<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended July 31, 1997
OR
Transaction report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
----------------- -----------------
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COMMISSION FILE NO. 0-21879
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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)
Indicate by 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
--- ---
As of September 5, 1997, 3,226,752 common shares, no par value, were
outstanding. Transition Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
BALANCE SHEETS
July 31, 1997 , April 30, 1997 and July 31, 1996
<TABLE>
<CAPTION>
ASSETS JULY 31, APRIL 30, JULY 31,
1997 1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 64,018 $ 730,833 $ 51,557
Trade accounts receivable, net of allowance for doubtful
accounts of $44,520, $46,000 and $45,845 as of
July 31, 1997, April 30, 1997 and July 31, 1996, respectively 1,085,474 884,459 716,648
Inventory 1,333,531 1,239,671 1,207,240
Prepaid and other 55,182 75,639 47,505
Deferred income taxes 17,757 25,999
---------- ---------- ----------
Total current assets 2,555,962 2,956,601 2,022,950
---------- ---------- ----------
Property and equipment:
Land 80,848 80,848 74,653
Construction in progress 0 941,199 97,721
Machinery and equipment 1,580,702 1,412,061 1,329,723
Office equipment 254,325 213,140 193,977
Building improvements 91,716 91,716 91,716
Buildings 1,723,978 137,734 137,734
Leasehold improvements 9,434 43,003 43,003
Tooling 65,557 59,344 25,851
Vehicles 36,964 36,964 25,332
---------- ---------- ----------
3,843,524 3,016,009 2,019,710
Less: accumulated depreciation (793,159) (780,538) (646,006)
---------- ---------- ----------
Net property and equipment 3,050,365 2,235,471 1,373,704
---------- ---------- ----------
Goodwill 429,560 441,833 530,079
Cash surrender value of life insurance 34,384 23,611 19,647
Trademarks and patents 4,386 4,560 5,083
Deferred stock offering costs 60,632
Deferred income taxes 73,685 75,973
Other assets 38,814 42,313 62,913
---------- ---------- ----------
Total assets $6,187,156 $5,780,362 $4,075,008
========== ========== ==========
</TABLE>
CONTINUED
1
<PAGE> 3
STEARNS & LEHMAN, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
JULY 31, APRIL 30, JULY 31,
1997 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $1,088,248 $ 801,672 $ 690,583
Accrued expenses 174,191 239,275 203,598
Current portion of notes payable 39,714 107,708
Current portion of capital lease obligations 9,270 9,827 14,738
Subordinated convertible notes 300,000
---------- ---------- ----------
Total current liabilities 1,311,423 1,050,774 1,316,627
---------- ---------- ----------
Notes payable, net of current portion 110,286 385,418
Capital lease obligations, net of current portion 2,256 9,270
---------- ---------- ----------
Total long-term liabilities 110,286 2,256 394,688
---------- ---------- ----------
Total liabilities 1,421,709 1,053,030 1,711,315
---------- ---------- ----------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares
authorized, 3,230,052, 3,230,052 and 2,829,422
issued and 3,226,752, 3,226,752 and 2,826,122
outstanding as of July 31, 1997, April 30, 1997
and July 31, 1996, respectively 3,563 3,563 3,120
Additional paid-in capital 5,091,920 5,091,920 3,183,347
Accumulated deficit (316,836) (354,951) (809,574)
---------- ---------- ----------
4,778,647 4,740,532 2,376,893
Less treasury shares, at cost (3,300 shares) (13,200) (13,200) (13,200)
---------- ---------- ----------
Total shareholders' equity 4,765,447 4,727,332 2,363,693
---------- ---------- ----------
Total liabilities and shareholders' equity $6,187,156 $5,780,362 $4,075,008
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
STEARNS & LEHMAN, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
for the three months ended July 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $1,908,991 $1,340,638
Cost of sales 1,440,283 1,011,355
---------- ----------
Gross profit 468,708 329,283
Selling, general and administrative expenses 428,150 361,255
---------- ----------
Income (loss) from operations 40,558 (31,972)
---------- ----------
Other income (expense), net:
Interest expense (1,087) (19,696)
Interest income 12,073
Other, net (2,499) (683)
---------- ----------
8,487 (20,379)
---------- ----------
Net income (loss) before income tax expense 49,045 (52,351)
Income tax expense:
Current 400
Deferred 10,530
---------- ----------
Total income tax expense 10,930 0
---------- ----------
Net income (loss) $ 38,115 $ (52,351)
========== ==========
Earnings (loss) per share $ 0.01 $ (0.02)
========== ==========
Weighted average shares outstanding 3,226,752 2,825,399
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
STEARNS & LEHMAN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the year ended April 30, 1997 and the three months ended July 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES STOCK CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996 2,824,372 $ 3,118 $3,178,099 $(757,223) $(13,200) $2,410,794
Net Income 402,272 402,272
Repurchase and retirement of
common stock (95) (664) (664)
Conversion of debentures to
common stock 48,230 53 264,947 265,000
Issuance of common stock 354,245 392 1,649,538 1,649,930
--------- -------- ---------- --------- -------- ----------
Balance at April 30, 1997 3,226,752 3,563 5,091,920 (354,951) (13,200) 4,727,332
Net Income 38,115 38,115
--------- -------- ---------- --------- -------- ----------
Balance at July 31, 1997 3,226,752 $ 3,563 $5,091,920 $(316,836) $(13,200) $4,765,447
========= ======== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 6
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
for the three months ended July 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 38,115 $ (52,351)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 63,032 63,961
Loss on the sale of property and equipment 1,571
Deferred income taxes 10,530
Changes in assets and liabilities:
Trade accounts receivable (201,015) (131,982)
Inventory (93,860) (74,692)
Prepaid expenses and other 20,457 2,003
Accounts payable 286,576 205,175
Accrued expenses (65,084) (24,448)
--------- ---------
Net cash provided by (used in) operating activities 60,322 (12,334)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (864,551) (22,752)
Sale of property and equipment 1,000
Cash surrender value of life insurance, net (10,773)
--------- ---------
Net cash used in investing activities (874,324) (22,752)
--------- ---------
Cash flows from financing activities:
Net borrowing under construction loan agreement 150,000
Principal payments on notes payable and capital leases (2,813) (31,657)
Deferred capital stock offering costs (10,158)
Net proceeds from issuance of common stock 5,250
--------- ---------
Net cash provided by (used in) financing activities 147,187 (36,565)
--------- ---------
Net decrease in cash and cash equivalents (666,815) (71,651)
Cash and cash equivalents, beginning of year 730,833 123,208
--------- ---------
Cash and cash equivalents, end of period $ 64,018 $ 51,557
========= =========
</TABLE>
CONTINUED
5
<PAGE> 7
STEARNS & LEHMAN, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
for the three months ended July 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $331 $ 19,352
==== ========
Supplemental schedule of noncash financing activities:
Conversion of line of credit to note payable $350,000
==== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three months ended July 31,
1997 and 1996 for Stearns & Lehman, Inc. (the Company) are unaudited
and are presented pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the financial
statements should be read in conjunction with the audited financial
statements for the years ended April 30, 1997 and April 30, 1996. In
the opinion of management, the accompanying financial statements
reflect all adjustments necessary (which are of a normal recurring
nature) to present fairly the financial position and results of
operations and cash flows for the interim periods presented, but are
not necessarily indicative of the results of operations for a full
year.
2. LINES OF CREDIT:
On August 7, 1997, the Company modified its Construction and Business
Loan Agreement with a bank for $750,000 for financing of a
manufacturing and office facility. The terms of this modified agreement
changed the original first payment date from August 2, 1997 to October
31, 1997. This change was made to accommodate the delay in the
completion of construction of the facility. As of July 31, 1997 the
Company had borrowed $150,000 against this Construction and Business
Loan.
3. MANUFACTURING AND OFFICE FACILITY:
On November 27, 1996, the Company entered into an agreement to
construct a 50,000 square foot manufacturing and office facility. As of
July 31, 1997, the construction of the facility was approximately 95%
complete. The facility was substantially completed as of August 16,
1997.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. INCOME TAXES:
The components of the net deferred tax asset at July 31, 1997, April 30, 1997
and July 31, 1996 are as follows:
<TABLE>
<CAPTION>
JULY 31, APRIL 30, JULY 31,
1997 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 306,869 $ 315,982 $ 430,117
Accrued expenses 7,842 26,782 26,600
Other 1,925 1,763 1,440
Allowance for doubtful accounts 16,918 17,480 17,421
--------- --------- ---------
Gross deferred tax assets 333,554 362,007 475,578
Deferred tax liabilities:
Property and equipment 134,641 134,652 107,708
--------- --------- ---------
Net deferred tax asset before
valuation allowance 198,913 277,355 367,870
Valuation allowance (107,471) (125,383) (367,870)
--------- --------- ---------
Net deferred tax asset $ 91,442 $ 101,972 $ 0
--------- --------- ---------
</TABLE>
A valuation allowance of $91,442 as of July 31, 1997 was recorded
against the net deferred tax assets due to the potential uncertainty of
their recoverability in future years. The valuation allowance was
reduced since April 30, 1997 primarily to the utilization of net
operating loss carryforwards. As of July 31, 1996, a valuation
allowance had been provided against the full amount of the net deferred
tax asset due to uncertainty regarding their recoverability at that
time.
5. SUPPLIER AGREEMENT:
On September 1, 1997, the Company renewed an agreement to supply a
customer with a product at specified prices. The agreement is effective
September 1, 1997, with an initial term of two years, expiring on
August 31, 1999.
The agreement shall terminate at the end of the initial term if written
notice to terminate
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
is given by either party at least sixty (60) days prior to the last day
of the initial term. Otherwise, following the initial term, the
agreement shall renew and continue from year to year until canceled
upon thirty (30) days written notice by either party.
6. ROYALTY COMMITMENTS:
As a result of the purchase acquisition of Select Origins, Inc., the
Company was required to pay royalty payment for sales of the
Gran'Mere's brand name. The required payments are the greater of
$35,000 or 5% of gross sales for the calendar years ended December 31,
1995 and 1996, 3% of gross sales for the calendar years 1997, 1998 and
1999 and 2% of gross sales for calendar years 2000 through 2016.
Accordingly, the Company accrued $70,479 and $70,000 at April 30, 1997
and July 31, 1996, respectively. As of July 9, 1997, the Company
reached an agreement to return the rights of the Gran'Mere's brand name
to the owners for a payment of $50,000. The agreement allows the
Company to continue to sell existing inventory until September 22,
1997. Management of the Company believes that the remaining accrued
expense of $20,479 will be sufficient to cover the disposition of
remaining inventory after September 22, 1997.
9
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
GENERAL
- -------
Stearns & Lehman, Inc. (the "Company"), is an Ohio corporation headquartered in
Mansfield, Ohio. The Company was organized on March 14, 1988 and is engaged in
the business of manufacturing and marketing specialty food products, including
coffee and espresso flavorings, syrups, oils and toppings, extracts, flavorings,
sauces, dressings and specialty sugars. The Company sells its products
throughout the United States and in certain foreign countries, including Canada,
Chile, Mexico, Australia, New Zealand, England, Finland, Spain, Singapore, Korea
and Japan.
Since its incorporation in 1988, the Company has grown from providing a single
product line and having two employees, to being a major manufacturer and
supplier of flavoring syrups for the specialty coffee industry with 43
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, Flagstar Cos. Inc.'s
Denny's Restaurant, Gloria Jeans Gourmet coffee, Godiva Chocolatier, Inc., Kraft
General Foods, Krups, Sara Lee's Superior Coffee Division, and Sysco Food
Service. The Company does not have any long-term supply agreements with any of
these customers except Starbucks. The Company believes that its success in
obtaining these accounts is attributable to the Company's emphasis on quality,
dependable service and innovation.
PLAN OF OPERATION
The Company's plans, for the fiscal year ending April 30, 1998, included
increasing market penetration of the DOLCE(R) and The Godiva Chocolatier Cafe'
Godiva brands of flavoring syrups, initiating production of and developing the
market for the DiNATURA(R) premium natural flavored syrups, moving into its new
manufacturing, warehouse and executive office facility, installing a new
manufacturing and business computer system and enhancing revenue growth through
strategic acquisitions.
During the quarter ended July 31, 1997, the Company completed moving its
executive offices, warehouse operations and the production of flavoring based
products into its new manufacturing warehouse and executive office facility. The
remaining production lines were moved during the month of August 1997 after the
new facility was substantially completed.
10
<PAGE> 12
The Company intends to enhance the distribution of the DOLCE(R) brand of
flavoring syrups by entering into master distributor relationships with large,
financially sound organizations that have the resources to readily market the
Company's products and order and receive product in larger quantities. As of
September 5, 1997, the Company has 9 master distributors covering 12 states.
The Company's view is that the flavoring syrup market is weak in brand name
recognition. As a result, the Company initiated efforts to obtain partnering
arrangements that enhance the brand name recognition of its products in addition
to providing value services to the partnering entity. Currently, the Company has
entered into a written agreement with Godiva Chocolatier, Inc. for the use of
the Godiva Chocolatier Cafe' Godiva brand name. As of July 31, 1997, the
Company's sales of Godiva Chocolatier Cafe' Godiva brand name syrups have been
small but interest has been high and sales are expected to improve after the
summer and fall industry trade shows. On June 20, 1997, the Company entered into
a verbal agreement with Darden Restaurants Inc. for use of The Olive Garden
Signature Syrups brand name. However, the Company is still negotiating with
Darden Restaurants Inc. to reduce this verbal agreement to writing. The Company
cannot anticipate when, or if, this verbal agreement can be reduced to writing.
Efforts to start producing The Olive Garden Signature Syrups brand name are on
hold, awaiting the finalization of a written agreement.
The Company's planned DiNATURA(R) premium natural flavored syrups rounds out the
Company's flavoring syrup line. This product, intended to be the "best in the
class", will enable the Company to cover all segments of the flavoring syrup
market. It is anticipated that this product line coverage will eliminate the
need for distribution channels to handle products from competitors. As of
September 5, 1997, the packaging has been finalized, all production tooling is
on order and development of final flavor profiles continue. Due to delays
encountered with the tooling manufacturers, production of the DiNATURA(R)
premium natural flavored syrups is now expected in either the third or fourth
quarter of the Company's fiscal year. The Company anticipates an additional
capital expenditure of approximately $65,000 to start production of the
DiNATURA(R) premium natural flavored syrups.
The installation of a year 2000 compliant manufacturing and business computer
system started during the month of August 1997. The startup of the general
ledger, accounts payable and payroll modules is scheduled for October 1, 1997
with the remaining modules to be implemented by the end of the Company's fiscal
year. This system should enable the Company to reduce inventory carrying costs,
improve production planning and customer deliveries and allow significant
improvements in product and customer profitability analysis. The Company
anticipates additional expenditures of approximately $100,000 for additional
computer components and installation costs.
The Company's plans also include evaluating and proceeding with strategic
acquisitions to enhance revenue growth. Financing for acquisitions is expected
to be in the form of notes payable with First Knox National Bank and with the
principals of the acquired entities. It is expected that strategic acquisitions
will add volume and will compliment the Company's existing product lines.
11
<PAGE> 13
SELECTED SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTERLY INFORMATION FOR THE 1ST 4TH 3RD 2ND 1ST
SPECIFIED QUARTERS WITHIN INDICATED QUARTER QUARTER QUARTER QUARTER QUARTER
FISCAL YEARS ("FY") FY 1998 FY 1997 FY 1997 FY 1997 FY 1997
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $2,555,962 $2,956,601 $3,762,852 $2,635,424 $2,022,950
TOTAL ASSETS $6,187,156 $5,780,362 $5,987,157 $4,630,923 $4,075,008
CURRENT LIABILITIES $1,311,423 $1,050,774 $1,507,068 $1,674,796 $1,316,627
TOTAL LIABILITIES $1,421,709 $1,053,030 $1,540,377 $2,039,851 $1,711,315
SHAREHOLDERS' EQUITY $4,765,447 $4,727,332 $4,446,780 $2,591,072 $2,363,693
TOTAL SALES $1,908,991 $1,888,778 $2,034,609 $2,117,080 $1,340,638
COST OF GOODS SOLD $1,440,283 $1,433,659 $1,475,180 $1,512,394 $1,011,355
SELLING, GENERAL AND ADMINISTRATIVE $ 428,150 $ 412,495 $ 406,794 $ 408,321 $ 361,255
EXPENSES
NET INCOME (LOSS) $ 38,115 $ 15,578 $ 211,666 $ 227,379 $ (52,351)
EARNINGS (LOSS) PER SHARE $ 0.01 $ 0.00 $ 0.07 $ 0.08 $ (0.02)
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1996
- -----------------------------------------------------------------------
Net sales for the three months ended July 31, 1997 and 1996 were $1,908,991 and
$1,340,638, respectively, which represents a 42.4% increase. For the three
months ended July 31, 1997, private label sales increased by 52.4% and the net
sales of other Company products increased by 48.6%, while DOLCE(R) brand
products decreased by 5% compared to the three months ended July 31, 1996.
Private label, DOLCE(R) brand products, and other Company products represented
71.7%, 15.2% and 13.1% of gross sales, respectively, for the three months ended
July 31, 1997. The increase in private label sales was the result of strong
sales growth by several of the Company's private label customers. DOLCE(R) brand
products' sales decreased primarily as a result of a large 50 ml bottle gift
pack customer order that the Company filled in July 1996 that was not repeated
in the current fiscal year. The loss of this gift pack order offset gains made
in the sales of DOLCE(R) brand products as a result of the Company's master
distributor program. The net sales of other Company products increased primarily
due to sales to a large Flavor-Mate(R) customer that was lost in January, 1996
and regained in January 1997.
The increase in sales volume in the three months ended July 31, 1997 permitted
the Company to better utilize its manufacturing facilities, however,
inefficiencies caused during the move of the flavoring based product production
lines resulted in cost of sales, as a percentage of net sales, remaining the
same at 75.4% for the three months ended July 31, 1997 and 1996, respectively.
Cost of sales increased by $428,928 for the three months ended July 31, 1997
compared to the three months ended July 31, 1996. This increase primarily was a
result of higher raw material costs and higher sales volume, resulting in
increased material, freight-in, labor, and plant supply costs. The
12
<PAGE> 14
increase in cost of sales in the three months ended July 31, 1997 was also the
result of increased depreciation and utility costs. These increases were
partially offset by decreased tooling costs as a result of fewer new private
label customers in the three months ended July 31, 1997 compared to the same
period in the previous year.
Selling, general and administrative expenses increased by 18.5% or $66,895 for
the three months ended July 31, 1997 compared to the three months ended July 31,
1996. This increase resulted from increased participation in trade shows,
magazine advertising, promotional costs, outside professional auditing and legal
services, travel costs, insurance expense, and additional marketing personnel.
These increases were offset by decreases in telephone expense, postage expense
and shareholder relations costs. Selling, general and administrative expenses,
as a percentage of net sales, decreased to 22.4% compared to 26.9% for the three
months ended July 31, 1997 and 1996, respectively.
Interest expense for the three months ended July 31, 1997 decreased by $18,609
compared to the three months ended July 31, 1996. The decrease primarily
reflects bank borrowings that were paid in full on November 6, 1996.
The Company recorded a deferred income tax expense of $10,530 for the three
months ended July 31, 1997. This expense was associated with the anticipated
usage of the net operating loss carryforwards as a result of taxable income and
the reversal of temporary differences for the three months ended July 31, 1997.
As a result of the foregoing, the Company reported net income of $38,115, or
$0.01 per weighted average number of the common shares of the Company (the
"Common Stock") outstanding, for the three months ended July 31, 1997 compared
to a net (loss) of ($52,351), or ($0.02) per weighted average number of Common
Stock outstanding, for the three months ended July 31, 1996. The weighted
average number of Common Stock outstanding increased to 3,226,752 for the
current three month period compared to 2,825,399 for the comparable three month
period last year. The increase primarily reflects increased shares outstanding
as a result of the Company's Common Stock offering, warrants exercised,
conversion of subordinated debt into Common Stock and treasury stock sold.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128, establishes standards for computing and
presenting earnings per share (EPS) and supersedes APB Opinion No. 15, Earnings
Per Share (Opinion 15). SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. This statement also requires
dual presentation of basic EPS and diluted EPS on the face of the income
statement for all periods presented. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15, with some modifications. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Early adoption is not permitted and the
statement requires restatement of all prior EPS data presented after the
effective date.
The Company will adopt SFAS No. 128 effective with the issuance of its third
quarter results for the fiscal year ending April 30, 1998. Per share data
calculated in accordance with this pronouncement
13
<PAGE> 15
for the year ended April 30, 1997 and for the three months ended July 31, 1997
and 1996, are consistent with the current disclosures.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On July 31, 1997, the Company's working capital was $1,244,539 with a working
capital ratio of 1.95 to 1. The working capital and working capital ratio for
the quarters ended April 30, 1997, January 31, 1997, October 31, 1996, July 31,
1996 and April 30, 1996 were $1,905,827 and 2.81 to 1, $2,255,784 and 2.50 to 1,
$960,628 and 1.57 to 1, $706,323, and 1.54 to 1, and $472,186 and 1.33 to 1,
respectively. The decrease in working capital for the three months ended July
31, 1997 was primarily a result of the Company's construction of the Company's
new manufacturing, warehouse and executive office facility in Mansfield, Ohio.
The Company's operating activities, for the three months ended July 31, 1997,
provided net cash of $60,322. The Company used $864,551 to acquire equipment and
to construct a new manufacturing and office facility in Mansfield, Ohio. The
Company also increased its investment in life insurance policies by $10,773, and
used $2,813 to make principal payments on capital leases. The Company received
$151,000 from borrowing under a construction loan agreement and from the sale of
equipment. Consequently, during this period, cash and cash equivalents decreased
$666,815. The Company expects future operating activities to continue to provide
cash for investing and financing activities. However, this cash may be
insufficient to meet the Company's possible investing and financing activities.
For the three months ended July 31, 1997 compared to the three months ended July
31, 1996, the Company has experienced an inflationary increase in the cost of
one of its principal raw materials. The Company has raised the selling price of
its products to cover this cost increase.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(A) None
(B) None
(C) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
14
<PAGE> 16
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
Exhibit #10(a) - MODIFICATION AGREEMENT dated August 25, 1997
Exhibit #10(b) - SUPPLIER AGREEMENT dated September 1, 1997
Exhibit #27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized,
Date: September 15, 1997 STEARNS & LEHMAN, INC.
(Registrant)
/s/ William C. Stearns
----------------------------------
William C. Stearns
President
/s/ John A. Chuprinko
----------------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
15
<PAGE> 1
EXHIBIT 10(a)
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT (the "Agreement") is made and entered into
as of the 7th day of August , 1997, by and between Stearns and Lehman, Inc.
("Borrower"); and the FIRST KNOX NATIONAL BANK of Mount Vernon ("Bank").
WHEREAS, Borrower executed a certain promissory note (the "Note") dated
December 2, 1996, in the original principal amount of $ 750,000.00 payable to
the order of Bank on or before July 2, 2007, a true and correct copy of the Note
being attached hereto as "Exhibit A" and incorporated herein by reference, which
Note is presently unpaid and represents as outstanding principal balance of $
750,000.00 ; and
WHEREAS, the parties desire to modify certain provisions with respect to
the principal repayment, signors and reporting requirements provided for in the
Note, but otherwise preserving all other terms and conditions of the Note and
any other instrument or document executed in connection with the Note.
NOW THEREFORE, in consideration of and subject to the covenants and
terms contained herein and for other good and valuable consideration, the
parties hereto agree as follows:
1. Payment of principal: The unpaid principal balance of the Note shall
be paid in consecutive equal monthly installments of principal and interest in
the amount of $ 9,652.28 on the 31st day of each month beginning October 31,
1997, and monthly thereafter, with the remaining balance, together with all
unpaid accrued interest thereon, due on or before September 30, 2007.
This extends the Line of Credit draw period to September 30, 1997.
2. Interest Rate: Payment of Interest: The unpaid principal of the Note
shall now bear interest at a per annum rate of interest equal to prime plus 0.75
percent, and shall be calculated on the above basis beginning August 6, 1997 ,
and shall continue to be paid monthly and at maturity on the dates provided in
Section 1 above. Said rate will adjust annually beginning October 31. 1998 with
the payment adjusted to fully amortize the loan by September 30, 2007.
3. Modification Fee: In consideration of this modification, Borrower
shall pay to Bank at the time this Agreement is executed an amount equal to
_________.
4. Ratification of Note: Loan Agreement and Mortgage Provisions: This
Agreement constitutes only a modification of the indebtedness represented by the
Note and Borrower hereby acknowledges, ratifies, and confirms all of the
provisions of the Note except as herein expressly modified of any credit or loan
agreement executed in connection with the Note, and of any mortgage deed or
security agreement executed in connection with this Note or applicable to the
Note, including provisions for the acceleration of the maturity of the debt upon
any event of default and for the enforcement by Bank of all remedies it may have
according to law. In addition, Borrower, acknowledges, ratifies and confirms any
and all other security interests previously granted to Bank in any other
collateral for this indebtedness as continuing in full force and effect.
Exhibit #10(a), Page 1 of 3
<PAGE> 2
5. Continuation of Mortgage Liens and Security Interest: Except for the
modifications above stated, this Agreement does not constitute the creation of a
new debt or the extinguishment of the debt evidenced by the Note, nor does it in
any manner affect or impair any mortgage deed or security agreement executed in
connection with the Note or applicable to the Note, which Borrower hereby
acknowledges to be a valid and existing lien on the property described in any
mortgage a deed or security agreement, and such mortgage liens or security
interests are hereby agreed to be continued in full force and effect from the
date hereof until debt herein is fully satisfied.
6. No Course of Dealing; Waiver: Borrower expressly acknowledges and
agrees that the execution of this Agreement shall not constitute a waiver of,
and shall not preclude the exercise of, any right, power or remedy granted to
Bank in any document evidencing the indebtedness of Borrower to Bank, or as
provided by law, except to the extension expressly provided herein. No previous
modification, extension or compromise entered into with respect to any
indebtedness of Borrower to Bank shall constitute a course of dealing or be
inferred or construed as constituting an express or implied understanding to
enter into any future modification, extension or compromise. No delay on the
part of Bank in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice Bank's rights, powers or remedies.
7. Promise to Pay: Borrower hereby covenants and promises to pay the
order of Bank, the unpaid principal balance of the Note together with interest
as provided therein, and hereby promises (as modified by this Agreement) to
perform all of the covenants, conditions, stipulations and agreements as
contained in the Note, and in any other document or instrument executed in
connection with the Note or referencing the Note, and as provided herein.
8. Obligations Joint and Several: The obligations hereunder of each of
the undersigned, if there be more than one, whether as Borrower or co-maker
shall be joint and several, and any reference herein to Borrower or to the
undersigned shall be deemed to be applicable to each such person separately as
well as to all.
9. Governing Law: This Agreement shall be interpreted and construed in
accordance with and governed by the laws of the State of Ohio. Further, the
parties hereto intend that this Agreement shall be in compliance with all
applicable laws and shall be enforceable in accordance with its terms. If any
provisions of this Agreement shall be illegal or unenforceable with respect to
the Note or with respect to any such mortgage deed or security agreement, such
provision shall be deemed canceled to the same extent as though it never had
appeared herein, but the remaining provisions shall not be affected thereby.
10. Acknowledgment by Guarantor: This Agreement shall only be effective
upon the acknowledgment and acceptance by any guarantor, guaranteeing the
performance of Borrower's obligations under the Note pursuant to any contract of
guaranty, that the terms of any such contract of guaranty shall continue in full
force and effect with respect to the liability evidence by the Note.
Irrespective of any modification made by this agreement, which acknowledgment
and acceptance shall be evidence by the execution of this Agreement by the
guarantor at the space indicated below.
Exhibit #10(a), Page 2 of 3
<PAGE> 3
11. Further Assurances: Borrower further agrees to execute and deliver
any and all other documents and take any and all other steps or actions
reasonable deemed necessary by Bank to effectuate this Agreement.
12. Successors and Assigns: This Agreement shall be binding upon the
parties hereto and their respective successors and assigns, and shall inure to
the benefit of Bank and its respective successors and assigns.
13. Titles and Headings: The titles and headings herein are intended to
promote convenience and are not a part of this Agreement for purposes of
interpreting and applying the provisions hereof.
IN WITNESS WHEREOF, The parties hereto have caused this Agreement to be
executed in manner and form sufficient to bind them at Mount Vernon, Knox
County, Ohio, as of the date first above written.
FIRST KNOX NATIONAL BANK STEARNS AND LEHMAN, INC.
By: /s/ Jim Brinker By: /s/ William Stearns
------------------------ ---------------------------
Jim Brinker, V.P. William Stearns, Pres.
By: /s/ John Chuprinko
---------------------------
John Chuprinko, C.F.O.
Exhibit #10(a), Page 3 of 3
<PAGE> 1
EXHIBIT 10(b)
SUPPLIER AGREEMENT
THIS SUPPLIER AGREEMENT is made this 1st day of September, 1997, by and
between STARBUCKS CORPORATION, d/b/a Starbucks Coffee Company, a Washington
corporation ("Starbucks") and STEARNS & LEHMAN, INC., an Ohio corporation
("Supplier").
WHEREAS, Supplier wishes to be designated by Starbucks as a supplier of
flavored beverage syrups (the "Product"); and
WHEREAS, Starbucks is willing to designate Supplier as a manufacturer
and supplier of the Product, subject to compliance by Supplier with the terms
and conditions of this Agreement, as it may be amended from time to time
throughout its term, including but not limited to the requirement that the
Product be manufactured and sold exclusively to Starbucks, (this Agreement,
together with all attachments and exhibits shall be collectively referred to
herein as the "Agreement");
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Starbucks and Supplier hereby
agree as follows:
1. EXCLUSIVITY. Subject to compliance by Supplier throughout the term
of the Agreement with all of the provisions herein, Starbucks hereby designates
Supplier as a supplier of the Product to Starbucks, for the term specified in
Section 2 of the Agreement. Supplier hereby agrees to manufacture, distribute
and sell the Product to Starbucks, and agrees that those Products designated as
"Exclusive Products" shall be produced for and supplied exclusively to
Starbucks. Starbucks acknowledges that Supplier is a recognized producer of
flavored beverage syrups with multiple customers and products. No provision of
this Agreement shall be interpreted to restrict Supplier from distributing
flavored beverage syrup under its own label, under private label or for hire,
provided such syrup does not include any Exclusive Product as defined herein.
2. TERM. This Agreement shall be in effect commencing September 1, 1997
with an initial term of two (2) years, expiring on August 31, 1999 ("Initial
Term"). This Agreement shall terminate at the end of the Initial Term if written
notice to terminate is given by either party at least sixty (60) days prior to
the last day of the Initial Term. Otherwise, following the Initial Term, this
Agreement shall renew and continue from year to year until canceled upon thirty
(30) days' written notice by either party. This Agreement may also be terminated
earlier pursuant to the provisions of this Agreement.
3. PRODUCT. The Product covered by the terms and conditions contained
herein shall be any syrup manufactured by Supplier for Starbucks. An "Exclusive
Product" shall be any syrup so designated by Starbucks on Attachment A, as may
be amended from time to time, which Exclusive Products shall be produced for and
supplied exclusively to Starbucks. Supplier shall manufacture, label, and
deliver the Product according to Starbucks' instructions and specifications,
including but not limited to, those terms contained in Attachment A, which terms
are incorporated herein by this reference.
Exhibit #10(b), Page 1 of 13
<PAGE> 2
4. PRICE. The prices of the Product shall be set forth on Attachment B
to this Agreement (the "Base Prices"). Notwithstanding the foregoing, should the
price of any Commodity Ingredient of the Product (as defined below) increase or
decrease, the parties agree to an appropriate pro rata increase or decrease to
the Base Prices. Any price increase or decrease during the Initial Term or any
renewal term hereof shall be negotiated and agreed to by Starbucks and shall be
in accordance with the following:. (1) Supplier must provide Starbucks notice of
such increase in writing at the notice address provided herein as soon as
reasonably possible, but at least sixty (60) days prior to the increase; (2)
such price increase must be tied to an increase in cost of a Commodity
Ingredient, (specifically, the price of liquid sugar and/or flavoring extracts,
packaging materials costs, freight costs and other manufacturing costs); and (3)
such price and commodity increase must be documented in writing, accompanied by
supporting documentation, and provided to Starbucks along with the notice of
price change. Upon Starbucks' receipt of such notice, the parties shall commence
good faith negotiations. In the event that agreement on new prices cannot be
reached, either party shall have the option to terminate the Agreement upon
sixty (60) days notice to the other. Notwithstanding anything contained herein
to the contrary, if, at any time after the first year, the Product is made
available to Starbucks at a lower price by a competitor of Supplier, Starbucks
will have the right to terminate this Agreement in such event Supplier is unable
to match such competitor's price. ln such event, Starbucks shall terminate this
Agreement with ninety (90) days' written notice to Supplier and shall be
released of all obligations hereunder.
5. PURCHASE ORDER. Orders shall be placed in writing by Starbucks, sent
by US. Mail, or facsimile to Supplier at the following address and shall set
forth the Product amount, flavor and delivery instructions ("Order"):
Stearns & Lehman, Inc.
30 Paragon Parkway
Post Office Box 1748
Mansfield, OH 44901
Fax: (419)522-1152
6. DELIVERY. An Order shall be deemed accepted by Supplier unless
otherwise indicated in writing by Supplier within seven (7) days of Supplier's
receipt of the Order. All prices quoted for delivery to Starbucks' York roasting
plant shall be Full Truckload only, and for any order to be delivered to
Starbucks' York roasting plant of Less Than a Truckload, Starbucks shall pay
additional freight cost. Notwithstanding the foregoing, orders of Less Than a
Truckload shall be accepted for delivery at Starbucks' Kent Roasting Plant with
no additional freight cost. All Orders shall be shipped F.O.B. Starbucks.
Delivery shall not be complete until the Product has been actually delivered to
and accepted by Starbucks. Substitutions will not be accepted. The risk of loss
or damage in transit shall be upon the Supplier, except where shipment is by
Starbucks' vehicle in which case the risk of loss or damage shall pass to
Starbucks upon completion of loading. The Order must be shipped complete by the
date requested but not more than one week in advance of the date specified in
the Order, without Starbucks' prior approval. Supplier shall, in the event of a
delay or threat of delay and to the extent Supplier has knowledge of a delay or
threat of delay, due to any cause in the production or delivery of the Product
hereunder, immediately notify Starbucks and shall include with such notice all
relevant information with respect to such delay or threatened delay.
Exhibit #10(b), Page 2 of 13
<PAGE> 3
Supplier shall be liable for any damages resulting from failure to make delivery
within the time called for by the Order or by any written instructions of
Starbucks, except where: (i) such delay in delivery shall be due to causes
beyond the reasonable control of Supplier, and (ii) Supplier notifies Starbucks
as aforesaid. If Supplier for any reason cannot comply with Starbucks' delivery
schedule, Starbucks, in addition to any other rights or remedies available to it
by law or under these terms and conditions, may terminate the Order or cancel
any shipments thereunder without further liability to Supplier. In the event of
a delay which has the potential to cause damage to Starbucks, Starbucks and
Supplier shall exercise their best efforts to mitigate such damages. Supplier
shall not ship any excess quantities without Starbucks' approval. Buyer shall
not be obligated to accept untimely or under shipments in whole or in part, and
such shipments may at Starbucks' option, be returned to Supplier at Supplier's
expense and risk.
7. PAYMENT TERMS. Supplier shall provide invoices to Starbucks and
payment shall be made within thirty (30) days after the date of receipt of the
invoice for the Product by Starbucks. The invoice shall describe the items,
state the Order date and be attached to the original bill of lading or other
shipping receipt. Repeated failure by Starbucks to make timely payments shall
result in loss of all rights to exclusivity, indemnity or contribution
hereunder.
8. INDEMNITY. Supplier agrees to defend, indemnify and hold Starbucks,
its officers and directors, employees or agents, customers and users of the
Product, harmless from all claims, demands, losses, liabilities, suits at law or
in equity, costs and expenses, including reasonable attorney's fees, resulting
from injury, illness and/or death caused, in whole or in part, by contact with,
use and/or consumption of the Product, unless (and then only to the extent) such
injury, illness and/or death is caused by Starbucks. In the event it is
determined by court decision that Starbucks is partially liable, then Starbucks
shall reimburse Supplier for the appropriate percentage of the costs, fees and
expenses of defense, including attorney's fees. In the event of a settlement of
any claim, the settlement process shall apportion liability, whereupon Starbucks
shall pay its share of the settlement and reimburse Supplier the appropriate
percentage for the costs, fees and expenses of defense, including attorney's
fees. In the event it is determined by settlement or court decision that
Supplier had no legal responsibility to the claimant, then Starbucks shall
reimburse Supplier for all costs, fees and expenses of defense, including
attorney 5 fees. Upon tendering of any suit to Supplier, Supplier shall defend
the same at its sole cost and expense. Starbucks agrees to advise Supplier in
the event it receives notification that a claim has been or may be filed with
respect to a matter covered by this indemnity and Supplier shall be given the
opportunity to assume the defense of that claim. If Supplier fails to assume
such defense, Starbucks may defend the action in the manner it deems
appropriate, and Supplier shall pay to Starbucks all costs, including reasonable
attorneys' fees, incurred by Starbucks in effecting such defense, in addition to
any sum which Starbucks may pay by reason of any settlement or judgment against
Starbucks. This indemnification shall apply whether Supplier or Starbucks
defends such suits or claims.
9. INSURANCE. Supplier agrees to maintain during the entire term of the
Agreement (a) comprehensive commercial liability insurance, including product
liability coverage, in minimum amounts of $2,000,000.00 per occurrence for
damage, injury and/or death to persons and $1,000,000.00 per occurrence for
damage and/or injury to property, and (b) product recall liability insurance in
a minimum amount of $100,000.00 per occurrence and with a deductible of not more
Exhibit #10(b), Page 3 of 13
<PAGE> 4
than $10,000.00. Supplier further agrees to require all of its delivery
personnel to be licensed to drive, whether they are employees or independent
contractors. All policies of liability insurance required to be effected by
Supplier shall cover Supplier's employees, agents and independent contractors,
include Starbucks as an additional insured, and in addition shall contain cross
liability and severability clauses protecting Starbucks with respect to claims
by Supplier or other persons as if Starbucks were separately insured. The
insurance coverage required herein shall be provided by an insurance company or
companies acceptable to Starbucks in its reasonable business judgment. Upon
execution of this Agreement, and annually thereafter, Supplier shall promptly
provide Starbucks with certificates of insurance evidencing such coverage and
each certificate shall indicate that the coverage represented thereby shall not
be canceled nor modified until at least thirty (30) days prior written notice
has been given to Starbucks. Upon Starbucks request, Supplier will provide
Starbucks with copies of its insurance policies.
10. REPRESENTATIONS AND WARRANTIES. Supplier represents and warrants:
(a) that the Product will conform to applicable
specifications, as such specifications may be updated from time to time,
instructions, and drawings, including but not limited to those contained in
Attachment A, and will be merchantable, free from defects and will be fit for
the purpose intended.;
(b) that any formula not developed by Starbucks shall be
developed solely by Supplier pursuant to this Agreement and Starbucks' use of
the formula will not violate the rights of any third party;
(c) that the Product, including food articles, food
ingredients, food packaging, and food labeling relating to or comprising the
Product or any part thereof delivered, sold or transferred to Starbucks
hereunder shall be in full compliance with all applicable federal statutes,
rules and regulations, including, without limitation. with the Federal Food,
Drug and Cosmetic Act ("FDCA"), the rules and regulations promulgated from time
to time by the USDA, the Fair Packaging and Labeling Act (FP&L Act), the
Nutritional Labeling & Education Act (NLEA), the Canadian Food and Drugs Act,
the Canadian Consumer Packaging and Labeling Act, the Food Additives Amendment
of 1958, the Color Additives Amendment of 1960, the Tea Importation Act, the
Federal Trade Commission Act, and the Organic Foods Production Act of 1990, all
current and future amendments thereto, and all regulations and rules implemented
thereunder now and in the future;
(d) that the Product shall be manufactured, stored and
delivered in accordance with appropriate "Good Manufacturing Practices" or
similar practices that may be promulgated under the aforementioned acts,
amendments, regulations, and rules, as applicable;
(e) that the Product shall be manufactured, stored, and
delivered in accordance with all state laws and local health and sanitary
ordinances or regulations;
(f) that the Product shall not be adulterated or misbranded
within the meaning of the aforementioned acts, amendments, regulations, rules,
and all state laws and local municipal rules and ordinances, as applicable;
Exhibit #10(b), Page 4 of 13
<PAGE> 5
(g) that the Product shall not be a food product which may
not, under the aforementioned acts, amendments, regulations, rules, and all
state laws and local municipal rules and ordinances, be introduced into
interstate commerce except as provided therein;
(h) that the Product will be in compliance with all accepted
models and samples and all written affirmations of fact, promises, descriptions
or specifications made or furnished by Supplier and accepted by Starbucks
hereunder;
(i) that Supplier has the facilities and capacity to
manufacture and supply the Product to Starbucks in accordance with the terms of
this Agreement and any specifications set forth on Attachment A, and
(j) that Supplier is free to enter into this Agreement, that
Supplier's execution of this Agreement has been duly approved by all applicable
corporate procedures, and that this Agreement constitutes a legal, valid and
binding obligation of Supplier, and that to Supplier's knowledge this Agreement
will not violate the rights of any third party.
These warranties shall be in addition to all other warranties, express, implied
or statutory and in addition to all obligations contained in this Agreement.
Payment for, inspection of, or receipt of the Product shall not constitute a
waiver of any breach or warranty.
11. INSPECTIONS. The Product must comply with the inspection and test
procedures established and carried out by Kraft General Foods and/or the United
States Department of Agriculture ("USDA") Upon request, Supplier will provide
Starbucks' with copies of all inspection reports and provide additional
documentation to indicate compliance with this Section. In addition, all
Products ordered hereunder will be subject to inspection and test by Starbucks
to the extent practicable at all times and places, including the period of
manufacture and in any event prior to acceptance. Supplier agrees to permit
access to Supplier's facilities at all reasonable times and upon reasonable
notice for such inspection. The Product will be subject to final inspection and
acceptance by Starbucks after delivery. It is expressly agreed that inspections
and/or payments prior to delivery will not constitute final acceptance. If the
Product does not meet the specifications or otherwise conform with the
requirements of the Order or this Agreement, Starbucks shall have the right to
reject such Product.
12. WIDE SCALE DEFECTS / RECALL.
(a) Whenever Supplier becomes aware that any ingredient or
component of a Product covered by this Agreement is or may become harmful to
persons or property, or that the Product is defective in any manner which is or
may become harmful to persons or property, or that a Product is mislabeled,
Supplier shall immediately give notice thereof to Starbucks and Supplier shall
provide all relevant information with respect thereto.
Exhibit #10(b), Page 5 of 13
<PAGE> 6
(b) In the event it is deemed necessary by either Starbucks or
Supplier to recall any quantity of the Product, from any store of Starbucks or
from any consumer, either as a result of failure of the Product to satisfy the
specifications, comply with any warranties, or for any other reason bearing on
quality and/or safety of the Product, Supplier agrees to take such steps as
Starbucks deems necessary to protect the interests of the public and Starbucks
and to comply diligently with all product recall procedures established by the
Food & Drug Administration. Supplier shall maintain a written recall procedure
on file at its company offices.
(c) Supplier shall lot code each production run of Products
with a formalized tracking system. The lot code shall identify the date and
production run. Supplier agrees to bear all cost and expenses incurred by it
and/or Starbucks (including consequential damages) in complying with such recall
procedures, unless such recall is the result of the sole negligence of
Starbucks. In the event Supplier fails or refuses to comply with the recall of
the Product upon request by Starbucks, Starbucks shall be authorized to take
such action as it deems necessary to recall the Product from any and all stores
of Starbucks or from its customers, and Supplier shall reimburse Starbucks for
its costs and expenses incurred in such recall procedure. Any such action taken
by Starbucks shall not relieve Supplier of its obligations or liability
hereunder.
13. DEFAULT AND TERMINATION.
(a) If Supplier fails or refuses to comply with any of its
obligations hereunder and/or abuses its status an exclusive supplier of the
Product to the detriment of Starbucks, or
(b) If Supplier seeks protection under the bankruptcy laws
(other than as a creditor) or any assignment is made for the benefit of
creditors or a trustees is appointed for all or any portion of such party's
assets;
then, Starbucks, in its sole discretion and in either event, may terminate the
Agreement upon thirty (30) days prior written notice to Supplier. The failure of
Starbucks to terminate the Agreement upon the occurrence of one or more of these
events of default by Supplier in its performance of any obligations hereunder
shall not constitute a waiver or otherwise affect the right of Starbucks to
terminate the Agreement as a result of a continuing or subsequent failure or
refusal by Supplier to comply with any of such obligations. Furthermore, failure
by Starbucks to exercise any of its rights or remedies hereunder or to insist on
strict compliance by Supplier with any of the terms of this Agreement shall not
constitute a waiver of any of the terms or conditions of this Agreement with
respect to any other or subsequent breach nor shall it constitute a waiver by
Starbucks of its rights at any time thereafter to require strict compliance with
the terms of this Agreement. Upon termination, Starbucks shall pay Supplier the
percentage of the total Order price corresponding to the proportion of the
Product received and accepted by Starbucks and shall purchase up to three (3)
months of supply inventory calculated based upon quarterly purchase averages. In
the event that Starbucks has provided written approval of a purchase requisition
which results in Supplier obtaining more than a three (3) month supply of any
inventory item, then Starbucks shall purchase the entire remaining supply
inventory of that item. Supply inventory shall be limited to syrup ingredients,
labels, artwork, bottles and printing plates used exclusively and specifically
for the manufacture of Starbucks Products. During the thirty day period
commencing with notice of termination, Supplier shall cooperate with Starbucks
to fill Orders and coordinate transfer of production to Starbucks'
Exhibit #10(b), Page 6 of 13
<PAGE> 7
designee, including delivery of unused labels, art work, printing plates or
Starbucks' property within Supplier's possession, at Starbucks' expense.
Supplier shall notify Starbucks of the quantity and type of Product ready to
ship, which Supplier shall ship and invoice to Starbucks. Upon such payment all
rights to the Product, including work in progress, as set forth in this
Agreement shall pass to Starbucks. The rights or remedies set forth herein are
in addition to any other rights or remedies which may be granted by law.
14. INGREDIENT AND NUTRITIONAL INFORMATION.
(a) Supplier shall provide an ingredient list for each Product
which meets the requirements, as may be applicable, of the United States Code of
Federal Regulations, Sections 101.4 and 101.22, and Regulation B.01.010 of the
Canadian Food and Drugs Act. Supplier shall not change the formulation, the
design or the production process of the Product in any way without prior written
approval from Starbucks. In the event of such approved changes, Supplier shall
provide Starbucks with a revised statement of ingredients for the Product.
Supplier shall bear all costs and expenses associated with such change, unless
such change was done at Starbucks' request and direction.
(b) Supplier shall comply with all applicable nutritional
labeling requirements, including, but not limited to, the Code of Federal
Regulations, Section 101.9(a) through (c) or Regulation B.0 1 of the Canadian
Food and Drugs Act, and shall pay all costs associated therewith. In the event
that the Supplier changes the formulation of the Product in any way, it shall
provide Starbucks with revised nutritional information for that Product.
Supplier shall provide documentary evidence establishing the source from which
Supplier obtained such nutritional information for the purpose of demonstrating,
to Starbucks' reasonable satisfaction, that the nutritional information supplied
was generated by a credible source. If nutritional labeling is not required by
applicable statute, regulation or law, Supplier nevertheless agrees to furnish
all information reasonably required by Starbucks for the purpose of providing
nutritional information to its customers. Notwithstanding anything contained
herein to the contrary, Supplier agrees to provide nutritional information for
any Products containing nutritional or dietary representations or those labeled
or designated (by way of example and not limitation) "healthy", "high fiber",
"low cholesterol", "low fat", "whole grain" or "nonfat".
15. HARMFUL INGREDIENTS OR DEFECTIVE DESIGN. Whenever Supplier becomes
aware that any ingredient or component of the Product covered by this Agreement
is or may become harmful to persons or property, or that the design or
construction of the Product is defective in any manner which is or may become
harmful to persons or property, Supplier shall immediately give notice thereof,
including all relevant information with respect thereto, to Starbucks.
16. INDEPENDENT CONTRACTOR RELATIONSHIP. Supplier acknowledges that it
is an independent contractor and is not an agent, partner, joint venturer nor
employee of Starbucks. Supplier shall have no authority to bind or otherwise
obligate Starbucks in any manner nor shall Supplier represent to anyone that it
has a right to do so.
Exhibit #10(b), Page 7 of 13
<PAGE> 8
17. RIGHTS TO WORK.
(a) All services and/or works, and any elements thereof
(including but not limited to packaging materials, methods designs or
techniques), created, performed, contributed, or prepared by Supplier
specifically for Starbucks during the term of this Agreement (whether or not
they are documented on an Attachment A attached to this Agreement), all patents,
copyrights, trade secrets and other proprietary rights and equivalent rights in
or based on such works, and any results or proceeds thereof (the "Works") which
have been specially ordered and commissioned by Starbucks, shall be deemed
works-made-for-hire from the moment of their creation, and are and shall be the
sole and exclusive property of Starbucks. Without reservation, limitation or
condition, Supplier hereby sells, assigns, transfers and conveys the Works and
any Improvements (as defined below) to Starbucks, exclusively, irrevocably, and
perpetually, together with all right, title, and interest throughout the world
therein, including without limitation any copyrights, patents, or rights of
reproduction, and the right to secure registrations, renewals, reissues, and
extensions thereof. No rights of any kind are reserved to or by the Supplier or
shall revert to Supplier.
(b) The Works are prepared for the benefit of Starbucks and
Starbucks shall be the sole owner of the Works, with all rights to use, copy,
distribute and make productive use of the Works. Upon completion of the Works
(or Starbucks' earlier request), Supplier shall deliver to Starbucks the
original Works and Improvements together with all copies of the Works and
Improvements. Supplier shall hold for the benefit of Starbucks and shall deliver
at Starbucks' request all programs, source code, data, proofs, negatives and
other documents, information and elements of production, in any form and in any
media, used to create the Works and Improvements or developed during the
production of the Works and Improvements. Supplier shall provide Starbucks with
such information and know-how in Supplier's possession or control as may be
necessary to use, market and/or develop the Works and Improvements.
(c) Supplier hereby grants to Starbucks, and Starbucks
accepts, an irrevocable, fully paid-up, worldwide and nonexclusive right and
license, with the right to grant licenses and sublicenses to others without
accounting to Supplier, under all patents, copyrights, trade secrets and other
proprietary rights of Supplier included in or necessary to use the Works and
Improvements to the extent that Supplier has the right to grant the same.
(d) Supplier represents and warrants that Starbucks may use
the Works and the Improvements without infringing or violating the rights of any
third party. Supplier also represents and warrants that Supplier has not sold or
transferred any of the exclusive rights to the Works or the Improvements to any
third party and has disclosed to Starbucks the names of any third parties who
may have a nonexclusive right to reproduce, distribute, sell or otherwise use
the Works and the Improvements. Supplier agrees to indemnify, defend, and hold
harmless Starbucks for any liability, loss, damage, claim or action (including
reasonable attorneys' fees) arising out of a breach of the warranties in this
paragraph. Supplier makes no representations or warranties with respect to
materials originating from or provided by Starbucks.
(e) "Improvements", as used in this Agreement, shall mean all
improvements, refinements, and/or modifications of the Works, regardless of the
time when such Improvements are
Exhibit #10(b), Page 8 of 13
<PAGE> 9
or were conceived, developed or reduced to practice, including without
limitation, all inventions, discoveries, designs, developments, improvements,
copyrightable material and trade secrets related to the Works. Supplier shall
make prompt and full disclosure to Starbucks, will hold in trust for the sole
benefit of Starbucks, and will assign to Starbucks all right, title and interest
in and to any and all Improvements.
(f) Supplier agrees to execute such further documents and to
do such further acts as may be necessary to perfect, register, or enforce
Starbucks' ownership of the rights conveyed under this Agreement. If Supplier
fails or refuses to execute any such documents, Supplier hereby appoints
Starbucks as Supplier's attorney-in-fact (this appointment to be irrevocable and
a power coupled with an interest) to act on Supplier's behalf and to execute
such documents.
(g) For purposes of this Paragraph, "Supplier" means, in
addition to the party signing this Agreement. that party's employees. agents and
authorized subcontractors.
18. CONFIDENTIALITY AND NONDISCLOSURE.
(a) Confidential Information. Supplier acknowledges that it
will receive certain technical, business, and economic information which
Starbucks deems proprietary and confidential, including, any and all information
or data, whether in oral, audio, visual, written or other form, communicated to
Supplier which is either identified as confidential or which by its nature is
generally considered proprietary and confidential, regardless of whether such
information is specifically labeled as such (collectively, "Confidential
Information"). Confidential Information includes, without limitation information
and data concerning Starbucks' business, financial information that has not been
disclosed publicly by Starbucks, customers, vendors, marketing and financial
plans, methods, formulae, systems, data, processes, designs, technology, tables,
calculations, letters, agreements, documents, and know-how.
(b) NON-USE AND NON-DISCLOSURE.
(i) Supplier agrees that it shall maintain the
confidentiality of all Confidential Information it receives or otherwise obtains
and that it shall not disclose such information or transmit any documents or
copies containing such information to any other party, except as permitted under
the terms of this Agreement. Supplier shall use at least that standard of care
with respect to protecting the Confidential Information which it accords its own
proprietary and confidential information.
(ii) Supplier further agrees that at no time shall it
use or knowingly permit any other person or entity to examine, use, derive any
benefit from, or otherwise exploit the Confidential Information without
Starbucks' prior written consent or as permitted under the terms of this
Agreement. Supplier shall not disclose any Confidential Information to anyone
other than those of Supplier's employees, agents, and those third parties
authorized by Starbucks (A) who have a reasonable need-to-know such Confidential
Information in connection with the business relationship or transaction to which
this Agreement relates, (B) which individuals have been advised of the
confidential nature of the information, and (C) have agreed to be bound by the
terms of this Agreement.
Exhibit #10(b), Page 9 of 13
<PAGE> 10
(iii) The duty of nondisclosure shall not apply to
information which: (A) was in the public domain at the time it was communicated
to Supplier or subsequently enters the public domain through no fault of
Supplier; (B) Supplier can prove was independently developed by Supplier or was
already known to Supplier at the time of receipt; (C) was communicated
rightfully to Supplier free of any obligation of nondisclosure and without
restriction as to use; or (iv) is required to be disclosed by Supplier pursuant
to judicial order or other compulsion of law, provided that Supplier shall
provide to Starbucks prompt notice of any such order and comply with any
protective or similar order imposed on such disclosure. In the event of
unauthorized disclosure of Confidentiality Information by Supplier, Supplier
shall bear the burden of proof of demonstrating that the information falls under
one of the above described exceptions.
(c) LIMITATIONS ON USE. Unless otherwise agreed in writing by
Starbucks, Company shall use the Confidential Information solely for purposes of
rendering services in connection with graphic design for Starbucks and such
other projects as Starbucks may from time to time assign.
(d) OWNERSHIP AND IMPLIED RIGHTS. All Confidential Information
shall remain the exclusive property of Starbucks, and nothing in this Agreement
shall be deemed to grant Supplier any rights in or to the Confidential
Information, or any part thereof.
(d) RESTRICTIONS ON COPYING. Supplier shall not make any
copies of any Confidential Information, except as may be strictly necessary to
carry Out the purposes stated herein. Supplier agrees that any copies made shall
bear a clear stamp or legend indicating their confidential nature. Supplier
agrees not to remove, overprint, or deface any notice of copyright, trademark,
logo, or other notices of ownership from any originals or copies of Confidential
Information.
(e) RETURN OF MATERIALS. Upon completion of the purposes
stated above, or upon Starbucks' earlier request, Supplier shall promptly
return; all materials incorporating Confidential Information and all copies of
the same, and shall cause any third parties to whom disclosure was made to do
the same.
(f) AFFILIATES. Nothing in this Agreement shall be deemed to
permit access by Supplier's affiliates to Confidential Information provided
pursuant to the terms of this Agreement without Starbucks' prior written
consent. An "affiliate" is any entity which controls, is controlled by, or is
under common control with Supplier. For purposes of this definition, an entity
shall be deemed to control another entity if it owns or controls, directly or
indirectly, more than five percent (5%) of the voting equity or assets of the
other entity (or other comparable ownership interest for an entity other than a
corporation).
Exhibit #10(b), Page 10 of 13
<PAGE> 11
(g) SECURITIES LAWS.
(i) Supplier hereby acknowledge that it is aware, and
agrees that it will advise those persons who are informed about the matters that
are the subject of this Agreement, that federal and state securities laws
prohibit any person who has received material, non-public information concerning
Starbucks, including, without limitation, the matters that are the subject of
this Agreement, from purchasing or selling securities of Starbucks or from
communicating that information to any other person who may purchase or sell or
otherwise violate such laws. Supplier agrees to abide by the terms of Starbucks'
Insider Trading and Confidentiality Policy and Procedure memorandum, distributed
to Supplier on or before the date of this Agreement.
(ii) Starbucks hereby acknowledge that it is aware,
and agrees that it will advise those persons who are informed about the matters
that are the subject of this Agreement, that federal and state securities laws
prohibit any person who has received material, non-public information concerning
Supplier, including, without limitation, the matters that are the subject of
this Agreement, from purchasing or selling securities of Supplier or from
communicating that information to any other person who may purchase or sell or
otherwise violate such laws.
(h) BREACH.
(i) In the event of Supplier's breach of this
Agreement, Starbucks shall have the right to: (A) demand the immediate return of
all Confidential Information; (B) recover its actual damages incurred by reason
of such breach, including, without limitation, its attorneys' fees and costs of
suit; (C) obtain injunctive relief to prevent such breach or to otherwise
enforce the terms of this Agreement; and (D) pursue any other remedy available
at law or in equity.
(ii) In the event of Starbuck's breach of this
Agreement, Supplier shall have the right to: (A) recover its actual damages
incurred by reason of such breach, including, without limitation, its attorneys'
fees and costs of suit; (B) obtain injunctive relief to prevent such breach or
to otherwise enforce the terms of this Agreement; and (C) pursue any other
remedy available at law or in equity.
(iii) Supplier specifically acknowledges that
unauthorized disclosure of Confidential Information would result in irreparable
harm for which there is no adequate remedy at law. Supplier therefore agrees
that in the event of any unauthorized disclosure, Starbucks shall be entitled to
an injunction and that no bond shall be required. This remedy shall be in
addition to any other remedy available at law or in equity.
19. SEVERABILITY. The provisions of the Agreement are severable and the
Agreement shall be interpreted and enforced as if all completely invalid or
unenforceable provisions were not contained in the Agreement, and partially
valid and enforceable provisions shall be enforced to the extent that they are
valid and enforceable.
20. AMENDMENTS IN WRITING. Neither the Agreement nor any of its
provisions may be waived, modified or amended except by an instrument in writing
signed by the parties to this Agreement.
Exhibit #10(b), Page 11 of 13
<PAGE> 12
21. ENTIRE AGREEMENT. The Agreement constitutes the entire written
agreement between Starbucks and the Supplier and supersedes any and all prior
negotiations, understandings and/or agreements, oral or written, between the
parties to this Agreement with respect to the subject matter of this Agreement.
This Agreement may be amended only by an instrument executed by the authorized
representative of both parties.
22. ASSIGNMENT. The Agreement shall be binding upon and shall inure to
the benefit of; the parties to this Agreement, provided, however, it shall not
be assigned by either Starbucks or Supplier, without the prior written consent
of the other party.
23. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Washington. Starbucks may elect to
enforce this Agreement in Washington, and Supplier hereby irrevocably submits
itself to the jurisdiction and venue of the Superior Court of the State of
Washington for King County and the United States Federal District Court for the
Western District of Washington for the purposes of proceedings arising out of or
relating to this Agreement, and hereby irrevocably waives and agrees not to
assert any claim that it is not personally subject to the jurisdiction of the
above-named courts. The parties further agree to waive their right, if any, to a
trial by jury.
24. FORCE MAJEURE. Neither party shall be liable for defaults or delays
or non-performance of any covenant, agreement, work, service, or other act
required under this Agreement to be performed by such party, if such delay or
hindrance is due to strikes, lockouts, failure of power or other utilities,
injunction or other court or administrative order, governmental law or
regulations which prevent or substantially interfere with the required
performance, condemnations, riots, insurrections, martial law, civil commotion,
war, fire, flood, earthquake, or other casualty, acts of God, or other causes
not within the control of such party, the performance of any covenant,
agreement, work, service, or other act shall be excused for the period of delay
and the period for the performance of the same shall be extended by such period.
25. SUCCESSOR. Any provision of this Agreement which imposes upon the
parties an obligation after termination or expiration of the Agreement shall
survive termination or expiration of this Agreement and be binding upon the
parties, its successors and assigns.
26. NONASSIGNMENT. Supplier or Starbucks shall not subcontract to or
permit third parties to perform its obligations or produce the Product to be
rendered under this Agreement.
27. CUMULATIVE REMEDIES. The rights and remedies above provided to
either party shall be cumulative and in addition to all other rights and
remedies available to either party in law and in equity.
28. NOTICES. Whenever a provision is made under this Agreement for any
demand, notice or declaration of any kind, or where it is deemed desirable or
necessary by either party to give or serve any such notice, demand or
declaration to the other party, it shall be in writing and served
Exhibit #10(b), Page 12 of 13
<PAGE> 13
either personally or sent by United States mail, certified, postage prepaid,
addressed at the addresses set forth below or at such address as either party
may advise the other from time to time. It shall be deemed delivered when
actually delivered, if delivered in person, or three (3) days after being
deposited in the United States mail
To Supplier at: Stearns & Lehman, Inc.
Post Office Box 1748
Mansfield, OH 44901
or by overnight mail to: 30 Paragon Parkway
Mansfield, OH 44903
To Starbucks at: Starbucks Corporation
P.O. Box 34067
Seattle, WA 98124-1067
or by overnight mail to: 2401 Utah Avenue South
Seattle, WA 98134
IN WITNESS WHEREOF, the parties have executed this agreement as of
September 1, 1997, which is the first date written.
STARBUCKS CORPORATION STEARNS & LEHMAN, INC.
a Washington corporation an Ohio corporation
By /s/ Eduardo R. Garcia By /s/ William C. Stearns
--------------------------- -----------------------------
Title Senior V.P. S.C.O. Title President
Exhibit #10(b), Page 13 of 13
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