<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ......................to .......................
Commission file number 1-13856
Sel-Leb Marketing, Inc.
(Exact name of small business issuer as
specified in its charter)
New York 11-3180295
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
495 River Street, Paterson, NJ 07524
(Address of principal executive offices)
973-225-9880
(Issuer's telephone number)
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 report(s)), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,089,091 shares of common
stock as of November 10, 1998.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
PAGE
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998
(Unaudited) and December 31, 1997 2
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 1998 and 1997 (Unaudited) 3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity Nine Months Ended September 30, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis or Plan of Operation 10-13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
September December
ASSETS 30, 1998 31, 1997
------ -------- --------
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 344,517 $ 249,688
Accounts receivable, less allowance for doubtful
accounts of $204,528 and $202,810 4,734,675 2,959,996
Inventories 6,473,995 5,814,673
Due from officer 25,136 25,136
Deferred tax assets, net 173,655 173,655
Prepaid expenses and other current assets 780,196 835,856
------------ -----------
Total current assets 12,532,174 10,059,004
Property and equipment, at cost, net of accumulated
depreciation and amortization of $529,082 and $351,473 589,915 474,252
Goodwill, net of accumulated amortization of $90,342 and
$61,599 289,871 321,669
Other assets 124,773 51,655
------------ -----------
Totals $13,536,733 $10,906,580
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 2,480,000 $ 1,400,000
Current portion of long-term debt 161,975 161,975
Accounts payable 2,732,090 1,159,203
Accrued expenses and other liabilities 303,569 229,872
------------ -----------
Total current liabilities 5,677,634 2,951,050
Long-term debt, net of current portion 774,429 933,642
------------ -----------
Total liabilities 6,452,063 3,884,692
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized in 1998; none issued - -
Common stock, $.01 par value; 40,000,000 shares
authorized; 1,089,091 and 8,712,727 shares
issued and outstanding 10,891 87,127
Additional paid-in capital 6,440,095 6,363,859
Retained earnings 678,684 615,902
Less receivable in connection with equity transactions (45,000) (45,000)
------------ -----------
Total stockholders' equity 7,084,670 7,021,888
------------ -----------
Totals $13,536,733 $10,906,580
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $13,288,234 $13,656,862
----------- -----------
Operating expenses:
Cost of sales 9,133,396 9,418,302
Selling, general and administrative expenses 3,948,366 3,440,409
----------- -----------
Totals 13,081,762 12,858,711
----------- -----------
Operating income 206,472 798,151
Other income (expense):
Interest expense, net of interest income of $4,519 and $3,252 (192,715) (56,896)
Unusual item - gain on sale of portion of minority interest in
subsidiary 75,729
Other 14,961
----------- -----------
Income before provision for income taxes 104,447 741,255
Provision for income taxes 41,665 319,097
----------- -----------
Net income $ 62,782 $ 422,158
=========== ===========
Basic net earnings per share $.06 $.40
----------- -----------
Basic weighted average shares outstanding 1,089,091 1,065,431
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net sales $5,181,902 $5,034,456
---------- ----------
Operating expenses:
Cost of sales 3,439,230 3,306,382
Selling, general and administrative expenses 1,339,010 1,215,355
---------- ----------
Totals 4,778,240 4,521,737
---------- ----------
Operating income 403,662 512,719
Other income (expense):
Interest expense, net of interest income of $67 in 1997 (74,642) (25,912)
Other 12,552
---------- ----------
Income before provision for income taxes 341,572 486,807
Provision for income taxes 136,515 226,080
---------- ----------
Net income $ 205,057 $ 260,727
=========== ==========
Basic net earnings per share $.19 $.24
---- ----
Basic weighted average shares outstanding 1,089,091 1,065,431
========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Receivable in
Additional Connection Total
Common Stock Paid-in Retained with Equity Stockholders'
Shares Amount Capital Earnings Transactions Equity
--------- ------------ ----------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 8,712,727 $87,127 $6,363,859 $615,902 $(45,000) $7,021,888
Effect of 1-for-8 reverse
split (7,623,636) (76,236) 76,236
Net income 62,782 62,782
--------- ------- ---------- -------- --------- ----------
Balance, September 30, 1998 1,089,091 $10,891 $6,440,095 $678,684 $(45,000) $7,084,670
========= ======= ========== ======== ======== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
Operating activities:
<S> <C> <C>
Net income $ 62,782 $ 422,158
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 209,418 154,126
Allowance for doubtful accounts 182,000 204,000
Net gain on sale of interest in subsidiary (75,729)
Changes in operating assets and liabilities:
Accounts receivable (1,956,679) (1,539,943)
Inventories (659,322) (1,950,086)
Prepaid expenses and other current assets 55,660 (287,647)
Other assets (73,118) (61,338)
Accounts payable, accrued expenses and other
liabilities 1,641,176 900,033
Due to affiliates (64,398)
----------- -----------
Net cash used in operating activities (613,812) (2,223,095)
----------- -----------
Investing activities:
Purchases of property and equipment (293,283) (274,017)
Proceeds from sale of interest in subsidiary 81,137
Loans to officer, net (522)
----------- -----------
Net cash used in investing activities (212,146) (274,539)
----------- -----------
Financing activities:
Proceeds from notes payable to bank 1,080,000 1,700,000
Proceeds from long-term note 100,000
Repayments of long-term debt (159,213)
Net proceeds from exercise of warrants and stock options 735,789
Collection of receivable in connection with equity transactions 13,000
----------- -----------
Net cash provided by financing activities 920,787 2,548,789
----------- -----------
Net increase in cash and cash equivalents 94,829 51,155
Cash and cash equivalents, beginning of period 249,688 129,538
----------- -----------
Cash and cash equivalents, end of period $ 344,517 $ 180,693
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and basis of presentation:
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary
to present fairly the financial position of Sel-Leb Marketing,
Inc. ("Sel-Leb") and its 80%-owned subsidiary, Ales Signature,
Ltd. ("Ales"), as of September 30, 1998, its results of
operations for the nine and three months ended September 30,
1998 and 1997 and its cash flows for the nine months ended
September 30, 1998 and 1997. Sel-Leb and Ales, which was formed
in September 1997 and commenced operations on October 23, 1997,
are referred to together herein as the "Company." Information
included in the condensed consolidated balance sheet as of
December 31, 1997 has been derived from the audited
consolidated balance sheet included in the Company's Form
10-KSB for the year ended December 31, 1997 (the "10-KSB")
previously filed with the Securities and Exchange Commission
(the "SEC"). Pursuant to rules and regulations of the SEC,
certain information and disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
from these consolidated financial statements unless significant
changes have taken place since the end of the most recent
fiscal year. Accordingly, these unaudited condensed
consolidated financial statements should be read in conjunction
with the consolidated financial statements, notes to
consolidated financial statements and the other information in
the 10-KSB.
The consolidated results of operations for the nine and three
months ended September 30, 1998 are not necessarily indicative
of the results to be expected for the full year.
Note 2 - Reverse split:
The numbers of common shares and the per share amounts set
forth herein have been retroactively adjusted, where
appropriate, for a 1-for-8 reverse split effected on June 19,
1998.
Note 3 - Earnings per share:
As further explained in Note 1 in the 10-KSB, effective
December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings
per Share ("FAS 128"), which requires the presentation of
"basic" and, if appropriate, "diluted" earnings (loss) per
common share.
7
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Earnings per share (continued):
Since the exercise prices of all of the Company's outstanding
options and warrants exceeded the fair market value of the
Company's common stock, during the periods presented,
the assumed exercise of those options and warrants and the
application of the treasury stock method would not have resulted
in an increase in the weighted average number of common shares
outstanding for the nine months and three months ended September
30, 1998 and 1997 and, accordingly, dilutive per share amounts
have not been presented in the accompanying unaudited condensed
consolidated statements of income. In addition, the basic per
share and weighted average share amounts presented in the
accompanying unaudited condensed consolidated statements of
income for the nine months and three months ended September 30,
1997 which were computed in accordance with SFAS 128 do not
differ from those computed under previously promulgated
accounting standards.
Note 4 - Line of credit:
The balance of the note payable to bank of $2,480,000 as of
September 30, 1998 arose from borrowings drawn under a
$2,500,000 revolving credit agreement with Summit Bank (the
"Lender"). The maximum borrowings under the revolving credit
agreement had been increased from $2,000,000 on April 1, 1998.
Borrowings under the revolving credit agreement bear interest,
payable monthly, at the Lender's prevailing base rate (8.5% at
September 30, 1998). The loan is collateralized by
substantially all of the assets of the Company. In the opinion
of management, the fair value of the note payable approximates
the carrying amount due to the short-term nature of the
instrument. Effective as of September 30, 1998, the revolving
credit agreement, which had an original expiration date of May
28, 1998, was further extended to November 30, 1998. As of
November 10, 1998, the outstanding balance of the note payable
was the same as the balance at September 30, 1998.
Note 5 - Minority interest in subsidiary:
On March 31, 1998, the Company, which at that date owned a
90%-interest in Ales, entered into an agreement whereby it sold
an additional 10% interest to the minority stockholder for a
total consideration of $81,137. The sale resulted in a gain of
$75,729, before giving effect to any related income tax
effects, which has been reflected separately as an unusual item
in the accompanying unaudited condensed consolidated statement
of income for the nine months ended September 30, 1998. As a
result of the completion of this sale, the minority stockholder
has a 20% interest in Ales, and the Company has an 80% interest
in Ales.
8
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SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Preferred stock and stock options:
On May 27, 1998, the Company's stockholders approved an
amendment to the Company's certificate of incorporation which
authorizes the issuance by the Company of up to 10,000,000
shares of preferred stock with a par value of $.01 per share.
No shares of preferred stock had been issued by the Company as
of September 30, 1998.
As of December 31, 1997, the Company had options for the
purchase of 150,156 shares of common stock outstanding at
exercise prices ranging from $4 to $56 per share. During the
nine months ended September 30, 1998, the Company granted
options for the purchase of 16,438 shares of common stock at
exercise prices ranging from $1.16 to $5.25 per share. No
options were exercised and options for the purchase of 16,153
shares were cancelled during that period. As a result, the
Company had options for the purchase of 150,441 shares of
common stock outstanding as of September 30, 1998 with exercise
prices ranging from $1.16 to $56 per share, of which options
for the purchase of 110,621 shares with exercise prices ranging
from $1.16 to $47.00 per share were exercisable. The Company
also had warrants for the purchase of 725,496 shares of common
stock outstanding as of September 30, 1998 with exercise prices
ranging from $5.12 to $16 per share that are exercisable
through March 21, 2000.
9
<PAGE>
ITEM 2. 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 Unaudited Condensed Consolidated Financial Statements of the Company
and related notes thereto. This Quarterly Report on Form 10-QSB 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, 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 and other factors set forth
herein or in reports and other documents filed by the Company with the SEC.
Consolidated Results of Operations: Three and Nine Months Ended September
30, 1998 Compared to the Corresponding Periods Ended September 30, 1997
Net sales for the three months ended September 30, 1998 were
$5,181,902 compared to $5,034,456 for the three months ended September 30,
1997, representing an increase of 2.9%. For the nine month period ended
September 30, 1998, net sales were $13,288,234 compared to $13,656,862 for the
corresponding period in 1997, representing a decrease of 2.7%. The increase in
net sales for the three months ended September 30, 1998 resulted primarily from
increases in sales of merchandise acquired in connection with the Company's
opportunistic purchasing business as well as increases in the sales of
specialty cosmetics lines being marketed and sold through the electronic media.
Despite the increase in sales of $147,446 for the three months ended September
30, 1998, versus 1997, the decrease in sales for the previous six month period
resulted in an overall reduction of sales of $368,628 for the nine months ended
September 30, 1998 versus the comparable period in 1997.
Primarily as a result of increases in sales during the three month
period ended September 30, 1998 versus the comparable period in 1997, the cost
of goods sold increased from $3,306,382 for the three month period in 1997 to
$3,439,230 for the same period in 1998. However, as a result of the overall
decrease in net sales described above for the nine month period ended September
30, 1998 versus the comparable period in 1997, the cost of goods sold decreased
from $9,418,302, for the nine month period in 1997 to $9,133,396 for the same
period in 1998. The cost of goods sold as a percentage of sales increased from
65.7% for the three month period ended September 30, 1997 to 66.4% for the same
period in 1998, and decreased for the nine month period from 69.0% in 1997 to
68.7% in 1998. The corresponding reduction in gross profit margin for the three
month period ended September 30, 1998 resulted primarily from increases in sales
of merchandise within the Company's opportunistic purchasing business segment,
which merchandise typically generates lower gross profit margins, as well as
sales during the quarter of certain low profit margin inventory acquired in
connection with the Company's October 1997 acquisition of the Signature product
line. Despite this reduction in gross profit margins for the three month period,
the gross profit margins for the nine month period ended September 30, 1998
represented an increase over the comparable period in 1997 as a result of the
Company's continued focus on the sale of higher profit margin product lines.
Selling, general and administrative ("SG&A") expenses increased from
$1,215,355 for the three month period ended September 30, 1997 to $1,339,010
for the comparable period in 1998. SG&A for the nine month period ended
September 30 was $3,440,409 in 1997 and $3,948,366 in 1998. The principal
components of SG&A are payroll, rent, commissions, insurance, legal, accounting
and other fees paid to third parties and travel and promotional expenses. The
increase in SG&A expenses for the three and nine months in 1998 over 1997
resulted primarily from expenses (royalties, commissions, promotional and other
expenses) incurred in connection with sales of a specialty cosmetics line being
marketed and sold through
10
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the electronic media pursuant to the Company's agreement with ACI, Inc.
(approximately $154,000 and $320,000 for the three and nine months ended
September 30, 1998 over the three and nine months ended September 30, 1997),
and expenses related to the operation of the Company's 80% owned subsidiary,
which commenced operations on October 23, 1997 (approximately $85,000 and
$230,000 for the three and nine months ended September 30, 1998). These
increases for the three month period ended September 30, 1998 versus 1997 were
offset by reductions in other SG&A costs.
Total operating expenses increased from $4,521,737 in 1997 to
$4,778,240 in 1998 for the three month period ended September 30, and from
$12,858,711 in 1997 to $13,081,762 in 1998 for the nine month period ended
September 30.
Despite an increase in sales for the three month period ended
September 30, 1998 versus 1997 of $147,446, operating income decreased for the
period from $512,719 in 1997 to $403,662 in 1998 due to an increase in total
operating expenses amounting to $256,503 for the three month period ended
September 30, 1998 versus the same period in 1997.
The decrease in sales of $368,628 for the nine month period ended
September 30, 1998 versus 1997 coupled with an increase in operating expenses
of $223,051 resulted in operating income decreasing from $798,151 in 1997 to
$206,472 in 1998.
Due to the above mentioned items, net income for the three months ended
September 30, 1998 decreased to $205,057 from $260,727 and for the nine months
decreased to $62,782 from $422,158.
Liquidity and Capital Resources
At September 30, 1998, the Company had working capital of $6,854,540
and cash and cash equivalents in the amount of $344,517. The Company's
principal cash requirements are for the acquisition of inventory and the
financing of receivables. Receivables increased from $2,959,996 at December 31,
1997 to $4,734,675 at September 30, 1998, representing an increase of
$1,774,679. A portion of the increase in receivables was financed by increased
borrowings under the Company's revolving credit arrangement and term loan
described below.
On November 6, 1995, the Company entered into a Loan and Security
Agreement (the "Original Loan Agreement") with Summit Bank (the "Lender")
pursuant to which it obtained a revolving line of credit for general working
capital purposes in an aggregate principal amount of up to $2,000,000, subject
to a borrowing base limitation. The line of credit bore interest at fluctuating
rates per annum based on the "Prevailing Base Rate" (as defined in the Original
Loan Agreement) of the Lender. The Loan Agreement terminated on July 31, 1997
and, subsequent thereto, the Company borrowed funds from the Lender pursuant to
an informal, non-binding arrangement on the same terms as the Original Loan
Agreement. The Company and the Lender reinstated the Original Loan Agreement on
September 22, 1997.
On October 22, 1997, the Company and Ales entered into a new Loan and
Security Agreement with the Lender (the "Current Loan Agreement"). The Current
Loan Agreement provided for the continuation through May 31, 1998 of the
Company's line of credit arrangement and provided for borrowings of up to the
lesser of $2,000,000 or prescribed levels of eligible accounts receivable and
inventories on substantially the same terms as under the Original Loan
Agreement. On April 1, 1998, the Company and the Lender executed a first
amendment to
11
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the Loan and Security Agreement pursuant to which the line of credit
available thereunder was increased to $2,500,000. On May 28, 1998, the Company
and the Lender extended the maturity of the Current Loan Agreement to July 30,
1998 and effective July 30, 1998, the agreement was further extended to
September 30, 1998. Effective September 30,1998, the agreement was extended to
November 30, 1998. As of both September 30, 1998 and November 10, 1998, the
Company had outstanding borrowings of $2,480,000 under this line of credit.
Pursuant to the Current Loan Agreement, the Company and Ales also
obtained from the Lender in October 1997 a three-year, $1,000,000 term loan to
finance the acquisition by Ales of certain assets from SBC Corporation, Inc.
("SBC"), a manufacturer of cosmetics, skin care and treatment products. The
term loan bears interest at the "Prevailing Base Rate" plus .25%, and the
outstanding principal amount of the loan is payable in installments, with
$150,000 having been paid on August 30, 1998 and an additional $150,000 payable
on August 30, 1999 with the balance payable on August 30, 2000. In connection
with the acquisition, which was consummated on October 23, 1997, Ales acquired
from SBC, for approximately $670,000, inventory and certain other assets, as
well as trademarks and trade names including Signature Solutions and Signature
Beauty Care(R). The balance of the proceeds from the term loan were used for
working capital purposes.
On September 26, 1997, in connection with the previous relocation of
its office and warehouse facilities to Paterson, New Jersey, the Company
borrowed $100,000 from the Paterson Restoration Corporation. The loan, which
bears interest at 6% per annum, provides for monthly payments of principal and
interest in the amount of $1,461 through October 1, 2004 and is secured by a
second priority lien on all new machinery and equipment purchased by the
Company. The proceeds of the loan were used for the purchase of fixed assets.
Assuming that the Company is able to renew its Current Loan Agreement
or obtain a new line of credit on terms that are substantially similar to those
that are currently in effect, 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 from September 30, 1998. In the event the Company's plans change (due to
unanticipated expenses or difficulties or otherwise), or if the Company is
unable to renew the Current Loan Agreement or obtain a new line of credit on
substantially similar terms, or if working capital and projected cash flow
otherwise prove insufficient to fund operations, the Company could be required
to seek additional financing sooner than currently anticipated. Except for the
Current Loan Agreement, which expires on November 30, 1998, the Company has no
current arrangements with respect to, or sources of, additional financing.
Accordingly, there can be no assurance that the additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all. The Company's inability to obtain such additional financing could have a
material adverse effect on the Company's liquidity and the business plans of the
Company.
The Company recognizes the need to assure that its operations will not
be adversely impacted by Year 2000 hardware and software failures. The impact
on operations has been and continues to be evaluated. During 1998, management
has begun to identify the revisions
12
<PAGE>
needed to be made to ensure that the Company will be able to process
information beyond 1999 without disruption. Hardware and software revisions
have been made and are expected to be continued, principally by Company
employees. The Company intends to conduct risk evaluations and assessments to
determine the preparedness level of customers, vendors and other service
providers. The Company will take such actions as management deems appropriate
based on the results of the review. The total estimated cost for achieving Year
2000 compliance is not anticipated to be material to the Company's financial
position or results of operations.
13
<PAGE>
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Fourth Amendment to Loan and Security Agreement dated
September 30, 1998 between Sel-Leb Marketing, Inc. and
Summit Bank.
11.1 Statement re computation of earnings (not required
because the relevant computation can be clearly
determined from the material contained in the financial
statements).
27. Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during
the three month period ended September 30, 1998.
Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SEL-LEB MARKETING, INC.
/s/ Jan S. Mirsky
---------------------------------------
Jan S. Mirsky
Executive Vice President - Finance
Dated: November 10, 1998
as both duly authorized officer of the
registrant and as principal financial
officer of registrant.
14
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FOURTH AMENDMENT TO
-------------------
LOAN AND SECURITY AGREEMENT
---------------------------
This Fourth Amendment to Loan and Security Agreement (the "Amendment")
dated September 30, 1998 by and between SUMMIT BANK, a state banking association
organized and existing under the laws of the State of New Jersey (the "Lender")
with an office at 250 Moore Street, 2nd Floor, Hackensack, New Jersey 07601, and
SEL-LEB MARKETING, INC., a New York corporation ("Sel-Leb"), having its
principal executive office located at 495 River Street, Paterson, New Jersey
07524 and ALES SIGNATURE LTD., a New York corporation ("ALES"), having its
principal executive office located at 495 River Street, Paterson, New Jersey
07524 (ALES and SEL-LEB each a "Borrower" and collectively the "Borrowers").
WHEREAS, on October 22, 1997, the Lender provided a certain credit
facility (the "Loan") to the Borrowers pursuant to the terms and conditions of
that certain Loan and Security Agreement dated as of September 12, 1997 (the
"Original Loan Agreement") in the principal amount of Three Million
($3,000,000.00) Dollars as evidenced by that certain Line of Credit Note dated
October 22, 1997 in the principal amount of Two Million ($2,000,000.00) Dollars
(the "Original Line of Credit Note") and by a certain Term Note dated October
22, 1997 in the principal amount of One Million
-1-
<PAGE>
($1,000,000.00) Dollars (the "Term Note"); and
WHEREAS, on April 1, 1998 the Original Loan Agreement was amended
pursuant to that certain First Amendment to Loan and Security Agreement (the
"First Amendment") to increase the Line of Credit Loan Maximum to Two
Million Five Hundred Thousand ($2,500,000) Dollars; and
WHEREAS, the Original Line of Credit Note was amended and restated
pursuant to the terms of that certain Restated Line of Credit Note from the
Borrowers to the order of the Lender, dated as of April 1, 1998 (the
"Restated Note"); and
WHEREAS, on May 28, 1998 the Original Loan Agreement was further
amended pursuant to that certain Second Amendment to Loan and Security
Agreement (the "Second Amendment") to extend the Line of Credit Loan
Termination Date to July 30, 1998; and
WHEREAS, on July 30, 1998 the Original Loan Agreement was further
amended pursuant to that certain Third Amendment to Loan and Security
Agreement (the "Third Amendment") to extend the Line of Credit Termination
Date to September 30, 1998 (the Original Loan Agreement as amended by the
First Amendment, Second Amendment and Third Amendment is referred to herein
as the "Loan
-2-
<PAGE>
Agreement"); and WHEREAS, the Original Line of Credit Note was further
amended and restated pursuant to the terms of that certain Second Restated
Line of Credit Note dated as of May 28, 1998 (the "Second Restated Note");
and
WHEREAS, the Original Line of Credit Note was further amended and
restated pursuant to the terms of that certain Third Restated Line of Credit
Note dated as of July 30, 1998 (the "Third Restated Note") (the Original
Line of Credit Note as amended and restated by the Restated Note, Second
Restated Note and Third Restated Note is referred to herein as the "Line of
Credit Note"); and
WHEREAS, the Borrower has requested the Lender to extend the Line
of Credit Loan Termination Date to November 30, 1998; and
WHEREAS, the Lender is willing to extend the Line of Credit Loan
Termination Date to November 30, 1998 subject to the terms and conditions
set forth in this Amendment.
NOW, THEREFORE, in consideration of the recitals and the mutual
covenants contained herein, the parties hereto agree as follows:
I. All capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed to them pursuant
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<PAGE>
to the Loan Agreement, Line of Credit Note and Term Note. Notwithstanding
anything to the contrary contained in the Loan Agreement, the Line of Credit
Note or the Term Note, the terms of this Amendment shall control.
2. Section 1.1(y) of the Loan Agreement is hereby stricken and
replaced with the following:
"(y) "Line of Credit Loan Termination Date" shall mean
November 30, 1998."
3. The reference to the "Line of Credit Note" in Section 1.1(z) of
the Loan Agreement shall be deemed to refer to the Line of Credit Note as
amended by that certain Fourth Restated Line of Credit Note attached hereto
as Exhibit "A" (the "Fourth Restated Line of Credit Note"), by this
reference made a part hereof as if fully set forth herein.
4. The Borrowers acknowledge and agree that: (a) as of September 30,
1998 the unpaid principal balance of the Line of Credit Note is Two Million Four
Hundred Eighty Thousand ($2,480,000) Dollars; (b) the obligation of the
Borrowers to repay the Line of Credit Note is absolute and unconditional and is
not subject to any defense, counterclaim, set-off, right of recoupment,
abatement or other claim or determination, and (c) the
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<PAGE>
Line of Credit Note is and shall be governed by the terms and provisions of
the Loan Agreement, as set forth in this Amendment.
5. The Lender and the Borrower hereby agree and consent to the
terms and provisions of this Amendment and the transactions contemplated
hereby.
6. The Borrowers shall pay all of the Lender's costs and expenses
incurred in connection with the preparation, execution and delivery of this
Amendment, including, without limitation, reasonable legal fees and
disbursements of Lender's counsel.
7. Except as expressly otherwise provided herein, the terms of the
Loan Agreement shall remain in full force and effect and are incorporated
herein by reference. In the event of a conflict between the terms of this
Amendment and the Loan Agreement, the terms of this Amendment shall control.
8. The Borrowers acknowledge that the Lender has no obligation to
make any further amendments to the Loan Agreement or any other agreement
executed in connection therewith, including but not limited to this
Amendment and the Line of Credit Note.
9. This Amendment shall be construed in accordance with, and shall
be governed by, the laws of the State of New Jersey.
-5-
<PAGE>
This Amendment shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the undersigned have caused this Fourth
Amendment to Loan and Security Agreement to be executed by their proper and
duly authorized officers and members as of the date first set forth above.
SUMMIT BANK
By: /s/ Richard Mady, VP
---------------------------------
RICHARD MADY, Vice President
ATTEST: SEL-LEB MARKETING, INC.
/s/ Jorge Lazaro By: /s/ Jan S. Mirsky
- ------------------------ ---------------------------------
JAN MIRSKY, Executive Vice President
of Finance
ATTEST: ALES SIGNATURE LTD.
/s/ Jorge Lazaro By: /s/ Jan S. Mirsky
- ------------------------ ---------------------------------
JAN MIRSKY, Chief Financial Officer
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<PAGE>
EXHIBIT A
---------
FOURTH RESTATED LINE OF CREDIT NOTE
-----------------------------------
Principal Amount: $2,500,000 Dated: September 30, 1998
FOR VALUE RECEIVED, SEL-LEB MARKETING, INC., a New York
corporation, having its principal place of business at 495 River Street,
Paterson, New Jersey 07524 ("SEL-LEB") and ALES SIGNATURE LTD., a New York
corporation, having its principal place of business at 495 River Street,
Paterson, New Jersey 07524 ("ALES") (SEL-LEB and ALES each a "Payor" and
collectively the "Payors"), jointly and severally, promise to pay to the order
of SUMMIT BANK, a state banking association organized under the laws of the
State of New Jersey (the "Bank" or "Holder"), its successors and assigns, at its
offices at 250 Moore Street, 2nd Floor, Hackensack, New Jersey 07601, or at such
other address as Holder shall notify Payors in writing, the principal sum of TWO
MILLION FIVE HUNDRED THOUSAND ($2,500,000) DOLLARS, or so much thereof as shall
have been advanced to the Payors pursuant to the Loan Agreement (as defined
below), together with interest on the unpaid principal balance, payable as
provided below.
1. Subject to Loan Documents.
(a) The obligations of Payors under this Fourth
Restated Line of Credit Note (the "Restated Note") are secured by the
"Collateral", as such term is defined in the Loan and Security Agreement entered
into between the Bank and Payors on September 12, 1997 (the "Original Loan and
Security Agreement"), as amended by that certain First Amendment to Loan and
Security Agreement dated April 1, 1998 (the "First Amendment"), as further
amended by that certain Second Amendment to Loan and Security Agreement dated
May 28, 1998 (the "Second Amendment"), as further amended by that certain Third
Amendment to Loan and Security Agreement dated July 30, 1998 (the "Third
Amendment"), and as further amended by that certain Fourth Amendment to Loan and
Security Agreement dated the date hereof (the "Fourth Amendment") (the Original
Loan and Security Agreement as amended by the First Amendment, the Second
-1-
<PAGE>
Amendment, the Third Amendment and the Fourth Amendment is hereinafter
referred to as the "Loan Agreement").
(b) The terms and provisions of the Loan
Agreement and all other documents and instruments referred to therein or
executed and delivered pursuant thereto are incorporated herein by reference
(all of the foregoing are hereinafter collectively referred to as the "Loan
Documents").
2. Rate of Interest. The principal amount outstanding under
this Restated Note shall bear interest at the Bank's Prevailing Base Rate on a
floating basis. The Bank's Prevailing Base Rate of interest is the fluctuating
rate of interest established by the Bank from time to time whether or not such
rate shall be otherwise published. The Prevailing Base Rate is established for
the convenience of the Bank. The Prevailing Base Rate is a means of pricing some
loans to customers of the Bank. The Prevailing Base Rate is not tied to any
external rate of interest and does not necessarily reflect the lowest rate of
interest actually charged at any given time by the Bank to any particular class
or category of customers of the Bank. In the event that there shall be a change
in the Prevailing Base Rate, such change shall be effective on the date of such
change without notice to Payors. Interest shall be computed on the basis of the
actual number of days elapsed over a period of 360 days.
3. Payment of Interest; Repayment of Principal. Principal
and interest shall be paid during the term of this Restated Note in the
following manner:
(a) Payors shall make consecutive monthly
payments of interest at the Bank's Prevailing Base Rate on a floating basis
on the principal balance outstanding under this Restated Note on the first
(1st) day of each and every month through and including November 1, 1998.
(b) Payors shall make a final payment of the
entire unpaid principal balance and accrued interest under this Restated
Note and all other costs, expenses and charges of any nature whatsoever due
or assessable hereunder, on November 30, 1998.
-2-
<PAGE>
(c) In addition to the payments required to be
made as set forth in subparagraphs 3(a) and 3(b) above, pursuant to Section
5.20 of the Loan Agreement, during each twelve month period, commencing on
the date of execution of the Original Loan and Security Agreement, Payors
shall reduce the principal amount outstanding under this Restated Note to
zero ($0) dollars for a period of thirty (30) continuous and consecutive
days.
(d) Upon the failure of Payors to make any
payments hereunder within ten (10) days of the date when due, Payors shall,
to the extent permitted by law, pay a late payment charge on all amounts
overdue equal to five (5%) percent of the overdue amount (but in no event
less than twenty five ($25.00) dollars nor more than two thousand five
hundred ($2,500.00) dollars). Any such late charge assessed is immediately
due and payable.
4. Event of Default. Either of the following shall
constitute an Event of Default under this Restated Note:
(a) Failure to make any payments required
hereunder within five (5) days after the date when due; or
(b) The occurrence of any Event of Default
(as defined in the Loan Agreement) under any of the Loan Documents.
5. Acceleration Upon Default. Upon the occurrence of an
Event of Default, the entire unpaid principal balance of this Restated Note,
together with accrued interest, shall, at the option of Holder, immediately
become due and payable without notice or demand. Upon acceleration by Holder
as hereinabove provided, all amounts due hereunder, whether principal,
interest or otherwise, which have not been paid as of the date of such
acceleration, shall bear interest from such date to the date payment in full
is received by Holder at the rate of interest set forth in Paragraph 2 of
this Restated Note plus five (5%) percent per annum, instead of the rate
established in Paragraph 2 of this Restated Note. The Payor acknowledges
that: (i) such additional rate is a material inducement to the Bank to make
the Loan; (ii) the Bank would not have made the Loan in the absence of the
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<PAGE>
agreement of the Payor to pay such default rate; (iii) such additional rate
represents compensation for increased risk to the Bank that the Loan will
not be repaid; and (iv) such rate is not a penalty and represents a
reasonable estimate of (a) the cost of the Bank in allocating its resources
(both personnel and financial) to the ongoing review, monitoring,
administration and collection of the Loan and (b) compensation to the Bank
for losses that are difficult to ascertain.
6. Cumulative Remedies; Waivers by Payors. No remedy
referred to herein is intended to be exclusive, but each shall be cumulative
and in addition to any other remedy above or otherwise available to the
Holder under any of the Loan Documents, at law or in equity. Payors hereby
waive presentment, demand for payment, protest and notice of dishonor of
this Restated Note and all other notices and demands.
7. Non-Waiver. Failure to insist on the strict performance
of any or all of the terms, provisions, and covenants contained in this
Restated Note shall not be construed as a waiver or relinquishment of the
future performance of any term, provision or covenant herein.
8. Collection Fees. If suit is brought to collect this
Restated Note or any part hereof, Payors expressly agree to pay all of
Holder's reasonable costs and expenses of collection, including reasonable
attorneys' fees.
9. Prepayment. This Restated Note may be prepaid in full
or in part at any time without premium or penalty.
10. WAIVER OF JURY TRIAL. EACH PAYOR HEREBY WAIVES ALL
RIGHTS IT MAY HAVE TO A JURY TRIAL IN ANY AND ALL ACTIONS OR CONTROVERSIES
ARISING OUT OF OR IN CONNECTION WITH THIS RESTATED NOTE.
11. Usury. All provisions of this Restated Note and the
Loan Documents are expressly subject to the condition that in no event,
whether by reason of acceleration of maturity of the indebtedness evidenced
hereby or otherwise, shall the amount paid or agreed to be paid to the
undersigned hereunder and deemed
-4-
<PAGE>
interest under applicable law exceed the maximum rate of interest on the unpaid
principal balance of this Restated Note allowed by applicable law (the "Maximum
Allowable Rate"), which shall mean the law in effect on the date of this
Restated Note, except that if there is a change in such law which results in a
higher Maximum Allowable Rate being applicable to this Restated Note, then this
Restated Note shall be governed by such amended law from and after its effective
date. In the event that fulfillment of any provision of this Restated Note or
the Loan Documents results in the interest rate hereunder being in excess of the
Maximum Allowable Rate, the obligation to be fulfilled shall automatically be
reduced to eliminate such excess. If, notwithstanding the foregoing, the Bank or
any other holder of this Restated Note receives an amount which under applicable
law would cause the interest rate hereunder to exceed the Maximum Allowable
Rate, the portion thereof which would be excessive shall automatically be
applied to and deemed a prepayment of the unpaid principal balance of this
Restated Note and not a payment of interest.
12. Governing Law. This Restated Note shall be governed by
and construed in accordance with the laws of the State of New Jersey.
13. Line of Credit Note. This Fourth Restated Line of
Credit Note dated September 30, 1998 is issued in replacement (but not in
novation of the debt evidenced thereby) of that certain Line of Credit Note
of the Payors dated October 22, 1997, as amended and restated by that
certain Restated Line of Credit Note of the Payors dated April 1, 1998, and
as further amended and restated by that certain Second Restated Line of
Credit Note of the Payors dated May 28, 1998, and as further amended by that
certain Third Restated Line of Credit Note of the Payors dated July 30,
1998.
-5-
<PAGE>
IN WITNESS WHEREOF, each Payor has duly executed this
Fourth Restated Note the day and year first above written.
ATTEST: SEL-LEB MARKETING, INC.
By: By:
-------------------------- ---------------------------------
JACK KOEGAL, Vice-Chairman JAN MIRSKY, Executive Vice
of the Board President of Finance
ATTEST: ALES SIGNATURE, LTD.
By: By:
------------------------ ----------------------------
JACK KOEGAL, JAN MIRSKY, Chief Financial
Secretary Officer
-6-
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