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, 2002
[ ] 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 NUMBER)
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 for each of the issuer's classes of
common equity, as of the latest practicable date: 2,325,527 shares of common
stock as of November 14, 2002.
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, 2002
(Unaudited) and December 31, 2001 2
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2002 and 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity
Nine Months Ended September 30, 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis or Plan of Operation 12-16
Item 3. Controls and Procedures 17
Part II - Other Information 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Certifications Pursuant to 18 U.S.C. Section 1350 19-22
1
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
September December
ASSETS 30, 2002 31, 2001
------------ ------------
(Note 1)
Current assets:
Cash and cash equivalents $ 50,881 $ 60,300
Accounts receivable, less allowance for doubtful
accounts of $305,821 and $266,120 4,298,057 9,163,755
Inventories 10,298,549 8,297,918
Deferred tax assets, net 317,959 297,545
Prepaid expenses and other current assets 1,277,084 832,460
------------ ------------
Total current assets 16,242,530 18,651,978
Property and equipment, at cost, net of accumulated depreciation
and amortization of $1,229,853 and $1,153,237 185,236 164,130
Other assets 177,909 214,203
------------ ------------
Totals $ 16,605,675 $ 19,030,311
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable under line of credit $ 3,467,249 $ 2,622,390
Current portion of long-term debt 529,421 307,080
Accounts payable 1,597,238 4,626,583
Accrued expenses and other liabilities 894,247 2,080,918
------------ ------------
Total current liabilities 6,488,155 9,636,971
Long-term debt, net of current portion 1,215,282 690,274
------------ ------------
Total liabilities 7,703,437 10,327,245
------------ ------------
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; 2,325,527 and 2,261,018 shares issued
and outstanding 23,256 22,611
Additional paid-in capital 6,613,520 6,496,359
Retained earnings 2,302,462 2,223,096
Less receivable in connection with equity transactions (37,000) (39,000)
------------ ------------
Total stockholders' equity 8,902,238 8,703,066
------------ ------------
Totals $ 16,605,675 $ 19,030,311
============ ============
See Notes to Condensed Consolidated Financial Statements.
2
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
Net sales $ 14,268,267 $ 15,584,778
------------ ------------
Operating expenses:
Cost of sales 10,099,287 10,931,892
Selling, general and administrative expenses 3,851,375 3,506,409
------------ ------------
Totals 13,950,662 14,438,301
------------ ------------
Operating income 317,605 1,146,477
------------ ------------
Other income (expense):
Interest expense (185,329) (311,829)
Income from litigation settlement 280,000
Gain on sales of property and equipment 18,950
------------ ------------
Totals (185,329) (12,879)
------------ ------------
Income before provision for income taxes 132,276 1,133,598
Provision for income taxes 52,910 466,292
------------ ------------
Net income $ 79,366 $ 667,306
============ ============
Net earnings per share:
Basic $.03 $.30
==== ====
Diluted $.03 $.29
==== ====
Weighted average shares outstanding:
Basic 2,288,073 2,261,018
========= =========
Diluted 2,437,070 2,319,828
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
----------- -----------
Net sales $ 3,735,297 $ 6,022,532
----------- -----------
Operating expenses:
Cost of sales 2,928,267 4,008,830
Selling, general and administrative expenses 1,038,317 1,221,621
----------- -----------
Totals 3,966,584 5,230,451
----------- -----------
Operating income (loss) (231,287) 792,081
----------- -----------
Other income (expense):
Interest expense (54,807) (85,383)
Gain on sales of property and equipment 18,950
----------- -----------
Totals (54,807) (66,433)
----------- -----------
Income (loss) before provision (credit) for income taxes (286,094) 725,648
Provision (credit) for income taxes (114,190) 303,112
----------- -----------
Net income (loss) $ (171,904) $ 422,536
=========== ===========
Net earnings (loss) per share:
Basic $(.07) $.19
===== ====
Diluted $.18
====
Weighted average shares outstanding:
Basic 2,325,199 2,261,018
========= =========
Diluted 2,322,071
=========
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, 2002
(Unaudited)
Receivable in
Common Stock Additional Connection Total
------------------------ Paid-in Retained with Equity Stockholders'
Shares Amount Capital Earnings Transactions Equity
---------- ---------- ---------- ---------- -------------- -------------
Balance, January 1, 2002 2,261,018 $ 22,611 $6,496,359 $2,223,096 $ (39,000) $8,703,066
Partial payment of balance
of receivable 2,000 2,000
Exercise of stock options 64,509 645 90,731 91,376
Effects of issuance of stock
options in exchange for
services 26,430 26,430
Net income 79,366 79,366
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2002 2,325,527 $ 23,256 $6,613,520 $2,302,462 $ (37,000) $8,902,238
========= ========== ========== ========== ========== ==========
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, 2002 AND 2001
(Unaudited)
2002 2001
----------- -----------
Operating activities:
Net income $ 79,366 $ 667,306
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 76,616 173,978
Provision for doubtful accounts 219,500 133,425
Gain on sales of property and equipment (18,950)
Deferred income taxes (20,414) (55,115)
Effects of issuance of stock options in exchange for
services 26,430
Changes in operating assets and liabilities:
Accounts receivable 4,646,198 (2,511,195)
Inventories (2,000,631) (187,645)
Prepaid expenses and other current assets (444,624) (87,579)
Other assets 36,294 (23,656)
Accounts payable, accrued expenses and other
liabilities (4,216,016) 1,851,729
----------- -----------
Net cash used in operating activities (1,597,281) (57,702)
----------- -----------
Investing activities:
Purchases of property and equipment (97,722) (45,767)
Proceeds from sales of property and equipment 51,046
----------- -----------
Net cash provided by (used in) investing activities (97,722) 5,279
----------- -----------
Financing activities:
Net proceeds from (net repayments of) note payable under
line of credit 1,094,859 554,331
Proceeds from long-term debt 750,000
Repayments of long-term debt (252,651) (645,941)
Proceeds from exercise of stock options 91,376
Decrease in receivable in connection with equity transactions 2,000 3,000
----------- -----------
Net cash provided by (used in) financing activities 1,685,584 (88,610)
----------- -----------
Net decrease in cash and cash equivalents (9,419) (141,033)
Cash and cash equivalents, beginning of period 60,300 213,920
----------- -----------
Cash and cash equivalents, end of period $ 50,881 $ 72,887
=========== ===========
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, 2002, their results of operations for the nine and three months
ended September 30, 2002 and 2001, their changes in stockholders'
equity for the nine months ended September 30, 2002 and their cash
flows for the nine months ended September 30, 2002 and 2001. Sel-Leb
and Ales are referred to together herein as the "Company." Information
included in the condensed consolidated balance sheet as of December
31, 2001 has been derived from the audited consolidated balance sheet
included in the Company's Form 10-KSB for the year ended December 31,
2001 (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, 2002 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2002.
Certain accounts in the 2001 condensed consolidated financial
statements have been reclassified to conform with the 2002
presentations.
Note 2 - 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" 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 per share (concluded):
In computing diluted earnings per share for the nine months ended
September 30, 2002 and 2001 and the three months ended September 30,
2001, 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
September 30, Ended
--------------------- September
2002 2001 30, 2001
--------- --------- ------------
Basic weighted average shares outstanding 2,288,073 2,261,018 2,261,018
Shares arising from assumed exercise of:
Stock options 136,928 58,810 61,053
Warrants (A) 12,069
--------- --------- ---------
Diluted weighted average shares outstanding 2,437,070 2,319,828 2,322,071
========= ========= =========
(A) The warrants expired on April 15, 2002.
Since the Company had a net loss for the three months ended September
30, 2002, the assumed effects of the exercise of all of the Company's
outstanding stock options and warrants and the application of the
treasury stock method would have been anti-dilutive. Accordingly, the
basic and diluted loss per share and weighted average share amounts
are the same for that period.
Note 3 - Note payable under 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"). Based on the
terms of the loan agreement in effect as of September 30, 2002, the
Facility consisted of a revolving line of credit, with maximum
borrowings of $3,800,000 (before adjustment as a result of the new
term loan arrangement originating October 18, 2002) against the
Company's eligible accounts receivable and inventories, and a term
loan (see Note 4 herein). Borrowings under the revolving line of
credit totaled $3,717,249 at September 30, 2002, of which $3,467,249
was classified as a current liability and, based on the terms of an
agreement with Merrill Lynch on October 18, 2002 described in Note 8
herein, $250,000 was classified as a noncurrent liability. Borrowings
under the line of credit bear interest, which is payable monthly, at
2.75% above the 30-day London Interbank Offering Rate (an effective
rate of 4.57% as of September 30, 2002). As of September 30, 2002, all
remaining borrowings under the revolving line of credit were payable
on October 31, 2002; however, the due date was subsequently extended
to October 31, 2003 (see Note 8 herein). Borrowings from Merrill Lynch
are secured by substantially all of the Company's assets.
8
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-term debt:
As explained in Note 4 in the 10-KSB, long-term debt at December 31,
2001 included three term loans with an aggregate principal balance of
$875,000 that were payable in monthly installments to Merrill Lynch
under the Facility and due to mature at various dates through January
2006. Based on amendments to the loan agreement for the Facility, the
Company received proceeds of $1,498,808 from a new term loan (the
"Amended Term Loan") in June 2002, of which $748,808 was applied to
the repayment of the remaining balances of the prior term loans and
$750,000 was applied to the reduction of the balance outstanding under
the revolving line of credit (see Note 3 herein). The Amended Term
Loan, which had a balance of $1,393,569 as of September 30, 2002, is
payable in monthly installments of principal of $41,634 through June
2005 plus interest at 2.75% above the 30-day London Interbank Offering
Rate (an effective rate of 4.57% as of September 30, 2002).
Long-term debt as of September 30, 2002 includes $250,000 that was
reclassified from the balance payable under the revolving line of
credit based on the agreement for the new term loan with Merrill Lynch
dated October 18, 2002, described in Note 8, herein that extended the
due date for borrowings in that amount from October 31, 2002 to
October 31, 2004.
Borrowings from Merrill Lynch are secured by substantially all of the
Company's assets.
Note 5 - 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. Certain information related to options outstanding at
September 30, 2002 and changes in options outstanding during the nine
months ended September 30, 2002 are summarized below:
Weighted
Shares Average
or Exercise
Price Price
-------- --------
Outstanding at January 1, 2002 650,008 $ 2.19
Granted 37,500(A) 2.15
Exercised (64,509) 1.42
Canceled (111,400) 2.91
--------
Outstanding at September 30, 2002 511,599 $ 2.13
======== ======
Options exercisable at September 30, 2002 403,633
========
9
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Stock options and warrants (concluded):
(A) Includes options to purchase 16,000 shares of common stock
granted to nonemployees which had an aggregate fair value of
$26,430 as of the respective dates of grant. The fair value was
recorded as a charge to compensation expense and an increase in
additional paid-in capital in accordance with the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Note 6 - Goodwill:
As of September 30, 2002, goodwill, which is comprised of costs in
excess of net assets of acquired businesses, had an immaterial
carrying value that was included in other assets. Through December 31,
2001, goodwill was being amortized on a straight-line basis over
periods not exceeding ten years. Goodwill amortization totaled
approximately $25,500 and $8,500 in the nine and three months ended
September 30, 2001. In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142,
goodwill and other intangible assets with indefinite useful lives will
no longer be systematically amortized. Instead such assets will be
subject to reduction only when their carrying amounts exceed their
estimated fair values based on impairment tests established by SFAS
142 that will be made at least annually. The Company was required to
apply the provisions of SFAS 142 and discontinue amortization
effective as of January 1, 2002. The Company will also be required to
make its first impairment tests no later than December 31, 2002.
Management expects that these tests will not have any significant
effects on the Company's consolidated financial position and results
of operations.
Note 7 - 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" and branded cosmetics and health and beauty aid products and
designer and all other fragrances.
10
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
nine and three months ended September 30, 2002 and 2001 follows:
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales:
Opportunity $ 6,052,560 $ 6,894,847 $ 1,758,144 $ 2,698,086
Cosmetics 8,215,707 8,689,931 1,977,153 3,324,446
------------ ------------ ------------ ------------
Totals 14,268,267 15,584,778 3,735,297 6,022,532
------------ ------------ ------------ ------------
Cost of sales:
Opportunity 4,540,788 4,155,837 1,422,198 1,520,053
Cosmetics 5,558,499 6,776,055 1,506,069 2,488,777
------------ ------------ ------------ ------------
Totals 10,099,287 10,931,892 2,928,267 4,008,830
Selling, general and administrative
expenses 3,851,375 3,506,409 1,038,317 1,221,621
------------ ------------ ------------ ------------
Total operating expenses 13,950,662 14,438,301 3,966,584 5,230,451
------------ ------------ ------------ ------------
Operating income (loss) 317,605 1,146,477 (231,287) 792,081
------------ ------------ ------------ ------------
Other income (expense):
Interest expense, net (185,329) (311,829) (54,807) (85,383)
Income from litigation settlement 280,000
Gain on sales of property and
equipment 18,950 18,950
------------ ------------ ------------ ------------
Totals (185,329) (12,879) (54,807) (66,433)
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes $ 132,276 $ 1,133,598 $ (286,094) $ 725,648
============ ============ ============ ============
Note 8 - Subsequent events:
As a result of agreements with Merrill Lynch on October 18, 2002, the
maximum amount of borrowings under the revolving line of credit (see
Note 3 herein) was reduced by $250,000 from $3,800,000 to $3,550,000
and the due date for the payment of all remaining balances was
extended from October 31, 2002 to October 31, 2003. Concurrently,
Merrill Lynch agreed to provide the Company with a new term loan (the
"New Term Loan") in the principal amount of $500,000 comprised of new
borrowings of $250,000 and, effectively, the transfer of $250,000 from
the balance that had been outstanding under the revolving line of
credit. The New Term Loan is payable in monthly installments of
principal of $20,833 through October 31, 2004 plus interest at 2.75%
above the 30-day London Interbank Offering Rate. Borrowings from
Merrill Lynch under the revolving line of credit, the term loans
outstanding at September 30, 2002 (see Note 4 herein) and the New Term
Loan are secured by substantially all of the Company's assets.
* * *
11
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 (both general as well as electronic
outlets), the ability of the Company to maintain its financing arrangements (or
obtain satisfactory alternative financing) on favorable terms, or at all, the
ability of the Company to successfully implement any future 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, the ability of the Company to adequately source
products that it sells to its customers, 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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to accounts receivable, inventories, property and equipment, stock
based compensation, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Except as related to accounting for Goodwill, which is described below, the
accounting policies and estimates used as of December 31, 2001 and as outlined
in the Company's previously filed Form 10-KSB, have been applied consistently
for the nine and three months ended September 30, 2002.
Goodwill is comprised of costs in excess of net assets of acquired businesses
that were being amortized on a straight line basis over periods not exceeding
ten years. In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and other intangible
assets with indefinite useful lives will no longer be systematically amortized.
Instead such assets will be subject to reduction only when their carrying
amounts exceed their estimated fair values based on impairment tests established
by SFAS 142 that will be made at least annually. The Company began to apply the
provisions of SFAS 142 effective January 1, 2002, and discontinued amortization
effective as of that date. During the nine months and three months ended
September 30, 2001, Goodwill amortization totaled approximately $25,500 and
$8,500, respectively. The Company will also be required to make its first
impairment tests no later than December 31, 2002. The effects of these tests on
the Company's consolidated financial position and results of operations have not
been determined. As of September 30, 2002, goodwill had an immaterial carrying
value that was included in other assets.
12
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS: Nine Months Ended September 30,
2002
Compared to the Nine Months Ended September 30, 2001
The Company has two principal business segments (see Note 7 to the Company's
Condensed Consolidated Financial Statements - Unaudited) - Opportunity and
Cosmetics.
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 $ CHANGE
------------ ------------ ------------
Net sales:
Opportunity $ 6,052,560 $ 6,894,847 $ (842,287)(A)
Cosmetics 8,215,707 8,689,931 (474,224)(B)
------------ ------------ ------------
Total net sales 14,268,267 15,584,778 (1,316,511)
------------ ------------ ------------
Cost of sales:
Opportunity 4,540,788 4,155,837 384,951(C)
Cosmetics 5,558,499 6,776,055 (1,217,556)(D)
------------ ------------ ------------
Total cost of sales 10,099,287 10,931,892 (832,605)
Selling, general and administrative expenses 3,851,375 3,506,409 344,966(E)
------------ ------------ ------------
Total operating expenses 13,950,662 14,438,301 (487,639)
------------ ------------ ------------
Operating income 317,605 1,146,477 (828,872)
------------ ------------ ------------
Other Income 0 298,950 (298,950)(F)
Interest expense, net (185,329) (311,829) 126,500(G)
------------ ------------ ------------
Total Other Income (Expense) (185,329) (12,879) (172,450)
------------ ------------ ------------
Income before income taxes $ 132,276 $ 1,133,598 $ (1,001,322)
============ ============ ============
(A) The decrease in sales in this segment of our business in the nine months
ended September 30, 2002 resulted primarily from a decline in sales of a
line of specially purchased merchandise that neared complete sell-off in
the fourth quarter of 2001 (approximately $300,000 for the nine months
ended September 30, 2002 versus approximately $1,700,000 for the same
period in 2001). The Company anticipated mitigating this decline with sales
to new customers. However, one of the major new customers placed
significant Christmas orders for delivery in the fourth quarter, rather
than third quarter, of 2002. The Company's historical experience with other
retailers has been that goods for the Christmas holiday season typically
ship in the third quarter.
(B) During the nine months ended September 30, 2002, as compared to the nine
months ended September 30, 2001, sales for this segment of our business
decreased primarily as a result of a decline in sales through electronic
media (a decrease for the nine months ended September 30, 2002 of
approximately $751,000 for this segment versus the same period in 2001),
partially offset by the growth in the branded cosmetics and designer
fragrances portion of our business.
(C) Cost of sales for the "Opportunity" segment of our business increased to
approximately 75% of sales in the nine months ended September 30, 2002 from
approximately 60% of sales in the nine months ended September 30, 2001. The
increased cost resulted primarily from reduced sales of the line of
specially purchased merchandise as referred to in (A) above, that had
yielded higher margins.
(D) Cost of sales for the "Cosmetic" segment of our business decreased to
approximately 68% of sales for the nine months ended September 30, 2002 as
compared to approximately 78% of sales for the nine months ended September
30, 2001. This resulted primarily from higher sales of branded cosmetics
and designer fragrances, which typically yield higher margins.
(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, 2002 as compared with the nine months ended September 30,
2001 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 (an increase of approximately $415,000 in 2002
over 2001 for these expenses).
(F) Other income for the nine months ended September 30, 2001 primarily
represents proceeds from the settlement of a legal action brought against
one of the Company's licensors for an alleged breach of contract, in the
amount of $280,000. The balance of Other income was gains from the sale of
certain equipment which was no longer being used.
(G) The decrease in interest expense during the nine month period ended
September 30, 2002 versus the nine month period ended September 30, 2001
resulted primarily from reductions in the borrowing rate.
13
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS: Three Months Ended September 30,
2002
Compared to the Three Months Ended September 30, 2001
The Company has two principal business segments (see Note 7 to the Company's
Condensed Consolidated Financial Statements - Unaudited) - Opportunity and
Cosmetics.
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 $ CHANGE
------------ ------------ ------------
Net sales:
Opportunity $ 1,758,144 $ 2,698,086 $ (939,942)(A)
Cosmetics 1,977,153 3,324,446 (1,347,293)(B)
----------- ----------- -----------
Total net sales 3,735,297 6,022,532 (2,287,235)
----------- ----------- -----------
Cost of sales:
Opportunity 1,422,198 1,520,053 (97,855)(C)
Cosmetics 1,506,069 2,488,777 (982,708)(D)
----------- ----------- -----------
Total cost of sales 2,928,267 4,008,830 (1,080,563)
Selling, general and administrative expenses 1,038,317 1,221,621 (183,304)(E)
----------- ----------- -----------
Total operating expenses 3,966,584 5,230,451 (1,263,867)
----------- ----------- -----------
Operating income (loss) (231,287) 792,081 (1,023,368)
----------- ----------- -----------
Other Income 0 18,950 (18,950)(F)
Interest expense, net (54,807) (85,383) 30,576(G)
----------- ----------- -----------
Total Other Income (Expense) (54,807) (66,433) (11,626)
----------- ----------- -----------
Income before income taxes $ (286,094) $ 725,648 $(1,011,742)
=========== =========== ===========
(A) The decrease in sales in this segment of our business in the three months
ended September 30, 2002 resulted primarily from a decline in sales of a
line of specially purchased merchandise that neared complete sell-off in
the fourth quarter of 2001. The Company anticipated mitigating this decline
with sales to new customers. However, one of the major new customers placed
significant Christmas orders for delivery in the fourth quarter, rather
than the third quarter, of 2002. The Company's historical experience with
other retailers has been that goods for the Christmas holiday season
typically ship in the third quarter.
(B) During the three months ended September 30, 2002, as compared to the three
months ended September 30, 2001, sales for this segment of our business
decreased primarily as a result of declines in sales through electronic
media and reduced sales of fragrances due to the sale of the fragrance line
in August 2001.
(C) Cost of sales for the "Opportunity" segment of our business increased to
81% of sales in the third quarter of 2002 from approximately 56% of sales
in the third quarter of 2001. The increased cost resulted primarily from
a change in the sales mix whereby sales of the line of specially purchased
merchandise, which had yielded higher than normal margins, were
significantly lower in the third quarter of 2002 as compared with 2001.
(D) Cost of sales for the "Cosmetic" segment of our business increased to
approximately 76% of sales for the third quarter of 2002 from approximately
75% of sales for the third quarter of 2001. This resulted primarily from
reduced sales in the electronic media portion of our business, which
typically yield higher margins.
(E) Selling, general and administrative expenses consist principally of
payroll, rent, commissions, royalties, insurance, professional fees, and
travel and promotional expenses. The decrease during the three months ended
September 30, 2002 as compared with the three months ended September 30,
2001 is primarily the result of reduced sales for the third quarter of 2002
as compared with the same period in 2001, being made through outside sales
agencies and the electronic media, which generally have higher associated
selling expenses and vary in direct relation to sales.
(F) Other income for the three months ended September 30, 2001 represents gains
from the sale of certain equipment which is no longer being used in our
operations.
(G) The decrease in interest expense during the three month period ended
September 30, 2002 as compared with the three month period ended September
30, 2001 resulted primarily from reductions in the borrowing rate.
14
Liquidity and Capital Resources
At September 30, 2002 we had working capital of approximately $9,754,000. This
balance included cash and cash equivalents, which decreased during the nine
months ended September 30, 2002 from approximately $60,000 to $51,000, resulting
from our operating, investing and financing activities, as more fully discussed
below.
During the nine months ended September 30, 2002, our operating activities used
cash and cash equivalents of approximately $1,597,000. This consisted primarily
of paying down accounts payable, accrued expenses and other liabilities of
approximately $4,216,000, the acquisition of additional inventories of
approximately $2,001,000 in anticipation of increased fourth quarter sales, and
increases to Prepaid expenses and other assets of approximately $445,000
(primarily consisting of advance payments to key suppliers for the purchase of
inventory to be received in the fourth quarter), offset by net income of
approximately $79,000 and net collections of accounts receivable of
approximately $4,646,000. In addition, we wrote-off approximately $220,000 of
doubtful accounts and recognized depreciation and amortization expense of
approximately $80,000, both non-cash expenses.
During the nine months ended September 30, 2002, our investing activities used
cash and cash equivalents of approximately $98,000 for the acquisition of
property and equipment.
During the nine months ended September 30, 2002, our financing activities
provided cash and cash equivalents of approximately $1,686,000. This consisted
primarily of increased borrowings under our credit line of approximately
$1,095,000 and proceeds from new long-term debt of $750,000, more fully
discussed in Notes 3 and 4 of the Condensed Consolidated Financial Statements at
September 30, 2002. These additional borrowings were partially offset by
payments of principal on long-term debt of approximately $253,000. In addition,
we received proceeds from issuance of shares in connection with the exercise of
options of approximately $91,000.
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 Notes 3 and 4 of the Condensed Consolidated Financial
Statements at September 30, 2002. At September 30, 2002, the credit facility
provided for the following:
1) A revolving line of credit through October 31, 2002 with maximum
borrowings of $3,550,000 against the Company's eligible accounts
receivable and inventories through October 31, 2002 (as adjusted for
the new term loan arrangement, originating October 18, 2002, described
below). At September 30, 2002 we had approximately $3,467,000
outstanding under the revolving line of credit (as adjusted for the
new term loan arrangement, originating October 18, 2002, described
below and in Note 8 of the Condensed Consolidated Financial Statements
at September 30, 2002), representing a net increase in our borrowings
under the revolving line of credit of approximately $845,000 from
December 31, 2001. As of November 14, 2002 the outstanding balance
under the revolving line of credit was $3,384,829. A standby letter
of credit previously issued in the amount of $350,000 on behalf of one
of our suppliers, as discussed in the Company's Form 10-QSB dated June
30, 2002, was cancelled during the third quarter. No drawings had been
made against the standby letter of credit.
2) A $1,498,808 term loan originated in June, 2002. The loan is payable
in monthly installments of $41,634 plus interest through July 2005.
The loan had an outstanding balance of approximately $1,394,000 as of
September 30, 2002.
On October 18, 2002, the Company and Merrill Lynch amended the credit facility
to provide a second term loan in the amount of $500,000. This loan is payable in
monthly installments of $20,833 plus interest through October 2004.
Simultaneously, the maximum borrowings under the revolving credit line were
reduced by $250,000 to $3,550,000. As a result of these transactions, $250,000
of the credit line balance has been reclassified from current to long term debt
in the Financial Statements, footnotes and other discussions in this Form
10-QSB.
The Facility requires interest to be paid monthly at 2.75% above the 30 day
London Interbank Offering (LIBOR) rate (an effective rate of 4.57% at September
30, 2002).
In addition to the Merrill Lynch credit facility, on September 26, 1997 and
December 28, 1999, the Company entered into two other 6% term loans in the
amount of $100,000 each. As of September 30, 2002, $34,343 and $66,790 were
outstanding under the 1997 loan and 1999 loan, respectively.
As of November 14, 2002, the outstanding balance under all term loans was
$1,906,588.
15
The tables below summarize our long term debt and our lease commitments as of
September 30, 2002:
PAYMENTS DUE BY PERIOD
Long term Obligations Up to 1-3 4-5 After
As of September 30, 2002 Total 1 year years years 5 years
---------- --------- --------- -------- --------
Merrill Lynch, originated June, 2002 $1,394,000 $500,000 $894,000 -- --
Merrill Lynch, originated October, 2002(A) $ 250,000 $250,000
Other $ 101,000 $ 30,000 $ 49,000 $ 22,000 --
(A) See Notes 3 and 4 to the Condensed Consolidated Financial Statements.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
Total
Total Lease Commitments Amounts Up to 1-3 4-5 Over
As of September 30, 2002 Committed 1 year years years 5 years
---------- --------- --------- -------- --------
495 River Street $ 447,000 $298,000 $149,000 -- --
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 since the Company's Facility was
recently extended. 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, or if the Company's
Facility is not extended beyond its current expiration date of October 31, 2003,
on satisfactory terms, or at all, the Company could be required to seek
financing sooner than currently anticipated. Except for the revolving credit
portion of the Facility, which expires on October 31, 2003, and the various term
loans, 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 would 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.
16
ITEM 3. CONTROLS AND PROCEDURES
a) DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days before filing this
report, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures. The Company's disclosure controls and
procedures are the controls and other procedures that it designed to ensure that
it records, processes, summarizes and reports in a timely manner the information
it must disclose in reports that it files with or submits to the Securities and
Exchange Commission. Paul Sharp, the Company's President and CEO and George
Fischer, our Principal Accounting Officer and CFO, supervised and participated
in this evaluation. Based on this evaluation, Messrs. Sharp and Fischer
concluded that, as of the date of their evaluation, the Company's disclosure
controls and procedures were effective.
b) INTERNAL CONTROLS. Since the date of the evaluation described above,
there have not been any significant changes in the Company's internal accounting
controls or in other factors that could significantly affect those controls.
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
1. Effective November 15, 2002, Mr. Jack Koegel resigned as the Chief
Operating Officer of the Company. He will continue to serve as a
member of the Company's Board of Directors.
2. The Company's Audit Committee has approved the following non-audit
services provided by the Company's external auditor, JH Cohn:
-- the rendering of tax advice
-- non design/implementation computer support services
This disclosure is made pursuant to Section 10A(i)(2) of the
Securities Exchange Act, as added by Section 202 of the Sarbanes-Oxley
Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1a Merrill Lynch letter re: Amendment to Loan Documents
10.1b Merrill Lynch WCMA(R) Reducing Revolver(SM) Loan
and Security Agreement
10.1c Merrill Lynch Unconditional Guaranty
10.1d Merrill Lynch Security Agreement
10.2 Merrill Lynch letter re: Loan Documents Amendment and Extension
99.1 Certification Pursuant to 18 U.S.C. Section 1350
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, 2002.
17
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/ George Fischer
-----------------------
George Fischer
Chief Financial Officer
As both duly authorized
officer of the registrant
and as principal financial
officer of registrant
November 14, 2002
18
CERTIFICATION
I, Paul Sharp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sel-Leb Marketing,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"), and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directions (or persons performing the
equivalent function):
19
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ Paul Sharp
-------------------------------------
Paul Sharp
President and Chief Executive Officer
20
CERTIFICATION
I, George Fischer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sel-Leb Marketing,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"), and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directions (or persons performing the
equivalent function):
21
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ George Fischer
-----------------------------
George Fischer
Chief Financial Officer
22
EXHIBIT INDEX
Exhibit Description
------- -----------------------------------------------------------------
10.1a Merrill Lynch letter re: Amendment to Loan Documents
10.1b Merrill Lynch WCMA(R) Reducing Revolver(SM) Loan
and Security Agreement
10.1c Merrill Lynch Unconditional Guaranty
10.1d Merrill Lynch Security Agreement
10.2 Merrill Lynch letter re: Loan Documents Amendment and Extension
99.1 Certification Pursuant to 18 U.S.C. Section 1350