FORM 10-Q
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: 10/31/00 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, 2000 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, 2000
(unaudited) and July 31, 2000
Consolidated Statements of Operations - Three months ended
October 31, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows - Three months ended
October 31, 2000 and 1999 (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 3. Quantitative and Qualitative Disclosures about Market Risk
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, 2000.
SIGNATURES
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SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED OCTOBER 31, 2000 JULY 31, 2000
-------------------------------
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 176,945 $ 641,497
Accounts receivable, less allowance of $214,360 and
$115,000 13,232,546 2,094,694
Inventory 15,370,542 12,683,575
Income taxes receivable 407,487 407,237
Other current assets 388,293 288,934
Deferred taxes on income 196,000 196,000
----------- -----------
Total current Assets 29,771,813 16,311,937
Net property and equipment 4,576,238 4,245,848
Other assets 64,846 61,106
----------- -----------
TOTAL ASSETS $34,412,897 $20,618,891
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $10,000,000 $ 4,119,000
Current portion of long-term debt 202,825 210,000
Current portion of subordinated debt 331,072 324,593
Current portion of capital lease obligation - 31,245
Accounts payable 9,171,604 4,523,899
Accrued expenses 1,987,381 1,032,935
Income taxes payable 906,678 50,000
----------- -----------
Total current liabilities 22,599,560 10,291,672
Long-term debt 765,000 765,000
Capital lease obligation 424,332 424,332
Deferred taxes on income 109,000 109,000
----------- -----------
TOTAL LIABILITIES 23,897,892 11,590,004
----------- -----------
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 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 2,504,467 1,018,349
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,515,005 9,028,887
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,412,897 $20,618,891
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements
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SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED THREE MONTHS ENDED OCTOBER 31,
------------------------------
2000 1999
------------ ------------
Net sales $ 19,733,398 $ 12,865,846
Cost of sales 13,532,376 8,896,417
------------ ------------
Gross profit 6,201,022 3,969,429
------------ ------------
Selling, general and administrative expenses 2,486,335 1,685,425
Salaries and related expenses 1,218,066 763,765
------------ ------------
Total operating expenses 3,704,401 2,449,190
------------ ------------
Income from operations 2,496,621 1,520,239
------------ ------------
Other income (expense)
Interest income 6,851 7,071
Interest expense (120,593) (62,711)
Other income (expense) (40,083) 441,092
------------ ------------
Total other income (expense) (153,825) 385,452
------------ ------------
Income before provision for taxes on income 2,342,796 1,905,691
Provision for taxes on income 856,678 698,702
----------- ------------
Net income $ 1,486,118 $ 1,206,989
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Net income per share - basic $ 0.40 $ 0.33
- diluted 0.39 0.33
----------- ------------
Weighted average shares outstanding - basic 3,700,000 3,700,000
- diluted 3,774,456 3,700,000
=========== ============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
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SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED THREE MONTHS ENDED
----------------------------
OCTOBER 31, OCTOBER 31,
2000 1999
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<S> <C> <C>
Cash flows used in operating activities
Net income $ 1,486,118 $ 1,206,989
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation expense 81,333 59,084
Deferred income taxes - 244,533
Unrealized loss (gain) on foreign currency exchange - (3,811)
Provision for doubtful accounts 99,360 81,307
(Increase) decrease in assets
Accounts receivables (11,237,212) (5,827,323)
Inventory (2,686,967) (844,638)
Other current assets (99,359) 523,270
Other assets (3,990) --
Increase (decrease) in liabilities
Accounts payable 4,647,705 2,298,935
Accrued expenses 954,446 (255,646)
Income taxes payable 856,678 20,908
------------ -----------
Net cash provided by (used in) operating activities (5,901,888) (2,496,392)
Cash flows from investing activities
Capital expenditures (411,723) (114,529)
------------ -----------
Net cash used in investing activities (411,723) (114,529)
------------ -----------
Cash flows from financing activities
Net borrowings on line of credit 5,881,000 3,061,135
Payments on debt (31,941) (26,868)
------------ -----------
Net cash provided by financing activities 5,849,059 3,034,267
------------ -----------
Net increase (decrease) in cash and cash equivalents (464,552) 423,346
Cash and cash equivalents, at beginning of period 641,497 657,791
------------ -----------
Cash and cash equivalents, at end of period $ 176,945 $ 1,081,137
============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements
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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-Q 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 24, 2000.
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.
3. INTERIM FINANCIAL INFORMATION
The financial information as of October 31, 2000 and for the three months ended
October 31, 2000 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.
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Inventory consists of the following:
OCTOBER 31 JULY 31
2000 2000
----------- -----------
(UNAUDITED) (AUDITED)
----------- -----------
Raw materials and ingredients $ 681,777 $ 546,006
Components used in assembly 2,279,589 2,389,504
Packaging materials 1,955,960 1,715,479
Work-in-process and
Finished product 11,154,415 8,347,645
---------- -----------
16,071,741 12,998,634
Less reserve for inventory allowance (833,949) (315,059)
----------- -----------
$15,370,542 $12,683,575
=========== ===========
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,
2001 which approximates 37%.
7. STOCKHOLDERS' EQUITY
On August 4,2000 the Company granted options to buy 19,500 shares to its three
outside directors and 582,920 shares to its executive and management team. The
options granted were under the 1998 Stock Option Plan which was amended to
increase the number of options which can be issued from 350,000 to 1,100,000.
The Board of Directors approved the amendment to the Stock Option Plan in order
to allow additional options for performance based compensation awards to all
employees. The options have an exercise price of $1.625 and expire July 30,
2010. Options granted in prior years have various exercise prices in excess of
$3.00 per share.
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 receipt to the Company
in the amount of $350,000.
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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-Q 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-Q, whether as a result of new information, future events or
circumstances or otherwise.
Results of Operations
THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
Net sales for the three months ended October 31, 2000 and 1999 were $19,733,398
and $12,865,846 respectively. Net sales increased 53% primarily due to higher
sales of gift baskets, gift items and candies. Sam's Club and Dollar General
accounted for 37% and 12% of the sales for the first quarter. Gross profit for
the first quarter increased to $6,201,022 from $3,969,429 and increased to 31.4%
from 30.8% as a percent of sales.
Selling, general and administrative expenses increased to $2,486,335 from
$1,685,425 and remained the same 13% as a percent of sales largely due to the
additional freight, commissions and advertising expenses associated with the
higher sales volume and higher lease payments for the Rhode Island properties.
Salaries and related expenses increased to $1,218,066 from $763,765 or 6%
as a percent of sales for both quarters due to the addition of new management
employees at both the Maryland and Rhode Island operations as well as higher
management salaries.
As a result, operating expenses increased to $3,704,401 from $2,449,190 or 19%
as a percent of sales.
Income from operations for the three months ended October 31, 2000 was
$2,496,621 compared to $1,520,239 for the prior year's comparable quarter.
Interest income decreased to $6,851 from $7,071. Interest expenses increased to
$120,593 from $62,711 due to working capital requirements to support higher
sales. Other income (expense) decreased to an expense of $40,083 from income of
$441,092 primarily due to the receipt of a $350,000 settlement arising out of a
trademark infringement suit the company initiated in the prior year's quarter.
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, 2001
which approximates 37%.
As a result of the foregoing the Company earned net income of $1,486,118 for the
three months ended October 31, 2000 compared to net income of $1,206,989 for the
prior comparable quarter.
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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, 2000 and July 31, 2000 was
$7,172,253 and $6,020,265 respectively.
Net cash used in operating activities for the nine months ended October 31, 2000
and 1999, respectively was $5,901,888 and $2,496,392. 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 increased to $411,723 from $114,529,
primarily due to the acquisition of equipment purchases and capital improvements
for the Company's new location in New Bedford, Massachusetts.
Net cash provided by financing activities increased to $5,849,059 from
$3,034,267 primarily due to additional borrowings on the Company's line of
credit to finance working capital needs. The Company fully utilized its
$10,000,000 line of credit due to the seasonal needs to purchase inventory to
meet sales orders.
Principal payments for the Company's long-term debt for the twelve months ending
October 31, 2001 are $504,651. 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 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
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of its variable rate line of credit, the Company is exposed to the
risk of rising interest rates. The $10,000,000 line of credit had an interest
rate ranging from 8.47% to 9.12% for the three months ended October 31,2000. The
Company's long term debt is at variable market tax exempt rates, which expose
the Company to fluctuations in the market. However, since the rate is based on
the tax exempt rate, it is below the market rate.
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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, 2000 /s/ Uziel Frydman
President and Chief Executive Officer
Date: December 15, 2000 /s/ Anat Schwartz
Executive Vice President - Finance and
Secretary
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EXHIBIT INDEX
EXHIBIT EXHIBIT DESCRIPTION
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27 Financial Data Schedule
