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, 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 August 13, 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 June 30, 2002
(Unaudited) and December 31, 2001 2
Condensed Consolidated Statements of Income
Six Months Ended June 30, 2002 and 2001 (Unaudited) 3
Condensed Consolidated Statements of Income
Three Months Ended June 30, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity Six Months Ended June 30, 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
1
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
June 30, December 31,
ASSETS 2002 2001
----------- -----------
(Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 44,581 $ 60,300
Accounts receivable, less allowance for
doubtful accounts of $349,490 and $266,120 5,885,946 9,163,755
Inventories 10,038,641 8,297,918
Deferred tax assets, net 365,670 297,545
Prepaid expenses and other current assets 1,047,038 832,460
----------- -----------
Total current assets 17,381,876 18,651,978
Property and equipment, at cost, net of
accumulated depreciation and amortization
of $1,200,745 and $1,153,237 190,114 164,130
Other assets 213,277 214,203
----------- -----------
Totals $17,785,267 $19,030,311
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable under line of credit $ 3,339,518 $ 2,622,390
Current portion of long-term debt 528,978 307,080
Accounts payable 1,931,116 4,626,583
Accrued expenses and other liabilities 1,882,502 2,080,918
----------- -----------
Total current liabilities 7,682,114 9,636,971
Long-term debt, net of current portion 1,034,257 690,274
----------- -----------
Total liabilities 8,716,371 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;
2,324,213 and 2,261,018 shares
issued and outstanding 23,242 22,611
Additional paid-in capital 6,610,288 6,496,359
Retained earnings 2,474,366 2,223,096
Less receivable in connection with
equity transactions (39,000) (39,000)
----------- -----------
Total stockholders' equity 9,068,896 8,703,066
----------- -----------
Totals $17,785,267 $19,030,311
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
2
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
2002 2001
----------- ----------
Net sales $10,532,970 $9,562,246
----------- ----------
Operating expenses:
Cost of sales 7,171,020 7,110,433
Selling, general and administrative expenses 2,813,058 2,097,417
----------- ----------
Totals 9,984,078 9,207,850
----------- ----------
Operating income 548,892 354,396
----------- ----------
Other income (expense):
Interest expense (130,522) (226,446)
Income from litigation settlement 280,000
----------- ----------
Totals (130,522) 53,554
----------- ----------
Income before provision for income taxes 418,370 407,950
Provision for income taxes 167,100 163,180
----------- ----------
Net income $ 251,270 $ 244,770
=========== ==========
Net earnings per share:
Basic $.11 $.11
==== ====
Diluted $.10 $.11
==== ====
Weighted average shares outstanding:
Basic 2,269,203 2,261,018
========= =========
Diluted 2,433,786 2,318,633
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
2002 2001
---------- ----------
Net sales $4,825,113 $4,548,449
---------- ----------
Operating expenses:
Cost of sales 3,275,804 3,591,714
Selling, general and administrative expenses 1,400,491 917,612
---------- ----------
Totals 4,676,295 4,509,326
---------- ----------
Operating income 148,818 39,123
---------- ----------
Other income (expense):
Interest expense (69,871) (104,667)
Income from litigation settlement 280,000
---------- ----------
Totals (69,871) 175,333
---------- ----------
Income before provision for income taxes 78,947 214,456
Provision for income taxes 38,100 85,680
---------- ----------
Net income $ 40,847 $ 128,776
========== ==========
Net earnings per share:
Basic $.02 $.06
==== ====
Diluted $.02 $.06
==== ====
Weighted average shares outstanding:
Basic 2,277,297 2,261,018
========= =========
Diluted 2,438,283 2,302,977
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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
Exercise of stock options 63,195 631 87,499 88,130
Effects of issuance of stock
options in exchange for
services 26,430 26,430
Net income 251,270 251,270
--------- ------- ---------- ---------- -------- ----------
Balance, June 30, 2002 2,324,213 $23,242 $6,610,288 $2,474,366 $(39,000) $9,068,896
========= ======= ========== ========== ======== ==========
See Notes to Condensed Consolidated Financial Statements.
5
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
2002 2001
----------- -----------
Operating activities:
Net income $ 251,270 $ 244,770
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 47,508 116,735
Provision for doubtful accounts 187,200 33,826
Deferred income taxes (68,125) (35,615)
Effects of issuance of stock options
in exchange for services 26,430
Changes in operating assets and liabilities:
Accounts receivable 3,090,609 (497,359)
Inventories (1,740,723) (1,249,488)
Prepaid expenses and other current assets (214,578) (215,924)
Other assets 926 (25,447)
Accounts payable, accrued expenses and
other liabilities (2,893,883) 1,017,830
----------- -----------
Net cash used in operating activities (1,313,366) (610,672)
----------- -----------
Investing activities - purchases of property
and equipment (73,492) (45,237)
----------- -----------
Financing activities:
Proceeds from note payable under
line of credit, net of repayments 717,128 879,158
Proceeds from long-term debt 750,000
Repayments of long-term debt (184,119) (432,036)
Proceeds from exercise of stock options 88,130
Decrease in receivable in connection
with equity transactions 3,000
----------- -----------
Net cash provided by financing activities 1,371,139 450,122
----------- -----------
Net decrease in cash and cash equivalents (15,719) (205,787)
Cash and cash equivalents, beginning of period 60,300 213,920
----------- -----------
Cash and cash equivalents, end of period $ 44,581 $ 8,133
=========== ===========
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 June
30, 2002, their results of operations for the six and three months
ended June 30, 2002 and 2001, their changes in stockholders' equity
for the six months ended June 30, 2002 and their cash flows for the
six months ended June 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 six and three months
ended June 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" and, if appropriate, "diluted" earnings per
common share. Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding
during each period. The calculation of diluted earnings per share is
similar to that of basic earnings per share, except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if all potentially dilutive
common shares, such as those issuable upon the exercise of stock
options and warrants, were issued during the period.
7
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 six and three months
ended June 30, 2002 and 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:
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Basic weighted average
shares outstanding 2,269,203 2,261,018 2,277,297 2,261,018
Shares arising from
assumed exercise of:
Stock options 144,565 57,615 160,986 41,959
Warrants (A) 20,018
--------- --------- --------- ---------
Diluted weighted average
shares outstanding 2,433,786 2,318,633 2,438,283 2,302,977
========= ========= ========= =========
(A) The warrants expired on April 15, 2002.
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 latest amendments to the loan agreement as of June 6, 2002,
the Facility consists of a revolving line of credit, with maximum
borrowings of $3,800,000 against the Company's eligible accounts
receivable and inventories through October 31, 2002, and a term loan
(see Note 4 herein). Borrowings under the revolving line of credit,
which totaled $3,339,518 at June 30, 2002, bear interest, which is
payable monthly, at 2.75% above the 30-day London Interbank Offering
Rate (an effective rate of 4.58% as of June 30, 2002). Outstanding
borrowings under the Facility 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 the latest amendments to the loan agreement
for the Facility, the Company received proceeds of $1,498,808 from a
new 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 reduction of the balance outstanding under
the revolving line of credit (see Note 3 herein). The new term loan,
which had a balance of $1,454,922 as of June 30, 2002, is payable in
monthly installments of principal of $41,634 through July 2005 plus
interest at 2.75% above the 30-day London Interbank Offering Rate
(an effective rate of 4.58% as of June 30, 2002). Outstanding
borrowings under the new term loan are also secured by substantially
all of the Company's assets.
Note 5 - Standby letter of credit:
On July 11, 2002, the Company issued a standby letter of credit in
the amount of $350,000 on behalf of one of its suppliers. The
maximum amount the Company may borrow under the revolving line of
credit (see Note 3 herein) is reduced by the amount guaranteed
pursuant to the standby letter of credit. As of August 13, 2002, no
drawings have been made against the standby letter of credit.
Note 6 - 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 June 30, 2002 and changes in options outstanding
during the six months ended June 30, 2002 are summarized below:
Shares Weighted
or Average
Price Exercise Price
------- --------------
Outstanding at January 1, 2002 650,008 $2.19
Granted 37,500(A) 2.15
Exercised (63,195) 1.39
Canceled (1,150) 2.50
-------
Outstanding at June 30, 2002 623,163 $2.27
======= =====
Options exercisable at June 30, 2002 508,080
=======
-----------
(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 Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
9
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Goodwill:
As of June 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
$17,000 and $8,500 in the six and three months ended June 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 8 - 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 8 - Segment information (concluded):
Net sales, cost of sales and other related segment information for
the six and three months ended June 30, 2002 and 2001 follows:
Six Months Three Months
Ended June 30, Ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Net sales:
Opportunity $ 4,294,416 $4,196,761 $1,950,337 $1,717,601
Cosmetics 6,238,554 5,365,485 2,874,776 2,830,848
----------- ---------- ---------- ----------
Totals 10,532,970 9,562,246 4,825,113 4,548,449
----------- ---------- ---------- ----------
Cost of sales:
Opportunity 3,118,590 2,714,051 1,424,926 1,123,730
Cosmetics 4,052,430 4,396,382 1,850,878 2,467,984
----------- ---------- ---------- ----------
Totals 7,171,020 7,110,433 3,275,804 3,591,714
Selling, general and administrative expenses 2,813,058 2,097,417 1,400,491 917,612
----------- ---------- ---------- ----------
Total operating expenses 9,984,078 9,207,850 4,676,295 4,509,326
----------- ---------- ---------- ----------
Operating income 548,892 354,396 148,818 39,123
Other income (expense):
Interest expense, net (130,522) (226,446) (69,871) (104,667)
Income from litigation settlement 280,000 280,000
----------- ---------- ---------- ----------
Income before provision for income taxes $ 418,370 $ 407,950 $ 78,947 $ 214,456
=========== ========== ========== ==========
* * *
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 extend its financing arrangements (or
obtain satisfactory alternative financing) on favorable terms, or at all, 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.
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 six months ended June 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 six months and three months ended June 30,
2001, Goodwill amortization totaled approximately $17,000 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 has not been
determined. As of June 30, 2002, goodwill had an immaterial carrying value that
was included in other assets.
12
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS: Six Months Ended June 30, 2002
Compared to the Six Months Ended June 30, 2001
The Company has two principal business segments (see Note 8 to the Company's
Condensed Consolidated Financial Statements - Unaudited) - Opportunity and
Cosmetics.
JUNE 30, 2002 JUNE 30, 2001 $ CHANGE
------------- ------------- ---------
Net sales:
Opportunity $ 4,294,416 $4,196,761 $ 97,655(A)
Cosmetics $ 6,238,554 $5,365,485 $ 873,069(B)
----------- ---------- ---------
Total net sales $10,532,970 $9,562,246 $ 970,724
----------- ---------- ---------
Cost of sales:
Opportunity $ 3,118,590 $2,714,051 $ 404,539(C)
Cosmetics $ 4,052,430 $4,396,382 $(343,952)(D)
----------- ---------- ---------
Total cost of sales $ 7,171,020 $7,110,433 $ 60,587
Selling, general and
administrative expenses $ 2,813,058 $2,097,417 $ 715,641(E)
----------- ---------- ---------
Total operating expenses $ 9,984,078 $9,207,850 $ 776,228
----------- ---------- ---------
Operating income $ 548,892 $ 354,396 $ 194,496
----------- ---------- ---------
Other Income $ 0 $ 280,000 $(280,000)(F)
Interest expense, net $ (130,522) $ (226,446) $ 95,924(G)
----------- ---------- ---------
Total Other Income (Expense) $ (130,522) $ 53,554 $(184,076)
----------- ---------- ---------
Income before income taxes $ 418,370 $ 407,950 $ 10,420
=========== ========== =========
(A) The net increase in sales in this segment of our business in the six
months ended June 30, 2002 resulted primarily from sales of a product line
that was introduced during the third quarter of 2001. This was partially
offset by the decline in sales of a line of specially purchased merchandise
that neared complete sell-off in the fourth quarter of 2001.
(B) During the six months ended June 30, 2002, as compared to the six
months ended June 30, 2001, sales for this segment of our business
increased primarily as a result of 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 73% of sales in the six months ended June 30, 2002 from
approximately 65% of sales in the six months ended June 30, 2001. The
increased cost resulted primarily from reduced sales of the line of
specially purchased merchandise that had yielded higher margins.
(D) Cost of sales for the "Cosmetic" segment of our business decreased to
approximately 65% of sales for the six months ended June 30, 2002 as
compared to approximately 82% of sales for the six months ended June 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 six months ended
June 30, 2002 as compared with the six months ended June 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.
(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 six month period ended June
30, 2002 versus the six month period ended June 30, 2001 resulted primarily
from less borrowings outstanding, coupled with reductions in the borrowing
rate.
13
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS: Three Months Ended June 30, 2002
Compared to the Three Months Ended June 30, 2001
The Company has two principal business segments (see Note 8 to the Company's
Condensed Consolidated Financial Statements - Unaudited) - Opportunity and
Cosmetics.
JUNE 30, 2002 JUNE 30, 2001 $ CHANGE
------------- ------------- ---------
Net sales:
Opportunity $1,950,337 $1,717,601 $ 232,736(A)
Cosmetics $2,874,776 $2,830,848 $ 43,928(B)
---------- ---------- ---------
Total net sales $4,825,113 $4,548,449 $ 276,664
---------- ---------- ---------
Cost of sales:
Opportunity $1,424,926 $1,123,730 $ 301,196(C)
Cosmetics $1,850,878 $2,467,984 $(617,106)(D)
---------- ---------- ---------
Total cost of sales $3,275,804 $3,591,714 $(315,910)
Selling, general and
administrative expenses $1,400,491 $ 917,612 $ 482,879(E)
---------- ---------- ---------
Total operating expenses $4,676,295 $4,509,326 $ 166,969
---------- ---------- ---------
Operating income $ 148,818 $ 39,123 $ 109,695
---------- ---------- ---------
Other Income $ 0 $ 280,000 $(280,000)(F)
Interest expense, net $ (69,871) $ (104,667) $ 34,796(G)
---------- ---------- ---------
Total Other Income (Expense) $ (69,871) $ 175,333 $(245,204)
---------- ---------- ---------
Income before income taxes $ 78,947 $ 214,456 $(135,509)
========== ========== =========
(A) The net increase in sales in this segment of our business resulted
primarily from sales of a product line that was introduced during the third
quarter of 2001. This was partially offset by the decline in sales of a
line of specially purchased merchandise that neared complete sell-off in
the fourth quarter of 2001.
(B) The change in cosmetic sales represents less than a 2% difference
versus the 2nd quarter of 2001. This change was primarily due to changes in
the sales mix.
(C) Cost of sales for the "Opportunity" segment of our business increased
to 73% of sales in the second quarter of 2002 from approximately 65% of
sales in the second quarter of 2001. The increased cost resulted primarily
from reduced sales of the line of specially purchased merchandise that had
yielded higher margins.
(D) Cost of sales for the "Cosmetic" segment of our business decreased to
approximately 64% of sales for the second quarter of 2002 from
approximately 87% of sales for the second quarter of 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 three months ended
June 30, 2002 as compared with the three months ended June 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.
(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 three month period ended
June 30, 2002 as compared with the three month period ended June 30, 2001
resulted primarily from lower outstanding borrowing levels, coupled with
reductions in the borrowing rate.
14
Liquidity and Capital Resources
At June 30, 2002 we had working capital of approximately $9,700,000. This
balance included cash and cash equivalents, which decreased during the six
months ended June 30, 2002 from approximately $60,000 to $45,000, resulting from
our operating, investing and financing activities, as more fully discussed
below.
During the six months ended June 30, 2002, our operating activities used cash
and cash equivalents of approximately $1,313,000. This consisted primarily of
paying down accounts payable, accrued expenses and other liabilities of
approximately $2,894,000 and the acquisition of additional inventories of
approximately $1,741,000, offset by net income of approximately $251,000 and net
collections of accounts receivable of approximately $3,091,000.
During the six months ended June 30, 2002, our investing activities used cash
and cash equivalents of approximately $73,000 for the acquisition of property
and equipment.
During the six months ended June 30, 2002, our financing activities provided
cash and cash equivalents of approximately $1,371,000. This consisted primarily
of increased borrowings under our credit line of approximately $717,000 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 June 30, 2002. These
additional borrowings were partially offset by payments of principal on
long-term debt of approximately $184,000. Proceeds from issuance of shares in
connection with the exercise of options were approximately $88,000.
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, 4 and 5 of the Condensed Consolidated Financial
Statements at June 30, 2002. At June 30, 2002, the credit facility provided for
the following:
1) A revolving line of credit through October 31, 2002 with maximum
borrowings of $3,800,000 (with $350,000 allocated for a standby letter
of credit, more fully described below) against the Company's eligible
accounts receivable and inventories through October 31, 2002. At June
30, 2002 we had $3,339,518 outstanding under the revolving line of
credit, representing a net increase in our borrowings under the
revolving line of credit of $717,128 from December 31, 2001. As of
August 13, 2002 the outstanding balance under the revolving line of
credit was $3,109,453. On July 11, 2002, the Company issued a standby
letter of credit in the amount of $350,000 on behalf of one of its
suppliers. The maximum amount the company may borrow under the
revolving line of credit (see Note 3 to the attached Condensed
Consolidated Financial Statements) is reduced by the amount guaranteed
pursuant to the standby letter of credit. As of August 13, 2002, no
drawings have been made against the standby letter of credit.
2) A $1,498,808 term loan originated in June, 2002. Of the total
proceeds, $748,808 was applied to the repayment of the remaining
balances of prior term loans, and $750,000 was applied to reduction of
the balance outstanding under the revolving line of credit. The loan
is payable in monthly installments of $41,634 plus interest through
July 2005. The loan had an outstanding balance of $1,454,922 as of
June 30, 2002.
The Facility requires interest to be paid monthly at 2.75% above the 30 day
London Interbank Offering (LIBOR) rate (an effective rate of 4.58% at June 30,
2002).
The Company intends to engage in discussions with Merrill Lynch with a view to
extending and increasing the Facility and presently believes that it will be
able to reach such an agreement with Merrill Lynch. In the event Merrill Lynch
does not extend the Facility, however, the Company intends to contact other
banks and financing sources and believes that it would then be able to arrange
adequate alternative financing, although there can be no assurance of such. If
the Company is unable to extend the current Facility and cannot obtain adequate
alternative financing, and its cash available from operations is insufficient to
satisfy the Company's obligations then due to Merrill Lynch, Merrill Lynch would
be entitled to exercise all remedies available to it as a secured lender.
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 June 30, 2002, $38,173 and $70,140 were
outstanding under the 1997 loan and 1999 loan, respectively.
As of August 13, 2002, the outstanding balance under all term loans was
$1,516,826.
15
The tables below summarize our long term debt and our lease commitments as of
June 30, 2002:
PAYMENTS DUE BY PERIOD
----------------------
Long term Obligations Less than 1-3 4-5 After
As of June 30, 2002 Total 1 year years years 5 years
---------- -------- ---------- -------- -------
Merrill Lynch $1,455,000 $500,000 $955,000 -- --
Other $ 108,000 $ 29,000 $ 79,000 -- --
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
Total
Total Lease Commitments Amounts Less than 1-3 4-5 Over
As of June 30, 2002 Committed 1 year years years 5 years
---------- -------- ---------- -------- -------
495 River Street $ 497,000 $275,000 $222,000 -- --
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 assuming that the Company's
Facility is extended or adequate alternative financing arrangements are obtained
by the Company. 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 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, 2002, 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
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 30, 2002. At the Annual Meeting, the shareholders of the Company
voted upon the election of six directors with all six 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.
The votes were cast as follows:
PROPOSAL NO. 1
NUMBER OF VOTES NUMBER OF VOTES
NAME FOR WITHHELD
---------------- --------------- ---------------
Harold Markowitz 1,555,545 3,948
Paul Sharp 1,555,545 3,948
Jorge Lazaro 1,555,545 3,948
Jack Koegel 1,551,545 7,948
Stanley R. Goodman 1,551,545 7,948
Edward C. Ross 1,551,545 7,948
17
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Merrill Lynch Term Loan and Security Agreement
10.2 Merrill Lynch Collateral Installment Note
10.3 Merrill Lynch Unconditional Guaranty
10.4 Merrill Lynch Security Agreement
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 June 30, 2002.
18
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
August 14, 2002
19