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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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
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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: $15,880,672
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 June 30, 2000: $5,271,027
As of June 30, 2000, 3,285,865 shares of common stock, no par value, were
outstanding.
Documents incorporated by reference: NONE.
Exhibit Index is located on pages 45 to 47.
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, dressings, specialty sugars and
frozen beverage products. The Company sells its products throughout the United
States and in over 16 foreign countries, including Australia, Canada, China,
England, Iceland, Ireland, Israel, Japan, Malaysia, Mexico, New Zealand, Norway
and Turkey.
Since its incorporation in 1988, the Company has grown from providing a single
product line and having two employees, to being a major multi-national
manufacturer and supplier of flavoring syrups for the specialty coffee industry
with 78 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, Borders, Inc.,
Caribou Coffee Company, 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, Caribou Coffee Company and Advantica
Restaurant Group, Inc. 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 originally consisted 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 and again on September 1, 1999, 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 PALM BAY CLUB(TM)
product name.
On August 17, 1999, the Company established 19035 Yukon Inc., a wholly owned
Canadian subsidiary, for the purpose of acquiring Oscar Skollsberg's Food
Technique Limited ("Oscars"), a Canadian corporation located in British
Columbia. Oscars is reportedly the largest manufacturer of flavoring syrups for
the specialty coffee industry in Canada. On October 1, 1999, using capital
contributed by the Company and bank borrowings, 19035 Yukon Inc. acquired
Oscars. With the acquisition, the Company became a multi-national manufacturer.
On November 8, 1999, Oscars was amalgamated with 19035 Yukon Inc, ultimately
completing the acquisition process. Upon amalgamation, the surviving corporation
assumed the Oscars 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 five 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
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the food service industries. The OSCAR's(R) brand product line consists of 40
premium flavors and nine sugar free flavors in three sizes for distribution
through food brokers to the specialty coffee industry. The DiNATURA(TM) premium
natural flavored brand consists of 27 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 of syrups has been discontinued and the SAN MARINO
FLAVORED SYRUPS brands have been converted to a private label brand 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.
The frozen beverage products are used in granita machines and blenders to create
frozen drinks. The PALM BAY CLUB(TM) product line currently consists of Jammin'
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 PALM BAY CLUB(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, and Cherry Cod Liver Oil for
GNC(R) (General Nutrition Center). Both of these 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.
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STATUS OF NEW PRODUCTS
The Company introduced the PALM BAY CLUB(TM) product line, in both a branded and
private label form, 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 realized first
year sales of this product line of over $884,000 and anticipates additional
marketing expenditures in advertising, product literature, promotion material
and trade shows to further stimulate growth.
In February 2000, the Company, through its Oscars subsidiary, introduced three
new liquid concentrate products. The products are Chai, Iced Cappuccino, and
Iced Mocha. These products are aimed to provide the specialty coffee retailers
alternative products for sale to their customers. As with most product
introductions, the Company anticipates additional marketing expenditures.
PATENTS, TRADEMARKS AND LICENSES
The Company has obtained federal trademark protection for its DOLCE(R),
FLAVOR-MATE(R), SENZA RIVALE(R) and OSCAR's(R) products. The Company has also
obtained federal trademark protection for SELECT ORIGINS(R), THE COOKING
EXPERIENCE(R), SOPHISTICATED NIBBLES(R), STEARNS & LEHMAN(R), and LIMITED
HARVEST(R). The Company is in the process of obtaining federal trademark
protection for its DiNATURA(TM) and the PALM BAY CLUB(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. The Company also has distributors in Australia, Canada, England,
Israel, Japan, Mexico, New Zealand , and 11 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, payment terms of net 30 days with approved
credit and freight terms of F.O.B. Mansfield, Ohio or F.O.B. Kent, Washington.
Any modification of price, payment terms or freight billing from the price list
is made verbally between the distributor and the Company.
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The Company utilizes several types of distributors in the United States, 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's Canadian operation (Oscars) utilizes a brokerage system to market
its products. In this brokerage system, a broker handles several functions
including in-store demonstrations, maintaining shelves and customer support
along with soliciting new business. Unlike the distributor system, a broker
normally does not maintain any inventory of product. Consequently, sales are
either direct to end customers or to a distributor that the broker employs.
Oscars has written agreements with its brokers. Oscars periodically publishes
product price lists for use by its brokers and end customers. The price list
indicates the product price and payment terms, of net 30 days with approved
credit, and may either be based on freight terms of F.O.B. Destination or F.O.B.
Delta, British Columbia, Canada. Sales shipped to the United States are in U.S.
dollars where all Canadian sales are in Canadian dollars.
Both the Company's United States and Canadian operations have direct marketing
and distribution arrangements with its private label customers. The Company does
not utilize any other distribution network to service those customers.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's principal products consist primarily of liquid sucrose, dry sugar
or fructose, along with flavors, preservatives, 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, dry sugar and
fructose from The Amalgamated Sugar Company, Rogers Sugar Ltd. and Total Foods
Corp., respectively. Liquid sucrose, dry sugar and fructose are readily
available from several large refiners. Flavors are currently obtained from a
large number of specialty flavor companies or manufactured at one of the
Company's facilities. Each flavor that is purchased, is obtained 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. 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, containers and
preservatives used by the Company are readily available from a number of
sources.
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COMPETITION
The specialty food products market is highly competitive and competition is
likely to increase over time. 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 were introduced into the market 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 and in Canada, 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.
DEPENDENCE ON MAJOR CUSTOMERS
For the fiscal years ended April 30, 2000 and 1999, Starbucks represented 49%
and 43% of the Company's total sales, respectively. In addition, for the fiscal
years ended April 30, 2000 and 1999, Starbucks represented 83% and 74% of the
sales from the Company's Kent, Washington facility, respectively. The Company's
eight major customers, including Starbucks, represented approximately 70% and
71% of the Company's total sales, respectively, for the fiscal years ended April
30, 2000 and 1999. However, other than Starbucks, no other customer exceeded 8%
of the Company's total sales in fiscal year 2000 or 1999.
If the Company lost the Starbucks' business, the current estimated reduction in
net income before taxes would be significant. 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 move its West Coast manufacturing into its Canadian facility. The
potential impact of this closure would be minimal since approximately 6% of the
Company's non-Starbucks business is serviced from this facility.
The Company has a written supply agreement through August 31, 2001 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
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are defined within the agreement, along with a mechanism for price increases
associated with increased production costs. 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 June 30, 2000, the Company employed 78 people, all of whom are full-time
employees and are not unionized. 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, 2000, 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 for its United States
operations 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.
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,
is subject to the regulations set forth in Section 403 of the Food, Drug and
Cosmetic Act which specifically establishes the Food and Drug Administration
("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.
In Canada, the flavoring industry and the Company are subject to the Canadian
Food Inspection Agency, which is responsible for the administration and
enforcement of the Food and Drug Act as well as the Consumer Packaging and
Labeling Act as defined in Section 2 of the Food and Drug
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Regulations. The Company is required to comply with these regulations and is
subject to periodic inspections by the Agency. In addition, at the provincial
and municipal level, the Company is subject to inspections and the regulations
of the Public Health Protection Branch of the Ministry of Health.
The Company believes it is in compliance with applicable government regulations,
including environmental regulations, 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 50,000 square foot facility,
located at 30 Paragon Parkway in Mansfield, Ohio. This facility 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 $608,991 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 insurance.
CANADIAN MANUFACTURING, OFFICE AND WAREHOUSE FACILITY
In January 2000, the Company moved Oscars to a 18,625 square foot office,
manufacturing and warehousing facility in Delta, British Columbia, Canada
outside of Vancouver. This facility is comprised of 8,030 square feet of
warehouse space, 7,970 square feet of manufacturing space and 2,625 square feet
of office space. The lease on this facility is for seven years starting December
1, 1999. The base rent averages $9,700 CDN per month for the five-year period.
In addition to base rent, the Company is responsible for real estate taxes,
insurance and operating fees.
EQUIPMENT AND ADEQUACY OF FACILITIES
The Company owns substantially all of the equipment at its executive offices and
manufacturing and warehouse facilities. This includes eight automated production
lines. Five of these lines are located in Mansfield, Ohio, two lines are located
at the Kent, Washington facility and one line is located at
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the Delta, British Columbia facility. All the facilities have space for
additional automated production lines.
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 $608,991, as of April 30, 2000, 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 September 28, 1999, the Company, via its Canadian subsidiary, borrowed
$800,000 on a note payable from First Knox payable in one principal payment due
on October 1, 2004, plus interest at a rate of prime adjusted not more than once
per year. The interest rate on this note as of April 30, 2000 was 8.25%. The
balance on this note as of April 30, 2000 was $733,335.
Pursuant to the terms of both notes, all tangible property must be fully
insured. The financial covenants and ratios imposed by First Knox with respect
to both 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.
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
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commencing July 1, 1999. Interest on the note is payable monthly from December
4, 1997 at a rate of 8.25%. As of April 30, 2000, the balance on this note was
$48,433.
The Company's Canadian subsidiary has a demand note payable with Canadian
Imperial Bank of Commerce ("CIBC"). This note is collateralized by the accounts
receivable, inventory, and equipment of Oscars and a Standby Letter of Credit
issued against the Company's $400,000 Line of Credit with First Knox. This note
is payable in monthly installments of $2,750 CDN including interest at a rate of
the Canadian prime plus 0.25%. As of April 30, 2000, the interest rate was 7%
and the balance of this note was $57,643 US. This note requires Oscars to
maintain a ratio of current assets to current liabilities of not less than 1:1,
a minimum shareholders' equity of not less than $300,000 CDN, and places limits
on capital expenditures, dividends and withdrawals without prior consent of
CIBC.
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 effect 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.
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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 June 30, 2000, 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):
Quarter Ended April 30, 2000 High $3.250 Low $2.063
Quarter Ended January 31, 2000 High $2.375 Low $1.25
Quarter Ended October 31, 1999 High $2.344 Low $1.25
Quarter Ended July 31, 1999 High $3.00 Low $1.313
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
11
<PAGE> 14
HOLDERS
At June 30, 2000, the approximate number of holders of record of shares of
Common Stock was 758.
DIVIDENDS
The Company has not paid any cash dividends during the two fiscal years ended
April 30, 2000 and 1999 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 possible construction process risks, availability
of financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
PLAN OF OPERATION
The sales of flavored syrup to the specialty coffee industry will continue to be
the primary focus of the Company's business plans for the fiscal year ending
April 30, 2001. This focus includes a significant push into the international
markets and greatly enhancing the Company's marketing channels. The Company also
plans to continue its efforts to increase product diversity. This includes
further development of the specialty frozen beverage line along with developing
other new product lines. Coinciding with the plans for increased diversity and
strengthened syrup sales, the Company will continue its search for strategic
acquisitions to enhance market position and provide for revenue growth. Finally,
the Company is dedicated to constantly increasing manufacturing efficiencies.
The Company's plans to intensify its international efforts are in response to
the rapid expansion of various United States based specialty coffee retailers
into the international market place and the rapid growth of United States style
specialty coffee shops in various countries. The Company feels that with the
emergence of its in-house product development team, the Company can tailor its
products and packaging to meet the specific requirements of an international
region or a specific country. The Company feels that it has a competitive
advantage in the international market place due to its experience in producing
and delivering a broad range of products to its private label customers. For the
year ending April 30, 2001, the Company plans to increase its international
trade show presence, improve its international distribution channels, and
increase the frequency and length of its international sales excursions.
12
<PAGE> 15
The Company also plans a major initiative to improve its marketing channels on
all fronts. Recently, the Company hired several experienced marketing
professionals including an individual with extensive specialty coffee industry
experience. The team that the Company is assembling will enable the Company to
invigorate its marketing efforts. The first results of these efforts was the
recently introduced trade show program which featured innovative new product
demonstrations tailored to a new trade show booth. The marketing team is also
working on new methods to introduce its products to new customers and ways to
disseminate Company and product information.
In addition, the Company plans to continue its efforts to diversify the 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 Company's experienced research and
development team, utilizing a modern research lab at its Mansfield facility,
continues to work on a broad number of new product initiatives. These
initiatives range from specific private label customer requests to enhancements
to the frozen beverage line of products, which began shipping in late April
1999. The efforts on the frozen beverage product line are believed to be
especially beneficial as the Company understands that this market will yield
rapid growth, with the total market size several times larger than the specialty
coffee market. The Company's first year results for this product line were
promising. During the second year, with the experience and knowledge obtained,
the Company plans to fine tune its marketing effort and expand the base of
products offered. The plans call for the Company's expanded sales team to
continue to aggressively pursue the frozen beverage market in both domestic and
international markets, in conjunction with increased advertising and marketing
expenditures.
The Company has made the goal of increasing customer satisfaction along with
lowering production costs a constant element of it operational plans. To
increase customer satisfaction, the Company plans to continue to develop
additional customer support programs in order to meet marketplace demands. The
current emphasis of these programs are to provide in-house services that
dramatically reduce product development time on customer requests. In its
efforts to lower production costs, the Company, in late April 1999, acquired new
production equipment for its Mansfield, Ohio facility. This production equipment
greatly enhanced production efficiency. As a result of the experience at the
Mansfield facility, along with increased production demands at the Kent,
Washington facility, the Company plans on adding similar equipment at the Kent
facility. This equipment, which has proven to provide an immediate cost benefit,
provides for a phased growth path to much higher production speeds. The Company,
besides adding the first phase of this equipment in Kent, also plans to initiate
the next phase of this growth path at the Mansfield facility.
The Company's plans also include the continued search for acquisition
candidates. The appropriate candidates will either complement the Company's
marketing efforts or enhance market position in addition to providing revenue
growth. Specifically, an acquisition could provide new distribution channels,
new technological capability, add volume to the Company's existing product lines
or compliment the Company's existing product lines.
13
<PAGE> 16
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,
2000 1999 1998 1997 1996
BALANCE SHEET:
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $ 5,379,080 $ 3,457,644 $ 3,556,309 $ 2,956,601 $ 1,889,929
TOTAL ASSETS $10,608,902 $ 7,438,221 $ 7,514,201 $ 5,780,362 $ 3,973,037
CURRENT LIABILITIES $ 1,975,932 $ 865,692 $ 1,156,514 $ 1,050,774 $ 1,417,743
LONG TERM DEBT,
NET OF CURRENT PORTION $ 1,555,040 $ 664,203 $ 802,353 $ 2,256 $ 144,500
TOTAL LIABILITIES $ 3,724,257 $ 1,633,032 $ 2,010,146 $ 1,053,030 $ 1,562,243
SHAREHOLDERS' EQUITY $ 6,884,645 $ 5,805,189 $ 5,504,055 $ 4,727,332 $ 2,410,794
STATEMENTS OF OPERATIONS:
TOTAL SALES $15,880,672 $10,206,832 $ 9,242,530 $ 7,381,105 $ 5,514,753
COST OF GOODS SOLD $10,853,682 $ 7,630,669 $ 6,613,046 $ 5,432,588 $ 4,343,803
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES $ 3,180,460 $ 2,108,038 $ 1,758,667 $ 1,588,865 $ 1,774,118
NET INCOME (LOSS) $ 1,081,238 $ 261,534 $ 659,716 $ 402,272 $ (732,915)
BASIC AND DILUTED
EARNINGS (LOSS)
PER SHARE $ 0.33 $ 0.08 $ 0.20 $ 0.13 $ (0.26)
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4(TH) QUARTER 3(RD) QUARTER 2(ND) QUARTER 1(ST) QUARTER
YEAR ENDED APRIL 30, 2000
BALANCE SHEET:
<S> <C> <C> <C> <C>
CURRENT ASSETS $ 5,379,080 $ 4,662,497 $ 4,942,970 $ 3,662,587
TOTAL ASSETS $10,608,902 $ 9,943,266 $10,072,211 $ 7,598,596
CURRENT LIABILITIES $ 1,975,932 $ 1,694,917 $ 1,892,134 $ 939,751
LONG TERM DEBT, NET OF CURRENT
PORTION $ 1,555,040 $ 1,634,669 $ 1,715,048 $ 621,832
TOTAL LIABILITIES $ 3,724,257 $ 3,519,754 $ 3,753,682 $ 1,681,052
SHAREHOLDERS' EQUITY $ 6,884,645 $ 6,423,512 $ 6,318,529 $ 5,917,544
STATEMENTS OF OPERATIONS:
TOTAL SALES $ 4,568,561 $ 3,961,107 $ 4,278,000 $ 3,073,004
COST OF GOODS SOLD $ 2,882,054 $ 2,766,903 $ 2,978,782 $ 2,225,943
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 910,992 $ 961,439 $ 656,242 $ 651,787
NET INCOME $ 451,123 $ 116,830 $ 400,930 $ 112,355
BASIC AND DILUTED EARNINGS
PER SHARE $ 0.14 $ 0.04 $ 0.12 $ 0.03
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4(TH) QUARTER 3(RD) QUARTER 2(ND) QUARTER 1(ST) 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
PORTION $ 664,203 $ 701,330 $ 734,851 $ 766,681
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
ADMINISTRATIVE EXPENSES $ 552,295 $ 468,103 $ 561,529 $ 526,111
NET INCOME (LOSS) $ (128,259) $ 127,882 $ 261,719 $ 192
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ (0.04) $ 0.04 $ 0.08 $ 0.00
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 4(TH) QUARTER 3(RD) QUARTER 2(ND) QUARTER 1(ST) 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
PORTION $ 802,353 $ 840,524 $ 694,642 $ 110,286
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
ADMINISTRATIVE EXPENSES $ 479,484 $ 411,369 $ 439,664 $ 428,150
NET INCOME $ 246,908 $ 147,935 $ 226,758 $ 38,115
BASIC AND DILUTED EARNINGS
PER SHARE $ 0.08 $ 0.05 $ 0.07 $ 0.01
</TABLE>
15
<PAGE> 18
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
Operations for the year ended April 30, 2000 resulted in record sales and net
income for a fiscal year. These record amounts were a result of a strong
increase in the sales of flavoring syrups to the specialty coffee industry
including a significant increase in sales of private label flavoring syrup to
the Company's major customer. Additionally, the year was highlighted by the
acquisition of Oscars and the introduction of the specialty frozen beverage
products.
Net sales for the year ended April 30, 2000 and 1999 were $15,880,672 and
$10,206,832, respectively, which represents a 55.6% increase. For the year ended
April 30, 2000, private label syrup sales increased by 51.1%, the Company's
branded syrup products sales increased by 59.1%, while the sales of other
Company products increased by 93.5%, all as compared to the year ended April 30,
1999. Private label syrup, Company branded syrup, and other Company products
represented 71.3%, 19.2% and 9.5% of gross sales, respectively, for the year
ended April 30, 2000. The Company's private label sales increased primarily as a
result of a 78.4% increase in sales to the Company's largest private label
customer. In addition, the Company's third, fourth and fifth largest private
label customers increased sales by 36.9%, 26.9% and 34.8%, respectively. The
Company's branded syrup products' sales increased primarily as a result of a
23.3% increase in the sales of the DOLCE(R) brand syrups, the closeout sale of
the GODIVA(R) brand syrups and $930,783 in additional sales of OSCAR'S(R) brand
syrups. In addition, the DiNATURA(C) brand, for which shipments began in October
1998, contributed to the sales increase. The sales of other Company products
increased due to the successful introduction of the specialty frozen beverage
products. Sales of the specialty frozen beverage products, along with small
increases in sales of Sugars & Toppings, Flavoring Extracts, and My Hero(TM) Sub
Dressings, were offset by decreases in the remaining product lines in this
group.
During the year ended April 30, 2000, the Company experienced lower cost of
goods sold, as a percentage of net sales, compared to the previous year. The
costs associated with improved manufacturing efficiency were partially offset by
higher freight-out and building lease costs. Consequently, cost of sales, as a
percentage of net sales, decreased to 68.3% for the year ended April 30, 2000
compared to 74.8% for last year. Overall, cost of sales increased by $3,223,013,
including $519,260 associated with Oscars operations, for the year ended April
30, 2000 compared to the year ended April 30, 1999. This overall increase, other
than the Oscars portion and higher costs previously mentioned, was generally a
result of higher sales volume.
Total selling, general and administrative expenses increased by 50.9% or
$1,072,422 for the year ended April 30, 2000 compared to the year ended April
30, 1999. This increase included $402,315 in additional expenses associated from
Oscars operations and a $182,925 write-off of an accounts receivable as a result
of Ameriserve Food Distribution Inc. filing a Chapter 11 bankruptcy petition on
January 31, 2000. Sales of the Company's products, since that date, were not
affected by this bankruptcy, as the private label customer that received Company
products from a subsidiary of the bankrupt redirected distribution of the
Company's products to that customer through other distributors. This write-off
represented 1.15% of total year net sales while total write-offs represented
1.25% of total net sales. Write-offs of accounts receivable for the fiscal year
ended April 30, 1999 were 0.5% of net sales. The overall increase, other than
that attributed to Oscars and write-
16
<PAGE> 19
offs, was $487,182 or 23.1%. This increase was a result of increases in trade
shows, travel, product samples, promotional material, postage, telephone, legal
services, insurance, depreciation of office equipment, amortization of goodwill
and other intangibles, and increases in the number of employees and employee
wages. These increases were offset by decreases in advertising, public
relations, and sales promotional allowances. Total selling, general and
administrative expenses, as a percentage of net sales, decreased to 20.0%
compared to 20.7% for the years ended April 30, 2000 and 1999, respectively.
Interest expense for the year ended April 30, 2000 increased by $39,132 compared
to the year ended April 30, 1999. The increase reflects an increase in the
average principal amount of outstanding notes payable primarily associated with
the acquisition of Oscars.
The Company reported interest income of $69,948 for the current year compared to
$27,392 for the same period last year. The increase in interest income is
associated with higher levels of invested cash for the current year and a high
rate of return on an insurance policy.
The Company also reported total net other expense of $9,020 for the year ended
April 30, 2000 compared to total net other income of $47,798 for the year ended
April 30, 1999. The primary reasons for this $56,818 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, each received
during the year ended April 30, 1999.
Income before income tax expense increased to $1,788,106 for the year ended
April 30, 2000 from $463,095 for the year ended April 30, 1999.
The Company recorded income tax expense of $706,868 for the year ended April 30,
2000. For the year ended April 30, 1999, the Company recorded income tax expense
of $201,561.
As a result of the foregoing, the Company reported a record net income of
$1,081,238, or $0.33 per basic and diluted weighted average number of shares of
Common Stock outstanding, for the year ended April 30, 2000 compared to net
income of $261,534 or $0.08 per basic weighted average number of shares of
Common Stock outstanding for the year ended April 30, 1999. The basic and
diluted weighted average number of shares of Common Stock outstanding increased
to 3,285,865 for the current year compared to 3,285,684 for the prior year. The
increase reflects Common Stock issued upon the exercise of warrants during the
fiscal year ended April 30, 1999.
Net income for the 4th quarter of the fiscal year ended April 30, 2000 was
affected by an increase of approximately $109,000 because of year-end inventory
adjusting entries. The amount of the inventory adjustments, pre-tax, was
approximately $181,000. 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, 2000 and to record the year-end physical
inventory adjustment. The Company, for the year ended April 30, 2000, used a
standard cost 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.
17
<PAGE> 20
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 Company's private label syrup
sales increased as a 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 was 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 reflected 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. The costs associated with improved manufacturing
efficiency were 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 PALM BAY CLUB(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 fiscal year ended April 30, 1999 compared to the previous fiscal year. In
addition, the introduction of both the DiNATURA(TM) and PALM BAY CLUB(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.
18
<PAGE> 21
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 and diluted weighted average number of shares of Common Stock
outstanding, for the fiscal year ended April 30, 1999 compared to net income of
$659,167, or $0.20 per basic and diluted 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, for the year ended April 30,1999, used 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.
LIQUIDITY AND CAPITAL RESOURCES
The working capital and working capital ratio as of April 30, 2000 and April 30,
1999 were $3,403,148 and 2.72 to 1 and $2,591,952 and 3.99 to 1, respectively.
The increase in working capital for April 30, 2000 compared to April 30, 1999
was primarily a result of a $727,022 increase in the Company's cash and cash
equivalents, a $85,043 decrease in the Company's prepaid expenses, a $289,957
increase in accounts payable, and a $641,374 increase in the Company's accrued
taxes and expenses, offset by a $171,211 increase in the Company's inventory,
and a $1,077,505 increase in the Company's accounts receivable. The decrease in
prepaid expenses and increase in accrued taxes and expenses were a result of
estimated income tax payables. The increase in inventory was
19
<PAGE> 22
a result of the Company's acquisition of Oscars. The increases in accounts
receivable and accounts payable were a result of stronger sales in April 2000
compared to April 1999 and the acquisition of Oscars.
The Company's operating activities, for the year ended April 30, 2000, provided
net cash of $1,547,967. The Company used $420,223 to acquire equipment and other
assets and received $499 from the sale of fixed assets. The Company used
$921,232 to acquire Oscars. It also increased its investment in life insurance
policies by $44,458. The Company used $273,105 to make principal payments on a
notes payable and on other long term liabilities, while receiving $800,000 from
a note payable to First Knox and $40,217 from additional borrowings under a line
of credit with CIBC. Consequently, during this year, cash and cash equivalents
increased by $727,022. The Company expects future operating activities to
continue to provide cash for investing and financing activities. However, this
cash may be insufficient to meet the Company's possible investing and financing
activities.
The Company 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.
On September 28, 1999, the Company renewed its $400,000 line of credit with
First Knox. The First Knox line of credit expires on September 28, 2000. As of
June and April 30, 2000, there was no outstanding balance under this agreement.
Under a Standby Letter of Credit issued to CIBC, $200,000 of the First Knox line
of credit was pledged as collateral for a credit agreement with CIBC that
includes a demand line of credit of $121,737. As of April 30, 2000, there was a
balance of $102,713 under the CIBC line of credit.
The Company, during the fiscal year ending April 30, 2000, experienced some
minor inflationary increases in the cost of various raw and packaging materials.
During the same period, the Company also received reductions in the cost of
other raw materials. Subsequently, the Company did not change the selling price
of its products and absorbed any net changes in the cost.
[The remainder of this page intentionally left blank.]
20
<PAGE> 23
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
1. Consolidated Financial Statements of Stearns & Lehman, Inc.
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants (dated June 23, 2000) ............................................... 22
Consolidated Balance Sheets as of April 30, 2000 and 1999 ............................................. 23
Consolidated Statements of Income for the years ended April 30, 2000 and 1999 ......................... 25
Consolidated Statements of Shareholders' Equity for the years
ended April 30, 2000 and 1999 .................................................................... 26
Consolidated Statements of Cash Flows for the years ended April 30, 2000 and 1999 ..................... 27
Notes to Consolidated Financial Statements ............................................................ 29
</TABLE>
21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Stearns & Lehman, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Stearns & Lehman,
Inc. and its subsidiary at April 30, 2000 and 1999, and the results of their
operations and their cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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, 2000
22
<PAGE> 25
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,088,890 $ 361,868
Trade accounts receivable, net of allowance for doubtful
accounts of $70,000 in 2000 and $40,000 in 1999 2,122,020 1,044,515
Inventory 1,986,564 1,815,353
Prepaid expenses and other 109,747 194,790
Deferred income taxes 71,859 41,118
----------------- -----------------
Total current assets 5,379,080 3,457,644
----------------- -----------------
Property and equipment:
Land 73,928 73,928
Buildings 1,829,823 1,829,823
Building improvements 93,934 91,809
Leasehold improvements 178,540 9,433
Machinery and equipment 2,181,742 1,991,730
Office equipment 476,151 388,754
Tooling 135,425 131,089
Vehicles 40,401 40,401
----------------- -----------------
5,009,944 4,556,967
Less accumulated depreciation 1,365,811 1,169,800
----------------- -----------------
Net property and equipment 3,644,133 3,387,167
----------------- -----------------
Goodwill and other intangibles, net 1,461,660 523,826
Cash surrender value of life insurance 95,547 51,089
Trademarks and patents, net 12,102 3,167
Other assets 16,380 15,328
----------------- -----------------
Total assets $ 10,608,902 $ 7,438,221
================= =================
</TABLE>
CONTINUED
23
<PAGE> 26
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2000 AND 1999
-------------------------------------------------------------------------------------------------------------------
2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 829,625 $ 539,668
Accrued taxes 667,758 80,516
Accrued expenses 161,194 107,062
Lines of credit 102,713 -
Current portion of notes payable 129,757 138,446
Current portion of other long term liabilities 84,885 -
----------------- ----------------
Total current liabilities 1,975,932 865,692
----------------- ----------------
Long-term liabilities:
Notes payable, net of current portion 1,318,645 664,203
Other long term liabilities, net of current portion 236,395 -
Deferred income taxes 193,285 103,137
----------------- ----------------
Total long-term liabilities 1,748,325 767,340
----------------- ----------------
Total liabilities 3,724,257 1,633,032
----------------- ----------------
Commitments and contingencies
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized,
3,289,165 issued and 3,285,865 outstanding
as of April 30, 2000 and 1999, respectively 3,629 3,629
Additional paid-in capital 5,248,461 5,248,461
Retained earnings 1,647,537 566,299
Accumulated other comprehensive loss (1,782) -
----------------- ----------------
6,897,845 5,818,389
Less treasury stock at cost; 3,300 shares 13,200 13,200
----------------- ----------------
Total shareholders' equity 6,884,645 5,805,189
----------------- ----------------
Total liabilities and shareholders' equity $ 10,608,902 $ 7,438,221
================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
24
<PAGE> 27
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
----------------------------------------------------------------------------------------------------------------------
2000 1999
<S> <C> <C>
Sales $ 15,880,672 $ 10,206,832
Cost of sales 10,853,682 7,630,669
----------------- -----------------
Gross profit 5,026,990 2,576,163
Selling, general and administrative expenses 3,180,460 2,108,038
----------------- -----------------
Income from operations 1,846,530 468,125
----------------- -----------------
Other income (expense), net:
Interest expense (119,352) (80,220)
Interest income 69,948 27,392
Other, net (9,020) 47,798
----------------- -----------------
Income before income tax expense 1,788,106 463,095
----------------- -----------------
Income tax expense (benefit):
Current 709,288 152,356
Deferred (2,420) 49,205
----------------- -----------------
Total income tax expense 706,868 201,561
----------------- -----------------
Net income $ 1,081,238 $ 261,534
================= =================
Earnings per share - Basic $ .33 $ .08
================= =================
Earnings per share - Diluted $ .33 $ .08
================= =================
Basic weighted-average common shares outstanding 3,285,865 3,285,684
================= =================
Diluted weighted-average common shares outstanding 3,285,865 3,287,964
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
25
<PAGE> 28
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
----------------------------------------------------------------------------------------------------------------------------------
NUMBER ACCUMULATED
OF ADDITIONAL OTHER TOTAL SHARE-
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY HOLDERS'
SHARES SHARES CAPITAL EARNINGS LOSS SHARES EQUITY
---------- ----------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 3,272,665 $ 3,614 $ 5,208,876 $ 304,765 $ - $ (13,200) $ 5,504,055
Net income - - 261,534 - - 261,534
Exercise of warrants 13,200 15 39,585 - - - 39,600
---------- ----------- ------------- ------------- ------------- ----------- -------------
Balance at April 30, 1999 3,285,865 3,629 5,248,461 566,299 - (13,200) 5,805,189
Net income - - 1,081,238 - - 1,081,238
Cumulative translation
Adjustment - - - (1,782) - (1,782)
Comprehensive income 1,079,456
---------- ----------- ------------- ------------- ------------- ----------- -------------
Balances at April 30, 2000 3,285,865 $ 3,629 $ 5,248,461 $ 1,647,537 $ (1,782) $ (13,200) $ 6,884,645
========== =========== ============= ============= ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
26
<PAGE> 29
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
----------------------------------------------------------------------------------------------------------------------
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,081,238 $ 261,534
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 224,166 31,169
Depreciation and amortization 509,172 381,401
Loss on the disposal of fixed assets 4,689 12,214
Deferred income taxes (2,420) 49,205
Changes in assets and liabilities:
Trade accounts receivable (1,174,130) 231,549
Inventory (48,695) 52,989
Prepaid expenses and other 93,175 (124,860)
Accounts payable 234,784 (228,425)
Accrued taxes 586,559 (49,919)
Accrued expenses 39,429 (2,979)
----------------- -----------------
Net cash provided by operating activities 1,547,967 613,878
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (412,840) (407,787)
Proceeds from sale of property and equipment 499 500
Cash surrender value of life insurance, net (44,458) (9,013)
Acquisition of business (921,232) -
Purchase of other assets (7,383) -
----------------- -----------------
Net cash used in investing activities (1,385,414) (416,300)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable 800,000 -
Net borrowings under line of credit 40,217 -
Principal payments on long-term debt and other liabilities (273,105) (147,649)
Net proceeds from issuance of common shares - 39,600
----------------- -----------------
Net cash provided by (used in) by financing activities 567,112 (108,049)
----------------- -----------------
Effect of exchange rate changes on cash (2,643) -
----------------- -----------------
Net increase in cash and cash equivalents 727,022 89,529
Cash and cash equivalents, beginning of year 361,868 272,339
----------------- -----------------
Cash and cash equivalents, end of year $ 1,088,890 $ 361,868
================= =================
CONTINUED
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
----------------------------------------------------------------------------------------------------------------------
2000 1999
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 119,007 $ 80,220
================= =================
Income taxes $ 51,113 $ 318,288
================= =================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Other long term liability associated with subsidiary acquired $ 370,951
=================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
28
<PAGE> 31
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business. Steams & Lehman, Inc. (the Company) and its wholly
owned Canadian subsidiary, Oscar Skollsberg's Food Technique Ltd.
("Oscars") are 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 and Canada.
Consolidation. Consolidated statements include the accounts of the
Company and its wholly-owned subsidiary, Oscars. All significant
intercompany accounts have been eliminated in the preparation of the
consolidated financial statements. The accounts of Oscars have been
included since October 1, 1999, the date of acquisition.
Inventories. Inventory is valued at the lower of most recent cost 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, in 2000, used a standard cost method
to estimate cost of sales during interim periods, whereas in 1999, the
Company used a gross margin method. 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 decreased cost of sales by $180,738
in 2000 and increased cost of sales by $159,957 in 1999.
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 $356,605 in 2000 and
$308,119 in 1999. 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 is computed in accordance with
SFAS No. 128, "Earnings Per Share". Basic earnings per share is
computed based upon the weighted average number of outstanding common
shares. Diluted earnings per share include the weighted average effect
of dilutive warrants outstanding.
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2000 1999
-------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Common shares issued 3,289,165 3,288,984
Treasury shares (3,300) (3,300)
--------------- ---------------
Basic shares 3,285,865 3,285,684
Dilutive effect of warrants 0 2,280
--------------- ---------------
Diluted shares 3,285,865 3,287,964
=============== ===============
</TABLE>
29
<PAGE> 32
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
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.
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.
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.
Goodwill and other intangibles. Goodwill represents the excess of
purchase price over fair value of net tangible assets acquired (see
Notes 6) and is amortized on a straight-line basis over 12 to 15 years.
Other intangibles consist of customer lists and are amortized over 15
years. Amortization expense was $145,399 in 2000 and $59,594 in 1999,
and accumulated amortization was $409,653 and $264,254 at April 30,
2000 and 1999, 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's United States operations transact all
foreign sales to distributors and customers in United States currency.
Oscars transacts foreign sales to distributors and customers in either
Canadian or 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 70% in 2000 and 71% in 1999. 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.
30
<PAGE> 33
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
Foreign currency translation. For operations outside the United States
that prepare financial statements in currencies other than the U.S.
dollar, results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are
translated at end-of-period exchange rates. Translation adjustments are
included as a separate component of accumulated other comprehensive
income (loss) in shareholders' equity.
Recent accounting pronouncements. In June 1997, the FASB issued SFAS
No.130, Reporting Comprehensive Income. SFAS 130 is effective for
financial statements issued for periods beginning after December 31,
1997, with earlier application encouraged. The Company has adopted SFAS
130 in fiscal year 2000 and has presented comprehensive income for all
periods presented in the Consolidated Statements of Shareholders'
Equity.
2. INVENTORY
The major components of inventory at April 30, 2000 and 1999 were as
follows:
2000 1999
Raw materials $ 965,919 $ 883,676
Work in process 13,347 7,704
Finished goods 1,007,298 923,973
---------------- ----------------
Total inventory $ 1,986,564 $ 1,815,353
================ ================
3. LEASE COMMITMENTS
The Company leases office, warehouse and manufacturing facilities and certain
office and production equipment under noncancelable operating lease agreements
expiring through fiscal 2007. The building lease provides for future minimum
rent escalations. Minimum rental commitments under noncancelable operating
leases at April 30, 2000 are as follows:
YEAR ENDING APRIL 30,
2001 $ 279,681
2002 280,992
2003 291,254
2004 291,580
2005 292,891
Thereafter 147,275
---------------
$ 1,583,673
===============
Total rent expense charged to operations for all operating leases was
$290,514 in 2000 and $128,770 in 1999.
31
<PAGE> 34
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------------------------------------------------
4. NOTES PAYABLE
Notes payable at April 30, 2000 and 1999 consisted of the following:
2000 1999
<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, 2000 and 1999), due on October 1, 2007. $ 608,991 $ 666,995
Note payable to a bank, collateralized by real estate, accounts receivable,
inventory, and equipment, payable on November 1, 2000 with monthly interest
payments at a rate of prime adjusted not more than once per year (interest
rate of 8.25% as of April 30, 2000). 733,335 0
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. 48,433 120,000
Note payable to a bank, collateralized by accounts receivable, inventory, and
equipment, payable in monthly installments of $2,750 CDN including interest
at a rate of prime plus 0.25%, (7% as of April 30, 2000) due on March 1, 2003. 57,643 0
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. 0 15,654
----------------- -- --------------
Total notes payable 1,448,402 802,649
Less current portion 129,757 138,446
----------------- -- --------------
$ 1,318,645 $ 664,203
================= =================
</TABLE>
32
<PAGE> 35
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
Future maturities of notes payable at April 30, 2000 are as follows:
YEAR ENDING APRIL 30,
-------------------------------
2001 $ 129,757
2002 87,903
2003 92,895
2004 79,573
2005 819,518
Thereafter 238,756
-----------------
$ 1,448,402
=================
5. LINES OF CREDIT
On December 2, 1996, the Company signed a Line of Credit Agreement with
a U.S. bank for $400,000 with interest at a rate of prime. This Line of
Credit Agreement was renewed on September 28, 1999 and expires on
September 28, 2000. 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, 2000, there
was no outstanding balance under this agreement. Under a Standby Letter
of Credit issued to a Canadian bank, $200,000 of this Line of Credit
was pledged as collateral for a Credit Agreement with a Canadian bank.
This Canadian agreement includes a Demand Line of Credit of $121,737
with interest at a rate of prime and contains covenants covering
Oscar's current ratio, minimum shareholders' equity, capital
expenditures and dividends. As of April 30, 2000, there was a balance
of $102,713 under this Canadian agreement.
6. BUSINESS COMBINATIONS
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. The Company settled escrow and
augmentation issues with a majority of the former Select shareholders
relating to the purchase price. However, as of April 30, 2000,
settlement has not been reached with three former shareholders. The
Company intends to settle with these remaining former shareholders of
Select for 420 shares, of which 417 shares were in escrow on April 30,
2000 and April 30, 1999, and 3 shares were contingently issuable upon
settlement. The settlement has been recorded in the financial
statements at April 30, 2000 and 1999 as an adjustment to the original
purchase price.
On October 1, 1999, the Company acquired Oscar Skollsberg's Food
Technique Limited ("Oscars"), a Canadian corporation located in
Richmond, British Columbia, for $862,983 in cash. The Company also
incurred $58,249 in direct acquisition expenses. The agreement to
purchase Oscars also includes cash compensation, payable to Jan
Skollsberg in Canadian dollars pursuant to a four-year non-compete
agreement. The present value in U.S. dollars of this non-compete
agreement as of October 1, 1999 was $370,951. This amount has been
recorded as other intangible assets and other
33
<PAGE> 36
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
long-term liabilities. The Company financed this transaction through
$800,000 in bank financing, with the remainder from cash flows from
operations.
For accounting purposes, the acquisition of Oscars has been recorded
using the purchase method of accounting. The Company's financial
statements include the results of Oscars on a consolidated basis from
the closing date of the acquisition. The purchase price has been
allocated to the assets and liabilities of Oscars at their estimated
fair value. The value of Oscars' customer list exceeds the amount of
goodwill recorded and will be amortized over fifteen years. The fair
values of assets and liabilities have been determined based on
management's estimates.
The allocation of the purchase price of Oscars is as follows:
Trade accounts receivable $ 127,541
Inventory 122,516
Prepaid expenses and other 8,131
Property and equipment 205,903
Trademarks 9,591
Goodwill and other intangible assets 712,283
Accounts payable (55,173)
Accrued expenses (15,385)
Deferred income taxes (62,491)
Bank debt (131,684)
------------------
$ 921,232
==================
7. COMMON STOCK TRANSACTIONS
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
On May 5, 1998, 10,256 warrants, with an exercise price of $3.00 per
common share, expired without being exercised.
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.
34
<PAGE> 37
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
On September 29, 1998, 17,000 employee stock options were granted with
an exercise price of $2.266 per share of common stock. On September 29,
1999, 25% of these options were 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.
During fiscal 1999, 13,200 shares of the Company's common stock were
issued at $3.00 per share upon exercise of warrants.
On March 14, 2000, 3,600 warrants, with an exercise price of $5.75 per
common share, expired without being exercised.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its option and warrant grants. 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. 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.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C> <C>
Net income Pro forma $ 1,071,246 $ 255,706
As reported 1,081,238 261,534
Diluted earnings per share Pro forma $ .33 $ .08
As reported .33 .08
</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: no dividend yield; expected volatility of
111%; risk-free interest rate of 4.59%; and expected life of 10.0 years
for warrants granted in 1999. There were no options grants in fiscal
year 2000.
35
<PAGE> 38
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
-------------------------------------------------------------------------------------------------------------------
A summary of the status of the Company's warrants as of April 30, 2000
and 1999, respectively, and changes during the years then ended is
presented below:
2000 1999
---------------------------- ----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS / OPTIONS SHARES PRICE SHARES PRICE
---------------------------- ---------------------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 96,996 $ 4.98 103,452 $ 4.74
Granted - - 17,000 $ 2.27
Forfeited (3,600) $ 5.75 (10,256) $ 3.00
Exercised - - (13,200) $ 3.00
Outstanding at end of year 93,396 $ 4.95 96,996 $ 4.98
Exercisable at year-end 79,996 $ 5.63 79,996 $ 5.63
Weighted-average fair value of
warrants / options granted during
the year utilizing Black-Scholes
options pricing model $ 2.35
</TABLE>
The following table summarizes information about warrants outstanding
at April 30, 2000:
<TABLE>
<CAPTION>
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AT APRIL 30, REMAINING AT APRIL 30,
EXERCISE PRICE 2000 LIFE 2000
------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$2.27 17,000 8.4 years 4,250
$3.00 10,000 5.0 years 10,000
$3.15 2,648 0.5 years 2,648
$5.50 18,798 6.4 years 18,798
$5.63 10,000 7.7 years 10,000
$5.75 34,950 1.5 years 34,950
---------------- ---------------- ----------------
96,996 5.6 years 79,996
================ ================ ================
</TABLE>
36
<PAGE> 39
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
9. COMMITMENTS
The Company has a written supply agreement through August 31, 2001 with
a customer. 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. Payment for
products are required to be made within 30 days upon receipt of
invoice. Both the Company and the customer can cancel this agreement
with 60 days written notice, with respect to price disagreements, and
the customer can cancel this agreement with 90 days written notice if
the Company does not match a lower price from a competitor.
10. RELATED-PARTY TRANSACTIONS
An entity owned by an employee/board member provided services to the
Company related to flight transportation up to and including August 3,
1999. Expenses incurred from this entity were approximately $18,714 in
2000 and $48,049 in 1999. No payables, related to these services, were
outstanding as of April 30, 2000 or 1999.
11. INCOME TAXES
The components of the net deferred tax liability at April 30, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 115,686 $ 112,779
Alternative minimum tax credit - 6,867
Other 19,796 7,773
Allowance for doubtful accounts 26,600 15,200
----------------- -- --------------
Gross deferred tax assets 162,082 142,619
Deferred tax liabilities:
Goodwill 49,363 -
Property and equipment 234,145 204,638
----------------- -- --------------
Net deferred tax liability $ (121,426) $ (62,019)
================= == ==============
</TABLE>
The Company had net operating loss carryforwards available of $298,531
and $331,701 at April 30, 2000 and 1999, respectively, from the
purchase of Select, of which $33,170 are available to deduct each year
through April 30, 2009. The Company also had $36,730 of net operating
loss carryforwards available at April 30, 2000 of which $6,543 will
expire on November 7, 2006 and $30,187 will expire on April 30, 2007.
The Company utilized approximately $33,170 of net operating
carryforwards in fiscal 2000.
37
<PAGE> 40
<TABLE>
<CAPTION>
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
-------------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate and the
effective income tax on pretax earnings follows:
2000 1999
<S> <C> <C>
Statutory income tax rate 34.0 % 34.0%
Local and state income tax,
net of federal income tax effect 2.3 2.1
Permanent differences 3.0 4.9
Adjustments to prior year tax
calculations .7
Other items, net .2 1.8
--------------- ----------------
39.5 % 43.5%
=============== ================
</TABLE>
12. 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.
13. 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 $31,283 in 2000 and $27,573 in
1999.
38
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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39
<PAGE> 42
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains the name, position, age and telephone number of
each director and executive officer of the Company as of June 30, 2000.
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 47 419/522-2722
Sally A. Stearns Executive Vice President, Secretary and Director 40 419/522-2722
John A. Chuprinko Chief Financial Officer 45 419/522-2722
Frank E. Duval Director 56 419/882-2314
Carter F. Randolph Director 44 513/891-4227
</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 Executive Vice President, Secretary and a Director of the
Company. Ms. Stearns is the wife of William C. Stearns
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
40
<PAGE> 43
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 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 Na-Churs Plant Food Company and 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 is also
Chairman and Chief Executive Officer of Planet Products and Apex Machine Design.
Planet Products is a manufacturing company focused on precision machining, food
processing automation and precision packaging. Apex Machine Design is an
engineering firm oriented on the design of factory automation machines and
lines. 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 46, has been employed by the Company since November 1993 and
currently is the Assistant Vice-President of Corporate Affairs. Ms. Thomas is
the Company's principal liaison with Starbucks and 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.
41
<PAGE> 44
JAMIE L. DAY
Mr. Day, age 30, is a graduate of The Ohio State University with a Bachelor of
Science Degree in Business Administration and has been employed by the Company
since January 1999. Mr Day currently is the National Sales Manager. Prior to
working for the Company, Mr. Day owned and operated Tropic Thirst, a frozen
beverage distribution company located in California.
JAMES E. POWERS
Mr. Powers, age 26, has been employed by the Company since May 1996. Mr. Powers
currently is the Director of Operations. Mr. Powers started with the Company as
its Maintenance Manager and was then promoted to Production Manager in 1998. He
assumed his current responsibility in June 1999. Prior to working for the
Company, Mr. Powers was a Maintenance Technician enrolled in a management
trainee program at Hedstrom Corporation located in Mansfield, Ohio.
FAMILY RELATIONSHIPS
Except for Mr. and Mrs. Stearns, there are no family relationships among the
directors and executive officers of the Company.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Not Applicable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Carter F. Randolph failed, on a timely basis, to file a Form 4 detailing the
transfer of Common Stock to his spouse.
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors, and persons 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.
[The remainder of this page intentionally left blank.]
42
<PAGE> 45
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, 2000 exceeded $100,000:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL FISCAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William C. Stearns, 2000 $ 125,000 $10,000 $ 123 (1)
President 1999 $ 109,635 $ 0 $ 123 (1)
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, 2000 through 1997 and 1996, the premium value of this benefit to
Mr. Stearns was $123 and $115, respectively.
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 and Carter F Randolph,
Ph.D. each received $4,000 for attending Board of Directors meetings for the
fiscal year ended April 30, 2000. 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
20, 2000 for services rendered in calendar year 1999.
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, 2000, 17,000 options have been granted.
43
<PAGE> 46
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 June 30, 2000, 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 PERCENTAGE OF
BENEFICIAL OWNER (1) NATURE OF CLASS
BENEFICIAL
OWNERSHIP (2)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, no par William C. Stearns 614,391 18.5%
value Director, President and
Treasurer
-----------------------------------------------------------------------------------------------------------
Common Stock, no par Sally A. Stearns 631,916 19.1%
value Director, Vice President
and Secretary
-----------------------------------------------------------------------------------------------------------
Common Stock, no par Frank E. Duval 125,000 (3) 3.8%
value Director
-----------------------------------------------------------------------------------------------------------
Common Stock, no par Carter F. Randolph, Ph.D. 63,906 (4) 1.9%
value Director
-----------------------------------------------------------------------------------------------------------
Common Stock, no par John A. Chuprinko 2,140 (5) 0.1%
value Chief Financial Officer
-----------------------------------------------------------------------------------------------------------
Common Stock, no par All Directors and Officers 1,437,353 (6) 43.4%
value 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 the controlling interest. 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 1,500 shares purchasable on the exercise of currently exercisable
stock options.
(6) Includes 25,298 shares purchasable on exercise of currently exercisable
warrants and stock options.
44
<PAGE> 47
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William C. Stearns, the President, Treasurer and a Director of the Company,
owned a twin engine airplane which he regularly used for Company business up to
and including August 3, 1999. The Company paid 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, 2000 and 1999, Corporate Flight Service was
paid $18,714 and $48,049, respectively, pursuant to this arrangement. As of
August 3, 1999, this arrangement was terminated.
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
ACQUISITIONS
Exhibit #2 - Share Purchase Agreement between Stearns & Lehman, Inc. and
Wargo Holdings Ltd. dated October 1, 1999. (Note 8)
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)
45
<PAGE> 48
Exhibit #3(g) - Amended Code of Regulations of Stearns & Lehman, Inc.
(Note 1)
MATERIAL CONTRACTS
Exhibit #10(a) - Supplier Agreement, dated September 1, 1997 (Note 7)
Exhibit #10(b) - Stearns & Lehman, Inc. 1994 Stock Option Plan (Note
1)
Exhibit #10(c) - Description of agreement on outside directors
compensation (Note 3)
Exhibit #10(d) - Description of agreement pertaining to a "key man"
life insurance policies (Note 3)
Exhibit #10(e) - Promissory Note and Business Loan Agreement (First
Knox National Bank - $400,000) dated December 2, 1996
(Note 2)
Exhibit #10(f) - Promissory Note and Business Loan Agreement -
Modification (First Knox National Bank - $750,000)
dated August 25, 1997 (Note 4)
Exhibit #10(g) - Stock Purchase Warrant No. 5, April 28, 1997, 5,000
Shares (Note 3)
Exhibit #10(h) - Stock Purchase Warrant No. 6, April 28, 1997, 3,798
Shares (Note 3)
Exhibit #10(i) - Warrant Certificate No. WA 17, (34,950 Shares
Underwriter's Warrants), April 28, 1997 (Note 3)
Exhibit #10(j) - Computer Software, Hardware and Consulting Services
Agreement dated June 9, 1997 (Note 3)
Exhibit #10(k) - Stock Purchase Warrant No. 7, January 21, 1998, 5,000
Shares (Note 6)
Exhibit #10(l) - Stock Purchase Warrant No. 8, January 21, 1998, 5,000
Shares (Note 6)
Exhibit #10(m) - Sales Agreement with supplier dated October 7, 1997
(Note 5)
Exhibit #10(n) - Business Loan Agreement (First Knox National Bank -
$400,000) dated December 2, 1996 (Note 2)
Exhibit #10(o) - Promissory Note and Business Loan Agreement (between
19035 Yukon Inc., Oscar Skollsberg's Food Technique
Ltd., and Stearns & Lehman, Inc. and First Knox
National Bank - $800,000) dated September 28, 1999
(Note 8)
Exhibit #10(p) - Non-competition Agreement between Stearns & Lehman,
Inc. and Jan Skollsberg dated October 1, 1999 (Note
8)
46
<PAGE> 49
CONSENT OF EXPERTS AND COUNSEL
Exhibit #23 - Consent of Independent Accountants
(PricewaterhouseCoopers LLP)
FINANCIAL DATA SCHEDULE
Exhibit #27 - Financial Data Schedule
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).
Note 7. Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended October 31, 1999 filed with the Commission
on December 14, 1999 (File No. 0-21879).
Note 8. Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 14, 1999 (File No. 0-21879).
47
<PAGE> 50
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 27, 2000 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 27, 2000 /s/ William C. Stearns
---------------------------
William C. Stearns
President, Director
Date: July 27, 2000 /s/ John A. Chuprinko
---------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
Date: July 27, 2000 /s/ Sally A. Stearns
---------------------------
Sally A. Stearns
Vice President, Director
Date: July 27, 2000 /s/ Frank E. Duval
---------------------------
Frank E. Duval
Director
Date: July 27, 2000 /s/ Carter F. Randolph
---------------------------
Carter F. Randolph, Ph.D.
Director
48
