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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
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COMMISSION FILE NO. 0-21879
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STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
OHIO 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
30 PARAGON PARKWAY
MANSFIELD, OHIO 44903
(Address of principal executive offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON SHARES, NO PAR VALUE
(Title of Class)
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Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [___]
State issuer's revenues for its most recent fiscal year: $10,206,832
State the aggregate market value of the voting common stock, no par value, held
by non-affiliates computed by reference to the average bid and asked price of
such stock as of July 15, 1999: $3,865,670
As of July 15, 1999, 3,285,865 shares of common stock, no par value, were
outstanding.
Documents incorporated by reference: NONE.
Transition Small Business Disclosure Format (check one): Yes ___ No _X_
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company is an Ohio corporation headquartered in Mansfield, Ohio. The Company
was organized on March 14, 1988 and is engaged in the business of manufacturing
and marketing specialty food products, including coffee and espresso flavorings,
syrups, oils and toppings, extracts, flavorings, sauces, dressings and specialty
sugars. The Company sells its products throughout the United States and in 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, Kraft General Foods,
Krups, Sara Lee's Superior Coffee Division, and Sysco Food Service. The Company
does not have any long-term supply agreements with any of these customers except
Starbucks and Caribou Coffee Company. The Company believes that its success in
obtaining these accounts is attributable to the Company's emphasis on quality,
dependable service and innovation.
HISTORY OF OPERATIONS
In 1988, the Company commenced production of a single consumer product line,
Grandma's Choice flavorings and extracts for baking and cooking. The Company
initially employed two persons and leased 1,200 square feet of space in
Mansfield, Ohio. In early fiscal 1993, the Company introduced its DOLCE(R)
product line of flavoring syrups, which consists of over 30 sweetened liquid
flavorings offered in three different sizes. The Company also started
manufacturing flavoring syrups under private labels for various national
accounts, including several large North American based food companies. Flavoring
syrups are used to flavor coffee, iced tea, espressos, cappuccinos, ice cream
and specialty drinks. In April 1994, the Company acquired by merger Select
Origins, Inc., a New York corporation which was also engaged in the manufacture
and marketing of specialty food products.
On September 1, 1994, the Company entered into a written private label supply
agreement with Starbucks to develop and manufacture certain flavored coffee
syrups. On September 1, 1997, the Company and Starbucks renewed such agreement.
This agreement is an exclusive supplier agreement with Starbucks to supply
defined flavored syrups meeting certain specifications and complying with
defined inspection and testing procedures. In order to meet the increased
production and warehousing requirements, in March 1995, the Company leased
manufacturing and warehouse space near Seattle, Washington.
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In light of the success of the DOLCE(R) product line and the associated private
label products, in late 1995, the Company began to expand the FLAVOR-MATE(R)
product line to include syrups, sugars and toppings. In February 1996, the
Company introduced a line of sugar free flavored syrup products under the
DOLCE(R) brand name and under certain private label brands as well. On December
4, 1997, the Company acquired the inventory, equipment, customers, product
formulas, trademarks and other intangible assets of Ricter Enterprises, LTD.
("Ricter"), the manufacturer of the SENZA ZUCCHERO and SENZA RIVALE(TM) brands
of flavoring syrups. On January 16, 1998, the Company acquired the SAN MARINO
Flavored Syrup product line. In October 1998, the Company started shipping the
premium DiNATURA(TM) Flavored Syrup product line. In April 1999, the Company
introduced a broad line of frozen beverage products under the PARADISE BAY(TM)
product name.
INDUSTRY OVERVIEW
The U.S. flavorings industry expanded rapidly after World War II. Today, over
80% of packaged foods contain flavor additions. Approximately 5% of flavor
additions are from natural sources. Ninety-five percent are "imitation" as
defined by the Food and Drug Administration (the "FDA"). The Company produces
several "natural" or "pure" products. Natural/pure classification is regulated
by the FDA. A pure extract is obtained directly from the food item (e.g. vanilla
or coffee beans, nuts, fruit) through use of a solution with a 35% alcohol
content. A natural flavor is obtained by extracting essential flavor-bearing
oils from botanical sources (e.g. peppermint leaves, orange and lemon peels).
By contrast, artificial or imitation flavors are created by blending aromatic
chemicals to which natural flavors are sometimes added. Imitation flavors
commonly contain propylene glycol and/or glycerin, which are heavier and less
volatile than alcohol and will not evaporate during cooking. Because of their
resistance to heat, imitation products can deliver more consistent flavor and
greater retention of aromatic properties than natural flavors. Conversely, the
alcohol contained in extracts or natural flavors helps prevent freezing and
spoilage. The Company produces both natural and imitation flavored products in
order to meet the various needs of consumers.
PRINCIPAL PRODUCTS AND THEIR MARKETS
Flavoring syrups are sold via six branded product lines. The DOLCE(R) brand
product line consists of 38 flavors, all certified Kosher by the Orthodox
Union(R), in four sizes. The DOLCE(R) brand also consists of eight sugar free
flavors. The DOLCE(R) brand is distributed to the specialty coffee and the food
service industries. The DiNATURA(TM) premium natural flavored brand consists of
24 flavors in two sizes for distribution to the specialty coffee and the food
service industries. The SENZA RIVALE(TM) brand consists of 35 flavors and the
SENZA ZUCCHERO brand consists of 14 sugar free flavors. The SENZA brands are
distributed through supermarkets, specialty food stores and the food service
industry. With the acquisition of the SENZA brand, the FLAVOR-MATE(R) brand
along with SAN MARINO FLAVORED SYRUPS brands have been converted to private
label brands for certain customers. The Company also manufactures private label
flavoring syrups for distribution direct to the private label customer. The
primary use of flavoring syrups are to flavor beverages including coffee, tea,
and espresso-based drinks.
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The frozen beverage products are used in granita machines and blenders to create
frozen drinks. The PARADISE BAY(TM) product line currently consists of Jam'n
Juicers(TM), a 10% real fruit juice ice drink product; Real Fruit Smoothies, a
real fruit frozen drink product; Island Chillers(TM), a flavored ice drink
product; Chai Latte, a spiced tea based product; and a cappuccino based iced
drink product. The PARADISE BAY(TM) brand products are distributed to the
specialty food and the food service industries. In addition, the Company
manufacturers these products for direct distribution to private label customers.
The FLAVOR-MATE(R) line of concentrate flavoring products is sold in
supermarkets throughout the United States. The product is available in 13
flavors, including amaretto, chocolate raspberry, dutch chocolate, french
vanilla and orange cappuccino. FLAVOR-MATE(R) is packaged in a shatter resistant
bottle with a resealable snap cap which allows users to create a variety of
flavored coffee, tea or other beverages from a single unflavored pot.
FLAVOR-MATE(R) products can also be used for cooking and baking purposes.
FLAVOR-MATE(R) products are available in single flavor 12 packs or as an
assortment of flavors in 12 flavor 48-packs.
The Company currently produces Cod Liver Oil, Cherry Cod Liver Oil and Wheat
Germ Oil for GNC(R) (General Nutrition Center). All three products are
distributed through the GNC(R) distribution network for sale in GNC(R) retail
stores. These products are directed to the health and natural food markets. The
Company also bottles a Rice Bran Oil for distribution to supermarkets and
specialty food stores and the food service industry. Rice Bran Oil is used as an
alternative cooking and baking oil.
The Company packages four different sugars and seven different toppings for use
primarily in the espresso and food service industries. These sugars and toppings
are also available in supermarkets and specialty food stores for consumer use in
beverages and desserts. The sugars and toppings are available in the DOLCE(R)
brand name.
Cinnamon Sticks and Mulling Spices, packaged under the Select Origins(R) brand,
are used with wine, cider and apple juice to create a fragrant beverage. These
products are distributed through supermarkets and specialty food stores.
My Hero(TM) Submarine Dressing is an all natural dressing for use on sandwiches,
salads and pastas and for marinating. This product is distributed through
supermarkets and specialty food stores.
STATUS OF NEW PRODUCTS
The Company introduced the PARADISE BAY(TM) product line in April 1999. Prior to
and since the introduction, the Company has increased the number of field sales
managers and increased marketing expenditures to promote and sell this product
line. The Company anticipates additional marketing expenditures in advertising,
product literature, promotion material and trade shows to support a strong
introduction program.
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PATENTS, TRADEMARKS AND LICENSES
The Company has obtained federal trademark protection for its DOLCE(R) and
FLAVOR-MATE(R) products. The Company has also obtained federal trademark
protection for SELECT ORIGINS(R), THE COOKING EXPERIENCE(R), SOPHISTICATED
NIBBLES(R), STEARNS & LEHMAN(R), LIMITED HARVEST(R), and GIFT OF BRAN(R). The
Company is in the process of obtaining federal trademark protection for its
DiNATURA(TM), SENZA RIVALE(TM), and the PARADISE BAY(TM) trademarks. The Company
keeps all of its proprietary information confidential and takes steps to insure
that the results of its development activities (i) are not disclosed and (ii)
remain protected under common law, including requiring certain of the Company's
key employees to execute written agreements regarding trade secrets and certain
restrictive covenants. There can be no assurances that technology and other
information acquired by the Company pursuant to its development activities will
constitute trade secrets under applicable laws. The Company does not hold any
patents.
DISTRIBUTION AND MARKETING
The Company has distribution arrangements with more than 120 distributors in the
United States, most of which are members of the National Food Distributors
Association, along with distributors in Australia, Canada, Egypt, England,
Israel, Japan, Mexico, New Zealand, Saudi Arabia, Singapore, United Arab
Emirates, and 8 other countries. All sales to foreign and domestic distributors
are conducted in U.S. currency. The majority of the distributors distribute
directly to retailers, such as supermarket chains and specialty food stores.
Utilizing a distributor enables the retailer to maximize efficient use of time
and profit by shifting responsibility to the distributor for stocking shelves,
pricing product, rotating stock, providing shelf tags and maintaining inventory.
The distributor also coordinates in-store product demonstrations and removes
damaged or unsalable products. The Company does not have any written supply
agreements with its distributors. The Company periodically issues product price
lists to all current distributors. The price list indicates the product price
and payment terms of net 30 days with approved credit and freight F.O.B.
Mansfield, Ohio. Any modification of price, payment terms or freight billing
from the price list is made verbally between the distributor and the Company.
The Company utilizes several types of distribution channels such as grocery
distributors for supermarkets, specialty food distributors for supermarkets and
specialty retailers, coffee distributors for coffee stores and retailers, and
food service distributors for restaurants, to achieve penetration into the
various market segments. The Company sells its products directly to such
distributors for distribution to end customers. The utilization of a
distribution network benefits the Company's ultimate customers of its products
by providing a product marketing and servicing conduit between the Company and
end user. The distributor introduces and sells the product to retailers,
delivers the product, provides store schematics for maximizing product sales and
exposure, and monitors market activity. Use of specialty food distributors lends
a "service-oriented" aspect to the primary manufacturing business of the
Company.
The Company has direct marketing and distribution arrangements with its private
label customers. The Company does not utilize any other distribution network to
service those customers.
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SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's principal products consist primarily of liquid sucrose, fructose,
flavors, packaging and water. The Company has its own water filtration system,
which is connected to municipal water supplies. The Company currently acquires
its liquid sucrose from The Amalgamated Sugar Company. The Company currently
acquires its fructose from the Cleveland Syrup Company. Both liquid sucrose and
fructose are readily available from several large refiners. Flavors are
currently obtained from a large number of specialty flavor companies. Each
flavor is purchased from a sole source supplier and a change in the availability
of a flavor or supplier could result in a delay in production and a change in
the flavor profile of the end product. As part of a Marketing and Development
Agreement with Cultor Food Science, Inc. ("Cultor"), the Company has agreed to
Cultor being a primary supplier of flavoring material if Cultor can meet the
Company's technical and flavor specifications at a competitive price. Packaging
consists primarily of corrugated boxes, bottles and labels. The Company owns the
tooling for boxes and labels and can obtain these materials from a large number
of vendors. The primary bottle can be obtained from two vendors, Plaxicon and
Plastipak. Most other bottles and containers used by the Company are readily
available from a number of sources.
COMPETITION
The specialty food products market is highly competitive and competition is
likely to increase over time. There are no assurances that the Company will be
able to continue to successfully compete in the industry. Several companies are
engaged in business similar to or competitive with the business of the Company,
and more may be entering the field. As a consequence, there is no assurance that
the Company will be able to successfully compete in the marketplace. Some of the
competitors, such as R. Torre of San Francisco and DaVinci of Seattle, are
older, more established companies whose products have been in the market for a
number of years prior to the Company's introduction of flavoring syrups to the
United States espresso industry. As all of the known competitors to the Company
are closely-held private companies that do not divulge financial information to
the public, it is impossible to estimate their competitive ability.
The Company attempts to distinguish its position in the market place by
delivering high quality products in innovative packaging and at a competitive
price. The Company places a strong emphasis on establishing quality assurance
standards and procedures that meet the same high standards established by the
leaders in the entire food industry.
The Company has the industry experience to create value added product marketing
programs for its customers in addition to meeting the customer's specific
packaging and product needs. By having manufacturing facilities in both the
eastern and western United States, the Company is unique in the flavoring syrup
industry and is better equipped to meet customer service requirements. The
Company also believes it is a leader in the flavoring syrup industry in using
new materials and methods in packaging its products. Finally, the Company
believes that through overall sales volume and production capacity, it can offer
its products at highly competitive prices.
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DEPENDENCE ON MAJOR CUSTOMERS
For the fiscal years ended April 30, 1999 and 1998, Starbucks represented 43%
and 35% of the Company's total sales, respectively. In addition, for the fiscal
years ended April 30, 1999 and 1998, Starbucks represented 74% and 69% of the
sales from the Company's Kent, Washington facility, respectively. The Company's
eight major customers represent approximately 71% and 65% of the Company's total
sales, respectively, for the fiscal years ended April 30, 1999 and 1998.
However, other than Starbucks, no other customer exceeded 8% of the Company's
total sales in fiscal year 1999 or 1998.
If the Company lost the Starbucks' business, the current estimated reduction in
net income before taxes would be approximately $1,758,000. The loss in revenue
would be offset by a reduction in overhead. The majority of the reduction in
overhead would result from the expected closure of the Washington facility. The
Company would have to reposition its West Coast marketing efforts to compensate
for this closure. However, because only approximately 9% of the Company's
non-Starbucks business is serviced from this facility, the potential impact of
this closure would be minimal.
The Company has a written supply agreement through August 31, 1999 with
Starbucks. This exclusive supplier agreement details the manufacturing of
flavored syrups meeting certain specifications and complying with defined
inspection and testing procedures. The price of the syrups are defined within
the agreement, along with a mechanism for price increases associated with
increased production costs. Under this agreement, payment for products are
required to be made within 30 days upon receipt of invoice. Both the Company and
Starbucks can cancel this agreement with 60 days written notice, with respect to
price disagreements, and Starbucks can cancel this agreement with 90 days
written notice if the Company does not match a lower price from a competitor.
OPERATIONS AND MANAGEMENT/EMPLOYEES
As of July 15, 1999, the Company employed 60 people, all of whom are full-time
employees. None of the employees are unionized and the Company's management is
unaware of any efforts by its employees to unionize.
The Company adopted the 1994 Stock Option Plan (the "Plan") to help attract and
retain employees. at the Company's annual meeting of shareholders held on March
31, 1994. As of April 30, 1999, the Company has issued 17,000 options under this
Plan. The Company is authorized to, and may, issue up to a total of 275,000 of
its common shares, no par value, under the Plan.
The Company also maintains a salary deferral plan that is qualified under
Section 401(k) of the Internal Revenue Code. The plan, covering all full-time
employees, allows participants to contribute certain amounts on a pretax basis
and provides for certain matching contributions by the Company as specified in
the plan agreement.
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GOVERNMENTAL REGULATION
The manufacture and sale of the Company's products are subject to the
jurisdiction of a variety of regulatory authorities, including, but not limited
to, federal, state, county and city agencies administering laws and regulations
relating to health, labor, taxation and the food industry. The Company is also
subject to periodic inspections of its facilities by federal, state and local
governmental agencies.
The United States flavorings industry in general, and the Company in particular,
are subject to the regulations set forth in Section 403 of the Food, Drug and
Cosmetic Act which specifically establishes the FDA and gives the FDA authority
to establish regulations governing food manufacturing and distribution. This
industry is governed by other federal agencies only as prescribed by the FDA and
such Act. Specifically, the Company is required to comply with regulations set
forth by the FDA in Title 21 of the Code of Federal Regulations. A few examples
of such regulations are Good Manufacturing Practices (21 CRF110) and Food
Labeling (21 CFR100).
The Company is also subject to and continues to monitor compliance with the
Federal Nutrition Labeling Act of 1990. In addition, the Company has established
a volunteer Hazard Analysis Critical Control Points (HACCP) program similar to
the FDA Seafood HACCP regulations.
The Company believes it is in compliance with applicable government regulations,
including environmental, and these regulations are elementary to its normal
manufacturing practices. Consequently, the Company incurs minimal additional
costs to comply with these regulations.
ITEM 2. DESCRIPTION OF PROPERTY
EXECUTIVE OFFICE, EASTERN UNITED STATES MANUFACTURING AND WAREHOUSE FACILITY
On August 16, 1997, the Company moved into a new 50,000 square foot facility,
located at 30 Paragon Parkway in Mansfield, Ohio. This facility, costing
approximately $1,824,000, serves as the Company's executive offices and the
Eastern United States manufacturing and warehouse facility. In addition to this
facility, the Company owns a 12,600 square foot building at 64 Surrey Road in
Mansfield, Ohio. This building is used for additional warehouse and storage
space. The Company owns the Surrey Road building clear of debt and has a
$666,995 mortgage note payable on the Paragon Parkway facility.
WESTERN UNITED STATES MANUFACTURING AND WAREHOUSE FACILITY
In May 1999, the Company moved to a 31,000 square foot warehousing and
manufacturing facility in Kent, Washington outside of Seattle. This facility is
comprised of 23,000 square feet of warehouse space and 5,500 square feet of
manufacturing space. The lease on this facility is for five years starting June
1, 1999. The base rent averages $13,824 per month for the five year period. In
addition to base rent, the Company is responsible for real estate taxes and
operating fees, which are expected to average $3,433 per month. The Company is
also required to maintain public liability
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insurance. The Company has installed over $200,000 of automated manufacturing
equipment in this facility. Compared to the previous Kent, Washington facility,
the increased space will enable the Company to better serve its West Coast
customers and improve manufacturing efficiencies.
EQUIPMENT AND ADEQUACY OF FACILITIES
The Company owns substantially all of the equipment at its executive offices and
manufacturing and warehouse facilities. This includes six automated production
lines. Five of these lines are located in Mansfield, Ohio with another located
at the Kent, Washington facility. Both the new Mansfield, Ohio and the Kent,
Washington facilities have space for an additional automated production line.
The Company believes that its facilities are adequate for its current and
anticipated needs and are adequately covered by insurance.
NOTES PAYABLE
The Company has a balance of $666,995, as of April 30, 1999, on a mortgage note
payable to First Knox National Bank ("First Knox") collateralized by the real
estate located at 30 Paragon Parkway Road in Mansfield, Ohio and by
substantially all the assets of the Company. The mortgage note is payable in
monthly installments of $9,071, including variable interest at a rate of 7.81%.
Final payment will be due on October 1, 2007. The interest rate cannot change
more than once every five years and is based upon 3.25% over the weekly average
yield on U.S. Treasury securities. On December 4, 1997, the Company borrowed
$140,098 on a note payable from First Knox payable in eighteen monthly principal
payments plus interest at a rate of prime plus 0.5% commencing on January 31,
1997. The Wall Street Journal Prime rate as of April 30, 1999 was 7.75%. The
balance on this note as of April 30, 1999 was $15,654. Pursuant to the terms of
this note, all tangible property must be fully insured. The financial covenants
and ratios imposed by First Knox with respect to such notes are as follows:
The Company must maintain (i) a minimum Tangible Net Worth of not less than
$3,500,000.00, (ii) Working Capital in excess of $500,000.00, (iii) a ratio of
Liquid Assets to current liabilities in excess of 0.60 to 1.00 and (iv) a ratio
of current assets to current liabilities in excess of 1.45 to 1.00.
The term "Tangible Net Worth" means the Company's total assets excluding all
intangible assets (i.e., goodwill, trademarks, patents, copyrights,
organizational expenses and similar intangible items, but including leaseholds
and leasehold improvements) less total Debt. The term "Debt" means all of the
Company's liabilities excluding Subordinated Debt. The term "Subordinated Debt"
means indebtedness and liabilities of the Company which have been subordinated
by written agreement to indebtedness owed by the Company to the Lender in form
and substance acceptable to the Lender. The term "Working Capital" means the
Company's current assets, less the Company's current liabilities. The term
"Liquid Assets" means the Company's accounts receivable plus cash on hand plus
the Company's readily marketable securities. Except as provided above, all
computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with accounting principles acceptable
to the First Knox, applied on a consistent basis, and certified by the Company
as being true and correct.
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On December 4, 1997, the Company borrowed $120,000 from Ricter in connection
with the Company's acquisition of Ricter's inventory, equipment, customers,
product formulas, trademarks and other intangible assets. The note from Ricter
is payable in eighteen monthly principal payments commencing July 1, 1999.
Interest on the note is payable monthly from December 4, 1997 at a rate of
8.25%.
ITEM 3. LEGAL PROCEEDINGS
Except for litigation which may arise in connection with any of the foregoing
matters, the Company is not engaged in any material litigation other than
litigation arising in the ordinary course of business, none of which the Company
believes would have a materially adverse affect on the Company or its business
in the event of an unfavorable outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
[The remainder of this page intentionally left blank.]
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Prior to January 1995, the common shares, no par value, of the Company ("Common
Stock") were traded only by a single market maker and did not have an NASD
inter-dealer transaction price. From that date until December 17, 1996, the
Common Stock was traded in the over-the-counter market. Since December 17, 1996,
the Common Stock has been traded on The NASDAQ SmallCap Market tier of the
NASDAQ Stock Market(SM) under the symbol "SLHN." As of July 15, 1999, the
Company had seven listed market makers. The following table sets forth the high
and low closing prices of the Common Stock as reported by The Nasdaq Stock
Market(SM):
<TABLE>
<S> <C> <C>
Quarter Ended April 30, 1999 High $3.00 Low $1.75
Quarter Ended January 31, 1999 High $4.00 Low $2.125
Quarter Ended October 31, 1998 High $3.75 Low $2.00
Quarter Ended July 31, 1998 High $4.875 Low $3.00
Quarter Ended April 30, 1998 High $5.75 Low $4.00
Quarter Ended January 31, 1998 High $6.25 Low $4.625
Quarter Ended October 31, 1997 High $6.375 Low $5.00
Quarter Ended July 31, 1997 High $6.625 Low $4.75
Quarter Ended April 30, 1997 High $7.50 Low $6.00
Period of December 17, 1996 High $7.25 Low $6.00
thru January 31, 1997
</TABLE>
The following table sets forth the actual NASD inter-dealer transaction prices
for the Common Stock for the previous fiscal quarters as reported by Bloomberg
L.P.:
<TABLE>
<S> <C> <C>
Period of November 1, 1996 High $6.50 Low $5.00
thru December 16, 1997
Quarter Ended October 31, 1996 High $5.50 Low $4.75
Quarter Ended July 31, 1996 High $5.50 Low $4.75
Quarter Ended April 30, 1996 High $7.00 Low $5.00
</TABLE>
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<TABLE>
<S> <C> <C>
Quarter Ended January 31, 1996 High $7.50 Low $6.00
Quarter Ended October 31, 1995 High $7.25 Low $5.00
Quarter Ended July 31, 1995 High $4.375 Low $4.00
</TABLE>
HOLDERS
At June 30, 1999, the approximate number of holders of record of shares of
Common Stock was 790.
DIVIDENDS
The Company has not paid any cash dividends during the two fiscal years ended
April 30, 1999 and 1998 and has no present intention of paying dividends. The
Company cannot, without written prior consent of First Knox, pay any dividends
on the Common Stock.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
PLAN OF OPERATION
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 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 also has long recognized the need to diversify from
its concentration in sales to the specialty coffee industry. The first step in
this process was to improve the Company's product development capabilities. In
January 1999, the Company hired an experienced research flavorist from the raw
flavoring and extract industry and built a modern
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research lab at its Mansfield facility. This initiative dramatically reduced the
time between product conception and finished products ready for delivery. This
was evident when the Company initiated efforts to develop a frozen beverage line
of products in late January 1999. The development of this full line of products
was completed with shipments beginning in late April 1999. An enhanced product
development capability is also essential for strong international sales as a
number of significant countries have specific ingredient and labeling
requirements for products sold within their country.
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 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 expansion of the
Company's sales force, some of which took place in the 4th quarter of fiscal
year 1999, and increased 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.
12
<PAGE> 15
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 3,457,644 $ 3,556,309 $ 2,956,601 $ 1,889,929 $ 2,567,618
TOTAL ASSETS $ 7,438,221 $ 7,514,201 $ 5,780,362 $ 3,973,037 $ 4,211,961
CURRENT LIABILITIES $ 865,692 $ 1,156,514 $ 1,050,774 $ 1,417,743 $ 924,388
LONG TERM DEBT, $ 664,203 $ 802,353 $ 2,256 $ 144,500 $ 408,355
NET OF CURRENT PORTION
TOTAL LIABILITIES $ 1,633,032 $ 2,010,146 $ 1,053,030 $ 1,562,243 $ 1,332,743
SHAREHOLDERS' EQUITY $ 5,805,189 $ 5,504,055 $ 4,727,332 $ 2,410,794 $ 2,879,218
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 10,206,832 $ 9,242,530 $ 7,381,105 $ 5,514,753 $ 5,557,469
COST OF GOODS SOLD $ 7,630,669 $ 6,613,046 $ 5,432,588 $ 4,343,803 $ 3,935,180
SELLING, GENERAL AND $ 2,108,038 $ 1,758,667 $ 1,588,865 $ 1,774,118 $ 1,359,406
ADMINISTRATIVE
EXPENSES
NET INCOME (LOSS) $ 261,534 $ 659,716 $ 402,272 $ (732,915) $ 156,718
BASIC AND DILUTED $ 0.08 $ 0.20 $ 0.13 $ (0.26) $ 0.06
EARNINGS (LOSS)
PER SHARE
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
YEAR ENDED APRIL 30, 1999
<S> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 3,457,644 $ 3,835,542 $ 4,505,502 $ 3,475,712
TOTAL ASSETS $ 7,438,221 $ 7,680,435 $ 8,375,647 $ 7,405,074
CURRENT LIABILITIES $ 865,692 $ 960,420 $ 1,758,331 $ 1,033,687
LONG TERM DEBT, NET OF CURRENT $ 664,203 $ 701,330 $ 734,851 $ 766,681
PORTION
TOTAL LIABILITIES $ 1,633,032 $ 1,746,987 $ 2,570,081 $ 1,861,227
SHAREHOLDERS' EQUITY $ 5,805,189 $ 5,933,448 $ 5,805,566 $ 5,543,847
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 2,367,885 $ 2,661,301 $ 3,241,046 $ 1,936,600
COST OF GOODS SOLD $ 1,976,377 $ 1,961,436 $ 2,243,219 $ 1,449,637
SELLING, GENERAL AND $ 552,295 $ 468,103 $ 561,529 $ 526,111
ADMINISTRATIVE EXPENSES
NET INCOME (LOSS) $ (128,259) $ 127,882 $ 261,719 $ 192
BASIC AND DILUTED EARNINGS $ (0.04) $ 0.04 $ 0.08 $ 0.00
(LOSS) PER SHARE
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
YEAR ENDED APRIL 30, 1998
<S> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 3,556,309 $ 3,181,291 $ 2,747,143 $ 2,555,962
TOTAL ASSETS $ 7,514,201 $ 7,220,671 $ 6,638,931 $ 6,187,156
CURRENT LIABILITIES $ 1,156,514 $ 1,123,000 $ 952,084 $ 1,311,423
LONG TERM DEBT, NET OF CURRENT $ 802,353 $ 840,524 $ 694,642 $ 110,286
PORTION
TOTAL LIABILITIES $ 2,010,146 $ 1,963,524 $ 1,646,726 $ 1,421,709
SHAREHOLDERS' EQUITY $ 5,504,055 $ 5,257,147 $ 4,992,205 $ 4,765,447
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 2,409,321 $ 2,432,955 $ 2,491,263 $ 1,908,991
COST OF GOODS SOLD $ 1,519,009 $ 1,804,891 $ 1,848,863 $ 1,440,283
SELLING, GENERAL AND $ 479,484 $ 411,369 $ 439,664 $ 428,150
ADMINISTRATIVE EXPENSES
NET INCOME $ 246,908 $ 147,935 $ 226,758 $ 38,115
BASIC AND DILUTED EARNINGS $ 0.08 $ 0.05 $ 0.07 $ 0.01
PER SHARE
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
YEAR ENDED APRIL 30, 1997
<S> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 2,956,601 $ 3,762,852 $ 2,635,424 $ 2,022,950
TOTAL ASSETS $ 5,780,362 $ 5,987,157 $ 4,630,923 $ 4,075,008
CURRENT LIABILITIES $ 1,050,774 $ 1,507,068 $ 1,674,796 $ 1,316,627
LONG TERM DEBT, NET OF CURRENT $ 2,256 $ 33,309 $ 365,055 $ 394,688
PORTION
TOTAL LIABILITIES $ 1,053,030 $ 1,540,377 $ 2,039,851 $ 1,711,315
SHAREHOLDERS' EQUITY $ 4,727,332 $ 4,446,780 $ 2,591,072 $ 2,363,693
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 1,888,778 $ 2,034,609 $ 2,117,080 $ 1,340,638
COST OF GOODS SOLD $ 1,433,659 $ 1,475,180 $ 1,512,394 $ 1,011,355
SELLING, GENERAL AND $ 412,495 $ 406,794 $ 408,321 $ 361,255
ADMINISTRATIVE EXPENSES
NET INCOME (LOSS) $ 15,578 $ 211,666 $ 227,379 $ (52,351)
BASIC AND DILUTED EARNINGS $ 0.00 $ 0.07 $ 0.08 $ (0.02)
(LOSS) PER SHARE
</TABLE>
14
<PAGE> 17
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
Net sales for the fiscal years ended April 30, 1999 and 1998 were $10,206,832
and $9,242,530, respectively, which represents a 10.4% increase. For the fiscal
year ended April 30, 1999, private label syrup sales increased by 22.9%, the
Company's branded syrup products sales increased by 17.7%, while the sales of
other Company products decreased by 35.3%, all as compared to the fiscal year
ended April 30, 1998. Private label syrup, Company branded syrup, and other
Company products represented 73.5%, 18.8% and 7.7% of gross sales, respectively,
for the fiscal year ended April 30, 1999. 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 and initial shipments of the new DiNATURA(TM) brand of premium syrups. The
increase in the DiNATURA(TM), SENZA and SAN MARINO brands, along with a 2.7%
increase in the DOLCE(R) brand syrups was offset by a 28.3% decrease in
Flavor-Mate(R) brand syrups. The decrease in Flavor-Mate(R) brand syrups sales
were primarily a result of customers transferred to the SENZA brand in an effort
to consolidate the number of brands offered by the Company. The sales of other
Company products decreased due to lower sales of all product lines in this
group, other than dip mixes packaged under the Select Origins(R) brand. The
downward trend in the sales of other Company products reflects the sale of the
Grandma's Choice flavor extract business in February 1998 and other low profit
product lines being eliminated or de-emphasized.
During the fiscal year ended April 30, 1999, the Company experienced higher cost
of goods sold, as a percentage of net sales, compared to the same twelve-month
period in the previous year. Improved manufacturing efficiency was offset by
increases in write offs of obsolete inventory, spoilage and slippage, packaging
costs and freight-out costs. Consequently, cost of sales, as a percentage of net
sales, increased to 74.8% for the fiscal year ended April 30, 1999 compared to
71.6% for the previous year. Cost of sales increased by $1,017,623 for the
fiscal year ended April 30, 1999 compared to the fiscal year ended April 30,
1998.
Selling, general and administrative expenses increased by 19.9% or $349,371 for
the fiscal year ended April 30, 1999 compared to the prior fiscal year. This
increase resulted from increases in the number of employees, employee wages and
benefit programs, advertising, marketing and professional services,
depreciation, computer support costs, director fees, the amortization of
goodwill and direct selling expenses such as product samples, travel and
telephone. These increases were offset by decreases in sales promotion and trade
show expense, corporate insurance, supplies and product placement costs.
Specifically, the Company increased the sales staff by five employees to support
the introduction of the PARADISE BAY(TM) frozen beverage product line and to
support international sales and other marketing efforts. Increases in the number
of employees, employee wages and employee benefit programs totaled $136,555 for
the current year compared to the fiscal year ended April 30, 1998. In addition,
the introduction of both the DiNATURA(TM) and PARADISE BAY(TM) product lines
increased advertising and product sample expense by $88,861 or 64.6% for the
fiscal year ended April 30, 1999 compared to the fiscal year ended April 30,
1998. Selling, general and administrative expenses, as a percentage of net
sales, increased to 20.7% compared to 19.0% for the fiscal years ended April 30,
1999 and 1998, respectively.
15
<PAGE> 18
Interest expense for the fiscal year ended April 30, 1999 increased by $25,900
compared to the fiscal year ended April 30, 1998. 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 interest and other income of $75,190 for the fiscal year
ended April 30, 1999 compared to $14,641 for the fiscal year ended April 30,
1998. The primary reasons for this $60,549 increase 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 decreased 44.3% to $463,095 for the fiscal year
ended April 30, 1999 from $831,138 for the fiscal year ended April 30, 1998.
The Company recorded income tax expense of $201,561 for the fiscal year ended
April 30, 1999. For the fiscal year ended April 30, 1998, the Company recorded
income tax expense of $171,422. The income tax expense in fiscal year 1998 was
lower than fiscal year 1999 due to a reversal of a previously recorded valuation
allowance of $125,383.
As a result of the foregoing, the Company reported net income of $261,534, or
$0.08 per basic weighted average number of shares of Common Stock outstanding,
for the fiscal year ended April 30, 1999 compared to net income of $659,716, or
$0.20 per basic weighted average number of shares of Common Stock outstanding,
for the fiscal year ended April 30, 1998. The basic weighted average number of
shares of Common Stock outstanding increased to 3,285,684 for the current
twelve-month period compared to 3,246,375 for the comparable twelve-month period
last year. The increase reflects Common Stock issued upon the exercise of
warrants.
Net income for the 4th quarter of the fiscal year ended April 30, 1999 decreased
approximately $99,000 because of year-end inventory adjusting entries. The
amount of the inventory adjustments, pre-tax, were approximately $160,000. The
primary purpose of the adjusting entries was to capitalize labor and overhead
associated with the production of finished goods inventory still on-hand as of
April 30, 1999 and to record the year-end physical inventory adjustment. The
Company uses a gross margin method to estimate cost of sales during the interim
periods and an adjustment is recorded at year-end to properly reflect activity
based on the results of the physical inventory.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
Net sales for the fiscal years ended April 30, 1998 and 1997 were $9,242,530 and
$7,381,105, respectively, which represents a 25.2% increase. Private label
flavored syrup sales and the Company's branded flavored syrup sales increased by
33.3% and 26.8%, respectively, while the sales of other Company products
decreased by 6.7% for the fiscal year ended April 30, 1998 compared to the
fiscal year ended April 30, 1997. For the fiscal year ended April 30, 1998,
private label and the Company's branded flavored syrup sales represented 68.5%
and 18.2% of gross sales, respectively, while the Company's other products
represented 13.3% of gross sales. The increase in private label flavored syrup
sales was primarily the result of significant sales growth by several of the
Company's private label customers. The increase in the Company's branded
flavored syrup
16
<PAGE> 19
sales was primarily due to the acquisition of the SENZA RIVALE(TM), the SENZA
ZUCCHERO and the SAN MARINO FLAVORED SYRUP brands, and the effect of the
recovery in January 1997 of a Flavor-Mate(R) customer lost in January 1996. The
unit sales volume of the DOLCE(R) brand of flavoring syrups increased for the
fiscal year ended April 30, 1998. However, as a result of master distributor
pricing, the dollar sales of the DOLCE(R) brand decreased by 4.0% compared to
the fiscal year ended April 30, 1997. The net sales of other Company products
decreased primarily as a result of significant decreases in the sales of
flavorings, cod liver oil, and cinnamon and mulling sticks.
The Company, in an on going effort to improve the profitability of the other
products sales category, disposed of the Grandma's Choice line of extracts and
flavorings in February 1998 and ceased production of the Gran'Mere's product
line in March 1998.
The increase in sales volume in the fiscal year ended April 30, 1998 and the new
manufacturing facility in Mansfield, Ohio permitted the Company to improve
manufacturing efficiencies, resulting in cost of sales, as a percentage of net
sales, decreasing to 71.6% compared to 73.7% for the fiscal years ended April
30, 1998 and 1997, respectively. Cost of sales increased by $1,180,458 for the
current year compared to the fiscal year ended April 30, 1997. This increase
primarily was a result of higher sales volume, resulting in increased material,
freight-in, labor, and packaging costs. The increase in cost of sales in the
fiscal year ended April 30, 1998 was also the result of increased depreciation
due to the new manufacturing facility, and an increase in freight-out costs due
to free freight on large product shipments to master distributors. These
increases were partially offset by decreased costs associated with continued
improvement in manufacturing controls resulting in lower scrappage, and the
elimination of building rent in Mansfield, Ohio after the move to the new
facility.
Selling, general and administrative expenses increased by 10.7% or $169,802 for
the fiscal year ended April 30, 1998 compared to the fiscal year ended April 30,
1997. This increase resulted from increased participation in trade shows,
increased travel costs, increased depreciation expense, increased employee costs
associated with an increase in the sales and marketing staff and an increase in
employee health and general corporate insurance costs. These increases were
offset by decreases in sales commission expense and advertising costs. The
Company also recorded a large increase in public relations expenses associated
with efforts to increase the marketability of its Common Stock and with
complying with SEC disclosure requirements. In addition, the Company recorded
expenses associated with the disposal of its former Mansfield manufacturing
building.
The Company recorded income tax expense of $171,422 for the year ended April 30,
1998 compared to a income tax benefit of $96,601 for the year ended April 30,
1997. This $268,023 change is primarily the result of increased earnings and
reversal of a previously recorded valuation allowance due to the usage of the
Company's net loss carry forwards.
As a result of the foregoing, the Company reported net income of $659,716, or
$0.20 per basic and diluted weighted average number of shares of Common Stock
outstanding, for the fiscal year ended April 30, 1998 compared to a net income
of $402,272, or $0.13 per basic and diluted weighted average number of shares of
Common Stock outstanding, for the fiscal year ended April 30, 1997. The weighted
average number of shares of Common Stock outstanding increased to 3,246,375 for
the current year compared to 2,994,679 for the previous fiscal year. The
increase primarily reflects
17
<PAGE> 20
increased Common Stock outstanding as a result of the Company's stock offering,
warrants exercised and conversion of subordinated debt into Common Stock.
Net income for the 4th quarter of the fiscal year ended April 30, 1998 increased
approximately $164,000 because of year end inventory adjusting entries. The
amount of the year end inventory adjustment, pre-tax, was approximately
$254,000. The primary purpose of the adjusting entries was to capitalize labor
and overhead associated with the production of finished goods inventory still
on-hand as of April 30, 1998 and to record the year end physical inventory
adjustment. The Company uses a gross margin method to estimate cost of sales
during the interim period and an adjustment is recorded at year end to properly
reflect activity based on the results of the physical inventory.
LIQUIDITY AND CAPITAL RESOURCES
The working capital and working capital ratio as of April 30, 1999 and April 30,
1998 were $2,591,952 and 3.99 to 1 and $2,399,795 and 3.08 to 1, respectively.
The increase in working capital for April 30, 1999 compared to April 30, 1998
was primarily a result of a $89,529 increase in the Company's cash and cash
equivalents, a $124,860 increase in the Company's prepaid expenses, a $52,898
decrease in the Company's accrued expenses and a $228,425 decrease in accounts
payable, offset by a $52,989 decrease in the Company's inventory and a $231,549
decrease in the Company's accounts receivable. The increase in prepaid expenses
and decrease in accrued expenses was a result of estimated income tax payments.
The decrease in account payable and inventory was 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 accounts receivable was a result
of weaker sales in April 1999 compared to April 1998.
The Company's operating activities, for the year ended April 30, 1999, provided
net cash of $613,878. The Company used $407,787 to acquire equipment and also
increased its investment in life insurance policies by $9,013. The Company used
$147,649 to make principal payments on a mortgage note payable and on capital
leases, and received $39,600 from the exercise of warrants and received $500
from the sale of fixed assets. Consequently, during this period, cash and cash
equivalents increased by $89,529. The Company expects future operating
activities to continue to provide cash for investing and financing activities.
However, this cash may be insufficient to meet the Company's possible investing
and financing activities.
On December 2, 1998, the Company renewed its $400,000 line of credit with First
Knox and there was no outstanding balance on this line as of July 15, 1999.
The Company, during the fiscal year ending April 30, 1999, experienced minor
inflationary increases in the cost of its raw and packaging materials. The
Company did not raise the selling prices of its products and subsequently
absorbed these cost increases.
The Company believes that the First Knox line of credit and cash from operating
activities will be sufficient to finance operations and planned capital
expenditures for the next 12 months. The Company will need to secure additional
financing to pursue acquisitions.
18
<PAGE> 21
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 April
30, 1999, has incurred costs of $215,219 and anticipates $15,000 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 vulnerable to potential disruption from suppliers,
and the Company will be assessing the extent of this vulnerability.
[The remainder of this page intentionally left blank.]
19
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
<TABLE>
<CAPTION>
1. Financial Statements of Stearns & Lehman, Inc. Page
<S> <C>
Report of Independent Accountants (dated June 23, 1999) ...............................................21
Balance Sheets as of April 30, 1999 and 1998 ..........................................................22
Statements of Income for the years ended April 30, 1999 and 1998 ......................................24
Statements of Shareholders' Equity for the years ended April 30, 1999 and 1998 .......................25
Statements of Cash Flows for the years ended April 30, 1999 and 1998 ..................................26
Notes to Financial Statements .........................................................................28
</TABLE>
20
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Stearns & Lehman, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Stearns & Lehman, Inc. at April 30, 1999 and
1998, and the results of its operations and its cash flows for each year of the
two years in the period ended April 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers
June 23, 1999
21
<PAGE> 24
STEARNS & LEHMAN, INC.
BALANCE SHEETS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 361,868 $ 272,339
Trade accounts receivable, net of allowance for doubtful
accounts of $40,000 in 1999 and $56,000 in 1998 1,044,515 1,307,233
Inventory 1,815,353 1,868,342
Prepaid expenses and other 194,790 69,930
Deferred income taxes 41,118 38,465
---------- ----------
Total current assets 3,457,644 3,556,309
---------- ----------
Property and equipment:
Land 73,928 73,928
Buildings 1,829,823 1,829,823
Building improvements 91,809 41,281
Leasehold improvements 9,433 9,433
Machinery and equipment 1,991,730 1,756,977
Office equipment 388,754 411,328
Tooling 131,089 89,873
Vehicles 40,401 45,392
---------- ----------
4,556,967 4,258,035
Less accumulated depreciation 1,169,800 957,822
---------- ----------
Net property and equipment 3,387,167 3,300,213
---------- ----------
Goodwill, net 523,826 583,420
Cash surrender value of life insurance 51,089 42,076
Trademarks and patents, net 3,167 3,863
Other assets 15,328 28,320
---------- ----------
Total assets $7,438,221 $7,514,201
========== ==========
</TABLE>
CONTINUED
22
<PAGE> 25
STEARNS & LEHMAN, INC.
BALANCE SHEETS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 539,668 $ 768,093
Accrued expenses 187,578 240,476
Current portion of notes payable 138,446 145,689
Current portion of capital lease obligations -- 2,256
---------- ----------
Total current liabilities 865,692 1,156,514
---------- ----------
Long-term liabilities:
Notes payable, net of current portion 664,203 802,353
Deferred income taxes 103,137 51,279
---------- ----------
Total long-term liabilities 767,340 853,632
---------- ----------
Total liabilities 1,633,032 2,010,146
---------- ----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized,
3,289,165 and 3,275,965 issued and 3,285,865 and
3,272,665 outstanding as of April 30, 1999 and 1998,
respectively 3,629 3,614
Additional paid-in capital 5,248,461 5,208,876
Retained earnings 566,299 304,765
---------- ----------
5,818,389 5,517,255
Less treasury stock at cost; 3,300 shares 13,200 13,200
---------- ----------
Total shareholders' equity 5,805,189 5,504,055
---------- ----------
Total liabilities and shareholders' equity $7,438,221 $7,514,201
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 26
STEARNS & LEHMAN, INC.
STATEMENT OF INCOME
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Sales $ 10,206,832 $ 9,242,530
Cost of sales 7,630,669 6,613,046
------------ -----------
Gross profit 2,576,163 2,629,484
Selling, general and administrative expenses 2,108,038 1,758,667
------------ -----------
Income from operations 468,125 870,817
------------ -----------
Other income (expense), net:
Interest expense (80,220) (54,320)
Interest income 27,392 16,641
Other, net 47,798 (2,000)
------------ -----------
Income before income tax expense 463,095 831,138
------------ -----------
Income tax expense:
Current 152,356 56,636
Deferred 49,205 114,786
------------ -----------
Total income tax expense 201,561 171,422
------------ -----------
Net income $ 261,534 $ 659,716
============ ===========
Earnings per share - Basic $ .08 $ .20
============ ===========
Earnings per share - Diluted $ .08 $ .20
============ ===========
Basic weighted-average common shares outstanding 3,285,684 3,246,375
============ ===========
Diluted weighted-average common shares outstanding 3,287,964 3,273,029
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 27
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
NUMBER OF ADDITIONAL EARNINGS TOTAL SHARE-
COMMON COMMON PAID-IN (ACCUMULATED 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 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 -- -- 261,534 -- 261,534
Exercise of warrants 13,200 15 39,585 -- -- 39,600
--------- ----- --------- --------- --------- ----------
Balances at April 30, 1999 3,285,865 $3,629 $5,248,461 $ 566,299 $ (13,200) $5,805,189
========= ====== ========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 28
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 261,534 $ 659,716
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 31,169 21,400
Depreciation and amortization 381,401 326,020
Impairment and loss on the disposal of fixed assets 12,214 40,720
Deferred income taxes 49,205 114,786
Changes in assets and liabilities:
Trade accounts receivable 231,549 (444,174)
Inventory 52,989 (589,179)
Prepaid expenses and other (124,860) 5,709
Accounts payable (228,425) (33,579)
Accrued expenses (52,898) 1,201
--------- -----------
Net cash provided by operating activities 613,878 102,620
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (407,787) (1,402,546)
Proceeds from sale of property and equipment 500 74,324
Cash surrender value of life insurance, net (9,013) (18,465)
Purchase of other assets -- (149,649)
--------- -----------
Net cash used in investing activities (416,300) (1,496,336)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under notes payable -- 890,000
Principal payments on long-term debt and capital leases (147,649) (71,785)
Net proceeds from issuance of common shares 39,600 117,007
--------- -----------
Net cash (used in) provided by financing activities (108,049) 935,222
--------- -----------
Net increase (decrease) in cash and cash equivalents 89,529 (458,494)
Cash and cash equivalents, beginning of year 272,339 730,833
--------- -----------
Cash and cash equivalents, end of year $ 361,868 $ 272,339
========= ===========
</TABLE>
CONTINUED
26
<PAGE> 29
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 80,220 $ 54,321
======== ========
Income taxes $318,228 $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Issuance of note payable for business assets acquired $ -- $120,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business. Steams & Lehman, Inc. (the Company) is engaged in
the business of manufacturing and selling specialty food products,
including extracts, flavorings, liquid spices and Italian syrups. The
principal market for the Company's products is the continental United
States.
Inventories. Inventory is valued at the lower of most recent costs or
market which approximates cost using the first-in, first-out (FIFO)
method. Indirect costs that do not relate to production of finished
goods, including general and administrative expenses, are charged to
expense as incurred. The Company uses a gross margin method to estimate
cost of sales during interim periods. An adjustment is made at year end
to record actual activity based on the results of the year end physical
inventory. The year end adjustment increased cost of sales by $159,957
in 1999 and decreased cost of sales by $253,934 in 1998.
Property and equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line
method over the following estimated useful lives: buildings and
building improvements, 30 to 40 years; machinery and equipment, 5 to 10
years; tooling, 2 to 10 years; and vehicles, 3 to 5 years. Leasehold
improvements are amortized over the shorter of their useful lives or
the term of the lease. Depreciation expense was $308,119 in 1999 and
$253,948 in 1998. Repairs and maintenance are charged to expense as
incurred; major renewals and betterments are capitalized. When assets
are sold, retired, or otherwise disposed of, the related cost and
accumulated depreciation are removed from the applicable accounts, and
any gain or loss from disposition is included in operations.
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>
APRIL 30,
-------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1999 1998
- ------------------------------------------ ----------- ---------
<S> <C> <C>
Common shares issued 3,288,984 3,249,675
Treasury shares (3,300) (3,300)
--------- ---------
Basic shares 3,285,684 3,246,375
Dilutive effect of warrants 2,280 26,654
--------- ---------
Diluted shares 3,287,964 3,273,029
========= =========
</TABLE>
Cash and cash equivalents. The Company considers all highly liquid debt
instruments purchased with an initial maturity of three months or less
to be cash equivalents. Cash consists primarily of demand deposits held
principally with one financial institution.
28
<PAGE> 31
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Income taxes. The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been recognized in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are recognized based
on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates.
Revenue recognition. Sales are recorded when products are shipped to
the customer.
Advertising and promotion costs. Advertising and promotion costs are
charged to operations as incurred. Advertising and promotion expense
was $206,664 in 1999 and $169,192 in 1998.
Goodwill. Goodwill represents the excess of purchase price over fair
value of net tangible assets acquired (see Notes 6 and 15). Goodwill is
amortized on a straight-line basis over 12 to 15 years. Amortization
expense was $59,594 in 1999 and $57,383 in 1998 and accumulated
amortization was $264,254 and $204,660 at April 30, 1999 and 1998,
respectively.
Fair value of financial instruments. The carrying amounts reported in
the balance sheet for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the
short maturity. The carrying amount of variable rate debt issued
approximates fair value because the interest rate changes with market
interest rates and the carrying amount of fixed rate debt approximates
fair value due to its short-term nature.
Foreign sales. The Company transacts all foreign sales to distributors
and customers in United States currency.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of risk. The Company purchases certain products from
sole-source suppliers of which there are currently no other suppliers
used by the Company. A change in suppliers during certain peak periods
could cause a delay in production and a possible loss of sales, which
would affect operating results adversely.
The Company has eight major customers which represented sales of
approximately 71% in 1999 and 65% in 1998. The loss of any of these
customers could have an adverse impact on the operating results of the
Company.
The Company maintains virtually all of its banking relationships with
one financial institution.
29
<PAGE> 32
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
2. INVENTORY
The major components of inventory at April 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 883,676 $1,002,539
Work in process 7,704 2,708
Finished goods 923,973 863,095
---------- ----------
Total inventory $1,815,353 $1,868,342
========== ==========
</TABLE>
3. LEASE COMMITMENTS
The Company leases a building and certain office and production
equipment under noncancelable operating lease agreements expiring
through fiscal 2006. The building lease provides for future minimum
rent escalations. Minimum rental commitments under noncancelable
operating leases at April 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
---------------------
<S> <C>
2000 $ 196,409
2001 204,164
2002 204,164
2003 212,590
2004 212,916
Thereafter 230,659
----------
$1,260,902
==========
</TABLE>
Total rent expense charged to operations for all operating leases was
$128,770 in 1999 and $120,894 in 1998.
4. LINES OF CREDIT
On December 2, 1996, the Company signed a Line of Credit Agreement with
a bank for $400,000 with interest at a rate of prime plus 0.5%. This
Line of Credit Agreement was renewed on December 2, 1998 and expires on
December 2, 1999. This agreement is collateralized by substantially all
the assets of the Company and contains covenants that require the
Company to maintain a certain minimum working capital and net worth and
maintain a certain quick and current ratio. As of April 30, 1999, there
was no outstanding balance under this agreement.
30
<PAGE> 33
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
5. NOTES PAYABLE
Notes payable at April 30, 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. $ 666,995 $ 719,055
Note payable to a company, unsecured, payable in monthly
installments of $7,111 including interest at a rate of
8.25% per annum commencing July 1, 1999, due on December
1, 2000. Interest will be paid monthly until the first
principal payment is made on July 1, 1999. 120,000 120,000
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 April 30, 1999),due on June 2, 1999. 15,654 108,987
---------- ---------
Total notes payable 802,649 948,042
Less current portion 138,446 145,689
---------- ---------
$ 664,203 $ 802,353
---------- ---------
Future maturities of notes payable at April 30, 1999 are as follows:
YEAR ENDING APRIL 30,
---------------------
2000 $ 138,446
2001 118,020
2002 68,018
2003 73,604
2004 79,573
Thereafter 324,988
---------
$ 802,649
=========
</TABLE>
31
<PAGE> 34
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
6. BUSINESS COMBINATION
On April 30, 1994, the Company issued 240,000 shares of its common
stock in exchange for 100% of the outstanding stock of Select Origins,
Inc. (Select). The acquisition has been accounted for as a purchase
transaction and accordingly, the fair value of the stock issued was
allocated to Select's assets and liabilities based on its estimated
fair value as of the acquisition date. The excess value of the
Company's stock issued over the fair value of the net assets acquired
has been recorded as goodwill.
36,000 of the shares issued were placed in escrow to provide security
to the Company in the event the Company suffers any losses arising from
misrepresentations by Select or its former shareholders. During fiscal
1995, the Company received 18,526 of the escrow shares pursuant to an
agreement with former shareholders of Select. On June 29, 1995, the
Company filed a claim for the remaining 17,474 shares held in escrow.
The purchase also allowed for the issuance of 50,000 additional shares
(augmentation) if certain events did not occur subsequent to the
merger. The Company believes that only one of two objectives stated in
the Purchase Agreement needed to be achieved, and if neither was
achieved, then augmentation would occur. The Company did not achieve
one of the objectives. Based on the interpretation by certain former
shareholders of Select that both objectives must be achieved, they
filed a claim for the shares to augmentation on July 21, 1995.
As of April 30, 1999, the Company has settled the escrow and
augmentation issues with certain former shareholders of Select for
17,162 shares of which 17,057 shares were in escrow on April 30, 1996
and 105 shares were contingently issuable upon settlement. The Company
repurchased and retired the 95 contingently issuable shares. The
Company intends to settle the escrow and augmentation issues with the
remaining former shareholders of Select for 420 shares of which 417
were in escrow on April 30, 1999 and April 30, 1998 and 3 were
contingently issuable upon settlement. The settlement has been recorded
in the financial statements at April 30, 1999 and 1998 as an adjustment
to the original purchase price.
7. COMMON STOCK TRANSACTIONS
On November 25, 1997, 25,000, 10,913 and 10,000 shares of the Company's
common stock were issued at $3.50, $3.15 and $3.00 per share,
respectively, upon exercise of warrants (see Note 8).
On May 5, 1998, 13,200 shares of the Company's common stock were issued
at $3.00 per share upon exercise of warrants (see Note 8).
8. WARRANTS AND OPTIONS TO PURCHASE COMMON STOCK
During fiscal 1998, the Company issued warrants to two directors for
each to purchase 5,000 shares of common stock at an exercise price of
$5.625 per share, which expire January 20, 2008. The warrants were
fully exercisable at the date of grant.
During fiscal 1998, 25,000, 10,913 and 10,000 shares of the Company's
common stock were issued at $3.50, $3.15 and $3.00 per share,
respectively, upon exercise of warrants.
32
<PAGE> 35
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
During fiscal 1999, 13,200 shares of the Company's common stock were
issued at $3.00 per share upon exercise of warrants.
On May 5, 1998, 10,256 warrants, with an exercise price of $3.00 per
common share, expired without being exercised.
On September 29, 1998, 17,000 employee stock options were issued with
an exercise price of $2.266 per share of common stock. On September 29,
1999, 25% of these options are exercisable. On the anniversary date of
issuance in each subsequent year, an additional 25% of these options
become exercisable until all 17,000 options are exercisable on
September 29, 2002.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for warrants or options ("warrants") granted as the Company
believes warrants were granted at fair market value at the date of
grant. The Company did not recognize any expense for warrants granted
during the year ended April 30, 1999. Had compensation cost for the
warrants granted been determined based on the fair value at the grant
dates for awards under that plan consistent with the method of SFAS No.
123, Accounting for Stock-Based Compensation, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below. The 1998 pro forma amounts include the effect of the
reversal of prior years pro forma net operating losses under SFAS No.
123.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C>
Net income Pro forma $ 255,706 $ 600,531
As reported 261,534 659,716
Diluted earnings per share Pro forma $ .08 $ .18
As reported .08 .20
</TABLE>
In determining the pro forma amount of stock-based compensation on a
basis consistent with SFAS No. 123, the fair value of each warrant
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions
used for grants in 1999 and 1998, respectively: no dividend yield;
expected volatility 111% and 80.0%; risk-free interest rate of 4.59%
and 6.25%; and expected life of 10.0 years and 6.0 years for warrants
granted in 1999 and 1998, respectively.
33
<PAGE> 36
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
A summary of the status of the Company's warrants as of April 30, 1999
and 1998, respectively; and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- --------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Warrants / Options Shares Price Shares Price
------------------ ------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 103,452 $ 4.74 139,365 $ 4.20
Granted 17,000 $ 2.27 10,000 $ 5.63
Forfeited (10,256) $ 3.00 -- $ --
Exercised (13,200) $ 3.00 (45,913) $ 3.31
Outstanding at end of year 96,996 $ 5.04 103,452 $ 4.74
Exercisable at year-end 79,996 $ 5.63 103,452 $ 4.74
Weighted-average fair value of
warrants / options granted during
the year utilizing Black-Scholes
options pricing model $ 2.35 $ 4.11
</TABLE>
The following table summarizes information about warrants outstanding
at April 30, 1999:
<TABLE>
<CAPTION>
Number Weighted- Number
Outstanding Average Exercisable
at April 30, Remaining at April 30,
Exercisable Prices 1999 Life 1999
- ------------------ ---- ---- ----
<S> <C> <C> <C>
$2.27 17,000 9.4 years --
$3.00 10,000 6.0 years 10,000
$3.15 2,648 1.5 years 2,648
$5.50 18,798 7.4 years 18,798
$5.63 10,000 8.7 years 10,000
$5.75 38,550 2.3 years 38,550
-------- ------------ --------
96,996 5.6 years 79,996
======== ============ ========
</TABLE>
34
<PAGE> 37
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
9. STOCK OPTION PLAN
Effective March 4, 1994, the Company adopted the 1994 Stock Option Plan
(the Plan). The shares that may be issued subject to options granted
under the Plan shall not exceed 275,000 shares in aggregate. The
options granted under the Plan may be designed as incentive stock
options or non-qualified stock options, at the discretion of the
committee designated by the Board of Directors to administer the Plan.
The option price for non qualified stock options shall not be less than
100% of the fair market value of a share on the effective date of the
grant. The option price for incentive stock options shall not be less
than 110% of the fair market value of a share on the effective date of
the grant. As of April 30, 1999, 17,000 options have been granted.
10. COMMITMENTS
The Company has an agreement to supply a customer with a product at
specified prices. The agreement became effective September 1, 1997,
with an initial term of two years, expiring on August 31, 1999.
The agreement shall terminate at the end of the initial term if written
notice to terminate is given by either party at least 60 days prior to
the last day of the initial term. Otherwise, following the initial
term, the agreement shall renew and continue from year to year until
canceled upon 30 days written notice by either party.
11. RELATED-PARTY TRANSACTIONS
An entity owned by an employee/board member provided services to the
Company related to flight transportation. Expenses incurred from this
entity were approximately $48,049 in 1999 and $36,300 in 1998. No
payables were outstanding as of April 30, 1999 or 1998.
12. BUSINESS ACQUISITIONS
On December 4, 1997, the Company acquired $39,492 of inventory, $31,187
of equipment, the customers, product formulas, trademarks, and other
intangible assets of Ricter Enterprises, LTD., the manufacturer of the
Senza Zucchero and Senza Rivale brands of flavoring syrups for $150,762
in cash and a $120,000 note payable. The Company obtained $140,000 in
cash from a note payable to First Knox National Bank payable in
eighteen monthly payments of $7,778 plus interest at a rate of prime
plus 0.5% commencing on January 31, 1998. The $120,000 note payable to
Ricter Enterprises, LTD. is payable in eighteen monthly principal
payments, including interest at a rate of 8.25%, of $7,111 commencing
July 1, 1999 Interest on the note to Ricter Enterprises, LTD is payable
monthly until June 1, 1999 at a rate of 8.25%.
On January 16, 1998, the Company acquired the rights to the San Marino
Flavored Syrup product line from Cultor Food Science, Inc. ("Cultor")
as part of a Marketing and Development Agreement that has been entered
into between the two firms. Under this five year agreement, the Company
acquired the rights to the San Marino product line, trademarks,
customer lists, formulas and other related information from Cultor in
exchange for Cultor supplying a minimum quantity of raw materials to
the Company. These raw materials supplied by Cultor are subject to
competitive pricing and meeting the technical and flavor specifications
of the Company and its customers. The Company under no circumstances
shall purchase less than $25,000 of raw materials from Cultor during
the terms of this agreement.
35
<PAGE> 38
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
13. INCOME TAXES
The components of the net deferred tax liability at April 30, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 112,779 $ 131,353
Alternative minimum tax credit 6,867 --
Other 7,773 5,244
Allowance for doubtful accounts 15,200 21,280
--------- ---------
Gross deferred tax assets 142,619 157,877
Deferred tax liabilities:
Property and equipment 204,638 170,691
--------- ---------
Net deferred tax liability $ (62,019) $ (12,814)
--------- ---------
</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.
As of April 30, 1997 a valuation allowance of $125,383 was recorded
against the net deferred tax assets due to the potential uncertainty of
their recoverability in future years. The valuation allowance was
eliminated as of April 30, 1998 as continued profitability had reduced
the uncertainty of the utilization of net operating loss carryforwards.
The Company utilized approximately $33,170 of net operating
carryforwards in fiscal 1999.
A reconciliation between the statutory federal income tax rate and the
effective income tax on pretax earnings follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Statutory income tax rate 34.0% 34.0%
Local and state income tax,
net of federal income tax effect 2.1 .8
Permanent differences 4.9 3.0
Adjustments to prior year tax
calculations .7 (3.0)
Reduction in valuation allowance -- (15.1)
Other items, net 1.8 .9
-------- --------
43.5% 20.6%
======== ========
</TABLE>
36
<PAGE> 39
STEARNS & LEHMAN, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
14. CONTINGENCIES
The Company is involved in various legal proceedings that are
incidental to the conduct of its business. Although amounts with
respect to these proceedings cannot be determined, in the opinion of
management, any such amounts will not have a material adverse effect on
the Company's financial position, liquidity or results of operations.
15. EMPLOYEE BENEFIT PLAN
The Company maintains a salary deferral plan that is qualified under
Section 401(k) of the Internal Revenue Code. The plan, covering all
full-time employees, allows participants to contribute certain amounts
on a pretax basis and provides for certain matching contributions by
the Company as specified in the plan agreement. Company contributions
to the plan charged to operations were $27,573 in 1999 and $8,078 in
1998.
37
<PAGE> 40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
[The remainder of this page intentionally left blank.]
38
<PAGE> 41
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains the name, position, age and telephone number with
the Company of each director and executive officer of the Company as of July 15,
1999. Directors are elected to a one year term, to serve until the next annual
meeting of shareholders and until their successors are duly elected and
qualified or until their earlier resignation, removal from office, or death. The
respective background of each director and executive officer is described
following the table. Each of the executive officers devotes his or her full-time
efforts to the affairs of the Company.
<TABLE>
<CAPTION>
NAME POSITION AGE TELEPHONE NO.
<S> <C> <C> <C>
William C. Stearns President, Treasurer and Director 46 419/522-2722
Sally A. Stearns Executive Vice President, Secretary and Director 39 419/522-2722
John A. Chuprinko Chief Financial Officer 44 419/522-2722
Frank E. Duval Director 55 419/882-2314
Carter F. Randolph Director 43 513/891-4227
</TABLE>
WILLIAM C. STEARNS - PRESIDENT, TREASURER AND DIRECTOR
William C. Stearns is President, Treasurer and a Director of the Company. Mr.
Stearns founded the Company in March of 1988 and has been its President and a
Director since that time. Mr. Stearns attended both Cleveland State University
and Baldwin-Wallace University and is a member of the Manufacturers' Board of
Directors of the National Food Distributors Association and the National
Association of Specialty Food Trade. Mr. Stearns is the husband of Sally A.
Stearns.
SALLY A. STEARNS - EXECUTIVE VICE PRESIDENT, SECRETARY AND DIRECTOR
Sally A. Stearns graduated from Bowling Green State University in June of 1982
with a Bachelor of Science Degree in Business Administration, with a major
concentration in Human Resource Management. From October 1987 to February 8,
1989, she was a senior accountant for Autocall, Inc., a division of Federal
Signal located in Shelby, Ohio. From February 18, 1989 to the present Ms.
Stearns has served as Vice President, Secretary and a Director of the Company.
JOHN A. CHUPRINKO - CHIEF FINANCIAL OFFICER
John A. Chuprinko is a graduate of The Ohio State University, where he obtained
a Bachelor of Science Degree in accounting, and the United States Navy Supply
School in Athens, Georgia. Mr. Chuprinko was hired as the Chief Financial
Officer of the Company on January 10, 1996 and is a Certified Public Accountant.
Mr. Chuprinko is a member and past President of the Knox County, Ohio Airport
Advisory Board and is a member and past Chairman of the Marion Technical College
39
<PAGE> 42
Accounting Advisory Committee. From October 1994 to January 1996, Mr. Chuprinko
served as the Chief Financial Officer and Treasurer of Na-Churs Plant Food
Company, a national manufacturing company with $18,000,000 in sales, located in
Marion, Ohio. Prior to that position, Mr. Chuprinko was the Controller at The
J.E. Grote Company, Incorporated in Blacklick, Ohio.
FRANK E. DUVAL - DIRECTOR
Mr. Duval has served as a Director of the Company since January 3, 1995. Mr.
Duval has been the President of J&S Capital, Inc. since 1990 where he oversees a
portfolio of real estate, limited partnership and stock and bond investments.
Mr. Duval has a Bachelor of Science Degree in Education from the University of
Buffalo. From 1979 to 1990, Mr. Duval served as President and Chief Executive
Officer of International Automated Machines, Inc., a manufacturer of single
service and portion control condiments. From 1973 to 1979, he served as
President and Chief Executive Officer of United Wild Rice, Inc. Prior to 1973,
Mr. Duval held various sales and marketing management positions with Ralston
Purina, Wm. Underwood Company and Scott Paper Company. Mr. Duval is a member of
the Board of Directors' Audit Committee.
CARTER F. RANDOLPH, PH.D. - DIRECTOR
Dr. Randolph, was appointed as a Director of the Company on March 29, 1996.
Since 1987, Dr. Randolph has been the President of The Randolph Company, Inc.
where he is responsible for the management of pension plans, foundations and
trusts. From 1989 to the present, Dr. Randolph has been Executive Vice President
and Trustee of the Green Acres Foundation where he is responsible for
management, including all aspects of organization and operation of the private
nonprofit foundation. Dr. Randolph has experience in the areas of estate
planning, tax planning, IRS audit management, investment management, real estate
management, farm management and property management. Dr. Randolph currently
serves on the Board of Directors of Cintech Tele-Management Systems, Inc. Dr.
Randolph is a member of the Board of Directors' Audit Committee.
SIGNIFICANT EMPLOYEES
PHYLLIS J. THOMAS
Ms. Thomas, age 45, has been employed by the Company since November 1993 and
currently is the Director of Operations. Ms. Thomas is a graduate of Ashland
University with a Bachelor of Science Degree in Business Administration. Prior
to working for the Company, Ms. Thomas was a promotion specialist for R.J.R.
Nabisco from 1990 to 1993.
FAMILY RELATIONSHIPS
Except for Mr. and Mrs. Stearns, there are no family relationships among the
directors and executive officers of the Company.
40
<PAGE> 43
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Not Applicable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
William C. Stearns, Sally A. Stearns, John A. Chuprinko, Frank E. Duval and
Carter F. Randolph failed to file Form 5 on a timely basis.
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors, and person who beneficially own more than ten percent (10%) of
the Common Stock, to file initial reports of ownership and reports of changes in
ownership with the SEC. Executive officers, directors and greater than ten
percent (10%) beneficial owners are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
ITEM 10. EXECUTIVE COMPENSATION
SALARY COMPENSATION TABLE
The following table and notes set forth information regarding remuneration of
the only officer of the Company whose total annual salary and bonus during the
fiscal year ended April 30, 1999 exceeded $100,000:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL FISCAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
<S> <C> <C> <C> <C>
William C. Stearns, 1999 $ 109,635 $ 0 $ 123 (1)
President 1998 $ 104,000 $ 0 $ 123 (1)
1997 $ 104,000 $ 0 $ 123 (1)
1996 $ 127,500 $ 0 $ 115 (1)
</TABLE>
(1) The Company carries and pays the premium on a "key man" life insurance
policy on Sally A. Stearns in the amount of $500,000 and is entitled to eighty
percent (80%) of the benefits of such a policy. Mr. Stearns is the other named
beneficiary of this policy and is entitled to receive the remaining twenty
percent (20%) of the benefits of such insurance policy. For the fiscal years
ended April 30, 1999, 1998, 1997 and 1996, the premium value of this benefit to
Mr. Stearns was $123, $123, $123 and $115, respectively.
41
<PAGE> 44
DIRECTORS COMPENSATION
The Directors of the Company receive cash compensation of $1,000 per meeting for
serving on the Board of Directors, and are reimbursed reasonable expenses
incurred while attending these meetings. Frank E. Duval received $3,000 and
Carter F Randolph, Ph.D. received $4,000 for attending Board of Directors
meetings for the fiscal year ended April 30, 1999. The Company has agreed to pay
$15,000 to each of the outside Directors for services rendered during a calendar
year, on a pro rata basis for the actual time served as a Director during such
calendar year. Frank E. Duval and Carter F. Randolph, Ph.D. each received
$15,000 on January 14, 1999 for services rendered in calendar year 1998.
STOCK OPTION PLAN
At the Company's Annual Meeting of Shareholders held on March 31, 1994, the
Company adopted the 1994 Stock Option Plan (the "Plan"). The shares of Common
Stock that may be issued upon the exercise of options granted under the Plan
shall not exceed 275,000 shares in the aggregate. The options granted under the
Plan may be designed as "incentive stock options" or "non-qualified stock
options", at the discretion of the committee designated by the Board of
Directors of the Company to administer the Plan. The option price of
"non-qualified stock options" shall not be less than 100% of the fair market
value of a share of Common Stock on the effective date of the grant. The option
price for "incentive stock options" shall not be less than 110% of the fair
market value of a share of Common Stock on the effective date of the grant. As
of April 30, 1999, 17,000 options have been granted.
[The remainder of this page intentionally left blank.]
42
<PAGE> 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, so far as is known to
management of the Company, regarding beneficial ownership of Common Stock held
of record, as of July 15, 1999, by (i) each shareholder who owns beneficially
more than five percent (5%) of the outstanding Common Stock; (ii) each officer
and director of the Company; and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) CLASS
<S> <C> <C> <C>
Common Stock, no par value William C. Stearns 614,391 18.6%
Director, President and
Treasurer
Common Stock, no par value Sally A. Stearns 631,916 19.1%
Director, Vice President and
Secretary
Common Stock, no par value Frank E. Duval 125,000 (3) 3.8%
Director
Common Stock, no par value Carter F. Randolph, Ph.D. 63,906 (4) 1.9%
Director
Common Stock, no par value John A. Chuprinko 640 .02%
Chief Financial Officer
Common Stock, no par value All Directors and Officers 1,435,853 (5) 43.4%
as a group (5 persons)
</TABLE>
(1) The address for all persons listed is 30 Paragon Parkway, Mansfield, Ohio
44903.
(2) Unless otherwise indicated, the named shareholder has sole voting and
investment power.
(3) Includes 15,000 shares purchasable on exercise of currently exercisable
warrants.
(4) Of such shares, 51,198 are beneficially owned by the Randolph Company, Inc.,
an Ohio corporation, of which Dr. Randolph owns 100% of its Common Stock. The
Randolph Company, Inc. and, therefore, Dr. Randolph have full discretionary
investment authority over such shares, including the right to vote and sell such
shares. Includes 12,708 shares for which Dr. Randolph and his wife, Kathy, have
shared voting and investment power. Includes 8,798 shares purchasable on
exercise of currently exercisable warrants.
(5) Includes 23,798 shares purchasable on exercise of currently exercisable
warrants.
43
<PAGE> 46
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William C. Stearns, the President, Treasurer and a Director of the Company, owns
a twin engine airplane which he regularly uses for Company business. The Company
pays Corporate Flight Services, a sole proprietorship of Mr. Stearns, $315 per
hour for the use of the airplane. During the fiscal years ended April 30, 1999
and 1998, Corporate Flight Service was paid $48,089 and $33,675, respectively,
pursuant to this arrangement.
The Company carries and pays the premium for a "key man" life insurance policy
on Mr. Stearns in the amount of $1,000,000, and as one of the named
beneficiaries, the Company is entitled to ninety (90%) of the benefits of such
policy. Sally A. Stearns is the other named beneficiary of Mr. Stearns'
insurance policy and is entitled to ten percent (10%) of the benefits of such
insurance policy. The Company also carries and pays the premium for a "key man"
life insurance policy on Ms. Stearns, the Vice President, Secretary and a
Director of the Company, in the amount of $500,000 and is entitled to eighty
percent (80%) of the benefits of such policy. William C. Stearns is the other
named beneficiary of Ms. Stearns' policy and is entitled to receive the
remaining twenty percent (20%) of the benefits of such insurance policy.
Any future transactions between the Company and its officers, directors or
shareholders owning five percent (5%) or more of the Common Stock will be on
terms no less favorable to the Company than could be obtained from independent
third parties.
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
ARTICLES OF INCORPORATION AND BY-LAWS
Exhibit #3(a) - Articles of Incorporation of Sal-Wan Corp. (filed 3/14/88)
(Note 1)
Exhibit #3(b) - Certificate of Amendment (filed 1/17/90) (Note 1)
Exhibit #3(c) - Certificate of Amendment (filed 9/4/90) (Note 1)
Exhibit #3(d) - Certificate of Amendment (filed 3/12/92) (Note 1)
Exhibit #3(e) - Certificate of Amendment (filed 4/30/92) (Note 1)
Exhibit #3(f) - Certificate of Amendment (filed 5/2/94) (Note 1)
Exhibit #3(g) - Amended Code of Regulations of Stearns & Lehman, Inc. (Note 1)
MATERIAL CONTRACTS
Exhibit #10(a) - Industrial Lease, dated March 10, 1995 (Note 1)
44
<PAGE> 47
Exhibit #10(b) - Supplier Agreement, dated September 1, 1997 (Note 4)
Exhibit #10(c) - Machinery Lease Agreement, dated August 1, 1993 (Note 1)
Exhibit #10(d) - Madison Leasing Company (Equipment Lease Agreement) (Note 1)
Exhibit #10(e) - Stearns & Lehman, Inc. 1994 Stock Option Plan (Note 1)
Exhibit #10(f) - Description of agreement on outside directors compensation
(Note 3)
Exhibit #10(g) - Description of agreement pertaining to the Company's use of
William C. Stearns' airplane (Note 3)
Exhibit #10(h) - Description of agreement pertaining to a "key man" life
insurance policies (Note 3)
Exhibit #10(i) - Escrow Agreement, dated October 17, 1996, by and among Stearns
& Lehman, Inc., Quantum Capital Corp., dba Diversified Capital
Markets and First Knox National Bank (Note 1)
Exhibit #10(j) - Standard Form of Agreement Between Owner and Design/Builder
dated December 20, 1996 (Note 2)
Exhibit #10(k) - Promissory Note and Business Loan Agreement (First Knox
National Bank - $400,000) dated December 2, 1996 (Note 2)
Exhibit #10(l) - Promissory Note and Business Loan Agreement - Modification
(First Knox National Bank - $750,000) dated August 25, 1997
(Note 4)
Exhibit #10(m) - Construction Loan Agreement (First Knox National Bank -
$750,000) dated December 2, 1996 (Note 2)
Exhibit #10(n) - Stock Purchase Warrant No. 5, April 28, 1997, 5,000 Shares
(Note 3)
Exhibit #10(o) - Stock Purchase Warrant No. 6, April 28, 1997, 3,798 Shares
(Note 3)
Exhibit #10(p) - Warrant Certificate No. WA 17, (34,950 Shares Underwriter's
Warrants), April 28, 1997 (Note 3)
Exhibit #10(q) - Computer Software, Hardware and Consulting Services Agreement
dated June 9, 1997 (Note 3)
Exhibit #10(r) - License Agreement between Godiva Chocolatier, Inc. and Stearns
& Lehman, Inc. dated June 30, 1997 (Note 3)
45
<PAGE> 48
Exhibit #10(s) - Stock Purchase Warrant No. 7, January 21, 1998, 5,000 Shares
(Note 6)
Exhibit #10(t) - Stock Purchase Warrant No. 8, January 21, 1998, 5,000 Shares
(Note 6)
Exhibit #10(u) - Sales Agreement with supplier dated October 7, 1997 (Note 5)
CONSENT OF EXPERTS AND COUNSEL
Exhibit #23 - Consent of Independent Accountants (PricewaterhouseCoopers LLP)
FINANCIAL DATA SCHEDULE
Exhibit #27 - Financial Data Schedule
ADDITIONAL EXHIBITS
Exhibit #99(a) - Escrow and Subordination Agreement, effective May 4, 1992, by
and between Stearns & Lehman, Inc., First Knox National Bank
and Williams C. Stearns, Sally A. Stearns and Richard S. Patton
(Note 1)
Exhibit #99(b) - Form of Lock-Up Agreement, dated October 22, 1996, by and among
Sally A. Stearns and William C. Stearns and Quantum Capital
Corp. d/b/a Diversified Capital Markets. (Note 1)
Exhibit #99(c) - Mutual Release Agreement by and between Bick Goss and Bruce
Saunders, Co-Trustees of the Earnie Parmentier Trust and
Stearns & Lehman dated July 9, 1997. (Note 3)
Note 1. Incorporated by reference to the Company's Amendment No. 1 to the
Registration Statement on the Form SB-1 filed with Commission on
September 25, 1996 (File No. 333-4244-C).
Note 2. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended January 31, 1997 filed with the Commission on
March 14, 1997 (File No. 0-21879).
Note 3. Incorporated by reference to the Company's Form 10-KSB/A for the year
ended April 30, 1997 filed with the Commission on August 12, 1997 (File
No. 0-21879).
Note 4. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended July 31, 1997 filed with the Commission on
September 15, 1997 (File No. 0-21879).
Note 5. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended October 31, 1997 filed with the Commission on
December 15, 1997 (File No. 0-21879).
Note 6. Incorporated by reference to the Company's Form 10-KSB for the year
ended April 30, 1998 filed with the Commission on July 29, 1998 (File
No. 0-21879).
46
<PAGE> 49
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: July 29, 1999 STEARNS & LEHMAN, INC.
(Registrant)
/s/ William C. Stearns
---------------------------------
William C. Stearns
President, Director
In accordance with the Exchange Act, this report been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: July 29, 1999 /s/ William C. Stearns
---------------------------------
William C. Stearns
President, Director
Date: July 29, 1999 /s/ John A. Chuprinko
---------------------------------
John A. Chuprinko
Chief Financial Officer
Date: July 29, 1999 /s/ Sally A. Stearns
---------------------------------
Sally A. Stearns
Vice President, Director
Date: July 29, 1999 /s/ Frank E. Duval
---------------------------------
Frank E. Duval
Director
Date: July 29, 1999 /s/ Carter F. Randolph
---------------------------------
Carter F. Randolph, Ph.D.
Director
47
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-69425) of Stearns & Lehman, Inc. of our report
dated June 23, 1999 relating to the financial statements, which appears in this
Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
July 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 361,868
<SECURITIES> 0
<RECEIVABLES> 1,084,515
<ALLOWANCES> (40,000)
<INVENTORY> 1,815,353
<CURRENT-ASSETS> 3,457,644
<PP&E> 4,556,967
<DEPRECIATION> (1,169,800)
<TOTAL-ASSETS> 7,438,221
<CURRENT-LIABILITIES> 865,692
<BONDS> 664,203
0
0
<COMMON> 3,629
<OTHER-SE> 5,801,560
<TOTAL-LIABILITY-AND-EQUITY> 7,438,221
<SALES> 10,206,832
<TOTAL-REVENUES> 10,282,022
<CGS> 7,630,669
<TOTAL-COSTS> 9,707,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 31,169
<INTEREST-EXPENSE> 80,220
<INCOME-PRETAX> 463,095
<INCOME-TAX> 201,561
<INCOME-CONTINUING> 261,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,534
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
