SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001
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)
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 $21,451,140.
The aggregate market value of voting stock held by non-affiliates of the
registrant on April 2, 2002 was approximately $2,554,372. On such date, the
closing price of the issuer's common stock was $2.09 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 April 2, 2002 was 2,261,018.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on May 30, 2002 are incorporated by reference in Part III.
The Company's Proxy Statement will be filed within 120 days after December 31,
2001.
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SEL-LEB MARKETING, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 1
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 7
Item 6. Management's Discussion and Analysis or Plan of Operation 8
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 14
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and Management 14
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits and Reports on Form 8-K 15
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PART I
Item 1. Description of Business
General
Sel-Leb Marketing, Inc. was incorporated under the laws of the State of New York
in September 1993. 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) marketing and
selling the Company's own proprietary brands of budget-line health, beauty aid
and cosmetic products, which are filled for the Company by contract fillers,
(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) marketing and selling products to be promoted by celebrity
spokespersons and sold 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.
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(TM) name. The Company owns 80% of Ales
Signature, Ltd. The Company, in connection with the acquisition, acquired rights
to the following trademarks: (i) all rights of SBC in and to certain trademarks
(including the Signature Solutions(R) mark and the Signature Beauty Care(R), Lip
Set(R) and Salon Essence(R) registered trademarks) and (ii) finished products
and other inventory (including works in progress and component parts) related to
the product lines bearing the acquired trademarks. Unless otherwise specified
herein, references to the "Company" shall refer collectively to Sel-Leb
Marketing, Inc. and its subsidiary Ales Signature, Ltd.
SALE OF PROPRIETARY BRAND NAME PRODUCTS. The Company is currently engaged in the
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 bath products, as well as budget-line lipsticks, lip pencils, nail
polishes and eye pencils sold under the Linette(R), Loud Music(R), Ghoul
Tools(R), Quick Thang(R), Loud Sticks(TM), Signature Solutions(R) and Signature
Beauty Care(R) brand names. The Company's products are sold to department
stores, retail chains and other mass merchandisers located throughout the United
States, Canada, Puerto Rico and Europe. All of the Company's proprietary beauty
aid and cosmetic products are manufactured and supplied by third parties. 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, 2001, no supplier accounted for 10% or
more of such purchases. The Company has credit arrangements with 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. The Company thereafter delivers such materials, on an as-needed
basis, to its contract fillers, 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, 2001, no such contract
filler accounted for 10% or more of the Company's filling services. Once
completed, the products are delivered to the Company, which packs out the
products and distributes the finished products to its customers. Although the
Company believes that its contract fillers 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 fillers and that the Company
will continue to obtain its finished beauty aid and cosmetic products from such
fillers in the foreseeable future, the Company does not have written contracts
with any of these fillers 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 fillers, the Company believes that it would be able to
retain the services of other fillers; 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 fillers.
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, kitchen items and other household
products. The Company acquires its merchandise 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, Canada and Puerto Rico. During the year ended December 31, 2001,
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, Ames Department Stores, Variety Wholesale and Roses Stores, Inc.
which accounted for approximately 35.9%, 23.6%, 19.1% and 15.1%, respectively,
of the Company's net opportunistic sales in 2001. The Company believes that its
longstanding relationships with many of its suppliers and customers are
important to the secondary sourcing activities of the
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Company, and that its relationship with its suppliers and customers are good.
In connection with its distribution activities, the Company has the ability to
reconfigure merchandise acquired by it or to provide other value-added services
at the request of a retailing 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
retailer, reconfigure 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 reconfigure 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 total opportunistic merchandise purchases for the year ended December
31, 2001. During the year ended December 31, 2001, substantially all of the
Company's secondary sourcing merchandise was purchased from domestic suppliers.
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, except as described elsewhere herein, 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
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has credit arrangements with substantially all of its existing suppliers,
thereby allowing the Company to purchase merchandise on account. Generally, such
credit arrangements allow the Company to purchase merchandise with payment
generally due 30 days after the purchase. However, in certain cases the Company
purchases merchandise with payment made upon the receipt of goods in order to
enable the Company to obtain favorable prices.
The Company has also acted 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 has purchased these fragrances from
other secondary sources such as export and import companies, duty-free
distributors and department stores which were liquidating their excess
inventory. Unlike other merchandise acquired by the Company at prices
significantly below wholesale, the Company has purchased certain designer
fragrances at above-wholesale prices (although still well below their normal
retail price). The Company, in turn, has sold such items to other mass
merchandisers. The Company believes that revenue from the sales of fragrances
(or its consulting services, described below, relating to fragrance sales) will
continue to constitute a portion of its sales, although there can be no
assurance of such.
Within this segment, the Company has also sought to develop further its bath
products lines and to become less dependent on sales of lipsticks, lip pencils,
nail polishes eye pencils and cosmetics in general. In July, 2001, the Company
entered into an arrangement with RJS Scientific, Inc. relating to the Company's
sale of bath and home fragrance products manufactured by RJS. Under the
agreement, all profits and losses are to be divided equally between the Company
and RJS. The agreement with RJS is terminable upon sixty days notice by either
party. The revenues generated by the Company's agreement with RJS accounted for
approximately 7% of the Company's net sales in 2001. There can be no assurance
that any products made by RJS and sold by the Company pursuant to this agreement
will meet with consumer acceptance or provide ongoing significant revenues to
the Company.
In August 2001, the Company entered into an agreement with Perfume Center of
America, Inc. ("PCA"), a leading fragrance importer, pursuant to which the
Company sold to PCA its fragrance rack program supply arrangement for a mass
merchandise retailer, together with the Company's inventory of fragrances
relating to that retailer's program. In consideration for the transfer of the
program and rack assets, the Company received approximately $245,000 in 2001,
with the balance payable to the Company in two installments of $100,000 each due
by December of 2002 and 2003. The Company received approximately $248,000 for
the inventory. In connection with the sale, the Company agreed to serve as
consultant to PCA concerning PCA's relationship with the retailer, for which PCA
is to pay to the Company a specified percentage of net sales.
MARKETING AND SALE OF "CELEBRITY-ENDORSED" PRODUCTS. The Company believes that
the increasing popularity of consumer products endorsed by celebrities may
provide significant future opportunities for the Company. Accordingly, the
Company is seeking to develop products for promotion by celebrity spokespersons
which products 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.
In September 1996, the Company entered into an arrangement with ACI, Inc., 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
provides the financing required in connection with developing, marketing and
distributing the products to be promoted by such celebrities and sold in the
retail market. ACI's fee is equivalent to approximately 50% of the profit (after
giving effect to any royalty payments required to be made to celebrity
spokespersons and certain management fees payable to ACI) resulting from the
sale of such products. 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 accounted for approximately 40.5% of the
Company's net sales in 2001. 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.
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In December 2001, the Company entered into a trademark license and product
promotion agreement with Kobra International, Ltd. pursuant to which Kobra
agreed to provide to the Company the services of Nicole Miller, a world famous
designer, in connection with the grant to the Company of a license for the
production, manufacture and sale of a line of Nicole Miller jewelry through
electronic and traditional retail channels. Under the agreement, the Company is
to pay Kobra a specified percentage of net sales, subject to a minimum royalty
for each year. The agreement has an initial term of three years, subject to
renewal or early termination under specified circumstances.
In September 2000, the Company entered into a product promotion agreement with Z
Metro, Inc. ("Metro, Inc."), pursuant to which Metro, Inc. agreed to provide to
the Company the services of Zoe Metro, a jewelry and handbag designer, who is to
assist in the design of, and endorse and promote, various products through
electronic retailers. Under this agreement, Ms. Metro has made several
appearances on The Shop Channel in Japan and is scheduled to make an additional
appearance in July 2002. In return for the grant to the Company of Ms. Metro's
services and the use of certain trademarks and other rights, the Company is to
pay to Metro, Inc. a specified percentage of net sales in accordance with the
terms of the agreement. The agreement has an initial term of thirty months,
subject to renewal or early termination under specified circumstances.
Although the Company is seeking to develop the "celebrity-endorsed" 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. There can be no assurance that the Company will be
able to continue to develop any new celebrity 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 reconfiguring of goods
are also performed at this facility.
Typically, all raw materials purchased by the Company for its proprietary beauty
aid and cosmetic products, are delivered to the Company's warehouse facility.
Thereafter, the Company delivers such materials, on an as-needed basis, to its
contract fillers, which provide filling services and perform quality control
with respect to the finished products. Once completed, the products are
delivered to the Company, which reconfigures or packs out 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. The
Company believes that it competes with the following:
In the opportunistic purchasing area of its business, the Company competes with
other secondary sourcers, as well as with wholesale distributors and retailers,
with respect to its ability to obtain merchandise. In addition, with respect to
sales of such merchandise to its customers, the Company competes with other
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secondary suppliers, as well as with manufacturers who sell directly to retail
merchandisers. The Company believes that its ability to purchase a broad array
of merchandise at competitive prices is critical to its success. In connection
with its sale of proprietary brand name products including the Linette(R), Quick
Thang(R), Loud Sticks, Loud Music(R), Ghoul Tools(R), Signature Solutions(R) and
Signature Beauty Care(R) products, the Company competes at the retail level with
other manufacturers of budget-line health, beauty aid and cosmetic products for
shelf space and promotional space. In connection with its celebrity-endorsed
products business, the Company competes with manufacturers and marketing
organizations that seek out celebrities to endorse products and assist in
marketing programs for their merchandise, as well as with celebrity agents who
can negotiate directly with retailers in order to secure marketing contracts for
the celebrities they represent. The Company believes that it will compete on the
basis of its ability to design products which are consistent with celebrities'
respective preferences and characters and to provide such products to retailers
at competitive prices.
Many of the Company's existing or potential competitors are well established
companies and have or will have substantially greater financial, marketing and
other resources than the Company. The Company believes that it competes on the
basis of value, product assortment and availability, service to customers and
reputation, as well as on the basis of its long-standing and well established
relationships with both its suppliers and customers. Although the Company
believes that it will be able to compete effectively on the basis of such
factors, there can be no assurance of such.
Trademark and Servicemark Protection
Products developed by the Company are sold under the Linette(R), Quick Thang(R),
Loud Sticks(TM), Signature Solutions(R) and Signature Beauty Care(R) trademarks
and the Loud Music(R) and Ghoul Tools(R) marks. The Company has registered the
Linette(R), Loud Music(R) and Ghoul Tools(R) trademarks with the United States
Patent and Trademark Office (the "Trademark Office") and, in connection with the
acquisition of the product lines from SBC, Ales acquired all of SBC's rights in
and to the Signature Solutions(R) mark and the Signature Beauty Care(R),
Groomer's Secret(R), Lip Set(R) and Salon Essence(R) trademarks. There can be no
assurance that the names and marks used by the Company do not or will not
violate the proprietary rights of others, that such names and marks would be
upheld if challenged or that the Company would not be prevented from using any
names and trademarks in the future.
Personnel
The Company currently employs approximately 18 full-time salaried employees
and approximately 24 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, 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 $5,000,000 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
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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 which commenced April 1, 1997, has
been renewed through the period ending March 31, 2004. Thereafter, the lease
will be subject to two one-year renewal options at increasing rental rates. The
current monthly rent (including tax) is $24,864. The Company is also obligated
to reimburse the lessor 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.
The Company did not submit any matters to the vote of security holders during
the fourth quarter of the fiscal year ended December 31, 2001.
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, 2000 and 2001 were as follows:
HIGH LOW
------- -------
FISCAL YEAR 2000 Quarter Ended:
March 31, 2000 .................................. $ 3.75 $ 2.25
June 30, 2000 ................................... $ 3.25 $ 1.125
September 30, 2000 .............................. $ 2.0625 $ 1.3125
December 31, 2000 ............................... $ 1.75 $ 0.6875
FISCAL YEAR 2001 Quarter Ended:
March 31, 2001 .................................. $ 1.50 $ .85
June 30, 2001 ................................... $ 1.16 $ .50
September 30, 2001 .............................. $ 1.16 $ .75
December 31, 2001 ............................... $ 1.80 $ .80
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The prices set forth above reflect inter dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
B. Holders.
On April 1, 2002, as reported by the Company's transfer agent, shares of
Common Stock were held by 43 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 2000 and 2001. 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 Consolidated Financial Statements of the Company and related notes thereto.
The Annual Report on Form 10-KSB contains certain forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements due to a number of factors, including but not limited
to general trends in the retail industry (both general as well as electronic
outlets), the ability of the Company to extend its financing arrangements (or
obtain satisfactory alternative financing) on favorable terms, or at all, the
ability of the Company to successfully implement its expansion plans, consumer
acceptance of any products developed and sold by the Company, the ability of the
Company to develop its "celebrity" product business, the ability of the Company
to sell its specially purchased merchandise at favorable prices, on a timely
basis or at all, and other factors set forth herein or in reports and other
documents filed by the Company with the SEC.
Summary of Significant Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to accounts receivable, inventories, property
and equipment, stock based compensation, income taxes and contingencies. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
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Note 1 of the notes to consolidated financial statements included in this Annual
Report sets forth the principal accounting policies, assumptions and bases for
estimates used in preparing the Company's financial statements as summarized
below.
REVENUE RECOGNITION -- Sales are recognized when the earnings process is
complete and collectibility is assured, which is usually when the goods are
shipped to customers. The Company generally extends credit to its customers, a
significant portion of which are in the retail industry. Approximately 54% and
37% of the Company's net sales were derived from two major customers during 2001
and 2000, respectively. The Company closely monitors the extension of credit to
its customers while maintaining apppropriate allowances for potential credit
losses.
RELATED PARTY TRANSACTIONS -- From time-to-time, the Company transacts business
with parties related to the minority stockholders of Ales. During 2001 and 2000,
the Company purchased inventories at a total cost of approximately $428,000 and
$1,440,000, respectively, from companies affiliated with the minority
stockholders. At December 31, 2001, accounts payable included a total of
approximately $43,000 that arose primarily from such purchases. In addition,
during 2001 and 2000, the Company made sales of merchandise to companies
affiliated with minority stockholders aggregating approximately $102,000 and
$606,000, respectively. At December 31, 2001, accounts receivable included a
total of approximately $39,000 that arose primarily from such sales.
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. Management monitors and periodically reviews inventory quantities and
agings and, when appropriate, inventory is sold at lower than normal margins in
order to reduce the levels of excess or older goods.
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 which
ranged from two to seven years for machinery and equipment, three years for
display fixtures and three to five years for computer equipment. Amortization of
leasehold improvements is computed using the straight-line method over the term
of the lease.
Impairment losses on property and equipment are recognized when events indicate
that the undiscounted cash flows estimated to be generated by such assets are
less than their carrying value and all or a portion of such carrying value may
not be recoverable. The Company did not recognize any impairment losses during
2001 and 2000.
GOODWILL -- Goodwill is comprised of costs in excess of net assets of acquired
businesses that were being amortized on a straight-line basis over periods not
exceeding ten years. In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and other intangible
assets with indefinite useful lives will no longer be systematically amortized.
Instead such assets will be subject to reduction only when their carrying
amounts exceed their estimated fair values based on impairment tests established
by SFAS 142 that will be made at least annually. The Company will be required to
apply the provisions of SFAS 142 and discontinue amortization effective as of
January 1, 2002. The Company will also be required to make its first impairment
tests no later than December 31, 2002. The effects of these tests on the
Company's consolidated financial position and results of operations has not been
determined. As of December 31, 2001, goodwill had an immaterial carrying value
that was included in other assets.
ADVERTISING -- The Company expenses the cost of advertising and promotions as
incurred.
9
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.
EARNINGS PER SHARE -- The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings per Share," which require the
presentation of "basic" and, if appropriate, "diluted" earnings per common share
if that 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.
In computing diluted earnings per share, the assumed exercise of all of the
Company's outstanding stock options and warrants, adjusted for the application
of the treasury stock method, would have increased the weighted average number
of common shares outstanding as shown in the table below:
2001 2000
--------- ---------
Basic weighted average shares outstanding 2,261,018 2,261,018
Shares arising from assumed exercise of:
Stock options 65,483 106,849
Warrants 29,634
--------- ---------
Diluted weighted average shares outstanding 2,326,501 2,397,501
========= =========
10
Consolidated Results of Operations: Year Ended December 31, 2001 Compared to the
Year Ended December 31, 2000:
Although the Company has identified three main areas of business activity (as
described more fully in Item 1. Description of Business), it manages and
accounts for these activities in two principal business segments: Opportunity
and Cosmetics (Opportunistic Purchasing and Secondary Sourcing are considered
to be Opportunity; Proprietary Brand Name Products and "Celebrity Endorsed"
products are considered to be Cosmetics).
DECEMBER 31, DECEMBER 31,
2001 2000 $ CHANGE
--------------------------------------------------
Net sales:
Opportunity $ 9,087,478 $ 8,832,579 $ 254,899 (A)
Cosmetics 12,363,662 11,874,690 488,972 (B)
--------------------------------------------------
Total sales 21,451,140 20,707,269 743,871
--------------------------------------------------
Cost of sales:
Opportunity 6,103,725 6,545,926 (442,201)(C)
Cosmetics 10,182,980 9,481,662 701,318 (D)
--------------------------------------------------
Total cost of sales 16,286,705 16,027,588 259,117
Selling general and
administrative expenses 4,502,924 4,060,211 442,713 (E)
--------------------------------------------------
Total operating expenses 20,789,629 20,087,799 701,830
--------------------------------------------------
Operating income 661,511 619,470 42,041
--------------------------------------------------
Other income (expense):
Litigation settlement 280,000 280,000 (F)
Other 19,042 19,042
Interest expense, net (370,948) (449,791) (78,843)(G)
--------------------------------------------------
Totals (71,906) (449,791) 377,885
--------------------------------------------------
Income before income taxes $ 589,605 $ 169,679 $ 419,926
==================================================
(A) The increase in sales for this segment of our business primarily resulted
from the successful introduction of a new line of bath and home fragrance
products partially offset by a decrease in sales of specially purchased
merchandise, as well as improved supply resources, allowing for quicker
responses to retailer requirements.
(B) During the year ended December 31, 2001, sales for this segment of our
business increased primarily as a result of growth in the electronic media
portion of our business as well as the successful continued introduction of new
products and development of new customers.
(C) For the year ended December 31, 2001, cost of sales for this segment was
approximately 67.2% of sales as compared to 74.1% for the year ended December
31, 2000. Improved margins for this segment resulted primarily from the
continuing effect of sales of specially purchased merchandise sold during the
year at higher margins.
(D) Cost of sales for the "Cosmetics" segment of our business was approximately
82.4% of sales for the year ended December 31, 2001 as compared to 79.8% for the
year ended December 31, 2000. The decrease in margins for
11
this segment of our business resulted primarily from the sale of slower moving
merchandise at lower profit margins, based on the Company's decision to reduce
inventory levels, especially in the Cosmetics segment.
(E) Selling, general and administrative expenses consist principally of
payroll, rent, commissions, insurance, professional fees, and travel and
promotional expenses. During the year ended December 31, 2001 these costs
increased primarily as a result of increased sales related expenses.
(F) Litigation settlement reflects proceeds from the settlement of a legal
action brought by the Company against one of its licensors for an alleged breach
of contract.
(G) The decrease in interest expense results primarily from lower borrowings
under our credit facility during the year, coupled with lower borrowing rates.
Liquidity and Capital Resources
At December 31, 2001 we had working capital of approximately $9,015,000
including cash and cash equivalents of approximately $60,300.
During the year ended December 31, 2001, our operations generated cash and cash
equivalents of approximately $1,433,000, primarily from net income of
approximately $444,000 plus noncash charges of approximately $328,000. The
balance of our increase arose from liquidating our inventory by approximately
$1,500,000 and an increase in accounts payable, accrued expenses and other
liabilities of approximately $3,636,000. These increases were offset in part by
an increase in accounts receivable of approximately $4,325,000.
During the year ended December 31, 2001 we used approximately $62,000 for the
acquisition of property and equipment, and received $45,000 from the sale of
property and equipment.
During the year ended December 31, 2001 approximately $1,600,000 of cash and
cash equivalents was used to reduce long term and short term debt.
In December, 1998 we entered into a credit facility ("Facility") with Merrill
Lynch Business Financial Services, Inc. ("Merrill Lynch"). At December 31, 2001,
the credit facility, as amended, provided for the following:
1) A revolving line of credit through October 31, 2002, with maximum
borrowings of $3,800,000 against the Company's eligible accounts
receivable and inventories. At December 31, 2001 we had $2,622,390
outstanding under the revolving line of credit, representing a net
decrease in our utilization of the revolving line of credit of $782,115.
As of April 2, 2002, the outstanding balance under the revolving line of
credit was $3,574,850.
2) A $900,000 term loan originating in December 1998 payable in monthly
installments of $10,714 plus interest through January 2006. This term
loan had an outstanding balance of $525,000 as of December 31, 2001.
3) A $500,000 term loan originating in October 1999 payable in monthly
installments of $8,333 plus interest through November 2004. This term
loan had an outstanding balance of $300,000 as of December 31, 2001.
4) A $600,000 term loan originating in January, 2001 having an outstanding
balance of $50,000 as of December 31, 2001, which was repaid during
January, 2002.
The revolving line of credit with Merrill Lynch requires interest to be paid
monthly at 2.75% above the 30 day London Interbank offering (LIBOR) rate (an
effective rate of 4.62% at December 31, 2001).
The Company intends to engage in discussions with Merrill Lynch with a view to
extending and increasing the Facility and presently believes that it will be
able to reach such an agreement with Merrill Lynch. In the event Merrill Lynch
does not extend the Facility, however, the Company intends to contact other
banks
12
and financing sources and believes that it would then be able to arrange
adequate alternative financing, although there can be no assurance of such. If
the Company is unable to extend the current Facility and cannot obtain adequate
alternative financing, and its cash available from operations is insufficient to
satisfy the Company's obligations then due to Merrill Lynch, Merrill Lynch would
be entitled to exercise all remedies available to it as a secured lender.
In addition to the Merrill Lynch credit facility, on September 26, 1997 and
December 28, 1999, the Company entered into two other 6% term loans in the
amount of $100,000 each. As of December 31, 2001, $45,663 and $76,691 were
outstanding under the 1997 loan and 1999 loan, respectively.
The tables below summarize our long term debt and our lease commitments as of
December 31, 2001:
Payments Due by Period
------------------------------------------------
Long term debt Obligations Less than 1- 3 4 - 5 After
As of December 31, 2001 Total 1 year years years 5 years
------------------------- --------- --------- ----- ----- -------
Merrill Lynch $875,000 $272,000 $583,000 $20,000 --
-------------------------
Other $122,000 $ 35,000 $ 87,000 -- --
-------------------------
Amount of Commitment Expiration Per Period
------------------------------------------------
Total
Lease Commitments Amounts Less than 1- 3 4 - 5 Over
As of December 31, 2001 Committed 1 year years years 5 years
----------------------------- --------- --------- ----- ----- -------
495 River Street $648,000 $275,000 $373,000 -- --
-------------------------
Our Merrill Lynch credit facility contains certain restrictive covenants which,
among other things, require the maintenance of certain financial ratios,
including minimum levels of Stockholders equity and certain levels of cash flow
(as defined within the credit facility agreement). As of December 31, 2001 the
Company was in compliance with the covenants contained in the agreement. Should
circumstances arise that would cause us to be in default, Merrill Lynch would
have the ability to accelerate the maturity on the credit facility agreement.
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 assuming that the Company's
Facility is extended or adequate alternative financing arrangements are obtained
by the Company. 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 are insufficient to fund operations or if the
13
Company's Facility is not extended on satisfactory terms, the Company could be
required to seek financing sooner than currently anticipated. Except for the
revolving credit portion of the Facility, which expires on October 31, 2002, and
various term loans, the Company has no current arrangements with respect to, or
sources of, financing. Accordingly, there can be no assurance that financing
will be available to the Company when needed, on commercially reasonable terms,
or at all. The Company's inability to obtain adequate financing when needed
would have a material adverse effect on the Company. In addition, any equity
financing obtained by the Company could involve substantial dilution to the
interests of the Company's stockholders.
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.
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 30, 2002, 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 30, 2002, 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 30, 2002, which section is
incorporated herein by reference.
(b) Security Ownership of Management
See the section captioned "Principal Shareholders of the Company"
included in the Company's Proxy Statement in connection with its Annual
14
Meeting scheduled to be held on May 30, 2002, which section is
incorporated herein by reference.
(c) Changes in Control
The Company knows of no contractual arrangements which may, at a
subsequent date, result in a change of control of the Company.
Item 12. Certain Relationships and Related Transactions
See the section captioned "Certain Transactions" included in the Company's Proxy
Statement in connection with its Annual Meeting scheduled to be held on May 30,
2002, which section is incorporated herein by reference.
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits
(1) The financial statements of the Company and the report thereon on
the Index to Financial Statements on page F-1 hereof are 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:
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 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).
4.3 Warrant Extension Agreement Between Sel-Leb Marketing, Inc. and
Jan S. Mirsky dated March 3, 2000 (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999).
4.4 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).
15
4.5 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).
4.6 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).
4.7 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 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).
10.2 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).
10.3A 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).
10.3B Lease Renewal dated as of January 29, 2002, between Bascom Corp.
and the Company.
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 Asset Purchase Agreement dated as of September 15, 1997 between
SBC Corporation, Inc. and Ales (incorporated by reference to
16
Exhibit 10.6 to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended September 30, 1997).
10.9 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).
10.10 Promissory Note and Security Agreement between Sel-Leb Marketing,
Inc. and Paterson Restoration Corporation dated December 29, 1999
(incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-KSB for fiscal year ended December 31,
1999).
10.11 Product Promotion Agreement ("Zoe Metro") (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 2000).
10.12 License Agreement ("Juliet") (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 2000).
10.13 Trademark License and Product Promotion Agreement ("Nicole
Miller").
10.14 Agreement of Sale dated August 28, 2001, between the Company and
Perfume Center of America, Inc.
10.15 Letter Agreement between the Company and RJS Scientific Inc.
10.16 Working Capital Management Account (WCMA) and Term Loan Agreement
dated as of November 16, 1999 between Sel-Leb Marketing, Inc. and
Merrill Lynch Business Financial Services Inc. (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on Form
10-KSB for fiscal year ended December 31, 1999).
10.17 Letter Agreement dated August 3, 2000 by and between Merrill Lynch
Business Financial Services, Inc. ("MLBFS") and Sel-Leb Marketing,
Inc., amending the WCMA and Term Loan and Security Agreement with
MLBFS (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2000).
10.18 Letter Agreement dated August 3, 2000 by and between Merrill Lynch
Business Financial Services, Inc. ("MLBFS") and Sel-Leb Marketing,
Inc., amending the Term Loan and Security Agreement with MLBFS
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2000).
10.19 Extension of Temporary Increase and Renewal for the WCMA Line of
Credit (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 2000).
10.20 Extension of WCMA Line of Credit and Temporary Increase of Line of
Credit (incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-KSB for fiscal year ended
December 31, 2000).
10.21 Extension of Temporary Increase and Renewal for the WCMA Line of
Credit (incorporated by reference to Exhibit 10.1 to the Company's
17
Quarterly Report on Form 10-QSB for the quarterly period ended
March 31, 2001).
10.22 Extension of Temporary Increase and Renewal for the WCMA Line of
Credit (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2001).
10.23 Extension of WCMA Line of Credit (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended September 30, 2001).
11.1 Statement re: computation of per share earnings (not required
because the relevant computation can be clearly determined from
material contained in the financial statements).
21 Subsidiary of the Company.
23.1 Consent of J.H. Cohn LLP.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year ended December 31, 2001.
18
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: April 3, 2002
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.
Date Name Title
---- ---- -----
April 2, 2002 /s/ Harold Markowitz Chairman of the Board and Director
------------------------
Harold Markowitz
April 2, 2002 President, Chief Executive Officer and
/s/ Paul Sharp Director (Principal Executive Officer)
------------------------
Paul Sharp
April 2, 2002 Chief Financial Officer (Principal
/s/ George Fischer Financial and Accounting Officer)
------------------------
George Fischer
April 2, 2002 /s/ Jack Koegel Vice Chairman of the Board,
------------------------ Chief Operating Officer and Director
Jack Koegel
April 2, 2002 /s/ Jorge Lazaro Executive Vice President, Secretary
------------------------ and Director
Jorge Lazaro
April 2, 2002 /s/ Stanley R. Goodman Director
------------------------
Stanley R. Goodman
April 2, 2002 /s/ Edward C. Ross Director
------------------------
Edward C. Ross
19
SEL-LEB MARKETING, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 F-3
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000 F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7/18
* * *
F-1
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, 2001, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2001, and their results of operations and
cash flows for the years ended December 31, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
J.H. COHN LLP
Roseland, New Jersey
April 1, 2002
F-2
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
------
Current assets:
Cash and cash equivalents $ 60,300
Accounts receivable, less allowance for doubtful accounts
of $266,120 9,163,755
Inventories 8,297,918
Deferred tax assets 297,545
Prepaid expenses and other current assets 832,460
-----------
Total current assets 18,651,978
Property and equipment, at cost, net of accumulated
depreciation and amortization of $1,153,237 164,130
Other assets 214,203
-----------
Total $19,030,311
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable under line of credit $ 2,622,390
Current portion of long-term debt 307,080
Accounts payable 4,626,583
Accrued expenses and other liabilities 2,080,918
-----------
Total current liabilities 9,636,971
Long-term debt, net of current portion 690,274
-----------
Total liabilities 10,327,245
-----------
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; 2,261,018 shares issued and outstanding 22,611
Additional paid-in capital 6,496,359
Retained earnings 2,223,096
Less receivable in connection with equity transactions (39,000)
-----------
Total stockholders' equity 8,703,066
-----------
Total $19,030,311
===========
See Notes to Consolidated Financial Statements.
F-3
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
Net sales $21,451,140 $20,707,269
----------- -----------
Operating expenses:
Cost of sales 16,286,705 16,027,588
Selling, general and administrative expenses 4,502,924 4,060,211
----------- -----------
Total operating expenses 20,789,629 20,087,799
----------- -----------
Operating income 661,511 619,470
----------- -----------
Other income (expense):
Interest expense, net of interest income
of $2,688 and $18,176 (370,948) (449,791)
Income from litigation settlement 280,000
Gain on sales of property and equipment 12,954
Other 6,088
----------- -----------
Totals (71,906) (449,791)
----------- -----------
Income before provision for income taxes 589,605 169,679
Provision for income taxes 145,936 75,318
----------- -----------
Net income $ 443,669 $ 94,361
=========== ===========
Net earnings per share:
Basic $ .20 $ .04
=========== ===========
Diluted $ .19 $ .04
=========== ===========
Weighted average shares outstanding:
Basic 2,261,018 2,261,018
=========== ===========
Diluted 2,326,501 2,397,501
=========== ===========
See Notes to Consolidated Financial Statements.
F-4
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
Receivable in
Common Stock Additional Connection Total
----------------------- Paid-in Retained with Equity Stockholders'
Shares Amount Capital Earnings Transactions Equity
--------- -------- ---------- ---------- ------------- -------------
Balance, January 1, 2000 2,261,018 $ 22,611 $6,496,359 $1,685,066 $(45,000) $8,159,036
Partial payment of
balance receivable 3,000 3,000
Net income 94,361 94,361
--------- -------- ---------- ---------- -------- ----------
Balance, December 31, 2000 2,261,018 22,611 6,496,359 1,779,427 (42,000) 8,256,397
Partial payment of
balance receivable 3,000 3,000
Net income 443,669 443,669
--------- -------- ---------- ---------- -------- ----------
Balance, December 31, 2001 2,261,018 $ 22,611 $6,496,359 $2,223,096 $(39,000) $8,703,066
========= ======== ========== ========== ======== ==========
See Notes to Consolidated Financial Statements.
F-5
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
Operating activities:
Net income $ 443,669 $ 94,361
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 228,390 299,179
Provision (credit) for doubtful accounts 113,001 (35,644)
Gain on sales of property and equipment (12,954)
Deferred income taxes (670) (8,680)
Changes in operating assets and liabilities:
Accounts receivable (4,325,605) 786,836
Inventories 1,500,938 (1,467,018)
Prepaid expenses and other current assets (213,784) (84,367)
Other assets 64,151 (17,684)
Accounts payable, accrued expenses and
other liabilities 3,635,733 (261,534)
---------- ----------
Net cash provided by (used in)
operating activities 1,432,869 (694,551)
---------- ----------
Investing activities:
Purchases of property and equipment (61,522) (45,977)
Proceeds from sales of property and equipment 45,050
---------- ----------
Net cash used in investing activities (16,472) (45,977)
---------- ----------
Financing activities:
Net proceeds from (net repayments of) note
payable under line of credit (782,115) 456,149
Proceeds from long-term debt 600,000
Repayments of long-term debt (790,902) (262,733)
Decrease in receivable in connection
with equity transactions 3,000 3,000
---------- ----------
Net cash provided by (used in)
financing activities (1,570,017) 796,416
---------- ----------
Net increase (decrease) in cash and cash equivalents (153,620) 55,888
Cash and cash equivalents, beginning of year 213,920 158,032
---------- ----------
Cash and cash equivalents, end of year $ 60,300 $ 213,920
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 370,013 $ 467,967
========== ==========
Income taxes paid $ 30,506 $ 352,502
========== ==========
See Notes to Consolidated Financial Statements.
F-6
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. Sel-Leb
Marketing, Inc. and Ales are referred to collectively herein as
the "Company." The Company is primarily engaged in distributing
and marketing cosmetics and consumer products through mass
merchandisers, discount chain stores and food, drug and
electronic retailers.
All significant intercompany balances and transactions have been
eliminated in consolidation. The minority interest in the net
equity of Ales as of December 31, 2001 and the minority interest
in the results of its operations in 2001 and 2000 were
immaterial.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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 when the earnings process is complete and
collectibility is assured, which is usually when the goods are
shipped to customers. Amounts billed for shipping and handling,
which have not been significant, are included in sales and
shipping and handling costs are included in cost of sales.
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
computed using the straight-line method over the term of the
lease.
Impairment losses on property and equipment are recognized when
events indicate that the undiscounted cash flows estimated to be
generated by such assets are less than their carrying value and
all or a portion of such carrying value may not be recoverable.
The Company did not recognize any impairment losses during 2001
and 2000.
F-7
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(continued):
Goodwill:
Goodwill is comprised of costs in excess of net assets of
acquired businesses that were being amortized on a straight-line
basis over periods not exceeding ten years. In June 2001, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and
other intangible assets with indefinite useful lives will no
longer be systematically amortized. Instead such assets will be
subject to reduction only when their carrying amounts exceed
their estimated fair values based on impairment tests established
by SFAS 142 that will be made at least annually. The Company will
be required to apply the provisions of SFAS 142 and discontinue
amortization effective as of January 1, 2002. The Company will
also be required to make its first impairment tests no later than
December 31, 2002. The effects of these tests on the Company's
consolidated financial position and results of operations has not
been determined.
As of December 31, 2001, goodwill had an immaterial carrying
value that was included in other assets. Goodwill amortization
totaled approximately $34,000 in 2001 and 2000, respectively.
Product development costs:
The Company expenses product development costs as incurred.
Product development costs charged to operations amounted to
approximately $78,000 and $72,000 in 2001 and 2000, respectively.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations amounted to
approximately $47,000 and $105,000 in 2001 and 2000,
respectively.
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.
F-8
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(concluded):
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.
Earnings per share:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which require
the presentation of "basic" and, if appropriate, "diluted"
earnings per common share if that 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.
In computing diluted earnings per share, the assumed exercise of
all of the Company's outstanding stock options and warrants,
adjusted for the application of the treasury stock method, would
have increased the weighted average number of common shares
outstanding as shown in the table below:
2001 2000
--------- ---------
Basic weighted average shares outstanding 2,261,018 2,261,018
Shares arising from assumed exercise of:
Stock options 65,483 106,849
Warrants 29,634
--------- ---------
Diluted weighted average shares outstanding 2,326,501 2,397,501
========= =========
Recent accounting pronouncements:
In addition to SFAS 142, 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, 2001 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 during 2001
and 2000 or that they will have a significant effect at the time
they become effective.
F-9
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Property and equipment:
Property and equipment at December 31, 2001 consisted of the
following:
Estimated
Useful
Lives Amount
------------ ----------
Machinery and equipment 2 to 7 years $ 817,019
Display fixtures 3 years 283,080
Computer equipment 3 to 5 years 152,790
Leasehold improvements 10 years 64,478
----------
1,317,367
Less accumulated depreciation
and amortization 1,153,237
----------
Total $ 164,130
==========
Depreciation expense aggregated $193,930 and $264,719 in 2001 and
2000, respectively.
Note 3 - Note payable under line of credit:
During December 1998, the Company entered into a loan agreement
pursuant to which Merrill Lynch Business Financial Services, Inc.
("Merrill Lynch") is providing the Company with a credit facility
(the "Facility"). Based on the latest amendments to the loan
agreement as of December 31, 2001, the Facility consists of a
revolving line of credit, with maximum borrowings of $3,800,000
against the Company's eligible accounts receivable and
inventories through October 31, 2002, and three term loans (see
Note 4). Borrowings under the revolving line of credit, which
totaled $2,622,390 at December 31, 2001, bear interest, which is
payable monthly, at 2.75% above the 30-day London Interbank
Offering Rate (an effective rate of 4.62% as of December 31,
2001). 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.
F-10
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Long-term debt:
At December 31, 2001, long-term debt consisted of the following:
Term loans payable to Merrill Lynch (A):
Due in monthly installments of $50,000 and a final
payment made in January 2002 $ 50,000
Due in monthly installments of $8,333 and a final
payment in November 2004 300,000
Due in monthly installments of $10,714 and a final
payment in January 2006 525,000
Other Loans payable (B):
Due in monthly installments of $1,461 and a final
payment in October 2004 45,663
Due in monthly installments of $1,461 and a final
payment in January 2007 76,691
--------
997,354
Less current portion 307,080
--------
Long-term debt $690,274
========
(A) The loans bear interest payable monthly at 2.75% above the
30-day London Interbank Offering Rate (LIBOR) and are
secured by substantially all of the assets of the Company
(see Note 3).
(B) The loans bear interest at an annual rate of 6%. The loans
are 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, 2001 are as
follows:
Year Ending
December 31, Amount
------------ --------
2002 $307,080
2003 263,646
2004 259,918
2005 146,114
2006 20,596
F-11
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Preferred stock, stock options and warrants:
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. The preferred
stock may be issued in one or more series with the terms and
preferences to be determined by the Company's Board of Directors.
No shares of preferred stock had been issued by the Company as of
December 31, 2001.
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 1,250
common shares exercisable from the date of grant.
F-12
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Preferred stock, stock options and warrants (continued):
Stock options (continued):
A summary of the status of the Company's shares subject to
options as of December 31, 2001 and 2000 and changes during the
years then ended is presented below:
2001 2000
----------------- ----------------
Weighted Weighted
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
------- ------ ------- ------
Outstanding, at beginning
of year 545,758 $ 2.40 563,910 $ 2.44
Granted 104,750 1.10 8,750 2.36
Canceled (500) (0.94) (26,902) (3.17)
------- -------
Outstanding, at end of year 650,008 $(2.19) 545,758 $ 2.40
======== ====== ======= ======
Options exercisable, at
end of year 524,383 423,306
======== =======
Weighted average fair
value of options granted
during the year $.86 $2.11
======== =====
The following table summarizes information about fixed stock options
outstanding at December 31, 2001:
Options
Options Outstanding Exercisable
---------------------------------------------- -----------------
Weighted
Average
Years of Weighted Weighted
Number Remaining Average Number Average
Exercise Out- Contractual Exercise Exer- Exercise
Prices standing Life Price cisable Price
------------- -------- ----------- -------- ------- --------
$.4375 105,689 6.76 $ .4375 105,689 $ .4375
.578-2.125 211,505 7.99 1.30 118,192 1.42
2.375-2.719 199,126 5.76 2.44 171,564 2.45
3.00-6.67 123,688 4.29 3.60 118,938 3.58
8.00-27.00 10,000 4.96 17.38 10,000 17.38
------- -------
$.4375-$27.00 650,008 6.35 $ 2.19 524,383 $ 2.35
============== ======= ==== ====== ======= ======
F-13
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Preferred stock, stock options and warrants (continued):
Shares subject to warrants:
At December 31, 2000, the Company had warrants outstanding for
the purchase of 86,622 shares of common stock that were
originally exercisable through April 15, 2001 at $1.25 per share.
On April 9, 2001, the Company extended the expiration date of the
warrants to April 15, 2002. The fair market value of the shares
on April 9, 2001 was $.75 per share.
Shares reserved for issuance:
At December 31, 2001, shares of common stock were reserved for
the following:
Exercise of outstanding stock options 650,008
---------
Exercise of stock options available for grant:
Option Plan 98,190
Directors' Plan 53,750
---------
Total 151,940
---------
Exercise of warrants 86,622
---------
Total 888,570
=========
Pro forma information:
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 and
warrants 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 2001 and
2000 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:
2001 2000
-------- --------
Net income - as reported $443,669 $ 94,361
======== ========
Net income - pro forma $362,149 $ 18,754
======== ========
Basic earnings per share - as reported $.20 $.04
==== ====
Basic earnings per share - pro forma $.16 $.01
==== ====
Diluted earnings per share - as reported $.19 $.04
==== ====
Diluted earnings per share - pro forma $.16 $.01
==== ====
F-14
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Preferred stock, stock options and warrants (concluded):
Pro forma information (concluded):
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 2001 and
2000:
2001 2000
------ ------
Expected volatility 116% 100%
Risk-free interest rate 4.4% 6.0%
Expected years of option life 5.0 5.0
Expected dividends 0% 0%
The pro forma charges for compensation derived from the fair
value option pricing model as describe above totaled $81,520 and
$75,607 (net of tax effects) in 2001 and 2000, respectively.
Note 6 - Income taxes:
Deferred tax assets at December 31, 2001 (there were no deferred
tax liabilities) were attributable to temporary differences
related to the following:
Inventories $165,015
Allowance for bad debts 102,995
Other 29,535
--------
Deferred tax assets $297,545
========
The net provision for income taxes in 2001 and 2000 consisted of the
following provisions (credits):
2001 2000
-------- -------
Federal:
Current $154,052 $50,509
Deferred 240 (5,741)
-------- -------
Totals 154,292 44,768
-------- -------
State:
Current (7,448) 33,489
Deferred (908) (2,939)
-------- -------
Totals (8,356) 30,550
-------- -------
Totals $145,936 $75,318
======== =======
F-15
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
The provision for income taxes in 2001 and 2000 differs from the
amount computed using the Federal statutory rate of 34% as a
result of the following:
2001 2000
---- ----
Tax at Federal statutory rate 34% 34%
Increase (decrease) from effects of:
State income taxes, net of Federal income
tax benefit 3 12
Nondeductible expenses and other permanent
differences 1 8
Prior year overaccrual (13) (12)
Other (primarily surtax exemption) 2
--- ---
Totals 25% 44%
=== ===
Note 7 - Related party transactions:
From time-to-time, the Company transacts business with parties
related to the minority stockholders of Ales. During 2001 and
2000, the Company purchased inventories at a total cost of
approximately $428,000 and $1,440,000, respectively, from
companies affiliated with the minority stockholders. At December
31, 2001, accounts payable included a total of approximately
$43,000 that arose primarily from such purchases. In addition,
during 2001 and 2000, the Company made sales of merchandise to
companies affiliated with minority stockholders aggregating
approximately $102,000 and $606,000, respectively. At December
31, 2001, accounts receivable included a total of approximately
$39,000 that arose primarily from such sales.
Note 8 - Commitments and contingencies:
Leases:
The Company has a noncancelable operating lease for office and
warehouse facilities that expires on March 31, 2004. In addition
to base rentals, the lease requires payments for real estate
taxes and other operating costs.
Minimum rental payments under the lease from January 1, 2002
until its expiration on March 31, 2004 total approximately
$648,000 and are payable as follows: $275,000 in 2002; $298,000
in 2003; and $75,000 in 2004.
Rent expense amounted to approximately $258,000 and $291,000 in
2001 and 2000, respectively.
F-16
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (concluded):
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
$776,000 and $390,000 in 2001 and 2000, 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.
On May 30, 2001, the Company entered into an agreement to settle
a legal action it had brought against one of its licensors for an
alleged breach of contract. The accompanying 2001 consolidated
statement of income includes the Company's income from the
litigation settlement which totaled $280,000.
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. From time to time, cash
balances exceed Federal insurance limits. Exposure to credit risk
is reduced by placing such deposits in major financial
institutions and monitoring their credit ratings.
The Company generally extends credit to its customers, a
significant portion of which are in the retail industry.
Approximately 54% and 37% of the Company's net sales were derived
from two major customers during 2001 and 2000, respectively. The
two customers also accounted for approximately $7,048,000 of the
Company's accounts receivable balance at December 31, 2001. 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, 2001.
Note 9 - Fair value of financial instruments:
The Company's material financial instruments at December 31, 2001
and 2000 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 substantially all of those
obligations had interest rates equivalent to those currently
prevailing for financial instruments with similar
characteristics.
F-17
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Segment information:
The Company has 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 manufacturers,
wholesalers or retailers as a result of close-outs, overstocks
and/or changes in the packaging of brand name items. The
Cosmetics segment is comprised of the acquisition, sale and
distribution of all other products, including "celebrity
endorsed" and "tie-in" cosmetics and health and beauty aid
products and designer and all other fragrances.
Net sales, cost of sales and other related segment information
follows:
2001 2000
----------- -----------
Net sales:
Opportunity $ 9,087,478 $ 8,832,579
Cosmetics 12,363,662 11,874,690
----------- -----------
Totals 21,451,140 20,707,269
----------- -----------
Cost of sales:
Opportunity 6,103,725 6,545,926
Cosmetics 10,182,980 9,481,662
----------- -----------
Totals 16,286,705 16,027,588
Selling, general and
administrative expenses 4,502,924 4,060,211
----------- -----------
Total operating expenses 20,789,629 20,087,799
----------- -----------
Operating income 661,511 619,470
----------- -----------
Other income (expense):
Interest expense, net (370,948) (449,791)
Income from litigation settlement 280,000
Gain on sales of property
and equipment 12,954
Other 6,088
----------- -----------
Totals (71,906) (449,791)
----------- -----------
Income before provision for
income taxes $ 589,605 $ 169,679
=========== ===========
Segment assets:
Inventories:
Opportunity $ 1,456,274 $ 2,465,454
Cosmetics 6,841,644 7,333,402
----------- -----------
Totals 8,297,918 9,798,856
Other assets 10,732,393 6,722,070
----------- -----------
Total assets $19,030,311 $16,520,926
=========== ===========
F-18