<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
___ Exchange Act of 1934
For the quarterly period ended October 31, 1996
OR
___ Transaction report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from___________________ to ____________________
--------------------------------
COMMISSION FILE NO. 333-04244C
--------------------------------
STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
OHIO 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
52 SURREY ROAD
MANSFIELD, OHIO 44901
(Address of principal executive offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
As of November 29, 1996, 3,136,347 shares of common stock, no par value, were
outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
BALANCE SHEET
October 31, 1996, April 30, 1996 and October 31, 1995
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 74,186 $ 123,208 $ 26,862
Trade accounts receivable, net of allowance for doubtful
accounts of $46,927, $56,000 and $9,225 as of
October 31, 1996, April 30, 1996 and
October 31,1995, respectively 1,148,253 584,665 1,133,100
Inventory 1,293,843 1,132,548 1,129,490
Prepaid and other 73,542 49,508 70,114
Deferred income taxes 45,600
----------- ----------- -----------
Total current assets 2,635,424 1,889,929 2,339,566
----------- ----------- -----------
Property and equipment:
Land 74,653 74,653 57,325
Machinery and equipment 1,345,691 1,309,007 1,313,139
Office equipment 196,621 193,977 194,206
Building improvements 91,716 91,716 91,716
Buildings 235,456 237,016 219,718
Leasehold improvements 43,003 43,003 43,003
Tooling 35,517 22,254 38,567
Vehicles 25,332 25,332 93,031
----------- ----------- -----------
2,019,710 1,996,958 2,050,705
Less: accumulated depreciation (689,782) (602,297) (558,604)
----------- ----------- -----------
Net property and equipment 1,358,207 1,394,661 1,492,101
----------- ----------- -----------
Goodwill 466,379 543,671 516,331
Cash surrender value of life insurance 26,020 19,646 8,500
Trademarks and patents 4,908 5,257 5,604
Deferred stock offering costs 83,558 50,474 709
Other assets 56,427 69,399 71,533
----------- ----------- -----------
Total assets $ 4,630,923 $ 3,973,037 $ 4,434,344
=========== =========== ===========
</TABLE>
<PAGE> 3
STEARNS & LEHMAN, INC.
BALANCE SHEET, CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Lines of credit $ 350,000 $ 60,000
Accounts payable $ 1,016,393 485,407 843,081
Accrued expenses 238,123 228,045 130,438
Current portion of notes payable 107,842 37,578 45,914
Current portion of capital lease 12,438 16,713 18,893
obligations
Subordinated convertible notes 300,000 300,000
----------- ----------- -----------
Total current liabilities 1,674,796 1,417,743 1,098,326
----------- ----------- -----------
Notes payable, net of current portion 358,415 132,416 168,993
Capital lease obligations, net of 6,640 12,084 19,078
current portion
Subordinated convertible notes 300,000
----------- ----------- -----------
Total long-term liabilities 365,055 144,500 488,071
----------- ----------- -----------
Total liabilities 2,039,851 1,562,243 1,586,397
----------- ----------- -----------
Shareholders' equity:
Common stock, no par value; 4,000,000 shares
authorized, 2,829,422, 2,827,672 and 2,827,564
issued and 2,826,122, 2,824,372 and 2,799,834
outstanding as of October 31, 1996, April 30, 1996
and October 31, 1995, respectively 3,120 3,118 3,159
Additional paid-in capital 3,183,347 3,178,099 3,130,375
Accumulated deficit (582,195) (757,223) (276,613)
----------- ----------- -----------
2,604,272 2,423,994 2,856,921
Less treasury stock, at cost (3,300 shares in 1996
and 11,256 shares in 1995) (13,200) (13,200) (8,974)
----------- ----------- -----------
Total shareholders' equity 2,591,072 2,410,794 2,847,947
----------- ----------- -----------
Total liabilities and shareholders' equity $ 4,630,923 $ 3,973,037 $ 4,434,344
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
STEARNS & LEHMAN, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
for three months ended October 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Sales $ 2,117,080 $ 1,797,953
Cost of sales 1,512,393 1,352,400
----------- -----------
Gross profit 604,687 445,553
Selling, general and administrative expenses 408,321 395,239
----------- -----------
Income from operations 196,366 50,314
----------- -----------
Other income (expenses), net:
Interest expense (19,161) (14,375)
Interest income 3,794 0
Other, net 3,180 (734)
----------- -----------
(12,187) (15,109)
----------- -----------
Net income before income tax expense 184,179 35,205
Income tax expense (benefits):
Current 2,400 0
Deferred (45,600) 0
----------- -----------
Total income tax expense (benefits) (43,200) 0
----------- -----------
Net income $ 227,379 $ 35,205
=========== ===========
Earnings (loss) per share $0.08 ($0.01)
=========== ===========
Weighted average shares outstanding 2,898,866 2,767,120
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
STEARNS & LEHMAN, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
for six months ended October 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Sales $ 3,457,718 $ 2,773,064
Cost of sales 2,523,748 2,141,927
----------- -----------
Gross profit 933,970 631,137
Selling, general and administrative expenses 769,576 818,417
----------- -----------
Income (loss) from operations 164,394 (187,280)
----------- -----------
Other income (expenses), net:
Interest expense (38,858) (26,675)
Interest income 3,794 0
Other, net 2,498 (2,436)
----------- -----------
(32,566) (29,111)
----------- -----------
Net income (loss) before income tax expense 131,828 (216,391)
Income tax expense (benefits):
Current 2,400 0
Deferred (45,600) 35,913
----------- -----------
Total income tax expense (benefits) (43,200) 35,913
----------- -----------
Net income (loss) $ 175,028 ($ 252,304)
=========== ===========
Earnings (loss) per share $0.06 ($0.09)
=========== ===========
Weighted average shares outstanding 2,860,964 2,755,598
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
STEARNS & LEHMAN, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the year ended April 30, 1996 and the six months ended October 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES STOCK CAPITOL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 2,744,934 $ 3,098 $ 2,957,674 ($ 24,308) ($57,246) $2,879,218
Net Loss (732,915) (732,915)
Sale of treasury stock, net 65,256 204,449 57,246 261,695
Repurchase of common stock (3,300) (13,200) (13,200)
Purchase of warrants (36,750) (36,750)
Purchase price adjustment 17,582 20 52,726 52,746
----------- --------- ----------- --------- -------- ----------
Balance at April 30, 1996 2,824,372 3,118 3,178,099 (757,223) (13,200) 2,410,794
Net Income 175,028 175,028
Issuance of common stock 1,750 2 5,248 5,250
----------- --------- ----------- --------- -------- ----------
Balance at October 31, 1996 2,826,122 $ 3,120 $ 3,183,347 ($582,195) ($13,200) $2,591,072
========== ========= =========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 7
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
for six months ended October 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 175,028 ($252,304)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Bad debt expense 1,569 18,424
Depreciation and amortization 127,066 130,116
Loss on the sale of property and equipment 86 1,244
Deferred income taxes (45,600) 35,913
Changes in assets and liabilities:
Trade accounts receivable (565,157) (472,990)
Inventory (161,295) 11,700
Prepaid expenses and other (24,034) 5,817
Accounts payable 530,986 233,498
Accrued expenses 10,078 10,795
--------- ---------
Net cash provided (used) by operating activities 48,727 (277,787)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (56,331) (570,943)
Sale of property and equipment 3,500 1,500
Cash surrender value of life insurance, net (6,374)
Proceeds from purchase price adjustment 52,746
Purchase of other assets (11,642)
--------- ---------
Net cash used by investing activities (6,459) (581,085)
--------- ---------
Cash flows from financing activities:
Net borrowing under revolving credit agreements 60,000
Principal payments on notes payable and capital leases (63,456) (35,263)
Deferred capital stock offering costs (33,084) (709)
Sale of treasury stock 0 48,272
Net proceeds from issuance of common stock 5,250 172,761
--------- ---------
Net cash provided (used) by financing activities (91,290) 245,061
--------- ---------
Net decrease in cash (49,022) (613,811)
Cash, beginning of year 123,208 640,673
--------- ---------
Cash, end of period $ 74,186 $ 26,862
========= =========
</TABLE>
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS (UNAUDITED), CONTINUED
for six months ended October 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 38,753 $ 27,761
======== ========
Supplemental schedule of noncash financing activities:
Conversion of line of credit to note payable $350,000 $163,000
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three months ended October 31,
1996 and 1995 for Stearns & Lehman, Inc. (the Company) are unaudited and
are presented pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, the financial statements should be read
in conjunction with the audited financial statements for the years ended
April 30, 1996 and April 30, 1995. In the opinion of management, the
accompanying financial statements reflect all adjustments necessary
(which are of a normal recurring nature) to present fairly the financial
position and results of operations and cash flows for the interim periods
presented, but are not necessarily indicative of the results of
operations for a full year.
2. COMMON STOCK TRANSACTIONS:
On June 7, 1996, the Company issued 1,750 shares of its common stock at
$3.00 per share upon exercise of warrants. On October 22, 1996, the
Company's form SB-1 registration statement was declared effective by the
Securities and Exchange Commission. This registration statement offered
for sale up to 454,546 shares of the Company's stock at $5.50 per share.
In connection with the stock offering the Company also registered
1,120,001 shares of stock that were either (i) currently issued and
outstanding, (ii) reserved for issuance upon exercise or conversion of
currently issued and outstanding warrants and convertible debentures of
the Company, or (iii) reserved for issuance upon exercise of
underwriter's warrants.
3. LINES OF CREDIT:
On May 5, 1996, the Company converted a $350,000 revolving line of credit
agreement to a five-year term note with monthly principal payments of
$5,833 plus interest at prime plus 1% through May 5, 2001.
9
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. NOTES PAYABLE:
Notes payable at October 31, 1996, April 30, 1996 and October 31, 1995
consisted of:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1996 1995
<S> <C> <C> <C>
Note payable to a bank, collateralized by a
vehicle payable in monthly installments
of $354 including interest at a rate of
6.84%, due on December 10, 1997. This $ 8,528
note was paid in full during 1996.
Note payable to a bank, collateralized by real
estate payable in monthly installments of
$682 including interest at a rate of prime
plus 2% adjusted every three years and
subject to a minimum interest rate of
3.5% and a maximum interest rate of 13.5%
with the maximum decrease or increase in
interest rates not to exceed 2% at any
one time, due on February 14, 2002. $ 35,461 $ 37,877 40,168
Note payable to a bank, collateralized by a
vehicle, payable in monthly installments
of $512 including interest at 8.5% due
on February 9, 1999. This note was paid
in full during 1996. 17,794
Note payable to a bank, collateralized by
accounts receivable, inventory and
equipment, payable in monthly
installments of $2,717 plus interest
at a rate of prime (8.25% at
October 31, 1996) plus 1.25%
due on May 5, 2000. 115,817 132,117 148,417
Note payable to a bank, collateralized by
accounts receivable, inventory and
equipment, payable in monthly
installments of $5,833 plus interest at
a rate of prime (8.25% at October 31,
1996) plus 1% due on May 5, 2001. 314,979
---------- --------- ---------
Total notes payable 466,257 169,994 214,907
Less current portion 107,842 37,578 45,914
---------- --------- ---------
$ 358,415 $ 132,416 $ 168,993
--------- --------- ---------
</TABLE>
10
<PAGE> 11
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
5. LEASE COMMITMENTS:
The Company leases buildings and certain office and production
equipment under noncancelable operating lease agreements expiring
through fiscal 2002.
Minimum rental commitments under noncancelable operating leases at
October 31, 1996 are as follows:
Year Ending April 30, 1997 $ 58,313
1998 111,568
1999 19,704
2000 6,345
2001 6,345
2002 3,701
---------
$ 205,976
---------
Total rent expense charged to operations for all operating leases was $60,346
and $61,640 for the six months ended October 31, 1996 and 1995 respectively.
The Company has various capital lease agreements for equipment. The present
value of the minimum lease payments has been capitalized and the related asset
and obligation recorded. Future minimum lease payments under capital leases,
together with the present value of the minimum lease payments as of October 31,
1996, are as follows:
Year Ending April 30, 1997 $ 7,916
1998 10,697
1999 2,301
---------
Total minimum lease payments 20,914
Less amounts representing
interest 1,836
---------
Present value of net minimum
lease payments 19,078
Less current maturities 12,438
---------
$ 6,640
---------
11
<PAGE> 12
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
6. WARRANTS TO PURCHASE COMMON STOCK:
On June 7, 1996, 1,750 shares of the Company's common stock were issued
at $3.00 per share upon exercise of warrants. The balance of warrants
outstanding at October 31, 1996 was 98,617 with an exercise price per
share ranging from $3.00 to $5.75. All outstanding warrants are
exercisable at October 31, 1996.
7. INCOME TAXES:
Effective November 30,1993, the Company adopted the Statement of
Financial Accounting Standards No. 109. A net deferred tax asset of
$35,913 was reflected on the financial statements as of April 30, 1995.
On July 31, 1995, the Company established a valuation allowance for the
entire net deferred tax asset, as it concluded, at that time that it
would be more likely than not that some portion or all of the net
deferred tax asset would not be realized. On October 31, 1996, the
Company established a net deferred tax asset of $45,600. This net
deferred tax asset represents net operating loss carry-forwards utilized
to the extent of the current year tax obligation as the result of income
for the six months ended October 31, 1996.
8. SUBSEQUENT EVENTS:
From November 4, 1996 through November 29, 1996, the Company received
$1,535,614 in proceeds, net of $170,624 in commissions and underwriter
expenses, from its SB-1 stock offering (see Note 2) and subsequently
issued 310,225 shares of stock. The Company used $422,353 of these
proceeds to pay, in full, certain notes payable to a bank, collateralized
by accounts receivable, inventory and equipment (see Note 4). On November
27, 1996, the Company entered into an agreement to construct a 50,000
square foot manufacturing and office building. On December 2, 1996, the
Company signed a Construction and Business Loan Agreement with a bank for
$750,000 for the financing of this manufacturing and office building,
with a term of 120 monthly payments beginning July 2, 1997 with interest
at a rate of prime plus 0.75%. Also on December 2, 1996, the Company
signed a Line of Credit Agreement with a bank for $400,000 with interest
at a rate of prime plus 0.5%.
12
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Stearns & Lehman, Inc. (the "Company"), is headquartered in Mansfield, Ohio with
manufacturing facilities in Mansfield, Ohio and Kent, Washington. The Company is
engaged in the business of manufacturing and marketing specialty food products,
including coffee and espresso flavorings, syrups, oils and toppings, extracts,
flavorings, sauces, dressings and specialty sugars. The Company sells its
products throughout the United States and Canada and in certain other foreign
countries.
The Company markets its Flavor-Mate(R) and Dolce(R) flavored syrups product
lines through distributors that are focused on the specialty coffee industry and
food service accounts including restaurants, coffee houses, cart operations and
specialty coffee retailers. These distributors take delivery of product by
pallet load and re-distribute case quantities to their customers, adding a
"service oriented" aspect to the marketing of the Company's product.
The Company also has direct marketing and distribution arrangements with a
number of private label customers. The Company does not utilize any distribution
network to service these customers and provides direct shipments in quantities
and method of transportation specified by the customer. The Company believes
that this segment of the business has the greatest short-term potential for
sales.
The Company markets the remaining part of its product lines through general food
distributors. The majority of these distributors are members of the National
Food Distributors Association who distribute the Company's products directly to
retailers, such as supermarket chains and specialty food stores. These
distributors enable the retailer to maximize efficiency and profits by shifting
the responsibility for stocking shelves, pricing product, rotating stock,
providing demonstrations and maintaining inventory to the distributor. These
distributors generally take delivery of the Company's product by pallet load for
re-distribution to the retailers.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
Net Sales for the three months ended October 31, 1996 and 1995 were $2,117,080
and $1,797,953, respectively, a 17.7% increase. For the current three month
period, private label sales increased by 40.0% and Dolce(R) branded products
increased by 14.6%, while the Net Sales of other Company products decreased by
22.8% compared to the same quarter last year. Private label, Dolce(R) branded
products, and other Company products represented 67.8%, 13.5%, and 18.7% of
Gross Sales, respectively for the current three month period. The increase in
private label sales was the result of significant sales growth by several of the
Company's private label customers and obtaining several new private label
customers. Dolce(R) branded products sales increased primarily as a result of
increased sales from Midwest and Eastern United States distributors. The Net
Sales of other Company products decreased primarily due to a loss of a
Flavor-Mate(R) customer in January, 1996.
13
<PAGE> 14
The increase in sales volume permitted the Company to better utilize its
manufacturing facilities, resulting in Cost of Sales, as a percentage of Net
Sales, decreasing to 71.4% compared to 75.2% for the second quarter ended
October 31, 1996 and 1995, respectively. Cost of Sales increased by $159,993 for
the current quarter compared to the corresponding quarter last year. This
increase primarily was a result of higher sales volume, resulting in increased
material, labor, and utility costs for the current three month period. The
increase in Cost of Sales was also the result of the decision to increase
product testing by Company personnel. Tooling costs also increased as a result
of new private label customers. These increases were partially offset by
decreased costs associated with improved manufacturing controls resulting in
lower scrappage, a decrease in the cost of product testing performed by outside
services, and a decrease in maintenance costs.
Selling, general and administrative expenses increased by 3.33% or $13,082 for
the second quarter ended October 31, 1996 compared to the corresponding quarter
last year. This increase resulted from increased payroll expenses incurred
following the hiring of a Chief Financial Officer in January 1996, increased
sales promotional costs, increased sales commissions as a result of a revised
sales staff compensation program and higher sales volume, increased retail store
product placement ("slotting") fees, increased personal property and real estate
taxes, and increased maintenance costs of the Company's computer system. These
increases were nearly offset by decreases in outside professional financial
consulting services, travel costs, office supplies, and bad debt expense.
Interest expense for the three months ended October 31, 1996 increased by $4,786
compared to the three months ended October 31, 1995. The increase reflects bank
borrowings that occurred from October 1, 1995 through April 30, 1996 resulting
in a Note Payable with a balance as of October 31, 1996 of $314,979.
The Company recorded a Deferred Income Tax credit of $45,600 for the second
quarter ended October 31, 1996. This credit is a result of the reversal of a
previously recorded valuation allowance due to the anticipated usage of the
Company's net loss carry forwards.
As a result of the foregoing, the Company reported net income of $227,379, or
$0.08 per weighted average number of common stock outstanding, for the second
quarter ended October 31, 1996 compared to net income of $35,205, or $0.01 per
weighted average number of common stock outstanding, for the second quarter
ended October 31, 1995. The weighted average number of common stock outstanding
increased to 2,898,866 for the current quarter compared to 2,767,120 for the
comparative quarter last year. The increase primarily reflects treasury stock
sold and changes in the common stock equivalents of outstanding warrants.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1995
Net Sales for the six months ended October 31, 1996 and 1995 were $3,457,718 and
$2,773,064 respectively, a 24.7% increase. For the current six month period,
private label sales increased by 53.3% and Dolce(R) branded products increased
by 20.3%, while the Net Sales of other Company products decreased by 26.7%
compared to the same six month period last year. Private label, Dolce(R) branded
products, and other Company products represented 66.6%, 17.1%, and 16.3%
14
<PAGE> 15
of Gross Sales, respectively for the current six month period. The increase in
private label sales was the result of significant sales growth by several of the
Company's private label customers and obtaining several new private label
customers. Dolce(R) branded products sales increased primarily as a result of
increased sales from Midwest United States distributors. The Net Sales of other
Company products decreased primarily due to a loss of a Flavor-Mate(R) customer
in January, 1996.
The increase in sales volume permitted the Company to better utilize its
manufacturing facilities, resulting in Cost of Sales, as a percentage of Net
Sales, decreasing to 73.0% compared to 77.2% for the six months ended October
31, 1996 and 1995, respectively. Cost of Sales increased by $381,821 for the six
month period compared to the corresponding six month period last year. This
increase primarily was a result of higher sales volume, resulting in increased
material, labor, and utility costs for the current six month period. The
increase in Cost of Sales was also the result of increased depreciation and the
decision to increase product testing by Company personnel. Tooling costs also
increased as a result of new private label customers. These increases were
partially offset by decreased costs associated with improved manufacturing
controls resulting in lower scrappage, a decrease in the cost of product testing
performed by outside services, and a decrease in maintenance costs.
Selling, general and administrative expenses decreased by 0.6% or $48,841 for
the six month period ended October 31, 1996 compared to the corresponding six
month period last year. This decrease resulted from decreases in trade show
costs, outside professional financial consulting services, travel costs, office
supplies, and bad debt expense. These decreases were offset by increased payroll
expenses incurred following the hiring of a Chief Financial Officer in January
1996, increased sales promotional costs, increased sales commissions as a result
of a revised sales staff compensation program and higher sales volume, increased
retail store product placement ("slotting") fees, increased personal property
and real estate taxes, and increased maintenance costs of the Company's computer
system.
Interest expense for the six months ended October 31, 1996 increased by $12,183
compared to the six months ended October 31, 1995. The increase primarily
reflects bank borrowings that occurred from October 1, 1995 through April 30,
1996 resulting in a Note Payable with a balance as of October 31, 1996 of
$314,979.
The Company recorded a Deferred Income Tax credit of $45,600 for the six month
period ended October 31, 1996. This credit is a result of the reversal of a
previously recorded valuation allowance due to the anticipated usage of the
Company's net loss carry forwards.
As a result of the foregoing, the Company reported net income of $175,028, or
$0.06 per weighted average number of common stock outstanding, for the six
months ended October 31, 1996 compared to a net (loss) of ($252,304), or ($0.09)
per weighted average number of common stock outstanding, for the six months
ended October 31, 1995. The weighted average number of common stock outstanding
increased to 2,860,964 for the current six month period compared to 2,755,598
for the comparative six month period last year. The increase primarily reflects
treasury stock sold and changes in the common stock equivalents of outstanding
warrants.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1996, the Company's working capital was $976,006 with a working
capital ratio of 1.58 to 1. The Company's working capital has improved for two
consecutive quarters. The working capital and working capital ratio for the
quarters ended April 30, 1996 and July 31, 1996 were $472,182 and 1.33 to 1, and
$706,323 and 1.54 to 1, respectively. The increase in working capital for the
six month period ended October 31, 1996 was primarily a result of the conversion
of a $350,000 bank line of credit to a note payable, operating income for the
period, and the effect of the current deferred tax asset. On October 31, 1995,
the Company's working capital was $1,241,240 with a working capital ratio of
2.13 to 1. The Company's decrease in working capital for the twelve month period
ended October 31, 1996 was primarily the result of operating losses for the
months of November 1995 through June 1996 offset by in the foregoing described
increases in working capital for the six month period ended October 31, 1996.
The Company's operating activities, for the six month period ended October 31,
1996, provided net cash of $48,726. The Company used $122,660 to acquire
equipment, invest in life insurance policies, and make principal payments on
notes payable and capital leases. For the three month period ended October 31,
1996, the Company's operating activities provided net cash of $61,060 and the
Company during this same period used $68,251 to acquire equipment, invest in
life insurance policies, and make principal payments on notes payable and
capital leases. For the six month period ended October 31, 1996, the Company
received net cash of $24,912 from non-recurring sources. The Company expects
future operating activities to continue to provide cash for investing and
financing activities. However, this cash will be insufficient to meet the
Company's planned investing and financing activities.
The Company plans to build a new manufacturing and office facility, estimated to
cost approximately $1,533,000 and purchase equipment estimated to cost
approximately $542,000. In addition, the Company expects to utilize $520,000 to
retire outstanding notes payable and subordinated debentures. The Company
expects to fund the acquisition of the building and equipment and retirement of
debt primarily through the sale of stock and obtaining a bank mortgage on the
new building.
On October 22, 1996, the Securities and Exchange Commission declared the
Company's form SB-1 registration statement to be effective. This registration
statement offered for sale up to 454,546 shares of the Company's stock at $5.50
per share. On November 4, 1996 the Company received the first proceeds from this
offering and through November 29, 1996, the Company has received $1,535,614 in
proceeds, net of $170,624 in commissions and underwriter expenses. The Company
anticipates additional net proceeds from the offering.
On December 2, 1996, the Company formalized a $750,000 bank mortgage and a
$400,000 bank line of credit. The Company believes that this bank financing
together with proceeds from its stock offering and cash from operating
activities will be sufficient to finance the Company's operations, and planned
capital expenditures and repayment of debt.
On November 22, 1996, the Company's board of directors authorized the
construction of a new
16
<PAGE> 17
manufacturing and office facility.
The Company during the six month period ending October 31, 1996 has experienced
an inflationary increase in the cost of one of its principal raw materials. The
Company has raised the selling price of its products to cover this cost
increase.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit #27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized,
Date: December 6, 1996 STEARNS & LEHMAN, INC.
(Registrant)
/S/ William C. Stearns
------------------------
William C. Stearns
President
/S/ John A. Chuprinko
------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 74,186
<SECURITIES> 0
<RECEIVABLES> 1,195,180
<ALLOWANCES> (46,927)
<INVENTORY> 1,293,843
<CURRENT-ASSETS> 2,635,424
<PP&E> 2,019,710
<DEPRECIATION> (689,782)
<TOTAL-ASSETS> 4,630,923
<CURRENT-LIABILITIES> 1,674,796
<BONDS> 766,257
<COMMON> 3,120
0
0
<OTHER-SE> 2,601,152
<TOTAL-LIABILITY-AND-EQUITY> 4,630,923
<SALES> 3,457,718
<TOTAL-REVENUES> 3,464,010
<CGS> 2,523,748
<TOTAL-COSTS> 3,291,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,569
<INTEREST-EXPENSE> 38,858
<INCOME-PRETAX> 131,828
<INCOME-TAX> (43,200)
<INCOME-CONTINUING> 175,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175,028
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
