<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 July 31, 1999
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 September 3, 1999, 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
July 31, 1999 , April 30, 1999 and July 31, 1998
- -------------------------------------------------------------------------------------------------
<CAPTION>
JULY 31, APRIL 30, JULY 31,
ASSETS 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 421,894 $ 361,868 $ 303,323
Trade accounts receivable, net of allowance
for doubtful accounts of $40,484, $40,000 and
$54,580 as of July 31, 1999, April 30, 1999
and July 31, 1998 1,316,147 1,044,515 1,051,198
Inventory 1,767,171 1,815,353 2,020,862
Prepaid expenses and other 115,887 194,790 62,404
Deferred income taxes 41,488 41,118 37,925
---------- ---------- ----------
Total current assets 3,662,587 3,457,644 3,475,712
---------- ---------- ----------
Property and equipment:
Land 73,928 73,928 73,928
Buildings 1,829,823 1,829,823 1,829,823
Building improvements 91,809 91,809 52,116
Leasehold improvements 13,126 9,433 9,433
Machinery and equipment 2,016,741 1,991,730 1,784,483
Office equipment 400,950 388,754 422,121
Tooling 131,774 131,089 103,756
Vehicles 40,401 40,401 45,392
---------- ---------- ----------
4,598,552 4,556,967 4,321,052
Less accumulated depreciation 1,250,164 1,169,800 1,030,919
---------- ---------- ----------
Net property and equipment 3,348,388 3,387,167 3,290,133
---------- ---------- ----------
Goodwill, net 508,236 523,826 566,172
Cash surrender value of life insurance 56,555 51,089 43,751
Trademarks and patents, net 2,993 3,167 3,689
Other assets 19,837 15,328 25,617
---------- ---------- ----------
Total assets $7,598,596 $7,438,221 $7,405,074
========== ========== ==========
</TABLE>
CONTINUED
1
<PAGE> 3
<TABLE>
STEARNS & LEHMAN, INC.
BALANCE SHEETS
July 31, 1999 , April 30, 1999 and July 31, 1998
- ----------------------------------------------------------------------------------------------------
<CAPTION>
JULY 31, APRIL 30, JULY 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 582,718 $ 539,668 $ 697,021
Accrued expenses 218,483 187,578 191,157
Current portion of notes payable 138,550 138,446 145,509
---------- ---------- ----------
Total current liabilities 939,751 865,692 1,033,687
---------- ---------- ----------
Long-term liabilities:
Notes payable, net of current portion 621,832 664,203 766,681
Deferred income taxes 119,469 103,137 60,859
---------- ---------- ----------
Total long-term liabilities 741,301 767,340 827,540
---------- ---------- ----------
Total liabilities 1,681,052 1,633,032 1,861,227
---------- ---------- ----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares
authorized, 3,289,165 issued and 3,285,865
outstanding as of July 31, 1999, April 30,
1999 and July 31, 1998 respectively 3,629 3,629 3,629
Additional paid-in capital 5,248,461 5,248,461 5,248,461
Retained earnings 678,654 566,299 304,957
---------- ---------- ----------
5,930,744 5,818,389 5,557,047
Less treasury stock at cost; 3,300 shares 13,200 13,200 13,200
---------- ---------- ----------
Total shareholders' equity 5,917,544 5,805,189 5,543,847
---------- ---------- ----------
Total liabilities and shareholders' equity $7,598,596 $7,438,221 $7,405,074
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENT OF INCOME (UNAUDITED)
For the three months ended July 31, 1999 and 1998
- ----------------------------------------------------------------------------------
<CAPTION>
1999 1998
<S> <C> <C>
Sales $3,073,004 $1,936,600
Cost of sales 2,225,943 1,455,447
---------- ----------
Gross profit 847,061 481,153
Selling, general and administrative expenses 651,787 520,301
---------- ----------
Income (loss) from operations 195,274 (39,148)
---------- ----------
Other income (expense), net:
Interest expense (15,807) (21,312)
Interest income 8,872 7,774
Other, net (1,361) 63,106
---------- ----------
Income before income tax expense 186,978 10,420
---------- ----------
Income tax expense:
Current 58,661 108
Deferred 15,962 10,120
---------- ----------
Total income tax expense 74,623 10,228
---------- ----------
Net income $ 112,355 $ 192
========== ==========
Earnings per share - Basic $ .03 $ .00
========== ==========
Earnings per share - Diluted $ .03 $ .00
========== ==========
Basic weighted-average common shares outstanding 3,285,865 3,285,148
========== ==========
Diluted weighted-average common shares outstanding 3,285,865 3,288,152
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended April 30, 1999 and the three months ended July 31, 1999
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN RETAINED TREASURY HOLDERS'
SHARES SHARES CAPITAL EARNINGS SHARES EQUITY
--------- ------ ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 3,272,665 $3,614 $5,208,876 $304,765 $(13,200) $5,504,055
Net income -- -- -- 261,534 -- 261,534
Exercise of warrants 13,200 15 39,585 -- -- 39,600
--------- ------ ---------- -------- -------- ----------
Balance at April 30, 1999 3,285,865 3,629 5,248,461 566,299 (13,200) 5,805,189
Net income -- -- -- 112,355 -- 112,355
--------- ------ ---------- -------- -------- ----------
Balances at July 31, 1999 3,285,865 $3,629 $5,248,461 $678,654 $(13,200) $5,917,544
========= ====== ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS
For the three months Ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112,355 $ 192
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 5,000 --
Depreciation and amortization 98,762 93,222
Deferred income taxes 15,962 10,120
Changes in assets and liabilities:
Trade accounts receivable (276,632) 256,035
Inventory 48,182 (152,520)
Prepaid expenses and other 78,903 7,526
Accounts payable 43,050 (71,072)
Accrued expenses 30,905 (49,319)
--------- ---------
Net cash provided by operating activities 156,487 94,184
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (41,585) (63,017)
Cash surrender value of life insurance, net (5,466) (1,675)
Purchase of other assets (7,143) --
--------- ---------
Net cash used in investing activities (54,194) (64,692)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (42,267) (38,108)
Net proceeds from issuance of common shares -- 39,600
--------- ---------
Net cash (used in) provided by financing activities (42,267) 1,492
--------- ---------
Net increase in cash and cash equivalents 60,026 30,984
Cash and cash equivalents, beginning of year 361,868 272,339
--------- ---------
Cash and cash equivalents, end of quarter $ 421,894 $ 303,323
========= =========
</TABLE>
CONTINUED
5
<PAGE> 7
<TABLE>
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS
For the three months Ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 15,807 $ 22,068
========= =========
Income taxes $ -- $ 13,904
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
July 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three months ended July 31,
1999 and 1998 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, 1999 and April 30, 1998. 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. INVENTORY
The major components of inventory at July 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 825,872 $1,143,031
Work in process 17,909 4,117
Finished goods 923,390 873,714
---------- ----------
Total inventory $1,767,171 $2,020,862
========== ==========
</TABLE>
3. EARNINGS PER SHARE
Earnings per share. Earnings per share are computed in accordance with
SFAS No. 128, "Earnings Per Share", which the Company adopted in the
third quarter of the fiscal year ended April 30, 1998. Basic earnings
per share are computed based upon the weighted average number of
outstanding common shares. Diluted earnings per share include the
weighted average of dilutive warrants outstanding.
<TABLE>
<CAPTION>
JULY 31,
--------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1999 1998
- ------------------------------------------------- --------- ---------
<S> <C> <C>
Common shares issued 3,289,165 3,288,448
Treasury shares (3,300) (3,300)
--------- ---------
Basic shares 3,285,865 3,285,148
Dilutive effect of warrants 0 3,004
--------- ---------
Diluted shares 3,285,865 3,288,152
========= =========
</TABLE>
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
July 31, 1999 and 1998
- --------------------------------------------------------------------------------
4. NOTES PAYABLE
Notes payable at July 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to a bank, collateralized by
real estate, accounts receivable,
inventory, and equipment, payable in
monthly installments of $9,071 including
interest at a rate of weekly average
yield on U.S. Treasury securities plus
3.25% adjusted not more than once per
five years (interest rate of 7.81% as of
April 30, 1999), due on October 1, 2007. $652,996 $706,536
Note payable to a company, unsecured,
payable in monthly installments of $7,111
including interest at a rate of 8.25% per
annum commencing July 1, 1999, due on
December 1, 2000. Interest will be paid
monthly until the first principal payment
is made on July 1, 1999. 107,386 120,000
Note payable to a bank, collateralized by
accounts receivable, inventory and
equipment, payable in monthly
installments of $7,778 plus interest at a
rate of prime plus 0.5% (7.75% at June 2,
1999),due on June 2, 1999. 0 85,654
-------- --------
Total notes payable 760,382 912,190
Less current portion 138,550 145,509
-------- --------
$621,832 $766,681
======== ========
</TABLE>
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
July 31, 1999 and 1998
- --------------------------------------------------------------------------------
5. INCOME TAXES
The components of the net deferred tax liability at July 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $101,501 $128,423
Alternative minimum tax credit 6,867 --
Other 7,773 5,244
Allowance for doubtful accounts 15,570 20,740
-------- --------
Gross deferred tax assets 131,711 154,407
Deferred tax liabilities:
Property and equipment 209,692 177,341
-------- --------
Net deferred tax liability $(77,981) $(22,934)
======== ========
</TABLE>
The Company had net operating loss carryforwards available of $331,701
and $364,871 at April 30, 1999 and 1998, respectively, from the
purchase of Select, of which $33,170 is available to deduct each year
through April 30, 2009.
6. SUBSEQUENT EVENTS
On August 5, 1999 the Company signed a Letter of Intent to acquire
Oscar Skollsberg's Food Technique Limited ("Oscars") of Richmond,
British Columbia, Canada for approximately $1,200,000 in cash and cash
compensation. The due diligence process is scheduled for completion by
September 17, 1999 with closing scheduled for October 1, 1999. The
Company anticipates financing this transaction through $800,000 in bank
financing and the remainder from cash flows from operations. Oscars is
reported to be the largest manufacturer of flavoring syrups for the
specialty coffee industry in Canada.
The Company has an agreement with Starbucks Coffee Company
("Starbucks") to supply it products at specified prices. This agreement
provides that unless written notice is given by either party at least
sixty (60) days prior to the last day of the initial term of this
agreement (August 31, 1999), the agreement shall renew and continue
from year to year until canceled upon thirty (30) days written notice
by either party. As of September 3, 1999, the Company and Starbucks
have substantially completed renegotiations of this agreement and it is
expected that the new agreement will be effective as of September 1,
1999.
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, 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, extracts, flavorings, sauces, dressings and specialty
sugars. The Company sells its products throughout the United States and in over
15 foreign countries, including Australia, Canada, Egypt, England, Israel,
Japan, Mexico, New Zealand, Saudi Arabia, Singapore, and United Arab Emirates.
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 60
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, Advantica Restaurant
Group, Inc.'s Denny's Restaurant, Gloria Jeans Gourmet Coffee, Godiva
Chocolatier, Inc., Borders, Inc., Caribou Coffee Company ("Caribou"), 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. 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
- -----------------
While flavored syrup sales to the specialty coffee industry continues to be the
backbone of the Company's business, efforts are being made to develop product
diversity. The Company's plans, for the fiscal year ended April 30, 2000,
include aggressively pursuing the specialty frozen beverage market, developing
other new product lines, further developing the international market, adjusting
its domestic distributor network and increasing manufacturing efficiencies. The
Company also plans to continue to search for strategic acquisitions to enhance
market position and provide for revenue growth.
Specifically, the Company's plans center around diversifying and providing a
wider range of products for its distributors to handle. The Company's management
recognizes the need to diversify from its concentration in sales to the
specialty coffee industry and that a wider range of products will enhance the
Company's distributors' sales efforts and enable them to be a more valuable
supplier to their customers. The Company's frozen beverage product line is the
initial move to diversify from the specialty coffee industry and leverage the
Company's strength in manufacturing flavored liquid
10
<PAGE> 12
products. The Company believes that this market is several times larger than the
specialty coffee market and is still in a rapid growth phase. The Company's
plans for this product line include expanding the Company's sales force and
increasing advertising and marketing expenditures. The Company's marketing
efforts will be concentrated to aggressively pursue the frozen beverage market
with a broad base of different products. Also marketing will focus on the
advantages that the Company's distributors and existing frozen beverage
distributors will have in selling both the frozen beverage and coffee flavoring
product lines. The Company plans also call for efforts to continue to identify
and develop additional product lines.
The Company plans also include making an intensified effort to grow its
international business. A large number of international contacts were made
during the fiscal year ended April 30, 1999. From these contacts, the Company
has been able to establish a number of new international distributors. Efforts
will continue in fiscal year 2000 to build a strong international presence. In
addition, the Company is adjusting its domestic distributor network. The
performance of the Company's master distributor program to build
sub-distributors did not meet expectations. Subsequently, the master
distributors are changing to volume distributors with non-exclusive territories
with Company sales personnel more aggressively developing sub-distributors and
regular distributors throughout the domestic market.
The Company continues to strive to offer a higher degree of customer service and
to lower production costs through improved efficiencies at its manufacturing
facilities. In order to meet increased warehousing requirements by some of the
Company's larger customers, the Company, in May 1999, moved into a 30,000 square
foot facility manufacturing and warehouse facility in Kent, Washington. The
move, from the Company's smaller Kent facility, also permitted improvements in
Kent's manufacturing capabilities. With this move, the Company now has two large
and modern facilities to serve its customers. In late April 1999, the Company
also acquired new production equipment at its Mansfield, Ohio facility. This new
production equipment, in addition to providing an immediate cost benefit,
provides for a growth path to much higher production speeds in the future.
The Company's plans also include the continued search for acquisition
candidates. The appropriate candidates will enhance market position and provide
for revenue growth. Specifically, an acquisition could provide new technological
capability, add volume to the Company's existing product lines or compliment the
Company's existing product lines. This effort resulted in the Company signing a
letter of intent to acquire Oscar Skollsberg's Food Technique Limited of
Richmond, British Columbia, Canada for approximately $1,200,000 in cash and cash
compensation. This acquisition would make the Company the largest manufacturer
of specialty coffee flavoring syrups in Canada and would provide the Company an
excellent base for other international opportunities.
[The remainder of this page intentionally left blank.]
11
<PAGE> 13
<TABLE>
SELECTED SUMMARY FINANCIAL INFORMATION
- --------------------------------------
<CAPTION>
QUARTERLY INFORMATION FOR 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
INDICATED FISCAL YEARS FY 2000 FY 1999 FY 1999 FY 1999 FY 1999
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 3,662,587 $3,457,644 $3,835,542 $4,505,502 $3,475,712
TOTAL ASSETS $ 7,598,596 $7,438,221 $7,680,435 $8,375,647 $7,405,074
CURRENT LIABILITIES $ 939,751 $ 865,692 $ 960,420 $1,758,331 $1,033,687
LONG TERM DEBT, NET OF
CURRENT PORTION $ 621,832 $ 664,203 $ 701,330 $ 734,851 $ 766,681
TOTAL LIABILITIES $ 1,681,052 $1,633,032 $1,746,987 $2,570,081 $1,861,227
SHAREHOLDERS' EQUITY $ 5,917,544 $5,805,189 $5,933,448 $5,805,566 $5,543,847
STATEMENT OF OPERATIONS:
TOTAL SALES $ 3,073,004 $2,367,885 $2,661,301 $3,241,046 $1,936,600
COST OF GOODS SOLD $ 2,225,943 $1,970,567 $1,961,436 $2,243,219 $1,455,447
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 651,787 $ 558,105 $ 468,103 $ 561,529 $ 520,301
NET INCOME (LOSS) $ 112,355 $ (128,259) $ 127,882 $ 261,719 $ 192
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 0.03 $ (0.04) $ 0.04 $ 0.08 $ 0.00
<CAPTION>
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR THREE MONTHS THREE MONTHS
SPECIFIED PERIODS APRIL 30, APRIL 30, APRIL 30, JULY 31, JULY 31,
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 3,457,644 $3,556,309 $2,956,601 $3,662,587 $3,475,712
TOTAL ASSETS $ 7,438,221 $7,514,201 $5,780,362 $7,598,596 $7,405,074
CURRENT LIABILITIES $ 865,692 $1,156,514 $1,050,774 $ 939,751 $1,033,687
LONG TERM DEBT, NET OF
CURRENT PORTION $ 664,203 $ 802,353 $ 2,256 $ 621,832 $ 766,681
TOTAL LIABILITIES $ 1,633,032 $2,010,146 $1,053,030 $1,681,052 $1,861,227
SHAREHOLDERS' EQUITY $ 5,805,189 $5,504,055 $4,727,332 $5,917,544 $5,543,847
STATEMENT OF OPERATIONS:
TOTAL SALES $10,206,832 $9,242,530 $7,381,105 $3,073,004 $1,936,600
COST OF GOODS SOLD $ 7,630,669 $6,613,046 $5,432,588 $2,225,943 $1,455,447
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 2,108,038 $1,758,667 $1,588,865 $ 651,787 $ 520,301
NET INCOME $ 261,534 $ 659,716 $ 402,272 $ 112,355 $ 192
BASIC AND DILUTED EARNINGS
PER SHARE $ 0.08 $ 0.20 $ 0.13 $ 0.03 $ 0.00
</TABLE>
12
<PAGE> 14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998
- -----------------------------------------------------------------------
Results of operations for the three months ended July 31, 1999 were highlighted
by a strong increase in sales of flavoring syrups to the specialty coffee
industry, the introduction of the PARADISE BAY(TM) line of specialty frozen
beverage products and higher selling expenses as a result of a larger sales
force and introduction expenses associated with the PARADISE BAY(TM) line.
Net sales for the three months ended July 31, 1999 and 1998 were $3,073,004 and
$1,936,600, respectively, which represents a 58.7% increase. For the three
months ended July 31, 1999, private label syrup sales increased by 65.2%, the
Company's branded syrup products sales increased by 29.7%, while the sales of
other Company products increased by 80.2%, all as compared to the three months
ended July 31, 1998. Private label syrup, Company branded syrup, and other
Company products represented 66.8%, 21.6% and 11.5% of gross sales,
respectively, for the three months ended July 31, 1999. The Company's private
label sales increased primarily as a result of a 110.4% increase in sales to the
Company's largest private label customer. In addition, the Company's third and
fourth largest private label customers increased sales by 94.6% and 73.5%,
respectively. The Company's branded syrup products' sales increased primarily as
a result of 21.8% increase in the sales of the DOLCE(R) brand syrups and a large
closeout sale of the GODIVA(R) brand syrups. In addition, the DiNATURA(C) brand,
for which shipments began in October 1998, contributed to the sales increase.
The sales of other Company products increased due to the successful introduction
of the PARADISE BAY(TM) line of specialty frozen beverage products. Sales of the
PARADISE BAY(TM) line, along with small increases in sales of Sugars & Toppings
and Flavor Drops, were offset by decreases in the remaining product lines in
this group. The downward trend in the sales of these remaining product lines are
a result of these low profit product lines being eliminated or de-emphasized.
During the three-month period ended July 31, 1999, 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. As in the previous quarter, improved
manufacturing efficiency was partially offset by write-offs of obsolete
inventory and increases in freight-out and packaging costs. Consequently, cost
of sales, as a percentage of net sales, decreased to 72.4% for the three months
ended July 31, 1999 compared to 75.2% for same quarter last year. Cost of sales
increased by $770,496 for the three months ended July 31, 1999 compared to the
three months ended July 31, 1998 as a result of higher sales volume.
Selling, general and administrative expenses increased by 25.3% or $131,486 for
the three months ended July 31, 1999 compared to the three months ended July 31,
1998. This increase resulted from increases in advertising, trade shows, travel,
telephone and product sample expenses and increases in the number of employees
and employee wages. These increases were offset by decreases in sales promotion
and outside consulting costs. Selling, general and administrative expenses, as a
percentage of net sales, decreased to 21.2% compared to 26.9% for the three
months ended July 31, 1999 and 1998, respectively.
Interest expense for the three months ended July 31, 1999 decreased by $5,505
compared to the three months ended July 31, 1998. The decrease reflects lower
notes payable outstanding.
The Company reported total net other expense of $8,296 for the three months
ended July 31, 1999 compared to total net other income of $49,568 for the three
months ended July 31, 1998. The primary reasons for this $57,864 change were a
$50,632 rebate from the Ohio Bureau of Workers
13
<PAGE> 15
Compensation and a $13,500 settlement from a defamation claim made by the
Company against a competitor received during the three months ended July 31,
1998.
Income before income tax expense increased by $176,558 for the three months
ended July 31, 1999 from $10,420 for the three months ended July 31, 1998.
The Company recorded income tax expense of $74,623 for the three months ended
July 31, 1999. For the three months ended July 31, 1998, the Company recorded
income tax expense of $10,228.
As a result of the foregoing, the Company reported net income of $112,355, or
$0.03 per basic weighted average number of common shares of the Company (the
"Common Shares") outstanding, for the three months ended July 31, 1999 compared
to net income of $192 or $0.00 per basic weighted average number of Common
Shares outstanding for the three months ended July 31, 1998. The basic weighted
average number of Common Shares outstanding increased to 3,285,865 for the
current three-month period compared to 3,285,148 for the comparable three-month
period last year. The increase reflects Common Shares issued upon the exercise
of warrants during the fiscal year ended April 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The working capital and working capital ratio as of July 31, 1999 and July 31,
1998 were $2,722,836 and 3.90 to 1 and $2,442,025 and 3.36 to 1, respectively.
The increase in working capital for July 31, 1999 compared to July 31, 1998 was
primarily a result of a $118,571 increase in the Company's cash and cash
equivalents, a $264,949 increase in the Company's accounts receivable, a $53,483
increase in prepaid expenses and a $114,303 decrease in accounts payable, offset
by a $253,691 decrease in the Company's inventory and a $27,326 increase in the
Company's accrued expenses. The increase in accounts receivable was a result of
strong sales in July 1999 compared to July 1998. The increase in prepaid
expenses is primarily a result of federal and city income tax deposits. The
decrease in accounts payable is a result of the Company's strong cash position
and reduced raw material purchases as a result of efforts to decrease inventory
levels. The decrease in inventory was a result of management efforts and
improved controls associated with new computer software implemented during the
past one and one-half years. The increase in accrued expenses primarily reflects
an increase in accrued state income taxes.
The Company's operating activities, for the three months ended July 31, 1999,
provided net cash of $156,487. The Company used $41,585 to acquire equipment and
also increased its investment in life insurance policies by $5,466. The Company
used $42,267 to make principal payments on a mortgage note payable and on
capital leases, and used $7,143 for a long term lease deposit on the Company's
new Kent, Washington manufacturing facility. Consequently, during this period,
cash and cash equivalents increased by $60,026. 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 September 3, 1999, there was no outstanding balance on the Company's
$400,000 line of credit with First Knox National Bank.
14
<PAGE> 16
YEAR 2000 COMPLIANCE
- --------------------
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware. All the primary financial and manufacturing
modules have been implemented as of April 30, 1999. The installation and
implementation of some secondary manufacturing modules are targeted for
completion by April 2000. This software is Year 2000 compliant. The Company
needs to update the version of its UNIX operating system and the system's
printer spooler for the hardware to be fully Year 2000 compliant. This upgrade
is scheduled for the third calendar quarter of 1999. The Company's personal
computers require a minor upgrade to the operating system according to the
operating system manufacturer. The Company has obtained the necessary upgrade
and will be installing it over the next several months.
The Company has completed upgrades and tests on all other software and hardware
for Year 2000 compliance and does not anticipate any additional costs or Year
2000 compliance problems on these systems. The Company's software is currently
functioning in fiscal year 2000 without any problems. The Company, as of
September 4, 1999, has incurred costs of $217,000 and anticipates $13,000 in
additional expenditures to complete the Year 2000 compliance costs. The Company
does not anticipate any other significant internal costs associated with Year
2000 compliance. The Company is however vulnerable to potential disruption from
suppliers, and the Company will be assessing the extent of this vulnerability.
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, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
Date: September 9, 1999 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)
15
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JUL-31-1999
<CASH> 421,894
<SECURITIES> 0
<RECEIVABLES> 1,356,631
<ALLOWANCES> (40,484)
<INVENTORY> 1,767,171
<CURRENT-ASSETS> 3,662,587
<PP&E> 4,598,552
<DEPRECIATION> (1,250,164)
<TOTAL-ASSETS> 7,598,596
<CURRENT-LIABILITIES> 939,751
<BONDS> 621,832
0
0
<COMMON> 3,629
<OTHER-SE> 5,927,115
<TOTAL-LIABILITY-AND-EQUITY> 7,598,596
<SALES> 3,073,004
<TOTAL-REVENUES> 3,081,876
<CGS> 2,225,943
<TOTAL-COSTS> 2,874,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 15,807
<INCOME-PRETAX> 186,978
<INCOME-TAX> 74,623
<INCOME-CONTINUING> 112,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,355
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
