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 Exchange Act of 1934
For the quarterly period ended: 01/31/00 Commission file number: 1-14091
SHERWOOD BRANDS, INC.
(Exact name of Registrant as specified in its charter)
North Carolina 56-1349259
(State or other jurisdiction 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 March 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 -
January 31, 2000(unaudited) and July 31, 1999
Consolidated Statements of Operations -
Three months and six months ended January 31, 2000
and 1999 (unaudited)
Consolidated Statements of Cash Flows -
Six months ended January 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on form 8-K
SIGNATURES
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED JANUARY 31, 2000 JULY 31, 1999
---------------- -------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,213,636 $ 657,791
Accounts receivable, less allowance of $120,101
and $40,000 5,581,343 2,928,874
Inventory 13,824,189 8,569,580
Income taxes receivable 435,609
Other current assets 708,123 658,364
Deferred taxes on income -- 141,800
----------- -----------
Total current assets 21,327,291 13,392,018
Deferred taxes on income 43,000 43,000
Net property and equipment 3,154,010 3,110,220
Other assets 30,133 30,132
----------- -----------
TOTAL ASSETS $24,554,434 $16,575,370
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 7,285,922 $ 1,938,448
Current portion of long-term debt 205,000 205,000
Current portion of subordinated debt 48,799 96,444
Accounts payable 4,204,265 2,863,182
Accrued expenses 1,241,400 1,082,011
Deferred taxes on income 102,700 --
Income taxes payable 214,400 214,400
----------- -----------
Total current liabilities 13,302,486 6,399,485
Long-term debt 975,000 975,000
Subordinated debt 324,860 328,082
----------- -----------
TOTAL LIABILITIES 14,602,346 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 1,941,550 862,265
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 9,952,088 8,872,803
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,554,434 $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
<TABLE>
<CAPTION>
UNAUDITED THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------ -----------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $10,161,858 $8,994,213 $23,027,704 $15,234,136
Cost of sales 7,342,142 6,121,340 16,238,559 10,300,729
----------- ---------- ----------- -----------
Gross profit 2,819,716 2,872,873 6,789,145 4,933,407
----------- ---------- ----------- -----------
Selling, general and administrative expenses 2,112,393 1,298,003 3,797,818 2,313,402
Pre-production costs -- -- -- 213,112
Salaries and related expenses 922,547 783,046 1,686,312 1,264,337
----------- ---------- ----------- -----------
Total operating expenses 3,034,940 2,081,049 5,484,130 3,790,851
----------- ---------- ----------- -----------
(Loss) income from operations (215,224) 791,824 1,305,015 1,142,556
----------- ---------- ----------- -----------
Other income (expense)
Interest income 5,253 11,830 12,324 68,014
Interest expense (112,504) (46,678) (175,215) (62,689)
Other income (expense) 84,386 (20,467) 525,478 (38,868)
----------- ---------- ----------- -----------
Total other income (expense) (22,865) (55,315) 362,587 (33,543)
----------- ---------- ----------- -----------
(Loss) income before (benefit) provision
for taxes on income (238,089) 736,509 1,667,602 1,109,013
(Benefit) provision for taxes on income (110,384) 257,863 588,318 377,064
----------- ---------- ----------- -----------
Net (loss) income $ (127,705) $ 478,646 $ 1,079,284 $ 731,949
----------- ---------- ----------- -----------
Basic and diluted (loss) earnings per share $ (0.03) $ 0.13 $ 0.29 $ 0.20
----------- ---------- ----------- -----------
Weighted average common shares outstanding 3,700,000 3,700,000 3,700,000 3,700,000
=========== ========== =========== ===========
</TABLE>
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 SIX MONTHS ENDED
----------------------------
JANUARY 31, JANUARY 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,079,284 $ 731,949
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation expense 120,968 87,500
Deferred income taxes 244,533 --
Unrealized loss (gain) on foreign currency exchange -- (10,485)
Provision for doubtful accounts 91,712 52,973
Write-off of accounts receivable 2,413 16,600
(Increase) decrease in assets
Accounts receivable (2,746,594) (2,295,888)
Inventory (5,254,609) (3,464,185)
Other current assets 385,818 (398,784)
Other assets -- 22,161
Increase (decrease) in liabilities
Accounts payable 1,341,083 (236,243)
Accrued expenses 159,388 322,099
Income taxes payable -- 252,064
----------- -----------
Net cash used in operating activities (4,576,004) (4,920,239)
Cash flows from investing activities
Inventory purchased from Rosen --
Capital expenditures (164,758) (420,199)
----------- -----------
Net cash used in investing activities (164,758) (420,199)
----------- -----------
Cash flows from financing activities
Net borrowings on line of credit 5,347,474 153,583
Payments on debt (50,867) (49,632)
----------- -----------
Net cash provided by financing activities 5,296,607 103,951
----------- -----------
Net increase (decrease) in cash and cash equivalents 555,845 (5,236,487)
Cash and cash equivalents, at beginning of period 657,791 6,087,789
----------- -----------
Cash and cash equivalents, at end of period $ 1,213,636 $ 851,302
=========== ===========
</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. is a manufacturer of hard candies and
jellybeans and a packer of gift items and baskets.
<PAGE>
3. INTERIM FINANCIAL INFORMATION
The financial information as of January 31, 2000 and for the three months and
six months ended January 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.
Inventory consists of the following:
JANUARY 31 JULY 31
----------- ----------
2000 1999
----------- ----------
(UNAUDITED) (AUDITED)
Raw materials and ingredients $ 510,687 $1,238,786
Components used in assembly 2,174,956 542,459
Packaging materials 1,758,633 1,380,525
Work-in-process and
Finished product 9,379,913 5,407,810
----------- ----------
13,824,189 $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.
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 35%.
<PAGE>
7. STOCKHOLDERS' EQUITY
On August 2,1999, the Company granted options to buy an aggregate of 15,000
shares of Class A common stock 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 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 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 Form 10-QSB, whether as a result of new information, future events or
circumstances or otherwise.
Results of Operations
THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
Net sales for the three months ended January 31, 2000 and 1999 were $10,161,858
and $8,994,213 respectively. Net sales increased 13% primarily due to higher
sales of gift baskets, gift items and candies as we integrated the E. Rosen line
of products.
Gross profit for the second quarter decreased to $2,819,716 from $2,872,873 and
declined as a percentage of sales to 28% from 32%. The decrease in gross profit
was primarily attributable to higher costs of production due to high labor costs
associated with a labor shortage in the Company's area, which created high
levels of overtime and required us to hire temporary employees. The Company is
taking action to ameliorate the labor supply problem including adjusting
production scheduling to minimize labor requirements but anticipates that the
labor shortage will continue into the third fiscal quarter. In addition, the
gross profit margin was affected by the lower margins associated with jellybean
sales which accounted for 15% of the total sales for the quarter.
Selling, general and administrative expenses increased to $2,112,393 from
$1,298,003 and increased as a percentage of sales to 21% from 14% of sales,
largely due to increased freight costs and the additional selling, general and
administrative expenses associated with the new operation in Rhode Island.
Salaries and related expenses increased to $922,547 from $783,046 and increased
as a percentage of sales to 9% from 8.7% of sales in the prior comparable
quarter due to higher management salaries.
As a result, operating expenses increased to $3,034,940 from $2,081,049 and
increased as a percentage of sales to 30% from 23% of sales.
<PAGE>
Loss from operations for the three months ended January 31, 2000 was $215,224
compared to income of $791,824 for the prior comparable quarter.
Interest income decreased to $5,253 from $11,830. Interest expenses increased to
$112,504 from $46,678 due to increased borrowing under our line of credit for
working capital requirements to support higher sales. Other income increased to
$84,386 from expense of $20,467 due to the collection of an insurance claim and
other non-material non-operating income.
The effective income tax rate for the current quarter was 35%. 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
35%.
As a result of the foregoing, the Company incurred a net loss of $127,705 for
the three months ended January 31, 2000 compared to net income of $478,646 for
the prior comparable quarter.
SIX MONTHS ENDED JANUARY 31, 2000 AND 1999
Net sales for the six months ended January 31, 2000 and 1999 were $23,027,704
and $15,234,136 respectively. Net sales increased 51% primarily due to higher
sales of gift baskets, gift items and candies as we integrated the E. Rosen line
of products.
Gross profit for the six months increased to $6,789,145 from $4,993,407 but
declined as a percentage of sales to 30% from 32%. The decrease in gross profit
as a percentage of sales was primarily attributable to higher costs of
production in the second quarter due to high labor costs associated with a labor
shortage which created high overtime and the necessity to hire temporary
employees. In addition, the gross profit margin was affected by the lower
margins associated with jellybean sales which accounted for 6.5% of the total
sales for the period.
Selling, general and administrative expenses increased to $3,797,818 from
$2,313,402 and increased as a percentage of sales to 17% from 15% of sales,
largely due to increased freight costs and the additional selling, general and
administrative expenses associated with the new operation in Rhode Island.
Salaries and related expenses increased to $1,686,312 from $1,264,337 but
decreased as a percentage of sales to 7% from 8% of sales in the prior
comparable period. The increase in salaries and related expenses was 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 $5,484,130 from $3,790,851 but
decreased as a percent of sales to 24% from 25% 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 lines and customer base.
Income from operations for the six months ended January 31, 2000 was $1,305,015
compared to
<PAGE>
income of $1,142,556 for the prior comparable period.
Interest income decreased to $12,324 from $68,014. During the prior comparable
period interest income was generated by the investment of 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 $175,215 from $62,689 due to increased borrowing under the line of
credit for working capital requirements to support higher sales. Other income
increased to $525,587 from expense of $38,868 primarily due to the receipt of a
$350,000 settlement arising out of a trademark infringement suit the company
initiated.
The effective income tax rate for the six month period was 35%. The income tax
rate utilized for the current period is based on the Company's estimate of the
effective tax rate for the fiscal year ending July 31, 2000 which approximates
35%.
As a result of the foregoing, the Company earned net income of $1,079,284 for
the six months ended January 31, 2000 compared to net income of $731,949 for the
prior comparable period.
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, 2000 and July 31, 1999 was
$8,024,805 and $6,992,533, respectively.
Net cash used in operating activities for the six months ended January 31, 2000
and 1999, respectively was $4,576,004 and $4,920,239. The decrease in cash used
by operating activities was due to increases in the Company's accounts payables
which were offset by the increase in inventory and accounts receivable which
were caused by the additional sales and purchasing activity.
Net cash used in investing activities decreased to $164,758 from $420,199,
primarily due to more acquisitions of equipment by the Company in the prior
period.
Net cash provided by financing activities increased to $5,296,607 from $103,951
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, 2001 are $253,799. 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 during the second half of the calendar
year principally due to the holiday season.
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders (the "Meeting") of the Company was
held on December 2, 1999.
(b) Not applicable because:
(i) Proxies for the Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934.
(ii) There was no solicitation in opposition to management's nominees
as listed in the Company's proxy statement dated November 5,
1999; and
(iii) All such nominees were elected.
(c) The matters voted on at the Meeting consisted of the following:
(i) The election of five members to the Company's Board of Directors.
The name of each nominee for the election and the number of
shares voted and withheld for such nominee, as well as the number
of broker non-votes with respect to such nominee, are set forth
below:
NAME FOR WITHHELD NON-VOTES
---- --------- -------- ---------
Uziel Frydman 9,352,061* 4,000 343,939
Amir Frydman 9,349,061* 7,000 343,939
D. A. Cummins 9,352,061* 4,000 343,939
Jean E. Clary 9,352,061* 4,000 343,939
Jason Adelman 9,352,061* 4,000 343,939
*Includes 1 million Class B Common Stock which carries 7 votes per share.
<PAGE>
(ii) A proposal to ratify the appointment of BDO Seidman LLP as the
Company's independent certified public accountant. 9,354,361
(including 1 million Class B shares which carries 7 votes per
share) shares were voted in favor of such proposal, 700 shares
were voted against the proposal and 1000 shares abstained from
voting on such proposal. In addition, there were 343,939 broker
non-votes with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27. Financial Data Schedule
(b) The Company did not file any report on Form 8-K during the
quarter ended January 31,2000.
<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 thereunto duly authorized.
SHERWOOD BRANDS, INC.
Date: March 15 , 2000 /s/ Uziel Frydman
--------------------------------
President and
Chief Executive Officer
Date: March 15, 2000 /s/ Anat Schwartz
--------------------------------
Executive Vice President -
Finance and Secretary
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 1,213,636
<SECURITIES> 0
<RECEIVABLES> 5,701,444
<ALLOWANCES> 120,101
<INVENTORY> 13,824,189
<CURRENT-ASSETS> 21,327,291
<PP&E> 3,822,685
<DEPRECIATION> 777,988
<TOTAL-ASSETS> 24,554,434
<CURRENT-LIABILITIES> 13,302,486
<BONDS> 0
37,000
0
<COMMON> 0
<OTHER-SE> 9,915,088
<TOTAL-LIABILITY-AND-EQUITY> 24,554,434
<SALES> 23,027,704
<TOTAL-REVENUES> 23,027,704
<CGS> 16,238,559
<TOTAL-COSTS> 5,484,130
<OTHER-EXPENSES> 525,478
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (175,215)
<INCOME-PRETAX> 1,667,602
<INCOME-TAX> 588,318
<INCOME-CONTINUING> 1,079,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,079,284
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.29
</TABLE>
