<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, 1997
OR
Transaction report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- ----------------
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COMMISSION FILE NO. 0-21879
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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)
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 December 10, 1997, 3,272,665 common shares, no par value, were
outstanding. Transition Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
BALANCE SHEETS
October 31, 1997 , April 30, 1997 and October 31, 1996
<TABLE>
<CAPTION>
ASSETS OCTOBER 31, APRIL 30, OCTOBER 31,
1997 1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 180,513 $ 730,833 $ 74,186
Trade accounts receivable, net of allowance for doubtful
accounts of $49,512, $46,000 and $46,927 as of
October 31, 1997, April 30, 1997 and October 31, 1996 1,190,934 884,459 1,148,253
Inventory 1,294,425 1,239,671 1,293,843
Prepaid and other 40,748 75,639 73,542
Deferred income taxes 40,523 25,999 45,600
---------- ---------- ----------
Total current assets 2,747,143 2,956,601 2,635,424
---------- ---------- ----------
Property and equipment:
Land 80,848 80,848 74,653
Construction in progress 0 941,199 97,721
Machinery and equipment 1,621,248 1,412,061 1,345,692
Office equipment 348,650 213,140 196,621
Building improvements 91,716 91,716 91,716
Buildings 1,896,356 137,734 137,734
Leasehold improvements 9,434 43,003 43,003
Tooling 66,425 59,344 35,517
Vehicles 36,964 36,964 25,332
---------- ---------- ----------
4,151,641 3,016,009 2,047,989
Less: accumulated depreciation (854,336) (780,538) (689,782)
---------- ---------- ----------
Net property and equipment 3,297,305 2,235,471 1,358,207
---------- ---------- ----------
Goodwill 417,287 441,833 466,379
Cash surrender value of life insurance 34,352 23,611 26,020
Trademarks and patents 4,212 4,560 4,908
Deferred stock offering costs 13,722 83,558
Deferred income taxes 89,594 75,973
Other assets 35,316 42,313 56,427
---------- ---------- ----------
Total assets $6,638,931 $5,780,362 $4,630,923
========== ========== ==========
</TABLE>
CONTINUED
1
<PAGE> 3
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1997 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 722,286 $ 801,672 $1,016,393
Accrued expenses 174,017 239,275 238,123
Current portion of notes payable 49,141 107,842
Current portion of capital lease obligations 6,640 9,827 12,438
Subordinated convertible notes 300,000
---------- ---------- ----------
Total current liabilities 952,084 1,050,774 1,674,796
---------- ---------- ----------
Notes payable, net of current portion 694,642 358,415
Capital lease obligations, net of current portion 2,256 6,640
---------- ---------- ----------
Total long-term liabilities 694,642 2,256 365,055
---------- ---------- ----------
Total liabilities 1,646,726 1,053,030 2,039,851
---------- ---------- ----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized,
3,230,052, 3,230,052 and 2,829,422 issued and 3,226,752,
3,226,752 and 2,826,122 outstanding as of October 31, 1997,
April 30, 1997 and October 31, 1996, respectively 3,563 3,563 3,120
Additional paid-in capital 5,091,920 5,091,920 3,183,347
Accumulated deficit (90,078) (354,951) (582,195)
---------- ---------- ----------
5,005,405 4,740,532 2,604,272
Less treasury shares, at cost (3,300 shares) (13,200) (13,200) (13,200)
---------- ---------- ----------
Total shareholders' equity 4,992,205 4,727,332 2,591,072
---------- ---------- ----------
Total liabilities and shareholders' equity $6,638,931 $5,780,362 $4,630,923
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the three months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $2,491,263 $2,117,080
Cost of sales 1,848,863 1,512,393
---------- ----------
Gross profit 642,400 604,687
Selling, general and administrative expenses 439,664 408,321
---------- ----------
Income from operations 202,736 196,366
---------- ----------
Other income (expense), net:
Interest expense (10,502) (19,161)
Interest income (31) 3,794
Other, net (620) 3,180
---------- ----------
(11,153) (12,187)
---------- ----------
Net income before income tax expense 191,583 184,179
Income tax expense (benefit):
Current 3,500 2,400
Deferred (38,675) (45,600)
---------- ----------
Total income tax expense (benefit) (35,175) (43,200)
---------- ----------
Net income $ 226,758 $ 227,379
========== ==========
Earnings per share $0.07 $0.08
========== ==========
Weighted average shares outstanding 3,226,752 2,826,123
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the six months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $4,400,254 $3,457,718
Cost of sales 3,289,146 2,523,748
---------- ----------
Gross profit 1,111,108 933,970
Selling, general and administrative expenses 867,813 769,576
---------- ----------
Income from operations 243,295 164,394
---------- ----------
Other income (expense), net:
Interest expense (11,590) (38,858)
Interest income 12,043 3,794
Other, net (3,120) 2,498
---------- ----------
(2,667) (32,566)
---------- ----------
Net income before income tax expense 240,628 131,828
Income tax expense (benefit):
Current 3,900 2,400
Deferred (28,145) (45,600)
---------- ----------
Total income tax expense (benefit) (24,245) (43,200)
---------- ----------
Net income $ 264,873 $ 175,028
========== ==========
Earnings per share $ 0.08 $ 0.06
========== ==========
Weighted average shares outstanding 3,226,752 2,825,761
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the year ended April 30, 1997 and the six months ended October 31, 1997
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES SHARES CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
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 shares (95) (664) (664)
Conversion of debentures to
common shares 48,230 53 264,947 265,000
Issuance of common shares 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
Net Income 264,873 264,873
--------- ------ ---------- --------- -------- ----------
Balance at October 31, 1997 3,226,752 $3,563 $5,091,920 ($90,078) ($13,200) $4,992,205
========= ====== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 264,873 $ 175,028
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 10,000 1,569
Depreciation and amortization 140,154 127,066
Loss on the sale of property and equipment 1,571 86
Deferred income taxes (28,145) (45,600)
Changes in assets and liabilities:
Trade accounts receivable (316,475) (565,157)
Inventory (54,754) (161,295)
Prepaid expenses and other 34,891 (24,034)
Accounts payable (146,761) 530,986
Accrued expenses (65,258) 10,078
----------- ---------
Net cash provided by (used in) operating activities (159,904) 48,727
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (1,105,293) (56,331)
Sale of property and equipment 1,000 3,500
Cash surrender value of life insurance, net (10,741) (6,374)
Proceeds from purchase price adjustment 52,746
----------- ---------
Net cash used in investing activities (1,115,034) (6,459)
----------- ---------
Cash flows from financing activities:
Net borrowing under construction loan agreement 750,000
Principal payments on notes payable and capital leases (11,660) (63,456)
Deferred capital stock offering costs (13,722) (33,084)
Net proceeds from issuance of common stock 5,250
----------- ---------
Net cash provided by (used in) financing activities 724,618 (91,290)
----------- ---------
Net decrease in cash and cash equivalents (550,320) (49,022)
Cash and cash equivalents, beginning of year 730,833 123,208
----------- ---------
Cash and cash equivalents, end of period $ 180,513 $ 74,186
=========== =========
</TABLE>
CONTINUED
6
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
for the six months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information:
Progress billings accrued but not paid for:
Construction of manufacturing and office facility $67,375
=======
Cash paid during the period for:
Interest $11,590 $ 38,753
======= ========
Supplemental schedule of noncash financing activities:
Conversion of line of credit to note payable $350,000
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the six months ended October 31,
1997 and 1996 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, 1997 and April 30, 1996. 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. INCOME TAXES:
The components of the net deferred tax asset at October 31, 1997, April
30, 1997 and October 31, 1996 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1997 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $236,176 $ 315,982 $ 430,117
Accrued expenses 7,842 26,782 26,600
Other 1,925 1,763 1,440
Allowance for doubtful accounts 18,815 17,480 17,832
-------- --------- ---------
Gross deferred tax assets 264,758 362,007 475,989
Deferred tax liabilities:
Property and equipment 134,641 134,652 107,708
-------- --------- ---------
Net deferred tax asset before
valuation allowance 130,117 227,355 368,281
Valuation allowance 0 (125,383) (368,281)
-------- --------- ---------
Net deferred tax asset $130,117 $ 101,972 $ 0
-------- --------- ---------
</TABLE>
A valuation allowance of $101,972 as of April 30, 1997 was recorded
against the net deferred tax assets due to the potential uncertainty of
their recoverability in future years. The valuation allowance was
eliminated as of October 31, 1997 as continued profitability has
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
reduced the potential uncertainty of the utilization of net operating
loss carryforwards. As of October 31, 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.
3. RAW MATERIAL AGREEMENT:
On October 7, 1997, the Company signed an agreement with a vendor to
supply certain containers. The term of this agreement is for three
years, commencing with the date of the first shipment of regular
production containers. The cost of the molds used for the production of
these containers, totaling $262,193, has been incorporated into the
purchase price of the containers. Subsequently, the cost of the molds
will be amortized over the term of the agreement. If the quantity of
containers purchased over the term of the agreement is insufficient to
amortize the cost of the molds, the Company is obligated to pay the
unamortized portion at the end of the agreement. As of December 10,
1997 regular production of these containers had not commenced.
4. SUBSEQUENT EVENTS:
On November 25, 1997; 25,000 common shares of the Company were issued
at $3.50 per share upon exercise of warrants, 10,913 common shares of
the Company were issued at $3.15 per share upon exercise of warrants
and 10,000 common shares of the Company were issued at $3.00 per share
upon exercise of warrants. The balance of warrants outstanding at
December 10, 1997 was 93,452 with an exercise price per share ranging
from $3.00 to $5.75 per share. All outstanding warrants are exercisable
at December 10, 1997.
On December 4, 1997, the Company acquired the inventory, equipment,
customers, product formulas, trademarks, and other intangible assets of
Ricter Enterprises, LTD., the manufacturer of the Senza Zucchero and
Senza Rivale(TM) brands of flavoring syrups for $140,000 in cash and a
$120,000 note payable. The Company obtained the cash from a $140,000
note payable to First Knox National Bank payable in eighteen monthly
payments of $7,778 plus interest at a rate of prime plus 0.5%
commencing on January 31, 1997. The $120,000 note payable to Ricter
Enterprises, LTD. is payable in eighteen monthly principal payments,
including interest, of $7,111 commencing July 1, 1999. Interest on the
note to Ricter Enterprises, LTD is payable monthly until June 1, 1999
at a rate of 8.25%.
9
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
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 49
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.,
Borders, Inc., Caribou Coffee Company, 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.
PLAN OF OPERATION
The Company's plans, for the fiscal year ending April 30, 1998, included
increasing market penetration of the DOLCE(R) and The Godiva Chocolatier Cafe'
Godiva brands of flavoring syrups, initiating production of and developing the
market for the DiNATURA(R) premium natural flavored syrups, moving into its new
manufacturing, warehouse and executive office facility, installing a new
manufacturing and business computer system and enhancing revenue growth through
strategic acquisitions.
The Company made several progressive steps toward achieving its plans during the
quarter ended October 31, 1997. On August 22, 1997, the Company signed a letter
of intent to acquire the inventory, equipment, customers, product formulas,
trademarks, and other intangible assets of Ricter Enterprises, LTD. ("Ricter"),
the manufacturer of the Senza Zucchero and Senza Rivale(TM) brands of flavoring
syrups, for $140,000 in cash and a $120,000 note payable. Ricter reported
unaudited
10
<PAGE> 12
sales of $356,000 for the twelve months ended September 30, 1997. The Company
and Ricter completed this transaction on December 4, 1997.
On October 15, 1997, the Company signed a letter of understanding with Cultor
Food Science, Inc. ("Cultor"). This letter of understanding describes the intent
of Cultor to transfer the business and trademark of its SanMarino(TM) brand of
flavoring syrups to the Company in exchange for Cultor becoming the Company's
primary compound flavor supplier. In addition, both the Company and Cultor would
become partners in the development of future products. Both Cultor and the
Company are currently engaged in developing a mutually beneficial agreement
towards these ends. However, no assurance can be made that a final agreement
will be reached.
Also on October 15, 1997, the Company signed a Sales Management Contract with
The Continental Group (TCG) appointing TCG as its consumer retail market master
broker. The principals of TCG have numerous years of experience in the consumer
retail market and it is anticipated that TCG's expertise will revitalize and
broaden sales of the Company's consumer product group.
The Company has continued its efforts to enhance the distribution of the
DOLCE(R) brand of flavoring syrups by entering into master distributor
relationships with large, financially sound organizations that have the
resources to readily market the Company's products, and order and receive
product in larger quantities. As of December 10, 1997, the Company has 9 master
distributors covering 12 states.
In addition, during the quarter ended October 31, 1997, the Company renewed its
agreement to supply Starbucks with product at specified prices. The agreement is
effective September 1, 1997, with an initial term of two years, expiring on
August 31, 1999. The Company also put on indefinite hold its negotiations with
Darden Restaurants Inc. to market The Olive Garden Signature Syrups to the
consumer retail market
The Company's planned DiNATURA(R) premium natural flavored syrups has
encountered delays as a result of the need for additional production line
equipment. The production of the DiNATURA(R) premium natural flavored syrups is
now expected to begin in the fourth quarter of the Company's fiscal year. The
Company anticipates an additional capital expenditure of approximately $89,000
to start production of the DiNATURA(R) premium natural flavored syrups.
The installation of a year 2000 compliant manufacturing and business computer
system started during the month of August 1997. The startup of the general
ledger and accounts payable modules occurred on November 1, 1997 with the
remaining modules to be implemented by the end of the Company's fiscal year.
This system should enable the Company to reduce inventory carrying costs,
improve production planning and customer deliveries and allow significant
improvements in product and customer profitability analysis. The Company
anticipates additional expenditures of approximately $100,000 for additional
computer components and installation costs.
11
<PAGE> 13
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 2ND 1ST 4TH 3RD 2ND
SPECIFIED QUARTERS WITHIN INDICATED QUARTER QUARTER QUARTER QUARTER QUARTER
FISCAL YEARS ("FY") FY 1998 FY 1998 FY 1997 FY 1997 FY 1997
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $2,747,143 $2,555,962 $2,956,601 $3,762,852 $2,635,424
TOTAL ASSETS $6,638,931 $6,187,156 $5,780,362 $5,987,157 $4,630,923
CURRENT LIABILITIES $ 952,084 $1,311,423 $1,050,774 $1,507,068 $1,674,796
LONG TERM DEBT, NET OF CURRENT
PORTION $ 694,642 $ 110,286 $ 2,256 $ 33,309 $ 365,055
TOTAL LIABILITIES $1,646,726 $1,421,709 $1,053,030 $1,540,377 $2,039,851
SHAREHOLDERS' EQUITY $4,992,205 $4,765,447 $4,727,332 $4,446,780 $2,591,072
TOTAL SALES $2,491,263 $1,908,991 $1,888,778 $2,034,609 $2,117,080
COST OF GOODS SOLD $1,848,863 $1,440,283 $1,433,659 $1,475,180 $1,512,394
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES $ 439,664 $ 428,150 $ 412,495 $ 406,794 $ 408,321
NET INCOME $ 226,758 $ 38,115 $ 15,578 $ 211,666 $ 227,379
EARNINGS PER SHARE $ 0.07 $ 0.01 $ 0.00 $ 0.07 $ 0.08
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
- --------------------------------------------------------------------------
Net sales for the three months ended October 31, 1997 and 1996 were $2,491,263
and $2,117,080, respectively, which represents a 17.7% increase. For the three
months ended October 31, 1997, private label sales increased by 16.8% and
DOLCE(R) brand products sales increased by 15.5%, while the net sales of other
Company products increased by 28.1%, all as compared to the three months ended
October 31, 1996. Private label, DOLCE(R) brand products, and other Company
products represented 67.3%, 13.2% and 19.5% of gross sales, respectively, for
the three months ended October 31, 1997. The increase in private label sales was
the result of strong sales growth by several of the Company's private label
customers. DOLCE(R) brand products' sales increased primarily as a result of the
growth in sales to the Company's DOLCE(R) master distributors. The net sales of
other Company products increased primarily due to sales to a large
Flavor-Mate(R) customer that was lost in January 1996 and regained in January
1997 offset with decreased sales of mulling spices and cinnamon sticks.
The increase in sales volume in the three months ended October 31, 1997 combined
with low finished goods inventory as of July 31, 1997 resulted in unexpected
manufacturing inefficiencies during the quarter. The low finished goods
inventory level as of July 31, 1997 was due to lost production time during the
move of the Company's Mansfield, Ohio production lines to its new facility in
the first quarter. The low finished goods inventory level led to smaller than
normal production batches to fill customer orders on a timely basis. In
addition, during the three month
12
<PAGE> 14
period, the Company experienced higher raw material and freight out costs
compared to the same three month period in the previous year. The increase in
freight out costs are associated with the development of the Company's DOLCE(R)
master distributor program. Under this program the Company absorbs the freight
cost on large orders. Subsequently, cost of sales, as a percentage of net sales,
increased to 74.2% for the three months ended October 31, 1997 compared to 71.4%
for same quarter last year. The increase in cost of sales in the three months
ended October 31, 1997 was also the result of increased volume, depreciation,
plant supply costs and utility costs. Cost of sales increased by $336,470 for
the three months ended October 31, 1997 compared to the three months ended
October 31, 1996.
Selling, general and administrative expenses increased by 7.7% or $31,343 for
the three months ended October 31, 1997 compared to the three months ended
October 31, 1996. This increase resulted from increases in trade show
participation and magazine advertising, promotional costs, insurance expense,
bad debt expense, employee benefits, shareholder relations and SEC reporting
expenses. These increases were offset by decreases in legal fees and postage
expense. Selling, general and administrative expenses, as a percentage of net
sales, decreased to 17.6% compared to 19.3% for the three months ended October
31, 1997 and 1996, respectively.
Interest expense for the three months ended October 31, 1997 decreased by $8,659
compared to the three months ended October 31, 1996. The decrease primarily
reflects bank borrowings that were paid in full on November 6, 1996 and current
year borrowings occurring late in the quarter.
The Company recorded a deferred income tax benefit of $38,675 and current income
tax expense of $3,500 for the three months ended October 31, 1997. This deferred
income tax benefit is a result of a reversal of the remaining portion of the
Company's deferred income tax valuation allowance. For the three months ended
October 31, 1996, the Company recorded a deferred income tax benefit of $45,600
and current income tax expense of $2,400. The deferred income tax benefit was a
result of a reversal of a large portion of the Company's deferred income tax
valuation allowance.
As a result of the foregoing, the Company reported net income of $226,758, or
$0.07 per weighted average number of the common shares of the Company (the
"Common Shares") outstanding, for the three months ended October 31, 1997
compared to net income of $227,379, or $0.08 per weighted average number of
Common Shares outstanding, for the three months ended October 31, 1996. The
weighted average number of Common Shares outstanding increased to 3,226,752 for
the current three month period compared to 2,826,123 for the comparable three
month period last year. The increase primarily reflects increased shares
outstanding as a result of the Company's Common Share offering, warrants
exercised and conversion of subordinated debt into Common Shares.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1997 AND 1996
- ------------------------------------------------------------------------
Net sales for the six months ended October 31, 1997 and 1996 were $4,400,254 and
$3,457,718, respectively, which represents a 27.3% increase. For the six months
ended October 31, 1997, private label sales increased by 36% and DOLCE(R) brand
products sales increased by 5.1%, while the net sales of other Company products
increased by 9.5%, all as compared to the six months ended October 31, 1996.
Private label, DOLCE(R) brand products, and other Company products represented
13
<PAGE> 15
72.9%, 14.1% and 13% of gross sales, respectively, for the six months ended
October 31, 1997. The increase in private label sales was the result of strong
sales growth by several of the Company's private label customers. DOLCE(R) brand
products' sales increased primarily as a result of second quarter growth in
sales to the Company's DOLCE(R) master distributors. The growth in DOLCE(R)
brand products' sales was lower than expected due to the slower than expected
development of the DOLCE(R) master distributor program. The net sales of other
Company products increased primarily due to sales to a large Flavor-Mate(R)
customer that was lost in January, 1996 and regained in January 1997 offset with
decreased sales in most of the other products within the consumer retail group.
The increase in sales volume in the six months ended October 31, 1997
accentuated manufacturing inefficiencies described above. Subsequently,
anticipated reduction in operating expenses did not offset increased
depreciation and utility expenses associated with the new facility. In addition,
during the six month period, the Company experienced previously described higher
material and freight out costs compared to the same six month period in the
previous year. The cost of sales, as a percentage of net sales, increased to
74.7% compared to 73.0% for the six months ended October 31, 1997 and 1996,
respectively. The increase in cost of sales in the six months ended October 31,
1997 was also the result of increased volume, maintenance expense and plant
supply costs. Cost of sales increased by $765,398 for the six months ended
October 31, 1997 compared to the six months ended October 31, 1996.
Selling, general and administrative expenses increased by 12.8% or $98,237 for
the six months ended October 31, 1997 compared to the six months ended October
31, 1996. This increase resulted from increases in trade show participation and
magazine advertising, insurance expense, bad debt expense, employee benefits,
shareholder relations and SEC reporting expenses. These increases were offset by
decreases in legal fees and postage expense. Selling, general and administrative
expenses, as a percentage of net sales, decreased to 19.7% compared to 22.3% for
the six months ended October 31, 1997 and 1996, respectively.
Interest expense for the six months ended October 31, 1997 decreased by $27,268
compared to the six months ended October 31, 1996. The decrease primarily
reflects bank borrowings that were paid in full on November 6, 1996 and current
year borrowings occurring late in the six month period.
The Company recorded a deferred income tax benefit of $28,145 and current income
tax expense of $3,900 for the six months ended October 31, 1997. This deferred
income tax benefit is a result the reversal of the remaining portion of the
Company's deferred income tax valuation allowance. For the six months ended
October 31, 1996, the Company recorded a deferred income tax benefit of $45,600
and current income tax expense of $2,400. The deferred income tax benefit was a
result of a reversal of a large portion of the Company's deferred income tax
valuation allowance.
As a result of the foregoing, the Company reported net income of $264,873, or
$0.08 per weighted average number of the Common Shares outstanding, for the six
months ended October 31, 1997 compared to net income of $175,028, or $0.06 per
weighted average number of Common Shares outstanding, for the six months ended
October 31, 1996. The weighted average number of Common Shares outstanding
increased to 3,226,752 for the current six month period compared to 2,825,761
for the comparable six month period last year. The increase primarily reflects
increased shares
14
<PAGE> 16
outstanding as a result of the Company's Common Share offering, warrants
exercised and conversion of subordinated debt into Common Shares.
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 shareholders 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 year ended April 30,
1997 and for the six months ended October 31, 1997 and 1996, are consistent with
the current disclosures.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On October 31, 1997, the Company's working capital was $1,780,184 with a working
capital ratio of 2.87 to 1. The working capital and working capital ratio for
the quarters ended July 31, 1997, April 30, 1997, January 31, 1997, October 31,
1996, and April 30, 1996 were $1,244,539 and 1.95 to 1, $1,905,827 and 2.81 to
1, $2,255,784 and 2.50 to 1, $1,960,628, and 1.57 to 1, and $472,186 and 1.33 to
1, respectively. The decrease in working capital for the six months ended
October 31, 1997 was primarily a result of the Company's construction of its new
manufacturing, warehouse and executive office facility in Mansfield, Ohio offset
partially by a mortgage note payable to First Knox National Bank ("First Knox").
The Company's operating activities, for the six months ended October 31, 1997,
used net cash of $159,904. The Company used $1,105,293 to acquire equipment and
to construct a new manufacturing and office facility in Mansfield, Ohio. The
Company also increased its investment in life insurance policies by $10,741, and
used $11,660 to make principal payments on a mortgage note payable and capital
leases. The Company received $750,000 from borrowing under a mortgage note
payable and $1,000 from the sale of equipment. The Company also paid $13,722 in
deferred offering costs. These costs are be netted against $151,876 in cash
received on November 25, 1997 on the exercise of warrants by certain warrant
holders associated with the Company's filing of a Post-Effective Amendment to
its Registration Statement on Form SB-1. Consequently, during this period, cash
and cash equivalents decreased $550,320. The Company expects future operating
activities to continue to provide cash for investing and financing activities.
However, this cash may be insufficient to meet the Company's possible investing
and financing activities.
15
<PAGE> 17
The Company on December 2, 1997 renewed its $400,000 line of credit with First
Knox for a one year period with the same terms as its previous line of credit
with First Knox. As of December 10, 1997, there was no outstanding balance on
this line of credit.
In addition on December 4, 1997, the Company borrowed $140,098 on a note payable
from First Knox and $120,000 from Ricter associated with its transaction with
Ricter. The note from First Knox is payable in eighteen monthly principal
payments plus interest at a rate of prime plus 0.5% commencing on January 31,
1997. The note from Ricter is payable in eighteen monthly principal payments
plus interest at a rate of 8.25% commencing July 1, 1999. Interest on the note
from Ricter is payable monthly from December 4, 1997 until June 1, 1999 at a
rate of 8.25%.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(A) None
(B) None
(C) 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
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit #10(a) - SALES AGREEMENT with supplier dated October 7, 1997
Exhibit #10(b) - SALES MANAGEMENT CONTRACT dated October 15, 1997
Exhibit #27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
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 15, 1997 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)
<PAGE> 1
Exhibit 10(a)
SALES AGREEMENT
THIS AGREEMENT, dated this 7th day of October 1997, and entered into by
and between PLASTIPAK PACKAGING, INC., a corporation, having an office at 9135
General Court, Plymouth, Michigan 48170 (hereinafter referred to as "Seller"),
and STEARNS & LEHMAN, INC., 30 Paragon Pkwy., Mansfield, Ohio 44903, and/or its
successors (hereinafter referred to as"Buyer").
IN CONSIDERATION of the mutual promises hereinafter set forth, THE
PARTIES HERETO AGREE AS FOLLOWS:
1. Buyer agrees to purchase from Seller its total requirements of
375 ML and 750 ML OPET wine-style containers.
2. The initial term of this Agreement shall be for three (3)
years commencing with the date of first regular production
bottle shipments. This Agreement shall be automatically
extended on a year-to-year basis unless and/or until
terminated by either party sending written notice to the other
party, ninety (90) days in advance of the expiration date.
ESTIMATED ANNUAL BOTTLE REQUIREMENTS
375 ML 326,000 Annually
750 ML 1,300,000 Annually
Blowmolds used for the production of Seller's bottles as covered by
this Agreement will be at the expense of the Seller, the total cost of
$262,192.50 being recovered over three (3) years (to be included in the
total delivered price of the bottles). Such molds of the Seller shall
be used exclusively for the business of the Buyer during this Agreement
unless otherwise approved by the Buyer. Seller agrees to maintain molds
during the term of this Agreement and provide reasonable protection
against loss due to fire, theft, and similar casualty. Seller will be
responsible for providing molds that will produce bottles that meet
mutually agreed upon specifications.
Within ninety (90) days of the end of the initial three-year contract
period, the actual number of units purchased is to be reviewed and
confirmed by both parties. If the original forecasted volume of
4,878,000 bottles (the above estimated annual bottle requirements for
both 375 ml and 750 ml bottles taken over the initial three year
period) has not been purchased, Buyer agrees to pay Seller in full for
the total unrecovered cost of the molds stated above (due to the
purchase shortfall of bottles from the above estimates at $53.75/M) in
three equal monthly installments to be paid within ninety (90) days
after the last date of the initial three-year contract period. Upon
payment in full, Buyer will own the above referenced blow molds.
3. Quantity pricing listed for the bottles as outlined below is
based on Buyer's estimated annual requirement forecast of
326,000 375 ml and 1,300,000 750 ml and is firm (based on
costs as of June 9, 1997) for the first year with the
exception of PET
Page 1 of 3
<PAGE> 2
material and packaging supplies (labels, corrugated, etc.).
Any changes in the cost of these items will be passed on to
the Buyer with 30 day written notification.
375 ML, 32 gram clear OPET wine-style bottle with
28/400mm neck finish, bulk palletized in 410 pack
customer provided tier sheets.
<TABLE>
<S> <C>
FOB Plastipak Plant $163.48/M
Delivered to Mansfield, OH (Freight:$1.24/M) $164.72/M
Delivered to Kent, WA (Freight: $22.17/M) $185.65/M
</TABLE>
750 ML, 47 gram clear OPET wine-style bottle with
28/400mm neck finish, bulk palletized in 216 pack
customer provided tier sheets.
<TABLE>
<S> <C>
FOB Plastipak Plant $212.76/M
Delivered to Mansfield, OH (Freight: $2.10/M) $214.86/M
Delivered to Kent, WA (Freight: $37.58/M) $250.34/M
</TABLE>
Delivered prices apply to truckload quantities only (loads may be
mixed). In order to be competitive with regard to freight, the method
of shipment for loads from Medina, OH to Kent, WA will be intermodal or
by similar method. Thus, sufficient lead time will be provided to
Seller when issuing releases for shipments to Kent. If another method
of shipment is requested by Buyer, an upcharge based on actual cost
will apply and be passed on to the Buyer.
Upon reasonable notification from the Buyer, Seller agrees to warehouse
up to one full truckload of 750ML bottles and one-half truckload of 375
ML bottles on the floor throughout the contract period based on Buyer's
reasonable forecasts.
New trays will be provided by Buyer to Seller on a backhaul basis. No
used trays will be backhauled to Seller. Pal lets are to be provided by
Buyer to Seller for shipments to be sent by Seller to Mansfield and
Kent. Seller will deliver bottles on standard GMA 4-way entry #1
hardwood pallets only; such pal lets will be provided by Buyer and
supplied to Seller on a timely basis.
Payment terms are net thirty (30) days from receipt of invoice. Buyer
agrees to pay an interest charge of 1-1/2% per month for all payments
that are not paid within 45 days of the date of invoice. Additionally,
if Buyer fails to pay an invoice when due, Seller may suspend further
delivery until all past-due indebtedness of Buyer has been paid in full
and, if the default in payment continues thirty (45) days or more,
Seller may immediately terminate this Agreement. Seller will not be
liable for any delays or failures in delivery due to circumstances
beyond its reasonable control. Buyer will not be liable for delays in
the delivery of timely payments due to delivery circumstances beyond
Buyer's reasonable control (e.g., mail strikes). If in the reasonable
opinion of Seller the credit of Buyer becomes impaired so that buyer
cannot or will not pay its bills when due, Seller may at any time
suspend further deliveries except for cash in advance.
Page 2 of 3
<PAGE> 3
Any change in the mutually agreed specifications for corrugated and/or
packaging that results in an increase or decrease in the above costs
will be passed on to Buyer with container production utilizing the new
specified components.
4. Material cost adjustment will be based on the following:
Resin Escalator/De-escalator
----------------------------
375 ML Bottle price will be adjusted by $.80/M for each
$.01/1b. change in PET resin pricing.
750 ML Bottle price will be adjusted by $1.18!M for each
$.01/lb. change in PET resin pricing.
Gram Weight Change
------------------
Bottle price will be adjusted by $1.35/M for each
one gram change in bottle weight.
5. Seller has right of first refusal to supply any alternative
package either in size or design that may replace or adversely
affect the volume of items to be purchased by the Buyer under
this Agreement.
6. The rights and duties under this Agreement are not assignable
or delagable by either party without the other party's prior
written consent which will not be unreasonably withheld;
except that the rights and duties under this Agreement shall
inure to the benefit of the heirs, successors or permitted
assigns of this Agreement. In addition, any sale by Buyer of
all or a portion of the business to which this Sales Agreement
refers, requires an assignment and acceptance by the intended
purchaser of such business.
7. This Agreement may not be modified except by a writing signed
by a duly authorized representative of both parities.
8. Waiver by either party of nonperformance or any breach of this
Agreement shall not be deemed to constitute a waiver for any
future nonperformance or other breach of the same or any other
provision.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the 7th day of
October, 1997.
STEARNS & LEHMAN, INC. PLASTIPAK PACKAGING, INC.
By: /s/ John A. Chuprinko By: /s/ J. Ronald Overbeck
---------------------------- ----------------------------
Title: Chief Financial Officer Title: Vice President
------------------------- -------------------------
Date: October 2, 1997 Date: October 7, 1997
------------------------- -------------------------
Page 3 of 3
<PAGE> 1
Exhibit 10(b)
SALES MANAGEMENT CONTRACT
This contract, effective 11/01/97, is made this October 15th, 1997 between
Steams & Lehman, Inc. (Manufacturer) and The Continental Group (TCG).
In consideration of the premises and mutual understandings herein contained, the
manufacturer and TCG agree as follows:
1. All sales negotiations by TCG for the account of the manufacturer will be
conducted in accordance with the prices, terms and conditions specified by the
manufacturer.
2. TCG will appoint and/or manage brokers in all ageed upon geographical areas.
The manufacturer will give final approval on all broker appointments.
3. The manufacturer has the right to make its own independent evaluation
concerning the financial condition of the prospective customer in deciding
whether or not to sell products to the prospective customer. TCG is not
responsible for the collection of unpaid invoices to the manufacturer, however,
will utilize all conscientious efforts through responsible broker to collect
unpaid invoices.
4. TCG will act as an agent for the manufacturer. Neither TCG nor its employees
shall be considered employees of the manufacturer. Neither party shall in any
event be held liable or accountable for any obligations incurred by either party
other than as specified in this contract. It is specifically understood that the
respective businesses of each of the parties will be operated separate and apart
from each other.
5. The manufacturer agrees to protect, defend, hold harmless, and indemnify TCG
from and against any and all claims, actions, liabilities, losses, costs, and
expenses arising out of any actual or alleged death, injury, sickness or disease
of any person, damage to any property or any other damage or loss, by whomever
suffered, resulting, or claimed result, in whole or in part, from any actual or
alleged defect in any products sold by the manufacturer through TCG in such
transaction. The term "defect in any products" as used in this agreement, shall
include, but not be limited to, any actual or alleged failure of said products
to comply with specifications, or with any express or implied warranty of the
seller, or arising out of any actual or alleged violation by such products, its
manufacture, possession, or sale, of any law, statute, ordinance or governmental
order, rule or regulations.
6. Stearns & Lehman, Inc. shall pay services herein by TCG, a monthly fee of
$1,000 per month, paid in two installments of $500.00 on the 15th and 30th of
the month, beginning November 15th, 1997. In additiona, TCG will be paid a
commission of 2% for all paid new branded business, defmed as increased dollar
amounts over the same time period of previous year as detailed in Schedule A,
and 3% on all paid new private label business generated by TCG.
Page 1 of 3
<PAGE> 2
Contract
Page Two
7. Specific geographical contracts will be made between the manufacturer and the
appointed broker for that area. It will be the responsibility of the
manufacturer to pay brokerage to all appointed brokers.
8. This contract contains the entire agreement between the manufacturer and TCG
with respect to the subject matter contained in this contract and supersedes any
prior negotiations, agreements or understandings.
9. This agreement will be construed in accordance with and governed by the law
of the State of Ohio.
10. Following the 180 day trial period (Nov. 1 - April 30, 1998), this agreement
will continue in effect from year to year. The agreement can only be terminated
with ninety (90) days written notice.
In witness whereof, the parties hereto have executed this contract as of the day
and year first written above.
By: /s/ Phyllis Thomas Stearns & Lehman, Inc.
------------------------------
Title: National Sales Manager
By: /s/ Priscella Berndt The Continental Group
------------------------------
Title: Partner
Page 2 of 3
<PAGE> 3
EXHIBIT A
----------
PRINCIPAL: STEARNS & LEHMAN
- ----------
PRODUCTS: Flavor-Mate Beverage Flavors
- --------- Flavor-Mate Syrups, Granitas
Senza Syrups when owned bv S & L
San Marino Syrups when owned by S & L
Grandma's Choice Extracts & Flavorings
Soph Nibbles Dip Mixes
My Hero Submarine Dressings
TERRITORY: NATIONALLY
- ----------
----------
CLASSES OF TRADE: DSD Distributors ** and others as per agreement
- -----------------
** otherwise defined as Supermarket Distributors
----------
By: /s/ Phyllis Thomas Stearns & Lehman, Inc.
------------------------------
Title: National Sales Manager
By: /s/ Priscella Berndt The Continental Group
------------------------------
Title: Partner
Page 3 of 3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<CASH> 180,513
<SECURITIES> 0
<RECEIVABLES> 1,240,446
<ALLOWANCES> (49,512)
<INVENTORY> 1,294,425
<CURRENT-ASSETS> 2,747,143
<PP&E> 4,151,641
<DEPRECIATION> (854,336)
<TOTAL-ASSETS> 6,638,931
<CURRENT-LIABILITIES> 952,084
<BONDS> 694,642
0
0
<COMMON> 3,563
<OTHER-SE> 4,988,642
<TOTAL-LIABILITY-AND-EQUITY> 6,591,167
<SALES> 4,400,254
<TOTAL-REVENUES> 4,412,297
<CGS> 3,289,146
<TOTAL-COSTS> 4,150,079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 11,590
<INCOME-PRETAX> 240,628
<INCOME-TAX> (24,245)
<INCOME-CONTINUING> 264,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264,873
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
