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: 4/30/99 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.)
1803 Research Blvd. Suite 201, Rockville MD 20850
(Address of principal executive offices)
Registrant's telephone number, including area code: 301-309-6161
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 the registrant was
required to file such reports and (2) has been subject to such filing
requirement for the past 90 days. Yes __X__ No___
As of June 14, 1999 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.
Transitional Small Business Disclosure Format (check one):
Yes__ No __X__
<PAGE>
SHERWOOD BRANDS, INC.
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Balance Sheets - April 30, 1999 (unaudited) and July 31, 1998
Consolidated Statements of Operations - Three months and nine months ended April
30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Nine months ended April 30, 1999 and
1998 (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 1. Legal Proceedings
Item 6. Exhibits and Reports on form 8-K
(a) Exhibit 27. Financial Data Schedule
(b) The Company did not file any reports on Form 8K during the quarter ended
April 30, 1999.
SIGNATURES
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, 1999 JULY 31, 1998
-------------- -------------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 876,719 $ 6,087,789
Accounts receivable, less allowance of $63,000 and $23,400 2,648,124 2,067,123
Inventory (Note 4) 7,903,080 4,058,293
Other current assets 455,352 127,817
Deferred taxes on income 29,667 29,700
----------- -----------
Total current assets 11,912,942 12,370,722
----------- -----------
Net property and equipment 3,096,165 2,642,570
Other Assets 25,736 53,066
----------- -----------
TOTAL ASSETS $15,034,843 $15,066,358
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 549,583 $ -
Current portion of long-term debt 175,000 175,000
Current portion of subordinated debt 87,329 90,941
Accounts payable 1,326,125 2,277,512
Accrued expenses 604,671 421,789
Income taxes payable 168,954 161,261
----------- -----------
Total current liabilities 2,911,662 3,126,503
----------- -----------
Long-term debt 1,180,000 1,180,000
Subordinated debt 355,133 424,116
Deferred taxes on income 194,767 194,800
----------- -----------
TOTAL LIABILITIES 4,641,562 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 27,700 27,700
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 2,382,743 2,125,162
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,393,281 10,140,939
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,034,843 $15,066,358
=========== ===========
</TABLE>
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
Three months ended Nine months ended
------------------ -----------------
April 30, 1999 April 30, 1998 April 30, 1999 April 30, 1998
<S> <C> <C> <C> <C>
Net sales $4,966,263 $4,400,053 $20,200,399 $14,120,837
Cost of sales 3,453,004 3,039,447 13,753,733 9,554,909
---------- ---------- ----------- -----------
Gross profit 1,513,259 1,360,606 6,446,666 4,565,928
---------- ---------- ----------- -----------
Selling, general and administrative expenses 1,483,749 838,781 3,797,151 2,255,598
Pre-production costs - - 213,112 54,125
Salaries and related expenses 730,577 322,055 1,994,914 843,095
---------- ---------- ----------- -----------
Total operating expenses 2,214,326 1,160,836 6,005,177 3,152,818
---------- ---------- ----------- -----------
Income (loss) from operations (701,067) 199,770 441,489 1,413,110
---------- ---------- ----------- -----------
Other income (expense)
Interest income 5,923 5,281 73,937 14,083
Interest expense (20,644) (58,273) (83,333) (180,697)
Insurance claim, net - - - 102,223
Other (expense) income (2,951) 59,670 (41,819) 64,396
---------- ---------- ----------- -----------
Total other income (expense) (17,672) 6,678 (51,215) 5
---------- ---------- ----------- -----------
Income (loss) before provision (benefit)
for taxes on income (718,739) 206,448 390,274 1,413,115
Provision (benefit) for taxes on income 244,371 9,405 (132,693) 395,672
---------- ---------- ----------- -----------
Net income (loss) $ (474,368) $ 197,043 $ 257,581 $ 1,017,443
---------- ---------- ----------- -----------
Basic and diluted earnings (loss) per share $ (0.13) $ 0.09 $ 0.07 $ 0.47
---------- ---------- ----------- -----------
Weighted average common shares 3,700,000 2,150,000 3,700,000 2,150,000
========== ========== =========== ===========
</TABLE>
<PAGE>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED Nine months ended
-----------------
April 30, April 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating
activities
Net income $ 257,581 $ 1,017,443
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities
Depreciation expense 141,600 88,366
Unrealized gain on foreign exchange (2,423) --
Provision for doubtful accounts 39,600 14,400
Write-off of accounts receivable 16,600 (15,504)
(Increase) decrease in assets
Accounts receivable (637,594) (23,228)
Inventory (3,844,787) (269,900)
Insurance settlement receivable -- 262,574
Other current assets (327,535) (118,560)
Other assets 27,330 (132,466)
Increase (decrease) in liabilities
Accounts payable (953,810) (651,320)
Accrued expenses 182,882 142,614
Income taxes payable 7,693 163,283
----------- -----------
Net cash (used in) provided by
operating activities (5,092,863) 477,702
----------- -----------
Cash flows from investing activities
Capital expenditures (595,195) (352,537)
----------- -----------
Net cash used in investing activities (595,195) (352,537)
----------- -----------
Cash flows from financing activities
Borrowings on line of credit 549,583 --
Repayments on line of credit -- (182,364)
Payments on debt (72,595) (63,769)
Payments to related parties -- (13,156)
----------- -----------
Net cash provided by (used in) financing activities 476,988 (259,289)
----------- -----------
Net decrease in cash and
cash equivalents (5,211,070) (134,124)
Cash and cash equivalents, at beginning
of period 6,087,789 614,109
----------- -----------
Cash and cash equivalents, at end
of period $ 876,719 $ 479,985
=========== ===========
</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 From 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
conjuction with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report and Form 10-KSB dated October 30, 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 \ registered 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 April 30, 1999 and for the three and nine months
ended April 30, 1998 and 1999 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 APRIL 30
1998 1999
---- ----
(AUDITED) (UNAUDITED)
--------- -----------
Raw materials $400,722 $3,894,757
Finished goods $3,657,571 $4,008,323
---------- ----------
$4,058,293 $7,903,080
========== ==========
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. 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 34%.
<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 From 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 the
Company and its management. Such statements are subject to a variety of 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 Registration Statement on Form
SB-2, filed with the Commission on May 11, 1998. 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 From 10-QSB, whether as a result of new information, future events or
circumstances or otherwise.
Results of Operations
THREE MONTHS ENDED APRIL 30, 1999 AND 1998
Net sales for the three months ended April 30, 1999 and 1998 were $4,966,263 and
$4,400,053 respectively. Net sales increased 13% or $566,210 primarily due to
sales of gift baskets, gift items and candies from the newly acquired Rhode
Island operation. International sales declined approximately $160,000 due to the
weak Canadian dollar.
Gross profit for the third quarter increased to $1,513,259 from $1,360,606 but
as a percentage of sales remained at 30%. The increase in costs was attributable
to higher costs of production of new items due to yet unrealized production
efficiencies offset by lower cost of products manufactured by European factories
due to the strengthening of the U.S. dollar.
Selling, general and administrative expenses increased to $1,483,749 from
$838,781 or to 30% from 19% of sales, largely due to the additional selling,
general and administrative expenses associated with the new operation in Rhode
Island, increased advertising expenditures as well as additional costs related
to operating as a public company.
Salaries and related expenses increased to $730,577 from to $322,054 or 15% from
7% of sales in the prior comparable quarter due to the addition of new
management employees at both the Maryland and Rhode Island operations as well as
higher management salaries. New management includes, among others, new sales
managers, operations, accounting and MIS personnel hired to develop and support
current and future marketing and operational needs of the Company.
As a result operating expenses increased to $2,214,326 from $1,160,836 or to 45%
from 26% of sales. The Company believes that it has put into place the
infrastructure including new management in the areas of marketing, sales and
operations to support its newly expanded and growing product
<PAGE>
lines and customer base. These additional operating costs are high in proportion
to the current period sales levels.
Loss from operations for the three months ended April 30, 1999 was $701,067
compared to income of $199,770 for the prior comparable quarter. The loss was
primarily due to the increased cost of staffing and overhead as well as
increased advertising expenditures as the Company prepares for its expanded
sales and manufacturing operations.
Interest income increased to$5,923 from $5,281 while interest expenses decreased
to $20,644 from $58,273 due to improved working capital availability as a result
of higher sales and the repayment of debt. Other expense decreased to $2,951
from income of $59,670 due to the decline in value of Canadian dollar
investments partially offset by Canadian interest earned and the payment of an
insurance claim in the prior comparable period.
The effective income tax rate for the current quarter was 34%. 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
34%.
As a result of the foregoing the Company incurred a net loss of $474,368 for the
three months ended April 30, 1999 compared to net income of $197,043 for the
prior comparable quarter.
NINE MONTHS ENDED APRIL 30, 1999
Net sales for the nine months ended April 30, 1999 and 1998 were $20,200,399 and
$14,120,837 respectively. Net sales increased $6,079,562 largely as a result of
sales volume growth attributable to the gift items, gift baskets and candies
from the newly acquired Rhode Island operation. International sales declined by
approximately $700,000 due to the continued weak Asian markets and Canadian
dollar.
Gross profit for the nine months ended April 30, 1999 increased to $6,446,666
from $4,565,928 and as a percentage of sales remained at 32%. Gross profit
reflected the higher costs of production due to yet unrealized production
efficiencies in Sherwood Brands, Inc.'s Chase City facility offset by the strong
gross profit contribution from the Rhode Island operation and the lower cost of
products manufactured in Europe due to the strengthening of the U.S. dollar.
Selling, general and administrative expenses increased to $3,797,151 from
$2,255,598 or to 19% from 16% of sales largely due to additional expenses
associated with the new operation in Rhode Island, increased advertising and
additional costs of operating as a public company.
Salaries and related expenses increased to $1,994,914 from $843,095 or to 10%
from 6% due to the addition of new management and administrative employees at
both of the Maryland and Rhode Island operations as well as increased management
salaries.
Pre-production costs increased to $213,112 compared to $54,125 in the prior
period. These costs were associated with first quarter start-up costs of product
line extensions in the Chase City facility.
<PAGE>
There were no additional pre-production costs in the third quarter.
As a result of the foregoing, operating expenses increased to $6,005,177 from
$3,152,818 and as a percent of sales to 30% from 22%.
Income from operations for the nine months ended April 30, 1999 decreased to
$441,489 from $1,413,115 for the same prior year period as a result of increased
pre-production costs associated with the manufacturing facility in Chase City,
higher operating costs due to increased staffing and overhead associated with
the acquisition of the Rhode Island operation and the marketing and operational
needs of the Company.
Interest income increased to $73,937 from $14,083 as a result of the investment
of proceeds from the public offering.
Interest expense was reduced by half to $83,333 from $180,692 as a result of
reduced borrowings from the prior year nine month period. Other expense
increased to $41,819 from income of $64,396 due to the decline in value of the
Canadian dollar investments partially offset by Canadian dollar interest income.
During the nine months ended April 30,1998 the Company received an insurance
claim in the amount of $102,223. There were no such receipts in the current
period.
The effective income tax rate for the nine months ending April 30, 1999 was 34%.
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 34%.
Net income for the nine month period decreased to $257,581 from $1,017,443 for
the same prior year period principally due to the additional salaries and
overhead expenses associated with the Company's marketing and operational needs
which were high in proportion to current sales levels; and increased
pre-production costs partially offset by the strong gross profit contribution
from the Rhode Island operation.
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 bank financing.
The Company's working capital at April 30, 1999 and July 31, 1998 was $9,001,280
and $9,244,219 respectively.
Net cash used in operating activities for the nine months ended April 30, 1999
and 1998, respectively was $5,092,863 compared to net cash provided by operating
activities of $477,702. The increase in cash used by operating activities was
due to increases in the Company's inventory and accounts receivable accounts
which were caused by the acquisition of E. Rosen and by the additional sales
activity generated by the Rhode Island operation.
Net cash used in investing activities increased to $595,195 from $352,537,
primarily due to equipment purchases for the Company's candy line in Chase City
and the acquisition of a new
<PAGE>
building. On April 30, the Company acquired a 74,000 square foot manufacturing
facility on approximately 15 acres in the town of Keysville, Virginia. The
facility is located 20 minutes from the Chase City facility and will be utilized
for manufacturing and assembly of confectionery products. The purchase price of
the facility was $156,968. The Company received state and county grants for site
preparation and building improvements of $150,000. The Company has committed to
maintain an average yearly employment of 80 through December 31, 2003 at this
new facility.
Net cash provided by financing activities increased to $476,998 from net cash
used of $259,289 primarily due to additional borrowings on the Company's line of
credit to finance working capital needs.
Principal payments for the Company's long term debt for the twelve months ending
April 30, 2000 are $262,329. The Company believes that cash provided by
operations will be sufficient to finance its operations and fund debt service
requirements.
YEAR 2000 COMPUTER ISSUE
The Company recognizes the potential problems for many computer systems relating
to the Year 2000. The Company's systems are purchased from outside vendors.
Those installed systems which are not currently able to fully function in the
Year 2000 have new versions which are Year 2000 compliant and which the Company
is preparing to install on the system. The Company is currently upgrading and
installing new computer software that it has been advised will be compliant with
the Year 2000 requirements. The Company anticipates that the new system will be
fully operational by fall 1999 and anticipates the costs to approximate $75,000.
In addition, the Company is assessing the impact of vendors' compliance to Year
2000 and what the impact will be on the Company's ongoing results of operations.
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is currently plaintiff in several actions.
Management believes the outcomes of these actions, individually or in the
aggregate would not have a material adverse effect on the Company.
<PAGE>
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 therunto duly authorized.
SHERWOOD BRANDS, INC.
Date: June 14, 1999 /s/ Uziel Frydman
President and Chief Executive Officer
Date: June 14, 1999 /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> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 876,719
<SECURITIES> 0
<RECEIVABLES> 2,711,124
<ALLOWANCES> 63,000
<INVENTORY> 7,903,080
<CURRENT-ASSETS> 11,912,942
<PP&E> 3,721,388
<DEPRECIATION> 625,223
<TOTAL-ASSETS> 15,034,843
<CURRENT-LIABILITIES> 2,911,662
<BONDS> 0
0
0
<COMMON> 37,000
<OTHER-SE> 10,356,281
<TOTAL-LIABILITY-AND-EQUITY> 15,034,843
<SALES> 20,200,399
<TOTAL-REVENUES> 20,200,399
<CGS> 13,753,733
<TOTAL-COSTS> 6,005,177
<OTHER-EXPENSES> (41,819)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (83,333)
<INCOME-PRETAX> 390,274
<INCOME-TAX> 132,693
<INCOME-CONTINUING> 257,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,581
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
