FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the quarterly period ended: 10/31/98 Commission file number: 1-14091
SHERWOOD BRANDS, INC.
(Exact name of Registrant as specified in its charter)
North Carolina 56-1349259
(State or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.)
6110 Executive Blvd. Suite 1080, Rockville MD 20852
(Address of principal executive offices)
Registrant's telephone number, including area code: 301-881-9340
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that he registrant was
required to file such reports and (2) has been subject to such filing
requirement for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of December 14, 1998 there were 2,700,000 shares of Class A Common stock and
1,000,000 shares of Class B Common Stock, par value $0.01 per share, of the
registrant outstanding.
<PAGE>
SHERWOOD BRANDS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - October 31, 1998 (unaudited)
and July 31, 1998
Consolidated Statements of Operations - Three months ended
October 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Three months ended
October 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
Item 6A. Exhibit 27 Financial Data Schedule
Item 6B. Reports on Form 8K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 July 31, 1998
---------------- -------------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,794,924 $6,087,789
Accounts receivable, less allowance of $61,000 and $3,654,616 $2,067,123
$40,000
Inventory (Note 4) $8,473,047 $4,058,293
Other current assets $289,725 $127,817
Deferred taxes on income $29,667 $29,700
------- -------
Total current assets $14,241,979 $12,370,722
Net property and equipment $2,863,543 $2,642,570
Other Assets $61,006 $53,066
TOTAL ASSETS $17,166,528 $15,066,358
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $1,638,000 $0
Current portion of long-term debt $175,000 $175,000
Current portion of subordinated debt $90,941 $90,941
Accounts payable $2,013,043 $2,277,512
Accrued expenses $853,319 $421,789
Income taxes payable $231,712 $161,261
-------- --------
Total current liabilities $5,002,015 $3,126,503
---------- ----------
Long-term debt $1,180,000 $1,180,000
Subordinated debt $401,876 $424,116
Deferred taxes on income $194,767 $194,800
-------- --------
TOTAL LIABILITIES $6,778,658 $4,925,419
========== ==========
Commitments
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued or outstanding - -
Common Stock, Class A, $.01 par value, 30,000,000
shares authorized, 2,700,000 issued and outstanding $27,000 $27,000
Common Stock, Class B, $.01 par value, 5,000,000 shares
authorized, 1,000,000 shares issued and outstanding $10,000 $10,000
Additional paid-in capital $7,973,538 $7,978,777
Retained earnings $2,377,332 $2,125,162
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $10,387,870 $10,140,939
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $17,166,528 $15,066,358
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
Three months ended
------------------
October 31, October 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $6,239,923 $5,272,474
Cost of sales $4,179,389 $3,466,006
---------- ----------
Gross profit $2,060,534 $1,806,468
---------- ----------
Selling, general and administrative expenses $1,015,399 $655,892
Pre-production costs $213,112 $54,125
Salaries and related expenses $481,291 $297,631
-------- --------
Total operating expenses $1,709,802 $1,007,648
---------- ----------
Income from operations $350,732 $798,820
-------- --------
Other income (expense)
Interest income $56,184 $3,126
Interest expense ($16,011) ($67,298)
Insurance claim, net $0 $40,634
Other (expense) income ($18,401) $7,123
-------- ------
Total other income (expense) $21,772 ($16,415)
------- --------
Income before provision for taxes $372,504 $782,405
on income
Provision for taxes on income ($119,201) ($266,000)
--------- ---------
Net income $253,303 $516,405
-------- --------
Basic and diluted earnings per share $0.07 $0.24
Weighted average common shares 3,700,000 2,150,000
outstanding ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Three months ended
------------------
October 31, October 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating
activities
Net income $253,303 $516,405
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities
Depreciation expense $39,400 $36,034
Unrealized (gain) loss on foriegn exchange $19,864 ($29,957)
Provision for doubtful accounts $21,000 $4,356
Write-off of accounts receivable $13,652
(Increase) decrease in assets
Accounts receivable ($1,622,145) ($871,775)
Inventory ($4,414,754) $375,904
Insurance settlement receivable $0 $262,574
Other current assets ($168,247) $46,062
Other assets ($7,940) ($61,622)
Increase (decrease) in liabilities
Accounts payable ($284,333) $647,297
Accrued expenses $431,497 $45,505
Income taxes payable $70,451 $84,193
------- -------
Net cash provided by (used in)
operating activities ($5,648,252) $1,054,976
----------- ----------
Cash flows from investing activities
Capital expenditures ($260,373) $0
--------- --
Net cash used in investing activities ($260,373) $0
--------- --
Cash flows from financing activities
Borrowings on line of credit $1,638,000 -
Repayments on line of credit - ($600,000)
Payments on debt ($22,240) ($20,897)
Payments to related parties $0 ($235,786)
-- ---------
Net cash provided by (used in) financing activities $1,615,760 ($856,683)
---------- ---------
Net (decrease) increase in cash and
cash equivalents ($4,292,865) $198,293
Cash and cash equivalents, at beginning
of period $6,087,789 $614,109
---------- --------
Cash and cash equivalents, at end
of period $1,794,924 $812,402
========== ========
</TABLE>
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sherwood Brands,
Inc., and its wholly- owned subsidiaries, Sherwood Brands, LLC, Sherwood Brands
of RI Inc. and Sherwood Brands Overseas, Inc. ("Overseas") (collectively, the
"Company"). All material inter-company transactions and balances have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report and 10KSB dated October 28, 1998.
2. ORGANIZATION AND DESCRIPTION OF BUSINESS
Sherwood Brands, Inc. (formerly Sherwood Foods, Inc.) was incorporated in
December 1982 in the state of North Carolina. Sherwood Brands, Inc. manufactures
its own line of confectionery products, demitasse \registerered trademark\
biscuits and is developing a new product line of candies.
Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland limited
liability company. Sherwood Brands, LLC markets and distributes its own lines of
confectionery products in the United States.
Overseas (a wholly-owned subsidiary of Sherwood Brands, LLC) was incorporated in
July 1993 in the Bahamas to market and distribute the Sherwood lines of
confectionery products internationally. Sherwood Brands, LLC and Overseas
purchase confectionery products from Sherwood Brands, Inc. as well as third
party suppliers.
Sherwood Brands of RI Inc. was incorporated in September, 1998 in the state of
Rhode Island. Sherwood Brands of RI Inc. d/b/a E. Rosen Company is a
manufacturer of hard candies, jelly beans and packer of gift items and baskets.
<PAGE>
3. INTERIM FINANCIAL INFORMATION
The financial information as of October 31, 1998 and for the three months ended
October 31, 1997 and 1998 is unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for such periods.
Results for interim periods are not necessarily indicative of results to be
expected for an entire year.
4. INVENTORY
Inventory consists of raw materials and finished goods and is stated at the
lower of cost or market. Cost is determined by the FIFO (First-in, first-out)
method.
Inventory consists of the following:
JULY 31 OCTOBER 31
------- ----------
1998 1998
------ ----
Raw materials............. $ 400,722 $5,122,245
Finished goods............ 3,657,571 3,350,802
--------- ---------
$4,058,293 $8,473,047
========== ==========
5. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
6. STOCKHOLDER'S EQUITY
In September 1998 the Company granted options to buy 10,000 shares to its new
Chief Financial Officer. The options granted were under the 1998 Stock Option
Plan. The options have an exercise price of $5.95 and expire September 2008.
7. ACQUISITION OF ASSETS OF E. ROSEN COMPANY
On September 24, 1998, Sherwood Brands, Inc. acquired certain assets of the E.
Rosen Company, a Rhode Island based manufacturer of hard candy, jelly beans and
lollipops and packer of gift items and baskets. E. Rosen Company filed a
receivership proceeding before the Rhode Island Superior Court on July 31, 1998.
<PAGE>
Sherwood Brands paid $4 million in cash for the machinery and equipment,
inventory, trade names, trademarks and customer lists of E. Rosen Company. The
total purchase price of $4million has been allocated to inventory. Sherwood
Brands, Inc. formed a subsidiary Sherwood Brands of RI Inc. d/b/a E. Rosen
Company, which owns the acquired assets and will operate the new manufacturer of
candy and packer of gift items.
The financial information presented herein incorporates the results of operation
of Sherwood Brands of R.I. Inc. for the period commencing September 24, 1998
through October 31, 1998.
8. INCOME TAXES
The income tax rate utilized on an interim basis is based on the Company's
estimate of the effective income tax rate for the fiscal year ending July 31,
1999 which approximates 32%.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Important Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent, belief or current expectations of
Sherwood Brands, Inc. and its management. Such statements are subject to a
variety or risks and uncertainties, many of which are beyond the Company's
control, which could cause actual results to differ materially from those
contemplated in such forward-looking statements, including in particular the
risks and uncertainties described under "Risk Factors" in the Company's
Prospectus. Existing and prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update or revise the information
contained in this Quarterly Report on Form 10-QSB, whether as a result of new
information, future events or circumstances or otherwise.
Results of Operations
THREE MONTHS ENDED OCTOBER 31,1998.
Net sales for the three months ended October 31, 1998 and 1997 were $6,239,923
and $5,272,474, respectively. Net sales increased 18% or $967,449 primarily due
to approximately $850,000 of sales made by the new Rhode Island operation.
Domestic sales of all product categories increased by approximately 5% during
the first quarter. International sales declined by approximately $220,000 due to
continued soft market conditions in Asia and the weakening of the Canadian
dollar.
Gross profit for the third quarter increased to $2,060,534 from $1,806,468 but
declined as a percentage of sales to 33% from 34%. The decrease was attributable
to a less favorable currency rates and higher costs of production of new items
due to as yet unrealized production efficiencies.
Selling, general and administrative expenses as a percentage of sales increased
from 12.4% to 16.3% or from $655,892 to $1,015,399 largely due to increased
advertising expenditures of approximately $60,000, and professional and
administrative fees associated with the acquisition and start-up of the Rhode
Island operation which were high in proportion to the moderate Rhode Island
sales during the period.
Pre-production costs increased to $213,112 compared to $54,125 in the prior
quarter. These costs were associated with the start-up costs of product line
extensions in the Chase City facility.
Salaries and related expenses increased to $481,291 from $297,631 or to 7.7%
from 5.6% due to an increase in management salaries and the addition of new
employees at the Rhode Island operation.
Operating expenses increased to $1,709,802 from $1,007,648 primarily as a result
of the increase in pre-production costs, costs associated with the acquisition
and start-up of the Rhode Island operation
<PAGE>
and salary increases.
Income from operations for the three months ended October 31, 1998 was $350,732
compared to $798,820 for the same period last year. The decrease was primarily
due to lower gross margin, higher start-up operating expenses and increased
advertising and salary expenses.
Other Income (expense) increased to $21,772 compared to expense $16,415 due to
interest income of $56,184 generated on the proceeds at the initial public
offering of which $4,000,000 were utilized in September, 1998 for the purchase
of assets of E. Rosen Company.
The effective income tax rate for the current quarter was 32%. The income tax
rate utilized for the current quarter is based on the Company's estimate of the
effective tax rate for the fiscal year ending July 31, 1999 which approximates
32%.
Net Income was $253,303 or $0.07 basic and diluted earnings per share for the
three months ended October 31, 1998 compared to $516,405 or $0.24 basic and
diluted earnings per share for the prior comparable period. The decrease was
primarily due to lower margins and increased pre-production costs and costs
associated with the acquisition and start-up of Rhode Island as well as higher
salary and advertising expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements have been to fund the purchase,
manufacture and commercialization of its products. The Company finances its
operation and manufacturing with cash flow from operations and borrowings,
primarily from banks. The Company's working capital at October 31, 1998 and July
31, 1998 was $9,239,964 and $9,244,219 respectively.
Net cash used in operating activities was $5,648,252 compared to net cash
provided of $1,054,976. The primary use of cash was the $4 million purchase of
assets of E. Rosen Company which was allocated to inventory. In addition,
accounts receivables increased as a result of the additional sales from the
Rhode Island operation.
Net cash used in investing activities increased from $0 to $260,373 due to
equipment purchases for the Chase City facility in the current period.
Net cash provided by financing activities was $1,615,760 compared to cash used
of $856,683 in the prior period. The difference was due to the Company borrowing
$1,638,000 in the current quarter to finance additional working capital needs
compared to repayments of $600,000 and $235,786 in the prior quarter.
Principal payments for the Company's long term debt for the twelve months ending
October 31, 1999 are $259,801. The Company believes that cash provided by
operations will be sufficient to finance its operations and fund debt service
requirements.
<PAGE>
SEASONALITY
The Company's sales typically increase toward the end and beginning of the
calendar year principally due to the holiday seasons.
INFLATION
The Company does not believe that inflation has had a significant impact on the
Company's results of operations for the periods presented.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits. The following exhibits are filed with this report:
Exhibit No. Description
27 Financial Data Schedule (filed herewith)
b) Reports on Form 8-K
On November 24, 1998, the Company filed a Current Report on Form 8-K/A
regarding the Company's acquisition of E. Rosen Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHERWOOD BRANDS, INC.
Date: December 15, 1998 /s/ Uziel Frydman
President and Chief
Executive Officer
Date: December 15, 1998 /s/ Anat Schwartz
Vice President - Finance and
Secretary
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,794,924
<SECURITIES> 0
<RECEIVABLES> 3,715,633
<ALLOWANCES> 61,017
<INVENTORY> 8,473,047
<CURRENT-ASSETS> 14,241,979
<PP&E> 3,386,566
<DEPRECIATION> 523,023
<TOTAL-ASSETS> 17,166,528
<CURRENT-LIABILITIES> 5,002,015
<BONDS> 0
0
0
<COMMON> 37,000
<OTHER-SE> 10,350,870
<TOTAL-LIABILITY-AND-EQUITY> 17,166,528
<SALES> 6,239,923
<TOTAL-REVENUES> 6,239,923
<CGS> 4,179,389
<TOTAL-COSTS> 1,709,802
<OTHER-EXPENSES> 18,401
<LOSS-PROVISION> 21,000
<INTEREST-EXPENSE> 16,011
<INCOME-PRETAX> 372,504
<INCOME-TAX> 119,201
<INCOME-CONTINUING> 253,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,303
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
