10KSB 1 l89395ae10ksb.txt STEARNS & LEHMAN, INC. FORM 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB __X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 2001 _____ 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) Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON SHARES, NO PAR VALUE (Title of Class) 2 Check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [___] State issuer's revenues for its most recent fiscal year: $20,044,671 State the aggregate market value of the voting common stock, no par value, held by non-affiliates computed by reference to the average bid and asked price of such stock as of June 29, 2001: $6,559,609 As of June 29, 2001, 3,285,865 shares of common stock, no par value, were outstanding. Documents incorporated by reference: NONE. Exhibit Index is located on pages 48 to 50. Transition Small Business Disclosure Format (check one): Yes ___ No _X_ 3 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL ------- The Company is an Ohio corporation headquartered in Mansfield, Ohio. The Company was organized on March 14, 1988 and is engaged in the business of manufacturing and marketing specialty food products, including coffee and espresso flavorings, syrups, oils and toppings, extracts, flavorings, dressings, specialty sugars and frozen beverage products. Accordingly, the Company operates in one industry segment. The Company sells its products throughout the United States and in over 16 foreign countries, including Australia, Canada, England, Ireland, Israel, Japan, Malaysia, Mexico, New Zealand, Norway, Singapore and Turkey. Since its incorporation in 1988, the Company has grown from providing a single product line and having two employees, to being multi-national and a major manufacturer and supplier of flavoring syrups for the specialty coffee industry with 83 employees. The Company's customer list includes a number of America's top specialty coffee retailers and restaurants including Starbucks Coffee Company ("Starbucks"), Barnie's Coffee & Tea Company, The Coffee Beanery, Darden Restaurants Inc.'s The Olive Garden Italian Restaurant, Advantica Restaurant Group, Inc.'s Denny's Restaurant, Gloria Jeans Gourmet Coffee, Borders, Inc., Caribou Coffee Company, Sara Lee's Superior Coffee Division, Sysco Food Service and also the United Kingdom's Tate & Lyle PLC. The Company has long-term supply agreements with three customers. They are Starbucks, The Coffee Beanery, and Tate & Lyle. The Company believes that its success in obtaining these accounts is attributable to the Company's emphasis on quality, dependable service and innovation. HISTORY OF OPERATIONS --------------------- In 1988, the Company commenced production of a single consumer product line, Grandma's Choice flavorings and extracts for baking and cooking. The Company initially employed two persons and leased 1,200 square feet of space in Mansfield, Ohio. In early fiscal 1993, the Company introduced its DOLCE(R) product line of flavoring syrups, which originally consisted of over 30 sweetened liquid flavorings offered in three different sizes. The Company also started manufacturing flavoring syrups under private labels for various national accounts, including several large North American based food companies. Flavoring syrups are used to flavor coffee, iced tea, espressos, cappuccinos, ice cream and specialty drinks. In April 1994, the Company acquired by merger Select Origins, Inc., a New York corporation also engaged in the manufacture and marketing of specialty food products. On September 1, 1994, the Company entered into a written private label supply agreement with Starbucks to develop and manufacture certain flavored coffee syrups and have renewed this agreement three times. The current agreement covers the period of June 1, 2001 through August 31, 2003. This agreement is an exclusive supplier agreement with Starbucks to supply defined flavored syrups meeting certain specifications and complying with defined inspection and testing procedures. In order to meet the increased production and warehousing requirements, in March 1995, the Company leased manufacturing and warehouse space near Seattle, Washington. 1 4 In light of the success of the DOLCE(R) product line and the associated private label products, in late 1995, the Company began to expand the FLAVOR-MATE(R) product line to include syrups, sugars and toppings. In February 1996, the Company introduced a line of sugar free flavored syrup products under the DOLCE(R) brand name and under certain private label brands as well. On December 4, 1997, the Company acquired the inventory, equipment, customers, product formulas, trademarks and other intangible assets of Ricter Enterprises, LTD. ("Ricter"), the manufacturer of the SENZA ZUCCHERO and SENZA RIVALE(TM) brands of flavoring syrups. On January 16, 1998, the Company acquired the SAN MARINO Flavored Syrup product line. In October 1998, the Company started shipping the premium DiNATURA(TM) Flavored Syrup product line. In April 1999, the Company introduced a broad line of frozen beverage products under the PALM BAY CLUB(TM) product name. On August 17, 1999, the Company established 19035 Yukon Inc., a wholly owned Canadian subsidiary, for the purpose of acquiring Oscar Skollsberg's Food Technique Limited ("Oscars"), a Canadian corporation located in British Columbia. Oscars is reportedly the largest manufacturer of flavoring syrups for the specialty coffee industry in Canada. On October 1, 1999, using capital contributed by the Company and bank borrowings, 19035 Yukon Inc. acquired Oscars. With the acquisition, the Company became a multi-national manufacturer. On November 8, 1999, Oscars was amalgamated with 19035 Yukon Inc, ultimately completing the acquisition process. Upon amalgamation, the surviving corporation assumed the Oscars name. INDUSTRY OVERVIEW ----------------- The U.S. flavorings industry expanded rapidly after World War II. Today, over 80% of packaged foods contain flavor additions. Approximately 5% of flavor additions are from natural sources. Ninety-five percent are "imitation" as defined by the Food and Drug Administration (the "FDA"). The Company produces several "natural" or "pure" products. Natural/pure classification is regulated by the FDA. A pure extract is obtained directly from the food item (e.g. vanilla or coffee beans, nuts, fruit) through use of a solution with a 35% alcohol content. A natural flavor is obtained by extracting essential flavor-bearing oils from botanical sources (e.g. peppermint leaves, orange and lemon peels). By contrast, artificial or imitation flavors are created by blending aromatic chemicals to which natural flavors are sometimes added. Imitation flavors commonly contain propylene glycol and/or glycerin, which are heavier and less volatile than alcohol and will not evaporate during cooking. Because of their resistance to heat, imitation products can deliver more consistent flavor and greater retention of aromatic properties than natural flavors. Conversely, the alcohol contained in extracts or natural flavors helps prevent freezing and spoilage. The Company produces both natural and imitation flavored products in order to meet the various needs of consumers. PRINCIPAL PRODUCTS AND THEIR MARKETS ------------------------------------ Flavoring syrups are sold via five branded product lines. The DOLCE(R) brand product line consists of 38 flavors, all certified Kosher by the Orthodox Union(R), in four sizes. The DOLCE(R) brand also consists of eight sugar free flavors. The DOLCE(R) brand is distributed to the specialty coffee and 2 5 the food service industries. The OSCAR's(R) brand product line consists of 40 premium flavors and nine sugar free flavors in three sizes for distribution through food brokers to the specialty coffee industry. The DiNATURA(TM) premium natural flavored brand consists of 27 flavors in two sizes for distribution to the specialty coffee and the food service industries. The SENZA RIVALE(TM) brand consists of 35 flavors and the SENZA ZUCCHERO brand consists of 14 sugar free flavors. The SENZA brands are distributed through supermarkets, specialty food stores and the food service industry. With the acquisition of the SENZA brand, the FLAVOR-MATE(R) brand of syrups has been discontinued and the SAN MARINO FLAVORED SYRUPS brands have been converted to a private label brand for certain customers. The Company also manufactures private label flavoring syrups for distribution direct to the private label customer. The primary use of flavoring syrups are to flavor beverages including coffee, tea, and espresso-based drinks. The frozen beverage products are used in granita machines and blenders to create frozen drinks. The PALM BAY CLUB(TM) product line currently consists of Jammin' Juicers(TM), a 10% real fruit juice ice drink product; Real Fruit Smoothies, a real fruit frozen drink product; Island Chillers(TM), a flavored ice drink product; Chai Latte, a spiced tea based product; and a cappuccino based iced drink product. The PALM BAY CLUB(TM) brand products are distributed to the specialty food and the food service industries. In addition, the Company manufacturers these products for direct distribution to private label customers. The FLAVOR-MATE(R) line of concentrate flavoring products is sold in supermarkets throughout the United States. The product is available in 13 flavors, including amaretto, chocolate raspberry, dutch chocolate, french vanilla and orange cappuccino. FLAVOR-MATE(R) is packaged in a shatter resistant bottle with a resealable snap cap which allows users to create a variety of flavored coffee, tea or other beverages from a single unflavored pot. FLAVOR-MATE(R) products can also be used for cooking and baking purposes. FLAVOR-MATE(R) products are available in single flavor 12 packs or as an assortment of flavors in 12 flavor 48-packs. The Company currently produces Cod Liver Oil, and Cherry Cod Liver Oil for GNC(R) (General Nutrition Center). Both of these products are distributed through the GNC(R) distribution network for sale in GNC(R) retail stores. These products are directed to the health and natural food markets. The Company also bottles a Rice Bran Oil for distribution to supermarkets and specialty food stores and the food service industry. Rice Bran Oil is used as an alternative cooking and baking oil. The Company packages four different sugars and seven different toppings for use primarily in the espresso and food service industries. These sugars and toppings are also available in supermarkets and specialty food stores for consumer use in beverages and desserts. The sugars and toppings are available in the DOLCE(R) brand name. Cinnamon Sticks and Mulling Spices, packaged under the Select Origins(R) brand, are used with wine, cider and apple juice to create a fragrant beverage. These products are distributed through supermarkets and specialty food stores. My Hero(TM) Submarine Dressing is an all natural dressing for use on sandwiches, salads and pastas and for marinating. This product is distributed through supermarkets and specialty food stores. 3 6 STATUS OF NEW PRODUCTS ---------------------- The Company introduced the PALM BAY CLUB(TM) product line, in both a branded and private label form, in April 1999. Product development of this line continues as the Company has worked with its customers to meet changing consumer demands. New product development has been focused on new flavors and extension of the Company's powder products within this line. In February 2000, the Company, through its Oscars subsidiary, introduced three new liquid concentrate products. The products are Chai, Iced Cappuccino, and Iced Mocha. These products are aimed to provide the specialty coffee retailers alternative products for sale to their customers. Although facing stiff competition, sales of these products have made steady improvement throughout fiscal year 2001. PATENTS, TRADEMARKS AND LICENSES -------------------------------- The Company has obtained federal trademark protection for its DOLCE(R), FLAVOR-MATE(R), SENZA RIVALE(R) and OSCAR's(R) products. The Company has also obtained federal trademark protection for SELECT ORIGINS(R), THE COOKING EXPERIENCE(R), SOPHISTICATED NIBBLES(R), STEARNS & LEHMAN(R), and LIMITED HARVEST(R). The Company is in the process of obtaining federal trademark protection for its DiNATURA(TM) and the PALM BAY CLUB(TM) trademarks. The Company keeps all of its proprietary information confidential and takes steps to insure that the results of its development activities (i) are not disclosed and (ii) remain protected under common law, including requiring certain of the Company's key employees to execute written agreements regarding trade secrets and certain restrictive covenants. There can be no assurances that technology and other information acquired by the Company pursuant to its development activities will constitute trade secrets under applicable laws. The Company does not hold any patents. DISTRIBUTION AND MARKETING -------------------------- The Company has distribution arrangements with more than 120 distributors in the United States, most of which are members of the National Food Distributors Association. The Company also has distributors in Australia, Canada, England, Israel, Japan, Mexico, New Zealand , and 10 other countries. All sales to foreign and domestic distributors are conducted in U.S. currency. The majority of the distributors distribute directly to retailers, such as supermarket chains and specialty food stores. Utilizing a distributor enables the retailer to maximize efficient use of time and profit by shifting responsibility to the distributor for stocking shelves, pricing product, rotating stock, providing shelf tags and maintaining inventory. The distributor also coordinates in-store product demonstrations and removes damaged or unsalable products. The Company does not have any written supply agreements with its distributors. The Company periodically issues product price lists to all current distributors. The price list indicates the product price, payment terms of net 30 days with approved credit and freight terms of F.O.B. Mansfield, Ohio or F.O.B. Kent, Washington. Any modification of price, payment terms or freight billing from the price list is made verbally between the distributor and the Company. 4 7 The Company utilizes several types of distributors in the United States, such as grocery distributors for supermarkets, specialty food distributors for supermarkets and specialty retailers, coffee distributors for coffee stores and retailers, and food service distributors for restaurants, to achieve penetration into the various market segments. The Company sells its products directly to such distributors for distribution to end customers. The utilization of a distribution network benefits the Company's ultimate customers of its products by providing a product marketing and servicing conduit between the Company and end user. The distributor introduces and sells the product to retailers, delivers the product, provides store schematics for maximizing product sales and exposure, and monitors market activity. Use of specialty food distributors lends a "service-oriented" aspect to the primary manufacturing business of the Company. The Company's Canadian operation (Oscars) utilizes a brokerage system to market its products. In this brokerage system, a broker handles several functions including in-store demonstrations, maintaining shelves and customer support along with soliciting new business. Unlike the distributor system, a broker normally does not maintain any inventory of product. Consequently, sales are either direct to end customers or to a distributor that the broker employs. Oscars has written agreements with its brokers. Oscars periodically publishes product price lists for use by its brokers and end customers. The price list indicates the product price and payment terms, of net 30 days with approved credit, and may either be based on freight terms of F.O.B. Destination or F.O.B. Delta, British Columbia, Canada. Sales shipped to the United States are in U.S. dollars where all Canadian sales are in Canadian dollars. Both the Company's United States and Canadian operations have direct marketing and distribution arrangements with its private label customers. The Company does not utilize any other distribution network to service those customers. SOURCES AND AVAILABILITY OF RAW MATERIALS ----------------------------------------- The Company's principal products consist primarily of liquid sucrose, dry sugar or fructose, along with flavors, preservatives, packaging and water. The Company has its own water filtration system, which is connected to municipal water supplies. The Company currently acquires its liquid sucrose, dry sugar and fructose from The Amalgamated Sugar Company, Rogers Sugar Ltd. and Total Foods Corp., respectively. Liquid sucrose, dry sugar and fructose are readily available from several large refiners. Flavors are currently obtained from a large number of specialty flavor companies or manufactured at one of the Company's facilities. Each flavor that is purchased is obtained from a sole source supplier and a change in the availability of a flavor or supplier could result in a delay in production and a change in the flavor profile of the end product. Packaging consists primarily of corrugated boxes, bottles and labels. The Company owns the tooling for boxes and labels and can obtain these materials from a large number of vendors. The primary bottle can be obtained from two vendors, Plaxicon and Plastipak. Most other bottles, containers and preservatives used by the Company are readily available from a number of sources. 5 8 COMPETITION ----------- The specialty food products market is highly competitive and competition is likely to increase over time. Several companies are engaged in business similar to or competitive with the business of the Company, and more may be entering the field. As a consequence, there is no assurance that the Company will be able to successfully compete in the marketplace. Some of the competitors, such as R. Torre of San Francisco and DaVinci of Seattle, are older, more established companies whose products were introduced into the market prior to the Company's introduction of flavoring syrups to the United States espresso industry. As all of the known competitors to the Company are closely-held private companies that do not divulge financial information to the public, it is impossible to estimate their competitive ability. The Company attempts to distinguish its position in the market place by delivering high quality products in innovative packaging and at a competitive price. The Company places a strong emphasis on establishing quality assurance standards and procedures that meet the same high standards established by the leaders in the entire food industry. The Company has the industry experience to create value added product marketing programs for its customers in addition to meeting the customer's specific packaging and product needs. By having manufacturing facilities in both the eastern and western United States and in Canada, the Company is unique in the flavoring syrup industry and is better equipped to meet customer service requirements. The Company also believes it is a leader in the flavoring syrup industry in using new materials and methods in packaging its products. Finally, the Company believes that through overall sales volume and production capacity, it can offer its products at highly competitive prices. DEPENDENCE ON MAJOR CUSTOMERS ----------------------------- For the fiscal years ended April 30, 2001 and 2000, Starbucks represented 50% and 49% of the Company's total sales, respectively. In addition, for the fiscal years ended April 30, 2001 and 2000, Starbucks represented 86% and 83% of the sales from the Company's Kent, Washington facility, respectively. The Company's eight major customers, including Starbucks, represented approximately 68% and 70% of the Company's total sales, respectively, for the fiscal years ended April 30, 2001 and 2000. However, other than Starbucks, no other customer exceeded 8% of the Company's total sales in fiscal year 2001 or 2000. If the Company lost the Starbucks' business, the current estimated reduction in net income before taxes would be significant. The loss in revenue would be offset by a reduction in overhead. The majority of the reduction in overhead would result from the expected closure of the Washington facility. The Company would move its West Coast manufacturing into its Canadian facility. The potential impact of this closure would be minimal since approximately 5% of the Company's non-Starbucks business is serviced from this facility. The Company has a written supply agreement through August 31, 2003 with Starbucks. This exclusive supplier agreement details the manufacturing of flavored syrups meeting certain specifications and complying with defined inspection and testing procedures. The price of the syrups 6 9 are defined within the agreement, along with a mechanism for price increases associated with increased production costs. Payment for products are required to be made within 30 days upon receipt of invoice. Both the Company and Starbucks can cancel this agreement with 60 days written notice, with respect to price disagreements, and Starbucks can cancel this agreement with 90 days written notice if the Company does not match a lower price from a competitor. OPERATIONS AND MANAGEMENT/EMPLOYEES ----------------------------------- As of June 29, 2001, the Company employed 83 people, all of whom are full-time employees and are not unionized. The Company's management is unaware of any efforts by its employees to unionize. At the Company's annual meeting of shareholders held on March 31, 1994, the Company adopted the 1994 Stock Option Plan (the "Plan") to help attract and retain employees. As of April 30, 2001, the Company has issued 17,000 options with 15,500 options outstanding under this Plan. The Company is authorized to, and may, issue up to a total of 275,000 of its common shares, no par value, under the Plan. The Company also maintains a salary deferral plan for its United States operations that is qualified under Section 401(k) of the Internal Revenue Code. The salary deferral plan, covering all full-time employees, allows participants to contribute certain amounts on a pretax basis and provides for certain matching contributions by the Company as specified in the salary deferral plan agreement. GOVERNMENTAL REGULATION ----------------------- The manufacture and sale of the Company's products are subject to the jurisdiction of a variety of regulatory authorities, including, but not limited to, federal, state, county and city agencies administering laws and regulations relating to health, labor, taxation and the food industry. The Company is also subject to periodic inspections of its facilities by federal, state and local governmental agencies. The United States flavorings industry in general, and the Company in particular, is subject to the regulations set forth in Section 403 of the Food, Drug and Cosmetic Act which specifically establishes the FDA and gives the FDA authority to establish regulations governing food manufacturing and distribution. This industry is governed by other federal agencies only as prescribed by the FDA and such Act. Specifically, the Company is required to comply with regulations set forth by the FDA in Title 21 of the Code of Federal Regulations. A few examples of such regulations are Good Manufacturing Practices (21 CRF110) and Food Labeling (21 CFR100). The Company is also subject to and continues to monitor compliance with the Federal Nutrition Labeling Act of 1990. In addition, the Company has established a volunteer Hazard Analysis Critical Control Points (HACCP) program similar to the FDA Seafood HACCP regulations. In Canada, the flavoring industry and the Company are subject to the Canadian Food Inspection Agency, which is responsible for the administration and enforcement of the Food and Drug Act as 7 10 well as the Consumer Packaging and Labeling Act as defined in Section 2 of the Food and Drug Regulations. The Company is required to comply with these regulations and is subject to periodic inspections by the Agency. In addition, at the provincial and municipal level, the Company is subject to inspections and the regulations of the Public Health Protection Branch of the Ministry of Health. The Company believes it is in compliance with applicable government regulations, including environmental regulations, and these regulations are elementary to its normal manufacturing practices. Consequently, the Company incurs minimal additional costs to comply with these regulations. ITEM 2. DESCRIPTION OF PROPERTY EXECUTIVE OFFICE, EASTERN UNITED STATES MANUFACTURING AND WAREHOUSE FACILITY ---------------------------------------------------------------------------- On August 16, 1997, the Company moved into a 50,000 square foot facility, located at 30 Paragon Parkway in Mansfield, Ohio. This facility serves as the Company's executive offices and the Eastern United States manufacturing and warehouse facility. In addition to this facility, the Company owns a 12,600 square foot building at 64 Surrey Road in Mansfield, Ohio. This building is used for production of powdered products and as additional warehouse and storage space. The Company owns the Surrey Road building clear of debt and has a $546,053 mortgage note payable on the Paragon Parkway facility. WESTERN UNITED STATES MANUFACTURING AND WAREHOUSE FACILITY ---------------------------------------------------------- In May 1999, the Company moved to a 31,000 square foot warehousing and manufacturing facility in Kent, Washington outside of Seattle. This facility is comprised of 23,000 square feet of warehouse space and 5,500 square feet of manufacturing space. The lease on this facility is for five years starting June 1, 1999. The base rent averages $13,824 per month for the five year period. In addition to base rent, the Company is responsible for real estate taxes and operating fees, which are expected to average $4,166 per month. The Company is also required to maintain public liability insurance. CANADIAN MANUFACTURING, OFFICE AND WAREHOUSE FACILITY ----------------------------------------------------- In January 2000, the Company moved Oscars to a 18,625 square foot office, manufacturing and warehousing facility in Delta, British Columbia, Canada outside of Vancouver. This facility is comprised of 8,030 square feet of warehouse space, 7,970 square feet of manufacturing space and 2,625 square feet of office space. The lease on this facility is for seven years starting December 1, 1999. The base rent averages $9,700 CDN per month for the five-year period. In addition to base rent, the Company is responsible for real estate taxes, insurance and operating fees, which are expected to average $2,896 CDN per month. 8 11 EQUIPMENT AND ADEQUACY OF FACILITIES ------------------------------------ The Company owns substantially all of the equipment at its executive offices and manufacturing and warehouse facilities. This includes nine automated production lines. Six of these lines are located in Mansfield, Ohio, two lines are located at the Kent, Washington facility and one line is located at the Delta, British Columbia facility. All the facilities have space for additional automated production lines. The Company believes that its facilities are adequate for its current and anticipated needs and are adequately covered by insurance. NOTES PAYABLE ------------- The Company has a balance of $546,053, as of April 30, 2001, on a mortgage note payable to First Knox National Bank ("First Knox") collateralized by the real estate located at 30 Paragon Parkway Road in Mansfield, Ohio and by substantially all the assets of the Company. The mortgage note is payable in monthly installments of $9,071, including variable interest at a rate of 7.81%. Final payment will be due on October 1, 2007. The interest rate cannot change more than once every five years and is based upon 3.25% over the weekly average yield on U.S. Treasury securities. On September 28, 1999, the Company, and its Canadian subsidiary, borrowed $800,000 on a note payable from First Knox payable in one principal payment due on October 1, 2004, plus interest at a rate of prime adjusted not more than once per year. The interest rate on this note as of April 30, 2001 was 8.14%. The balance on this note as of April 30, 2001 was $626,671. Pursuant to the terms of both notes, all tangible property must be fully insured. The financial covenants and ratios imposed by First Knox with respect to both notes are as follows: The Company must maintain (i) a minimum Tangible Net Worth of not less than $3,500,000.00, (ii) Working Capital in excess of $500,000.00, (iii) a ratio of Liquid Assets to current liabilities in excess of 0.60 to 1.00 and (iv) a ratio of current assets to current liabilities in excess of 1.45 to 1.00. The term `Tangible Net Worth" means the Company's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. The term "Debt" means all of the Company's liabilities excluding Subordinated Debt. The term "Subordinated Debt" means indebtedness and liabilities of the Company which have been subordinated by written agreement to indebtedness owed by the Company to the Lender in form and substance acceptable to the Lender. The term `Working Capital" means the Company's current assets, less the Company's current liabilities. The term "Liquid Assets" means the Company's accounts receivable plus cash on hand plus the Company's readily marketable securities. 9 12 The Company's Canadian subsidiary has a demand note payable with Canadian Imperial Bank of Commerce ("CIBC"). This note is collateralized by the accounts receivable, inventory, and equipment of Oscars and a Standby Letter of Credit issued against the Company's $400,000 Line of Credit with First Knox. This note is payable in monthly installments of $2,750 CDN including interest at a rate of the Canadian prime plus 0.25%. As of April 30, 2001, the interest rate was 6.75% and the balance of this note was $37,524 US. This note requires Oscars to maintain a ratio of current assets to current liabilities of not less than 1:1, a minimum shareholders' equity of not less than $300,000 CDN, and places limits on capital expenditures, dividends and withdrawals without prior consent of CIBC. ITEM 3. LEGAL PROCEEDINGS Except for litigation which may arise in connection with any of the foregoing matters, the Company is not engaged in any material litigation other than litigation arising in the ordinary course of business, none of which the Company believes would have a materially adverse effect on the Company or its business in the event of an unfavorable outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Not Applicable. [The remainder of this page intentionally left blank.] 10 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION ------------------ Prior to January 1995, the common shares, no par value, of the Company ("Common Stock") were traded only by a single market maker and did not have an NASD inter-dealer transaction price. From that date until December 17, 1996, the Common Stock was traded in the over-the-counter market. Since December 17, 1996, the Common Stock has been traded on The NASDAQ SmallCap Market tier of the NASDAQ Stock Market(SM) under the symbol "SLHN." As of June 29, 2001, the Company had seven listed market makers. The following table sets forth the high and low closing prices of the Common Stock as reported by The Nasdaq Stock Market(SM): Quarter Ended April 30, 2001 High $4.625 Low $2.906 Quarter Ended January 31, 2001 High $5.094 Low $3.438 Quarter Ended October 31, 2000 High $4.969 Low $2.531 Quarter Ended July 31, 2000 High $3.719 Low $2.00 Quarter Ended April 30, 2000 High $3.250 Low $2.063 Quarter Ended January 31, 2000 High $2.375 Low $1.25 Quarter Ended October 31, 1999 High $2.344 Low $1.25 Quarter Ended July 31, 1999 High $3.00 Low $1.313 Quarter Ended April 30, 1999 High $3.00 Low $1.75 Quarter Ended January 31, 1999 High $4.00 Low $2.125 Quarter Ended October 31, 1998 High $3.75 Low $2.00 Quarter Ended July 31, 1998 High $4.875 Low $3.00 Quarter Ended April 30, 1998 High $5.75 Low $4.00 Quarter Ended January 31, 1998 High $6.25 Low $4.625 Quarter Ended October 31, 1997 High $6.375 Low $5.00 Quarter Ended July 31, 1997 High $6.625 Low $4.75 Quarter Ended April 30, 1997 High $7.50 Low $6.00 11 14 HOLDERS ------- At June 29, 2001, the approximate number of holders of record of shares of Common Stock was 688. DIVIDENDS --------- The Company has not paid any cash dividends during the two fiscal years ended April 30, 2001 and 2000 and has no present intention of paying dividends. The Company cannot, without written prior consent of First Knox, pay any dividends on the Common Stock. ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of results of operations and financial condition contains forward-looking information that involves risks and uncertainties. The Company's actual results could differ materially from those anticipated. Factors that could cause or contribute to such differences include, but are not limited to, development activity and possible construction process risks, availability of financing for development, government regulations, competition, and issues related to managing rapid growth and business expansion. PLAN OF OPERATION ----------------- The Company's business plan for the fiscal year ending April 30, 2002 is focused on developing and broadening its position as an international supplier of specialty beverage products. This focus includes a continued push into the international markets and working with the Company's existing and new customers in developing innovative specialty beverage products. The Company also plans to continue its efforts on increasing flavoring syrup sales to the specialty coffee industry. The Company plans also include additional efforts to provide products to the overall food service industry. This effort is a result of the shift of the general food service industry into offering specialty coffee and other specialty beverage products. The Company will continue its search for strategic acquisitions to enhance market position and provide for revenue growth. The Company's plans to broaden its international effort's are in response to the rapid expansion of various United States based specialty coffee retailers into the international market place and the rapid growth of United States style specialty coffee shops in various countries. These efforts include the possibility of an international sales office, an international manufacturing facility, or both. During the past fiscal year, the Company has significantly increased its international sales volume and plans to build upon this growth. The Company feels that with the its in-house product development team, the Company can tailor its products and packaging to meet the specific requirements of an international region or a specific country. The Company feels that it has a competitive advantage in the international market place due to its experience in producing and delivering a broad range of products to its private label customers. 12 15 The Company is working on several major initiatives and alliances to bring the Company, and its product offerings, closer to the food service and nightclub industry personnel involved in the initial development of beverage menus, concepts, themes and facilities. As a provider of specialty beverage products, the Company feels that it is important to be active in developing concepts along with providing products for established concepts. Recently, the Company hired a sales and marketing professional that has experience in the on-premise food service and nightclub industry and the Company has partnered with a third party entity that provides concepts to the food service and nightclub industry. These steps along with the Company's in-house product development team will allow the Company to move into a leadership position within the specialty beverage segment of the food service and nightclub industry. The Company plans to add manufacturing capability and continue to improve manufacturing efficiency. In May 2001, the Company added an additional automated production line to enhance its powder manufacturing capabilities. During the June through August 2001 period, the Company will be adding equipment to handle the packaging of fully pasteurized hot filled products. During the fiscal year 2002, the Company also plans to begin the next phase of enhancements to its production lines to increase production efficiency. The Company's plans also include the continued search for acquisition candidates. The appropriate candidates will either complement the Company's marketing efforts or enhance market position in addition to providing revenue growth. Specifically, an acquisition could provide new distribution channels, new technological capability, add volume to the Company's existing product lines or complement the Company's existing product lines. [The remainder of this page intentionally left blank.] 13 16 SELECTED SUMMARY FINANCIAL INFORMATION
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR APRIL 30, 2001 APRIL 30, 2000 APRIL 30, 1999 APRIL 30, 1998 APRIL 30, 1997 BALANCE SHEET: CURRENT ASSETS $ 6,055,666 $ 5,379,080 $ 3,457,644 $ 3,556,309 $ 2,956,601 TOTAL ASSETS $11,484,281 $10,608,902 $ 7,438,221 $ 7,514,201 $ 5,780,362 CURRENT LIABILITIES $ 1,749,429 $ 1,975,932 $ 865,692 $ 1,156,514 $ 1,050,774 LONG TERM DEBT, NET OF CURRENT PORTION $ 1,264,891 $ 1,555,040 $ 664,203 $ 802,353 $ 2,256 TOTAL LIABILITIES $ 3,172,467 $ 3,724,257 $ 1,633,032 $ 2,010,146 $ 1,053,030 SHAREHOLDERS' EQUITY $ 8,311,814 $ 6,884,645 $ 5,805,189 $ 5,504,055 $ 4,727,332 STATEMENTS OF OPERATIONS: TOTAL SALES $20,044,671 $16,022,600 $10,322,539 $ 9,406,684 $ 7,531,966 COST OF GOODS SOLD $13,536,764 $10,995,610 $ 7,746,376 $ 6,777,200 $ 5,583,499 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 4,008,535 $ 3,180,460 $ 2,108,038 $ 1,758,667 $ 1,588,865 NET INCOME $ 1,477,600 $ 1,081,238 $ 261,534 $ 659,716 $ 402,272 BASIC AND DILUTED EARNINGS PER SHARE $ 0.45 $ 0.33 $ 0.08 $ 0.20 $ 0.13
QUARTERLY INFORMATION FOR THE YEAR 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER ENDED APRIL 30, 2001 BALANCE SHEET: CURRENT ASSETS $ 6,055,666 $ 6,135,923 $ 6,076,687 $ 5,257,098 TOTAL ASSETS $11,484,281 $11,332,352 $11,308,823 $10,554,778 CURRENT LIABILITIES $ 1,749,429 $ 1,765,335 $ 2,056,198 $ 1,729,861 LONG TERM DEBT, NET OF CURRENT PORTION $ 1,264,891 $ 1,329,056 $ 1,410,544 $ 1,489,067 TOTAL LIABILITIES $ 3,172,467 $ 3,266,073 $ 3,666,924 $ 3,421,498 SHAREHOLDERS' EQUITY $ 8,311,814 $ 8,066,279 $ 7,641,899 $ 7,133,280 STATEMENTS OF OPERATIONS: TOTAL SALES $ 4,951,151 $ 5,374,092 $ 5,350,701 $ 4,368,727 COST OF GOODS SOLD $ 3,380,542 $ 3,585,049 $ 3,550,433 $ 3,020,740 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 1,043,781 $ 1,095,301 $ 965,140 $ 904,313 NET INCOME $ 295,699 $ 428,174 $ 500,105 $ 253,622 BASIC AND DILUTED EARNINGS PER SHARE $ 0.09 $ 0.13 $ 0.15 $ 0.08
14 17
QUARTERLY INFORMATION FOR THE YEAR 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER ENDED APRIL 30, 2000 BALANCE SHEET: CURRENT ASSETS $ 5,379,080 $ 4,662,497 $ 4,942,970 $ 3,662,587 TOTAL ASSETS $10,608,902 $ 9,943,266 $10,072,211 $ 7,598,596 CURRENT LIABILITIES $ 1,975,932 $ 1,694,917 $ 1,892,134 $ 939,751 LONG TERM DEBT, NET OF CURRENT PORTION $ 1,555,040 $ 1,634,669 $ 1,715,048 $ 621,832 TOTAL LIABILITIES $ 3,724,257 $ 3,519,754 $ 3,753,682 $ 1,681,052 SHAREHOLDERS' EQUITY $ 6,884,645 $ 6,423,512 $ 6,318,529 $ 5,917,544 STATEMENTS OF OPERATIONS: TOTAL SALES $ 4,606,739 $ 3,984,573 $ 4,319,514 $ 3,111,774 COST OF GOODS SOLD $ 2,920,232 $ 2,790,369 $ 3,020,296 $ 2,264,713 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 910,992 $ 961,439 $ 656,242 $ 651,787 NET INCOME $ 451,123 $ 116,830 $ 400,930 $ 112,355 BASIC AND DILUTED EARNINGS PER SHARE $ 0.14 $ 0.04 $ 0.12 $ 0.03
QUARTERLY INFORMATION FOR THE YEAR 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER ENDED APRIL 30, 1999 BALANCE SHEET: CURRENT ASSETS $ 3,457,644 $ 3,835,542 $ 4,505,502 $ 3,475,712 TOTAL ASSETS $ 7,438,221 $ 7,680,435 $ 8,375,647 $ 7,405,074 CURRENT LIABILITIES $ 865,692 $ 960,420 $ 1,758,331 $ 1,033,687 LONG TERM DEBT, NET OF CURRENT PORTION $ 664,203 $ 701,330 $ 734,851 $ 766,681 TOTAL LIABILITIES $ 1,633,032 $ 1,746,987 $ 2,570,081 $ 1,861,227 SHAREHOLDERS' EQUITY $ 5,805,189 $ 5,933,448 $ 5,805,566 $ 5,543,847 STATEMENTS OF OPERATIONS: TOTAL SALES $ 2,393,790 $ 2,680,357 $ 3,281,237 $ 1,967,155 COST OF GOODS SOLD $ 2,002,282 $ 1,980,492 $ 2,283,410 $ 1,480,192 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 552,295 $ 468,103 $ 561,529 $ 526,111 NET INCOME (LOSS) $ (128,259) $ 127,882 $ 261,719 $ 192 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.04) $ 0.04 $ 0.08 $ 0.00
15 18 RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 2001 AND 2000 ----------------------------------------------------------------- Operations for the year ended April 30, 2001 were highlighted by strong sales of private label flavoring syrups to several of the Company's major customers, sales of the OSCAR'S(R) brand of flavoring syrups to the specialty coffee industry and sales of the specialty frozen beverage products. Net sales for the year ended April 30, 2001 and 2000 were $20,044,671 and $16,022,600, respectively, which represents a 25.1% increase. For the year ended April 30, 2001, private label syrup sales increased by 25.9%, the Company's branded syrup products sales increased by 14.2%, and the specialty frozen beverage products increased by 82.9%, while the sales of other Company products decreased by 0.4%, all as compared to the year ended April 30, 2000. Private label syrup, Company branded syrup, specialty frozen beverage products, and other Company products represented 71.4%, 17.4%, 8.1% and 3.1% of gross sales, respectively, for the year ended April 30, 2001. The Company's private label sales increased primarily as a result of a 29.9%, a 36.9%, a 29.3% and a 12.5% increase in sales to the Company's first, second, third 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 and sales growth of the OSCAR'S(R) brand of flavoring syrups. In addition, sales growth of the DiNATURA(C) brand also contributed to the sales increase. The sales of the specialty frozen beverage products increased due to continued development of this product line after its successful introduction is fiscal year 2000. The sales of other Company products decreased slightly because increases in Sugars & Toppings, cod liver oil, and My Hero(TM) Sub Dressings were offset by decreases in the remaining product lines in this group. The per unit sales price of the Company's products for the fiscal year ended April 30, 2001 did not materially change from the fiscal year ended April 30, 2000. During the year ended April 30, 2001, the Company experienced lower cost of goods sold, as a percentage of net sales, compared to the previous year. The costs associated with improved manufacturing efficiency were partially offset by slightly higher raw materials costs. Consequently, cost of sales, as a percentage of net sales, decreased to 67.5% for the year ended April 30, 2001 compared to 68.6% for year ended April 30, 2000. Cost of sales increased by $2,541,154 for the year ended April 30, 2001 compared to the year ended April 30, 2000, as a result of the addition of Oscars and higher sales volume. Total selling, general and administrative expenses increased by 26.0% or $828,075 for the year ended April 30, 2001 compared to the year ended April 30, 2000. This increase included $130,260 in expenses incurred as a result of the due diligence and negotiation associated with Bunge Foods Corporation ("Bunge"). On December 28, 2000, the Company and Bunge mutually terminated negotiations toward a definitive purchase agreement in which the Company would have purchased from Bunge certain assets comprising Bunge's Foods Service Syrups & Toppings business. The increase in selling, general and administrative expenses was principally a result of the addition of Oscars, expenses associated with Bunge, growth in the size of the sales and marketing staff, expansion of international sales efforts and trade show participation, efforts to market the specialty frozen beverage products and the hiring of additional professional and outside services, all offset by a $190,423 reduction in bad debt expense. Selling, general and administrative expenses, as a percentage of net sales, increased slightly to 20.0% compared to 19.8% for the years ended April 30, 16 19 2001 and 2000, respectively. Interest expense for the year ended April 30, 2001 increased by $20,448 compared to the year ended April 30, 2000. 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 $34,479 for the year ended April 30, 2001 compared to total net other expense of $9,020 for the year ended April 30, 2000. The Company also reported interest income of $45,784 for the current year compared to $69,948 for last year. The decrease in interest income is associated with a negative rate of return on a life insurance policy for the year offset by higher levels of invested cash for the same period. Income before income tax expense increased to $2,370,877 for the year ended April 30, 2001 from $1,788,106 for the year ended April 30, 2000. This 32.6% 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 $893,277 for the year ended April 30, 2001. For the year ended April 30, 2000, the Company recorded income tax expense of $706,868. The increase is due to an increase in taxable income and a lower effective rate. As a result of the foregoing, the Company reported a record net income of $1,477,600, or $0.45 per basic and diluted weighted average number of shares of Common Stock outstanding, for the year ended April 30, 2001 compared to net income of $1,081,238, or $0.33 per basic weighted average and diluted number of shares of Common Stock outstanding for the year ended April 30, 2000. The basic weighted average number of Common Shares outstanding was 3,285,865 for each year. Net income for the 4th quarter of the fiscal year ended April 30, 2001 was affected by an increase of approximately $126,000 because of year-end inventory adjusting entries. The amount of the inventory adjustments, pre-tax, was approximately $207,000. The primary purpose of the adjusting entries was to capitalize labor and overhead associated with the production of finished goods inventory still on-hand as of April 30, 2001 and to record the year-end physical inventory adjustment. The Company, for the year ended April 30, 2001, used a standard cost method to estimate cost of sales during the interim periods and an adjustment is recorded at year-end to properly reflect activity based on the results of the physical inventory. RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 2000 AND 1999 ----------------------------------------------------------------- Operations for the year ended April 30, 2000 resulted in a strong increase in the sales of flavoring syrups to the specialty coffee industry including a significant increase in sales of private label flavoring syrup to the Company's major customer. Additionally, the year was highlighted by the acquisition of Oscars and the introduction of the specialty frozen beverage products. Net sales for the year ended April 30, 2000 and 1999 were $16,022,600 and $10,332,539, respectively, which represents a 55.1% increase. For the year ended April 30, 2000, private label syrup sales increased by 51.1%, the Company's branded syrup products sales increased by 59.1%, 17 20 while the sales of other Company products increased by 93.5%, all as compared to the year ended April 30, 1999. Private label syrup, Company branded syrup, and other Company products represented 71.3%, 19.2% and 9.5% of gross sales, respectively, for the year ended April 30, 2000. The Company's private label sales increased primarily as a result of a 78.4% increase in sales to the Company's largest private label customer. In addition, the Company's third, fourth and fifth largest private label customers increased sales by 36.9%, 26.9% and 34.8%, respectively. The Company's branded syrup products' sales increased primarily as a result of a 23.3% increase in the sales of the DOLCE(R) brand syrups, the closeout sale of the GODIVA(R) brand syrups and $930,783 in additional sales of OSCAR'S(R) brand syrups. In addition, the DiNATURA(C) brand, for which shipments began in October 1998, contributed to the sales increase. The sales of other Company products increased due to the successful introduction of the specialty frozen beverage products. Sales of the specialty frozen beverage products, along with small increases in sales of Sugars & Toppings, Flavoring Extracts, and My Hero(TM) Sub Dressings, were offset by decreases in the remaining product lines in this group. The per unit sales price of the Company's products for the fiscal year ended April 30, 2000 did not materially change from the fiscal year ended April 30, 1999. During the year ended April 30, 2000, the Company experienced lower cost of goods sold, as a percentage of net sales, compared to the previous year. The costs associated with improved manufacturing efficiency were partially offset by higher freight-out and building lease costs. Consequently, cost of sales, as a percentage of net sales, decreased to 68.6% for the year ended April 30, 2000 compared to 75.0% for the previous year. Overall, cost of sales increased by $3,249,234, including $519,260 associated with Oscars operations, for the year ended April 30, 2000 compared to the year ended April 30, 1999. This overall increase, other than the Oscars portion and higher costs previously mentioned, was generally a result of higher sales volume. Total selling, general and administrative expenses increased by 50.9% or $1,072,422 for the year ended April 30, 2000 compared to the year ended April 30, 1999. This increase included $402,315 in additional expenses associated from Oscars operations and a $182,925 write-off of an accounts receivable as a result of Ameriserve Food Distribution Inc. filing a Chapter 11 bankruptcy petition on January 31, 2000. Sales of the Company's products, since that date, were not affected by this bankruptcy, as the private label customer that received Company products from a subsidiary of the bankrupt redirected distribution of the Company's products to that customer through other distributors. This write-off represented 1.14% of total year net sales while total write-offs represented 1.24% of total net sales. Write-offs of accounts receivable for the fiscal year ended April 30, 1999 were 0.53% of net sales. The overall increase, other than that attributed to Oscars and write-offs, was $487,182 or 23.1%. This increase was a result of increases in trade shows, travel, product samples, promotional material, postage, telephone, legal services, insurance, depreciation of office equipment, amortization of goodwill and other intangibles, and increases in the number of employees and employee wages. These increases were offset by decreases in advertising, public relations, and sales promotional allowances. Total selling, general and administrative expenses, as a percentage of net sales, decreased to 19.8% compared to 20.4% for the years ended April 30, 2000 and 1999, respectively. Interest expense for the year ended April 30, 2000 increased by $39,132 compared to the year ended April 30, 1999. The increase reflects an increase in the average principal amount of outstanding 18 21 notes payable primarily associated with the acquisition of Oscars. The Company reported interest income of $69,948 for the year ended April 30, 2000 compared to $27,392 for year ended April 30, 1999. The increase in interest income is associated with higher levels of invested cash for the year ended April 30 2000 and a high rate of return on an insurance policy. The Company also reported total net other expense of $9,020 for the year ended April 30, 2000 compared to total net other income of $47,798 for the year ended April 30, 1999. The primary reasons for this $56,818 change were a $50,632 rebate from the Ohio Bureau of Workers Compensation and a $13,500 settlement from a defamation claim made by the Company against a competitor, each received during the year ended April 30, 1999. Income before income tax expense increased to $1,788,106 for the year ended April 30, 2000 from $463,095 for the year ended April 30, 1999. The Company recorded income tax expense of $706,868 for the year ended April 30, 2000. For the year ended April 30, 1999, the Company recorded income tax expense of $201,561. As a result of the foregoing, the Company reported a record net income of $1,081,238, or $0.33 per basic and diluted weighted average number of shares of Common Stock outstanding, for the year ended April 30, 2000 compared to net income of $261,534 or $0.08 per basic weighted average number of shares of Common Stock outstanding for the year ended April 30, 1999. The basic and diluted weighted average number of shares of Common Stock outstanding increased to 3,285,865 for the year ended April 30, 2000 compared to 3,285,684 for the prior year. The increase reflects Common Stock issued upon the exercise of warrants during the fiscal year ended April 30, 1999. Net income for the 4th quarter of the fiscal year ended April 30, 2000 was affected by an increase of approximately $109,000 because of year-end inventory adjusting entries. The amount of the inventory adjustments, pre-tax, was approximately $181,000. The primary purpose of the adjusting entries was to capitalize labor and overhead associated with the production of finished goods inventory still on-hand as of April 30, 2000 and to record the year-end physical inventory adjustment. The Company, for the year ended April 30, 2000, used a standard cost method to estimate cost of sales during the interim periods and an adjustment is recorded at year-end to properly reflect activity based on the results of the physical inventory. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The working capital and working capital ratio as of April 30, 2001 and April 30, 2000 were $4,306,237 and 3.46 to 1 and $3,403,148 and 2.72 to 1, respectively. The increase in working capital for April 30, 2001 compared to April 30, 2000 was primarily a result of a $359,884 increase in the Company's cash and cash equivalents, a $12,600 increase in the Company's prepaid expenses, a $510,636 increase in inventory, a $405,135 decrease in the Company's accrued taxes and a $111,364 decrease in debt related current liabilities, offset by a $185,441 increase in the Company's accounts payable, a $104,555 increase in the Company's accrued expenses, a $197,419 decrease in 19 22 the Company's accounts receivable and a $9,115 decrease in current deferred income taxes. The decrease in accounts receivable was a result of a decrease in the number of days that the Company's customers are taking in paying their outstanding receivable balances. The increase in inventory was the net result of increases associated with the specialty frozen beverage products and higher levels of flavoring syrup raw material inventory. The increase in prepaid expenses is primarily a result of deposits on equipment purchases and prepaid marketing expenses. 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 increase in accounts payable is a result of the Company's higher purchasing level associated with higher sales levels offset by a strong cash position and taking early payment discounts. The decrease in accrued taxes is a result of the requirement to make larger estimated quarterly tax payments for the 2001 fiscal year. The increase in accrued expenses primarily reflects increases in accrued customer claims, vacations, accrued salaries and wages, and accrued employee medical expenses. The Company's operating activities for the year ended April 30, 2001 provided net cash of $1,653,413. The Company used $926,197 to acquire equipment and make building improvements, $327,965 to make principal payments on a mortgage note payable and on other long term liabilities and $73,548 to decrease its line of credit. The net cash surrender value of a life insurance policy decreased by $16,249. The Company also received $15,400 in proceeds from the sale of equipment. Consequently, during this period, cash and cash equivalents increased by $359,884 after a $2,532 increase in cash as the result of the effect of exchange rate changes. The Company believes that the First Knox line of credit and cash from operating activities will be sufficient to finance operations and planned capital expenditures for the next 12 months. The Company will need to secure additional financing to pursue acquisitions. On December 21, 2000, the Company renewed its $400,000 line of credit with First Knox. The First Knox line of credit expires on December 21, 2001. As of June 29, 2001 and April 30, 2001, there was no outstanding balance under this agreement. Under a Standby Letter of Credit issued to CIBC, $200,000 of the First Knox line of credit was pledged as collateral for a credit agreement with CIBC that includes a demand line of credit of $116,732. As of April 30, 2001, there was a balance of $29,164 under the CIBC line of credit. The Company, during the fiscal year ending April 30, 2001, experienced some minor inflationary increases in the cost of various raw and packaging materials. During the same period, the Company also received reductions in the cost of other raw materials. Subsequently, the Company did not change the selling price of its products and absorbed any net changes in the cost. 20 23 ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements of Stearns & Lehman, Inc.
Page Independent Auditors' Report (dated June 22, 2001) .............................. 22 Report of Independent Accountants (dated June 23, 2000) ......................... 23 Consolidated Balance Sheets as of April 30, 2001 and 2000 ....................... 24 Consolidated Statements of Income for the years ended April 30, 2001 and 2000 ... 25 Consolidated Statements of Shareholders' Equity for the years ended April 30, 2001 and 2000 .............................................. 27 Consolidated Statements of Cash Flows for the years ended April 30, 2001 and 2000 28 Notes to Consolidated Financial Statements ...................................... 30
21 24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Stearns & Lehman, Inc. Mansfield, Ohio We have audited the accompanying consolidated balance sheet of Stearns & Lehman, Inc. and subsidiary as of April 30, 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company for the year ended April 30, 2000 were audited by other auditors whose report, dated June 23, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 2001 consolidated financial statements present fairly, in all material respects, the financial position of the companies at April 30, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Cleveland, Ohio June 22, 2001, except for Note 15 as to which the date is June 29, 2001 22 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Stearns & Lehman, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Stearns & Lehman, Inc. and its subsidiary at April 30, 2000, and the result of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Columbus, Ohio June 23, 2000 23 26 STEARNS & LEHMAN, INC. CONSOLIDATED BALANCE SHEETS APRIL 30, 2001 AND 2000 --------------------------------------------------------------------------------
2001 2000 ASSETS Current assets: Cash and cash equivalents $ 1,448,774 $ 1,088,890 Trade accounts receivable, net of allowance for doubtful accounts of $75,000 in 2001 and $70,000 in 2000 1,924,601 2,122,020 Inventory 2,497,200 1,986,564 Prepaid expenses and other 122,347 109,747 Deferred income taxes 62,744 71,859 ----------- ----------- Total current assets 6,055,666 5,379,080 ----------- ----------- Property and equipment: Land 73,928 73,928 Buildings 1,829,823 1,829,823 Building improvements 163,929 93,934 Leasehold improvements 178,220 178,540 Machinery and equipment 2,753,498 2,181,742 Office equipment 488,354 476,151 Tooling 128,762 135,425 Vehicles 40,401 40,401 ----------- ----------- 5,656,915 5,009,944 Less accumulated depreciation 1,560,074 1,365,811 ----------- ----------- Net property and equipment 4,096,841 3,644,133 ----------- ----------- Goodwill and other intangibles, net 1,226,797 1,461,660 Cash surrender value of life insurance 79,298 95,547 Trademarks, net 10,369 12,102 Other assets 15,310 16,380 ----------- ----------- Total assets $11,484,281 $10,608,902 =========== ===========
CONTINUED 24 27 STEARNS & LEHMAN, INC. CONSOLIDATED BALANCE SHEETS APRIL 30, 2001 AND 2000 --------------------------------------------------------------------------------
2001 2000 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,015,066 $ 829,625 Accrued taxes 262,623 667,758 Accrued expenses 265,749 161,194 Lines of credit 29,164 102,713 Current portion of notes payable 86,588 129,757 Current portion of other long term liabilities 90,239 84,885 ------------ ------------ Total current liabilities 1,749,429 1,975,932 ------------ ------------ Long-term liabilities: Notes payable, net of current portion 1,123,660 1,318,645 Other long term liabilities, net of current portion 141,231 236,395 Deferred income taxes 158,147 193,285 ------------ ------------ Total long-term liabilities 1,423,038 1,748,325 ------------ ------------ Total liabilities 3,172,467 3,724,257 ------------ ------------ Commitments and contingencies Shareholders' equity: Common shares, no par value; 4,000,000 shares authorized, 3,289,165 issued and 3,285,865 outstanding as of April 30, 2001 and 2000, respectively 3,629 3,629 Additional paid-in capital 5,248,461 5,248,461 Retained earnings 3,125,137 1,647,537 Accumulated other comprehensive loss (52,213) (1,782) ------------ ------------ 8,325,014 6,897,845 Less treasury stock at cost; 3,300 shares 13,200 13,200 ------------ ------------ Total shareholders' equity 8,311,814 6,884,645 ------------ ------------ Total liabilities and shareholders' equity $ 11,484,281 $ 10,608,902 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 25 28 STEARNS & LEHMAN, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED APRIL 30, 2001 AND 2000 --------------------------------------------------------------------------------
2001 2000 Net sales $ 20,044,671 $ 16,022,600 Cost of sales 13,536,764 10,995,610 ------------ ------------ Gross profit 6,507,907 5,026,990 Selling, general and administrative expenses 4,008,535 3,180,460 ------------ ------------ Income from operations 2,499,372 1,846,530 ------------ ------------ Other income (expense), net: Interest expense (139,800) (119,352) Interest income 45,784 69,948 Other, net (34,479) (9,020) ------------ ------------ Income before income tax expense 2,370,877 1,788,106 ------------ ------------ Income tax expense (benefit): Current 917,257 709,288 Deferred (23,980) (2,420) ------------ ------------ Total income tax expense 893,277 706,868 ------------ ------------ Net income $ 1,477,600 $ 1,081,238 ============ ============ Earnings per share - Basic $ .45 $ .33 ============ ============ Earnings per share - Diluted $ .45 $ .33 ============ ============ Basic weighted-average common shares outstanding 3,285,865 3,285,865 ============ ============ Diluted weighted-average common shares outstanding 3,294,107 3,285,865 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 26 29 STEARNS & LEHMAN, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED APRIL 30, 2001 AND 2000 --------------------------------------------------------------------------------
ACCUMULATED NUMBER OF ADDITIONAL OTHER TOTAL SHARE- COMMON COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY HOLDERS' SHARES SHARES CAPITAL EARNINGS LOSS SHARES EQUITY ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at April 30, 1999 3,285,865 3,629 5,248,461 566,299 -- (13,200) 5,805,189 Net income -- -- 1,081,238 -- -- 1,081,238 Foreign currency translation adjustment -- -- -- (1,782) -- (1,782) ----------- Comprehensive income 1,079,456 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at April 30, 2000 3,285,865 3,629 5,248,461 1,647,537 (1,782) (13,200) 6,884,645 Net income -- -- 1,477,600 -- -- 1,477,600 Foreign currency translation adjustment -- -- -- (50,431) -- (50,431) ----------- Comprehensive income 1,427,169 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balances at April 30, 2001 3,285,865 $ 3,629 $ 5,248,461 $ 3,125,137 $ (52,213) $ (13,200) $ 8,311,814 =========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 27 30 STEARNS & LEHMAN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30, 2001 AND 2000 --------------------------------------------------------------------------------
2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,477,600 $ 1,081,238 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense 35,113 224,166 Depreciation and amortization 614,693 509,172 Loss on the disposal of fixed assets 26,056 4,689 Deferred income taxes (23,980) (2,420) Changes in assets and liabilities, net of acquisitions: Trade accounts receivable 162,306 (1,174,130) Inventory (510,636) (48,695) Prepaid expenses and other (12,600) 93,175 Accounts payable 185,441 234,784 Accrued taxes (405,135) 586,559 Accrued expenses 104,555 39,429 ----------- ----------- Net cash provided by operating activities 1,653,413 1,547,967 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (926,197) (412,840) Proceeds from sale of property and equipment 15,400 499 Cash surrender value of life insurance, net 16,249 (44,458) Acquisition of business -- (921,232) Purchase of other assets -- (7,383) ----------- ----------- Net cash used in investing activities (894,548) (1,385,414) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes payable -- 800,000 Net borrowings (repayments) under lines of credit (73,548) 40,217 Principal payments on long-term debt and other liabilities (327,965) (273,105) ----------- ----------- Net cash provided by (used in) by financing activities (401,513) 567,112 ----------- ----------- Effect of exchange rate changes on cash 2,532 (2,643) ----------- ----------- Net increase in cash and cash equivalents 359,884 727,022 Cash and cash equivalents, beginning of year 1,088,890 361,868 ----------- ----------- Cash and cash equivalents, end of year $ 1,448,774 $ 1,088,890 =========== ===========
CONTINUED 28 31 STEARNS & LEHMAN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30, 2001 AND 2000 --------------------------------------------------------------------------------
2001 2000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 139,915 $119,007 ============ ======== Income taxes $ 1,297,863 $ 51,113 ============ ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Other long term liability associated with subsidiary acquired $ -- $370,951 ============ ========
The accompanying notes are an integral part of these consolidated financial statements. 29 32 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business. Steams & Lehman, Inc. (the "Company") and its wholly owned Canadian subsidiary, Oscar Skollsberg's Food Technique Ltd. ("Oscars") operate in one business segment. The Company and its subsidiary are engaged in the business of manufacturing and selling specialty food products, including extracts, flavorings, liquid spices and Italian syrups. The principal market for the Company's products is the continental United States and Canada. Consolidation. The consolidated statements include the accounts of the Company and its wholly-owned subsidiary, Oscars. All significant intercompany accounts have been eliminated in the preparation of the consolidated financial statements. The accounts of Oscars have been included since October 1, 1999, the date of acquisition. Inventories. Inventory is valued at the lower of most recent cost or market which approximates cost using the first-in, first-out (FIFO) method. Indirect costs that do not relate to production of finished goods, including general and administrative expenses, are charged to expense as incurred. The Company uses a standard cost method to estimate cost of sales during interim periods. An adjustment is made at year end to record actual activity based on the results of the year-end physical inventory. The year-end adjustment decreased cost of sales by $207,419 and $180,738 in 2001 and 2000, respectively. Property and equipment. Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: buildings and building improvements, 30 to 40 years; machinery and equipment, 5 to 10 years; tooling, 2 to 10 years; and vehicles, 3 to 5 years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. Depreciation expense was $413,378 in 2001 and $356,605 in 2000. Repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. When assets are sold, retired, or otherwise disposed of, the related cost and accumulated depreciation are removed from the applicable accounts, and any gain or loss from disposition is included in operations. Earnings per share. Earnings per share is computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Basic earnings per share is computed based upon the weighted average number of outstanding common shares. Diluted earnings per share include the weighted average effect of dilutive warrants outstanding.
APRIL 30, --------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2001 2000 --------------------------------------------------------------- --------------- ---------------- Common shares issued 3,289,165 3,289,165 Treasury shares (3,300) (3,300) --------------- ---------------- Basic shares 3,285,865 3,285,865 Dilutive effect of warrants 8,242 0 --------------- ---------------- Diluted shares 3,294,107 3,285,865 =============== ================
30 33 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- Cash and cash equivalents. The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash consists primarily of demand deposits held principally with one financial institution. Income taxes. The Company provides for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are recognized based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates. Revenue recognition. Sales are recorded when products are shipped to the customer. In general, customers do not have the right to return products that have been shipped, unless such products do not meet established quality standards. Goodwill and other intangibles. Goodwill represents the excess of purchase price over fair value of net tangible assets acquired (see Note 6) and is amortized on a straight-line basis over 12 to 15 years. Other intangibles consist of customer lists and are amortized over 15 years. The Company reviews the carrying value of goodwill and intangibles for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Amortization expense was $199,024 in 2001 and $145,399 in 2000, and accumulated amortization was $609,677 and $409,653 at April 30, 2001 and 2000, respectively. Fair value of financial instruments. The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short maturity. The carrying amount of variable rate debt issued approximates fair value because the interest rate changes with market interest rates and the carrying amount of fixed rate debt approximates fair value due to its short-term nature. Foreign sales. The Company's United States operations transact all foreign sales to distributors and customers in United States currency. Oscars transacts foreign sales to distributors and customers in either Canadian or United States currency. Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 31 34 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- Concentration of risk. The Company purchases certain products from sole-source suppliers of which there are currently no other suppliers used by the Company. A change in suppliers during certain peak periods could cause a delay in production and a possible loss of sales, which would affect operating results adversely. The Company's largest customer and the total of the eight largest customers represent approximately 50% and 68% of net sales in 2001 and 49% and 70% of net sales in 2000, respectively. The loss of any of these customers could have an adverse impact on the operating results of the Company. The Company maintains virtually all of its banking relationships with one financial institution. Foreign currency translation. For operations outside the United States that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. Translation adjustments are included as a separate component of accumulated other comprehensive income (loss) in shareholders' equity. Recent accounting pronouncements. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after Jun 15, 2000. SFAS 133, as amended, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective May 1, 2001. The effect of the adoption did not have a significant impact on the financial position, results of operations, or cash flows of the Company. In December 1999, the Securities and Exchange Commission ("SEC") issued SEC Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. The Company adopted the guidelines of SAB 101 without material effect. 2. INVENTORY The major components of inventory at April 30, 2001 and 2000 were as follows:
2001 2000 Raw materials $ 1,188,799 $ 965,919 Work in process 20,357 13,347 Finished goods 1,288,044 1,007,298 ----------------- ----------------- Total inventory $ 2,497,200 $ 1,986,564 ================= =================
32 35 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- 3. NOTES PAYABLE Notes payable at April 30, 2001 and 2000 consisted of the following:
2001 2000 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, 2001 and 2000), due on October 1, 2007. $ 546,053 $ 608,991 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 626,671 733,335 8.14% as of April 30, 2001). Note payable to a company, unsecured, payable in monthly installments of $7,111 including interest, at a rate of 8.25% per annum commencing July 1, 1999, due on December 1, 2000. -- 48,433 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%, (6.75% as of April 30, 2001) due on March 1, 2003 37,524 57,643 ---------- ---------- Total notes payable 1,210,248 1,448,402 Less current portion 86,588 129,757 ---------- ---------- $1,123,660 $1,318,645 ========== ==========
33 36 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- Future maturities of notes payable at April 30, 2001 are as follows:
YEAR ENDING APRIL 30, -------------------------------- 2002 $ 86,588 2003 92,559 2004 79,573 2005 712,854 2006 93,261 Thereafter 145,413 ----------------- $ 1,210,248 =================
4. 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 December 21, 2000 and expires on December 21, 2001. This agreement is collateralized by substantially all the assets of the Company and contains covenants that require the Company to maintain a certain minimum working capital and net worth and maintain a certain quick and current ratio. As of April 30, 2001, there was no outstanding balance under this agreement. Under a Standby Letter of Credit issued to a Canadian bank, $200,000 of this Line of Credit was pledged as collateral for a Credit Agreement with a Canadian bank. This Canadian agreement includes a Demand Line of Credit of $116,732 with interest at a rate of prime and contains covenants covering Oscar's current ratio, minimum shareholders' equity, capital expenditures and dividends. As of April 30, 2001, there was an outstanding balance of $29,164 under this Canadian agreement. 5. LEASE COMMITMENTS The Company leases office, warehouse and manufacturing facilities and certain office and production equipment under noncancelable operating lease agreements expiring through fiscal 2007. The building lease provides for future minimum rent escalations. Minimum rental commitments under noncancelable operating leases at April 30, 2001 are as follows:
YEAR ENDING APRIL 30, ------------------------------- 2002 $ 309,234 2003 319,419 2004 319,743 2005 117,765 2006 101,050 Thereafter 68,338 ----------------- $ 1,235,549 =================
Total rent expense charged to operations for all operating leases was $330,388 in 2001 and $290,514 in 2000. 34 37 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- 6. BUSINESS COMBINATIONs On October 1, 1999, the Company acquired Oscar Skollsberg's Food Technique Limited ("Oscars"), a Canadian corporation located in Richmond, British Columbia, for $862,983 in cash. The Company also incurred $58,249 in direct acquisition expenses. The agreement to purchase Oscars also includes cash compensation, payable to Jan Skollsberg in Canadian dollars pursuant to a four-year non-compete agreement. The present value in U.S. dollars of this non-compete agreement as of October 1, 1999 was $370,951. This amount has been recorded as other intangible assets and other long-term liabilities. The Company financed this transaction through $800,000 in bank financing, with the remainder from cash flows from operations. For accounting purposes, the acquisition of Oscars has been recorded using the purchase method of accounting. The Company's consolidated financial statements include the results of from the closing date of the acquisition. The purchase price has been allocated to the assets and liabilities of Oscars at their estimated fair value. The amount allocated to the Oscars' customer list, that is reported as other intangible assets, are amortized over fifteen years. The fair values of assets and liabilities have been determined based on management's estimates. The allocation of the purchase price of Oscars is as follows:
Trade accounts receivable $ 127,541 Inventory 122,516 Prepaid expenses and other 8,131 Property and equipment 205,903 Trademarks 9,591 Other intangible assets 712,283 Accounts payable (55,173) Accrued expenses (15,385) Deferred income taxes (62,491) Bank debt (131,684) ----------------- $ 921,232 =================
7. WARRANTS AND OPTIONS TO PURCHASE COMMON STOCK On April 6, 2001, 500 employee stock options, with an exercise price of $2.266 per common share, expired due to employee separation without being exercised. On October 14, 2000, 2,648 warrants, with an exercise price of $3.15 per common share, expired without being exercised. On March 14, 2000, 3,600 warrants, with an exercise price of $5.75 per common share, expired without being exercised. 35 38 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- On November 12, 1999, 1,000 employee stock options, with an exercise price of $2.266 per common share, expired due to employee separation without being exercised Effective March 4, 1994, the Company adopted the 1994 Stock Option Plan ("the Plan"). The shares that may be issued subject to options granted under the Plan shall not exceed 275,000 shares in aggregate. The options granted under the Plan may be designated as incentive stock options or non-qualified stock options, at the discretion of the committee designated by the Board of Directors to administer the Plan. The option price for non-qualified stock options shall not be less than 100% of the fair market value of a share on the effective date of the grant. The option price for incentive stock options shall not be less than 110% of the fair market value of a share on the effective date of the grant. On September 29, 1998, 17,000 employee stock options were granted with an exercise price of $2.266 per share of common stock. On September 29, 2000, 50% of these options were exercisable. On the anniversary date of issuance in each subsequent year, an additional 25% of these options become exercisable until all 17,000 options are exercisable on September 29, 2002. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its option and warrant grants for employees. Accordingly, no compensation cost has been recognized for warrants or options ("warrants") granted as the Company believes warrants were granted at fair market value at the date of grant. Had compensation cost for the warrants granted been determined based on the fair value at the grant dates for awards under that plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
2001 2000 Net income Pro forma $ 1,467,608 $ 1,071,246 As reported 1,477,600 1,081,238 Diluted earnings per share Pro forma $ .45 $ .33 As reported .45 .33
In determining the pro-forma amount of stock-based compensation on a basis consistent with SFAS No. 123, the fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1999: no dividend yield; expected volatility of 111%; risk-free interest rate of 4.59%; and expected life of 10.0 years for warrants granted in fiscal 1999. There were no options granted in fiscal year 2001 and 2000. 36 39 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- A summary of the status of the Company's warrants and options as of April 30, 2001 and 2000, respectively, and changes during the years then ended is presented below:
2001 2000 -------------------------- --------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE WARRANTS / OPTIONS SHARES PRICE SHARES PRICE ---------------------------- --------------------------------------- -------------- Outstanding at beginning of year 92,396 $ 4.71 96,996 $ 4.72 Forfeited (3,148) $ 3.01 (4,600) $ 4.99 Outstanding at end of year 89,248 $ 4.77 92,396 $ 4.71 Exercisable at year-end 81,498 $ 5.01 79,996 $ 5.09
The following table summarizes information about warrants and options outstanding at April 30, 2001:
NUMBER WEIGHTED- NUMBER OUTSTANDING AVERAGE EXERCISABLE AT APRIL 30, REMAINING AT APRIL 30, EXERCISE PRICE 2001 LIFE 2001 ------------------------- ---------------- ---------------- ---------------- $2.27 15,500 7.4 years 7,750 $3.00 10,000 4.0 years 10,000 $5.50 18,798 5.4 years 18,798 $5.63 10,000 6.7 years 10,000 $5.75 34,950 0.5 years 34,950 ---------------- ---------------- ---------------- 89,248 3.8 years 81,498 ================ ================ ================
8. COMMITMENTS The Company has a written supply agreement through August 31, 2003 with a customer. This exclusive supplier agreement details the manufacturing of flavored syrups meeting certain specifications and complying with defined inspection and testing procedures. The price of the syrups are defined within the agreement, along with a mechanism for price increases associated with increased production costs. Payment for products are required to be made within 30 days upon receipt of invoice. Both the Company and the customer can cancel this agreement with 60 days written notice, with respect to price disagreements, and the customer can cancel this agreement with 90 days written notice if the Company does not match a lower price from a competitor. 37 40 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- 9. INCOME TAXES The components of the net deferred tax liability at April 30, 2001 and 2000 are as follows:
2001 2000 Deferred tax assets: Net operating loss carryforwards $ 90,223 $ 115,686 Other 22,966 19,796 Allowance for doubtful accounts 28,500 26,600 ---------------- ----------------- Gross deferred tax assets 141,689 162,082 Deferred tax liabilities: Goodwill & Intangibles 6,454 49,363 Property and equipment 230,638 234,145 ---------------- ----------------- Net deferred tax liability $ (95,403) $ (121,426) ================ =================
The Company had net operating loss carryforwards available of $265,361 and $298,531 at April 30, 2001 and 2000, respectively, from the purchase of Select, of which $33,170 is available to deduct each year through April 30, 2009. The Company utilized approximately $47,355 of net operating carryforwards in fiscal 2001. The provision (benefit) for income taxes include:
2001 2000 Current taxes: U.S. federal $ 761,109 $ 622,828 Canadian federal and provincial 78,855 12,634 State and local 77,293 73,826 ---------------- ----------------- Total current taxes 917,257 709,288 Deferred taxes: U.S. (34,077) 17,214 Canadian 10,097 (19,634) ---------------- ----------------- Total deferred taxes (23,980) (2,420) Total income taxes $ 893,277 $ 706,868 ================ =================
38 41 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- A reconciliation between the statutory federal income tax rate and the effective income tax on pretax earnings follows:
2001 2000 Statutory income tax rate 34.0 % 34.0 % U.S. local and state income tax and Canadian federal and provincial, net of U.S. federal income tax effect 2.4 2.3 Permanent differences 1.4 3.0 Other items, net - .2 ----------------- ----------------- 37.8 % 39.5 % ================= =================
10. RELATED-PARTY TRANSACTIONS An entity owned by an employee/board member provided services to the Company related to flight transportation up to and including August 3, 1999. Expenses incurred from this entity were $0 in 2001 and $18,714 in 2000. No payables, related to these services, were outstanding as of April 30, 2001 or 2000. 11. CONTINGENCIES The Company is involved in various legal proceedings that are incidental to the conduct of its business. Although amounts with respect to these proceedings cannot be determined, in the opinion of management, any such amounts will not have a material adverse effect on the Company's financial position, liquidity or results of operations. 12. EMPLOYEE BENEFIT PLAN The Company maintains a salary deferral plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan, covering all full-time United States employees, allows participants to contribute certain amounts on a pretax basis and provides for certain matching contributions by the Company as specified in the plan agreement. Company contributions to the plan charged to operations were $39,162 in 2001 and $31,283 in 2000. 13. 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 adopted the provisions of EITF 00-10 during the fiscal quarter ended January 31, 2001. Net sales and cost of sales for all prior periods presented have been reclassified to conform with the current presentation. There was no effect on the dollar amount of the Company's gross profit or net income as a result of adopting EITF 00-10. 39 42 STEARNS & LEHMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 AND 2000 -------------------------------------------------------------------------------- 14. ACQUISITIONS On December 28, 2000, the Company and Bunge Foods Corporation ("Bunge") mutually terminated negotiations toward a definitive purchase agreement in which the Company would purchase, from Bunge, the Food Service Syrups & Toppings Business. The purchase price for the Business would have approximated $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. The Huntington National Bank ("Huntington") had provided the Company a loan commitment totaling $17,176,000 to finance this purchase, other capital expenditures, and to replace existing loans that the Company has with First-Knox National Bank ("First-Knox"). The negotiations were terminated when the Company and Bunge were unable to resolve issues that arose through the Company's due diligence process in a time frame prescribed by Bunge. The Company believed that these issues could have negatively impacted its ability to meet certain requirements of Huntington's commitment to finance this purchase. As a result of the termination of negotiations, $500,000 of the purchase price, that had been placed in an escrow account, was returned to the Company, and the Company did not proceed with the Huntington commitment and has maintained its relationship with First-Knox as its primary bank. The Company incurred selling, general and administrative expenses of $130,260 as a result of the negotiations, the due diligence process and the Huntington commitment. 15. RECENT ACCOUNTING PRONOUNCEMENTS On June 29, 2001, FASB concluded its voting process on SFAS No. 141, "Business Combinations" and this statement will be issued in July 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company is required to implement SFAS No. 141 on July 1, 2001 and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. On June 29, 2001, FASB concluded its voting process on SFAS No. 142, "Goodwill and Other Intangible Assets" and this statement will be issued in July 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on May 1, 2002 and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. 40 43 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 31, 2000, the Company completed a review of its auditing service provider and selected Deloitte & Touche LLP ("Deloitte") as the accountants to audit the Company's consolidated financial statements for the year ending April 30, 2001. Accordingly, the Company entered into a letter agreement engaging Deloitte as the accountant to audit the Company's consolidated financial statements. Also, on October 31, 2000, the Company dismissed PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), the accountant which had been the Company's auditing service provider. PricewaterhouseCoopers' reports on the consolidated financial statements of the Company for the fiscal years ended April 30, 1999 and April 30, 2000 (which are referred to herein as the "Prior Report Periods") contained no adverse opinion or disclaimer of opinion. No report on the consolidated financial statements for the Prior Report Periods was qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to change auditors was recommended by the audit committee of the Board of Directors of the Company and approved by the Board of Directors of the Company. During the Prior Report Periods and through October 31, 2000, preceding the replacement of PricewaterhouseCoopers, there were no disagreements with PricewaterhouseCoopers on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of PricewaterhouseCoopers, would have caused them to make any reference to the disagreement in their reports on the consolidated financial statements. The Company did not consult with Deloitte during the last two years or subsequent interim period on either the application of accounting principles or type of opinion Deloitte might issue on the Company's consolidated financial statements. The Company requested PricewaterhouseCoopers to furnish a letter to the SEC stating whether PricewaterhouseCoopers agreed with the above statements. A copy of the PricewaterhouseCoopers letter to the SEC dated November 2, 2000 was filed as an exhibit to the Form 8-K filed by the Company on November 6, 2000 [The remainder of this page intentionally left blank.] 41 44 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE OFFICERS The following table contains the name, position, age and telephone number of each director and executive officer of the Company as of June 29, 2001. Directors are elected to a one year term, to serve until the next annual meeting of shareholders and until their successors are duly elected and qualified or until their earlier resignation, removal from office, or death. The respective background of each director and executive officer is described following the table. Each of the executive officers devotes his or her full-time efforts to the affairs of the Company.
NAME POSITION AGE TELEPHONE NO. ---- -------- --- ------------- William C. Stearns President, Treasurer and Director 48 419/522-2722 Sally A. Stearns Executive Vice President, Secretary and Director 41 419/522-2722 John A. Chuprinko Chief Financial Officer 46 419/522-2722 Frank E. Duval Director 57 419/882-2314 Carter F. Randolph Director 45 513/891-4227 Adam "Bud" Vetter Director 41 419/525-1611
WILLIAM C. STEARNS - PRESIDENT, TREASURER AND DIRECTOR William C. Stearns is President, Treasurer and a Director of the Company. Mr. Stearns founded the Company in March of 1988 and has been its President and a Director since that time. Mr. Stearns attended both Cleveland State University and Baldwin-Wallace University and is a member of the Manufacturers' Board of Directors of the National Food Distributors Association and the National Association of Specialty Food Trade. Mr. Stearns is the husband of Sally A. Stearns. SALLY A. STEARNS - EXECUTIVE VICE PRESIDENT, SECRETARY AND DIRECTOR Sally A. Stearns graduated from Bowling Green State University in June of 1982 with a Bachelor of Science Degree in Business Administration, with a major concentration in Human Resource Management. From October 1987 to February 8, 1989, she was a senior accountant for Autocall, Inc., a division of Federal Signal located in Shelby, Ohio. From February 18, 1989 to the present Ms. Stearns has served as Executive Vice President, Secretary and a Director of the Company. Ms. Stearns is the wife of William C. Stearns JOHN A. CHUPRINKO - CHIEF FINANCIAL OFFICER John A. Chuprinko is a graduate of The Ohio State University, where he obtained a Bachelor of Science Degree in accounting, and the United States Navy Supply School in Athens, Georgia. Mr. 42 45 Chuprinko was hired as the Chief Financial Officer of the Company on January 10, 1996 and is a Certified Public Accountant. Mr. Chuprinko is a member and past President of the Knox County, Ohio Airport Advisory Board and is a member and past Chairman of the Marion Technical College Accounting Advisory Committee. From October 1994 to January 1996, Mr. Chuprinko served as the Chief Financial Officer and Treasurer of Na-Churs Plant Food Company, a national manufacturing company with $18,000,000 in sales, located in Marion, Ohio. Prior to that position, Mr. Chuprinko was the Controller at Na-Churs Plant Food Company and Controller at The J.E. Grote Company, Incorporated in Blacklick, Ohio. FRANK E. DUVAL - DIRECTOR Mr. Duval has served as a Director of the Company since January 3, 1995. Mr. Duval has been the President of J&S Capital, Inc. since 1990 where he oversees a portfolio of real estate, limited partnership and stock and bond investments. Mr. Duval has a Bachelor of Science Degree in Education from the University of Buffalo. From 1979 to 1990, Mr. Duval served as President and Chief Executive Officer of International Automated Machines, Inc., a manufacturer of single service and portion control condiments. From 1973 to 1979, he served as President and Chief Executive Officer of United Wild Rice, Inc. Prior to 1973, Mr. Duval held various sales and marketing management positions with Ralston Purina, Wm. Underwood Company and Scott Paper Company. Mr. Duval is a member of the Board of Directors' Audit Committee. CARTER F. RANDOLPH, PH.D. - DIRECTOR Dr. Randolph was appointed as a Director of the Company on March 29, 1996. Since 1987, Dr. Randolph has been the President of The Randolph Company, Inc. where he is responsible for the management of pension plans, foundations and trusts. From 1989 to the present, Dr. Randolph has been Executive Vice President and Trustee of the Green Acres Foundation where he is responsible for management, including all aspects of organization and operation of the private nonprofit foundation. Dr. Randolph has experience in the areas of estate planning, tax planning, IRS audit management, investment management, real estate management, farm management and property management. Dr. Randolph is also Chairman and Chief Executive Officer of Planet Products and Apex Machine Design. Planet Products is a manufacturing company focused on precision machining, food processing automation and precision packaging. Apex Machine Design is an engineering firm oriented on the design of factory automation machines and lines. Dr. Randolph currently serves on the Board of Directors of Cintech Tele-Management Systems, Inc. Dr. Randolph is a member of the Board of Directors' Audit Committee. ADAM "BUD" VETTER - DIRECTOR Bud Vetter was appointed as a Director of the Company on October 10, 2000. Mr. Vetter is a partner with the law firm Brown, Bemiller, Murray & McIntyre where his practice is focused in the areas of corporate law, real estate development, and estate planning and probate. Mr. Vetter has a Bachelor or Science degree in Business Administration from Bowling Green State University (Cum Laude, 1982). Mr. Vetter also has a Juris Doctorate degree from Cleveland State University, Cleveland-Marshall College of Law (Magna Cum Laude, 1985). Mr. Vetter is a principal owner and 43 46 developer of the Mansfield Commerce Center, a large industrial complex in Mansfield, Ohio, the Connersville Industrial Center, a large industrial and office complex in Connersville, Indiana, and has a number of other operating companies. Mr. Vetter also currently serves on numerous Boards of Directors and non-profit Boards of Trustees and is a member and Vice Chairman of the Mansfield Regional Airport and Aviation Commission. Mr. Vetter is a member of the Board of Directors' Audit Committee. SIGNIFICANT EMPLOYEES --------------------- PHYLLIS J. THOMAS Ms. Thomas, age 47, has been employed by the Company since November 1993 and currently is the Assistant Vice-President of Corporate Affairs. Ms. Thomas is the Company's principal liaison with Starbucks and is a graduate of Ashland University with a Bachelor of Science Degree in Business Administration. Prior to working for the Company, Ms. Thomas was a promotion specialist for R.J.R. Nabisco from 1990 to 1993. JOHN M. LUDWIG Mr. Ludwig, age 45, is a 1979 graduate of Bowling Green State University with a Bachelor of Science Degree in Business Administration and has been employed by the Company since October 2000. Mr. Ludwig currently is the Director of Sales and Marketing. Prior to joining the Company, Mr. Ludwig was employed by Ocean Spray Cranberries, Inc.'s Food Service division for 15 years. Mr Ludwig has held various sales and trade marketing positions with Ocean Spray Cranberries, Inc. and with Durkee Food Service. Mr. Ludwig has been active in industry initiatives such as; Efficient Food Service Response (EFR), and the Manufacturers Advisory Committee to the Association of Sales & Marketing Companies. JAMES E. POWERS Mr. Powers, age 27, has been employed by the Company since May 1996. Mr. Powers currently is the Director of Operations. Mr. Powers started with the Company as its Maintenance Manager and was then promoted to Production Manager in 1998. He assumed his current responsibility in June 1999. Prior to working for the Company, Mr. Powers was a Maintenance Technician enrolled in a management trainee program at Hedstrom Corporation located in Mansfield, Ohio. FAMILY RELATIONSHIPS -------------------- Except for Mr. and Mrs. Stearns, there are no family relationships among the directors and executive officers of the Company. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS ---------------------------------------- Not Applicable. 44 47 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires executive officers and directors, and persons who beneficially own more than ten percent (10%) of the Common Stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than ten percent (10%) beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. ITEM 10. EXECUTIVE COMPENSATION SALARY COMPENSATION TABLE ------------------------- The following table and notes set forth information regarding remuneration of the officers of the Company whose total annual salary and bonus during the fiscal year ended April 30, 2001 exceeded $100,000:
--------------------------------------- ------------ ------------------ ---------------- ------------------------ NAME OF INDIVIDUAL FISCAL ALL OTHER POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) --------------------------------------- ------------ ------------------ ---------------- ------------------------ William C. Stearns, 2001 $ 139,659 $ 42,037 $ 123 (1) President 2000 $ 125,000 $ 10,000 $ 123 (1) 1999 $ 109,635 $ 0 $ 123 (1) John A. Chuprinko, 2001 $ 90,045 $ 17,019 $ 0 Chief Financial Officer 2000 $ 80,000 $ 0 $ 0 1999 $ 80,000 $ 0 $ 0 --------------------------------------- ------------ ------------------ ---------------- ------------------------
(1) The Company carries and pays the premium on a "key man" life insurance policy on Sally A. Stearns in the amount of $500,000 and is entitled to eighty percent (80%) of the benefits of such a policy. Mr. Stearns is the other named beneficiary of this policy and is entitled to receive the remaining twenty percent (20%) of the benefits of such insurance policy. For the fiscal years ended April 30, 2001 through 1999 the premium value of this benefit to Mr. Stearns was $123. DIRECTORS COMPENSATION ---------------------- The Directors of the Company receive cash compensation of $1,000 per meeting for serving on the Board of Directors, and are reimbursed reasonable expenses incurred while attending these meetings. Frank E. Duval and Carter F Randolph, Ph.D. each received $8,000 and Bud Vetter received $4,000 for attending Board of Directors meetings for the fiscal year ended April 30, 2001. The Company has agreed to pay $15,000 to each of the outside Directors for services rendered during a calendar year, on a pro rata basis for the actual time served as a Director during such calendar year. Frank E. Duval and Carter F. Randolph, Ph.D. each received $15,000 and Bud Vetter received $3,750 on January 9, 2001 for services rendered in calendar year 2000. 45 48 STOCK OPTION PLAN ----------------- At the Company's Annual Meeting of Shareholders held on March 31, 1994, the Company adopted the 1994 Stock Option Plan (the "Plan"). The shares of Common Stock that may be issued upon the exercise of options granted under the Plan shall not exceed 275,000 shares in the aggregate. The options granted under the Plan may be designed as "incentive stock options" or "non-qualified stock options", at the discretion of the committee designated by the Board of Directors of the Company to administer the Plan. The option price of "non-qualified stock options" shall not be less than 100% of the fair market value of a share of Common Stock on the effective date of the grant. The option price for "incentive stock options" shall not be less than 110% of the fair market value of a share of Common Stock on the effective date of the grant. As of April 30, 2001, 17,000 options have been granted and 1,500 of these options have expired due to employee separation. [The remainder of this page intentionally left blank.] 46 49 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, so far as is known to management of the Company, regarding beneficial ownership of Common Stock held of record, as of June 29, 2001, by (i) each shareholder who owns beneficially more than five percent (5%) of the outstanding Common Stock; (ii) each officer and director of the Company; and (iii) all officers and directors as a group.
---------------------------------- --------------------------------- ------------------------ ------------------------ TITLE OF CLASS NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) CLASS ---------------------------------- --------------------------------- ------------------------ ------------------------ Common Stock, no par value William C. Stearns 614,391 18.5% Director, President and Treasurer ---------------------------------- --------------------------------- ------------------------ ------------------------ Common Stock, no par value Sally A. Stearns 631,916 19.1% Director, Vice President and Secretary ---------------------------------- --------------------------------- ------------------------ ------------------------ Common Stock, no par value Frank E. Duval 125,000 (3) 3.8% Director ---------------------------------- --------------------------------- ------------------------ ------------------------ Common Stock, no par value Carter F. Randolph, Ph.D. 63,542 (4) 1.9% Director ---------------------------------- --------------------------------- ------------------------ ------------------------ Common Stock, no par value John A. Chuprinko 2,140 (5) 0.1% Chief Financial Officer ---------------------------------- --------------------------------- ------------------------ ------------------------ Common Stock, no par value All Directors and Officers as a 1,436,989 (6) 43.4% group (5 persons) ---------------------------------- --------------------------------- ------------------------ ------------------------
(1) The address for all persons listed is 30 Paragon Parkway, Mansfield, Ohio 44903. (2) Unless otherwise indicated, the named shareholder has sole voting and investment power. (3) Includes 15,000 shares purchasable on exercise of currently exercisable warrants. (4) Of such shares, 50,834 are beneficially owned by the Randolph Company, Inc., an Ohio corporation, of which Dr. Randolph owns the controlling interest. The Randolph Company, Inc. and, therefore, Dr. Randolph have full discretionary investment authority over such shares, including the right to vote and sell such shares. Includes 12,708 shares for which Dr. Randolph and his wife, Kathy, have shared voting and investment power. Includes 8,798 shares purchasable on exercise of currently exercisable warrants. (5) Includes 1,500 shares purchasable on the exercise of currently exercisable stock options. (6) Includes 25,298 shares purchasable on exercise of currently exercisable warrants and stock options. 47 50 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS William C. Stearns, the President, Treasurer and a Director of the Company, owned a twin engine airplane which he regularly used for Company business up to and including August 3, 1999. The Company paid Corporate Flight Services, a sole proprietorship of Mr. Stearns, $315 per hour for the use of the airplane. During the fiscal years ended April 30, 2001 and 2000, Corporate Flight Service was paid $0 and $18,714, respectively, pursuant to this arrangement. As of August 3, 1999, this arrangement was terminated. The Company carries and pays the premium for a "key man" life insurance policy on Mr. Stearns in the amount of $1,000,000, and as one of the named beneficiaries, the Company is entitled to ninety (90%) of the benefits of such policy. Sally A. Stearns is the other named beneficiary of Mr. Stearns' insurance policy and is entitled to ten percent (10%) of the benefits of such insurance policy. The Company also carries and pays the premium for a "key man" life insurance policy on Ms. Stearns, the Vice President, Secretary and a Director of the Company, in the amount of $500,000 and is entitled to eighty percent (80%) of the benefits of such policy. William C. Stearns is the other named beneficiary of Ms. Stearns' policy and is entitled to receive the remaining twenty percent (20%) of the benefits of such insurance policy. Any future transactions between the Company and its officers, directors or shareholders owning five percent (5%) or more of the Common Stock will be on terms no less favorable to the Company than could be obtained from independent third parties. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS ACQUISITIONS ------------ Exhibit #2 - Share Purchase Agreement between Stearns & Lehman, Inc. and Wargo Holdings Ltd. dated October 1, 1999. (Note 8) ARTICLES OF INCORPORATION AND BY-LAWS Exhibit #3(a) - Articles of Incorporation of Sal-Wan Corp. (filed 3/14/88) (Note 1) Exhibit #3(b) - Certificate of Amendment (filed 1/17/90) (Note 1) Exhibit #3(c) - Certificate of Amendment (filed 9/4/90) (Note 1) Exhibit #3(d) - Certificate of Amendment (filed 3/12/92) (Note 1) Exhibit #3(e) - Certificate of Amendment (filed 4/30/92) (Note 1) Exhibit #3(f) - Certificate of Amendment (filed 5/2/94) (Note 1) 48 51 Exhibit #3(g) - Amended Code of Regulations of Stearns & Lehman, Inc. (Note 1) MATERIAL CONTRACTS ------------------ Exhibit #10(a) - Supplier Agreement, dated September 1, 1997 (Note 7) Exhibit #10(b) - Stearns & Lehman, Inc. 1994 Stock Option Plan (Note 1) Exhibit #10(c) - Description of agreement on outside directors compensation (Note 3) Exhibit #10(d) - Description of agreement pertaining to a "key man" life insurance policies (Note 3) Exhibit #10(e) - Promissory Note and Business Loan Agreement (First Knox National Bank - $400,000) dated December 2, 1996 (Note 2) Exhibit #10(f) - Promissory Note and Business Loan Agreement - Modification (First Knox National Bank - $750,000) dated August 25, 1997 (Note 4) Exhibit #10(g) - Stock Purchase Warrant No. 5, April 28, 1997, 5,000 Shares (Note 3) Exhibit #10(h) - Stock Purchase Warrant No. 6, April 28, 1997, 3,798 Shares (Note 3) Exhibit #10(i) - Warrant Certificate No. WA 17, (34,950 Shares Underwriter's Warrants), April 28, 1997 (Note 3) Exhibit #10(j) - Computer Software, Hardware and Consulting Services Agreement dated June 9, 1997 (Note 3) Exhibit #10(k) - Stock Purchase Warrant No. 7, January 21, 1998, 5,000 Shares (Note 6) Exhibit #10(l) - Stock Purchase Warrant No. 8, January 21, 1998, 5,000 Shares (Note 6) Exhibit #10(m) - Sales Agreement with supplier dated October 7, 1997 (Note 5) Exhibit #10(n) - Business Loan Agreement (First Knox National Bank - $400,000) dated December 2, 1996 (Note 2) Exhibit #10(o) - Promissory Note and Business Loan Agreement (between 19035 Yukon Inc., Oscar Skollsberg's Food Technique Ltd., and Stearns & Lehman, Inc. and First Knox National Bank - $800,000) dated September 28, 1999 (Note 8) Exhibit #10(p) - Non-competition Agreement between Stearns & Lehman, Inc. and Jan Skollsberg dated October 1, 1999 (Note 8) 49 52 CONSENT OF EXPERTS AND COUNSEL ------------------------------ Exhibit #23(a) - Consent of Independent Auditors (Deloitte & Touche LLP) Exhibit #23(b) - Consent of Independent Accountants (PricewaterhouseCoopers LLP) Note 1. Incorporated by reference to the Company's Amendment No. 1 to the Registration Statement on the Form SB-1 filed with Commission on September 25, 1996 (File No. 333-4244-C). Note 2. Incorporated by reference to the Company's Form 10-QSB for the quarterly period ended January 31, 1997 filed with the Commission on March 14, 1997 (File No. 0-21879). Note 3. Incorporated by reference to the Company's Form 10-KSB/A for the year ended April 30, 1997 filed with the Commission on August 12, 1997 (File No. 0-21879). Note 4. Incorporated by reference to the Company's Form 10-QSB for the quarterly period ended July 31, 1997 filed with the Commission on September 15, 1997 (File No. 0-21879). Note 5. Incorporated by reference to the Company's Form 10-QSB for the quarterly period ended October 31, 1997 filed with the Commission on December 15, 1997 (File No. 0-21879). Note 6. Incorporated by reference to the Company's Form 10-KSB for the year ended April 30, 1998 filed with the Commission on July 29, 1998 (File No. 0-21879). Note 7. Incorporated by reference to the Company's Form 10-QSB for the quarterly period ended October 31, 1999 filed with the Commission on December 14, 1999 (File No. 0-21879). Note 8. Incorporated by reference to the Company's Form 8-K filed with the Commission on October 14, 1999 (File No. 0-21879). 50 53 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: July 26, 2001 STEARNS & LEHMAN, INC. (Registrant) /S/ William C. Stearns ---------------------------------------- William C. Stearns President, Director In accordance with the Exchange Act, this report been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: July 26, 2001 /S/ William C. Stearns ---------------------------------------- William C. Stearns President, Director Date: July 26, 2001 /S/ John A. Chuprinko ---------------------------------------- John A. Chuprinko Chief Financial Officer (Principal Accounting Officer) Date: July 26, 2001 /S/ Sally A. Stearns ---------------------------------------- Sally A. Stearns Vice President, Director Date: July 26, 2001 /S/ Frank E. Duval ---------------------------------------- Frank E. Duval Director Date: July 26, 2001 /S/ Carter F. Randolph, Ph.D. ---------------------------------------- Carter F. Randolph, Ph.D. Director Date: July 26, 2001 /S/ Adam "Bud" Vetter ---------------------------------------- Adam "Bud" Vetter Director 51