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, 2001
[_] 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 OF (I.R.S. EMPLOYER
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: 2,261,018 shares of common stock as
of November 13, 2001
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
SEL-LEB MARKETING, INC. AND SUBSIDIARY
PAGE
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000 2
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 2001 and 2000 (Unaudited) 3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis or Plan of Operation 10-13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
1
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
September December
ASSETS 30, 2001 31, 2000
------ ------------ ------------
(Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 72,887 $ 213,920
Accounts receivable, less allowance for doubtful
accounts of $289,285 and $195,274 7,328,921 4,951,151
Inventories 9,986,501 9,798,856
Deferred tax assets, net 351,990 296,875
Prepaid expenses and other current assets 706,255 618,676
------------ ------------
Total current assets 18,446,554 15,879,478
Property and equipment, at cost, net of accumulated depre-
ciation and amortization of $1,107,440 and $1,123,601 194,172 328,634
Other assets 310,625 312,814
------------ ------------
Totals $ 18,951,351 $ 16,520,926
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable under line of credit $ 3,958,836 $ 3,404,505
Current portion of long-term debt 406,657 859,949
Accounts payable 3,002,471 2,598,964
Accrued expenses and other liabilities 1,921,026 472,804
------------ ------------
Total current liabilities 9,288,990 7,336,222
Long-term debt, net of current portion 735,658 928,307
------------ ------------
Total liabilities 10,024,648 8,264,529
------------ ------------
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; 2,261,018 shares issued and outstanding 22,611 22,611
Additional paid-in capital 6,496,359 6,496,359
Retained earnings 2,446,733 1,779,427
Less receivable in connection with equity transactions (39,000) (42,000)
------------ ------------
Total stockholders' equity 8,926,703 8,256,397
------------ ------------
Totals $ 18,951,351 $ 16,520,926
============ ============
See Notes to Condensed Consolidated Financial Statements.
2
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
2001 2000
------------ ------------
Net sales $ 15,584,778 $ 16,328,035
------------ ------------
Operating expenses:
Cost of sales 10,931,892 11,834,212
Selling, general and administrative expenses 3,506,409 3,342,086
------------ ------------
Totals 14,438,301 15,176,298
------------ ------------
Operating income 1,146,477 1,151,737
------------ ------------
Other income (expense):
Interest expense, net of interest income of $2,016 in 2000 (311,829) (313,694)
Income from litigation settlement 280,000
Gain on sales of property and equipment 18,950
------------ ------------
Totals (12,879) (313,694)
------------ ------------
Income before provision for income taxes 1,133,598 838,043
Provision for income taxes 466,292 318,450
------------ ------------
Net income $ 667,306 $ 519,593
============ ============
Net earnings per share:
Basic $.30 $.23
==== ====
Diluted $.29 $.21
==== ====
Weighted average shares outstanding:
Basic 2,261,018 2,261,018
============ ============
Diluted 2,319,828 2,422,803
============ ============
See Notes to Condensed Consolidated Financial Statements.
3
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
2001 2000
----------- -----------
Net sales $ 6,022,532 $ 6,300,469
----------- -----------
Operating expenses:
Cost of sales 4,008,830 4,212,819
Selling, general and administrative expenses 1,221,621 1,313,607
----------- -----------
Totals 5,230,451 5,526,426
----------- -----------
Operating income 792,081 774,043
----------- -----------
Other income (expense):
Interest expense, net of interest income of $1,343 in 2000 (85,383) (125,750)
Gain on sales of property and equipment 18,950
----------- -----------
Totals (66,433) (125,750)
----------- -----------
Income before provision for income taxes 725,648 648,293
Provision for income taxes 303,112 242,550
----------- -----------
Net income $ 422,536 $ 405,743
=========== ===========
Net earnings per share:
Basic $.19 $.18
==== ====
Diluted $.18 $.17
==== ====
Weighted average shares outstanding:
Basic 2,261,018 2,261,018
=========== ===========
Diluted 2,322,071 2,376,035
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
Receivable in
Common Stock Additional Connection Total
--------------------- Paid-in Retained With Equity Stockholders'
Shares Amount Capital Earnings Transactions Equity
--------- -------- ---------- ---------- ------------ ----------
Balance, January 1, 2001 2,261,018 $ 22,611 $6,496,359 $1,779,427 $(42,000) $8,256,397
Decrease in receivable in
connection with equity
transaction 3,000 3,000
Net income 667,306 667,306
--------- -------- ---------- ---------- -------- ----------
Balance, September 30, 2001 2,261,018 $ 22,611 $6,496,359 $2,446,733 $(39,000) $8,926,703
========= ======== ========== ========== ======== ==========
See Notes to Condensed Consolidated Financial Statements.
5
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
2001 2000
----------- -----------
Operating activities:
Net income $ 667,306 $ 519,593
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 173,978 213,128
Provision for doubtful accounts 133,425 85,915
Gain on sales of property and equipment (18,950)
Deferred income taxes (55,115) (45,385)
Changes in operating assets and liabilities:
Accounts receivable (2,511,195) (1,504,245)
Inventories (187,645) (2,003,580)
Prepaid expenses and other current assets (87,579) (24,494)
Other assets (23,656) 18,612
Accounts payable, accrued expenses and other
liabilities 1,851,729 1,469,486
----------- -----------
Net cash used in operating activities (57,702) (1,270,970)
----------- -----------
Investing activities:
Purchases of property and equipment (45,767) (40,289)
Proceeds from sales of property and equipment 51,046
----------- -----------
Net cash provided by (used in) investing activities 5,279 (40,289)
----------- -----------
Financing activities:
Proceeds from note payable under line of credit, net
of repayments 554,331 1,412,097
Repayments of long-term debt (645,941) (196,614)
Decrease in receivable in connection with equity transactions 3,000 3,000
----------- -----------
Net cash provided by (used in) financing activities (88,610) 1,218,483
----------- -----------
Net decrease in cash and cash equivalents (141,033) (92,776)
Cash and cash equivalents, beginning of period 213,920 158,032
----------- -----------
Cash and cash equivalents, end of period $ 72,887 $ 65,256
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
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, 2001, their results of operations for the nine and
three months ended September 30, 2001 and 2000, their changes in
stockholders' equity for the nine months ended September 30, 2001
and their cash flows for the nine months ended September 30, 2001
and 2000. Sel-Leb and Ales are referred to together herein as the
"Company." Information included in the condensed consolidated
balance sheet as of December 31, 2000 has been derived from the
audited consolidated balance sheet included in the Company's Form
10-KSB for the year ended December 31, 2000 (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 accounting principles
generally accepted in the United States of America 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, 2001 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2001.
Note 2 - Earnings (loss) 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" earnings (loss) per common share and, if
appropriate, "diluted" earnings per common share. Basic earnings
(loss) per share is calculated by dividing net income (loss) 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
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Earnings (loss) per share (concluded):
In computing diluted earnings per share for the nine and three
months ended September 30, 2001 and 2000, 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:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Basic weighted average shares
outstanding 2,261,018 2,261,018 2,261,018 2,261,018
Shares arising from assumed
exercise of:
Stock options 58,810 119,721 61,053 95,233
Warrants 42,064 19,784
---------- ---------- ---------- ----------
Diluted weighted average shares
outstanding 2,319,828 2,422,803 2,322,071 2,376,035
========== ========== ========== ==========
Note 3 - Note payable under revolving line of credit:
As further explained in Note 3 in the 10-KSB, during December 1998,
the Company entered into a loan agreement pursuant to which Merrill
Lynch Business Financial Services, Inc. ("Merrill Lynch") is
providing the Company with a credit facility (the "Facility"). The
Facility consists of a revolving line of credit for borrowings
against the Company's eligible accounts receivable and inventories
and three term loans (see Note 4 in the 10-KSB). As of September 30,
2001, the maximum amount the Company could borrow under the line of
credit was $4,150,000 through October 31, 2001. Borrowings under the
revolving line of credit, bear interest which is payable monthly,
and totaled $3,958,836 at September 30, 2001. Based on amendments to
the loan agreement, on October 31, 2001 the revolving line of credit
was extended to October 31, 2002, with maximum borrowings reduced to
$3,800,000, and interest, payable monthly, at 2.75% above the 30 day
London Interbank Offering Rate. Outstanding borrowings under the
Facility are secured by substantially all of the Company's assets.
Note 4 - Stock options and warrants:
Descriptions of the Company's stock option plans and other
information related to stock options and warrants are included in
Note 5 in the 10-KSB. No options or warrants were granted, exercised
or cancelled during the nine and three months ended September 30,
2001.
8
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Litigation settlement:
On May 30, 2001, the Company entered into an agreement to settle a
legal action it had brought against one of its licensors for an
alleged breach of contract. The accompanying condensed consolidated
statements of income for the nine months ended September 30, 2001
include the Company's income from the litigation settlement which
totaled $280,000.
Note 6 - Segment information:
The Company has 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 manufacturers, wholesalers or
retailers as a result of close-outs, overstocks and/or changes in
the packaging of brand name items. The Cosmetics segment is
comprised of the acquisition, sale and distribution of all other
products, including "celebrity endorsed" and "tie-in" cosmetics 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 and three months ended September 30, 2001 and 2000 follows:
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ----------- -----------
Net sales:
Opportunity $ 6,894,847 $ 7,194,067 $ 2,698,086 $ 2,676,824
Cosmetics 8,689,931 9,133,968 3,324,446 3,623,645
------------ ------------ ----------- -----------
Total net sales 15,584,778 16,328,035 6,022,532 6,300,469
------------ ------------ ----------- -----------
Cost of sales:
Opportunity 4,155,837 4,802,928 1,520,053 1,649,757
Cosmetics 6,776,055 7,031,284 2,488,777 2,563,062
------------ ------------ ----------- -----------
Total cost of sales 10,931,892 11,834,212 4,008,830 4,212,819
Selling, general and administrative
expenses 3,506,409 3,342,086 1,221,621 1,313,607
------------ ------------ ----------- -----------
Total operating expenses 14,438,301 15,176,298 5,230,451 5,526,426
------------ ------------ ----------- -----------
Operating income 1,146,477 1,151,737 792,081 774,043
------------ ------------ ----------- -----------
Other income (expense):
Interest expense, net (311,829) (313,694) (85,383) (125,750)
Income from litigation settlement 280,000
Gain on sales of property and
equipment 18,950 18,950
------------ ------------ ----------- -----------
Total other income (expense) (12,879) (313,694) (66,433) (125,750)
------------ ------------ ----------- -----------
Income before provision for income taxes $ 1,133,598 $ 838,043 $ 725,648 $ 648,293
============ ============ =========== ===========
9
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, including statements concerning the adequacy of the Company's
sources of cash to finance its current and future operations. 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 (both general as well as electronic outlets), the ability of the
Company to extend its financing arrangements (or obtain satisfactory alternative
financing) on favorable terms, or at all beyond the term of the recently renewed
operating line of credit, 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, the ability of the Company to sell its specially purchased merchandise
at favorable prices, on a timely basis or at all, and other factors set forth
herein or in reports and other documents filed by the Company with the SEC. In
addition, quarterly results in the Company's two business segments do not
necessarily indicate trends in the Company's overall business operations, due to
the timing of special purchases, special sales and large sales to any one
particular customer.
The Company has two principal business segments (see Note 6 to the Company's
Condensed Consolidated Financial Statements - Unaudited) - Opportunity and
Cosmetics.
Consolidated Results of Operations - Nine months Ended September 30, 2001
Compared to the Nine Months Ended September 30, 2000:
September 30, September 30,
2001 2000 $ Change
---- ---- --------
Net sales:
Opportunity $ 6,894,847 $ 7,194,067 $(299,220) (A)
Cosmetics $ 8,689,931 $ 9,133,968 $(444,037) (B)
----------- ----------- ---------
Total net sales $15,584,778 $16,328,035 $(743,257)
----------- ----------- ---------
Cost of sales:
Opportunity $ 4,155,837 $ 4,802,928 $(647,091) (C)
Cosmetics $ 6,776,055 $ 7,031,284 $(255,229) (D)
----------- ----------- ---------
Total cost of sales $10,931,892 $11,834,212 $(902,320)
Selling, general and administrative expenses $ 3,506,409 $ 3,342,086 $ 164,323 (E)
----------- ----------- ---------
Total operating expenses $14,438,301 $15,176,298 $(737,997)
----------- ----------- ---------
Operating income $ 1,146,477 $ 1,151,737 $ (5,260)
----------- ----------- ---------
Other income $ 280,000 $ 0 $ 280,000 (F)
Interest expense, net $ (311,829) $ (313,694) $ 1,865 (G)
Gain on Sale of property and equipment $ 18,950 $ 0 $ 18,950
----------- ----------- ---------
Total Other income (expense) $ (12,879) $ (313,694) $ 300,815
----------- ----------- ---------
Income before income taxes $ 1,133,598 $ 838,043 $ 295,555
=========== =========== =========
(A) The "Opportunity" segment of our business is comprised of the acquisition,
sale and distribution of name-brand and off-brand products which are
purchased from either manufacturers, wholesalers, or retailers as a result
of close-outs, overstocks and/or change-of-packaging of name-brand items.
The net decrease in sales in this segment of our business, was
approximately $299,000, and
10
resulted primarily from management's continuing, conscious decisions to
restrict sales to companies that management feels may pose severe credit
risks. This was partially offset by the introduction during the second
quarter of 2000 of a line of specially purchased merchandise, which
increased this segment's overall sales during the first quarter of 2001,
and the introduction of another, newly developed line of products,
introduced during the third quarter of 2001.
(B) The "Cosmetic" segment of our business is comprised of the acquisition,
sale and distribution of all other products, including "celebrity
endorsed" and "tie-in" cosmetics and health and beauty aid products and
designer and all other fragrances. Sales of certain components of this
segment increased as a result of increased sales in the electronic media
portion of the business, as well as the successful continued introduction
of new products and development of new customers. However, this increase
did not offset the reduction in sales compared to the same period last
year for a specialty fragrance line, which was completely sold out during
the year 2000, which, in the first nine months of 2000, had sales of
approximately $ 1,400,000
(C) Cost of sales for the "Opportunity" segment of our business decreased from
approximately 67% of sales in 2000 to 60% of sales in 2001. This decrease
resulted primarily from significantly higher margins on the sale of a line
of specially purchased merchandise, which was introduced during the second
quarter of 2000, further improved by the introduction during the third
quarter of 2001 of a newly developed line of products which yield
significantly higher margins.
(D) Cost of sales for the "Cosmetic" segment of our business was approximately
77% of sales for the nine months ended September 30, 2000 as compared to
78% for the nine months ended September 30, 2001. The decrease of
approximately $255,000 resulted primarily from lower sales.
(E) Selling, general and administrative expenses consist principally of
payroll, rent, commissions, royalties, insurance, professional fees, and
travel and promotional expenses. The increase during the nine months ended
September 30, 2001 versus the nine months ended September 30, 2000 is
primarily the result of higher costs due to more sales being made through
outside sales agencies and the electronic media, which have higher
associated selling expenses.
(F) Other income represents proceeds from the settlement of a legal action
brought against one of the Company's licensors for an alleged breach of
contract.
(G) The decrease in interest expense during the nine month period ended
September 30, 2001 versus the nine month period ended September 30, 2000
results primarily from lowered overall borrowings and reductions in the
borrowing.
Consolidated Results of Operations -- Three months Ended September 30, 2001
Compared to the Three Months Ended September 30, 2000:
September 30, September 30,
2001 2000 $ Change
---- ---- --------
Net sales:
Opportunity $2,698,086 $2,676,824 $ 21,262 (A)
Cosmetics $3,324,446 $3,623,645 $(299,199) (B)
---------- ---------- ---------
Total net sales $6,022,532 $6,300,469 $(277,937)
---------- ---------- ---------
Cost of sales:
Opportunity $1,520,053 $1,649,757 $(129,704) (C)
Cosmetics $2,488,777 $2,563,062 $ (74,285) (D)
---------- ---------- ---------
Total cost of sales $4,008,830 $4,212,819 $(203,989)
11
September 30, September 30,
2001 2000 $ Change
---- ---- --------
Selling, general and administrative expenses $1,221,621 $1,313,607 $ (91,986)(E)
---------- ---------- ---------
Total operating expenses $5,230,451 $5,526,426 $(295,975)
---------- ---------- ---------
Operating income $ 792,081 $ 774,043 $ 18,038
---------- ---------- ---------
Interest expense, net $ (85,383) $ (125,750) $ 40,367 (F)
Gain on Sale of property and equipment $ 18,950 $ 0 $ 18,950
---------- ---------- ---------
Total other Income (Expense) $ (66,433) $ (125,750) $ 59,317
---------- ---------- ---------
Income before income taxes $ 725,648 $ 648,293 $ 77,355
========== ========== =========
(A) The net increase in sales of the Opportunity segment of our business was
approximately $21,000.
(B) The net sales of the Cosmetics segment decreased as a result of lower
cosmetics sales, partially offset by increases in the electronic media
segment.
(C) Cost of sales for the "Opportunity" segment of our business decreased from
approximately 62% of sales in 2000 to 56% of sales in 2001. This decrease
resulted primarily from significantly higher profit margins on continuing
sales of specially purchased merchandise, and, sales of newly developed
products introduced during the third quarter of 2001, which also yield high
profit margins.
(D) Cost of sales for the "Cosmetic" segment of our business was approximately
71% of sales for the three months ended September 30, 2000 as compared to
75% for the three months ended September 30, 2001. The decrease in margins
for this segment resulted primarily from the Company's decision to provide
sales at lower margins to customers with whom the Company is hopeful of
doing significant business in the future. This decrease was partially
offset by increased sales in the electronic media portion of our business,
which generally yields a higher gross profit margin.
(E) The decrease in selling, general and administrative expenses during the
three months ended September 30, 2001 versus the three months ended
September 30, 2000 is primarily the result of managements continuing
efforts at monitoring and controlling these costs.
(F) The decrease in interest expense during the three month period ended
September 30, 2001 versus the three month period ended September 30, 2000
results primarily from lower overall borrowings coupled with significant
reductions in the borrowing rate.
Liquidity and Capital Resources
At September 30, 2001 we had working capital of approximately $9,158,000
including cash and cash equivalents of approximately $73,000. Cash and cash
equivalents decreased during the nine months ended September 30, 2001 from
approximately $214,000 to $73,000 as more fully discussed below.
During the nine months ended September 30, 2001 we used approximately $58,000 of
cash in our operations, primarily to increase inventory by approximately
$188,000, in order to meet anticipated sales demands. The increase in accounts
receivable of approximately $2,511,000 was funded by operating profits of
approximately $667,000 and increases in accounts payable, accrued expenses and
other liabilities of approximately $1,851,000.
In addition, during the nine months ended September 30, 2001 we used
approximately $89,000 in our financing activities, primarily in a net repayment
of our debt.
12
Our cash and cash equivalent position of approximately $73,000 at September 30,
2001 result primarily from various financing activities. In December, 1998 we
entered into a credit facility ("Facility") with Merrill Lynch Business
Financial Services, Inc. ("Merrill Lynch"), as more fully described in Notes 3
and 4 to the annual report which has been previously filed on Form 10-KSB, and
in Note 3 of the Condensed Consolidated Financial Statements at September 30,
2001. At September 30, 2001, the credit facility provided for the following:
1) A revolving line of credit with maximum borrowings of $4,150,000
against the Company's eligible accounts receivable and inventories
through October 31, 2001. At September 30, 2001 we had $3,958,836
outstanding under the revolving line of credit, representing a net
increase in our borrowings under the revolving line of credit of
$554,331 from December 31, 2000.
2) A $900,000 term loan originated in December 1998 payable in monthly
installments of $10,714 plus interest through January 2006. This term
loan had an outstanding balance of $546,427 as of September 30, 2001.
3) A $500,000 term loan originated in October 1999 payable in monthly
installments of $8,333 plus interest through November 2004. This term
loan had an outstanding balance of $316,669 as of September 30, 2001.
4) A $600,000 term loan originated in December 2000 payable in monthly
installments of $50,000 plus interest through December 2001. This term
loan had an outstanding balance of $150,000 as of September 30, 2001.
Each of the aforementioned term loans with Merrill Lynch require interest to be
paid monthly at 2.65% above the 30-day commercial paper rate (an effective rate
of 5.32% at September 30, 2001).
Effective October 31, 2001, the Company obtained an extension of its revolving
line of credit through October 31, 2002. The maximum borrowing under the renewed
line of credit is $3,800,000, with interest to be paid monthly at the rate of
2.75% above the 30 day London Interbank Offering Rate.
In addition to the Merrill Lynch credit facility, on September 26, 1997 the
Paterson Restoration Corporation provided us with a $100,000 term loan, which
bears interest at 6% and provides for monthly installments in the amount of
$1,461 through October 1, 2004. On December 28, 1999 the Paterson Restoration
Corporation provided us with an additional $100,000 term loan, which bears
interest at 6% and provides for monthly installments of $1,461 through January
1, 2007. As of September 30, 2001 $49,324 and $79,895 were outstanding under the
1997 loan and the 1999 loan, respectively.
Pursuant to the terms of the term loans, we made principal payments of $645,941
during the nine months ended September 30, 2001.
As of November 13, 2001, the outstanding balance under the revolving line of
credit was $3,432,424 and under the term loans, including the Paterson
Restoration Corporation was $999,657.
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 are insufficient to fund
operations, the Company could be required to seek financing sooner than
currently anticipated. Except for the renewed Facility, which expires on October
31, 2002, and the term loans under the Facility, the Company has no current
arrangements with respect to, or sources of, financing. Accordingly, there can
be no assurance that financing will be available to the Company when needed, on
commercially reasonable terms, or at all. The Company's inability to obtain
adequate financing when needed could have a material adverse effect on the
Company. In addition, any equity financing obtained by the Company could involve
substantial dilution to the interests of the Company's stockholders.
13
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Extension of WCMA Line of Credit
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, 2001.
14
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/ Jack Koegel
---------------
Jack Koegel
Vice Chairman and Chief Operating Officer
/s/ George Fischer
------------------
George Fischer
Chief Financial Officer
(As principal financial and accounting officer)
November 13, 2001
15
Exhibit 10.1 Extension of WCMA Line of Credit.
Exhibit 10.1
Private Client Group
MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC.
222 North LaSalle Street
17th Floor
Chicago, Illinois 60601
(312) 499-3057
[MERRILL LYNCH LOGO] FAX: (312) 499-3256
October 25, 2001
Sel-Leb Marketing, Inc.
495 River Street
Paterson, NJ 07524
RE: LOAN DOCUMENTS AMENDMENT AND EXTENSION
Ladies & Gentlemen:
This Letter Agreement will serve to confirm certain agreements of Merrill Lynch
Business Financial Services Inc. ("MLBFS") and Sel-Leb Marketing, Inc.
("Customer") with respect to: (i) that certain WCMA AND TERM LOAN AND SECURITY
AGREEMENT NO. 9811551601 between MLBFS and Customer (including any previous
amendments and extensions thereof), and (ii) all other agreements between MLBFS
and Customer or any party who has guaranteed or provided collateral for
Customer's obligations to MLBFS (a "Guarantor") in connection therewith
(collectively, the "Loan Documents"). Capitalized terms used herein and not
defined herein shall have the meaning set forth in the Loan Documents.
Subject to the terms hereof, effective as of the "Effective Date" (as defined
below), the Loan Documents are hereby amended as follows:
(a) The "Maturity Date" of the WCMA Line of Credit is hereby extended to October
31, 2002.
(b) The term "Maximum WCMA Line of Credit" shall mean an amount equal to the
lesser of: (A) 80% of Customer's domestic 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) plus 50%
of Customer's Inventory, as shown on its regular books and records, up to a
maximum of $2,750,000.00, and LESS the aggregate outstanding balance of
Customer's Term Loan Nos. 9811551601, 9911550701, and 0012552001, or (B)
$3,800,000.00.
(c) The term "Interest Rate" shall mean a variable per annum rate of interest
equal to the sum of 2.75% and the One-Month LIBOR. "One-Month LIBOR" shall mean,
as of the date of any determination, the interest rate then most recently
published in the "Money Rates" section of THE WALL STREET JOURNAL as the
one-month London Interbank Offered Rate. The Interest Rate will change as of the
date of publication in THE WALL STREET JOURNAL of a One-Month LIBOR that is
different from that published on the preceding Business Day. In the event that
THE WALL STREET JOURNAL shall, for any reason, fail or cease to publish the
One-Month LIBOR, MLBFS will choose a reasonably comparable index or source to
use as the basis for the Interest Rate.
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
October 25, 2001
Page No. 2
(d) The "Line Fee" for the period ending October 31, 2002, shall be $38,000.00.
Customer hereby authorizes and directs MLBFS to charge said amount to WCMA
Account No. 885-07E38 on or at any time after the Effective Date
Except as expressly amended hereby, the Loan Documents shall continue in full
force and effect upon all of their terms and conditions.
By its execution of this Letter Agreement, the below-named Guarantor hereby
consents to the foregoing modifications to the Loan Documents, and hereby agrees
that the "Obligations" under its Unconditional Guaranty and/or agreements
providing collateral shall extend to and include the Obligations of Customer
under the Loan Documents, as amended hereby.
Customer and said Guarantor acknowledge, warrant and agree, as a primary
inducement to MLBFS to enter into this Agreement, that: (a) no Default or Event
of Default has occurred and is continuing under the Loan Documents; (b) each of
the warranties of Customer in the Loan Documents are true and correct as of the
date hereof and shall be deemed remade as of the date hereof; (c) neither
Customer nor said Guarantor have any claim against MLBFS or any of its
affiliates arising out of or in connection with the Loan Documents or any other
matter whatsoever; and (d) neither Customer nor said Guarantor have any defense
to payment of any amounts owing, or any right of counterclaim for any reason
under, the Loan Documents.
The obligations of MLBFS under this Letter Agreement are subject to its receipt
(where applicable) and satisfaction with the following:
(1) 09/30/01 Accounts Receivable Aging and Inventory Report; and
(2) 10/31/01 Accounts Receivable Aging and Inventory Report, if Effective
Date is after 11/15/01.
Provided that no Event of Default, or event which with the giving of notice,
passage of time, or both, would constitute an Event of Default, shall then have
occurred and be continuing under the terms of the Loan Documents, and each of
the conditions specified above shall have been met to our satisfaction, the
amendments and agreements in this Letter Agreement will become effective on the
date (the "Effective Date") upon which: (a) Customer and the Guarantor shall
have executed and returned the duplicate copy of this Letter Agreement enclosed
herewith; and (b) an officer of MLBFS shall have reviewed and approved this
Letter Agreement as being consistent in all respects with the original internal
authorization hereof.
Notwithstanding the foregoing, if Customer and the Guarantor do not execute and
return the duplicate copy of this Letter Agreement within 14 days from the date
hereof, or if for any other reason (other than the sole fault of MLBFS) the
Effective Date shall not occur within said 14-day period, then all of said
amendments and agreements will, at the sole option of MLBFS, be void.
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Sel-Leb Marketing, Inc.
October 25, 2001
Page No. 3
Very truly yours,
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
By: /s/ Kimberly D. Lee
-------------------------------------------
Kimberly D. Lee
Senior Relationship Manager
ACCEPTED:
SEL-LEB MARKETING, INC.
By: /s/ George Fischer
-------------------------------------------
Printed Name: George Fischer
---------------------------------
Title: Chief Financial Officer
----------------------------------------
APPROVED:
ALES SIGNATURE LTD.
By: /s/ J. Koegel
-------------------------------------------
Printed Name: J. Koegel
---------------------------------
Title: Vice-Chairman, COO
----------------------------------------