<PAGE>
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: 04/30/98 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 No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of June 12, 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 - April 30, 1998 (unaudited) and
July 31, 1997
Consolidated Statements of Operations - Three months and nine
months ended April 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Nine months ended
April 30, 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 2. Changes in Securities and Use of Proceeds.
Item 6. Exhibit 27.1
Signatures
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, 1998 July 31, 1997
-------------- -------------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $479,985 $614,109
Accounts receivable, less allowance of $37,800 and $2,126,282 $2,101,950
$23,400
Insurance settlement receivable $262,574
Inventory (Note 4) $3,682,862 $3,412,962
Other current assets $164,622 $46,062
Deferred taxes on income $170,700 $170,700
---------- ----------
Total current assets $6,624,451 $6,608,357
---------- ----------
Net property and equipment $2,599,727 $2,335,556
---------- ----------
Other Assets $151,913 $19,447
---------- ----------
TOTAL ASSETS $9,376,091 $8,963,360
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit $1,462,225 $1,644,589
Current portion of long-term debt $145,000 $145,000
Current portion of subordinated debt $89,613 $85,757
Accounts payable $1,473,444 $2,124,764
Accrued expenses $340,626 $198,012
Income taxes payable $353,783 $190,500
---------- ----------
Total current liabilities $3,864,691 $4,388,622
---------- ----------
Long-term debt $1,355,000 $1,355,000
Subordinated debt $447,860 $515,485
Deferred taxes on income $108,600 $108,600
Due to related parties $890,024 $903,180
---------- ----------
TOTAL LIABILITIES $6,666,175 $7,270,887
---------- ----------
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, 1,150,000 issued and outstanding $11,500 $11,500
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 $247,000 $247,000
Retained earnings $2,441,416 $1,423,973
---------- ----------
TOTAL STOCKHOLDERS EQUITY $2,709,916 $1,692,473
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY $9,376,091 $8,963,360
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
Three months ended Nine months ended
------------------ -----------------
April 30, April 30, April 30, April 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $3,595,879 $4,400,053 $13,169,419 $14,120,837
Cost of sales $2,539,060 $3,039,447 $9,675,215 $9,554,909
---------- ---------- ----------- -----------
Gross profit $1,056,819 $1,360,606 $3,494,204 $4,565,928
---------- ---------- ----------- -----------
Selling, general and administrative expenses $802,606 $838,781 $1,976,032 $2,255,598
Pre-production costs $98,845 $0 $714,860 $54,125
Salaries and related expenses $344,832 $322,054 $805,461 $843,095
---------- ---------- ----------- -----------
Total operating expenses $1,246,283 $1,160,836 $3,496,353 $3,152,818
---------- ---------- ----------- -----------
Income (loss) from operations ($189,464) $199,770 ($2,149) $1,413,110
Other income (expense)
Interest income $2,291 $5,281 $23,666 $14,083
Interest expense ($81,167) ($58,273) ($207,722) ($180,697)
Insurance claim, net $39,803 $0 $364,026 $102,223
Other (expense) income ($31,136) $59,670 ($17,273) $64,396
---------- ---------- ----------- -----------
Total other income (expense) ($70,209) $6,678 $162,697 $5
---------- ---------- ----------- -----------
Income (loss) before provision for taxes ($259,673) $206,448 $160,548 $1,413,115
on income
Provision (benefit) for taxes on income ($121,627) $9,405 $12,844 $395,672
---------- ---------- ----------- -----------
Net income (loss) ($138,046) $197,043 $147,704 $1,017,443
---------- ---------- ----------- -----------
Basic and diluted earnings (loss) per share ($0.06) $0.09 $0.07 $0.47
---------- ---------- ----------- -----------
Weighted average common shares outstanding 2,150,000 2,150,000 2,150,000 2,150,000
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
Nine months ended
-----------------
April 30, April 30,
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating
activities
Net income $147,704 $1,017,443
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities
Depreciation expense $91,168 $88,366
Unrealized (gain) loss on foriegn exchange ($20,805) $0
Provision for doubtful accounts ($891) $14,400
Write-off of accounts receivable $0 ($15,504)
(Increase) decrease in assets
Accounts receivable $333,533 ($23,228)
Inventory ($1,756,928) ($269,900)
Insurance settlement receivable $0 $262,574
Other current assets ($9,483) ($118,560)
Other assets $9,310 ($132,466)
Increase (decrease) in liabilities
Accounts payable ($63,389) ($651,320)
Accrued expenses $359,331 $142,614
Income taxes payable $84,844 $163,283
----------- -----------
Net cash provided by (used in)
operating activities ($825,606) $477,702
----------- -----------
Cash flows from investing activities
Capital expenditures ($828,206) ($352,537)
----------- -----------
Net cash used in investing activities ($828,206) ($352,537)
----------- -----------
Cash flows from financing activities
Borrowings on line of credit $650,000 -
Repayments on line of credit - ($182,364)
Proceeds from issuance of long term debt $580,000 -
Payments on debt ($25,883) ($63,769)
Payments to related parties ($200,000) ($13,156)
----------- -----------
Net cash provided by (used in) financing activities $1,004,117 ($259,289)
Net decrease in cash and
cash equivalents ($649,695) ($134,124)
Cash and cash equivalents, at beginning
of period $869,924 $614,109
----------- -----------
Cash and cash equivalents, at end
of period $220,229 $479,985
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<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 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 in the Prospectus dated May 6, 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(R) 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.
3. Interim Financial Information
The financial information as of April 30, 1998 and for the nine months ended
April 30, 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.
<PAGE>
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 April 30
------- --------
1997 1998
------ --------
Raw materials............. $ 184,921 $ 310,935
Finished goods............ 3,228,041 3,371,927
---------- ----------
$3,412,962 $3,682,862
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. Recent Accounting Pronouncements
In October 1995, the Financial Accounting standards Board issued Statements of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). SFAS 123 will begin to affect the Company in fiscal 1998 with the
establishment of the 1998 Stock Option Plan. The Company will adopt only the
disclosure provisions of SFAS 123 for stock issued to employees and will account
for such stock-based compensation using the intrinsic value method set forth in
APB Opinion 25.
Effective January 31, 1998, the Company has adopted the provisions of statement
of financial accounting standards No. 128, Earnings per share. Statement No. 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options and
convertible securities. Diluted earnings per share is computed similarly to
fully diluted earnings per share. The Company's calculation for basic and fully
diluted earnings per share is the same as there are no options or convertible
securities outstanding as of April 30, 1998. All earnings per share amounts for
all periods presented have been restated to conform to the requirements of
Statement No. 128.
Basic and diluted earnings per share is computed based on the weighted average
number of common shares outstanding, after giving effect to the stock split as
described in Note 8.
<PAGE>
7. Foreign Exchange Contracts
The Company has foreign exchange contracts which are designated as hedges of
identifiable foreign currency firm commitments. Gains and losses on these
contracts are deferred and included in the measurement of the related foreign
currency transaction.
As of April 30, 1998, the Company has contracted to purchase foreign currency
during 1998 at a contract value totaling $1,045,337. Each contract was entered
into in order to fulfill specific purchase orders for raw materials.
8. Stockholders Equity
Effective December 30, 1997, the Company amended its articles of incorporation
to provide for a recapitalization of its common stock. As a result of the
recapitalization, two new classes of common stock were authorized as follows: 30
million shares of Class A Common Stock, par value $0.01, and 5 million shares of
Class B Common Stock, par value $0.01. The shares of Class A Common Stock and
Class B Common stock are identical in all respects, except that each share of
Class B Common Stock entitles the holder to seven votes on each matter submitted
to a vote of the shareholders. In addition, the Company is authorized to issue 5
million shares of Preferred stock.
As a result of the recapitalization, all 251 issued and outstanding shares of
common stock were recapitalized and converted into 1,150,000 validly issued,
fully paid and nonassessable shares of Class A Common Stock reflecting a
conversion ratio of 4581.67331:1 and 1,000,000 validly issued, fully paid and
nonassessable shares of Class B Common Stock, reflecting a conversion ratio of
3984.063745:1.
The change in the Company's common stock for the stock split and the calculation
of basic and diluted earnings per share have been retroactively adjusted to give
effect to the increases in authorized, issued and outstanding shares of common
stock for all periods presented.
9. Subsequent Events
On May 6, 1998 the Company completed a public offering of 1,550,000 shares of
its Class A common stock and 775,000 redeemable warrants at a public offering
price of $5.95 per share and $0.10 per warrant. Each warrant entitles the
registered holder to purchase one share of Class A Common Stock at a price of
$7.50, subject to certain adjustments, at any time commencing on May 6, 1999
through and including May 6, 2003. Proceeds to the Company net of expenses of
the offering amounted to approximately $7.8 million which was partially utilized
to pay down the working capital line and related party loan. The capital
significantly reduced the Company's debt level.
Upon consummation of the offering the Company entered into employment agreements
with certain key officers. The agreements are for a term of three years and
provide for set annual base salaries.
<PAGE>
In addition, such employment agreements entitle the executives to a portion of a
bonus pool as determined by the Board of Directors.
In January 1998 the Company's shareholders approved a stock option plan ("Option
Plan") pursuant to which 350,000 shares of Class A Common Stock have been
reserved. As of May 6, 1998 the Company issued options to purchase 140,000
shares of Class A Common Stock under the Option Plan at an exercise price of
$5.95 per share to several key employees.
10. 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,
1998 which approximates 28%.
<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 April 30,1998.
Net sales for the three months ended April 30, 1998 and 1997 were $4,400,053 and
$3,595,879, respectively. Net sales increased $804,174 or 22 % due to increased
volume of third quarter sales in all product categories.
Gross profit for the third quarter increased to $1,360,606 from $1,056,819 and
as a percentage of sales to 31% from 29%. The increase was attributable to lower
costs associated with manufacturing demitasse biscuits at the Chase City
facility and also to favorable currency exchange rates.
Selling, general and administrative expenses as a per cent of sales decreased
from 22% to 19% but increased from $802,606 to $838,781, or $36,175, largely due
to increased advertising expenditures.
Operating expenses declined from $1,246,283 to $1,160,836 primarily as a result
of a reduction in pre-production costs in the third quarter of 1998 as the
Company incurred most of the costs associated with the start-up manufacturing
operations at the Chase City facility during the prior period. The Company did
not incur any additional pre-production costs in the current period compared to
$98,845 for the prior period.
Income from operations for the three months ended April 30, 1998 was $199,770
compared to a loss of $189,464 for the same period last year. The increase was
primarily due to an increase in sales, improved gross margin and a decrease in
pre-production costs.
<PAGE>
Other Income (expense) increased to $6,678 compared to an expense of $70,209 due
to non-recurring legal expenses incurred in the prior period.
The effective income tax rate for the current quarter was 6%. 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, 1998 which approximates
28%.
Net Income was $197,043 for the three months ended April 30, 1998 compared to a
loss of $138,046 for the prior comparable period. The improvement was primarily
due to increased sales, improved margins and reduced pre-production costs.
Nine Months Ended April 30, 1998
Net sales for the nine months ended April 30, 1998 and 1997 were $14,120,837 and
$13,169,419, respectively or a 7% increase. The increase in sales was largely
attributable to sales volume growth in demitasse, Cows and chocolate products
categories.
Gross profit in the three quarters increased to $4,565,928 from $3,494,204 and
as percentage of sales from 27% to 32%. The increase was primarily due to lower
costs associated with manufacturing demitasse biscuits at the Chase City
facility and as well as favorable exchange rates.
Selling, general and administrative expenses increased from 15% to 16% of sales
largely due to increased advertising expenditures.
Operating expenses declined to $3,152,818 from $3,496,353 and as a per cent of
sales to 22% from 27%. The decline was largely attributable to a decline in
pre-production costs from $714,860 to $54,125 (as the Company incurred most of
the costs associated with start-up of the Chase City facility in the prior year)
partially offset with higher advertising expenditures and an increase in
salaries.
Income from operations for the nine months ended April 30, 1998 increased to
$1,413,110 from a loss of $2,149 for the prior period as a result of increased
sales, improved margins and the reduction in pre-production costs associated
with the manufacturing facility in Chase City.
Other income (expense) decreased from $162,697 to $5 for the nine months ended
April 30, 1997 and 1998, respectively. The change was primarily due to income of
$324,223, net of legal expenses, recorded as part of an insurance settlement in
the prior period.
The effective income tax rate for the nine months ending April 30, 1998 was 28%.
The income tax rate utilized for the interim period is based on the Company's
estimate of the effective income tax rate for the fiscal year ending July 31,
1998 which approximates 28%.
Net income for the nine month period increased by $869,739 from $147,704 to
$1,017,443 principally because of higher sales, improved gross margin and a
reduction in pre-production costs.
<PAGE>
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 and related party loans. The Company's working capital at
April 30, 1998 and July 31, 1997 was $2,759,760 and $2,219,735 respectively.
Net cash provided by operating activities was $477,702 compared to net cash used
of $825,606. The increase in cash provided by operating activities was due to
increased net income, increased inventory turnover and receipt of an insurance
settlement during the nine month period ending April 30, 1998.
Capital expenditures declined as the Company purchased most of its equipment in
the prior year. Net cash used in investing activities declined from $828,206 to
$352,537 due to timing of equipment purchases as a result of opening of the
Chase City facility in the prior period.
Principal payments for the Company's long term debt for the twelve months ending
April 30, 1999 are $234,613. The Company believes that cash provided by
operations will be sufficient to finance its operations and fund debt service
requirements.
Seasonality
The Company's sales typically increase toward the end of the calendar year
principally due to the holiday season.
Inflation
The Company does not believe that inflation has had a significant impact on the
Company's results of operations for the periods presented.
Subsequent Events
On May 6, 1998 the Company completed a public offering of 1,550,000 shares of
its Class A common stock and 775,000 redeemable warrants at a public offering
price of $5.95 per share and $0.10 per warrant. Each warrant entitles the
registered holder to purchase one share of Class A common stock at a price of
$7.50, subject to certain adjustments, at any time commencing on May 6, 1999
through and including May 6, 2003. Proceeds to the Company net of expenses of
the offering amounted to approximately $7.8 million which was partially utilized
to pay down the working capital line and related party loan. The capital
significantly reduced the Company's debt level.
<PAGE>
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds.
(d) Use of Proceeds
The Company completed its initial public offering pursuant to a
Registration Statement on Form SB2 (File No. 333-44655) declared
effective by the Securities and Exchange Commission on May 6, 1998 and
issued 1,550,000 shares of its Common Stock, par value $0.01 per share,
and redeemable warrants to purchase 775,000 shares of Class A Common
Stock, to the public at a price of $5.95 per share and $0.10 per
warrant. The underwriter for the initial public offering was Paragon
Capital Corporation. The Company received approximately $7,800,000 of
cash from the initial public offering, net of underwriting discounts,
commissions, and other offering costs and expenses.
Since April 30, 1998, the Company used approximately $2.2 million of
the net proceeds from the Company's initial public offering to repay
indebtedness. The Company has placed approximately $5.5 million in
temporary investments pending future use.
Item 6. Exhibit 27.1 Financial Data Schedule
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: June 16, 1998 /s/ Uziel Frydman
------------------------------------
President and Chief
Executive Officer
Date: June 16, 1998 /s/ Anat Schwartz
------------------------------------
Vice President - Finance and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 479,985
<SECURITIES> 0
<RECEIVABLES> 2,164,082
<ALLOWANCES> 37,800
<INVENTORY> 3,682,862
<CURRENT-ASSETS> 6,624,451
<PP&E> 3,032,165
<DEPRECIATION> 432,438
<TOTAL-ASSETS> 9,376,091
<CURRENT-LIABILITIES> 3,864,491
<BONDS> 0
0
0
<COMMON> 11,500
<OTHER-SE> 10,000
<TOTAL-LIABILITY-AND-EQUITY> 9,376,091
<SALES> 14,120,837
<TOTAL-REVENUES> 14,120,837
<CGS> 9,554,909
<TOTAL-COSTS> 3,152,818
<OTHER-EXPENSES> (64,396)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,697
<INCOME-PRETAX> 1,413,115
<INCOME-TAX> 395,672
<INCOME-CONTINUING> 1,017,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,017,443
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
