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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
- ----- For the fiscal year ended April 30, 1998
TRANSITION 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)
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)
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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: $9,242,530
State the aggregate market value of the voting common stock, no par value, held
by non-affiliates computed by reference to the average bid and asked price of
such stock as of July 27, 1998: $6,773,823
As of July 15, 1998, 3,285,865 shares of common stock, no par value, were
outstanding.
Documents incorporated by reference: NONE.
Transition Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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, Israel, 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 51
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 and
Caribou Coffee Company. 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. On September 1, 1997, the Company and Starbucks renewed such agreement.
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. 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. On December
4, 1997, the Company acquired 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. On January 16, 1998, the Company acquired the San Marino
Flavored Syrup product line as part of a Marketing and Development Agreement
entered into with Cultor Food Science, Inc. ("Cultor").
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 eight different product lines. The DOLCE(R)brand
product line consists of 38 flavors, all certified Kosher by the Orthodox
Union(R), 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. DiNATURA(TM)premium natural
flavored brand will consist of 24 flavors in two sizes when in full production.
The Godiva Chocolatier Cafe' Godiva(R)brand name consists of four specialty
chocolate flavors in three sizes. Both the DiNATURA(TM)(see "DESCRIPTION OF
BUSINESS-Status of New Products"), and the Godiva Chocolatier Cafe'
Godiva(R)brands are for distribution to the specialty coffee and the food
service industries. The SENZA RIVALE(TM)brand consists of 35 flavors and the
SENZA ZUCCHERO brand consists of 14 sugar free flavors. The SENZA brands are
distributed through supermarkets, specialty food stores and the food service
industry. With the acquisition of the SENZA brand, the FLAVOR-MATE(R)brand along
with SAN MARINO FLAVORED SYRUPS brands have been converted to private label
brands for certain customers. The Company also manufactures private label
flavoring syrups for distribution direct to the private label customer. The
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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, 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 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 the DiNATURA(TM) product line in fiscal year 1997.
Since that time, the Company increased the number of DiNATURA(TM) flavors and
has encountered many other development delays. Production of the initial flavors
of the DiNATURA(TM) premium natural flavored syrups finally began on July 20,
1998. Development costs for DiNATURA(TM) were approximately $62,000 and $23,000
for the fiscal years ended April 30, 1998 and 1997 respectively. The Company
anticipates additional capital expenditures of approximately $95,000 to complete
production development of the DiNATURA(TM) premium natural flavored syrups.
PATENTS, TRADEMARKS AND LICENSES
The Company has obtained federal trademark protection for its DOLCE(R) and
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),
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LIMITED HARVEST(R), and GIFT OF BRAN(R). The Company is in the process of
obtaining federal trademark protection for its DiNATURA(TM) products and the
recently acquired SENZA RIVALE(TM) trademark. 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. 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, Israel,
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 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.
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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 currently 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. As part of a Marketing and Development Agreement with Cultor, the
Company has agreed to Cultor being a primary supplier of flavoring material if
Cultor can meet the Company's technical and flavor specifications at a
competitive price. 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 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.
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DEPENDENCE ON MAJOR CUSTOMERS
For the fiscal years ended April 30, 1998 and 1997, Starbucks represented 35%
and 27% of the Company's total sales, respectively. In addition, for the fiscal
years ended April 30, 1998 and 1997, Starbucks represented 69% and 75% of the
sales from the Company's Kent, Washington facility, respectively. The Company's
eight major customers represent approximately 65% and 57% of the Company's total
sales, respectively, for the fiscal years ended April 30, 1998 and 1997.
However, other than Starbucks, no other customer exceeded 8% of the Company's
total sales in fiscal year 1998 or 1997.
If the Company lost the Starbucks' business, the current estimated reduction in
net income before taxes would be approximately $750,000. The loss in revenue
would be 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 14% of the Company's non-
Starbucks business is serviced from this facility, the potential impact of this
closure would be minimal.
The Company has a written supply agreement through August 31, 1999 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 does not match a lower price from a competitor.
OPERATIONS AND MANAGEMENT/EMPLOYEES
As of July 15, 1998, the Company employed 51 people, all of which are full-time
employees. None of the employees are 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 April 30, 1998, 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 shares of the Company") 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 manufacturing 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 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.
ITEM 2. DESCRIPTION OF PROPERTY
EXECUTIVE OFFICE, MIDWEST MANUFACTURING AND WAREHOUSE FACILITY
As of August 16, 1997, the Company moved into a new 50,000 square foot facility,
located at 30 Paragon Parkway in Mansfield, Ohio. This facility, costing
approximately $1,824,000, will serve as the Company's executive offices and the
eastern United States manufacturing and warehouse facility. In addition to this
facility, the Company owns a 12,600 square foot building at 64 Surrey Road in
Mansfield, Ohio. This building is used for additional warehouse and storage
space. The Company owns the Surrey Road building clear of debt and has a
$750,000 mortgage note payable on the new facility.
WESTERN UNITED STATES MANUFACTURING AND WAREHOUSE FACILITY
In March, 1998, the Company renewed, for five years starting June 1, 1998, a
lease for a 18,000 square foot warehousing and manufacturing facility in Kent,
Washington outside of Seattle. This facility is comprised of 12,000 square feet
of warehouse space and 6,000 square feet of manufacturing space. The Company has
installed over $200,000 of automated manufacturing equipment in this facility.
The facility enables the Company to better serve its west coast customers and
provides increased manufacturing capacity. The base rent for this facility
averages to $7,516.20
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per month for the five year period. In addition to base rent, the Company is
responsible for real estate taxes and operating fees which, collectively,
averaged $2,002.00 per month during the fiscal year ended April 30, 1998. The
Company is also required to maintain public liability insurance.
EQUIPMENT AND ADEQUACY OF FACILITIES
The Company owns substantially all of the equipment at its executive offices and
manufacturing and warehouse facilities. This includes five automated production
lines. Four of these lines are located in Mansfield, Ohio with another located
at the Kent, Washington facility. Both the new Mansfield, Ohio and the Kent,
Washington facilities have space for an additional automated production line.
The Company believes that its facilities are adequate for its current and
anticipated needs and are adequately covered by insurance.
NOTES PAYABLE
The Company issued a $750,000 mortgage note payable to First Knox National Bank
("First Knox") collateralized by the real estate located at 30 Paragon Parkway
Road in Mansfield, Ohio and by substantially all the assets of the Company.
Construction of the Company's new facility was substantially completed on August
16, 1997. The mortgage note is payable in monthly installments of $9,652.28,
including variable interest at a rate of 9.25%. Final payment will be due on
July 2, 2007. The interest rate cannot change more than once every year and is
based upon 0.75% over the Wall Street Journal Prime rate. On December 4, 1997,
the Company borrowed $140,098 on a note payable from First Knox payable in
eighteen monthly principal payments plus interest at a rate of prime plus 0.5%
commencing on January 31, 1997. The Wall Street Journal Prime rate as of July
15, 1998 was 8.5%. Pursuant to the terms of this note, all tangible property
must be fully insured. The financial covenants and ratios imposed by First Knox
with respect to such notes are as follows:
The Company must maintain (i) a minimum Tangible Net Worth of not less than
$3,500,000.00, (ii) Working Capital in excess of $500,000.00, (iii) a ratio of
Liquid Assets to current liabilities in excess of 0.60 to 1.00 and (iv) a ratio
of current assets to current liabilities in excess of 1.45 to 1.00.
The term 'Tangible Net Worth" means the Company's total assets excluding all
intangible assets (i.e., goodwill, trademarks, patents, copyrights,
organizational expenses and similar intangible items, but including leaseholds
and leasehold improvements) less total Debt. The term "Debt" means all of the
Company's liabilities excluding Subordinated Debt. The term "Subordinated Debt"
means indebtedness and liabilities of the Company which have been subordinated
by written agreement to indebtedness owed by the Company to the Lender in form
and substance acceptable to the Lender. The term 'Working Capital" means the
Company's current assets, less the Company's current liabilities. The term
"Liquid Assets" means the Company's accounts receivable plus cash on hand plus
the Company's readily marketable securities. Except as provided above, all
computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with accounting principles acceptable
to the Lender, applied on a consistent basis, and certified by the Company as
being true and correct.
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On December 4, 1997, the Company borrowed $120,000 from Ricter in connection
with the Company's acquisition of Ricter's inventory, equipment, customers,
product formulas, trademarks and other intangible assets. The note from Ricter
is payable in eighteen monthly principal payments commencing July 1, 1999.
Interest on the note is payable monthly from December 4, 1997 at a rate of
8.25%.
ITEM 3. LEGAL PROCEEDINGS
Except for litigation which may arise in connection with any of the foregoing
matters, the Company is not engaged in any material litigation other than
litigation arising in the ordinary course of business, none of which the Company
believes would have a materially adverse affect on the Company or its business
in the event of an unfavorable outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Prior to January, 1995, the common shares of the Company (the "Common Stock")
were traded only by a single market maker and did not have an NASD inter-dealer
transaction price. From that date until December 17, 1996, the common shares of
the Company were traded in the over-the-counter market. Since December 17, 1996,
the common shares have been traded on The NASDAQ SmallCap Market tier of the
NASDAQ Stock MarketSM under the symbol "SLHN." As of July 15, 1998, the Company
had seven listed market makers. The following table sets forth the high and low
sales prices of the common shares of the Company as reported by The Nasdaq Stock
Market(R):
Quarter Ended April 30, 1998 High $5.75 Low $4.00
Quarter Ended January 31, 1998 High $6.25 Low $4.625
Quarter Ended October 31, 1997 High $6.375 Low $5.00
Quarter Ended July 31, 1997 High $6.625 Low $4.75
Quarter Ended April 30, 1997 High $7.50 Low $6.00
Period of December 17, 1996 High $7.25 Low $6.00
thru January 31, 1997
The following table sets forth the actual NASD inter-dealer transaction prices
for the Common Stock for the previous fiscal quarters as reported by Bloomberg
L.P.:
Period of November 1, 1996 High $6.50 Low $5.00
thru December 16, 1997
Quarter Ended October 31, 1996 High $5.50 Low $4.75
Quarter Ended July 31, 1996 High $5.50 Low $4.75
Quarter Ended April 30, 1996 High $7.00 Low $5.00
Quarter Ended January 31, 1996 High $7.50 Low $6.00
Quarter Ended October 31, 1995 High $7.25 Low $5.00
Quarter Ended July 31, 1995 High $4.375 Low $4.00
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HOLDERS
At June 30, 1998, the approximate number of holders of record of shares of
Common Stock was 780.
DIVIDENDS
The Company has not paid any cash dividends during the last two fiscal years
ended April 30, 1998 and 1997 and has no present intention of paying dividends.
The Company cannot, without written prior consent of First Knox, pay any
dividends on the Common Stock.
ITEM 6: 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.
PLAN OF OPERATION
The Company's plans, for the fiscal year ended April 30, 1999, are primarily a
continuation of endeavors initiated in the fiscal year ended April 30, 1998.
While private label syrup sales continue to be the backbone of the Company's
business, efforts continue to strengthen the market penetration of the DOLCE(R)
and The Godiva Chocolatier Cafe' Godiva brands of specialty chocolate flavored
flavoring syrups. In addition, with the start of production of the DiNATURA(R)
premium natural flavored syrups, the Company anticipates a favorable market
impact in the premium niche of the flavoring syrup market. The Company also
plans to continue its efforts to enhance revenue growth through strategic
acquisitions.
Specifically, the Company's plans for the DOLCE(R) brand of flavoring syrups
call for continued growth in the distribution network through the addition of
master distributors. Master distributors typically are large, financially sound
organizations that have the resources to readily market the Company's products
and order and receive product in larger quantities. The larger order quantities
decrease freight costs per product unit. Because of the additional market
presence provided by the master distributors, the Company is able to be a
stronger competitor in the national market.
The Company's view is that the flavoring syrup market is weak in brand name
recognition. As a result, the Company initiated efforts to obtain partnering
arrangements that enhance the brand name recognition of its products. Currently,
the Company has an agreement with Godiva Chocolatier, Inc. for the use of the
Godiva Chocolatier Cafe' Godiva brand name and recently initiated an advertising
campaign to market this product line. The Company believes that the Godiva brand
name will encourage new consumers to use the product and subsequently strengthen
retail sales.
11
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The Company's DiNATURA(R) premium natural flavored syrups will round out the
Company's flavoring syrup line. This product, intended to be the "best in the
class", will enable the Company to cover all segments of the flavoring syrup
market. It is anticipated that this product line coverage will eliminate the
need for distribution channels to handle products from competitors.
The Company moved into its new manufacturing, warehouse and executive office
facility in Mansfield, Ohio in August 1997 and the Company continues to develop
new methods and procedures to maximize efficiencies in the production and
shipment of its products. The installation of a year 2000 compliant
sophisticated manufacturing and business computer system is underway. Currently
all the financial and accounting modules have been implemented and efforts are
underway to install the manufacturing modules. The plans call for complete
implementation by April 30, 1999. When the system is fully implemented, the
Company anticipates a reduction in inventory carrying costs, improved production
planning and customer deliveries and significant improvements in product and
customer profitability analysis.
The Company's plans also include evaluating and proceeding with strategic
acquisitions to enhance revenue growth. The Company is looking for acquisitions
that will add volume to its existing product lines or that will compliment its
existing product lines. For the year ended April 30, 1998 the Company made two
acquisitions that added volume to existing product lines and as of July 15,
1998, the Company is involved in the search process for additional acquisitions.
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 3,556,309 $ 2,956,601 $ 1,889,929 $ 2,567,618
TOTAL ASSETS $ 7,514,201 $ 5,780,362 $ 3,973,037 $ 4,211,961
CURRENT LIABILITIES $ 1,156,514 $ 1,050,774 $ 1,417,743 $ 924,388
LONG TERM DEBT, NET OF CURRENT $ 802,353 $ 2,256 $ 144,500 $ 408,355
PORTION
TOTAL LIABILITIES $ 2,010,146 $ 1,053,030 $ 1,562,243 $ 1,332,743
SHAREHOLDERS' EQUITY $ 5,504,055 $ 4,727,332 $ 2,410,794 $ 2,879,218
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 9,242,530 $ 7,381,105 $ 5,514,753 $ 5,557,469
COST OF GOODS SOLD $ 6,613,046 $ 5,432,588 $ 4,343,803 $ 3,935,180
SELLING, GENERAL AND $ 1,758,667 $ 1,588,865 $ 1,774,118 $ 1,359,406
ADMINISTRATIVE EXPENSES
NET INCOME (LOSS) $ 659,716 $ 402,272 $ (732,915) $ 156,718
BASIC AND DILUTED EARNINGS (LOSS) $ 0.20 $ 0.13 $ (0.26) $ 0.06
PER SHARE
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
YEAR ENDED APRIL 30, 1998
BALANCE SHEET:
<S> <C> <C> <C> <C>
CURRENT ASSETS $ 3,556,309 $ 3,181,291 $ 2,747,143 $ 2,555,962
TOTAL ASSETS $ 7,514,201 $ 7,220,671 $ 6,638,931 $ 6,187,156
CURRENT LIABILITIES $ 1,156,514 $ 1,123,000 $ 952,084 $ 1,311,423
LONG TERM DEBT, NET OF CURRENT $ 802,353 $ 840,524 $ 694,642 $ 110,286
PORTION
TOTAL LIABILITIES $ 2,010,146 $ 1,963,524 $ 1,646,726 $ 1,421,709
SHAREHOLDERS' EQUITY $ 5,504,055 $ 5,257,147 $ 4,992,205 $ 4,765,447
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 2,409,321 $ 2,432,955 $ 2,491,263 $ 1,908,991
COST OF GOODS SOLD $ 1,519,009 $ 1,804,891 $ 1,848,863 $ 1,440,283
SELLING, GENERAL AND $ 479,484 $ 411,369 $ 439,664 $ 428,150
ADMINISTRATIVE EXPENSES
NET INCOME $ 246,908 $ 147,935 $ 226,758 $ 38,115
BASIC AND DILUTED EARNINGS $ 0.08 $ 0.05 $ 0.07 $ 0.01
PER SHARE
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
YEAR ENDED APRIL 30, 1997
BALANCE SHEET:
<S> <C> <C> <C> <C>
CURRENT ASSETS $ 2,956,601 $ 3,762,852 $ 2,635,424 $ 2,022,950
TOTAL ASSETS $ 5,780,362 $ 5,987,157 $ 4,630,923 $ 4,075,008
CURRENT LIABILITIES $ 1,050,774 $ 1,507,068 $ 1,674,796 $ 1,316,627
LONG TERM DEBT, NET OF CURRENT $ 2,256 $ 33,309 $ 365,055 $ 394,688
PORTION
TOTAL LIABILITIES $ 1,053,030 $ 1,540,377 $ 2,039,851 $ 1,711,315
SHAREHOLDERS' EQUITY $ 4,727,332 $ 4,446,780 $ 2,591,072 $ 2,363,693
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 1,888,778 $ 2,034,609 $ 2,117,080 $ 1,340,638
COST OF GOODS SOLD $ 1,433,659 $ 1,475,180 $ 1,512,394 $ 1,011,355
SELLING, GENERAL AND $ 412,495 $ 406,794 $ 408,321 $ 361,255
ADMINISTRATIVE EXPENSES
NET INCOME (LOSS) $ 15,578 $ 211,666 $ 227,379 $ (52,351)
BASIC AND DILUTED EARNINGS (LOSS) $ 0.00 $ 0.07 $ 0.08 $ (0.02)
PER SHARE
</TABLE>
13
<PAGE> 16
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
Net sales for the fiscal years ended April 30, 1998 and 1997 were $9,242,530 and
$7,381,105, respectively, which represents a 25.2% increase. Private label
flavored syrup sales and the Company's branded flavored syrup sales increased by
33.3% and 26.8%, respectively, while the sales of other Company products
decreased by 6.7% for the fiscal year ended April 30, 1998 compared to the
fiscal year ended April 30, 1997. For the fiscal year ended April 30, 1998,
private label and the Company's branded flavored syrup sales represented 68.5%
and 18.2% of gross sales, respectively, while the Company's other products
represented 13.3% of gross sales. The increase in private label flavored syrup
sales was primarily the result of significant sales growth by several of the
Company's private label customers. The increase in the Company's branded
flavored syrup sales was primarily due to the acquisition of the SENZA
RIVALE(TM), the SENZA ZUCCHERO and the SAN MARINO FLAVORED SYRUP brands, and the
effect of the recovery in January, 1997 of a Flavor-Mate(R) customer lost in
January, 1996. The unit sales volume of the Dolce(R) brand of flavoring syrups
increased for the fiscal year ended April 30, 1998. However, as a result of
master distributor pricing (See "Plan of Operation"), the dollar sales of the
Dolce(R) brand decreased by 4.0% compared to the fiscal year ended April 30,
1997. The net sales of other Company products decreased primarily as a result of
significant decreases in the sales of flavorings, cod liver oil, and cinnamon
and mulling sticks.
The Company, in an on going effort to improve the profitability of the other
products sales category, disposed of the Grandma's Choice line of extracts and
flavorings in February 1998 and ceased production of the Gran'Mere's product
line in March 1998.
The increase in sales volume in the fiscal year ended April 30, 1998 and the new
manufacturing facility in Mansfield, Ohio permitted the Company to improve
manufacturing efficiencies, resulting in cost of sales, as a percentage of net
sales, decreasing to 71.6% compared to 73.7% for the fiscal years ended April
30, 1998 and 1997, respectively. Cost of sales increased by $1,180,458 for the
current year compared to the fiscal year ended April 30, 1997. This increase
primarily was a result of higher sales volume, resulting in increased material,
freight-in, labor, and packaging costs. The increase in cost of sales in the
fiscal year ended April 30, 1998 was also the result of increased depreciation
due to the new manufacturing facility, and an increase in freight-out costs due
to free freight on large product shipments to master distributors. These
increases were partially offset by decreased costs associated with continued
improvement in manufacturing controls resulting in lower scrappage, and the
elimination of building rent in Mansfield, Ohio after the move to the new
facility.
Selling, general and administrative expenses increased by 10.7% or $169,802 for
the fiscal year ended April 30, 1998 compared to the fiscal year ended April 30,
1997. This increase resulted from increased participation in trade shows,
increased travel costs, increased depreciation expense, increased employee costs
associated with an increase in the sales and marketing staff and an increase in
employee health and general corporate insurance costs. These increases were
offset by decreases in sales commission expense and advertising costs. The
Company also recorded a large increase in public relations expenses associated
with efforts to increase the marketability of the Company's common shares and
with complying with SEC disclosure requirements. In addition, the Company
recorded expenses associated with the disposal of its former Mansfield
manufacturing building.
14
<PAGE> 17
The Company recorded income tax expense of $171,422 for the year ended April 30,
1998 compared to a income tax benefit of $96,601 for the year ended April 30,
1997. This $268,023 change is primarily the result of increased earnings and
reversal of a previously recorded valuation allowance due to the usage of the
Company's net loss carry forwards.
As a result of the foregoing, the Company reported net income of $659,716, or
$0.20 per basic and diluted weighted average number of Common Stock outstanding,
for the fiscal year ended April 30, 1998 compared to a net income of $402,272,
or $0.13 per basic and diluted weighted average number of Common Stock
outstanding, for the fiscal year ended April 30, 1997. The weighted average
number of Common Stock outstanding increased to 3,246,375 for the current year
compared to 2,994,679 for the previous fiscal year. The increase primarily
reflects increased Common Stock outstanding as a result of the Company's stock
offering, warrants exercised and conversion of subordinated debt into Common
Stock.
Net income for the 4th quarter of the fiscal year ended April 30, 1998
increased approximately $164,000 because of year end inventory adjusting entry.
The amount of the year end inventory adjustment, pre-tax, was approximately
$254,000. The primary purpose of the adjusting entries was to capitalize labor
and overhead associated with the production of finished goods inventory still
on-hand as of April 30, 1998 and to record the year end physical inventory
adjustment. The Company uses a gross margin method to estimate cost of sales
during the interim period and an adjustment is recorded at year end to properly
reflect activity based on the results of the physical inventory.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
Net sales for the fiscal years ended April 30, 1997 and 1996 were $7,381,105 and
$5,514,753, respectively, which represents a 33.8% increase. Private label
flavored syrup sales increased by 69.9% while the Company's branded flavored
syrup sales decreased by 0.3% and the sales of other Company products decreased
by 9.9% for the fiscal year ended April 30, 1997 compared to the fiscal year
ended April 30, 1996. For the fiscal year ended April 30, 1997, private label
and the Company's branded flavored syrup sales represented 64.2% and 17.9% of
gross sales, respectively, while the other Company other products represented
17.9% of gross sales. The increase in private label flavored syrup sales was the
result of significant sales growth by several of the Company's private label
customers, and the addition of several new private label customers. The small
decrease in the Company's branded flavored syrup sales was primarily due to a
loss of a Flavor-Mate(R) customer in January, 1996 offset by an increase in
sales of the Dolce(R) brand to the mid-west United States distributors. The
Company was able to regain the lost Flavor-Mate(R) customer in January 1997. The
net sales of other Company products decreased primarily as a result of dropping
the Liquid Spice product line and large decreases in sales of the Gran'Mere's
and Peppers and Salts product lines.
As a result of the performance of the Dolce(R) branded products in the fiscal
year ended April 30, 1997, the Company made changes in its sales staff and
distributor program in February and March of 1997 to stimulate sales of this
product line. In addition, the Company has also decided to dispose of the
Gran'Mere's and Peppers and Salts product lines to improve performance in the
other products sales category.
15
<PAGE> 18
The increase in sales volume in the fiscal year ended April 30, 1997 permitted
the Company to better utilize its manufacturing facilities, resulting in cost of
sales, as a percentage of net sales, decreasing to 73.6% compared to 78.8% for
the fiscal years ended April 30, 1997 and 1996, respectively. Cost of sales
increased by $1,088,785 for the fiscal year ended April 30, 1997 compared to the
previous fiscal year. This increase primarily was a result of higher sales
volume, resulting in increased material, freight-in, labor, and plant supply
costs. The increase in cost of sales in the fiscal year ended April 30, 1997 was
also the result of increased depreciation and the decision to increase product
testing by Company personnel. In addition, tooling costs also increased as a
result of new private label customers in the fiscal year ended April 30, 1997.
These increases were partially offset by decreased costs associated with
improved manufacturing controls resulting in lower scrappage, a decrease in the
cost of product testing performed by outside services and a decrease in
maintenance costs.
Selling, general and administrative expenses decreased by 10.4% or $185,253 for
the fiscal year ended April 30, 1997 compared to the fiscal year ended April 30,
1996. This decrease resulted from decreased participation in trade shows,
decreased magazine advertising, the reduction of outside professional financial
consulting services, less travel, a decrease in office supplies used, and lower
bad debt expense. These decreases were offset by increases in payroll expenses
incurred following the hiring of a Chief Financial Officer in January 1996,
promotional costs, sales commissions as a result of a revised sales staff
compensation program and higher sales volume, retail store product placement
("slotting") fees, personal property and real estate taxes, maintenance costs of
the Company's computer system, and insurance and shareholder relations costs
associated with the Company becoming a SEC reporting company.
Interest expense for the fiscal year ended April 30, 1997 decreased by $8,754
compared to the fiscal year ended April 30, 1996. The decrease primarily
reflects bank borrowings that were paid in full on November 6, 1996.
The Company recorded a deferred income tax benefit of $101,972 for the year
ended April 30, 1997. This benefit is a result of the reversal of a previously
recorded valuation allowance due to the anticipated usage of the Company's net
loss carry forwards.
As a result of the foregoing, the Company reported net income of $402,272, or
$0.13 per basic and diluted weighted average number of Common Stock outstanding,
for the fiscal year ended April 30, 1997 compared to a net loss of ($732,915),
or ($0.26) per basic and diluted weighted average number of Common Stock
outstanding, for the fiscal year ended April 30, 1996. The weighted average
number of Common Stock outstanding increased to 2,994,679 from 2,781,249. This
change primarily reflects increased Common Stock outstanding as a result of the
Company's stock offering, warrants exercised, conversion of subordinated debt
into Common Stock and treasury stock sold.
Net income for the 4th quarter of the fiscal year ended April 30, 1997 was
reduced because of year end inventory and deferred income tax adjusting entries.
The amount of the year end inventory adjustment was approximately $18,000. The
amount of the year end deferred income tax adjustment was $23,000.
16
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1998, the Company's working capital was $2,399,795 with a working
capital ratio of 3.08 to 1. The Company's working capital has generally shown
improvement over the previous four quarters. The working capital and working
capital ratio for the quarters ended January 31, 1998, October 31, 1997, July
31, 1997 and April 30, 1997 were $2,058,291 and 2.83 to 1, $1,795,059 and 2.89
to 1, $1,244,539, and 1.95 to 1, and $1,905,827 and 2.81 to 1, respectively. The
increase in working capital for the fiscal year ended April 30, 1998 was
primarily a result of the Company's earnings invested in inventory and accounts
receivables.
The Company's operating activities, for the fiscal year ended April 30, 1998,
provided net cash of $102,620. The Company used $1,492,796 to acquire equipment
and complete construction of a new manufacturing and office facility in
Mansfield, Ohio, invest in life insurance policies, and make principal payments
on notes payable and capital leases. During this period, the Company received
cash of $890,000 from bank borrowings. The Company also received $74,324 from
the nonrecurring sale of property and equipment, and the exercise of warrants
provided net cash of $117,007. The Company also utilized $149,649 in cash to
acquire the SENZA RIVALE(TM), the SENZA ZUCCHERO product lines. Consequently,
during this period, cash and cash equivalents decreased $458,494. 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.
On December 2, 1997, the Company renewed a $400,000 bank line of credit. Also on
December 2, 1997, the Company secured a $140,098 bank loan and a $120,000
promissory note associated with the acquisition of the SENZA RIVALE(TM), the
SENZA ZUCCHERO product lines.
The Company, during the fiscal year ending April 30, 1998, experienced minor
inflationary increases in the cost of its raw and packaging materials. The
Company did not raise its selling price of its products and subsequently
absorbed these cost increases.
The Company believes that the bank line of credit and cash from operating
activities will be sufficient to finance operations and planned capital
expenditures for the next 12 months.
YEAR 2000 COMPLIANCE
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware. The installation and implementation of the
application software is currently underway and is targeted for completion by
April 1999. As of May 1, 1998, the financial modules of the software have been
implemented. This software and hardware when fully implemented will be Year 2000
compliant. The Company, as of April 30, 1998, has incurred costs of $181,281 and
anticipates $25,000 in additional installation costs to complete the project.
The Company does not anticipate any other significant internal costs associated
with Year 2000 compliance. The Company is vulnerable to potential disruption
from suppliers and the Company will be assessing the extent of this
vulnerability.
17
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
1. Financial Statements of Stearns & Lehman, Inc. Page
<S> <C> <C> <C>
Report of Independent Accountants (dated June 26, 1998) ....................................... 19
Balance Sheets as of April 30, 1998 and 1997 .................................................. 20
Statements of Income for the years ended April 30, 1998 and 1997 .............................. 22
Statements of Shareholders' Equity for the years ended April 30, 1998 and 1997 ............... 23
Statements of Cash Flows for the years ended April 30, 1998 and 1997 .......................... 24
Notes to Financial Statements ................................................................. 26
</TABLE>
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Stearns & Lehman, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income and shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Stearns & Lehman, Inc. at April 30,
1998 and 1997, and the results of its operations and its cash flows for each
year of the two years in the period ended April 30, 1998, in conformity with
general accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
------------------------------
Columbus, Ohio
June 26, 1998
19
<PAGE> 22
CONTINUED
STEARNS & LEHMAN, INC.
BALANCE SHEETS
April 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 272,339 $ 730,833
Trade accounts receivable, net of allowance for doubtful accounts
of $56,000 in 1998 and $46,000 in 1997 1,307,233 884,459
Inventory 1,868,342 1,239,671
Prepaid expenses and other 69,930 75,639
Deferred income taxes 38,465 25,999
-------------- -------------
Total current assets 3,556,309 2,956,601
-------------- -------------
Property and equipment:
Land 73,928 80,848
Buildings 1,829,823 137,734
Building improvements 41,281 91,716
Leasehold improvements 9,433 43,003
Machinery and equipment 1,756,977 1,412,061
Office equipment 411,328 213,140
Tooling 89,873 59,344
Vehicles 45,392 36,964
Construction in progress 941,199
-------------- -------------
4,258,035 3,016,009
Less accumulated depreciation 957,822 780,538
-------------- -------------
Net property and equipment 3,300,213 2,235,471
-------------- -------------
Goodwill, net 583,420 441,833
Cash surrender value of life insurance 42,076 23,611
Trademarks and patents, net 3,863 4,560
Deferred income taxes 75,973
Other assets 28,320 42,313
-------------- -------------
Total assets $ 7,514,201 $ 5,780,362
============== =============
</TABLE>
20
Continued
<PAGE> 23
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
Current liabilities:
Accounts payable $ 768,093 $ 801,672
Accrued expenses 240,476 239,275
Current portion of notes payable 145,689
Current portion of capital lease obligations 2,256 9,827
-------------- -------------
Total current liabilities 1,156,514 1,050,774
-------------- -------------
Long-term liabilities:
Notes payable, net of current portion 802,353
Capital lease obligations, net of current portion 2,256
Deferred income taxes 51,279
-------------- -------------
Total long-term liabilities 853,632 2,256
-------------- -------------
Total liabilities 2,010,146 1,053,030
-------------- -------------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized, 3,275,965 and
3,230,052 issued and 3,272,665 and 3,226,752 outstanding as of April
30, 1998 and 1997,
respectively 3,614 3,563
Additional paid-in capital 5,208,876 5,091,920
Retained earnings (accumulated deficit) 304,765 (354,951)
-------------- -------------
5,517,255 4,740,532
Less treasury stock at cost; 3,300 shares 13,200 13,200
-------------- -------------
Total shareholders' equity 5,504,055 4,727,332
-------------- -------------
Total liabilities and shareholders' equity $ 7,514,201 $ 5,780,362
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE> 24
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF INCOME
for the years ended April 30, 1998 and 1997
1998 1997
<S> <C> <C>
Sales $ 9,242,530 $ 7,381,105
Cost of sales 6,613,046 5,432,588
-------------- --------------
Gross profit 2,629,484 1,948,517
Selling, general and administrative expenses 1,758,667 1,588,865
-------------- --------------
Income from operations 870,817 359,652
-------------- --------------
Other income (expense), net:
Interest expense (54,320) (53,814)
Interest income 16,641 13,952
Other, net (2,000) (14,119)
-------------- --------------
(39,679) (53,981)
-------------- --------------
Income before income tax expense 831,138 305,671
-------------- --------------
Income tax expense (benefit):
Current 56,636 5,371
Deferred 114,786 (101,972)
-------------- --------------
Total income tax expense (benefit) 171,422 (96,601)
-------------- --------------
Net income $ 659,716 $ 402,272
============== ==============
Earnings per share - Basic $ .20 $ .13
============== ==============
Earnings per share - Diluted $ .20 $ .13
============== ==============
Basic weighted-average common shares outstanding 3,246,375 2,994,679
============== ==============
Diluted weighted-average common shares outstanding 3,273,029 3,033,365
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE> 25
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED TOTAL
COMMON COMMON PAID-IN EARNINGS TREASURY SHARE-
SHARES SHARES CAPITAL (DEFICIT) SHARES HOLDERS'
EQUITY
<S> <C> <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 (95) (664) (664)
retirement of
common shares
Conversion of debentures 48,230 53 264,947 265,000
to
common shares
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 659,716 659,716
Exercise of warrants 45,913 51 116,956 117,007
------------ ---------- ------------ ------------- ---------- ------------
Balance at April 30, 1998 3,272,665 $ 3,614 $ 5,208,876 $ 304,765 $ 13,200 $ 5,504,055
============ ========== ============ ============= ========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 26
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS
for the years ended April 30, 1998 and 1997
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 659,716 $ 402,272
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Bad debt expense 21,400 18,820
Depreciation and amortization 326,020 257,636
Impairment and loss on the disposal of fixed assets 40,720 1,582
Deferred income taxes 114,786 (101,972)
Changes in assets and liabilities:
Trade accounts receivable (444,174) (318,614)
Inventory (589,179) (107,123)
Prepaid expenses and other 5,709 (26,131)
Accounts payable (33,579) 316,265
Accrued expenses 1,201 11,230
---------------- ----------------
Net cash provided by operating activities 102,620 453,965
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (1,402,546) (1,026,653)
Proceeds from sale of property and equipment 74,324 3,500
Cash surrender value of life insurance, net (18,465) (3,966)
Purchase of other assets (149,649)
Proceeds from purchase price adjustment 52,746
---------------- ----------------
Net cash used in investing activities (1,496,336) (974,373)
---------------- ----------------
Cash flows from financing activities:
Net borrowings under notes payable 890,000
Principal payments on long-term debt and capital leases (71,785) (571,707)
Purchase of treasury stock (664)
Net proceeds from issuance of common shares 117,007 1,700,404
---------------- ----------------
Net cash provided by financing activities 935,222 1,128,033
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (458,494) 607,625
Cash and cash equivalents, beginning of year 730,833 123,208
---------------- ----------------
Cash and cash equivalents, end of year $ 272,339 $ 730,833
================ ================
</TABLE>
Continued
24
<PAGE> 27
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
1998 1997
Supplemental disclosure of cash flow information: Cash paid during the year
for:
<S> <C> <C>
Interest $ 54,321 $ 61,582
=============== ===============
Supplemental schedule of noncash financing and investing activities:
Conversion of subordinated debentures to common shares $ 265,000
===============
Conversion of line of credit to note payable $ 350,000
===============
Issuance of note payable for business assets acquired $ 120,000
===============
</TABLE>
In 1997, the Company allocated $50,474 of deferred stock offering costs,
incurred in 1996, against equity as a result of the issuance of common shares.
The accompanying notes are an integral parts of the financial statements.
25
<PAGE> 28
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. The Company uses a gross margin method to
estimate cost of sales during interim periods. An adjustment is made
at year end to record actual activity based on the results of the
year end physical inventory. The year end adjustment was a $253,934
decrease and a $12,669 increase in cost of sales in 1998 and 1997,
respectively.
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 $253,948 in
1998 and $180,761 in 1997. 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 in accordance
with SFAS No. 128, "Earning Per Shares", which the Company adopted in
the third quarter of the fiscal year ended April 30, 1998. Basic
earnings per share are computed based upon the weighted average
number of outstanding common shares. Diluted earnings per share
include the weighted average of dilutive warrants outstanding.
<TABLE>
<CAPTION>
APRIL 30, 1998 APRIL 30, 1997
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
<S> <C> <C>
Common shares issued 3,249,675 2,997,979
Treasury shares (3,300) (3,300)
--------------- ---------------
Basic shares 3,246,375 2,994,679
Dilutive effect of warrants 26,654 38,686
--------------- ---------------
Diluted shares 3,273,029 3,033,365
=============== ===============
</TABLE>
26
<PAGE> 29
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
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
$433,954 in cash equivalents which had been allocated for the
construction of the new manufacturing and office building, pursuant
to the Form SB-1 registration statement. 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.
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 $169,192 in 1998 and $197,780 in 1997.
I. GOODWILL: Goodwill represents the excess of purchase price over fair
value of net tangible assets acquired (see Notes 7 and 17). Goodwill
is amortized on a straight-line basis over 10 to 12 years.
Amortization expense was $57,383 in 1998 and $49,092 in 1997 and
accumulated amortization was $204,660 and $147,277 at April 30, 1998
and 1997, respectively.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in
the balance sheet for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to
the short maturity. The carrying amount of variable rate debt issued
approximates fair value because the interest rate changes with market
interest rates and the carrying amount of fixed rate debt
approximates fair value due to its short-term nature.
K. FOREIGN SALES: The Company transacts all foreign sales to
distributors and customers in United States currency.
L. 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.
27
<PAGE> 30
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
M. 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 eight major customers which represented sales of
approximately 65% in 1998 and 57% in 1997. 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.
2. INVENTORY:
The major components of inventory at April 30, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 1,002,539 $ 736,281
Work in process 2,708 7,278
Finished goods 863,095 496,112
-------------- --------------
Total inventory $ 1,868,342 $ 1,239,671
============== ==============
</TABLE>
3. LINES OF CREDIT:
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%. This Line
of Credit Agreement was renewed on December 2, 1997 and expires on
December 2, 1998. This agreement is collateralized by substantially all
the assets of the Company and contains 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, 1998, there was no
outstanding balance under this agreement.
28
<PAGE> 31
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, 1998 consisted of the following:
<TABLE>
<S> <C>
Note payable to a bank, collateralized by real estate,
accounts receivable, inventory, and equipment,
payable in monthly installments of $9,652 including
interest at a rate of prime plus 0.75% adjusted not
more than once per year,
due on July 2, 2007. $ 719,055
Note payable to a company, unsecured, payable in monthly
installments of $7,111 including interest at a rate of
8.25% per annum commencing July 1, 1999, due on December
1, 2000. Interest will be paid monthly until the first
principal payment is
made on July 1, 1999. 120,000
Note payable to a bank, collateralized by accounts
receivable, inventory and equipment, payable in monthly
installments of $7,778 plus interest at a rate of prime
plus 0.5% (8.25% at April 30, 1998),
due on June 2, 1999. 108,987
--------------
Total notes payable 948,042
Less current portion 145,689
--------------
$ 802,353
==============
</TABLE>
Future maturities of notes payable at April 30, 1998 are as follows:
YEAR ENDING APRIL 30,
1999 $ 145,689
2000 137,669
2001 117,942
2002 68,751
2003 75,292
Thereafter 402,699
--------------
$ 948,042
==============
29
<PAGE> 32
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
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 a building and certain office and production equipment
under noncancelable operating lease agreements expiring through fiscal
2004. The building lease provides for future minimum rent escalations.
Minimum rental commitments under noncancelable operating leases at April
30, 1998 are as follows:
YEAR ENDING APRIL 30,
1999 $ 116,494
2000 112,304
2001 117,034
2002 117,465
2003 121,996
Thereafter 10,164
--------------
$ 595,457
==============
Total rent expense charged to operations for all operating leases was
$120,894 in 1998 and $133,178 in 1997.
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
30
<PAGE> 33
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
shareholders. During fiscal 1995, the Company received 18,526 of the
escrow shares pursuant 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 objectives must be achieved, they filed a claim for the
shares to augmentation on July 21, 1995.
As of April 30, 1998, the Company has settled the escrow and augmentation
issues with certain former shareholders of Select for 17,162 shares of
which 17,057 shares were in escrow on April 30, 1996 and 105 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 420 shares of which 417 were in escrow
on April 30, 1998 and April 30, 1997 and 3 were contingently issuable
upon settlement. The settlement has been recorded in the financial
statements at April 30, 1998 and 1997 as an adjustment to the original
purchase price.
8. COMMON STOCK TRANSACTIONS:
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).
On November 25, 1997, 25,000, 10,913 and 10,000 shares of the Company's
common stock were issued at $3.50, $3.15 and $3.00 per share,
respectively, upon exercise of warrants (see Note 9).
9. WARRANTS TO PURCHASE COMMON STOCK:
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, 2007. The warrants were fully exercisable
at the date of grant.
31
<PAGE> 34
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
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.
During 1998, the Company issued warrants to two directors for each to
purchase 5,000 shares of common stock at an exercise price of $5.625 per
share, which expire January 20, 2008. The warrants were fully exercisable
at the date of grant.
During 1998, 25,000, 10,913 and 10,000 shares of the Company's common
stock were issued at $3.50, $3.15 and $3.00 per share, respectively, 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 as the Company believes warrants were
granted at fair market value at the date of grant. The Company did not
recognize any expense for warrants granted during the year ended April
30, 1998. 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 1998 pro forma
amounts include the effect of the reversal of prior years pro forma net
operating losses under SFAS No. 123.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income Pro forma $ 600,531 $ 379,887
As reported 659,716 402,272
Diluted earnings per share Pro forma 0.18 0.13
As reported 0.20 0.13
</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
1998 and 1997, respectively: no dividend yield; expected volatility 80.0%
and 63.7%; risk-free interest rate of 6.25% and 6.15%; and expected life
of 6.0 years and 3.0 years for warrants granted in 1998 and 1997,
respectively.
32
<PAGE> 35
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
A summary of the status of the Company's warrants as of April 30, 1998
and 1997, respectively; and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS SHARES PRICE SHARES PRICE
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 139,365 $ 4.20 100,367 $ 3.49
Granted 10,000 $ 5.63 43,748 $ 5.70
Cancelled/recissioned
Exercised (45,913) $ 3.31 (4,750) $ 3.00
Outstanding at end of year 103,452 $ 4.74 139,365 $ 4.20
Warrants exercisable at year-end 103,452 $ 4.74 104,415 $ 3.68
Weighted-average fair value of
warrants granted during the
year utilizing Black-Scholes
options pricing model $ 4.11 $ 3.15
</TABLE>
The following table summarizes information about warrants outstanding at
April 30, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE
APRIL 30, 1998 REMAINING LIFE AT APRIL 30,
EXERCISE PRICES 1998
<S> <C> <C> <C> <C>
$3.00 33,456 2.1 years 33,456
$3.15 2,648 2.5 years 2,648
$5.50 18,798 8.4 years 18,798
$5.63 10,000 9.7 years 10,000
$5.75 38,550 3.3 years 38,550
---------------- ---------------- ---------------
103,452 4.4 years 103,452
================ ================ ===============
</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
33
<PAGE> 36
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
options or non-qualified stock options, at the discretion of the
committee designated by the Board of Directors to administer the Plan.
The option price for non qualified 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, 1998 and 1997, no options have been
granted.
11.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.
The facility was substantially completed as of August 16, 1997.
12.INCOME TAXES:
The components of the net deferred tax asset at April 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 131,353 $ 315,982
Accrued expenses 26,782
Other 5,244 1,763
Allowance for doubtful accounts 21,280 17,480
------------- -------------
Gross deferred tax assets 157,877 362,007
Deferred tax liabilities:
Property and equipment 170,691 134,652
------------- -------------
Net deferred tax asset (liability)
before valuation allowance (12,814) 227,355
Valuation allowance 125,383
------------- -------------
Net deferred tax asset (liability) $ (12,814) $ 101,972
============= =============
</TABLE>
The Company had net operating loss carryforwards of $549,109 at April 30,
1997. These net operating losses were utilized for the year ended April
30, 1998. In addition, the Company had net operating loss carryforwards
available of $364,871 and $398,041 at April 30, 1998 and
34
<PAGE> 37
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
1997, respectively, from the purchase of Select, of which $33,170 is
available to deduct each year through April 30, 2009.
As of April 30, 1997, 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. The valuation allowance was
eliminated as of April 30, 1998 as continued profitability has reduced
the uncertainty of the utilization of net operating loss carryforwards.
The Company utilized approximately $582,000 of net operating
carryforwards in fiscal 1998.
A reconciliation between the statutory federal income tax rate and the
effective income tax on pretax earnings follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Statutory income tax rate 34.0 % 34.0 %
Local income tax, net of federal
income tax effect 0.8 1.1
Permanent differences 3.0 6.6
Adjustments to prior year tax
calculations (3.0) 3.6
Reduction in valuation allowance (15.1) (80.1)
Other items, net 0.9 3.2
---- ----
Effective income tax rate 20.6 % (31.6) %
==== ====
</TABLE>
13. COMMITMENTS:
The Company has an agreement to supply a customer with a product at
specified prices. The agreement is effective September 1, 1997, with an
initial term of two years, expiring on August 31, 1999.
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 30 days written notice by either party.
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
35
<PAGE> 38
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
the end of the agreement. Regular production deliveries had commenced on
March 3, 1998 and as of April 30, 1998, the Company had purchased 4% of
containers covered under the agreement.
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 had accrued
$70,479 at April 30, 1997. As of July 9, 1997, the Company reached an
agreement to return the rights of the Gran'Meres' brand name to the
owners for a payment of $50,000.
14. 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.
15. 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 $36,300 in 1998 and $53,000 in 1997. No
payables were outstanding as of April 30, 1998 or 1997.
16. YEAR 2000 COMPLIANCE:
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware. The installation and implementation of
the application software is currently underway and is targeted for
completion by April 1999. As of May 1, 1998, the financial modules of the
software have been implemented. This software and hardware when fully
implemented will be Year 2000 compliant. The Company, as of April 30,
1998, has incurred costs of $181,281 and anticipates $25,000 in
additional installation costs to complete the project. The Company does
not anticipate any other significant internal costs associated with Year
2000 compliance. The Company is vulnerable to potential disruption from
suppliers, and the Company will be assessing the extent of this
vulnerability.
36
<PAGE> 39
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
17. BUSINESS ACQUISITIONS:
On December 4, 1997, the Company acquired $39,492 of inventory, $31,187
of equipment, the customers, product formulas, trademarks, and other
intangible assets of Ricter Enterprises, LTD., the manufacturer of the
Senza Zucchero and Senza Rivale brands of flavoring syrups for $150,762
in cash and a $120,000 note payable. The Company obtained $140,000 in
cash from a 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, 1998. The $120,000 note payable to Ricter
Enterprises, LTD. is payable in eighteen monthly principal payments,
including interest at a rate of 8.25%, 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%.
On January 16, 1998, the Company acquired the rights to the San Marino
Flavored Syrup product line from Cultor Food Science, Inc. ("Cultor") as
part of a Marketing and Development Agreement that has been entered into
between the two firms. Under this five year agreement, the Company
acquired the rights to the San Marino product line, trademarks, customer
lists, formulas and other related information from Cultor in exchange for
Cultor supplying a minimum quantity of raw materials to the Company.
These raw materials supplied by Cultor are subject to competitive pricing
and meeting the technical and flavor specifications of the Company and
its customers. The Company under no circumstances shall purchase less
than $25,000 of raw materials per year from Cultor.
37
<PAGE> 40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
[The remainder of this page intentionally left blank.]
38
<PAGE> 41
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains the name, position, age and telephone number with
the Company of each director and executive officer of the Company as of July 15,
1998. Directors are elected to a one year term, to serve until the next annual
meeting of shareholders and until their successors are duly elected and
qualified or until their earlier resignation, removal from office, or death. The
respective background of each director and executive officer is described
following the table. Each of the executive officers devotes his or her full-time
efforts to the affairs of the Company.
<TABLE>
<CAPTION>
NAME POSITION AGE TELEPHONE NO.
- ---- -------- --- -------------
<S> <C> <C> <C>
William C. Stearns President, Treasurer and Director 45 419/522-2722
Sally A. Stearns Executive Vice President, Secretary and Director 38 419/522-2722
John A. Chuprinko Chief Financial Officer 43 419/522-2722
Frank E. Duval Director 54 419/882-2314
Carter F. Randolph Director 42 513/891-4227
</TABLE>
WILLIAM C. STEARNS - PRESIDENT, TREASURER AND DIRECTOR
William C. Stearns is President, Treasurer and a Director of the Company. Mr.
Stearns founded the Company in March of 1988 and has been its President and a
Director since that time. Mr. Stearns attended both Cleveland State University
and Baldwin-Wallace University and is a member of the Manufacturers' Board of
Directors of the National Food Distributors Association and the National
Association of Specialty Food Trade. Mr. Stearns is the husband of Sally A.
Stearns.
SALLY A. STEARNS - EXECUTIVE VICE PRESIDENT, SECRETARY AND DIRECTOR
Sally A. Stearns graduated from Bowling Green State University in June of 1982
with a Bachelor of Science Degree in Business Administration, with a major
concentration in Human Resource Management. From October 1987 to February 8,
1989, she was a senior accountant for Autocall, Inc., a division of Federal
Signal located in Shelby, Ohio. From February 18, 1989 to the present Ms.
Stearns has served as Vice President, Secretary and a Director of the Company.
JOHN A. CHUPRINKO - CHIEF FINANCIAL OFFICER
John A. Chuprinko is a graduate of The Ohio State University, where he obtained
a Bachelor of Science Degree in accounting, and the United States Navy Supply
School in Athens, Georgia. Mr. Chuprinko was hired as the Chief Financial
Officer of the Company on January 10, 1996 and is a Certified Public Accountant.
Mr. Chuprinko is a member and past President of the Knox County, Ohio Airport
Advisory Board and is a member and past Chairman of the Marion Technical College
39
<PAGE> 42
Accounting Advisory Committee. From October 1994 to January 1996, Mr. Chuprinko
served as the Chief Financial Officer and Treasurer of Na-Churs Plant Food
Company, a national manufacturing company with $18,000,000 in sales, located in
Marion, Ohio. Prior to that position, Mr. Chuprinko was the Controller at The
J.E. Grote Company, Incorporated in Blacklick, Ohio.
FRANK E. DUVAL - DIRECTOR
Mr. Duval has served as a Director of the Company since January 3, 1995. Mr.
Duval has been the President of J&S Capital, Inc. since 1990 where he oversees a
portfolio of real estate, limited partnership and stock and bond investments.
Mr. Duval has a Bachelor of Science Degree in Education from the University of
Buffalo. From 1979 to 1990, Mr. Duval served as President and Chief Executive
Officer of International Automated Machines, Inc., a manufacturer of single
service and portion control condiments. From 1973 to 1979, he served as
President and Chief Executive Officer of United Wild Rice, Inc. Prior to 1973,
Mr. Duval held various sales and marketing management positions with Ralston
Purina, Wm. Underwood Company and Scott Paper Company. Mr. Duval is a member of
the Board of Directors' Audit Committee.
CARTER F. RANDOLPH, PH.D. - DIRECTOR
Dr. Randolph, was appointed as a Director of the Company on March 29, 1996.
Since 1987, Dr. Randolph has been the President of The Randolph Company, Inc.
where he is responsible for the management of pension plans, foundations and
trusts. From 1989 to the present, Dr. Randolph has been Executive Vice President
and Trustee of the Green Acres Foundation where he is responsible for
management, including all aspects of organization and operation of the private
nonprofit foundation. Dr. Randolph has experience in the areas of estate
planning, tax planning, IRS audit management, investment management, real estate
management, farm management and property management. Dr. Randolph currently
serves on the Board of Directors of Cintech Tele-Management Systems, Inc. Dr.
Randolph is a member of the Board of Directors' Audit Committee.
SIGNIFICANT EMPLOYEES
PHYLLIS J. THOMAS
Ms. Thomas, age 44, has been employed by the Company since November 1993 and
currently is the Director of Operations. Ms. Thomas is a graduate of Ashland
University with a Bachelor of Science Degree in Business Administration. Prior
to working for the Company, Ms. Thomas was a promotion specialist for R.J.R.
Nabisco from 1990 to 1993.
JON D. WHITESIDE
Mr. Whiteside, age 38, was hired by the Company in March 1997 and currently is
the national sales manager responsible for managing the Company's sales
department, including the coordination of the regional sales personnel. Mr.
Whiteside attended Arizona State University. From 1993 to March, 1997, Mr.
Whiteside was the national sales manager for Saquella U.S.A. Inc., a $4,000,000
distributor of coffee and espresso industry products.
40
<PAGE> 43
FAMILY RELATIONSHIPS
Except for Mr. and Mrs. Stearns, there are no family relationships among the
directors and executive officers of the Company.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Not Applicable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Frank E. Duval and Carter F. Randolph failed to file a Form 4 on a timely basis.
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors, and person who beneficially own more than ten percent (10%) of
the Company's stock, to file initial reports of ownership and reports of changes
in ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than ten percent (10%) beneficial owners are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.
ITEM 10. EXECUTIVE COMPENSATION
SALARY COMPENSATION TABLE
The following table and notes set forth information regarding remuneration of
the only officer of the Company whose total annual salary and bonus during the
fiscal year ended April 30, 1998 exceeded $100,000:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL FISCAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
<S> <C> <C> <C> <C>
William C. Stearns, 1998 $ 104,000.00 $ 0.00 $ 123.00 (1)
President 1997 $ 104,000.00 $ 0.00 $ 123.00 (1)
1996 $ 127,500.00 $ 0.00 $ 115.00 (1)
</TABLE>
(1) The Company carries and pays the premium on a "key man" life insurance
policy on Sally A. Stearns in the amount of $500,000 and is entitled to eighty
percent (80%) of the benefits of such a policy. Mr. Stearns is the other named
beneficiary of this policy and is entitled to receive the remaining twenty
percent (20%) of the benefits of such insurance policy. For the fiscal years
ended April 30, 1998, 1997 and 1996, the premium value of this benefit to Mr.
Stearns was $123.00, $123.00 and $115.00, respectively.
41
<PAGE> 44
DIRECTORS COMPENSATION
The Directors of the Company receive cash compensation of $1,000.00 per meeting
for serving on the Board of Directors, and are reimbursed reasonable expenses
incurred while attending these meetings. Frank E. Duval and Carter F Randolph,
Ph.D. each received $3,000.00 for attending Board of Directors meetings for the
fiscal year ended April 30, 1998. The Company has agreed to grant warrants to
each of the outside Directors for services rendered during a calendar year, on a
pro rata basis for the actual time served as a Director during such calendar
year, to purchase up to 5,000 shares of Common Stock. The exercise price for
such warrants shall be equal to the fair market value of such shares at the date
the warrants are granted. Frank E. Duval and Carter F. Randolph, Ph.D. each
received warrants to purchase 5,000 shares of Common Stock, respectively, at an
exercise price of $5.625 per share, on January 21, 1998 for services rendered in
calendar year 1997.
STOCK OPTION PLAN
At the Company's Annual Meeting of Shareholders held on March 31, 1994, the
Company adopted the 1994 Stock Option Plan (the "Plan"). The shares of Common
Stock that may be issued upon the exercise of options granted under the Plan
shall not exceed 275,000 shares in the 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 of the Company to administer the Plan. The exercise price of
"nonqualified stock options" shall not be less than 100% of the fair market
value of a share of Common Stock 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 of Common Stock on the effective date of the grant. As
of April 30, 1998, the Company has not issued options to any of its officers,
directors or employees under the Plan.
[The remainder of this page intentionally left blank.]
42
<PAGE> 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, so far as is known to
management of the Company, regarding beneficial ownership of Common Stock held
of record, as of July 15, 1998, by (i) each shareholder who owns beneficially
more than five percent (5%) of the outstanding Common Stock; (ii) each officer
and director of the Company; and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS OF AMOUNT AND PERCENTAGE OF
BENEFICIAL OWNER (1) NATURE OF CLASS
BENEFICIAL
OWNERSHIP (2)
<S> <C> <C> <C>
Common Stock, no par William C. Stearns 614,391 18.6%
value Director, President and
Treasurer
Common Stock, no par Sally A. Stearns 631,916 19.1%
value Director, Vice President
and Secretary
Common Stock, no par Frank E. Duval 125,000 (3) 3.8%
value Director
Common Stock, no par Carter F. Randolph, Ph.D. 63,906 (4) 1.9%
value Director
Common Stock, no par John A. Chuprinko 640 .02%
value Chief Financial Officer
Common Stock, no par All Directors and Officers 1,435,853 (5) 43.4%
value as a group (5 persons)
</TABLE>
(1) The address for all persons listed is 30 Paragon Parkway, Mansfield, Ohio
44903.
(2) Unless otherwise indicated, the named shareholder has sole voting and
investment power.
(3) Includes 15,000 shares purchasable on exercise of currently exercisable
warrants.
(4) Of such shares, 51,198 are beneficially owned by the Randolph Company,
Inc., an Ohio corporation, of which Dr. Randolph owns 100% of its common
shares. The Randolph Company, Inc. and, therefore, Dr. Randolph have full
discretionary investment authority over such shares, including the right
to vote and sell such shares. Includes 12,708 shares for which Dr.
Randolph and his wife, Kathy, have shared voting and investment power.
Includes 8,798 shares purchasable on exercise of currently exercisable
warrants.
(5) Includes 23,798 shares purchasable on exercise of currently exercisable
warrants.
43
<PAGE> 46
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William C. Stearns, the President, Treasurer and a Director of the Company, owns
a twin engine airplane which he regularly uses for Company business. The Company
pays Corporate Flight Services, a sole proprietorship of Mr. Stearns, $500.00
per month and $210.00 per hour for the use of the airplane. During the fiscal
years ended April 30, 1998 and 1997, Corporate Flight Service was paid
$33,675.00 and $49,892.60, respectively, pursuant to this arrangement.
The Company carries and pays the premium for a "key man" life insurance policy
on Mr. Stearns in the amount of $1,000,000, and as one of the named
beneficiaries, the Company is entitled to ninety (90%) of the benefits of such
policy. Sally A. Stearns is the other named beneficiary of Mr. Stearns'
insurance policy and is entitled to ten percent (10%) of the benefits of such
insurance policy. The Company also carries and pays the premium for a "key man"
life insurance policy on Ms. Stearns, the Vice President, Secretary and a
Director of the Company, in the amount of $500,000 and is entitled to eighty
percent (80%) of the benefits of such policy. William C. Stearns is the other
named beneficiary of Ms. Stearns' policy and is entitled to receive the
remaining twenty percent (20%) of the benefits of such insurance policy.
Any future transactions between the Company and its officers, directors or
shareholders owning five percent (5%) or more of the Common Stock will be on
terms no less favorable to the Company than could be obtained from independent
third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
ARTICLES OF INCORPORATION AND BY-LAWS
Exhibit #3(a) - Articles of Incorporation of Sal-Wan Corp.
(filed 3/14/88) (Note 1)
Exhibit #3(b) - Certificate of Amendment (filed 1/17/90) (Note 1)
Exhibit #3(c) - Certificate of Amendment (filed 9/4/90) (Note 1)
Exhibit #3(d) - Certificate of Amendment (filed 3/12/92) (Note 1)
Exhibit #3(e) - Certificate of Amendment (filed 4/30/92) (Note 1)
Exhibit #3(f) - Certificate of Amendment (filed 5/2/94) (Note 1)
Exhibit #3(g) - Amended Code of Regulations of Stearns & Lehman,
Inc. (Note 1)
MATERIAL CONTRACTS
Exhibit #10(a) - Industrial Lease, dated March 10, 1995 (Note 1)
44
<PAGE> 47
<TABLE>
<S> <C>
Exhibit #10(b) - Supplier Agreement, dated September 1, 1997 (Note 4)
Exhibit #10(c) - Machinery Lease Agreement, dated August 1, 1993 (Note 1)
Exhibit #10(d) - Madison Leasing Company (Equipment Lease Agreement) (Note 1)
Exhibit #10(e) - Stearns & Lehman, Inc. 1994 Stock Option Plan (Note 1)
Exhibit #10(f) - Description of agreement on outside directors compensation (Note 3)
Exhibit #10(g) - Description of agreement pertaining to the Company's use of William C.
Stearns' airplane (Note 3)
Exhibit #10(h) - Description of agreement pertaining to a "key man" life insurance policies
(Note 3)
Exhibit #10(i) - Escrow Agreement, dated October 17, 1996, by and among Stearns &
Lehman, Inc., Quantum Capital Corp., dba Diversified Capital Markets and
First Knox National Bank (Note 1)
Exhibit #10(j) - Standard Form of Agreement Between Owner and Design/Builder dated
December 20, 1996 (Note 2)
Exhibit #10(k) - Promissory Note and Business Loan Agreement (First Knox National Bank -
$400,000) dated December 2, 1996 (Note 2)
Exhibit #10(l) - Promissory Note and Business Loan Agreement - Modification (First Knox
National Bank - $750,000) dated August 25, 1997 (Note 4)
Exhibit #10(m) - Construction Loan Agreement (First Knox National Bank - $750,000) dated
December 2, 1996 (Note 2)
Exhibit #10(n) - Stock Purchase Warrant No. 5, April 28, 1997, 5,000 Shares (Note 3)
Exhibit #10(o) - Stock Purchase Warrant No. 6, April 28, 1997, 3,798 Shares (Note 3)
Exhibit #10(p) - Warrant Certificate No. WA 17, (34,950 Shares Underwriter's Warrants),
April 28, 1997 (Note 3)
Exhibit #10(q) - Computer Software, Hardware and Consulting Services Agreement dated
June 9, 1997 (Note 3)
Exhibit #10(r) - License Agreement between Godiva Chocolatier, Inc. and Stearns & Lehman,
Inc. dated June 30, 1997 (Note 3)
Exhibit #10(s) - Stock Purchase Warrant No. 7, January 21, 1998, 5,000 Shares
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C>
Exhibit #10(t) - Stock Purchase Warrant No. 8, January 21, 1998, 5,000 Shares
Exhibit #10(u) - Sales Agreement with supplier dated October 7, 1997 (Note 5)
FINANCIAL DATA SCHEDULE
Exhibit #27 - Financial Data Schedule
ADDITIONAL EXHIBITS
Exhibit #99(a) - Escrow and Subordination Agreement, effective May 4, 1992, by and
between Stearns & Lehman, Inc., First Knox National Bank and Williams C.
Stearns, Sally A. Stearns and Richard S. Patton (Note 1)
Exhibit #99(b) - Form of Lock-Up Agreement, dated October 22, 1996, by and among Sally
A. Stearns and William C. Stearns and Quantum Capital Corp. d/b/a
Diversified Capital Markets. (Note 1)
Exhibit #99(c) - Mutual Release Agreement by and between Bick Goss and Bruce Saunders,
Co-Trustees of the Earnie Parmentier Trust and Stearns & Lehman dated July
9, 1997. (Note 3)
Note 1. Incorporated by reference to the Company's Amendment No. 1 to the Registration
Statement on the Form SB-1 filed with Commission on September 25, 1996 (File No. 333-
4244-C).
Note 2. 2. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended January 31, 1997 filed with the Commission
on March 14, 1997 (File No. 0-21879).
Note 3. 3. Incorporated by reference to the Company's Form 10-KSB/A for the
year ended April 30, 1997 filed with the Commission on August 12,
1997 (File No. 0-21879).
Note 4. 4. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended July 31, 1997 filed with the Commission on
September 15, 1997 (File No. 0-21879).
Note 5. 5. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended October 31, 1997 filed with the Commission
on December 15, 1997 (File No. 0-21879).
(B) REPORTS ON FORM 8-K
None
</TABLE>
46
<PAGE> 49
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: July 29, 1998 STEARNS & LEHMAN, INC.
(Registrant)
--------------------------
William C. Stearns
President, Director
In accordance with the Exchange Act, this report been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: July 29, 1998
---------------------------
William C. Stearns
President, Director
Date: July 29, 1998
---------------------------
John A. Chuprinko
Chief Financial Officer
Date: July 29, 1998
---------------------------
Sally A. Stearns
Vice President, Director
Date: July 29, 1998
---------------------------
Frank E. Duval
Director
Date: July 29, 1998
---------------------------
Carter F. Randolph, Ph.D.
Director
47
<PAGE> 1
Exhibit #10(s)
STOCK PURCHASE WARRANT
January 21, 1998
No. 7 Right to Purchase
5,000 common shares
STEARNS & LEHMAN, INC.
An Ohio Corporation
This is to certify that Frank E. Duval of 4557 Crossfields Road, Toledo, Ohio
43623, or its assigns is entitled to subscribe, on the form attached hereto, at
Five Dollars and Sixty Two and one half Cents ($5.625) per share, for five
thousand(5,000) shares of the capital stock of STEARNS & LEHMAN, INC.
(hereinafter the "Company"). Payment for this subscription must be made in full,
in cash.
Unless this warrant is surrendered at the offices of the Company at 52 Surrey
Road, Mansfield, Ohio 44902 (or at such other address as the Company shall
hereafter notify the holder hereof in writing) as above, at or before 5:00 p.m.
on January 20, 2008, with the subscription attached hereto duly signed,
accompanied by payment in full, the privilege granted hereby shall be void and
the warrant of no value.
This warrant cannot be exercised except for shares of capital stock of the
Company which, at the time of exercise, are exempt from registration, are the
subject matter of an exempt transaction or have been registered under the
Securities Act of 1933, as amended, and any applicable state securities laws.
This warrant is not transferable.
In case the Company shall declare any dividend or other distribution upon its
outstanding shares of capital stock payable in shares of capital stock or shall
subdivide its outstanding shares of capital stock into a greater number of
shares, then the number of shares of capital stock which, may hereafter be
purchased upon the exercise of the rights represented hereby, shall be increased
in proportion to the increase through such dividend or subdivision and the
purchase price per share shall be decreased in such proportion. In case the
Company shall at any time combine the outstanding shares of its capital stock
into a smaller number of shares, the number of shares of capital stock which may
thereafter be purchased upon the exercise of the rights represented hereby shall
be decreased in proportion to the decrease through such combination and the
purchase price per share shall be increased in such proportion.
48
<PAGE> 2
Stearns & Lehman, Inc. Stock Warrant
The warrants evidenced by this Certificate and the shares of capital stock
purchasable upon exercise thereof have not been registered under the Securities
Act of 1933(the "Act"), or any state securities laws, and may not be sold,
offered for sale, pledged, or hypothecated except pursuant to: (1) an effective
registration statement registering the shares under the Act , (2) a transaction
permitted by Rule 144 promulgated under the Act as to which the Company has
received satisfactory evidence of compliance with the provisions of Rule 144 or
(3) an opinion of counsel satisfactory to the Company that such transfer is
lawful.
If the Company hereafter proposes to register any additional shares of capital
stock under the Act (except for registration statements on Form S-8 or Form S-4,
or any successor forms then in effect), it will so notify the holder of this
warrant, or the holder of shares of capital stock purchased upon exercise
hereof, who may include in such registration such number of shares purchased or
purchasable hereunder as such holder has a bona fide intention to sell;
provided, however, that if the registration is an underwritten registration, the
number of shares so included shall be determined by the managing underwriter.
STEARNS & LEHMAN, INC.
By: /s/ William C. Stearns
--------------------------
William C. Stearns, President
49
<PAGE> 1
Exhibit #10(t)
STOCK PURCHASE WARRANT
January 21, 1998
No. 8 Right to Purchase
5,000 common shares
STEARNS & LEHMAN, INC.
An Ohio Corporation
This is to certify that Carter F. Randolph, Ph.D of 8221 Spooky Hollow Road,
Cincinnati, Ohio 45242, or its assigns is entitled to subscribe, on the form
attached hereto, at Five Dollars and Sixty Two and one half Cents ($5.625) per
share, for five thousand (5,000) shares of the capital stock of STEARNS &
LEHMAN, INC. (hereinafter the "Company"). Payment for this subscription must be
made in full, in cash.
Unless this warrant is surrendered at the offices of the Company at 52 Surrey
Road, Mansfield, Ohio 44902 (or at such other address as the Company shall
hereafter notify the holder hereof in writing) as above, at or before 5:00 p.m.
on January 20, 2008, with the subscription attached hereto duly signed,
accompanied by payment in full, the privilege granted hereby shall be void and
the warrant of no value.
This warrant cannot be exercised except for shares of capital stock of the
Company which, at the time of exercise, are exempt from registration, are the
subject matter of an exempt transaction or have been registered under the
Securities Act of 1933, as amended, and any applicable state securities laws.
This warrant is not transferable.
In case the Company shall declare any dividend or other distribution upon its
outstanding shares of capital stock payable in shares of capital stock or shall
subdivide its outstanding shares of capital stock into a greater number of
shares, then the number of shares of capital stock which, may hereafter be
purchased upon the exercise of the rights represented hereby, shall be increased
in proportion to the increase through such dividend or subdivision and the
purchase price per share shall be decreased in such proportion. In case the
Company shall at any time combine the outstanding shares of its capital stock
into a smaller number of shares, the number of shares of capital stock which may
thereafter be purchased upon the exercise of the rights represented hereby shall
be decreased in proportion to the decrease through such combination and the
purchase price per share shall be increased in such proportion.
50
<PAGE> 2
Stearns & Lehman, Inc. Stock Warrant
The warrants evidenced by this Certificate and the shares of capital stock
purchasable upon exercise thereof have not been registered under the Securities
Act of 1933(the "Act"), or any state securities laws, and may not be sold,
offered for sale, pledged, or hypothecated except pursuant to: (1) an effective
registration statement registering the shares under the Act , (2) a transaction
permitted by Rule 144 promulgated under the Act as to which the Company has
received satisfactory evidence of compliance with the provisions of Rule 144 or
(3) an opinion of counsel satisfactory to the Company that such transfer is
lawful.
If the Company hereafter proposes to register any additional shares of capital
stock under the Act (except for registration statements on Form S-8 or Form S-4,
or any successor forms then in effect), it will so notify the holder of this
warrant, or the holder of shares of capital stock purchased upon exercise
hereof, who may include in such registration such number of shares purchased or
purchasable hereunder as such holder has a bona fide intention to sell;
provided, however, that if the registration is an underwritten registration, the
number of shares so included shall be determined by the managing underwriter.
STEARNS & LEHMAN, INC.
By: /s/ William C. Stearns
----------------------------
William C. Stearns, President
51
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 272,339
<SECURITIES> 0
<RECEIVABLES> 1,363,233
<ALLOWANCES> (56,000)
<INVENTORY> 1,868,342
<CURRENT-ASSETS> 3,556,309
<PP&E> 4,258,035
<DEPRECIATION> (957,822)
<TOTAL-ASSETS> 7,514,201
<CURRENT-LIABILITIES> 1,156,514
<BONDS> 802,353
0
0
<COMMON> 3,614
<OTHER-SE> 5,500,441
<TOTAL-LIABILITY-AND-EQUITY> 7,514,201
<SALES> 9,242,530
<TOTAL-REVENUES> 9,259,171
<CGS> 6,613,046
<TOTAL-COSTS> 8,350,313
<OTHER-EXPENSES> 2,000
<LOSS-PROVISION> 21,400
<INTEREST-EXPENSE> 54,320
<INCOME-PRETAX> 831,138
<INCOME-TAX> 171,422
<INCOME-CONTINUING> 659,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659,716
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
