UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 2003 Commission File Number: 1-14091
SHERWOOD BRANDS, INC.
(Exact name of Registrant as specified in its charter)
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North Carolina |
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56-1349259 |
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(State or other jurisdictions of |
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(I.R.S. Employer |
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1803 Research Boulevard, Suite 201 |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (301) 309-6161 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirement for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The number of shares outstanding of the registrant’s Class A Common Stock, $.01 par value per share, as of December 13, 2003 was 3,003,476. The number of shares outstanding of the registrant’s Class B Common Stock, $.01 par value per share, as December 13, 2003 was 1,000,000. The Class B Common Stock is not publicly traded.
Transitional Small Business Disclosure Format (check one):
Yes o No ý
SHERWOOD BRANDS, INC.
INDEX
SHERWOOD BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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October 31, 2003 |
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July 31, 2003 |
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(unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
121,409 |
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$ |
227,352 |
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Accounts receivable, less allowance of $167,000 and $186,000 |
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14,244,748 |
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899,230 |
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Inventory |
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16,731,412 |
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13,719,294 |
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Income taxes receivable |
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1,020,428 |
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1,020,379 |
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Other current assets |
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489,277 |
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578,155 |
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Deferred taxes on income |
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614,000 |
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614,000 |
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Total current assets |
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33,221,274 |
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17,058,410 |
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Net property and equipment |
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6,850,024 |
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7,129,227 |
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Goodwill |
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2,001,330 |
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2,001,330 |
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Other assets |
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318,504 |
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313,504 |
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TOTAL ASSETS |
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$ |
42,391,132 |
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$ |
26,502,471 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Line of credit |
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$ |
16,255,795 |
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$ |
6,260,264 |
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Current portion of long-term debt |
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530,377 |
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530,377 |
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Current portion of subordinated debt |
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2,000,000 |
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2,000,000 |
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Current portion of capital lease obligation |
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15,718 |
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15,718 |
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Accounts Payable |
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9,134,678 |
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6,257,145 |
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Accrued expenses |
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2,957,755 |
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1,325,891 |
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Total current liabilities |
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30,894,323 |
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16,389,395 |
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Deferred taxes on income |
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464,000 |
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464,000 |
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Long-term debt |
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1,028,089 |
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1,150,513 |
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Obligations under capital lease |
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420,050 |
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423,892 |
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TOTAL LIABILITIES |
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32,806,462 |
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18,427,800 |
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Stockholders’ equity |
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Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued or outstanding |
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— |
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— |
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Common stock, Class A, $.01 par value, 30,000,000 shares authorized, 3,003,476 and 3,003,476 shares issued and outstanding |
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30,035 |
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30,035 |
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Common stock, Class B, $.01 par value, 5,000,000 shares authorized, 1,000,000 shares issued and outstanding |
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10,000 |
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10,000 |
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Additional paid-in-capital |
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9,843,774 |
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9,843,774 |
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Retained earnings (deficit) |
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(299,138 |
) |
(1,809,138 |
) |
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|
|
|
|
|
|
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TOTAL STOCKHOLDERS’ EQUITY |
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9,584,670 |
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8,074,671 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
42,391,132 |
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$ |
26,502,471 |
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See Accompanying summary of accounting policies and notes to consolidated financial statements
1
SHERWOOD BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
UNAUDITED
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Three Months Ended October 31, |
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2003 |
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2002 |
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Net sales |
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$ |
17,420,813 |
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$ |
18,462,212 |
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Cost of sales |
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12,384,142 |
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12,955,743 |
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Gross profit |
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5,036,671 |
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5,506,469 |
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Selling, general and administrative expenses |
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2,231,517 |
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2,563,700 |
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Salaries and related expenses |
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1,062,982 |
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1,175,008 |
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Pre production costs |
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— |
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503,936 |
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Total operating expenses |
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3,294,499 |
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4,242,644 |
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Income from operations |
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1,742,172 |
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1,263,825 |
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Other income (expense) |
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|
|
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|
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Interest income |
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19 |
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2,259 |
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||
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Interest expense |
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(236,766 |
) |
(141,057 |
) |
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Other (expense)income |
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4,537 |
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1,536 |
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Total other (expense)income |
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(232,210 |
) |
(137,262 |
) |
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Income before provision for taxes on income |
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1,509,962 |
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1,126,563 |
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Provision for taxes on income |
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— |
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417,614 |
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Net income |
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$ |
1,509,962 |
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$ |
708,949 |
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Net income per share-basic |
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$ |
0.38 |
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$ |
0.18 |
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-diluted |
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0.37 |
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0.16 |
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Weighted average shares outstanding-basic |
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3,996,199 |
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3,986,809 |
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-diluted |
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4,136,235 |
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4,390,550 |
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See accompanying summary of accounting policies and notes to consolidated financial statements.
2
SHERWOOD BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
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Three months ended October 31, |
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2003 |
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2002 |
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Cash flows from operating activities |
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Net income |
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$ |
1,509,962 |
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$ |
708,949 |
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Adjustments to reconcile net income to net Cash used in operating activities |
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Depreciation expense |
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248,444 |
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222,921 |
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Provision for doubtful accounts |
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75,682 |
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95,161 |
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(Increase) decrease in assets |
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Accounts receivable |
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(13,421,200 |
) |
(12,409,297 |
) |
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Income taxes receivable |
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(49 |
) |
451,989 |
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Inventory |
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(3,012,118 |
) |
(1,859,410 |
) |
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Other current assets |
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88,878 |
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(52,631 |
) |
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Other assets |
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(5,000 |
) |
(14,427 |
) |
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Increase (decrease) in liabilities |
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|
|
|
|
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Accounts payable |
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2,877,533 |
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2,844,808 |
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Accrued expenses |
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1,631,901 |
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981,548 |
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Income taxes payable |
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— |
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— |
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Net cash used in operating activities |
|
(10,005,966 |
) |
(9,030,289 |
) |
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Cash flows from investing activities |
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|
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|
|
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Proceeds from sales of assets |
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142,750 |
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— |
|
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Capital expenditures |
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(111,992 |
) |
(351,960 |
) |
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Net cash used in investing activities |
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30,759 |
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(178,664 |
) |
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Cash flows from financing activities |
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Net borrowings on line of credit |
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9,995,531 |
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9,114,060 |
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Proceeds from long-term debt |
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— |
|
350,000 |
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Payments on long term debt |
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(126,266 |
) |
(64,235 |
) |
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|
|
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|
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|
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Net cash provided by financing activities |
|
9,869,265 |
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9,399,825 |
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|
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Net increase in cash and cash equivalents |
|
(105,943 |
) |
17,576 |
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||
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|
|
|
|
|
|
||
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Cash and cash equivalents, at beginning of period |
|
227,352 |
|
709,247 |
|
||
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|
|
|
|
|
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Cash and cash equivalents, at end of period |
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$ |
121,409 |
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$ |
726,823 |
|
See accompanying summary of accounting policies and notes to consolidated financial statements
3
SHERWOOD BRANDS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sherwood Brands, Inc., and its direct and indirect wholly-owned subsidiaries, Sherwood Brands, LLC, a Maryland limited liability company, Sherwood Brands of RI Inc., a Rhode Island corporation, Sherwood Brands Overseas, Inc., a Bahamas entity (“Overseas”), and Asher Candy, Inc., a Wyoming corporation (collectively referred to herein as, “we”, “our” “us” or, the “Company”). All material inter-company transactions and balances have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Company’s Annual Report and Form 10-K filed on October 29, 2003.
2. ORGANIZATION AND DESCRIPTION OF BUSINESS
Sherwood Brands, Inc. (the “Company”) was incorporated in December 1982 in the state of North Carolina. Sherwood Brands, Inc. is engaged in the manufacture, marketing and distribution of a diverse line of brand name candies, cookies, chocolates and gifts. The Company manufactures lollipops, biscuits and assembles seasonal gift items including gift baskets for Christmas, Valentines Day and Easter. The Company’s principal branded products include COWS(TM) butter toffee candies, DEMITASSE(R) biscuits, RUGER(R) wafers, SMILE POPS(R) lollipops, STRIP-O-POPS(R) lollipops and ELANA(R) chocolates, SOUR FRUIT BURST(TM) fruit-filled hard candies and PIRATE’S GOLD COINS(R) milk chocolates. The Company’s marketing strategy, including its packaging of products, is designed to maximize freshness, taste and visual appeal, and emphasizes highly distinctive, premium quality products that are sold at prices that compare favorably to those of competitive products. The Company operates in the confectionery industry and aligns its operations into three business segments for management to measure financial performance by product type. The Company’s business segments are (i) Manufactured Candy, (ii) Purchased Candy and (iii) Gift Items.
Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland limited liability company. Sherwood Brands, LLC markets and distributes its own line of confectionery products in the United States.
Sherwood Overseas, Inc. (a wholly-owned subsidiary of Sherwood Brands, LLC) was incorporated in July 1993 in the Bahamas to market and distribute the Sherwood lines of confectionery products internationally.
4
Sherwood Brands of RI, Inc. is a wholly owned subsidiary of Sherwood Brands, Inc. that was incorporated in September, 1998 in the state of Rhode Island. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company manufactures hard candies and jelly beans and assembles and markets gift items and baskets to chains such as Wal-Mart, Kmart and CVS.
Sherwood Acquisition Corporation, a wholly-owned subsidiary of the Company, was incorporated in April, 2002 in the state of Wyoming. On May 1, 2002, Sherwood Acquisition merged with and into Asher Candy Acquisition Corporation, a Wyoming corporation. Asher Candy Acquisition Corporation is a manufacturer of candy canes and other hard candies under the “Asher” name. The surviving corporation of the merger is Asher Candy Acquisition Corporation, which has changed its name to Asher Candy, Inc.
3. INTERIM FINANCIAL INFORMATION
The financial information as of October 31, 2003 and for the three months ended October 31, 2003 and 2002 is un-audited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. Results for interim periods are not necessarily indicative of results to be expected for an entire year.
4. INVENTORY
Inventory consists of raw materials, packaging materials, components used in assembly, work- in- process and finished goods and is stated at the lower of cost or market. Cost is determined by the FIFO (first-in, first-out) method.
Inventory consists of the following:
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October 31 |
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July 31 |
|
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|
|
|
(unaudited) |
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|
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Raw materials and ingredients |
|
$ |
504,270 |
|
$ |
423,497 |
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Components used in assembly |
|
1,973,424 |
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1,496,166 |
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Packaging materials |
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3,157,273 |
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2,936,702 |
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Work-in-process |
|
609,496 |
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648,539 |
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Finished product |
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11,549,745 |
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9,358,100 |
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|
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|
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17,794,208 |
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14,863,004 |
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Less reserve for inventory obsolescence |
|
(1,081,792 |
) |
(1,143,710 |
) |
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|
|
|
|
|
|
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|
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$ |
16,712,416 |
|
$ |
13,719,294 |
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5. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
5
the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
6. INCOME TAXES
Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes (SFAS 109).” Under SFAS 109, deferred taxes are determined using the liability method which requires the recognition of deferred tax assets and liability based on differences between the financial statement and the income tax basis using presently enacted tax rates.
The income tax rate utilized on an interim basis is based on the Company’s estimate of the effective income tax rate for the fiscal year ending July 31, 2004. The Company has a net operating loss carry forward which management believes will offset all taxable income generated in fiscal year 2004. Therefore, the Company estimated its effective tax rate at 0%.
7. STOCK COMPENSATION OF STOCK OPTIONS
We have adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123”), but we continue to measure compensation cost for the stock options using the intrinsic value method prescribed by APB Opinion No. 25. As allowable under SFAS 123, we used the Black-Sholes method to measure the compensation cost of stock options granted . The Company did not grant any stock options to employees in the period ended October 31, 2003 or 2002.
There were no adjustments made in calculating the fair value to account for vesting provisions, for non-transferability or risk of forfeiture. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
If we had elected to recognize compensation cost based on the value at the grant dates with the method prescribed by SFAS 123, net income and earnings per share would have been changed to the pro forma amounts indicated in the following table:
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For the three months ended October 31, |
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|
2003 |
|
2002 |
|
||
|
Net Income/(loss) |
|
|
|
|
|
||
|
As Reported |
|
$ |
1,509,962 |
|
$ |
708,949 |
|
|
|
|
|
|
|
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Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
26,000 |
|
37,000 |
|
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|
|
|
|
|
|
|
||
|
Pro Forma net income (loss) |
|
1,483,962 |
|
671,949 |
|
||
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Basic Income/(loss) per Common Share: |
|
|
|
|
|
||
|
As Reported |
|
$ |
0.38 |
|
$ |
0.18 |
|
|
Pro Forma |
|
0.37 |
|
0.17 |
|
||
|
Diluted income/(loss) per Common Share: |
|
|
|
|
|
||
|
As reported |
|
$ |
0.37 |
|
$ |
0.16 |
|
|
Pro Forma |
|
0.36 |
|
0.15 |
|
||
6
8. EARNINGS PER SHARE
Earnings per share is based on weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. The following table presents a reconciliation between the weighted average shares outstanding for basic and diluted earnings per share for the three months ended October 31, 2003 and October 31, 2002:
|
For the three months ended October 31, 2003 |
|
Income |
|
Shares |
|
Per Share |
|
||
|
|
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
|
|
|
|
|
|
||
|
Income available to common shareholders |
|
$ |
1,509,962 |
|
3,996,199 |
|
$ |
0.38 |
|
|
Effect of dilutive stock options |
|
|
|
140,036 |
|
|
|
||
|
Dilutive earnings per share |
|
$ |
1,509,962 |
|
4,136,235 |
|
$ |
0.37 |
|
|
For the three months ended October 31, 2002 |
|
Income |
|
Shares |
|
Per Share |
|
||
|
|
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
|
|
|
|
|
|
||
|
Income available to common shareholders |
|
$ |
708,949 |
|
3,986,809 |
|
$ |
0.18 |
|
|
Effect of dilutive stock options |
|
|
|
403,741 |
|
|
|
||
|
Dilutive earnings per share |
|
$ |
708,949 |
|
4,390,550 |
|
$ |
0.16 |
|
9. CONTINGENCY
The Company is, from time to time, involved in litigation incidental to the conduct of its business. The Company is currently involved in several actions. In particular, the Company’s landlord at its Rhode Island facility has named the Company as a defendant in an action seeking security for claims relating to the lease agreement. The Company deposited $180,000 with the registry of the court relating to claims for payment of real estate taxes, water and sewer, rent of
7
other occupied space and repair expenses. In September 2002, the landlord claimed other breaches of the lease agreement, alleging an obligation of $932,000 under the lease and demanded $750,000 to settle the disputes. The Company has claims against the landlord it is pursuing and continues to occupy space at the leased premises. The Company has accrued amounts to cover current charges. Management does not believe that the outcome of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition of the Company. In November 2003, the company has settled its claims with the landlord. The accrual reflected in the financial statements is sufficient to cover all outstanding obligations to the landlord.
The Company is currently involved as Plaintiff in a suit brought before the Circuit Court for Montgomery County, Maryland, presenting claims in connection with the merger agreement under which Sherwood Brands acquired securities of Asher Candy Acquisition Corporation and agreed to sell securities in Sherwood Brands to prior shareholders of Asher Candy. The complaint alleges that the Company was fraudulently induced to enter into the merger agreement on the basis of, among other things, material misrepresentations and omissions by the shareholders of Asher Candy. Sherwood Brands is seeking declaratory and injunctive relief and award of damages against the former shareholders of Asher Candy for violations of the merger agreement and for common law fraud and violations of applicable securities laws. Pending resolution of the litigation, the Company has refused to honor the demand of the former shareholders for the Company to repurchase half of the shares issued to them at a price of $4.50 per share. Certain of the shareholders have filed a counterclaim seeking $7.0 million in damages. The Company believes that it has defenses to the counterclaim. There can be no assurance that the Company will not be a party to other litigation in the future.
10. LICENSING AGREEMENTS
During the quarter ended October 31, 2003, the Company entered into one licensing agreements to incorporate products into gift sets. The royalty rates for such licenses are from 3% of net sales and expire in range of two to three years.
The products to be incorporated into the Company’s gift set items is during the Christmas holiday season and are effective on the selling season of January 2004. The Company paid $5,000 in advance fee to have the rights to incorporate products into its gift set items. These advance fees will be offset against any amounts due on royalties. There is a $20,000 minimum guarantee license fee under these agreements. The Company incurred $15,185, royalties related to the quarter ended October 31, 2003. The Company is currently pursuing other licenses with similar terms and conditions.
11. CREDIT FACILITY
During the quarter ended October 31, 2003, the Company was in no violation of the certain business and financial covenants under its credit facility relating to the fixed charge coverage ratio. . Management believes the Company will comply with the restrictive covenants for the remainder of 2004.
8
12. CONCENTRATION OF CREDIT RISK AND EXPORT SALES
The Company has a variety of customers, including mass merchandisers, drug stores and grocery stores throughout the United States and abroad. For the quarter ended October 31, 2003 three customers accounted for approximately 16%, 12% and 10% of the Company’s net sales. For the quarter ended October 31, 2002 the same three customers accounted for approximately 16%, 8% and 13% of the Company’s total net sales. The Company had sales to customers in Canada which represent 0.23% and 0.44% of net sales for quarter ended October 31, 2003 and 2002, respectively.
13. OPERATING SEGMENTS
We operate in the confectionery industry and align our operations into three business segments for management reporting purposes. These segments are based on product type. This alignment allows management to measure financial performance by product type. Our business segments are (i) Manufactured Candy and Cookies, (ii) Purchased Candy and Cookies and (iii) Purchased Gift Items. We report these as reportable segments in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.
Our Chief Operating Decision Maker, who is our Chairman and Chief Executive Officer, evaluates performance based upon a measure of segment operating profit or loss that includes an allocation of common expenses, but excludes some unallocated expenses. Unallocated expenses represent corporate expenditures that are not specifically allocated to the segments.
Our reportable segments are strategic business units that offer different products in different geographic areas. We have no assets outside of the United States. There is no concentration of net sales in any one area within the United States. Net sales outside of the United States are minimal.
|
|
|
|
|
Three Months ended October 31, 2003 |
|
|||||||||||
|
|
|
Manufactured |
|
Purchased |
|
Gift |
|
Other |
|
Consolidated |
|
|||||
|
Total revenue |
|
$ |
5,605,903 |
|
$ |
8,302,312 |
|
$ |
3,515,126 |
|
$ |
— |
|
$ |
17,420,813 |
|
|
Gross margin |
|
90,326 |
|
3,801,575 |
|
1,147,298 |
|
— |
|
5,036,671 |
|
|||||
|
Interest expense |
|
113,643 |
|
86,225 |
|
36,893 |
|
— |
|
236,766 |
|
|||||
|
Segment assets |
|
10,731,663 |
|
17,662,819 |
|
12,640,937 |
|
1,355,713 |
|
42,391,132 |
|
|||||
|
Depreciation and amortization |
|
172,919 |
|
— |
|
33,884 |
|
41,868 |
|
248,444 |
|
|||||
9
|
|
|
|
|
Three Months ended October 31, 2002 |
|
|||||||||||
|
|
|
Manufactured |
|
Purchased |
|
Gift |
|
Other |
|
Consolidated |
|
|||||
|
Total revenue |
|
$ |
10,161,103 |
|
$ |
6,106,501 |
|
$ |
2,194,608 |
|
$ |
— |
|
$ |
18,462,212 |
|
|
Gross margin |
|
2,177,604 |
|
2,626,442 |
|
702,423 |
|
— |
|
5,506,469 |
|
|||||
|
Interest expense |
|
67,707 |
|
51,370 |
|
21,980 |
|
— |
|
141,057 |
|
|||||
|
Segment assets |
|
10,155,339 |
|
18,081,409 |
|
15,453,418 |
|
1,658,453 |
|
45,348,619 |
|
|||||
|
Depreciation and amortization |
|
159,782 |
|
— |
|
25,572 |
|
37,567 |
|
222,921 |
|
|||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Important Information Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of the company and its management. Such statements are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in such forward-looking statements, including in particular the risks and uncertainties described under “Risk Factors” in our Form 10-K filed with the commission on October 29, 2003. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise the information contained in this quarterly report on Form 10-Q, whether as a result of new information, future events or circumstances or otherwise.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements. Significant estimates in our financial statements include the accounts receivable and inventory reserves. We continually evaluate these reserves based upon historical experience. Although actual results could differ from those disclosed, management feels that the estimates used to establish the reserves are conservative in nature. Furthermore, management contends that it would be unlikely that the reserve level would be materially different from any other independently prudently established reserve.
If any of the following risks occurs, our business, financial condition or results of operations could be adversely affected.
The loss of a significant customer could have an adverse effect on our business. We are dependent on a limited number of customers for a significant portion of our revenues. Sam’s
10
Club and Wal-Mart accounted for approximately 12% and 8%, respectively, of our sales for the quarter ended Ocotber 31, 2003. We do not maintain agreements with our customers and sell products pursuant to purchase orders placed from time to time in the ordinary course of business. The loss of a significant customer could have an adverse effect on our business.
We face significant competition in the marketing and sales of our products. Our products compete for consumer recognition and shelf space with candies, cakes, cookies, chocolates and other food products which have achieved international, national, regional and local brand recognition and consumer loyalty. These products are marketed by companies (which may include our suppliers) with significantly greater financial, manufacturing, marketing, distribution, personnel and other resources than we have. Some of these competitors, such as Hershey Food Corporation, Masterfoods USA (M&M Mars), Inc., Nestle, S.A., and Kraft Foods, dominate the markets for candy and cookie products, and have substantial promotional budgets which enable them to implement extensive advertising campaigns. The food industry is characterized by frequent introductions of new products, accompanied by substantial promotional campaigns. If we are unable to continue to compete successfully our business could be adversely affected.
We face various risks relating to a recent acquisition. In May 2002 we acquired the business of Asher Candy Acquisition Corporation. Asher Candy Acquisition Corporation manufactured candy canes, a product which we had no prior experience in manufacturing. If we are unable to successfully produce a quality product, and maintain or increase the customer base, our profitability could be adversely affected.
Our success is highly dependent on consumer preferences and industry factors. The markets for candy and cookie products are affected by changes in consumer tastes and preferences and nutritional and health-related concerns. We could be subject to increased competition from companies whose products or marketing strategies address these concerns. In addition, the markets for our products may be subject to national, regional and local economic conditions which affect discretionary spending, demographic trends and product life cycles, whereby product sales increase from their introductory stage through their maturity and then reach a stage of decline over time.
We have limited historical profitability and may not be profitable in the future. We have historically, until recently, achieved limited profitability. Our operating expenses have increased and can be expected to continue to increase in connection with any expansion activities undertaken by us, including those relating to advertising and product manufacturing. Accordingly, our profitability will depend on our ability to improve our operating margins and increase revenues from operations. Unanticipated expenses, unfavorable currency exchange rates, increased price competition and adverse changes in economic conditions could have a material adverse effect on our operating results. If we are unable to achieve significantly increased levels of revenues, our future operations may not continue to be profitable.
We depend on our trademarks. We hold United States trademark registrations for the “ELANA,” “RUGER”, “TONGUE TATTOO”, “STRIP-O-POP”, “SMILE POPS” and “demitasse” names, and have filed applications to register certain other names, including “COWS,” and use other
11
names for which we have not applied for registration. We believe that our rights to these names are a significant part of our business and that our ability to create demand for our products is dependent to a large extent on our ability to exploit these trademarks. Our failure to protect our trademarks and other intellectual property rights could negatively impact the value of our brand names. We are requested some of our marks in countries other than the U.S. and may apply for additional registration as appropriate.
We are dependent on third party manufacturers and suppliers. We are dependent on the ability of our manufacturers to adhere to our product, price and quality specifications and scheduling requirements. Our operations require us to have production orders in place in advance of shipment to our warehouses (product deliveries typically take 60 days). Any delay by manufacturers in supplying finished products to us would adversely affect our ability to deliver products on a timely and competitive basis. In addition, raw materials necessary for the manufacture of our products at our facilities, including flour, sugar, shortening, butter and flavorings, are purchased from third-party suppliers. We do not maintain agreements with any such suppliers and we are, therefore, subject to risks of periodic price fluctuations, shortages and delays. If there is a material interruption in the availability or significant price increases for raw materials would have a material adverse effect on our operating margins.
We face various risks relating to foreign manufacturing. During the three months ended October 31, 2003 and 2002, approximately 45% and 33% , respectively, of our products were manufactured in foreign countries. We have been and will continue to be subject to risks associated with the manufacture of products in foreign countries, primarily in Argentina, Austria, Belgium, China and Holland. These risks include material shipping delays, fluctuations in foreign currency exchange rates, customs duties, tariffs and import quotas and international political, regulatory and economic developments. We assume the risk of loss, damage or destruction of products when shipped by a manufacturer. Because we pay for some of our products manufactured outside the United States in foreign currencies, any weakening of the United States dollar in relation to relevant foreign currencies, could result in significantly increased costs to us. In addition, some products manufactured overseas are subject to import duties. Deliveries of products from our foreign manufacturers could also be delayed or restricted by the future imposition of quotas. If quotas were imposed, it is possible that we would not be able to obtain quality products at favorable prices from domestic or other suppliers whose quotas have not been exceeded by the supply of products to their existing customers.
Our operating results are subject to fluctuations as a result of new product introductions, the timing of significant operating expenses and customer orders, delays in shipping orders, pricing and seasonality. We are subject to government regulation. We are subject to extensive regulation by the United States Food and Drug Administration, the United States Department of Agriculture and by other state and local authorities in jurisdictions in which our products are manufactured or sold. Among other things, such regulation governs the importation, manufacturing, packaging, storage, distribution and labeling of our products, as well as sanitary conditions and public health and safety. Applicable statutes and regulations governing our products include “standards of identity” for the content of specific types of products, nutritional labeling and serving size requirements and general “Good Manufacturing Practices” with respect to manufacturing processes. Our facilities and products are subject to periodic inspection by federal, state and local
12
authorities. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions.
We may incur product liability claims that are not fully insured. As a manufacturer and marketer of food products, we are subject to product liability claims from consumers. We maintain product liability insurance with limits of $2,000,000 in the aggregate and $1,000,000 per occurrence (with excess coverage of $10,000,000). These insurance amounts may not be sufficient to cover potential claims and adequate levels of coverage may not be available in the future at a reasonable cost. In the event of a partially or completely uninsured successful claim against us, our financial condition and reputation would be materially adversely affected.
We are dependent on key personnel and the loss of these key personnel could have a material adverse effect on our success. Our success is dependent on the personal efforts of Uziel Frydman, our Chairman, President and Chief Executive Officer, Amir Frydman, our Vice President of Marketing and Christopher Willi, our Chief Financial Officer. The loss or interruption of the services of such individuals could have a material adverse effect on our business. We maintain “key-man” insurance in the amount of $1,000,000 on the life of Mr. Uziel Frydman. Our success also depends upon our ability to hire and retain additional qualified management, marketing and other personnel. Employment and retention of qualified personnel is important due to the competitive nature of the food industry. Our failure to hire and retain qualified personnel could adversely affect our success.
Our President and Chief Executive Officer controls our company. Mr. Uziel Frydman, President and Chief Executive Officer, owns 400,000 shares of Class A Common Stock (with a right to acquire an additional 202,984 upon the exercise of options) and 1,000,000 shares of Class B Common Stock, representing, in the aggregate, approximately 43% of the outstanding Common Stock of our company and 76% of the voting control of our company, assuming that all of the warrants are exercised. Accordingly, Mr. Frydman will be able to direct the election of all of our company’s directors, increase the authorized capital, dissolve, merge or sell the assets of our company, and generally direct the affairs of our company. In addition, the level of control exercised by Mr. Frydman may discourage investors from purchasing our Common Stock.
We may issue “blank check” preferred stock that would prevent a change of control. Our Articles of Incorporation, as amended, authorize our board of directors to issue up to 5,000,000 shares of “blank check” preferred stock without stockholder approval, in one or more series and to fix the dividend rights, terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series of preferred stock. The issuance of shares of preferred stock in the future could, among other things, adversely affect the voting power of the holders of common stock and, under certain circumstances, could make it difficult for a third party to gain control of our company, prevent or substantially delay a change in control, discourage bids for the Common Stock at a premium, or otherwise adversely affect the market price of the Common Stock.
We are prohibited from paying dividends by the terms of our financing agreements. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends
13
in the foreseeable future. The payment of cash dividends is prohibited by the terms of our financing agreements.
For the year ended July 31, 2003 and first quarter ended October 31, 2003, we had a total of sixteen licensing agreements, one signed during first quarter ended October 31, 2003, nine signed during the fiscal year ended July 31 ,2003 and six signed during the fiscal year ended July 31 ,2002, to incorporate our products into gift sets and to manufacture candies and wafers. The royalty rates for such licenses range from 2% to 12% of net sales and expire in range of 2 to 3 years. The products to be incorporated into our gift set items are primarily for the first quarter and Easter selling season. We entered into a licensing agreement to produce everyday candies and wafers. We paid $242,000 in advance fees for the rights under the licensing agreements. These advance fees were offset against any amounts due on royalties. There were no other minimum license fees under these agreements. For the quarter ended October 31 ,2003, we incurred $15,185 in royalties. We are currently pursuing other licenses with similar terms and conditions. We expect the greatest impact from the agreements will occur in the year ending July 31, 2004.
Our Rhode Island manufacturing facility, which occupied five stories in an old building, closed on May 31, 2002. All the production equipment, together with the electrical, piping, steam and air-conditioning were disassembled and transferred to our expanded Chase City, Virginia facility. This 75,000 square feet facility, with an additional 25,000 square feet from a recent expansion, and the 73,000 square foot facility at Keysville, Virginia (about 20 miles from Chase City, Virginia), would become the single manufacturing and distribution facility under one plant management for all products produced at the Chase City facility
Christmas, Easter gift sets and gift baskets are distributed at the Rhode Island and Massachusetts facilities. We source product primarily from the Pacific Rim. We are continually looking to further reduce costs by more efficient sourcing.
We did not exercise the options to extend the term of the lease on our office and assembly facility in Rhode Island and we plan to vacate the location on March 31, 2004. After March 31, 2004, our New Bedford, Massachusetts facility together with a planned West Coast assembly and distribution facility will be utilized to improve our shipping costs and assembly of our products.
Environmental Factors Affecting the Performance in the Quarter Ended October 31, 2002.
On September 30, 2002, 29 west coast ports were shut down abruptly and remained closed as contract negotiations between dock-workers and shipping companies broke off negotiations for new contracts. The shut down occurred during our peak inventory shipping period for orders for the holiday season. In mid-October 2002, the President of the United States of America signed an order under the Taft-Hartley Act to reopen the ports and put a moratorium on the strike for 60 days. The shut down had an effect on our first quarter of shipments to our customers. A large portion of containers, which were to be received, remained either at ports or on shipping vessels on the water. In addition, empty containers were not brought back to ports in the Pacific Rim, which we needed to move some of our other products. In mid-October 2002, our inventory
14
began to be released for shipment to our facility in New Bedford, Massachusetts. A slow down by the long shore-men on shipping products was still prevalent. Our revenues for the three months ended October 31 ,2002 were impacted by the shut down and resulted in a delay of approximately $6.0 million in sales. Approximately $3.5 million in inventory was shipped out during the second quarter and approximately $2.5 million of the remaining inventory will be shipped during the first and second quarters of fiscal year 2004. We shipped $0.5 million of this inventory in the quarter ended October 31, 2003.
Results of Operations
Three Months Ended October 31, 2003 and 2002
Net sales for the three months ended October 31, 2003 and 2002 were $17,420,813 and $18,462,212 respectively, a decrease of 5.6%, or $1,041,399. The decline in net sales was due to lower sales of manufactured candy of approximately $4,500,000 offset by increases in sales of purchased candy of $2,200,000 and an increase of $1,250,000 on sales of gift sets. Big Lots, Sam’s Club and Dollar General accounted for approximately 16%, 12% and 10%, respectively, of sales for the three months ended October 31, 2003. Big Lots, Dollar Tree and Sam’s Club accounted for approximately 16%, 13% and 8%, respectively, of sales for the prior year’s comparable period.
Net sales for each of our business segments was as follows:
Net sales of Manufactured Candy decreased from $10.1 million for the three months ended October 31, 2002 to $5.6 million for the three months ended October 31, 2003. The decrease of $4.5 million was primarily due to a decline of $2.9 million of sales of manufactured candy canes, of which, $1.5 million relates to firm orders scheduled to be shipped in the first quarter but delayed until the second quarter of 2004, $0.4 million decline in our manufactured items for Halloween, $0.6 million decline in Kastins Christmas candy and $0.6 million decline in Cows sales.
Net sales of Purchased Candy increased from $6.1 million for the three months ended October 31, 2002 to $8.3 million for the three months ended October 31, 2003. The increase of $2.2 million was primarily due to increases in the sale of purchased candy of $0.6 million and $1.6 million of purchased gift items, which had been assembled at our New Bedford, Massachusetts facility in the prior fiscal year.
Net sales of Gift Items increased from $2.2 million for the three months ended October 31, 2002 to $3.5 million for the period ended October 31, 2003. The $1.3 million increase was primarily a result of a $2.0 million increase of sales of Christmas assembled goods, offset by $0.7 million of health and beauty gift items purchased as a one time item by Wal-Mart.
Gross margins decreased to $5.0 million for the three months ended October 31, 2003 from $5.5 million for the three months ended October 31, 2002, and decreased to 28.9% from 29.8% as percent of sales, respectively.
Gross margins for each of our business segments were as follows:
15
Gross margins on our Manufactured Candy decreased from $2.7 million to $0.1 million for the three months ended October 31, 2003 and 2002, respectively. The decrease was mainly attributable to increased labor costs and overhead expenses at our manufacturing plant in New Hyde Park, New York.
Gross margins for our Purchased Candy increased from $2.6 million to $3.8 million for the three months ended October 31, 2002 and 2003, respectively. The increase was primarily due to purchased pre-packed assembled gift items that were not assembled in our New Bedford, Massachusetts facility and better pricing of purchased candy from our third party overseas suppliers.
Gross margins on our Gift Items increased from $0.7 million to $1.1 million for the three months ended October 31, 2002 and 2003, respectively. The increase was due primarily to lower labor associated with the assembly of our products. For the three months ended October 31, 2002, we were reliant on contract labor. For the three months ended October 31, 2003, we shifted back to utilizing hourly employees.
During the three months ended October 31, 2003 and 2002, selling, general and administrative expenses decreased to $2.2 million from $2.6 million, respectively, and decreased to 12.8% from 13.9% as a percent of sales, respectively. The decrease was largely due to $98,000 in travel expenses, $131,000 of shipping and carrier costs, $24,000 in building rental costs, $28,000 in bank fees, $16,000 of pre-employment costs and $35,000 in property insurance expenses.
Pre-productions startup costs decreased to $0 during the three month ended October 31, 2003 compared to $503,936 from the three months ended October 31, 2002 period. In the fourth quarter of fiscal year ended July 31, 2002, we reduced the level of employees and the scope of operations eliminating the need for continued training costs for new employees at our Chase City, Virginia facility.
Salaries and related expenses decreased to $1,062,982 for the three months ended October 31, 2003, from $1,175,008 for the three months ended October 31, 2002, or 6.1% from 6.4%, respectively, as a percent of sales. This decrease resulted from a decline of $112,000 in our overhead due to our reorganization effort in the fourth quarter of the fiscal year ended July 31, 2003.
As a result, operating expenses for the three months ended October 31, 2003 decreased to $3.3 million from $4.2 million for the three months ended October 31, 2002 and decreased to 18.9% from 23.0%, respectively, as a percent of sales.
Income from operations for the three months ended October 31, 2003 was $1.7 million as compared to income of $1.3 million for the prior year’s comparable period. Most of the increase resulted from the decrease in pre production start up costs of approximately $0.5 million and other expense explained in results from operating expenses.
For the three months ended October 31, 2003, interest income decreased to $19 from $2,259 for
16
the three months ended October 31, 2002 as reserves declined. For the three months ended October 31, 2003, interest expenses increased to $236,766 from $141,057 for the three months ended October 31, 2002 due to an increase in our term debt financing of $1.3 million associated with the merger with Asher Candy and interest on the subordinated debt instrument we entered into during the fiscal year ended July 31, 2003.
For the three months ended October 31, 2003, other income increased to $4,537 from $1,536 for the three months ended October 31, 2002 due to $6,000 of realized losses on foreign exchange transactions and $10,349 in gains on sales of assets at the Chase City facility.
The income tax rate utilized on an interim basis is based on the Company’s estimate of the effective income tax rate for the fiscal year ending July 31, 2004. The Company has a net operating loss carry forward which management believes will offset all taxable income generated in fiscal year 2004. Therefore, the Company estimated its effective tax rate at 0%.
Liquidity and Capital Resources
Our primary cash requirements have been to fund the purchase, manufacture and commercialization of our products. We finance our operation and manufacturing with cash flow from operations and bank financing. Our working capital at October 31, 2003 and July 31, 2003 was $2,326,951 and $669,015, respectively.
Net cash used in operating activities for the three months ended October 31, 2003 and 2002, was $10,005,966 and $9,030,289, respectively. The increase in cash used by operating activities was due primarily to increases in accounts receivable and inventory, which where offset by the increase in net income, accounts payable accrued expenses.
Net cash provided in investing activities for the three months ended October 31, 2003 and 2002, increased to $30,759 from cash used of $351,960, respectively, primarily due to decreased capital improvements for the manufacturing operations into our Chase City, Virginia facility and the proceeds from the sale of assets.
Net cash provided by financing activities for the three months ended October 31, 2003 and 2002, was $9,869,265 and $9,399,825, respectively. This increase was primarily due to increased reliance on borrowings under our line of credit to finance working capital needs for seasonal materials. The borrowings for the period ended October 31, 2003 was approximately $9,995,531 as compared to $9,114,060 for the prior years comparable period. We have $8,004,469 of our $18,000,000 line of credit available to meet additional seasonal needs to purchase and manufacture inventory subject to availability of accounts receivable and inventory.
Principal payments for our long-term debt for the three months ended October 31, 2003, were $126,266. We believe that cash provided by operations will be sufficient to finance our operations and fund debt service requirements.
17
Schedule of Contractual Obligations
|
|
|
|
|
Payments Due by Period |
|
||||||||
|
Contractual Obligation |
|
Total |
|
Less Than |
|
1-3 years |
|
After 4 years |
|
||||
|
Long-Term Debt |
|
$ |
1,558,466 |
|
$ |
530,376 |
|
$ |
870,992 |
|
$ |
157,098 |
|
|
Subordinated Debt |
|
2,000,000 |
|
2,000,000 |
|
— |
|
— |
|
||||
|
Capital Lease Obligation |
|
420,050 |
|
15,718 |
|
125,000 |
|
279,332 |
|
||||
|
Operating Leases |
|
973,926 |
|
380,798 |
|
358,284 |
|
234,844 |
|
||||
|
Total Contractual Obligation |
|
$ |
4,952,442 |
|
$ |
2,926,892 |
|
$ |
1,354,276 |
|
$ |
671,274 |
|
Schedule of Commercial Commitments
|
|
|
|
|
Amount of Commitment expiration per period |
|
||||||
|
Commercial Commitments |
|
Total |
|
Less Than |
|
1-3 years |
|
After 4 years |
|
||
|
Line of Credit (*) |
|
$ |
18,000,000 |
|
— |
|
$ |
18,000,000 |
|
— |
|
|
Total Commercial Commitments |
|
$ |
18,000,000 |
|
— |
|
$ |
18,000,000 |
|
— |
|
(*) The line of credit is available for advances to finance working capital and the issuance of letter of credits. Advances under the line of credit are based on a borrowing formula equal to 85% of eligible domestic accounts receivable plus 60% of eligible finished goods and 30% of eligible components inventory. The line of credit facility varies from quarter to quarter based on working capital needs and the level of repayments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of its variable rate line of credit, we are exposed to the risk of rising interest rates. Our $18,000,000 line of credit had an interest rate ranging from 4.11% to 4.12% for the three months ended October 31, 2003. Our long-term debt is at variable market tax exempt rates, which exposes us to fluctuations in the market. However, since the rate is based on the tax exempt rate, it is below the market rate.
Significant Accounting Policies and Estimates
Our preparation of financial statements in conformity with accounting principals generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that effect amounts reported in the accompanying financial statements and related notes. In preparing these financial statement, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below; however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
18
We provide an allowance for un-collectible accounts receivable based on experience. We consider the following factors in developing an estimate of our allowance for non-payment and the overall economic environment. Although it is reasonably possible that management’s estimate of un-collectible accounts could change in the near future, management is not aware of any events that would result in a change to its estimates which would be material to our financial position or results from operations. For the quarter ended October 31, 2003, we had an allowance for doubtful accounts of approximately $92,000.
We provide an allowance for slow moving inventory based on experience and aging of products. We consider the following factors in developing an estimate of our allowance for non-moving of inventory and the overall economic environment. Although it is reasonably possible that management’s estimate of slow moving inventory could change in the near future, management is not aware of any events that would result in change to its estimates which would be material to our financial position or results from operations. For the quarter ended October 31, 2003, we had an allowance for slow moving inventory of approximately $1,081,792.
Goodwill represents the excess of consideration over the net assets acquired resulting from acquisitions of companies accounted for by the purchase method. We utilize the annual evaluation as required by SFAS 142. At each Balance Sheet date, management evaluates the recoverability of the goodwill and reviews goodwill and other long-lived assets for impairment. As of October 31, 2003 there was no impairment loss.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. We adopted the use of this accounting statement in June 2003. Adoption did not have a material effect on our financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement established standards on how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires an issuer to classify a financial instrument that is within its scope as a liability, or an asset in some circumstances. We adopted the use of this accounting statement in May 2003. Adoption did not have a material effect on our financial position or results of operations.
Seasonality and Cylicality; Fluctuation in Quarterly Operating Results
We have experienced and expect to continue to experience variability in revenues and net income from quarter to quarter as a result of seasonality that may accompany private or public sector budget cycles. Sales of our products have historically been higher in the first and second quarters as a result of patterns of capital spending by our customers.
We also believe that the confectionery industry is influenced by general economic conditions and particularly by the level of change. Increase levels of change can have a favorable impact on our
19
revenues. We also believe that the confectionary industry tends to experience periods of decline and recession during economic downturns. The confectionary industry could sustain periods of decline in revenues in the future, and any decline may materially adversely effect us.
We could in the future experience quarterly fluctuations in operating results due to the factors described above and other factors, including short-term nature of certain client commitments; patterns of capital spending by customers; loss of a major client; seasonality that may accompany private or public budget cycles; pricing changes in response to various competitive factors; market factors affecting availability of qualified personnel and general economic conditions.
Item 4. Controls and Procedures
As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer (collectively, the “certifying officers”) have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with the Commission is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.
The certifying officers concluded, based on their evaluation, that our disclosure controls and procedures are effective, taking into consideration the size and nature of our business and operations.
No change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
We are from time to time involved in litigation incidental to the conduct of its business. We are currently a plaintiff in several actions and currently in particular to the landlord at its Rhode Island Facility. The landlord sought security for its claims relating to the lease agreement. The company deposited $180,000 with the registry of the court on allegation relating to amounts sought for payment of real estate taxes, water and sewer, rent of other occupied space and repair expenses. On September 2002, the landlord claimed other breaches of the Lease Agreement alleging an obligation of $932,000 under the lease and has demanded $750,000 to settle the disputes. We have continued claims against the landlord and continue to occupy space at the leased premises. We have accrued amounts to cover current charges. Management does not believe that the outcome of these actions, individually or in the Aggregate, would have a material adverse effect on our financial statements. In November 2003, we settled the claims with the landlord. The accrual in the financial statements is sufficient to cover all outstanding obligations to the landlord.
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We are currently involved as Plaintiff in a suit brought before the Circuit Court for Montgomery County, Maryland, presenting claims in connection with the merger agreement under which Sherwood Brands acquired securities of Asher Candy Acquisition Corporation and agreed to sell securities in Sherwood Brands to prior shareholders of Asher Candy. The complaint alleges that we were fraudulently induced to enter into the merger agreement on the basis of, among other things, material misrepresentations and omissions by the shareholders of Asher Candy. We are seeking declaratory and injunctive relief and award of damages against the former shareholders of Asher Candy for violations of the merger agreement and for common law fraud and violations of applicable securities laws. Pending resolution of the litigation, we have refused to honor the demand of the former shareholders for us to repurchase half of the shares issued to them at a price of $4.50 per share. Some of the shareholders have filed a counterclaim seeking $7.0 million in damages. We believe that we have defenses to the counterclaim. There can be no assurance that we will not be a party to other litigation in the future.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.
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SHERWOOD BRANDS, INC. |
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Date: December 12, 2003 |
/s/ Uziel Frydman |
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Chairman,
President and Chief Executive |
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Date: December 12, 2003 |
/s/ Christopher J. Willi |
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Chief Financial Officer and Secretary |
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Exhibit Index
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Exhibit No. |
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Description |
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31.1 |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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