<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 June 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 August 13, 1998.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998 (Unaudited)
and December 31, 1997 2
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 1998 and 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis or Plan of Operation 11-13
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
1
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June December
ASSETS 30, 1998 31, 1997
-------- --------
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 290,144 $ 249,688
Accounts receivable, less allowance for doubtful
accounts of $204,960 and $202,810 3,483,219 2,959,996
Inventories 5,772,527 5,814,673
Due from officer 25,136 25,136
Deferred tax assets, net 173,655 173,655
Prepaid expenses and other current assets 985,881 835,856
----------- -----------
Total current assets 10,730,562 10,059,004
Property and equipment, at cost, net of accumulated
depreciation and amortization of $468,096 and $351,473 624,333 474,252
Goodwill, net of accumulated amortization of $73,680 and
$61,599 309,588 321,669
Other assets 103,863 51,655
----------- -----------
Totals $11,768,346 $10,906,580
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 2,000,000 $1,400,000
Current portion of long-term debt 161,975 161,975
Accounts payable 1,413,383 1,159,203
Accrued expenses and other liabilities 384,563 229,872
----------- ----------
Total current liabilities 3,959,921 2,951,050
Long-term debt, net of current portion 928,812 933,642
----------- ----------
Total liabilities 4,888,733 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 473,627 615,902
Less receivable in connection with equity transactions (45,000) (45,000)
----------- -----------
Total stockholders' equity 6,879,613 7,021,888
------------ ------------
Totals $11,768,346 $10,906,580
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 8,106,332 $ 8,622,406
----------- -----------
Operating expenses:
Cost of sales 5,694,166 6,111,919
Selling, general and administrative expenses 2,609,356 2,225,054
----------- -----------
Totals 8,303,522 8,336,973
----------- -----------
Operating income (loss) (197,190) 285,433
Other income (expense):
Interest expense, net of interest income of $4,519 and $1,926 (118,073) (32,242)
Unusual item - gain on sale of portion of minority interest
in subsidiary 75,729
Other 2,409 1,259
----------- -----------
Income (loss) before income taxes (237,125) 254,450
Provision (credit) for income taxes (94,850) 93,019
----------- -----------
Net income (loss) $ (142,275) $ 161,431
=========== ===========
Basic net earnings (loss) per share $ (.13) $ .16
=========== ===========
Diluted net earnings per share $ .11
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 4,087,324 $ 4,423,616
----------- -----------
Operating expenses:
Cost of sales 2,755,750 3,194,082
Selling, general and administrative expenses 1,234,512 1,219,303
----------- -----------
Totals 3,990,262 4,413,385
----------- -----------
Operating income 97,062 10,231
Other income (expense):
Interest expense, net of interest income of $1,199 in 1997 (65,864) (19,529)
Other 4,413
----------- -----------
Income (loss) before income taxes 35,611 (9,298)
Provision (credit) for income taxes 2,199 (12,931)
----------- -----------
Net income $ 33,412 $ 3,633
=========== ===========
Basic net earnings per share $ .03 $ --
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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 loss (142,275) (142,275)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 1,089,091 $ 10,891 $ 6,440,095 $ 473,627 $ (45,000) $ 6,879,613
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) $ (142,275) $ 161,431
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 128,704 100,670
Allowance for doubtful accounts 152,000
Net gain on sale of interest in subsidiary (75,729)
Changes in operating assets and liabilities:
Accounts receivable (675,223) (954,907)
Inventories 42,146 (1,523,150)
Prepaid expenses and other current assets (150,025) (250,929)
Other assets (52,208) (46,629)
Accounts payable, accrued expense and other
liabilities 403,463 1,304,658
----------- -----------
Net cash used in operating activities (369,147) (1,208,856)
----------- -----------
Investing activities:
Purchases of property and equipment (266,704) (233,838)
Proceeds from sale of interest in subsidiary 81,137
Loans to officer, net (522)
----------- -----------
Net cash used in investing activities (185,567) (234,360)
----------- -----------
Financing activities:
Proceeds from notes payable to bank 600,000 945,000
Repayments of long-term debt (4,830)
Net proceeds from exercise of warrants and stock options 733,039
Collection of receivable in connection with equity transactions 7,000
----------- -----------
Net cash provided by financing activities 595,170 1,685,039
----------- -----------
Net increase in cash and cash equivalents 40,456 241,823
Cash and cash equivalents, beginning of period 249,688 129,538
----------- -----------
Cash and cash equivalents, end of period $ 290,144 $ 371,361
=========== ===========
</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 June 30, 1998, its
results of operations for the six and three months ended June 30, 1998
and 1997 and its cash flows for the six months ended June 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 six and three months
ended June 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 (loss) per share:
As 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 replaced the
presentation of "primary" and "fully-diluted" earnings (loss) per
common share required under previously promulgated accounting
standards with the presentation of "basic" and "diluted" earnings
(loss) per common share.
7
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Earnings (loss) per share (continued):
Basic net earnings (loss) per common share is calculated by dividing
net income or loss by the weighted average number of common shares
outstanding during the period. The calculation of diluted net earnings
(loss) per common share is similar to that of basic net earnings (loss)
per common share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, principally those issuable
upon the exercise of stock options and warrants, were issued during the
period.
The following table summarizes the calculation of basic and diluted
earnings (loss) per common share for each period:
Six Months Ended
June 30,
--------------------------
1998 1997
----------- -----------
Numerator:
Net income (loss) $ (142,275) $ 161,431
=========== ===========
Denominator:
Weighted average shares for basic
net earnings (loss) per share 1,088,927 1,031,168
Add effect of dilutive securities from
assumed exercise of stock options
and warrants 506,112
----------- -----------
Weighted average shares for diluted net
earnings (loss) per share 1,088,927 1,537,280
=========== ===========
Basic net earnings (loss) per share $ (.13) $ .16
=========== ===========
Diluted net earnings (loss) per share $ .11
===========
8
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Earnings (loss) per share (continued):
Six Months Ended
June 30,
------------------------
1998 1997
----------- ----------
Numerator:
Net income $ 33,412 $ 3,633
=========== ==========
Denominator:
Weighted average shares for basic
net earnings per share 1,088,927 1,031,168
Add effect of dilutive securities from
assumed exercise of stock options
and warrants 506,112
----------- ----------
Weighted average shares for diluted net
earnings per share 1,088,927 1,537,280
=========== ==========
Basic net earnings per share $ .03 $ --
=========== ==========
Diluted net earnings per share $ .03 $ --
=========== ==========
The condensed consolidated statement of operations for the six months
ended June 30, 1998 only reflects basic net loss per share amounts
because the effects of the assumed exercise of outstanding stock
options and warrants for that period were anti-dilutive. The condensed
consolidated statements of operations for the three months ended June
30, 1998 and 1997 only reflect basic net earnings per share amounts
because such amounts are equal to the diluted net earnings per share
amounts computed based on the effects of the assumed exercise of
outstanding stock options and warrants.
Prior to the adoption of FAS 128, the Company originally reported
primary earnings per share of $.16 and was not required to report
fully-diluted earnings per share for the six months ended June 30,
1997. Primary earnings per share originally reported for the three
months ended June 30, 1997 was zero.
9
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Line of credit:
The balance of the note payable to bank of $2,000,000 as of June 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 June 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 July 30, 1998, the
expiration date of the revolving credit agreement, which had an
original expiration date of May 28, 1998, was further extended to
September 30, 1998. As of August 13, 1998, the Company had a balance of
$2,200,000 outstanding under this agreement.
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, which was paid in installments prior to June 30, 1998. 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 condensed consolidated statement of operations
for the six months ended June 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.
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 June 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 six months ended June 30, 1998,
the Company granted options for the purchase of 11,438 shares of common
stock at exercise prices ranging from $2.25 to $5.25 per share.
No options were exercised during that period 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
145,441 shares of common stock outstanding as of June 30, 1998 with
exercise prices ranging from $2.25 to $56 per share, of which options
for the purchase of 109,371 shares with exercise prices ranging from
$2.25 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 June 30, 1998 with exercise prices ranging from $5.12 to $16
per share that are exercisable through March 21, 2000.
10
<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 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 Six Months Ended June 30, 1998
Compared to the Corresponding Periods Ended June 30, 1997
Net sales for the three months ended June 30, 1998 were $4,087,324
compared to $4,423,616 for the three months ended June 30, 1997, representing a
decrease of 7.6%. For the six month period ended June 30, 1998, net sales were
$8,106,332 compared to $8,622,406 for the corresponding period in 1997,
representing a decrease of 6.0%. The decrease in net sales for the three
months ended June 30, 1998 resulted primarily from the Company's concentrating
its sales efforts on product lines involving higher profit margin merchandise
rather than on maintaining or increasing its sales volume of lower margin
merchandise. As a result of this decrease in net sales for the three month
period ended June 30, 1998, as well as a decrease in net sales for the three
months ended March 30, 1998 which resulted primarily from a decrease in sales of
merchandise acquired in connection with the Company's opportunistic purchasing
business, partially offset by an increase in sales of the Company's cosmetic
product lines, net sales for the six month period ended June 30, 1998 decreased
as compared to the same period in 1997.
Primarily as a result of decreases in overall sales, together with
improved profit margins, the cost of sales decreased from $3,194,082 for the
three month period in 1997 to $2,755,750 for the same period in 1998. For the
six month period ended June 30, 1998 and 1997, cost of sales were $5,694,166 and
$6,111,919, respectively. The cost of good sold for the three month and six
month periods ended June 30, as a percentage of sales was 67.4% for the three
months and 70.2% for the six months in 1998 and 72.2% for the three months and
70.9% for the six months in 1997. The gross profit margin improvements in both
the three and six month periods ended June 30, 1998 resulted from the Company's
focus on the sale of higher profit margin product lines.
Selling, general and administrative ("SG&A") expenses increased from
$1,219,303 for the three month period ended June 30, 1997 to $1,234,512 for the
comparable period in 1998. SG&A for the six month period ended June 30 was
$2,225,054 in 1997 and $2,609,356 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 six months in 1998 over 1997 resulted primarily from expenses related to
the operation of the Company's 80% owned subsidiary, which commenced operations
on October 23, 1997 (approximately $145,000 for the six months ended June 30,
1998), and expenses (royalties, commissions, promotional and other expenses)
incurred in connection with sales of a specialty cosmetics line being marketed
and sold through the electronic media pursuant to the Company's agreement with
ACI, Inc. (approximately $353,000 for the six months ended June 30, 1998 versus
$186,000 for the six months ended June 30, 1997).
11
<PAGE>
Total operating expenses decreased from $4,413,385 in 1997 to
$3,990,262 in 1998 for the three month period ended June 30 and from $8,336,973
in 1997 to $8,303,522 in 1998 for the six month period ended June 30.
Despite a decrease in sales of $336,292 for the three month period
ended June 30, 1998 versus 1997, operating income increased for the period from
$10,231 in 1997 to $97,062 in 1998 as a result of a decrease in total operating
expenses amounting to $423,123 for the three month period ended June 30, 1998
versus the same period in 1997.
However, the decrease in sales of $516,074 for the six month period
ended June 30, 1998 versus 1997 was only offset by a corresponding decrease in
operating expenses of $33,451. This resulted in operating income decreasing from
$285,433 in 1997 to a loss of ($197,190) in 1998.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $6,770,641 and
cash and cash equivalents in the amount of $290,144. 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
$3,483,219 at June 30, 1998, representing an increase of $523,223. 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 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. As of June 30, 1998 and August 13, 1998, the Company had
outstanding borrowings of $2,000,000 and $2,200,000, respectively, under this
line of credit.
12
<PAGE>
Pursuant to the Current Loan Agreement, the Company and Ales also
obtained from the Lender in October 1997 a three-year, $1 million 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 payable
on each of August 31, 1998 and 1999 and the balance payable on August 31, 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(TM)
and Signature Beauty Care(R). The balance of the proceeds from the term loan
were used for working capital purposes.
On September 26, 1997, in connection with the 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. 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 September 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 software failures. The impact on operations
is currently being evaluated. In 1998, management will begin to identify the
revisions, if any, needed to be made to ensure that the Company will be able to
process information beyond 1999 without disruption. Software revisions are
expected to be performed principally by Company employees and 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on May 27, 1998. At the Annual Meeting, the shareholders of
the Company voted upon the election of nine directors (Proposal No. 1), with all
nine nominees being elected. The votes cast with respect to the election of
directors are set forth below. No other directors term of office continued after
the Annual Meeting.
In addition, at the Annual Meeting, the shareholders of the Company
voted upon (1) a proposal to amend the Company's Certificate of Incorporation to
effect a reverse stock split of the Company's common stock of not greater than 1
for 8 (Proposal No. 2) and (2) a proposal to amend the Certificate of
Incorporation to authorize the issuance of up to 10,000,000 shares of preferred
stock, par value $.01 per share, to be issued from time to time in such amounts
and designations as may be authorized by the Board of Directors (Proposal No.
3).
The votes were cast as follows:
PROPOSAL NO. 1 NUMBER OF VOTES NUMBER OF VOTES
NAME FOR WITHHELD
- --- --- --------
Harold Markowitz 1,042,280 14,881
Paul Sharp 1,042,905 14,253
Jan S. Mirsky 1,041,093 16,069
Jorge Lazaro 1,043,093 14,069
Jack Koegel 1,043,343 13,819
Stanley R. Goodman 1,043,093 14,069
Edward C. Ross 1,043,593 13,569
L. Douglas Bailey 1,041,593 15,569
Carl A. Bellini 1,041,593 15,569
PROPOSAL NO. 2
NUMBER OF VOTES FOR NUMBER OF VOTES AGAINST ABSTENTIONS
------------------- ----------------------- -----------
1,006,103 41,534 3,256
PROPOSAL NO. 3
NUMBER OF VOTES FOR NUMBER OF VOTES AGAINST ABSTENTIONS
------------------- ----------------------- -----------
632,928 53,844 3,506
All share and vote amounts have been adjusted for the 1-for-8 reverse stock
split effected June 19, 1998.
14
<PAGE>
Item 2 Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Third Amendment to Loan and Security Agreement
dated July 30, 1998 between Sel-Leb Marketing, Inc. and Summit Bank.
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 June 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: August 14, 1998 as both duly authorized officer of the
registrant and as principal financial
officer of registrant.
<PAGE>
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This Third Amendment to Loan and Security Agreement (the Third
"Amendment") dated July 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 a
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 a 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 ($1,000,000.00) Dollars (the
"Term Note"); and
-1-
<PAGE>
WHEREAS, on April 1, 1998 the Original Loan Agreement loan was amended
pursuant to a 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 a Second Amendment to Loan and Security Agreement (the
"Second Amendment") to extend the Line of Credit Loan Termination Date to July
30, 1998 (the Original Loan Agreement as amended by the First Amendment and
Second Amendment is referred to herein as the "Loan 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") (the Original Line of
Credit Note as amended and restated by the Restated Note and Second Restated
Note is referred to herein as the "Line of Credit Note"); and
-2-
<PAGE>
WHEREAS, the Borrower has requested the Lender to extend the Line of
Credit Loan Termination Date to September 30, 1998; and
WHEREAS, the Lender is willing to extend the Line of Credit Loan
Termination Date to September 30, 1998 subject to the terms and conditions set
forth in this Third 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 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
Third 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 September 30, 1998."
3. The reference to the "Line of Credit Note" in Section
-3-
<PAGE>
1.1(z) of the Loan Agreement shall be deemed to refer to the Line
of Credit Note as amended by that certain Third Restated Line of
Credit Note attached hereto as Exhibit "A" (the "Third Restated
Line of Credit Note") and by this reference made a part hereof as
if fully set forth herein.
4. The Borrowers acknowledge and agree that: (a) as of July 30, 1998
the unpaid principal balance of the Line of Credit Note is Two Million Two
Hundred Thousand ($2,200,000) 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 Line of Credit Note is and shall be governed
by the terms and provisions of the Loan Agreement, and as set forth in this
Third Amendment.
5. The Lender and the Borrower hereby agree and consent to the terms
and provisions of this Third 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,
-4-
<PAGE>
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 Third Amendment
and the Loan Agreement, the terms of this Third 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 Third Amendment and the
Line of Credit Note.
9. This Third Amendment shall be construed in accordance with, and
shall be governed by, the laws of the State of New Jersey. This Third Amendment
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
-5-
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Third 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:___________________________________
RICHARD MADY, Vice President
ATTEST: SEL-LEB MARKETING, INC.
______________________ By:___________________________________
JAN MIRSKY, Executive Vice President
of Finance
ATTEST: ALES SIGNATURE LTD.
______________________ By:___________________________________
JAN MIRSKY, Chief Financial Officer
-6-
<PAGE>
EXHIBIT A
THIRD RESTATED LINE OF CREDIT NOTE
Principal Amount: $2,500,000 Dated: July 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 Third
Restated Line of Credit Note ("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 ("Original Loan and
Security Agreement"), as amended by that certain First Amendment to Loan and
Security Agreement dated April 1, 1998 ("First Amendment"), as further amended
by that certain Second Amendment to Loan and Security Agreement dated May 28,
1998 ("Second Amendment"), and as further amended by that certain Third
Amendment to Loan and Security Agreement dated as of the date hereof ("Third
Amendment") (the Original Loan and Security Agreement as amended by the First
Amendment, the Second Amendment and the Third Amendment is hereinafter referred
to as the "Loan Agreement").
(b) The terms and provisions of the Loan
-7-
<PAGE>
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 September 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 September 30, 1998.
(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 Loan 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.
-8-
<PAGE>
(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.
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
-9-
<PAGE>
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 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
-10-
<PAGE>
governed by and construed in accordance with the laws of the State of New
Jersey.
13. Line of Credit Note. This Third Restated Line of Credit
Note dated as of July 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 as of October 22, 1997, as amended and restated by that certain Restated
Line of Credit Note of the Payors dated as of April 1, 1998, and as further
amended and restated by that certain Second Restated Line of Credit Note of the
Payors dated as of May 28, 1998.
IN WITNESS WHEREOF, each Payor has duly executed this Third
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, Secretary JAN MIRSKY, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 290,144
<SECURITIES> 0
<RECEIVABLES> 3,688,179
<ALLOWANCES> 204,960
<INVENTORY> 5,772,527
<CURRENT-ASSETS> 10,730,562
<PP&E> 1,092,429
<DEPRECIATION> 468,096
<TOTAL-ASSETS> 11,768,346
<CURRENT-LIABILITIES> 3,959,921
<BONDS> 0
0
0
<COMMON> 10,891
<OTHER-SE> 6,868,722
<TOTAL-LIABILITY-AND-EQUITY> 11,768,346
<SALES> 8,106,332
<TOTAL-REVENUES> 8,106,332
<CGS> 5,694,166
<TOTAL-COSTS> 5,694,166
<OTHER-EXPENSES> 2,609,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,592
<INCOME-PRETAX> (237,125)
<INCOME-TAX> (94,850)
<INCOME-CONTINUING> (142,275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (142,275)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
