<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, 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 August 11, 1999.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
PAGE
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999
(Unaudited) and December 31, 1998 2
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity Six Months Ended June 30, 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
June December
ASSETS 30, 1999 31, 1998
------ ---------- -----------
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 144,966 $ 504,060
Accounts receivable, less allowance for doubtful accounts
of $237,908 and $171,456 4,556,008 3,530,312
Inventories 7,775,472 6,496,298
Deferred tax assets 294,455 254,095
Prepaid expenses and other current assets 773,607 696,855
----------- -----------
Total current assets 13,544,508 11,481,620
Property and equipment, at cost, net of accumulated depreciation
and amortization of $708,018 and $590,368 642,877 607,650
Goodwill, net of accumulated amortization of $112,456
and $95,236 233,312 250,532
Other assets 74,647 101,483
----------- -----------
Totals $14,495,344 $12,441,285
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank $ 2,942,051 $ 2,328,241
Current portion of long-term debt 150,509 150,509
Accounts payable 1,722,653 1,341,602
Accrued expenses and other liabilities 1,312,212 588,765
----------- -----------
Total current liabilities 6,127,425 4,409,117
Long-term debt, net of current portion 781,144 859,396
----------- -----------
Total liabilities 6,908,569 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 1,123,681 766,786
Less receivable in connection with equity transactions (45,000) (45,000)
----------- -----------
Total stockholders' equity 7,586,775 7,172,772
----------- -----------
Totals $14,495,344 $12,441,285
=========== ===========
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 9,439,105 $ 8,106,332
----------- -----------
Operating expenses:
Cost of sales 6,435,019 6,085,569
Selling, general and administrative expenses 2,269,440 2,217,953
----------- -----------
Totals 8,704,459 8,303,522
----------- -----------
Operating income (loss) 734,646 (197,190)
----------- -----------
Other income (expense):
Interest expense (147,851) (118,073)
Unusual item - gain on sale of portion of minority interest
in subsidiary 75,729
Other 2,409
----------- -----------
Totals (147,851) (39,935)
----------- -----------
Income (loss) before provision (credit) for income taxes 586,795 (237,125)
Provision (credit) for income taxes 229,900 (94,850)
----------- -----------
Net income (loss) $ 356,895 $ (142,275)
=========== ===========
Basic net earnings (loss) per share $.32 $(.13)
==== =====
Diluted net earnings per share $.30 $ --
==== =====
Basic weighted average shares outstanding 1,107,147 1,088,927
=========== ===========
Diluted weighted average shares outstanding 1,201,707
===========
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales $5,014,790 $4,087,324
---------- ----------
Operating expenses:
Cost of sales 3,355,352 3,117,769
Selling, general and administrative expenses 1,181,805 872,493
---------- ----------
Totals 4,537,157 3,990,262
---------- ----------
Operating income 477,633 97,062
---------- ----------
Other income (expense):
Interest expense (86,184) (65,864)
Other 4,413
---------- ----------
Totals (86,184) (61,451)
---------- ----------
Income before provision for income taxes 391,449 35,611
Provision for income taxes 155,000 2,199
---------- ----------
Net income $ 236,449 $ 33,412
========== ==========
Basic net earnings per share $.21 $.03
==== ====
Diluted net earnings per share $.19 $.03
==== ====
Basic weighted average shares outstanding 1,125,212 1,088,927
========== ==========
Diluted weighted average shares outstanding 1,228,652 1,098,317
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
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 356,895 356,895
--------- ------- ---------- ---------- -------- ----------
Balance, June 30, 1999 1,128,259 $11,283 $6,496,811 $1,123,681 $(45,000) $7,586,775
========= ======= ========== ========== ======== ==========
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ 356,895 $(142,275)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 134,870 128,704
Allowance for doubtful accounts 66,452 152,000
Deferred income taxes (40,360)
Net gain on sale of interest in subsidiary (75,729)
Changes in operating assets and liabilities:
Accounts receivable (1,092,148) (675,223)
Inventories (1,279,174) 42,146
Prepaid expenses and other current assets (76,752) (150,025)
Other assets 26,836 (52,208)
Accounts payable, accrued expense and other
liabilities 1,104,498 403,463
----------- ---------
Net cash used in operating activities (798,883) (369,147)
----------- ---------
Investing activities:
Purchases of property and equipment (152,877) (266,704)
Proceeds from sale of interest in subsidiary 81,137
----------- ---------
Net cash used in investing activities (152,877) (185,567)
----------- ---------
Financing activities:
Proceeds from notes payable to bank 613,810 600,000
Repayments of long-term debt (78,252) (4,830)
Net proceeds from exercise of warrants and stock options 57,108
----------- ---------
Net cash provided by financing activities 592,666 595,170
----------- ---------
Net increase (decrease) in cash and cash equivalents (359,094) 40,456
Cash and cash equivalents, beginning of period 504,060 249,688
----------- ---------
Cash and cash equivalents, end of period $ 144,966 $ 290,144
=========== =========
</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, 1999, its results of operations
for the six and three months ended June 30, 1999 and 1998, its
cash flows for the six months ended June 30, 1999 and 1998 and
its changes in stockholders' equity for the six months ended
June 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 six and three
months ended June 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 (loss) 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 six months ended
June 30, 1999 and the three months ended June 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>
Three Months
Ended
Six Months June 30,
Ended --------------------------
June 30, 1999 1999 1998
------------- --------- ---------
<S> <C> <C> <C>
Basic weighted average shares
outstanding 1,107,147 1,125,212 1,088,927
Shares arising from assumed
exercise of:
Stock options 71,375 78,439 9,390
Warrants 23,185 25,001
--------- --------- ---------
Diluted weighted average shares
outstanding 1,201,707 1,228,652 1,098,317
========= ========= =========
</TABLE>
Diluted earnings per share for the six months ended June 30,
1998 has not been presented since the assumed exercise of the
options and warrants would have been be anti-dilutive.
Note 4 - Note payable under revolving line of credit:
The balance of the note payable of $2,942,051 as of June 30,
1999 arose from borrowings under a revolving credit agreement
with Merrill Lynch Business Financial Services, Inc. (see Note 4
in the 10-KSB). Borrowings bear interest, payable monthly, at
2.65% above the 30-day commercial paper rate (7.85% at June 30,
1999). Pursuant to an amendment to the agreement, the maximum
borrowings will temporarily increase to $3,800,000 during the
period from April 20, 1999 to October 31, 1999 and will revert
to $3,300,000 until the expiration of the agreement on October
31, 2000.
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.
8
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Sale of minority interest in subsidiary (concluded):
The minority interest in the net equity of Ales as of June 30,
1999 and the minority interest in the results of its operations
in the six and three months ended June 30, 1999 and 1998 were
immaterial.
Note 6 - Preferred stock, stock options and warrants:
Preferred stock: On May 27, 1998, the Company's stockholders
approved an amendment to the Company's Certificate of
Incorporation which authorizes the issuance by the Company of up
to 10,000,000 shares of preferred stock with a par value of
$.01 per share. No shares of preferred stock had been issued by
the Company as of June 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 June 30, 1999
and changes in options and warrants outstanding during the
six months ended June 30, 1999 are summarized below.
Shares subject to options:
A summary of the status of the Company's shares subject to
options as of June 30, 1999 and changes during the six
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) 101,275 4.21
Canceled (A) (19,625) 5.39
Exercised (34,776) 1.33
-------
Outstanding, at June 30, 1999 254,280 $5.11
======= =====
Options exercisable, at June 30, 1999 128,284
=======
Weighted average fair value of options
granted during the six months
ended June 30, 1999 $4.13
=====
</TABLE>
(A) Options granted and canceled include options for
the purchase of 6,250 shares for which the
exercise price was reduced from $6.50 to $4.00
per share and 4,000 shares for which the exercise
price was reduced from $6.50 to $4.75 per share.
9
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited
Note 6 - Stock options and warrants (concluded):
Shares subject to warrants:
At June 30, 1999, the Company had warrants outstanding for
the purchase of 721,096 shares of common stock of which
677,785 expired unexercised on July 12, 1999. The warrants
that did not expire on July 12, 1999 are exercisable through
March 31, 2000 at $2.50 per share.
Shares reserved for issuance:
At June 30, 1999, shares of common stock were reserved for
the following:
Exercise of outstanding stock options 254,280
---------
Exercise of stock options available for grant:
Option Plan 131,569
Directors' Plan 26,250
---------
Total 157,819
---------
Exercise of warrants 721,096
---------
Total 1,133,195
=========
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.
10
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7- Segment information (concluded):
Net sales, cost of sales and other related segment
information for the six months ended June 30, 1999 and
1998 follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales:
Opportunity $4,702,325 $4,022,194
Cosmetics 4,736,780 4,084,138
---------- ----------
Total net sales 9,439,105 8,106,332
---------- ----------
Cost of sales:
Opportunity 3,883,187 3,379,448
Cosmetics 2,551,832 2,706,121
---------- ----------
Total cost of sales 6,435,019 6,085,569
---------- ----------
Selling, general and administrative expenses 2,269,440 2,217,953
---------- ----------
Total operating expenses 8,704,459 8,303,522
---------- ----------
Operating income (loss) 734,646 (197,190)
Other income (expense):
Interest expense, net (147,851) (118,073)
Unusual item - gain on sale of portion
of minority interest 75,729
Other 2,409
---------- ----------
Totals (147,851) (39,935)
---------- ----------
Income (loss) before provision (credit)
for income taxes $ 586,795 $ (237,125)
========== ==========
</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 Six Months Ended June 30, 1999
Compared to the Corresponding Periods Ended June 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 June 30, 1999 were $5,014,790 compared to
$4,087,324 for the three months ended June 30, 1998, representing an increase of
22.7%. For the six month period ended June 30, 1999, net sales were $9,439,105
compared to $8,106,332 for the corresponding period in 1998, representing an
increase of 16.4%. The increase in net sales for both the three and six months
ended June 30, 1999 resulted primarily from the Company's sales efforts on
continued growth in both the Opportunity and Cosmetic lines. The Opportunity
sales increased to $4,702,325 for the six months ended June 30, 1999, versus
$4,022,194 for the same period in 1998, representing an increase of 16.9%. The
Opportunity sales increased to $2,851,571 for the second quarter ended June 30,
1999 versus $2,250,587 for the same period in 1998, representing an increase of
26.7%. Cosmetic sales for the six months ended June 30, 1999 increased to
$4,736,780 from $4,084,138 in 1998, representing an increase of 16.0%. The
Cosmetic sales increased for the second quarter of 1999 versus 1998 to
$2,163,219 versus $1,836,737 representing an increase of 17.8% for the period.
Primarily as a result of increases in overall net sales, partially offset by
improved profit margins, the cost of sales increased to $3,355,352 for the
three-month period in 1999 from $3,117,769 for the same period in 1998. For the
six-month period ended June 30, 1999 and 1998, cost of sales were $6,435,019 and
$6,085,569, respectively. The cost of goods sold for the three month and six
month periods ended June 30, 1999, as a percentage of sales, was 66.9% for the
three months and 68.2% for the six months, compared to 76.3% for the three
months and 75.1% for the six months in 1998. The gross profit margin
improvements in both the three and six month periods ended June 30, 1999
resulted from the Company's continued focus on the sale of higher profit margin
product lines. The improvements in profit margins were also reflected in both
segments of the Company's business. The Cosmetic lines improved its margins with
the cost of sales decreasing to $2,551,832 for the six months in 1999 versus
$2,706,121 in 1998, reducing the cost of sales percentages to 53.9% from 66.3%
in this period. For the second quarter of 1999, Cosmetics cost of sales also
decreased, to $1,062,951 in 1999 versus $1,262,123 in 1998, with a resulting
cost of sales percentage of 49.1% in 1999 versus 68.7% in 1998. The Opportunity
lines cost of sales increased to $3,883,187 for the six months of 1999 versus
$3,379,448 in 1998, however this represented a decreased cost of sales
percentage of 82.6% in 1999 versus 84.0% in 1998. For the second quarter of
1999, the opportunity division improved its profit margins as well, with 1999
cost of sales of $2,292,401 versus $1,855,646 in 1998, representing a decreased
cost of sales percentage of 80.4% in 1999 versus 82.5% for the second quarter of
1998.
Selling, general and administrative ("SG&A") expenses increased to $1,181,805
for the three month period ended June 30, 1999 from $872,493 for the comparable
period in 1998. SG&A expenses for the six-month period ended June 30 increased
from $2,217,953 in 1998 to $2,269,440 in 1999. 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. The increase in
SG&A expenses for the three months ended June 30, 1999 over the same period in
1998 resulted primarily from higher selling 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 $307,500 in 1999 versus $109,400 in 1998), coupled with increased
expenses and personnel in the Sales department, resulting from the company's
continued efforts to expand its national sales efforts. Although SG&A expenses
increased in the second quarter of 1999 versus 1998, this increase was offset by
decreases in SG&A expenses during the first quarter of 1999, versus 1998,
resulting in SG&A expenses for the six months ended June 30, 1999 being
comparable in total to those for the six months ended June 30, 1998.
12
<PAGE>
Total operating expenses increased from $3,990,262 in 1998 to $4,537,157 in 1999
for the three-month period ended June 30 and from $8,303,552 in 1998 to
$8,704,459 in 1999 for the six-month period ended June 30.
As a result of increases in net sales of $927,466 partially offset by increases
in operating expenses of $546,895 for the three month period ended June 30, 1999
versus 1998, operating income increased by $380,571 for the period, from $97,062
in 1998 to $477,633 in 1999.
The increase in net sales of $1,332,773 for the six month period ended June 30,
1999 versus 1998 was partially offset by a corresponding increase in operating
expenses of $400,937. As a result, operating income increased by $931,836, from
a loss of ($197,190) in 1998 to a profit of $734,646 in 1999.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $7,417,083, including cash
and cash equivalents in the amount of $144,966. The Company's principal cash
requirements are for the acquisition of inventory and the financing of
receivables. Receivables increased from $3,530,312 at December 31, 1998 to
$4,556,008 at June 30,, 1999, representing an increase of $1,025,696, primarily
as a result of the increased sales volume for the period ending June 30, 1999.
Inventory increased from $6,496,298 at December 31, 1998 to $7,775,472 at June
30, 1999, representing an increase of $1,279,174, primarily in anticipation of
continued increased sales volume expected in the third and fourth quarters of
1999. These increases in receivables and inventory were financed by increased
borrowings under the Company's revolving credit arrangement and increases in
trade payables.
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 provides 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 is effective through October 31,
1999, at which time the maximum line will revert back to $3,300,000. Outstanding
borrowings under the Facility are secured by substantially all of the Company's
assets. Funds available under the loan 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 June 30, 1999, the outstanding balance of the working capital
facility was $2,942,051 and $834,725 on the term loan. As of August 11,1999, the
outstanding balance under the working capital facility was $2,964,759 and
$814,288 on the term loan. 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 six 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 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, 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 begun 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
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 should be completed by the third quarter of 1999. The Company is
assessing the Y2K status of its major suppliers to also reduce the likelihood of
Y2K failure. Y2K compliance is not anticipated to have any material adverse
effect on the Company's financial position or results of operations and the cost
associated with completing the Y2K compliance are not expected to be material.
13
<PAGE>
If the Company's computer systems fail with respect to the Y2K issue, the
Company's internal and external reporting process could be affected causing a
material adverse effect on the business and financial condition of the Company.
In addition, there can be no assurance that the systems of the other companies
upon which the Company's systems rely will be converted or that a failure to
convert by another company would not have a material adverse effect on the
business and financial condition of the Company.
The Company has not yet developed a contingency plan to address situations that
may result if it is unable to achieve year 2000 compliance. The cost of
developing and implementing such a plan, if necessary, could be material.
14
<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, 1999. At the Annual Meeting, the shareholders of the Company
voted upon the election of eight directors (Proposal No. 1), with all eight
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
a proposal (Proposal No. 2) to amend the Company's 1995 Stock Option Plan to (a)
increase by 250,000 shares the number of shares of Common Stock available for
options to be granted under the Plan and (b) to increase to 30,000 the limit on
the total number of shares for which options may be granted to any one optionee
in any year under the Plan.
The votes were cast as follows:
PROPOSAL NO. 1
NUMBER OF VOTES NUMBER OF VOTES
NAME FOR WITHHELD
- ---- --------- -----
Harold Markowitz 1,084,396 4,358
Paul Sharp 1,084,396 4,358
Jan S. Mirsky 1,084,396 4,358
Jorge Lazaro 1,084,396 4,358
Jack Koegel 1,084,396 4,358
Stanley R. Goodman 1,084,146 4,608
Edward C. Ross 1,084,396 4,358
L. Douglas Bailey 1,084,396 4,358
PROPOSAL NO. 2
NUMBER OF VOTES FOR NUMBER OF VOTES AGAINST ABSTENTIONS
------------------- ----------------------- -----------
622,781 34,070 3,402
15
<PAGE>
Item 6 Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Amendment as of April 12, 1999 to
Stockholders Agreement by and between RBCJJ
ASSOCIATES and Sel-Leb Marketing, Inc. dated
October 31, 1997
27. Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed by the registrant
during the six month period ended June 30, 1999.
16
<PAGE>
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 13, 1999 as both duly authorized officer of the
registrant and as principal financial
officer of registrant.
17
<PAGE>
AMENDMENT TO STOCKHOLDERS AGREEMENT BY AND
BETWEEN RBCJJ ASSOCIATES, LLC AND SEL-LEB
MARKETING, INC. DATED OCTOBER 31, 1997
AS OF APRIL 12, 1999
AMENDMENT made this 12th day of April, 1999, by and between RBCJJ
ASSOCIATES, LLC ("LLC"), a New York limited liability company, with offices at
25 Seabro Avenue, North Amityville, New York 11701, and SEL-LEB MARKETING, INC.
("SEL-LEB") with offices at 495 River Street, Paterson, New Jersey 07524
(hereinafter called the "Shareholders"), and ALES SIGNATURE LTD. ("ALES") with
offices at 495 River Street, Paterson, New Jersey 07524 (hereinafter called the
"Corporation").
WHEREAS, the Shareholders entered into a Stockholders
Agreement on the 31st day of October, 1997; and
WHEREAS, the parties to said Agreement have reviewed certain
of the financial matters concerning the acquisition of Signature
Beauty Care Corp. (hereinafter "SBC"); and
WHEREAS, the parties are now in agreement as to the
capitalization and value of the ALES no par common stock; and
WHEREAS, the parties desire to amend the October 31, 1997 Agreement
to reflect accurately their understanding of the values attributable to the
stock.
NOW, THEREFORE, in consideration of mutual promises and
<PAGE>
other valuable considerations, the Shareholders and the Corporation agree with
each other as follows:
1. Paragraph numbered "2" of the Agreement entitled
"Contributions to Capital of the Corporation" as amended shall read
as follows:
"The Shareholders will simultaneously herewith initially commit to
fund the Corporation with such amounts as may be necessary to
purchase the Signature Beauty Care assets in accordance with the
terms of the Asset Purchase Agreement on a 90%/10% basis, with
SEL-LEB contributing 90% and LLC 10% and such further and other
amounts as may be necessary for working capital in the same ratio.
The working capital contribution shall not exceed Three Hundred
Thousand ($300,000.00) Dollars in the aggregate. The capital
contribution made by the parties on a 90%/10% basis is in the
amount of $671,796.00".
2. Paragraph numbered "7" of the Agreement entitled "Valuation of
No Par Value Common Shares" as amended shall read as follows:
2
<PAGE>
The parties acknowledge and agree that the value of the no par
common shares upon full contribution of capital as provided for in
Paragraph "2" is $6,718.00 per share and that LLC is the holder of
twenty (20) shares and that SEL-LEB is the owner of eighty (80)
shares.
3. Paragraph numbered "12" of the Agreement entitled "LLC's
Rights to Purchase Additional Stock of ALES" as amended shall read as follows:
In accordance with the terms and conditions hereinafter set forth,
LLC shall have the unqualified right to acquire from SEL-LEB an
additional twenty-nine (29) shares of no par value common stock,
which equates to a forty-nine (49%) percent ownership of the
Corporation:
(a) In the event that at any time following the execution
of this Agreement, the Corporation elects to sell or merge the
Corporation with another entity, LLC may, at its option, notify
SEL-LEB in writing of its intent to purchase twenty-nine (29)
shares of SEL-LEB's no par value common
3
<PAGE>
stock at a price of $10,077.00 per share, payable upon such terms
as may be mutually agreed; or
(b) In the event that at any time following the execution
of this Agreement, the Corporation receives a letter of intent from
an underwriter for an initial public offering, LLC may, at its
option, notify SEL-LEB in writing prior to registration with the
Securities and Exchange Commission of its intent to purchase
twenty-nine (29) shares of SEL-LEB's no par value common stock at a
price of $13,436.00 per share, payable upon such terms as may be
mutually agreed; or
(c) In the event that neither of the events described in
subparagraphs (a) and (b) above occur, at the end of a two-year
period following the date ALES first ships Signature product, LLC
may, at its option, within six months thereafter, purchase
twenty-nine (29) shares at the original price of $6,718.00 per
share, payable under such terms as may be mutually agreed. As a
condition to the purchase and simultaneously therewith, SEL-LEB
will
4
<PAGE>
cause its banking institution to release the assets of ALES which
are presently the subject of cross-collateralization pursuant to
SEL-LEB's credit agreement with the banking institution.
(i) Upon LLC exercising its option, the net worth
of the Corporation shall be determined as of the close of the
preceding quarter; and
(ii) The net worth shall be distributed to the
respective Shareholders, eighty (80%) percent to SEL-LEB and twenty
(20%) percent to LLC. In the event that there is insufficient cash
to distribute the net worth, then the available cash shall be
distributed in accordance with the percentages stated above and the
balance in the same percentages shall be entered upon the books of
the Corporation as loans by the Shareholders to the Corporation
payable with interest upon such terms as may be mutually agreed.
4. That other than the foregoing amendments contained in paragraphs
"2", "7" and "12", the Agreement of October 31, 1997 shall remain without change
and with the same force and effect as
5
<PAGE>
originally stated.
IN WITNESS WHEREOF, the Shareholders have signed this Agreement on
the day and year first above written.
RBCJJ ASSOCIATES, LLC SEL-LEB MARKETING, INC.
By: By:
----------------------- ------------------------
Joel Spielfogel, Member Jan Mirsky, Executive
Vice President-Finance
ALES SIGNATURE LTD.
By:
------------------------
Jack Koegel
Chief Executive Officer/
Chairman of the Board
Attest:
- -----------------------
Secretary
STATE OF NEW YORK )
) ss.:
COUNTY OF NASSAU )
On the 12th day of April, 1999, before me personally came JOEL
SPIELFOGEL, to me known, who, being by me duly sworn, did depose and say that he
is a member of RBCJJ ASSOCIATES, LLC, a New York limited liability company
described in and which executed the foregoing instrument; that he knows the seal
of said LLC; that the seal affixed to said instrument is such LLC seal; that it
was so
6
<PAGE>
affixed by order of the board of directors of said LLC, and that he signed his
name thereto by like order.
------------------------
Notary Public
STATE OF )
) ss.:
COUNTY OF )
On the 12th day of April, 1999, before me personally came JAN
MIRSKY, to me known, who, being by me duly sworn, did depose and say that he is
the Executive Vice President-Finance of SEL-LEB MARKETING, INC., the Corporation
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the board of directors of said
corporation, and that he signed his name thereto by like order.
------------------------
Notary Public
7
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On the 12th day of April, 1999, before me personally came JACK
KOEGEL, to me known, who, being by me duly sworn, did depose and say that he is
the Chief Executive Officer and Chairman of the Board of ALES SIGNATURE LTD.,
the Corporation described in and which executed the foregoing instrument; that
he knows the seal of said corporation; that the seal affixed to said instrument
is such corporate seal; that it was so affixed by order of the board of
directors of said corporation, and that he signed his name thereto by like
order.
------------------------
Notary Public
- -------------------------
8
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<PERIOD-START> JAN-01-1999
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