<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended January 31, 1998
OR
Transaction 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)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- -----
As of March 6, 1998, 3,272,665 common shares, no par value, were outstanding.
Transition Small Business Disclosure Format (check one): Yes No X
----- -----
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
BALANCE SHEETS
JANUARY 31, 1998 , APRIL 30, 1997 AND JANUARY 31, 1997
<TABLE>
<CAPTION>
ASSETS JANUARY 31, APRIL 30, JANUARY 31,
1998 1997 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 329,023 $ 730,833 $ 1,342,449
Trade accounts receivable, net of allowance for doubtful
accounts of $49,409, $46,000 and $55,556 as of
January 31, 1998, April 30, 1997 and January 31, 1997
respectively 1,159,147 884,459 916,322
Inventory 1,590,566 1,239,671 1,323,120
Prepaid and other 67,064 75,639 63,861
Deferred income taxes 35,491 25,999 117,100
----------- ----------- -----------
Total current assets 3,181,291 2,956,601 3,762,852
----------- ----------- -----------
Property and equipment:
Land 80,848 80,848 74,653
Construction in progress 941,199 422,659
Machinery and equipment 1,719,940 1,412,061 1,374,221
Office equipment 394,311 213,140 207,728
Building improvements 67,873 91,716 91,716
Buildings 1,866,282 137,734 137,734
Leasehold improvements 9,434 43,003 43,003
Tooling 72,178 59,344 37,529
Vehicles 45,392 36,964 35,852
----------- ----------- -----------
4,256,258 3,016,009 2,425,095
Less: accumulated depreciation (925,109) (780,538) (734,848)
----------- ----------- -----------
Net property and equipment 3,331,149 2,235,471 1,690,247
----------- ----------- -----------
Goodwill 600,667 441,833 454,106
Cash surrender value of life insurance 35,457 23,611 25,103
Trademarks and patents 4,037 4,560 4,734
Deferred income taxes 36,252 75,973
Other assets 31,818 42,313 50,115
----------- ----------- -----------
Total assets $ 7,220,671 $ 5,780,362 $ 5,987,157
=========== =========== ===========
</TABLE>
Continued
1
<PAGE> 3
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JANUARY 31,
1998 1997 1997
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 827,510 $ 801,672 $ 991,882
Accrued expenses 147,381 239,275 199,470
Current portion of notes payable 143,629 5,380
Current portion of capital lease obligations 4,480 9,827 10,336
Subordinated convertible notes 300,000
----------- ----------- -----------
Total current liabilities 1,123,000 1,050,774 1,507,068
----------- ----------- -----------
Notes payable, net of current portion 840,524 28,829
Capital lease obligations, net of current portion 2,256 4,480
----------- ----------- -----------
Total long-term liabilities 840,524 2,256 33,309
----------- ----------- -----------
Total liabilities 1,963,524 1,053,030 1,540,377
----------- ----------- -----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized 3,275,965, 3,230,052
and 3,181,826 issued and 3,272,665, 3,226,752 and 3,178,526 outstanding
as of January 31, 1998, April 30, 1997
and January 31, 1997, respectively 3,614 3,563 3,493
Additional paid-in capital 5,208,876 5,091,920 4,827,016
Accumulated earnings (deficit) 57,857 (354,951) (370,529)
----------- ----------- -----------
5,270,347 4,740,532 4,459,980
Less treasury shares, at cost (3,300 shares) (13,200) (13,200) (13,200)
----------- ----------- -----------
Total shareholders' equity 5,257,147 4,727,332 4,446,780
----------- ----------- -----------
Total liabilities and shareholders' equity $ 7,220,671 $ 5,780,362 $ 5,987,157
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales $ 2,432,955 $ 2,034,609
Cost of sales 1,804,891 1,475,180
----------- -----------
Gross profit 628,064 559,429
Selling, general and administrative expenses 411,369 406,793
----------- -----------
Income from operations 216,695 152,636
----------- -----------
Other income (expense), net:
Interest expense (21,204) (11,982)
Interest income 1,105 3,675
Other 11,213 (1,463)
----------- -----------
(8,886) (9,770)
----------- -----------
Net income before income tax expense 207,809 142,866
Income tax expense (benefit):
Current 1,500 2,700
Deferred 58,374 (71,500)
----------- -----------
Total income tax expense (benefit) 59,874 (68,800)
----------- -----------
Net income $ 147,935 $ 211,666
=========== ===========
Earnings per share - basic $ 0.05 $ 0.07
=========== ===========
Earnings per share - diluted $ 0.05 $ 0.07
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales $ 6,833,209 $ 5,492,328
Cost of sales 5,094,037 3,998,929
----------- -----------
Gross profit 1,739,172 1,493,399
Selling, general and administrative expenses 1,279,182 1,176,369
----------- -----------
Income from operations 459,990 317,030
----------- -----------
Other income (expense), net:
Interest expense (32,794) (50,839)
Interest income 13,147 7,469
Other 8,094 1,034
----------- -----------
(11,553) (42,336)
----------- -----------
Net income before income tax expense 448,437 274,694
Income tax expense (benefit):
Current 5,400 5,100
Deferred 30,229 (117,100)
----------- -----------
Total income tax expense (benefit) 35,629 (112,000)
----------- -----------
Net income $ 412,808 $ 386,694
=========== ===========
Earnings per share - basic $ 0.13 $ 0.13
=========== ===========
Earnings per share - diluted $ 0.13 $ 0.13
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE YEAR ENDED APRIL 30, 1997 AND THE NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL ACCUMULATED TOTAL SHARE-
COMMON COMMON PAID-IN EARNINGS 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 412,808 412,808
Conversion of warrants to
common shares 45,913 51 116,956 117,007
---------- ------ ---------- --------- -------- ----------
Balance at January 31, 1998 3,272,665 $3,614 $5,208,876 $ 57,857 ($13,200) $5,257,147
========== ====== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 412,808 $ 386,694
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 10,000 13,160
Depreciation and amortization 231,167 190,891
Impairment and loss on the sale of property and equipment 26,330 86
Deferred income taxes 30,229 (117,100)
Changes in assets and liabilities:
Trade accounts receivable (284,688) (344,817)
Inventory (350,895) (190,572)
Prepaid expenses and other 8,575 (14,353)
Accounts payable (41,537) 188,175
Accrued expenses (91,894) (28,575)
----------- -----------
Net cash provided by (used in) operating activities (49,905) 83,589
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,235,646) (115,137)
Sale of property and equipment 1,000 3,500
Cash surrender value of life insurance, net (11,846) (5,457)
Purchase of goodwill (198,970)
Proceeds from purchase price adjustment 52,746
----------- -----------
Net cash used in investing activities (1,445,462) (64,348)
----------- -----------
Cash flows from financing activities:
Net borrowing under notes payable 1,010,000
Principal payments on notes payable and capital leases (33,450) (499,766)
Sale of treasury stock (637)
Net proceeds from issuance of common stock 117,007 1,700,403
----------- -----------
Net cash provided by financing activities 1,093,557 1,200,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (401,810) 1,219,241
Cash and cash equivalents, beginning of year 730,833 123,208
----------- -----------
Cash and cash equivalents, end of period $ 329,023 $ 1,342,449
=========== ===========
</TABLE>
Continued
6
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<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 $318,300
======== ========
Cash paid during the period for:
Interest $ 32,794 $ 53,673
======== ========
Supplemental schedule of noncash financing activities:
Conversion of line of credit to note payable $350,000
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three and nine months ended
January 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,
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 January 31, 1998, April 30, 1997
and January 31, 1997 are as follows:
<TABLE>
<CAPTION>
January 31, April 30, January 31,
1998 1997 1997
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 182,834 $ 315,982 $328,094
Accrued expenses 26,782 26,640
Other 4,735 1,763 1,290
Allowance for doubtful accounts 18,815 17,480 21,111
--------- --------- --------
Gross deferred tax assets 206,384 362,007 377,135
Deferred tax liabilities:
Property and equipment 134,641 134,652 134,652
--------- --------- --------
Net deferred tax asset before
valuation allowance 71,743 227,355 242,483
Valuation allowance (125,383) (125,383)
--------- --------- --------
Net deferred tax asset $ 71,743 $ 101,972 $117,100
========= ========= ========
</TABLE>
A valuation allowance of $125,383 as of January 31, 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 reduced the potential
uncertainty of the utilization of net operating loss carryforwards.
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
3. EARNINGS PER SHARE:
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share" which the Company adopted in the this quarter. 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 outstanding.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE COMMON SHARES THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31 JANUARY 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Common shares issued 3,263,489 3,126,511 3,241,198 2,928,211
Treasury shares (3,300) (3,300) (3,300) (3,300)
---------- ---------- ---------- ----------
Basic shares 3,260,189 3,123,211 3,237,898 2,924,911
Dilutive effect of warrants 21,578 41,375 32,174 36,020
---------- ---------- ---------- ----------
Diluted shares 3,281,767 3,164,586 3,270,072 2,960,931
========== ========== ========== ==========
</TABLE>
4. COMMON STOCK:
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. On January
21, 1998, 10,000 warrants, with an exercise price of $5.625 per share, were
granted to the Company's outside directors for services rendered during the
calendar year of 1997. The balance of warrants outstanding at March 6, 1998 was
103,452 with an exercise price per share ranging from $3.00 to $5.75 per share.
All outstanding warrants are exercisable at March 6, 1998.
5. NOTES PAYABLE
On December 4, 1997, the Company acquired the inventory, equipment, customer
list, 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 $150,762 in cash and a $120,000 note payable. The
Company principally obtained the cash from a $140,000 note payable to First Knox
National Bank payable in eighteen monthly payments of $7,778 plus interest at a
rate of prime plus 0.5% commencing on January 31, 1997. The $120,000 note
payable to Ricter Enterprises, LTD. is payable in eighteen monthly principal
payments, including interest, of $7,111 commencing July 1, 1999. Interest on the
note to Ricter Enterprises, LTD is payable monthly until June 1, 1999 at a rate
of 8.25%.
9
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
GENERAL
Stearns & Lehman, Inc. (the "Company"), is an Ohio corporation headquartered in
Mansfield, Ohio. The Company was organized on March 14, 1988 and is engaged in
the business of manufacturing and marketing specialty food products, including
coffee and espresso flavorings, syrups, oils and toppings, 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 50
employees. The Company's customer list includes a number of America's top
specialty coffee retailers and restaurants including Starbucks Coffee Company
("Starbucks "), Barnie's Coffee & Tea Company, The Coffee Beanery, Darden
Restaurants Inc.'s The Olive Garden Italian Restaurant, Flagstar Cos. Inc.'s
Denny's Restaurant, Gloria Jeans Gourmet Coffee, Godiva Chocolatier, Inc.,
Borders, Inc., Caribou Coffee Company, Kraft General Foods, Krups, Sara Lee's
Superior Coffee Division, and Sysco Food Service. The Company does not have any
long-term supply agreements with any of these customers except Starbucks and
Caribou Coffee Company. The Company believes that its success in obtaining these
accounts is attributable to the Company's emphasis on quality, dependable
service and innovation.
PLAN OF OPERATION
The Company's plans, for the fiscal year ending April 30, 1998, included
increasing market penetration of the DOLCE(R) and The Godiva Chocolatier Cafe'
Godiva brands of flavoring syrups, initiating production of and developing the
market for the DiNATURA(R) premium natural flavored syrups, moving into its new
manufacturing, warehouse and executive office facility, installing a new
manufacturing and business computer system and enhancing revenue growth through
strategic acquisitions.
The Company completed several progressive steps toward achieving its plans
during the quarter ended January 31, 1998. 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, for
$150,762 in cash and a $120,000 note payable. Ricter reported unaudited sales of
$356,000 for the twelve months ended September 30, 1997.
10
<PAGE> 12
On January 23, 1998, the Company signed a Marketing and Development Agreement
with Cultor Food Science, Inc. ("Cultor"). Under this agreement, the Company
acquired the rights to the San Marino(TM) product line, trademarks, customer
lists, formulas and other related information from Cultor. Cultor, with
expertise in flavor creation technology, product development and applications,
intends to partner in a business-building effort with the Company, with the
intent of bringing new products to markets currently served by the Company.
Cultor will also be a primary supplier of flavoring material for the Company's
existing products. Cultor reported unaudited San Marino(TM) products sales of
$200,000 for the twelve months ended December 31, 1997. . The Company has
continued its efforts to enhance the distribution of the DOLCE(R) brand of
flavoring syrups by entering into master distributor relationships with large,
financially sound organizations that have the resources to readily market the
Company's products, and order and receive product in larger quantities. As of
March 6, 1998, the Company has 10 master distributors covering 16 states.
The Company's planned DiNATURA(R) premium natural flavored syrups has
encountered delays as a result of the need for and receiving additional
production line equipment. The production of the DiNATURA(R) premium natural
flavored syrups is now expected to begin late in the fourth quarter of the
Company's fiscal year. The Company anticipates an additional capital expenditure
of approximately $89,000 to start production of the DiNATURA(R) premium natural
flavored syrups.
The installation of a year 2000 compliant manufacturing and business computer
system started during the month of August 1997. As of March 6, 1998, the Company
has implemented the general ledger, accounts payable and payroll modules. The
accounts receivable, order entry and purchasing modules are scheduled for
implementation on April 1, 1998, with the remaining modules to be implemented by
the end of the Company's fiscal year. This system should enable the Company to
reduce inventory carrying costs, improve production planning and customer
deliveries and allow significant improvements in product and customer
profitability analysis. The Company anticipates additional expenditures of
approximately $40,000 for additional computer components and installation costs.
Late in January 1998, the Company decided to sell the Grandma's Choice line of
extract and flavoring products. Production of this product line has been very
labor intensive and the Company felt that an investment in additional
manufacturing equipment would not yield an adequate rate of return. This line
was sold to Shank's Extract Inc. on February 12, 1998. The material terms of
this transaction included the sale of all Grandma's Choice inventory for $66,000
and the sale of Grandma's Choice customers and goodwill for $9,000. Sales of the
Grandma's Choice product line was $63,602 for the nine months ended January 31,
1998. The Company is continuing to review several of its low volume labor
intensive product lines for disposition.
11
<PAGE> 13
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR 3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER
INDICATED FISCAL YEARS FY 1998 FY 1998 FY 1998 FY 1997 FY 1997
Balance Sheet:
<S> <C> <C> <C> <C> <C>
Current Assets $3,181,291 $2,747,143 $2,555,962 $2,956,601 $3,762,852
Total Assets $7,220,671 $6,638,931 $6,187,156 $5,780,362 $5,987,157
Current Liabilities $1,123,000 $ 952,084 $1,311,423 $1,050,774 $1,507,068
Long Term Debt, net of $ 840,524 $ 694,642 $ 110,286 $2,256 $ 33,309
current portion
Total Liabilities $1,963,524 $1,646,726 $1,421,709 $1,053,030 $1,540,377
Shareholders' Equity $5,257,147 $4,992,205 $4,765,447 $4,727,332 $4,446,780
Statement of Operations:
Total Sales $2,432,955 $2,491,263 $1,908,991 $1,888,778 $2,034,609
Cost of Goods Sold $1,804,891 $1,848,863 $1,440,283 $1,433,659 $1,475,180
Selling, General and $ 411,369 $ 439,664 $ 428,150 $ 412,495 $ 406,793
Administrative Expenses
Net Income $ 147,935 $ 226,758 $ 38,115 $ 15,578 $ 211,666
Basic Earnings per Share $ 0.05 $ 0.07 $ 0.01 $ 0.00 $ 0.07
Diluted Earnings per Share $ 0.05 $ 0.07 $ 0.01 $ 0.00 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTHS NINE MONTHS
SPECIFIED PERIODS APRIL 30, APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1997 1996 1995 1998 1997
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Current Assets $2,956,601 $ 1,889,929 $2,567,618 $3,181,291 $3,762,852
Total Assets $5,780,362 $ 3,973,037 $4,211,961 $7,220,671 $5,987,157
Current Liabilities $1,050,030 $ 1,417,743 $ 924,388 $1,123,000 $1,507,068
Long Term Debt, net of $ 2,256 $ 144,500 $ 408,355 $ 840,524 $ 33,309
current portion
Total Liabilities $1,053,030 $ 1,562,243 $1,332,743 $1,963,524 $1,540,377
Shareholders' Equity $4,727,332 $ 2,410,794 $2,879,218 $5,270,347 $4,446,780
Statement of Operations:
Total Sales $7,381,105 $ 5,514,753 $1,908,991 $6,833,209 $5,492,328
Cost of Goods Sold $5,432,588 $ 4,343,803 $3,935,180 $5,094,037 $3,998,929
Selling, General and $1,588,865 $ 1,774,118 $1,359,406 $1,279,182 $1,176,369
Administrative Expenses
Net Income (Loss) $ 402,272 $ (732,915) $ 156,718 $ 412,808 $ 386,694
Basic Earnings per Share $ 0.13 $ (0.26) $ 0.06 $ 0.13 $ 0.13
Diluted Earnings per Share $ 0.13 $ (0.26) $ 0.06 $ 0.13 $ 0.13
</TABLE>
12
<PAGE> 14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
Net sales for the three months ended January 31, 1998 and 1997 were $2,432,955
and $2,034,609, respectively, which represents a 19.6% increase. For the three
months ended January 31, 1998, private label syrup sales increased by 26.1%, the
Company's branded syrup products sales increased by 30.4%, while the sales of
other Company products decreased by 17.9%, all as compared to the three months
ended January 31, 1997. Private label syrup, Company branded syrup, and other
Company products represented 72.5%, 16.4% and 11.1% of gross sales,
respectively, for the three months ended January 31, 1998. The increase in
private label syrup sales was the result of strong sales growth by several of
the Company's large existing private label customers. The Company's branded
syrup products' sales increased primarily as a result of sales to a large
Flavor-Mate(R) customer that was lost in January 1996 and regained in January
1997, and sales of the Senza brand product line that was newly acquired in
December 1997. The sales of other Company products decreased primarily due to
lower sales of the Grandma's Choice line of extracts and flavorings and Rice
Bran Oil, Cinnamon Sticks and Mulling Spices packaged under the Select
Origins(R) brand.
During the three month period ended January 31, 1998, the Company experienced
higher raw material and freight out costs compared to the same three month
period in the previous year. The increase in freight out costs are associated
with the development of the Company's DOLCE(R) master distributor program. Under
this program, the Company absorbs the freight cost to distributors on large
orders. Subsequently, cost of sales, as a percentage of net sales, increased to
74.2% for the three months ended January 31, 1998 compared to 72.5% for same
quarter last year. The increase in cost of sales in the three months ended
January 31, 1998 was also the result of increased volume and depreciation costs.
Cost of sales increased by $329,711 for the three months ended January 31, 1998
compared to the three months ended January 31, 1997.
Selling, general and administrative expenses increased by 1.1% or $4,576 for the
three months ended January 31, 1998 compared to the three months ended January
31, 1997. This increase resulted from increases in employee, insurance, product
placement, sales promotion, public/shareholder relations and SEC reporting
expenses and a fixed asset impairment recorded in this three month period. These
increases were offset by decreases in legal fees and advertising. Selling,
general and administrative expenses, as a percentage of net sales, decreased to
16.9% compared to 20.0% for the three months ended January 31, 1998 and 1997,
respectively.
Interest expense for the three months ended January 31, 1998 increased by $9,222
compared to the three months ended January 31, 1997. The increase primarily
reflects current year borrowings associated with the Company's new
manufacturing, warehouse and executive office facility and borrowings associated
with the acquisition of the Senza product line.
Net income before income tax expense increased 45.5% from $142,866 for the three
months ended January 31, 1997 to $207,809 for the three months ended January 31,
1998.
The Company recorded current and deferred income tax expense of $59,874 for the
three months ended January 31, 1998. For the three months ended January 31,
1997, the Company recorded a deferred income tax benefit of $71,500 and current
income tax expense of $2,700. The deferred
13
<PAGE> 15
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 $147,935, or
$0.05 per basic weighted average number of common shares of the Company (the
"Common Shares") outstanding, for the three months ended January 31, 1998
compared to net income of $211,666, or $0.07 per basic weighted average number
of Common Shares outstanding, for the three months ended January 31, 1997. The
basic weighted average number of Common Shares outstanding increased to
3,260,189 for the current three month period compared to 3,123,211 for the
comparable three month period last year. The increase primarily reflects
increased shares outstanding as a result of the Company's Common Share offering,
warrants exercised and conversion of subordinated debt into Common Shares.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
Net sales for the nine months ended January 31, 1998 and 1997 were $6,833,209
and $5,492,328, respectively, which represents a 24.4% increase. For the nine
months ended January 31, 1998, private label syrup sales increased by 35.1%, the
Company's branded syrup products sales increased by 29.6%, while the sales of
other Company products decreased by 13.8%, all as compared to the nine months
ended January 31, 1997. Private label syrup, Company branded syrup, and other
Company products represented 68.9%, 17.2% and 14.0% of gross sales,
respectively, for the nine months ended January 31, 1998. The increase in
private label syrup sales was the result of strong sales growth by several of
the Company's large existing private label customers. The Company's branded
syrup products' sales increased primarily as a result of sales to a large
Flavor-Mate(R) customer that was lost in January 1996 and regained in January
1997, and sales of the Senza brand product line that was newly acquired in
December 1997. The sales of other Company products decreased primarily due to
lower sales of the Grandma's Choice line of extracts and flavorings, Cod Liver
Oil for General Nutrition Centers and Cinnamon Sticks and Mulling Spices
packaged under the Select Origins(R) brand.
During the nine month period ended January 31, 1998, the Company experienced
higher raw material and freight out costs compared to the same nine month period
in the previous year. Cost of sales, as a percentage of net sales, increased to
74.5% for the nine months ended January 31, 1998 compared to 72.8% for same
period last year. The increase in cost of sales in the nine months ended January
31, 1998 was also the result of increased volume and utility, maintenance,
packaging supplies and depreciation costs. Cost of sales increased by $1,095,108
for the nine months ended January 31, 1998 compared to the nine months ended
January 31, 1997.
Selling, general and administrative expenses increased by 8.7% or $102,813 for
the nine months ended January 31, 1998 compared to the nine months ended January
31, 1997. This increase resulted from increases in employee, insurance,
depreciation, product placement, trade show, travel, public/shareholder
relations and SEC reporting expenses and a fixed asset impairment recorded in
this nine month period. These increases were offset by decreases in legal fees,
sales promotion, office supplies and advertising. Selling, general and
administrative expenses, as a percentage of net
14
<PAGE> 16
sales, decreased to 18.7% compared to 21.4% for the nine months ended
January 31, 1998 and 1997, respectively.
Interest expense for the nine months ended January 31, 1998 decreased by $18,045
compared to the nine months ended January 31, 1997. The decrease primarily
reflects bank borrowings that were paid in full on November 6, 1996 offset by
current year borrowings associated with the Company's new manufacturing,
warehouse and executive office facility and borrowings associated with the
acquisition of the Senza product line.
Net income before income tax expense increased 63.2% from $274,694 for the nine
months ended January 31, 1997 to $448,437 for the nine months ended January 31,
1998.
The Company recorded current and deferred income tax expense of $35,629 for the
nine months ended January 31, 1998. For the nine months ended January 31, 1997,
the Company recorded a deferred income tax benefit of $117,100 and current
income tax expense of $5,100. 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 $412,808, or
$0.13 per basic weighted average number of Common Shares outstanding, for the
nine months ended January 31, 1998 compared to net income of $386,694, or $0.13
per basic weighted average number of Common Shares outstanding, for the nine
months ended January 31, 1997. The basic weighted average number of Common
Shares outstanding increased to 3,237,898 for the current nine month period
compared to 2,924,911 for the comparable nine 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.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128, establishes standards for computing and
presenting earnings per share (EPS) and supersedes APB Opinion No. 15, Earnings
Per Share (Opinion 15). SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. This statement also requires
dual presentation of basic EPS and diluted EPS on the face of the income
statement for all periods presented. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15, with some modifications. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company adopted SFAS No. 128 effective with
the quarter ended January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The working capital and working capital ratio for the nine months ended January
31, 1998 and January 31, 1997 were $2,058,291 and 2.83 to 1 and $2,255,784 and
2.50 to 1, respectively. The decrease in working capital for the nine months
ended January 31, 1998 was primarily a result of the Company's construction of
its new manufacturing, warehouse and executive office facility in
15
<PAGE> 17
Mansfield, Ohio offset partially by a mortgage note payable to First Knox
National Bank ("First Knox").
The Company's operating activities, for the nine months ended January 31, 1998,
used net cash of $49,905. The Company used $1,235,646 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 $11,846, and
used $33,450 to make principal payments on a mortgage note payable and capital
leases. The Company also used $270,762 to acquire the Senza product line of
which $198,970 of this amount represented goodwill. The Company received
$750,000 from borrowing under a mortgage note payable, $260,000 from borrowing
associated with the acquisition of the Senza product line and $1,000 from the
sale of equipment. The Company also received $117,007, net of offering costs,
from the exercise of warrants by certain warrant holders associated with the
Company's filing of a Post-Effective Amendment to its Registration Statement on
Form SB-1. Consequently, during this period, cash and cash equivalents decreased
$401,810. 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 March 6, 1998, there was no outstanding balance on this
line of credit.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
(c) On November 25, 1997; 12,500 Common Shares were issued each to Thomas
Dooley and Quantum Capital Corporation at $3.50 per share upon exercise of
warrants; 5,844 Common Shares were issued to Michael Patterson, 148 Commons
Shares were issued to Carlos Gamez, 3,011 Common Shares were issued to
Nancy Vargo and 1,910 Common Shares were issued to Thomas Daly at $3.15 per
share upon exercise of warrants; and 10,000 Common Shares were issued to
Frank Duval at $3.00 per share upon exercise of warrants. All the shares
described above were issued pursuant to the exemption provided by Section
4(2) of the Securities Act of 1933 as amended.
16
<PAGE> 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit #27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized,
Date: March 17, 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 329,023
<SECURITIES> 0
<RECEIVABLES> 1,208,556
<ALLOWANCES> (49,409)
<INVENTORY> 1,590,566
<CURRENT-ASSETS> 3,181,291
<PP&E> 4,256,258
<DEPRECIATION> (925,109)
<TOTAL-ASSETS> 7,220,671
<CURRENT-LIABILITIES> 1,123,000
<BONDS> 840,524
0
0
<COMMON> 3,614
<OTHER-SE> 5,253,533
<TOTAL-LIABILITY-AND-EQUITY> 7,220,671
<SALES> 6,833,209
<TOTAL-REVENUES> 6,854,450
<CGS> 5,094,037
<TOTAL-COSTS> 6,363,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 32,794
<INCOME-PRETAX> 448,437
<INCOME-TAX> 35,629
<INCOME-CONTINUING> 412,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412,808
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
