<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, 1999
[ ] 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: 1,128,259 shares of common stock as
of November 10, 1999.
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 September 30, 1999
(Unaudited) and December 31, 1998 2
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis or Plan of Operation 12-14
Part II - Other Information
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
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September December
ASSETS 30, 1999 31, 1998
----------- --------
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 104,101 $ 504,060
Accounts receivable, less allowance for doubtful accounts
of $275,690 and $171,456 6,117,791 3,530,312
Inventories 8,468,781 6,496,298
Deferred tax assets 323,570 254,095
Prepaid expenses and other current assets 895,891 696,855
----------- -----------
Total current assets 15,910,134 11,481,620
Property and equipment, at cost, net of accumulated depreciation
and amortization of $784,868 and $590,368 607,487 607,650
Goodwill, net of accumulated amortization of $121,066 and
$95,236 224,702 250,532
Other assets 73,996 101,483
----------- -----------
Totals $16,816,319 $12,441,285
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 3,268,777 $ 2,328,241
Current portion of long-term debt 233,842 150,509
Accounts payable 2,985,873 1,341,602
Accrued expenses and other liabilities 1,204,738 588,765
----------- -----------
Total current liabilities 7,693,230 4,409,117
Long-term debt, net of current portion 1,151,357 859,396
----------- -----------
Total liabilities 8,844,587 5,268,513
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued - -
Common stock, $.01 par value; 40,000,000 shares authorized;
1,128,259 and 1,089,083 shares issued and outstanding 11,283 10,891
Additional paid-in capital 6,496,811 6,440,095
Retained earnings 1,508,638 766,786
Less receivable in connection with equity transactions (45,000) (45,000)
----------- -----------
Total stockholders' equity 7,971,732 7,172,772
----------- -----------
Totals $16,816,319 $12,441,285
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales $15,682,406 $13,288,234
----------- -----------
Operating expenses:
Cost of sales 10,759,341 9,525,019
Selling, general and administrative expenses 3,482,217 3,556,743
----------- -----------
Totals 14,241,558 13,081,762
----------- -----------
Operating income 1,440,848 206,472
----------- -----------
Other income (expense):
Interest expense (232,996) (192,715)
Unusual item - gain on sale of portion of minority interest
in subsidiary 75,729
Other 14,961
----------- -----------
Totals (232,996) (102,025)
----------- -----------
Income before provision for income taxes 1,207,852 104,447
Provision for income taxes 466,000 41,665
----------- -----------
Net income $ 741,852 $ 62,782
=========== ===========
Basic net earnings per share $.67 $.06
==== ====
Diluted net earnings per share $.61 $.05
==== ====
Basic weighted average shares outstanding 1,114,288 1,089,091
========= =========
Diluted weighted average shares outstanding 1,214,975 1,153,320
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales $6,243,301 $5,181,902
---------- ----------
Operating expenses:
Cost of sales 4,324,322 3,439,450
Selling, general and administrative expenses 1,212,777 1,338,790
---------- ----------
Totals 5,537,099 4,778,240
---------- ----------
Operating income 706,202 403,662
---------- ----------
Other income (expense):
Interest expense (85,145) (74,642)
Other 12,552
---------- ----------
Totals (85,145) (62,090)
---------- ----------
Income before provision for income taxes 621,057 341,572
Provision for income taxes 236,100 136,515
---------- ----------
Net income $ 384,957 $ 205,057
========== ==========
Basic net earnings per share $.34 $.19
==== ====
Diluted net earnings per share $.31 $.19
==== ====
Basic weighted average shares outstanding 1,128,259 1,089,091
========= =========
Diluted weighted average shares outstanding 1,232,940 1,107,209
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Receivable in
Common Stock Additional Connection Total
------------ Paid-in Retained with Equity Stockholders'
Shares Amount Capital Earnings Transactions Equity
------ ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,089,083 $ 10,891 $6,440,095 $ 766,786 $ (45,000) $7,172,772
Net proceeds from exercise
of stock option and warrants 39,176 392 56,716 57,108
Net income 741,852 741,852
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 1,128,259 $ 11,283 $6,496,811 $1,508,638 $ (45,000) $7,971,732
========== ========== ========== ========== ========== ==========
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 741,852 $ 62,782
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 220,330 209,418
Provision for doubtful accounts 104,234 182,000
Deferred income taxes (69,475)
Net gain on sale of interest in subsidiary (75,729)
Changes in operating assets and liabilities:
Accounts receivable (2,691,713) (1,956,679)
Inventories (1,972,483) (659,322)
Prepaid expenses and other current assets (199,036) 55,660
Other assets 27,487 (73,118)
Accounts payable, accrued expenses and other
liabilities 2,260,244 1,641,176
----------- -----------
Net cash used in operating activities (1,578,560) (613,812)
----------- ------------
Investing activities:
Purchases of property and equipment (194,337) (293,283)
Proceeds from sale of interest in subsidiary 81,137
----------- -----------
Net cash used in investing activities (194,337) (212,146)
----------- -----------
Financing activities:
Proceeds from note payable to bank 1,440,536 1,080,000
Repayments of long-term debt (124,706) (159,213)
Net proceeds from exercise of warrants and stock options 57,108
----------- -----------
Net cash provided by financing activities 1,372,938 920,787
----------- -----------
Net increase (decrease) in cash and cash equivalents (399,959) 94,829
Cash and cash equivalents, beginning of period 504,060 249,688
----------- -----------
Cash and cash equivalents, end of period $ 104,101 $ 344,517
=========== ===========
</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, 1999, its results of
operations for the nine and three months ended September 30,
1999 and 1998, its cash flows for the nine months ended
September 30, 1999 and 1998 and its changes in stockholders'
equity for the nine months ended September 30, 1999. Sel-Leb and
Ales are referred to together herein as the "Company."
Information included in the condensed consolidated balance sheet
as of December 31, 1998 has been derived from the audited
consolidated balance sheet included in the Company's Form 10-KSB
for the year ended December 31, 1998 (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, 1999 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, the Company has
adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share ("FAS 128"), which require
the presentation of "basic" and, if appropriate, "diluted"
earnings per common share. Basic earnings per share is
calculated by dividing net income by the weighted average number
of common shares outstanding during each period. The calculation
of diluted earnings per share is similar to that of basic
earnings per share, except that the denominator is increased to
include the number of additional common shares that would have
been outstanding if all potentially dilutive common shares, such
as those issuable upon the exercise of stock options and
warrants, were issued during the period.
7
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Earnings per share (concluded):
In computing diluted earnings per share for the nine months and
the three months ended September 30, 1999 and 1998, the assumed
exercise of all of the Company's outstanding stock options and
warrants, adjusted for the application of the treasury stock
method, would have increased the weighted average number of
common shares outstanding as shown in the table below:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic weighted average shares
outstanding 1,114,288 1,089,091 1,128,259 1,089,091
Shares arising from assumed
exercise of:
Stock options 77,211 58,645 80,669 18,118
Warrants 23,476 5,584 24,012
--------- --------- --------- ---------
Diluted weighted average shares
outstanding 1,214,975 1,153,320 1,232,940 1,107,209
========= ========= ========= =========
</TABLE>
Note 4 - Note payable under revolving line of credit:
At September 30, 1999, the Company had borrowings of $3,768,777
outstanding under a revolving credit agreement with Merrill
Lynch Business Financial Services, Inc. ("Merrill Lynch").
Borrowings bear interest, payable monthly, at 2.65% above the
30-day commercial paper rate (7.95% at September 30, 1999).
Pursuant to an amendment to the agreement, maximum borrowings
were temporarily increased to $3,800,000, subject to the
availability of eligible accounts receivable and inventories,
during the period from April 20, 1999 to October 31, 1999 and
were scheduled to revert to $3,300,000 until the expiration of
the agreement on October 31, 2000.
During November 1999, the credit facility was further amended,
effective October 31, 1999, to increase the maximum borrowings
under the revolving credit loan to $3,800,000 through its
expiration on October 31, 2000 and provide for an additional
term loan of $500,000. The principal balance of the additional
term loan is to be repaid in 60 equal monthly installments, plus
interest at 2.65% above the 30-day commercial paper rate,
through October 31, 2004. The new term loan provided by Merrill
Lynch is secured by substantially all of the Company's assets.
As a result of the November 1999 amendment, short-term
borrowings of $500,000 (less the installments due during the
twelve month period ending September 30, 2000) were reclassified
as long-term debt in the accompanying condensed consolidated
balance sheet at September 30, 1999.
8
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Sale of 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 reduced
its interest to 80% by selling an additional 10% interest to the
minority stockholder for total consideration of $81,137 (see
Note 2 in the 10-KSB). As a result of the sale, the Company
recognized a gain of $75,729, before giving effect to any
related income tax effects, which has been reflected separately
as an unusual item in the accompanying 1998 condensed
consolidated statement of operations.
The minority interest in the net equity of Ales as of September
30, 1999 and the minority interest in the results of its
operations for the nine and three months ended September 30,
1999 and 1998 were immaterial.
Note 6 - Preferred stocks, stock options and warrants:
No shares of preferred stock had been issued by the Company
at September 30, 1999. Stock option plans and warrants:
Descriptions of the Company's stock option plans and other
information related to stock options and warrants are
included in Note 6 in the 10-KSB. Certain information
related to options and warrants outstanding at September 30,
1999 and changes in options and warrants outstanding during
the nine months ended September 30, 1999 are summarized
below.
Shares subject to options:
A summary of the status of the Company's shares subject to
options as of September 30, 1999 and changes during the nine
months then ended is presented below:
<TABLE>
<CAPTION>
Weighted
Shares Average
or Exercise
Price Price
------- --------
<S> <C> <C>
Outstanding, at January 1, 1999 207,406 $4.94
Granted (A) 160,701 4.62
Canceled (A) (60,376) 6.31
Exercised (34,776) 1.33
--------
Outstanding, at September 30, 1999 272,955 $4.91
======== =====
Options exercisable, at September 30, 1999 135,681
========
Weighted average fair value of options
granted during the nine months
ended September 30, 1999 $4.43
=====
</TABLE>
9
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Preferred stock, stock options and warrants (concluded):
Shares subject to options (concluded):
(A) Options granted and canceled during the nine months
ended September 30, 1999 include shares subject to
options for which the exercise price was reduced as
follows:
Original Adjusted
Exercise Exercise
Shares Price Price
------ -------- ---------
6,250 $ 6.50 $4.00
4,000 6.50 4.75
40,000 6.50 5.00
63 10.50 5.00
375 13.00 5.00
125 42.00 5.00
63 43.00 5.00
---------
Total 50,876
=========
Shares subject to warrants:
At September 30, 1999, the Company had warrants outstanding
for the purchase of 43,311 shares of common stock that are
exercisable through March 31, 2000 at $2.50 per share.
Warrants to purchase 677,785 shares at an exercise price of
$16.00 per share expired during the nine months ended
September 30, 1999.
Shares reserved for issuance:
At September 30, 1999, shares of common stock were reserved
for the following:
<TABLE>
<S> <C>
Exercise of outstanding stock options 272,955
-------
Exercise of stock options available for grant:
Option Plan 112,894
Directors' Plan 26,250
-------
Total 139,144
-------
Exercise of warrants 43,311
-------
Total 455,410
=======
</TABLE>
10
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7- Segment information:
During 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131").
Pursuant to the provisions of SFAS 131, the Company is reporting
segment sales and gross margins in the same format reviewed by
the Company's management (the "management approach"). The
Company has two reportable segments: "Opportunity" and
"Cosmetics". The Opportunity segment is comprised of the
operations connected with the acquisition, sale and distribution
of name-brand and off-brand products which are purchased from
close-out, overstocked and/or change-of-packaging brand name
items. The Cosmetics segment is comprised of the acquisition,
sale and distribution of all other products, including
"celebrity endorsed" and "tie-in" cosmetic and health and beauty
aid products and designer and all other fragrances.
Net sales, cost of sales and other related segment information
for the nine months ended September 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales:
Opportunity $ 7,654,040 $ 6,393,140
Cosmetics 8,028,366 6,895,094
------------ ------------
Total net sales 15,682,406 13,288,234
------------ ------------
Cost of sales:
Opportunity 6,226,695 4,923,544
Cosmetics 4,532,646 4,601,475
------------ ------------
Total cost of sales 10,759,341 9,525,019
Selling, general and administrative expenses 3,482,217 3,556,743
------------- -------------
Total operating expenses 14,241,558 13,081,762
------------ ------------
Operating income 1,440,848 206,472
------------- --------------
Other income (expense):
Interest expense (232,996) (192,715)
Unusual item - gain on sale of portion
of minority interest 75,729
Other 14,961
------------ ------------
Totals (232,996) (102,025)
------------ ------------
Income before provision for income taxes $ 1,207,852 $ 104,447
============ ============
</TABLE>
* * *
11
<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
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,
1999 Compared to the Corresponding Periods Ended September 30, 1998:
The Company has two principal business segments (see Note 7 to the Company's
condensed consolidated financial statements): Opportunity and Cosmetics.
Net sales for the three months ended September 30, 1999 were $6,243,301 compared
to $5,181,902 for the three months ended September 30, 1998, representing an
increase of 20.5%. For the nine month period ended September 30, 1999, net sales
were $15,682,406 compared to $13,288,234 for the corresponding period in 1998,
representing an increase of 18.0%. The increase in net sales for both the three
and nine months ended September 30, 1999 resulted primarily from the Company's
sales efforts in both the Opportunity and Cosmetic lines. The Opportunity sales
increased to
12
<PAGE>
$7,654,040 for the nine months ended September 30, 1999, versus $6,393,140 for
the same period in 1998, representing an increase of 19.7%. The Opportunity
sales increased to $2,951,715 for the third quarter ended September 30, 1999
versus $2,370,946 for the same period in 1998, representing an increase of
24.5%. Cosmetic sales for the nine months ended September 30, 1999 increased to
$8,028,366 from $6,895,094 in 1998, representing an increase of 16.4%. The
Cosmetic sales increased for the third quarter of 1999 versus 1998 to $3,291,586
versus $2,810,956 representing an increase of 17.1% for the period.
Primarily as a result of increases in overall net sales, the cost of sales
increased to $4,324,322 for the three-month period in 1999 from $3,439,450 for
the same period in 1998. For the nine-month period ended September 30, 1999 and
1998, cost of sales were $10,759,341 and $9,525,019, respectively. The cost of
goods sold for the three month and nine month periods ended September 30, 1999,
as a percentage of sales, was 69.3% for the three months and 68.6% for the nine
months, compared to 66.4% for the three months and 71.7% for the nine months in
1998. The gross profit margin improvement in the nine month period ended
September 30, 1999 resulted from the Company's continued focus on the sale of
higher profit margin product lines, offset, in part, by a special purchase in
the Opportunity segment of branded merchandise during the third quarter of
1999, which yielded lower profit margins. The Cosmetic lines improved their
margins with the cost of sales decreasing to $4,532,646 for the nine months in
1999 versus $4,601,475 in 1998, reducing the cost of sales percentage to 56.5%
from 66.7% in this period. For the third quarter of 1999, Cosmetics cost of
sales increased to $1,980,813 in 1999 versus $1,895,354 in 1998, with a
resulting cost of sales percentage of 60.2% in 1999 versus 67.4% in 1998. This
higher margin resulted from the Company's successful concentration on the sale
of higher profit items in this segment. The Opportunity lines cost of sales
increased to $6,226,695 for the nine months of 1999 versus $4,923,544 in 1998,
representing an increased cost
13
<PAGE>
of sales percentage of 81.4% in 1999 versus 77.0% in 1998. For the third quarter
of 1999, the opportunity division had lower profit margins, primarily as a
result of the special purchase of branded merchandise which yielded lower profit
margins, with 1999 cost of sales of $2,343,509 versus $1,544,096 in 1998,
representing an increased cost of sales percentage of 79.4% in 1999 versus 65.1%
for the third quarter of 1998.
Selling, general and administrative ("SG&A") expenses decreased to $1,212,777
for the three month period ended September 30, 1999 from $1,338,790 for the
comparable period in 1998. SG&A expenses for the nine-month period ended
September 30 also decreased from $3,556,743 in 1998 to $3,482,217 in 1999. The
decreases are primarily the result of managements continuing efforts at
monitoring and controlling these costs. The principal components of SG&A
expenses are payroll, rent, commissions, insurance, legal, accounting and other
fees paid to third parties and travel and promotional expenses.
14
<PAGE>
Total operating expenses increased from $4,778,240 in 1998 to $5,537,099 in 1999
for the three-month period ended September 30 and from $13,081,762 in 1998 to
$14,241,558 in 1999 for the nine-month period ended September 30.
As a result of increases in net sales of $1,061,395 partially offset by
increases in operating expenses of $758,859 for the three month period ended
September 30, 1999 versus 1998, operating income increased by $302,540 for the
period, from $403.662 in 1998 to $706,202 in 1999.
The increase in net sales of $2,394,172 for the nine month period ended
September 30, 1999 versus 1998 was partially offset by a corresponding increase
in operating expenses of $1,159,796. As a result, operating income increased by
$1,234,376, from $206,472 in 1998 to $1,440,848 in 1999.
As a result of the above the Company has achieved substantial increases in
profits over the prior year for both the nine months and third quarter. Net
income increased from $62,782 for the nine months ended September 1998 to
$741,852 for the nine months ended September 30, 1999. Net income increased
from $205,057 for the three months ended September 30, 1998 to $384,957 for
the three months ended September 30, 1999.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of $8,216,904 including
cash and cash equivalents in the amount of $104,101. The Company's principal
cash requirements are for the
15
<PAGE>
acquisition of inventory and the financing of receivables. Receivables increased
from $3,530,312 at December 31, 1998 to $6,117,791 at September 30, 1999,
representing an increase of $2,587,479, primarily as a result of the increased
sales volume for the period ending September 30, 1999. Inventory increased from
$6,496,298 at December 31, 1998 to $8,468,781 at September 30, 1999,
representing an increase of $1,972,483, primarily in anticipation of continued
increased sales volume expected in the fourth quarter of 1999 and the first
quarter of 2000. These increases in receivables and inventory were primarily
financed by increased borrowings under the Company's revolving credit
arrangement, in the amount of $1,315,830, and increases in accounts payable and
accrued expenses, in the amount of $2,260,244.
During December 1998, the Company entered into a new credit facility
("Facility") with Merrill Lynch Business Financial Services Inc. ("Merrill
Lynch") which replaced the Company's previous arrangement with Summit Bank. The
Facility consists of both a revolving line of credit and a $900,000 term loan,
which is payable in monthly installments through January 2006, at which time
the unpaid balance is due. The revolving line of credit provided for maximum
borrowings of $3,300,000 (see note 4 to the Company's condensed consolidated
financial statements) against the Company's eligible accounts receivable and
inventories, through October 31, 2000. On April 20, 1999, the Company obtained a
temporary line of credit increase with Merrill Lynch increasing the Facility to
a maximum borrowing of $3,800,000. The increase was effective through October
31, 1999, at which time the maximum line was to revert back to $3,300,000.
Effective as of October 31, 1999, the Company and Merrill Lynch further amended
the facility to increase the revolving credit loan to $3,800,000, and provide
for an additional term loan of $500,000, which is to be repaid in 60 equal
monthly installments, with interest at 2.65% above the
16
<PAGE>
30 day commercial paper rate, through October 31, 2004, at which time the unpaid
balance is due.
Outstanding borrowings under the Facility are secured by substantially all of
the Company's assets. Funds available under the Facility were used to replace
the previous loans with Summit Bank as well as provide funds for the working
capital needs of the Company. As of September 30, 1999, the outstanding balance
under the Revolving Line of Credit was $3,268,777 and under the term loans was
$1,292,582. As of November 8, 1999, the outstanding balance under the Revolving
Line of Credit was $3,265,093 and under the term loans was $1,282,146. The
Facility contains certain restrictive covenants, which, among other things,
require the maintenance of certain financial ratios and limitations on future
indebtedness.
During the first nine months of l999, the Company received proceeds of $57,108
upon the exercise of options and warrants for the purchase of 39,176 shares of
common stock at exercise prices ranging from $.875 to $4.25 per share.
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 payment 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.
The Company anticipates that its working capital, together with anticipated cash
flow from the
17
<PAGE>
Company's operations, will be sufficient to satisfy the Company's cash
requirements for at least twelve months. In the event the Company's plans change
(due to unanticipated expenses or difficulties or otherwise), or if the working
capital and projected cash flow otherwise prove insufficient to fund operations,
the Company could be required to seek additional financing sooner than currently
anticipated. Except for the Facility, which expires on October 31. 2000, and the
term loans under the Facility, the Company has no current arrangements with
respect to, or sources of, additional financing. Accordingly, there can be no
assurance that additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all. The Company's inability to
obtain such additional financing could have a material adverse effect on the
Company's long-term liquidity.
The Company recognized the need to assure that its operations will not be
adversely impacted by Year 2000 (Y2K) software failures. The impact on
operations continues to be evaluated. Management has already assessed the
revisions needed to be made to ensure that the Company will be able to process
information beyond 1999 without disruption. New hardware and software has been
purchased and installed and the Company's accounting programs have been upgraded
and revised to reduce the possibility of Y2K failure. The installation and
testing of the new programs and systems has been completed. The Company has
assessed the Y2K status of its major suppliers to also reduce the likelihood of
Y2K failure. Based on this assessment, Y2K compliance is not anticipated to have
any material adverse effect on the Company's results of operations. The Company
has also determined that a contingency plan in the event that it is unable to
achieve Y2K compliance is unnecessary. The Company does not expect to incur
material costs if such compliance is not achieved.
18
<PAGE>
The Company is also subject to external Y2K related failures or disruptions that
might generally affect industry and commerce, such as utility or transportation
company Y2K compliance failures and related service interruptions. All of these
could materially effect the Company's results of operations and financial
condition.
19
<PAGE>
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K
A. Exhibits
10.1 WCMA Line of Credit Increase
10.2 Approval of Term Loan
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, 1999.
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.
November 10, 1999 /s/ Jan S. Mirsky
--------------------
Jan S. Mirsky
<PAGE>
[LETTERHEAD OF MERRILL LYNCH] November 8, 1999
Mr. Jan Mirsky
Chief Financial Officer
Sel-Leb Marketing, Inc.
495 River Street
Paterson, NJ 07524
Re: Approval of INCREASE TO WCMA LINE OF CREDIT
Dear Mr. Mirsky,
On behalf of Merrill Lynch Business Financial Services Inc. ("MLBFS"), I am
pleased to inform you that MLBFS has approved the increase request of Sel-Leb
Marketing, Inc. ("Customer") for the WCMA Line of Credit hereafter described.
The following is a summary of what I believe to be the major terms and
conditions which will be included in the final documents evidencing the WCMA
Line of Credit. It is not, of course, intended to be a complete statement of
said terms and conditions of said facility.
Advantages of the WCMA Line of Credit: The WCMA Line of Credit combines a
checking account with a revolving line of credit and certain other features to
create an automated cash management system that:
o Eliminates the guesswork required with conventional bank lines of credit
as to the amount and timing of borrowed funds.
o Ensures that only funds actually needed are borrowed, and that they are
borrowed only when needed at the time that a check written on the WCMA
checking account clears.
o Ensures that all deposits into the WCMA checking account are
automatically applied first to pay down the line of credit (with any excess
automatically invested in money market funds).
As a result, interest expense is minimized, and the hassles and the management
time required by most competitive lines of credit are eliminated.
Purpose: To provide working capital.
Maximum WCMA Line of Credit: An amount equal to the lesser of: (i) 80% of
Customer's Accounts and Chattel Paper, as shown on its regular books and records
(excluding Accounts over 90 days old, Chattel Paper with installments or other
sums more than 90 days past due, and Accounts and Chattel Paper directly or
indirectly due from any person or entity not domiciled in the continental United
States, Alaska or Hawaii, or from any shareholder, officer or employee of
Customer or any affiliated entity) and 50% of Customer's Inventory as shown on
its regular books and records with a maximum advance of $2,750,000.00, or (ii)
$3,800,000.00.
<PAGE>
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
November 8, 1999
Page No. 2
WCMA Interest Rate: Variable at a per annum rate equal to the sum of 2.65% plus
the 30-day Dealer Commercial Paper Rate (as published in The Wall Street
Journal), based upon actual days elapsed over a 360-day year. Interest will
normally be charged to the WCMA Line of Credit each month without invoicing.
Annual Line of Credit Fee: $28,500.00.
Fee for Increase: $5,000.00.
Initial Expiration Date: October 31, 2000 (subject to renewal annually
thereafter with MLBFS' consent).
Collateral: First lien on all business assets of Customer and Ales Signature,
Inc., now owned or hereafter acquired.
Guarantors: Ales Signature, Inc..
Reporting Requirements: Customer and Ales Signature, Inc. will be required to
provide MLBFS with a copy of each of its annual certified financial statements
and quarterly interim financial statements, its monthly accounts receivable
agings, its monthly inventory report and such other information as MLBFS may
from time to time reasonably request.
Covenants: The Loan Documents evidencing the WCMA Line of Credit will contain
the following covenants, as well as others of the type customarily required by
lenders for similar facilities:
(a) No Purchase of Securities. The WCMA Line of Credit may not be used
to purchase or carry securities.
(b) Continuity. Customer will continue and maintain its business,
existence, ownership and good standing.
(c) Minimum Tangible Net Worth.Customer's "tangible net worth" shall at
all times exceed $6,500,000.00. For the purposes hereof, the term
"tangible net worth" shall mean Customer's net worth as shown on
Customer's regular financial statements, but excluding an amount equal
to: (i) any assets which are ordinarily classified as "intangible" in
accordance with generally accepted accounting principles, and (ii) any
amounts now or hereafter directly or indirectly owing to Customer by
officers, shareholders or affiliates of Customer.
(d) Borrowed Debt. Except upon the prior written consent of MLBFS,
Customer shall not directly or indirectly hereafter incur or permit to
exist any debt of Customer for borrowed money or the lease under a
capital lease or deferred purchase price of real or personal property
other than: (i) debt to MLBFS and (ii) debt existing as of the date of
and reflected on the last financial statements of Customer submitted to
MLBFS prior to the date of the original funding with MLBFS.
<PAGE>
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
November 8, 1999
Page No. 3
This Approval and MLBFS' obligations to fund the WCMA Line of Credit are further
subject to its customary funding conditions, including, without limitation, the
following:
(i) Customer and each Guarantor shall have executed and delivered or
caused the execution and delivery of all agreements, instruments and
documents required by MLBFS, all of which shall be in form and
substance satisfactory to MLBFS.
(ii) There shall not have occurred any material adverse change in the
business and financial condition of Customer or any Guarantor, or other
event which would lead MLBFS in good faith and with reasonable cause
MLBFS to deem itself insecure.
(iii) No event shall occur and be continuing which by itself or with
notice and/or the passage of time would constitute an Event of default
under any of the Loan Documents or any other documents required by
MLBFS.
(iv) MLBFS shall have received and is satisfied with evidence of the
perfection and priority of its liens on the Collateral.
(v) Activation shall have occurred prior to the expiration of this
Approval, and the WCMA Line of Credit shall not have expired.
(vi) The WCMA Line of Credit shall not be or by any advance (including,
without limitation, any advance to pay accrued interest) be exceeded.
Customer shall keep the contents of this letter confidential, and shall not,
without the prior written consent of MLBFS, directly or indirectly include the
name, logo or any trademark of MLBFS or any of its affiliates in any press or
promotional publication. In no event shall Customer use this letter or its
contents as a representation of Customer's creditworthiness or shall any third
party rely upon the contents of this letter in extending credit to Customer.
In order for this Approval to become effective, Customer must indicate its
acceptance on a copy of this letter in the space set forth below, and return
said copy to the undersigned within 7 days from the date hereof with a check for
$5,000.00 on account of the fees set forth above (which fees shall be deemed
fully earned by MLBFS upon Customer's acceptance hereof, and shall not be
refundable under any circumstances, including, without limitation, any
subsequent voiding of this Approval, as hereafter provided). Thereafter, this
Approval will remain in effect subject to the above conditions until January 7,
2000, after which it will at MLBFS' option be void unless the WCMA Line Of
Credit has then been activated.
If you have any questions about this letter or the Approval, please call Wayne
Dedrick at 212-284-5960.
<PAGE>
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
November 8, 1999
Page No. 4
Very truly yours,
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
By: /s/ Dustin Vanpeursem
---------------------------------------------
Dustin Vanpeursem
Senior Portfolio Manager
ACCEPTED:
SEL-LEB MARKETING, INC.
By: /s/ Jan Mirsky
---------------------------------------------
Jan Mirsky
Chief Financial Officer
cc.: Wayne Dedrick
<PAGE>
[LETTERHEAD OF MERRILL LYNCH]
November 8, 1999
Mr. Jan Mirsky
Chief Financial Officer
Sel-Leb Marketing, Inc.
495 River Street
Paterson, NJ 07524
Re: Approval of TERM LOAN
Dear Mr. Mirsky,
On behalf of Merrill Lynch Business Financial Services Inc. ("MLBFS"), I am
pleased to inform you that MLBFS has approved the request of Sel-Leb Marketing,
Inc. ("Customer") for the Term Loan hereafter described.
The following is a summary of what I believe to be the major terms and
conditions which will be included in the final documents evidencing the Term
Loan. It is not, of course, intended to be a complete statement of said terms
and conditions of said facility.
Term Loan Purpose: Reduce the level of permanent working capital in the
Customer's WCMA Line of Credit.
Maximum Loan Amount: $500,000.00, or the amount necessary to fulfill or satisfy
the Term Loan Purpose, whichever is less.
Repayment: 60 consecutive monthly installments, each in an amount equal to the
sum of (i) accrued interest at the Interest Rate (with the first such
installment including interest accrued from the date of funding), and (ii)
1/60th of the original Loan Amount.
Interest Rate: Variable at a per annum rate equal to the sum of 2.65% plus the
"30-day Dealer Commercial Paper Rate" (as published in The Wall Street Journal),
based upon actual days elapsed over a 360-day year.
Prepayment: At any time in whole or in part without premium or penalty.
Term Loan Approval Fee: $5,000.00.
Collateral: First lien on all business assets of Customer and Ales Signature,
Inc., now owned or hereafter acquired.
Guarantors: Ales Signature, Inc..
<PAGE>
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
November 8, 1999
Page No. 2
Reporting Requirements: Customer and Ales Signature, Inc. will be required to
provide MLBFS with a copy of each of its annual certified financial statements
and quarterly interim financial statements, its monthly accounts receivable
agings, its monthly inventory reports, and such other information as MLBFS may
from time to time reasonably request.
Covenants: The Loan Documents evidencing the Term Loan will contain the
following covenants, as well as others of the type customarily required by
lenders for similar facilities:
(a) No Purchase of Securities. The Term Loan may not be used to
purchase or carry securities.
(b) Continuity. Customer will continue and maintain its business,
existence, ownership and good standing.
(c) Minimum Tangible Net Worth.Customer's "tangible net worth" shall at
all times exceed $6,500,000.00. For the purposes hereof, the term
"tangible net worth" shall mean Customer's net worth as shown on
Customer's regular financial statements, but excluding an amount equal
to: (i) any assets which are ordinarily classified as "intangible" in
accordance with generally accepted accounting principles, and (ii) any
amounts now or hereafter directly or indirectly owing to Customer by
officers, shareholders or affiliates of Customer.
(d) Borrowed Debt. Except upon the prior written consent of MLBFS,
Customer shall not directly or indirectly hereafter incur or permit to
exist any debt of Customer for borrowed money or the lease under a
capital lease or deferred purchase price of real or personal property
other than: (i) debt to MLBFS and (ii) debt existing as of the date of
and reflected on the last financial statements of Customer submitted to
MLBFS prior to the original funding with MLBFS.
This Approval and MLBFS' obligations to fund the Term Loan are further subject
to its customary funding conditions, including, without limitation, the
following:
(i) Customer and each Guarantor shall have executed and delivered or
caused the execution and delivery of all agreements, instruments and
documents required by MLBFS, all of which shall be in form and
substance satisfactory to MLBFS.
(ii) There shall not have occurred any material adverse change in the
business and financial condition of Customer or any Guarantor, or other
event which would lead MLBFS in good faith and with reasonable cause
MLBFS to deem itself insecure.
(iii) No event shall occur and be continuing which by itself or with
notice and/or the passage of time would constitute an Event of default
under any of the Loan Documents or any other documents required by
MLBFS.
(iv) MLBFS shall have received and is satisfied with evidence of the
perfection and priority of its liens on the Collateral.
(v) Funding shall have occurred prior to the expiration of this
Approval.
<PAGE>
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
November 8, 1999
Page No. 3
Customer shall keep the contents of this letter confidential, and shall not,
without the prior written consent of MLBFS, directly or indirectly include the
name, logo or any trademark of MLBFS or any of its affiliates in any press or
promotional publication. In no event shall Customer use this letter or its
contents as a representation of Customer's creditworthiness or shall any third
party rely upon the contents of this letter in extending credit to Customer.
In order for this Approval to become effective, Customer must indicate its
acceptance on a copy of this letter in the space set forth below, and return
said copy to the undersigned within 7 days from the date hereof with a check for
$5,000.00 on account of the fees set forth above (which fees shall be deemed
fully earned by MLBFS upon Customer's acceptance hereof, and shall not be
refundable under any circumstances, including, without limitation, any
subsequent voiding of this Approval, as hereafter provided). Thereafter, this
Approval will remain in effect subject to the above conditions until January 7,
2000, after which it will at MLBFS' option be void with respect to any portion
of the Term Loan not then funded.
If you have any questions about this letter or the Approval, please call Wayne
Dedrick at 212-284-5960.
Very truly yours,
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
By: /S/ Dustin Vanpeursem
----------------------------------------------
Dustin Vanpeursem
Senior Portfolio Manager
ACCEPTED:
SEL-LEB MARKETING, INC.
By: /S/ Jan Mirsky
----------------------------------------------
Jan Mirsky
Chief Financial Officer
cc.: Wayne Dedrick
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 104,101
<SECURITIES> 0
<RECEIVABLES> 6,393,481
<ALLOWANCES> 275,690
<INVENTORY> 8,468,781
<CURRENT-ASSETS> 15,910,134
<PP&E> 1,392,355
<DEPRECIATION> 784,868
<TOTAL-ASSETS> 16,816,319
<CURRENT-LIABILITIES> 7,693,230
<BONDS> 0
0
0
<COMMON> 11,283
<OTHER-SE> 7,960,449
<TOTAL-LIABILITY-AND-EQUITY> 16,816,319
<SALES> 15,682,406
<TOTAL-REVENUES> 15,682,406
<CGS> 10,759,341
<TOTAL-COSTS> 14,241,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232,996
<INCOME-PRETAX> 1,207,852
<INCOME-TAX> 466,000
<INCOME-CONTINUING> 741,852
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