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: 10/31/99 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 December 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.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
SHERWOOD BRANDS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - October 31, 1999 (unaudited) and
July 31, 1999
Consolidated Statements of Operations - Three months ended
October 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Three months ended
October 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 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 October 31, 1999.
SIGNATURES
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED OCTOBER 31, 1999 JULY 31, 1999
-------------------------------
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,081,137 $ 657,791
Accounts receivable, less allowance of $121,307 and
$ 40,000 8,674,890 2,928,874
Inventory 9,414,218 8,569,580
Income taxes receivable 435,609
Other current assets 570,701 658,364
Deferred taxes on income -- 141,800
----------- -----------
Total current Assets 19,740,946 13,392,018
Deferred taxes on income 42,800 43,000
Net property and equipment 3,165,665 3,110,220
Other assets 30,132 30,132
----------- -----------
TOTAL ASSETS $22,979,543 $16,575,370
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 4,999,583 $ 1,938,448
Current portion of long-term debt 205,000 205,000
Current portion of subordinated debt 72,796 96,444
Accounts payable 5,158,306 2,863,182
Accrued expenses 826,366 1,082,011
Deferred taxes on income 102,533 --
Income taxes payable 235,307 214,400
----------- -----------
Total current liabilities 11,599,891 6,399,485
Long-term debt 975,000 975,000
Subordinated debt 324,860 328,082
----------- -----------
TOTAL LIABILITIES 12,899,751 7,702,567
----------- -----------
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 and 1,150,000 shares
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 7,973,538
Retained earnings 2,069,254 862,265
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,079,792 8,872,803
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,979,543 $16,575,370
=========== ===========
</TABLE>
See accompanying summary of acconting policies and notes to consolidated
financial statements
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED THREE MONTHS ENDED OCTOBER 31,
------------------------------
1999 1998
------------ ------------
Net sales $ 12,865,846 $ 6,239,923
Cost of sales 8,896,417 4,179,389
------------ ------------
Gross profit 3,969,429 2,060,534
------------ ------------
Selling, general and administrative expenses 1,685,425 1,015,399
Pre-production costs -- 213,112
Salaries and related expenses 763,765 481,291
------------ ------------
Total operating expenses 2,449,190 1,709,802
------------ ------------
Income from operations 1,520,239 350,732
------------ ------------
Other income (expense)
Interest income 7,071 56,184
Interest expense (62,711) (16,011)
Other income (expense) 441,092 (18,401)
------------ ------------
Total other income (expense) 385,452 21,772
------------ ------------
Income before provision for taxes on income 1,905,691 372,504
Provision for taxes on income 698,702 119,201
------------ ------------
Net income $ 1,206,989 $ 253,303
------------ ------------
Basic and diluted earnings per share $ 0.33 $ 0.07
------------ ------------
Weighted average common shares outstanding 3,700,000 3,700,000
============ ============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED THREE MONTHS ENDED
----------------------------
OCTOBER 31, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,206,989 $ 253,303
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation expense 59,084 39,400
Deferred income taxes 244,533 --
Unrealized loss (gain) on foreign currency exchange (3,811) 19,864
Provision for doubtful accounts 81,307 21,000
Write-off of accounts receivable 13,652
(Increase) decrease in assets
Accounts receivable (5,827,323) (1,622,145)
Inventory (844,638) (414,754)
Other current assets 523,270 (168,247)
Other assets -- (7,940)
Increase (decrease) in liabilities
Accounts payable 2,298,935 (284,333)
Accrued expenses (255,646) 431,497
Income taxes payable 20,908 70,451
----------- -----------
Net cash provided by (used in) operating activities (2,496,392) (1,648,252)
Cash flows from investing activities
Inventory purchased from Rosen (4,000,000)
Capital expenditures (114,529) (260,373)
----------- -----------
Net cash used in investing activities (114,529) (4,260,373)
----------- -----------
Cash flows from financing activities
Net borrowings on line of credit 3,061,135 1,638,000
Payments on debt (26,868) (22,240)
----------- -----------
Net cash provided by financing activities 3,034,267 1,615,760
----------- -----------
Net increase (decrease) in cash and cash equivilents 423,346 (4,292,865)
Cash and cash equivilents, at beginning of period 657,791 6,087,789
----------- -----------
Cash and cash equivilents, at end of period $ 1,081,137 $ 1,794,924
=========== ===========
</TABLE>
See accompanying summary of accounting policies and 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, 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 Form 10-KSB dated October 29, 1999.
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 lines of confectionery products and demitasse \ registered
trademark\ biscuits.
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, jellybeans and packer of gift items and baskets.
<PAGE>
3. INTERIM FINANCIAL INFORMATION
The financial information as of October 31, 1999 and for the three months ended
October 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, packaging materials, components used in
assembly, work- in- process 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:
OCTOBER 31 JULY 31
1999 1999
---------- ----------
(UNAUDITED) (AUDITED)
---------- ----------
Raw materials and ingredients $ 863,317 $1,238,786
Components used in assembly 1,079,854 542,459
Packaging materials 1,050,500 1,380,525
Work-in-process and
Finished product 6,420,547 5,407,810
---------- ----------
$9,414,218 $8,569,580
========== ==========
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.
<PAGE>
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,
2000 which approximates 37%.
7. STOCKHOLDER'S EQUITY
On August 2,1999 the Company granted options to buy 15,000 shares to its three
outside directors and 133,500 shares to its executive and management team. The
options granted were under the 1998 Stock Option Plan. The options have an
exercise price of $3.00 and expire July 30, 2009.
8. LEGAL SETTLEMENT
On October 6, 1999 the Company settled a trademark infringement suit which it
had initiated. The settlement resulted in a one-time cash payment to the Company
in the amount of $350,000.
<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 OCTOBER 31, 1999 AND 1998
Net sales for the three months ended October 31, 1999 and 1998 were $12,865,846
and $6,239,923 respectively. Net sales doubled primarily due to higher sales of
gift baskets, gift items and candies. Gross profit for the first quarter
increased to $3,969,429 from $2,060,534 but declined as a percentage of sales to
31% from 33%. The increase in costs was attributable to higher costs of
production due to yet unrealized production efficiencies in the beginning of the
quarter 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 $1,685,425 from
$1,015,399 but decreased as a percent of sales to 13% from 16% of sales, largely
due to the additional selling, general and administrative expenses associated
with the new operation in Rhode Island.
Salaries and related expenses increased to $763,765 from $481,291 but decreased
as a percent of sales to 6% from 8% 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 $2,449,190 from $1,709,802 but
decreased as a percent of sales to 19% from 27% 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
<PAGE>
its newly expanded and growing product lines and customer base.
Income from operations for the three months ended October 31, 1999 was
$1,520,239 compared to income of $350,732 for the prior comparable quarter.
Interest income decreased to $7,071 from $56,184. During the prior comparable
quarter interest income was generated from the proceeds of the initial public
offering. The proceeds were utilized for the purchase of E. Rosen assets on
September 24,1998 as well as working capital. Interest expenses increased to
$62,711 from $16,011 due to working capital requirements to support higher
sales. Other income increased to $441,092 from expense of $18,401 due to the
payment of a $350,000 settlement arising out of a trademark infringement suit
the company initiated.
The effective income tax rate for the current quarter was 37%. 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, 2000 which approximates
37%.
As a result of the foregoing the Company earned net income of $1,206,989 for the
three months ended October 31, 1999 compared to net income of $253,303 for the
prior comparable quarter.
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 October 31, 1999 and July 31, 1999 was
$8,141,055 and $6,992,533 respectively.
Net cash used in operating activities for the nine months ended October 31, 1999
and 1998, respectively was $2,496,392 and $1,648,252. 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 additional sales activity.
Net cash used in investing activities decreased to $114,529 from $4,260,373,
primarily due to the prior period acquisition of E. Rosen inventory and
equipment purchases for the Company's candy line in Chase City .
Net cash provided by financing activities increased to $3,034,267 from
$1,615,760 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
October 31, 2000 are $277,796. The Company believes that cash provided by
operations will be sufficient to finance its operations and fund debt service
requirements.
<PAGE>
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. 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 second half 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
On October 6,1999 the Company settled a trademark infringement suit which it had
initiated. The settlement resulted in a one-time cash payment to the Company in
the amount of $350,000.
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.
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, 1999 /s/ Uziel Frydman
President and Chief Executive Officer
Date: December 15, 1999 /s/ Anat Schwartz
Executive Vice President - Finance and
Secretary
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT DESCRIPTION
- ------- -------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 1,081,137
<SECURITIES> 0
<RECEIVABLES> 8,829,195
<ALLOWANCES> 154,305
<INVENTORY> 9,414,218
<CURRENT-ASSETS> 19,740,946
<PP&E> 3,822,685
<DEPRECIATION> 657,020
<TOTAL-ASSETS> 22,979,543
<CURRENT-LIABILITIES> 11,599,891
<BONDS> 0
0
0
<COMMON> 37,000
<OTHER-SE> 10,042,792
<TOTAL-LIABILITY-AND-EQUITY> 22,979,543
<SALES> 12,865,846
<TOTAL-REVENUES> 12,865,846
<CGS> 8,896,417
<TOTAL-COSTS> 2,449,190
<OTHER-EXPENSES> 441,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (62,711)
<INCOME-PRETAX> 1,905,691
<INCOME-TAX> 698,702
<INCOME-CONTINUING> 1,206,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,206,989
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
