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: 1/31/99 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.)
6110 EXECUTIVE BLVD. SUITE 1080, ROCKVILLE MD 20852
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(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 March 15, 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.
<PAGE>
SHERWOOD BRANDS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - January 31, 1999 (unaudited) and
July 31, 1998
Consolidated Statements of Operations - Three months and six
months ended January 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Six months ended
January 31, 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 6A. Exhibit 27 Financial Data Schedule
SIGNATURES
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 JULY 31, 1998
---------------- -------------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 851,302 $ 6,087,789
Accounts receivable, less allowance of $93,000 and $ 4,293,438 $ 2,067,123
$23,400
Inventory (Note 4) $ 7,522,478 $ 4,058,293
Other current assets $ 526,601 $ 127,817
Deferred taxes on income $ 29,700 $ 29,700
----------- -----------
Total current assets $13,223,519 $12,370,722
----------- -----------
Net property and equipment $ 2,975,269 $ 2,642,570
Other Assets $ 30,905 $ 53,066
----------- -----------
TOTAL ASSETS $16,229,693 $15,066,358
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 153,583
Current portion of long-term debt $ 175,000 $ 175,000
Current portion of subordinated debt $ 93,652 $ 90,941
Accounts payable $ 2,030,784 $ 2,277,512
Accrued expenses $ 749,127 $ 421,789
Income taxes payable $ 413,325 $ 161,261
----------- -----------
Total current liabilities $ 3,615,471 $ 3,126,503
----------- -----------
Long-term debt $ 1,180,000 $ 1,180,000
Subordinated debt $ 371,773 $ 424,116
Deferred taxes on income $ 194,800 $ 194,800
----------- -----------
TOTAL LIABILITIES $ 5,362,044 $ 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 $ 2,857,111 $ 2,125,162
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $10,867,649 $10,140,939
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $16,229,693 $15,066,358
=========== ===========
</TABLE>
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<TABLE>
<CAPTION>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------- -------------------------------------
January 31, 1999 January 31, 1998 January 31, 1999 January 31, 1998
<S> <C> <C> <C> <C>
Net sales $ 8,994,213 $ 4,448,310 $ 15,234,136 $ 9,720,784
Cost of sales $ 6,121,340 $ 3,049,456 $ 10,300,729 $ 6,515,462
------------ ------------ ------------ ------------
Gross profit $ 2,872,873 $ 1,398,854 $ 4,933,407 $ 3,205,322
------------ ------------ ------------ ------------
Selling, general and administrative expenses $ 1,298,003 $ 760,924 $ 2,313,402 $ 1,416,816
Pre-production costs $ 0 $ 0 $ 213,112 $ 54,125
Salaries and related expenses $ 783,046 $ 223,410 $ 1,264,337 $ 521,041
------------ ------------ ------------ ------------
Total operating expenses $ 2,081,049 $ 984,334 $ 3,790,851 $ 1,991,982
------------ ------------ ------------ ------------
Income from operations $ 791,824 $ 414,520 $ 1,142,556 $ 1,213,340
------------ ------------ ------------ ------------
Other income (expense)
Interest income $ 11,830 $ 5,676 $ 68,014 $ 8,802
Interest expense ($ 46,678) ($ 55,126) ($ 62,689) ($ 122,424)
Insurance claim, net $ 0 $ 61,589 $ 0 $ 102,223
Other (expense) income ($ 20,467) ($ 2,397) ($ 38,868) $ 4,726
------------ ------------ ------------ ------------
Total other income (expense) ($ 55,315) $ 9,742 ($ 33,543) ($ 6,673)
------------ ------------ ------------ ------------
Income before provision for taxes $ 736,509 $ 424,262 $ 1,109,013 $ 1,206,667
on income
Provision for taxes on income ($ 257,863) ($ 120,267) ($ 377,064) ($ 386,267)
------------ ------------ ------------ ------------
Net income $ 478,646 $ 303,995 $ 731,949 $ 820,400
------------ ------------ ------------ ------------
Basic and diluted earnings per share $ 0.13 $ 0.14 $ 0.20 $ 0.38
------------ ------------ ------------ ------------
Weighted average common shares 3,700,000 2,150,000 3,700,000 2,150,000
============ ============ ============ ============
</TABLE>
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<TABLE>
<CAPTION>
SHERWOOD BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED SIX MONTHS ENDED
----------------
JANUARY 31, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating
activities
Net income $ 731,949 $ 820,400
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities
Depreciation expense $ 87,500 $ 55,266
Unrealized gain on foreign exchange ($ 10,485) ($ 7,590)
Provision for doubtful accounts $ 52,973 $ 4,400
Write-off of accounts receivable $ 16,600 --
(Increase) decrease in assets
Accounts receivable ($2,295,888) ($ 29,636)
Inventory ($3,464,185) ($ 667,736)
Insurance settlement receivable -- $ 233,191
Other current assets ($ 398,784) ($ 40,307)
Other assets $ 22,161 ($ 65,442)
Increase (decrease) in liabilities
Accounts payable ($ 236,243) ($ 95,744)
Accrued expenses $ 322,099 $ 142,487
Income taxes payable $ 252,064 $ 195,767
----------- -----------
Net cash (used in) provided by
operating activities ($4,920,239) $ 545,056
----------- -----------
Cash flows from investing activities
Capital expenditures ($ 420,199) ($ 201,066)
----------- -----------
Net cash used in investing activities ($ 420,199) ($ 201,066)
----------- -----------
Cash flows from financing activities
Borrowings on line of credit $ 153,583 --
Repayments on line of credit -- ($ 225,000)
Payments on debt ($ 49,632) ($ 46,758)
Payments to related parties -- ($ 60,978)
-----------
Net cash provided by (used in) financing activities $ 103,951 ($ 332,736)
----------- -----------
Net (decrease) increase in cash and
cash equivalents ($5,236,487) $ 11,254
Cash and cash equivalents, at beginning
of period $ 6,087,789 $ 614,109
----------- -----------
Cash and cash equivalents, at end
of period $ 851,302 $ 625,363
=========== ===========
</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 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 \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 January 31, 1999 and for the three and six
months ended January 31, 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 JANUARY 31
1998 1999
--------- ----------
(AUDITED) (UNAUDITED)
Raw materials $400,722 $3,328,417
Finished goods $3,657,571 $4,194,061
---------- ----------
$4,058,293 $7,522,478
========== ==========
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
Sherwood Brands, Inc. 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
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 From 10-QSB, whether as a result of new
information, future events or circumstances or otherwise.
Results of Operations
THREE MONTHS ENDED JANUARY 31, 1999
Net sales for the three months ended January 31, 1999 and 1998 were $8,994,213
and $4,448,310 respectively. Net sales increased $4,545,903 primarily due to
sales of gift baskets, gift items from the newly acquired Rhode Island operation
and candies. Domestic sales of core products increased approximately 5% while
international sales declined approximately $370,000 due to the continued
weakness of the Canadian dollar.
Gross profit for the second quarter increased to $2,872,873 from $1,398,854 and
as a percentage of sales increased to 32%. The increase was attributable to the
increased sales in the second quarter and the strong gross profit contribution
of the Rhode Island operation partially due to the "bargain" purchase price of
some of the inventory partially offset by higher costs of production of new
items at Sherwood Brands, Inc.'s Chase City facility due to yet unrealized
production efficiency.
Selling, general and administrative expenses as percent of sales decreased to
14% from 17% but increased to $1,298,003 from $760,924, or $537,079, 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 becoming a public company.
Salaries and related expenses increased to $783,046 compared to $223,410 or to
9% from 5% 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
increased management salaries. New management includes, among others, new sales
managers, operations and accounting personnel hired to develop and support
current and future marketing and operational needs of the Company.
<PAGE>
Operating expenses increased to $2,081,049 from $984,334 primarily due to the
increased staffing and overhead costs associated with the acquisition and
start-up of Rhode Island, increased advertising expenditures and additional
costs related to becoming a public company. The Company has put into place the
infrastructure including new management lines in the areas of marketing, sales
and operations to support the expanded and growing product lines and customer
base. These additional operating costs are high in proportion to the current
period sales levels.
Income from operations for the three months ended January 31, 1999 was $791,824
compared to $414,520 for the same period last year. The increase was primarily
due to increased sales, and the strong gross profit contribution of the Rhode
Island operations.
Interest income increased to $11,830 from $5,676 while interest expenses
decreased to $46,678 from $55,120 due to improved working capital availability
as a result of higher sales and the repayment of debt. Other expense increased
to $20,467 from $2,397 due to the decline in value of Canadian dollar
investments partially offset by Canadian interest earned.
Total other expense was ($55,315) compared to income of $9,742 due to the
decline in Canadian dollar and the final payment of an insurance claim in the
prior period partially offset by reduced interest expense and higher interest
income.
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%.
Net Income was $478,646 for the three months ended January 31, 1999 compared to
$303,995 for the prior comparable period. The improvement was primarily due to
increased sales, strong gross profit contribution from the Rhode Island
operation partially offset by the additional salaries and overhead expenses
associated with supporting the Company's marketing and operational needs.
SIX MONTHS ENDED JANUARY 31, 1999
Net sales for the six months ended January 31, 1999 and 1998 were $15,234,136
and $9,720,784 respectively. Net sales increased $5,513,352 largely attributable
to sales volume growth of the gift items, gift baskets, candies and chocolate
categories. Domestic sales of core products increased approximately by 5% while
international sales declined by approximately $500,000 due to the continued weak
Asian markets and Canadian dollar.
Gross profit for the six months ended January 31, 1999 increased to $4,933,407
from $3,205,322 and as a percentage of sales decreased to 32% from 33%. The
decrease was primarily due to less favorable currency rates affecting foreign
purchases and higher costs of production of new items due to yet unrealized
production efficiency in Sherwood Brands, Inc.'s Chase City facility offset by
strong gross profit contribution from the Rhode Island operation partially due
to the "bargain" purchase price of inventory.
<PAGE>
Selling, general and administrative expenses increased to $2,313,402 from
$1,416,816 largely due to additional expenses associated with the new operation
in Rhode Island, increased advertising and additional costs of becoming a public
company, but remained 15% of sales in both periods.
Salaries and related expenses increased to $1,264,337 from $521,041 due to the
addition of new management 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. There were no additional pre-production costs in the second
quarter.
Operating expenses increased to $3,790,851 from $1,991,982 and as a percent of
sales to 25% from 20%. The increase was largely attributable to increases in
pre-productions costs, salaries, and advertising and administration to support
the Company's planned expanded operation.
Income from operations for the six months ended January 31, 1999 decreased to
$1,142,556 from $1,213,340 for the same prior year period as a result of
increased pre-productions cost associated with the manufacturing facility in
Chase City, 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.
Total other expense for the six months ended January 31, 1999 increased to
$33,543 from $6,673 for the same prior year period. Interest income increased as
a result of proceeds from the public offering while interest expense was reduced
by half as a result of reduced borrowings from the prior year six month period.
Other expense increased to $38,868 from income of $4,728 due to the decline in
value of the Canadian dollar investments partially offset by Canadian dollar
interest income.
The effective income tax rate for the six months ending January 31, 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 six month period decreased to $731,949 from $820,400 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 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 January 31, 1999 and July 31, 1998 was
$9,608,048 and $9,244,219 respectively.
Net cash used in operating activities for the six months ended January 31, 1999
and 1998, respectively was $4,920,239 compared to net cash provided by operating
activities of $545,056. The increase in cash used by operating activities was
due to increases in the Company's inventory and
<PAGE>
accounts receivable accounts which were caused by the additional sales activity
generated by the Rhode Island operation.
Net cash used in investing activities increased to $420,199 from $201,066
primarily due to equipment purchases for the Company's candy line in Chase City.
Net cash provided by financing activities increased to $103,951 from net cash
used of $332,731 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
January 31, 2000 are $268,652. 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 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 be approximately $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 6. Exhibit 27.1 Financial Data Schedule
<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: March 15, 1999 /s/ UZIEL FRYDMAN
---------------------------
Uziel Frydman
President and Chief Executive Officer
Date: March 15, 1999 /s/ ANAT SCHWARTZ
---------------------------
Anat Schwartz
Vice President - Finance and Secretary
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 851,302
<SECURITIES> 0
<RECEIVABLES> 4,293,438
<ALLOWANCES> 93,000
<INVENTORY> 7,522,478
<CURRENT-ASSETS> 13,223,519
<PP&E> 3,481,393
<DEPRECIATION> 571,123
<TOTAL-ASSETS> 16,229,693
<CURRENT-LIABILITIES> 3,615,471
<BONDS> 0
<COMMON> 37,000
0
0
<OTHER-SE> 10,830,649
<TOTAL-LIABILITY-AND-EQUITY> 16,229,693
<SALES> 15,234,136
<TOTAL-REVENUES> 15,234,136
<CGS> 10,300,729
<TOTAL-COSTS> 3,790,851
<OTHER-EXPENSES> (38,868)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (62,689)
<INCOME-PRETAX> 1,109,013
<INCOME-TAX> 377,064
<INCOME-CONTINUING> 731,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 731,949
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
