<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 March 13, 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
January 31, 2000, April 30, 1999 and January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JANUARY 31,
ASSETS 2000 1999 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 860,596 $ 361,868 $ 595,732
Trade accounts receivable, net of allowance for doubtful
accounts of $69,373, $40,000 and $57,526 as of
January 31, 2000, April 30, 1999 and January 31, 1999 1,596,610 1,044,515 1,082,287
Inventory 2,024,916 1,815,353 1,991,473
Prepaid expenses and other 113,108 194,790 87,515
Deferred income taxes 67,267 41,118 78,535
---------------- ---------------- ----------------
Total current assets 4,662,497 3,457,644 3,835,542
---------------- ---------------- ----------------
Property and equipment:
Land 73,928 73,928 73,928
Buildings 1,829,823 1,829,823 1,829,823
Building improvements 91,809 91,809 60,154
Leasehold improvements 138,783 9,433 9,433
Machinery and equipment 2,296,532 1,991,730 1,820,409
Office equipment 465,770 388,754 453,269
Tooling 132,299 131,089 125,349
Vehicles 40,401 40,401 45,392
---------------- ---------------- ----------------
5,069,345 4,556,967 4,417,757
Less accumulated depreciation 1,417,885 1,169,800 1,185,253
---------------- ---------------- ----------------
Net property and equipment 3,651,460 3,387,167 3,232,504
---------------- ---------------- ----------------
Goodwill and other intangible assets, net 1,512,908 523,826 539,415
Cash surrender value of life insurance 87,303 51,089 51,013
Trademarks and patents, net 12,231 3,167 3,341
Other assets 16,867 15,328 18,620
---------------- ---------------- ----------------
Total assets $ 9,943,266 $ 7,438,221 $ 7,680,435
================ ================ ================
</TABLE>
CONTINUED
1
<PAGE> 3
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
January 31, 2000, April 30, 1999 and January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JANAURY 31,
LIABILITIES AND SHAREHOLDERS* EQUITY 2000 1999 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 849,641 $ 539,668 $ 519,627
Accrued expenses 496,471 187,578 302,221
Lines of credit 113,819 - -
Current portion of long-term liabilities 234,986 138,446 138,582
---------------- ---------------- ----------------
Total current liabilities 1,694,917 865,692 960,420
---------------- ---------------- ----------------
Long-term liabilities:
Notes payable, net of current portion 1,367,327 664,203 701,330
Other long term liabilities, net of current portion 267,342 - -
Deferred income taxes 190,168 103,137 85,237
---------------- ---------------- ----------------
Total long-term liabilities 1,824,837 767,340 786,567
---------------- ---------------- ----------------
Total liabilities 3,519,754 1,633,032 1,746,987
---------------- ---------------- ----------------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized, 3,289,165 issued
and 3,285,865 outstanding as of January 31, 2000, April 30, 1999 and
January 31, 1999, respectively 3,629 3,629 3,629
Additional paid-in capital 5,248,461 5,248,461 5,248,461
Retained earnings, including cumulative translation
adjustment of ($11,792) as of January 31, 2000 1,184,622 566,299 694,558
---------------- ---------------- ----------------
6,436,712 5,818,389 5,946,648
Less treasury stock at cost; 3,300 shares 13,200 13,200 13,200
---------------- ---------------- ----------------
Total shareholders' equity 6,423,512 5,805,189 5,933,448
---------------- ---------------- ----------------
Total liabilities and shareholders' equity $ 9,943,266 $ 7,438,221 $ 7,680,435
================ ================ ================
</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 January 31, 2000 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales $ 3,961,107 $ 2,661,301
Cost of sales 2,766,903 1,961,436
---------------- -----------------
Gross profit 1,194,204 699,865
Selling, general and administrative expenses 961,439 468,103
---------------- -----------------
Income from operations 232,765 231,762
---------------- -----------------
Other income (expense), net:
Interest expense (40,194) (19,038)
Interest income 31,079 17,228
Other, net (595) (1,017)
---------------- -----------------
Income before income tax expense 223,055 228,935
---------------- -----------------
Income tax expense:
Current 121,531 133,255
Deferred (15,306) (32,202)
---------------- -----------------
Total income tax expense 106,225 101,053
---------------- -----------------
Net income $ 116,830 $ 127,882
================ =================
Earnings per share - Basic $ .04 $ .04
================ =================
Earnings per share - Diluted $ .04 $ .04
================ =================
Basic weighted-average common shares outstanding 3,285,865 3,285,865
================ =================
Diluted weighted-average common shares outstanding 3,285,865 3,290,011
================ =================
</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 nine months ended January 31, 2000 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales $ 11,312,112 $ 7,838,948
Cost of sales 7,971,628 5,660,102
---------------- -----------------
Gross profit 3,340,484 2,178,846
Selling, general and administrative expenses 2,269,469 1,549,933
---------------- -----------------
Income from operations 1,071,015 628,913
---------------- -----------------
Other income (expense), net:
Interest expense (80,113) (60,737)
Interest income 51,978 28,697
Other, net (1,142) 58,413
---------------- -----------------
Income before income tax expense 1,041,738 655,286
---------------- -----------------
Income tax expense:
Current 411,050 271,605
Deferred 573 (6,112)
---------------- -----------------
Total income tax expense 411,623 265,493
---------------- -----------------
Net income $ 630,115 $ 389,793
================ =================
Earnings per share - Basic $ .19 $ .12
================ =================
Earnings per share - Diluted $ .19 $ .12
================ =================
Basic weighted-average common shares outstanding 3,285,865 3,285,626
================ =================
Diluted weighted-average common shares outstanding 3,285,865 3,288,751
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 6
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended April 30, 1999 and the nine months ended January 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN RETAINED TREASURY HOLDERS'
SHARES SHARES CAPITAL EARNINGS SHARES EQUITY
------------ ------------ ------------ -------------- ------------- ------------
<S> <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 - - - 630,115 - 630,115
Cumulative translation
adjustment - - - (11,792) - (11,792)
----------- ----------- ----------- ------------- ------------ -----------
Balances at January 31, 2000 3,285,865 $ 3,629 $ 5,248,461 $ 1,184,622 $ (13,200) $ 6,423,514
=========== =========== =========== ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 7
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended January 31, 2000 and 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 630,115 $ 389,793
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 221,747 -
Depreciation and amortization 355,827 281,659
Loss on the sale of property and equipment (1,407) -
Deferred income taxes 573 (6,112)
Changes in assets and liabilities:
Trade accounts receivable (646,302) 224,946
Inventory (87,047) (123,131)
Prepaid expenses and other 89,813 (17,585)
Accounts payable 254,801 (248,466)
Accrued expenses 293,507 61,735
--------------- ----------------
Net cash provided by operating activities 1,111,627 562,839
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (311,631) (159,723)
Sale of property and equipment 199 -
Investment in subsidiary, net of cash (921,232) -
Cash surrender value of life insurance, net (36,215) (8,937)
Purchase of other assets (7,382) -
---------------- -----------------
Net cash used in investing activities (1,276,261) (168,660)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under notes payable and line of credit 851,323 -
Principal payments on long-term debt and capital leases (173,132) (110,386)
Net proceeds from issuance of common shares - 39,600
---------------- -----------------
Net cash provided by (used in) financing activities 678,191 (70,786)
---------------- -----------------
Effect of exchange rate changes on cash (14,829) -
---------------- -----------------
Net increase in cash and cash equivalents 498,728 323,393
---------------- -----------------
Cash and cash equivalents, beginning of year 361,868 272,339
---------------- -----------------
Cash and cash equivalents, end of quarter $ 860,596 $ 595,732
================ =================
</TABLE>
CONTINUED
6
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS, CONTINUED
For the nine months ended January 31, 2000 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 79,760 $ 60,737
================ =================
Income taxes $ - $ 60,631
================ =================
</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)
January 31, 2000 and 1999
- --------------------------------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three and nine months ended
January 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, 1999 and April 30, 1998. 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 January 31, 2000 and 1999 were as
follows:
2000 1999
Raw materials $ 972,870 $ 1,023,637
Work in process 12,424 1,662
Finished goods 1,039,622 966,174
----------------- -----------------
Total inventory $ 2,024,916 $ 1,991,473
================= =================
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
WEIGHTED AVERAGE COMMON JANUARY 31, JANUARY 31,
------------------------------- -------------------------------
SHARES OUTSTANDING 2000 1999 2000 1999
----------------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Common shares issued 3,289,165 3,289,165 3,289,165 3,288,926
Treasury shares (3,300) (3,300) (3,300) (3,300)
-------------- --------------- -------------- ---------------
Basic shares 3,285,865 3,285,865 3,285,865 3,285,626
Dilutive effect of warrants 0 4,146 0 3,125
-------------- --------------- -------------- ---------------
Diluted shares 3,285,865 3,290,011 3,285,865 3,288,751
============== =============== ============== ===============
</TABLE>
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2000 and 1999
- --------------------------------------------------------------------------------
4. NOTES PAYABLE
Notes payable at January 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
February 1, 2000), due on October 1, 2007. $ 624,137 $ 680,925
Note payable to a bank, collateralized by real estate,
accounts receivable, inventory, and equipment, payable on
November 1, 2004, and monthly interest payments at a rate of
prime adjusted not more than once per year (interest rate of
8.25% as of February 1, 2000). 760,001 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. 68,489 120,000
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%, due on March 1, 2003. 63,609 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 June 2, 1999),due on June 2, 1999. 0 38,987
--------------- ---------------
Total notes payable 1,516,236 839,912
Less current portion 148,909 138,582
--------------- ---------------
$ 1,367,327 $ 701,330
=============== ===============
</TABLE>
9
<PAGE> 11
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2000 and 1999
- --------------------------------------------------------------------------------
5. INCOME TAXES
The components of the net deferred tax liability at January 31, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 116,488 $ 112,779
Alternative minimum tax credit 6,867 42,674
Allowance for doubtful accounts 26,362 21,860
Other 7,773 2,723
---------------- -----------------
Gross deferred tax assets 157,490 180,036
Deferred tax liabilities:
Property and equipment 280,391 186,738
---------------- -----------------
Net deferred tax liability $ (122,901) $ (6,702)
================ =================
</TABLE>
The Company had net operating loss carryforwards available of $331,701
and $364,871 at April 30, 1999 and 1998, respectively, from the
purchase of Select Origins, of which $33,170 is available to deduct
each year through April 30, 2009.
6. BAD DEBT EXPENSE
The Company, as of January 31, 2000, recorded bad debt expense of
$182,925 associated with the Chapter 11 bankruptcy petition filed by
AmeriServe Food Distribution Inc., the parent company of Prosource
Distribution Services. At the time of the bankruptcy, Prosource
Distribution Services owed the Company $195,744. The Company believes
that it will receive $12,819 from interim emergency financing obtained
by AmeriServe Food Distribution Inc. Prosource Distribution Services
was chosen by one of the Company's major private label customers to
distribute Company products to that customer. Since the bankruptcy
filing, the customer has provided the Company with instructions to use
alternative distributors for future distribution of Company products to
that customer.
10
<PAGE> 12
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2000 and 1999
- --------------------------------------------------------------------------------
7. BUSINESS ACQUISITION
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 is $370,951, this amount has been recorded as other
intangible assets and other long-term liabilities. The Company financed
this transaction through $800,000 in bank financing and the remainder
from cash flows from operations. Oscars is reported to be the largest
manufacturer of flavoring syrups for the specialty coffee industry in
Canada. The operations of Oscars have been included for the periods
subsequent to the acquisition.
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 on 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 preliminary allocation of the purchase
price 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
================
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.
GENERAL
- -------
The Company is an Ohio corporation headquartered in Mansfield, Ohio. The Company
was organized on March 14, 1988 and is engaged in the business of manufacturing
and marketing specialty food products, including coffee and espresso flavorings,
syrups, oils and toppings, extracts, flavorings, sauces, dressings and specialty
sugars. The Company sells its products throughout the United States and in over
15 foreign countries, including Australia, Canada, Egypt, England, Iceland,
Israel, Japan, Mexico, New Zealand, Saudi Arabia, Singapore, and United Arab
Emirates.
Since its incorporation in 1988, the Company has grown from providing a single
product line and having two employees, to being a major multinational
manufacturer and supplier of flavoring syrups for the specialty coffee industry
with 67 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 ("Caribou"), Kraft General Foods, Krups, Sara Lee's
Superior Coffee Division, and Sysco Food Service. The Company does not have any
long-term supply agreements with any of these customers except Starbucks and
Caribou. 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
- -----------------
While flavored syrup sales to the specialty coffee industry continues to be the
backbone of the Company's business, efforts are being made to develop product
diversity. The Company's plans, for the fiscal year ended April 30, 2000,
include aggressively pursuing the specialty frozen beverage market, developing
other new product lines, further developing the international market, and
increasing manufacturing efficiencies. The Company also plans to continue to
search for strategic acquisitions to enhance market position and provide for
revenue growth.
Specifically, the Company's plans center around diversifying and providing a
wider range of products for its distributors to handle. The Company's management
recognizes the need to diversify from its concentration in sales to the
specialty coffee industry and 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's frozen beverage product line is the
initial move to diversify from the specialty coffee industry and leverage the
Company's strength in manufacturing flavored liquid products. The Company
believes that this market is several times larger than the specialty coffee
market and is still in a rapid growth phase. In the first nine months of fiscal
year 2000, the Company
12
<PAGE> 14
has expanded the sales force and increased advertising and marketing
expenditures to support this product line. The Company's marketing efforts,
during this period, have been concentrated to aggressively pursue the frozen
beverage market with a broad base of different products. Also marketing has
focused on the advantages that the Company's distributors and existing frozen
beverage distributors have in selling both the frozen beverage and coffee
flavoring product lines. The Company's plans call for the continued effort to
identify and develop additional product lines.
The Company's plans also include making an intensified effort to grow its
international business. A large number of international contacts were made
during the fiscal year ended April 30, 1999. From these contacts, the Company
has been able to establish a number of new international distributors. Efforts
continue in fiscal year 2000 to build a strong international presence. These
efforts include the Company adding an international marketing specialist in the
second quarter of fiscal year 2000 and the Company exhibiting its products at
several international trade shows. The Company is also rapidly developing the
manufacturing expertise and flexibility to handle the various regulatory
requirements of the international market place.
The Company continues to strive to offer a higher degree of customer service and
to lower production costs through improved efficiencies at its manufacturing
facilities. In order to meet increased warehousing requirements by some of the
Company's larger customers, the Company, in May 1999, moved into a 30,000 square
foot facility manufacturing and warehouse facility in Kent, Washington. The
move, from the Company's smaller Kent facility, also permitted improvements in
Kent's manufacturing capabilities. With this move, the Company now has two large
and modern facilities in the United States to serve its customers. In late April
1999, and again in December 1999, the Company acquired new production equipment
at its Mansfield, Ohio facility. This new production equipment, in addition to
providing an immediate cost benefit, provides for a growth path to much higher
production speeds in the future.
The Company's plans also include the continued search for acquisition
candidates. The appropriate candidates will enhance market position and provide
for revenue growth. Specifically, an acquisition could provide new technological
capability, add volume to the Company's existing product lines or compliment the
Company's existing product lines. This effort resulted in the Company acquiring
Oscar Skollsberg's Food Technique Limited ("Oscars") of Richmond, British
Columbia, Canada. This acquisition makes the Company the largest manufacturer of
specialty coffee flavoring syrups in Canada and should provide the Company an
excellent base for other international opportunities. The Company has
subsequently moved Oscars into a 18,625 square foot facility in Delta, British
Columbia, Canada. This facility consolidated several smaller production and
warehouse facilities. This facility should permit improvements in manufacturing
capabilities and provide room for future growth.
13
<PAGE> 15
<TABLE>
<CAPTION>
SELECTED SUMMARY FINANCIAL INFORMATION
- --------------------------------------
QUARTERLY INFORMATION FOR 3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER
INDICATED FISCAL YEARS FY 2000 FY 2000 FY 2000 FY 1999 FY 1999
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
CURRENT ASSETS $ 4,662,497 $ 4,942,970 $ 3,662,587 $ 3,457,644 $ 3,835,542
TOTAL ASSETS $ 9,943,266 $ 10,072,211 $ 7,598,596 $ 7,438,221 $ 7,680,435
CURRENT LIABILITIES $ 1,694,917 $ 1,892,134 $ 939,751 $ 865,692 $ 960,420
LONG TERM DEBT, NET $ 1,634,669 $ 1,715,048 $ 621,832 $ 664,203 $ 701,330
OF CURRENT PORTION
TOTAL LIABILITIES $ 3,519,754 $ 3,753,682 $ 1,681,052 $ 1,633,032 $ 1,746,987
SHAREHOLDERS' EQUITY $ 6,423,512 $ 6,318,529 $ 5,917,544 $ 5,805,189 $ 5,933,448
STATEMENT OF OPERATIONS:
TOTAL SALES $ 3,961,107 $ 4,278,000 $ 3,073,004 $ 2,367,885 $ 2,661,301
COST OF GOODS SOLD $ 2,766,903 $ 2,978,782 $ 2,225,943 $ 1,970,567 $ 1,961,436
SELLING, GENERAL $ 961,439 $ 656,242 $ 651,787 $ 558,105 $ 468,103
AND ADMINISTRATIVE
EXPENSES
NET INCOME (LOSS) $ 116,830 $ 400,930 $ 112,355 $ (128,259) $ 127,882
BASIC AND DILUTED EARNINGS $ 0.04 $ 0.12 $ 0.03 $ (0.04) $ 0.04
(LOSS) PER SHARE
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTHS NINE MONTHS
SPECIFIED PERIODS APRIL 30, 1999 APRIL 30, 1998 APRIL 30, 1997 JANUARY 31, JANUARY 31,
2000 1999
BALANCE SHEET:
CURRENT ASSETS $ 3,457,644 $ 3,556,309 $ 2,956,601 $ 4,662,497 $ 3,835,542
TOTAL ASSETS $ 7,438,221 $ 7,514,201 $ 5,780,362 $ 9,943,266 $ 7,680,435
CURRENT LIABILITIES $ 865,692 $ 1,156,514 $ 1,050,774 $ 1,694,917 $ 960,420
LONG TERM DEBT, NET
OF CURRENT PORTION $ 664,203 $ 802,353 $ 2,256 $ 1,634,669 $ 701,330
TOTAL LIABILITIES $ 1,633,032 $ 2,010,146 $ 1,053,030 $ 3,519,754 $ 1,746,987
SHAREHOLDERS' EQUITY $ 5,805,189 $ 5,504,055 $ 4,727,332 $ 6,423,512 $ 5,933,448
STATEMENT OF OPERATIONS:
TOTAL SALES $10,206,832 $ 9,242,530 $ 7,381,105 $ 11,312,112 $ 7,838,948
COST OF GOODS SOLD $ 7,630,669 $ 6,613,046 $ 5,432,588 $ 7,971,628 $ 5,660,102
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES $ 2,108,038 $ 1,758,667 $ 1,588,865 $ 2,269,469 $ 1,549,933
NET INCOME $ 261,534 $ 659,716 $ 402,272 $ 630,115 $ 389,793
BASIC AND DILUTED EARNINGS
PER SHARE $ 0.08 $ 0.20 $ 0.13 $ 0.19 $ 0.12
</TABLE>
14
<PAGE> 16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------
Results of operations for the three months ended January 31, 2000 were
highlighted by continued strong sales of branded flavoring syrups to the
specialty coffee industry and in sales of private label flavoring syrup to the
Company's major customer. During the current fiscal year quarter, the Company
encountered a large accounts receivable write-off, higher selling and marketing
expenses and the effects from the acquisition of Oscars. In addition, the
Company experienced a slight reduction in sales and increased expenses
associated with moving Oscars operations to a new manufacturing and warehouse
facility.
Net sales for the three months ended January 31, 2000 and 1999 were $3,961,107
and $2,661,301, respectively, which represents a 49% increase. For the three
months ended January 31, 2000, private label syrup sales increased by 47.6%, the
Company's branded syrup products sales increased by 54.2%, while the sales of
other Company products increased by 54.58%, all as compared to the three months
ended January 31, 1999. Private label syrup, Company branded syrup, and other
Company products represented 72.1%, 20.2% and 7.7% of gross sales, respectively,
for the three months ended January 31, 2000. The Company's private label sales
increased primarily as a result of a 75.8% increase in sales to the Company's
largest private label customer. The Company's branded syrup products' sales
increased primarily as a result of 9.4% increase in the sales of the DOLCE(R)
brand syrups and $355,264 in additional sales of OSCAR'S(R) brand syrups. 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 and Flavoring
Extracts, were offset by decreases in the remaining product lines in this group.
During the three-month period ended January 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
69.8% for the three months ended January 31, 2000 compared to 73.7% for the same
quarter last year. Cost of sales increased by $805,467, including $216,507
associated with Oscars operations, for the three months ended January 31, 2000
compared to the three months ended January 31, 1999 as a result of higher sales
volume.
Total selling, general and administrative expenses increased by 105.4%, or
$493,336, for the three months ended January 31, 2000 compared to the three
months ended January 31, 1999. This increase included $168,968 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. This write-off represented
4.6% of net sales for the quarter. Future sales of the Company's products will
not be affected by this bankruptcy as the private label customer, that received
Company products from a subsidiary of the bankrupt, has redirected distribution
of the Company's products to that customer through other distributors. Other
selling, general and administrative expenses increased by $141,443 or 30.2%. The
increase in other selling, general and administrative expenses were a result of
increases in trade shows, travel, sales promotions, product samples, postage,
telephone, outside services, depreciation of office equipment, amortization of
goodwill, and increases in the number of employees and employee wages. These
increases were offset by decreases in advertising, and insurance costs. Selling,
general and administrative expenses, as a percentage of net sales, increased to
24.3% compared to 17.6% for the three months ended January 31, 2000 and 1999,
respectively.
15
<PAGE> 17
Interest expense for the three months ended January 31, 2000 increased by
$21,156 compared to the three months ended January 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 $595 for the three months ended
January 31, 2000 compared to total net other expense of $1,017 for the three
months ended January 31, 1999. The Company also reported interest income of
$31,079 for the current quarter compared to $17,228 for the second quarter last
year. The increase in interest income is associated with a higher rate of return
on a life insurance policy and higher levels of invested cash for the current
period.
Income before income tax expense decreased by only $5,880 for the three months
ended January 31, 2000 from $228,935 for the three months ended January 31, 1999
in spite of the significant accounts receivable write-off.
The Company recorded income tax expense of $106,225 for the three months ended
January 31, 2000. For the three months ended January 31, 1999, the Company
recorded income tax expense of $101,053.
As a result of the foregoing, the Company reported net income of $116,830, or
$0.04 per basic weighted average number of common shares of the Company (the
"Common Shares") outstanding, for the three months ended January 31, 2000
compared to net income of $127,882 or $0.04 per basic weighted average number of
Common Shares outstanding for the three months ended January 31, 1999. The basic
weighted average number of Common Shares outstanding was 3,285,865 for the each
three-month period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
- -------------------------------------------------------------------------
Results of operations for the nine months ended January 31, 2000 were
highlighted by a strong increase in sales of flavoring syrups to the specialty
coffee industry and in sales of private label flavoring syrup to the Company's
major customer. Additionally, the Company introduced the specialty frozen
beverage products, but encountered a large accounts receivable write-off, higher
selling and marketing expenses and the financial effects from the acquisition of
Oscars as of October 1, 1999.
Net sales for the nine months ended January 31, 2000 and 1999 were $11,312,112
and $7,838,948, respectively, which represents a 44.3% increase. For the nine
months ended January 31, 2000, private label syrup sales increased by 41.1%, the
Company's branded syrup products sales increased by 47.4%, while the sales of
other Company products increased by 72.1%, all as compared to the nine months
ended January 31, 1999. Private label syrup, Company branded syrup, and other
Company products represented 73.4%, 18.7% and 7.9% of gross sales, respectively,
for the nine months ended January 31, 2000. The Company's private label sales
increased primarily as a result of a 60.9% 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 33.6%, 28.9% and 27.6%,
respectively. The Company's branded syrup products' sales increased primarily as
a result of 23.1% increase in the sales of the DOLCE(R) brand syrups, the
closeout sale of the GODIVA(R) brand syrups and $486,675 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
16
<PAGE> 18
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 nine-month period ended January 31, 2000, the Company experienced
lower cost of goods sold, as a percentage of net sales, compared to the same
nine-month period in the previous year. The costs associated with improved
manufacturing efficiency were partially offset by write-offs of obsolete
inventory and increases in freight-out and packaging costs. Consequently, cost
of sales, as a percentage of net sales, decreased to 70.5% for the nine months
ended January 31, 2000 compared to 72.2% for same quarter last year. Cost of
sales increased by $2,311,526, including $275,444 associated with Oscars
operations, for the nine months ended January 31, 2000 compared to the nine
months ended January 31, 1999 as a result of higher sales volume.
Total selling, general and administrative expenses increased by 46.4% or
$719,536 for the nine months ended January 31, 2000 compared to the nine months
ended January 31, 1999. This increase included $215,196 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. Future sales of the Company's products
will not be affected by this bankruptcy as the private label customer, that
received Company products from a subsidiary of the bankrupt, has redirected
distribution of the Company's products to that customer through other
distributors. This write-off represented 1.6% of year-to-date net sales while
total write-offs represented 2% of year-to-date net sales. Write-offs of
accounts receivable for the fiscal years ending April 30, 1996 through April 30,
1999 have averaged 1.6% of net sales. Other selling, general and administrative
expenses increased by $321,415 or 20.7%. The increase was a result of increases
in trade shows, advertising, travel, product samples, postage, telephone,
outside services, depreciation of office equipment, amortization of goodwill,
and increases in the number of employees and employee wages. These increases
were offset by decreases in sales promotion, and insurance costs. Total selling,
general and administrative expenses, as a percentage of net sales, increased to
20.1% compared to 19.8% for the nine months ended January 31, 2000 and 1999,
respectively.
Interest expense for the nine months ended January 31, 2000 increased by $19,376
compared to the nine months ended January 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 interest income of $51,978 for the current nine month
period compared to $28,697 for the same period last year. The increase in
interest income is associated with higher levels of invested cash for the
current period.
The Company also reported total net other expense of $1,142 for the nine months
ended January 31, 2000 compared to total net other income of $58,413 for the
nine months ended January 31, 1999. The primary reasons for this $59,555 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 nine months ended January 31, 1999.
Income before income tax expense increased to $1,041,738 for the nine months
ended January 31, 2000 from $655,286 for the nine months ended January 31, 1999.
17
<PAGE> 19
The Company recorded income tax expense of $411,623 for the nine months ended
January 31, 2000. For the nine months ended January 31, 1999, the Company
recorded income tax expense of $265,43.
As a result of the foregoing, the Company reported net income of $630,115, or
$0.19 per basic weighted average number of Common Shares outstanding, for the
nine months ended January 31, 2000 compared to net income of $389,793 or $0.12
per basic weighted average number of Common Shares outstanding for the nine
months ended January 31, 1999. The basic weighted average number of Common
Shares outstanding increased to 3,285,865 for the current nine-month period
compared to 3,285,626 for the comparable nine-month period last year. The
increase reflects Common Shares issued upon the exercise of warrants during the
fiscal year ended April 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The working capital and working capital ratio as of January 31, 2000 and January
31, 1999 were $2,967,580 and 2.75 to 1 and $2,875,122 and 3.99 to 1,
respectively. The increase in working capital for January 31, 2000 compared to
January 31, 1999 was primarily a result of a $264,864 increase in the Company's
cash and cash equivalents, a $514,323 increase in the Company's accounts
receivable, a $25,593 increase in prepaid expenses and a $33,443 increase in the
Company's inventory, offset by a $330,014 increase in accounts payable, a
$194,250 increase in the Company's accrued expenses, a $210,223 increase in debt
related current liabilities and a $11,268 decrease in deferred income taxes. The
increase in accounts receivable was a result of strong sales in January 2000
compared to January 1999. The increase in prepaid expenses is primarily a result
of prepaid rent and city income tax deposits. The increase in inventory was the
net result of increases associated with the acquisition of Oscars inventory
offsetting decreases that were a result of management efforts and improved
controls associated with new computer software implemented by July, 1999. The
increase in accounts payable is a result of the Company's strong sales in
January 2000 and the related purchases of raw materials. The increase in accrued
expenses primarily reflects an increase in accrued state income taxes. 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 nine months ended January 31, 2000,
provided net cash of $1,111,627. The Company used $921,232 to acquire Oscars,
$311,787 to acquire equipment and trademarks, and also increased its investment
in life insurance policies by $36,215. The Company also used $173,132 to make
principal payments on a mortgage note payable and on capital leases, and used
$7,143 for a long term lease deposit on the Company's Kent, Washington
manufacturing facility. The Company borrowed $800,000 to acquire Oscars and
Oscars increased its line of credit by $51,323. Consequently, during this
period, cash and cash equivalents increased by $498,728 after a $14,829 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 March 13, 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.
18
<PAGE> 20
YEAR 2000 COMPLIANCE
- --------------------
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware. All the primary financial and manufacturing
modules have been implemented as of April 30, 1999. This software is Year 2000
compliant. The Company updated the version of its UNIX operating system and the
system's printer spooler to be fully Year 2000 compliant during September 1999.
The Company's personal computer operating systems were also upgraded in
September 1999 to be Year 2000 compliant according to the operating system
manufacturer.
The Company, as of March 13, 2000, had incurred costs of $223,000 to complete
its Year 2000 compliance work. The Company did not incur any Year 2000 related
problems in its computer systems nor did the Company incur any disruptions from
its suppliers.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 7, 1999, Tina Michaud d/b/a Allied Resources filed a complaint
against the Company which was moved to the federal District Court of Minnesota
for unlawful termination of a sales representative agreement, breach of covenant
of good faith and fair dealing, and unjust enrichment. The plaintiff in this
complaint is seeking damages in excess of $20,000,000 for lost commissions and
out-of-pocket losses. On or about May 20, 1999, the Company terminated the
agreement with the plaintiff. The Company's records, upon initial review,
indicate that it paid Allied Resources $2,994.28 in commissions and expenses
pursuant to the terms of the agreement. The Company believes that there are no
additional expenses or commissions due or owed to the plaintiff. The Company
believes it has complied with the terms of the agreement with the plaintiff and
believes that the allegations of the plaintiff are without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit #27 - Financial Data Schedule
19
<PAGE> 21
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: March 15, 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)
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JAN-31-2000
<CASH> 860,596
<SECURITIES> 0
<RECEIVABLES> 1,665,983
<ALLOWANCES> (69,373)
<INVENTORY> 2,024,916
<CURRENT-ASSETS> 4,662,497
<PP&E> 5,069,345
<DEPRECIATION> (1,417,885)
<TOTAL-ASSETS> 9,943,266
<CURRENT-LIABILITIES> 1,694,917
<BONDS> 1,367,327
0
0
<COMMON> 3,629
<OTHER-SE> 6,433,083
<TOTAL-LIABILITY-AND-EQUITY> 9,943,266
<SALES> 11,312,112
<TOTAL-REVENUES> 11,364,090
<CGS> 7,971,628
<TOTAL-COSTS> 10,020,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 221,747
<INTEREST-EXPENSE> 80,113
<INCOME-PRETAX> 1,041,738
<INCOME-TAX> 411,623
<INCOME-CONTINUING> 630,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 630,115
<EPS-BASIC> .19
<EPS-DILUTED> .19
</TABLE>
