<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
----------
COMMISSION FILE NO. 0-21879
----------
STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
OHIO 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
30 PARAGON PARKWAY
MANSFIELD, OHIO 44903
(Address of principal executive offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
As of December 4, 1998, 3,285,865 common shares, no par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
STEARNS & LEHMAN, INC.
BALANCE SHEETS
October 31, 1998, April 30, 1998 and October 31, 1997
<CAPTION>
ASSETS OCTOBER 31, APRIL 30, OCTOBER 31,
1998 1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 244,075 $ 272,339 $ 180,513
Trade accounts receivable, net of allowance for doubtful
accounts of $55,606, $56,000 and $49,512 as of
October 31, 1998, April 30, 1998 and October 31, 1997 1,952,072 1,307,233 1,190,934
Inventory 2,201,798 1,868,342 1,294,425
Prepaid and other 69,562 69,930 40,748
Deferred income taxes 37,995 38,465 40,523
----------- ---------- ----------
Total current assets 4,505,502 3,556,309 2,747,143
----------- ---------- ----------
Property and equipment:
Land 73,928 73,928 80,848
Buildings 1,829,823 1,829,823 1,896,356
Building improvements 53,591 41,281 91,716
Leasehold improvements 9,433 9,433 9,433
Machinery and equipment 1,795,227 1,756,977 1,621,249
Office equipment 429,342 411,328 348,650
Tooling 124,037 89,873 66,425
Vehicles 45,392 45,392 36,964
----------- ---------- ----------
4,360,773 4,258,035 4,151,641
Less: accumulated depreciation (1,105,828) (957,822) (854,336)
----------- ---------- ----------
Net property and equipment 3,254,945 3,300,213 3,297,305
----------- ---------- ----------
Goodwill 548,925 583,420 417,287
Cash surrender value of life insurance 40,642 42,076 34,352
Trademarks and patents 3,515 3,863 4,212
Deferred stock offering costs 13,722
Deferred income taxes 89,594
Other assets 22,118 28,320 35,316
----------- ---------- ----------
Total assets $ 8,375,647 $7,514,201 $6,638,931
=========== ========== ==========
</TABLE>
CONTINUED
1
<PAGE> 3
<TABLE>
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1998 1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 1,241,250 $ 768,093 $ 722,286
Accrued expenses 375,885 240,476 174,017
Current portion of notes payable 141,196 145,689 49,141
Current portion of capital lease obligations 2,256 6,640
----------- ---------- ----------
Total current liabilities 1,758,331 1,156,514 952,084
----------- ---------- ----------
Notes payable, net of current portion 734,851 802,353 694,642
Deferred income taxes 76,899 51,279
----------- ---------- ----------
Total long-term liabilities 811,750 853,632 694,642
----------- ---------- ----------
Total liabilities 2,570,081 2,010,146 1,646,726
----------- ---------- ----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares
authorized, 3,289,165, 3,275,965 and 3,230,052
issued and 3,285,865, 3,272,665 and 3,226,752
outstanding as of October 31, 1998, April 30, 1998
and October 31, 1997, respectively 3,629 3,614 3,563
Additional paid-in capital 5,248,461 5,208,876 5,091,920
Accumulated earnings (deficit) 566,676 304,765 (90,078)
----------- ----------- -----------
5,818,766 5,517,255 5,005,405
Less treasury shares, at cost (3,300 shares) (13,200) (13,200) (13,200)
----------- ----------- -----------
Total shareholders' equity 5,805,566 5,504,055 4,992,205
----------- ----------- -----------
Total liabilities and shareholders' equity $ 8,375,647 $ 7,514,201 $ 6,638,931
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the three months ended October 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Sales $3,241,046 $2,491,263
Cost of sales 2,243,219 1,848,863
---------- ----------
Gross profit 997,827 642,400
Selling, general and administrative expenses 561,529 439,664
---------- ----------
Income from operations 436,298 202,736
---------- ----------
Other income (expense), net:
Interest expense (20,386) (10,502)
Interest income 3,695 (31)
Other (3,676) (620)
---------- ----------
(20,367) (11,153)
---------- ----------
Income before income tax expense 415,931 191,583
Income tax expense (benefit):
Current 138,242 3,500
Deferred 15,970 (38,675)
---------- ----------
Total income tax expense (benefit) 154,212 (35,175)
---------- ----------
Net income $ 261,719 $ 226,758
========== ==========
Earnings per share - basic $ 0.08 $ 0.07
========== ==========
Earnings per share - diluted $ 0.08 $ 0.07
========== ==========
Basic weighted-average common shares outstanding 3,285,865 3,226,752
========== ==========
Diluted weighted-average common shares outstanding 3,287,052 3,268,657
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the six months ended October 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Sales $5,177,647 $4,400,254
Cost of sales 3,698,666 3,289,146
---------- ----------
Gross profit 1,478,981 1,111,108
Selling, general and administrative expenses 1,081,830 867,813
---------- ----------
Income from operations 397,151 243,295
---------- ----------
Other income (expense), net:
Interest expense (41,698) (11,590)
Interest income 11,468 12,043
Other 59,430 (3,120)
---------- ----------
29,200 (2,667)
---------- ----------
Income before income tax expense 426,351 240,628
Income tax expense (benefit):
Current 138,350 3,900
Deferred 26,090 (28,145)
---------- ----------
Total income tax expense (benefit) 164,440 (24,245)
---------- ----------
Net income $ 261,911 $ 264,873
========== ==========
Earnings per share - basic $ 0.08 $ 0.08
========== ==========
Earnings per share - diluted $ 0.08 $ 0.08
========== ==========
Basic weighted-average common shares outstanding 3,285,506 3,226,752
========== ==========
Diluted weighted-average common shares outstanding 3,287,724 3,264,498
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
for the year ended April 30, 1998 and the six months ended October 31, 1998
<CAPTION>
NUMBER OF ADDITIONAL ACCUMULATED TOTAL SHARE-
COMMON COMMON PAID-IN EARNINGS TREASURY HOLDERS'
SHARES SHARES CAPITAL (DEFICIT) SHARES EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1997 3,226,752 $3,563 $5,091,920 $(354,951) $(13,200) $4,727,332
Net Income 659,716 659,716
Exercise of warrants to
common shares 45,913 51 116,956 117,007
---------- ------ ---------- --------- -------- ----------
Balance at April 30, 1998 3,272,665 3,614 5,208,876 304,765 (13,200) 5,504,055
Net Income 261,911 261,911
Exercise of warrants to
common shares 13,200 15 39,585 39,600
---------- ------ ---------- --------- -------- ----------
Balance at October 31, 1998 3,285,865 $3,629 $5,248,461 $ 566,676 $(13,200) $5,805,566
========== ====== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended October 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 261,911 $ 264,873
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 10,000
Depreciation and amortization 189,051 140,154
Impairment and loss on the sale of property and equipment 1,571
Deferred income taxes 26,090 (28,145)
Changes in assets and liabilities:
Trade accounts receivable (644,839) (316,475)
Inventory (333,456) (54,754)
Prepaid expenses and other 368 34,891
Accounts payable 473,157 (146,761)
Accrued expenses 135,409 (65,258)
--------- -----------
Net cash provided by (used in) operating activities 107,691 (159,904)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (102,738) (1,105,293)
Sale of property and equipment 1,000
Cash surrender value of life insurance, net 1,434 (10,741)
--------- -----------
Net cash used in investing activities (101,304) (1,115,034)
--------- -----------
Cash flows from financing activities:
Net borrowing under notes payable 750,000
Principal payments on notes payable and capital leases (74,251) (11,660)
Deferred capital stock offering costs (13,722)
Net proceeds from issuance of common stock 39,600
--------- -----------
Net cash provided by (used in) financing activities (34,651) 724,618
--------- -----------
Net decrease in cash and cash equivalents (28,264) (550,320)
Cash and cash equivalents, beginning of year 272,339 730,833
--------- -----------
Cash and cash equivalents, end of period $ 244,075 $ 180,513
========= ===========
</TABLE>
CONTINUED
6
<PAGE> 8
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
<CAPTION>
1998 1997
<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 $41,698 $11,590
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three and six months ended
October 31, 1998 and 1997 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, 1998 and April 30, 1997. In
the opinion of management, the accompanying financial statements
reflect all necessary adjustments (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, 1998, April
30, 1998 and October 31, 1997 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
1998 1998 1997
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $119,412 $131,353 $236,176
Accrued expenses 7,842
Other 5,244 5,244 1,925
Allowance for doubtful accounts 20,810 21,280 18,815
-------- -------- --------
Gross deferred tax assets 145,466 157,877 264,758
Deferred tax liabilities:
Property and equipment 184,370 170,691 134,641
-------- -------- --------
Net deferred tax asset (liabilities) $(38,904) $(12,814) $130,117
-------- -------- --------
</TABLE>
A valuation allowance of $101,972 was eliminated during the six-month
period ended October 31, 1997 as continued profitability has reduced
the potential uncertainty of the utilization of net operating loss
carryforwards. This created a net deferred tax benefit for the three
and six month periods ended October 31, 1997.
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
3. COMMON SHARES:
On September 29, 1998 the Committee of the Company's Amended and
Restated 1994 Stock Option Plan ("Plan"), as designated by the Board of
Directors, authorized the granting of 17,000 incentive stock options.
These incentive stock options had an effective date of September 29,
1998 with an option price of $2.266 per share. This option price was
based on the fair value of common shares on September 29, 1998 in
accordance with the terms of the Plan.
4. EARNINGS PER SHARE:
Net income per share is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings per share are computed based upon
the weighted average number of outstanding common shares. Diluted
earnings per share include the weighted average effect of dilutive
warrants and stock options outstanding.
<TABLE>
WEIGHTED AVERAGE COMMON SHARES THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31 OCTOBER 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Common shares issued 3,289,165 (3,230,052) 3,288,806 3,230,052
Treasury shares (3,300) (3,300) (3,300) (3,300)
----------- ----------- ----------- -----------
Basic shares 3,285,865 3,226,752 3,285,506 3,226,752
Dilutive effect of warrants 1,187 41,905 2,218 37,746
and stock options
----------- ----------- ----------- -----------
Diluted shares 3,287,052 3,268,657 3,287,724 3,264,498
----------- ----------- ----------- -----------
</TABLE>
9
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
GENERAL
- -------
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, 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, Israel, 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 57
employees. The Company's customer list includes a number of America's top
specialty coffee retailers and restaurants including Starbucks Coffee Company
("Starbucks "), Barnie's Coffee & Tea Company, The Coffee Beanery, Darden
Restaurants Inc.'s The Olive Garden Italian Restaurant, Flagstar Cos. Inc.'s
Denny's Restaurant, Gloria Jeans Gourmet Coffee, Godiva Chocolatier, Inc.,
Borders, Inc., Caribou Coffee Company, Kraft General Foods, Sara Lee's Superior
Coffee Division, and Sysco Food Service. The Company does not have any long-term
supply agreements with any of these customers except Starbucks and Caribou
Coffee Company. The Company believes that its success in obtaining these
accounts is attributable to the Company's emphasis on quality, dependable
service and innovation.
PLAN OF OPERATION
- -----------------
The Company's plans, for the fiscal year ended April 30, 1999, are primarily a
continuation of endeavors initiated in the fiscal year ended April 30, 1998.
While private label syrup sales continue to be the primary component of the
Company's business, efforts continue to strengthen the market penetration of the
DOLCE(R) and The Godiva Chocolatier Cafe' Godiva brands of specialty chocolate
flavored flavoring syrups. In addition, with the start of production of the
DiNATURA(R) premium natural flavored syrups, the Company anticipates a favorable
market impact in the premium niche of the flavoring syrup market. The Company
also plans to continue its efforts to enhance revenue growth through strategic
acquisitions. The Company also intends to enhance net income by improving
production efficiencies and raw material procurement.
Specifically, the Company's plans for the DOLCE(R) brand of flavoring syrup call
for continued growth in the distribution network through the addition of volume
distributors. Generally, the Company will search for volume distributors that
the Company believes are large, financially sound
10
<PAGE> 12
organizations that have the resources to readily market the Company's products,
and order and receive the product in larger quantities. The larger order
quantities decrease freight costs per product unit. Because of the additional
market presence provided by the volume distributors, the Company should be able
to be a stronger competitor in the national market. In addition, the Company is
developing an internal marketing team to assist distributors in acquiring new
customers for the Company's branded products.
The Company's view is that the flavoring syrup market is weak in brand name
recognition. As a result, the Company initiated efforts to obtain partnering
arrangements that enhance the brand name recognition of its products. Currently,
the Company has an agreement with Godiva Chocolatier, Inc. for the use of the
Godiva Chocolatier Cafe' Godiva brand name and recently initiated an advertising
campaign to market this product line. The Company believes that the Godiva brand
name will encourage new consumers to use the product and subsequently strengthen
retail sales.
The Company's DiNATURA(R) premium natural flavored syrups will round out the
Company's flavoring syrup line. This product, intended to be the "best in the
class," will enable the Company to cover all segments of the flavoring syrup
market. It is anticipated that this product line will eliminate the need for
distributors to offer competitors' products.
The Company moved into its new manufacturing, warehouse and executive office
facility in Mansfield, Ohio in August 1997 and the Company continues to develop
new methods and procedures to maximize efficiencies in the production and
shipment of its products. The installation of a year 2000 compliant
manufacturing and business computer system is underway. Currently all the
financial and accounting modules have been implemented and efforts are underway
to install the manufacturing modules. The plans call for complete implementation
by April 30, 1999. When the system is fully implemented, the Company anticipates
a reduction in inventory carrying costs, improved production planning and
customer deliveries and significant improvements in product and customer
profitability analysis.
The Company's plans also include evaluating and proceeding with strategic
acquisitions to enhance revenue growth. The Company is looking for acquisitions
that will add volume to its existing product lines or that will compliment its
existing product lines. For the year ended April 30, 1998 the Company made two
acquisitions that added volume to existing product lines and as of December 4,
1998, the Company is involved in the search process for additional acquisitions.
The Company is developing plans for a higher speed production line. The
specifications for this line are to maintain the flexibility to handle private
label requirements while achieving competitive production speeds and
efficiencies. The target date for implementation of this line is the summer of
1999. The Company also recently hired a purchasing/inventory specialist to
improve the Company's raw material procurement procedures and to improve the
turnover of inventory.
11
<PAGE> 13
<TABLE>
SELECTED SUMMARY FINANCIAL INFORMATION
- --------------------------------------
<CAPTION>
QUARTERLY INFORMATION FOR 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER
INDICATED FISCAL YEARS FY 1999 FY 1999 FY 1998 FY 1998 FY 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $4,505,502 $3,475,712 $3,556,309 $3,181,291 $2,747,143
TOTAL ASSETS $8,375,647 $7,405,074 $7,514,201 $7,220,671 $6,638,931
CURRENT LIABILITIES $1,758,331 $1,033,687 $1,156,514 $1,123,000 $ 952,084
LONG TERM DEBT, NET OF $ 734,851 $ 766,681 $ 802,353 $ 840,524 $ 694,642
CURRENT PORTION
TOTAL LIABILITIES $2,570,081 $1,861,227 $2,010,146 $1,963,524 $1,646,726
SHAREHOLDERS' EQUITY $5,805,566 $5,543,847 $5,504,055 $5,257,147 $4,992,205
STATEMENT OF OPERATIONS:
TOTAL SALES $3,241,046 $1,936,600 $2,409,321 $2,432,955 $2,491,263
COST OF GOODS SOLD $2,243,219 $1,449,637 $1,519,009 $1,804,891 $1,848,863
SELLING, GENERAL AND $ 561,529 $ 526,111 $ 479,484 $ 411,369 $ 439,664
ADMINISTRATIVE EXPENSES
NET INCOME $ 261,719 $ 192 $ 246,908 $ 147,935 $ 226,758
BASIC AND DILUTED EARNINGS $ 0.08 $ 0.00 $ 0.08 $ 0.05 $ 0.07
PER SHARE
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR SIX MONTHS SIX MONTHS
SPECIFIED PERIODS APRIL 30, APRIL 30, APRIL 30, OCTOBER 31, OCTOBER 31,
1998 1997 1996 1998 1997
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $3,556,309 $2,956,601 $1,889,929 $4,505,502 $2,747,143
TOTAL ASSETS $7,514,201 $5,780,362 $3,973,037 $8,375,647 $6,638,931
CURRENT LIABILITIES $1,156,514 $1,050,774 $1,417,743 $1,758,331 $ 952,084
LONG TERM DEBT, NET OF $ 802,353 $ 2,256 $ 144,500 $ 734,851 $ 694,642
CURRENT PORTION
TOTAL LIABILITIES $2,010,146 $1,053,030 $1,562,243 $2,570,081 $1,646,726
SHAREHOLDERS' EQUITY $5,504,055 $4,727,332 $2,410,794 $5,805,566 $4,992,205
STATEMENT OF OPERATIONS:
TOTAL SALES $9,242,530 $7,381,105 $5,514,753 $5,177,647 $4,400,254
COST OF GOODS SOLD $6,613,046 $5,432,588 $4,343,803 $3,698,666 $3,289,146
SELLING, GENERAL AND $1,758,667 $1,588,865 $1,774,118 $1,081,830 $ 867,813
ADMINISTRATIVE EXPENSES
NET INCOME (LOSS) $ 659,716 $ 402,272 $ (732,915) $ 261,911 $ 264,873
BASIC AND DILUTED EARNINGS $ 0.20 $ 0.13 $ (0.26) $ 0.08 $ 0.08
(LOSS) PER SHARE
</TABLE>
12
<PAGE> 14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
- --------------------------------------------------------------------------
Net sales for the three months ended October 31, 1998 and 1997 were $3,241,046
and $2,491,263, respectively, which represents a 30.1% increase. For the three
months ended October 31, 1998, private label syrup sales increased by 55.8%, the
Company's branded syrup products sales increased by 11.9%, while the sales of
other Company products decreased by 58.1%, all as compared to the three months
ended October 31, 1997. Private label syrup, Company branded syrup, and other
Company products represented 79.0%, 15.2% and 5.8% of gross sales, respectively,
for the three months ended October 31, 1998. The increase in private label syrup
sales was the result of a 153.8% increase in sales to the Company's largest
private label customer. This increase followed a 6.2% decrease in sales to this
customer in the first quarter. Consequently, portions of this increase
represented timing differences in shipments between the first and second
quarters in the current fiscal year. The Company's branded syrup products' sales
increased primarily as a result of sales of the Senza and San Marino brand
product lines that were acquired in the latter part of fiscal 1998. The increase
in the Senza and San Marino brands was offset by a respective 50.9% and a 1.3%
decrease in Flavor-Mate(R) and Dolce(R) brand syrups. The decrease in
Flavor-Mate(R) brand syrups sales are primarily a result of customers of this
brand being transferred to the Senza brand in an effort to consolidate the
number of brands offered by the Company. In addition, the Company faced first
quarter delays in readying the new DiNatura(C) brand of premium syrups for sale.
Production of the DiNatura(C) brand began late in the first quarter and the
first shipments occurred in October 1998. Sales of the DiNatura(C) brand
represented less than 1% of the sales for the quarter. The sales of other
Company products decreased due to lower sales of all product lines in this
group. The downward trend in the sales of other Company products reflects the
sale of the Grandma Choice flavor extract business in February 1998 and other
low profit product lines being eliminated or de-emphasized.
During the three-month period ended October 31, 1998, the Company experienced
lower cost of goods sold, as a percentage of net sales, compared to the same
three-month period in the previous year. Improved manufacturing efficiency was
partially offset by increases in packaging costs and freight out costs.
Consequently, cost of sales, as a percentage of net sales, decreased to 69.2%
for the three months ended October 31, 1998 compared to 74.2% for same quarter
last year. Cost of sales increased by $394,356 for the three months ended
October 31, 1998 compared to the three months ended October 31, 1997 as a result
of higher sales volume.
Selling, general and administrative expenses increased by 27.7% or $121,865 for
the three months ended October 31, 1998 compared to the three months ended
October 31, 1997. This increase resulted from increases in depreciation,
advertising, product sample expense, marketing services expense, the number of
employees and employee wages, computer support costs, director fees and the
amortization of goodwill. These increases were offset by decreases in trade show
and travel expense and product placement costs. Selling, general and
administrative expenses, as a percentage of net sales, decreased to 17.3%
compared to 17.6% for the three months ended October 31, 1998 and 1997,
respectively.
13
<PAGE> 15
Interest expense for the three months ended October 31, 1998 increased by $9,884
compared to the three months ended October 31, 1997. The increase primarily
reflects borrowing associated with the Company's new manufacturing, warehouse
and executive office facility and borrowing associated with the acquisition of
the Senza product line. The Company reported total net other expenses of $20,367
for the three months ended October 31, 1998 compared to$11,153 for the three
months ended October 31, 1997.
Income before income tax expense increased 117.1% to $415,931 for the three
months ended October 31, 1998 from $191,583 for the three months ended October
31, 1997.
The Company recorded income tax expense of $154,212 for the three months ended
October 31, 1998. For the three months ended October 31, 1997, the Company
recorded an income tax benefit of $35,175.
As a result of the foregoing, the Company reported net income of $261,719, or
$0.08 per basic weighted average number of common shares of the Company (the
"Common Shares") outstanding, for the three months ended October 31, 1998
compared to net income of $226,758, or $0.07 per basic weighted average number
of Common Shares outstanding, for the three months ended October 31, 1997. The
basic weighted average number of Common Shares outstanding increased to
3,285,865 for the current three-month period compared to 3,226,752 for the
comparable three-month period last year. The increase primarily reflects Common
Shares issued upon the exercise of warrants.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 AND 1997
- ------------------------------------------------------------------------
Net sales for the six months ended October 31, 1998 and 1997 were $5,177,647 and
$4,400,254, respectively, which represents a 17.7% increase. For the six months
ended October 31, 1998, private label syrup sales increased by 31.0%, the
Company's branded syrup products sales increased by 14.0%, while the sales of
other Company products decreased by 41.1%, all as compared to the six months
ended October 31, 1997. Private label syrup, Company branded syrup, and other
Company products represented 74.5%, 17.4% and 8.1% of gross sales, respectively,
for the six months ended October 31, 1998. The increase in private label syrup
sales was the result of significant sales increases to several large private
label customers including the Company's largest customer. The Company's branded
syrup products' sales increased primarily as a result of sales of the Senza and
San Marino brand product lines that were acquired in the latter part of fiscal
1998. The increase in the Senza and San Marino brands was offset by a respective
37.7% and a 7.1% decrease in Flavor-Mate(R) and Dolce(R) brand syrups. The
decrease in Flavor-Mate(R) brand syrups sales are primarily a result of
customers of this brand being transferred to the Senza brand in an effort to
consolidate the number of brands offered by the Company. In addition, the
Company faced first quarter delays in readying the new DiNatura(C) brand of
premium syrups for sale. Production of the DiNatura(C) brand began late in the
first quarter and the first shipments occurred in October 1998. The sales of
other Company products decreased due to lower sales of all product lines in this
group other than Mulling Spices packaged under the Select Origins(R) brand. The
downward trend in the sales of other Company products reflects the sale of the
Grandma Choice flavor extract business in February 1998 and other low profit
product lines being eliminated or de-emphasized.
14
<PAGE> 16
During the six-month period ended October 31, 1998, the Company experienced
lower cost of goods sold, as a percentage of net sales, compared to the same
six-month period in the previous year. Improved manufacturing efficiency was
partially offset by increases in packaging costs and freight out costs.
Consequently, cost of sales, as a percentage of net sales, decreased to 71.4%
for the six months ended October 31, 1998 compared to 74.7% for same quarter
last year. Cost of sales increased by $409,520 for the six months ended October
31, 1998 compared to the six months ended October 31, 1997 as a result of higher
sales volume.
Selling, general and administrative expenses increased by 24.7% or $214,017 for
the six months ended October 31, 1998 compared to the six months ended October
31, 1997. This increase resulted from increases in advertising, product sample
expense, marketing services expense, the number of employees and employee wages,
depreciation, computer support costs, employee benefit programs, director fees
and the amortization of goodwill. These increases were offset by decreases in
sales promotion expense, supplies, product placement costs. Selling, general and
administrative expenses, as a percentage of net sales, increased to 20.9%
compared to 19.7% for the six months ended October 31, 1998 and 1997,
respectively.
Interest expense for the six months ended October 31, 1998 increased by $30,108
compared to the six months ended October 31, 1997. The increase primarily
reflects borrowing associated with the Company's new manufacturing, warehouse
and executive office facility and borrowing associated with the acquisition of
the Senza product line.
The Company reported other income of $59,430 for the six months ended October
31, 1998 compared to other expense of $3,120 for the six months ended October
31, 1997. The primary reasons for this $62,550 change were a $50,632 rebate from
the Ohio Bureau of Workers Compensation and a $13,500 settlement from a
defamation claim made by the Company against a competitor.
Income before income tax expense increased 77.2% to $426,351 for the six months
ended October 31, 1998 from $240,628 for the six months ended October 31, 1997.
The Company recorded income tax expense of $164,440 for the six months ended
October 31, 1998. For the six months ended October 31, 1997, the Company
recorded an income tax benefit of $24,245.
As a result of the foregoing, the Company reported net income of $261,911, or
$0.08 per basic weighted average number of Common Shares outstanding, for the
six months ended October 31, 1998 compared to net income of $264,873, or $0.08
per basic weighted average number of Common Shares outstanding, for the six
months ended October 31, 1997. The basic weighted average number of Common
Shares outstanding increased to 3,285,506 for the current six-month period
compared to 3,226,752 for the comparable six-month period last year. The
increase primarily reflects Common Shares issued upon the exercise of warrants.
15
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The working capital and working capital ratio as of October 31, 1998 and October
31, 1997 were $2,747,171 and 2.56 to 1 and $1,795,059 and 2.89 to 1,
respectively. The increase in working capital for October 31, 1998 compared to
October 31, 1997 was primarily a result of a $907,373 increase in the Company's
inventory, a $761,138 increase in the Company's accounts receivable offset by a
$518,964 increase in accounts payable. The increase in inventory was a result of
the acquisition of the Senza and San Marino brand syrups, raw materials, planned
increases in certain private label brands to improve manufacturing efficiencies
and the slower than expected introduction of the DiNatura(C) brand of syrups.
The increase in accounts receivable was entirely due to very strong October 1998
sales made under the Company's normal 30 day terms. The increase in accounts
payable was a result of raw material purchases necessary to accommodate the
strong product demand the Company experienced in October.
The Company's operating activities, for the six months ended October 31, 1998,
provided net cash of $107,691. The Company used $102,738 to acquire equipment
and also increased its investment in life insurance policies by $1,434. The
Company used $74,251 to make principal payments on a mortgage note payable and
on capital leases, and received $39,600 from the exercise of warrants.
Consequently, during this period, cash and cash equivalents decreased by
$28,264. 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.
As of November 30, 1998, the Company renewed its $400,000 line of credit with
First Knox National Bank and there was no outstanding balance on this line as of
December 4, 1998.
YEAR 2000 COMPLIANCE
- --------------------
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware as part of a normal plan to upgrade the
Company's computer application software capability. The installation and
implementation of the application software is currently underway and is targeted
for completion by April 1999. As of December 4, 1998, the financial modules of
the software have been implemented and several elements of the manufacturing
modules are being utilized. This software and hardware when fully implemented
will be Year 2000 compliant. The Company, as of December 4, 1998, has incurred
costs of $202,148 and anticipates $25,000 in additional installation costs to
complete the project.
The Company has completed tests on all of the Company-owned personal and network
computers and its production devices and does not anticipate any other internal
costs associated with Year 2000 compliance on these systems or devices. The
Company completed internal Year 2000 tests on its telephone system and incurred
costs of approximately $4,000 to upgrade the system to be Year 2000 compliant.
The Company's shipping system, that was provided by a third party vendor, is not
currently Year 2000 compliant. This vendor has indicated their shipping system
will meet Year 2000 compliance prior to December 1999. The Company will not
absorb any cost associated with Year 2000 compliance on this shipping system.
16
<PAGE> 18
The Company plans to perform an elementary survey of its vendors by March 1999.
This will provide basic information pertaining to the Company's vulnerability to
potential disruption from suppliers. Until that survey is complete, the Company
will be unable to determine the extent of this vulnerability or determine any
contingency plans necessary to obtain raw materials from alternate vendors.
The Company plans to be fully Year 2000 compliant, with exception to the third
party shipping system, by April 1999. However, the Company cannot be certain if
its customers or vendors will likewise be Year 2000 compliant. The Company may
face material risks if certain of its customers or vendors cannot conduct normal
receipt or shipments of product or materials on or after January 1, 2000.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit #27 - Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
Date: December 10, 1998 STEARNS & LEHMAN, INC.
(Registrant)
/s/ William C. Stearns
------------------------------------
William C. Stearns
President
/s/ John A. Chuprinko
------------------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 224,075
<SECURITIES> 0
<RECEIVABLES> 2,007,678
<ALLOWANCES> (55,606)
<INVENTORY> 2,201,798
<CURRENT-ASSETS> 4,505,502
<PP&E> 4,360,773
<DEPRECIATION> (1,105,828)
<TOTAL-ASSETS> 8,375,647
<CURRENT-LIABILITIES> 1,758,331
<BONDS> 734,851
0
0
<COMMON> 3,629
<OTHER-SE> 5,801,937
<TOTAL-LIABILITY-AND-EQUITY> 8,375,647
<SALES> 5,177,647
<TOTAL-REVENUES> 5,248,545
<CGS> 3,698,666
<TOTAL-COSTS> 4,780,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,698
<INCOME-PRETAX> 426,351
<INCOME-TAX> 164,440
<INCOME-CONTINUING> 261,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,911
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
