<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-KSB/A
Amendment No. 1
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the fiscal year ended April 30, 1997
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the transition period from ____________to_____________
---------------------------
COMMISSION FILE NO. 0-21879
---------------------------
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.)
30 PARAGON PARKWAY
MANSFIELD, OHIO 44903
(Address of principal executive offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON SHARES, NO PAR VALUE
(Title of Class)
<PAGE> 2
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 ____
---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [____]
State issuer's revenues for its most recent fiscal year: $7,381,105
State the aggregate market value of the voting common stock, no par value, held
by non-affiliates computed by reference to the price of such stock as of July 8,
1997: $9,320,443.
As of July 8, 1997, 3,226,752 shares of common stock, no par value, were
outstanding.
Documents incorporated by reference: NONE.
Transition Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Stearns & Lehman, Inc. (the "Company"), is an Ohio corporation headquartered in
Mansfield, Ohio. The Company was organized on March 14, 1988 and 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 in certain foreign countries, including Canada,
Chile, Mexico, Australia, New Zealand, England, Finland, Spain, Singapore, Korea
and Japan.
Since its incorporation in 1988, the Company has grown from providing a single
product line and having two employees, to being a major manufacturer and
supplier of flavoring syrups for the specialty coffee industry with 43
employees. The Company's customer list includes a number of America's top
specialty coffee retailers and restaurants including Starbucks Coffee Company
("Starbucks"), Barnie's Coffee & Tea Company, The Coffee Beanery, Darden
Restaurants Inc.'s The Olive Garden Italian Restaurant, Flagstar Cos. Inc.'s
Denny's Restaurant, Gloria Jeans Gourmet coffee, Godiva Chocolatier, Inc., Kraft
General Foods, Krups, Sara Lee's Superior Coffee Division, and Sysco Food
Service. The Company does not have any long-term supply agreements with any of
these customers except Starbucks. The Company believes that its success in
obtaining these accounts is attributable to the Company's emphasis on quality,
dependable service and innovation.
HISTORY OF OPERATIONS
In 1988, the Company commenced production of a single consumer product line,
Grandma's Choice flavorings and extracts for baking and cooking. The Company
initially employed two persons and leased 1,200 square feet of space in
Mansfield, Ohio. In early fiscal 1993, the Company introduced its DOLCE(R)
product line of flavoring syrups, which consists of over 30 sweetened liquid
flavorings offered in three different sizes. The Company also started
manufacturing of flavoring syrups under private labels for various national
accounts, including several large North American based food companies. Flavoring
syrups are used to flavor coffee, iced tea, espressos, cappuccinos, ice cream
and specialty drinks. In April 1994, the Company acquired by merger Select
Origins, Inc., a New York corporation which was also engaged in the manufacture
and marketing of specialty food products.
On September 1, 1994, the Company entered into a written private label supply
agreement with Starbucks to develop and manufacture certain flavored coffee
syrups. This agreement is an exclusive supplier agreement with Starbucks to
supply defined flavored syrups meeting certain specifications and complying with
defined inspection and testing procedures. On April 30, 1997, Starbucks
terminated this agreement and requested to operate on a month to month basis
until a new agreement is signed. In order to meet the increased production and
warehousing requirements, in March, 1995 the Company leased approximately 18,000
square foot of manufacturing and warehouse space near Seattle, Washington.
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In light of the success of the DOLCE(R) product line and the associated private
label products, in late 1995, the Company began to expand the FLAVOR-MATE(R)
product line to include syrups, sugars and toppings. In February, 1996, the
Company introduced a line of sugar free flavored syrup products under the
DOLCE(R) brand name and under certain private label brands as well.
INDUSTRY OVERVIEW
The U.S. flavorings industry expanded rapidly after World War II. Today, over
80% of packaged foods contain flavor additions. Approximately 5% of flavor
additions are from natural sources. Ninety-five percent are "imitation" as
defined by the Food and Drug Administration (the "FDA"). The Company produces
several "natural" or "pure" products. Natural/pure classification is regulated
by the FDA. A pure extract is obtained directly from the food item (e.g. vanilla
or coffee beans, nuts, fruit) through use of a solution with a 35% alcohol
content. A natural flavor is obtained by extracting essential flavor-bearing
oils from botanical sources (e.g. peppermint leaves, orange and lemon peels).
By contrast, artificial or imitation flavors are created by blending aromatic
chemicals to which natural flavors are sometimes added. Imitation flavors
commonly contain propylene glycol and/or glycerin, which are heavier and less
volatile than alcohol and will not evaporate during cooking. Because of their
resistance to heat, imitation products can deliver more consistent flavor and
greater retention of aromatic properties than natural flavors. Conversely, the
alcohol contained in extracts or natural flavors helps prevent freezing and
spoilage. The Company produces both natural and imitation flavored products in
order to meet the various needs of consumers.
PRINCIPAL PRODUCTS AND THEIR MARKETS
Flavoring syrups are sold via six different product lines. The DOLCE(R) brand
product line consists 36 flavors, all certified Kosher by the Orthodox Union(U),
in four sizes. The DOLCE(R) brand also consists of eight sugar free flavors and
seven granita syrups. The DOLCE(R) brand is distributed to the specialty coffee
and the food service industries. The recently announced DiNATURA(R) premium
natural flavored brand consists of 14 flavors in two sizes. The Godiva
Chocolatier Cafe' Godiva(R) brand name consists of four specialty chocolate
flavors in three sizes. Both the DiNATURA(R) and the Godiva Chocolatier Cafe'
Godiva(R) brands are for distribution to the specialty coffee and the food
service industries. The FLAVOR-MATE(R) brand consists of 23 flavors in three
sizes. The FLAVOR-MATE(R) brand also consists of eight sugar free flavors and
seven granita syrups. The FLAVOR-MATE(R) brand is distributed through
supermarkets and specialty food stores along with the food service industry. The
newly announced Olive Garden Signature Syrups(R) brand consists of seven flavors
in two sizes for distribution through supermarkets and specialty food stores.
The Company also manufactures private label flavoring syrups for distribution
direct to the private label customer. The primary use of flavoring syrups are to
flavor beverages including coffee, tea, and espresso-based drinks. Granita
flavoring syrups are used for granita machines and frozen blender drinks.
The FLAVOR-MATE(R) line of concentrate flavoring products is sold in
supermarkets throughout the United States. The product is available in 13
flavors, including amaretto, chocolate raspberry,
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<PAGE> 5
dutch chocolate, french vanilla and orange cappuccino. FLAVOR-MATE(R) is
packaged in a shatter resistant bottle with a resealable snap cap which allows
users to create a variety of flavored coffee, tea or other beverages from a
single unflavored pot. FLAVOR-MATE(R) products can also be used for cooking and
baking purposes. FLAVOR-MATE(R) products are available in single flavor 12 packs
or as an assortment of flavors in 12 flavor 48-packs.
The Company's Grandma's Choice line includes extracts and flavorings for baking
and cooking, available in individual single-flavor packages. The Company
currently produces 14 different varieties of Grandma's Choice extracts and
flavors, including almond, banana, butter, coconut, lemon, pineapple and
vanilla.
The Company currently produces Cod Liver Oil, Cherry Cod Liver Oil and Wheat
Germ Oil for GNC(R) (General Nutrition Center). All three products are
distributed through the GNC(R) distribution network for sale in GNC(R) retail
stores. These products are directed to the health and natural food markets. The
Company also bottles a Rice Bran Oil for distribution to supermarkets and
specialty food stores and the food service industry. Rice Bran Oil is used as an
alternative cooking and baking oil.
The Company packages four different sugars and seven different toppings for use
primarily in the espresso and food service industries. These sugars and toppings
are also available in supermarkets and specialty food stores for consumer use in
beverages and desserts. The sugars and toppings are available in the DOLCE(R)
and FLAVOR-MATE(R) brand names
Cinnamon Sticks and Mulling Spices, packaged under the Select Origins(R) brand,
are used with wine, cider and apple juice to create a fragrant beverage. These
products are distributed through supermarkets and specialty food stores.
My Hero(TM) Submarine Dressing is an all natural dressing for use on sandwiches,
salads and pastas and for marinating. This product is distributed through
supermarkets and specialty food stores.
STATUS OF NEW PRODUCTS
The Company announced three new product lines in fiscal year 1997. These lines
are DiNATURA(R) premium natural flavored syrups, the Godiva Chocolatier Cafe'
Godiva(R) brand specialty chocolate flavored syrups and the Olive Garden
Signature Syrups(R) brand flavored syrups. The Godiva Chocolatier Cafe'
Godiva(R) brand specialty chocolate flavored syrups are in production and are
currently being shipped. The Olive Garden Signature Syrups(R) brand flavored
syrups are in the final stages of pre-production development with production
scheduled to begin in September 1997. The DiNATURA(R) premium natural flavored
syrups are scheduled for production in the fourth calendar quarter of 1997.
Development costs for new products were approximately $23,000 and $2,000 for the
fiscal years ended April 30, 1997 and 1996 respectively.
PATENTS, TRADEMARKS AND LICENSES
The Company has obtained federal trademark protection for its DiNATURA(R),
DOLCE(R) and
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FLAVOR-MATE(R) products. The Company has also obtained federal trademark
protection for SELECT ORIGINS(R), THE COOKING EXPERIENCE(R), SOPHISTICATED
NIBBLES(R), STEARNS & LEHMAN(R), LIMITED HARVEST(R), and GIFT OF BRAN(R). The
Company keeps all of its proprietary information confidential and takes steps to
insure that the results of its development activities (i) are not disclosed and
(ii) remain protected under common law, including requiring certain of the
Company's key employees to execute written agreements regarding trade secrets
and certain restrictive covenants. There can be no assurances that technology
and other information acquired by the Company pursuant to its development
activities will constitute trade secrets under applicable laws. The Company
currently has a license agreement with Godiva Chocolatier, Inc. to market and
sell flavoring syrups to the specialty coffee industry under the Godiva
Chocolatier Cafe' Godiva brand name. In addition, the Company currently has a
verbal agreement in principle with Darden Restaurants Inc., that has not been
reduced to a written agreement and has not been executed by either party, to
market and sell flavoring syrups to the consumer retail market under The Olive
Garden Signature Syrups brand name. The Company does not hold any patents.
DISTRIBUTION AND MARKETING
The Company has distribution arrangements with more than 70 distributors in the
United States, Canada, England, New Zealand, Australia, Switzerland, Denmark and
Mexico, most of which are members of the National Food Distributors Association.
All sales to foreign and domestic distributors are conducted in U.S. currency.
The majority of the distributors distribute directly to retailers, such as
supermarket chains and specialty food stores. Utilizing a distributor enables
the retailer to maximize efficient use of time and profit by shifting
responsibility for stocking shelves, pricing product, rotating stock, providing
shelf tags and maintaining inventory to the distributor. The distributor also
coordinates in-store product demonstrations and removes damaged or unsalable
products. The Company does not have any written supply agreements with its
distributors. The Company periodically issues product price lists to all current
distributors. The price list indicates the product price and payment terms of
net 30 days with approved credit and freight F.O.B. Mansfield, Ohio. Any
modification of price, payment terms or freight billing from the price list is
made verbally between the distributor and the Company.
The Company utilizes multiple distribution channels such as grocery distributors
for supermarkets, specialty food distributors for supermarkets and specialty
retailers, coffee distributors for coffee stores and retailers, and food service
distributors for restaurants, to achieve penetration into the various market
segments. The Company sells its products directly to such distributors for
distribution.
Utilization of a distribution network benefits the Company's consumer products
by providing a product marketing and servicing conduit between the Company and
retailers. The distributor introduces and sells the product to retailers,
delivers the product, provides schematics for maximizing product sales and
exposures and monitors market activity. Use of specialty food distributors lends
a "service-oriented" aspect to the primary manufacturing business of the
Company.
The Company has established a second network of distributors for its DOLCE(R)
flavored syrups
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product line. These distributors market the DOLCE(R) product line to 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, also adding to the "service oriented" aspect of
the Company's marketing.
The Company has direct marketing and distribution arrangements with its private
label customers. The Company does not utilize any other distribution network to
service those customers.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's principal products consist primarily of liquid sucrose, flavors,
packaging and water. The Company has its own water filtration system which is
connected to municipal water supplies. The Company currently acquires its liquid
sucrose from The Amalgamated Sugar Company. Liquid sucrose is readily available
from several large sugar refiners. Flavors are obtained from a large number of
specialty flavor companies. Each flavor is purchased from a sole source supplier
and a change in the availability of a flavor or supplier could result in a delay
in production and a change in the flavor profile of the end product. Packaging
consists primarily of corrugated boxes, bottles and labels. The Company owns the
tooling for boxes and labels and can obtain these materials from a large number
of vendors. The primary bottle can be obtained from two vendors, Plaxicon and
Plastipak. Most other bottles and containers used by the Company are readily
available from a number of sources.
COMPETITION
The specialty food products market is highly competitive and competition is
likely to increase over time. There are no assurances that the Company will be
able to continue to successfully compete in the industry. Several companies are
engaged in business similar to or competitive with the business of the Company,
and more may be entering the field. As a consequence, there is no assurance that
the Company will be able to successfully compete in the marketplace. Some of the
competitors such as R. Torre of San Francisco and DaVinci of Seattle are older,
more established companies whose products have been in the market for a number
of years prior to the Company's introduction of flavoring syrups to the United
States espresso industry. As all of the known competitors to the Company are
closely held private companies that do not divulge financial information to the
public, it is impossible to estimate their competitive ability.
The Company attempts to distinguish its position in the market place by
delivering high quality products in innovative packaging and at a competitive
price. The Company places a strong emphasis on establishing quality assurance
standards and procedures that meet the same high standards established by the
leaders in the entire food industry.
The Company has the industry experience to create value added product marketing
programs for its customers in addition to meeting the customers specific
packaging and product needs. By having manufacturing facilities in both the
eastern and western United States, the Company is unique in the flavoring syrup
industry and is better equipped to meet customer service requirements. The
Company also believes it is a leader in the flavoring syrup industry in using
new materials and
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methods in packaging its products. Finally, the Company believes that through
overall sales volume and production capacity, it can offer its products at
highly competitive prices.
DEPENDENCE ON MAJOR CUSTOMERS
For the fiscal years ended April 30, 1997 and 1996, Starbucks represented 27%
and 23% of the Company's total sales respectively. The Company's six major
customers represent approximately 47% and 42% of the Company's total sales
respectively for the fiscal years ended April 30, 1997 and 1996. However, other
than Starbucks, no other customer exceeded 8% of the Company's total sales in
either fiscal year. In addition, for the fiscal year ended April 30, 1997,
Starbucks represented 75% of the sales from the Company's Kent, Washington
facility.
If the Company lost the Starbucks' business, the current estimated reduction in
net income before taxes would be approximately $500,000. The loss in revenue
would be significantly offset by a reduction in overhead. The majority of the
reduction in overhead would result from the expected closure of the Washington
facility. The Company would have to reposition its West Coast marketing efforts
to compensate for this closure. However, because only approximately 6% of the
Company's non-Starbucks business is serviced from this facility, the potential
impact of this closure would be minimal.
The Company currently has a written supply agreement lasting through July 1,
1997 with Starbucks. This exclusive supplier agreement details the manufacturing
of flavored syrups meeting certain specifications and complying with defined
inspection and testing procedures. The price of the syrups are defined within
the agreement, along with a mechanism for price increases associated with
increased production costs. Under this agreement, payment for products are
required to be made within 30 days upon receipt of invoice. Both the Company and
Starbucks can cancel this agreement with 60 days written notice for price
disagreements and Starbucks can cancel this agreement with 90 days written
notice if the Company will not match a lower price from a competitor. On April
30, 1997, Starbucks terminated this agreement and requested to operate on a
month to month basis until a new agreement is signed. As of July 8, 1997, both
parties were negotiating a revised three year agreement. Both parties have
agreed verbally on a revised agreement, however this has not been reduced to a
written agreement and has not been executed by either party.
OPERATIONS AND MANAGEMENT/EMPLOYEES
As of July 8, 1997, the Company employed 43 people, all of which are full-time
employees. All employees are not unionized and the Company's management is
unaware of any efforts by its employees to unionize.
The Company adopted the 1994 Stock Option Plan (the "Plan") to help attract and
retain employees. at the Company's annual meeting of shareholders held on March
31, 1994. As of July 8, 1997, the Company has not issued any options under the
Plan. The Company is authorized to, and in the future may issue up to 275,000
common shares, no par value (the "Common Stock") under the plan.
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GOVERNMENTAL REGULATION
The manufacture and sale of the Company's products are subject to the
jurisdiction of a variety of regulatory authorities, including, but not limited
to, federal, state, county and city agencies administering laws and regulations
relating to health, labor, taxation and the food industry. The Company is also
subject to periodic inspections of its facilities by federal, state and local
governmental agencies.
The United States flavorings industry in general and the Company in particular
are subject to the regulations set forth in Section 403 of the Food, Drug and
Cosmetic Act which specifically establishes the FDA and gives the FDA authority
to establish regulations governing food manufacture and distribution. This
industry is governed by other federal agencies only as prescribed by the FDA and
such Act. Specifically, the Company is required to comply with regulations set
forth by the FDA in Title 21 of the Code of Federal Regulations. A few examples
of such regulations are Good Manufacturing Practices (21 CRF110) and Food
Labeling (21 CFR100).
The Company is also subject to and continues to monitor compliance with the
Federal Nutrition Labeling Act of 1990. In addition, the Company has established
a volunteer Hazard Analysis Critical Control Points (HACCP) program similar to
the FDA Seafood HACCP regulations.
The Company believes that it is in compliance with applicable government
regulations, including environmental, and these regulations are elementary to
its normal manufacturing practices. Consequently, the Company incurs minimal
additional costs to comply with these regulations.
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months.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
1. Financial Statements of Stearns & Lehman, Inc. Page
<S> <C>
Report of Independent Public Accountants (dated June 20, 1997) .............................19
Balance Sheets as of April 30, 1997 and 1996 ...............................................20
Statements of Operations for the years ended April 30, 1997 and 1996 .......................22
Statements of Shareholders' Equity for the years ended April 30, 1997 and 1996 .............23
Statements of Cash Flows for the years ended April 30, 1997 and 1996 .......................24
Notes to Consolidated Financial Statements .................................................26
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Stearns & Lehman, Inc.
We have audited the accompanying balance sheets of Stearns & Lehman, Inc. as of
April 30, 1997 and 1996, and the related statements of operations, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stearns & Lehman, Inc. as of
April 30, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P
------------------------------
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
June 20, 1997
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<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
BALANCE SHEETS
APRIL 30, 1997 AND 1996
ASSETS 1997 1996
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 730,833 $ 123,208
Trade accounts receivable, net of allowance for doubtful accounts
of $46,000 in 1997 and $56,000 in 1996 884,459 584,665
Inventory 1,239,671 1,132,548
Prepaid expenses and other 75,639 49,508
Deferred income taxes 25,999
--------------- --------------
Total current assets 2,956,601 1,889,929
--------------- --------------
Property and equipment:
Land 80,848 74,653
Construction in progress 941,199 99,282
Machinery and equipment 1,412,061 1,309,007
Office equipment 213,140 193,977
Building improvements 91,716 91,716
Buildings 137,734 137,734
Leasehold improvements 43,003 43,003
Tooling 59,344 22,254
Vehicles 36,964 25,332
--------------- --------------
3,016,009 1,996,958
Less: accumulated depreciation (780,538) (602,297)
--------------- --------------
Net property and equipment 2,235,471 1,394,661
--------------- --------------
Goodwill 441,833 543,671
Cash surrender value of life insurance 23,611 19,646
Trademarks and patents 4,560 5,257
Deferred stock offering costs 50,474
Deferred income taxes 75,973
Other assets 42,313 69,399
--------------- --------------
Total assets $ 5,780,362 $ 3,973,037
=============== ==============
</TABLE>
CONTINUED 20
<PAGE> 13
STEARNS & LEHMAN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
Current liabilities:
<S> <C> <C>
Lines of credit $ 350,000
Current portion of notes payable 37,578
Accounts payable $ 801,672 485,407
Accrued expenses 239,275 228,045
Subordinated convertible notes 300,000
Current portion of capital lease obligations 9,827 16,713
------------ -------------
Total current liabilities 1,050,774 1,417,743
------------ -------------
Long-term liabilities:
Notes payable, net of current portion 132,416
Capital lease obligations, net of current portion 2,256 12,084
------------ -------------
Total long-term liabilities 2,256 144,500
------------ -------------
Total liabilities 1,053,030 1,562,243
------------ -------------
Shareholders' equity:
Common stock, no par value; 4,000,000 shares authorized,
3,230,052 and 2,827,672 issued and 3,226,752 and
2,824,372 outstanding as of April 30, 1997 and 1996,
respectively 3,563 3,118
Additional paid-in capital 5,091,920 3,178,099
Accumulated deficit (354,951) (757,223)
------------ -------------
4,740,532 2,423,994
Less treasury stock, at cost 3,300 shares (13,200) (13,200)
------------ -------------
Total shareholders' equity 4,727,332 2,410,794
------------ -------------
Total liabilities and shareholders' equity $ 5,780,362 $ 3,973,037
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 14
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $ 7,381,105 $ 5,514,753
Cost of sales 5,432,588 4,343,803
------------ ------------
Gross profit 1,948,517 1,170,950
Selling, general and administrative expenses 1,588,865 1,774,118
------------ ------------
Income (loss) from operations 359,652 (603,168)
------------ ------------
Other income (expense), net:
Interest expense (53,814) (62,568)
Interest income 13,952 3,577
Other, net (14,119) (34,843)
------------ ------------
(53,981) (93,834)
------------ ------------
Net income (loss) before income tax expense 305,671 (697,002)
------------ ------------
Income tax (benefit) expense:
Current 5,371
Deferred (101,972) 35,913
------------ ------------
Total income tax (benefit) expense (96,601) 35,913
------------ ------------
Net income (loss) $ 402,272 $ (732,915)
============ ============
Earnings (loss) per share $ .13 $ (.26)
============ ============
Weighted-average shares outstanding 2,994,679 2,781,249
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES STOCK CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 2,744,834 $ 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 402,272 402,272
Repurchase and retirement of
common stock (95) (664) (664)
Conversion of debentures to
common stock 48,230 53 264,947 265,000
Issuance of common stock 354,245 392 1,649,538 1,649,930
------------ ----------- ------------ ------------ ----------- ------------
Balance at April 30, 1997 3,226,752 $ 3,563 $ 5,091,920 $ (354,951) $ (13,200) $ 4,727,332
============ =========== ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
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STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 402,272 $ (732,915)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Bad debt expense 18,820 63,445
Depreciation and amortization 257,636 270,628
Loss on disposal of fixed assets 1,582 32,416
Deferred income taxes (101,972) 35,913
Changes in assets and liabilities:
Trade accounts receivable (318,614) 10,423
Inventory (107,123) 8,642
Prepaid expenses and other (26,131) 26,423
Accounts payable 316,265 (124,176)
Accrued expenses 11,230 108,403
------------ ------------
Net cash provided by (used in) operating activities 453,965 (300,798)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,026,653) (645,523)
Proceeds from sale of property and equipment 3,500 41,766
Cash surrender value of life insurance, net (3,966) (11,146)
Purchase of other assets, net (23,686)
Proceeds from purchase price adjustment 52,746
------------ ------------
Net cash used in investing activities (974,373) (638,589)
------------ ------------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 351,000
Principal payments on long-term debt and capital leases (571,707) (90,349)
Payments for deferred stock offering costs (50,474)
Purchase of treasury stock (664) (13,200)
Purchase of warrants (36,750)
Net proceeds from issuance of common stock 1,700,404 261,695
------------ ------------
Net cash provided by financing activities 1,128,033 421,922
------------ ------------
Net increase (decrease) in cash and cash equivalents 607,625 (517,465)
Cash and cash equivalents, beginning of year 123,208 640,673
------------ ------------
Cash and cash equivalents, end of year $ 730,833 $ 123,208
============ ============
</TABLE>
CONTINUED
24
<PAGE> 17
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 61,582 $ 62,568
============= ============
Supplemental schedule of noncash financing and investing activities:
Conversion of subordinated debentures to common stock $ 265,000
=============
Conversion of line of credit to note payable $ 350,000 $ 163,000
============= ============
Purchase price adjustment:
Goodwill $ (52,746)
Additional paid-in capital 52,726
Common stock 20
------------
$ 0
============
</TABLE>
In 1997, the Company allocated $50,474 of deferred stock offering costs,
incurred in 1996, against equity as a result of the common stock issuance.
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 18
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. NATURE OF BUSINESS: Stearns & Lehman, Inc. (the Company) is engaged in
the business of manufacturing and selling specialty food products,
including extracts, flavorings, liquid spices and Italian syrups. The
principal market for the Company's products is the continental United
States.
b. INVENTORIES: Inventory is valued at the lower of most recent costs or
market which approximates cost using the first-in, first-out (FIFO)
method. Indirect costs that do not relate to production of finished
goods, including general and administrative expenses, are charged to
expense as incurred.
c. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line
method over the following estimated useful lives: buildings and
building improvements, 30 to 40 years; machinery and equipment, 5 to
10 years; tooling, 2 to 10 years; and vehicles, 3 to 5 years.
Leasehold improvements are amortized over the shorter of their useful
lives or the term of the lease. Depreciation expense was $180,761 in
1997 and $193,450 in 1996. Repairs and maintenance are charged to
expense as incurred; major renewals and betterments are capitalized.
When assets are sold, retired, or otherwise disposed of, the related
cost and accumulated depreciation are removed from the applicable
accounts, and any gain or loss from disposition is included in
operations.
d. EARNINGS PER SHARE: Earnings per share are computed based on the
weighted-average number of common shares outstanding during the year.
e. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
debt instruments purchased with an initial maturity of three months or
less to be cash equivalents. At April 30, 1997, the Company had
$537,798 in cash equivalents, of which, $433,954 has been allocated
for the construction of the new manufacturing and office building (see
Note 12), pursuant to the Form SB-1 registration statement. The
Company had no cash equivalents in 1996. Cash consists primarily of
demand deposits held principally with one financial institution.
f. INCOME TAXES: The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been recognized in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
recognized based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates.
26
<PAGE> 19
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
g. REVENUE RECOGNITION: Sales are recorded when products are shipped to
the customer.
h. ADVERTISING AND PROMOTION COSTS: Advertising and promotion costs are
charged to operations as incurred. Advertising and promotion expense
was $197,780 in 1997 and $215,588 in 1996.
i. GOODWILL: Goodwill represents the excess value of the Company's stock
issued over the fair value of net assets of an acquired company (see
Note 7). Goodwill is amortized on a straight-line basis over 12 years.
Amortization expense was $49,092 for the years ended April 30, 1997
and 1996, and accumulated amortization was $147,277 and $98,184 at
April 30, 1997 and 1996, respectively.
j. FOREIGN SALES: The Company transacts all foreign sales to distributors
and customers in United States currency.
k. 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 disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
l. CONCENTRATION OF RISK: The Company purchases certain products from
sole-source suppliers of which there are currently no other suppliers
used by the Company. A change in suppliers during certain peak periods
could cause a delay in production and a possible loss of sales, which
would affect operating results adversely.
The Company has six major customers which represented approximately
47% of sales for the year ended April 30, 1997 and four major
customers which represented approximately 37% of sales for the year
ended April 30, 1996. The loss of any of these customers could have an
adverse impact on the operating results of the Company.
The Company maintains virtually all of its banking relationships with
one financial institution.
m. RECLASSIFICATIONS: Certain amounts in the 1996 financial statements
have been reclassified to conform with the current-year presentation.
27
<PAGE> 20
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
2. INVENTORY:
The major components of inventory at April 30, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $ 736,281 $ 429,279
Work in process 7,278 18,012
Finished goods 496,112 685,257
---------- ----------
Total inventory $1,239,671 $1,132,548
========== ==========
</TABLE>
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. On November 6,
1996, the Company completely paid the balance outstanding on this five year
term note payable and the balance outstanding on another note payable to a
bank due on May 5, 2000. The total of these payments was $422,353. 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% and signed a
Construction and Business Loan Agreement with a bank for $750,000 for the
financing of a manufacturing and office building, with a term of 120
monthly payments beginning August 2, 1997 with interest at a rate of prime
plus 0.75%. Both of these agreements are collateralized by substantially
all the assets of the Company and contain covenants that require the
Company to maintain a certain minimum working capital and net worth and
maintain a certain quick and current ratio. As of April 30, 1997, there
were no outstanding balances under either of these bank agreements.
28
<PAGE> 21
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE:
The Company had no notes payable at April 30, 1997. Notes payable at April
30, 1996 consisted of the following:
<TABLE>
<S> <C>
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. $ 37,877
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 April
30, 1996) plus 1.25%, due on May 5, 2000. 132,117
----------------
Total notes payable 169,994
Less current portion 37,578
----------------
$ 132,416
================
</TABLE>
5. SUBORDINATED CONVERTIBLE REDEEMABLE THREE-YEAR NOTES:
The Company had $300,000 of subordinated convertible redeemable notes which
bore interest at a rate of 9% per annum and matured on March 1, 1997. These
notes were convertible into common stock at the rate of 182 shares for
every $1,000 of principal. On the maturity date, $265,000 of notes were
converted into 48,230 shares of common stock and the Company paid $35,000
in principal.
6. LEASE COMMITMENTS:
The Company leases buildings and certain office and production equipment
under noncancelable operating lease agreements expiring through fiscal
1999. Certain leases provide for future minimum rent escalations.
29
<PAGE> 22
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
Minimum rental commitments under noncancelable operating leases at April
30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $105,221
1999 13,358
--------
$118,579
========
</TABLE>
Total rent expense charged to operations for all operating leases was
$133,178 in 1997 and $136,960 in 1996.
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
April 30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
<S> <C>
1998 $10,696
1999 2,301
-------
Total minimum lease payments 12,997
Less amounts representing
interest 914
-------
Present value of net minimum
lease payments 12,083
Less current maturities 9,827
-------
$ 2,256
=======
</TABLE>
7. BUSINESS COMBINATION:
On April 30, 1994, the Company issued 240,000 shares of its common stock in
exchange for 100% of the outstanding stock of Select Origins, Inc.
(Select). The acquisition has been accounted for as a purchase transaction
and accordingly, the fair value of the stock issued was allocated to
Select's assets and liabilities based on its estimated fair value as of the
acquisition date. The excess value of the Company's stock issued over the
fair value of the net assets acquired has been recorded as goodwill.
36,000 of the shares issued were placed in escrow to provide security to
the Company in the event the Company suffers any losses arising from
misrepresentations by Select or its former shareholders. During fiscal
1995, the Company received 18,526 of the escrow shares pursuant
30
<PAGE> 23
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
to an agreement with former shareholders of Select. On June 29, 1995, the
Company filed a claim for the remaining 17,474 shares held in escrow.
The purchase also allowed for the issuance of 50,000 additional shares
(augmentation) if certain events did not occur subsequent to the merger.
The Company believes that only one of two objectives stated in the Purchase
Agreement needed to be achieved, and if neither was achieved, then
augmentation would occur. The Company did not achieve one of the
objectives. Based on the interpretation by certain former shareholders of
Select that both objective must be achieved, they filed a claim for the
shares to augmentation on July 21, 1995.
As of April 30, 1997, the Company has settled the escrow and augmentation
issues with certain former shareholders of Select for 15,594 shares of
which 15,499 shares were in escrow on April 30, 1996 and 95 shares were
contingently issuable upon settlement. The Company repurchased and retired
the 95 contingently issuable shares (see Note 8). The Company intends to
settle the escrow and augmentation issues with the remaining former
shareholders of Select for 1,988 shares of which 1,975 were in escrow on
April 30, 1997 and April 30, 1996 and 13 were contingently issuable upon
settlement. The settlement has been recorded in the financial statements at
April 30, 1997 and 1996 as an adjustment to the original purchase price.
8. COMMON STOCK TRANSACTIONS:
Between the dates of November 4, 1996 and December 20, 1996, the Company
issued 349,495 shares at $5.50 per share pursuant to the Company's Form
SB-1 registration statement that was declared effective by the Securities
and Exchange Commission on October 22, 1996.
During 1997, the Company repurchased 95 shares of common stock at an
average price of $6.99 per share pursuant to a Settlement Agreement between
former Select Origins, Inc. shareholders, and the Company (see Note 7).
In fiscal 1997, 4,750 shares of the Company's common stock were issued at
$3.00 per share upon exercise of warrants (see Note 9).
On March 1, 1997, the Company issued 48,230 shares of common stock upon
conversion of $265,000 in Subordinated Convertible Redeemable Three-Year
Notes (see Note 5).
9. WARRANTS TO PURCHASE COMMON STOCK:
During 1996, the Company issued warrants to two directors for each to
purchase 5,000 shares of common stock at an exercise price of $5.50 per
share expiring April 10, 2005. The warrants were fully exercisable at the
date of grant.
31
<PAGE> 24
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
During 1996, the Company issued warrants to a broker in connection with a
1995 Private Placement Memorandum to purchase 13,561 shares of common stock
at an exercise price of $3.15 per share expiring October 14, 2000. The
warrants were fully exercisable at the date of grant.
During 1996, the Company became aware of the possibility that a former
underwriter for the Company may have effectuated trades of certain of the
Company's securities in violation of certain state and federal securities
law and regulations. The Company made offers of recision to the current
holders of these securities pursuant to which the Company offered to
purchase these securities for a price equal to the price the current
holders paid for these securities. The Company repurchased 14,000 warrants
under these offers of recision. The Company reduced additional paid-in
capital by $36,750 as a result of this transaction.
During 1997, the Company issued warrants to two directors to purchase 5,000
and 3,798 shares of common stock at an exercise price of $5.50 per share,
which expire March 14, 2001. The warrants were fully exercisable at the
date of grant.
During 1997, the Company issued warrants to Quantum Capital Corp., d.b.a.
Diversified Capital Markets to purchase 34,950 shares of common stock at an
exercise price of $5.75 per share expiring October 22, 2001 pursuant to an
Underwriting Agreement dated August 28, 1996 pertaining to the Company's
Form SB-1 registration statement. The warrants vest 100% after twelve
months, commencing October 22, 1996.
During 1997, 4,750 shares of the Company's common stock were issued at
$3.00 per share upon exercise of warrants.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for warrants granted. The Company did not recognize any expense
for warrants granted during the year ended April 30, 1997. Had compensation
cost for the warrants granted been determined based on the fair value at
the grant dates for awards under that plan consistent with the method of
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below. The 1997 pro forma amounts include the effect of
the reversal of prior years pro forma net operating losses under SFAS No.
123.
32
<PAGE> 25
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Net income (loss) Pro forma $ 379,887 $ (802,888)
As reported 402,272 (732,915)
Earnings (loss) per share Pro forma 0.12 (0.29)
As reported 0.13 (0.26)
</TABLE>
In determining the pro forma amount of stock-based compensation on a basis
consistent with SFAS No. 123, the fair value of each warrant grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996, respectively: no dividend yield; expected volatility 63.7% for both
years; risk-free interest rate of 6.03% and 6.12%; and expected life of 3.0
years and 5.3 years.
A summary of the status of the Company's warrants as of April 30, 1997 and
1996, respectively; and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- -------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS SHARES PRICE SHARES PRICE
------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 100,367 $ 3.49 90,806 $ 3.25
Granted 43,748 $ 5.70 23,561 $ 4.15
Cancelled/recissioned (14,000) $ 3.00
Exercised (4,750) $ 3.00
Outstanding at end of year 139,365 $ 4.20 100,367 $ 3.49
Warrants exercisable at year-end 104,415 100,367
Weighted-average fair value of
warrants granted during the
year utilizing Black-Scholes
option-pricing model $ 3.15 $ 2.97
</TABLE>
33
<PAGE> 26
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about warrants outstanding at
April 30, 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AT APRIL 30, REMAINING AT APRIL 30,
EXERCISE PRICES 1997 LIFE 1997
<S> <C> <C> <C>
$3.00 43,456 3.8 years 43,456
$3.15 13,561 3.5 years 13,561
$3.50 25,000 1.7 years 25,000
$5.50 18,798 8.4 years 18,798
$5.75 38,550 4.5 years 3,600
------- --------- -------
139,365 4.2 years 104,415
======= ========= =======
</TABLE>
10. STOCK OPTION PLAN:
Effective March 4, 1994, the Company adopted the 1994 Stock Option Plan
(the Plan). The shares that may be issued subject to options granted under
the Plan shall not exceed 275,000 shares in aggregate. The options granted
under the Plan may be designed as incentive stock options or nonqualified
stock options, at the discretion of the committee designated by the Board
of Directors to administer the Plan. The option price for nonqualified
stock options shall not be less than 100% of the fair market value of a
share on the effective date of the grant. The option price for incentive
stock options shall not be less than 110% of the fair market value of a
share on the effective date of the grant. As of April 30, 1997 and 1996, no
options have been granted.
34
<PAGE> 27
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES:
The components of the net deferred tax asset at April 30, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 315,982 $ 430,117
Accrued expenses 26,782 26,600
Other 1,763
Allowance for doubtful accounts 17,480 21,280
------------ -----------
Gross deferred tax assets 362,007 477,997
Deferred tax liabilities:
Property and equipment 134,652 107,818
------------ -----------
Net deferred tax asset before
valuation allowance 227,355 370,179
Valuation allowance (125,383) (370,179)
------------ -----------
Net deferred tax asset $ 101,972 $ 0
============ ===========
</TABLE>
The Company had net operating loss carryforwards of $479,687 and $748,079
at April 30, 1997 and 1996 respectively. These net operating losses expire
November 30, 2007 through April 30, 2011. In addition, the Company had net
operating loss carryforwards available of $398,041 and $431,211 at April
30, 1997 and 1996, respectively, from the purchase of Select, of which
$33,170 is available to deduct each year through April 30, 2009.
A valuation allowance of $125,383 was recorded against the net deferred tax
assets due to the potential uncertainty of their recoverability in future
years. As of April 30, 1996, a valuation allowance had been provided
against the full amount of the net deferred tax asset due to uncertainty
regarding their recoverability at that time.
The Company utilized approximately $301,600 of net operating carryforwards
in fiscal 1997.
35
<PAGE> 28
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
A reconciliation between the statutory federal income tax rate and the
effective income tax on pre-tax earnings follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Statutory income tax rate 34.0% (34.0)%
Local income tax, net of federal
income tax effect 1.1%
Permanent differences 6.6% 2.8%
Adjustments to prior year tax
calculations 3.6%
Reduction in valuation allowance (80.1)%
Increase in valuation allowance 36.0%
Other items, net 3.2% .4%
------------- -----------
Effective income tax rate (31.6)% 5.2%
============= ===========
</TABLE>
12. MANUFACTURING AND OFFICE BUILDING:
On November 27, 1996, the Company entered into an agreement to construct a
50,000 square foot manufacturing and office building. As of April 30, 1997,
the construction of the building was approximately 61% complete.
13. SUPPLIER AGREEMENT:
The Company has an agreement to supply a customer with a product at
specified prices. The agreement is effective July 1, 1994, with an initial
term of three years, expiring on July 1, 1997.
The agreement shall terminate at the end of the initial term if written
notice to terminate is given by either party at least 60 days prior to the
last day of the initial term. Otherwise, following the initial term, the
agreement shall renew and continue from year to year until canceled upon 60
days written notice by either party.
On April 30, 1997, the customer terminated this agreement and requested to
operate on a month to month basis until a new agreement is signed.
14. ROYALTY COMMITMENTS:
As a result of the Select purchase (see Note 7), the Company is required to
pay royalty payments for sales of the Gran'Meres' brand name. The required
payments are the greater of $35,000 or 5% of gross sales for the calendar
years ended December 31, 1995 and 1996, 3% of gross sales for the calendar
years 1997, 1998 and 1999 and 2% of gross sales for the calendar years 2000
through 2016. Accordingly, the Company has accrued $70,479 and $70,000 at
April 30, 1997 and 1996, respectively. After December 31, 1998, the Company
may terminate
36
<PAGE> 29
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
this royalty agreement for a minimum buyout payment of $225,000. As of May
23, 1997, the Company has reached a tentative agreement to return the
rights of the Gran'Meres' brand name to the owners for a payment of
$50,000. Management of the Company believes that accrued expense as of
April 30, 1997 will cover the expense of this payment and the disposition
of existing inventory.
15. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128, establishes standards for computing
and presenting earnings per share (EPS) and supersedes APB Opinion No. 15,
Earnings Per Share (Opinion 15). SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS which excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period.
This statement also requires dual presentation of basic EPS and diluted EPS
on the face of the income statement for all periods presented. Diluted EPS
is computed similarly to fully diluted EPS pursuant to Opinion 15, with
some modifications. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods. Early adoption is not permitted and the statement requires
restatement of all prior EPS data presented after the effective date.
The Company will adopt SFAS No. 128 effective with the issuance of its
third quarter results for the fiscal year ending April 30, 1998. Per share
data calculated in accordance with this pronouncement for the years ended
April 30, 1997 and 1996, are consistent with the current disclosures.
16. CONTINGENCIES:
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. Although amounts with respect to these
proceedings cannot be determined, in the opinion of management, any such
amounts will not have a material adverse effect on the Company's financial
position, liquidity or results of operations.
37
<PAGE> 30
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
17. RELATED-PARTY TRANSACTIONS:
An entity owned by an employee/board member provided services to the
Company related to flight transportation. Expenses incurred from this
entity were approximately $53,000 in 1997 and $46,500 in 1996. No payables
were outstanding as of April 30, 1997, however, $2,870 in payables were
outstanding at April 30, 1996.
18. YEAR 2000 COMPLIANCE:
It is the Company's intention to purchase new application software in
fiscal year end 1998, which will be Year 2000 compliant, as part of its
operational strategy.
38
<PAGE> 31
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 12, 1997 STEARNS & LEMAN, INC.
(Registrant)
/s/ William C. Stearns
---------------------------
William C. Stearns
President, Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: August 12, 1997 /s/ William C. Stearns
---------------------------
William C. Stearns
President, Director
Date: August 12, 1997 /s/ John A. Chuprinko
---------------------------
John A. Chuprinko
Chief Financial Officer
Date: August 12, 1997 /s/ Sally A. Stearns
---------------------------
Sally A. Stearns
Vice President, Director
Date: August 12, 1997 /s/ Frank E. Duval
---------------------------
Frank E. Duval
Director
Date: August 12, 1997 /s/ Carter F. Randolph, Ph.D.
-----------------------------
Carter F. Randolph, Ph.D.
Director
48
