<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended October 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 offices) (Zip code)
(419)522-2722
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of December 8, 2000, 3,285,865 common shares, no par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 2000 , April 30, 2000 and October 31, 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
ASSETS 2000 2000 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 864,663 $ 1,088,890 $ 263,588
Trade accounts receivable, net of allowance for doubtful
accounts of $61,068, $70,000 and $54,797 as of
October 31, 2000, April 30, 2000 and October 31, 1999 2,786,726 2,122,020 2,541,869
Inventory 2,286,899 1,986,564 1,990,722
Prepaid expenses and other 84,119 109,747 100,050
Deferred income taxes 54,280 71,859 46,741
---------------- ---------------- ----------------
Total current assets 6,076,687 5,379,080 4,942,970
---------------- ---------------- ----------------
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 186,386 178,540 13,126
Machinery and equipment 2,433,412 2,181,742 2,229,977
Office equipment 502,018 476,151 434,553
Tooling 131,736 135,425 131,774
Vehicles 40,401 40,401 40,401
---------------- ---------------- ----------------
5,300,993 5,009,944 4,845,391
Less accumulated depreciation 1,560,736 1,365,811 1,333,490
---------------- ---------------- ----------------
Net property and equipment 3,740,257 3,644,133 3,511,901
---------------- ---------------- ----------------
Goodwill and other intangible assets, net 1,362,831 1,461,660 1,522,684
Cash surrender value of life insurance 102,251 95,547 64,166
Trademarks and patents, net 11,487 12,102 12,620
Other assets 15,310 16,380 17,870
---------------- ---------------- ----------------
Total assets $ 11,308,823 $ 10,608,902 $ 10,072,211
================ ================ ================
</TABLE>
CONTINUED
1
<PAGE> 3
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 2000 , April 30, 2000 and October 31, 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2000 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 1,143,855 $ 829,625 $ 1,184,613
Accrued taxes 462,132 667,758 262,597
Accrued expenses 201,739 161,194 140,052
Lines of credit 70,966 102,713 63,033
Current portion of notes payable 90,314 129,757 159,947
Current portion of other long-term liabilities 87,192 84,885 81,892
---------------- ---------------- ----------------
Total current liabilities 2,056,198 1,975,932 1,892,134
---------------- ---------------- ----------------
Long-term liabilities:
Notes payable, net of current portion 1,221,994 1,318,645 1,433,875
Other long term liabilities, net of current portion 188,550 236,395 281,173
Deferred income taxes 200,182 193,285 146,500
---------------- ---------------- ----------------
Total long-term liabilities 1,610,726 1,748,325 1,861,548
---------------- ---------------- ----------------
Total liabilities 3,666,924 3,724,257 3,753,682
---------------- ---------------- ----------------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized, 3,289,165 issued
and 3,285,865 outstanding as of October 31, 2000, April 30, 2000 and
October 31, 1999,
respectively 3,629 3,629 3,629
Additional paid-in capital 5,248,461 5,248,461 5,248,461
Retained earnings 2,401,264 1,647,537 1,079,584
Accumulated other comprehensive gain (loss) 1,745 (1,782) 55
---------------- ---------------- ----------------
7,655,099 6,897,845 6,331,729
Less treasury stock at cost; 3,300 shares 13,200 13,200 13,200
---------------- ---------------- ----------------
Total shareholders' equity 7,641,899 6,884,645 6,318,529
---------------- ---------------- ----------------
Total liabilities and shareholders' equity $ 11,308,823 $ 10,608,902 $ 10,072,211
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended October 31, 2000 and 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales $ 5,310,076 $ 4,278,000
Cost of sales 3,509,808 2,978,782
---------------- -----------------
Gross profit 1,800,268 1,299,218
Selling, general and administrative expenses 965,140 656,242
---------------- -----------------
Income from operations 835,128 642,976
---------------- -----------------
Other income (expense), net:
Interest expense (36,680) (24,113)
Interest income 28,742 12,028
Other, net (6,983) 813
---------------- -----------------
Income before income tax expense 820,207 631,704
---------------- -----------------
Income tax expense:
Current 317,878 230,858
Deferred 2,224 (84)
---------------- -----------------
Total income tax expense 320,102 230,774
---------------- -----------------
Net income $ 500,105 $ 400,930
================ =================
Earnings per share - Basic $ .15 $ .12
================ =================
Earnings per share - Diluted $ .15 $ .12
================ =================
Basic weighted-average common shares outstanding 3,285,865 3,285,865
================ =================
Diluted weighted-average common shares outstanding 3,295,642 3,285,865
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 5
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the six months ended October 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales $ 9,634,236 $ 7,351,004
Cost of sales 6,485,981 5,204,724
---------------- -----------------
Gross profit 3,148,255 2,146,280
Selling, general and administrative expenses 1,869,453 1,308,030
---------------- -----------------
Income from operations 1,278,802 838,250
---------------- -----------------
Other income (expense), net:
Interest expense (74,143) (39,919)
Interest income 36,365 20,899
Other, net (7,853) (548)
---------------- -----------------
Income before income tax expense 1,233,171 818,682
---------------- -----------------
Income tax expense:
Current 453,265 289,519
Deferred 26,179 15,878
---------------- -----------------
Total income tax expense 479,444 305,397
---------------- -----------------
Net income $ 753,727 $ 513,285
================ =================
Earnings per share - Basic $ .23 $ .15
================ =================
Earnings per share - Diluted $ .23 $ .15
================ =================
Basic weighted-average common shares outstanding 3,285,865 3,285,865
================ =================
Diluted weighted-average common shares outstanding 3,292,589 3,285,865
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 6
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS* EQUITY (UNAUDITED) For the year ended
April 30, 2000 and the six months ended October 31, 2000
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER OF ADDITIONAL OTHER TOTAL SHARE-
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY HOLDERS*
SHARES SHARES CAPITAL EARNINGS GAIN (LOSS) SHARES EQUITY
----------- --------- -------------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 3,285,865 $ 3,629 $ 5,248,461 $ 566,299 $ - $ (13,200) $ 5,805,189
1999
Net income - - 1,081,238 - - 1,081,238
Translation - - - (1,782) - (1,782)
Adjustment
-------------
Comprehensive income 1,079,456
----------- ---------- ------------ ------------- --------------- ------------ --------------
Balance at April 30, 3,285,865 3,629 5,248,461 1,647,537 (1,782) (13,200) 6,884,645
2000
Net income - - 753,727 - - 753,727
Translation - - - 3,527 - 3,527
Adjustment
-------------
Comprehensive income 757,254
----------- ---------- ------------ ------------- --------------- ------------ --------------
Balances at 3,285,865 $ 3,629 $ 5,248,461 $ 2,401,264 $ 1,745 $ (13,200) $ 7,641,899
October 31, 2000 =========== ========== ============ ============= =============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 7
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended October 31, 2000 and 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 753,727 $S 513,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 10,152 18,822
Depreciation and amortization 299,596 212,217
Gain on the sale of fixed property and equipment 4,970 -
Deferred income taxes 26,179 15,878
Changes in assets and liabilities:
Trade accounts receivable (674,858) (1,388,635)
Inventory (300,335) (52,854)
Prepaid expenses and other 25,627 102,871
Accounts payable 314,230 589,773
Accrued taxes (205,626) 181,398
Accrued expenses 40,545 18,287
---------------- -----------------
Net cash provided by operating activities 294,207 211,042
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (306,991) (82,505)
Proceeds from sale of property and equipment 6,900 -
Cash surrender value of life insurance, net (6,704) (13,077)
Acquisition of business - (921,024)
Purchase of other assets - (7,354)
---------------- -----------------
Net cash used in investing activities (306,795) (1,023,960)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under notes payable - 800,000
Net borrowing (payments) under line of credit (31,747) 1,191
Principal payments on long-term debt and capital leases (181,632) (85,168)
---------------- -----------------
Net cash used in financing activities (213,379) 716,023
---------------- -----------------
Effect of exchange rate changes on cash 1,740 (1,385)
---------------- -----------------
Net decrease in cash and cash equivalents (224,227) (98,280)
Cash and cash equivalents, beginning of year 1,088,890 361,868
---------------- -----------------
Cash and cash equivalents, end of quarter $ 864,663 $ 263,588
================ =================
</TABLE>
CONTINUED
6
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS (UNAUDITED), CONTINUED
For the six months ended October 31, 2000 and 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
<S> <C> <C>
Interest $ 74,216 $ 39,547
================ =================
Income taxes $ 691,974 $ -
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 2000 and 1999
-------------------------------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The consolidated financial statements as of and for the three and six
months ended October 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
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the years ended April 30,
2000 and April 30, 1999. In the opinion of management, the accompanying
consolidated 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 October 31, 2000 and 1999 were as
follows:
2000 1999
Raw materials $ 1,052,237 $ 981,993
Work in process 23,312 6,054
Finished goods 1,211,350 1,002,675
----------------- -----------------
Total inventory $ 2,286,899 $ 1,990,722
================= =================
3. EARNINGS PER SHARE
Basic earnings per share are computed based upon the weighted average
number of outstanding common shares. Diluted earnings per share include the
weighted average of dilutive warrants outstanding.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
WEIGHTED AVERAGE COMMON OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
SHARES OUTSTANDING 2000 1999 2000 1999
----------------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Common shares issued 3,289,165 3,289,165 3,289,165 3,289,165
Treasury shares (3,300) (3,300) (3,300) (3,300)
-------------- --------------- -------------- ---------------
Basic shares 3,285,865 3,285,865 3,285,865 3,285,865
Dilutive effect of warrants 9,777 0 6,724 0
-------------- --------------- -------------- ---------------
Diluted shares 3,295,642 3,285,865 3,292,589 3,285,865
============== =============== ============== ===============
</TABLE>
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 2000 and 1999
-------------------------------------------------------------------------------
4. NOTES PAYABLE
Notes payable at October 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. $ 578,327 $ 638,713
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). 680,003 800,000
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. 7,062 88,138
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. 46,916 66,971
---------------- ----------------
Total notes payable 1,312,308 1,593,822
Less current portion 90,314 159,947
---------------- ----------------
$ 1,221,994 $ 1,433,875
================ ================
</TABLE>
9
<PAGE> 11
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 2000 and 1999
-------------------------------------------------------------------------------
5. INCOME TAXES
The components of the net deferred tax liability at October 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 23,206 20,823
Other 19,796 7,773
---------------- -----------------
Gross deferred tax assets 133,225 136,964
Deferred tax liabilities:
Goodwill 47,697 -
Property and equipment 231,430 236,723
---------------- -----------------
Net deferred tax liability $ (145,902) $ (99,759)
================ =================
</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.
6. 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 21, 2000 and expires on September
21, 2001. This agreement is collateralized by substantially all the assets
of the Company and contains covenants that require the Company to maintain
certain minimum working capital and net worth and to maintain certain quick
and current ratios. As of October 31, 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 such 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 Skollsberg's Food Technique
Limited, the Company's subsidiary, current ratio, minimum shareholders'
equity, capital expenditures and dividends. As of October 31, 2000, there
was a balance of $70,966 outstanding under this Canadian agreement.
10
<PAGE> 12
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 2000 and 1999
-------------------------------------------------------------------------------
7. SHIPPING AND HANDLING FEES
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards
Board issued EITF 00-10, Accounting for Shipping and Handling Fees and
Costs, which is to become effective for the Company no later than the
fourth quarter of the fiscal year ending April 30, 2001. EITF 00-10
provides that all amounts billed to a customer in a sale transaction
related to shipping and handling represent revenues earned for the goods
sold and should be classified as revenue. The Company currently nets
freight revenues against freight expenses within cost of sales. The Company
is currently evaluating the requirements and effects of EITF 00-10, and
estimates that implementation will result in an increase in revenues of
1.2% with a corresponding increase in cost of sales of 1.7%. There will be
no effect on the dollar amount of the Company's gross profit or net income.
8. SUBSEQUENT EVENTS
On November 3, 2000, the Company and Bunge Foods Corporation ("Bunge")
signed a letter of intent in which the Company would purchase, from Bunge,
the Food Service Syrups & Toppings Business. This Business is defined as
(a) machinery and equipment comprising of a can line, pouch line, jug line
and extract line, (b) inventories; (c) certain intellectual property,
including trademarks, customer lists and know how, goodwill, including
goodwill associated with customer relationships and certain other assets.
The purchase price for the Business would approximate $6,800,000 plus (a)
an amount up to $4,700,000 based on a formula amount relating to net sales
to a major customer of the Business for the two years subsequent to the
proposed acquisition date, and (b) 1% of net sales to the same customer in
excess of a target quantity for the same two years subsequent to the
proposed acquisition date. Net sales for this Business, for the twelve
months ending December 31, 2000, is estimated to be approximately
$17,000,000. The Company has placed $500,000 of the purchase price in an
escrow account pursuant to the terms of an escrow agreement entered into
with Bunge.
On December 1, 2000, The Huntington National Bank ("Huntington") provided a
commitment, subject to certain closing requirements specified by
Huntington, to provide financing for the Bunge acquisition and for the
Company's anticipated capital expenditure needs. The commitment includes a
$500,000 revolving line of credit, an $11,500,000 term loan and a
$3,900,000 capital expenditure draw note. Huntington also committed to a
$583,000 mortgage note and a $693,000 time loan to replace existing loans
that the Company currently has with First-Knox National Bank.
11
<PAGE> 13
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, including without limitation, generating revenues or other
sources of funds necessary to repay Company debt incurred with respect to growth
and expansion (See Note 8 of the Notes to Consolidated Financial Statements).
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 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, Sysco Food Service
and Tate & Lyle. The Company does not have any long-term supply agreements with
any of these customers except Starbucks, Caribou Coffee Company, The Coffee
Beanery, Tate & Lyle 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 continues 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. Increased product diversity and strengthened syrup sales are
part of the Company's
12
<PAGE> 14
strategic acquisition plans along with enhancing market position and providing
for revenue growth. Finally, the Company is continually dedicated to increasing
manufacturing efficiencies. As a result of the search for strategic
acquisitions, the Company, on November 3, 2000, signed a letter of intent to
purchase the food-service syrups and toppings business of Bunge Foods, a
subsidiary of the Bunge Corporation. The products of this business would expand
the Company's syrup product line to meet the broader needs of the general
food-service industry. In addition, the various sauce and topping products will
increase the diversity of products that the Company manufactures and sells. The
sauce and topping products also have synergistic value, with the Company's
existing products, as they are also used in the specialty coffee industry. See
Note 8 of the Notes to Consolidated Financial Statements.
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 believes 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 believes 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 second quarter of fiscal 2001, the Company participated in a large European
trade show and received a initial syrup order, valued at approximately $200,000
from an European company, for delivery in the third quarter.
The Company also plans a major initiative to improve its marketing channels on
all fronts. During the second quarter of fiscal 2001, the Company hired John
Ludwig as National Sales Manager. Mr. Ludwig has extensive sales management
experience, including fifteen years with Ocean Spray Cranberries, and will lead
the reorganization of the Company's sales and marketing department. The team
that the Company is assembling will enable the Company to invigorate and focus
its sales and marketing efforts.
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. These efforts, during the past six months, have yielded a number of
modifications to existing products and enhancements to the frozen beverage
product line. The work on the frozen beverage product line is 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 plans call for the Company's 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.
13
<PAGE> 15
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. 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 provided an immediate cost benefit.
[The remainder of this page intentionally left blank.]
14
<PAGE> 16
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER
INDICATED FISCAL YEARS FY 2001 FY 2001 FY 2000 FY 2000 FY 2000
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 6,076,687 $ 5,257,098 $ 5,379,080 $ 4,662,497 $ 4,942,970
TOTAL ASSETS $ 11,308,823 $ 10,554,778 $ 10,608,902 $ 9,943,266 $ 10,072,211
CURRENT LIABILITIES $ 2,056,198 $ 1,729,861 $ 1,975,932 $ 1,694,917 $ 1,892,134
LONG TERM DEBT, NET OF
CURRENT PORTION $ 1,410,544 $ 1,489,067 $ 1,555,040 $ 1,634,669 $ 1,715,048
TOTAL LIABILITIES $ 3,666,924 $ 3,421,498 $ 3,724,257 $ 3,519,754 $ 3,753,682
SHAREHOLDERS' EQUITY $ 7,641,899 $ 7,133,280 $ 6,884,645 $ 6,423,512 $ 6,318,529
STATEMENT OF OPERATIONS:
TOTAL SALES $ 5,310,076 $ 4,324,160 $ 4,568,561 $ 3,961,107 $ 4,278,000
COST OF GOODS SOLD $ 3,509,808 $ 2,976,173 $ 2,882,054 $ 2,766,903 $ 2,978,782
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 965,140 $ 904,313 $ 910,992 $ 961,439 $ 656,242
NET INCOME $ 500,105 $ 253,622 $ 451,123 $ 116,830 $ 400,930
BASIC AND DILUTED EARNINGS
PER SHARE $ 0.15 $ 0.08 $ 0.14 $ 0.04 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR SIX MONTHS SIX MONTHS
SPECIFIED PERIODS APRIL 30, 2000 APRIL 30, 1999 APRIL 30, 1998 OCTOBER 31, OCTOBER 31,
2000 1999
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 5,379,080 $ 3,457,644 $ 3,556,309 $ 6,076,687 $ 4,942,970
TOTAL ASSETS $ 10,608,902 $ 7,438,221 $ 7,514,201 $ $
CURRENT LIABILITIES $ 1,975,932 $ 865,692 $ 1,156,514 $ 11,308,823 $ 10,072,211
LONG TERM DEBT, NET OF
CURRENT PORTION $ 1,555,040 $ 664,203 $ 802,353 $ 1,410,544 $ 1,715,048
TOTAL LIABILITIES $ 3,724,257 $ 1,633,032 $ 2,010,146 $ 3,666,924 $ 3,753,682
SHAREHOLDERS' EQUITY $ 6,884,645 $ 5,805,189 $ 5,504,055 $ 7,641,899 $ 6,318,529
STATEMENT OF OPERATIONS:
TOTAL SALES $ 15,880,672 $ 10,206,832 $ 9,242,530 $ 9,634,236 $ 7,351,004
COST OF GOODS SOLD $ 10,853,682 $ 7,630,669 $ 6,613,046 $ 6,485,981 $ 5,204,724
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 3,180,460 $ 2,108,038 $ 1,758,667 $ 1,869,453 $ 1,308,030
NET INCOME $ 1,081,238 $ 261,534 $ 659,716 $ 753,727 $ 513,285
BASIC AND DILUTED EARNINGS
PER SHARE $ 0.33 $ 0.08 $ 0.20 $ 0.23 $ 0.15
</TABLE>
15
<PAGE> 17
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
Results of operations for the three months ended October 31, 2000 were
highlighted by record quarterly sales. The sales were paced by strong private
label syrup sales, continued strong sales of the specialty frozen beverage
products, and sales of the OSCAR'S(R) brand of flavoring syrups to the specialty
coffee industry.
Net sales for the three months ended October 31, 2000 and 1999 were $5,310,076
and $4,278,000, respectively, which represents a 24% increase. For the three
months ended October 31, 2000, private label syrup sales increased by 21.3%, the
Company's branded syrup products sales increased by 17.6% and the specialty
frozen beverage products increased by 109.9%, while the sales of other Company
products increased by 21.3%, all as compared to the three months ended October
31, 1999. Private label syrup, Company branded syrup, specialty frozen beverage
products, and other Company products represented 72.0%, 16.9%, 7.4% and 3.7% of
gross sales, respectively, for the three months ended October 31, 2000. The
Company's private label sales increased as a result of a 16.8%, a 87.8%, a 31.4%
and a 63.2% increase in sales to the Company's first, second, fourth and fifth
largest private label customers, respectively. The Company's branded syrup
products' sales increased as a result of additional sales due to the acquisition
of the OSCAR'S(R) brand of flavoring syrups; this increase offset decreases in
the sales of the DOLCE(R) and SENZA brands 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 increased due to sales of Cod Liver Oil and
Cinnamon Sticks & Mulling Spices, while all other products within this group
decreased in sales.
During the three-month period ended October 31, 2000, the Company experienced
lower production 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 66.1% for the three months ended October
31, 2000, compared to 69.64% for the same quarter last year. Cost of sales
increased by $531,026, including $180,952 associated with the acquisition of
Oscars operations, for the three months ended October 31, 2000, compared to the
three months ended October 31, 1999 as a result of higher sales volume.
Total selling, general and administrative expenses increased by 47.1%, or
$308,898, for the three months ended October 31, 2000, compared to the three
months ended October 31, 1999. This increase included $82,196 in additional
expenses associated with acquisition of 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, increased to 18.2% compared to 15.4% for the three
months ended October 31, 2000 and 1999, respectively.
16
<PAGE> 18
Interest expense for the three months ended October 31, 2000 increased by
$12,567 compared to the three months ended October 31, 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 total net other expense of $6,983 for the three months
ended October 31, 2000 compared to total net other income of $813 for the three
months ended October 31, 1999. The Company also reported interest income of
$28,742 for the current quarter compared to $12,028 for the second quarter last
year.
Income before income tax expense increased to $820,207 for the three months
ended October 31, 2000 from $631,704 for the three months ended October 31,
1999. This 29.89% increase can mainly be attributed to higher net sales levels
along with lower cost of sales as a percentage of net sales.
The Company recorded income tax expense of $320,102 for the three months ended
October 31, 2000. For the three months ended October 31, 1999, the Company
recorded income tax expense of $230,774. The increase is due to an increase in
taxable income and a higher effective tax rate.
As a result of the foregoing, the Company reported net income of $500,105, or
$0.15 per basic and diluted weighted average number of common shares of the
Company (the "Common Shares") outstanding, for the three months ended October
31, 2000 compared to net income of $400,930 or $0.12 per basic and diluted
weighted average number of Common Shares outstanding for the three months ended
October 31, 1999. The basic weighted average number of Common Shares outstanding
was 3,285,865 for each three-month period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 2000 AND 1999
Results of operations for the six months ended October 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 six months ended October 31, 2000 and 1999 were $9,634,236 and
$7,351,004, respectively, which represents a 31% increase. For the six months
ended October 31, 2000, private label syrup sales increased by 24.2%, the
Company's branded syrup products sales increased by 39.82% and the specialty
frozen beverage products increased by 115.6%, while the sales of other Company
products increased by 6.8%, all as compared to the six months ended October 31,
1999. Private label syrup, Company branded syrup, specialty frozen beverage
products, and other Company products represented 68.0%, 18.8%, 9.9% and 3.3% of
gross sales, respectively, for the six months ended October 31, 2000. The
Company's private label sales increased as a result of a 24.6%, a 78.4%, a 28.7%
and a 22.8% increase in sales to the Company's first, second, fourth and fifth
largest private label customers, respectively. 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
17
<PAGE> 19
other Company products increased due to sales of Sugars & Toppings, Cod Liver
Oil, Sub Dressing and Cinnamon Sticks & Mulling Spices offset by lower sales of
other products within this group.
During the six-month period ended October 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 six-month period in the previous
year. Consequently, cost of sales, as a percentage of net sales, decreased to
67.3% for the six months ended October 31, 2000, compared to 70.8% for the same
quarter last year. Cost of sales increased by $1,281,257, including $464,514
associated with Oscars operations, for the six months ended October 31, 2000,
compared to the six months ended October 31, 1999, as a result of higher sales
volume.
Total selling, general and administrative expenses increased by 42.9%, or
$561,423, for the six months ended October 31, 2000, compared to the six months
ended October 31, 1999. This increase included $204,559 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, efforts to market the specialty frozen beverage products and the
hiring of additional professional and outside services. Selling, general and
administrative expenses, as a percentage of net sales, increased to 19.4%
compared to 17.8% for the six months ended October 31, 2000 and 1999,
respectively.
Interest expense for the six months ended October 31, 2000 increased by $34,224
compared to the six months ended October 31, 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 total net other expense of $7,853 for the six months ended
October 31, 2000 compared to total net other expense of $548 for the six months
ended October 31, 1999. The Company also reported interest income of $36,365 for
the current year compared to $20,899 for 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 $414,489 for the six months ended
October 31, 2000 from $818,682 for the six months ended October 31, 1999. This
50.6% increase can mainly be attributed to higher net sales levels along with
lower cost of sales as a percentage of net sales.
The Company recorded income tax expense of $479,444 for the six months ended
October 31, 2000. For the six months ended October 31, 1999, the Company
recorded income tax expense of $305,397. The increase is due to an increase in
taxable income and a higher effective tax rate.
As a result of the foregoing, the Company reported net income of $753,727, or
$0.23 per basic and diluted weighted average number of Common Shares
outstanding, for the six months ended October 31, 2000 compared to net income of
$513,285 or $0.15 per basic and diluted weighted average number of Common Shares
outstanding for the six months ended October 31, 1999. The basic weighted
average number of Common Shares outstanding was 3,285,865 for each six-month
period.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The working capital and working capital ratio as of October 31, 2000 and October
31, 1999 were $4,020,489 and 2.96 to 1 and $3,050,836 and 2.61 to 1,
respectively. The increase in working capital for October 31, 2000 compared to
October 31, 1999 was primarily a result of a $601,075 increase in the Company's
cash and cash equivalents, a $244,857 increase in the Company's accounts
receivable, a $296,177 increase in the Company's inventory, a $7,539 increase in
deferred income taxes and a $56,400 decrease in debt-related current liabilities
offset by a $15,931 decrease in prepaid expenses, a $199,535 increase in accrued
taxes and a $61,687 increase in the Company's accrued expenses. The increase in
accounts receivable was a result of strong sales in October 2000 compared to
October 1999. The increase in inventory was the net result of increases
associated with the specialty frozen beverage products and inventory acquired in
anticipation of a large international syrup order. The decrease in accounts
payable is a result of the Company's strong cash position and taking early
payment discounts. The decrease in debt-related current liabilities is the
result of a decrease in short-term liabilities associated with the acquisition
of Ricter Enterprises, LTD. The decrease in prepaid expenses is primarily a
result of prepaid rent and prepaid marketing expenses. 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 Company's operating activities, for the six months ended October 31, 2000,
provided net cash of $294,207. The Company used $306,991 to acquire equipment
and trademarks, $181,632 to make principal payments on a mortgage note payable
and on capital leases and used $31,747 to decrease its line of credit. The net
cash surrender value of a life insurance policy increased by $6,704. The Company
also received $6,900 in proceeds from the sale of equipment. Consequently,
during this period, cash and cash equivalents decreased by $224,227 after a
$1,740 increase 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.
On September 21, 2000, the Company renewed its $400,000 line of credit with
First Knox National Bank ("First Knox"). As of December 8, 2000, $200,000 of the
Company's $400,000 line of credit with First Knox has been pledged via a standby
letter of credit as collateral to Canadian Imperial Bank of Commerce ("CIBC") on
Oscars $286,432 CDN overall credit limit with CIBC. See Note 6 of the Notes to
Consolidated Financial Statements.
On December 1, 2000, Huntington provided a commitment, subject to certain
closing requirements specified by Huntington, for financing the Bunge
acquisition and for the Company's anticipated capital expenditure needs. See
Note 8 of the Notes to Consolidated Financial Statements.
19
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 10, 2000, the Company held its Annual Meeting of Shareholders
("Annual Meeting") for the purposes of electing directors to serve until the
next annual meeting. In addition to the election of directors, as permitted by
the Company's code of regulations, a motion was made and seconded to increase
the number of directors to five. The nominees for directors were unopposed.
3,285,865 Common Shares were outstanding and entitled to vote at the Annual
Meeting. The number of shares present at the Annual Meeting was 1,483,554 and
1,335,624 shares were represented at the Annual Meeting by proxy. The results of
the voting were as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAINED
<S> <C> <C> <C>
Motion to increase the size of the Board of
Directors of the Company from four to five 1,483,554 0 1,335,624
William C. Stearns for Director 2,813,670 0 5,508
Sally A. Stearns for Director 2,815,578 0 3,600
Frank E. Duval for Director 2,813,870 0 5,308
Carter F. Randolph, Ph.D. for Director 2,813,870 0 5,308
Adam "Bud" Vetter for Director 1,483,554 0 1,335,624
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit #27 - Financial Data Schedule
20
<PAGE> 22
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: December 12, 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)
21
