<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
--------------------------
COMMISSION FILE NO. 0-21879
--------------------------
STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
OHIO 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
30 PARAGON PARKWAY
MANSFIELD, OHIO 44903
(Address of principal executive offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
As of December 13, 1999, 3,285,865 common shares, no par value, were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 1999 , April 30, 1999 and October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
ASSETS 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 263,588 $ 361,868 $ 244,075
Trade accounts receivable, net of allowance for doubtful
accounts of $54,797, $40,000 and $55,606 as of
October 31, 1999, April 30, 1999 and October 31, 1998 2,541,869 1,044,515 1,952,072
Inventory 1,990,722 1,815,353 2,201,798
Prepaid expenses and other 100,050 194,790 69,562
Deferred income taxes 46,741 41,118 37,995
---------------- ---------------- ----------------
Total current assets 4,942,970 3,457,644 4,505,502
---------------- ---------------- ----------------
Property and equipment:
Land 73,928 73,928 73,928
Buildings 1,829,823 1,829,823 1,829,823
Building improvements 91,809 91,809 53,591
Leasehold improvements 13,126 9,433 9,433
Machinery and equipment 2,229,977 1,991,730 1,795,227
Office equipment 434,553 388,754 429,342
Tooling 131,774 131,089 124,037
Vehicles 40,401 40,401 45,392
---------------- ---------------- ----------------
4,845,391 4,556,967 4,360,773
Less accumulated depreciation 1,333,490 1,169,800 1,105,828
---------------- ---------------- ----------------
Net property and equipment 3,511,901 3,387,167 3,254,945
---------------- ---------------- ----------------
Goodwill and other intangible assets, net 1,522,684 523,826 548,925
Cash surrender value of life insurance 64,166 51,089 40,642
Trademarks and patents, net 12,620 3,167 3,515
Other assets 17,870 15,328 22,118
---------------- ---------------- ----------------
Total assets $ 10,072,211 $ 7,438,221 $ 8,375,647
================ ================ ================
</TABLE>
CONTINUED
1
<PAGE> 3
STEARNS & LEHMAN, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 1999 , April 30, 1999 and October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 1,184,613 $ 539,668 $ 1,241,250
Accrued expenses 402,649 187,578 375,885
Lines of credit 63,033 - -
Current portion of long-term liabilities 241,839 138,446 141,196
---------------- ---------------- ----------------
Total current liabilities 1,892,134 865,692 1,758,331
---------------- ---------------- ----------------
Long-term liabilities:
Notes payable, net of current portion 1,433,875 664,203 734,851
Other long term liabilities, net of current portion 281,173 - -
Deferred income taxes 146,500 103,137 76,899
---------------- ---------------- ----------------
Total long-term liabilities 1,861,548 767,340 811,750
---------------- ---------------- ----------------
Total liabilities 3,753,682 1,633,032 2,570,081
---------------- ---------------- ----------------
Shareholders' equity:
Common shares, no par value; 4,000,000 shares authorized,
3,289,165 issued and 3,285,865 outstanding as of
October 31, 1999, April 30, 1999 and October 31, 1998,
respectively 3,629 3,629 3,629
Additional paid-in capital 5,248,461 5,248,461 5,248,461
Retained earnings, including cumulative translation
adjustment of $55 as of October 31, 1999 1,079,639 566,299 566,676
---------------- ---------------- ----------------
6,331,729 5,818,389 5,818,766
Less treasury stock at cost; 3,300 shares 13,200 13,200 13,200
---------------- ---------------- ----------------
Total shareholders' equity 6,318,529 5,805,189 5,805,566
---------------- ---------------- ----------------
Total liabilities and shareholders' equity $ 10,072,211 $ 7,438,221 $ 8,375,647
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended October 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Sales $ 4,278,000 $ 3,241,046
Cost of sales 2,978,782 2,243,219
---------------- -----------------
Gross profit 1,299,218 997,827
Selling, general and administrative expenses 656,242 561,529
---------------- -----------------
Income from operations 642,976 436,298
---------------- -----------------
Other income (expense), net:
Interest expense (24,113) (20,386)
Interest income 12,028 3,695
Other, net 813 (3,676)
---------------- -----------------
Income before income tax expense 631,704 415,931
---------------- -----------------
Income tax expense:
Current 230,858 138,242
Deferred (84) 15,970
---------------- -----------------
Total income tax expense 230,774 154,212
---------------- -----------------
Net income $ 400,930 $ 261,719
================ =================
Earnings per share - Basic $ .12 $ .08
================ =================
Earnings per share - Diluted $ .12 $ .08
================ =================
Basic weighted-average common shares outstanding 3,285,865 3,285,865
================ =================
Diluted weighted-average common shares outstanding 3,285,865 3,287,052
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 5
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the six months ended October 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Sales $ 7,351,004 $ 5,177,647
Cost of sales 5,204,724 3,698,666
---------------- -----------------
Gross profit 2,146,280 1,478,981
Selling, general and administrative expenses 1,308,030 1,081,830
---------------- -----------------
Income from operations 838,250 397,151
---------------- -----------------
Other income (expense), net:
Interest expense (39,919) (41,698)
Interest income 20,899 11,468
Other, net (548) 59,430
---------------- -----------------
Income before income tax expense 818,682 426,351
---------------- -----------------
Income tax expense:
Current 289,519 138,350
Deferred 15,878 26,090
---------------- -----------------
Total income tax expense 305,397 164,440
---------------- -----------------
Net income $ 513,285 $ 261,911
================ =================
Earnings per share - Basic $ .15 $ .08
================ =================
Earnings per share - Diluted $ .15 $ .08
================ =================
Basic weighted-average common shares outstanding 3,285,865 3,285,506
================ =================
Diluted weighted-average common shares outstanding 3,285,865 3,287,724
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 6
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended April 30, 1999 and the six months ended October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL
SHARE-
COMMON COMMON PAID-IN RETAINED TREASURY HOLDERS'
SHARES SHARES CAPITAL EARNINGS SHARES EQUITY
------------ ------------ ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 3,272,665 $ 3,614 $ 5,208,876 $ 304,765 $ (13,200) $ 5,504,055
Net income - - - 261,534 - 261,534
Exercise of warrants 13,200 15 39,585 - - 39,600
------------ ------------ ------------ -------------- ------------- ------------
Balance at April 30, 1999 3,285,865 3,629 5,248,461 566,299 (13,200) 5,805,189
Net income - - - 513,285 - 513,285
Cumulative translation
adjustment - - - 55 - 55
------------ ------------ ------------ -------------- ------------- ------------
Balances at October 31,
1999 3,285,865 $ 3,629 $ 5,248,461 $ 1,079,639 $ (13,200) $ 6,318,529
============ ============ ============ ============== ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 7
STEARNS & LEHMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months Ended October 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 513,285 $ 261,911
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 18,822 -
Depreciation and amortization 212,217 189,051
Deferred income taxes 15,878 26,090
Changes in assets and liabilities:
Trade accounts receivable (1,388,635) (644,839)
Inventory (52,855) (333,456)
Prepaid expenses and other 102,871 368
Accounts payable 589,773 473,157
Accrued expenses 199,686 135,409
---------------- -----------------
Net cash provided by operating activities 211,042 107,691
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (82,505) (102,738)
Investment in subsidiary, net of cash (921,024) -
Cash surrender value of life insurance, net (13,077) 1,434
Purchase of other assets (7,354) -
---------------- -----------------
Net cash used in investing activities (1,023,960) (101,304)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under notes payable and line of credit 801,191 -
Principal payments on long-term debt and capital leases (85,168) (74,251)
Net proceeds from issuance of common shares - 39,600
---------------- -----------------
Net cash provided by (used in) financing activities 716,023 (34,651)
---------------- -----------------
Effect of exchange rate changes on cash (1,385) -
---------------- -----------------
Net increase in cash and cash equivalents (98,280) (28,264)
---------------- -----------------
Cash and cash equivalents, beginning of year 361,868 272,339
---------------- -----------------
Cash and cash equivalents, end of quarter $ 263,588 $ 244,075
================ =================
</TABLE>
CONTINUED
6
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS
For the six months Ended October 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid during the year for:
Interest $ 37,100 $ 41,698
================ =================
Income taxes $ - $ 60,631
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three and six months ended
October 31, 1999 and 1998 for Stearns & Lehman, Inc. (the Company) are
unaudited and are presented pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the financial
statements should be read in conjunction with the audited financial
statements for the years ended April 30, 1999 and April 30, 1998. In
the opinion of management, the accompanying financial statements
reflect all necessary adjustments (which are of a normal recurring
nature) to present fairly the financial position and results of
operations and cash flows for the interim periods presented, but are
not necessarily indicative of the results of operations for a full
year.
2. INVENTORY
The major components of inventory at October 31, 1999 and 1998 were as
follows:
1999 1998
Raw materials $ 981,993 $ 1,091,996
Work in process 6,054 14,206
Finished goods 1,002,675 1,095,596
----------------- -----------------
Total inventory $ 1,990,722 $ 2,201,798
================= =================
3. EARNINGS PER SHARE
Earnings per share are computed in accordance with SFAS No. 128,
"Earnings Per Share", which the Company adopted in the third quarter of
the fiscal year ended April 30, 1998. Basic earnings per share are
computed based upon the weighted average number of outstanding common
shares. Diluted earnings per share include the weighted average of
dilutive warrants outstanding.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
WEIGHTED AVERAGE COMMON OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
SHARES OUTSTANDING 1999 1998 1999 1998
----------------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Common shares issued 3,289,165 3,289,165 3,289,165 3,288,806
Treasury shares (3,300) (3,300) (3,300) (3,300)
-------------- --------------- -------------- ---------------
Basic shares 3,285,865 3,285,865 3,285,865 3,285,506
Dilutive effect of warrants 0 1,187 0 2,218
-------------- --------------- -------------- ---------------
Diluted shares 3,285,865 3,287,052 3,285,865 3,287,724
============== =============== ============== ===============
</TABLE>
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4. NOTES PAYABLE
Notes payable at October 31, 1999 and 1998 consisted of the
following:
1999 1998
<S> <C> <C>
Note payable to a bank, collateralized by real estate,
accounts receivable, inventory, and equipment,
payable in monthly installments of $9,071 including
interest at a rate of weekly average yield on U.S.
Treasury securities plus 3.25% adjusted not more
than once per five years (interest rate of 7.81% as of
April 30, 1999), due on October 1, 2007. $ 638,713 $ 693,727
Note payable to a bank, collateralized by real estate,
accounts receivable, inventory, and equipment,
payable on November 1, 2004, and monthly interest
payments at a rate of prime adjusted not more than
once per year (interest rate of 8.25% as of November 1,
1999). 800,000 0
Note payable to a company, unsecured, payable in monthly
installments of $7,111 including interest at a
rate of 8.25% per annum commencing July 1, 1999,
due on December 1, 2000. 88,138 120,000
Note payable to a bank, collateralized by accounts
receivable, inventory, and equipment, payable in
monthly installments of $2,750 CDN including
interest at a rate of prime plus 0.25%, due on
March 1, 2003. 66,971 0
Note payable to a bank, collateralized by accounts
receivable, inventory and equipment, payable in
monthly installments of $7,778 plus interest at a rate
of prime plus 0.5% (7.75% at June 2, 1999),due on
June 2, 1999. 0 62,320
------------ ------------
Total notes payable 1,593,822 876,047
Less current portion 159,947 141,196
------------ ------------
$ 1,433,875 $ 734,851
============ ============
</TABLE>
9
<PAGE> 11
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. INCOME TAXES
The components of the net deferred tax liability at October 31, 1999
and 1998 are as follows:
1999 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 101,501 $ 119,412
Alternative minimum tax credit 6,867 -
Allowance for doubtful accounts 20,823 20,810
Other 7,773 5,244
---------------- -----------------
Gross deferred tax assets 136,964 145,466
Deferred tax liabilities:
Property and equipment 236,723 184,370
---------------- -----------------
Net deferred tax liability $ (99,759) $ (38,904)
================ =================
</TABLE>
The Company had net operating loss carryforwards available of $331,701
and $364,871 at April 30, 1999 and 1998, respectively, from the
purchase of Select Origins, of which $33,170 is available to deduct
each year through April 30, 2009.
6. SUPPLIER AGREEMENT
The Company, as of September 1, 1999, signed a new agreement with
Starbucks Coffee Company to supply products at specified prices. This
agreement provides that, unless written notice is given by either party
at least sixty (60) days prior to the last day of the initial term of
this agreement (August 31, 2001), the agreement shall renew and
continue from year to year until canceled upon thirty (30) days written
notice by either party.
10
<PAGE> 12
STEARNS & LEHMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999 and 1998
- --------------------------------------------------------------------------------
7. BUSINESS ACQUISITION
On October 1, 1999, the Company acquired Oscar Skollsberg's Food
Technique Limited ("Oscars"), a Canadian corporation located in
Richmond, British Columbia, for $862,983 in cash, subject to final
closing adjustments. The Company also incurred $58,041 in direct
acquisition expenses. The agreement to purchase Oscars also includes
cash compensation, payable to Jan Skollsberg in Canadian dollars
pursuant to a four year non-compete agreement. The present value in
U.S. dollars of this non-compete agreement is $370,951, this amount has
been recorded as other intangible assets and other long-term
liabilities. The Company financed this transaction through $800,000 in
bank financing and the remainder from cash flows from operations.
Oscars is reported to be the largest manufacturer of flavoring syrups
for the specialty coffee industry in Canada. The operations of Oscars
have been included for the periods subsequent to the acquisition.
For accounting purposes, the acquisition of Oscars has been recorded
using the purchase method of accounting. The Company's financial
statements include the results of Oscars on a consolidated basis from
the closing date of the acquisition. The purchase price has been
allocated on a preliminary basis to the assets and liabilities of
Oscars at their estimated fair value. The fair values of assets and
liabilities have been determined based on management's estimates. The
allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
<S> <C>
Trade accounts receivable $ 127,541
Inventory 122,516
Prepaid expenses and other 8,131
Property and equipment 205,903
Trademarks 9,591
Goodwill and other intangible assets 671,547
Accounts payable (55,173)
Accrued expenses (15,385)
Deferred income taxes (21,963)
Bank debt (131,684)
----------------
$ 921,024
================
</TABLE>
11
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity, availability of financing for development, government
regulations, competition, and issues related to managing rapid growth and
business expansion.
GENERAL
- -------
The Company is an Ohio corporation headquartered in Mansfield, Ohio. The Company
was organized on March 14, 1988 and is engaged in the business of manufacturing
and marketing specialty food products, including coffee and espresso flavorings,
syrups, oils and toppings, extracts, flavorings, sauces, dressings and specialty
sugars. The Company sells its products throughout the United States and in over
15 foreign countries, including Australia, Canada, Egypt, England, Israel,
Japan, Mexico, New Zealand, Saudi Arabia, Singapore, and United Arab Emirates.
Since its incorporation in 1988, the Company has grown from providing a single
product line and having two employees, to being a major multinational
manufacturer and supplier of flavoring syrups for the specialty coffee industry
with 69 employees. The Company's customer list includes a number of America's
top specialty coffee retailers and restaurants including Starbucks Coffee
Company ("Starbucks"), Barnie's Coffee & Tea Company, The Coffee Beanery, Darden
Restaurants Inc.'s The Olive Garden Italian Restaurant, Advantica Restaurant
Group, Inc.'s Denny's Restaurant, Gloria Jeans Gourmet Coffee, Godiva
Chocolatier, Inc., Borders, Inc., Caribou Coffee Company ("Caribou"), Kraft
General Foods, Krups, Sara Lee's Superior Coffee Division, and Sysco Food
Service. The Company does not have any long-term supply agreements with any of
these customers except Starbucks and Caribou. The Company believes that its
success in obtaining these accounts is attributable to the Company's emphasis on
quality, dependable service and innovation.
PLAN OF OPERATION
- -----------------
While flavored syrup sales to the specialty coffee industry continues to be the
backbone of the Company's business, efforts are being made to develop product
diversity. The Company's plans, for the fiscal year ended April 30, 2000,
include aggressively pursuing the specialty frozen beverage market, developing
other new product lines, further developing the international market, adjusting
its domestic distributor network and increasing manufacturing efficiencies. The
Company also plans to continue to search for strategic acquisitions to enhance
market position and provide for revenue growth.
Specifically, the Company's plans center around diversifying and providing a
wider range of products for its distributors to handle. The Company's management
recognizes the need to diversify from its concentration in sales to the
specialty coffee industry and that a wider range of products will enhance the
Company's distributors' sales efforts and enable them to be a more valuable
supplier to their customers. The Company's frozen beverage product line is the
initial move to diversify from the specialty coffee industry and leverage the
Company's strength in manufacturing flavored liquid products. The Company
believes that this market is several times larger than the specialty coffee
12
<PAGE> 14
market and is still in a rapid growth phase. In the first half of fiscal year
2000, the Company has expanded the sales force and increased advertising and
marketing expenditures to support this product line. The Company's marketing
efforts, during this period, have been concentrated to aggressively pursue the
frozen beverage market with a broad base of different products. Also marketing
has focused on the advantages that the Company's distributors and existing
frozen beverage distributors have in selling both the frozen beverage and coffee
flavoring product lines. The Company's plans call for the continued effort to
identify and develop additional product lines.
The Company's plans also include making an intensified effort to grow its
international business. A large number of international contacts were made
during the fiscal year ended April 30, 1999. From these contacts, the Company
has been able to establish a number of new international distributors. Efforts
continue in fiscal year 2000 to build a strong international presence. These
efforts include the Company adding an international marketing specialist in the
second quarter of fiscal year 2000 and the Company exhibiting its products at
several international trade shows. The Company is also rapidly developing the
manufacturing expertise and flexibility to handle the various regulatory
requirements of the international market place.
In addition, the Company is adjusting its domestic distributor network. The
performance of the Company's master distributor program to build
sub-distributors did not meet expectations. Subsequently, the master
distributors are changing to volume distributors with non-exclusive territories.
Further, the Company sales personnel are more aggressively developing
sub-distributors and regular distributors throughout the domestic market.
The Company continues to strive to offer a higher degree of customer service and
to lower production costs through improved efficiencies at its manufacturing
facilities. In order to meet increased warehousing requirements by some of the
Company's larger customers, the Company, in May 1999, moved into a 30,000 square
foot facility manufacturing and warehouse facility in Kent, Washington. The
move, from the Company's smaller Kent facility, also permitted improvements in
Kent's manufacturing capabilities. With this move, the Company now has two large
and modern facilities in the United States to serve its customers. In late April
1999, the Company also acquired new production equipment at its Mansfield, Ohio
facility. This new production equipment, in addition to providing an immediate
cost benefit, provides for a growth path to much higher production speeds in the
future.
The Company's plans also include the continued search for acquisition
candidates. The appropriate candidates will enhance market position and provide
for revenue growth. Specifically, an acquisition could provide new technological
capability, add volume to the Company's existing product lines or compliment the
Company's existing product lines. This effort resulted in the Company acquiring
Oscar Skollsberg's Food Technique Limited ("Oscars") of Richmond, British
Columbia, Canada. This acquisition makes the Company the largest manufacturer of
specialty coffee flavoring syrups in Canada and should provide the Company an
excellent base for other international opportunities.
13
<PAGE> 15
<TABLE>
<CAPTION>
SELECTED SUMMARY FINANCIAL INFORMATION
- --------------------------------------
QUARTERLY INFORMATION FOR 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER
INDICATED FISCAL YEARS FY 2000 FY 2000 FY 1999 FY 1999 FY 1999
BALANCE SHEET:
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $ 4,942,970 $ 3,662,587 $ 3,457,644 $ 3,835,542 $ 4,505,502
TOTAL ASSETS $ 10,072,211 $ 7,598,596 $ 7,438,221 $ 7,680,435 $ 8,375,647
CURRENT LIABILITIES $ 1,892,134 $ 939,751 $ 865,692 $ 960,420 $ 1,758,331
LONG TERM DEBT, NET OF
CURRENT PORTION $ 1,715,048 $ 621,832 $ 664,203 $ 701,330 $ 734,851
TOTAL LIABILITIES $ 3,753,682 $ 1,681,052 $ 1,633,032 $ 1,746,987 $ 2,570,081
SHAREHOLDERS' EQUITY $ 6,318,529 $ 5,917,544 $ 5,805,189 $ 5,933,448 $ 5,805,566
STATEMENT OF OPERATIONS:
TOTAL SALES $ 4,278,000 $ 3,073,004 $ 2,367,885 $ 2,661,301 $ 3,241,046
COST OF GOODS SOLD $ 2,978,782 $ 2,225,943 $ 1,970,567 $ 1,961,436 $ 2,243,219
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 656,242 $ 651,787 $ 558,105 $ 468,103 $ 561,529
NET INCOME (LOSS) $ 400,930 $ 112,355 $ (128,259) $ 127,882 $ 261,719
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 0.12 $ 0.03 $ (0.04) $ 0.04 $ 0.08
FINANCIAL INFORMATION FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR SIX MONTHS SIX MONTHS
SPECIFIED PERIODS APRIL 30, 1999 APRIL 30, 1998 APRIL 30, 1997 OCTOBER 31, OCTOBER 31,
1999 1998
BALANCE SHEET:
CURRENT ASSETS $ 3,457,644 $ 3,556,309 $ 2,956,601 $ 4,942,970 $ 4,505,502
TOTAL ASSETS $ 7,438,221 $ 7,514,201 $ 5,780,362 $ 10,072,211 $ 8,375,647
CURRENT LIABILITIES $ 865,692 $ 1,156,514 $ 1,050,774 $ 1,892,134 $ 1,758,331
LONG TERM DEBT, NET OF
CURRENT PORTION $ 664,203 $ 802,353 $ 2,256 $ 1,715,048 $ 734,851
TOTAL LIABILITIES $ 1,633,032 $ 2,010,146 $ 1,053,030 $ 3,753,682 $ 2,570,081
SHAREHOLDERS' EQUITY $ 5,805,189 $ 5,504,055 $ 4,727,332 $ 6,318,529 $ 5,805,566
STATEMENT OF OPERATIONS:
TOTAL SALES $ 10,206,832 $ 9,242,530 $ 7,381,105 $ 7,351,004 $ 5,177,647
COST OF GOODS SOLD $ 7,630,669 $ 6,613,046 $ 5,432,588 $ 5,204,724 $ 3,698,666
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 2,108,038 $ 1,758,667 $ 1,588,865 $ 1,308,030 $ 1,081,830
NET INCOME $ 261,534 $ 659,716 $ 402,272 $ 513,285 $ 261,911
BASIC AND DILUTED EARNINGS PER
SHARE $ 0.08 $ 0.20 $ 0.13 $ 0.15 $ 0.08
</TABLE>
14
<PAGE> 16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
- --------------------------------------------------------------------------
Results of operations for the three months ended October 31, 1999 were
highlighted by a strong increase in sales of branded flavoring syrups to the
specialty coffee industry and in sales of private label flavoring syrup to the
Company's major customer. Additionally, the Company continued its strong sales
of specialty frozen beverage products, but encountered higher selling and
marketing expenses and the financial effects from the acquisition of Oscars as
of October 1, 1999.
Net sales for the three months ended October 31, 1999 and 1998 were $4,278,000
and $3,241,046, respectively, which represents a 32% increase. For the three
months ended October 31, 1999, private label syrup sales increased by 23.9%, the
Company's branded syrup products sales increased by 55%, while the sales of
other Company products increased by 84.8%, all as compared to the three months
ended October 31, 1998. Private label syrup, Company branded syrup, and other
Company products represented 74%, 17.9% and 8.1% of gross sales, respectively,
for the three months ended October 31, 1999. The Company's private label sales
increased primarily as a result of a 31.9% increase in sales to the Company's
largest private label customer. The Company's branded syrup products' sales
increased primarily as a result of 24.7% increase in the sales of the DOLCE(R)
brand syrups, the closeout sale of the GODIVA(R) brand syrups and $131,411 in
additional sales of OSCAR'S(R) brand syrups. In addition, the DiNATURA(C) brand,
for which shipments began in October 1998, contributed to the sales increase.
The sales of other Company products increased due to the successful introduction
of the specialty frozen beverage products. Sales of the specialty frozen
beverage products, along with small increases in sales of Sugars & Toppings,
Flavoring Extracts, and My Hero(TM) Sub Dressings, were offset by decreases in
the remaining product lines in this group. The downward trend in the sales of
these remaining product lines are a result of these low profit product lines
being eliminated or de-emphasized.
During the three-month period ended October 31, 1999, the Company experienced
lower production costs but higher material and freight-out costs, as a
percentage of net sales, compared to the same three-month period in the previous
year. Consequently, cost of sales, as a percentage of net sales, increased to
69.6% for the three months ended October 31, 1999 compared to 69.2% for the same
quarter last year. Cost of sales increased by $735,563, including $58,937
associated with Oscars operations, for the three months ended October 31, 1999
compared to the three months ended October 31, 1998 as a result of higher sales
volume.
Selling, general and administrative expenses increased by 16.9% or $94,713 for
the three months ended October 31, 1999 compared to the three months ended
October 31, 1998. This increase included $45,700 in additional expenses
associated from Oscars operations. In addition, selling, general and
administrative expenses increased as a result of increases in trade shows,
travel, telephone, outside services, depreciation of office equipment,
royalties, bad debt expense, and increases in the number of employees and
employee wages. These increases were offset by decreases in advertising, product
samples, and sales promotion costs. Selling, general and administrative
expenses, as a percentage of net sales, decreased to 15.4% compared to 17.3% for
the three months ended October 31, 1999 and 1998, respectively.
Interest expense for the three months ended October 31, 1999 increased by $3,727
compared to the three months ended October 31, 1998. The increase reflects an
increase in the average principal amount of outstanding notes payable.
15
<PAGE> 17
The Company reported total net other income of $813 for the three months ended
October 31, 1999 compared to total net other expense of $3,676 for the three
months ended October 31, 1998. The Company also reported interest income of
$12,028 for the current quarter compared to $3,695 for the second quarter last
year. The increase in interest income is associated with higher levels of cash
for the current period.
Income before income tax expense increased by $215,773 for the three months
ended October 31, 1999 from $415,931 for the three months ended October 31,
1998.
The Company recorded income tax expense of $230,774 for the three months ended
October 31, 1999. For the three months ended October 31, 1998, the Company
recorded income tax expense of $154,212.
As a result of the foregoing, the Company reported net income of $400,930, or
$0.12 per basic weighted average number of common shares of the Company (the
"Common Shares") outstanding, for the three months ended October 31, 1999
compared to net income of $261,719 or $0.08 per basic weighted average number of
Common Shares outstanding for the three months ended October 31, 1998. The basic
weighted average number of Common Shares outstanding was 3,285,865 for the each
three-month period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 AND 1998
- ------------------------------------------------------------------------
Results of operations for the six months ended October 31, 1999 were highlighted
by a strong increase in sales of flavoring syrups to the specialty coffee
industry and in sales of private label flavoring syrup to the Company's major
customer. Additionally, the Company introduced the specialty frozen beverage
products, but encountered higher selling and marketing expenses and the
financial effects from the acquisition of Oscars as of October 1, 1999.
Net sales for the six months ended October 31, 1999 and 1998 were $7,351,004 and
$5,177,647, respectively, which represents a 42% increase. For the six months
ended October 31, 1999, private label syrup sales increased by 37.8%, the
Company's branded syrup products sales increased by 44.7%, while the sales of
other Company products increased by 79.7%, all as compared to the six months
ended October 31, 1998. Private label syrup, Company branded syrup, and other
Company products represented 72.1%, 17.7% and 10.2% of gross sales,
respectively, for the six months ended October 31, 1999. The Company's private
label sales increased primarily as a result of a 54.1% increase in sales to the
Company's largest private label customer. In addition, the Company's third,
fourth and fifth largest private label customers increased sales by 39.2%, 28.4%
and 30.6%, respectively. The Company's branded syrup products' sales increased
primarily as a result of 25.1% increase in the sales of the DOLCE(R) brand
syrups, the closeout sale of the GODIVA(R) brand syrups and $131,411 in
additional sales of OSCAR'S(R) brand syrups. In addition, the DiNATURA(C) brand,
for which shipments began in October 1998, contributed to the sales increase.
The sales of other Company products increased due to the successful introduction
of the specialty frozen beverage products. Sales of the specialty frozen
beverage products, along with small increases in sales of Sugars & Toppings,
Flavoring Extracts, and My Hero(TM) Sub Dressings, were offset by decreases in
the remaining product lines in this group. The downward trend in the sales of
these remaining product lines are a result of these low profit product lines
being eliminated or de-emphasized.
16
<PAGE> 18
During the six-month period ended October 31, 1999, the Company experienced
lower cost of goods sold, as a percentage of net sales, compared to the same
six-month period in the previous year. Improved manufacturing efficiency was
partially offset by write-offs of obsolete inventory and increases in
freight-out and packaging costs. Consequently, cost of sales, as a percentage of
net sales, decreased to 70.8% for the six months ended October 31, 1999 compared
to 71.4% for same quarter last year. Cost of sales increased by $1,506,058,
including $58,937 associated with Oscars operations, for the six months ended
October 31, 1999 compared to the six months ended October 31, 1998 as a result
of higher sales volume.
Selling, general and administrative expenses increased by 20.9% or $226,200 for
the six months ended October 31, 1999 compared to the six months ended October
31, 1998. This increase included $45,700 in additional expenses associated with
Oscar's operations. In addition, selling, general and administrative expenses
increased as a result of increases in advertising, trade shows, travel,
telephone, legal, royalty, bad debt and product sample expenses and increases in
the number of employees and employee wages. These increases were offset by
decreases in sales promotion and outside consulting costs. Selling, general and
administrative expenses, as a percentage of net sales, decreased to 17.8%
compared to 20.9% for the six months ended October 31, 1999 and 1998,
respectively.
Interest expense for the six months ended October 31, 1999 decreased by $1,779
compared to the six months ended October 31, 1998. The decrease reflects an
decrease in the average principal amount of outstanding notes payable.
The Company reported interest income of $20,899 for the current six month period
compared to $11,468 for the same period last year. The increase in interest
income is associated with higher levels of cash for the current period.
The Company also reported total net other expense of $548 for the six months
ended October 31, 1999 compared to total net other income of $59,430 for the six
months ended October 31, 1998. The primary reasons for this $60,243 change were
a $50,632 rebate from the Ohio Bureau of Workers Compensation and a $13,500
settlement from a defamation claim made by the Company against a competitor,
each received during the six months ended October 31, 1998.
Income before income tax expense increased to $818,682 for the six months ended
October 31, 1999 from $426,351 for the six months ended October 31, 1998.
The Company recorded income tax expense of $305,397 for the six months ended
October 31, 1999. For the six months ended October 31, 1998, the Company
recorded income tax expense of $164,440.
As a result of the foregoing, the Company reported net income of $513,285, or
$0.15 per basic weighted average number of Common Shares outstanding, for the
six months ended October 31, 1999 compared to net income of $261,911 or $0.08
per basic weighted average number of Common Shares outstanding for the six
months ended October 31, 1998. The basic weighted average number of Common
Shares outstanding increased to 3,285,865 for the current six-month period
compared to 3,285,506 for the comparable six-month period last year. The
increase reflects Common Shares issued upon the exercise of warrants during the
fiscal year ended April 30, 1999.
17
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The working capital and working capital ratio as of October 31, 1999 and October
31, 1998 were $3,050,836 and 2.61 to 1 and $2,747,171 and 2.56 to 1,
respectively. The increase in working capital for October 31, 1999 compared to
October 31, 1998 was primarily a result of a $19,513 increase in the Company's
cash and cash equivalents, a $589,797 increase in the Company's accounts
receivable, a $30,488 increase in prepaid expenses and a $56,637 decrease in
accounts payable, offset by a $211,076 decrease in the Company's inventory, a
$27,183 increase in the Company's accrued expenses and $163,676 increase in debt
related current liabilities. The increase in accounts receivable was a result of
strong sales in October 1999 compared to October 1998. The increase in prepaid
expenses is primarily a result of prepaid rent and city income tax deposits. The
decrease in accounts payable is a result of the Company's strong cash position
and reduced raw material purchases as a result of efforts to decrease inventory
levels. The decrease in inventory was a result of management efforts and
improved controls associated with new computer software implemented during the
past one and one-half years. The increase in accrued expenses primarily reflects
an increase in accrued state income taxes. The increase in debt related current
liabilities are the result of debt and other long term liabilities associated
with the acquisition of Oscars.
The Company's operating activities, for the six months ended October 31, 1999,
provided net cash of $211,042. The Company used $921,024 to acquire Oscars,
$82,716 to acquire equipment and trademarks, and also increased its investment
in life insurance policies by $13,077. The Company also used $77,282 to make
principal payments on a mortgage note payable and on capital leases, and used
$7,143 for a long term lease deposit on the Company's new Kent, Washington
manufacturing facility. The Company borrowed $800,000 to acquire Oscars and
Oscars increased its line of credit by $1,191. Consequently, during this period,
cash and cash equivalents decreased by $98,280 after a $1,385 decrease in cash
as the result of the effect of exchange rate changes. The Company expects future
operating activities to continue to provide cash for investing and financing
activities. However, this cash may be insufficient to meet the Company's
possible investing and financing activities.
As of December 4, 1999, $200,000 of the Company's $400,000 line of credit with
First Knox National Bank has been pledged via a standby letter of credit as a
guarantee to Canadian Imperial Bank of Commerce ("CIBC") on Oscars $286,432 CDN
overall credit limit with CIBC.
YEAR 2000 COMPLIANCE
- --------------------
On June 4, 1997, the Company signed an agreement to purchase new computer
application software and hardware. All the primary financial and manufacturing
modules have been implemented as of April 30, 1999. This software is Year 2000
compliant. The Company updated the version of its UNIX operating system and the
system's printer spooler to be fully Year 2000 compliant during September 1999.
The Company's personal computer operating systems were also upgraded in
September 1999 to be Year 2000 compliant according to the operating system
manufacturer.
The Company has completed upgrades and tests on all other software and hardware
for Year 2000 compliance and does not anticipate any additional costs or Year
2000 compliance problems on these systems. The Company's software is currently
functioning in fiscal year 2000 without any problems. The Company, as of
December 4, 1999, has incurred costs of $223,000 to complete its Year 2000
compliance work. The Company does not anticipate any other significant internal
costs associated
18
<PAGE> 20
with Year 2000 compliance. The Company is however vulnerable to potential
disruption from suppliers.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 7, 1999, Tina Michaud d/b/a Allied Resources filed a complaint
against the Company which was moved to the federal District Court of Minnesota
for unlawful termination of a sales representative agreement, breach of covenant
of good faith and fair dealing, and unjust enrichment. The plaintiff in this
complaint is seeking damages in excess of $20,000,000 for lost commissions and
out-of-pocket losses. On or about May 20, 1999, the Company terminated the
agreement with the plaintiff. The Company's records, upon initial review,
indicate that it paid Allied Resources $2,994.28 in commissions and expenses
pursuant to the terms of the agreement. The Company believes that there are no
additional expenses or commissions due or owed to the plaintiff. The Company
believes it has complied with the terms of the agreement with the plaintiff and
believes that the allegations of the plaintiff are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 15, 1999, the Company held its Annual Meeting of Shareholders
("Annual Meeting") for the purposes of electing four directors to serve until
the next Annual Meeting and to ratify the appointment of PricewaterhouseCoopers
LLP as the independent accountants of the Company for the fiscal year ending
April 30, 2000. The nominees for directors were unopposed. 3,285,865 Common
Shares were outstanding and entitled to vote and the Annual Meeting. The results
of the voting were as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAINED
<S> <C> <C> <C>
William C. Stearns for Director 3,245,176 0 29,010
Sally A.. Stearns for Director 3,245,176 0 29,010
Frank E. Duval for Director 3,245,176 0 29,010
Carter F. Randolph, Ph.D. for Director 3,245,176 0 29,010
PricewaterhouseCoopers LLP as independent 3,257,495 3,291 13,400
public accountants
</TABLE>
19
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit #10 - Material Contract - Flavored Syrups Master Agreement
Exhibit #27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
A Form 8-K was filed on October 14, 1999 reporting the acquisition of all the
outstanding shares of Oscar Skollsberg's Food Technique Limited by the Company
on October 1, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
Date: December 14, 1999 STEARNS & LEHMAN, INC.
(Registrant)
/s/ William C. Stearns
-----------------------------------
William C. Stearns
President
/s/ John A. Chuprinko
-----------------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
20
<PAGE> 1
Exhibit 10
FLAVORED SYRUPS
MASTER AGREEMENT
THIS MASTER AGREEMENT (the "Agreement") is made this 1st day of
September, 1999, by and between STARBUCKS CORPORATION, a Washington corporation,
d/b/a Starbucks Coffee Company ("Buyer"), and Stearns & Lehman, Incorporated, an
Ohio corporation ("Seller").
A. Seller wishes to be designated by Buyer as a supplier of the
products described in EXHIBIT A (each a "Product", collectively the "Goods").
B. Buyer is willing to designate Seller as a manufacturer and/or
supplier of the Goods, subject to compliance by Seller with the terms and
conditions of this Agreement and the Contract, as it may be amended from time to
time throughout its term. This Agreement and its exhibits shall be collectively
referred to herein as the "Agreement." The "Contract" includes the Agreement and
any other documents referenced herein, including General Provisions and all
Orders.
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, Buyer and Seller hereby agree as
follows:
1. GOODS. From time to time, upon Buyer request, Seller shall
manufacture and/or supply Goods for and to Buyer. Each Product and the
specifications for such Product shall be described in EXHIBIT A, which is part
of this Agreement. A Product shall not be substituted, modified, or otherwise
changed from these specifications without first obtaining Buyer's written
approval of such change.
2. TERM. This Agreement shall be in effect commencing September 1, 1999
with an initial term of two (2) calendar years ("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 ninety (90) days prior to the last day of the
Initial Term. Otherwise, following the Initial Term, this Agreement shall
automatically renew and continue for additional one (1) year term(s) ("Renewal
Term(s)") unless canceled by either party with at least ninety (90) days written
notice. This Agreement may also be terminated earlier pursuant to the provisions
of the Contract. Notwithstanding anything contained herein, the volume of Goods
ordered and the number of orders placed during the Initial or Renewal Terms
shall be determined solely by Orders placed pursuant to Article 3.
3. ORDER AND DELIVERY. Purchase orders ("Orders") shall be placed in
writing by Buyer (or its authorized distributor), sent by U.S. Mail, facsimile
or personally delivered to Seller at the address set forth below (the "Order").
See General Provisions for additional delivery requirements. All Orders shall be
shipped F.O.B. Destination. Prices established for delivery to Buyer's York, PA
and Sparks, NV warehouses are for full truckloads only, and Buyer shall pay
additional freight cost for orders requiring delivery of less-than-truckload
quantities to these locations. Orders of less-than-truckload-quantities shall be
delivered to Buyer's Kent, WA warehouse with no additional freight cost.
4. PRICE, INVOICE AND PAYMENT. Prices for Products are described in
EXHIBIT A and shall be valid for the Contract Term. Buyer and Seller agree that
following the Initial Term, changes in the cost of commodities used in the Goods
may justify increases or decreases in prices. Any party requesting a price
revision shall provide notification to the other party and include substantial
rationale for the requested revision. Following such notification, the parties
will enter good faith negotiations for price revisions, with no guaranty that
revised prices will result.
21
1 of 5 Exhibit #10
<PAGE> 2
FLAVORED SYRUPS
MASTER AGREEMENT
See the Standard Terms and Conditions for basic invoice requirements.
Invoices will be sent to the following address:
Starbucks Coffee Company
Mail Stop S-AC3
P.O. Box 94187
Seattle, WA 98124-6487
Payment Terms are Net 30 days.
5. NO IMPLIED REPRESENTATIONS. Buyer makes no representations,
warranties, or guarantees, express or implied, regarding the duration of this
Agreement beyond the Initial Term, or any Renewal Term. Buyer reserves the right
to terminate this Agreement as provided herein without liability to Seller for
any damages, including but not limited to consequential damages, or lost profits
or other speculative damages. Buyer shall not be liable for any expenses,
capital or otherwise, incurred by Seller to perform its obligations herein.
6. SPECIAL PROVISIONS. The most recent version of "Starbucks Coffee
Company Standard Terms and Conditions" ("General Provisions") is incorporated as
part of the Contract. Special Provision Articles below are additive to the
General Provisions and may revise the General Provisions, but any revisions to
the Buyer's physical form are rejected. In the event of a conflict between the
terms of this Agreement and the General Provisions, this Agreement will prevail.
If no special provisions are included, the General Provisions shall apply.
6.1 WIDESCALE DEFECTS/RECALL
A. Whenever Seller becomes aware that any ingredient or component of a
Product covered by this Contract 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 mis-labeled, Seller shall
immediately give notice thereof to Buyer and Seller shall provide all relevant
information with respect thereto.
B. In the event it is deemed necessary by either Buyer or Seller to
recall any quantity of the Goods, from any store of Buyer or from any Customer,
either as a result of failure of the Goods to satisfy the specifications, comply
with any warranties, or for any other reason bearing on quality and/or safety of
the Goods, Seller agrees to take such steps as Buyer deems necessary to protect
the interests of the public and Buyer and to comply diligently with all product
recall procedures established by the Food & Drug Administration. Seller shall
maintain a written recall procedure on file at its company offices.
C. Seller shall lot code each production run of Goods with a formalized
tracking system. The lot code shall identify the date and production run. Seller
agrees to bear all cost and expenses incurred by it and/or Buyer (including
consequential damages) in complying with such recall procedures, unless (and
only to the extent) such recall is the result of the gross negligence of the
Buyer. In the event Seller fails or refuses to comply with the recall of the
Goods upon request by Buyer, Buyer shall be authorized to take such action as it
deems necessary to recall the Goods from any and all stores of Buyer or from its
customers, and Seller shall reimburse Buyer for its costs and expenses incurred
in such recall procedure. Any such action taken by Buyer shall not relieve
Seller of its obligations or liability hereunder.
6.2 WARRANTIES AND REPRESENTATIONS. Seller represents and warrants,
which warranties and representations will survive the term of this Contract:
A. that the Goods, including food articles, food ingredients, food
packaging, and food labeling
22
2 of 5 Exhibit #10
<PAGE> 3
FLAVORED SYRUPS
MASTER AGREEMENT
relating to or comprising the Goods or any part thereof delivered, sold or
transferred to Buyer 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 Meat
Inspection Act, the Poultry Products Inspection Act, the Wholesome Meat Act, the
Food Additives Amendment of 1958, the Color Additives Amendment of 1960, the Tea
Importation Act, the Filled Milk Act, the Butter 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;
B. that the Goods 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, and in accordance with all state laws and local health
and sanitary ordinances or regulations, including but not limited to any
expiration date ordinances;
C. that the Goods 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;
D. that the Goods shall not be food products 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;
E. that the Goods will be in compliance with all accepted models and
samples and all written affirmations of fact, promises, descriptions or
specifications made or furnished by Seller and accepted by Buyer hereunder;
F. that Seller has the facilities and capacity to supply the Goods to
Buyer in accordance with the specifications of EXHIBIT A; that Seller shall use
Hazard Analysis of Critical Control Point and Statistical Process Control
techniques in its performance of this Contract; that Seller's facilities will
comply with the inspection and testing procedures established and carried out by
the American Institute of Baking, Silliker Laboratories and/or the United States
Department of Agriculture; and that Seller shall conform to the Food Safety and
Quality Assurance Standards set forth in EXHIBIT B.
6.3 INGREDIENT AND NUTRITIONAL INFORMATION.
A. Seller 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 10 1. 4 and 10 1.22, and Regulation B.01.010 of the
Canadian Food and Drugs Act. Seller shall not change the formulation, the design
or the production process of a Product in any way without prior written approval
from Buyer. In the event of such approved changes, Seller shall provide Buyer
with a revised statement of ingredients for the Product. Seller shall bear all
costs and expenses associated with such change unless initiated by Buyer
direction.
B. Seller shall comply with all applicable nutritional labeling
requirements, including, but not limited to, the Code of Federal Regulations,
Section 10 1.9(a) through (c) or Regulation B.0 I of the Canadian Food and Drugs
Act, and shall pay all costs associated therewith. In the event that the Seller
changes the formulation of a Product in any way, it shall provide Buyer with
revised nutritional information for that Product. Seller shall provide
documentary evidence establishing the source from which Seller obtained such
nutritional information for the purpose of demonstrating, to Buyer's 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, Seller nevertheless agrees to furnish all information
reasonably required by Buyer for the purpose of providing nutritional
information to its customers. Notwithstanding anything contained herein to the
23
3 of 5 Exhibit #10
<PAGE> 4
FLAVORED SYRUPS
MASTER AGREEMENT
contrary, Seller agrees to provide nutritional information for any Goods
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".
6.4 PRODUCT RECALL INSURANCE. In addition to insurance required by the
General Provisions, Seller agrees to maintain product recall insurance in a
minimum amount of $2,000,000.00 per occurrence and with a deductible of not more
than $10,000.00 during the entire term of the Contract. All required policies of
liability insurance shall cover Seller's employees, agents, and independent
contractors and shall include Buyer as an additional insured, and in addition
shall contain cross liability and severability clauses protecting Buyer with
respect to claims by Seller or other persons as if Buyer were separately
insured.
6.5 EXCLUSIVITY. If a Product is designated as an "Exclusive Product"
in the Contract, Seller agrees that unless expressly agreed to in writing by
Buyer: (1) The Product will be manufactured for and supplied exclusively to
Buyer, and (2) The Seller will not manufacture, supply, distribute or sell the
Product under Seller's own label to third parties, or under any private label
for or to any other party. If the Product is designated as having "Defining
Characteristics" in the Contract, Seller agrees that it will not manufacture any
product with such Defining Characteristics for any third party, unless expressly
agreed to in writing by Buyer.
6.6 RIGHTS TO WORK - EXCLUSIVE PRODUCTS. Seller agrees that any work
performed by Seller for Buyer with respect to any Exclusive Product has been
specifically ordered and directed by Buyer. Seller hereby agrees to provide
Buyer with all work in connection with an Exclusive Product, including without
limitation, steps, processes, ingredient certification, nutritional analysis,
specifications, list of ingredients by weight and percentage, ingredient
composition, and flavoring specifications including specific brand names (the
"Work"). The Work shall be considered works-made-for-hire and all patents,
copyrights, trademarks and other proprietary rights in or related to the Work
shall be owned exclusively by Buyer. To the extent the Work is deemed to be
other than works-made-for-hire, Seller hereby irrevocably grants, assigns and
conveys to Buyer all right, title and interest in and to the Work and all works
and other proprietary data and all other materials conceived, developed or
formulated by Seller or its agents, during and in connection with the
performance of goods and services under this Contract including without
limitation all patents, trademarks, copyrights and trade secrets in the Work and
all rights to secure registrations, renewals and extensions of the same; and all
rights to make use, practice, import, export and otherwise fully exploit the
Work and any and all modifications and improvements that Seller or Buyer may
hereafter make or develop.
6.7 TRADEMARKS AND DESIGNS. The Products may bear the Starbucks and/or
Fontana name, logo and/or other proprietary marks ("Trademarks") and proprietary
designs ("Designs"). Seller acknowledges that rights to the Trademarks in the
United States are owned by Starbucks U.S. Brands Corporation under license to
Starbucks and rights to the Trademarks outside the United States are owned by
Starbucks. Seller will use the Trademarks and Designs only in the manner and
form approved by Starbucks, only with approved Products meeting Starbucks
specifications and only on Products manufactured for Starbucks at Starbucks'
direction. Seller acknowledges that the Trademarks and Designs remain the
property of their respective owner and that Seller's use of the Trademarks and
Designs does not create any separate rights. Seller agrees not to contest the
ownership of the Trademarks or Designs, not to otherwise use or attempt to
register the Trademarks or Designs in any country and to refrain from any action
adversely affecting Starbucks' trademark, copyright or other rights. Subject to
the terms of this Agreement, Starbucks grants to Seller the limited right to use
the Trademarks and Designs on and in connection with Products that are made for
Starbucks, pursuant to this Agreement and purchase orders placed from time to
time. All Trademarks and Designs shall be accurately reproduced in their
approved forms in accordance with Starbucks guidelines and graphic standards,
with such trademark and copyright notice markings as may be prescribed by
Starbucks. Seller shall promptly implement at its expense any change required by
Seller's failure to properly mark the Products. Seller will cooperate with
Starbucks to facilitate Starbucks control over the use of the Trademarks.
Starbucks will not use Seller's trademarks in Starbucks' advertising or
promotions except with Seller's prior written approval.
24
4 of 5 Exhibit #10
<PAGE> 5
FLAVORED SYRUPS
MASTER AGREEMENT
6.8 REVISIONS TO STARBUCKS STANDARD TERMS AND CONDITIONS. The following
revisions are hereby incorporated:
A. Paragraph 7.B. "Lots/Expiration": Delete entirely.
B. Paragraph 17.B. "Termination-Convenience": Add "Buyer shall
provide 90 days written notice to Seller of such termination. To the extent that
such termination is solely for the purpose of obtaining more favorable pricing,
Seller will be given a fair opportunity to re-quote pricing for Buyer's
consideration, if such quote has not previously been requested in conjunction
with the decision to Terminate."
C. Paragraph 21.A. "Publicity": Seller may release information
regarding the Contract if required by Law, such as Securities and Exchange
Commission filings.
D. Supplier Handbook (ref. Paragraphs 15 and 6): Buyer has not
released the Supplier Handbook at the time of this execution, and will forward
it to the Seller when available. Seller's current operations are considered to
be in compliance with the Supplier Handbook.
7. NOTIFICATIONS. In accordance with the NOTIFICATIONS clause in the
General Provisions, notifications will be forwarded to the following addresses:
To Seller at: Stearns & Lehman, Incorporated
30 Paragon Parkway, PO Box 1748
Mansfield, Ohio, 44903
Fax: (419) 522-1152
To Buyer at: Starbucks Corporation
Purchasing Department S-PH1
P.O. Box 34067
Seattle, WA 98124-1067
Fax: (206) 382-4658
with copies by mail to: Starbucks Corporation
Law and Corporate Affairs Department
P.O. Box 34067
Seattle, WA 98124-1067
or by delivery to: 2401 Utah Ave. S.
Seattle, WA 98134
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
BUYER: SELLER:
STARBUCKS CORPORATION STEARNS & LEHMAN, INCORPORATED
a Washington corporation an Ohio corporation
/s/ Buck Hendrix /s/ John A. Chuprinko
- ------------------------------- ---------------------------------------
By: Buck Hendrix By: John A. Chuprinko
Title: Vice President Title: Chief Financial Officer
25
5 of 5 Exhibit #10
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> OCT-31-1999
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