<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________________
---------------------------------------
COMMISSION FILE NO. 0-21879
---------------------------
STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
OHIO 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
30 PARAGON PARKWAY
MANSFIELD, OHIO
(Address of principal executive 44903
offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of March 4, 1999, 3,285,865 common shares, no par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 2
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
BALANCE SHEETS
January 31, 1999 , April 30, 1998 and January 31, 1998
ASSETS JANUARY 31, APRIL 30, JANUARY 31,
1999 1998 1998
(UNAUDITED) (UNAUDITED)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $595,732 $272,339 $329,023
Trade accounts receivable, net of allowance for doubtful
accounts of $57,526, $56,000 and $49,409 as of
January 31, 1999, April 30, 1998 and January 31, 1998 1,082,287 1,307,233 1,159,147
Inventory 1,991,473 1,868,342 1,590,566
Prepaid and other 87,515 69,930 67,064
Deferred income taxes 78,535 38,465 35,491
---------- -------- --------
Total current assets 3,835,542 3,556,309 3,181,291
---------- -------- --------
Property and equipment:
Land 73,928 73,928 80,848
Buildings 1,829,823 1,829,823 1,866,283
Building improvements 60,154 41,281 67,873
Leasehold improvements 9,433 9,433 9,433
Machinery and equipment 1,820,409 1,756,977 1,719,940
Office equipment 453,269 411,328 394,311
Tooling 125,349 89,873 72,178
Vehicles 45,392 45,392 45,392
---------- -------- --------
4,417,757 4,258,035 4,256,258
Less: accumulated depreciation (1,185,253) (957,822) (925,109)
---------- -------- --------
Net property and equipment 3,232,504 3,300,213 3,331,149
---------- -------- --------
Goodwill 539,415 583,420 600,667
Cash surrender value of life insurance 51,013 42,076 35,457
Trademarks and patents 3,341 3,863 4,037
Deferred income taxes 36,252
Other assets 18,620 28,320 31,818
---------- -------- --------
Total assets $7,680,435 $7,514,201 $7,220,671
========== ========== ==========
</TABLE>
CONTINUED
<PAGE> 3
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
JANUARY 31, APRIL 30, JANUARY 31,
1999 1998 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
Current liabilities:
<S> <C> <C> <C>
Accounts payable $519,627 $768,093 $827,510
Accrued expenses 302,211 240,476 147,381
Current portion of notes payable 138,582 145,689 143,629
Current portion of capital lease obligations 2,256 4,480
--------- --------- ---------
Total current liabilities 960,420 1,156,514 1,123,000
--------- --------- ---------
Notes payable, net of current portion 701,330 802,353 840,524
Deferred income taxes 85,237 51,279
--------- --------- ---------
Total long-term liabilities 786,567 853,632 840,524
--------- --------- ---------
Total liabilities 1,746,987 2,010,146 1,963,524
--------- --------- ---------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares
authorized, 3,289,165, 3,275,965 and 3,275,965
issued and 3,285,865, 3,272,665 and 3,272,665
outstanding as of January 31, 1999, April 30, 1998
and January 31, 1998, respectively 3,629 3,614 3,614
Additional paid-in capital 5,248,461 5,208,876 5,208,876
Accumulated earnings 694,558 304,765 57,857
--------- --------- ---------
5,946,648 5,517,255 5,270,347
Less treasury shares, at cost (3,300 shares) (13,200) (13,200) (13,200)
--------- --------- ---------
Total shareholders' equity 5,933,448 5,504,055 5,257,147
--------- --------- ---------
Total liabilities and shareholders' equity $7,680,435 $7,514,201 $7,220,671
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the three months ended January 31, 1999 and 1998
1999 1998
<S> <C> <C>
Sales $2,661,301 $2,432,955
Cost of sales 1,961,436 1,804,891
---------- ----------
Gross profit 699,865 628,064
Selling, general and administrative expenses 468,103 411,369
---------- ----------
Income from operations 231,762 216,695
---------- ----------
Other income (expense), net:
Interest expense (19,038) (21,204)
Interest income 17,228 1,105
Other (1,017) 11,213
---------- ----------
(2,827) (8,886)
---------- ----------
Income before income tax expense 228,935 207,809
Income tax expense (benefit):
Current 133,255 1,500
Deferred (32,202) 58,374
---------- ----------
Total income tax expense 101,053 59,874
---------- ----------
Net income $ 127,882 $ 147,935
---------- ----------
Earnings per share - basic $0.04 $0.05
---------- ----------
Earnings per share - diluted $0.04 $0.05
---------- ----------
Basic weighted-average common shares outstanding 3,285,865 3,260,189
---------- ----------
Diluted weighted-average common shares outstanding 3,290,011 3,281,767
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the nine months ended January 31, 1999 and 1998
1999 1998
<S> <C> <C>
Sales $7,838,948 $6,833,209
Cost of sales 5,660,102 5,094,037
--------- ---------
Gross profit 2,178,846 1,739,172
Selling, general and administrative expenses 1,549,933 1,279,182
--------- ---------
Income from operations 628,913 459,990
--------- ---------
Other income (expense), net:
Interest expense (60,737) (32,794)
Interest income 28,697 13,147
Other 58,413 8,094
--------- ---------
26,373 (11,553)
--------- ---------
Income before income tax expense 655,286 448,437
Income tax expense (benefit):
Current 271,605 5,400
Deferred (6,112) 30,229
--------- ---------
Total income tax expense 265,493 35,629
--------- ---------
Net income $389,793 $412,808
--------- ---------
Earnings per share - basic $0.12 $0.13
--------- ---------
Earnings per share - diluted $0.12 $0.13
--------- ---------
Basic weighted-average common shares outstanding 3,285,626 3,237,898
--------- ---------
Diluted weighted-average common shares outstanding 3,288,751 3,270,072
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
for the year ended April 30, 1998 and the nine months ended January 31, 1999
NUMBER OF ADDITIONAL ACCUMULATED TOTAL SHARE-
COMMON COMMON PAID-IN EARNINGS TREASURY HOLDERS'
SHARES SHARES CAPITAL (DEFICIT) SHARES EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1997 3,226,752 $3,563 $5,091,920 ($354,951) ($13,200) $4,727,332
Net Income 659,716 659,716
Exercise of warrants to
common shares 45,913 51 116,956 117,007
--------- ------ ---------- -------- --------- -----------
Balance at April 30, 1998 3,272,665 3,614 5,208,876 304,765 (13,200) 5,504,055
Net Income 389,793 389,793
Exercise of warrants to
common shares 13,200 15 39,585 39,600
--------- ------ ---------- -------- --------- -----------
Balance at January 31, 1999 3,285,865 $3,629 $5,248,461 $694,558 ($13,200) $5,933,448
========= ====== ========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
for the nine months ended January 31, 1999 and 1998
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $389,793 $412,808
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 10,000
Depreciation and amortization 281,659 231,167
Impairment and loss on the sale of property and equipment 26,330
Deferred income taxes (6,112) 30,229
Changes in assets and liabilities:
Trade accounts receivable 224,946 (284,688)
Inventory (123,131) (350,895)
Prepaid expenses and other (17,585) 8,575
Accounts payable (248,466) (41,537)
Accrued expenses 61,735 (91,894)
-------- ----------
Net cash provided by (used in) operating activities 562,839 (49,905)
-------- ----------
Cash flows from investing activities:
Purchase of property and equipment (159,723) (1,235,646)
Sale of property and equipment 1,000
Cash surrender value of life insurance, net (8,937) (11,846)
Purchase of goodwill (198,970)
-------- ----------
Net cash used in investing activities (168,660) (1,445,462)
-------- ----------
Cash flows from financing activities:
Net borrowing under notes payable 1,010,000
Principal payments on notes payable and capital leases (110,386) (33,450)
Net proceeds from issuance of common stock 39,600 117,007
-------- ----------
Net cash (used in) provided by financing activities (70,786) 1,093,557
-------- ----------
Net increase (decrease) in cash and cash equivalents 323,393 (401,810)
Cash and cash equivalents, beginning of year 272,339 730,833
-------- ----------
Cash and cash equivalents, end of period $595,732 $329,023
======== ==========
</TABLE>
CONTINUED
6
<PAGE> 8
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
1999 1998
Supplemental disclosure of cash flow information:
Progress billings accrued but not paid for:
<S> <C> <C>
Construction of manufacturing and office facility $67,375
-------
Cash paid during the period for:
Interest $60,737 $32,794
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three and nine months ended
January 31, 1999 and 1998 for Stearns & Lehman, Inc. (the Company) are
unaudited and are presented pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the financial
statements should be read in conjunction with the audited financial
statements for the years ended April 30, 1998 and April 30, 1997. In
the opinion of management, the accompanying financial statements
reflect all necessary adjustments (which are of a normal recurring
nature) to present fairly the financial position and results of
operations and cash flows for the interim periods presented, but are
not necessarily indicative of the results of operations for a full
year.
2. INCOME TAXES:
The components of the net deferred tax asset at January 31, 1999, April
30, 1998 and January 31, 1998 are as follows:
JANUARY 31, APRIL 30, JANUARY 31,
1999 1998 1998
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $112,779 $ 131,353 $ 182,834
Other 45,397 5,244 4,735
Allowance for doubtful accounts 21,860 21,280 18,815
Gross deferred tax assets 180,036 157,877 206,384
Deferred tax liabilities:
Property and equipment 186,738 170,691 134,641
Net deferred tax asset (liabilities) $ (6,702) $ (12,814) $ 71,743
</TABLE>
A valuation allowance of $101,972 was eliminated during the nine-month
period ended January 31, 1998 as continued profitability has reduced
the potential uncertainty of the utilization of net operating loss
carryforwards.
8
<PAGE> 10
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
3. COMMON SHARES:
On September 29, 1998 the Committee administering the Company's Amended
and Restated 1994 Stock Option Plan ("Plan"), as designated by the
Board of Directors, authorized the granting of 17,000 incentive stock
options. These incentive stock options had an effective date of
September 29, 1998 with an option price of $2.266 per share. This
option price was based on the fair value of common shares on September
29, 1998 in accordance with the terms of the Plan.
4. EARNINGS PER SHARE:
Net income per share is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings per share are computed based upon
the weighted average number of outstanding common shares. Diluted
earnings per share include the weighted average effect of dilutive
warrants and stock options outstanding.
WEIGHTED AVERAGE COMMON SHARES THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31 JANUARY 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Common shares issued 3,289,165 3,263,489 3,288,926 3,241,198
Treasury shares (3,300) (3,300) (3,300) (3,300)
------------ ------------ ------------ ------------
Basic shares 3,285,865 3,260,189 3,285,626 3,237,898
Dilutive effect of 4,146 21,578 3,125 32,174
warrants and stock options
------------ ------------ ------------ ------------
Diluted shares 3,290,011 3,281,767 3,288,751 3,270,072
------------ ------------ ------------ ------------
</TABLE>
5. LINES OF CREDIT:
On December 2, 1998, the Company renewed its $400,000 line of credit
with First Knox National Bank ("First Knox") with interest at the rate
of prime. This agreement expires on December 2, 1999 and 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
ratio and current ratio. In addition, First Knox requires the Company
to be Year 2000 compliant by December 31, 1999. As of January 31, 1999,
there was no outstanding balance under this agreement.
9
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
GENERAL
- -------
The Company is an Ohio corporation headquartered in Mansfield, Ohio. The Company
was organized on March 14, 1988 and is engaged in the business of manufacturing
and marketing specialty food products, including coffee and espresso flavorings,
syrups, oils and toppings, flavorings, sauces, dressings and specialty sugars.
The Company sells its products throughout the United States and in certain
foreign countries, including Canada, Chile, Mexico, Australia, New Zealand,
England, Finland, Israel, Spain, Singapore, Korea and Japan.
Since its incorporation in 1988, the Company has grown from providing a single
product line and having two employees, to being a major manufacturer and
supplier of flavoring syrups for the specialty coffee industry with 57
employees. The Company's customer list includes a number of America's top
specialty coffee retailers and restaurants including Starbucks Coffee Company
("Starbucks "), Barnie's Coffee & Tea Company, The Coffee Beanery, Darden
Restaurants Inc.'s The Olive Garden Italian Restaurant, Flagstar Cos. Inc.'s
Denny's Restaurant, Gloria Jeans Gourmet Coffee, Godiva Chocolatier, Inc.,
Borders, Inc., Caribou Coffee Company, Kraft General Foods, Sara Lee's Superior
Coffee Division, and Sysco Food Service. The Company does not have any long-term
supply agreements with any of these customers except Starbucks and Caribou
Coffee Company. The Company believes that its success in obtaining these
accounts is attributable to the Company's emphasis on quality, dependable
service and innovation.
PLAN OF OPERATION
- -----------------
The Company's plans, for the fiscal year ended April 30, 1999, are primarily a
continuation of endeavors initiated in the fiscal year ended April 30, 1998.
While private label syrup sales continue to be the primary component of the
Company's business, efforts continue to strengthen the market penetration of the
DOLCE(R) and The Godiva Chocolatier Cafe' Godiva brands of specialty chocolate
flavored flavoring syrups. In addition, with the start of production of the
DiNATURA(R) premium natural flavored syrups, the Company anticipates a favorable
market impact in the premium niche of the flavoring syrup market. The Company
also plans to continue its efforts to enhance revenue growth through strategic
acquisitions. The Company also intends to enhance net income by improving
production efficiencies and raw material procurement.
The Company made two significant strategic moves in the third quarter of the
fiscal year ended April 30, 1999. The first strategic move was to hire an
experienced flavorist from the raw flavor industry.
10
<PAGE> 12
This addition should permit the Company to reduce the cost of raw flavor
purchases. In addition this move is expected to reduce the development time of
new products. This reduction in development time was demonstrated late in the
third quarter with the rapid development of a low cost granita syrup product
line. This product line is the beginning step of the Company's second strategic
move made in the third quarter. The Company is planning to develop a full line
of liquid and dry granita products. The Company estimates that the market for
granita products is significantly larger than the specialty coffee syrup market.
The Company has also hired a granita marketing specialist to lead the Company's
efforts in this market.
The Company moved into its new manufacturing, warehouse and executive office
facility in Mansfield, Ohio in August 1997 and the Company continues to develop
new methods and procedures to maximize efficiencies in the production and
shipment of its products. The installation of a year 2000 compliant
manufacturing and business computer system is underway. Currently all the
financial and accounting modules have been implemented in addition to several of
the manufacturing modules. Efforts are underway to complete the installation of
the remaining manufacturing modules. The plans call for complete implementation
by April 30, 1999. When the system is fully implemented, the Company anticipates
a reduction in inventory carrying costs, improved production planning and
customer deliveries and significant improvements in product and customer
profitability analysis.
The Company's plans also include evaluating and proceeding with strategic
acquisitions to enhance revenue growth. The Company is looking for acquisitions
that will add volume to its existing product lines or that will compliment its
existing product lines. For the year ended April 30, 1998 the Company made two
acquisitions that added volume to existing product lines and as of March 4,
1999, the Company is involved in the search process for additional acquisitions.
The Company is developing plans for a higher speed production line. The Company,
in early March 1999, ordered production equipment that will serve as the basic
elements of this higher speed production line. The Company plans to implement
the remaining portions of this line at such time when volume or market
requirements dictate. The equipment ordered is expected to double the production
rate of the Company's principal products.
(THE REST OF THIS PAGE IS INTENTIONALLY BLANK)
11
<PAGE> 13
<TABLE>
<CAPTION>
SELECTED SUMMARY FINANCIAL INFORMATION
QUARTERLY INFORMATION FOR 3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER
INDICATED FISCAL YEARS FY 1999 FY 1999 FY 1999 FY 1998 FY 1998
BALANCE SHEET:
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $ 3,835,542 $ 4,505,502 $ 3,475,712 $ 3,556,309 $ 3,181,291
TOTAL ASSETS $ 7,680,435 $ 8,375,647 $ 7,405,074 $ 7,514,201 $ 7,220,671
CURRENT LIABILITIES $ 960,420 $ 1,758,331 $ 1,033,687 $ 1,156,514 $ 1,123,000
LONG TERM DEBT, NET $ 701,330 $ 734,851 $ 766,681 $ 802,353 $ 840,524
OF CURRENT PORTION
TOTAL LIABILITIES $ 1,746,987 $ 2,570,081 $ 1,861,227 $ 2,010,146 $ 1,963,524
SHAREHOLDERS' EQUITY $ 5,933,448 $ 5,805,566 $ 5,543,847 $ 5,504,055 $ 5,257,147
STATEMENT OF OPERATIONS:
TOTAL SALES $ 2,661,301 $ 3,241,046 $ 1,936,600 $ 2,409,321 $ 2,432,955
COST OF GOODS SOLD $ 1,961,436 $ 2,243,219 $ 1,449,637 $ 1,519,009 $ 1,804,891
SELLING, GENERAL $ 468,103 $ 561,529 $ 526,111 $ 479,484 $ 411,369
AND ADMINISTRATIVE
EXPENSES
NET INCOME $ 127,882 $ 261,719 $ 192 $ 246,908 $ 147,935
BASIC AND DILUTED EARNINGS PER $ 0.04 $ 0.08 $ 0.00 $ 0.08 $ 0.05
SHARE
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTHS NINE MONTHS
SPECIFIED PERIODS APRIL 30, 1998 APRIL 30, 1997 APRIL 30, 1996 JANUARY 31, JANUARY 31,
1999 1998
BALANCE SHEET:
CURRENT ASSETS $ 3,556,309 $ 2,956,601 $ 1,889,929 $ 3,835,542 $ 3,181,291
TOTAL ASSETS $ 7,514,201 $ 5,780,362 $ 3,973,037 $ 7,680,435 $ 7,220,671
CURRENT LIABILITIES $ 1,156,514 $ 1,050,774 $ 1,417,743 $ 960,420 $ 1,123,000
LONG TERM DEBT, NET $ 802,353 $ 2,256 $ 144,500 $ 701,330 $ 840,524
OF CURRENT PORTION
TOTAL LIABILITIES $ 2,010,146 $ 1,053,030 $ 1,562,243 $ 1,746,987 $ 1,963,524
SHAREHOLDERS' EQUITY $ 5,504,055 $ 4,727,332 $ 2,410,794 $ 5,933,448 $ 5,257,147
STATEMENT OF OPERATIONS:
TOTAL SALES $ 9,242,530 $ 7,381,105 $ 5,514,753 $ 7,838,948 $ 6,833,209
COST OF GOODS SOLD $ 6,613,046 $ 5,432,588 $ 4,343,803 $ 5,660,102 $ 5,094,037
SELLING, GENERAL $ 1,758,667 $ 1,588,865 $ 1,774,118 $ 1,549,933 $ 1,279,182
AND ADMINISTRATIVE
EXPENSES
NET INCOME (LOSS) $ 659,716 $ 402,272 $ (732,915) $ 389,793 $ 412,808
BASIC AND DILUTED EARNINGS $ 0.20 $ 0.13 $ (0.26) $ 0.12 $ 0.13
(LOSS) PER SHARE
</TABLE>
12
<PAGE> 14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
- --------------------------------------------------------------------------
Net sales for the three months ended January 31, 1999 and 1998 were $2,661,301
and $2,432,955, respectively, which represents a 9.4% increase. For the three
months ended January 31, 1999, private label syrup sales increased by 9.4%, the
Company's branded syrup products sales increased by 24.7%, while the sales of
other Company products decreased by 18.9%, all as compared to the three months
ended January 31, 1998. Private label syrup, Company branded syrup, and other
Company products represented 72.8%, 16.9% and 10.3% of gross sales,
respectively, for the three months ended January 31, 1999. The Company's branded
syrup products' sales increased primarily as a result of sales of the Senza and
San Marino brand product lines, which were acquired in the latter part of fiscal
1998, and sales of the DiNatura(C) brand, which shipments began in October 1998.
In addition to the increases in the Senza, San Marino and DiNatura(C) brands,
the Dolce(R) brand syrups increased by 15.3%, this was offset by 13.8% decrease
in Flavor-Mate(R) brand syrups. The decrease in Flavor-Mate(R) brand syrups
sales were primarily a result of customers being 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. The downward trend in the sales of other Company products
reflects the sale of the Grandma Choice flavor extract business in February 1998
and other low profit product lines being eliminated or de-emphasized.
During the three-month period ended January 31, 1999, the Company experienced
lower cost of goods sold, as a percentage of net sales, compared to the same
three-month period in the previous year. Improved manufacturing efficiency was
partially offset by write offs of obsolete inventory and increases in freight
out costs. Consequently, cost of sales, as a percentage of net sales, decreased
to 73.7% for the three months ended January 31, 1999 compared to 74.2% for same
quarter last year. Cost of sales increased by $156,545 for the three months
ended January 31, 1999 compared to the three months ended January 31, 1998 as a
result of higher sales volume.
Selling, general and administrative expenses increased by 13.8% or $56,734 for
the three months ended January 31, 1999 compared to the three months ended
January 31, 1998. This increase resulted from increases in depreciation,
advertising, trade shows, travel and product sample expense, the number of
employees and employee wages, computer support costs, director fees and the
amortization of goodwill. These increases were offset by decreases in product
placement costs. Selling, general and administrative expenses, as a percentage
of net sales, increased to 17.6% compared to 16.9% for the three months ended
January 31, 1999 and 1998, respectively.
Interest expense for the three months ended January 31, 1999 decreased by $2,166
compared to the three months ended January 31, 1998. The decrease reflects lower
notes payable outstanding.
The Company reported total net other expenses of $2,827 for the three months
ended January 31, 1999 compared to $8,886 for the three months ended January 31,
1998.
Income before income tax expense increased 10.2% to $228,935 for the three
months ended January 31, 1999 from $207,809 for the three months ended January
31, 1998.
13
<PAGE> 15
The Company recorded income tax expense of $101,053 for the three months ended
January 31, 1999. For the three months ended January 31, 1998, the Company
recorded income tax expense of $59,874.
As a result of the foregoing, the Company reported net income of $127,882, or
$0.04 per basic weighted average number of common shares of the Company (the
"Common Shares") outstanding, for the three months ended January 31, 1999
compared to net income of $147,935, or $0.05 per basic weighted average number
of Common Shares outstanding, for the three months ended January 31, 1998. The
basic weighted average number of Common Shares outstanding increased to
3,285,865 for the current three-month period compared to 3,260,189 for the
comparable three-month period last year. The increase reflects Common Shares
issued upon the exercise of warrants.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1999 AND 1998
- -------------------------------------------------------------------------
Net sales for the nine months ended January 31, 1999 and 1998 were $7,838,948
and $6,833,209, respectively, which represents a 14.7% increase. For the nine
months ended January 31, 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 nine months
ended January 31, 1998. Private label syrup, Company branded syrup, and other
Company products represented 74.0%, 18.1% and 7.9% of gross sales, respectively,
for the nine months ended January 31, 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(C) brand of premium syrups. The
increase in the DiNatura(C), Senza and San Marino brands was offset by a
respective 29.5% and a 0.5% decrease in Flavor-Mate(R) and Dolce(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
Mulling Spices packaged under the Select Origins(R) brand. The downward trend in
the sales of other Company products reflects the sale of the Grandma Choice
flavor extract business in February 1998 and other low profit product lines
being eliminated or de-emphasized.
During the nine-month period ended January 31, 1999, the Company experienced
lower cost of goods sold, as a percentage of net sales, compared to the same
nine-month period in the previous year. Improved manufacturing efficiency was
partially offset by increases in write offs of obsolete inventory, packaging
costs and freight out costs. Consequently, cost of sales, as a percentage of net
sales, decreased to 72.2% for the nine months ended January 31, 1999 compared to
74.5% for same quarter last year. Cost of sales increased by $566,065 for the
nine months ended January 31, 1999 compared to the nine months ended January 31,
1998 as a result of higher sales volume.
Selling, general and administrative expenses increased by 21.2% or $270,751 for
the nine months ended January 31, 1999 compared to the nine months ended January
31, 1998. This increase resulted from increases in advertising, marketing
services expense, direct selling expenses such as product
14
<PAGE> 16
samples, travel and telephone, the number of employees and employee wages,
depreciation, computer support costs, employee benefit programs, director fees
and the amortization of goodwill. These increases were offset by decreases in
sales promotion and trade show expense, supplies, product placement costs.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 19.8% compared to 18.7% for the nine months ended January 31, 1999
and 1998, respectively.
Interest expense for the nine months ended January 31, 1999 increased by $27,943
compared to the nine months ended January 31, 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 other income of $26,373 for the nine months ended January
31, 1999 compared to other expense of $11,553 for the nine months ended January
31, 1998. The primary reasons for this $37,926 change were a $50,632 rebate from
the Ohio Bureau of Workers Compensation and a $13,500 settlement from a
defamation claim made by the Company against a competitor, offset by the $27,943
increase in interest expense.
Income before income tax expense increased 46.1% to $655,286 for the nine months
ended January 31, 1999 from $448,437 for the nine months ended January 31, 1998.
The Company recorded income tax expense of $265,493 for the nine months ended
January 31, 1999. For the nine months ended January 31, 1998, the Company
recorded income tax expense of $35,629.
As a result of the foregoing, the Company reported net income of $389,793, or
$0.12 per basic weighted average number of Common Shares outstanding, for the
nine months ended January 31, 1999 compared to net income of $412,808, or $0.13
per basic weighted average number of Common Shares outstanding, for the nine
months ended January 31, 1998. The basic weighted average number of Common
Shares outstanding increased to 3,285,626 for the current nine-month period
compared to 3,237,898 for the comparable nine-month period last year. The
increase reflects Common Shares issued upon the exercise of warrants.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The working capital and working capital ratio as of January 31, 1999 and January
31, 1998 were $2,875,122 and 3.99 to 1 and $2,058,291 and 2.83 to 1,
respectively. The increase in working capital for January 31, 1999 compared to
January 31, 1998 was primarily a result of a $266,709 increase in the Company's
cash and cash equivalents, a $400,907 increase in the Company's inventory, a
$307,883 decrease in accounts payable, offset by a $76,860 decrease in the
Company's accounts receivable and a $154,830 increase in the Company's accrued
expenses. The increase in inventory was a result of the acquisition of the Senza
and San Marino brand syrups and raw materials obtained to produce the
DiNatura(C) brand of syrups. The decrease in account payable is a result of the
Company's strong cash position and reduced raw material purchases as a result of
efforts to decrease inventory levels. The increase in accrued expenses primarily
reflects an increase in accrued
15
<PAGE> 17
income taxes. The decrease in accounts receivable was a result of weaker sales
in January 1999 compared to January 1998.
The Company's operating activities, for the nine months ended January 31, 1999,
provided net cash of $562,839. The Company used $159,723 to acquire equipment
and also increased its investment in life insurance policies by $8,937. The
Company used $110,386 to make principal payments on a mortgage note payable and
on capital leases, and received $39,600 from the exercise of warrants.
Consequently, during this period, cash and cash equivalents increased by
$323,393. The Company expects future operating activities to continue to provide
cash for investing and financing activities. However, this cash may be
insufficient to meet the Company's possible investing and financing activities.
As of December 2, 1998, the Company renewed its $400,000 line of credit with
First Knox National Bank and there was no outstanding balance on this line as of
March 4, 1999.
YEAR 2000 COMPLIANCE
- --------------------
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware as part of a normal plan to upgrade the
Company's computer application software capability. The installation and
implementation of the application software is currently underway and is targeted
for completion by April 1999. As of March 4, 1999, the financial modules of the
software have been implemented and several elements of the manufacturing modules
are being utilized. This software is currently Year 2000 compliant while the
hardware is awaiting an upgrade in the operating system to be fully Year 2000
compliant. The Company, as of March 4, 1999, has incurred costs of $215,219 and
anticipates $25,000 in additional installation costs to complete the project.
The Company has completed tests on all of the Company-owned personal and network
computers, and associated application software, and its production devices and
does not anticipate any other internal costs associated with Year 2000
compliance on these systems or devices. The Company completed internal Year 2000
tests on its telephone system and incurred costs of approximately $4,000 to
upgrade the system to be Year 2000 compliant. The Company's shipping system,
that was provided by a third party vendor, is not currently Year 2000 compliant.
This vendor has indicated their shipping system will meet Year 2000 compliance
prior to December 1999. The Company will not absorb any cost associated with
Year 2000 compliance on this shipping system.
The Company plans to perform an elementary survey of its vendors by April 1999.
This will provide basic information pertaining to the Company's vulnerability to
potential disruption from suppliers. Until that survey is complete, the Company
will be unable to determine the extent of this vulnerability or determine any
contingency plans necessary to obtain raw materials from alternate vendors.
16
<PAGE> 18
The Company plans to be fully Year 2000 compliant, with the exception of a third
party shipping system, by April 1999. However, the Company cannot be certain
that its customers or vendors will likewise be Year 2000 compliant. The Company
may face material risks if certain of its customers or vendors cannot conduct
normal receipts or shipments of product or materials on or after January 1,
2000.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit #27 - Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
Date: March 12, 1999 STEARNS & LEHMAN, INC.
(Registrant)
/s/ William C. Stearns
------------------------
William C. Stearns
President
/s/ John A. Chuprinko
---------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JAN-31-1999
<CASH> 595,732
<SECURITIES> 0
<RECEIVABLES> 1,139,813
<ALLOWANCES> (57,526)
<INVENTORY> 1,991,473
<CURRENT-ASSETS> 3,835,542
<PP&E> 4,417,757
<DEPRECIATION> (1,185,253)
<TOTAL-ASSETS> 7,680,435
<CURRENT-LIABILITIES> 960,420
<BONDS> 701,330
<COMMON> 3,629
0
0
<OTHER-SE> 5,929,819
<TOTAL-LIABILITY-AND-EQUITY> 7,680,435
<SALES> 7,838,948
<TOTAL-REVENUES> 7,926,058
<CGS> 5,660,102
<TOTAL-COSTS> 7,210,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,737
<INCOME-PRETAX> 655,286
<INCOME-TAX> 265,493
<INCOME-CONTINUING> 389,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 389,793
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
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