U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
Commission File Number: 1-14091
SHERWOOD BRANDS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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North Carolina |
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56-1349259 |
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(State or Other
Jurisdiction of |
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(IRS Employer Identification Number) |
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1803
Research Blvd., Suite 201 |
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20850 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code: (301) 309-6161 |
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Securities Registered Pursuant to Section 12(b) of the Act: |
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None |
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Securities Registered Pursuant to Section 12(g) of the Act: |
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Class A Common Stock, $.01 Par Value |
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Check whether the issuer (1) has 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý.
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant as of October 21, 2003 (computed by reference to the last reported sale price of the Registrant’s Common Stock on the American Stock Exchange on such date) was $7,208,340.
The number of shares outstanding of Registrant’s Class A Common Stock, $.01 par value per share, as of October 21, 2003 was 3,003,475. Number of shares outstanding of Registrant’s Class B Common Stock, $.01 par value per share was 1,000,000. The Class B Common Stock is not publicly traded.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant’s definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, which will be filed with the Commission subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
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General
Sherwood Brands, Inc. (the “Company”) was incorporated in December 1982 in the state of North Carolina. Sherwood Brands, Inc. is engaged in the manufacture, marketing and distribution of a diverse line of brand name candies, cookies, chocolates and gifts. The Company manufactures lollipops, biscuits and assembles seasonal gift items including gift baskets for Christmas, Valentines Day and Easter. The Company’s principal branded products include COWS(TM) butter toffee candies, DEMITASSE(R) biscuits, RUGER(R) wafers, SMILE POPS(R) lollipops, STRIP-O-POPS(R) lollipops and ELANA(R) chocolates, SOUR FRUIT BURST(TM) fruit-filled hard candies and PIRATE’S GOLD COINS(R) milk chocolates. The Company’s marketing strategy, including its packaging of products, is designed to maximize freshness, taste and visual appeal, and emphasizes highly distinctive, premium quality products that are sold at prices that compare favorably to those of competitive products. The Company aligns its operations into three business segments for management to measure financial performance by product type. The Company’s business segments are (i) Manufactured Candy, (ii) Purchased Candy and (iii) Gift Items.
Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland limited liability company. Sherwood Brands, LLC markets and distributes its own line of confectionery products in the United States.
Sherwood Overseas, Inc. (a wholly-owned subsidiary of Sherwood Brands, LLC) was incorporated in July 1993 in the Bahamas to market and distribute the Sherwood lines of confectionery products internationally.
Sherwood Brands of RI, Inc. is a wholly owned subsidiary of Sherwood Brands, Inc. that was incorporated in September, 1998 in the state of Rhode Island. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company manufactures hard candies and jelly beans and assembles and markets gift items and baskets to chains such as Wal-Mart, Kmart and CVS.
Sherwood Acquisition Corporation, a wholly-owned subsidiary of the Company, was incorporated in April, 2002 in the state of Wyoming. On May 1, 2002, Sherwood Acquisition merged with and into Asher Candy Acquisition Corporation, a Wyoming corporation. Asher Candy Acquisition Corporation is a manufacturer of candy canes and other hard candies under the “Asher” name. The surviving corporation of the merger is Asher Candy Acquisition Corporation, which has changed its name to Asher Candy, Inc. The Company issued an aggregate of 270,559 shares of its common stock valued at $1,675,000 to the shareholders of Asher Candy Acquisition Corporation in consideration for the transaction, subject to escrows for indemnification and adjustments based on a final audit, as well as warrants exercisable for shares of the Company’s common stock valued at $108,000. The Company valued the common shares at the closing market price on April 30, 2002 and valued the warrants using the Black-Scholes options pricing method.
Market Overview
Sales of candy and cookie products in the United States have increased significantly in recent years. According to the United States Department of Commerce, manufacturers’ domestic shipments of confectionery products (excluding chewing gum) have increased from approximately $9 billion in 1990 to $21.3 billion in 2002. The Chocolate Manufacturers Association/National Confectioners Association has estimated that total retail sales of confectionery products in the United States in 2002 were approximately $24.1 billion, comprised of $13.1 billion in chocolate, $7.6 billion in non-chocolate products, $2.8 billion in gum products and $600 million in other products. Despite the growth, the United States ranks only fifth in per capita candy consumption among the industrialized nations.
Halloween generates the highest volume of sales ($2.0 billion), followed by Easter ($1.81 billion), Christmas ($1.50 billion) and Valentine’s Day ($1.09 billion). Candy Sales for 2002 were up 1.5% over the prior year. During 2002, 1,401 new confectionery products were introduced, comprised of 639 chocolate items, 640 non-chocolate items, 72 gum items, and 50 other confectionary items. Novelty/interactive candies growth slowed after a nearly 70% growth rate over the previous five years. Everyday candy sales increased slightly last year while holiday sales dipped slightly. The Company believes that the expanding candy market in the United States presents attractive growth opportunities for its business, and is focusing on introducing new products in these holiday categories as well as achieving greater brand recognition and market penetration for all of the Company’s products.
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The markets for candy and cookie products are dominated by a number of large, well capitalized corporations. In the candy market, these companies include Hershey Food Corporation, Masterfoods USA (M&M Mars) and Nestle S.A. The cookie and biscuit market is dominated by Kraft foods. In addition to domestic manufacturers, foreign candy and cookie companies, such as Lindt of Switzerland, Bahlsen KG, and Storck, have established their products in the United States. The Company believes that the remainder of the market is highly fragmented, with numerous manufacturers and hundreds of products and distribution channels, such as mass merchandisers, drug stores, club stores, vending companies and gourmet distributors.
In the current business environment, small and medium sized companies are exploring foreign manufacturing opportunities as a route to increased competitiveness. Unfortunately, with no sugar price relief in sight, and despite such high-profile closings as Kraft’s LifeSavers plant in Michigan and Brach’s move to Argentina, the situation is likely to continue. Also of growing interest are the moves a number of confectioners have made to outsource manufacturing to China, lured by increasing numbers of high quality, low-cost manufacturing facilities, and the market opening concessions the Chinese government made to gain entry to the World Trade Organization. The trend started several years ago with co-packing agreements, primarily for novelty items such as tubes-toppers, but has quickly expanded to include product development and co-manufacturing operations. According to Candy Business, for the first 10 months of last year, the value of sugar confectionery items imported to the U.S from mainland China nearly doubled when compared to the same period the previous year, rising from $19.4 million in 2001 to $36.8 million during 2002. Add to this the more than three-fold increase in the value of items imported from Hong Kong during the same 10-month period ($2.27 million in 2001 to nearly $10 million last year), and China outpaces Argentina as the fourth largest importer to the U.S. Management believes that the Company’s experience in these markets and distribution channels, coupled with its expanded manufacturing capabilities with its suppliers overseas, should enable the Company to capitalize on growth opportunities in these markets.
Products
Purchased Candy
The following is a description of products that the Company sells, which are purchased from third-party sources located outside of the United States:
COWS(TM): COWS is a line of butter toffee candy offering both a soft and chewy toffee and a dairy butter and cream hard candy. COWS butter toffee candies are made with real dairy butter and cream and are sold in 7 oz. bags, in tubs, and in bulk, and are packed in foil fresh packs to preserve freshness and extend shelf life. COWS butter toffee candies are also packaged as gift items in decorative tins and milk jars.
COWPOKES(TM) LOLLIPOPS: COWPOKES are an extension of the COWS line and are made with a hard dairy butter and cream candy on the outside and a soft, chewy butter toffee on the inside. Cowpokes are available in 6.4 oz. bags and are also distributed in 60-count check-out stand display cartons for single-item sales.
SOUR FRUIT BURST(TM) HARD CANDIES: SOUR FRUIT BURST is a line of fruit-filled hard candies that are available in a variety of flavors, are sold in 3 oz. and 12 oz. bags, and in a variety of other packages.
RUGER(R) WAFERS: RUGER wafers is a line of wafer cookie, including sugar free varieties, available in four flavors: chocolate, vanilla, lemon and coffee. The RUGER wafer cookie formula, designed by the Company, utilizes an aeration process which gives RUGER wafers its very light and delicate filling. RUGER wafers are distributed in a mylar packaging material that resists sunlight and humidity and is designed to preserve freshness and extend shelf life.
ELANA(R) BELGIAN CHOCOLATES: ELANA Belgian chocolate bars are sold in a variety of flavors, including mint, caramel, mocca, truffle, crispers, and almonds.
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COUNTDOWN TO CHRISTMAS(TM) CHOCOLATE CALENDARS: COUNTDOWN TO CHRISTMAS chocolate calendars are advent calendars made with 24 milk-chocolate candies behind numbered doors. The calendar is marketed domestically for the Christmas holiday season.
PIRATE’S GOLD COINS(TM) FOIL-WRAPPED CHOCOLATE COINS: PIRATE’S GOLD COINS is a milk chocolate candy product designed in coin shapes and wrapped in embossed gold foil. They are offered in two sizes of mesh bags, 2lb. 10oz. tubs and in bulk, and are marketed primarily for the Christmas holiday season.
Manufactured Candy
The following is a description of products the Company manufactures:
STRIP O POPS(TM) LOLLIPOPS: STRIP O POPS(TM) are a line of hard candy lollipops merchandised in hanging strips. They are available in a variety of flavors and are designed for the holiday season as well as year round sales.
SMILE POPS(TM) LOLLIPOPS: SMILE POPS(TM) are a line of candy iced lollipops individually wrapped and sold in tubs, poly bags or in hanging strips. Each pop is decorated with a smiling face.
TONGUE TATTOO(TM) LOLLIPOPS: TONGUE TATTOO lollipops are a line of hard candy lollipops embossed with candy icing images. The iced image transfers when pressed on the tongue creating a tongue tattoo.
COWSCARAMELS(TM): COWSCARAMELS is a line of caramel candy. Flavored fillings include vanilla, cappuccino and butter and cream. The candies are offered in both a soft and chewy toffee and as a dairy butter and cream hard candy. The COWSCARAMEL production line is certified kosher by the Orthodox Union.
DEMITASSE(TM) BISCUITS: DEMITASSE is a line of tea biscuits offered in a variety of flavors including the traditional tea biscuit, “Petit Beurre” (with real butter), cinnamon honey, coconut and chocolate. The DEMITASSE biscuit line is certified kosher by the Orthodox Union.
CANDY CANES: The Company manufactures a variety of packages, sizes, color and flavors, ranging from traditional peppermint canes to high-end gourmet lines. In addition, the Company manufactures premium flavor candy canes which include amaretto, merlot, Irish creme, Dutch chocolate, maraschino cherry and blueberry cheesecake.
Gift Items
The Company assembles a variety of custom made gift sets and gift baskets. The gift sets and gift baskets are typically designed for a particular holiday such as Christmas, Valentine’s Day or Easter. The gift sets and gift baskets may contain gourmet food products, candy, novelty items or seasonal merchandise. A significant portion of the contents of the gift sets and gift baskets are assembled from components imported from China.
The Company assemblies various products to the specification of our customer base and each Holiday season:
Christmas assembled items:
Elana Holiday Gifts: The Company’s Elana holiday gifts are mesh bags filled with individually gift wrapped squares of Elana premium chocolates.
Chocolate Santa Bears: These little Santa Bears are a Company classic, each mesh bag is filled with delicious chocolate bears foil-wrapped in Santa suits.
Chocolate Holiday Ornaments: A mesh bag is filled with solid milk chocolate wrapped in bright holiday colored foil. Each chocolate has its own trimming string for hanging on the Christmas tree, giving these bags extra novelty.
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Candy Filled Votive Candle Holders: House and lanterns hold standard votive candles and create a warm and festive mood anywhere. The ceramic pieces which are incorporated with various holiday seasonal candies and can be used as a lantern.
Gift Sets: The Company exclusively designs gift sets that are tailored to its customers taste.
These are some of the items which the Company assembles:
Starry Night: A collector-worthy plate is the center piece, painted with a beautiful rendering of a spirited snowman under a starry Christmas sky. Hot cocoa is packaged in two decorated tins and two mugs that include candy canes that hang over the rims to give the hot chocolate a peppermint accent.
Botanical Mug and Canister Set: A floral design of mugs and canister set to compliment a garden breakfast or tea time on the porch. A heavy canister with chromed metal latches seals air tight to keep food fresh. Apple blossom tea is included.
Pasta Houses: Ceramic houses tall enough to hold a pound of linguini. Included in each one is a package of imported gourmet pasta. The wooden spoon tied to each house makes it a complete set.
Share the Spirit Mug Set: Cheerful images of the season decorate two mugs and cocoa sets. The original artwork is appropriate for the holidays and beyond.
Valentines assembled items:
Valentine Card and Pops: Each of the colorful Valentine cards is accompanied by one conversation pop.
Valentine Coin Purse: The Valentine coin purse is a reusable purse filled with chocolate coins.
Valentine Treasure Chest: A plastic treasure chest is filled with premium gold chocolate coins.
Easter assembled items:
Easter Baskets: Wicker baskets of high quality wicker are made in various themes for the Easter holiday season. These are some of our baskets with various themes:
• Playtime assortment: Assortment of games, toys and creative play sets incorporated with various candies.
• Fun and Games assortment: Baskets are filled with summer fun toys for kids.
• Toy time assortment: Toys that help inspire the imagination, pretend dress up, sports and creative art kits.
• Fuzzy friends plush assortment: High quality plush fuzzy friends made of super soft velvet.
• All Candy Baskets: An assortment of various candy from the Company and other popular brands.
Suppliers
Some of the Company’s products are manufactured by third party sources to specific recipe and design specifications developed by the Company. These third party sources are located in Argentina, Austria, Belgium, Holland, Germany, Italy, and Ireland. The Company’s operations require it to have production orders in place in advance of shipment to the Company’s warehouses
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(product deliveries typically take 60 days). Generally, the Company’s foreign suppliers deliver finished products free on board to a freight forwarder, cargo consolidator or directly to a seaport for ocean transport. The Company assumes the risk of loss, damage or destruction of products, although the Company maintains cargo insurance. Upon entry into the United States, the products are then transported by rail or truck to one of the six regional warehouses used by the Company.
The Company has long-term relationships with the manufacturers of ELANA(R) Belgian chocolates, RUGER(R) Wafers, and PIRATE’S GOLD COINS(TM) milk chocolates. Generally, these manufacturers have agreed not to export into the United States, and in some cases, other countries, any products similar to those produced for the Company. The Company has no formal written agreements with its manufacturers and has no formal commitment to purchase minimum volumes of products. However, on an annual basis the Company and its manufacturer will agree upon volumes and prices and establish a delivery schedule based upon the Company’s forecast.
The Company requires that its suppliers maintain product liability insurance with the Company as an additional named insured. The loss of any one supplier would not have a material adverse effect on the Company’s business.
The Company purchases the necessary ingredients and packaging materials, which are used in its products that are manufactured at its New Hyde Park, NY and Chase City, VA production facilities from numerous third-party suppliers. These ingredients and packaging materials include flour, sugar, shortening, flavorings, butter, folding cartons, shipping cartons and wrapping film. The purchases are made on an open account basis with competitive payment terms.
Most of the components used in the Company’s line of holiday gift sets and gift baskets are assembled at its Central Falls, RI and New Bedford , MA facility and are purchased from manufacturers located in Asia, principally China. In addition, the Company purchases some components from domestic sources on an open account basis.
Customers
The Company sells its products primarily to mass merchandisers, other retail customers, grocery and drug store chains, club stores, convenience stores, specialty shops and wholesalers. The Company’s mass merchandise customers include Family Dollar, Target, Dollar General, K-Mart and Wal-Mart. For the year ended July 31, 2003, Sam’s Club and Wal-Mart accounted for 15% and 9% of the Company’s total net sales, respectively. For the year ended July 31, 2002, Sam’s Club and Wal-Mart accounted for 29% and 14%, respectively, of the Company’s total net sales. For the year ended July 31, 2001 Wal-Mart comprised 14% of the Company’s total net sales. The loss of either Sam’s Club or Wal-Mart as a customer would result in a significant decrease in the Company’s revenues and profits.
Vending companies are one of the Company’s major customer category. ELANA Belgian chocolates, RUGER wafers, COWS butter toffee candies and SOUR FRUIT BURST candies are available in vending machines as well as through traditional outlets. The Company believes that the visibility of its products in vending channels enhances market acceptance and consumer appeal of the Company’s products in other distribution channels.
The Company also sells its products to numerous gourmet distributors throughout the United States. These distributors in turn sell the Company’s products to a wide base of gourmet stores. The Company believes that it has been able to penetrate this customer segment because of its ability to satisfy consumer demand for premium quality products at prices that are attractive to these distributors.
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Distribution Channels
The Company distributes its products throughout the United States, Puerto Rico and Canada. Net sales of the Company’s products in the Canadian market accounted for less than 1% of the Company’s total net sales in fiscal 2003.
The Company engages independent food and candy brokers in various regions throughout the United States for marketing to retail stores. These brokers account for a majority of the Company’s sales. Food and candy brokers are paid on a commission basis (typically 5% of sales generated by them) and are generally responsible in their respective geographic markets for identifying customers, soliciting orders and inspecting merchandise on store shelves. As of July 31, 2003, the Company had arrangements with approximately 65 food and candy broker organizations. These arrangements typically prohibit the brokers from selling competing products during their engagement with the Company. The Company believes that the use of brokers, enhances the quality and scope of the Company’s sales operations. In addition, the use of brokers permits the Company to limit the costs associated with creating and maintaining a direct distribution network. The Company’s executive officers and six regional sales managers work with the brokers on an individual basis and are responsible for managing the broker network, identifying opportunities and developing sales in their respective territories.
The Company uses six regional bonded public warehouses that specialize in food and confectionery storage. These warehouses are selected based on proximity to the Company’s customers, their ability to provide prompt customer service and their efficient and economic delivery. Generally, the Company sells its products pursuant to customer purchase orders and fills these orders from inventory within one to two days of receipt.
Because these purchase orders are filled shortly after receipt, backlog is not material to the Company’s business. Substantially all of the Company’s products are delivered by common carrier.
Manufacturing and Assembly Facilities
The Company has two manufacturing facilities and three assembly facilities.
The Company currently manufactures hard candy, soft candy, jellies, Demitasse biscuits and COWSCARAMEL Caramel candies at its Chase City, VA facility. The Chase City facility consists of a brick building with 100,000 square feet (including a 1,750 square foot office) situated on approximately ten acres in Southern Virginia. The facility had approximately 25,000 square feet added to accommodate the consolidation of the Company’s Pawtucket, RI facility, which was closed in May 2002. The facility is equipped with state-of-the-art equipment for the manufacture and packaging of cookie and candy products and employed approximately 176 skilled and unskilled workers during the year ended July 31, 2003. Currently, the labor force at the Chase City facility has been reduced to 68 employees to better meet current biscuit and cookie orders. The facility will be operating at this level through the end of July 31, 2004, at which time the manufacturing operations of hard candy lines will be transferred to the Company’s overseas suppliers. The facility is certified kosher by the Orthodox Union. The Company also has a 73,000 square foot packaging and storage facility located on approximately 15 acres in Keysville, VA. Both the Chase City and Keysville facilities have access to a supply of skilled and unskilled labor. In addition, the Southern Virginia area in which the two plants are located, is readily accessible to common carriers, rail lines and a major seaport (Newport News). Management believes that by limiting its production level to its cookies and biscuits lines in Chase City it is more likely that the Company will return to profitability during the year ending July 31, 2004.
The Company leases approximately 411,000 square feet of improved real estate in Pawtucket and Central Falls, RI at which it assembles holiday gift items, stores inventory (397,000 square feet) and provides office space (14,000 square feet). Both Rhode Island facilities have access to skilled and unskilled labor, and are readily accessible to common carriers, rail lines and a major seaport (Boston). The Company did not exercise its option to extend the term of our leases on its office and assembly facility in Central Falls, Rhode Island and we plan to vacate the location on March 31, 2004. After March 31, 2004, its New Bedford, Massachusetts facility together with a planned West Coast assembly and distribution facility will be utilized to improve our shipping costs and assembly of our products.
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The Company leases approximately 30,000 square feet of improved real estate in New Hyde Park, NY. The property is used for manufacturing candy canes. The location has access to both skilled and unskilled labor, and is readily accessible to common carriers and a major seaport (New York). The current lease expires in March 31, 2004. The Company has requested from the landlord to extend the lease another six months until September 30, 2004 and the Company has the right to choose to extend the lease for an additional five year option on the facility.
In May 2000, the Company entered into a capital lease agreement with the New Bedford Redevelopment Authority to lease a 430,000 square foot building in New Bedford, MA. The facility is used for assembly and storage of components. Under the terms of the lease the Company made an initial payment of $400,000 and paid rent of $25,000 per annum for years one and two and is committed to pay $41,666.66 per annum for years three through twenty. The Company has an option to purchase the building at any time during the lease term for $1,200,000 less any amounts of rental payments made.
The Company currently employs technical and production personnel who have working knowledge of the technical and operational aspects of the Company’s production equipment. The Company also employs personnel to conduct quality control testing at the facilities through on-site laboratory analysis and quality assurance inspections. The inspectors evaluate the Company’s products on the basis of subjective factors such as taste and appearance. The Company monitors the efficiency of the production equipment continuously and its facilities are climate controlled where required.
Marketing, Sales and Advertising
The Company believes that product recognition by retail and wholesale customers, consumers and food brokers is an important factor in the marketing of its products. Accordingly, the Company promotes its products and brand names through the use of promotional materials, including full-color product brochures and newspaper inserts, advertising in trade magazines targeted to the mass merchandisers, vending industry, gourmet trade and gift basket markets, and participation in trade shows. For the year ended July 31, 2003, the Company spent approximately $928,000 on advertising and product promotion. For the years ended July 31, 2002 and 2001 the Company spent approximately $1,127,000 and $980,000, respectively, on advertising and product promotion.
The Company also promotes its products through sales discounts and advertising allowances. Promotional programs are generally used most during the initial introduction of a new product. As distribution of the new product increases, the Company gradually shifts from promotion to direct advertising in order to reinforce trade and consumer repeat purchasing. Management believes that these promotional programs have shortened the time periods necessary to achieve market penetration of its products. The Company intends to continue to develop and implement marketing and advertising programs to increase brand recognition of its products and to emphasize favorable pricing compared to competing products.
Competition
The Company faces significant competition in the marketing and sale of its products. The Company’s products compete for consumer recognition and shelf space with candies, cakes, cookies, chocolates and other food products which have achieved international, national, regional and local brand recognition and consumer loyalty. These products are marketed by companies (which may include the Company’s suppliers) with significantly greater financial, manufacturing, marketing, distribution, personnel and other resources than the Company. Certain of these competitors, such as Hershey Food Corporation, Masterfoods USA (M&M Mars), Inc., Nestle, S.A., and Kraft Foods, dominate the markets for candy and cookie products, and have substantial promotional budgets which enable them to implement extensive advertising campaigns. The food industry is characterized by frequent introductions of new products, accompanied by substantial promotional campaigns. Competitive factors in these markets include brand identity, product quality, taste and price. The Company’s major competitors for holiday gift items and gift baskets are Houston Harvest Co., Smith Enterprises, Inc. and Wonder Treats. The Company’s major competitors for candy canes are Bob’s Candies, Inc, Spangler Candy Company, and Allan Candy Company.
Trademarks
The Company holds United States trademark registrations for the “ELANA,” “RUGER”, “TONGUE TATTOO”, “STRIP-O-POP”, “SMILE POPS” and “demitasse” names, and has filed applications to register for certain other names, including “COWS,” and uses other names for which it has not applied for registration. The Company believes that its rights to these names are a significant part of the Company’s business and that its ability to create demand for its products is
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dependent to a large extent on its ability to exploit these trademarks. The Company’s failure to protect its trademarks and other intellectual property rights could negatively impact the value of its brand names. The Company is currently involved in a legal proceeding involving intellectual property rights. The Company is not aware of any other infringement claims or other challenges to the Company’s rights to use these marks. The Company is applying for the international registration of all its trademarks.
Government Regulation
The Company is subject to extensive regulation by the United States Food and Drug Administration, the United States Department of Agriculture and by other state and local authorities in jurisdictions in which the Company’s products are manufactured or sold. Among other things, such regulations govern the importing, manufacturing, packaging, storing, distribution and labeling of the Company’s products, as well as sanitary conditions and public health and safety. Applicable statutes and regulations governing the Company’s products include “standards of identity” for the content of specific types of products, nutritional labeling and serving size requirements and general “Good Manufacturing Practices” with respect to manufacturing processes. The Company’s manufacturing facilities and manufactured products are subject to periodic inspection by federal, state and local authorities. The Company believes that it is in compliance with all governmental laws and regulations and maintains all permits and licenses required for its operations.
Insurance
The Company maintains product liability insurance with limits of $2,000,000 in the aggregate and $1,000,000 per occurrence (with excess coverage of $10,000,000), which it believes is adequate for the types of products currently offered by the Company.
Employees
As of October 16, 2003, the Company had approximately 547 full-time employees and approximately 520 part-time or seasonal employees. Of the Company’s full-time workforce, 25 are located at the Company’s principal office in Rockville, MD. The Company has approximately 68 full and part-time employees in Virginia, approximately 755 full, part-time and seasonal employees in Rhode Island and Massachusetts and 219 full, part-time and seasonal employees in its New Hyde Park, NY facility. Management believes that the Company’s relationship with its employees is good. The employees at the Asher Candy facility are the Company’s only employees represented by labor unions under a collective bargaining agreement.
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The following table sets forth, with respect to properties leased and owned by the Company at July 31, 2003, the location of the property, the size of the property, the annual rent, and the year in which the lease expires, if applicable, and the business use which the Company makes of such facilities:
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Approximate |
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Square |
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Annual |
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Expiration |
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Address |
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Feet |
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Rent |
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of Lease |
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Business Use |
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Segment |
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Leased Properties: |
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1803 Research
Boulevard Office |
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5,500 |
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$116,000 |
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January 31, 2009 |
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Executive and General |
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— |
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1005 Main Street |
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14,000 |
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$100,893 |
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October 2004 |
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General Office |
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— |
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280 Rand Street |
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397,000 |
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$380,656 |
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March 2004 |
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Assembly facility, Storage And Distribution |
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Purchase Candy, Gift Items |
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1815 Gilford
Avenue |
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30,000 |
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$300,000 |
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March 2004 |
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Manufacturing Plant |
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Manufactured Candy |
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27 Healy Street |
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430,000 |
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$25,000 |
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June 2020 |
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Assembly facility, Storage And Distribution |
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Purchase Candy, Gift Items |
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(Yr 1-2) |
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$41,667 |
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(Yr 3-20) |
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