivalents:
The Company considers all highly liquid debt instruments
with a maturity of three months or less when purchased to be
cash equivalents.
Inventories:
Inventories, consisting primarily of finished goods, are
stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
Property and equipment:
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation 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.
Goodwill:
Goodwill is comprised of costs in excess of net assets of
acquired businesses that are being amortized on a
straight-line basis over periods not exceeding ten years.
The Company periodically evaluates the recoverability of its
goodwill and measures the amount of impairment, if any, by
assessing, among other things, the market and economic
conditions related to, and the current and estimated future
levels of income and cash flows to be generated by, the
acquired businesses.
F-7
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(continued):
Product development costs:
The Company expenses product development costs as incurred.
Product development costs charged to operations amounted to
approximately $66,000 and $69,000 in 1998 and 1997,
respectively.
Advertising:
The Company expenses the cost of advertising and promotions
as incurred. Advertising costs charged to operations
amounted to $151,000 and $228,000 in 1998 and 1997,
respectively.
Reverse split:
The numbers of common shares and the per share amounts in
these notes and the accompanying consolidated financial
statements have been retroactively adjusted, where
appropriate, for a 1-for-8 reverse split effected on June
19, 1998.
Stock options:
In accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), the Company will only recognize
compensation costs as a result of the issuance of stock
options to employees 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 expense as a result of any grants to employees
at an exercise price that is equal to or greater than fair
value. The Company will also make pro forma disclosures, in
accordance with the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), of net income or loss as if a fair value based
method of accounting for stock options had been applied
instead if such amounts differ materially from the
historical amounts.
Income taxes:
The Company accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax
assets and liabilities to be computed annually for temporary
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets
to the amount expected to be realized. The income tax
provision or credit is the tax payable or refundable for the
period plus or minus the change during the period in
deferred tax assets and liabilities.
F-8
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(concluded):
Earnings per share:
The Company has presented "basic" earnings per share in the
accompanying consolidated statements of income in accordance
with the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128
also requires the presentation of "diluted" earnings per
share if the amount differs from basic earnings per share.
Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares
outstanding during each period. The calculation of diluted
earnings per share is similar to that of basic 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, such
as those issuable upon the exercise of stock options and
warrants, were issued during the period.
Diluted earnings per share has not been presented because
the exercise prices of all of the outstanding stock options
and warrants exceeded the average fair market value during
1998 and 1997 and there were no additional shares derived
from the assumed exercise of stock options and warrants and
the application of the treasury stock method.
Recent accounting pronouncements:
The FASB and the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants
("ACSEC") had issued certain accounting pronouncements as of
December 31, 1998 that will become effective in subsequent
periods; however, management of the Company does not believe
that any of those pronouncements would have significantly
affected the Company's financial accounting measurements or
disclosures had they been in effect as of December 31, 1998.
Reclassifications:
Certain accounts in the 1997 consolidated financial
statements have been reclassified to conform to the 1998
presentations.
Note 2 - Acquisition:
During September 1997, the Company and an unrelated third party
(the "minority stockholder") 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 and skin care and treatment products. The Company
received a 90% equity interest in Ales and the minority
stockholder received the remaining 10% equity interest. Ales
acquired the beauty products line on October 23, 1997 for an
initial cash payment of $670,000. The cash payment was funded by
a portion of the proceeds of a term loan through a transfer
directly from the lender to the seller; (accordingly, the
payment is not reflected in the accompanying 1997 consolidated
statement of cash flows).
F-9
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisition (concluded):
The acquisition was accounted for as a purchase and,
accordingly, the results of operations of the acquired business
have been included in the accompanying 1997 consolidated
statement of income from the date of acquisition. Costs of
acquisition of approximately $570,000 and $100,000 were
allocated to inventories and goodwill, respectively. In December
1998, the Company received $37,500 based on adjustments to the
initial purchase price agreed to by SBC and, as a result,
goodwill was reduced by that amount.
On March 31, 1998, the Company, which at that date owned a 90%
interest in Ales, entered into an agreement whereby it reduced
its interest to 80% by selling an additional 10% interest to the
minority stockholder for total consideration of $81,137 which
was paid in installments prior to December 31, 1998. As a result
of the sale, the Company recognized a gain of $75,729, before
giving effect to any related income tax effects, which has been
reflected separately as an unusual item in the accompanying 1998
consolidated statement of income.
Unaudited pro forma information giving effect to the acquisition
and the subsequent sale of the 10% interest in Ales, as if the
acquisition had been consummated on, and the Company had owned
an 80% interest in Ales from, January 1, 1997, follows:
1998 1997
----------- -----------
Revenue $17,262,000 $17,937,000
Net income 161,000 127,000
Basic net earnings
per share .15 .12
The minority interest in the net equity of Ales as of December
31, 1998 and the minority interest in the results of its
operations in 1998 and 1997 were immaterial.
Note 3 - Property and equipment:
Property and equipment at December 31, 1998 consisted of the
following:
Estimated
Useful
Lives Amount
------------ -----------
Machinery and equipment 5 to 7 years $ 779,843
Display fixtures 2 to 3 years 253,510
Computer equipment 3 to 5 years 113,524
Leasehold improvements 10 years 51,141
-----------
1,198,018
Less accumulated depreciation
and amortization 590,368
-----------
Total $ 607,650
===========
Depreciation expense aggregated $242,494 and $199,629 in 1998
and 1997, respectively.
F-10
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Note payable to bank:
During December 1998, the Company obtained a new credit facility
(the "Facility") from Merrill Lynch Business Financial Services,
Inc. ("Merrill Lynch"). The Facility consists of a revolving
line of credit and a $900,000 term loan (see Note 5). The
revolving line of credit provides for maximum borrowings of
$3,300,000 against the Company's eligible accounts receivable
and inventories through October 31, 2000. Borrowings bear
interest, which is payable monthly, at 2.65% above the 30-day
commercial paper rate (an effective rate of 7.75% as of December
31, 1998). Outstanding borrowings under the Facility are
secured by substantially all of the Company's assets.
The loan agreement with Merrill Lynch contains certain
restrictive covenants which, among other things, require the
maintenance of certain financial ratios and limit additional
indebtedness.
Note 5 - Long-term debt:
At December 31, 1998, long-term debt consisted of the following:
Term loan payable to Merrill Lynch (A) $ 900,000
Loan payable to Paterson Restoration
Corporation (B) 86,186
Other 23,719
----------
1,009,905
Less current portion 150,509
----------
Long-term debt $ 859,396
==========
(A) Payable in monthly installments of $10,714 plus
interest at 2.8% above the 30-day commercial paper rate
through January 2006, at which time the unpaid balance
is due. The loan is secured by substantially all of the
assets of the Company (see Note 4).
(B) The loan is payable in monthly installments of $1,461
for principal and interest at 6% 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.
Principal amounts due under the Company's long-term obligations
in each of the five years subsequent to December 31, 1998 are as
follows:
Year Ending
December 31, Amount
------------ ------
1999 $150,509
2000 152,108
2001 147,339
2002 143,778
2003 144,716
F-11
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Preferred stock and stock options:
Preferred stock:
On May 27, 1998, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation
which authorizes the issuance by the Company of up to
10,000,000 shares of preferred stock with a par value of
$.01 per share. No shares of preferred stock had been issued
by the Company as of December 31, 1998.
Stock options:
The Company has a Stock Option Plan (the "Option Plan")
which provides for the issuance of incentive stock options
and nonincentive stock options to employees of the Company
for the purchase of shares of common stock at a price not
less than the fair market value of the shares on the date of
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 is not less
than 110% of the fair market value of the shares on the date
of 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") which provides for the
issuance of options to nonemployee directors of the Company
for the purchase of shares of common stock at a price that
is not less than the fair market value of the shares on the
date of grant. The term of each option and the manner of
exercise is determined by the Board of Directors, but the
options cannot be exercisable more than 10 years after the
date of grant. Upon election to the Board of Directors, and
after each reelection, each nonemployee director is granted
an option to purchase 625 common shares exercisable from
the date of grant.
F-12
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Preferred stock and stock options (continued):
Stock options (continued):
A summary of the status of the Company's shares subject to
options as of December 31, 1998 and 1997 and changes during
the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------- -------------------
Weighted Weighted
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, at beginning of
year 150,156 $17.14 152,312 $20.16
Granted (A) 196,188 3.89 34,313 13.12
Canceled (A) (138,938) 16.64 (17,594) 36.80
Exercised (18,875) 15.76
-------- -------
Outstanding, at end of year 207,406 $ 4.94 150,156 $17.14
======== ======= ======= ======
Options exercisable, at
end of year 138,672 94,375
======== ======
Weighted average fair value
of options granted during
the year $3.77 $10.32
===== ======
</TABLE>
(A) Options granted and canceled include shares
subject to options for which the exercise price
was reduced in 1998 and 1997 as set forth below:
Original Adjusted
Exercise Exercise
Shares Price Price
------ -------- --------
1998:
313 $47.00 $ .87
37,750 22.00 6.50
3,125 22.00 4.00
59,625 13.33 6.50
125 13.00 4.00
1,250 10.54 8.00
63 10.54 4.00
12,624 4.00 .87
--------
Total 114,875
========
1997:
10,563 45.04 4.00
========
F-13
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Preferred stock and stock options (continued):
Stock options (continued):
The following table summarizes information about fixed stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------------------
Weighted
Average
Years of Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.875 77,936 9.52 $ .875 25,438 $ .875
1.16-2.50 13,125 9.40 1.89 3,281 1.89
4.00-4.25 6,501 8.02 4.05 4,016 4.02
6.50 97,375 6.58 6.50 97,375 6.50
8.00-16.00 9,531 7.73 13.19 6,406 13.23
42.00-54.00 2,938 7.47 52.06 2,156 52.27
------- ---------
$.875-$54.00 207,406 7.97 4.94 138,672 $ 6.29
============ ======= ==== ====== ======= =======
</TABLE>
At December 31, 1998, the Company had warrants outstanding
for the purchase of 725,496 shares of common stock which are
exercisable through March 21, 2000 at exercise prices
ranging from the equivalent of $5.12 to $16.00 per share.
The Company received proceeds of $438,478 in 1997 upon the
exercise of warrants to purchase 36,656 shares of common
stock at exercise prices ranging from the equivalent of
$5.12 to $16.00 per share. There were no other changes in
the number of warrants outstanding during 1998 and 1997.
At December 31, 1998, shares of common stock were reserved
for the following:
Exercise of outstanding stock options 207,406
---------
Exercise of stock options available
for grant:
Option Plan 220,719
Directors' Plan 28,125
---------
Total 248,844
---------
Exercise of warrants 725,496
---------
Total 1,181,746
=========
F-14
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Preferred stock and stock options (continued):
Stock options (continued):
Since the Company has elected to continue to use the
provisions of APB 25 in accounting for stock options and
warrants granted to employees and the exercise price of all
of the options granted to employees has been equal to or
greater than the fair market value at the date of grant, no
earned or unearned compensation cost was recognized in the
accompanying 1998 and 1997 consolidated financial statements
for stock options and warrants granted to employees. The pro
forma amounts computed as if the Company had elected to
recognize compensation cost for stock options and warrants
granted to employees based on the fair value of the options
and warrants at the date of grant as prescribed by SFAS 123
and the related historical amounts reported in the
accompanying consolidated statements of income are set forth
below:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Net income - as reported $ 150,884 $ 27,644
========= ==========
Net loss - pro forma $(306,556) $(326,181)
========= =========
Basic earnings per share
- as reported $ .14 $ .03
===== =====
Basic loss per share - pro forma $(.28) $(.32)
===== =====
</TABLE>
The fair value of each option granted was estimated as of
the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used
for 1998 and 1997:
1998 1997
-------- --------
Expected volatility 160% 40%
Risk-free interest rate 5.2% 6.3%
Expected years of option life 5.0 5.0
Expected dividends 0% 0%
Substantially all of the pro forma charge for compensation
of $457,440 (net of tax benefits) in 1998 derived from the
fair value option pricing model was attributable to the
effects of the options that were repriced during the year.
Note 7 - Income taxes:
Deferred tax assets at December 31, 1998 were attributable to
temporary differences related to the following:
Inventories $128,730
Allowance for bad debts 69,830
Other 55,535
--------
Net deferred tax assets $254,095
========
F-15
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Income taxes (concluded):
The net provision for income taxes in 1998 and 1997 consisted of
the following provisions (credits):
1998 1997
---------- ---------
Federal:
Current $130,206 $85,569
Deferred (69,370) (55,155)
---------- --------
Totals 60,836 30,414
---------- --------
State:
Current 24,958 16,709
Deferred (11,070) (23,500)
---------- --------
Totals 13,888 (6,791)
---------- ---------
Totals $ 74,724 $23,623
========= =======
The provision for income taxes in 1998 and 1997 differs from the
amount computed using the Federal statutory rate of 34% as a
result of the following:
1998 1997
---- ----
Tax at Federal statutory rate 34% 34%
Increase (decrease) from effects of:
State income taxes, net of Federal
income tax benefit 4 (8)
Nondeductible expenses and other
permanent differences 8 37
Prior year overaccruals (10)
Other (primarily surtax exemption) (3) (18)
---- ---
Totals 33% 45%
==== ===
Note 8 - Commitments and contingencies:
Leases:
The Company has a noncancelable operating lease for office
and warehouse facilities which commenced on April 7, 1997
and expires on March 31, 2002. In addition to base rentals,
the lease requires payments for real estate taxes and other
operating costs.
F-16
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (continued):
Leases (concluded):
The future minimum rental payments under the leases as of
December 31, 1998 were as follows:
Year Ending
December 31, Amount
------------ --------
1999 $187,870
2000 203,537
2001 203,537
2002 50,884
--------
Total $645,828
========
Rent expense amounted to approximately $253,000 and $212,000
in 1998 and 1997, respectively.
Employment agreements:
The Company has entered into employment agreements with five
officers which expire at various times through July 2000.
The future minimum payments under the employment agreements
as of December 31, 1998 aggregated $562,500, of which
$375,000 is payable in 1999 and $187,500 is payable in 2000.
Promotional and licensing agreements:
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 $434,000 and $308,000 in 1998 and 1997,
respectively.
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 consolidated financial position or
results of operations of the Company.
Concentrations of credit risk:
Financial instruments which potentially subject the Company
to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents primarily in money
market accounts with major financial institutions that have
high credit ratings. At times, such amounts may exceed
Federally insured limits.
F-17
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (concluded):
Concentrations of credit risk (concluded):
The Company generally extends credit to its customers, a
significant portion of which are in the retail industry.
Approximately 46% and 42% of the Company's net sales were
derived from its two major customers during 1998 and 1997,
respectively. The two customers also accounted for
approximately $1,971,000 of the Company's accounts
receivable balance at December 31, 1998. The Company closely
monitors the extension of credit to its customers while
maintaining appropriate allowances for potential credit
losses. Accordingly, management does not believe that the
Company was exposed to significant credit risk at December
31, 1998.
Note 9 - Fair value of financial instruments:
The Company's material financial instruments at December 31,
1998 for which disclosure of estimated fair value is required by
certain accounting standards consisted of cash and cash
equivalents, accounts receivable, accounts payable, notes
payable and long-term debt. In the opinion of management, (i)
cash and cash equivalents, accounts receivable and accounts
payable were carried at values that approximated their fair
values because of their liquidity and/or their short-term
maturities and (ii) notes payable and long-term debt were
carried at values that approximated their fair values because
they had interest rates equivalent to those currently prevailing
for financial instruments with similar characteristics.
Note 10- Segment information:
During 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131").
Pursuant to the provisions of SFAS 131, the Company is reporting
segment sales and gross margins in the same format reviewed by
the Company's management (the "management approach"). The
Company has two reportable segments: "Opportunity" and
"Cosmetics". The Opportunity segment is comprised of the
operations connected with the acquisition, sale and distribution
of name-brand and off-brand products which are purchased from
close-out, overstocked and/or change-of-packaging brand name
items. The Cosmetics segment is comprised of the acquisition,
sale and distribution of all other products, including
"celebrity endorsed" and "tie-in" cosmetic and health and beauty
aid products and designer and all other fragrances.
F-18
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Segment information (concluded):
Net sales, cost of sales and other related segment information
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales:
Opportunity $ 7,615,130 $ 7,204,000
Cosmetics 9,660,293 10,170,041
------------ ------------
Total net sales 17,275,423 17,374,041
------------ ------------
Cost of sales:
Opportunity 6,782,946 6,340,100
Cosmetics 6,554,093 6,779,841
------------ ------------
Total cost of sales 13,337,039 13,119,941
Selling, general and administrative expenses 3,545,248 4,052,410
------------ ------------
Total operating expenses 16,882,287 17,172,351
------------ ------------
Operating income 393,136 201,690
------------ ------------
Other income (expense):
Interest expense, net (264,104) (149,278)
Unusual item - gain on sale of portion
of minority interest 75,729
Other 20,847 (1,145)
------------ ------------
Totals (167,528) (150,423)
------------ ------------
Income before provision for income taxes $ 225,608 $ 51,267
============ ============
Segment assets:
Inventories:
Opportunity $ 781,178 $ 544,370
Cosmetics 5,715,120 5,270,303
------------ ------------
Totals 6,496,298 5,814,673
Other assets 5,944,987 5,091,907
------------ ------------
Total assets $ 12,441,285 $ 10,906,580
============ ============
</TABLE>
* * *
F-19
<PAGE>
Exhibit 23.1
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 25, 1999, on the
consolidated financial statements of Sel-Leb Marketing, Inc. and its
subsidiary as of December 31, 1998 and for the years ended December 31, 1998
and 1997 which appear elsewhere in this Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
J. H. COHN LLP
Roseland, New Jersey
March 25, 1999
<PAGE>
[LOGO] Merrill Lynch SECURITY AGREEMENT
- - -------------------------------------------------------------------------------
Security Agreement ("Agreement") dated as of November 24, 1998, between ALES
SIGNATURE LTD., a corporation organized and existing under the laws of the State
of New York having its principal office at 495 River Street, Paterson, NJ 07524
("Grantor"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation
organized and existing under the laws of the State of Delaware having its
principal office at 33 West Monroe Street, Chicago, IL 60603 ("MLBFS").
In order to induce MLBFS to extend or continue to extend credit to SEL-LEB
MARKETING, INC. ("Customer"), under the Loan Agreement (as defined below) or
otherwise, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Grantor hereby agrees with MLBFS as
follows:
1. DEFINITIONS
(a) Specific Terms. In addition to terms defined elsewhere in this Agreement,
when used herein the following terms shall have the following meanings:
i. "Account Debtor" shall mean any party who is or may become obligated with
respect to an Account or Chattel Paper.
ii. "Bankruptcy Event" shall mean any of the following: (A) a proceeding under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or
receivership law or statute shall be filed or consented to by Grantor or
Customer; or (B) any such proceeding shall be filed against Grantor or Customer
and shall not be dismissed or withdrawn within sixty (60) days after filing; or
(C) Grantor or Customer shall make a general assignment for the benefit of
creditors; or (D) Grantor or Customer shall generally fail to pay or admit in
writing its inability to pay its debts as they become due; or (E) Grantor or
Customer shall be adjudicated a bankrupt or insolvent.
iii. "Business Day" shall mean any day other than a Saturday, Sunday, federal
holiday or other day on which the New York Stock Exchange is regularly closed.
iv. "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights,
Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts,
Documents, Instruments, Financial Assets and Investment Property of Grantor,
howsoever arising, whether now owned or existing or hereafter acquired or
arising, and wherever located; together with all parts thereof (including spare
parts), all accessories and accessions thereto, all books and records (including
computer records) directly related thereto, all proceeds thereof (including,
without limitation, proceeds in the form of Accounts and insurance proceeds),
and the additional collateral described in Section 7 (b) hereof.
v. "Default" shall mean an "Event of Default", as defined in Section 6 hereof,
or any event which with the giving of notice, passage of time, or both, would
constitute such an Event of Default.
vi. "Loan Agreement" shall mean that certain WCMA AND TERM LOAN AND SECURITY
AGREEMENT No. 9811551601 between Customer and MLBFS, as the same may from time
to time be or have been amended, restated, extended or supplemented. vii.
"Location of Tangible Collateral" shall mean the address of Grantor set forth at
the beginning of this Agreement, together with any other address or addresses
set forth on any exhibit hereto as being a Location of Tangible Collateral.
vii. "Location of Tangible Collateral" shall mean the address of Grantor set
forth at the beginning of this Agreement, together with any other address or
addresses set forth on any exhibit hereto as being a Location of Tangible
Collateral.
viii. "Obligations" shall mean all liabilities, indebtedness and other
obligations of Customer or Grantor to MLBFS, howsoever created, arising or
evidenced, whether now existing or hereafter arising, whether direct or
indirect, absolute or contingent, due or to become due, primary or secondary or
joint or several, and, without limiting the foregoing, shall include interest
accruing after the filing of any petition in bankruptcy, and all present and
future liabilities, indebtedness and obligations of Customer under the Loan
Agreement and the agreements, instruments and documents executed pursuant
thereto, and of Grantor under this Agreement.
ix. "Permitted Liens" shall mean with respect to the Collateral: (A) liens for
current taxes not delinquent, other non-consensual liens arising in the ordinary
course of business for sums not due, and, if MLBFS' rights to and interest in
the Collateral are not materially and adversely affected thereby, any such liens
for taxes or other non-consensual liens arising in the ordinary course of
business being contested in good faith by appropriate proceedings; (B) liens in
favor of MLBFS; and (C) any other liens expressly permitted in writing by MLBFS.
(b) Other Terms. Except as otherwise defined herein, all terms used in this
Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC")
shall have the meanings set forth in the UCC.
2. COLLATERAL
(a) Pledge of Collateral. To secure payment and performance of the Obligations,
Grantor hereby pledges, assigns, transfers and sets over to MLBFS, and grants to
MLBFS a first lien and security interest in and upon all of the Collateral,
subject only to Permitted Liens.
(b) Liens. Except upon the prior written consent of MLBFS, Grantor shall not
create or permit to exist any lien, encumbrance or security interest upon or
with respect to any Collateral now owned or hereafter acquired other than
Permitted Liens.
<PAGE>
(c) Performance of Obligations. Grantor shall perform all of its obligations
owing on account of or with respect to the Collateral; it being understood that
nothing herein, and no action or inaction by MLBFS, under this Agreement or
otherwise, shall be deemed an assumption by MLBFS of any of Grantor's said
obligations.
(d) Notice of Certain Events. Grantor shall give MLBFS immediate notice of any
attachment, lien, judicial process, encumbrance or claim affecting or involving
$25,000.00 or more of the Collateral.
(e) Indemnification. Grantor shall indemnify, defend and save MLBFS harmless
from and against any and all claims, losses, costs, expenses (including, without
limitation, reasonable attorneys' fees and expenses), demands, liabilities,
penalties, fines and forfeitures of any nature whatsoever which may be asserted
against or incurred by MLBFS arising out of or in any manner occasioned by (i)
the ownership, use, operation, condition or maintenance of any Collateral, or
(ii) any failure by Grantor to perform any of its obligations hereunder;
excluding, however, from said indemnity any such claims, losses, etc. arising
out of the willful wrongful act or active gross negligence of MLBFS. This
indemnity shall survive the expiration or termination of this Agreement as to
all matters arising or accruing prior to such expiration or termination.
(f) Insurance. Grantor shall insure all of the tangible Collateral with an
insurer or insurers reasonably acceptable to MLBFS, under a policy or policies
of physical damage insurance reasonably acceptable to MLBFS providing that (i)
losses will be payable to MLBFS as its interests may appear pursuant to a
Lender's Loss Payable endorsement, and (ii) MLBFS will receive not less than 10
days prior written notice of any cancellation; and containing such other
provisions as may be reasonably required by MLBFS. Grantor shall maintain such
other insurance as may be required by law or otherwise reasonably required by
MLBFS. Grantor shall furnish MLBFS with a copy or certificate of each such
policy or policies and, prior to any expiration or cancellation, each renewal or
replacement thereof.
(g) Event of Loss. Grantor shall at its expense promptly repair all repairable
damage to any tangible Collateral. In the event that any tangible Collateral is
damaged beyond repair, lost, totally destroyed or confiscated (an "Event of
Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00
or more, then, on or before the first to occur of (i) 90 days after the
occurrence of such Event of Loss, or (ii) 10 Business Days after the date on
which either Grantor or MLBFS shall receive any proceeds of insurance on account
of such Event of Loss, or any underwriter of insurance on such tangible
Collateral shall advise either Grantor or MLBFS that it disclaims liability in
respect of such Event of Loss, Grantor shall, at Grantor's option, either
replace the Collateral subject to such Event of Loss with comparable Collateral
free of all liens other than Permitted Liens (in which event Grantor shall be
entitled to utilize the proceeds of insurance on account of such Event of Loss
for such purpose, and may retain any excess proceeds of such insurance), or pay
to MLBFS on account of the Obligations an amount equal to the actual cash value
of such Collateral as determined by either the applicable insurance company's
payment (plus any applicable deductible) or, in absence of insurance company
payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at
the time of occurrence of such Event of Loss or any time thereafter prior to
replacement or payment, as aforesaid, an Event of Default shall have occurred
and be continuing hereunder, then MLBFS may at its sole option, exercisable at
any time while such Event of Default shall be continuing, require Grantor to
either replace such Collateral or make a payment on account of the Obligations,
as aforesaid.
(h) Sales and Collections. So long as no Event of Default shall have occurred
and be continuing, Grantor may in the ordinary course of its business: (i) sell
any Inventory normally held by Grantor for sale, (ii) use or consume any
materials and supplies normally held by Grantor for use or consumption, and
(iii) collect all of its Accounts. Grantor shall take such action with respect
to protection of its Inventory and the other Collateral and the collection of
its Accounts as MLBFS may from time to time reasonably request.
(i) Account Schedules. Upon the request of MLBFS, made now or at any time or
times hereafter, Grantor shall deliver to MLBFS, in addition to the other
information required hereunder, a schedule identifying, for each Account and all
Chattel Paper subject to MLBFS' security interests hereunder, each Account
Debtor by name and address and amount, invoice number and date of each invoice.
Grantor shall furnish to MLBFS such additional information with respect to the
Collateral, and amounts received by Grantor as proceeds of any of the
Collateral, as MLBFS may from time to time reasonably request.
(j) Location. Except for movements in the ordinary course of its business,
Grantor shall give MLBFS 30 days' prior written notice of the placing at or
movement of any tangible Collateral to any location other than a Location of
Tangible Collateral. In no event shall Grantor cause or permit any tangible
Collateral to be removed from the United States without the express prior
written consent of MLBFS.
(k) Alterations and Maintenance. Except upon the prior written consent of MLBFS,
Grantor shall not make or permit any material alterations to any tangible
Collateral which might materially reduce or impair its market value or utility.
Grantor shall at all times keep the tangible Collateral in good condition and
repair and shall pay or cause to be paid all obligations arising from the repair
and maintenance of such Collateral, as well as all obligations with respect to
each Location of Tangible Collateral, except for any such obligations being
contested by Grantor in good faith by appropriate proceedings.
3. REPRESENTATIONS AND WARRANTIES
Grantor represents and warrants to MLBFS that:
(a) Grantor. Grantor is a corporation, duly organized and validly existing in
good standing under the laws of the State of New York and is qualified to do
business and in good standing in each other state where the nature of its
business or the property owned by it make such qualification necessary.
(b) Execution, Delivery and Performance. The execution, delivery and performance
by Grantor of this Agreement have been duly authorized by all requisite action,
do not and will not violate or conflict with any law or other governmental
requirement, or any of the agreements, instruments or documents which formed or
governed Grantor, and do not and will not breach or violate any of the
provisions of, and will not result in a default by Grantor under, any other
agreement, instrument or document to which it is a party or by which it or its
properties are bound.
2
<PAGE>
(c) Notice or Consent. Except as may have been given or obtained, no notice to
or consent or approval of any governmental body or authority or other third
party whatsoever (including, without limitation, any other creditor) is required
in connection with the execution, delivery or performance by Grantor of this
Agreement.
(d) Valid and Binding. This Agreement is the legal, valid and binding obligation
of Grantor, enforceable against it in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws affecting the
rights of creditors generally or by general principles of equity.
(e) Financial Statements. Except as expressly set forth in Grantor's financial
statements, all financial statements of Grantor furnished to MLBFS have been
prepared in conformity with generally accepted accounting principles,
consistently applied, are true and correct, and fairly present the financial
condition of it as at such dates and the results of its operations for the
periods then ended; and since the most recent date covered by such financial
statements, there has been no material adverse change in any such financial
condition or operation.
(f) Litigation, etc. No litigation, arbitration, administrative or governmental
proceedings are pending or threatened against Grantor, which would, if adversely
determined, materially and adversely affect the financial condition or continued
operations of Grantor, or the liens and security interests of MLBFS hereunder.
(g) Taxes. All federal, state and local tax returns, reports and statements
required to be filed by Grantor have been filed with the appropriate
governmental agencies and all taxes due and payable by Grantor have been timely
paid (except to the extent that any such failure to file or pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder or the financial condition or continued operations of Grantor).
(h) Collateral. Grantor has good and marketable title to the Collateral, and,
except for any Permitted Liens: (i) none of the Collateral is subject to any
lien, encumbrance or security interest, and (ii) upon the filing of all Uniform
Commercial Code financing statements executed by Grantor with respect to the
Collateral or a copy of this Agreement in the appropriate jurisdiction(s) and/or
the completion of any other action required by applicable law to perfect is lien
and security interests, MLBFS will have valid and perfected first liens and
security interests upon all of the Collateral.
Each of the foregoing representations and warranties has been and will be relied
upon as an inducement to MLBFS to advance funds or extend or continue to extend
credit to Customer, and is continuing and shall be deemed remade by Grantor
concurrently with each such advance or extension of credit by MLBFS to Customer.
4. FINANCIAL AND OTHER INFORMATION
Grantor covenants and agrees that Grantor will furnish or cause to be furnished
to MLBFS during the term of this Agreement such financial and other information
as may be required by the Loan Agreement or any other document evidencing the
Obligations or as MLBFS may from time to time reasonably request relating to
Grantor or the Collateral.
5. OTHER COVENANTS
Grantor further agrees during the term of this Agreement that:
(a) Financial Records; Inspection. Grantor will: (i) maintain complete and
accurate books and records at its principal place of business, and maintain all
of its financial records in a manner consistent with the financial statements
heretofore furnished to MLBFS, or prepared on such other basis as may be
approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized
representatives, upon reasonable notice and at reasonable times, to inspect its
properties (both real and personal), operations, books and records.
(b) Taxes. Grantor will pay when due all taxes, assessments and other
governmental charges, howsoever designated, and all other liabilities and
obligations, except to the extent that any such failure to pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder, or the financial condition or continued operations of Grantor.
(c) Compliance With Laws and Agreements. Grantor will not violate any law,
regulation or other governmental requirement, any judgment or order of any court
or governmental agency or authority, or any agreement, instrument or document to
which it is a party or by which it is bound, if any such violation will
materially and adversely affect either the liens and security interests of MLBFS
hereunder, or the financial condition or continued operations of Grantor.
(d) Notification By Grantor. Grantor shall provide MLBFS with prompt written
notification of: (i) any Default; (ii) any materially adverse change in the
business, financial condition or operations of Grantor; and (iii) any
information which indicates that any financial statements of Grantor fail in any
material respect to present fairly the financial condition and results of
operations purported to be presented in such statements. Each notification by
Grantor pursuant hereto shall specify the event or information causing such
notification, and, to the extent applicable, shall specify the steps being taken
to rectify or remedy such event or information.
(e) Notice of Change. Grantor shall give MLBFS not less than 30 days prior
written notice of any change in the name (including any fictitious name) or
principal place of business of Grantor.
(f) Continuity. Except upon the prior written consent of MLBFS, which consent
will not be unreasonably withheld: (i) Grantor shall not be a party to any
merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets of, or any material stock, partnership, joint
venture or other equity interest in, any person or entity, or sell, transfer or
lease all or any substantial part of its assets, if any such action would result
in either: (A) a material change in the principal business, ownership or control
of Grantor, or (B) a material adverse change in the financial condition or
operations of Grantor; (ii) Grantor shall preserve its existence and good
standing in the jurisdiction(s) of establishment and operation; (iii) Grantor
shall not engage in any material
3
<PAGE>
business substantially different from its business in effect as of the date of
application by Customer for credit from MLBFS, or cease operating any such
material business; (iv) Grantor shall not cause or permit any other person or
entity to assume or succeed to any material business or operations of Grantor;
and (iv) Grantor shall not cause or permit any material change in its
controlling ownership.
6. EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an "Event of
Default" under this Agreement:
(a) Default Under Loan Agreement. An Event of Default shall occur under the
terms of the Loan Agreement.
(b) Failure to Perform. Grantor shall default in the performance or observance
of any covenant or agreement on its part to be performed or observed under this
Agreement (not constituting an Event of Default under any other clause of this
Section), and such default shall continue unremedied for 10 Business Days after
written notice thereof shall have been given by MLBFS to Grantor.
(c) Breach of Warranty. Any representation or warranty made by Grantor contained
in this Agreement shall at any time prove to have been incorrect in any material
respect when made.
(d) Default Under Other Agreement. A default or Event of Default by Grantor
shall occur under the terms of any other agreement, instrument or document with
or intended for the benefit of MLBFS, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") or any of their affiliates, and any required notice
shall have been given and required passage of time shall have elapsed.
(e) Seizure or Abuse of Collateral. The Collateral, or any material part
thereof, shall be or become subject to any levy, attachment, seizure or
confiscation which is not released within 10 Business Days.
(f) Bankruptcy Event. Any Bankruptcy Event shall occur.
(g) Material Impairment. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of payment or performance by
Grantor has been materially impaired. The existence of such a material
impairment shall be determined in a manner consistent with the intent of Section
1-208 of the UCC.
(h) Acceleration of Debt to Other Creditors. Any event shall occur which results
in the acceleration of the maturity of any indebtedness of $100,000.00 or more
of Grantor to another creditor under any indenture, agreement, undertaking, or
otherwise.
7. REMEDIES
(a) Remedies Upon Default Upon the occurrence and during the continuance of any
Event of Default, MLBFS may at its sole option do any one or more or all of the
following, at such time and in such order as MLBFS may in its sole discretion
choose:
(i) Acceleration. MLBFS may declare all Obligations to be forthwith due and
payable, whereupon all such amounts shall be immediately due and payable,
without presentment, demand for payment, protest and notice of protest, notice
of dishonor, notice of acceleration, notice of intent to accelerate or other
notice or formality of any kind, all of which are hereby expressly waived;
provided, however, that upon the occurrence of any Bankruptcy Event all
Obligations shall automatically become due and payable without any action on the
part of MLBFS.
(ii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the
remedies of a secured party under applicable law, including, but not limited to,
the UCC, and any or all of its other rights and remedies under this Agreement.
(iii) Possession. MLBFS may require Grantor to make the Collateral and the
records pertaining to the Collateral available to MLBFS at a place designated by
MLBFS which is reasonably convenient to Grantor, or may take possession of the
Collateral and the records pertaining to the Collateral without the use of any
judicial process and without any prior notice to Grantor.
(iv) Sale. MLBFS may sell any or all of the Collateral at public or private sale
upon such terms and conditions as MLBFS may reasonably deem proper, and MLBFS
may purchase any Collateral at any such public sale; and the net proceeds of any
such public or private sale and all other amounts actually collected or received
by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any
time in the collection of the Obligations and in the protection, collection and
sale of the Collateral, will be applied to the payment of the Obligations, with
any remaining proceeds paid to Grantor or whoever else may be entitled thereto,
and with Customer and each guarantor of Customer's obligations remaining jointly
and severally liable for any amount remaining unpaid after such application.
(v) Delivery of Cash, Checks, Etc. MLBFS may require Grantor to forthwith upon
receipt, transmit and deliver to MLBFS in the form received, all cash, checks,
drafts and other instruments for the payment of money (properly endorsed, where
required, so that such items may be collected by MLBFS) which may be received by
Grantor at any time in full or partial payment of any Collateral, and require
that Grantor not commingle any such items which may be so received by Grantor
with any other of its funds or property but instead hold them separate and apart
and in trust for MLBFS until delivery is made to MLBFS.
(vi) Notification of Account Debtors. MLBFS may notify any Account Debtor that
its Account or Chattel Paper has been assigned to MLBFS and direct such Account
Debtor to make payment directly to MLBFS of all amounts due or becoming due with
respect to such Account or Chattel Paper; and MLBFS may enforce payment and
collect, by legal proceedings or otherwise, such Account or Chattel Paper.
4
<PAGE>
(vii) Control of Collateral. MLBFS may otherwise take control in any lawful
manner of any cash or non-cash items of payment or proceeds of Collateral and of
any rejected, returned, stopped in transit or repossessed goods included in the
Collateral and endorse Grantor name on any item of payment on or proceeds of the
Collateral, and, in connection therewith, MLBFS may notify the postal
authorities to change the address for delivery of mail addressed to Grantor to
such address as MLBFS may designate.
(b) Set-Off. MLBFS shall have the further right upon the occurrence and during
the continuance of an Event of Default to set-off, appropriate and apply toward
payment of any of the Obligations, in such order of application as MLBFS may
from time to time and at any time elect, any cash, credits, deposits, accounts,
financial assets, investment property, securities and any other property of
Grantor which is in transit to or in the possession, custody or control of
MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Grantor
hereby collaterally assigns and grants to MLBFS a security interest in all such
property as additional Collateral.
(c) Power of Attorney. Effective upon the occurrence and during the continuance
of an Event of Default, Grantor hereby irrevocably appoints MLBFS as its
attorney-in-fact, with full power of substitution, in its place and stead and in
its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion
take any action and to execute any instrument which MLBFS may deem necessary or
advisable to accomplish the purposes of this Agreement, including, but not
limited to, to receive, endorse and collect all checks, drafts and other
instruments for the payment of money made payable to Grantor included in the
Collateral.
(d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available at law or in equity, and any one or more of such rights and
remedies may be exercised simultaneously or successively. Any notice required
under this Agreement or under applicable law shall be deemed reasonably and
properly given to Grantor if given at the address and by any of the methods of
giving notice set forth in this Agreement at least 5 Business Days before taking
any action specified in such notice.
(e) Notices. To the fullest extent permitted by applicable law, Grantor hereby
irrevocably waives and releases MLBFS of and from any and all liabilities and
penalties for failure of MLBFS to comply with any statutory or other requirement
imposed upon MLBFS relating to notices of sale, holding of sale or reporting of
any sale, and Grantor waives all rights of redemption or reinstatement from any
such sale. MLBFS shall have the right to postpone or adjourn any sale or other
disposition of Collateral at any time without giving notice of any such
postponed or adjourned date. In the event MLBFS seeks to take possession of any
or all of the Collateral by court process, Grantor further irrevocably waives to
the fullest extent permitted by law any bonds and any surety or security
relating thereto required by any statute, court rule or otherwise as an incident
to such possession, and any demand for possession prior to the commencement of
any suit or action.
8. MISCELLANEOUS
(a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any
right, power or remedy pursuant to this Agreement shall operate as a waiver
thereof, and no single or partial exercise of any such right, power or remedy
shall preclude any other or further exercise thereof, or the exercise of any
other right, power or remedy. Neither any waiver of any provision of this
Agreement, nor any consent to any departure by Grantor therefrom, shall be
effective unless the same shall be in writing and signed by MLBFS. Any waiver of
any provision of this Agreement and any consent to any departure by Grantor from
the terms of this Agreement shall be effective only in the specific instance and
for the specific purpose for which given. Except as otherwise expressly provided
herein, no notice to or demand on Grantor shall in any case entitle Grantor to
any other or further notice or demand in similar or other circumstances.
(b) Communications. All notices and other communications required or permitted
hereunder shall be in writing, and shall be either delivered personally, mailed
by postage prepaid certified mail or sent by express overnight courier or by
facsimile. Such notices and communications shall be deemed to be given on the
date of personal delivery, facsimile transmission or actual delivery of
certified mail, or one Business Day after delivery to an express overnight
courier. Unless otherwise specified in a notice sent or delivered in accordance
with the terms hereof, notices and other communications in writing shall be
given to the parties hereto at their respective addresses set forth at the
beginning of this Agreement, and, in the case of facsimile transmission, to the
parties at their respective regular facsimile telephone number.
(c) Costs, Expenses and Taxes. Grantor shall pay or reimburse MLBFS upon demand
for: (i) all Uniform Commercial Code filing and search fees and expenses
incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS' rights hereunder or in the Collateral; (ii) any and all
stamp, transfer and other taxes and fees payable or determined to be payable in
connection with the execution, delivery and/or recording of this Agreement; and
(iii) all reasonable fees and out-of-pocket expenses (including, but not limited
to, reasonable fees and expenses of outside counsel) incurred by MLBFS in
connection with the enforcement of this Agreement or the protection of MLBFS'
rights hereunder, excluding, however, salaries and expenses of MLBFS' employees.
The obligations of Grantor under this paragraph shall survive the expiration or
termination of this Agreement and the discharge of the other Obligations.
(d) Right to Perform Obligations. If Grantor shall fail to do any act or thing
which it has covenanted to do under this Agreement or any representation or
warranty on the part of Grantor contained in this Agreement shall be breached,
MLBFS may, in its sole discretion, after 5 Business Days written notice is sent
to Grantor (or such lesser notice, including no notice, as is reasonable under
the circumstances), do the same or cause it to be done or remedy any such
breach, and may expend its funds for such purpose. Any and all reasonable
amounts so expended by MLBFS shall be repayable to MLBFS by Grantor upon demand,
with interest at the "Interest Rate" (as that term is defined in the Loan
Agreement or any document incorporated into the Loan Agreement) during the
period from and including the date funds are so expended by MLBFS to the date of
repayment, and any such amounts due and owing MLBFS shall be additional
Obligations. The payment or performance by MLBFS of any of Grantor's obligations
hereunder shall not relieve Grantor of said obligations or of the consequences
of having failed to pay or perform the same, and shall not waive or be deemed a
cure of any Default.
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<PAGE>
(e) Further Assurances. Grantor agrees to do such further acts and things and to
execute and deliver to MLBFS such additional agreements, instruments and
documents as MLBFS may reasonably require or deem advisable to effectuate the
purposes of this Agreement , or to establish, perfect and maintain MLBFS'
security interests and liens upon the Collateral, including, but not limited to:
(i) executing financing statements or amendments thereto when and as reasonably
requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is
required by local law, causing the owners and/or mortgagees of the real property
on which any Collateral may be located to execute and deliver to MLBFS waivers
or subordinations reasonably satisfactory to MLBFS with respect to any rights in
such Collateral.
(f) Binding Effect. This Agreement shall be binding upon Grantor and its
successors and assigns, and shall inure to the benefit of MLBFS and its
successors and assigns.
(g) Headings. Captions and section and paragraph headings in this Agreement are
inserted only as a matter of convenience, and shall not affect the
interpretation hereof.
(h) Governing Law. This Agreement shall be governed in all respects by the laws
of the State of Illinois.
(i) Severability of Provisions. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
the remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
(j) Term. This Agreement shall become effective upon acceptance by MLBFS, and,
subject to the terms hereof, shall continue in effect so long thereafter as
either MLBFS shall be committed to advance funds or extend credit to Customer or
there shall be any Obligations outstanding.
(k) Counterparts. This Agreement may be executed in one or more counterparts
which, when taken together, constitute one and the same agreement.
(l) JURISDICTION; WAIVER. GRANTOR ACKNOWLEDGES THAT THIS AGREEMENT IS BEING
ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS
SOLE DISCRETION, TO ENFORCE THIS AGREEMENT IN EITHER THE STATE OF ILLINOIS OR IN
ANY OTHER JURISDICTION WHERE GRANTOR OR ANY COLLATERAL FOR THE OBLIGATIONS MAY
BE LOCATED. GRANTOR CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE
IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND
GRANTOR WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE.
GRANTOR FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY
JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND
GRANTOR HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE
OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THE LOAN AGREEMENT, THIS AGREEMENT AND/OR ANY OF THE TRANSACTIONS
WHICH ARE THE SUBJECT MATTER OF THE LOAN AGREEMENT OR THIS AGREEMENT.
(m) INTEGRATION. THIS WRITTEN AGREEMENT CONSTITUTES THE ENTIRE UNDERSTANDING AND
REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN
AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. NO AMENDMENT OR
MODIFICATION OF THIS AGREEMENT SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY
BOTH MLBFS AND GRANTOR.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
ALES SIGNATURE LTD.
By:
------------------------------------------
Signature (1) Signature (2)
- - -----------------------------------------------
Printed Name Printed Name
- - -----------------------------------------------
Title Title
Accepted at Chicago, Illinois:
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC.
By:
------------------------------------------
6
<PAGE>
EXHIBIT A
ATTACHED TO AND HEREBY MADE A PART OF SECURITY AGREEMENT NO. 9811551601
BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND ALES SIGNATURE LTD.
- - --------------------------------------------------------------------------------
Locations of Tangible Collateral:
<PAGE>
[LOGO] Merrill Lynch LANDLORD'S SUBORDINATION AGREEMENT
- - -------------------------------------------------------------------------------
The undersigned Landlord is the record owner and lessor to ALES SIGNATURE LTD.
("Tenant") of the real property commonly known as 495 River Street, Paterson, NJ
07524 (the "Premises").
Landlord has been advised that MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
("MLBFS") has or is about to lend moneys to, extend or continue to extend credit
to or for the benefit of, or enter into another financial accommodation with,
Tenant, or for the benefit of a third party based upon the credit and/or
collateral of Tenant, and in connection therewith that Tenant has granted or is
about to grant to MLBFS a security interest in, among other collateral, the
following property of Tenant; to wit: all equipment, inventory, removable trade
fixtures and other tangible and intangible personal property now or hereafter
owned by Tenant ("MLBFS' Collateral") Among other conditions thereof, MLBFS has
required that Landlord execute and deliver this Agreement..
Accordingly, and for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Landlord hereby agrees as follows:
1. Landlord hereby subordinates for the benefit of MLBFS, and with respect to
all present and future obligations of or secured by Tenant to MLBFS, any right
or interest in MLBFS' Collateral which, but for this Agreement, would or might
be prior to the security interests of MLBFS, as aforesaid; and Landlord agrees
so long as Tenant shall be obligated to MLBFS, it will not, without the prior
consent of MLBFS, exercise any right under local law to levy or distrain upon
any of MLBFS' Collateral.
2. Landlord further agrees that in the event that MLBFS shall at any time seek
to take possession of or remove all or any part of MLBFS' Collateral from the
Premises, Landlord will not hinder the same or interfere or object thereto, and
Landlord hereby consents to MLBFS' entry upon the Premises for such purposes;
provided, however, that: (i) any such removal shall be made during reasonable
business hours; (ii) MLBFS shall not, without the prior written consent of
Landlord, conduct any public or auction sale on the Premises; and (iii) MLBFS
shall promptly at its expense repair any damage to the Premises directly caused
by any such removal by MLBFS or its agents of MLBFS' Collateral from the
Premises.
This Agreement shall be binding upon and shall inure to the benefit of Landlord
and it successors, assigns, heirs and/or personal representatives, as
applicable, and MLBFS and its successors and assigns.
Dated as of November 24, 1998.
Landlord:
------------------------------------------
By:
------------------------------------------------
(Signature 1) (Signature 2)
- - ---------------------------------------------------
(Printed Name) (Printed Name)
- - ---------------------------------------------------
(Title) (Title)
<PAGE>
[LOGO] Merrill Lynch WCMA(REGISTERED) AND TERM LOAN AND SECURITY AGREEMENT
- - --------------------------------------------------------------------------------
WCMA and Term Loan and Security Agreement NO. 9811551601 ("Loan Agreement")
dated as of November 24, 1998, between SEL-LEB MARKETING, INC., a corporation
organized and existing under the laws of the State of New York having its
principal office at 495 River Street, Paterson, NJ 07524 ("Customer"), and
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and
existing under the laws of the State of Delaware having its principal office at
33 West Monroe Street, Chicago, IL 60603 ("MLBFS").
In accordance with that certain Working Capital Management(Registered) Account
Agreement No. 885-07E38 ("WCMA Agreement") between Customer and MLBFS'
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"),
Customer has subscribed to the WCMA Program described in the WCMA Agreement. The
WCMA Agreement is by this reference incorporated as a part hereof. In
conjunction therewith, and as part of the WCMA Program, Customer has requested
that MLBFS provide Customer with a commercial line of credit upon the terms
hereinafter described (the "WCMA Line of Credit"). Customer has further
requested that MLBFS make the 7-year term loan hereinafter described (the "Term
Loan"). Subject to the terms and conditions hereinafter set forth, MLBFS has
agreed to provide the WCMA Line of Credit and make the Term Loan.
Accordingly, and in consideration of the premises and of the mutual covenants of
the parties hereto, Customer and MLBFS hereby agree as follows:
Article I. DEFINITIONS
1.1 Specific Terms. In addition to terms defined elsewhere in this Loan
Agreement, when used herein the following terms shall have the following
meanings:
(a) "Account Debtor" shall mean any party who is or may become obligated with
respect to an Account or Chattel Paper.
(b) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA
Line of Credit to be fully activated under MLPF&S' computer system as part of
the WCMA Program.
(c) "Additional Agreements" shall mean all agreements, instruments, documents
and opinions other than this Loan Agreement, whether with or from Customer or
any other party, which are contemplated hereby or otherwise reasonably required
by MLBFS in connection herewith, or which evidence the creation, guaranty or
collateralization of any of the Obligations or the granting or perfection of
liens or security interests upon the Collateral or any other collateral for the
Obligations, and shall include, without limitation, the Term Note.
(d) "Bankruptcy Event" shall mean any of the following: (i) a proceeding under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or
receivership law or statute shall be filed or consented to by Customer or any
Guarantor; or (ii) any such proceeding shall be filed against Customer or any
Guarantor and shall not be dismissed or withdrawn within sixty (60) days after
filing; or (iii) Customer or any Guarantor shall make a general assignment for
the benefit of creditors; or (iv) Customer or any Guarantor shall generally fail
to pay or admit in writing its inability to pay its debts as they become due; or
(v) Customer or any Guarantor shall be adjudicated a bankrupt or insolvent.
(e) "Business Day" shall mean any day other than a Saturday, Sunday, federal
holiday or other day on which the New York Stock Exchange is regularly closed.
(f) "Closing Date" shall mean the date upon which all conditions precedent to
MLBFS' obligation to make the Term Loan shall have been met to the satisfaction
of MLBFS.
(g) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights,
Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts,
Documents, Instruments, Investment Property and Financial Assets of Customer,
howsoever arising, whether now owned or existing or hereafter acquired or
arising, and wherever located; together with all parts thereof (including spare
parts), all accessories and accessions thereto, all books and records (including
computer records) directly related thereto, all proceeds thereof (including,
without limitation, proceeds in the form of Accounts and insurance proceeds),
and the additional collateral described in Section 4.6 (b) hereof.
(h) "Commitment Expiration Date" shall mean December 24, 1998.
(i) "Default" shall mean either an "Event of Default" as defined in Section 4.5
hereof, or an event which with the giving of notice, passage of time, or both,
would constitute such an Event of Default.
(j) "General Funding Conditions" shall mean each of the following conditions to
any loan or advance by MLBFS hereunder: (i) no Default shall have occurred and
be continuing or would result from the making of any such loan or advance
hereunder by MLBFS; (ii) there shall not have occurred and be continuing any
material adverse change in the business or financial condition of Customer or
any Guarantor; (iii) all representations and warranties of Customer or any
Guarantor herein or in any Additional Agreements shall then be true and correct
in all material respects; (iv) MLBFS shall have received this Loan Agreement,
the Term Note and all other Additional Agreements, duly executed and filed or
recorded where applicable, all of which shall be in form and substance
reasonably satisfactory to MLBFS; (v) with respect to the Term Loan, MLBFS shall
have received, as and to the extent applicable, copies of invoices, bills of
sale, loan payoff letters and/or other evidence reasonably satisfactory to it
that the proceeds of the Term Loan will satisfy the Term Loan Purpose; (vi)
MLBFS shall have received evidence reasonably satisfactory to it as to the
ownership of the Collateral and the perfection and priority of MLBFS' liens and
security interests thereon, as well as the ownership of and the perfection and
priority of MLBFS' liens and security interests on any other
<PAGE>
collateral for the Obligations furnished pursuant to any of the Additional
Agreements; (vii) MLBFS shall have received evidence reasonably satisfactory to
it of the insurance required hereby or by any of the Additional Agreements; and
(viii) any additional conditions specified in the "WCMA Line of Credit and Term
Loan Approval" letter executed by MLBFS with respect to the transactions
contemplated hereby shall have been met to the reasonable satisfaction of MLBFS.
(k) "Guarantor" shall mean a person or entity who has either guaranteed or
provided collateral for any or all of the Obligations; and "Business Guarantor"
shall mean any such Guarantor that is a corporation, partnership,
proprietorship, limited liability company or other entity regularly engaged in a
business activity.
(l) "Initial Maturity Date" shall mean the first date upon which the WCMA Line
of Credit will expire (subject to renewal in accordance with the terms hereof);
to wit: October 31, 2000.
(m) "Interest Due Date" shall mean, with respect the WCMA Line of Credit, the
last Business Day of each calendar month during the term hereof (or, if Customer
makes special arrangements with MLPF&S, the last Friday of each calendar month
during the term hereof).
(n) "Interest Rate" shall mean, with respect the WCMA Line of Credit, a variable
per annum rate of interest equal to the sum of (i) 2.65% and (ii) the 30-Day
Commercial Paper Rate. The "30-Day Commercial Paper Rate" shall mean, as of the
date of any determination, the interest rate from time to time published in the
"Money Rates" section of The Wall Street Journal for 30-day high-grade unsecured
notes sold through dealers by major corporations. The Interest Rate will change
as of the date of publication in The Wall Street Journal of a 30-Day Commercial
Paper Rate that is different from that published on the preceding Business Day.
In the event that The Wall Street Journal shall, for any reason, fail or cease
to publish the 30-Day Commercial Paper Rate, MLBFS will choose a reasonably
comparable index or source to use as the basis for the Interest Rate. The
Interest Rate on the Term Loan is set forth or defined in the Term Note.
(o) "Line Fee" shall mean a fee of $24,750.00 payable periodically by Customer
to MLBFS in connection with the WCMA Line of Credit in accordance with the
provisions of Section 3.2 (k) hereof.
(p) "Location of Tangible Collateral" shall mean the address of Customer set
forth at the beginning of this Loan Agreement, together with any other address
or addresses set forth on an exhibit hereto as being a Location of Tangible
Collateral.
(q) " Maturity Date" shall mean the date of expiration of the WCMA Line of
Credit.
(r) "Maximum WCMA Line of Credit" shall mean, as of any date of determination
thereof, an amount equal to the lesser of: (i) $3,300,000.00, or (B) 80% of
Customer's Accounts and Chattel Paper, as shown on its regular books and records
(excluding Accounts over 90 days old, Chattel Paper with installments or other
sums more than 90 days past due, and Accounts and Chattel Paper directly or
indirectly due from any person or entity not domiciled in the United States or
from any shareholder, officer or employee of Customer or any affiliated entity)
and 50% of Customer's Inventory, as shown on its regular books and records, less
the outstanding balance of Customer's Term Loan No. 9811551601.
(s) "Obligations" shall mean all liabilities, indebtedness and other obligations
of Customer to MLBFS, howsoever created, arising or evidenced, whether now
existing or hereafter arising, whether direct or indirect, absolute or
contingent, due or to become due, primary or secondary or joint or several, and,
without limiting the foregoing, shall include interest accruing after the filing
of any petition in bankruptcy, and all present and future liabilities,
indebtedness and obligations of Customer under this Loan Agreement, the WCMA
Note included herein and the Term Note.
(t) "Permitted Liens" shall mean with respect to the Collateral: (i) liens for
current taxes not delinquent, other non-consensual liens arising in the ordinary
course of business for sums not due, and, if MLBFS' rights to and interest in
the Collateral are not materially and adversely affected thereby, any such liens
for taxes or other non-consensual liens arising in the ordinary course of
business being contested in good faith by appropriate proceedings; (ii) liens in
favor of MLBFS; (iii) liens which will be discharged with the proceeds of the
initial WCMA Loan or the Term Loan; and (iv) any other liens expressly permitted
in writing by MLBFS.
(u) "Renewal Year" shall mean and refer to the 12-month period immediately
following the Initial Maturity Date and each 12-month period thereafter.
(v) "Term Loan Amount" shall mean an amount equal to the lesser of: (i) 100% of
the amount required by Customer to satisfy or fulfill the Term Loan Purpose, or
(ii) $900,000.00.
(w) "Term Loan Commitment Fee" shall mean the fee of $9,000.00 due to MLBFS in
connection with and as partial consideration for the commitment by MLBFS under
this Loan Agreement to make the Term Loan.
(x) "Term Loan Purpose" shall mean the purpose for which the proceeds of the
Term Loan will be used; to wit: to refinance Customer's existing term loan with
Summit Bank and the remaining proceeds will be used to support Ales Signature,
Ltd.'s new product line.
(y) "WCMA Account" shall mean and refer to the Working Capital Management
Account of Customer with MLPF&S identified as WCMA Account No. 885-07E38 and any
successor Working Capital Management Account of Customer with MLPF&S.
(z) "WCMA Loan" shall mean each advance made by MLBFS pursuant to the WCMA Line
of Credit.
(aa) "WCMA Loan Balance" shall mean an amount equal the aggregate unpaid
principal amount of all WCMA Loans.
2
<PAGE>
1.2 Other Terms. Except as otherwise defined herein: (i) all terms used in this
Loan Agreement which are defined in the Uniform Commercial Code of Illinois
("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms
used herein which are defined in the WCMA Agreement shall have the meanings set
forth in the WCMA Agreement.
Article II. THE TERM LOAN
2.1 Term Loan Commitment. Subject to the terms and conditions hereof, MLBFS
hereby agrees to make the Term Loan to Customer for the Term Loan Purpose, and
Customer agrees to borrow all amounts borrowed to satisfy the Term Loan Purpose
from MLBFS. The entire proceeds of the Term Loan shall be disbursed on the
Closing Date either directly to the applicable third party or parties on account
of the Term Loan Purpose or to reimburse Customer for amounts directly expended
by it; all as directed by Customer in a Closing Certificate to be executed by
Customer and delivered to MLBFS prior to the Closing Date.
2.2 Term Note. The Term Loan shall be evidenced by and repayable in accordance
with that certain Collateral Installment Note made by Customer payable to the
order of MLBFS and issued pursuant to this Loan Agreement (the "Term Note"). The
Term Note is hereby incorporated as a part hereof as if fully set forth herein.
2.3 Conditions of MLBFS' Obligation. The Closing Date and MLBFS' obligation to
make the Term Loan on the Closing Date are subject to the prior fulfillment of
each of the following conditions: (a) MLBFS shall have received a written
request from Customer that the Term Loan be funded in accordance with the terms
hereof, together with a written direction from Customer as to the method of
payment and payee(s) of the proceeds of the Term Loan, which request and
direction shall have been received by MLBFS not less than two Business Days
prior to any requested funding date; (b) MLBFS shall have received a copy of
invoices, bills of sale, payoff letters or other applicable evidence reasonably
satisfactory to it that the proceeds of the Term Loan will satisfy the Term Loan
Purpose; (c) the Commitment Fee shall have been paid in full; (d) the Commitment
Expiration Date shall not then have occurred; and (e) each of the General
Funding Conditions shall then have been met or satisfied to the reasonable
satisfaction of MLBFS.
2.4 Term Loan Commitment Fee. In consideration of the agreement by MLBFS to make
the Term Loan to Customer in accordance with and subject to the terms hereof,
Customer has paid or shall, on or before the Closing Date pay, the Term Loan
Commitment Fee to MLBFS. Customer acknowledges and agrees that the Term Loan
Commitment Fee has been fully earned by MLBFS, and that it will not under any
circumstances be refundable.
Article III. THE WCMA LINE OF CREDIT
3.1 WCMA Promissory Note.
FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at
the times and in the manner set forth in this Loan Agreement, or in such other
manner and at such place as MLBFS may hereafter designate in writing, the
following: (a) on the Maturity Date, or if earlier, on the date of termination
of the WCMA Line of Credit, the WCMA Loan Balance; (b) interest at the Interest
Rate on the outstanding WCMA Loan Balance, from and including the date on which
the initial WCMA Loan is made until the date of payment of all WCMA Loans in
full; and (c) on demand, all other sums payable pursuant to this Loan Agreement,
including, but not limited to, the periodic Line Fee and any late charges.
Except as otherwise expressly set forth herein, Customer hereby waives
presentment, demand for payment, protest and notice of protest, notice of
dishonor, notice of acceleration, notice of intent to accelerate and all other
notices and formalities in connection with this WCMA Promissory Note ("WCMA
Note") and this Loan Agreement.
3.2 WCMA Loans.
(a) Activation Date. Provided that: (i) the Commitment Expiration Date shall not
then have occurred, and (ii) Customer shall have subscribed to the WCMA Program
and its subscription to the WCMA Program shall then be in effect, the Activation
Date shall occur on or promptly after the date, following the acceptance of this
Loan Agreement by MLBFS at its office in Chicago, Illinois, upon which each of
the General Funding Conditions shall have been met or satisfied to the
reasonable satisfaction of MLBFS. No activation by MLBFS of the WCMA Line of
Credit for a nominal amount shall be deemed evidence of the satisfaction of any
of the conditions herein set forth, or a waiver of any of the terms or
conditions hereof. Customer hereby authorizes MLBFS to pay out of and charge to
Customer's WCMA Account on the Activation Date any and all amounts necessary to
fully pay off any bank or other financial institution having a lien upon any of
the Collateral other than a Permitted Lien.
(b) WCMA Loans. Subject to the terms and conditions hereof, during the period
from and after the Activation Date to the first to occur of the Maturity Date or
the date of termination of the WMCA Line of Credit pursuant to the terms hereof,
and in addition to WCMA Loans automatically made to pay accrued interest, as
hereafter provided: (i) MLBFS will make WCMA Loans to Customer in such amounts
as Customer may from time to time request in accordance with the terms hereof,
up to an aggregate outstanding amount not to exceed the Maximum WCMA Line of
Credit, and (ii) Customer may repay any WCMA Loans in whole or in part at any
time without premium or penalty, and request a re-borrowing of amounts repaid on
a revolving basis. Customer may request WCMA Loans by use of WCMA Checks, FTS,
Visa(R) charges, wire transfers, or such other means of access to the WCMA Line
of Credit as may be permitted by MLBFS from time to time; it being understood
that so long as the WCMA Line of Credit shall be in effect, any charge or debit
to the WCMA Account which but for the WCMA Line of Credit would under the terms
of the WCMA Agreement result in an overdraft, shall be deemed a request by
Customer for a WCMA Loan.
(c) Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not be
obligated to make any WCMA Loan, and may without notice refuse to honor any such
request by Customer, if at the time of receipt by MLBFS of Customer's request:
(i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to
be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of
Credit shall have otherwise been terminated in accordance with the terms hereof;
or (iii) Customer's subscription to the WCMA Program shall have been terminated;
or (iv) an event shall have occurred and be continuing which shall have caused
any of the General Funding Conditions to not then be met or satisfied to the
reasonable
-3-
<PAGE>
satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any
one or more of said conditions shall not have been met shall not in any event be
construed as a waiver of said condition or conditions or of any Default, and
shall not prevent MLBFS at any time thereafter while any condition shall not
have been met from refusing to honor any request by Customer for a WCMA Loan.
(d) Limitation of Liability. MLBFS shall not be responsible, and shall have no
liability to Customer or any other party, for any delay or failure of MLBFS to
honor any request of Customer for a WCMA Loan or any other act or omission of
MLBFS, MLPF&S or any of their affiliates due to or resulting from any system
failure, error or delay in posting or other clerical error, loss of power, fire,
Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any
of their affiliates unless directly arising out of the willful wrongful act or
active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer
or any other party for any incidental or consequential damages arising from any
act or omission by MLBFS, MLPF&S or any of their affiliates in connection with
the WCMA Line of Credit or this Loan Agreement.
(e) Interest. (i) An amount equal to accrued interest on the WCMA Loan Balance
shall be payable by Customer monthly on each Interest Due Date, commencing with
the Interest Due Date occurring in the calendar month in which the Activation
Date shall occur. Unless otherwise hereafter directed in writing by MLBFS on or
after the first to occur of the Maturity Date or the date of termination of the
WCMA Line of Credit pursuant to the terms hereof, such interest will be
automatically charged to the WCMA Account on the applicable Interest Due Date,
and, to the extent not paid with free credit balances or the proceeds of sales
of any Money Accounts then in the WCMA Account, as hereafter provided, paid by a
WCMA Loan and added to the WCMA Loan Balance. All interest shall be computed for
the actual number of days elapsed on the basis of a year consisting of 360 days.
(ii) Notwithstanding any provision to the contrary in this Agreement or any of
the Additional Agreements, no provision of this Agreement or any of the
Additional Agreements shall require the payment or permit the collection of any
amount in excess of the maximum amount of interest permitted to be charged by
law ("Excess Interest"). If any Excess Interest is provided for, or is
adjudicated as being provided for, in this Agreement or any of the Additional
Agreements, then: (A) Customer shall not be obligated to pay any Excess
Interest; and (B) any Excess Interest that MLBFS may have received hereunder or
under any of the Additional Agreements shall, at the option of MLBFS, be: (1)
applied as a credit against the then unpaid WCMA Loan Balance, (2) refunded to
the payer thereof, or (3) any combination of the foregoing.
(f) Payments. All payments required or permitted to be made pursuant to this
Loan Agreement shall be made in lawful money of the United States. Unless
otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be
made by the delivery of checks (other than WCMA Checks), or by means of FTS or
wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S
for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA
Agreement to the contrary, Customer hereby irrevocably authorizes and directs
MLPF&S to apply available free credit balances in the WCMA Account to the
repayment of the WCMA Loan Balance prior to application for any other purpose.
Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by
Customer upon the same basis and schedule as funds are made available for
investment in the Money Accounts in accordance with the terms of the WCMA
Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid
authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance.
The acceptance by or on behalf of MLBFS of a check or other payment for a lesser
amount than shall be due from Customer, regardless of any endorsement or
statement thereon or transmitted therewith, shall not be deemed an accord and
satisfaction or anything other than a payment on account, and MLBFS or anyone
acting on behalf of MLBFS may accept such check or other payment without
prejudice to the rights of MLBFS to recover the balance actually due or to
pursue any other remedy under this Loan Agreement or applicable law for such
balance. All checks accepted by or on behalf of MLBFS in connection with the
WCMA Line of Credit or Term Loan are subject to final collection.
(g) Irrevocable Instructions to MLPF&S. In order to minimize the WCMA Loan
Balance, Customer hereby irrevocably authorizes and directs MLPF&S, effective on
the Activation Date and continuing thereafter so long as this Agreement shall be
in effect: (i) to immediately and prior to application for any other purpose pay
to MLBFS to the extent of any WCMA Loan Balance or other amounts payable by
Customer hereunder all available free credit balances from time to time in the
WCMA Account; and (ii) if such available free credit balances are insufficient
to pay the WCMA Loan Balance and such other amounts, and there are in the WCMA
Account at any time any investments in Money Accounts (other than any
investments constituting any Minimum Money Accounts Balance under the WCMA
Directed Reserve Program), to immediately liquidate such investments and pay to
MLBFS to the extent of any WCMA Loan Balance and such other amounts the
available proceeds from the liquidation of any such Money Accounts.
(h) Statements. MLPF&S will include in each monthly statement it issues under
the WCMA Program information with respect to WCMA Loans and the WCMA Loan
Balance. Any questions that Customer may have with respect to such information
should be directed to MLBFS; and any questions with respect to any other matter
in such statements or about or affecting the WCMA Program should be directed to
MLPF&S.
(i) Use of WCMA Loan Proceeds; Securities Transactions. On the Activation Date,
a WCMA Loan will be made to pay any indebtedness of Customer to a third party
secured by all or any part of the Collateral. The proceeds of each subsequent
WCMA Loan shall be used by Customer solely for working capital in the ordinary
course of its business, or, with the prior written consent of MLBFS, for other
lawful business purposes of Customer not prohibited hereby. Customer agrees that
under no circumstances will funds borrowed from MLBFS through the WCMA Line of
Credit or under the Term Loan be used: (i) for personal, family or household
purposes of any person whatsoever, or (ii) to purchase, carry or trade in
securities, or repay debt incurred to purchase, carry or trade in securities,
whether in or in connection with the WCMA Account, another account of Customer
with MLPF&S or an account of Customer at any other broker or dealer in
securities.
(j) Renewal at Option of MLBFS; Right of Customer to Terminate. MLBFS may at any
time, in its sole discretion and at its sole option, renew the WCMA Line of
Credit for one or more Renewal Years; it being understood, however, that no such
renewal shall be effective unless set forth in a writing executed by a duly
authorized representative of MLBFS and delivered to Customer. Unless any such
renewal is accompanied by a proposed change in the terms of the WCMA Line of
Credit (other than the extension of the Maturity Date), no such renewal shall
require Customer's approval. Customer shall, however, have the right to
terminate the WCMA Line of Credit at any time upon written notice to MLBFS.
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(k) Line Fees. (i) In consideration of the extension of the WCMA Line of Credit
by MLBFS to Customer during the period from the Activation Date to and including
the last day of October in the calendar year immediately following the calendar
year in which the Activation Date shall occur (the "Initial Line Period"),
Customer has paid or shall pay the initial Line Fee to MLBFS. If the initial
Line Fee has not heretofore been paid by Customer, Customer hereby authorizes
MLBFS, at its option, to either cause the initial Line Fee to be paid on the
Activation Date with a WCMA Loan, or invoice Customer for such initial Line Fee
(in which event Customer shall pay said fee within 5 Business Days after receipt
of such invoice). No delay in the Activation Date, howsoever caused, shall
entitle Customer to any rebate or reduction in the Line Fee or to any extension
of the Initial Maturity Date.
(ii) Customer shall pay an additional Line Fee for each 12-month period
following the Initial Line Period to the Initial Maturity Date, and for each
Renewal Year. In connection therewith, Customer hereby authorizes MLBFS, at its
option, to either cause each such additional Line Fee to be paid with a WCMA
Loan on or at any time after the first Business Day of such 12-month period or
Renewal Year, as applicable, or invoiced to Customer at such time (in which
event Customer shall pay such Line Fee within 5 Business Days after receipt of
such invoice). Each Line Fee shall be deemed fully earned by MLBFS on the date
payable by Customer, and no termination of the WCMA Line of Credit, howsoever
caused, shall entitle Customer to any rebate or refund of any portion of such
Line Fee; provided, however, that if Customer shall terminate the WCMA Line of
Credit not later than 5 Business Days after the receipt by Customer of notice
from MLBFS of a renewal of the WCMA Line of Credit, Customer shall be entitled
to a refund of any Line Fee charged by MLBFS for the ensuing Renewal Year.
Article IV. GENERAL PROVISIONS
4.1 Representations and Warranties.
Customer represents and warrants to MLBFS that:
(a) Organization and Existence. Customer is a corporation, duly organized and
validly existing in good standing under the laws of the State of New York and is
qualified to do business and in good standing in each other state where the
nature of its business or the property owned by it make such qualification
necessary; and, where applicable, each Business Guarantor is duly organized,
validly existing and in good standing under the laws of the state of its
formation and is qualified to do business and in good standing in each other
state where the nature of its business or the property owned by it make such
qualification necessary.
(b) Execution, Delivery and Performance. The execution, delivery and performance
by Customer of this Loan Agreement and by Customer and each Guarantor of such of
the Additional Agreements to which it is a party: (i) have been duly authorized
by all requisite action, (ii) do not and will not violate or conflict with any
law or other governmental requirement, or any of the agreements, instruments or
documents which formed or govern Customer or any such Guarantor, and (iii) do
not and will not breach or violate any of the provisions of, and will not result
in a default by Customer or any such Guarantor under, any other agreement,
instrument or document to which it is a party or by which it or its properties
are bound.
(c) Notices and Approvals. Except as may have been given or obtained, no notice
to or consent or approval of any governmental body or authority or other third
party whatsoever (including, without limitation, any other creditor) is required
in connection with the execution, delivery or performance by Customer or any
Guarantor of such of this Loan Agreement, the Term Note and the other Additional
Agreements to which it is a party.
(d) Enforceability. This Loan Agreement, the Term Note and such of the other
Additional Agreements to which Customer or any Guarantor is a party are the
respective legal, valid and binding obligations of Customer and such Guarantor,
enforceable against it or them, as the case may be, in accordance with their
respective terms, except as enforceability may be limited by bankruptcy and
other similar laws affecting the rights of creditors generally or by general
principles of equity.
(e) Collateral. Except for any Permitted Liens: (i) Customer has good and
marketable title to the Collateral, (ii) none of the Collateral is subject to
any lien, encumbrance or security interest, and (iii) upon the filing of all
Uniform Commercial Code financing statements executed by Customer with respect
to the Collateral in the appropriate jurisdiction(s) and/or the completion of
any other action required by applicable law to perfect its liens and security
interests, MLBFS will have valid and perfected first liens and security
interests upon all of the Collateral.
(f) Financial Statements Except as expressly set forth in Customer's or any
Business Guarantor's financial statements, all financial statements of Customer
and each Business Guarantor furnished to MLBFS have been prepared in conformity
with generally accepted accounting principles, consistently applied, are true
and correct in all material respects, and fairly present the financial condition
of it as at such dates and the results of its operations for the periods then
ended (subject, in the case of interim unaudited financial statements, to normal
year-end adjustments); and since the most recent date covered by such financial
statements, there has been no material adverse change in any such financial
condition or operation. All financial statements furnished to MLBFS of any
Guarantor other than a Business Guarantor are true and correct in all material
respects and fairly represent such Guarantor's financial condition as of the
date of such financial statements (subject, in the case of interim unaudited
financial statements of a Business Guarantor, to normal year-end adjustments),
and since the most recent date of such financial statements, there has been no
material adverse change in such financial condition.
(g) Litigation. No litigation, arbitration, administrative or governmental
proceedings are pending or, to the knowledge of Customer, threatened against
Customer or any Guarantor, which would, if adversely determined, materially and
adversely affect the liens and security interests of MLBFS hereunder or under
any of the Additional Agreements, the financial condition of Customer or any
such Guarantor or the continued operations of Customer or any Business
Guarantor.
(h) Tax Returns. All federal, state and local tax returns, reports and
statements required to be filed by Customer and each Guarantor have been filed
with the appropriate governmental agencies and all taxes due and payable by
Customer and each Guarantor have been timely paid (except to the extent that any
such failure to file or pay will not materially and adversely affect either the
liens and security interests of MLBFS hereunder or under any of the Additional
Agreements, the financial condition of Customer or any Guarantor, or the
continued operations of Customer or any Business Guarantor).
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(i) Collateral Location. All of the tangible Collateral is located at a Location
of Tangible Collateral.
Each of the foregoing representations and warranties: (i) has been and will be
relied upon as an inducement to MLBFS to provide the WCMA Line of Credit and
make the Term Loan, and (ii) is continuing and shall be deemed remade by
Customer on both the Closing Date and Activation Date, and thereafter
concurrently with each request for a WCMA Loan.
4.2 Financial and Other Information.
Customer shall furnish or cause to be furnished to MLBFS during the term of this
Loan Agreement all of the following:
(a) Annual Financial Statements. Within 120 days after the close of each fiscal
year of Customer and each Business Guarantor, Customer shall furnish or cause to
be furnished to MLBFS a copy of the annual audited consolidated financial
statements of Customer and each Business Guarantor, consisting of at least a
balance sheet as at the close of such fiscal year and related statements of
income, retained earnings and cash flows, certified by their current independent
certified public accountants or other independent certified public accountants
reasonably acceptable to MLBFS.
(b) Interim Financial Statements. Within 45 days after the close of each fiscal
quarter of Customer and each Business Guarantor, Customer shall furnish or cause
to be furnished to MLBFS: (i) their consolidated compiled statements of profit
and loss for the fiscal quarter then ended, and (ii) their consolidated compiled
balance sheet as at the close of such fiscal quarter; compiled by their current
independent accountants or other independent accountants reasonably acceptable
to MLBFS and certified by their respective chief financial officer.
(c) Other Interim Reports. Within 15 days after the close of each fiscal month
of Customer and each Business Guarantor, Customer shall furnish or cause to be
furnished to MLBFS an aging of Accounts and Chattel Paper and an Inventory
report for Customer and each such Business Guarantor as of the end of such
fiscal month, all in reasonable detail and certified by their respective chief
financial officer.
(d) Other Information. Customer shall furnish or cause to be furnished to MLBFS
such other information as MLBFS may from time to time reasonably request
relating to Customer, any Guarantor or the Collateral.
4.3 Other Covenants. Customer further covenants and agrees during the term of
this Loan Agreement that:
(a) Financial Records; Inspection. Customer and each Business Guarantor will:
(i) maintain at its principal place of business complete and accurate books and
records, and maintain all of its financial records in a manner consistent with
the financial statements heretofore furnished to MLBFS, or prepared on such
other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its
duly authorized representatives, upon reasonable notice and at reasonable times,
to inspect its properties (both real and personal), operations, books and
records.
(b) Taxes. Customer and each Guarantor will pay when due all taxes, assessments
and other governmental charges, howsoever designated, and all other liabilities
and obligations, except to the extent that any such failure to pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder or under any of the Additional Agreements, the financial condition of
Customer or any Guarantor or the continued operations of Customer or any
Business Guarantor.
(c) Compliance With Laws and Agreements. Neither Customer nor any Guarantor will
violate any law, regulation or other governmental requirement, any judgment or
order of any court or governmental agency or authority, or any agreement,
instrument or document to which it is a party or by which it is bound, if any
such violation will materially and adversely affect either the liens and
security interests of MLBFS hereunder or under any of the Additional Agreements,
the financial condition of Customer or any Guarantor, or the continued
operations of Customer or any Business Guarantor.
(d) Notification By Customer. Customer shall provide MLBFS with prompt written
notification of: (i) any Default; (ii) any materially adverse change in the
business, financial condition or operations of Customer or any Business
Guarantor; and (iii) any information which indicates that any financial
statements of Customer or any Guarantor fail in any material respect to present
fairly the financial condition and results of operations purported to be
presented in such statements. Each notification by Customer pursuant hereto
shall specify the event or information causing such notification, and, to the
extent applicable, shall specify the steps being taken to rectify or remedy such
event or information.
(e) Notice of Change. Customer shall give MLBFS not less than 30 days prior
written notice of any change in the name (including any fictitious name) or
principal place of business or residence of Customer or any Guarantor.
(f) Continuity. Except upon the prior written consent of MLBFS, which consent
will not be unreasonably withheld: (i) neither Customer nor any Business
Guarantor shall be a party to any merger or consolidation with, or purchase or
otherwise acquire all or substantially all of the assets of, or any material
stock, partnership, joint venture or other equity interest in, any person or
entity, or sell, transfer or lease all or any substantial part of its assets, if
any such action would result in either: (A) a material change in the principal
business, ownership or control of Customer or such Business Guarantor, or (B) a
material adverse change in the financial condition or operations of Customer or
such Business Guarantor; (ii) Customer and each Business Guarantor shall
preserve their respective existence and good standing in the jurisdiction(s) of
establishment and operation; (iii) neither Customer nor any Business Guarantor
shall engage in any material business substantially different from their
respective business in effect as of the date of application by Customer for
credit from MLBFS, or cease operating any such material business; (iv) neither
Customer nor any Business Guarantor shall cause or permit any other person or
entity to assume or succeed to any material business or operations of Customer
or such Business Guarantor; and (v) neither Customer nor any Business Guarantor
shall cause or permit any material change in its controlling ownership.
(g) Minimum Tangible Net Worth.Customer's "tangible net worth" shall at all
times exceed $6,500,000.00. For the purposes hereof, the term "tangible net
worth" shall mean Customer's net worth as shown on Customer's regular financial
statements prepared in a manner consistent with the terms hereof, but
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excluding an amount equal to: (i) any assets which are ordinarily classified as
"intangible" in accordance with generally accepted accounting principles, and
(ii) any amounts now or hereafter directly or indirectly owing to Customer by
officers, shareholders or affiliates of Customer.
(h) Borrowed Debt. Except upon the prior written consent of MLBFS, Customer
shall not directly or indirectly hereafter incur or permit to exist any debt of
Customer for borrowed money or the lease under a capital lease or deferred
purchase price of real or personal property other than: (i) debt to MLBFS and
(ii) debt existing as of the date of and reflected on the last financial
statements of Customer submitted to MLBFS prior to the date hereof and not
refinanced by MLBFS.
4.4 Collateral.
(a) Pledge of Collateral. To secure payment and performance of the Obligations,
Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants
to MLBFS first liens and security interests in and upon all of the Collateral,
subject only to Permitted Liens.
(b) Liens. Except upon the prior written consent of MLBFS, Customer shall not
create or permit to exist any lien, encumbrance or security interest upon or
with respect to any Collateral now owned or hereafter acquired other than
Permitted Liens.
(c) Performance of Obligations. Customer shall perform all of its obligations
owing on account of or with respect to the Collateral; it being understood that
nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or
otherwise, shall be deemed an assumption by MLBFS of any of Customer's said
obligations.
(d) Sales and Collections. So long as no Event of Default shall have occurred
and be continuing, Customer may in the ordinary course of its business: (i) sell
any Inventory normally held by Customer for sale, (ii) use or consume any
materials and supplies normally held by Customer for use or consumption, and
(iii) collect all of its Accounts. Customer shall take such action with respect
to protection of its Inventory and the other Collateral and the collection of
its Accounts as MLBFS may from time to time reasonably request.
(e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable
time or times hereafter, Customer shall deliver to MLBFS, in addition to the
other information required hereunder, a schedule identifying, for each Account
and all Chattel Paper subject to MLBFS' security interests hereunder, each
Account Debtor by name and address and amount, invoice or contract number and
date of each invoice or contract. Customer shall furnish to MLBFS such
additional information with respect to the Collateral, and amounts received by
Customer as proceeds of any of the Collateral, as MLBFS may from time to time
reasonably request.
(f) Alterations and Maintenance. Except upon the prior written consent of MLBFS,
Customer shall not make or permit any material alterations to any tangible
Collateral which might materially reduce or impair its market value or utility.
Customer shall at all times keep the tangible Collateral in good condition and
repair, reasonable wear and tear excepted, and shall pay or cause to be paid all
obligations arising from the repair and maintenance of such Collateral, as well
as all obligations with respect to each Location of Tangible Collateral, except
for any such obligations being contested by Customer in good faith by
appropriate proceedings.
(g) Location. Except for movements required in the ordinary course of Customer's
business, Customer shall give MLBFS 30 days' prior written notice of the placing
at or movement of any tangible Collateral to any location other than a Location
of Tangible Collateral. In no event shall Customer cause or permit any material
tangible Collateral to be removed from the United States without the express
prior written consent of MLBFS.
(h) Insurance. Customer shall insure all of the tangible Collateral under a
policy or policies of physical damage insurance providing that losses will be
payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable
Endorsement and containing such other provisions as may be reasonably required
by MLBFS. Customer shall further provide and maintain a policy or policies of
comprehensive public liability insurance naming MLBFS as an additional party
insured. Customer and each Business Guarantor shall maintain such other
insurance as may be required by law or is customarily maintained by companies in
a similar business or otherwise reasonably required by MLBFS. All such insurance
policies shall provide that MLBFS will receive not less than 10 days prior
written notice of any cancellation, and shall otherwise be in form and amount
and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall
furnish MLBFS with a copy or certificate of each such policy or policies and,
prior to any expiration or cancellation, each renewal or replacement thereof.
(i) Event of Loss. Customer shall at its expense promptly repair all repairable
damage to any tangible Collateral. In the event that any tangible Collateral is
damaged beyond repair, lost, totally destroyed or confiscated (an "Event of
Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00
or more, then, on or before the first to occur of (i) 90 days after the
occurrence of such Event of Loss, or (ii) 10 Business Days after the date on
which either Customer or MLBFS shall receive any proceeds of insurance on
account of such Event of Loss, or any underwriter of insurance on such
Collateral shall advise either Customer or MLBFS that it disclaims liability in
respect of such Event of Loss, Customer shall, at Customer's option, either
replace the Collateral subject to such Event of Loss with comparable Collateral
free of all liens other than Permitted Liens (in which event Customer shall be
entitled to utilize the proceeds of insurance on account of such Event of Loss
for such purpose, and may retain any excess proceeds of such insurance), or
prepay the Term Loan by an amount equal to the actual cash value of such
Collateral as determined by either the insurance company's payment (plus any
applicable deductible) or, in absence of insurance company payment, as
reasonably determined by MLBFS; it being further understood that if such actual
cash value is in excess of the balance then outstanding under the Term Loan, any
excess shall be deposited into the WCMA Account concurrently with a like
permanent reduction in the Maximum WCMA Line of Credit. Notwithstanding the
foregoing, if at the time of occurrence of such Event of Loss or any time
thereafter prior to replacement or line reduction, as aforesaid, an Event of
Default shall have occurred and be continuing hereunder, then MLBFS may at its
sole option, exercisable at any time while such Event of Default shall be
continuing, require Customer to either replace such Collateral or prepay the
Term Loan and/or reduce the Maximum WCMA Line of Credit, as aforesaid. Any
partial prepayment of the Term Loan shall be applied to installments due in
inverse order of maturity.
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(j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any
attachment, lien, judicial process, encumbrance or claim affecting or involving
$25,000.00 or more of the Collateral.
(k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless
from and against any and all claims, liabilities, losses, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses) of any
nature whatsoever which may be asserted against or incurred by MLBFS arising out
of or in any manner occasioned by (i) the ownership, collection, possession, use
or operation of any Collateral, or (ii) any failure by Customer to perform any
of its obligations hereunder; excluding, however, from said indemnity any such
claims, liabilities, etc. arising directly out of the willful wrongful act or
active gross negligence of MLBFS. This indemnity shall survive the expiration or
termination of this Loan Agreement as to all matters arising or accruing prior
to such expiration or termination.
4.5 Events of Default.
The occurrence of any of the following events shall constitute an "Event of
Default" under this Loan Agreement:
(a) Exceeding the Maximum WCMA Line of Credit. If the WCMA Loan Balance shall at
any time exceed the Maximum WCMA Line of Credit and Customer shall fail to
deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance
below the Maximum WCMA Line of Credit within five (5) Business Days after
written notice thereof shall have been given by MLBFS to Customer.
(b) Other Failure to Pay. Customer shall fail to pay to MLBFS or deposit into
the WCMA Account when due any other amount owing or required to be paid or
deposited by Customer under this Loan Agreement or the Term Note, or shall fail
to pay when due any other Obligations, and any such failure shall continue for
more than five (5) Business Days after written notice thereof shall have been
given by MLBFS to Customer.
(c) Failure to Perform. Customer or any Guarantor shall default in the
performance or observance of any covenant or agreement on its part to be
performed or observed under this Loan Agreement, the Term Note or any of the
other Additional Agreements (not constituting an Event of Default under any
other clause of this Section), and such default shall continue unremedied for
ten (10) Business Days after written notice thereof shall have been given by
MLBFS to Customer.
(d) Breach of Warranty. Any representation or warranty made by Customer or any
Guarantor contained in this Loan Agreement, the Term Note or any of the other
Additional Agreements shall at any time prove to have been incorrect in any
material respect when made.
(e) Default Under Other Agreement. A default or Event of Default by Customer or
any Guarantor shall occur under the terms of any other agreement, instrument or
document with or intended for the benefit of MLBFS, MLPF&S or any of their
affiliates, and any required notice shall have been given and required passage
of time shall have elapsed.
(f) Bankruptcy Event. Any Bankruptcy Event shall occur.
(g) Material Impairment. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of payment or performance by
Customer or any Guarantor has been materially impaired. The existence of such a
material impairment shall be determined in a manner consistent with the intent
of Section 1-208 of the UCC.
(h) Acceleration of Debt to Other Creditors. Any event shall occur which results
in the acceleration of the maturity of any indebtedness of $100,000.00 or more
of Customer or any Guarantor to another creditor under any indenture, agreement,
undertaking, or otherwise.
(i) Seizure or Abuse of Collateral. The Collateral, or any material part
thereof, shall be or become subject to any material abuse or misuse, or any
levy, attachment, seizure or confiscation which is not released within ten (10)
Business Days.
4.6 Remedies.
(a) Remedies Upon Default. Upon the occurrence and during the continuance of any
Event of Default, MLBFS may at its sole option do any one or more or all of the
following, at such time and in such order as MLBFS may in its sole discretion
choose:
(i) Termination. MLBFS may without notice terminate its obligation to make the
Term Loan (if the Term Loan has not then been funded) and terminate the WCMA
Line of Credit and all obligations to provide the WCMA Line of Credit or
otherwise extend any credit to or for the benefit of Customer (it being
understood, however, that upon the occurrence of any Bankruptcy Event the WCMA
Line of Credit and all such obligations shall automatically terminate without
any action on the part of MLBFS); and upon any such termination MLBFS shall be
relieved of all such obligations.
(ii) Acceleration. MLBFS may declare the principal of and interest on the Term
Note and WCMA Note, and all other Obligations to be forthwith due and payable,
whereupon all such amounts shall be immediately due and payable, without
presentment, demand for payment, protest and notice of protest, notice of
dishonor, notice of acceleration, notice of intent to accelerate or other notice
or formality of any kind, all of which are hereby expressly waived; provided,
however, that upon the occurrence of any Bankruptcy Event all such principal,
interest and other Obligations shall automatically become due and payable
without any action on the part of MLBFS.
(iii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the
remedies of a secured party under applicable law, including, but not limited to,
the UCC, and any or all of its other rights and remedies under this Loan
Agreement and the Additional Agreements.
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(iv) Possession. MLBFS may require Customer to make the Collateral and the
records pertaining to the Collateral available to MLBFS at a place designated by
MLBFS which is reasonably convenient to Customer, or may take possession of the
Collateral and the records pertaining to the Collateral without the use of any
judicial process and without any prior notice to Customer.
(v) Sale. MLBFS may sell any or all of the Collateral at public or private sale
upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may
purchase any Collateral at any such public sale. The net proceeds of any such
public or private sale and all other amounts actually collected or received by
MLBFS pursuant hereto, after deducting all costs and expenses incurred at any
time in the collection of the Obligations and in the protection, collection and
sale of the Collateral, will be applied to the payment of the Obligations, with
any remaining proceeds paid to Customer or whoever else may be entitled thereto,
and with Customer and each Guarantor remaining jointly and severally liable for
any amount remaining unpaid after such application.
(vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon
receipt, transmit and deliver to MLBFS in the form received, all cash, checks,
drafts and other instruments for the payment of money (properly endorsed, where
required, so that such items may be collected by MLBFS) which may be received by
Customer at any time in full or partial payment of any Collateral, and require
that Customer not commingle any such items which may be so received by Customer
with any other of its funds or property but instead hold them separate and apart
and in trust for MLBFS until delivery is made to MLBFS.
(vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that
its Account or Chattel Paper has been assigned to MLBFS and direct such Account
Debtor to make payment directly to MLBFS of all amounts due or becoming due with
respect to such Account or Chattel Paper; and MLBFS may enforce payment and
collect, by legal proceedings or otherwise, such Account or Chattel Paper.
(viii) Control of Collateral. MLBFS may otherwise take control in any lawful
manner of any cash or non-cash items of payment or proceeds of Collateral and of
any rejected, returned, stopped in transit or repossessed goods included in the
Collateral and endorse Customer's name on any item of payment on or proceeds of
the Collateral.
(b) Set-Off. MLBFS shall have the further right upon the occurrence and during
the continuance of an Event of Default to set-off, appropriate and apply toward
payment of any of the Obligations, in such order of application as MLBFS may
from time to time and at any time elect, any cash, credit, deposits, accounts,
financial assets, investment property, securities and any other property of
Customer which is in transit to or in the possession, custody or control of
MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Customer
hereby collaterally assigns and grants to MLBFS a continuing security interest
in all such property as additional Collateral.
(c) Power of Attorney. Effective upon the occurrence and during the continuance
of an Event of Default, Customer hereby irrevocably appoints MLBFS as its
attorney-in-fact, with full power of substitution, in its place and stead and in
its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion
take any action and to execute any instrument which MLBFS may deem necessary or
advisable to accomplish the purposes of this Loan Agreement, including, but not
limited to, to receive, endorse and collect all checks, drafts and other
instruments for the payment of money made payable to Customer included in the
Collateral.
(d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available in the Additional Agreements, at law or in equity, and any
one or more of such rights and remedies may be exercised simultaneously or
successively.
(e) Notices. To the fullest extent permitted by applicable law, Customer hereby
irrevocably waives and releases MLBFS of and from any and all liabilities and
penalties for failure of MLBFS to comply with any statutory or other requirement
imposed upon MLBFS relating to notices of sale, holding of sale or reporting of
any sale, and Customer waives all rights of redemption or reinstatement from any
such sale. Any notices required under applicable law shall be reasonably and
properly given to Customer if given by any of the methods provided herein at
least 5 Business Days prior to taking action. MLBFS shall have the right to
postpone or adjourn any sale or other disposition of Collateral at any time
without giving notice of any such postponed or adjourned date. In the event
MLBFS seeks to take possession of any or all of the Collateral by court process,
Customer further irrevocably waives to the fullest extent permitted by law any
bonds and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession, and any demand for
possession prior to the commencement of any suit or action.
4.7 Miscellaneous.
(a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any
right, power or remedy pursuant to this Loan Agreement, the Term Note or any of
the other Additional Agreements shall operate as a waiver thereof, and no single
or partial exercise of any such right, power or remedy shall preclude any other
or further exercise thereof, or the exercise of any other right, power or
remedy. Neither any waiver of any provision of this Loan Agreement, the Term
Note or any of the other Additional Agreements, nor any consent to any departure
by Customer therefrom, shall be effective unless the same shall be in writing
and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any
of the Additional Agreements and any consent to any departure by Customer from
the terms of this Loan Agreement, the Term Note or any of the other Additional
Agreements shall be effective only in the specific instance and for the specific
purpose for which given. Except as otherwise expressly provided herein, no
notice to or demand on Customer shall in any case entitle Customer to any other
or further notice or demand in similar or other circumstances.
(b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its
affiliates, including without limitation MLPF&S, to at any time (whether or not
an Event of Default shall have occurred) obtain from and disclose to each other
any and all financial and other information about Customer. In connection with
said authorization, the parties recognize that in order to provide a WCMA Line
of Credit certain information about Customer is required to be made available on
a computer network accessible by certain affiliates of MLBFS, including MLPF&S.
-9-
<PAGE>
(c) Communications. All notices and other communications required or permitted
hereunder or in connection with any of the Additional Agreements shall be in
writing, and shall be either delivered personally, mailed by postage prepaid
certified mail or sent by express overnight courier or by facsimile. Such
notices and communications shall be deemed to be given on the date of personal
delivery, facsimile transmission or actual delivery of certified mail, or one
Business Day after delivery to an express overnight courier. Unless otherwise
specified in a notice sent or delivered in accordance with the terms hereof,
notices and other communications in writing shall be given to the parties hereto
at their respective addresses set forth at the beginning of this Loan Agreement,
or, in the case of facsimile transmission, to the parties at their respective
regular facsimile telephone number.
(d) Costs, Expenses and Taxes. Customer shall upon demand pay or reimburse MLBFS
for: (i) all Uniform Commercial Code and other filing and search fees and
expenses incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS' rights hereunder or in the Collateral or any other
collateral for the Obligations; (ii) any and all stamp, transfer and other taxes
and fees payable or determined to be payable in connection with the execution,
delivery and/or recording of this Loan Agreement or any of the Additional
Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including,
but not limited to, reasonable fees and expenses of outside counsel) incurred by
MLBFS in connection with the collection of any sum payable hereunder or under
any of the Additional Agreements not paid when due, the enforcement of this Loan
Agreement or any of the Additional Agreements and the protection of MLBFS'
rights hereunder or thereunder, excluding, however, salaries and normal overhead
attributable to MLBFS' employees. The obligations of Customer under this
paragraph shall survive the expiration or termination of this Loan Agreement and
the discharge of the other Obligations.
(e) Right to Perform Obligations. If Customer shall fail to do any act or thing
which it has covenanted to do under this Loan Agreement or any representation or
warranty on the part of Customer contained in this Loan Agreement shall be
breached, MLBFS may, in its sole discretion, after 5 Business Days written
notice is sent to Customer (or such lesser notice, including no notice, as is
reasonable under the circumstances), do the same or cause it to be done or
remedy any such breach, and may expend its funds for such purpose. Any and all
reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer
upon demand, with interest at the Interest Rate during the period from and
including the date funds are so expended by MLBFS to the date of repayment, and
all such amounts shall be additional Obligations. The payment or performance by
MLBFS of any of Customer's obligations hereunder shall not relieve Customer of
said obligations or of the consequences of having failed to pay or perform the
same, and shall not waive or be deemed a cure of any Default.
(f) Late Charge. Any payment required to be made by Customer pursuant to this
Loan Agreement or any of the Additional Agreements not paid within ten (10) days
of the applicable due date shall be subject to a late charge in an amount equal
to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount
permitted by applicable law. Such late charge shall be payable on demand, or,
without demand, may in the sole discretion of MLBFS be paid by a WCMA Loan and
added to the WCMA Loan Balance in the same manner as provided herein for accrued
interest with respect to the WCMA Line of Credit.
(g) Further Assurances. Customer agrees to do such further acts and things and
to execute and deliver to MLBFS such additional agreements, instruments and
documents as MLBFS may reasonably require or deem advisable to effectuate the
purposes of this Loan Agreement, the Term Note or any of the other Additional
Agreements, or to establish, perfect and maintain MLBFS' security interests and
liens upon the Collateral, including, but not limited to: (i) executing
financing statements or amendments thereto when and as reasonably requested by
MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local
law, causing the owners and/or mortgagees of the real property on which any
Collateral may be located to execute and deliver to MLBFS waivers or
subordinations reasonably satisfactory to MLBFS with respect to any rights in
such Collateral.
(h) Binding Effect; Assignment. This Loan Agreement, the Term Note and the other
Additional Agreements shall be binding upon, and shall inure to the benefit of
MLBFS, Customer and their respective successors and assigns. Customer shall not
assign any of its rights or delegate any of its obligations under this Loan
Agreement, the Term Note or any of the other Additional Agreements without the
prior written consent of MLBFS. Unless otherwise expressly agreed to in a
writing signed by MLBFS, no such consent shall in any event relieve Customer of
any of its obligations under this Loan Agreement, the Term Note or the other
Additional Agreements.
(i) Headings. Captions and section and paragraph headings in this Loan Agreement
are inserted only as a matter of convenience, and shall not affect the
interpretation hereof.
(j) Governing Law. This Loan Agreement, the Term Note and, unless otherwise
expressly provided therein, each of the other Additional Agreements, shall be
governed in all respects by the laws of the State of Illinois.
(k) Severability of Provisions. Whenever possible, each provision of this Loan
Agreement, the Term Note and the other Additional Agreements shall be
interpreted in such manner as to be effective and valid under applicable law.
Any provision of this Loan Agreement, the Term Note or any of the other
Additional Agreements which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Loan Agreement, the Term Note and the other Additional Agreements or
affecting the validity or enforceability of such provision in any other
jurisdiction.
(l) Term. This Loan Agreement shall become effective on the date accepted by
MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof,
shall continue in effect so long thereafter as either MLBFS shall be obligated
to make the Term Loan or extend the WCMA Line of Credit, or, after the
Activation Date and/or the Closing Date, there shall be any moneys outstanding
under the Term Note, WCMA Note or this Loan Agreement, or there shall be any
other Obligations outstanding.
(m) Counterparts. This Loan Agreement may be executed in one or more
counterparts which, when taken together, constitute one and the same agreement.
(n) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS
BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN
ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT (INCLUDING THE WCMA
-10-
<PAGE>
NOTE SET FORTH HEREIN), THE TERM NOTE AND THE OTHER ADDITIONAL AGREEMENTS IN
EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY
COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER CONSENTS TO JURISDICTION
IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY
OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST
SAID JURISDICTION AND VENUE. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY
ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE
OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS
TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER
OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO,
ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE WCMA LINE OF CREDIT, THE TERM
LOAN, THIS LOAN AGREEMENT, ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE
TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT.
(o) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE TERM NOTE AND THE OTHER
ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE
FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER
HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE FOREGOING,
CUSTOMER ACKNOWLEDGES THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN: (I) NO
PROMISE OR COMMITMENT HAS BEEN MADE TO IT BY MLBFS, MLPF&S OR ANY OF THEIR
RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO: (X) LEND ANY ADDITIONAL
MONEYS, UNDER THE TERM LOAN, OR OTHERWISE, OR OTHERWISE EXTEND ANY OTHER CREDIT
TO CUSTOMER OR ANY OTHER PARTY, OR (Y) EXTEND THE AVAILABILITY OF THE WCMA LINE
OF CREDIT OR THE DUE DATE OF THE WCMA LOAN BALANCE, OR (Z) INCREASE THE MAXIMUM
WCMA LINE OF CREDIT; (II) NO PURPORTED AGREEMENT TO LEND ADDITIONAL MONEYS OR
OTHERWISE MODIFY THE TERMS OF THE TERM LOAN, OR TO EXTEND THE MATURITY DATE OR
INCREASE THE MAXIMUM WCMA LINE OF CREDIT, SHALL BE VALID OR BINDING UNLESS
EXPRESSLY SET FORTH IN A WRITTEN INSTRUMENT SIGNED BY MLBFS; AND (III) THIS LOAN
AGREEMENT SUPERSEDES AND REPLACES ANY AND ALL PROPOSALS, LETTERS OF INTENT AND
APPROVAL AND COMMITMENT LETTERS FROM MLBFS TO CUSTOMER, NONE OF WHICH SHALL BE
CONSIDERED AN ADDITIONAL AGREEMENT. NO AMENDMENT OR MODIFICATION OF THIS
AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS TO WHICH CUSTOMER IS A PARTY SHALL
BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND CUSTOMER.
IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year
first above written.
SEL-LEB MARKETING, INC.
By:
-----------------------------------------------------------------
Signature (1) Signature (2)
- - ----------------------------------------------------------------------
Printed Name Printed Name
- - ----------------------------------------------------------------------
Title Title
Accepted at Chicago, Illinois:
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC.
By:
----------------------------------------------
-11-
<PAGE>
EXHIBIT A
ATTACHED TO AND HEREBY MADE A PART OF WCMA(REGISTERED) AND TERM LOAN AND
SECURITY AGREEMENT NO. 9811551601 BETWEEN MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC. AND SEL-LEB MARKETING, INC.
- - --------------------------------------------------------------------------------
Locations of Tangible Collateral:
<PAGE>
[LOGO] Merrill Lynch No. 9811551601
- - --------------------------------------------------------------------------------
900,000.00 November 24, 1998
COLLATERAL INSTALLMENT NOTE
FOR VALUE RECEIVED, SEL-LEB MARKETING, INC., a corporation organized and
existing under the laws of the State of New York ("Customer") hereby promises to
pay to the order of MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a
corporation organized and existing under the laws of the State of Delaware
("MLBFS"), in lawful money of the United States, the principal sum of
$900,000.00, or if more or less, the aggregate amount advanced by MLBFS to
Customer pursuant to the Loan Agreement (the "Loan Amount"); together with
interest on the unpaid balance of the Loan Amount, from the Closing Date until
payment, at the Interest Rate, as follows:
1. DEFINITIONS.
(a) In addition to terms defined elsewhere in this Note, as used herein, the
following terms shall have the following meanings:
(i) "Closing Date" shall mean the date of advancement of funds hereunder.
(ii) "Excess Interest" shall mean any amount of interest in excess of the
maximum amount of interest permitted to be charged by law.
(iii) "Interest Rate" shall mean a variable per annum rate equal to the sum of
(i) 2.80% per annum, and (ii) the interest rate from time to time published in
the "Money Rates" section of The Wall Street Journal for 30-day high-grade
unsecured notes sold through dealers by major corporations (the "30-Day
Commercial Paper Rate"). The Interest Rate will change as of the date of
publication in The Wall Street Journal of a 30-Day Commercial Paper Rate that is
different from that published on the preceding Business Day. In the event that
The Wall Street Journal shall, for any reason, fail or cease to publish the
30-Day Commercial Paper Rate, MLBFS will choose a reasonably comparable index or
source to use as the basis for the Interest Rate.
(iv) "Loan Agreement" shall mean that certain WCMA AND TERM LOAN AND SECURITY
AGREEMENT No. 9811551601 between Customer and MLBFS, as the same may have been
or may hereafter be amended or supplemented.
(v) "Note" shall mean this COLLATERAL INSTALLMENT NOTE.
(b) Capitalized terms used herein and not defined herein shall have the meaning
set forth in the Loan Agreement. Without limiting the foregoing, the terms
"Additional Agreements", "Bankruptcy Event" and "Event of Default" shall have
the respective meanings set forth in the Loan Agreement.
2. PAYMENT AND OTHER TERMS. Customer shall pay the indebtedness under this Note
in 84 consecutive monthly installments commencing on the first day of the second
calendar month following the Closing Date and continuing on the first day of
each calendar month thereafter until this Note shall be paid in full. Each such
installment in an amount equal to the sum of (i) accrued interest at the
Interest Rate, and (ii) 1/84th of the Loan Amount (with the first such
installment including interest accrued from the date of funding).
Each payment received hereunder shall be applied first to any fees and expenses
of MLBFS payable by Customer under the terms of the Loan Agreement, next to any
late charges payable hereunder, next to accrued interest at the Interest Rate,
with the balance applied on account of the unpaid principal hereof. Any part of
the principal hereof or interest hereon or other sums payable hereunder or under
the Loan Agreement not paid within ten (10) days of the applicable due date
shall be subject to a late charge equal to the lesser of (i) 5% of the overdue
amount, or (ii) the maximum amount permitted by law. All interest shall be
computed on the basis of actual days elapsed over a 360-day year. All sums
payable hereunder shall be payable at the office of MLBFS at 33 West Monroe
Street, Chicago, Illinois 60603, or at such other place or places as the holder
hereof may from time to time appoint in writing.
Customer may prepay this Note at any time in whole or in part without premium or
penalty. Any partial prepayment shall be applied to installments of the Loan
Amount in inverse order of maturity.
This Note is the Collateral Installment Note referred to in, and is entitled to
all of the benefits of the Loan Agreement and any Additional Agreements. If
Customer shall fail to pay when due any installment or other sum due hereunder,
and any such failure shall continue for more than five (5) Business Days after
written notice thereof shall have been given by the holder hereof to Customer,
or if any other Event of Default shall occur and be continuing, then at the
option of the holder hereof (or, upon the occurrence of any Bankruptcy Event,
automatically, without any action on the part of the holder hereof), and in
addition to all other rights and remedies available to such holder under the
Loan Agreement, any Additional Agreements, and otherwise, the entire Loan Amount
at such time remaining unpaid, together with accrued interest thereon and all
other sums then owing by Customer under the Loan Agreement, may be declared to
be and thereby become immediately due and payable.
It is expressly understood, however, that nothing contained in the Loan
Agreement, any other agreement, instrument or document executed by Customer, or
otherwise, shall affect or impair the right, which is unconditional and
absolute, of the holder hereof to enforce payment of all sums due under this
Note at or after maturity, whether by acceleration or otherwise, or shall affect
the obligation of Customer, which is also unconditional and absolute, to pay the
sums payable under this Note in accordance with its terms. Except as otherwise
expressly set forth herein or in the Loan Agreement, Customer hereby waives
presentment, demand for payment, protest and notice of protest, notice of
dishonor, notice of acceleration, notice of intent to accelerate and all other
notices and formalities in connection with this Note.
<PAGE>
Wherever possible each provision of this Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Note shall be prohibited by or invalid under such law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of this
Note. Notwithstanding any provision to the contrary in this Note, the Loan
Agreement or any of the Additional Agreements, no provision of this Note, the
Loan Agreement or any of the Additional Agreements shall require the payment or
permit the collection of any Excess Interest. If any Excess Interest is provided
for, or is adjudicated as being provided for, in this Note, the Loan Agreement
or any of the Additional Agreements, then: (a) Customer shall not be obligated
to pay any Excess Interest; and (b) any Excess Interest that MLBFS may have
received under this Note, the Loan Agreement or any of the Additional Agreements
shall, at the option of MLBFS, be: (i) applied as a credit against the then
unpaid principal balance of this Note, or accrued interest hereon not to exceed
the maximum amount permitted by law, or both, (ii) refunded to the payor
thereof, or (iii) any combination of the foregoing.
This Note shall be construed in accordance with the laws of the State of
Illinois and may be enforced by the holder hereof in any jurisdiction in which
the Loan Agreement may be enforced.
IN WITNESS WHEREOF, this Note has been executed by Customer as of the day and
year first above written.
SEL-LEB MARKETING, INC.
By:
------------------------------------------------------------
Signature (1) Signature (2)
- - ------------------------------------------------------------------
Printed Name Printed Name
- - ------------------------------------------------------------------
Title Title
-2-
<PAGE>
[LOGO] Merrill Lynch CLOSING CERTIFICATE
- - -----------------------------------------------------------------------------
The undersigned, SEL-LEB MARKETING, INC., a corporation organized and existing
under the laws of the State of New York ("Customer"), as a primary inducement to
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to make a loan to
Customer (the "Loan") pursuant to that certain WCMA AND TERM LOAN AND SECURITY
AGREEMENT No. 9811551601 between Customer and MLBFS dated as of November 24,
1998 (the "Loan Agreement") DOES HEREBY REPRESENT, WARRANT AND AGREE AS FOLLOWS:
1. All of Customer's representations and warranties in the Loan Agreement are
true and correct and remade as of the date hereof, and, without limiting the
foregoing: (i) subject only to "Permitted Liens" (as defined in the Loan
Agreement), MLBFS has a first lien and security interest upon all of the
"Collateral" under the Loan Agreement (including any Collateral financed or
refinanced with the proceeds of the Loan), and (ii) the Loan is being applied on
account of and will satisfy the "Term Loan Purpose" under the Loan Agreement.
2. There has not occurred any event which constitutes a " Default" under the
Loan Agreement.
3. There has not occurred any material adverse change in the business or
financial condition of Customer or any Guarantor of Customer's obligations to
MLBFS since the date of the last financial statements submitted to MLBFS.
4. MLBFS is hereby authorized and directed to disburse the proceeds of the Loan,
by:
[_] check [_] wire transfer [_] deposit as follows:
1. Payoff Summit Bank per their payoff letter and instructions; and disburse any
remaining proceeds as follows:
2. Deposit remaining funds into our WCMA Acount #885-07E38
Dated this ____ day of _____________________, 1998
SEL-LEB MARKETING, INC.
By:
--------------------------------------------------------------
Signature (1) Signature (2)
--------------------------------------------------------------
Printed Name Printed Name
--------------------------------------------------------------
Title Title
<PAGE>
[LOGO] Merrill Lynch SECRETARY'S CERTIFICATE
- - -----------------------------------------------------------------------------
The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES
INC. that the undersigned is the duly appointed and acting Secretary (or
Assistant Secretary) of SEL-LEB MARKETING, INC., a corporation duly organized,
validly existing and in good standing under the laws of the State of New York;
and that the following is a true, accurate and compared transcript of
resolutions duly, validly and lawfully adopted on the _______ day of
____________________, 1998 by the Board of Directors of said Corporation acting
in accordance with the laws of the state of incorporation and the charter and
by-laws of said Corporation:
"RESOLVED, that this Corporation is authorized and empowered, now and from time
to time hereafter, to borrow and/or obtain credit from, and/or enter into other
financial arrangements with, MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
("MLBFS"), and in connection therewith to grant to MLBFS liens and security
interests on any or all property belonging to this Corporation; all such
transactions to be on such terms and conditions as may be mutually agreed from
time to time between this Corporation and MLBFS; and
"FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary
or other officer of this Corporation, or any one or more of them, be and each of
them hereby is authorized and empowered to: (a) execute and deliver to MLBFS on
behalf of this Corporation any and all loan agreements, promissory notes,
security agreements, pledge agreements, financing statements, mortgages, deeds
of trust, leases and/or all other agreements, instruments and documents required
by MLBFS in connection therewith, and any present or future extensions,
amendments, supplements, modifications and restatements thereof; all in such
form as any such officer shall approve, as conclusively evidenced by his or her
signature thereon, and (b) do and perform all such acts and things deemed by any
such officer to be necessary or advisable to carry out and perform the
undertakings and agreements of this Corporation in connection therewith; and any
and all prior acts of each of said officers in these premises are hereby
ratified and confirmed in all respects; and
"FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation from an
authorized officer of this Corporation, which change or revocation shall not in
any event affect the obligations of this Corporation with respect to any
transaction conditionally agreed or committed to by MLBFS or having its
inception prior to the receipt of such notice by MLBFS."
The undersigned further certifies that: (a) the foregoing resolutions have not
been rescinded, modified or repealed in any manner, are not in conflict with any
agreement of said Corporation and are in full force and effect as of the date of
this Certificate, and (b) the following individuals are now the duly elected and
acting officers of said Corporation and the signatures set forth below are the
true signatures of said officers:
President:
------------------------------------------------
Vice President:
-------------------------------------------
Treasurer:
------------------------------------------------
Secretary:
------------------------------------------------
:
---------------------- ---------------------------------
Additional Title
IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said Corporation hereto, pursuant to due authorization, all
as of this ________ day of _________________, 1998.
(Corporate Seal)
-------------------------------------------------
Secretary
Printed Name:
-------------------------------------------------
<PAGE>
[LOGO] Merrill Lynch UNCONDITIONAL GUARANTY
- - -----------------------------------------------------------------------------
FOR VALUE RECEIVED, and in order to induce MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC. ("MLBFS") to advance moneys or extend or continue to extend credit
or lease property to or for the benefit of, or modify its credit relationship
with, or enter into any other financial accommodations with SEL-LEB MARKETING,
INC., a corporation organized and existing under the laws of the State of New
York (with any successor in interest, including, without limitation, any
successor by merger or by operation of law, herein collectively referred to as
"Customer") under: (a) that certain WCMA AND TERM LOAN AND SECURITY AGREEMENT
No. 9811551601 between MLBFS and Customer (the "Loan Agreement"), (b) any
"Additional Agreements", as that term is defined in the Loan Agreement,
including, without limitation, the WCMA NOTE included with, and TERM NOTE
incorporated by reference into, the Loan Agreement, and (c) all present and
future amendments, restatements, supplements and other evidences of any
extensions, increases, renewals, modifications and other changes of or to the
Loan Agreement or any Additional Agreements (collectively, the "Guaranteed
Documents"), and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the undersigned, ALES SIGNATURE
LTD., a corporation organized and existing under the laws of the State of New
York ("Guarantor"), hereby unconditionally guarantees to MLBFS: (i) the prompt
and full payment when due, by acceleration or otherwise, of all sums now or any
time hereafter due from Customer to MLBFS under the Guaranteed Documents, (ii)
the prompt, full and faithful performance and discharge by Customer of each and
every other covenant and warranty of Customer set forth in the Guaranteed
Documents, and (iii) the prompt and full payment and performance of all other
indebtedness, liabilities and obligations of Customer to MLBFS, howsoever
created or evidenced, and whether now existing or hereafter arising
(collectively, the "Obligations"). Guarantor further agrees to pay all
reasonable costs and expenses (including, but not limited to, court costs and
reasonable attorneys' fees) paid or incurred by MLBFS in endeavoring to collect
or enforce performance of any of the Obligations, or in enforcing this Guaranty.
Guarantor acknowledges that MLBFS is relying on the execution and delivery of
this Guaranty in advancing moneys to or extending or continuing to extend credit
to or for the benefit of Customer.
This Guaranty is absolute, unconditional and continuing and shall remain in
effect until all of the Obligations shall have been fully and indefeasibly paid,
performed and discharged. Upon the occurrence and during the continuance of any
default or Event of Default under the Guaranteed Documents, any or all of the
indebtedness hereby guaranteed then existing shall, at the option of MLBFS,
become immediately due and payable from Guarantor (it being understood, however,
that upon the occurrence of any "Bankruptcy Event", as defined in the Guaranteed
Documents, all such indebtedness shall automatically become due and payable
without action on the part of MLBFS). Notwithstanding the occurrence of any such
event, this Guaranty shall continue and remain in full force and effect. To the
extent MLBFS receives payment with respect to the Obligations, and all or any
part of such payment is subsequently invalidated, declared to be fraudulent or
preferential, set aside, required to be repaid by MLBFS or is repaid by MLBFS
pursuant to a settlement agreement, to a trustee, receiver or any other person
or entity, whether under any Bankruptcy law or otherwise (a "Returned Payment"),
this Guaranty shall continue to be effective or shall be reinstated, as the case
may be, to the extent of such payment or repayment by MLBFS, and the
indebtedness or part thereof intended to be satisfied by such Returned Payment
shall be revived and continued in full force and effect as if said Returned
Payment had not been made.
The liability of Guarantor hereunder shall in no event be affected or impaired
by any of the following, any of which may be done or omitted by MLBFS from time
to time, without notice to or the consent of Guarantor: (a) any renewals,
amendments, restatements, modifications or supplements of or to any of the
Guaranteed Documents, or any extensions, forbearances, compromises or releases
of any of the Obligations or any of MLBFS' rights under any of the Guaranteed
Documents; (b) any acceptance by MLBFS of any collateral or security for, or
other guarantees of, any of the Obligations; (c) any failure, neglect or
omission on the part of MLBFS to realize upon or protect any of the Obligations,
or any collateral or security therefor, or to exercise any lien upon or right of
appropriation of any moneys, credits or property of Customer or any other
guarantor, possessed by or under the control of MLBFS or any of its affiliates,
toward the liquidation or reduction of the Obligations; (d) any invalidity,
irregularity or unenforceability of all or any part of the Obligations, of any
collateral security for the Obligations, or the Guaranteed Documents; (e) any
application of payments or credits by MLBFS; (f) the granting of credit from
time to time by MLBFS to Customer in excess of the amount set forth in the
Guaranteed Documents; or (g) any other act of commission or omission of any kind
or at any time upon the part of MLBFS or any of its affiliates or any of their
respective employees or agents with respect to any matter whatsoever. MLBFS
shall not be required at any time, as a condition of Guarantor's obligations
hereunder, to resort to payment from Customer or other persons or entities
whatsoever, or any of their properties or estates, or resort to any collateral
or pursue or exhaust any other rights or remedies whatsoever.
No release or discharge in whole or in part of any other guarantor of the
Obligations shall release or discharge Guarantor unless and until all of the
Obligations shall have been indefeasibly fully paid and discharged. Guarantor
expressly waives presentment, protest, demand, notice of dishonor or default,
notice of acceptance of this Guaranty, notice of advancement of funds under the
Guaranteed Documents and all other notices and formalities to which Customer or
Guarantor might be entitled, by statute or otherwise, and, so long as there are
any Obligations or MLBFS is committed to extend credit to Customer, waives any
right to revoke or terminate this Guaranty without the express written consent
of MLBFS.
So long as there are any Obligations, Guarantor shall not have any claim, remedy
or right of subrogation, reimbursement, exoneration, contribution,
indemnification, or participation in any claim, right, or remedy of MLBFS
against Customer or any security which MLBFS now has or hereafter acquires,
whether or not such claim, right or remedy arises in equity, under contract, by
statute, under common law, or otherwise.
MLBFS is hereby irrevocably authorized by Guarantor at any time during the
continuance of an Event of Default under the Loan Agreement or any other of the
Guaranteed Documents or in respect of any of the Obligations, in its sole
discretion and without demand or notice of any kind, to appropriate, hold, set
off and apply toward the payment of any amount due hereunder, in such order of
application as MLBFS may elect, all cash, credits, deposits, accounts, financial
assets, investment property, securities and any other property of Guarantor
which is in transit to or in the possession, custody or control of MLBFS or
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), or any of their
respective agents, bailees or affiliates. Guarantor hereby collaterally assigns
and grants to MLBFS a continuing security interest in all such property as
additional security for the Obligations. Upon the occurrence and during
<PAGE>
the continuance of an Event of Default, MLBFS shall have all rights in such
property available to collateral assignees and secured parties under all
applicable laws, including, without limitation, the UCC.
Guarantor agrees to furnish to MLBFS such financial information concerning
Guarantor as may be required by any of the Guaranteed Documents or as MLBFS may
otherwise from time to time reasonably request. Guarantor further hereby
irrevocably authorizes MLBFS and each of its affiliates, including without
limitation MLPF&S, to at any time (whether or not an Event of Default shall have
occurred) obtain from and disclose to each other any and all financial and other
information about Guarantor.
No delay on the part of MLBFS in the exercise of any right or remedy under the
Guaranteed Documents, this Guaranty or any other agreement shall operate as a
waiver thereof, and, without limiting the foregoing, no delay in the enforcement
of any security interest, and no single or partial exercise by MLBFS of any
right or remedy shall preclude any other or further exercise thereof or the
exercise of any other right or remedy. This Guaranty may be executed in any
number of counterparts, each of which counterparts, once they are executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Guaranty. This Guaranty
shall be binding upon Guarantor and its successors and assigns, and shall inure
to the benefit of MLBFS and its successors and assigns. If there are more than
one guarantor of the Obligations, all of the obligations and agreements of
Guarantor are joint and several with such other guarantors.
This Guaranty shall be governed by the laws of the State of Illinois. WITHOUT
LIMITING THE RIGHT OF MLBFS TO ENFORCE THIS GUARANTY IN ANY JURISDICTION AND
VENUE PERMITTED BY APPLICABLE LAW, GUARANTOR AGREES THAT THIS GUARANTY MAY AT
THE OPTION OF MLBFS BE ENFORCED BY MLBFS IN ANY JURISDICTION AND VENUE IN WHICH
ANY OF THE GUARANTEED DOCUMENTS MAY BE ENFORCED. GUARANTOR AND MLBFS HEREBY EACH
EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY IN ANY
WAY RELATED TO OR ARISING OUT OF THIS GUARANTY OR THE OBLIGATIONS. Wherever
possible each provision of this Guaranty shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Guaranty shall be prohibited by or invalid under such law, such provision shall
be ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Guaranty. No modification or waiver of any of the provisions of this Guaranty
shall be effective unless in writing and signed by both Guarantor and an officer
of MLBFS. Each signatory on behalf of Guarantor warrants that he or she has
authority to sign on behalf of Guarantor, and by so signing, to bind Guarantor
hereunder.
Dated as of November 24, 1998.
ALES SIGNATURE LTD.
By:
---------------------------------------------------------------
Signature (1) Signature (2)
---------------------------------------------------------------
Printed Name Printed Name
---------------------------------------------------------------
Title Title
Address of Guarantor:
495 RIVER STREET
PATERSON, NJ 07524
-2-
<PAGE>
[LOGO] Merrill Lynch SECRETARY'S CERTIFICATE
- - -----------------------------------------------------------------------------
(Guaranty by Corporation)
The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES
INC. that the undersigned is the duly appointed and acting Secretary (or
Assistant Secretary) of ALES SIGNATURE LTD., a corporation duly organized,
validly existing and in good standing under the laws of the State of New York;
and that the following is a true, accurate and compared transcript of
resolutions duly, validly and lawfully adopted on the _______ day of
____________________, 1998 by the Board of Directors of said Corporation acting
in accordance with the laws of the state of incorporation and the charter and
by-laws of said Corporation:
"RESOLVED, that it is advisable and in the best interests and to the benefit of
this Corporation to guaranty the obligations of SEL-LEB MARKETING, INC.
("Customer") to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS"); and
"FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary
or other officer of this Corporation, or any one or more of them, be and each of
them hereby is authorized and empowered for and on behalf of this Corporation
to: (a) execute and deliver to MLBFS: (i) an Unconditional Guaranty of the
obligations of Customer, (ii) any other agreements, instruments and documents
required by MLBFS in connection therewith, including, without limitation, any
agreements, instruments and documents evidencing liens or security interests on
any of the property of this Corporation as collateral for said Unconditional
Guaranty and/or the obligations of Customer to MLBFS, and (iii) any present or
future amendments to any of the foregoing; all in such form as such officer
shall approve, as evidenced by his signature thereon; and (b) to do and perform
all such acts and things deemed by any such officer to be necessary or advisable
to carry out and perform the undertakings and agreements of this Corporation set
forth therein; and all prior acts of each of said officers in these premises are
hereby ratified and confirmed; and
"FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation from an
authorized officer of this Corporation, which change or revocation shall not in
any event affect the obligations of this Corporation with respect to any
transaction conditionally agreed or committed to by MLBFS or having its
inception prior to the receipt of such notice by MLBFS."
The undersigned further certifies that: (a) the foregoing resolutions have not
been rescinded, modified or repealed in any manner, are not in conflict with any
agreement of said Corporation and are in full force and effect as of the date of
this Certificate, and (b) the following individuals are now the duly elected and
acting officers of said Corporation and the signatures set forth below are the
true signatures of said officers:
President:
---------------------------------------------------
Vice President:
----------------------------------------------
Treasurer:
---------------------------------------------------
Secretary:
---------------------------------------------------
:
----------------- -----------------------------------------
Additional Title
IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said corporation hereto, pursuant to due authorization, all
as of this ________ day of _________________, 1998.
(Corporate Seal) ------------------------------------------------------
Secretary
Printed Name: ------------------------------------------------------
<PAGE>
[LOGO] Merrill Lynch LANDLORD'S SUBORDINATION AGREEMENT
- - -----------------------------------------------------------------------------
The undersigned Landlord is the record owner and lessor to SEL-LEB MARKETING,
INC. ("Tenant") of the real property commonly known as 495 River Street,
Paterson, NJ 07524 (the "Premises");
Landlord has been advised that MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
("MLBFS") has or is about to lend moneys to, extend or continue to extend credit
to or for the benefit of, or enter into another financial accommodation with,
Tenant, or for the benefit of a third party based upon the credit and/or
collateral of Tenant, and in connection therewith that Tenant has granted or is
about to grant to MLBFS a security interest in, among other collateral, the
following property of Tenant ("MLBFS' Collateral"); to wit:
All equipment, inventory, removable trade fixtures and other tangible and
intangible personal property now and hereafter owned by Tenant.
Among other conditions thereof, MLBFS has required that Landlord execute and
deliver this Agreement. Accordingly, and for valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, Landlord hereby agrees as
follows:
1. Landlord hereby subordinates for the benefit of MLBFS, and with respect to
all present and future obligations of or secured by Tenant to MLBFS, any right
or interest in MLBFS' Collateral which, but for this Agreement, would or might
be prior to the rights and/or security interests of MLBFS, as aforesaid; and
Landlord agrees so long as Tenant shall be obligated to MLBFS, it will not,
without the prior consent of MLBFS, exercise any right under local law to levy
or distrain upon any of MLBFS' Collateral.
2. Landlord further agrees that in the event that MLBFS shall at any time seek
to take possession of or remove all or any part of MLBFS' Collateral from the
Premises, Landlord will not hinder the same or interfere or object thereto, and
Landlord hereby consents to MLBFS' entry upon the Premises for such purposes;
provided, however, that: (i) any such removal shall be made during reasonable
business hours; (ii) MLBFS shall not, without the prior written consent of
Landlord, conduct any public or auction sale on the Premises; and (iii) MLBFS
shall promptly at its expense repair any damage to the Premises directly caused
by any such removal by MLBFS or its agents of MLBFS' Collateral from the
Premises.
This Agreement shall be binding upon and shall inure to the benefit of Landlord
and it successors, assigns, heirs and/or personal representatives, as
applicable, and MLBFS and its successors and assigns.
Dated as of November 24, 1998.
Landlord:
--------------------------------------------------------
By:
--------------------------------------------------------------
(Signature 1) (Signature 2)
--------------------------------------------------------------
(Printed Name) (Printed Name)
--------------------------------------------------------------
(Title) (Title)
<PAGE>
Private Client Group
Merrill Lynch Business
Financial Services Inc.
[LOGO] Merrill Lynch 33 West Monroe Street
22nd Floor
Chicago, Illinois 60603
(312) 269-1352
FAX: (312) 845-9093
November 24, 1998
Mr. Jan Mirsky
Sel-Leb Marketing, Inc.
495 River Street
Paterson, NJ 07524
Re: WCMA Line of Credit and Term Loan Approval
Dear Mr. Mirsky,
As I believe you know, we have approved the request of Sel-Leb Marketing, Inc.
("Customer") for both a WCMA Line of Credit and Term Loan upon the terms and
conditions set forth in the enclosed documents ("Loan Documents").
For your information, the following are some of the principal terms of the
approval:
WCMA Line of Credit:
Maximum WCMA Line of Credit: An amount equal to the lesser of: (i)
$3,300,000.00, or (ii) 80% of Customer's Accounts and Chattel Paper, as
shown on its regular books and records (excluding Accounts over 90 days
old, Chattel Paper with installments or other sums more than 90 days past
due, and Accounts and Chattel Paper directly or indirectly due from any
person or entity not domiciled in the United States or from any
shareholder, officer or employee of Customer or any affiliated entity) and
50% of Customer's Inventory, as shown on its regular books and records,
less the outstanding balance of Customer's Term Loan No. 9811551601.
WCMA Interest Rate: Variable at a per annum rate equal to the sum of 2.65%
plus the 30-Day Commercial Paper Rate (as published in The Wall Street
Journal), based upon actual days elapsed over a 360-day year.
Initial Expiration Date: October 31, 2000 (subject to renewal annually
thereafter).
Line Fee For First Year of Initial Term: $24,750.00.
Term Loan:
Term Loan Purpose: The purpose of the Term Loan is to refinance Customer's
existing term loan with Summit Bank and the remaining proceeds will be used
to support Ales Signature, Ltd.'s new product line.
Maximum Term Loan Amount: An amount equal to the lesser of (i) 100% of the
amount required by Customer to satisfy or fulfill the Term Loan Purpose, or
(ii) $900,000.00.
Term: 7-years from the first day of the calendar month immediately
following the date of funding.
Term Loan Interest Rate: Variable at a per annum rate equal to the sum of
2.80% plus the 30-Day Commercial Paper Rate published from time to time in
The Wall Street Journal, based upon actual days elapsed over a 360-day
year.
<PAGE>
Commitment Fee: $9,000.00.
Please refer to the Loan Documents for a complete statement of the terms for
both the WCMA Line of Credit and Term Loan.
In addition to conditions set forth in the Loan Documents, our approval is
subject to:
(a) The valid subscription and continued maintenance by Customer of a Working
Capital Management Account with Merrill Lynch, Pierce, Fenner and Smith
Incorporated for use in connection with the WCMA Line of Credit, which
subscription and maintenance shall be evidenced on Merrill Lynch's computer
system.
(b) Our receipt of all of the Loan Documents together with any additional
documents contemplated thereby or otherwise reasonably required by us, all of
which shall be duly executed and, if applicable, recorded, and all of which
shall be in form and substance satisfactory to us.
(c) Acceptance by us in writing of the executed Loan Documents at our office in
Chicago after review and a final determination by us of the consistency of the
Loan Documents with our original internal credit approval. (Without limiting the
foregoing, it should be understood that prior to such acceptance we are not
bound by any clerical or other errors in or omissions from the Loan Documents.)
(d) Our continuing satisfaction with the financial condition of Customer and
each guarantor of Customer's obligations to us.
(e) There not occurring any event which under the terms of the Loan Documents
would constitute a Default.
(f) Evidence satisfactory to us of the perfection and priority of any liens
required by us in the Loan Documents.
(g) Our receipt and satisfaction with a payoff letter from Summit Bank setting
forth: (i) a payoff balance as of a specified date; (ii) a per diem interest
charge; (iii) wire transfer instructions; and (iv) a statement that upon receipt
of the payoff amount said bank will terminate all of its liens and security
interests on Customer's assets, and remit stamped copies of UCC Termination
Statements and/or other appropriate documents evidencing said termination to us.
A sample form of payoff letter is enclosed.
(h) Our receipt of a Certificate of Insurance satisfactory to us evidencing a
policy or policies of physical damage insurance on the tangible collateral
described in the Loan Documents, and providing that losses shall be payable to
us as our interests may appear pursuant to a Lender's Loss Payable Endorsement,
and that we shall receive not less than 10 days prior notice of any cancellation
or material amendment.
In addition to the foregoing, our approval is subject to our receipt (where
applicable) and satisfaction with the following:
(1) Current Accounts Receivable Aging, Inventory Report and 9/30/98 or more
current financial statements of Customer and Ales Signature Ltd. ("Ales");
(2) Reference from Summit Bank;
(3) Verification by a bank officer of PNC Bank that Customer has an open and
active lockbox. In addition, Customer must provide MLBFS with a copy of the
executed lockbox agreement; and
(4) A collateral audit of Customer's and Ales' accounts receivable and
inventory, to be performed by an independent third party, acceptable to MLBFS,
with all expenses incurred to be the responsibility of Customer.
Our approval will remain open subject to said conditions until December 24,
1998, after which time it shall be void.
<PAGE>
Note that as set forth above the Loan Documents require an initial Line Fee of
$24,750.00 and a Term Loan Commitment Fee of $9,000.00. If any portion of these
fees have not yet been paid, please pay these fees by check at the time you
return the executed Loan Documents. Note further that under the terms of the
Loan Documents Customer is responsible for UCC filing and search fees and
expenses.
To assist you in completing the Loan Documents, we have affixed a "Sign Here"
sticker to each page requiring a signature, and have penciled an "x" in front of
each signature line.
In order to minimize signature requirements, we normally seek only one copy of
each of the Loan Documents. After the WCMA Line of Credit has been activated and
the Term Loan has been funded, we will return a fully executed duplicate copy
for your records.
Although we will endeavor to make the WCMA Line of Credit available as soon as
feasible after the conditions of our approval have been met, there may be system
delays of up to several days until actual availability. Accordingly, we suggest
that you contact us prior to your initial use of the WCMA line. We would further
appreciate as much lead time as feasible prior to the Term Loan funding date.
<PAGE>
If you have any questions about our approval or the structure or terms of the
facility, please call Adine Hruby at (312) 269-5428. If you have any questions
about the Loan Documents, please call me at (312) 269-1352.
Very truly yours,
MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC.
By:
-------------------------------
Jennifer Corken
Documentation Manager
cc: Wayne Dedrick
Adine Hruby
<PAGE>
Exhibit 23.1
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 25, 1999, on the
consolidated financial statements of Sel-Leb Marketing, Inc. and its
subsidiary as of December 31, 1998 and for the years ended December 31, 1998
and 1997 which appear elsewhere in this Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
J. H. COHN LLP
Roseland, New Jersey
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 504,060
<SECURITIES> 0
<RECEIVABLES> 3,701,763
<ALLOWANCES> 171,456
<INVENTORY> 6,496,298
<CURRENT-ASSETS> 11,481,620
<PP&E> 1,198,018
<DEPRECIATION> 590,368
<TOTAL-ASSETS> 12,441,285
<CURRENT-LIABILITIES> 4,409,117
<BONDS> 0
0
0
<COMMON> 10,891
<OTHER-SE> 7,161,881
<TOTAL-LIABILITY-AND-EQUITY> 12,441,285
<SALES> 17,275,423
<TOTAL-REVENUES> 17,275,423
<CGS> 13,337,039
<TOTAL-COSTS> 16,882,287
<OTHER-EXPENSES> (96,576)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,104
<INCOME-PRETAX> 225,608
<INCOME-TAX> 74,724
<INCOME-CONTINUING> 150,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,884
<EPS-PRIMARY> .14
<EPS-DILUTED> .00
</TABLE>
