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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Post-Effective Amendment No. 2)
STEARNS & LEHMAN, INC.
(Name of small business issuer in its charter)
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OHIO 2087 34-1579817
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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30 PARAGON PARKWAY
MANSFIELD, OHIO 44903
419/522-2722
(Address and telephone number of principal executive offices)
Copy to:
William C. Stearns, President Susan E. Brown, Esq.
30 Paragon Parkway Vorys, Sater, Seymour and Pease
Mansfield, Ohio 44903 Box 1008
419/522-2722 52 East Gay Street
(Name, Address and telephone number of Columbus, Ohio 4316-1008
agent for service) 614/228-4546
Approximate date of proposed sale to the public: As soon as practical after this
Post-Effective Amendment No. 2 to Form SB-1 Registration Statement becomes
effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. [ ] __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Disclosure alternative used (check one): Alternative 1 ___ Alternative 2 _X_
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PROSPECTUS
STEARNS & LEHMAN, INC.
382,502 COMMON SHARES
Of the common shares of Stearns & Lehman, Inc., an Ohio corporation
(the "Company"), covered by this Prospectus (the "Shares"), 34,950 Shares will
be issued and sold by the Company upon the exercise of warrants (the
"Underwriter Warrants") issued to Quantum Capital Corporation (the "Underwriter"
or "Quantum"), as part of the Underwriter's compensation in connection with the
Company's initial public offering of its common shares (see "Description of
Underwriter Warrants"); 23,456 Shares will be issued and sold by the Company on
exercise of certain other outstanding warrants (the "Greystone Warrants")
originally issued to Greystone Resources Investment, Inc. ("Greystone") (see
"Description of the Greystone Warrants") and 324,096 Shares will be sold by
certain shareholders of the Company (the "Selling Shareholders"). See "Selling
Shareholders".
The Underwriter Warrants may be converted into 34,950 Shares at an
exercise price of $5.75 per Share. The Underwriter Warrants will expire October
23, 2001, if not exercised. See "Description of Underwriter Warrants." The
Greystone Warrants may be converted into 23,456 Shares at an exercise price of
$3.00 per Share. The Greystone Warrants will expire May 4, 1998, if not
exercised. See "Description of the Greystone Warrants."
The Selling Shareholders may sell the Shares being offered hereby in
transactions on the NASDAQ SmallCap Market, in negotiated transactions or
otherwise, at market prices prevailing at the time of the sale or at negotiated
or fixed prices. The Selling Shareholders may sell some or all of the Shares in
transactions involving broker-dealers, who may act either as agent or principal.
The aggregate proceeds to the Selling Shareholders will be the sales price of
the Shares less the aggregate commissions and discounts, if any, and other
expenses of issuance and distribution not borne by the Company. None of the
proceeds from the sale of the Shares by the Selling Shareholders will be
received by the Company. The Company will pay substantially all of the expenses
to be incurred, including those to be incurred by the Selling Shareholders, in
connection with the Registration Statement of which this Prospectus is a part
(other than such commissions and discounts). See "Selling Shareholders."
The Selling Shareholders and any agents, dealers or underwriters that
participate with the Selling Shareholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), and any discounts, commissions or concessions
received by them and any profit on the resale of the Shares purchased by them
may be deemed "underwriting commissions or discounts" under the Securities Act.
Since December 17, 1996, the common shares of the Company have been
traded on the NASDAQ SmallCap Market. On December 19, 1997, the closing price
for such common shares was $5.50 per share. See "Market for Common Shares."
AN INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGES 5 THROUGH 10 OF THIS PROSPECTUS.
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE
MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE
OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY PROSPECTUS
OR OTHER SELLING LITERATURE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is January 14, 1998
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The Company is subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended, and in accordance therewith,
files periodic reports, proxy and information statements and other information
with the United States Securities and Exchange Commission ("Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a web site that contains
reports, proxy, information statements and other information regarding
registrants that file electronically with the Commission. The Commission's web
site address is: http://www.sec.gov. Reports, proxy statements and other
information concerning the Company also may be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form SB-1 pursuant to Regulation S-B of the Rules and Regulations under the
Securities Act. This Prospectus omits certain information contained in the
Registration Statement and reference is hereby made to the Registration
Statement and the exhibits thereto for further information with respect to the
Company and the Shares. Statements contained herein concerning provisions of any
document filed as an exhibit are not necessarily complete and, in each instance,
reference is made to the copy of each document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference.
The Company will provide without charge to each person that receives a
Prospectus, upon written or oral request, a copy of any information that is
incorporated by reference in the Prospectus, not including exhibits to the
information that is incorporated by reference unless the exhibits themselves are
specifically incorporated by reference. Requests for information should be
directed to Stearns & Lehman, Inc., 30 Paragon Parkway, Mansfield, Ohio 44903,
Attention: Mr. William C. Stearns, 419/522-2722.
The fiscal year end of the Company is April 30. The Company intends to
furnish its shareholders with annual reports containing financial statements
audited by independent auditors and such other interim reports as it may
determine to furnish or as may be required by law.
In connection with this offering, no person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus and, if given or made, such other information or representations
should not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy Shares in any state where the offer and sale of the Shares is not lawful.
The delivery of this Prospectus at any time does not imply that the information
herein is correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY ...................................................................................................4
RISK FACTORS .........................................................................................................5
DESCRIPTION OF UNDERWRITER WARRANTS .................................................................................10
DESCRIPTION OF GREYSTONE WARRANTS ...................................................................................11
SELLING SHAREHOLDERS ................................................................................................12
PLAN OF DISTRIBUTION BY SELLING SHAREHOLDERS ........................................................................14
USE OF PROCEEDS TO ISSUER ...........................................................................................15
DESCRIPTION OF BUSINESS .............................................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ................................22
DESCRIPTION OF PROPERTY .............................................................................................29
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES .............................................................30
REMUNERATION OF DIRECTORS AND OFFICERS ..............................................................................32
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS .......................................................33
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS ...........................................................35
MARKET FOR COMMON SHARES ............................................................................................35
DESCRIPTION OF SECURITIES ...........................................................................................36
SIGNIFICANT PARTIES .................................................................................................38
RELATIONSHIP WITH ISSUER OF EXPERTS NAMED IN REGISTRATION STATEMENT .................................................40
LEGAL PROCEEDINGS ...................................................................................................40
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES .................................40
EXPERTS .............................................................................................................40
INDEX TO FINANCIAL STATEMENTS ......................................................................................F-i
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
THE COMPANY
Stearns & Lehman, Inc. (the "Company") is engaged in the business of
manufacturing and marketing specialty food products, including coffee and
espresso flavorings, syrups, oils and toppings, extracts, flavorings, sauces,
dressings and specialty sugars. The Company manufactures and sells products
under its own brand names, including DOLCE(R), FLAVOR-MATE(R) and Grandma's
Choice, and manufactures private label products for various national accounts.
The Company was incorporated under the laws of the State of Ohio on
March 14, 1988. The Company's address is 30 Paragon Parkway, Mansfield, Ohio
44903. Its telephone number is 419/522- 2722. The Company's fiscal year ends on
April 30 of each year.
THE OFFERING
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COMMON SHARES OFFERED 34,950 Shares at $5.75 per Share upon
exercise of Underwriter's Warrants;
23,456 Shares at $3.00 per share upon
exercise of Greystone Warrants;
324,096 Shares by the Selling
Shareholders
COMMON SHARES ISSUED AND OUTSTANDING 3,272,665
AS OF DECEMBER 22, 1997
PROCEEDS TO THE COMPANY The proceeds to the Company from the
exercise of the Underwriter Warrants
and the Greystone Warrants will be
$271,330.50; the Company will not
receive any proceeds from the sale of
Shares offered by the Selling
Shareholders.
ANTICIPATED USE OF PROCEEDS BY Expenses of offering (estimated to be
COMPANY $20,000), working capital and general
business purposes.
RISK FACTORS An investment in the Shares is
speculative and should be considered
only by those persons who are able to
bear the economic risks of an
investment in the Company for an
indefinite period of time. See "RISK
FACTORS"
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RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be considered in evaluating the Company and its business
before purchasing the Shares offered hereby.
POSSIBLE INADEQUACY OF FUNDS
The Company believes that it can normally operate and manage its
business for a period of two to three years at fiscal year 1997 sales levels,
current selling prices and current manufacturing costs. However, no assurance is
given that such will be the case and, in fact, the Company may require
additional financing. If the Company does require such additional financing,
there is no assurance that financing will be available in the amount required
or, if available, that it can be obtained on terms satisfactory to the Company.
The Company has financed much of its past growth and operations by sales of its
common shares and convertible debentures. There can be no assurance that the
Company will continue to seek debt or equity capital or use any other method of
financing. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION-Plan of Operation, Results of Operations for the years
ended April 30, 1997 and 1996, Results of Operations for the years ended April
30, 1996 and 1995, Results of Operations for the six months ended October 31,
1997 and 1996, and Liquidity and Capital Resources" sections herein.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business depends in large part on its
ability to retain the services of William C. Stearns, the Company's President.
Mr. Stearns currently does not have an employment agreement or noncompetition
agreement with the Company. The loss of his services or the inability of Mr.
Stearns to demonstrate the managerial skills and capabilities required could
have a material adverse effect on the operations of the Company. In the event of
the loss of Mr. Stearns, it could prove difficult to replace him. The Company
carries and pays for a "key man" life insurance policy on Mr. Stearns in the
amount of $1,000,000, and as one of the named beneficiaries, is entitled to
ninety percent (90%) of the benefits of such insurance policy. Sally A. Stearns,
the Company's Vice President-Finance and Secretary, and wife of Mr. 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 for a "key man" life insurance policy on Ms. Stearns in the
amount of $500,000 and is entitled to eighty percent (80%) of the benefits of
such policy. Mr. 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.
PRODUCTS LIABILITY AND PRODUCT RECALLS
The Company believes that it utilizes adequate quality assurance
standards in connection with the production of its products. However, in the
event that a batch or shipment of product were to become spoiled or contaminated
for any reason and a customer became ill due to his or her consumption of the
product, the Company may be subject to a product liability or other claims by
the customer and/or regulatory agencies. The Company carries product liability
insurance in the amount of $4,000,000 and product recall insurance in the amount
of $100,000, each of which it believes to be sufficient to protect
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against such claims. This belief is based on an assessment of the Company's
risks conducted by the Company and the Company's insurance broker. Such
assessment included the review of the Company's distribution channels, sales
level, quality assurance procedures, Hazard Analysis Critical Control of Points
(HACCP) Program, manufacturing and warehouse facilities, along with the type of
products made by the Company, including associated raw materials and known
environmental conditions. However, in the event damages would be awarded against
the Company in excess of such insurance coverage, the Company would be adversely
affected. Further, in the event that a batch or shipment of product were to
become spoiled or contaminated for any reason, the Company may be forced to
recall and destroy its existing inventory of such product at a significant cost
and cease production of the product until the cause of such spoilage or
contamination is determined. Such event would delay the production and shipment
of the product to the Company's customers and could adversely affect the
Company.
COMPETITION
There are several companies engaged in businesses similar to or
competitive with the business of the Company, and there may be more 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,
management of the Company cannot estimate their competitive ability.
CONCENTRATION OF SALES
For the fiscal years ended April 30, 1997 and April 30, 1996, Starbucks
Coffee Company ("Starbucks") represented 27% and 23% of the Company's total
sales respectively. For the six months ended October 31, 1997 and October 31,
1996, Starbucks represented 31% and 24% of the Company's total sales,
respectively. Starbucks represented 75% of the Company's sales from the
Company's Kent, Washington facility for the year ended April 30, 1997 and 68% of
the Company's sales from such facility for the six month period ended October
31, 1997. The loss of Starbucks as a customer could have an adverse impact on
the profitability of the Company. On September 1, 1997, the Company renewed its
written supply agreement with Starbucks for an initial term of two years,
expiring on August 31, 1999. See "DESCRIPTION OF BUSINESS-Dependence on Major
Customers" section herein.
LACK OF DIVERSIFICATION
The Company's business is not diversified, relying predominantly upon
the sale of its flavored syrups for its revenue. Revenue generation will be
limited by the success of the Company in marketing these items. Since the
Company's flavored syrups are sold primarily to specialty coffee companies, a
significant portion of the Company's revenues are dependent upon the specialty
coffee drink industry as a whole. Any health concerns with respect to coffee
could have an adverse impact on coffee sales and the Company's profitability.
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GENERAL ECONOMIC CLIMATE
The Company's operations are dependent upon the general economic
climate of the specialty coffee industry. These risks would include, among other
factors, any labor disputes or restrictions imposed by governmental authorities,
changes in federal, state or local tax laws applicable to the Company,
availability of working capital, consumer spending habits and fluctuations in
the availability and pricing of coffee. The Company may not have adequate
capital to survive prolonged work stoppages, strikes, lack of market acceptance
or economic maladies in general. Raw material shortages and increases in raw
material prices, taxes, energy and labor costs would adversely affect the
Company.
LIMITATION ON TRANSFER OF SHARES
The Shares offered hereby have been registered with the United States
Securities and Exchange Commission pursuant to the Securities Act and Regulation
S-B promulgated thereunder and, as such, are freely transferable under the
federal securities laws. However, the Shares have been registered only in Ohio,
and may not be sold or otherwise transferred to persons who are residents of any
state in which the Shares have not been registered unless they are registered
under such state's securities laws or there exists an exemption from
registration with respect to such sale or transfer.
PAST COMPLIANCE WITH SECURITIES LAWS.
The Company has made several sales in the past of its securities and,
in connection therewith, has made filings with the Commission and the Ohio
Division of Securities. Although the Company has attempted to comply with all
applicable securities laws and regulations with respect to such sales, there can
be no assurance that such sales of securities by the Company were conducted in
full compliance with such laws and regulations. At this time, the Company is
unaware of any threatened stop-order or other administrative action regarding
the disposition or trading of its securities by any governmental authority.
LIMITED PUBLIC MARKET
There is currently only a limited public market for the Company's
common shares, which are traded on the NASDAQ SmallCap Market. On December 19,
1997, the closing price for the common shares was $5.50 per share. There can be
no assurance that such public market will continue in the future. As of December
19, 1997, the Company had eight listed market makers, including Diversified
Capital Markets, a division of the Underwriter ("DCM"). However, trading of the
Company's common shares is sporadic and trading volume is very small. During the
four weeks ended on December 19, 1997, the average weekly trading volume was
35,662 common shares.
To continue to qualify for quotation on the NASDAQ SmallCap Market, the
Company must maintain total assets of at least $2,000,000, total stockholders'
equity of $1,000,000 and maintain a public float of not less than 500,000 common
shares having a market value of at least $500,000. The Company must also
maintain a minimum of 300 shareholders, 2 market makers and a per share bid
price of at least $1.00 per share. There can be no assurance that the Company
will be able to continue to meet such maintenance requirements. If the common
shares of the Company are delisted and the market price of the common shares
falls below $5.00 per share, resales of common shares may, subject to certain
exemptions and exclusions, become subject to the Commission's Penny Stock
Regulations, which
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impose certain special requirements on broker-dealers selling such low-priced
securities and prevent broker-dealers from selling such low-priced securities to
persons for whom such securities are deemed unsuitable.
Although DCM is a market maker, neither it nor the Underwriter will
participate in any market making activities for a period of nine (9) business
days prior to the effective date of this offering and until it completes its
participation in the offering, except for certain special circumstances
permitted by governmental regulations. Consequently, there can be no assurance
that an active trading market will continue during such period or be
re-established.
For all of the reasons set forth above, a purchaser of the Shares may
not be able to liquidate his or her investment readily, if at all.
SHARES ELIGIBLE FOR FUTURE SALES
Of the 3,272,665 common shares of the Company outstanding at December
22, 1997, 1,743,483 common shares were freely tradeable, 1,484,507 common shares
(including 1,474,501 common shares held by officers and directors) were
"restricted" and/or "control" shares and could be sold under federal securities
laws only pursuant to a registration statement under the Securities Act, an
exemption from such registration or a transaction which satisfies all of the
requirements of Rule 144 promulgated under the Securities Act ("Rule 144"),
35,913 common shares were underwriter's compensation and could be sold under
federal securities laws only pursuant to a registration statement under the
Securities Act, and 8,762 common shares were subject to escrow agreements and
are freely tradeable when released from escrow. Rule 144 provides, in essence,
that, with respect to shares acquired more than one year but less than two years
ago from an issuer or an affiliate of an issuer in a private placement
("restricted shares") and shares held by affiliates of an issuer ("control
shares"), a holder may only sell that number of shares in any three (3) month
period which is equal to the greater of (a) one percent (1%) of the issuer's
outstanding shares or (b) the average weekly volume of sales during the four
calendar weeks preceding the sale.
A total of 283,433 restricted and/or control shares and 35,913 common
shares of underwriter's compensation have been registered for sale by the
Selling Shareholders pursuant to this Prospectus. See "SELLING SHAREHOLDERS." As
of the date of this Prospectus, of the remaining restricted and/or control
shares, a maximum of 171,709 common shares currently may be sold under Rule 144
in a three month period.
The sale of a substantial number of common shares of the Company, or
the perception that such sales could occur, could adversely affect prevailing
market prices for the common shares of the Company.
CONTROL BY WILLIAM C. STEARNS AND SALLY A. STEARNS
Regardless of how many Shares are sold through this offering, effective
control of the Company will still be maintained by William and Sally Stearns,
who currently own approximately 39.6% of the total outstanding common shares of
the Company. Mr. and Mrs. Stearns effectively control the election of directors
of the Company and, thereby, the appointment of officers. Thus, Mr. and Mrs.
Stearns have
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substantial influence on matters submitted to a vote of the Company's
shareholders, including the sale or merger of the Company or a sale of
substantially all of its assets.
NO DIVIDENDS
The Company has not paid any cash dividends during the last two fiscal
years. The Company can make no assurances that the future operations of the
Company will result in additional revenues, will be profitable or that there
will be sufficient funds legally available for the distribution or payment of
dividends. The Company has no legal obligation or contract to pay dividends and,
should the operations of the Company be profitable, it is likely that the
Company would retain much or all of its earnings in order to finance future
growth and expansion. The Company's existing line of credit restricts the
ability of the Company to declare and pay dividends. The Company does not
presently intend to pay cash dividends, and it is not likely that any cash
dividends will be paid in the foreseeable future.
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 Food & Drug
Administration (FDA) and gives authority to the FDA to establish regulations
governing food manufacture and distribution. This industry is governed by other
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 CRF 110) and Food Labeling (21 CFR 100).
EXERCISE OF WARRANTS AND ISSUANCE OF ADDITIONAL SHARES MAY HAVE DILUTIVE EFFECT
The exercise of the Underwriter Warrants and the Greystone Warrants
will result in the dilution of the ownership interest in the Company held by its
shareholders. Further, the exercise of the Underwriter Warrants and the
Greystone Warrants and the sale of the Shares offered hereby could adversely
affect the market price of the common shares of the Company.
NECESSITY FOR UPDATING REGISTRATION STATEMENT
So long as the Shares remain unsold in this offering, the Company will
be required to file one or more Post-Effective Amendments to its Registration
Statement to update the general and financial information contained in this
Prospectus. These obligations could result in a substantial expense to the
Company and could be a hindrance to any additional attempts of the Company to
obtain financing.
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ABILITY TO MANAGE GROWTH
The Company's future profitability will be subject to a number of
risks, particularly those associated with managing its anticipated growth. The
Company's ability to manage its anticipated growth will depend upon a number of
factors, including hiring, training and retention of skilled management and
other personnel; availability of adequate financing and other factors, many of
which are beyond the Company's control. There can be no assurance that the
Company will achieve its anticipated growth.
COMPLIANCE WITH BANK COVENANTS
The Company currently has outstanding a mortgage note payable and a
note payable to First Knox National Bank ("First Knox") and has agreed to
maintain certain financial ratios and comply with certain other covenants and
requirements imposed by First Knox. There can be no assurance that the Company
will be able to comply with the covenants and other requirements imposed on the
Company by First Knox. The failure of the Company to comply with such
requirements from First Knox, or any other future lender, may result in such
lending institution requiring the immediate repayment of the Company's debt
obligations which could adversely impact the Company's profitability.
PLEDGE OF ASSETS
The Company has granted a security interest in all of its assets as
collateral for the Company's existing line of credit. In the event a default
occurs in connection with such line of credit, the secured party could foreclose
on its security interest and force a sale of all of the Company's assets.
DESCRIPTION OF UNDERWRITER WARRANTS
On October 22, 1996, the Company entered into an agreement with DCM
pursuant to which the Company offered and sold, through DCM, on a "best efforts"
basis, 349,495 common shares of the Company at $5.50 per share. DCM received a
cash commission equal to 8% of the gross proceeds received from the sale of such
shares and a non-accountable expense allowance of 2% of such gross proceeds. The
Company also granted to DCM the Underwriter Warrants. The Company will issue
34,950 common shares to DCM upon exercise of the Underwriter Warrants. Each of
the Underwriter Warrants entitles DCM to purchase one (1) common share of the
Company for an exercise price of $5.75 per share. The Underwriter Warrants
became exercisable on October 22, 1997, and will expire on October 23, 2001, if
not exercised. The Company agreed to indemnify DCM against certain civil
liabilities, including liabilities under the Securities Act. The Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
DCM
In February of 1995, the Underwriter and DCM were organized through the
acquisition of the assets of an existing broker-dealer in operation since 1987.
All of the Underwriter's current management personnel were employed by the
predecessor broker-dealer. (As used herein, "DCM" includes this pre decessor
broker-dealer.)
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DCM serves retail and institutional clients in both the private and
public sector. DCM is active in the municipal and government securities dealer
market and equity trading. DCM employs a staff of over twenty registered
representatives and has over 3,000 retail clients. DCM is a member of the
National Association of Securities Dealers, Inc., the Municipal Securities Rule
Making Board, Securities Industry Association and Securities Investors
Protection Corporation.
Nancy A. Vargo is the President and Chief Executive Officer of DCM. Ms.
Vargo is responsible for DCM's compliance program and all financial and
regulatory reporting to the SEC, NASD and State of Ohio; analysis and monitoring
of firm inventory; personnel; budgeting; and strategic planning. Ms. Vargo is a
graduate of The Ohio State University and is registered with the National
Association of Securities Dealers as a General Securities Representative,
General Securities Principal, and Financial and Operations Principal.
Thomas L. Dooley III is the Executive Vice President and Chief
Operating Officer of DCM. Mr. Dooley operates the equity trading and investment
banking departments of DCM and manages all aspects of DCM's retail sales. Mr.
Dooley is a graduate of The Ohio State University where he received a Bachelor
of Arts degree in Economics. Mr. Dooley currently holds National Association of
Securities Dealers General Securities, General Principal, Financial and
Operations Principal, and Municipal Securities Principal Licenses. Mr. Dooley is
a Selling Shareholder. See "Selling Shareholders."
DESCRIPTION OF GREYSTONE WARRANTS
The Company will issue 23,456 of the Shares upon the exercise of the
Greystone Warrants. The Greystone Warrants were originally issued pursuant to
the Warrant Agency Agreement and Underwriting Agreement between the Company and
Greystone, dated April 1, 1992. The Greystone Warrants provide for an exercise
price of $3.00 per share and will expire on May 4, 1998.
The Greystone Warrants were originally issued to Greystone as
underwriter's compensation and were subsequently distributed by Greystone to
Ohio residents. Because the Greystone Warrants may have been distributed by
Greystone in violation of federal and state securities laws and regulations, the
Company, in 1996, gave all subsequent holders an opportunity to rescind their
purchases and obtain a refund of the purchase price. The Company paid a total of
$36,750 to such warrantholders who accepted the rescission offer. In connection
with the rescission offer, the Company undertook to file a registration
statement covering the Shares to be issued upon exercise of the remaining
Greystone Warrants and to keep it effective until all of the Greystone Warrants
have been exercised or have expired.
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<PAGE> 13
SELLING SHAREHOLDERS
The following table shows certain information regarding the beneficial
ownership of Shares by each of the Selling Shareholders as of the date of this
Prospectus.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Shares Beneficially Owned
Prior to the Offering Offered Hereby After Offering
------------------------- -------------- -------------------------
Beneficial Owner Number Percent Number Percent
- ---------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
William C. and Sally A. Stearns 1,296,307 39.6% 273,433 1,022,874 31.3%
Thomas Dooley 12,500 * 12,500 0 0%
Quantum 12,500 * 12,500 0 0%
Michael Patterson 7,396 * 5,844 1,552 *
Lawrence A. Pabst 12,750 * 750 12,000 *
Lawrence A. Pabst, M.D., Inc. 4,640 * 1,000 3,640 *
Roger W. Syler 3,000 * 3,000 0 0%
Frank E. Duval 120,000 3.7% 10,000 110,000 3.4%
Carlos Gamez 148 * 148 0 0%
Nancy Vargo 3,011 * 3,011 0 0%
Thomas Daly 1,910 * 1,910 0 0%
</TABLE>
- ----------------------
* Less than 1%
William C. Stearns is President, Treasurer and a director of the
Company. Sally A. Stearns is Vice President, Secretary and a director of the
Company. See "Directors, Executive Officers and Significant Employees."
The Shares being sold by Mr. and Mrs. Stearns were subject to the terms
and conditions of an Escrow and Subordination Agreement pursuant to which, in
connection with the May, 1992 offering of common shares of the Company, Mr. and
Mrs. Stearns placed 1,363,382 common shares of the Company owned by Mr. and Mrs.
Stearns in escrow with First-Knox. The Escrow and Subordination Agreement
provides that the escrowed shares shall not be assigned, sold, hypothecated,
pledged, transferred or otherwise disposed of (except by will, descent or
operation of law) until released from escrow. Under the terms of the Escrow and
Subordination Agreement, shares subject to escrow thereunder may be released
when the Company has provided to First-Knox and the Ohio Commissioner of
Securities audited financial statements showing fully diluted net earnings of
(a) twelve percent (12%) of the 1992 public offering price per share over any
period of four consecutive quarters (i.e., $0.0975 per share) or (b) six percent
(6%) of the 1992 public offering price per share over any period of eight
consecutive quarters (i.e., $0.04875 per share). Absent fulfillment of the
above-mentioned earn-out provisions, and pursuant to the terms of the Escrow and
Subordination Agreement, on May 4, 1997, twenty-five percent (25%) of the total
amount of escrowed shares (340,958 shares, which include the Shares being sold
hereby by Mr. and Mrs. Stearns) were released automatically, and twenty-five
percent (25%) increments shall be released on May 4, 1998, 1999 and 2000,
respectively. As such additional
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<PAGE> 14
shares are released from escrow, those shares will not be registered for sale
pursuant to this Prospectus. The earnings required for release will be adjusted
for stock splits, exchanges or reclassification.
The common shares owned by Mr. and Mrs. Stearns, including the shares
being sold hereby were subject to a Lock-Up Agreement with Quantum, dated
October 22, 1996, which provides that Mr. and Mrs. Stearns can sell up to 68,170
common shares of the Company any time after such shares are released from the
Escrow and Subordination Agreement. Such Lock-Up Agreement further provides
that, until April 22, 1998, and after the sale of such 68,170 shares, Mr. and
Mrs. Stearns are permitted to sell an additional 68,170 shares in such
increments as would be permissible under the formula set forth in Rule 144
should such sale otherwise be permitted under applicable law. As of November 13,
1997, Quantum consented to the sale of the Shares owned by Mr. and Mrs. Stearns
being sold hereby, provided the Shares are sold through transactions made in the
public market and the sale price of the Shares is not less than $3.50 per Share.
Between March and May of 1994, DCM was the placement agent for the
Company's offering of $300,000 of subordinated convertible debentures (the
"Debentures"). In March, 1994, in consideration for its services, DCM received a
cash commission equal to 8% of the proceeds of the offering and a warrant to
purchase 3,600 common shares of the Company at $5.75 per share. This warrant was
subsequently transferred to Michael Veigel (979 common shares), Michael
Patterson (1,552 common shares), Samuel Wareb (821 common shares) and William
Johnston (248 common shares). Mr. Patterson is a principal of DCM and Mr.
Johnston is an agent of DCM.
Between October of 1994 and May of 1995, DCM acted as placement agent
for the Company's offering of 390,000 common shares. On May 15, 1995, in
consideration for its services, DCM received a cash commission equal to 8.8% of
the proceeds from the offering and a warrant to purchase 13,561 common shares of
the Company at $3.15 per share. This warrant was subsequently transferred to
Messrs. Patterson (5,844 common shares), Wareb (2,258 common shares), Thomas
Daly (1,910 common shares), Johnston (390 common shares), Carlos Gamez (148
common shares) and Ms. Vargo (3,011 common shares); Messrs. Patterson, Daly and
Gamez and Ms. Vargo exercised their warrants.
In January of 1995, the Company issued warrants to DCM to purchase up
to 25,000 common shares of the Company for an exercise price of $3.50 per share.
Such warrants were issued in accordance with the terms of a Representation and
Services Agreement with DCM pursuant to which DCM assisted the Company in
introducing, developing and securing strategic investment and marketing business
relationships. Twelve thousand and five hundred (12,500) of these warrants were
subsequently transferred to, and exercised by, Thomas Dooley, a principal of
DCM.
The 1,750 Shares being offered by Lawrence A. Pabst and Lawrence A.
Pabst, M.D. Inc. and the 3,000 Shares being offered by Roger W. Syler were
issued upon exercise of the Greystone Warrants. These Greystone Warrants were
distributed by Greystone to Mr. Pabst and Mr. Syler and were subsequently
exercised by Mr. Pabst and Mr. Syler on June 7, 1996 and January 27, 1997,
respectively.
The Company has issued warrants to purchase up to 28,798 common shares
of the Company to certain of its Directors in consideration of services rendered
to the Company. Warrants to purchase 15,000 common shares have an exercise price
of $3.00 per share and expire ten (10) years from the date
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<PAGE> 15
of issuance, if not exercised. The remaining 13,798 warrants have an exercise
price of $5.50 per share and expire ten (10) years from the date of issuance, if
not exercised. Ten thousand (10,000) of the Shares (those Shares offered hereby
by Mr. Duval) represent the common shares of the Company issued to Directors
upon exercise of these warrants. The registration of such Shares in connection
with this offering will remove any Rule 144 restrictions upon the sale of such
Shares.
PLAN OF DISTRIBUTION BY SELLING SHAREHOLDERS
The Shares being offered hereby will be sold by the Selling
Shareholders for their own accounts. The Company will not receive any of the
proceeds from the sale of such Shares. Each Selling Shareholder has agreed to
indemnify the Company and its officers and directors against any losses, claims
or damages arising out of any untrue statement of a material fact contained in
this Prospectus or omission to state a material fact required to be contained
herein, only to the extent that such untrue statement or omission relates to the
Selling Shareholder or the manner of distribution of the Shares by the Selling
Shareholder or was made in this Prospectus in reliance upon information
furnished to the Company by the Selling Shareholders, or arises out of the
failure of the Selling Shareholders to satisfy the prospectus delivery
requirement under the Securities Act.
The Selling Shareholders may sell the Shares being offered hereby from
time to time in the over-the-counter market on the NASDAQ SmallCap Market, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated or fixed prices. The Selling Shareholders may sell some or
all of the Shares in transactions involving broker-dealers who may act either as
agent or principal, and who may receive compensation in the form of discounts,
commissions or concessions from the Selling Shareholders or the purchaser of the
Shares for whom such broker-dealers act as agent or to whom they sell as
principal, or both.
The Selling Shareholders and any underwriters, dealers or agents that
participate with the Selling Shareholders in the distribution of the Shares
offered hereby may be deemed to be "underwriters" under the Securities Act, and
any profit on the resale of the Shares purchased by them and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
may be deemed to be "underwriting discounts and commissions" under the
Securities Act.
The Selling Shareholders have advised the Company that no agreement
exists with any broker-dealer with respect to the sale of the Shares offered
hereby. At the time a particular offer of the Shares is made and upon receipt of
notice of the same by the Company from the Selling Shareholders, a supplement to
this Prospectus will be filed, if required, pursuant to Rule 424(c) under the
Securities Act, which will set forth the aggregate number of Shares being
offered and the material terms of the offering, including the name or names of
any underwriters, dealers or agents, the purchase price to be paid by any
underwriter or dealer for the Shares purchased from the Selling Shareholders,
any discounts, commissions or concessions allowed or reallowed or paid to
dealers, the proposed selling price to the public and other facts material to
the transaction.
For purposes of this Prospectus, the term "Selling Shareholder" may
include persons who receive Shares from a named Selling Shareholder as a gift or
after a default in a bona fide pledge.
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<PAGE> 16
USE OF PROCEEDS TO ISSUER
The proceeds to the Company from the exercise of the Underwriter
Warrants and the Greystone Warrants will be $271,330.50. After deducting
estimated expenses of $20,000, the proceeds will be added to the working capital
of the Company and used for general business purposes.
The Company will not receive any proceeds from the sale of the Shares
being offered by the Selling Shareholders. See "Selling Shareholders."
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, Singapore, Korea and Japan.
Since its incorporation in 1988, the Company has grown from providing a
single product line and having two employees, to being a major manufacturer and
supplier of flavoring syrups for the specialty coffee industry with 49
employees. The Company's customer list includes a number of America's top
specialty coffee retailers and restaurants including Starbucks, Barnie's Coffee
& Tea Company, The Coffee Beanery, Darden Restaurants Inc.'s The Olive Garden
Italian Restaurant, Flagstar Cos. Inc.'s Denny's Restaurant, Gloria Jeans
Gourmet coffee, Godiva Chocolatier, Inc., Borders, Inc., Caribou Coffee Company,
Kraft General Foods, Krups, Sara Lee's Superior Coffee Division, and Sysco Food
Service. The Company does not have any long-term supply agreements with any of
these customers except Starbucks. The Company believes that its success in
obtaining these accounts is attributable to the Company's emphasis on quality,
dependable service and innovation.
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
15
<PAGE> 17
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.
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.
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 36 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. The recently announced
DiNATURA(TM) premium natural flavored brand consists of 14 flavors in two sizes.
The recently announced Godiva Chocolatier Cafe' Godiva(R) brand name consists of
four specialty chocolate flavors in three sizes. Both the DiNATURA(TM), when
produced (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 FLAVOR-MATE(R) brand consists of 23 flavors
in three sizes. The FLAVOR-MATE(R) brand also consists of eight sugar free
flavors and seven granita syrups. The SENZA RIVALE(TM) brand consists of 34
flavors and the SENZA ZUCCHERO brand consists of 14 sugar free flavors. The
SENZA brands and the FLAVOR-MATE(R) brand are distributed through supermarkets
and
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<PAGE> 18
specialty food stores along with the food service industry. The Company also
manufactures private label flavoring syrups for distribution direct to the
private label customer. The primary use of flavoring syrups are to flavor
beverages including coffee, tea, and espresso-based drinks. Granita flavoring
syrups are used for granita machines and frozen blender drinks.
The FLAVOR-MATE(R) line of concentrate flavoring products is sold in
supermarkets throughout the United States. The product is available in 13
flavors, including amaretto, chocolate raspberry, dutch chocolate, french
vanilla and orange cappuccino. FLAVOR-MATE(R) is packaged in a shatter resistant
bottle with a resealable snap cap which allows users to create a variety of
flavored coffee, tea or other beverages from a single unflavored pot.
FLAVOR-MATE(R) products can also be used for cooking and baking purposes.
FLAVOR-MATE(R) products are available in single flavor 12 packs or as an
assortment of flavors in 12 flavor 48-packs.
The Company's Grandma's Choice line includes extracts and flavorings
for baking and cooking, available in individual single-flavor packages. The
Company currently produces 14 different varieties of Grandma's Choice extracts
and flavors, including almond, banana, butter, coconut, lemon, pineapple and
vanilla.
The Company currently produces Cod Liver Oil, Cherry Cod Liver Oil and
Wheat Germ Oil for GNC(R) (General Nutrition Center). All three products are
distributed through the GNC(R) distribution network for sale in GNC(R) retail
stores. These products are directed to the health and natural food markets. The
Company also bottles a Rice Bran Oil for distribution to supermarkets and
specialty food stores and the food service industry. Rice Bran Oil is used as an
alternative cooking and baking oil.
The Company packages four different sugars and seven different toppings
for use primarily in the espresso and food service industries. These sugars and
toppings are also available in supermarkets and specialty food stores for
consumer use in beverages and desserts. The sugars and toppings are available in
the DOLCE(R) and FLAVOR-MATE(R) brand names.
Cinnamon Sticks and Mulling Spices, packaged under the Select
Origins(R) brand, are used with wine, cider and apple juice to create a fragrant
beverage. These products are distributed through supermarkets and specialty food
stores.
My Hero(TM) Submarine Dressing is an all natural dressing for use on
sandwiches, salads and pastas and for marinating. This product is distributed
through supermarkets and specialty food stores.
STATUS OF NEW PRODUCTS
The Company announced two new product lines in fiscal year 1997. These
lines are DiNATURA(TM) premium natural flavored syrups and the Godiva
Chocolatier Cafe' Godiva(R) brand specialty chocolate flavored syrups. The
Godiva Chocolatier Cafe' Godiva(R) brand specialty chocolate flavored syrups are
in production and are currently being shipped. The DiNATURA(TM) premium natural
flavored syrups are scheduled for production in the fourth quarter of fiscal
year 1998. Development costs for new products were approximately $23,000 and
$2,000 for the fiscal years ended April 30, 1997 and 1996 respectively. The
Company anticipates additional capital expenditures of approximately $89,000 to
start production of the DiNATURA(TM) premium natural flavored syrups.
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<PAGE> 19
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), 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 recently acquired the 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, 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.
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<PAGE> 20
These distributors take delivery of product by pallet load and re-distribute
case quantities to their customers, also adding to the "service oriented" aspect
of the Company's marketing.
The Company has direct marketing and distribution arrangements with its
private label customers. The Company does not utilize any other distribution
network to service those customers.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's principal products consist primarily of liquid sucrose,
flavors, packaging and water. The Company has its own water filtration system
which is connected to municipal water supplies. The Company currently acquires
its liquid sucrose from The Amalgamated Sugar Company. Liquid sucrose is readily
available from several large sugar refiners. Flavors are obtained from a large
number of specialty flavor companies. Each flavor is purchased from a sole
source supplier and a change in the availability of a flavor or supplier could
result in a delay in production and a change in the flavor profile of the end
product. Packaging consists primarily of corrugated boxes, bottles and labels.
The Company owns the tooling for boxes and labels and can obtain these materials
from a large number of vendors. The primary bottle can be obtained from two
vendors, Plaxicon and Plastipak. Most other bottles and containers used by the
Company are readily available from a number of sources.
COMPETITION
The specialty food products market is highly competitive and
competition is likely to increase over time. There are no assurances that the
Company will be able to continue to successfully compete in the industry.
Several companies are engaged in business similar to or competitive with the
business of the Company, and more may be entering the field. As a consequence,
there is no assurance that the Company will be able to successfully compete in
the marketplace. Some of the competitors such as R. Torre of San Francisco and
DaVinci of Seattle are older, more established companies whose products have
been in the market for a number of years prior to the Company's introduction of
flavoring syrups to the United States espresso industry. As all of the known
competitors to the Company are closely held private companies that do not
divulge financial information to the public, it is impossible to estimate their
competitive ability.
The Company attempts to distinguish its position in the market place by
delivering high quality products in innovative packaging and at a competitive
price. The Company places a strong emphasis on establishing quality assurance
standards and procedures that meet the same high standards established by the
leaders in the entire food industry.
The Company has the industry experience to create value added product
marketing programs for its customers in addition to meeting the customers
specific packaging and product needs. By having manufacturing facilities in both
the eastern and western United States, the Company is unique in the flavoring
syrup industry and is better equipped to meet customer service requirements. The
Company also believes it is a leader in the flavoring syrup industry in using
new materials and 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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<PAGE> 21
DEPENDENCE ON MAJOR CUSTOMERS
For the fiscal years ended April 30, 1997 and 1996, Starbucks
represented 27% and 23% of the Company's total sales, respectively. For the six
months ended October 31, 1997 and October 31, 1996, Starbucks represented 31%
and 24% of the Company's total sales, respectively. In addition, for the fiscal
year ended April 30, 1997, Starbucks represented 75% of the sales from the
Company's Kent, Washington facility and 68% of the sales from such facility for
the six month period ended October 31, 1997. The Company's six major customers
represent approximately 47% and 42% of the Company's total sales, respectively,
for the fiscal years ended April 30, 1997 and 1996. For the six months ended
October 31, 1997 and October 31, 1996, the Company's six major customers
represented 56% and 51% of the Company's total sales, respectively. However,
other than Starbucks, no other customer exceeded 9% of the Company's total sales
in fiscal year 1996 or 1997.
If the Company lost the Starbucks' business, the current estimated
reduction in net income before taxes would be approximately $500,000. The loss
in revenue would be significantly offset by a reduction in overhead. The
majority of the reduction in overhead would result from the expected closure of
the Washington facility. The Company would have to reposition its West Coast
marketing efforts to compensate for this closure. However, because only
approximately 6% of the Company's non-Starbucks business is serviced from this
facility, the potential impact of this closure would be minimal.
The Company 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 December 22, 1997, the Company employed 49 people, all of which
are full-time employees. All employees are not unionized and the Company's
management is unaware of any efforts by its employees to unionize.
The Company adopted the 1994 Stock Option Plan (the "Plan") to help
attract and retain employees. at the Company's annual meeting of shareholders
held on March 31, 1994. As of December 22, 1997, the Company has not issued any
options under the Plan. The Company is authorized to, and in the future may
issue up to 275,000 common shares, no par value (the "common shares of the
Company") under the plan.
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<PAGE> 22
GOVERNMENTAL REGULATION
The manufacture and sale of the Company's products are subject to the
jurisdiction of a variety of regulatory authorities, including, but not limited
to, federal, state, county and city agencies administering laws and regulations
relating to health, labor, taxation and the food industry. The Company is also
subject to periodic inspections of its facilities by federal, state and local
governmental agencies.
The United States flavorings industry in general and the Company in
particular are subject to the regulations set forth in Section 403 of the Food,
Drug and Cosmetic Act which specifically establishes the FDA and gives the FDA
authority to establish regulations governing food manufacture and distribution.
This industry is governed by other federal agencies only as prescribed by the
FDA and such Act. Specifically, the Company is required to comply with
regulations set forth by the FDA in Title 21 of the Code of Federal Regulations.
A few examples of such regulations are Good Manufacturing Practices (21 CRF110)
and Food Labeling (21 CFR100).
The Company is also subject to and continues to monitor compliance with
the Federal Nutrition Labeling Act of 1990. In addition, the Company has
established a volunteer Hazard Analysis Critical Control Points (HACCP) Program
similar to the FDA Seafood HACCP regulations.
The Company believes it is in that 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.
NOTES PAYABLE
The Company issued a $750,000 mortgage note payable to 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 September 30,
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 December 22, 1997
was 8.5%. 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
21
<PAGE> 23
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.
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%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION
PLAN OF OPERATION
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. See also,
"RISK FACTORS."
The Company's plans, for the fiscal year ending April 30, 1998, include
increasing market penetration of the DOLCE(R) and The Godiva Chocolatier Cafe'
Godiva brands of flavoring syrups, initiating production of and developing the
market for the DiNATURA(TM) premium natural flavored syrups, installing a new
manufacturing and business computer system and enhancing revenue growth through
strategic acquisitions.
During the quarter ended July 31, 1997, the Company completed moving
its executive offices, warehouse operations and the production of flavoring
based products into its new manufacturing warehouse and executive office
facility. The remaining production lines were moved during the month of August
1997 after the new facility was substantially completed.
The Company intends to enhance the distribution of the DOLCE(R) brand
of flavoring syrups by entering into master distributor relationships with
large, financially sound organizations that have the resources to readily market
the Company's products and order and receive product in larger quantities. As of
December 22, 1997, the Company has 9 master distributors covering 12 states.
The Company's view is that the flavoring syrup market is weak in brand
name recognition. As
22
<PAGE> 24
a result, the Company initiated efforts to obtain partnering arrangements that
enhance the brand name recognition of its products in addition to providing
value services to the partnering entity. Currently, the Company has entered into
a written agreement with Godiva Chocolatier, Inc. for the use of the Godiva
Chocolatier Cafe' Godiva brand name. As of October 31, 1997, the Company's sales
of Godiva Chocolatier Cafe' Godiva brand name syrups have been small but
interest has been high and sales are expected to improve.
The Company's planned DiNATURA(TM) premium natural flavored syrups is
intended to be the "best in the class" and 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. As of December 22, 1997, the packaging has been finalized, all
production tooling is on order and development of final flavor profiles
continue. Due to delays encountered with the tooling manufacturers, production
of the DiNATURA(TM) premium natural flavored syrups is now expected in the
fourth quarter of fiscal year 1998. The Company anticipates an additional
capital expenditure of approximately $89,000 to start production of the
DiNATURA(TM) premium natural flavored syrups.
The installation of a year 2000 compliant manufacturing and business
computer system started during the month of August 1997. The startup of the
general ledger and accounts payable occurred on November 1, 1997 with the
remaining modules to be implemented by the end of the Company's fiscal year.
This system is designed to enable the Company to reduce inventory carrying
costs, improve production planning and customer deliveries and allow significant
improvements in product and customer profitability analysis. The Company
anticipates additional expenditures of approximately $100,000 for additional
computer components and installation costs.
The Company's plans also includes evaluating and proceeding with
strategic acquisitions to enhance revenue growth. On August 22, 1997, the
Company signed a letter of intent to acquire the inventory, equipment,
customers, product formulas, trademarks, and other intangible assets of Ricter,
the manufacturer of the SENZA ZUCCHERO and SENZA RIVALE(TM) brands of flavoring
syrups, for $140,000 in cash and a $120,000 note payable. Ricter reported
unaudited sales of $356,000 for the twelve months ended September 30, 1997. The
Company and Ricter completed this transaction on December 4, 1997.
On October 15, 1997, the Company signed a letter of understanding with
Cultor Food Science, Inc. ("Cultor"). This letter of understanding describes the
intent of Cultor to transfer the business and trademark of its SanMarino(TM)
brand of flavoring syrups to the Company in exchange for Cultor becoming the
Company's primary compound flavor supplier. In addition, both the Company and
Cultor would become partners in the development of future products. Both Cultor
and the Company are currently engaged in developing a mutually beneficial
agreement towards these ends. However, no assurance can be made that a final
agreement will be reached.
Also on October 15, 1997, the Company signed a Sales Management
Contract with The Continental Group (TCG) appointing TCG as its consumer retail
market master broker. The principals of TCG have numerous years of experience in
the consumer retail market and it is anticipated that TCG's expertise will
revitalize and broaden sales of the Company's consumer product group.
23
<PAGE> 25
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR SIX MONTHS SIX MONTHS
APRIL 30, APRIL 30, APRIL 30, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $2,956,601 $1,889,929 $2,567,618 $2,747,143 $2,635,424
TOTAL ASSETS $5,780,362 $3,973,037 $4,211,961 $6,638,931 $4,630,923
CURRENT LIABILITIES $1,050,030 $1,417,743 $924,388 $952,084 $1,674,796
LONG TERM DEBT, NET OF CURRENT $2,256 $144,500 $408,355 $694,642 $365,055
PORTION
TOTAL LIABILITIES $1,053,030 $1,562,243 $1,332,743 $1,646,726 $2,039,851
SHAREHOLDERS' EQUITY $4,727,332 $2,410,794 $2,879,218 $4,992,205 $2,591,072
STATEMENTS OF OPERATIONS:
TOTAL SALES $7,381,105 $5,514,753 $5,557,469 $4,400,254 $3,457,718
COST OF GOODS SOLD $5,432,588 $4,343,803 $3,935,180 $3,289,146 $2,523,748
SELLING, GENERAL AND $1,588,865 $1,774,118 $1,359,406 $867,813 $769,576
ADMINISTRATIVE EXPENSES
NET INCOME (LOSS) $402,272 $(732,915) $156,718 $264,873 $175,028
EARNINGS (LOSS) PER SHARE $0.13 ($0.26) $0.06 $0.08 $0.06
</TABLE>
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. For
the fiscal year ended April 30, 1997, private label sales increased by 63.4% and
Dolce(R) brand products increased by 20.7%, while the net sales of other Company
products decreased by 21.7% compared to the fiscal year ended April 30, 1996.
Private label, Dolce(R) brand products, and other Company products represented
68.9%, 16.3% and 14.8% of gross sales, respectively for the fiscal year ended
April 30, 1997. The increase in private label sales was the result of
significant sales growth by several of the Company's private label customers,
and the Company's addition of several new private label customers. Dolce(R)
brand products' sales increased primarily as a result of increased sales from
the mid-west United States distributors. The net sales of other Company products
decreased primarily due to a loss of a Flavor-Mate(R) customer in January, 1996.
The Company was able to regain this Flavor-Mate(R) customer in January 1997.
However the business lost during the interim period represented 13.1% of the
decrease in other product sales. The remaining decrease in other product sales
was related to 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.
24
<PAGE> 26
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 current year compared to the fiscal year
ended April 30, 1996. 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
$402,372, or $0.13 per weighted average number of common shares of the Company
outstanding, for the fiscal year ended April 30, 1997 compared to a net (loss)
of ($732,915), or ($0.26) per weighted average number of common stock
outstanding, for the fiscal year ended April 30, 1996. The weighted average
number of common shares of the Company outstanding increased to 2,994,679 for
the current year compared to 2,781,249 for the previous last year. The increase
primarily reflects increased shares outstanding as a result of the Company's
stock offering, warrants exercised, conversion of subordinated debt into common
shares of the Company and treasury stock sold.
Net income for the fourth 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.
25
<PAGE> 27
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. SFAS No. 128, establishes standards for computing
and presenting earnings per share (EPS) and supersedes APB Opinion No. 15,
Earnings Per Share (Opinion 15). SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS which excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. This statement
also requires dual presentation of basic EPS and diluted EPS on the face of the
income statement for all periods presented. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion 15, with some modifications. SFAS No. 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Early adoption is not permitted and the
statement requires restatement of all prior EPS data presented after the
effective date.
The Company will adopt SFAS No. 128 effective with the issuance of its
third quarter results for the fiscal year ending April 30, 1998. Per share data
calculated in accordance with this pronouncement for the years ended April 30,
1997 and 1996, are consistent with the current disclosures.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
Net sales for the fiscal years ended April 30, 1996 and 1995 were
$5,514,753 and $5,557,469, respectively, which represents a 0.8% decrease. For
the fiscal year ended April 30, 1996, private label sales increased by 2.2% and
Dolce(R) brand products increased by 10.5%, while the Net Sales of other Company
products decreased by 7.5% compared to the fiscal year ended April 30, 1996.
Private label, Dolce(R) brand products and other Company products represented
56.5%, 18.1% and 25.4% of gross sales, respectively for the fiscal year ended
April 30, 1996 and 55.8%, 16.5% and 27.7% of gross sales, respectively for the
fiscal year ended April 30, 1995. Private label sales generally increased by
13.8% for the fiscal year ended April 30, 1996, however a large decrease in
sales to one customer resulted in the overall 2.2% increase. The decrease in
private label sales to this one customer was a result of a special production
run that occurred during the year ended April 30, 1995. Dolce(R) brand products
sales increased primarily as a result of increased exposure from advertising and
trade shows. The decrease in net sales of other Company products was the result
of lower sales in most of the products within this category except for increases
in the My Hero(TM) Submarine Dressing and FLAVOR-MATE(R) syrups product lines.
The decrease in most of the other Company products was the result of the
elimination of unprofitable marketing programs for the year ended April 30,
1996.
As a result of performance of the other Company products for the fiscal
year ended April 30, 1996, the Company decided to eliminate the Liquid Spice,
Chile/Salsa Kits and the Herbs & Spices product lines to improve sales
performance.
The small decrease in sales volume and the additional expenses related
to the opening and operations of the Washington manufacturing facility resulted
in the cost of sales, as a percentage of net sales, increasing to 78.8% compared
to 70.8% for the fiscal year ended April 30, 1996 compared to the fiscal year
ended April 30, 1995. Cost of sales increased by $408,623 for the fiscal year
ended April 30, 1996 compared to the fiscal year ended April 30, 1995. The
increase in cost of sales was primarily the result of increased depreciation,
additional expenses associated with the operation of the Washington facility,
the startup and operation of the technical services staff and additional quality
assurance testing.
26
<PAGE> 28
Selling, general and administrative expenses increased by 30.5% or
$414,712 for the fiscal year ended April 30, 1996 compared to the fiscal year
ended April 30, 1995. This increase resulted from expenses associated with
developing a professional sales staff, expanded trade show costs, additional
advertising expenses, increased usage of outside professional financial
consulting services, increased travel, increased usage of office supplies, the
hiring of a Chief Financial Officer in January 1996 and higher bad debt expense.
Interest expense for the fiscal year ended April 30, 1996 increased by
$6,903 compared to the fiscal year ended April 30, 1995. The increase primarily
reflects increased bank borrowings that occurred from October 1, 1995 through
April 30, 1996.
The Company recorded a deferred income tax expense of $35,913 for the
fiscal year ended April 30, 1996 compared to $49,869 in total income tax expense
for the fiscal year ended April 30, 1995.
As a result of the foregoing, the Company reported net loss of
($732,915), or ($0.26) per weighted average number of common shares of the
Company outstanding, for the fiscal year ended April 30, 1996 compared to a net
income of 156,718, or $0.06 per weighted average number of common shares of the
Company outstanding, for the fiscal year ended April 30, 1995. The weighted
average number of common shares of the Company outstanding increased to
2,781,249 for the fiscal year ended April 30, 1996 compared to 2,472,950 for the
fiscal year ended April 30, 1995. The increase primarily reflects increased
shares outstanding as a result of the private placement of common shares of the
Company issued during the latter part the fiscal year ended April 30, 1995.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1997 AND 1996
Net sales for the six months ended October 31, 1997 and 1996 were
$4,400,254 and $3,457,718, respectively, which represents a 27.3% increase. For
the six months ended October 31, 1997, private label sales increased by 36% and
DOLCE(R) brand products sales increased by 5.1%, while the net sales of other
Company products increased by 9.5%, all as compared to the six months ended
October 31, 1996. Private label, DOLCE(R) brand products, and other Company
products represented 72.9%, 14.1% and 13% of gross sales, respectively, for the
six months ended October 31, 1997. The increase in private label sales was the
result of strong sales growth by several of the Company's private label
customers. DOLCE(R) brand products' sales increased primarily as a result of
second quarter growth in sales to the Company's DOLCE(R) master distributors.
The growth in DOLCE(R) brand products' sales was lower than expected due to the
slower than expected development of the DOLCE(R) master distributor program. The
net sales of other Company products increased primarily due to sales to a large
Flavor-Mate(R) customer that was lost in January 1996 and regained in January
1997, offset with decreased sales in most of the other products within the
consumer retail group.
The increase in sales volume in the six months ended October 31, 1997
combined with low finished goods inventory as of July 31, 1997 resulted in
unexpected manufacturing inefficiencies during the quarter ended October 31,
1997. The low finished goods inventory level as of July 31, 1997 was due to lost
production time during the move of the Company's Mansfield, Ohio production
lines to its new facility in the first quarter. The low finished goods inventory
level led to smaller than normal production batches to fill customer orders on a
timely basis. In addition, during the six month period, the Company
27
<PAGE> 29
experienced higher raw material and freight out costs compared to the same six
month period in the previous year. The increase in freight out costs are
associated with the development of the Company's DOLCE(R) master distributor
program. Under this program the Company absorbs the freight cost on large
orders. Subsequently, the cost of sales for the current six month period, as a
percentage of net sales, increased to 74.7% compared to 73.0% for the six months
ended October 31, 1996. The increase in cost of sales in the six months ended
October 31, 1997 was also the result of increased volume, maintenance expense
and plant supply costs. Cost of sales increased by $765,398 for the six months
ended October 31, 1997 compared to the six months ended October 31, 1996.
Selling, general and administrative expenses increased by 12.8% or
$98,237 for the six months ended October 31, 1997 compared to the six months
ended October 31, 1996. This increase resulted from increases in trade show
participation and magazine advertising, insurance expense, bad debt expense,
employee benefits, shareholder relations and SEC reporting expenses. These
increases were offset by decreases in legal fees and postage expense. Selling,
general and administrative expenses for the current six month period, as a
percentage of net sales, decreased to 19.7% compared to 22.3% for the six months
ended October 31, 1996.
Interest expense for the six months ended October 31, 1997 decreased by
$27,268 compared to the six months ended October 31, 1996. The decrease
primarily reflects bank borrowings that were paid in full on November 6, 1996
and current year borrowings occurring late in the six month period.
The Company recorded a deferred income tax benefit of $28,145 and
current income tax expense of $3,900 for the six months ended October 31, 1997.
This deferred income tax benefit is a result of the reversal of the remaining
portion of the Company's deferred income tax valuation allowance. For the six
months ended October 31, 1996, the Company recorded a deferred income tax
benefit of $45,600 and current income tax expense of $2,400. The deferred income
tax benefit was a result of a reversal of a large portion of the Company's
deferred income tax valuation allowance.
As a result of the foregoing, the Company reported net income of
$264,873, or $0.08 per weighted average number of Common Shares outstanding, for
the six months ended October 31, 1997 compared to net income of $175,028, or
$0.06 per weighted average number of Common Shares outstanding, for the six
months ended October 31, 1996. The weighted average number of Common Shares
outstanding increased to 3,226,752 for the current six month period compared to
2,825,761 for the comparable six month period last year. The increase primarily
reflects increased shares outstanding as a result of the Company's Common Share
offering, warrants exercised and conversion of subordinated debt into Common
Shares.
LIQUIDITY AND CAPITAL RESOURCES
The working capital and working capital ratio for the years ended April
30, 1997, April 30, 1996 and April 30, 1995 were $1,905,827 and 2.81 to 1,
$472,186 and 1.33 to 1, and $1,643,230 and 2.78 to 1, respectively. The working
capital and working capital ratio for the six month period ended October 31,
1997 and October 31, 1996 were $1,795,059 and 2.89 to 1 and $960,628 and 1.57 to
1, respectively. The decrease in working capital for the six months ended
October 31, 1997 was primarily a result of the
28
<PAGE> 30
Company's construction of its new manufacturing, warehouse and executive office
facility in Mansfield, Ohio offset partially by a mortgage note payable to First
Knox.
The Company's operating activities, for the six months ended October
31, 1997, used net cash of $159,904. The Company used $1,105,293 to acquire
equipment and to construct a new manufacturing and office facility in Mansfield,
Ohio. The Company also increased its investment in life insurance policies by
$10,741, and used $11,660 to make principal payments on a mortgage note payable
and capital leases. The Company received $750,000 from borrowing under a
mortgage note payable and $1,000 from the sale of equipment. The Company also
paid $13,722 in deferred offering costs. These costs are to be netted against
$151,876 in cash received on November 25, 1997 upon the exercise of warrants by
certain warrant holders. Consequently, during this period, cash and cash
equivalents decreased $550,320. The Company expects future operating activities
to continue to provide cash for investing and financing activities. However,
this cash may be insufficient to meet the Company's possible investing and
financing activities.
The Company on December 2, 1997 renewed its $400,000 line of credit
with First Knox for a one year period with the same terms as its previous line
of credit with First Knox. As of December 10, 1997, there was no outstanding
balance on this line of credit.
In addition on December 4, 1997, the Company borrowed $140,098 on a
note payable from First Knox and $120,000 from Ricter associated with its
transaction with Ricter. The note from First Knox is payable in eighteen monthly
principal payments plus interest at a rate of prime plus 0.5% commencing on
January 31, 1997. The note from Ricter is payable in eighteen monthly principal
payments commencing July 1, 1999. Interest on the note from Ricter is payable
monthly from December 4, 1997 at a rate of 8.25%.
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 $1,870,000, 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 also owns a 10,000 square foot building at 52 Surrey
Road. This building will be either sold or leased to a third party. The Company
owns both Surrey Road buildings clear of debt and has a $750,000 mortgage note
payable on the new facility.
WESTERN UNITED STATES MANUFACTURING AND WAREHOUSE FACILITY
In March, 1995, the Company entered into a three year lease, with an
option to renew for an additional three year term, 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
29
<PAGE> 31
customers and provides increased manufacturing capacity. The base rent for this
facility is $6,372.00. In addition to base rent, the Company is responsible for
real estate taxes and operating fees which, collectively, averaged $1,881.00 per
month during the fiscal year ended April 30, 1997. 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 Washington facility 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.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
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 October 21, 1997. Their respective backgrounds are 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 Vice President, Secretary and Director 38 419/522-2722
John A. Chuprinko Chief Financial Officer 43 419/522-2722
Frank E. Duval Director 53 419/882-2314
Carter F. Randolph Director 41 513/891-4227
</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 - 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.,
30
<PAGE> 32
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 the President of the Knox County, Ohio Airport Advisory Board
and is a member and past Chairman of the Marion Technical College 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 national sales manager responsible for managing the
Company's sales department, including the
31
<PAGE> 33
coordination of the regional sales personnel and managing the Company's
marketing efforts. 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.
F. MICHAEL DEMETER
Mr. Demeter, age 46, a 1974 graduate of Wayne State University in
Detroit, Michigan, with a Bachelor of Arts Degree. in Business Administration,
was hired by the Company as the Director of Operations on February 27, 1997.
From August 1988 to February, 1997, Mr. Demeter was the Vice President of
Operations for Megas Beauty Care, Inc. (Division of American Safety Razor
Company), a $100,000,000 manufacturer of private label health and beauty aids
located in Cleveland, Ohio. In this capacity, Mr. Demeter directed a team of
over 500 salaried and hourly employees. Mr. Demeter is APICS Certified
Integrated Resource Management qualified.
REMUNERATION OF DIRECTORS AND OFFICERS
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, 1997 exceeded $100,000:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL FISCAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William C. Stearns, 1997 $ 104,000.00 $ 0.00 $ 123.00 (1)
President 1996 $ 127,500.00 (1) $ 0.00 $ 115.00 (1)
1995 $ 66,500.00 $65,000.00 $ 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, 1997, 1996 and 1995, the premium value of this benefit to Mr.
Stearns was $123.00, $115.00 and $115.00, respectively.
DIRECTORS COMPENSATION
Through April 30, 1997, the Directors of the Company received no cash
compensation for serving on the Board of Directors, but were reimbursed
reasonable expenses incurred in attending meetings. The Board of Directors voted
and approved a resolution to compensate outside directors $1,000.00 per meeting
of the Board of Directors effective June 13, 1997. 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 5000 common shares of the Company.
Frank E. Duval and Carter F. Randolph, Ph.D. received warrants to purchase 5,000
and 3,798
32
<PAGE> 34
common shares, respectively, at an exercise price of $5.50 per share, on April
28, 1997, for services rendered in calendar year 1996. On August 21, 1997, the
Board of Directors voted and approved to revise the plan to issue warrants as
compensation to outside Directors. The revised plan will expire as of the
calendar year ending December 31, 2002, the total warrants to purchase common
shares of the Company issued as compensation to outside Directors will not
exceed 5,000 shares and the exercise price for such warrants shall be equal to
the fair market value of such shares at the date of issuance. Furthermore, the
date of issuance shall be the third Wednesday of January of each such calendar
year for services rendered in the previous calendar year. The warrants are
exercisable for a period of ten years from the date of issuance.
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 common shares
of the Company 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 common 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 common share on the effective date of the grant. To date, the Company has
not issued options to any of its officers, directors or employees under the
Plan.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN SECURITY HOLDERS
The following table sets forth certain information, so far as is known
to management of the Company, regarding beneficial ownership of common shares of
the Company held of record, as of December 22, 1997, by (i) each shareholder who
owns beneficially more than five percent (5%) of the outstanding common shares
of the Company; (ii) each officer and director of the Company; and (iii) all
officers and directors as a group.
33
<PAGE> 35
<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 shares of the William C. Stearns 614,391 (3) 18.7%
Company, no par value Director, President and
Treasurer
- -----------------------------------------------------------------------------------------------------------------
common shares of the Sally A. Stearns 681,916 (3) 20.7%
Company, no par value Director, Vice President
and Secretary
- -----------------------------------------------------------------------------------------------------------------
common shares of the Frank E. Duval 120,000 (3) 3.7%
Company, no par value Director (4)
- -----------------------------------------------------------------------------------------------------------------
common shares of the Carter F. Randolph, Ph.D. 71,352 (5) 2.2%
Company, no par value Director
- -----------------------------------------------------------------------------------------------------------------
common shares of the John A. Chuprinko 640 .02%
Company, no par value Chief Financial Officer
- -----------------------------------------------------------------------------------------------------------------
common shares of the All Directors and Officers 1,488,299 (6) 45.3%
Company, no par 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) See "SELLING SHAREHOLDERS."
(4) Includes 10,000 shares purchasable on exercise of currently exercisable
warrants.
(5) Of such shares, 64,554 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 7,698 shares for which Dr. Randolph and his wife, Kathy, have
shared voting and investment power. Includes 3,798 shares purchasable on
exercise of currently exercisable warrants.
(6) Includes 13,798 shares purchasable on exercise of currently exercisable
warrants.
34
<PAGE> 36
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN 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, 1997 and 1996, Corporate Flight Service
was paid $49,892.60 and $38,846.00, 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 shares of the
Company will be on terms no less favorable to the Company than could be obtained
from independent third parties.
MARKET FOR COMMON SHARES
Prior to January, 1995, the common shares of the Company 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 December 19, 1997, the Company had eight
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):
<TABLE>
<S> <C> <C>
Quarter Ended October 31, 1997 High $6.375 Low $5.00
Quarter Ended July 31, 1997 High $6.375 Low $4.75
Period of December 17, 1996 High $7.25 Low $6.00
thru January 31, 1997
</TABLE>
The following table sets forth the actual NASD inter-dealer transaction prices
for the common shares of the Company for the previous fiscal quarters as
reported by Bloomberg L.P.:
35
<PAGE> 37
<TABLE>
<S> <C> <C>
Period of November 1, 1996 High $6.50 Low $5.00
thru December 16, 1996
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
</TABLE>
At November 26, 1997, the approximate number of holders of record of common
shares of the Company was 834.
DESCRIPTION OF SECURITIES
Holders of common shares of the Company have no preemptive rights to
subscribe for additional shares of stock. Each common share is entitled to one
vote on all matters submitted to a vote of shareholders. Holders of common
shares of the Company have no conversion, subscription, cumulative voting or
redemption rights, and such shares have no sinking fund provisions. All
outstanding common shares of the Company are fully paid and non-assessable.
Upon dissolution, liquidation or the sale of all or substantially all
of the assets of the Company, after payment in full of all amounts required to
be paid to creditors, the holders of common shares of the Company will be
entitled to receive on a pro rata basis the remaining assets of the Company
available for distribution.
Holders of the common shares of the Company are entitled to dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. The Company has not paid dividends during the last two
fiscal years. The Company's existing line of credit restricts the ability of the
Company to declare and pay dividends and the Company does not anticipate the
declaration or payment of any dividends in the foreseeable future. The Company
can make no assurances that the future operations of the Company will result in
additional revenues, will be profitable or that there will be sufficient funds
legally available for the distribution or payment of a dividend. The Company has
no legal obligation or contract to pay dividends and, should the operations of
the Company be profitable, it is likely that the Company would retain much or
all of its earnings in order to finance future growth and expansion. Future
dividend policy will be subject to the discretion of the Board of Directors and
will be contingent upon future earnings, if any, the Company's financial
condition, capital requirements, general business conditions and other factors.
Therefore, there can be no assurance that any dividends will ever be paid.
Under Ohio law, shareholders owning two-thirds of the outstanding
shares must approve
36
<PAGE> 38
amendments to the Company's Articles of Incorporation and other major corporate
actions, such as adopting a plan of merger, consolidation or exchange involving
the Company or its securities, or the sale of substantially all of the Company's
assets other than in the regular course of business.
Section 1701.831 of the Ohio General Corporation Law ("OGCL") provides
that any "control share acquisition" of an "issuing public corporation" may be
made only with the prior authorization of shareholders. A "control share
acquisition" is any acquisition, whether by tender offer, open market purchase,
privately negotiated transaction or otherwise, of shares of a corporation which,
when added to all other shares owned or controlled by the acquiror, would
entitle the acquiror to exercise voting power in the election of directors
within any of the following ranges: one-fifth or more but less than one-third;
one-third or more but less than a majority; and a majority or more. The effect
of this law is generally to prevent a person from acquiring any such level of
control without prior shareholder approval.
Section 1704.02 of the OGCL prohibits certain transactions, including
mergers, consolidations, sales or other dispositions of assets, dissolutions,
recapitalizations, loans and guarantees, between an "issuing public corporation"
and an "interested shareholder" for three years after the date that such
shareholder became an interested shareholder unless prior to such date the board
of directors of the corporation has approved such transaction or the purchase of
shares that resulted in the shareholder becoming an interested shareholder.
After three years, such a transaction is permitted only if (i) prior to the date
the shareholder became an interested shareholder the board of directors approved
the purchase of shares, (ii) the transaction is approved by two-thirds of the
shareholders or such other percentage (not less than a majority of the
disinterested shares) set forth in the corporation's articles of incorporation
or (iii) the transaction satisfies certain statutory fair price requirements.
Section 1707.043 of the OGCL provides that in the event any person
makes a proposal to acquire control of any Ohio corporation the outstanding
shares of which are listed on a national securities exchange or regularly quoted
in the over-the-counter market, such corporation is entitled to recover from
such person any profit realized by that person upon the disposition of any
equity securities of the corporation by that person within 18 months after
making the acquisition proposal.
For purposes of the foregoing Ohio statutes, (A) an "issuing public
corporation" is defined as a corporation that (i) is incorporated in Ohio, (ii)
has fifty or more shareholders, (iii) has its principal place of business,
principal executive offices, assets having substantial value, or a substantial
percentage of its assets within Ohio and (iv) has no close corporation agreement
in effect and (B) an "interested shareholder" is defined as any person who
beneficially owns or has the power to exercise the voting power of shares
entitling such person to 10% of the voting power in the election of directors.
The Company is presently an "issuing public corporation" for purposes of such
statutes.
37
<PAGE> 39
LIMITATIONS ON TRANSFER OF SHARES AND TRANSFER AGENT
The Shares offered hereby have been registered with the United States
Securities and Exchange Commission pursuant to the Securities Act and Regulation
S-B promulgated thereunder and, as such, the Shares are freely transferable
under the federal securities laws. However, the Shares have been registered only
in Ohio, and may not be sold or otherwise transferred to persons who are
residents of any state in which the Shares have not been registered unless they
are registered under such state's securities law or there exists an exemption
from such registration with respect to such sale or transfer.
The transfer agent for the Shares offered hereby is First-Knox National
Bank, One Main Street, Mt. Vernon, Ohio 43050.
SIGNIFICANT PARTIES
The business and residential addresses of the Company's directors are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DIRECTOR Business Address Residential Address
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
William C. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
Sally A. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
Carter F. Randolph, Ph.D. 30 Paragon Parkway 8200 Spooky Hollow Road
Mansfield, Ohio 44903 Cincinnati, Ohio 45242
- -----------------------------------------------------------------------------------------------------------
Frank E. Duval 30 Paragon Parkway 4557 Crossfields Road
Mansfield, Ohio 44903 Toledo, Ohio 43623
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The business and residential addresses of the Company's officers are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
OFFICER Business Address Residential Address
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William C. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- ------------------------------------------------------------------------------------------------------------
Sally A. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- ------------------------------------------------------------------------------------------------------------
John A. Chuprinko 30 Paragon Parkway 7961 Simmons Church Road
Mansfield, Ohio 44903 Centerburg, Ohio 43011-9489
- ------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 40
The business and residential addresses of record owners of 5 percent
(5%) or more of any class of the Company's equity securities are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DIRECTOR Business Address Residential Address
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
William C. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
Sally A. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
Cede & Co.1 c/o Depository Trust Not Applicable
Company
P.O. Box 863
Bowling Green Station
New York, New York 10274
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The business and residential addresses of beneficial owners of 5
percent (5%) or more of any class of the Company's equity securities are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DIRECTOR Business Address Residential Address
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
William C. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
Sally A. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The business and residential addresses of affiliates of the Company are
as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DIRECTOR Business Address Residential Address
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
William C. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
Sally A. Stearns 30 Paragon Parkway 1 Lex-Ontario Road
Mansfield, Ohio 44903 Lexington, Ohio 44904
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- --------
1 Cede & Co. is the record owner of such shares solely as a clearinghouse
for trading transactions for shares held in street name.
39
<PAGE> 41
Counsel to the Company with respect to the proposed offering is as
follows:
Susan E. Brown, Esq.
Vorys, Sater, Seymour and Pease LLP
52 East Gay Street
P. O. Box 1008
Columbus, Ohio 43216-1008
RELATIONSHIP WITH ISSUER OR EXPERTS
NAMED IN REGISTRATION STATEMENT
No expert or legal counsel to the Company was hired by the Company on a
contingent basis in connection with this offering. No expert or legal counsel of
the Company will receive a direct or indirect interest in the Company. No expert
or legal counsel hired by the Company is or was a promoter, underwriter, voting
trustee, director, officer or employee of the Company.
LEGAL PROCEEDINGS
Other than routine litigation that is incidental to the business of the
Company, the Company is not a party to any pending legal proceeding nor is any
of the property of the Company the subject of any pending legal proceeding.
Although certain disputes have arisen between the Company and other parties,
such disputes have not resulted in the commencement of any legal proceedings as
of the date of this Prospectus. See "Description of Business-Litigation"
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Code of Regulations of the Company contains a broad indemnification
provision intended to permit the Company to indemnify officers and directors for
their acts and omissions arising out of the performance of their duties on
behalf of the Company. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. The Company has also agreed to indemnify DCM
against certain civil liabilities, including liabilities under the Securities
Act.
EXPERTS
The financial statements of the Company as of and for the years ended
April 30, 1996 and April 30, 1997 included in this Prospectus have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
40
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants (dated June 20, 1997).............................................................F-1
Balance Sheets as of April 30, 1997 and 1996........................................................................F-2
Statements of Operations for the years ended April 30, 1997 and 1996................................................F-4
Statements of Shareholders' Equity for the years ended April 30, 1997 and 1996......................................F-5
Statements of Cash Flows for the years ended April 30, 1997 and 1996................................................F-6
Notes to the Financial Statements...................................................................................F-8
Balance Sheets as of October 31, 1997, April 30, 1997 and October 31, 1996.........................................F-21
Statements of Operations (Unaudited) for the six months ended October 31, 1997 and 1996............................F-23
Statements of Shareholders' Equity (Unaudited) for the year ended
April 30, 1997 and the six months ended October 31, 1997...........................................................F-24
Statements of Cash Flows (Unaudited) for the six months ended October 31, 1997 and 1996............................F-25
Notes to the Financial Statements (Unaudited)......................................................................F-27
</TABLE>
F-i
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Stearns & Lehman, Inc.
We have audited the accompanying balance sheets of Stearns & Lehman, Inc. as of
April 30, 1997 and 1996, and the related statements of operations, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stearns & Lehman, Inc. as of
April 30, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P
----------------------------
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
June 20, 1997
F-1
<PAGE> 44
STEARNS & LEHMAN, INC.
BALANCE SHEETS
April 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 730,833 $ 123,208
Trade accounts receivable, net of allowance for doubtful accounts
of $46,000 in 1997 and $56,000 in 1996 884,459 584,665
Inventory 1,239,671 1,132,548
Prepaid expenses and other 75,639 49,508
Deferred income taxes 25,999
----------- -----------
Total current assets 2,956,601 1,889,929
----------- -----------
Property and equipment:
Land 80,848 74,653
Construction in progress 941,199 99,282
Machinery and equipment 1,412,061 1,309,007
Office equipment 213,140 193,977
Building improvements 91,716 91,716
Buildings 137,734 137,734
Leasehold improvements 43,003 43,003
Tooling 59,344 22,254
Vehicles 36,964 25,332
----------- -----------
3,016,009 1,996,958
Less: accumulated depreciation (780,538) (602,297)
----------- -----------
Net property and equipment 2,235,471 1,394,661
----------- -----------
Goodwill 441,833 543,671
Cash surrender value of life insurance 23,611 19,646
Trademarks and patents 4,560 5,257
Deferred stock offering costs 50,474
Deferred income taxes 75,973
Other assets 42,313 69,399
----------- -----------
Total assets $ 5,780,362 $ 3,973,037
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
Continued
<PAGE> 45
STEARNS & LEHMAN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Current liabilities:
Lines of credit $ 350,000
Current portion of notes payable 37,578
Accounts payable $ 801,672 485,407
Accrued expenses 239,275 228,045
Subordinated convertible notes 300,000
Current portion of capital lease obligations 9,827 16,713
----------- -----------
Total current liabilities 1,050,774 1,417,743
----------- -----------
Long-term liabilities:
Notes payable, net of current portion 132,416
Capital lease obligations, net of current portion 2,256 12,084
----------- -----------
Total long-term liabilities 2,256 144,500
----------- -----------
Total liabilities 1,053,030 1,562,243
----------- -----------
Shareholders' equity:
Common stock, no par value; 4,000,000 shares authorized, 3,230,052 and
2,827,672 issued and 3,226,752 and 2,824,372 outstanding as of
April 30, 1997 and 1996, respectively 3,563 3,118
Additional paid-in capital 5,091,920 3,178,099
Accumulated deficit (354,951) (757,223)
----------- -----------
4,740,532 2,423,994
Less treasury stock, at cost 3,300 shares (13,200) (13,200)
----------- -----------
Total shareholders' equity 4,727,332 2,410,794
----------- -----------
Total liabilities and shareholders' equity $ 5,780,362 $ 3,973,037
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 46
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS
for the years ended April 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $ 7,381,105 $ 5,514,753
Cost of sales 5,432,588 4,343,803
----------- -----------
Gross profit 1,948,517 1,170,950
Selling, general and administrative expenses 1,588,865 1,774,118
----------- -----------
Income (loss) from operations 359,652 (603,168)
----------- -----------
Other income (expense), net:
Interest expense (53,814) (62,568)
Interest income 13,952 3,577
Other, net (14,119) (34,843)
----------- -----------
(53,981) (93,834)
----------- -----------
Net income (loss) before income tax expense 305,671 (697,002)
----------- -----------
Income tax (benefit) expense:
Current 5,371
Deferred (101,972) 35,913
----------- -----------
Total income tax (benefit) expense (96,601) 35,913
----------- -----------
Net income (loss) $ 402,272 $ (732,915)
=========== ===========
Earnings (loss) per share $ .13 $ (.26)
=========== ===========
Weighted-average shares outstanding 2,994,679 2,781,249
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 47
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended April 30, 1997 and 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN ACCUMULATED TREASURY SHARE-
SHARES STOCK CAPITAL DEFICIT STOCK HOLDERS'
EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 2,744,834 $ 3,098 $ 2,957,674 $ (24,308) $ (57,246) $ 2,879,218
Net loss (732,915) (732,915)
Sale of treasury stock, net 65,256 204,449 57,246 261,695
Repurchase of common stock (3,300) (13,200) (13,200)
Purchase of warrants (36,750) (36,750)
Purchase price adjustment 17,582 20 52,726 52,746
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1996 2,824,372 3,118 3,178,099 (757,223) (13,200) 2,410,794
Net income 402,272 402,272
Repurchase and retirement
of common stock (95) (664) (664)
Conversion of debentures
to common stock 48,230 53 264,947 265,000
Issuance of common stock 354,245 392 1,649,538 1,649,930
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1997 3,226,752 $ 3,563 $ 5,091,920 $ (354,951) $ (13,200) $ 4,727,332
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 48
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS
for the years ended April 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 402,272 $ (732,915)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 18,820 63,445
Depreciation and amortization 257,636 270,628
Loss on disposal of fixed assets 1,582 32,416
Deferred income taxes (101,972) 35,913
Changes in assets and liabilities:
Trade accounts receivable (318,614) 10,423
Inventory (107,123) 8,642
Prepaid expenses and other (26,131) 26,423
Accounts payable 316,265 (124,176)
Accrued expenses 11,230 108,403
----------- -----------
Net cash provided by (used in) operating activities 453,965 (300,798)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,026,653) (645,523)
Proceeds from sale of property and equipment 3,500 41,766
Cash surrender value of life insurance, net (3,966) (11,146)
Purchase of other assets, net (23,686)
Proceeds from purchase price adjustment 52,746
----------- -----------
Net cash used in investing activities (974,373) (638,589)
----------- -----------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 351,000
Principal payments on long-term debt and capital leases (571,707) (90,349)
Payments for deferred stock offering costs (50,474)
Purchase of treasury stock (664) (13,200)
Purchase of warrants (36,750)
Net proceeds from issuance of common stock 1,700,404 261,695
----------- -----------
Net cash provided by financing activities 1,128,033 421,922
----------- -----------
Net increase (decrease) in cash and cash equivalents 607,625 (517,465)
Cash and cash equivalents, beginning of year 123,208 640,673
----------- -----------
Cash and cash equivalents, end of year $ 730,833 $ 123,208
=========== ===========
</TABLE>
Continued
F-6
<PAGE> 49
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 61,582 $ 62,568
========= =========
Supplemental schedule of noncash financing and investing activities:
Conversion of subordinated debentures to common stock $ 265,000
=========
Conversion of line of credit to note payable $ 350,000 $ 163,000
========= =========
Purchase price adjustment:
Goodwill $ (52,746)
Additional paid-in capital 52,726
Common stock 20
---------
$ 0
=========
</TABLE>
In 1997, the Company allocated $50,474 of deferred stock offering costs,
incurred in 1996, against equity as a result of the common stock issuance.
Continued
F-7
<PAGE> 50
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. NATURE OF BUSINESS: Stearns & Lehman, Inc. (the Company) is engaged in
the business of manufacturing and selling specialty food products,
including extracts, flavorings, liquid spices and Italian syrups. The
principal market for the Company's products is the continental United
States.
B. INVENTORIES: Inventory is valued at the lower of most recent costs or
market which approximates cost using the first-in, first-out (FIFO)
method. Indirect costs that do not relate to production of finished
goods, including general and administrative expenses, are charged to
expense as incurred.
C. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line
method over the following estimated useful lives: buildings and
building improvements, 30 to 40 years; machinery and equipment, 5 to
10 years; tooling, 2 to 10 years; and vehicles, 3 to 5 years.
Leasehold improvements are amortized over the shorter of their useful
lives or the term of the lease. Depreciation expense was $180,761 in
1997 and $193,450 in 1996. Repairs and maintenance are charged to
expense as incurred; major renewals and betterments are capitalized.
When assets are sold, retired, or otherwise disposed of, the related
cost and accumulated depreciation are removed from the applicable
accounts, and any gain or loss from disposition is included in
operations.
D. EARNINGS PER SHARE: Earnings per share are computed based on the
weighted-average number of common shares outstanding during the year.
E. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
debt instruments purchased with an initial maturity of three months or
less to be cash equivalents. At April 30, 1997, the Company had
$537,798 in cash equivalents, of which, $433,954 has been allocated
for the construction of the new manufacturing and office building (see
Note 12), pursuant to the Form SB-1 registration statement. The
Company had no cash equivalents in 1996. Cash consists primarily of
demand deposits held principally with one financial institution.
F. INCOME TAXES: The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been recognized in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
recognized based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates.
F-8
<PAGE> 51
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
G. REVENUE RECOGNITION: Sales are recorded when products are shipped to
the customer.
H. ADVERTISING AND PROMOTION COSTS: Advertising and promotion costs are
charged to operations as incurred. Advertising and promotion expense
was $197,780 in 1997 and $215,588 in 1996.
I. GOODWILL: Goodwill represents the excess value of the Company's stock
issued over the fair value of net assets of an acquired company (see
Note 7). Goodwill is amortized on a straight-line basis over 12 years.
Amortization expense was $49,092 for the years ended April 30, 1997
and 1996, and accumulated amortization was $147,277 and $98,184 at
April 30, 1997 and 1996, respectively.
J. FOREIGN SALES: The Company transacts all foreign sales to distributors
and customers in United States currency.
K. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
L. CONCENTRATION OF RISK: The Company purchases certain products from
sole-source suppliers of which there are currently no other suppliers
used by the Company. A change in suppliers during certain peak periods
could cause a delay in production and a possible loss of sales, which
would affect operating results adversely.
The Company has six major customers which represented approximately
47% of sales for the year ended April 30, 1997 and four major
customers which represented approximately 37% of sales for the year
ended April 30, 1996. The loss of any of these customers could have an
adverse impact on the operating results of the Company.
The Company maintains virtually all of its banking relationships with
one financial institution.
M. RECLASSIFICATIONS: Certain amounts in the 1996 financial statements
have been reclassified to conform with the current-year presentation.
F-9
<PAGE> 52
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
2. INVENTORY:
The major components of inventory at April 30, 1997 and 1996 were as
follows:
1997 1996
Raw materials $ 736,281 $ 429,279
Work in process 7,278 18,012
Finished goods 496,112 685,257
---------- ----------
Total inventory $1,239,671 $1,132,548
========== ==========
3. LINES OF CREDIT:
On May 5, 1996, the Company converted a $350,000 revolving line of credit
agreement to a five-year term note with monthly principal payments of
$5,833 plus interest at prime plus 1% through May 5, 2001. On November 6,
1996, the Company completely paid the balance outstanding on this five
year term note payable and the balance outstanding on another note
payable to a bank due on May 5, 2000. The total of these payments was
$422,353. On December 2, 1996, the Company signed a Line of Credit
Agreement with a bank for $400,000 with interest at a rate of prime plus
0.5% and signed a Construction and Business Loan Agreement with a bank
for $750,000 for the financing of a manufacturing and office building,
with a term of 120 monthly payments beginning August 2, 1997 with
interest at a rate of prime plus 0.75%. Both of these agreements are
collateralized by substantially all the assets of the Company and contain
covenants that require the Company to maintain a certain minimum working
capital and net worth and maintain a certain quick and current ratio. As
of April 30, 1997, there were no outstanding balances under either of
these bank agreements.
F-10
<PAGE> 53
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE:
The Company had no notes payable at April 30, 1997. Notes payable at
April 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, collateralized by real estate,
payable in monthly installments of $682 including
interest at a rate of prime plus 2% adjusted every
three years and subject to a minimum interest rate of
3.5% and a maximum interest rate of 13.5% with the
maximum decrease or increase in interest rates not to
exceed 2% at any one time,
due on February 14, 2002 $ 37,877
Note payable to a bank, collateralized by accounts receivable,
inventory and equipment, payable in monthly installments
of $2,717 plus interest at a rate of prime (8.25% at
April 30, 1996) plus
1.25%, due on May 5, 2000 132,117
--------
Total notes payable 169,994
Less current portion 37,578
--------
$132,416
========
</TABLE>
5. SUBORDINATED CONVERTIBLE REDEEMABLE THREE-YEAR NOTES:
The Company had $300,000 of subordinated convertible redeemable notes
which bore interest at a rate of 9% per annum and matured on March 1,
1997. These notes were convertible into common stock at the rate of 182
shares for every $1,000 of principal. On the maturity date, $265,000 of
notes were converted into 48,230 shares of common stock and the Company
paid $35,000 in principal.
6. LEASE COMMITMENTS:
The Company leases buildings and certain office and production equipment
under noncancelable operating lease agreements expiring through fiscal
1999. Certain leases provide for future minimum rent escalations.
F-11
<PAGE> 54
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
Minimum rental commitments under noncancelable operating leases at
April 30, 1997 are as follows:
1998 $105,221
1999 13,358
--------
$118,579
========
Total rent expense charged to operations for all operating leases was
$133,178 in 1997 and $136,960 in 1996.
The Company has various capital lease agreements for equipment. The
present value of the minimum lease payments has been capitalized and the
related asset and obligation recorded. Future minimum lease payments
under capital leases, together with the present value of the minimum
lease payments as of April 30, 1997, are as follows:
YEAR ENDING APRIL 30,
1998 $10,696
1999 2,301
-------
Total minimum lease payments 12,997
Less amounts representing
interest 914
-------
Present value of net minimum
lease payments 12,083
Less current maturities 9,827
-------
$ 2,256
=======
7. BUSINESS COMBINATION:
On April 30, 1994, the Company issued 240,000 shares of its common stock
in exchange for 100% of the outstanding stock of Select Origins, Inc.
(Select). The acquisition has been accounted for as a purchase
transaction and accordingly, the fair value of the stock issued was
allocated to Select's assets and liabilities based on its estimated fair
value as of the acquisition date. The excess value of the Company's stock
issued over the fair value of the net assets acquired has been recorded
as goodwill.
36,000 of the shares issued were placed in escrow to provide security to
the Company in the event the Company suffers any losses arising from
misrepresentations by Select or its former shareholders. During fiscal
1995, the Company received 18,526 of the escrow shares pursuant
F-12
<PAGE> 55
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
to an agreement with former shareholders of Select. On June 29, 1995,
the Company filed a claim for the remaining 17,474 shares held
in escrow.
The purchase also allowed for the issuance of 50,000 additional shares
(augmentation) if certain events did not occur subsequent to the merger.
The Company believes that only one of two objectives stated in the
Purchase Agreement needed to be achieved, and if neither was achieved,
then augmentation would occur. The Company did not achieve one of the
objectives. Based on the interpretation by certain former shareholders of
Select that both objective must be achieved, they filed a claim for the
shares to augmentation on July 21, 1995.
As of April 30, 1997, the Company has settled the escrow and augmentation
issues with certain former shareholders of Select for 15,594 shares of
which 15,499 shares were in escrow on April 30, 1996 and 95 shares were
contingently issuable upon settlement. The Company repurchased and
retired the 95 contingently issuable shares (see Note 8). The Company
intends to settle the escrow and augmentation issues with the remaining
former shareholders of Select for 1,988 shares of which 1,975 were in
escrow on April 30, 1997 and April 30, 1996 and 13 were contingently
issuable upon settlement. The settlement has been recorded in the
financial statements at April 30, 1997 and 1996 as an adjustment to the
original purchase price.
8. COMMON STOCK TRANSACTIONS:
Between the dates of November 4, 1996 and December 20, 1996, the Company
issued 349,495 shares at $5.50 per share pursuant to the Company's Form
SB-1 registration statement that was declared effective by the Securities
and Exchange Commission on October 22, 1996.
During 1997, the Company repurchased 95 shares of common stock at an
average price of $6.99 per share pursuant to a Settlement Agreement
between former Select Origins, Inc. shareholders, and the Company (see
Note 7).
In fiscal 1997, 4,750 shares of the Company's common stock were issued at
$3.00 per share upon exercise of warrants (see Note 9).
On March 1, 1997, the Company issued 48,230 shares of common stock upon
conversion of $265,000 in Subordinated Convertible Redeemable Three-Year
Notes (see Note 5).
9. WARRANTS TO PURCHASE COMMON STOCK:
During 1996, the Company issued warrants to two directors for each to
purchase 5,000 shares of common stock at an exercise price of $5.50 per
share expiring April 10, 2005. The warrants were fully exercisable at the
date of grant.
F-13
<PAGE> 56
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
During 1996, the Company issued warrants to a broker in connection with a
1995 Private Placement Memorandum to purchase 13,561 shares of common
stock at an exercise price of $3.15 per share expiring October 14, 2000.
The warrants were fully exercisable at the date of grant.
During 1996, the Company became aware of the possibility that a former
underwriter for the Company may have effectuated trades of certain of the
Company's securities in violation of certain state and federal securities
law and regulations. The Company made offers of recision to the current
holders of these securities pursuant to which the Company offered to
purchase these securities for a price equal to the price the current
holders paid for these securities. The Company repurchased 14,000
warrants under these offers of recision. The Company reduced additional
paid-in capital by $36,750 as a result of this transaction.
During 1997, the Company issued warrants to two directors to purchase
5,000 and 3,798 shares of common stock at an exercise price of $5.50 per
share, which expire March 14, 2001. The warrants were fully exercisable
at the date of grant.
During 1997, the Company issued warrants to Quantum Capital Corp., d.b.a.
Diversified Capital Markets to purchase 34,950 shares of common stock at
an exercise price of $5.75 per share expiring October 22, 2001 pursuant
to an Underwriting Agreement dated August 28, 1996 pertaining to the
Company's Form SB-1 registration statement. The warrants vest 100% after
twelve months, commencing October 22, 1996.
During 1997, 4,750 shares of the Company's common stock were issued at
$3.00 per share upon exercise of warrants.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for warrants granted. The Company did not recognize any
expense for warrants granted during the year ended April 30, 1997. Had
compensation cost for the warrants granted been determined based on the
fair value at the grant dates for awards under that plan consistent with
the method of SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below. The 1997 pro forma amounts include
the effect of the reversal of prior years pro forma net operating losses
under SFAS No. 123.
F-14
<PAGE> 57
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Net income (loss) Pro forma $379,887 $(802,888)
As reported 402,272 (732,915)
Earnings (loss) per share Pro forma 0.12 (0.29)
As reported 0.13 (0.26)
</TABLE>
In determining the pro forma amount of stock-based compensation on a
basis consistent with SFAS No. 123, the fair value of each warrant grant
is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in
1997 and 1996, respectively: no dividend yield; expected volatility 63.7%
for both years; risk-free interest rate of 6.03% and 6.12%; and expected
life of 3.0 years and 5.3 years.
A summary of the status of the Company's warrants as of April 30, 1997
and 1996, respectively; and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS SHARES PRICE SHARES PRICE
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 100,367 $3.49 90,806 $3.25
Granted 43,748 $5.70 23,561 $4.15
Cancelled/recissioned (14,000) $3.00
Exercised (4,750) $3.00
Outstanding at end of year 139,365 $4.20 100,367 $3.49
Warrants exercisable at year-end 104,415 100,367
Weighted-average fair value of
warrants granted during the
year utilizing Black-Scholes
option-pricing model $3.15 $2.97
</TABLE>
F-15
<PAGE> 58
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about warrants outstanding at
April 30, 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE
EXERCISE PRICES APRIL 30, 1997 REMAINING LIFE AT APRIL 30, 1997
<S> <C> <C> <C>
$3.00 43,456 3.8 years 43,456
$3.15 13,561 3.5 years 13,561
$3.50 25,000 1.7 years 25,000
$5.50 18,798 8.4 years 18,798
$5.75 38,550 4.5 years 3,600
-------- --------- -------
139,365 4.2 years 104,415
======== ========= =======
</TABLE>
10. STOCK OPTION PLAN:
Effective March 4, 1994, the Company adopted the 1994 Stock Option Plan
(the Plan). The shares that may be issued subject to options granted
under the Plan shall not exceed 275,000 shares in aggregate. The options
granted under the Plan may be designed as incentive stock options or
nonqualified stock options, at the discretion of the committee designated
by the Board of Directors to administer the Plan. The option price for
nonqualified stock options shall not be less than 100% of the fair market
value of a share on the effective date of the grant. The option price for
incentive stock options shall not be less than 110% of the fair market
value of a share on the effective date of the grant. As of April 30, 1997
and 1996, no options have been granted.
F-16
<PAGE> 59
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES:
The components of the net deferred tax asset at April 30, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 315,982 $ 430,117
Accrued expenses 26,782 26,600
Other 1,763
Allowance for doubtful accounts 17,480 21,280
--------- ---------
Gross deferred tax assets 362,007 477,997
Deferred tax liabilities:
Property and equipment 134,652 107,818
--------- ---------
Net deferred tax asset before
valuation allowance 227,355 370,179
Valuation allowance (125,383) (370,179)
--------- ---------
Net deferred tax asset $ 101,972 $ 0
========= =========
</TABLE>
The Company had net operating loss carryforwards of $479,687 and $748,079
at April 30, 1997 and 1996 respectively. These net operating losses
expire November 30, 2007 through April 30, 2011. In addition, the Company
had net operating loss carryforwards available of $398,041 and $431,211
at April 30, 1997 and 1996, respectively, from the purchase of Select, of
which $33,170 is available to deduct each year through April 30, 2009.
A valuation allowance of $125,383 was recorded against the net deferred
tax assets due to the potential uncertainty of their recoverability in
future years. As of April 30, 1996, a valuation allowance had been
provided against the full amount of the net deferred tax asset due to
uncertainty regarding their recoverability at that time.
The Company utilized approximately $301,600 of net operating
carryforwards in fiscal 1997.
F-17
<PAGE> 60
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
A reconciliation between the statutory federal income tax rate and the
effective income tax on pre-tax earnings follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Statutory income tax rate 34.0 % (34.0)%
Local income tax, net of federal
income tax effect 1.1 %
Permanent differences 6.6 % 2.8 %
Adjustments to prior year tax
calculations 3.6 %
Reduction in valuation allowance (80.1)%
Increase in valuation allowance 36.0 %
Other items, net 3.2 % .4 %
------- -------
Effective income tax rate (31.6)% 5.2 %
======= =======
</TABLE>
12. MANUFACTURING AND OFFICE BUILDING:
On November 27, 1996, the Company entered into an agreement to construct
a 50,000 square foot manufacturing and office building. As of April 30,
1997, the construction of the building was approximately 61% complete.
13. SUPPLIER AGREEMENT:
The Company has an agreement to supply a customer with a product at
specified prices. The agreement is effective July 1, 1994, with an
initial term of three years, expiring on July 1, 1997.
The agreement shall terminate at the end of the initial term if written
notice to terminate is given by either party at least 60 days prior to
the last day of the initial term. Otherwise, following the initial term,
the agreement shall renew and continue from year to year until canceled
upon 60 days written notice by either party.
On April 30, 1997, the customer terminated this agreement and requested
to operate on a month to month basis until a new agreement is signed
14. ROYALTY COMMITMENTS:
As a result of the Select purchase (see Note 7), the Company is required
to pay royalty payments for sales of the Gran'Meres' brand name. The
required payments are the greater of $35,000 or 5% of gross sales for the
calendar years ended December 31, 1995 and 1996, 3% of
F-18
<PAGE> 61
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
gross sales for the calendar years 1997, 1998 and 1999 and 2% of gross
sales for the calendar years 2000 through 2016. Accordingly, the Company
has accrued $70,479 and $70,000 at April 30, 1997 and 1996, respectively.
After December 31, 1998, the Company may terminate this royalty agreement
for a minimum buyout payment of $225,000. As of May 23, 1997, the Company
has reached a tentative agreement to return the rights of the Gran'Meres'
brand name to the owners for a payment of $50,000. Management of the
Company believes that accrued expense as of April 30, 1997 will cover the
expense of this payment and the disposition of existing inventory.
15. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. SFAS No. 128, establishes standards for
computing and presenting earnings per share (EPS) and supersedes APB
Opinion No. 15, Earnings Per Share (Opinion 15). SFAS No. 128 replaces
the presentation of primary EPS with a presentation of basic EPS which
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. This statement also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement for all
periods presented. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15, with some modifications. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Early adoption is not
permitted and the statement requires restatement of all prior EPS data
presented after the effective date.
The Company will adopt SFAS No. 128 effective with the issuance of its
third quarter results for the fiscal year ending April 30, 1998. Per
share data calculated in accordance with this pronouncement for the years
ended April 30, 1997 and 1996, are consistent with the current
disclosures.
16. CONTINGENCIES:
The Company is involved in various legal proceedings that are incidental
to the conduct of its business. Although amounts with respect to these
proceedings cannot be determined, in the opinion of management, any such
amounts will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
F-19
<PAGE> 62
STEARNS AND LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
17. RELATED-PARTY TRANSACTIONS:
An entity owned by an employee/board member provided services to the
Company related to flight transportation. Expenses incurred from this
entity were approximately $53,000 in 1997 and $46,500 in 1996. No
payables were outstanding as of April 30, 1997, however, $2,870 in
payables were outstanding at April 30, 1996.
18. YEAR 2000 COMPLIANCE:
It is the Company's intention to purchase new application software in
fiscal year end 1998, which will be Year 2000 compliant, as part of its
operational strategy.
F-20
<PAGE> 63
STEARNS & LEHMAN, INC.
BALANCE SHEETS
October 31, 1997 , April 30, 1997 and October 31, 1996
<TABLE>
<CAPTION>
ASSETS OCTOBER 31, APRIL 30, OCTOBER 31,
1997 1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 180,513 $ 730,833 $ 74,186
Trade accounts receivable, net of allowance for doubtful
accounts of $49,512, $46,000 and $46,927 as of
October 31, 1997, April 30, 1997 and October 31, 1996 1,190,934 884,459 1,148,253
Inventory 1,294,425 1,239,671 1,293,843
Prepaid and other 40,748 75,639 73,542
Deferred income taxes 40,523 25,999 45,600
---------- ---------- ----------
Total current assets 2,747,143 2,956,601 2,635,424
---------- ---------- ----------
Property and equipment:
Land 80,848 80,848 74,653
Construction in progress 0 941,199 97,721
Machinery and equipment 1,621,248 1,412,061 1,345,692
Office equipment 348,650 213,140 196,621
Building improvements 91,716 91,716 91,716
Buildings 1,896,356 137,734 137,734
Leasehold improvements 9,434 43,003 43,003
Tooling 66,425 59,344 35,517
Vehicles 36,964 36,964 25,332
---------- ---------- ----------
4,151,641 3,016,009 2,047,989
Less: accumulated depreciation (854,336) (780,538) (689,782)
---------- ---------- ----------
Net property and equipment 3,297,305 2,235,471 1,358,207
---------- ---------- ----------
Goodwill 417,287 441,833 466,379
Cash surrender value of life insurance 34,352 23,611 26,020
Trademarks and patents 4,212 4,560 4,908
Deferred stock offering costs 13,722 83,558
Deferred income taxes 89,594 75,973
Other assets 35,316 42,313 56,427
---------- ---------- ----------
Total assets $6,638,931 $5,780,362 $4,630,923
========== ========== ==========
</TABLE>
CONTINUED
F-21
<PAGE> 64
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1997 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 722,286 $ 801,672 $1,016,393
Accrued expenses 174,017 239,275 238,123
Current portion of notes payable 49,141 107,842
Current portion of capital lease obligations 6,640 9,827 12,438
Subordinated convertible notes 300,000
---------- ---------- ----------
Total current liabilities 952,084 1,050,774 1,674,796
---------- ---------- ----------
Notes payable, net of current portion 694,642 358,415
Capital lease obligations, net of current portion 2,256 6,640
---------- ---------- ----------
Total long-term liabilities 694,642 2,256 365,055
---------- ---------- ----------
Total liabilities 1,646,726 1,053,030 2,039,851
---------- ---------- ----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized, 3,230,052,
3,230,052 and 2,829,422 issued and 3,226,752, 3,226,752 and 2,826,122
outstanding as of October 31, 1997, April 30, 1997
and October 31, 1996, respectively 3,563 3,563 3,120
Additional paid-in capital 5,091,920 5,091,920 3,183,347
Accumulated deficit (90,078) (354,951) (582,195)
---------- ---------- ----------
5,005,405 4,740,532 2,604,272
Less treasury shares, at cost (3,300 shares) (13,200) (13,200) (13,200)
---------- ---------- ----------
Total shareholders' equity 4,992,205 4,727,332 2,591,072
---------- ---------- ----------
Total liabilities and shareholders' equity $6,638,931 $5,780,362 $4,630,923
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 65
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the six months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $4,400,254 $3,457,718
Cost of sales 3,289,146 2,523,748
---------- ----------
Gross profit 1,111,108 933,970
Selling, general and administrative expenses 867,813 769,576
---------- ----------
Income from operations 243,295 164,394
---------- ----------
Other income (expense), net:
Interest expense (11,590) (38,858)
Interest income 12,043 3,794
Other, net (3,120) 2,498
---------- ----------
(2,667) (32,566)
---------- ----------
Net income before income tax expense 240,628 131,828
Income tax expense (benefit):
Current 3,900 2,400
Deferred (28,145) (45,600)
---------- ----------
Total income tax expense (benefit) (24,245) (43,200)
---------- ----------
Net income $ 264,873 $ 175,028
========== ==========
Earnings per share $ 0.08 $ 0.06
========== ==========
Weighted average shares outstanding 3,226,752 2,825,761
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 66
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the year ended April 30, 1997 and the six months ended October 31, 1997
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES SHARES CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996 2,824,372 $ 3,118 $3,178,099 ($ 757,223) ($13,200) $2,410,794
Net Income 402,272 402,272
Repurchase and retirement of
common shares (95) (664) (664)
Conversion of debentures to
common shares 48,230 53 264,947 265,000
Issuance of common shares 354,245 392 1,649,538 1,649,930
--------- -------- ---------- ----------- -------- ----------
Balance at April 30, 1997 3,226,752 3,563 5,091,920 (354,951) (13,200) 4,727,332
Net Income 264,873 264,873
--------- -------- ---------- ----------- -------- ----------
Balance at October 31, 1997 3,226,752 $ 3,563 $5,091,920 ($ 90,078) ($13,200) $4,992,205
========= ======== ========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 67
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 264,873 $ 175,028
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 10,000 1,569
Depreciation and amortization 140,154 127,066
Loss on the sale of property and equipment 1,571 86
Deferred income taxes (28,145) (45,600)
Changes in assets and liabilities:
Trade accounts receivable (316,475) (565,157)
Inventory (54,754) (161,295)
Prepaid expenses and other 34,891 (24,034)
Accounts payable (146,761) 530,986
Accrued expenses (65,258) 10,078
----------- ---------
Net cash provided by (used in) operating activities (159,904) 48,727
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (1,105,293) (56,331)
Sale of property and equipment 1,000 3,500
Cash surrender value of life insurance, net (10,741) (6,374)
Proceeds from purchase price adjustment 52,746
----------- ---------
Net cash used in investing activities (1,115,034) (6,459)
----------- ---------
Cash flows from financing activities:
Net borrowing under construction loan agreement 750,000
Principal payments on notes payable and capital leases (11,660) (63,456)
Deferred capital stock offering costs (13,722) (33,084)
Net proceeds from issuance of common stock 5,250
----------- ---------
Net cash provided by (used in) financing activities 724,618 (91,290)
----------- ---------
Net decrease in cash and cash equivalents (550,320) (49,022)
Cash and cash equivalents, beginning of year 730,833 123,208
----------- ---------
Cash and cash equivalents, end of period $ 180,513 $ 74,186
=========== =========
</TABLE>
CONTINUED
F-25
<PAGE> 68
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
for the six months ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information:
Progress billings accrued but not paid for:
Construction of manufacturing and office facility $67,375
=======
Cash paid during the period for:
Interest $11,590 $ 38,753
======= ========
Supplemental schedule of noncash financing activities:
Conversion of line of credit to note payable $350,000
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 69
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the six months ended October 31, 1997 and
1996 for Stearns & Lehman, Inc. (the Company) are unaudited and are presented
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, the financial statements should be read in conjunction with the
audited financial statements for the years ended April 30, 1997 and April 30,
1996. In the opinion of management, the accompanying financial statements
reflect all adjustments necessary (which are of a normal recurring nature) to
present fairly the financial position and results of operations and cash flows
for the interim periods presented, but are not necessarily indicative of the
results of operations for a full year.
2. INCOME TAXES:
The components of the net deferred tax asset at October 31, 1997, April 30, 1997
and October 31, 1996 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1997 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $236,176 $ 315,982 $ 430,117
Accrued expenses 7,842 26,782 26,600
Other 1,925 1,763 1,440
Allowance for doubtful accounts 18,815 17,480 17,832
-------- --------- ---------
Gross deferred tax assets 264,758 362,007 475,989
Deferred tax liabilities:
Property and equipment 134,641 134,652 107,708
-------- --------- ---------
Net deferred tax asset before
valuation allowance 130,117 227,355 368,281
Valuation allowance 0 (125,383) (368,281)
-------- --------- ---------
Net deferred tax asset $130,117 $ 101,972 $ 0
-------- --------- ---------
</TABLE>
A valuation allowance of $101,972 as of April 30, 1997 was recorded against the
net deferred tax assets due to the potential uncertainty of their recoverability
in future years. The valuation allowance was eliminated as of October 31, 1997
as continued profitability has
F-27
<PAGE> 70
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
reduced the potential uncertainty of the utilization of net operating loss
carryforwards. As of October 31, 1996, a valuation allowance had been provided
against the full amount of the net deferred tax asset due to uncertainty
regarding their recoverability at that time.
3. RAW MATERIAL AGREEMENT:
On October 7, 1997, the Company signed an agreement with a vendor to supply
certain containers. The term of this agreement is for three years, commencing
with the date of the first shipment of regular production containers. The cost
of the molds used for the production of these containers, totaling $262,193, has
been incorporated into the purchase price of the containers. Subsequently, the
cost of the molds will be amortized over the term of the agreement. If the
quantity of containers purchased over the term of the agreement is insufficient
to amortize the cost of the molds, the Company is obligated to pay the
unamortized portion at the end of the agreement. As of December 10, 1997 regular
production of these containers had not commenced.
4. SUBSEQUENT EVENTS:
On November 25, 1997; 25,000 common shares of the Company were issued at $3.50
per share upon exercise of warrants, 10,913 common shares of the Company were
issued at $3.15 per share upon exercise of warrants and 10,000 common shares of
the Company were issued at $3.00 per share upon exercise of warrants. The
balance of warrants outstanding at December 10, 1997 was 93,452 with an exercise
price per share ranging from $3.00 to $5.75 per share. All outstanding warrants
are exercisable at December 10, 1997.
On December 4, 1997, the Company acquired the inventory, equipment, customers,
product formulas, trademarks, and other intangible assets of Ricter Enterprises,
LTD., the manufacturer of the Senza Zucchero and Senza Rivale(TM) brands of
flavoring syrups for $140,000 in cash and a $120,000 note payable. The Company
obtained the cash from a $140,000 note payable to First Knox National Bank
payable in eighteen monthly payments of $7,778 plus interest at a rate of prime
plus 0.5% commencing on January 31, 1997. The $120,000 note payable to Ricter
Enterprises, LTD. is payable in eighteen monthly principal payments, including
interest, of $7,111 commencing July 1, 1999. Interest on the note to Ricter
Enterprises, LTD is payable monthly until June 1, 1999 at a rate of 8.25%.
F-28
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Ohio Revised Code Section 1701.13 authorizes indemnification of
directors, officers, employees and agents of the Company; allows the advancement
of costs of defending against litigation; and permits companies incorporated in
Ohio to purchase insurance on behalf of directors, officers, employees and
agents against liabilities whether or not under the circumstances such companies
could have the power to indemnify against such liabilities under the provisions
of the statute.
The Company's Amended Code of Regulations, a copy of which is filed as
Exhibit 2(g), provides for indemnification of its officers, directors, employees
and agents to the fullest extent permitted by the laws of the State of Ohio. The
Company's Amended Code of Regulations will, to the fullest extent permitted by
Ohio law, provide indemnification against liability of a director or officer to
the Company or its shareholders for damages for breach of such director's or
officer's fiduciary duties to the Company, except where a director or officer:
(a) violates criminal law, unless such person had reasonable cause to believe
his conduct was lawful or had no reasonable cause to believe his conduct was
unlawful; (b) a transaction from which such person derived an improper benefit;
or (c) authorizes an unlawful dividend. While liability for monetary damages has
been eliminated, equitable remedies such as injunctive relief or rescission
remain available.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by
the Company in connection with the registration, issuance and distribution of
the securities being registered hereby, other than commissions:
Estimated Fees and Expenses:
United States Securities and Exchange Commission Fees: $0.00
Ohio Division of Securities Fees $1,000.00
Transfer Agent Fees $1,000.00
Printing $2,500.00
Legal and Accounting Fees $30,000.00
Escrow Agent Fees $0.00
None of the foregoing expenses of issuance and distribution will be
paid by any of the holders of the presently issued and outstanding common shares
of the Company which are being registered as part of this offering.
II-1
<PAGE> 72
ITEM 3. UNDERTAKINGS
The Company will file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) Include any additional or changed material information on the plan of
distribution.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Company pursuant to the provisions set forth in Item
l, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer of controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
(a) Unregistered securities issued by the Company within one
year prior to the filing of this Post-Effective Amendment No.
1 to Form SB-l:
I. COMMON SHARES:
- -------------------------------------------------------------------------------
Name of Purchaser Identity Date Amount Price per
Share
- -------------------------------------------------------------------------------
Roger W. Syler individual 1/27/97 3,000 $3.00
- -------------------------------------------------------------------------------
Thomas Dooley individual 11/25/97 12,500 $3.50
- -------------------------------------------------------------------------------
Quantum Capital Corporation corporation 11/25/97 12,500 $3.50
- -------------------------------------------------------------------------------
Michael Patterson individual 11/25/97 5,844 $3.15
- -------------------------------------------------------------------------------
II-2
<PAGE> 73
- -------------------------------------------------------------------------------
Frank Duval individual 11/25/97 10,000 $3.00
- -------------------------------------------------------------------------------
Carlos Gamez individual 11/25/97 148 $3.15
- -------------------------------------------------------------------------------
Nancy Vargo individual 11/25/97 3,011 $3.15
- -------------------------------------------------------------------------------
Thomas Daly individual 11/25/97 1,910 $3.15
- -------------------------------------------------------------------------------
II. WARRANTS TO PURCHASE COMMON SHARES:
- -------------------------------------------------------------------------------
Name of Warrant Holder Identity Date Amount Exercise
Price
- -------------------------------------------------------------------------------
Frank E. Duval individual 4/28/97 5,000 $5.50
- -------------------------------------------------------------------------------
Carter F. Randolph, M.D. individual 4/28/97 3,798 $5.50
- -------------------------------------------------------------------------------
(b) Unregistered securities of the Company which were sold within one year
prior to the filing of this Post-Effective Amendment No. 1 to Form
SB-l by or for the account of any person who at the time was a
director, officer, promoter or principal security holder of the
Company, or was an underwriter of any securities of the Company:
I. COMMON SHARES:
- -------------------------------------------------------------------------------
Name of Seller Identity Date Amount Price per
Share
- -------------------------------------------------------------------------------
William C. Stearns individual 7/15/97 30,000 $4.75
- -------------------------------------------------------------------------------
9/25/97 30,000 $5.00
- -------------------------------------------------------------------------------
12/1/97 5,000 $5.125
- -------------------------------------------------------------------------------
12/2/97 2,625 $5.25
- --------------------------------------------------------------------------------
II-3
<PAGE> 74
II. WARRANTS TO PURCHASE COMMON SHARES: None
(c) The foregoing securities listed on this Item 4 were offered and sold
in reliance on the exemption provided by Regulation D, Rule 506 and/or
Section 4(2) of the Securities Act of 1933, or Rule 144, as the case
may be.
ITEM 5. INDEX TO EXHIBITS.
1. UNDERWRITING AGREEMENT: Not Applicable
2. CHARTER AND BY-LAWS
(a)* Articles of Incorporation of Sal-Wan Corp. (filed 3/14/88)
(b)* Certificate of Amendment (filed 1/17/90)
(c)* Certificate of Amendment (filed 9/4/90)
(d)* Certificate of Amendment (filed 3/12/92)
(e)* Certificate of Amendment (filed 4/30/92)
(f)* Certificate of Amendment (filed 5/2/94)
(g)* Amended Code of Regulations of Stearns & Lehman, Inc.
3. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
(see also Charter and By-Laws)
(a)* Three Year Subordinated Convertible Redeemable Promissory
Note Specimen
(b)* Warrant Certificate for 25,000 Shares
(c)* Warrant Plan, dated March 18, 1994
(d)* Warrant Certificate for 3,600 Shares
(e)* Warrant Plan, dated March 14, 1994
(f)* Stock Purchase Warrant No. 1, April 21, 1995, 10,000 Shares
(g)* Stock Purchase Warrant No. 2, April 21, 1995, 10,000 Shares
(h)* Stock Purchase Warrant No. 3, April 10, 1996, 5,000 Shares
(i)* Stock Purchase Warrant No. 4, April 10, 1996, 5,000 Shares
II-4
<PAGE> 75
(j)* Warrant Certificate (13,561 Underwriter's Warrants dated May 15, 1995)
(k)* Warrant Certificate to Purchase Up to 44,000 Shares, effective May 4,
1992
(l)** Stock Purchase Warrant No. 5, April 28, 1997, 5,000 Shares
(m)** Stock Purchase Warrant No. 6, April 28, 1997, 3,798 Shares
(n)** Warrant Certificate No. WA 17 (34,950 Shares Underwriter's Warrants),
April 28, 1997
(o) Selling Shareholder Agreement
4. SUBSCRIPTION AGREEMENT: Not Applicable
5. VOTING TRUST AGREEMENT: Not Applicable
6. MATERIAL CONTRACTS
(See also Instruments Defining the Rights of Security Holders)
(See also Escrow Agreements)
(a)* Industrial Lease, dated March 10, 1995
(b)* Machinery Lease Agreement, dated August 1, 1993
(c)* Madison Leasing Company (Equipment Lease Agreement)
(d)* Stearns & Lehman, Inc. 1994 Stock Option Plan
(e)** Description of agreement on outside directors compensation
(f)** Description of agreement pertaining to the Company's use of
William C. Stearns' airplane
(g)** Description of agreement pertaining to a "key man" life
insurance policies
(h)* Escrow Agreement, dated October 17, 1996, by and among Stearns &
Lehman, Inc., Quantum Capital Corp., dba Diversified Capital Markets
and First Knox National Bank
(i)*** Standard Form of Agreement Between Owner and Design/Builder dated
December 20, 1996
(j)*** Promissory Note and Business Loan Agreement (First Knox National
Bank - $400,000) dated December 2, 1996
II-5
<PAGE> 76
(k)*** Promissory Note and Business Loan Agreement (First Knox National
Bank - $750,000) dated December 2, 1996
(l)*** Construction Loan Agreement (First Knox National Bank - $750,000)
dated December 2, 1996
(m)** Computer Software, Hardware and Consulting Services Agreement dated
June 9, 1997
(n)** License Agreement between Godiva Chocolatier, Inc. and Stearns &
Lehman, Inc. dated June 30, 1997
(o)**** Supplier Agreement dated September 1, 1997
(p)**** Modification Agreement to Promissory Note and Business Loan
Agreement (First Knox National Bank - $750,000) dated December 2,
1996
7. MATERIAL FOREIGN PATENTS: Not Applicable
8. PLAN OF ACQUISITION, ETC.: Not Applicable
9. ESCROW AGREEMENTS
(a)* Escrow Agreement, dated October 17, 1996, by and among Stearns &
Lehman, Inc., Quantum Capital Corp., dba Diversified Capital
Markets and First Knox National Bank
10. CONSENTS
(a) Consent of Independent Accountants (Coopers & Lybrand L.L.P.) dated
January 9, 1998
11. OPINION RE: LEGALITY
(a) Opinion Letter from Vorys, Sater, Seymour and Pease LLP dated
January 9, 1998
12. ADDITIONAL EXHIBITS
(a)* Escrow and Subordination Agreement, effective May 4, 1992, by and
between Stearns & Lehman, Inc., First Knox National Bank and
William C. Stearns, Sally A. Stearns and Richard S. Patton
(b)* Form of Lock-Up Agreement, dated October 22, 1996, by and among
Sally A. Stearns, William C. Stearns, Quantum Capital Corp., d/b/a
Diversified Capital Markets and Stearns & Lehman, Inc.
(c)* Plan and Agreement of Merger, dated April 29, 1994, by and among
Stearns & Lehman, Inc. and Select Origins, Inc.
II-6
<PAGE> 77
(d)* Agreement With Certain Shareholders, entered into as of April 29,
1994, by and between Stearns & Lehman, Inc., Thomas H. Siplon and
the additional persons listed as signatories to such Agreement
(e)* Purchase and Sale Agreement, made January 29, 1992, between Ernie
Parmentier and Select Origins, Inc.
(f)* Escrow Agreement, effective May 2, 1994, by and between Stearns &
Lehman, Inc., First-Knox National Bank and the additional persons
listed as signatories to such Agreement
(g)* Release and Settlement Agreement, dated November 15, 1994, by and
among Thomas H. Siplon and Kristi L. Siplon and William Stearns and
Stearns & Lehman, Inc.
(h)* Officer's Certificate, dated June 27, 1995, by William C. Stearns,
President of Stearns & Lehman, Inc.
(i)** Mutual Release Agreement by and between Bick Goss and Bruce
Saunders, Co-Trustees of the Ernie Parmentier Trust and Stearns &
Lehman, Inc. dated July 9, 1997.
*Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form SB-1 filed with Commission on September 25,
1996 (File No. 333-4244-C).
**Incorporated by reference to the Company's Form 10-KSB filed with
Commission on August 12, 1997 (File No. 0-21879)
***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).
****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).
II-7
<PAGE> 78
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-1 and authorizes this Post-Effective
Amendment No. 2 to Registration Statement on Form SB-1 to be signed on its
behalf by the undersigned, in the City of Mansfield, State of Ohio, on January
9, 1998.
STEARNS & LEHMAN, INC.
By ______________________
William C. Stearns,
President, Treasurer and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on January 9, 1998. Further, KNOW ALL MEN BY THESE PRESENTS, that the
undersigned officer and/or director of Stearns & Lehman, Inc. hereby constitutes
William C. Stearns, his or her true and lawful attorney in fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
to the Form SB-1, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney in fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorney in
fact and agent or his substitute may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of the 9th day of January, 1998.
SIGNATURE TITLE
______________________ Director, Vice President and Secretary
Sally A. Stearns
______________________ Chief Financial Officer
John A. Chuprinko
______________________ Director
Frank E. Duval
______________________ Director
Carter F. Randolph
II-8
<PAGE> 1
EXHIBIT 3(o)
SELLING SHAREHOLDER AGREEMENT
The undersigned (the "Selling Shareholder") proposes to offer
and sell an aggregate of ___________ common shares, no par value (the "Shares"),
of Stearns & Lehman, Inc. (the "Company"). In connection with the offer and sale
of the Shares, the Company and the Selling Shareholder wish to confirm their
agreement as follows:
1. AMENDMENT NO. 1 AND PROSPECTUS; AGREEMENTS OF THE COMPANY. (a) The
Company has prepared and filed with the (i) Securities and Exchange Commission
(the "Commission") in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), and (ii) the Ohio Division of Securities (the
"Division") in accordance with Chapter 1707 of the Ohio Revised Code (the "Ohio
Securities Act"), Post-Effective Amendment No. 1 ("Amendment No. 1") to the
Registration Statement on Form SB-1 (File No. 333-04244C), including the
Prospectus, relating to the Shares. The term "Amendment No. 1" means Amendment
No. 1 at the time it becomes effective with the Commission and the Division. The
term "Prospectus" means the Prospectus in Amendment No. 1.
(b) Because it is necessary for Amendment No. 1 to be declared
effective with the SEC and the Division before the offer of the Shares may
commence, the Company will endeavor to cause Amendment No. 1 to become effective
as soon as possible and will advise the Selling Shareholder promptly when
Amendment No. 1 has become effective and, if requested by the Selling
Shareholder, will confirm such advice in writing.
(c) The Company will also advise the Selling Shareholder promptly and,
if requested by the Selling Shareholder, will confirm such advice in writing:
(i) of the issuance by the Commission or the Division of any stop order
suspending the effectiveness of Amendment No. 1 or the initiation of any
proceeding for such purpose; (ii) of any change in the Company's condition
(financial or other), business, prospects, properties, net worth or results of
operations, or of the happening of any event, which in any of these cases makes
any statement of a material fact made in Amendment No. 1 or the Prospectus
untrue or which requires the making of any additions to or changes in Amendment
No. 1 or the Prospectus in order to state a material fact required by the Act to
be stated therein or necessary in order to make the statements therein not
misleading; or (iii) of the necessity to amend or supplement Amendment No. 1 or
the Prospectus to comply with the Act or the Ohio Securities Act. If at any time
the Commission or the Division issues any stop order suspending the
effectiveness of Amendment No. 1, the Company will make every reasonable effort
to obtain the withdrawal of such order at the earliest possible time.
(d) The Company will register the sale of the Shares only with the SEC
and the Division; the Company will not register the sale of Shares, or seek an
exemption from such registration, under the securities laws of any other state.
(e) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the reasonable
opinion of counsel for the Company a Prospectus is required by the Act to be
delivered in connection with sales by the Selling Shareholder, the Company will
deliver to the Selling Shareholder, without charge, as many copies of the
Prospectus as the Selling Shareholder may reasonably request. The Company
consents to the use of the Prospectus in accordance with the provisions of the
Act and with the securities laws of the jurisdictions in which the Shares are
offered by the Selling Shareholder,
<PAGE> 2
both in connection with the offer and sale of the Shares and for such period of
time thereafter as the Prospectus is required by the Act to be delivered in
connection with sales by the Selling Shareholder. If during such period of time
any event shall occur that in the judgment of the Company or in the reasonable
opinion of counsel for the Company is required to be set forth in the Prospectus
or should be set forth therein in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or if it
is necessary to supplement or amend the Prospectus to comply with the Act or any
other law, the Company will forthwith prepare and file with the Commission and
the Division an appropriate supplement or amendment thereto and will
expeditiously furnish copies thereof to the Selling Shareholder in such
quantities as the Selling Shareholder shall reasonably request.
2. AGREEMENTS OF THE SELLING SHAREHOLDER. The Selling Shareholder
agrees as follows:
(a) The Selling Shareholder will take all reasonable actions
in cooperation with the Company to cause Amendment No. 1 to become effective at
the earliest possible time.
(b) The Selling Shareholder will pay all federal and other taxes, if
any, on the transfer or sale of any Shares that are sold by the Selling
Shareholder.
(c) The Selling Shareholder shall comply with all of the Prospectus
delivery requirements of the Act.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER. The
Selling Shareholder represents and warrants to the Company that:
(a) The Selling Shareholder has reviewed Amendment No. 1 and the
Prospectus and, to the best knowledge and belief of the Selling Shareholders,
neither Amendment No. 1 nor the Prospectus contains an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(b) The Selling Shareholder will offer the Shares pursuant to the terms
of the Prospectus and will not sell the Shares without, prior to such sale,
delivering the Prospectus to the prospective buyer of the Shares. If requested
by the transfer agent of the Company, the Selling Shareholder will deliver an
opinion of counsel to the transfer agent that the Selling Shareholder offered
the Shares pursuant to the terms of the Prospectus and sold such Shares to the
buyer thereof after the delivery of the Prospectus to such buyer.
(c) Unless the Selling Shareholder has received an opinion of counsel
satisfactory to the Company that the offer and sale of the Shares is in
compliance with the Ohio Securities Act, the Selling Shareholder will offer and
sell the Shares to residents of the state of Ohio only through a dealer licensed
as such under the Ohio Securities Act. The Selling Shareholder will not offer or
sell the Shares in any state other than the state of Ohio unless the Selling
Shareholder has received an opinion of counsel satisfactory to the Company that
such offer or sale is in compliance with such state's securities laws.
(d) No agreement exists between the Selling Shareholder and any
broker-dealer regarding the sale of the Shares.
(e) At or prior to the time an offer of the Shares is or to be made to
a prospective buyer, the Selling Shareholder will immediately forward to the
Company a notice which will set forth the aggregate number of Shares being
offered and the material terms of the offering, including the name of any
broker-dealer involved in such offer, the offered purchase price, and any
commissions to be paid to such broker-dealer, and any other
<PAGE> 3
facts material to the transaction.
(f) The Selling Shareholder has not taken, directly or indirectly, any
action designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Shares to facilitate the sale
of the Shares.
(g) The representations and warranties of the Selling Shareholder
herein shall be true on the date of the closing of the sale of the Shares.
4. INDEMNIFICATION. (a) The Selling Shareholder agrees to indemnify the
Company and its officers, directors or any person who controls the Company
within the meaning of Section 15 of the Act against any losses, claims or
damages arising out of any untrue statement of a material fact contained in
Amendment No. 1 or the Prospectus or omission to state a material fact required
to be contained therein, only to the extent that (i) such untrue statement or
omission relates to the Selling Shareholder or the manner of distribution of the
Shares by the Selling Shareholder or was made in the Prospectus in reliance upon
representations, warranties and agreements made by the Selling Shareholder in
this Agreement, or (ii) the loss, claim or damage arises out of failure of the
Selling Shareholder to satisfy the Prospectus delivery requirement under the
Act.
(b) If any action, suit or proceeding shall be brought against the
Company, its directors, its officers or any person who controls the Company
within the meaning of Section 15 of the Act in respect of which indemnity may be
sought against the Selling Shareholder, the Company shall promptly notify the
Selling Shareholder, and the Selling Shareholder shall assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. The Company shall have the right to employ separate counsel in any
such action, suit or proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the Company
unless (i) the Selling Shareholder has agreed in writing to pay such fees and
expenses, (ii) the Selling Shareholder has failed to assume the defense and
employ counsel or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both the Company and the Selling
Shareholder and the Company shall have been advised by its counsel that
representation of the Selling Shareholder and the Company by the same counsel
would be inappropriate under applicable standards of professional conduct
(whether or not such representation by the same counsel has been proposed) due
to actual or potential differing interests between them (in which case the
Selling Shareholder shall not have the right to assume the defense of such
action, suit or proceeding on behalf of the Company). It is understood, however,
that if the Selling Shareholder is obligated to pay the fees and expenses of
Company's counsel under the preceding sentence, then the Selling Shareholder
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to no more than one local counsel per jurisdiction) at
any time for the Company, which firm shall be designated in writing by the
Company and shall be reasonably acceptable to the Selling Shareholder, and that
all such fees and expenses shall be reimbursed as they are incurred. The Selling
Shareholder shall not be liable for any settlement of any such action, suit or
proceeding effected without its, his or her written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the Selling Shareholder agrees to indemnify and
hold harmless the Company, to the extent provided in the preceding paragraph,
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) No Selling Shareholder shall, without the prior written consent of
the Company, effect any settlement of any pending or threatened action, suit or
proceeding in respect of which the Company is or could have been a party and
indemnity could have been sought hereunder by the Company, unless such
settlement includes an unconditional release of the Company from all liability
on claims that are the subject
<PAGE> 4
matter of such action, suit or proceeding.
(d) Any losses, claims, damages, liabilities or expenses for which the
Company is entitled to indemnification shall be paid by the Selling Shareholder
to the Company as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and the representations and warranties of the Selling
Shareholder set forth in this Agreement shall remain operative and in full force
and effect, regardless of any termination of this Agreement.
5. EXPENSES. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
of Amendment No. 1, and each amendment or supplement thereto; (ii) the printing
(or reproduction) and delivery (including postage, air freight charges and
charges for counting and packaging) to the Selling Shareholder of such copies of
the Prospectus as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the fees and expenses of the Company's
accountants and counsel; and (iv) the performance by the Company of its other
obligations under this Agreement.
6. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, Amendment No. 1 has not yet
been declared effective by the Commission or the Division, when notification of
such effectiveness has been received by the Company.
7. NOTICE. Notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company, at the office of the
Company at 30 Paragon Parkway, Mansfield, Ohio 44903, Attention: John Chuprinko,
with a copy to Vorys, Sater, Seymour and Pease, 52 East Gay Street, Columbus,
Ohio 43215, Attention: Susan E. Brown, Esq.; (ii) if to the Selling Shareholder,
at
--------------------------------, ----------------------------, ------------.
8. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by
and construed in accordance with the laws of the State of Ohio. This Agreement
may be signed in various counterparts which together constitute one and the same
instrument. If signed in counterparts, this Agreement shall not become effective
unless at least one counterpart hereof shall have been executed and delivered on
behalf of each party hereto.
SELLING SHAREHOLDER STEARNS & LEHMAN, INC.
_________________________________ By:
Title:________________________________
<PAGE> 1
EXHIBIT 10(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 2 to
Registration Statement on Form SB-1 (File No. 333-04244-C) of our report dated
June 20, 1997, on our audit of the financial statements of Stearns & Lehman,
Inc. We also consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
January 9, 1998
<PAGE> 1
EXHIBIT 11
(614) 464-6400
January 9, 1998
Stearns & Lehman, Inc.
30 Paragon Parkway
Mansfield, Ohio 44903
Ladies and Gentlemen:
We have acted as counsel to Stearns & Lehman, Inc. (the "Company") in
connection with the registration under the Securities Act of 1993, as amended
(the "Act"), on Form SB-1 (the "Registration Statement") of the sale by certain
holders (the "Selling Shareholders") of up to 382,502 previously issued and now
outstanding common shares, without par value, of the Company (the "Common
Shares"). We are also familiar with the proceedings taken by the Company in
connection with the issuance and sale by the Company of the Common Shares
proposed to be sold by the Selling Shareholders.
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K of the General Rules and Regulations
promulgated under the Act (the "Rules and Regulations").
In connection with the preparation of this opinion, we have examined
and are familiar with each of the following:
A. The Amended Articles of Incorporation and Amended Regulations of
the Company, each as currently in effect, and the Company's minute book;
B. The Registration Statement, including Post-Effective Amendment
No. 2 thereto;
C. The resolutions adopted by the Board of Directors of the Company
relating to the issuance of the Common Shares; and
D. Such other records, documents or instruments as in our judgment
are necessary or appropriate to enable us to render the opinions herein.
Based on the foregoing, we are of the opinion that the Company is a
duly organized and legally existing corporation under the laws of the State of
Ohio. We are also of the opinion, based upon the foregoing and assuming
compliance with applicable federal and state securities laws, that the 382,502
Common Shares to be sold by the Selling Shareholders are validly issued and
outstanding, fully paid and non-assessable.
We are members of the Bar of the State of Ohio and do not purport to be
experts in the laws of any jurisdiction other than the laws of the State of Ohio
and the United States of America.
<PAGE> 2
We hereby consent to the filing of this opinion as Exhibit 11 to
Post-Effective Amendment No. 2 to the Registration Statement. In giving this
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Act or the Rules and Regulations.
Very truly yours,
VORYS, SATER, SEYMOUR AND PEASE LLP
