<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934
For the quarterly period ended July 31, 2000
_____ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________to______________
----------------------------
Commission File No. 0-21879
----------------------------
STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
30 Paragon Parkway
Mansfield, Ohio 44903
(Address of principal executive (Zip code)
offices)
(419) 522-2722
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
-----
As of September 8, 2000, 3,285,865 common shares, no par value, were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes____ No X
---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Stearns & Lehman, Inc.
Consolidated Balance Sheets
July 31, 2000 , April 30, 2000 and July 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 31, April 30, July 31,
Assets 2000 2000 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 960,495 $ 1,088,890 $ 421,894
Trade accounts receivable, net of allowance for doubtful
accounts of $68,104, $70,000 and $40,484 as of
July 31, 2000, April 30, 2000 and July 31, 1999 1,899,492 2,122,020 1,316,147
Inventory 2,221,539 1,986,564 1,767,171
Prepaid expenses and other 118,618 109,747 115,887
Deferred income taxes 56,954 71,859 41,488
------------- ------------- ------------
Total current assets 5,257,098 5,379,080 3,662,587
------------- ------------- ------------
Property and equipment:
Land 73,928 73,928 73,928
Buildings 1,829,823 1,829,823 1,829,823
Building improvements 103,289 93,934 91,809
Leasehold improvements 178,540 178,540 13,126
Machinery and equipment 2,372,450 2,181,742 2,016,741
Office equipment 495,478 476,151 400,950
Tooling 135,425 135,425 131,774
Vehicles 40,401 40,401 40,401
------------- ------------- ------------
5,229,334 5,009,944 4,598,552
Less accumulated depreciation 1,460,609 1,365,811 1,250,164
------------- ------------- ------------
Net property and equipment 3,768,725 3,644,133 3,348,388
------------- ------------- ------------
Goodwill and other intangible assets, net 1,413,215 1,461,660 508,236
Cash surrender value of life insurance 88,636 95,547 56,555
Trademarks and patents, net 11,794 12,102 2,993
Other assets 15,310 16,380 19,837
------------- ------------- ------------
Total assets $ 10,554,778 $ 10,608,902 $ 7,598,596
============= ============= ============
</TABLE>
Continued
1
<PAGE>
Stearns & Lehman, Inc.
Consolidated Balance Sheets
July 31, 2000 , April 30, 2000 and July 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 31, April 30, July 31,
Liabilities and Shareholders' Equity 2000 2000 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 942,161 $ 829,625 $ 582,718
Accrued taxes 294,557 667,758 92,941
Accrued expenses 195,515 161,194 125,542
Lines of credit 98,810 102,713 -
Current portion of notes payable 110,578 129,757 138,550
Current portion of other long-term liabilities 88,240 84,885 -
------------- ------------- ------------
Total current liabilities 1,729,861 1,975,932 939,751
------------- ------------- ------------
Long-term liabilities:
Notes payable, net of current portion 1,271,074 1,318,645 621,832
Other long term liabilities, net of current portion 217,993 236,395 -
Deferred income taxes 202,570 193,285 119,469
------------- ------------ ------------
Total long-term liabilities 1,691,637 1,748,325 741,301
------------- ------------ ------------
Total liabilities 3,421,498 3,724,257 1,681,052
------------- ------------ ------------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized,
3,289,165 issued and 3,285,865 outstanding as of
July 31, 2000, April 30, 2000 and July 31, 1999,
respectively 3,629 3,629 3,629
Additional paid-in capital 5,248,461 5,248,461 5,248,461
Retained earnings 1,901,159 1,647,537 678,654
Accumulated other comprehensive loss (6,769) (1,782) -
------------- ------------- ------------
7,146,480 6,897,845 5,930,744
Less treasury stock at cost; 3,300 shares 13,200 13,200 13,200
------------- ------------- ------------
Total shareholders' equity 7,133,280 6,884,645 5,917,544
------------- ------------- ------------
Total liabilities and shareholders' equity $ 10,554,778 $ 10,608,902 $ 7,598,596
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Stearns & Lehman, Inc.
Consolidated Statements of Income (Unaudited)
For the three months ended July 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales $ 4,324,160 $ 3,073,004
Cost of sales 2,976,173 2,225,943
-------------- ------------
Gross profit 1,347,987 847,061
Selling, general and administrative expenses 904,313 651,787
-------------- ------------
Income from operations 443,674 195,274
-------------- ------------
Other income (expense), net:
Interest expense (37,463) (15,807)
Interest income 7,623 8,872
Other, net (870) (1,361)
-------------- ------------
Income before income tax expense 412,964 186,978
-------------- ------------
Income tax expense:
Current 135,387 58,661
Deferred 23,955 15,962
-------------- ------------
Total income tax expense 159,342 74,623
-------------- ------------
Net income $ 253,622 $ 112,355
============== ============
Earnings per share - Basic $ .08 $ .03
============== ============
Earnings per share - Diluted $ .08 $ .03
============== ============
Basic weighted-average common shares outstanding 3,285,865 3,285,865
============== ============
Diluted weighted-average common shares outstanding 3,289,258 3,285,865
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Stearns & Lehman, Inc.
Consolidated Statements of Shareholders' Equity (Unaudited)
For the year ended April 30, 2000 and the three months ended July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Number 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, 1999 3,272,685 $ 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
---------- ---------- ------------- ------------- ---------------- ------------ --------------
Balance at April 30, 2000 3,285,865 3,629 5,248,461 1,647,537 (1,782) (13,200) 6,884,645
Net income - - 253,622 - - 253,622
Cumulative translation
Adjustment - - - (4,987) - (4,987)
--------------
Comprehensive income 248,635
---------- ---------- ------------- ------------- ---------------- ------------ --------------
Balances at July 31, 2000 3,285,865 $ 3,629 $ 5,248,461 $ 1,901,159 $ (6,769) $ (13,200) $ 7,133,280
========== ========== ============= ============= ================ ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Stearns & Lehman, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended July 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 253,622 $ 112,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 152 5,000
Depreciation and amortization 144,705 98,762
Deferred income taxes 23,955 15,962
Changes in assets and liabilities:
Trade accounts receivable 222,377 (276,632)
Inventory (234,975) 48,182
Prepaid expenses and other (8,872) 78,903
Accounts payable 112,536 43,050
Accrued taxes (373,201) 12,425
Accrued expenses 34,321 18,480
----------- -----------
Net cash provided by operating activities 174,620 156,487
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (219,341) (41,585)
Cash surrender value of life insurance, net 6,911 (5,466)
Purchase of other assets - (7,143)
----------- -----------
Net cash used in investing activities (212,430) (54,194)
----------- -----------
Cash flows from financing activities:
Net payments under line of credit (3,903) -
Principal payments on long-term debt and capital leases (81,797) (42,267)
----------- -----------
Net cash used in financing activities (85,700) (42,267)
----------- -----------
Effect of exchange rate changes on cash (4,885) -
----------- -----------
Net (decrease) increase in cash and cash equivalents (128,395) 60,026
----------- -----------
Cash and cash equivalents, beginning of year 1,088,890 361,868
----------- -----------
Cash and cash equivalents, end of quarter $ 960,495 $ 421,894
=========== ===========
</TABLE>
Continued
5
<PAGE>
Stearns & Lehman, Inc.
Statements of Cash Flows (Unaudited), Continued
For the three months ended July 31, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 37,113 $ 15,807
========= =========
Income taxes $ 525,379 $ -
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Stearns & Lehman, Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 31, 2000 and 1999
--------------------------------------------------------------------------------
1. Unaudited Interim Financial Statements:
The financial statements as of and for the three months ended July 31, 2000
and 1999 for Stearns & Lehman, Inc. (the Company) are unaudited and are
presented pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, the financial statements should be read
in conjunction with the audited financial statements for the years ended
April 30, 2000 and April 30, 1999. In the opinion of management, the
accompanying financial statements reflect all necessary adjustments (which
are of a normal recurring nature) to present fairly the financial position
and results of operations and cash flows for the interim periods presented,
but are not necessarily indicative of the results of operations for a full
year.
2. Inventory
The major components of inventory at July 31, 2000 and 1999 were as
follows:
2000 1999
Raw materials $ 1,060,169 $ 825,772
Work in process 36,035 17,909
Finished goods 1,125,335 923,390
----------- -----------
Total inventory $ 2,221,539 $ 1,767,171
=========== ===========
3. Earnings per Share
Earnings per share are computed in accordance with SFAS No. 128, "Earnings
Per Share", which the Company adopted in the third quarter of the fiscal
year ended April 30, 1998. Basic earnings per share are computed based upon
the weighted average number of outstanding common shares. Diluted earnings
per share include the weighted average of dilutive warrants outstanding.
Three Months Ended
Weighted Average Common July 31,
---------------------
Shares Outstanding 2000 1999
------------------------ --------- ---------
Common shares issued 3,289,165 3,289,165
Treasury shares (3,300) (3,300)
--------- ---------
Basic shares 3,285,865 3,285,865
Dilutive effect of warrants 3,393 0
--------- ---------
Diluted shares 3,289,258 3,285,865
========= =========
7
<PAGE>
Stearns & Lehman, Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 31, 2000 and 1999
------------------------------------------------------------------------------
4. Notes Payable
Notes payable at July 31, 2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
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. $ 593,814 $ 652,996
Note payable to a bank, collateralized by real estate,
accounts receivable, inventory, and equipment,
payable on November 1, 2004, 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). 706,669 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. 27,960 107,386
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. 53,209 0
------------ ----------
Total notes payable 1,381,652 760,382
Less current portion 110,578 138,550
------------ ----------
$ 1,271,074 $ 621,832
============ ===========
</TABLE>
8
<PAGE>
Stearns & Lehman, Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 31, 2000 and 1999
-------------------------------------------------------------------------------
5. Income Taxes
The components of the net deferred tax liability at July 31, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 90,223 $ 101,501
Alternative minimum tax credit - 6,867
Allowance for doubtful accounts 25,880 7,773
Other 19,796 15,570
------------ -----------
Gross deferred tax assets 135,899 131,711
Deferred tax liabilities:
Property and equipment 281,515 209,692
------------ -----------
Net deferred tax liability $ (145,616) $ (77,981)
============= ===========
</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
Origins, of which $33,170 is available to deduct each year through April 30,
2009.
9
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity, availability of financing for development, government
regulations, competition, and issues related to managing rapid growth and
business expansion.
General
-------
The Company is an Ohio corporation headquartered in Mansfield, Ohio. The Company
was organized on March 14, 1988 and is engaged in the business of manufacturing
and marketing specialty food products, including coffee and espresso flavorings,
syrups, oils and toppings, extracts, flavorings, 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.
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. The plans for increased diversity and strengthened
syrup sales coincide with the Company's continuing search for strategic
acquisitions to enhance market position and provide for revenue growth. Finally,
the Company is continually dedicated to increasing manufacturing efficiencies.
10
<PAGE>
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 marketplace 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 marketplace 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. During
the first quarter of fiscal 2001, the Company made several trips to Europe to
develop sales.
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 existing 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 believes 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 is 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.
11
<PAGE>
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, in July 2000 added
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.
[The remainder of this page intentionally left blank.]
12
<PAGE>
Selected Summary Financial Information
--------------------------------------
<TABLE>
<CAPTION>
Quarterly Information for 1/st/ Quarter 4/th/ Quarter 3/rd/ Quarter 2/nd/ Quarter 1/st/ Quarter
indicated fiscal years FY 2001 FY 2000 FY 2000 FY 2000 FY 2000
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Current Assets $ 5,257,098 $ 5,379,080 $4,662,497 $ 4,942,970 $3,662,587
Total Assets $10,554,778 $10,608,902 $9,943,266 $10,072,211 $7,598,596
Current Liabilities $ 1,729,861 $ 1,975,932 $1,694,917 $ 1,892,134 $ 939,751
Long Term Debt, net of
current portion $ 1,489,067 $ 1,555,040 $1,634,669 $ 1,715,048 $ 621,832
Total Liabilities $ 3,421,498 $ 3,724,257 $3,519,754 $ 3,753,682 $1,681,052
Shareholders' Equity $ 7,133,280 $ 6,884,645 $6,423,512 $ 6,318,529 $5,917,544
Statement of Operations:
Total Sales $ 4,324,160 $ 4,568,561 $3,961,107 $ 4,278,000 $3,073,004
Cost of Goods Sold $ 2,976,173 $ 2,882,054 $2,766,903 $ 2,978,782 $2,225,943
Selling, General and
Administrative Expenses $ 904,313 $ 910,992 $ 961,439 $ 656,242 $ 651,787
Net Income (Loss) $ 253,622 $ 451,123 $ 116,830 $ 400,930 $ 112,355
Basic and diluted Earnings
per Share $ 0.08 $ 0.14 $ 0.04 $ 0.12 $ 0.03
</TABLE>
<TABLE>
<CAPTION>
Financial Information for Fiscal Year Fiscal Year Fiscal Year Three Months Three Months
specified periods April 30, April 30, April 30, July 31, July 31,
2000 1999 1998 2000 1999
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Current Assets $ 5,379,080 $ 3,457,644 $3,556,309 $ 5,257,098 $3,662,587
Total Assets $10,608,902 $ 7,438,221 $7,514,201 $10,554,778 $7,598,596
Current Liabilities $ 1,975,932 $ 865,692 $1,156,514 $ 1,729,861 $ 939,751
Long Term Debt, net of
current portion $ 1,555,040 $ 664,203 $ 802,353 $ 1,489,067 $ 621,832
Total Liabilities $ 3,724,257 $ 1,633,032 $2,010,146 $ 3,421,498 $1,681,052
Shareholders' Equity $ 6,884,645 $ 5,805,189 $5,504,055 $ 7,133,280 $5,917,544
Statement of Operations:
Total Sales $15,880,672 $10,206,832 $9,242,530 $ 4,324,160 $3,073,004
Cost of Goods Sold $10,853,682 $ 7,630,669 $6,613,046 $ 2,976,173 $2,225,943
Selling, General and
Administrative Expenses $ 3,180,460 $ 2,108,038 $1,758,667 $ 904,313 $ 651,787
Net Income $ 1,081,238 $ 261,534 $ 659,716 $ 253,622 $ 112,355
Basic and diluted Earnings
per Share $ 0.33 $ 0.08 $ 0.20 $ 0.08 $ 0.03
</TABLE>
13
<PAGE>
Results of Operations for the three months ended July 31, 2000 and 1999
-----------------------------------------------------------------------
Results of operations for the three months ended July 31, 2000 were highlighted
by strong sales of the specialty frozen beverage products, the OSCAR'S(R) brand
of flavoring syrups to the specialty coffee industry and the sales of private
label flavoring syrups to the Company's major customer.
Net sales for the three months ended July 31, 2000 and 1999 were $4,324,160 and
$3,073,004, respectively, which represents a 41% increase. For the three months
ended July 31, 2000, private label syrup sales increased by 28.5%, the Company's
branded syrup products sales increased by 71.2% and the specialty frozen
beverage products increased by 119.8%, while the sales of other Company products
decreased by 9.5%, all as compared to the three months ended July 31, 1999.
Private label syrup, Company branded syrup, specialty frozen beverage products,
and other Company products represented 63.0%, 21.1%, 13.0% and 3.0% of gross
sales, respectively, for the three months ended July 31, 2000. The Company's
private label sales increased primarily as a result of a 37.1% increase in sales
to the Company's largest private label customer. The Company's branded syrup
products' sales increased primarily as a result of additional sales due to the
acquisition of the OSCAR'S(R) brand of flavoring syrups. The sales of the
specialty frozen beverage products increased due to continued development of
this product line after its successful introduction in fiscal year 2000. The
sales of other Company products decreased due to continued weakening sales of
most of the products within this group except Sugars & Toppings, Flavoring
Extracts and Rice Bran Oil.
During the three-month period ended July 31, 2000, the Company experienced lower
production and material costs but higher freight-out costs, as a percentage of
net sales, compared to the same three-month period in the previous year.
Consequently, cost of sales, as a percentage of net sales, decreased to 68.8%
for the three months ended July 31, 2000, compared to 72.4% for the same quarter
last year. Cost of sales increased by $750,230, including $283,563 associated
with Oscars operations, for the three months ended July 31, 2000, compared to
the three months ended July 31, 1999 as a result of higher sales volume.
Total selling, general and administrative expenses increased by 38.7%, or
$252,526, for the three months ended July 31, 2000, compared to the three months
ended July 31, 1999. This increase included $122,363 in additional expenses
associated with Oscars' operations. The increase in selling, general and
administrative expenses was principally a result of the addition of Oscars,
growth in the size of the sales and marketing staff, expansion of international
sales efforts and efforts to market the specialty frozen beverage products.
Selling, general and administrative expenses, as a percentage of net sales,
decreased to 20.9% compared to 21.2% for the three months ended July 31, 2000
and 1999, respectively.
Interest expense for the three months ended July 31, 2000 increased by $21,656
compared to the three months ended July 31, 1999. The increase reflects an
increase in the average principal amount of outstanding notes payable, primarily
associated with the acquisition of Oscars.
14
<PAGE>
The Company reported total net other expense of $870 for the three months ended
July 31, 2000 compared to total net other expense of $1,361 for the three months
ended July 31, 1999. The Company also reported interest income of $7,623 for the
current quarter compared to $8,872 for the first quarter last year. The decrease
in interest income is associated with a lower rate of return on a life insurance
policy offset by higher levels of invested cash for the current period.
Income before income tax expense increased by $225,986 for the three months
ended July 31, 2000 from $186,978 for the three months ended July 31, 1999. This
120.9% increase can mainly be attributed to higher net sales levels along with
lower cost of sales and selling, general and administrative expenses as a
percentage of net sales.
The Company recorded income tax expense of $159,342 for the three months ended
July 31, 2000. For the three months ended July 31, 1999, the Company recorded
income tax expense of $74,623. The increase is due to an increase in taxable
income offset by a lower effective tax rate.
As a result of the foregoing, the Company reported net income of $253,622, or
$0.08 per basic and diluted weighted average number of common shares of the
Company (the "Common Shares") outstanding, for the three months ended July 31,
2000 compared to net income of $112,355 or $0.03 per basic and diluted weighted
average number of Common Shares outstanding for the three months ended July 31,
1999. The basic weighted average number of Common Shares outstanding was
3,285,865 for each three-month period.
Liquidity and Capital Resources
-------------------------------
The working capital and working capital ratio as of July 31, 2000 and July 31,
1999 were $3,527,237 and 3.04 to 1 and $2,722,836 and 3.90 to 1, respectively.
The increase in working capital for July 31, 2000 compared to July 31, 1999 was
primarily a result of a $538,601 increase in the Company's cash and cash
equivalents, a $583,345 increase in the Company's accounts receivable, a
$454,368 increase in the Company's inventory, a $15,466 increase in deferred
income taxes and a $2,731 increase in prepaid expenses offset by a $359,443
increase in accounts payable, a $201,616 increase in accrued taxes, a $159,078
increase in debt-related current liabilities and a $69,973 increase in the
Company's accrued expenses. The increase in accounts receivable was a result of
strong sales in July 2000 compared to July 1999. The increase in inventory was
the net result of increases associated with the acquisition of Oscars'
inventory. The increase in prepaid expenses is primarily a result of prepaid
rent. The increase in accounts payable is a result of the Company's strong sales
in July 2000 and the related purchases of raw materials. The increase in accrued
taxes is a result of higher income tax payable due to higher net taxable income
for the period. The increase in accrued expenses primarily reflects increases in
accrued vacations and employee health insurance claims. The increase in debt-
related current liabilities is the result of debt and other long term
liabilities associated with the acquisition of Oscars.
The Company's operating activities, for the three months ended July 31, 2000,
provided net cash of $174,620. The Company used $219,341 to acquire equipment
and trademarks, and also the
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investment in life insurance policies decreased by $6,911. The Company also used
$81,797 to make principal payments on a mortgage note payable and on capital
leases. The Company decreased its line of credit by $3,903, and the net cash
surrender value of a life insurance policy decreased by $6,911. Consequently,
during this period, cash and cash equivalents decreased by $128,395 after a
$4,885 decrease in cash as the result of the effect of exchange rate changes.
The Company expects future operating activities to continue to provide cash for
investing and financing activities. However, this cash may be insufficient to
meet the Company's possible investing and financing activities.
As of September 7, 2000, $200,000 of the Company's $400,000 line of credit with
First Knox National Bank has been pledged via a standby letter of credit as a
guarantee to Canadian Imperial Bank of Commerce ("CIBC") on Oscars $286,432 CDN
overall credit limit with CIBC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit #27 - Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
Date: September 14, 2000 STEARNS & LEHMAN, INC.
(Registrant)
/s/ William C. Stearns
----------------------------------
William C. Stearns
President
/s/ John A. Chuprinko
---------------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
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