Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
(a) General Development of Business
MEM Company, Inc. (the "Company" or the "Registrant") was incorporated in 1948 under the laws of the State of New York. The business of the Company principally consists of manufacturing, selling and distributing a diversified line of toiletries in several fragrance groups. These are marketed under the nationally advertised trademarks English Leather(R), Heaven Sent(R), LOVE'S(R) and Tinkerbell(R). The Company also markets Acqua di Selva(R), a premium priced imported line of men's toiletries, through a subsidiary.
In May 1994, the Company acquired the trademark and inventories relating to the British Sterling(R) fragrance line of men's products. In mid 1994, the Company introduced the Timberline(R) fragrance line for young men in the "Generation X" category. In the women's product category, the Company began marketing its Heaven Sent Vanilla line and also introduced the Love's Frenzy(R) and Love's Clean & Natural product lines.
The Company manufactures and markets Heaven Sent(R), a line of women's fragrance items, in the United States and Canada and owns the distribution rights in Puerto Rico and elsewhere in the Western Hemisphere. The Company also manufactures and distributes, under the trademark LOVE'S(R), a line of toiletries, cosmetics and accessories for teenage girls which are distributed through franchised dealers consisting primarily of chain and independent drug stores, mass merchandisers and department stores in the United States and Canada.
Tom Fields, Ltd. ("Tom Fields"), operates as a division of the Company. Tom Fields manufactures and markets a line of children's cosmetics and accessories principally under the trademark Tinkerbell(R). A subsidiary, Tom Fields (U.K.) Ltd., markets this line of children's products in the United Kingdom and in Europe.
The principal market for all of the above products is the United States. With the exception of the new brands acquired or introduced in 1994, no significant change occurred during the fiscal year 1994 in kinds of products, markets or methods of distribution.
(b) Financial Information About Industry Segments
The Company operates in one industry segment: the production and distribution of toiletries and accessories for men, women and children.
Consolidated financial information relating to product lines, domestic and foreign operations and export sales for the years ended December 31 is as follows ($000 omitted):
(c) Narrative Description of Business
The Company is principally engaged in the manufacture, sale and distribution of a diversified line of toiletries and accessories under the nationally advertised trademarks English Leather(R), British Sterling(R), Timberline(R), Love's(R), Heaven Sent(R) and Tinkerbell(R). The principal market for these products is the continental United States with a distribution service network consisting of three warehouse locations.
The primary shipping location is Northvale, New Jersey and two other distribution warehouses are located in Texas and California. At the end of 1994, the Company terminated its arrangement with a distribution facility in Georgia. The toiletries industry is highly competitive and, based on available industry sources, the Company believes that it is among the leading producers of products sold within the same price range as its products.
Although the Company and its subsidiaries are not dependent upon a single customer or a very few customers for their business, one national customer represented 14% of net sales in 1994. The Company has done substantial business with this customer for several years and feels they have a good business relationship. Although the total loss of business with the customer would have a material adverse effect, the Company considers that possibility to be remote. Due to the seasonal nature of the business and the heavy volume of shipments made in the last half of the year, there was no significant backlog of orders as of December 31, 1994 or 1993. In 1994 and 1993 the last half of the calendar year accounted for 79% and 82% of net sales, respectively. The related inventory requirements and accounts receivable are financed by the Company's revolving credit agreement. Present supply sources are adequate for the requirements of the business and several alternate sources are available if needed. For protection against misuse by others, the trademarks under which most of the toiletry and accessory products are sold by the Company have been registered in the United States Patent Office and in many other countries. At December 31, 1994, the Company and its subsidiaries employed 411 persons.
The Company's terms of sale do not provide the purchaser any right to return merchandise to the Company. Returns of merchandise which has been damaged and of seasonal merchandise must be approved by the Company before the customer receives credit, which the Company does not unreasonably withhold. Orders are generally shipped promptly after receipt and cancellations have been negligible.
The Company owns the majority of the trademarks under which it markets its products and for which it pays no royalties. It uses certain trademarks pursuant to licensing agreements which generally provide for royalties based on the net sales volume of trademarked products. In 1993 the Company exercised its option to make a one time $500,000 payment under a licensing agreement in lieu of making any future royalty payments under the agreement. Royalties were not a material portion of the Company's costs during the Company's last three fiscal years. All the licenses are of perpetual duration.
The Company's expenditures for research and development were immaterial during the years ended December 31, 1994, 1993 and 1992.
Item 1A.

Item 1A. Executive Officers of the Registrant (See Item 10 herein)
All of the officers set forth below have been elected to serve until the next Annual Meeting of the Company's Board of Directors or until their successors are elected and qualified.
All officers serve at the pleasure of the Board of Directors. All of the above executive officers have served in such offices for the past five years except Messrs. Kazimir, Feigenbaum, Jensen and Marinacci.
Mr. Kazimir was elected Executive Vice President and Chief Operating Officer in March, 1993. Previously, he had been Senior Vice President of Finance and Administration, Chief Financial Officer since November, 1990. He had been the President of his own consulting firm for two years prior to joining MEM. Before that he was with Elizabeth Arden, Inc. in various financial and operating capacities.
Mr. Feigenbaum, before becoming Vice President of Sales in 1991, was National Sales Manager since 1989. Other previous positions with MEM included National Field Sales Manager and National Key Accounts Manager.
Mr. Jensen, before becoming Vice President of Operations in 1994, was Director of Operations since 1993. Prior to that, he was Director of Manufacturing since his employment in 1986.
Mr. Marinacci, prior to becoming Vice President of Marketing in 1994, had been employed by Houbigant, Inc. since 1989 in various capacities. From March 1993 to April 1994, he was Vice President of Operations and in 1992 and 1993 he was Vice President, Corporate Marketing. From 1989 to 1992 he held various marketing positions. Houbigant, Inc. entered Chapter 11 proceedings in November, 1993, and Mr. Marinacci also served as acting Chief Operating Officer from December, 1993 to April, 1994.
Item 2.


Item 2. Properties
The facilities and plant machinery and equipment owned by the Company and its subsidiaries are, in the opinion of management, adequate for the conduct of its business, and are well maintained and in good condition.
The Company's executive offices and main plant are located in a 206,000 square foot building located on 16.3 acres in Northvale, New Jersey and owned by the Company. The Tom Fields plant is located in a 53,000 square foot building in Northvale, New Jersey and is owned by a subsidiary of the Company. Manufacturing facilities in Canada are located in a 32,000 square foot plant in Boucherville, Quebec which is owned by MEM Company (Canada) Ltd. The Company leases a 51,000 square foot facility in Kenilworth, New Jersey which is used for inventory storage. Tom Fields (U.K.) assembles products in leased facilities in Folkestone, Kent.
Item 3.

Item 3. Legal Proceedings
No material legal proceedings, other than ordinary routine litigation incidental to the business, are pending to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
Not applicable PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Quarterly Market and Dividend Information
The common stock of the Company is traded on the American Stock Exchange under the ticker symbol MEM. As of March 24, 1995 the number of record holders of common stock was 420. The quarterly high and low sales prices for the past two years are as follows:
The Company has not declared any cash dividends for the past three years, and does not anticipate that dividends will be paid in the foreseeable future. Restrictions on dividend payments contained in the Company's financing agreement currently prohibit the declaration of dividends if the Company operates at a loss.
Item 6.

Item 6. Selected Financial Data, (In thousands, except per share figures)
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
1994 Compared to 1993
Consolidated net sales in 1994 were 38% higher than in 1993. This sales increase resulted primarily from the acquisition of the British Sterling line of men's toiletries in May, 1994 from the Speidel Division of Textron, Inc. and from the introduction of the Timberline fragrance line for "Generation X" young men. In addition, the Company introduced its Heaven Sent Vanilla line of fragrance products, the Love's Frenzy product line and the Love's Clean & Natural environmentally sensitive product line. All of these new brands and products were sold through the Company's existing channels of distribution by its regular salesforce. Sales of English Leather fragrances increased modestly over 1993, and sales of Love's Baby Soft and Heaven Sent were slightly lower than in 1993, excluding the new products. Sales of Tinkerbell products increased almost $1,000,000, of which $642,000 came from the United Kingdom. Lower domestic Tinkerbell sales of $1,090,000 were primarily the result of no 1994 sales to a customer with sizable 1993 volume, and this decline was more than offset by a decline in returns of $1,250,000. The increase in overall consolidated sales is primarily the result of higher unit sales, as unit sales price increases in 1994 were not significant.
Sales in the United States increased 45% as the result of new product sales. This sales growth was achieved in spite of the fact that some retailers continued to reduce their commitments to fragrance products, and most all continued their efforts to minimize their inventory investment. Sales of men's and women's fragrances continued to be impacted by competition from higher priced "prestige" fragrances being sold in the Company's distribution channels and from companies with larger resources to commit to advertising and marketing programs.
Canadian sales were up 13% in local currency and 7% in U. S. dollar equivalent, and the operating loss was sharply reduced from the prior year. Tinkerbell sales in the United Kingdom increased over 25% and are now approaching the volume necessary to achieve profitable operations. Overall, the effects of inflation and exchange rate fluctuations were not material. The Company continues to investigate opportunities to develop or acquire contraseasonal brands or products to compensate for the current seasonality of its business.
Retailers continue to consider fragrance merchandise to be highly promotional and seasonal, and request permission to return unsold goods. During the past two years, management has worked closely with the customers concerning their level of anticipated sales. As a result, actual and anticipated returns decreased by $100,000 in 1994 compared to 1993 despite the significantly higher sales level in 1994, and the percentage of returns to gross sales decreased to 15% in 1994 from 20% in 1993. Management anticipates further reductions in this returns ratio in 1995.
Cost of sales declined in relation to sales from 59% of sales in 1993 to 54% in 1994. The primary reason for this improvement is the higher gross margins on the new brands introduced in 1994, principally Timberline. In addition, production costs were lower in 1994 due to higher manufacturing volume. Selling and shipping expense increased from 34% of sales in 1993 to 37% in 1994. Shipping and distribution expenses were slightly lower in relation to sales in 1994 than in 1993. Selling expenses remained the same despite the large sales increase, reflecting the relatively fixed nature of these expenses. Marketing expenses rose significantly from 17% of sales in 1993 to 23% in 1994 principally as a result of expenditures incurred in the introduction of the Timberline fragrance line. Introductions of new product lines typically require large investments in advertising and marketing in the initial year to establish brand awareness. The Company anticipates that Timberline marketing expenditures will be lower in relation to sales in 1995. General and administrative expense increased $311,000, which resulted from an increase in the provision for losses on accounts receivable. Personnel and other administrative costs were the same as in 1993.
Royalty income decreased in 1994 due to lower amounts received from a Tinkerbell licensee. Amortization of intangibles increased due to the inclusion of amortization of the British Sterling trademark since June, 1994. Interest expense increased $429,000 as the result of new long term debt incurred during the year and increased $193,000 as the result of higher short term loans outstanding during the year and a modest increase in interest rates paid. Financing costs decreased in 1994 due to certain non-recurring charges in early 1993 in connection with a prior financing agreement. The Company has over $8,400,000 of domestic and foreign income tax loss carryforwards and accordingly does not anticipate paying income taxes until future earnings exceed the carryforwards.
1993 Compared to 1992
Consolidated net sales in 1993 were 14% lower than in 1992. Sales of English Leather fragrances declined $1,100,000, and the decline of $2,000,000 in women's fragrance sales was primarily from lower sales of Love's Baby Soft products. Sales of Tinkerbell declined $3,200,000 from 1992, primarily as the result of the decision by a few important customers not to purchase Tinkerbell in 1993. The decrease in overall sales was primarily the result of lower unit sales. Unit sales price increases in 1993 were not significant.
Sales in the United States continued to contract, although to a much lesser extent than in 1992, as the retail environment did not rebound from 1992 levels. Some retailers reduced their commitments to fragrance products, and most all continued their efforts to minimize their investment in inventories. Tinkerbell sales were also impacted by a proliferation of character merchandise offerings. Sales of men's and women's fragrances continued to be impacted by competition from higher priced "prestige" fragrances being sold in the Company's distribution channels and from companies with larger resources to commit to advertising and marketing programs, whereas the Company reduced its marketing expenditures by $1,600,000 in 1993.
Canadian sales were 26% lower than in 1992, reflecting the continued weak economy and the decision by a few retailers not to carry the Tinkerbell and Baby Soft lines. Tinkerbell sales in the United Kingdom were up 8% in local currency, but declined in U. S. dollar equivalent. Overall, the effects of inflation and exchange rate fluctuations were not material.
During the past two years, management has worked closely with the customers concerning their level of anticipated sales, and as a result, returns decreased by $4,300,000 in 1993 compared to 1992, and the percentage of returns to gross sales decreased to 20% in 1993 from 24% in 1992.
Cost of sales rose in relation to sales primarily as a result of lower gross margins on Tinkerbell products resulting from changes in product mix and lower unit sales. The impact on gross profit from lower customer returns was offset by higher per unit manufacturing costs resulting from lower production levels in 1993. Selling and shipping expense declined from 39% to 35% of sales due primarily to $960,000 lower selling expense as a result of a reorganization and reduction of the salesforce in early 1993 and a reduction of marketing expense in relation to sales of slightly over 1%. In addition, royalty expense decreased $575,000 mostly due to the termination of certain royalty obligations in 1993 and thereafter. General and administrative expense decreased $927,000, of which $266,000 was from a reduction of bad debt expense, $454,000 from personnel and related expenses and the balance of $207,000 from other general operating expenses.
Interest income declined due to a lower rate of interest earned on and lower outstanding principal of a note receivable. Interest expense declined due to significantly lower short term loans outstanding during the year, offset by a modest increase in interest rates paid. Financing expense decreased in 1993 due to the absence of costs incurred in 1992 in connection with the prior financing agreement.
Liquidity and Capital Resources
The Company's business is highly seasonal. In the first nine months of the year, cash is required to buy and manufacture inventories. The peak shipping months are from August through November and funds are required to finance accounts receivable from shipment date to December and January, when the Company receives significant cash collections. To finance these needs, the Company uses its working capital, which was $15,601,800 at the end of 1994, and a revolving credit agreement with financial institutions, which provides for a $17,500,000 line of credit expiring in 1998. In 1994, the maximum amount outstanding on short-term borrowings was $14,300,000. At December 31, 1994, short-term loans of $6,397,000 were outstanding under the agreement. The borrowings were subsequently reduced to less than $100,000 in February 1995. The revolving credit agreement contains a prohibition on the payment of dividends if the Company operates at a loss. There are no material commitments for capital expenditures.
Net cash used in operating activities in 1994 was $4,327,000 and resulted from the higher level of business activity in 1994. Accounts receivable increased $4,762,000 as a result of higher sales and the provision for losses on uncollectible receivables increased by $326,000 in 1994. Excluding the original British Sterling inventories acquired in May, other inventories increased $2,484,000, reflecting the requirements of the new brands introduced during the year as well as additional requirements for British Sterling. The increase in inventories was accompanied by an increase of $2,205,000 in accounts payable, reflecting the higher level of purchases. Other accrued expenses, principally advertising and promotion, increased $980,000 as a result of higher expenses associated with the higher sales level. All of these higher working capital requirements were financed by an increase in short term borrowings of $5,500,000 at December 31, 1994.
Additions to plant and equipment increased $304,000 over the prior year as a result of the packaging requirements of the new product lines. The cash portion of the purchase price for the British Sterling assets resulted in payments of $6,409,000 for intangibles and $1,037,000 for inventory. The source of the cash was a five year term loan for $7,050,000. In October, 1994, the Company received payment on a note receivable of $2,636,000 and this in turn was used to reduce the term loan. As a result of all this activity, the Company's cash increased $137,000 to a total of $1,129,000 at the end of 1994.
Item 8.


Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, the Report of Independent Auditors thereon and related schedule appear on pages to. See Index to Consolidated Financial Statements and Financial Statement Schedules, page.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is incorporated by reference to the information under the caption "Election of Directors - Information Concerning Nominees for Election as Directors" of the Definitive Proxy Statement. Information with respect to the executive officers of the Company is set forth in Item 1A of this Form 10-K.
Item 11.

Item 11. Executive Compensation
Information with respect to Item 11 is incorporated by reference to the information under the caption "Election of Directors - Executive Compensation" of the Definitive Proxy Statement.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Item 12 is incorporated by reference to the information under the caption "Election of Directors - Information Concerning Nominees for Election as Directors" and "Election of Directors - Principal Shareholders" of the Definitive Proxy Statement.
Item 13.

Item 13. Certain Relationships and Related Transactions
Not Applicable
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements - See accompanying Index to Consolidated Financial Statements and Financial Statement Schedules, Page.
(2) Financial Statement Schedules - See accompanying Index to Consolidated Financial Statements and Financial Statement Schedules, Page.
(3) See Exhibit Index on page 16.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEM COMPANY, INC.
Date: March 29, 1995 By:/S/ Michael G. Kazimir, Jr. --------------------------- Michael G. Kazimir, Jr. Executive Vice President Chief Operating Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/S/ Michael G. Kazimir, Jr. /S/ Michael G. Kazimir, Jr. --------------------------- --------------------------- Michael G. Kazimir, Jr. Michael G. Kazimir, Jr. as Attorney-in-Fact for: Executive Vice President Gay A. Mayer, Chairman, Chief Financial and President, Chief Executive Accounting Officer Officer and Director March 29, 1995 Robert E. Mulcahy, III, Director Paul Hallingby, Jr., Director Laurette M. Beach, Director Derek B. Van Dusen, Director March 29, 1995
Exhibit Index
Exhibit No. Document
3(A) Certificate of Incorporation. Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1980.
3(B) Amendment to the Certificate of Incorporation dated April 28, 1988. Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1988.
3(C) Amendment to the Certificate of Incorporation dated June 19, 1988. Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1988.
3(D) Amendment to the Certificate of Incorporation, dated April 28, 1987. Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1987.
3(E) By-Laws. Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1986.
10 Purchase and sale agreement, dated as of May 5, 1994, between Textron, Inc. and MEM Company, Inc. Incorporated by reference from the Registrant's Form 8-K dated May 20, 1994.
21 Subsidiaries of Registrant. Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1992.
23 Consent of Accountants. Filed herewith
24 Power of Attorney. Filed herewith.
27 Financial Data Schedule. Filed herewith.
MEM COMPANY, INC.
Index to Consolidated Financial Statements and Financial Statement Schedules
The following consolidated financial statements of MEM Company, Inc. are included in Item 8:
Report of Independent Auditors
Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of MEM Company, Inc. is included in Item 14(d):
II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors ------------------------------------------------------------
The Board of Directors and Stockholders MEM Company, Inc.
We have audited the accompanying consolidated balance sheets of MEM Company, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MEM Company, Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP Hackensack, New Jersey February 28, 1995
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
Assets
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
Liabilities and Stockholders' Equity
See accompanying notes.
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1994, 1993 and 1992
See accompanying notes.
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
See accompanying notes.
MEM COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1994, 1993 and 1992
Note 1. Accounting Policies
Nature of business: The Company's business consists of manufacturing, selling and distributing a diversified line of toiletries and accessories to retailers. The Company operates in one industry segment. In 1994, one national customer represented 14% of net sales. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Financial information about geographic data is disclosed in Item 1(b) of the Company's 1994 Form 10-K.
Consolidation: The consolidated financial statements include the accounts of the Company's subsidiaries. All material intercompany items have been eliminated. The assets and liabilities of foreign subsidiaries have been translated at the exchange rate at the balance sheet date. Revenues, expenses, gains and losses are translated at the average rate for the year, determined by averaging the rates at the end of each calendar quarter.
Deferred financing costs: Deferred financing costs are included in prepaid expenses and are being amortized over the life of the loans.
Intangible assets: The intangible assets arising from the excess of purchase price of subsidiaries acquired prior to 1971 over the fair value of the net assets acquired are not amortized since no diminution in value is anticipated. Other intangible assets are being amortized on a straight-line basis over twenty to forty years.
Depreciation: For financial accounting purposes, depreciation is provided on the straight-line basis as follows: buildings and improvements - 3 to 25 years; machinery and equipment - 5 to 12 years; furniture and fixtures - 4 to 10 years. For income tax purposes, the Company generally uses accelerated depreciation.
Advance royalty payments and license agreements: License agreements and nonrefundable royalty payments in connection with a licensing agreement are being amortized as selling expense on a straight-line basis which averages seventeen years.
Royalty income: Royalty income represents amounts earned by licensing the English Leather and Tinkerbell trademarks for use by various third parties.
Revenue recognition: Revenues are recorded at the time of shipment of merchandise. The Company provides for estimated sales returns and allowances.
Note 2. British Sterling Asset Purchase
On May 20, 1994, the Company acquired certain assets relating to the British Sterling fragrance line of products from the Speidel Division of Textron, Inc. for $9,182,000, of which $8,145,000 was for intangibles, $1,029,000 for inventories and $8,000 for other assets. Other direct costs of the acquisition were $196,215. The purchase was financed by a term loan of $7,050,000 and a note for $1,932,000 payable to Textron. The balance of $396,215 was paid from the Company's working capital.
Note 3. Credit Arrangements and Notes Payable
In March, 1993 the Company obtained a new three year secured financing agreement with a financial institution which provided for a revolving line of credit of up to $15,000,000 for working capital purposes. The agreement contains certain covenants generally associated with this type of financing including the pledging of substantially all assets as collateral and a prohibition on the payment of dividends. Interest on borrowings is at the Bank of America prime rate (8 1/2% at December 31, 1994) plus 2.5% and an unused line fee of 1/4% is payable at various levels of borrowing.
In connection with the Company's acquisition described in Note 2 above, the agreement was amended in May, 1994 to provide for a five year term loan of $7,050,000, extend the maturity of the agreement by two years to April, 1998 and increase the total permitted borrowings at any time to $17,500,000 (including the outstanding term loan). The term loan was reduced by $2,465,076 in October, 1994 from the collection of a note receivable held by the Company. Principal of the term loan is payable in equal monthly installments over five years, and interest is determined on the same basis as the revolving line of credit.
Under the terms of the acquisition, the seller received an unsecured note payable for $1,932,000 at 8% interest. This note is payable in three equal annual installments beginning June 1, 1995.
The Company's Canadian subsidiary has pledged its land and building as security for 8.19% notes payable which are payable in monthly principal installments of $1,572 until October, 1998 when the balance is due. The aggregate amounts of all notes payable during each of the four years subsequent to December 31, 1995 are: 1996 - $1,534,066; 1997 - $1,534,066; 1998 - $1,475,507; 1999 - $362,985.
The Company's United Kingdom subsidiary has a line of credit of $939,000 for short term financing at various interest rates, of which $131,474 was outstanding at December 31, 1994. This line is secured by the subsidiary's accounts receivable.
The weighted average interest rate on short-term borrowings outstanding at December 31,1994 and 1993 was 11% and 8.3%, respectively.
Note 4. Income Taxes
At December 31, 1994, the Company had loss carryforwards for U. S. tax purposes of approximately $6,916,000 of which $679,000 expires in 2006, $3,834,000 in 2007, $1,703,000 in 2008 and $700,000 in 2009. The Company also had approximately $1,484,000 of foreign tax loss carryforwards as of December 31, 1994. Approximately $597,000 of these loss carryforwards will expire between 1998 and 2001 while the remaining $887,000 can be carried forward indefi- nitely. Under the provisions of SFAS No. 109, a valuation allowance is established if, based on the weight of available evidence, it is more likely than not that a portion of the deferred asset will not be realized. Consequently, at December 31, 1994, the Company has established a valuation allowance against a portion of the above loss carryforwards.
Income (loss) before income taxes is as follows:
1994 1993 1992 ---- ---- ---- Domestic $(1,151,029) $(1,974,147) $(4,068,608) Foreign (177,248) (595,759) (444,146) ----------- ----------- ----------- $(1,328,277) $(2,569,906) $(4,512,754) =========== =========== ===========
The source of significant temporary differences in 1994, 1993 and 1992 which gave rise to deferred tax benefit and its effect was as follows:
1994 1993 1992 ---- ---- ---- Utilization of net operating loss carryforwards $ - $ - $(213,000) ========= ========= =========
The components of the net deferred tax asset and liability as of December 31, 1994 and 1993, were as follows: 1994 1993 ---- ---- Deferred tax liabilities: Property, plant and equipment $ 443,000 $ 493,000 ---------- ---------- Total deferred tax liability $ 443,000 $ 493,000 ========== ========== Deferred tax assets: Net operating loss carryforwards $3,360,000 $2,960,000 Valuation allowance for deferred tax assets (2,917,000) (2,467,000) ---------- ---------- Net deferred tax asset 443,000 493,000 ---------- ---------- Net deferred tax liability $ -0- $ -0- ========== ==========
The reconciliation of the (benefit) for federal income tax in the financial statements and the (benefit) computed at the statutory rates are as follows:
1994 1993 1992 ---- ---- ---- (Benefit) at statutory rate $(451,614) $(873,768) $(1,534,336) Limitation on utilization of domestic losses 347,150 632,110 1,134,146 Limitation on utilization of foreign losses 60,264 202,558 151,009 Other - Net 44,200 39,100 36,181 --------- --------- ----------- $ -0- $ -0- $ (213,000) ========= ========= ===========
Note 5. Leases
The Company rents warehouse and office space under leases which expire through 2003. The Company is also responsible for the payment of insurance, taxes and maintenance of the properties. The future minimum rental commitments for these leases are as follows: 1995 - $353,000; 1996 - $86,000; 1997 - $63,000; 1998 - $63,000; 1999 - $63,000; thereafter - $250,000. Rental expense amounted to $351,000 in 1994, $342,000 in 1993 and $332,000 in 1992.
Note 6. Stock Options
Under the 1987 Non-Qualified Stock Option Plan, 240,000 shares were authorized for issuance. No options have been granted under the Plan.
Under the 1991 Stock Incentive Plan, 200,000 shares of common stock were authorized for issuance to key employees at an option price which is the fair market value on the date of grant. Awards made under the Plan may be options or contingent options. Contingent options will become exercisable in whole or in part based upon an evaluation of the employee's performance during the year in which the option is granted. Under the 1993 Non-Employee Stock Incentive Plan, 50,000 shares of common stock were authorized for issuance to non-employee members of the Board of Directors and certain individuals who provide consulting services to the Company at an option price which is the fair market value on the date of grant.
Options issued under the Plans to date are exercisable in various installments, and are exercisable in full after two years from grant.
Information with respect to options is as follows:
Option Price Number of Shares per Share -------------------- ------------ Contingent Options Options ------- ---------- Outstanding - December 31, 1991 27,375 32,625 $5.00 Issued as options 20,250 (20,250) $5.00 Cancelled (4,250) (12,375) $5.00 ------ ------ Outstanding - December 31, 1992 43,375 0 $5.00 Granted 35,750 $4.13-$5.00 Exercised (500) $5.00 Cancelled (7,000) $5.00 ------ Outstanding - December 31, 1993 71,625 $4.13-$5.00 Granted 20,700 $4.13 Cancelled (10,000) $4.13-$5.00 ------ Outstanding - December 31, 1994 82,325 $4.13-$5.00 ======
Options were exercisable at December 31 as follows: 1994 - 48,625 shares; 1993 - 35,875; 1992 - 26,375.
Note 7. Postretirement Benefits
The Company does not provide any postretirement health care, life insurance or other welfare benefit programs to current or former employees except that the Company maintains a defined benefit pension plan for employees who meet certain eligibility requirements. Benefits under the plan are based on salary and years of service. For the past three years, no contributions have been required.
----------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------------------- Service cost-benefits earned during the period $ 182,915 $ 226,383 $ 220,700 Interest cost on projected benefit obligation 291,992 308,755 298,717 Investment return on plan assets 204,838 (471,152) (214,416) Other (710,709) ( 31,352) (310,984) ---------- ---------- ---------- Net pension cost (benefit) $ (30,964) $ 32,634 $ (5,983) ========== ========== ========== Assumptions: Discount rate 8% 8% 8% Compensation increases 5% 5% 5% Rate of return on assets 8% 8% 8% -----------------------------------------------------------------------
A reconciliation between the plan's funded status and the pension asset as recorded in the Company's balance sheet is presented below:
Plan's assets at fair value, primarily stocks and bonds $4,295,427 $5,121,274 $5,026,935 Plan's projected benefit obligation (3,699,488) (3,898,265) (3,781,645) ---------- ---------- ---------- Funded status 595,939 1,223,009 1,245,290 Unrecognized net asset to be amortized over 13 years (676,531) (787,438) (898,345) Unrecognized prior service cost 95,864 106,635 117,406 Unrecognized asset (gain) over expected return 727 (557,171) (446,682) ---------- ---------- ---------- Prepaid (accrued) pension cost $ 15,999 $ (14,965) $ 17,669 ========== ========== ========== Actuarial present value of accumulated benefit obligation: Vested $2,636,587 $2,532,562 $2,583,479 Not yet vested 148,055 175,622 170,563 ---------- ---------- ---------- Accumulated benefit obligation $2,784,642 $2,708,184 $2,754,042 ========== ========== ==========
Note 8. Quarterly Financial Data (Unaudited)
Following is a schedule of key financial data by quarter for the years 1994 and 1993.
Average Net Gross Net shares Quarters sales profit income Net income outstanding Ended (000) (000) (000) per share (000) -------- ----- ------ ------ ---------- ----------- 03/31/93 $ 5,094 $ 2,227 $(2,044) $( .79) 2,571 06/30/93 $ 1,947 $( 911) $(3,392) $(1.32) 2,571 09/30/93 $13,647 $ 6,547 $ 1,282 $ .50 2,572 12/31/93 $17,766 $ 7,969 $ 1,584 $ .61 2,572 03/31/94 $ 5,241 $ 2,159 $(1,087) $( .42) 2,573 06/30/94 $ 5,647 $ 1,870 $(2,129) $( .83) 2,573 09/30/94 $19,057 $ 9,797 $ 1,162 $ .45 2,575 12/31/94 $23,149 $10,727 $ 726 $ .28 2,576
Since the Company's business is seasonal in nature, comparisons among quarters of the year are not necessarily indicative of a trend in the results of operations, but principally reflect this seasonality.
MEM COMPANY, INC. AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts Years Ended December 31, 1994, 1993 and 1992
Balance Additions Deductions Balance at charged to write-off of at end beginning costs & uncollectible of Description of year expenses accounts year ----------- --------- ---------- ------------- ------- Allowance for doubtful accounts: 1994 $450,136 $445,065 $233,547 $661,654 1993 $496,368 $119,098 $165,330 $450,136 1992 $427,975 $384,661 $316,268 $496,368
Accounts receivable are stated net of a gross provision for merchandise returns and other items in the amounts of $5,600,000, $3,700,000 and $3,800,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
The net deferred tax asset is stated net of valuation allowances of $2,917,000, $2,467,000 and $1,848,000 for the years ended December 31, 1994, 1993 and 1992, respectively. After deducting deferred tax liability, the net deferred tax asset was $-0- in each of the three years.