SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1997
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
0-19263
(Commission File No.)
SUPREMA SPECIALTIES, INC.
(Exact name of registrant as specified in its charter)
New York 11-2662625
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
510 East 35th Street, Paterson, New Jersey 07543
(Address of principal executive offices including zip code)
Registrant's Telephone Number, including area code: (201) 684-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of September 11, 1997 was $12,760,500.
As of September 11, 1997, there were 4,562,800 shares of the registrant's Common
Stock outstanding.
Documents Incorporated by Reference:
Suprema Specialties, Inc.'s definitive Proxy Statement for the annual
meeting of shareholders to be held in November 1997 which will be filed on
or before October 12, 1997 is incorporated by reference into Part III of
this Form 10-K Annual Report.
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PART I
Item 1. Business
General
Suprema Specialties, Inc. and its wholly owned subsidiaries (hereinafter
referred to collectively as the "Company") manufactures, processes and markets a
variety of premium, gourmet natural cheese products, using fine quality imported
and domestic cheeses.
The Company purchases bulk cheeses from foreign sources (primarily from
Europe and to a lesser extent, South America) and domestic sources, and
manufactures bulk cheeses at its facilities in Manteca, California, and
Ogdensburg, New York. Bulk cheese is repackaged and sold to food service
distributors and food manufacturers under the Suprema Di Avellino(R) name or on
a private label basis or is grated or shredded and packaged by the Company and
sold to retail customers under the Suprema Di Avellino(R) name. The Company
packages its products for retail sale in convenient, easy to use, tamper
evident, resealable, clear plastic cups, bags and shakers.
The Company commenced operations in 1983 and currently markets and
distributes its products nationally.
Products
The Company's product line, which it principally markets under the Suprema
Di Avellino(R) brand name, currently consists primarily of grated and shredded
imported and domestic parmesan and romano cheeses, imported pecorino (sheep's
milk) romano cheese (including "lite" versions of these products containing less
fat and fewer calories), bulk mozzarella, ricotta and provolone cheese products.
Its cheese products are natural, containing no preservatives, additives,
sweeteners, dehydrated fillers or artificial flavorings. These cheese products
are often used as cooking ingredients and as flavor enhancements and complements
to other foods, such as pastas, meat sauces, soups and salads.
The Company sells its cheese products to food service industry
distributors, which distribute cheese products to restaurants, hotels and
caterers; food manufacturers; and supermarkets and other retail customers,
including grocery stores, delicatessens and gourmet shops. For the years ended
June 30, 1996 and June 30, 1997, sales of bulk cheese products to food service
industry distributors and food manufacturers under the Suprema Di
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Avellino(R) name or on a private label basis accounted for 43% and 54%,
respectively, of the Company's revenues in each period.
For retail sales, the Company packages a significant portion of its
products in resealable tamper-evident transparent plastic cups and eight ounce
shakers, permitting consumers to reseal the package which the Company believes
maximizes freshness and enhances visual appeal.
The Company also sells certain of its products in shrink-wrapped plastic
packaging and in plastic pillow packs. These packs range in size from one to ten
pounds or can be packaged in customized sizes for food service distributors and
food manufacturers.
Production
The Company has increasingly emphasized the marketing and sale of domestic
Italian variety cheese products manufactured at its Manteca, California facility
and for the past nine months, its Ogdensburg New York facility. For the years
ended June 30, 1996 and June 30, 1997, respectively, sales of mozzarella,
ricotta and provolone cheese products manufactured at such facilities accounted
for approximately 58.9% and 54.7%, respectively, of the Company's revenues. The
Company also processes natural cheese products, which involves shredding,
grating and packaging, at its facility in Paterson, New Jersey. Each of the
three facilities serve as distribution points for various geographic markets
throughout the United States.
The Company's East Coast production facility is located in Paterson, New
Jersey and is equipped with state of the art equipment for grating, shredding
and packaging the Company's products. The Company currently operates this
facility at approximately 63% of full productive capacity.
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The Company employs a Director of Operations at each facility. The
Company's Directors of Operations make preproduction inspections of each
product, and monitor critical manufacturing and processing functions. Random
samples of each product are regularly sent to outside laboratories, which
perform routine physical, chemical and micro-biological tests of products.
Customers
The Company sells its cheese products directly and through distributors to
supermarkets and other retail customers, including grocery stores, delicatessens
and gourmet shops; food service industry distributors, which distribute the
products to, among others, restaurants, hotels and caterers; and food
manufacturers. The Company's products sold to food service industry distributors
and food manufacturers are sold principally in bulk. The Company's supermarket
customers include several regional chain stores, such as King Kullen, Shop-Rite,
Price Costco, BJ's, Foodtown, Stop'N Shop, Safeway, D'Agostino's, Super Valu,
and Giant.
For the fiscal years ended June 30, 1996 and June 30, 1997, sales of cheese
products to retailers accounted for approximately 15% and 10%, respectively, of
the Company's revenues; sales to food service companies accounted for
approximately 73% and 83%, respectively, of the Company's revenues; and sales to
food manufacturers accounted for approximately 12% and 7% respectively, of the
Company's revenues.
For the fiscal year ended June 30, 1997, A&J Cheese Company and Lisanti
Foods of New Jersey accounted for 14% and 10% of the Company's revenues
respectively, and for the fiscal year ended June 30, 1996, Lisanti Foods of New
Jersey and A&J Cheese Company accounted for 13% and 12% of the Company's
revenues respectively.
Marketing, Sales and Advertising
The Company currently employs regional sales representatives to market its
products to retail customers primarily in New York, New England and California,
and one national representative who is responsible for sales of the Company's
products to the food service industry. In addition, the Company engages
independent food brokers throughout the United States for marketing to both
retail and food service customers. Food brokers, who are paid on a commission
basis, and salaried sales representatives, are generally responsible in their
respective geographic markets for identifying customers, soliciting customer
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orders and inspecting merchandise on supermarket shelves. To achieve greater
market penetration, the Company intends to continue to strengthen and expand its
sales force and food broker network. The Company also employs a Senior Vice
President-Sales, who is responsible for managing and coordinating the entire
sales program. This includes making sales presentations to food brokers and
working with regional sales representatives and food brokers in the marketing
and selling of products to, and the maintenance of relationships with, retail
customers.
The Company believes that product recognition by customers, consumers and
food brokers is an important factor in the marketing of the Company's products.
Accordingly, the Company promotes its products and brand name through the use of
promotional materials, including full color product brochures, circulars, free
standing product displays and newspaper inserts. The Company also employs a Vice
President of Market Development in an effort to increase product recognition in
various geographic markets.
The Company generally sells its cheese products pursuant to customer
purchase orders and fills orders within approximately seven days of receipt.
Because orders are filled shortly after receipt, backlog is not material to the
Company's business. Substantially all of the Company's products are delivered to
customers by independent trucking companies.
Suppliers
For the years ended June 30, 1996 and June 30, 1997, approximately 19% and
7%, respectively, of the Company's supply requirements were manufactured by
foreign producers in Europe and South America. Currently, the Company imports
certain of its bulk cheese directly from foreign suppliers and, to a lesser
extent, also purchases through domestic importers. The Company purchases cheese
supplies in large quantities in order to obtain volume discounts and places its
orders for import bulk cheese approximately four to six months in advance of
anticipated production requirements.
The Company is subject to various risks inherent in dependence on foreign
sources of supply, including economic or political instability, shipping delays,
fluctuations in foreign currency exchange rates, custom duties and import quotas
and other trade restrictions, all of which could have a significant impact on
the Company's ability to obtain supplies and deliver finished products on a
timely and competitive basis. Cheese imported from Argentina is currently
subject to United States import quotas and custom duties. There are currently no
quotas or custom duties imposed on pecorino romano cheese imported into the
United States from Italy, although there are quotas and duties imposed on
parmesan cheese imported from Italy.
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The Company also purchases certain of its cheese requirements from domestic
sources. The Company manufactures certain of its cheese requirements primarily
for sale to the food service industry. For the fiscal years ended June 30, 1996
and June 30, 1997, approximately 81% and 93%, respectively, of the Company's
supply requirements were manufactured by the Company or purchased from domestic
sources.
For the fiscal years ended June 30, 1996 and June 30, 1997, the Company's
largest supplier, a milk cooperative, accounted for approximately 33% and 31%,
respectively, of all purchases. The Company does not usually maintain contracts
with its suppliers. The Company believes that there are numerous alternative
sources of supply available to it, including for products currently provided by
its largest supplier.
Trademarks
In September, 1992, the Company registered the name "Suprema Di
Avellino(R)" with the United States Patent and Trademark Office.
Government Regulation
The Company is subject to extensive regulation by the United States Food
and Drug Administration (the "FDA"), the United States Department of
Agriculture, and by other state and local authorities in jurisdictions in which
the Company's products are manufactured, processed or sold, regarding the
importation, manufacturing, processing, packaging, storage, distribution and
labeling of the Company's products. Applicable statutes and regulations
governing cheese products include "standards of identity" for the content of
specific types of cheese; nutritional labeling and serving size requirements;
and general "Good Manufacturing Practices" with respect to production processes.
The Company's manufacturing and processing facilities are subject to compliance
with federal and state regulations regarding work safety and environmental
matters. The Company's manufacturing and processing facilities and products are
subject to periodic inspection by federal, state and local authorities. The
Company believes that it is currently in substantial compliance with all
material governmental laws and regulations and maintains all material permits
and licenses relating to its operations.
Advertising relating to the Company's products is subject to review of the
Federal Trade Commission and state agencies to monitor and prevent unfair or
deceptive trade practices.
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Competition
The Company faces significant competition in the marketing and sales of its
products. The Company's wholesale products compete with other products on the
basis of price, quality and service. The Company's retail products compete for
consumer recognition and shelf space with cheese products which have achieved
significant national, regional and local brand name recognition and consumer
loyalty including such product brands as Kraft, Sorrento, Sargento and Polly-O.
The Company also competes with other importers of foreign cheese and companies
manufacturing substitute cheese products. These products are marketed by
companies with significantly greater financial, manufacturing, marketing,
distribution, personnel and other resources than the Company, thereby permitting
such companies to procure supermarket shelf space and to implement extensive
advertising and promotional programs, both generally and in response to efforts
by additional competitors to enter into new markets. The food industry is also
characterized by the frequent introduction of new products, accompanied by
substantial promotional campaigns. The Company's products are positioned as
premium, gourmet products and, accordingly, are generally higher in price than
certain similar competitive products. The Company believes the principal
competitive factors in the marketing of cheese products are quality, freshness,
price, product recognition, packaging convenience and ease of use.
As is the case with other companies marketing cheese products, the Company
is subject to evolving consumer preferences and nutritional and health-related
concerns. The Company believes that the absence of preservatives, additives,
sweeteners, dehydrated fillers or artificial flavorings increases the
attractiveness of its products to consumers. In addition, the Company has
introduced certain "lite" cheese products containing less fat and fewer
calories. The Company will continue to endeavor to respond to certain consumer
concerns about dairy products, such as the cholesterol, calories, sodium,
lactose and fat content of such products. The Company expects to see increased
competition from other companies whose products or marketing strategies address
these consumer concerns.
Employees
As of September 11, 1997, the Company had 192 full-time employees of which
8 are employed in executive capacities and management positions, 12 are engaged
in sales and marketing and administrative capacities and 172 are engaged in
production and operations. In June, 1997, the employees at the Company's
Manteca, California facility which represents approximately 55% of the total
workforce, elected to form a Union. The Company is currently under negotiations
to formalize a contract with the employees. The Company considers its relations
with its employees to be good. While management is hopeful that these
negotiations will
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be resolved successfully, there can be no assurance that these negotiations will
be successful. The failure to reach an agreement could have a material adverse
affect on the Company.
Item 2. Properties
The Company operates three facilities: manufacturing facilities in Manteca,
California and Ogdensburg, New York and its executive offices and production
facility in Paterson, New Jersey.
The Company's facility in Paterson, New Jersey, consists of an aggregate of
approximately 32,000 square feet and contains the Company's executive offices as
well as production, storage and shipping facilities. This building has been
expanded to include a refrigerated/freezer storage facility. On March 29, 1996,
the Company purchased its Paterson production facility which it previously had
leased. The purchase was financed through a mortgage on the property. Proceeds
of the loan were $1,050,000 of which approximately $686,250 was used to pay the
remaining obligation to the landlord. The five year note bears interest of 8.51%
per annum is being amortized at a fifteen year rate and requires a balloon
payment at the end of year five of approximately $840,000.
The Company's facility in Manteca, California, which consists of an
aggregate of approximately 75,000 square feet and contains a cheese
manufacturing operation, as well as storage and shipping facilities, is occupied
under a net lease which was renewed in December 1994 and expires on August 31,
2005, and which may be extended at the option of the Company for two (2)
additional five-year periods. The basic annual rental (exclusive of insurance
and taxes) is $576,000, subject to adjustment for increases in the Consumer
Price Index during the renewal term. The rent is based on a formula relating to
the Landlord's cost of construction of the additional space.
The Company's facility in Ogdensburg, New York, which consists of an
aggregate of approximately 72,000 square feet and contains a cheese
manufacturing operation, as well as storage and shipping facilities, is occupied
under an operating lease which commenced in August 1996 and expires July 31,
2017. However, at each five year anniversary of the commencement of the lease;
July 31, 2002, July 31, 2007, and July 31, 2012 the Company may elect to
terminate the lease. Minimum monthly base rental is $4,000 plus a fee of $.06
per hundred weight of whole milk sold and delivered; provided that in no event
shall the minimum monthly rent exceed $8,000.
The Company leases, generally with options to purchase, substantially all
of the equipment at these manufacturing and
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processing facilities, subject to lease agreements currently providing for
annual aggregate payments of approximately $2,300,000.
The Company believes that the current facilities are sufficient for its
needs for the foreseeable future.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended June 30, 1997.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock has been traded in the over-the-counter market
and quoted on the NASDAQ System under the symbol "CHEZ" since April 25, 1991. On
March 22, 1993, the Company's stock commenced trading on the NASDAQ National
Market System. The following table sets forth the high and low closing bid
prices of the Company's Common Stock for the periods indicated below. The
following quotes represent inter-dealer quotations without adjustment for retail
markups, markdowns or commissions and may not necessarily represent the prices
of actual transactions.
Common Stock
-------------------
High Low
---- ---
Fiscal Year ending June 30, 1995
First Quarter 2 11/16 2 1/8
Second Quarter 3 3/8 2 3/8
Third Quarter 3 3/4 2 1/2
Fourth Quarter 3 5/8 2 25/32
Fiscal Year ending June 30, 1996
First Quarter 6 2 13/16
Second Quarter 6 1/4 4 1/4
Third Quarter 6 1/8 4 1/4
Fourth Quarter 6 3/4 5 1/8
Fiscal Year ending June 30, 1997
First Quarter 6 1/2 5 1/8
Second Quarter 5 7/8 4 3/8
Third Quarter 5 3/8 3 9/16
Fourth Quarter 4 1/2 3
The closing price of the Common Stock on September 11, 1997 was 3 3/4.
As of September 11, 1997, the number of record holders of the Company's
Common Stock was 92. The Company believes that this number does not include an
estimated 1,000 beneficial owners of the Company's Common Stock who currently
hold such securities in the name of depository institutions.
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In August 1994, the Company completed a private placement of 500,000 shares
of Series A Convertible Preferred Stock at a purchase price of $3.00 per share
with gross proceeds of $1,500,000 and net cash proceeds of approximately
$1,300,000. Each share of Preferred Stock was convertible into one share of
Common Stock. The Preferred Stock bore a cumulative 10% dividend, payable
quarterly. During fiscal year 1996, the Company paid $146,250 of dividends on
the preferred stock. In June 1996 all of the shares of Preferred Stock were
converted into Common Stock.
In June 1996, the Company completed a public offering for 1,500,000 shares
of its common stock of which 1,000,000 shares were issued by the Company and
500,000 shares were offered by selling shareholders upon conversion of 500,000
shares of the Company's convertible preferred stock (see above), at a purchase
price of $5.50 per share. Gross proceeds payable to the Company from the
offering was approximately $5,500,000 and net proceeds to the Company was
approximately $4,481,350. The Company received no proceeds from the shares sold
by selling shareholders. In association with this public offering, the Company
granted to the underwriter an option to purchase an aggregate of 225,000 shares
of the Company's common stock at the price of $5.50 per share to cover
over-allotments. In July, 1996, the underwriter exercised its option. Gross
proceeds payable to the Company from the exercise of the options were
approximately $1,237,500 and net proceeds to the Company was approximately
$1,021,791.
The Company has neither paid nor declared any cash dividends on its shares
of Common Stock. The Board of Directors of the Company does not presently
anticipate that cash dividends will be paid on its shares of Common Stock in the
foreseeable future. In addition, the Company's agreement with its bank prohibits
the payment of cash dividends. The Company anticipates that any funds derived
from operations in the foreseeable future will be required to be devoted to the
development of the Company's business.
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Item 6. Selected Financial Data
The following selected consolidated financial information is derived from,
and should be read in connection with, the consolidated financial statements of
the Company contained elsewhere herein.
Years Ended June 30,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
Earnings Statement
Data:
Net Sales $88,311 $65,104 $52,109 $31,996 $27,399
Earnings before
cumulative
effect of
accounting
change 121 1,409 912 504 621
Net Earnings 121 1,409 912 429 621
Earnings Per
Share before
cumulative
effect of
accounting
change .02 .40 .32 .23 .28
Earnings per .02 .40 .32 .20 .28
share
Weighed Average 5,040 3,195 2,369 2,191 2,213
Common Shares
Outstanding(1)
June 30,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Balance Sheet
Data:
Total Assets $47,043 $41,663 $27,212 $16,746 $12,610
Working Capital 32,546 19,374 11,209 8,384 2,447
Long Term 23,772 18,482 13,310 7,099 1,776
Obligations
(including
capital lease
obligations
Warrants 1,171 1,171 -- -- --
Total 31,754 27,577 19,811 11,600 8,296
Liabilities
Stockholders' 15,289 14,086 7,401 5,146 4,313
Equity
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(1) See Footnote 11 to Notes to Consolidated Financial Statements.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain items reflected in the Company's Statements
of Earnings.
Percentage of Revenues
--------------------------------
Year Year Year
Ended Ended Ended
June 30, June 30, June 30,
1997 1996 1995
------ ------ -----
Net Sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 83.0 78.9 77.4
----- ----- -----
Gross margin ............................. 17.0 21.1 22.6
Selling and shipping
expenses ................................. 10.4 12.5 15.6
General and administrative
expenses ................................. 2.5 2.8 3.7
Interest expense ......................... 2.5 2.8 1.3
Other (Income)/Expense ................... 1.4 (.5) (1.0)
----- ----- -----
Earnings before income
taxes .................................... .2 3.7 3.0
Income taxes ............................. .1 1.5 1.2
----- ----- -----
Net Income ............................... .1 2.2 1.8
===== ===== =====
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996. Revenues for
the fiscal year ended June 30, 1997 were approximately $88,311,000, as compared
to approximately $65,104,000 for the fiscal year ended June 30, 1996, an
increase of approximately $23,207,000, or 35.6%. This increase reflects higher
sales volume for food service products manufactured by the Company.
The Company's gross margin increased by approximately $1,303,000, from
approximately $13,745,000 for the year ended June 30, 1996 to approximately
$15,048,000 for the year ended June 30, 1997, primarily as a result of the
increased sales volume. The Company's gross margin as a percentage of sales
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decreased from 21.1% in the year ended June 30, 1996 to 17.0% in the year ended
June 30, 1997. The decrease in gross margin as a percentage of net sales was due
primarily to higher costs of raw materials during the fiscal year ended June 30,
1997, costs associated with the Ogdensburg New York manufacturing facility and
the shift toward lower margin sales associated with the food service and food
ingredient markets.
Selling and shipping expenses increased by approximately $1,051,000 from
approximately $8,125,000 during the fiscal year ended June 30, 1996 to
approximately $9,176,000 during the fiscal year ended June 30, 1997. The
increase in selling and shipping expenses was primarily due to the unusual
charge associated with the write-off of the marketing service agreements (see
note 5 to the financial statements) of approximately $944,000 as such amounts no
longer need continuing value as a result of declining relevance of these product
lines, partially offset by a decrease in freight expenses due to the Ogdensburg
facility coming on line. As a percentage of sales, selling and shipping expenses
decreased from 12.5% for the fiscal year ended June 30, 1996 to 10.4% for the
fiscal year ended June 30, 1997. This decrease is primarily due to the Company's
increased revenue growth along with a decrease in the Company's freight
expenses, partially offset by the unusual charge associated with the write-off
of the marketing service agreements.
General and administrative ("G&A") expenses increased from approximately
$1,807,000 in fiscal 1996 to approximately $2,181,000 in fiscal 1997, or
$374,000. The increase in general and administrative expenses is primarily due
to an increase in personnel. As a percentage of sales, G&A expenses decreased
from 2.8% in fiscal 1996 to 2.5% in fiscal 1997. This decrease is primarily due
to the Company's increased revenue growth during the fiscal year ended June 30,
1997.
Net interest expense increased to approximately $2,232,000 for the year
ended June 30, 1997 from approximately $1,812,000 for the year ended June 30,
1996. The increase was the result of the Company's expanded borrowing and lease
financing requirements necessary to finance working capital needs and capital
expansion for the Manteca, California and the Ogdensburg, New York manufacturing
facilities.
Other income decreased from approximately $412,000 in fiscal year 1996 to a
loss of approximately $1,259,000 in fiscal year 1997, primarily as a result of
other income associated with the payment in full of the note pertaining to the
licensing agreement during fiscal year 1996 as compared to the loss on the sale
of the Company's assets in association with the sale leaseback transaction the
Company completed during the fourth quarter of fiscal 1997 (see note 4 to the
financial statements) of approximately $1,259,000.
The provision for income taxes for the year ended June
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30, 1997 decreased by approximately $923,000 compared to fiscal year 1996 as a
result of the above.
Net earnings applicable to common stock decreased to approximately $121,000
in fiscal year 1997 from approximately $1,409,000 in fiscal year 1996 due to the
reasons discussed above.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995. Revenues for
the fiscal year ended June 30, 1996 were approximately $65,104,000, as compared
to approximately $52,109,000 for the fiscal year ended June 30, 1995, an
increase of approximately $12,995,000, or 24.9%. This increase reflects higher
sales volume for food service and food ingredient products manufactured by the
Company's Manteca California facility.
The Company's gross margin as a percentage of revenues decreased from 22.6%
in the year ended June 30, 1995 to 21.1% in the year ended June 30, 1996. The
decrease in gross margin as a percentage of revenues was due to higher than
normal costs during the second quarter of fiscal 1996 associated with the
start-up of the mozzarella manufacturing operations in Manteca accompanied by
the continued shift to lower margin sales associated with the food service and
food ingredient markets. Also higher raw material costs during the fourth
quarter of fiscal year 1996, which the Company elected to absorb rather than
pass on to customers, had a negative impact on the gross profit for such period.
Selling and shipping expenses decreased by approximately $8,000 from
approximately $8,133,000 during the fiscal year ended June 30, 1995 to
approximately $8,125,000 during the fiscal year ended June 30, 1996. As a
percentage of revenues, selling and shipping expenses decreased from 15.6% for
the fiscal year ended June 30, 1995 to 12.5% for the fiscal year ended June 30,
1996. This decrease is primarily due to the Company's increased revenue growth
as well as a decrease in commission expenses.
General and administrative ("G&A") expenses decreased from approximately
$1,911,000 in fiscal 1995 to approximately $1,807,000 in fiscal 1996, or
$104,000. As a percentage of sales, G&A expenses decreased from 3.7% in fiscal
1995 to 2.8% in fiscal 1996. This decrease is primarily due to the Company's
increased revenue growth during the fiscal year ended June 30, 1996.
Net interest expense increased to approximately $1,812,000 for the year
ended June 30, 1996 from approximately $690,000 for the year ended June 30,
1995. The increase was the result of the Company's expanded borrowing and lease
financing requirements necessary to finance working capital needs and capital
expansion for the Manteca manufacturing facility.
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Other income decreased from approximately $520,000 in fiscal year 1995 to
approximately $412,000 in fiscal year 1996, primarily as a result of other
income associated with the payment in full of the note pertaining to the
licensing agreement during fiscal year 1996 as compared to an approximate
$378,000 gain on the sale of excess production equipment and deferred income of
approximately $105,000 during fiscal year 1995.
The provision for income taxes for the year ended June 30, 1996 increased
by approximately $371,000 compared to fiscal year 1995 as a result of increased
taxable income.
Net earnings applicable to common stock increased to approximately
$1,263,000 in fiscal year 1996 from approximately $762,000 in fiscal year 1995,
or approximately $501,000. This increase is primarily due to the increase in
gross margin, as a result of increased revenues, and to a lesser extent,
decreases in both selling and shipping charges and general and administrative
expenses, partially offset by increases in net interest expense and a decrease
in other income.
Liquidity and Capital Resources
At June 30, 1997, the Company had working capital of approximately
$32,546,000 as compared with approximately $19,374,000 in June 1996, an increase
of approximately $13,172,000. The increase in working capital is the result of
cash proceeds of $3,700,000 related to the sale-leaseback of the Company's
machinery and equipment, the proceeds from the stock offering of $1,024,000 and
increased borrowings under the line of credit of $7,850,000. The cash was
invested in the increased accounts receivable and inventory levels in support of
the Company's increased sales volume, as well as decreases in accounts payable
and income taxes.
In May, 1997 the Company entered into an agreement with Fleet Capital
Leasing Corporation under which the Company sold to Fleet Capital its interests
in certain production and operating equipment for $9,565,000. Under the
agreement, the Company will lease back the equipment for a period of eight years
under an operating lease. The Company extinguished the existing capital lease
obligations and fees pertaining to the equipment and, as a result, realized net
proceeds to the Company of approximately $3,711,000.
The Company has a bank revolving credit facility that, in January 1997, was
amended and increased the bank's potential commitment to $20,000,000 through
October 1998. The rate of interest on amounts borrowed under the revolving
credit facility is LIBOR plus 200 basis points. The revolving credit loan
agreement expires on October 31, 1998. Advances under this facility are
initially limited to 80% of eligible accounts receivable, 40% of all inventory
except packaging material, as
-15-
<PAGE>
defined in the agreement. The agreement contains restrictive covenants,
including the maintenance of total debt to tangible net worth and debt service
coverage ratios, minimum levels of tangible net worth, and capital expenditure
limitations. As of September 30, 1997, the Company is in compliance with these
covenants. At June 30, 1997, the Company had $15,589,856 outstanding under the
long-term revolving credit facility with approximately $4,010,000 remaining as
available to borrow under the facility.
In June 1996, the Company completed a public offering for 1,500,000 shares
of its $.01 par value common stock of which 1,000,000 shares were issued by the
Company and 500,000 shares were offered by selling shareholders upon conversion
of 500,000 shares of the Company's convertible preferred stock, at a purchase
price of $5.50 per share. Gross proceeds payable to the Company from the
offering was approximately $5,500,000 and net proceeds to the Company was
approximately $4,481,000. The Company received no proceeds from the shares sold
by the selling shareholders. In association with the offering, the Company
granted to the underwriter an option to purchase an aggregate of 225,000 shares
of the Company's common stock at the price of $5.50 per share to cover
over-allotments. In July 1996, the underwriter exercised its option. Gross
proceeds from the issuance were approximately $1,237,500 and net proceeds to the
Company were approximately $1,024,000.
In October 1995, the Company entered into a Loan and Security Agreement
with CoreStates Enterprise Fund (the "Fund"), a division of CoreStates Bank,
N.A. pursuant to which the fund loaned $5,000,000 to the Company. The loan is
secured by a subordinated security interest in substantially all of the assets
of the Company. The loan is subordinated to the loan of the Company's senior
lender, Natwest Bank, N.A. The loan bears interest at 11.75% per annum. The
principal amount of the loan is payable in twelve consecutive quarterly
installments commencing January 1, 1999. In addition, in connection with the
execution and delivery of the Loan and Security agreement, the Company delivered
a Warrant to the fund exercisable for nominal additional consideration, for
354,990 shares of the Company's Common Stock. The warrant is exercisable until
September 30, 2001 and the shares issuable upon exercise of the Warrant are
subject to two demand registration rights on the part of the Fund and piggyback
registration rights. In addition, after October 1, 2000, or upon the occurrence
of certain other events, the Fund has the right to put the Warrant to the
Company on a formula basis. The Warrant was recorded at its relative fair market
value. The corresponding debt discount will be amortized over the life of the
loan on the interest rate method.
-16-
<PAGE>
In March, 1996, the Company purchased its Paterson production facility
which it previously had leased financed by a mortgage from Natwest Bank, N.A.
Proceeds of the loan amounted to $1,050,000, of which $686,000 was used to pay
the Company's remaining obligation to the landlord. The balance of the proceeds
was used to complete the expansion of the Paterson facility to include a
freezer/cooler refrigerated storage facility. The five year note which bears
interest at 8.51% per annum is being amortized at a fifteen year rate with a
balloon payment of approximately $840,000 due on March 29, 2001. At June 30,
1997, the Company had obligations of approximately $1,005,000 under the
mortgage.
The Company typically financed equipment purchases through capital lease
financing transactions. At June 30, 1997, the Company had obligations of
approximately $2,873,000 under capital leases, representing primarily capital
leases entered into in fiscal year 1997. The decrease in capital lease
obligations is due to the extinguished capital lease obligations associated with
the sale leaseback transaction discussed above. The additional capital lease
obligations entered into in fiscal year 1997 is in connection with the expansion
of the Company's Manteca California as well as capital improvements for the
Company's Paterson, New Jersey and Ogdensburg, New York facilities.
Management believes that the Company has adequate working capital to meet
its reasonably foreseeable cash requirements.
Net cash used by operating activities for the year ended June 30, 1997 was
approximately $8,148,000, as compared with approximately $7,287,000 in the prior
year. The use of cash in operations was primarily the result of increases in
inventory, and accounts receivable in support of the Company's increased volume
and decreases in accounts payable and income taxes payable, partially offset by
net earnings as adjusted for non-cash expenses, and decreases in prepaid
expenses and other current assets, other assets and accrued liabilities. The
cash used in operations was financed through cash flow from financing
activities. Net cash used in investing activities for the year ended June 30,
1997 was approximately $2,852,000 as compared with $1,607,000 in the prior year.
This increase is a result of continued expenditures for fixed assets (including
capital equipment utilized in the Company's California and New York
manufacturing facilities). As a result, at June 30, 1997, the Company had cash
of $480,225, as compared to $528,865 for the prior year.
As of September 5, 1997, the Company has made no additional commitments for
capital expenditures.
Foreign Currency
-17-
<PAGE>
The Company is subject to various risks inherent in dependence on foreign
sources of supply, including economic or political instability, shipping delays,
fluctuations in foreign currency exchange rates, custom duties and import quotas
and other trade restrictions, all of which could have a significant impact on
the Company's ability to obtain supplies and deliver finished products on a
timely and competitive basis. The Company has no material hedged monetary
assets, liabilities or commitments denominated in currencies other than the
United States dollar.
Effect of New Accounting Pronouncements
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS 128
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. Basic earnings per share are
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share are computed similarly to fully diluted earnings per share. The standard
is effective for financial statements for periods ending after December 15,
1997, with earlier application not permitted. For the year ended June 30, 1997,
basic earnings per share would have been $.03, under the provisions of SFAS 128
and diluted earnings per share would have been $.02.
In June 1997, SFAS 130, "Reporting Comprehensive Income", and SFAS 131,
"Disclosures about segments of an Enterprise and Related Information," were
issued. SFAS 130 addresses standards for reporting and display of comprehensive
income and its components and SFAS 131 requires disclosure of reportable
operating segments. Both statements are effective for the Company's 1999 fiscal
year. The Company will be reviewing these pronouncements to determine their
applicability to the Company, if any.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data of the Company are included
following Part IV of this report.
Item 9. Changes in and Disclosure with Accountants on
Accounting and Financial Disclosure
None.
-18-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
The information called for by this Item will be reported in the Company's
definitive Proxy Statement for the annual meeting of shareholders to be held in
November 1997 which will be filed on or before October 12, 1997 and is
incorporated herein by reference.
Item 11. Executive Compensation
The information called for by this Item will be reported in the Company's
definitive Proxy Statement for the annual meeting of shareholders to be held in
November 1997 which will be filed on or before October 12, 1997 and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information called for by this Item will be reported in the Company's
definitive Proxy Statement for the annual meeting of shareholders to be held in
November 1997 which will be filed on or before October 12, 1997 and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information called for by this Item will be reported in the Company's
definitive Proxy Statement for the annual meeting of shareholders to be held in
November 1997 which will be filed on or before October 12, 1997 and is
incorporated herein by reference.
-19-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets - June 30, 1997 and 1996 F-2
Consolidated Statements of Earnings -
For the Years Ended June 30, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity -
For the Years Ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows -
For the Years Ended June 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 - F-16
(a) 2. Financial Statement Schedules
Report of Independent Certified Public Accountants on
Supplemental Schedule F-17
Schedule II - Valuation and Qualifying Accounts and
Reserves - For the Years Ended June 30, 1997,
1996 and 1995 F-18
-20-
<PAGE>
(a) 3. Exhibits
3. Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation, as amended*
3.2 By-laws of the Registrant*
Amendment to Certificate of Incorporation.
10. Material Contracts
4.1 Rights Agreement, dated as of March 6, 1996, between the Company
and Continental Stock Transfer & Trust Company**
10.1 Stock Option Plan*
10.2 Lease, Option and Assignment to Purchase the Company's Paterson,
New Jersey facility and amendment thereto.*
10.3 Employment Agreement by and between the Company and Mark
Cocchiola.*
10.4 Employment Agreement by and between the Company and Paul
Lauriero.*
10.11 Revolving Loan, Guaranty and Security Agreement by and among the
Company, Suprema Specialties West, Inc. and National Westminister
Bank NJ dated as of February 15, 1994, as amended****
10.14 Form of Equipment Lease between the Company and BLT Leasing Corp.
dated December 28, 1992.*****
- --------
* Incorporated by reference to the registrant's registration statement on
Form S-18, SEC File No. 33-39076-NY
** Incorporated by reference to the registrant's registration Report on Form
8-K dated March 18, 1996.
*** Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended June 30, 1992.
**** Incorporated by reference to the registrant's Report on Form 10-Q for the
quarter ended December 31, 1995.
***** Incorporated by reference to the registrant's Annual Report on form 10-K
for the year ended June 30, 1994.
-21-
<PAGE>
10.16 Amendment to Lease and Purchase Agreement, dated October 4, 1994
between East 35th Street Associates and the Company.******
10.17 Loan and Security Agreement among CoreStates, Enterprise and the
Company and Suprema Specialties West, Inc. dated October 25,
1995.****
10.18 Lease between Cape Vincent Milk Producers Cooperative, Inc.,
Marble City Bulk Milk Producers Cooperative, Inc., Northern New
York Bulk Milk Producers Cooperative, Inc., Seaway Bulk Milk
Producers Cooperative Inc., and the Company, dated May 21,
1996.***
10.19 Master Equipment Lease Agreement No. 32399 between Fleet Capital
Corporation and Suprema Specialties, Inc. dated May 29, 1997.
21. Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public Accountants
- --------
****** Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended June 30, 1993.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUPREMA SPECIALTIES, INC.
By: /s/ Mark Cocchiola
-------------------------
Mark Cocchiola, President
Dated: September 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Mark Cocchiola September 23, 1997
- -----------------------
Mark Cocchiola,
Chairman of the Board,
President, Chief
Executive Officer and
Director (Principal
Executive Officer)
/s/ Paul Lauriero September 23, 1997
- -----------------------
Paul Lauriero,
Executive Vice President
and Director
/s/ Steven Venechanos September 23, 1997
Steven Venechanos
Chief Financial Officer, and
Secretary
/s/ Marco Cocchiola September 23, 1997
- -----------------------
Marco Cocchiola,
Director
/s/ Rudolph Acosta September 23, 1997
- -----------------------
Rudolph Acosta,
Director
/s/ Paul DeSocio September 23, 1997
- -----------------------
Paul DeSocio,
Director
/s/ William Gascoigne September 23, 1997
- -----------------------
William Gascoigne,
Director
-23-
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Suprema Specialties, Inc. and Subsidiaries
Paterson, New Jersey
We have audited the accompanying consolidated balance sheets of Suprema
Specialties, Inc. and Subsidiaries, as of June 30, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Suprema Specialties,
Inc. and Subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
August 20, 1997
F-1
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
============================================
June 30,
--------------------------
1997 1996
---- ----
ASSETS
Current:
Cash $ 480,225 $ 528,865
Accounts receivable, net of allowances of
$470,290 and $508,290 at June 30, 1997
and 1996, respectively 14,667,008 8,805,801
Inventories 22,462,421 16,901,355
Income taxes receivable 921,243 --
Prepaid expenses and other current assets 679,781 1,954,589
Deferred income taxes 168,348 183,548
----------- -----------
TOTAL CURRENT ASSETS 39,379,026 28,374,158
PROPERTY, PLANT AND EQUIPMENT, net 6,135,082 11,444,496
OTHER ASSETS 1,528,434 1,843,905
----------- -----------
$47,042,542 $41,662,559
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable $ 5,411,478 $ 6,504,476
Current portion of long-term obligations 402,877 1,562,953
Mortgage payable - current 39,875 36,588
Income taxes payable -- 244,413
Accrued expenses and other
current liabilities 805,754 569,502
Deferred income taxes 172,653 82,154
----------- -----------
TOTAL CURRENT LIABILITIES 6,832,637 9,000,086
DEFERRED INCOME TAXES 420,952 522,133
REVOLVING CREDIT LOAN 15,589,856 7,740,000
SUBORDINATED DEBT 4,303,670 4,061,468
LONG-TERM CAPITAL LEASES 2,470,599 4,077,386
MORTGAGE PAYABLE 964,870 1,004,745
----------- -----------
30,582,584 26,405,818
----------- -----------
WARRANTS (subject to mandatory redemption) 1,171,000 1,171,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Redeemable, convertible preferred stock, $.01 par
value, 2,500,000 shares authorized, none issued
and outstanding at June 30, 1997 and 1996 -- --
Common stock, $.01 par value, 10,000,000
shares authorized, 4,562,800 and
4,300,193 shares issued and outstanding at
June 30, 1997 and 1996, respectively 45,628 43,002
Additional paid-in capital 11,243,347 10,163,537
Retained earnings 3,999,983 3,879,202
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,288,958 14,085,741
----------- -----------
$47,042,542 $41,662,559
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
============================================
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 88,311,454 $ 65,103,914 $ 52,109,014
Cost of sales 73,263,129 51,358,460 40,350,333
------------ ------------ ------------
Gross margin 15,048,325 13,745,454 11,758,681
------------ ------------ ------------
Expenses:
Selling and shipping expenses 9,175,567 8,125,052 8,133,382
General and administrative expenses 2,180,576 1,807,275 1,910,899
------------ ------------ ------------
11,356,143 9,932,327 10,044,281
------------ ------------ ------------
Income from operations 3,692,182 3,813,127 1,714,400
Other income (expense):
Interest - net (2,231,820) (1,812,342) (690,026)
Other (1,259,081) 412,500 520,165
------------ ------------ ------------
(3,490,901) (1,399,842) (169,861)
------------ ------------ ------------
Earnings before income taxes 201,281 2,413,285 1,544,539
Income taxes 80,500 1,004,000 633,000
------------ ------------ ------------
Net earnings $ 120,781 $ 1,409,285 $ 911,539
============ ============ ============
Preferred Stock Dividends -- (146,250) (150,000)
Net earnings applicable to common stock 120,781 1,263,035 761,539
Net earnings per share applicable to
common stockholders $ .02 $ .40 $ .32
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING USED
TO COMPUTE NET EARNINGS PER SHARE 5,039,995 3,195,358 2,369,093
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
============================================
<TABLE>
<CAPTION>
Series A
Preferred stock Common stock Additional
----------------------------- ---------------------------- paid-in Retained
Shares Amount Shares Amount capital earnings
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30,
1994 89,468 $ 199,171 2,250,000 $ 22,500,171 $ 3,069,528 $ 1,854,628
Issuance of shares in
satisfaction of
trade payables -- -- 200,000 2,000 582,000 --
Net proceeds from
preferred stock 410,532 909,806 -- -- -- --
Dividends on
preferred stock -- -- -- -- -- (150,000)
Net earnings -- -- -- -- -- 911,539
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30,
1995 500,000 1,108,977 2,450,000 24,500 3,651,528 2,616,167
Issuance of shares on
conversion of
marketing service
agreements -- -- 306,900 3,070 937,114 --
Issuance of shares on
cashless exercise
of warrants -- -- 43,293 432 (432) --
Dividends on
preferred stock -- -- -- -- -- (146,250)
Net proceeds from
shares issued
during public
offering -- -- 1,000,000 10,000 4,471,350 --
Conversion of Series
"A" convertible
preferred stock
into common stock (500,000) (1,108,977) 500,000 5,000 1,103,977 --
Net earnings -- -- -- -- -- 1,409,285
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30,
1996 -- -- 4,300,193 43,002 10,163,537 3,879,202
Net proceeds from
underwriters over
allotment -- -- 225,000 2,250 1,021,791 --
Exercise of stock
options and
warrants -- -- 37,607 376 58,019 --
Net earnings -- -- -- -- -- 120,781
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30,
1997 -- -- 4,562,800 $ 45,628 $ 11,243,347 $ 3,999,983
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 120,781 $ 1,409,285 $ 911,539
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 2,027,080 1,997,949 485,452
Provision for doubtful accounts -- 82,030 680,500
Loss on sale leaseback transaction 1,259,085 -- --
Gain on disposal of property and equipment -- -- (370,608)
Write-off of prepaid commissions/licensing fees 943,863 -- --
Deferred income taxes (199,500) 301,000 (268,000)
Other income -- (412,500) (150,000)
(Increase) decrease in assets:
Accounts receivable (5,861,207) (3,537,008) (1,378,275)
Inventories (5,561,066) (6,548,379) (4,567,988)
Prepaid expenses and other current assets 330,945 124,788 (259,880)
Prepaid income taxes (717,225) -- --
Other assets 609,907 (2,381,571) 43,812
Increase (decrease) in liabilities:
Accounts payable (1,092,998) 1,763,990 2,351,973
Income taxes payable (244,413) (291,319) 276,469
Accrued expenses and other current
liabilities 236,252 204,690 183,198
------------ ------------ ------------
Net cash used in operating activities (8,148,496) (7,287,045) (2,061,808)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- -- 531,679
Payments for purchase of
property and equipment (2,852,287) (1,606,755) (1,070,062)
------------ ------------ ------------
Net cash used in investing activities (2,852,287) (1,606,755) (538,383)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit loan 36,791,000 18,175,000 3,775,000
Repayment of revolving credit loan (28,941,144) (18,135,000) (1,525,000)
Proceeds from subordinated loan -- 5,000,000 --
Proceeds from mortgage -- 1,050,000 --
Proceeds from secondary offering/options 1,082,436 4,481,350 --
Principal payments of mortgage (36,588) (8,667) --
Principal payments of capital leases (6,420,125) (2,125,428) (808,595)
Proceeds from sale-leaseback 9,565,000 -- --
Costs in connection with sale-leaseback (1,088,436) -- --
Proceeds from note receivable -- 637,500 337,500
Payment of preferred dividend -- (146,250) (150,000)
Proceeds from preferred stock -- -- 1,036,600
------------ ------------ ------------
Net cash provided by financing activities 10,952,143 8,928,505 2,665,505
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (48,640) 34,705 65,314
CASH, beginning of period 528,865 494,160 428,846
------------ ------------ ------------
CASH, end of period $ 480,225 $ 528,865 $ 494,160
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized of $340,000 in
1997, $51,996 in 1996 and $253,000 in 1995) $ 2,403,700 $ 1,900,630 $ 744,797
Income taxes 1,233,187 1,019,439 693,817
Noncash investing and financing transactions:
Purchases of property and equipment through
capital leases 3,653,262 2,156,010 4,769,609
Satisfaction of accounts payable through the
issuance of common stock -- -- 584,000
Decrease in prepaid expenses related to place-
ment of preferred stock -- -- 161,685
Decrease in accrued expenses related to place-
ment of preferred stock -- -- 34,338
Issuance of common stock upon conversion of
marketing service agreements -- 940,186 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION
Suprema Specialties, Inc., a New York corporation incorporated on August 15,
1983 and its subsidiaries (the "Company") manufactures, processes and markets a
variety of premium, gourmet natural cheese products.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the financial statements of
Suprema Specialties, Inc. and its wholly-owned subsidiaries, Suprema Specialties
West, Inc. and Suprema Specialties Northeast, Inc. All intercompany transactions
and balances have been eliminated in consolidation.
Inventory
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is being provided
by use of the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of the
term of the lease, including renewal options, or the useful lives of the assets.
Equipment under capitalized leases is being amortized over the useful lives of
the assets.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), was adopted as of July 1, 1996. SFAS 121 standardized the
accounting practices for the recognition and measurement of impairment losses on
certain long-lived assets. (See Note 5)
Product Introduction Costs
Certain product introduction costs, included in prepaid expenses and other
current assets, are capitalized and amortized over the stated program period,
generally ranging from one to twelve months.
Advertising Cost
The Company expenses advertising costs as incurred and cooperative advertising
costs when related revenue is recognized. Advertising costs amounted to
$3,004,028, $3,431,408 and $2,662,000 in 1997, 1996 and 1995, respectively.
Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
F-6
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Options
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." The Company adopted this pronouncement by making the
required pro forma note disclosures only. Therefore, the adoption of SFAS No.
123 did not have an effect on the Company's results of operations or financial
condition.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Risks and Uncertainties
In June, 1997, the employees at the Company's Manteca, California facility of
Suprema Specialties West, Inc. which represent approximately 55% of the total
workforce, elected to form a union. The Company is currently under negotiations
to formalize a contract with the employees. The Company considers its relations
with its employees to be good. While management is hopeful that these
negotiations will be resolved successfully, there can be no assurance that these
negotiations will be successful. The failure to reach an agreement could have a
material adverse affect on the Company.
Effect of New Accounting Pronouncements
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS 128
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. Basic earnings per share are
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share are computed similarly to fully diluted earnings per share. The standard
is effective for financial statements for periods ending after December 15,
1997, with earlier application not permitted. For the year ended June 30, 1997,
basic earnings per share would have been $.03 under the provisions of SFAS 128
and diluted earnings per share would have been $.02.
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," were
issued. SFAS 130 addresses standards for reporting and display of comprehensive
income and its components and SFAS 131 requires disclosure of reportable
operating segments. Both statements are effective for the Company's 1999 fiscal
year. The Company will be reviewing these pronouncements to determine their
applicability, if any, to the Company.
NOTE 3 - INVENTORIES
Inventories consist of the following:
June 30,
---------------------------------
1997 1996
---- ----
Raw materials $ 2,236,541 $ 2,497,204
Finished goods 19,293,624 13,582,636
Packaging 932,256 821,515
----------- -----------
$22,462,421 $16,901,355
=========== ===========
F-7
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30,
-----------------------------
1997 1996
---- ----
Property and plant $ 1,525,705 $ 936,370
Equipment 4,205,016 10,257,875
Leasehold improvements 1,158,797 839,589
Furniture and fixtures 176,687 357,757
Delivery equipment 48,179 48,179
Construction in progress 4,242 1,875,931
----------- -----------
7,118,626 14,315,701
Less: Accumulated depreciation and
amortization 983,544 2,871,205
----------- -----------
$ 6,135,082 $11,444,496
=========== ===========
In May 1997, the Company entered into a sale-leaseback transaction whereby fixed
assets with a net book value of $10,824,082 were sold for $9,565,000 and leased
back under operating leases. In connection with this transaction, $4,847,382 of
capital leases were paid in full. A loss of $2,347,517 resulted from this
transaction. In accordance with FASB 13 and its interpretations a loss of
$1,259,081 was recorded, representing the excess of the net book value of the
related assets over fair market value, which is reflected as other expense. The
balance of $1,088,436 have been included in other assets and will be amortized
over eight years, the life of the lease which is being reflected as an operating
lease.
Included in property, plant and equipment are plant and equipment acquired under
capital leases with an initial cost of $3,087,041 and $9,409,403 and accumulated
amortization of $26,828 and $1,914,210 as of June 30, 1997 and 1996,
respectively.
NOTE 5 - MARKETING SERVICE AGREEMENTS
The Company entered into marketing service agreements with unaffiliated third
parties expiring at various dates through June 1998, pursuant to which the
Company was provided with certain marketing and program support services,
including the payment of advertising promotional expenditures by such parties
(no amounts were provided during 1995 through 1997) in exchange for commissions
based on Company sales of specified products. The Company was required to pay
these commissions without any set-off, notwithstanding any termination of the
agreements. In addition, two of the agreements provided that after an initial
period (as defined in the agreements) under certain conditions, the Company or
the providers of the marketing services have the right to convert some or all of
the remaining estimated commissions to common stock of the Company at the market
price at the time of conversion. Such conversion right was limited to no more
than 10% and 2 1/2%, as specified in each of the agreements, of the Company's
common stock issued and outstanding at the time of the conversion. For the years
ended June 30, 1997, 1996 and 1995, commission expenses related to the marketing
agreements, were approximately $794,000, $598,100 and $743,500, respectively.
On August 14, 1995, two of these providers informed the Company they were
exercising their conversion feature in the agreements. As a result, the Company
issued 306,900 shares of common stock in September 1995. The shares were
recorded at approximate fair value at the date the notice of conversion was
received. The corresponding amount has been reflected in other assets and is
being amortized over the remaining term of the related agreements, as the
applicable sales revenue is recorded.
F-8
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
During fiscal 1994, the Company made payments under the marketing services
agreements leading to a prepaid position of $430,000, which is included in other
current assets. The balance at June 30, 1995 amounted to $622,500. In December
1995, an additional $300,000 was prepaid as final settlement of the remaining
agreements. This amount will be charged to expense over the remaining three
years of the related agreements as the applicable sales revenue is recorded. In
connection with the amendment of two of its Marketing Service Agreements, the
Company granted warrants to purchase 50,000 shares of the Company's common stock
in September 1994. The warrants are exercisable at $3.00 per share and terminate
on June 30, 1998.
During the fourth quarter of fiscal 1997, as a result of a review of the
Company's retail cheese business, it was determined, in accordance with FASB
121, the remaining amounts, $943,863, no longer had continuing value as a result
of declining relevance of these product lines. These amounts have been included
in selling and shipping expenses.
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following:
June 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
Current taxes:
Federal $ 223,000 $ 555,000 $ 698,000
State 57,000 148,000 203,000
----------- ----------- -----------
280,000 703,000 901,000
Deferred taxes (199,500) 301,000 (268,000)
----------- ----------- -----------
$ 80,500 $ 1,004,000 $ 633,000
=========== =========== ===========
The following reconciles income taxes at the U.S. statutory rate to the
provision for income taxes:
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed tax expense at statutory rates $ 68,000 $ 821,000 $ 525,000
State taxes, net of federal tax benefit 10,500 109,000 97,000
Travel and entertainment expenses not
deductible 2,000 67,000 8,000
Officers life insurance not deductible 3,500 7,000 3,000
Other, net (3,500) -- --
----------- ----------- -----------
$ 80,500 $ 1,004,000 $ 633,000
=========== =========== ===========
</TABLE>
Deferred income taxes arise from the difference between book and tax accounting
for depreciation, the write-offs of uncollectible accounts receivable and
product introduction costs.
The net deferred tax liabilities are comprised of the following components as of
June 30, 1997 and 1996:
June 30,
---------------------------
1997 1996
---- ----
Depreciation $ 40,000 $ 522,000
Product introduction costs 118,200 82,000
Deferred sale leaseback costs 435,400 82,000
--------- ---------
593,600 604,000
Accounts receivable reserve (168,300) (183,000)
--------- ---------
$ 425,300 $ 421,000
========= =========
F-9
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 7 - LONG-TERM DEBT
Revolving Credit Loan
In January 1997, the long-term revolving credit facility (the "Facility")
between the Company and a bank was amended to increase the line for up to
$20,000,000 through October 1998. The rate of interest on amounts borrowed under
the Facility is the adjusted LIBOR rate, as defined, plus 2% (7.69% as of June
30, 1997). The Facility is collateralized by all existing and acquired assets of
the Company, as defined in the Facility agreement, and is guaranteed by Suprema
Specialties West, Inc. and Suprema Specialties Northeast, Inc.. In connection
with obtaining the Facility, the Company and Suprema Specialties Northeast, Inc.
has agreed to pay a commitment fee on the average daily unused portion of the
Facility, equal to 1/4 of 1% per annum. Advances under this Facility are limited
to 80% of eligible accounts receivable and 40% of all inventory except packaging
material, as defined in the Facility agreement. The Facility agreement contains
three restrictive financial covenants, including the maintenance of specified
total debt to net worth ratios, minimum levels of tangible net worth, and debt
service coverage ratios, as defined and a restriction on dividends to common
shareholders. As of June 30, 1997, the Company was in compliance with these
covenants.
At June 30, 1997, the Company had approximately $4,010,000 available for
borrowing under the Facility.
Subordinated Debt Facility
In October 1995, the Company entered into a Loan and Security Agreement with
CoreStates Enterprise Fund (the "Fund"), a division of CoreStates Bank, N.A.,
pursuant to which the Fund loaned $5,000,000 to the Company. The loan is secured
by a subordinated security interest in substantially all of the assets of the
Company. The loan is subordinated to the loan of the Company's senior lender.
The loan bears interest at 11 3/4% per annum. The principal amount of the loan
is payable in 12 consecutive quarterly installments commencing September 30,
1998. In addition, in connection with the execution and delivery of the Loan
Agreement, the Company delivered a Warrant to the Fund exercisable for nominal
additional consideration for 354,990 shares of the Company's Common Stock. The
Warrant is exercisable until September 30, 2001 and the shares issuable upon
exercise of the Warrant are subject to two demand registration rights on the
part of the Fund and piggyback registration rights. In addition, after October
1, 2000, or upon the occurrence of certain other rights, the Fund has the right
to put the Warrant to the Company on a formula basis. The Warrant was recorded
at its relative fair value at date of issue, $1,100,000. The corresponding debt
discount will be amortized over the life of the loan on the interest rate
method. At June 30, 1997, the value of the put option was approximately
$1,171,000.
Mortgage Payable
On March 29, 1996, the Company purchased its Paterson production facility which
it previously had leased. The purchase was financed through a mortgage on the
property. Proceeds of the loan were $1,050,000, of which $686,250 was used to
pay the remaining obligation to the landlord. The balance of the proceeds was
used to complete the expansion of a 7,800 square foot refrigerated storage
facility. The five year note which bears interest at 8.51% per annum is being
amortized at a fifteen year rate and requires a balloon payment at the end of
year five of approximately $840,000.
F-10
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 7 - LONG-TERM DEBT (continued)
Principal payments on long-term debt over the next five years are as follows:
1998 $ 39,875
1999 16,466,647
2000 1,714,029
2001 2,540,726
2002 833,324
-----------
Total principal payments 21,594,601
Less: Discount on subordinated debt 696,330
-----------
$20,898,271
===========
The fair value of the long-term debt and capital leases approximates the
recorded value based on borrowing rates currently available for loans with
similar terms and maturities.
NOTE 8 - CAPITAL LEASES
There are various equipment and furniture and fixtures financed under capital
leases. These leases have interest rates ranging from 6.7% to 11.5%. At June 30,
1997, the Company's future minimum lease payments under capital leases are as
follows:
1998 $ 723,350
1999 723,350
2000 719,465
2001 719,465
2002 561,578
Thereafter 622,759
----------
Total minimum lease payments 4,069,967
Less: amount representing interest 1,196,491
----------
Present value of minimum lease payments 2,873,476
Less: current portion 402,877
----------
Long-term portion of capital leases $2,470,599
==========
NOTE 9 - LEASE COMMITMENTS
The Company rents warehouse space and certain equipment under lease arrangements
classified as operating leases including the equipment in the sale-leaseback
transaction. (See Note 4) The lease for the production facilities in Manteca,
California, which was renewed in December 1994 and expires on August 31, 2005
and which may be extended at the option of the Company for two (2) additional
five-year periods. The Company also leases its Ogdensburg facility. The lease is
for 5 years with three 5 year renewals at the Company's option. Rent expense was
$922,447, $731,875 and $362,703 for the years ended June 30, 1997, 1996 and
1995, respectively. Future minimum rental payments under non-cancelable
operating leases are: 1998 - $2,189,364; 1999 - $2,363,837; 2000 - $2,395,561;
2001 - $2,395,560; 2002 - $2,347,560 and thereafter - $6,779,810.
NOTE 10 - STOCKHOLDERS' EQUITY
Stock Issuance
In December 1994, the Company issued 200,000 shares of its $0.01 par value,
common stock to a supplier. The net proceeds from the sale of these shares,
which amounted to $584,000, were used in partial satisfaction of the accounts
payable due to the supplier.
F-11
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 10 - STOCKHOLDERS' EQUITY (continued)
In June 1996, the Company completed a public offering for 1,500,000 shares of
its $.01 par value common stock of which 1,000,000 shares were issued by the
Company and 500,000 shares were offered by selling shareholders upon conversion
of 500,000 shares of the Company's convertible preferred stock at a purchase
price of $5.50 per share. Gross proceeds from the offering was approximately
$4,481,350. The Company received no proceeds from the shares issued during the
offering from those shares offered by the selling shareholders.
In 1996, an additional 225,000 shares of Common Stock were sold pursuant to the
exercise of the underwriters' over-allotment option which generated net proceeds
of approximately $1,024,000.
Issuance of Preferred Stock
In August 1994 the Company completed a private placement of 500,000 shares of
Series A convertible preferred stock (the "Preferred Stock") for gross proceeds
of $1,500,000 or $3.00 per share. Each share of Preferred Stock was convertible
into one share of common stock at any time prior to redemption at a conversion
price of $3.00 per share. Quarterly dividends were payable in cash which
commenced September 30, 1994 at an annual dividend rate of 10% and are
cumulative.
As of June 30, 1994 the Company received gross proceeds from the private
placement of $268,400 on subscriptions for 89,468 shares which was presented as
a component of stockholders' equity in the accompanying financial statements,
net of a proportional amount of related expenses totalling $69,229. The
remaining proceeds amounting to $909,806 for 410,532 shares was received in July
and August 1994 net of related expenses totaling $321,794.
In June 1996, these shares were converted into common stock.
Stock Option Plan
On February 11, 1991, the Company adopted the 1991 Stock Option Plan (the
"Plan") pursuant to which officers, directors and key employees of the Company
are eligible to receive incentive and/or non-qualified stock options. The Plan,
which expires in February 2001, is administered by the board of directors. The
selection of participants, allotment of shares, determination of price and other
conditions of the grant of options is determined by the board at its sole
discretion in order to attract and retain persons instrumental to the success of
the Company. Incentive stock options granted under the Plan vest evenly over the
first three years and are exercisable for a period of up to ten years from the
date of grant at an exercise price which is not less than the fair market value
of the common stock on the date of grant, except that the term of an incentive
stock option granted under the Plan to a shareholder owning more than 10% of the
outstanding common stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the common stock on the date
of the grant.
F-12
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 10 - STOCKHOLDERS' EQUITY (continued)
In November 1995, the Company amended this 1991 Stock Option Plan (the "Plan")
to increase the maximum number of shares as to which options may be granted
under the Plan from 450,000 to 900,000. Stock option transactions under the Plan
are summarized as follows:
1991 Weighted Average
Plan Exercise Price ($)
---- ------------------
Outstanding at June 30, 1994 108,500 $ 3.55
Granted 154,000 $ 3.00
Exercised --
Forfeited (13,500) $ 3.50
-------
Outstanding at June 30, 1995 249,000 $ 3.26
Granted 105,000 $ 4.55
Exercised --
Forfeited (8,000) $ 3.06
-------
Outstanding at June 30, 1996 346,000 $ 3.66
Granted 176,000 $ 3.84
Exercised (13,500) $ 3.08
Forfeited --
-------
Outstanding at June 30, 1997 508,500 $ 3.73
======= ========
Options exercisable at June 30, 1997 213,033 $ 3.51
======= ========
Weighted - average fair value of
options granted during fiscal 1996 105,000 $ 2.38
======= ========
Weighted - average fair value of
options granted during fiscal 1997 176,000 $ 2.08
======= ========
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------------------
Number of Weighted- Weighted- Weighted-
Range of Options Average Average Number Average
Exercise Outstanding Remaining Con- Exercise Exercisable Exercise
Prices ($) at 6/30/97 tractual Life Price ($) at 6/30/96 price ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2.50 to 4.00 388,500 8.0 years 3.45 175,048 3.27
4.00 to 5.63 120,000 8.3 years 4.65 37,985 4.64
- -------------------------------------------------------------------------------------------------------------------------
2.50 to 5.63 508,500 8.1 years 3.73 213,033 3.51
=========================================================================================================================
</TABLE>
F-13
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 10 - STOCKHOLDERS' EQUITY (continued)
The Corporation has adopted the disclosures only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost been recognized for the stock option
plans been determined based on the fair value at the date of grant consistent
with the provisions of SFAS No. 123, the Corporation's net earnings and net
earnings per share would have been reduced to the pro forma amounts indicated
below:
December 31,
--------------------------
1996 1997
---- ----
Net earnings - as reported $1,409,285 $120,781
Net earnings (loss) - pro forma 1,344,770 (25,500)
Net earnings per share - as reported .40 .02
Net earnings per share - pro forma .38 --
The fair market value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants: expected volatility of 35%, risk free interest rate
of 5.9% in 1996 and 6.7% in 1997; expected lives of 10 years; and no dividend
yield.
Warrants
In connection with entering into a consulting agreement with the investment
banker which acted as sales agent for the private placement of Preferred Stock
discussed above, on April 28, 1994 and June 30, 1994, the investment banker was
granted two warrants to purchase 45,000 and 40,000 shares, respectively, of the
Company's $0.01 par value common stock. Each warrant terminates 5 years from its
issue date, and carries a $3.00 exercise price.
As of June 30, 1994 and 1993, a total of 260,000 and 175,000 warrants,
respectively, have been issued to unaffiliated parties at exercise prices
ranging from $3.00 to $5.08 per share. At June 30, 1997, these warrants are
exercisable at prices ranging from $3.00 to $5.08 per share.
As discussed in Notes 5 and 7, in September 1994 and October 1995, the Company
granted warrants to purchase 50,000 and 354,990 shares of common stock
exercisable at $3.00 and $.01 per share through June 30, 1998 and September
2001, respectively.
NOTE 11 - EARNINGS PER SHARE
The earnings per share were computed by dividing the net earnings applicable to
common stockholders by the weighted average number of shares outstanding during
each period. Fully diluted earnings per share computations have not been
disclosed because the effect is antidilutive.
The earnings per share computation for the year ended June 30, 1995 was based
upon 2,250,000 shares outstanding at the beginning of the year, plus 200,000
shares arising from the issuance of common stock in partial satisfaction of a
trade payable and includes the assumed conversion of all outstanding options and
warrants using the treasury stock method.
The earnings per share computation for the year ended June 30, 1996 was based
upon the 2,450,000 shares outstanding at the beginning of the year plus a pro-
ration of the 306,900 shares issued in connection with the conversion of the two
marketing service agreements, a proration of 43,293 shares issued in connection
with the cashless option exercise pertaining to underwriters warrants and a
proration of 1,500,000 shares issued in the Company's secondary public offering.
F-14
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 11 - EARNINGS PER SHARE (continued)
The earnings per share computation for the year ended June 30, 1997 was based
upon 4,300,193 shares outstanding at the beginning of the year, plus a proration
225,000 shares arising from the issuance of common stock issued upon exercise of
the underwriters over allotment option in the Company's secondary public
offering a proration of 37,607 shares issued for exercise of stock options and
includes the assumed conversion of all outstanding options and warrants using
the treasury stock method.
NOTE 12 - OTHER COMMITMENTS
On November 21, 1994, the board of directors of the Company revised and extended
the President and Executive Vice President employment agreement through June 30,
1997. Each agreement provides for an annual salary of $250,000, subject to a
cost of living increase, and an annual bonus equal to 5% of the Company's
pre-tax profits in excess of $650,000. Both of the employment agreements provide
for employment on a full-time basis and contain a provision that the employee
will not compete with the Company during the term of his employment or for a
period of one year following termination by either party for any reason. Both
agreements also provide that if the employee's employment is terminated under
certain circumstances, including a change of control, the employee will be
entitled to receive severance pay equal to the highest of (i) $250,000 ($450,000
in the event of a change of control) or (ii) the total compensation received
from the Company during the one-year period (three-year period in the event of a
change of control) prior to the date of termination. For the years ended June
30, 1996 and 1995, the President and Executive Vice President waived the annual
bonus.
NOTE 13 - CONCENTRATION OF CREDIT RISK
The Company provides credit to customers on an unsecured basis after evaluating
customer credit worthiness. Since the Company sells to a broad range of
customers concentrations of credit risk are very limited. The Company also
provides a reserve for bad debts for accounts receivable where there is a
possibility for loss.
The Company maintains demand deposits with major banks. At June 30, 1997 and
1996, approximately 98% of the Company's cash was held in one major bank.
NOTE 14 - MAJOR CUSTOMERS
During the fiscal year ended June 30, 1997, the Company had sales to two major
customers of $12,125,000 and $9,099,000 representing approximately 14% and 10%
of net sales, respectively.
During the fiscal year ended June 30, 1996, the Company had sales to two major
customers of $8,394,000 and $7,982,000 representing approximately 13% and 12% of
net sales, respectively.
During the fiscal year ended June 30, 1995, the Company had sales to a major
customer of $6,117,000 representing approximately 12% of net sales.
F-15
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the 1997, 1996
and 1995 fiscal years (in thousands of dollars except per share data):
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $ 21,922 $ 22,307 $ 21,786 $ 22,296
Gross profit 3,945 3,724 3,971 3,408
Income from operations 1,053 1,815 1,298 (474)
Net Earnings 308 417 388 (992)
Net earnings per share .06 .08 .08 (.20)
1996
- --------------------------------------------------------------------------------
Net sales 14,899 15,329 16,302 18,574
Gross profit 3,160 3,063 3,662 3,861
Income from operations 678 775 1,123 1,237
Net Earnings 257 431 367 355
Net earnings per share .08 .13 .10 .09
F-16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Suprema Specialties, Inc. and Subsidiaries
Paterson, New Jersey
The audits referred to in our report dated August 20, 1997 relating to the
consolidated financial statements of Suprema Specialties, Inc. and Subsidiaries,
which is contained in Item 8 of this Form 10-K, included the audits of the June
30, 1997, 1996 and 1995 financial statement schedule II Valuation and Qualifying
Accounts and Reserves. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
August 20, 1997
F-17
<PAGE>
Schedule II
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Balance @ Charged to Charged to Balance @
Beginning of Costs and Other Deductions End of
Description Period Expenses (1) Accounts (2) Period
- ------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995
Accounts receivable
allowance $140,500 $680,500 $000,000 $440,710 $380,290
======== ======== ======== ======== ========
YEAR ENDED JUNE 30, 1996
Accounts receivable
allowance 380,290 128,000 -- -- 508,290
======== ======== ======== ======== ========
YEAR ENDED JUNE 30, 1997
Accounts receivable
allowance $508,290 $ -- $ -- $ 38,000 $470,290
======== ======== ======== ======== ========
</TABLE>
(1) To increase accounts receivable allowance.
(2) Uncollectible accounts written off, net of recoveries.
F-18
MASTER EQUIPMENT LEASE AGREEMENT No. 32399
LESSOR: FLEET CAPITAL CORPORATION LESSEE: SUPREMA SPECIALTIES, INC.
a Rhode Island corporation a New York Corporation
Address: 50 Kennedy Plaza Address:510 East 35th Street
Providence, Rhode Island 02903-2305 Paterson, New Jersey 07543
1. LEASE OF EQUIPMENT
Subject to the terms and conditions set forth herein (the "Master Lease")
and in any Lease Schedule incorporating the terms of this Master Lease (each, a
"Lease Schedule"), Lessor agrees to lease to Lessee, and Lessee agrees to lease
from Lessor, the items and units of personal property described in each such
Lease Schedule, together with all replacements, parts, additions, accessories
and substitutions therefor (collectively, the "Equipment"). As used in this
Lease, the term "Item of Equipment" shall mean each functionally integrated and
separately marketable group or unit of Equipment subject to this Lease. Each
Lease Schedule shall constitute a separate, distinct and independent lease of
Equipment and contractual obligation of Lessee. References to "the Lease," "this
Lease" or "any Lease" shall mean and refer to any Lease Schedule which
incorporates the terms of this Master Lease, together with all exhibits,
addenda, schedules, certificates, riders and other documents and instruments
executed and delivered in connection with such Lease Schedule or this Master
Lease, all as the same may be amended or modified from time to time. The
Equipment is to be delivered and installed at the location specified or referred
to in the applicable Lease Schedule. The Equipment shall be deemed to have been
accepted by Lessee for all purposes under this Lease upon Lessor's receipt of an
Acceptance Certificate with respect to such Equipment, executed by Lessee after
receipt of all other documentation required by Lessor with respect to such
Equipment. Lessor shall not be liable or responsible for any failure or delay in
the delivery of the Equipment to Lessee for whatever reason. As used in this
Lease, "Acquisition Cost" shall mean (a) with respect to all Equipment subject
to a Lease Schedule, the amount set forth as the Acquisition Cost in the Lease
Schedule and the Acceptance Certificate applicable to such Equipment; and (b)
with respect to any item of Equipment, the total amount of all vendor or seller
invoices (including Lessee invoices, if any) for such item of Equipment,
together with all acquisition fees and costs of delivery, installation, testing
and related services, accessories, supplies or attachments procured or financed
by Lessor from vendors or suppliers thereof (including items provided by Lessee)
relating or allocable to such item of Equipment ("Related Expenses"). As used in
this Lease with respect to any Equipment, the terms "Acceptance Date," "Rental
Payment(s)," "Rental Payment Date(s)," "Rental Payment Numbers," "Rental Payment
Commencement Date," "Lease Term" and "Lease Term Commencement Date" shall have
the meanings and values assigned to them in the Lease Schedule and the
Acceptance Certificate applicable to such Equipment.
2. TERM AND RENT
The Lease Term for any Equipment shall be as specified in the applicable
Lease Schedule. Rental Payments shall be in the amounts and shall be due and
payable as set forth in the applicable Lease Schedule. Lessee shall, in
addition, pay interim rent to Lessor on a pro-rata, per-diem basis from the
Acceptance Date to the Lease Term Commencement Date set forth in the applicable
Acceptance Certificate, payable on such Lease Term Commencement Date. If any
rent or other amount payable hereunder shall not be paid within 10 days of the
date when due, Lessee shall pay as an administrative and late charge an amount
equal to 3% of the amount of any such overdue payment. In addition, Lessee shall
pay overdue interest on any delinquent payment or other amounts due under the
Lease (by reason of acceleration or otherwise) from 30 days after the due date
until paid at the rate of 1 1/2% per month or the maximum amount permitted by
applicable law, whichever is lower. All payments to be made to Lessor shall be
made to Lessor in immediately available funds at the address shown above, or at
such other place as Lessor shall specify in writing. THIS IS A NON-CANCELABLE,
NON-TERMINABLE LEASE OF EQUIPMENT FOR THE ENTIRE LEASE TERM PROVIDED IN EACH
LEASE SCHEDULE HERETO.
3. POSSESSION; PERSONAL PROPERTY
No right, title or interest in the Equipment shall pass to Lessee other
than the right to maintain possession and use of the Equipment for the Lease
Term (provided no Event of Default has occurred and is continuing) free from
interference by any person claiming by, through, or under Lessor. The Equipment
shall always remain personal property even though the Equipment may hereafter
become attached or affixed to real property. Lessee agrees to give and record
such notices and to take such other action at its own expense as may be
necessary to prevent any third party (other than an assignee of Lessor) from
acquiring or having the right under any circumstances to acquire any interest in
the Equipment or this Lease.
4. DISCLAIMER OF WARRANTIES
LESSOR IS NOT THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT, NOR THE AGENT
THEREOF, AND MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES AS TO ANY
MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION, THE MERCHANTABILITY OF THE
EQUIPMENT, ITS FITNESS FOR A PARTICULAR PURPOSE, ITS DESIGN OR CONDITION, ITS
CAPACITY OR DURABILITY, THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN THE
MANUFACTURE OR ASSEMBLY OF THE EQUIPMENT, OR THE CONFORMITY OF THE EQUIPMENT TO
THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR
PATENT INFRINGEMENTS, AND LESSOR HEREBY DISCLAIMS ANY SUCH WARRANTY. LESSOR IS
NOT RESPONSIBLE FOR ANY REPAIRS OR SERVICE TO THE EQUIPMENT, DEFECTS THEREIN OR
FAILURES IN THE OPERATION THEREOF. Lessee has made the selection of each item of
Equipment and the manufacturer and/or supplier thereof based on its own judgment
and expressly disclaims any reliance upon any statements or representations made
by Lessor.
If the Equipment is not delivered, is not properly installed, does not
operate as warranted, becomes obsolete, or is unsatisfactory for any reason
whatsoever, Lessee shall make all claims on account thereof solely against the
manufacturer or supplier and not against Lessor, and Lessee shall nevertheless
pay all rentals and other sums payable hereunder. Lessee acknowledges that
neither the manufacturer or supplier of the Equipment, nor any sales
representative or agent thereof, is an agent of Lessor, and no agreement or
representation as to the Equipment or any other matter by any such sales
representative or agent of the manufacturer or supplier shall in any way affect
Lessee's obligations hereunder.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee represents and warrants to and covenants with Lessor that:
(a) Lessee has the form of business organization indicated above and is
duly organized and existing in good standing under the laws of the state listed
in the caption of this Master Lease and is duly qualified to do business
wherever necessary to carry on its present business and operations and to own
its property; (b) this Lease has been duly authorized by all necessary action on
the part of Lessee consistent with its form of organization, does not require
any further shareholder or partner approval, does not require the approval of,
or the giving notice to, any federal, state, local or foreign governmental
authority and does not contravene any law binding on Lessee or contravene any
certificate or articles of incorporation or by-
<PAGE>
laws or partnership certificate or agreement, or any agreement, indenture, or
other instrument to which Lessee is a party or by which it may be bound; (c)
this Lease has been duly executed and delivered by authorized officers or
partners of Lessee and constitutes a legal, valid and binding obligation of
Lessee enforceable in accordance with its terms; (d) Lessee has not and will
not, directly or indirectly, create, incur or permit to exist any superior lien,
encumbrance, mortgage, pledge, attachment or security interest on or with
respect to the Equipment or this Lease (except those of persons claiming by,
through or under Lessor); (e) the Equipment will be used solely in the conduct
of Lessee's business and will remain in the location shown on the applicable
Lease Schedule unless Lessor otherwise agrees in writing and Lessee has
completed all notifications, filings, recordings and other actions in such new
location as Lessor may reasonably request to protect Lessor's interest in the
Equipment; (f) there are no pending or threatened actions or proceedings before
any court or administrative agency which materially adversely affect Lessee's
financial condition or operations, and all credit, financial and other
information provided by Lessee or at Lessee's direction is, and all such
information hereafter furnished will be, true, correct and complete in all
material respects; and (g) Lessor has not selected, manufactured or supplied the
Equipment to Lessee and has acquired any Equipment subject hereto solely in
connection with this Lease and Lessee has received and approved the terms of any
purchase order or agreement with respect to the Equipment.
6. INDEMNITY
Lessee assumes the risk of liability for, and hereby agrees to indemnify
and hold safe and harmless, and covenants to defend, Lessor, its employees,
servants and agents from and against: (a) any and all liabilities, losses,
damages, claims and expenses (including legal expenses of every kind and nature)
arising out of the manufacture, purchase, shipment and delivery of the Equipment
to Lessee, acceptance or rejection, ownership, titling, registration, leasing,
possession, operation, use, return or other disposition of the Equipment,
including, without limitation, any liabilities that may arise from patent or
latent defects in the Equipment (whether or not discoverable by Lessee), any
claims based on absolute tort liability or warranty and any claims based on
patent, trademark or copyright infringement; (b) any and all loss or damage of
or to the Equipment; and (c) any obligation or liability to the manufacturer or
any supplier of the Equipment arising under any purchase orders issued by or
assigned to Lessor.
7. TAXES AND OTHER CHARGES
Lessee agrees to comply with all laws, regulations and governmental orders
related to this Lease and to the Equipment and its use or possession, and to pay
when due, and to defend and indemnify Lessor against liability for all license
fees, assessments, and sales, use, property, excise, privilege and other taxes
(including any related interest or penalties) or other charges or fees now or
hereafter imposed by any governmental body or agency upon any Equipment, or with
respect to the manufacturing, ordering, shipment, purchase, ownership, delivery,
installation, leasing, operation, possession, use, return, or other disposition
thereof or the rentals hereunder (other than taxes on or measured solely by the
net income of Lessor). Any fees, taxes or other lawful charges paid by Lessor
upon failure of Lessee to make such payments shall at Lessor's option become
immediately due from Lessee to Lessor.
If any Lease Schedule is denominated as a "True Lease Schedule," then, with
respect to the Equipment set forth on such True Lease Schedule, Lessee hereby
covenants and agrees that Lessor shall be entitled to the following tax benefits
(the "Tax Benefits"), Lessor will be entitled to cost recovery deductions under
Section 168 of the Internal Revenue Code of 1986, as amended (the "Code"), using
a 200% declining balance method of depreciation switching to the straight line
method for the first taxable year for which such method will yield larger
depreciation deductions, and assuming a half-year convention and zero salvage
value, for the applicable recovery period for such Equipment as set forth in the
True Lease Schedule with respect to such Equipment. Lessee further acknowledges
and agrees that Lessor has entered into such True Lease Schedule on the
assumption that Lessor will be taxed throughout the Lease Term of the True Lease
Schedule at Lessor's federal corporate income tax rate existing on the date of
such Lease Schedule (the "Assumed Tax Rate"). If, because of (i) the occurrence
of an Event of Default under the lease; or (ii) any act or omission of Lessee,
there shall be a loss, disallowance, recapture or delay in claiming all or any
portion of the Tax Benefits with respect to the Equipment, or there shall be
included in Lessor's gross income for Federal, state or local income tax
purposes any amount on account of any addition, modification or improvement to
or in respect of any of the Equipment made or paid for by Lessee (any loss,
disallowance, recapture, delay or inclusion being herein called a "Tax Loss"),
then thirty (30) days after written notice to Lessee by Lessor that a Tax Loss
has occurred, Lessee shall pay Lessor a lump sum amount which, after deduction
of all taxes required to be paid by Lessor with respect to the receipt of such
amount, will provide Lessor with an amount necessary to maintain Lessor's
after-tax economic yield and overall net after-tax cash flows at least at the
same level that would have been available if such Tax Loss had not occurred,
plus any interest, penalties or additions to tax which may be imposed in
connection with such Tax Loss. In lieu of paying such Tax Loss in a lump sum,
upon Lessee's request, and provided the Lease has not been terminated, such Tax
Loss shall be paid in equal periodic payments over the applicable remaining
Lease Term with respect to such Equipment with each Rental Payment due and
payable with respect to such Equipment. A Tax Loss shall conclusively be deemed
to have occurred if a deficiency shall have been proposed by the Internal
Revenue Service or other taxing authority having jurisdiction, and paid by
Lessor. The foregoing indemnities and covenants set forth in Sections 6 and 7 of
this Master Lease shall continue in full force and effect and shall survive the
expiration or earlier termination of the Lease.
8. DEFAULT
Lessee shall be in default of this Lease upon the occurrence of any one or
more of the following events (each an "Event of Default"):
(a) Lessee shall fail to make any payment, of rent or otherwise, under any
Lease within 10 days of the date when due; or (b) Lessee shall fail to obtain or
maintain any of the insurance required under any Lease; or (c) Lessee shall fail
to perform or observe any covenant, condition or agreement under any Lease, and
such failure continued for 30 days after notice thereof to Lessee; or (d) Lessee
shall default in the payment or performance of any indebtedness or obligation to
Lessor or any affiliated person, firm or entity controlling, controlled by or
under common control with Lessor, under any loan, note, security agreement,
lease, guaranty, title retention or conditional sales agreement or any other
instrument or agreement evidencing such indebtedness with Lessor or such other
affiliated person, firm or entity affiliated with Lessor; or (e) any
representation or warranty made by Lessee herein or in any certificate,
agreement, statement or document hereto or hereafter furnished to Lessor in
connection herewith, including without limitation, any financial information
disclosed to Lessor, shall prove to be false or incorrect in any material
respect; or (f) death or judicial declaration of incompetence of Lessee, if an
individual; the commencement of any bankruptcy, insolvency, arrangement,
reorganization, receivership, liquidation or other similar proceeding by or
against Lessee or any of its properties or businesses, which proceedings are not
dismissed within 90 days, or the appointment of a trustee, receiver, liquidator
or custodian for Lessee or any of its properties of business, or if Lessee
suffers the entry of an order for relief under Title 11 of the United States
Code; or the making by Lessee of a general assignment or deed of trust for the
benefit of creditors, or (g) Lessee shall default in any payment or other
obligation to any third party in excess of $250,000.00 and any applicable grace
or cure period with respect thereto has expired; or (h) Lessee shall terminate
its existence by merger, consolidation, sale of substantially all of its assets
or otherwise; or (i) Lessor shall determine, in its sole discretion and in good
faith, that there has been a material adverse change in the financial condition
of the Lessee since the date of this Lease, or that Lessee's ability to make any
payment hereunder promptly when due or otherwise comply with the terms of this
Lease or any other agreement between Lessor and Lessee is impaired; or (j) any
event or condition set forth in subsections (b) through (i) of this Section 8
shall occur with respect to any guarantor responsible, in whole or in part, for
payment or performance of this Lease; or (k) any event or condition set forth in
subsections (d) through (h) shall occur with respect to any successors or
assigns of Lessee. Lessee shall promptly notify Lessor of the occurrence of any
Event of Default or the occurrence or existence of any event or condition which,
upon the giving of notice of lapse of time, or both, may become an Event of
Default.
9. REMEDIES; MANDATORY PREPAYMENT.
Upon the occurrence of any Event of Default, Lessor may, at its sole option
and discretion, exercise one or more of the following remedies with respect to
any or all of the Equipment: (a) cause Lessee to promptly return, at Lessee's
expense, any or all Equipment to such location as Lessor may designate in
accordance with the terms of Section 18 of this Master Lease, or Lessor, at its
option, may enter upon the premises where the Equipment is located and take
immediate possession of and remove the same by summary proceedings or otherwise,
all without liability to Lessor for or by reason of damage to property or such
entry or taking possession except for Lessor's negligence or willful misconduct;
(b) sell any or all Equipment at public or private sale or otherwise dispose of,
hold, use, operate, lease to others or keep idle the Equipment, all as Lessor in
its sole discretion may determine and all free and clear of any rights of
Lessee; (c) remedy such default, including making repairs or modifications to
the
2
<PAGE>
Equipment, for the account and expense of Lessee, and Lessee agrees to reimburse
Lessor for all of Lessor's reasonable costs and expenses actually incurred in
connection with making such repairs; (d) by written notice to Lessee, terminate
the Lease with respect to any or all Lease Schedules and the Equipment subject
thereto, as such notice shall specify, and, with respect to such terminated
Lease Schedules and Equipment, declare immediately due and payable and recover
from Lessee, as liquidated damages for loss of Lessor's bargain and not as a
penalty, an amount equal to the Stipulated Loss Value, calculated as of the next
following Rental Payment Date; (e) apply any deposit or other cash collateral or
sale or remarketing proceeds of the Equipment at any time to reduce any amounts
due to Lessor, and (f) exercise any other right or remedy which may be available
to Lessor under applicable law, or proceed by appropriate court action to
enforce the terms hereof or to recover damages for the breach hereof, including
reasonable attorneys' fees and court costs. Notwithstanding the foregoing,
provided all amounts due hereunder have been paid by Lessee, Lessor may sell the
Equipment on an AS IS BASIS to the highest bidder and refund the proceeds of
such sale to Lessee up to the full Stipulated Loss Value. Notice of Lessor's
intention to accelerate, notice of acceleration, notice of nonpayment,
presentment, protest, notice of dishonor, or any other notice whatsoever are
hereby waived by Lessee and any endorser, guarantor, surety or other party
liable in any capacity for any of the Lessee's obligations under or in respect
of the Lease. No remedy referred to in this Section 9 shall be exclusive, but
each shall be cumulative and in addition to any other remedy referred to above
or otherwise available to Lessor at law or in equity.
The exercise or pursuit by Lessor of any one or more of such remedies shall
not preclude the simultaneous or later exercise or pursuit by Lessor of any or
all such other remedies, and all remedies hereunder shall survive termination of
this Lease. At any sale of the Equipment pursuant to this Section 9, Lessor may
bid for the Equipment. Notice required, if any, of any sale or other disposition
hereunder by Lessor shall be satisfied by the mailing of such notice to Lessee
at least seven (7) days prior to such sale or other disposition. In the event
Lessor takes possession and disposes of the Equipment, the proceeds of any such
disposition shall be applied in the following order: (1) to all of Lessor's
costs, charges and expenses incurred in taking, removing, holding, repairing and
selling or leasing the Equipment; (2) to the extent not previously paid by
Lessee, to pay Lessor for any damages then remaining unpaid hereunder; (3) to
reimburse Lessee for any sums previously paid by Lessee as damages hereunder;
and (4) the balance, if any, shall be retained by Lessor. A termination shall
occur only upon written notice by Lessor and only with respect to such Equipment
as Lessor shall specify in such notice. Termination under this Section 9 shall
not affect Lessee's duty to perform Lessee's obligations hereunder to Lessor in
full. Lessee agrees to reimburse Lessor on demand for any and all costs and
expenses incurred by Lessor in enforcing its rights and remedies hereunder
following the occurrence of an Event of Default, including, without limitation,
reasonable attorney's fees, and the costs of repossession, storage, insuring,
reletting, selling and disposing of any and all Equipment.
The term "Stipulated Loss Value" with respect to any item of Equipment
shall mean the Stipulated Loss Value as set forth in any Schedule of Stipulated
Loss Values attached to and made a part of the applicable Lease Schedule. If
there is no such Schedule of Stipulated Loss Values, then the Stipulated Loss
Value with respect to any item of Equipment on any Rental Payment Date during
the Lease Term shall be an amount equal to the sum of: (a) all Rental Payments
and other amounts then due and owing to Lessor under the Lease, together with
all accrued interest and late charges thereon calculated through and including
the date of payment; plus (b) the net present value of: (i) all Rental Payments
then remaining unpaid for the Lease Term, plus (ii) the amount of any purchase
obligation with respect to such item of Equipment or, if there is no such
obligation, then the fair market value of such item of Equipment at the end of
the Lease Term, as estimated by Lessor in its sole discretion (accounting for
the amount of any unpaid Related Expenses for such item of Equipment and, with
respect to any such item of Equipment that has been attached to or installed on
or in any other property leased or owned by Lessee, such value shall be
determined on an installed basis, in place and in use), all discounted to net
present value at a discount rate equal to the 1-year Treasury Constant Maturity
rate as published in the Selected Interest Rates table of the Federal Reserve
statistical release H.15(519) for the week ending immediately prior to the
original Acceptance Date for such Equipment.
Lessee is or may become indebted under or in respect of one or more leases,
loans, notes, credit agreements, reimbursement agreements, security agreements,
title retention or conditional sales agreements, or other documents, instruments
or agreements, whether now existing or hereafter arising, evidencing Lessee's
obligations for the payment of borrowed money or other financial accommodations
("Obligations") owing to FCC, or to one or more affiliated persons, firms or
entities controlling, controlled by or under common control with Lessor
("Affiliates"). If Lessee pays or prepays all or substantially all of its
Obligations owing to any Affiliate, and Lessee shall be in default in the
payment or performance of such Obligations (whether or not such default has been
declared), then Lessee shall pay, at Lessor's option and immediately upon notice
from Lessor, all or any part of Lessee's Obligations owing to Lessor, including
but not limited to Lessee's payment of Stipulated Loss Value for all or any
Lease Schedules as set forth in such notice from Lessor.
10. ADDITIONAL SECURITY
For so long as any obligations of Lessee shall remain outstanding under any
Lease, Lessee hereby grants to Lessor a security interest in all of Lessee's
rights in and to Equipment subject to such Lease from time to time, to secure
the prompt payment and performance when due (by reason of acceleration or
otherwise) of each and every indebtedness, obligation or liability of Lessee, or
any affiliated person, firm, or entity controlling, controlled by, or under
common control with Lessee, owing to Lessor, whether now existing or hereafter
arising, of such obligations under or in respect of any Lease. The extent to
which Lessor shall have a purchase money security interest in any item of
Equipment under a Lease which is deemed to create a security interest under
Section 1-201(37) of the Uniform Commercial Code shall be determined by
reference to the Acquisition Cost of such item financed by Lessor. In order more
fully to secure its rental payments and all other obligations to Lessor
hereunder, Lessee hereby grants to Lessor a security interest in any deposit of
Lessee to Lessor under Section 3(d) of any Lease Schedule hereto. Such security
deposit shall not bear interest, may be commingled with other funds of Lessor
and shall be immediately restored by Lessee if applied under Section 9. Upon
expiration of the term of this Lease and satisfaction of all of Lessee's
obligations, the security deposit shall be returned to Lessee. The term "Lessor"
as used in this Section 10 shall include any affiliated person, firm or entity
controlling, controlled by or under common control with Lessor.
11. NOTICES
Any notices or demands required or permitted to be given under this Lease
shall be given in writing and by regular mail and shall become effective when
deposited in the United States mail with postage prepaid to Lessor to the
attention of Customer Accounts, and to Lessee at the address set forth above, or
to such other address as the party to receive notice hereafter designates by
such written notice.
12. USE; MAINTENANCE; INSPECTION; LOSS AND DAMAGE
During the Lease Term for each item of Equipment, Lessee shall, unless
Lessor shall otherwise consent in writing: (a) permit each item of Equipment to
be used only within the continental United States by qualified personnel solely
for business purposes and the purpose for which it was designed and shall, at
its sole expense, service, repair, overhaul and maintain each item of Equipment
in the same condition as when received, ordinary wear and tear excepted, in good
operating order, consistent with prudent industry practice (but, in no event
less than the same extent to which Lessee maintains other similar equipment in
the prudent management of its assets and properties) and in compliance with all
applicable laws, ordinances, regulations, and conditions of all insurance
policies required to be maintained by Lessee under the Lease and all manuals,
orders, recommendations, instructions and other written requirements as to the
repair and maintenance of such item of Equipment issued at any time by the
vendor and/or manufacturer thereof; (b) maintain conspicuously on any Equipment
such labels, plates, decals or other markings as Lessor may reasonably require,
stating that Lessor is owner of such Equipment; (c) furnish to Lessor such
information concerning the condition, location, use and operation of the
Equipment as Lessor may request; (d) permit any person designated by Lessor to
visit and inspect any Equipment and any records maintained in connection
therewith, provided, however, that the failure of Lessor to inspect the
Equipment or to inform Lessee of any noncompliance shall not relieve Lessee of
any of its obligations hereunder; (e) if any Equipment does not comply with the
requirements of this Lease, Lessee shall, within 30 days of written notice from
Lessor, bring such Equipment into compliance; (f) not use any Equipment, nor
allow the same to be used, for any unlawful purpose, nor in connection with any
property or material that would subject the Lessor to any liability under any
state or federal statute or regulation pertaining to the production, transport,
storage, disposal or discharge of hazardous or toxic waste or materials; and (g)
make no additions, alterations, modifications or improvements (collectively,
"Improvements") to any item of Equipment that are not readily removable without
causing material damage to such item of Equipment or which will cause the value,
utility or useful life of such item of Equipment to materially decline. If any
such Improvement is made and cannot be removed without causing material damage
or decline in value, utility or useful life (a "Non-Severable Improvement"),
then Lessee warrants that such Non-Severable Improvement shall immediately
become Lessor's property upon being installed and shall be free and clear of all
liens and encumbrances and shall become Equipment subject to all of the terms
and
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<PAGE>
conditions of the Lease. All such Improvements that are not Non-Severable
Improvements shall be removed by Lessee prior to the return of the item of
Equipment hereunder or such Improvements shall also become the sole and absolute
property of Lessor without any further payment by Lessor to Lessee and shall be
free and clear of all liens and encumbrances whatsoever. Lessee shall repair all
damage to any item of Equipment caused by the removal of any Improvement so as
to restore such item of Equipment to the same condition which existed prior to
its installation and as required by this Lease.
Lessee hereby assumes all risk of loss, damage or destruction for whatever
reason to the Equipment from and after the earlier of the date (i) on which the
Equipment is ordered or (ii) Lessor pays the purchase price of the Equipment,
and continuing until the Equipment has been returned to, and accepted by, Lessor
in the condition required by Section 18 hereof upon the expiration of the Lease
Term. If during the Lease Term all or any portion of an item of Equipment shall
become lost, stolen, destroyed, damaged beyond repair or rendered permanently
unfit for use for any reason, or in the event of any condemnation, confiscation,
theft or seizure or requisition of title to or use of such item, Lessee shall
immediately pay to Lessor an amount equal to the Stipulated Loss Value of such
item of Equipment, as of the next following Rental Payment Date.
13. INSURANCE
Lessee shall procure and maintain insurance in such amounts and upon such
terms and with such companies as Lessor may approve, during the entire Lease
Term and until the Equipment has been returned to, and accepted by, Lessor in
the condition required by Section 18 hereof, at Lessee's expense, provided that
in no event shall such insurance be less than the following coverages and
amounts: (a) Worker's Compensation and Employer's Liability Insurance, in the
full statutory amounts provided by law; (b) Comprehensive General Liability
Insurance including product/completed operations and contractual liability
coverage, with minimum limits of $1,000,000 each occurrence, and Combined Single
Limit Body Injury and Property Damage, $1,000,000 aggregate, where applicable;
and (c) All Risk Physical Damage Insurance, including flood, on each item of
Equipment, in an amount not less than the greater of the Stipulated Loss Value
of the Equipment or (if available) its full replacement value. Lessor will be
included as an additional insured and loss payee as its interest may appear.
Such policies shall be endorsed to provide that the coverage afforded to Lessor
shall not be rescinded, impaired or invalidated by any act or neglect of Lessee.
Lessee agrees to waive Lessee's right and its insurance carrier's rights of
subrogation against Lessor for any and all loss or damage.
In addition to the foregoing minimum insurance coverage, Lessee shall
procure and maintain such other insurance coverage as Lessor may reasonably
require from time to time during the Lease Term. All policies shall be endorsed
or contain a clause requiring the insurer to furnish Lessor with at least 30
days' prior written notice of any material change, cancellation or non-renewal
of coverage. Upon execution of this Lease, Lessee shall furnish Lessor with a
certificate of insurance or other evidence satisfactory to Lessor that such
insurance coverage is in effect, provided, however, that Lessor shall be under
no duty either to ascertain the existence of or to examine such insurance
coverage or to advise Lessee in the event such insurance coverage should not
comply with the requirements hereof. In case of failure of Lessee to procure or
maintain insurance, Lessor may at its option obtain such insurance, the cost of
which will be paid by the Lessee as additional rentals. Lessee hereby
irrevocably appoints Lessor as Lessee's attorney-in-fact to file, settle or
adjust, and receive payment of claims under any such insurance policy and to
endorse Lessee's name on any checks, drafts or other instruments on payment of
such claims. Lessee further agrees to give Lessor prompt notice of any damage to
or loss of, the Equipment, or any part thereof.
14. LIMITATION OF LIABILITY
Lessor shall have no liability in connection with or arising out of the
ownership, leasing, furnishing, performance or use of the Equipment or any
special, indirect, incidental or consequential damages of any character,
including, without limitation, loss of use of production facilities or
equipment, loss of profits, property damage or lost production, whether suffered
by Lessee or any third party.
15. FURTHER ASSURANCES
Lessee shall promptly execute and deliver to Lessor such further documents
and take such further action as Lessor may require in order to more effectively
carry out the intent and purpose of this Lease. Lessee shall provide to Lessor,
within 120 days after the close of each of Lessee's fiscal years, and, upon
Lessor's request, within 45 days of the end of each quarter of Lessee's fiscal
year, a copy of its financial statements prepared in accordance with generally
accepted accounting principles and, in the case of annual financial statements,
audited by independent certified public accountants, and in the case of
quarterly financial statements certified by Lessee's chief financial officer.
Lessee shall execute and deliver to Lessor upon Lessor's request any and all
schedules, forms and other reports and information as Lessor may deem necessary
or appropriate to respond to requirements or regulations imposed by any
governmental authorities. Lessee shall execute and deliver to Lessor upon
Lessor's reasonable request such further and additional documents, instruments
and assurances as Lessor deems necessary (a) to acknowledge and confirm, for the
benefit of Lessor or any assignee or transferee of any of Lessor's rights, title
and interests hereunder (an "Assignee"), all of the terms and conditions of all
or any part of this Lease and Lessor's or Assignee's rights with respect
thereto, and Lessee's compliance with all of the terms and provisions hereof and
(b) to preserve, protect and perfect Lessor's or Assignee's right, title or
interest hereunder and in any Equipment, including, without limitation, such UCC
financing statements or amendments, corporate resolutions, certificates of
compliance, notices of assignment or transfers of interests, and restatements
and reaffirmations of Lessee's obligations and its representations and
warranties with respect thereto as of the dates requested by Lessor from time to
time. In furtherance thereof, Lessor may file or record this Lease or a
memorandum or a photocopy hereof (which for the purposes hereof shall be
effective as a financing statement) so as to give notice to third parties, and
Lessee hereby appoints Lessor as its attorney-in-fact to execute, sign, file and
record UCC financing statements and other lien recordation documents with
respect to the Equipment where Lessee fails or refuses to do so after Lessor's
written request, and Lessee agrees to pay or reimburse Lessor for any filing,
recording or stamp fees or taxes arising from any such filings.
16. ASSIGNMENT
This Lease and all rights of Lessor hereunder shall be assignable by Lessor
absolutely or as security, without notice to Lessee, subject to the rights of
Lessee hereunder for the use and possession of the Equipment for so long as no
Event of Default has occurred and is continuing hereunder. Any such assignment
shall not relieve Lessor of its obligations hereunder unless specifically
assumed by the assignee, and Lessee agrees it shall not assert any defense,
rights of set-off or counterclaim against any assignee to which Lessor shall
have assigned its rights and interests hereunder, nor hold or attempt to hold
such assignee liable for any of Lessor's obligations hereunder arising prior to
the date of such assignment. No such assignment shall materially increase
Lessee's obligations hereunder. LESSEE SHALL NOT ASSIGN OR DISPOSE OF ANY OF ITS
RIGHTS OR OBLIGATIONS UNDER THIS LEASE OR ENTER INTO ANY SUBLEASE WITH RESPECT
TO ANY OF THE EQUIPMENT WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF LESSOR
WHICH SHALL NOT BE UNREASONABLY WITHHELD.
17. LESSEE'S OBLIGATION UNCONDITIONAL
This Lease is a net lease and Lessee hereby agrees that it shall not be
entitled to any abatement of rents or of any other amounts payable hereunder by
Lessee, and that its obligation to pay all rent and any other amounts owing
hereunder shall be absolute and unconditional under all circumstances,
including, without limitation, the following circumstances: (i) any claim by
Lessee to any right of set-off, counterclaim, recoupment, defense or other right
which Lessee may have against Lessor, any seller or manufacturer of any
Equipment or anyone else for any reason whatsoever; (ii) the existence of any
liens, encumbrances or rights of others whatsoever with respect to any
Equipment, whether or not resulting from claims against Lessor not related to
the ownership of such Equipment; or (iii) any other event or circumstances
whatsoever. Each Rent Payment or other amount paid by Lessee hereunder shall be
final and Lessee will not seek to recover all or any part of such payment from
Lessor for any reason whatsoever.
18. RETURN OF EQUIPMENT
Upon the expiration or earlier termination of the Lease Term with respect
to any Equipment, and provided that Lessee has not validly exercised any
purchase option with respect thereto, Lessee shall: (a) return the Equipment to
a location and in the manner designated by the Lessor within the continental
United States, including, as reasonably required by Lessor, securing
arrangements for the disassembly and packing for shipment by an authorized
representative of the manufacturer of the Equipment, shipment with all parts and
pieces on a carrier designated or approved by Lessor, and then reassembly
(including, if necessary, repair and overhaul) by such representative at the
return location in the condition the Equipment is
4
<PAGE>
required to be maintained by the Lease and in such condition as will make the
Equipment immediately able to perform all functions for which the Equipment was
originally designed (or as upgraded during the Lease Term), and immediately
qualified for the manufacturer's (or other authorized servicing
representative's) then-available service contract or warranty; (b) cause the
Equipment to qualify for all applicable licenses or permits necessary for its
operation for its intended purpose and to comply with all specifications and
requirements of applicable federal, state and local laws, regulations and
ordinances; (c) upon Lessor's request, provide suitable storage, acceptable to
Lessor, for the Equipment for a period not to exceed 180 days from the date of
return; (d) cooperate with Lessor in attempting to remarket the Equipment,
including, upon reasonable notice and not more frequently than twice in any
month display and demonstration of the Equipment to prospective purchasers or
lessees, and allowing Lessor to conduct any private or public sale or auction of
the Equipment on Lessee's premises. All costs incurred in connection with any of
the foregoing shall be the sole responsibility of the Lessee. During any period
of time from the expiration or earlier termination of the Lease until the
Equipment is returned in accordance with the provisions hereof or until Lessor
has been paid the applicable purchase option price if any applicable purchase
option is exercised, Lessee agrees to pay to Lessor additional per diem rent
("Holdover Rent"), payable promptly on demand in an amount equal to 125% of the
highest monthly Rental Payment payable during the Lease Term divided by 30,
provided, however, that nothing contained herein and no payment of Holdover Rent
hereunder shall relieve Lessee of its obligation to return the Equipment upon
the expiration or earlier termination of the Lease.
19. RELATED LEASE SCHEDULES
In the event that any Equipment subject to a Lease shall become attached
to, affixed to, or used in connection with Equipment subject to any other Lease
hereunder (each a "Related Lease Schedule"), Lessee agrees that: (a) if Lessee
elects to exercise any purchase option, early termination option, renewal
option, purchase obligation or early purchase option under any Lease; or (b) if
Lessee elects to return the Equipment under any Lease in accordance therewith,
then, in either case, Lessor shall have the right, in its discretion, to require
the same disposition for all Equipment subject to a Related Lease Schedule.
20. MISCELLANEOUS; ENFORCEABILITY AND GOVERNING LAW
The term "Lessee" as used in the Lease shall mean and include any and all
Lessees who sign below, each of whom shall be jointly and severally liable under
the Lease. This Master Lease will not be binding on Lessor until accepted and
executed by Lessor, notice of which is hereby waived by Lessee. Any waiver of
the terms hereof shall be effective only in the specific instance and for the
specific purpose given. Time is of the essence in the payment and performance of
all of Lessee's obligations under the Lease. The captions in this Lease are for
convenience only and shall not define or limit any of the terms hereof.
Any provisions of this Lease which are unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
unenforceability without invalidating the remaining provisions hereof, and any
such unenforceability in any jurisdiction shall not render unenforceable such
provisions in any other jurisdiction. To the extent permitted by applicable law,
Lessee hereby waives; (a) any provisions of law which render any provision
hereof unenforceable in any respect; (b) all rights and remedies under Rhode
Island General Laws Sections 6A-2.1-508 through 522 or corresponding provisions
of the Uniform Commercial Code article or division pertaining to personal
property leasing in any jurisdiction in which enforcement of this Lease is
sought.
THIS LEASE AND THE LEGAL RELATIONS OF THE PARTIES HERETO SHALL IN ALL
RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF RHODE ISLAND, WITHOUT REGARD TO PRINCIPLES REGARDING THE CHOICE OF LAW.
LESSEE HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF THE COURTS OF THE
STATE OF RHODE ISLAND AND THE FEDERAL DISTRICT COURT FOR THE DISTRICT OF RHODE
ISLAND FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF
ITS OBLIGATIONS HEREUNDER, AND EXPRESSLY WAIVES ANY OBJECTIONS THAT IT MAY HAVE
TO THE VENUE OF SUCH COURTS. LESSEE HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL
BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS LEASE. Any action by
Lessee against Lessor for any cause of action relating to this Lease shall be
brought within one year after any such cause of action first arises.
THIS LEASE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES CONCERNING
THE LEASE OF THE EQUIPMENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. LESSEE
ACKNOWLEDGES AND CERTIFIES THAT NO SUCH ORAL AGREEMENTS EXIST. THIS LEASE MAY
NOT BE AMENDED, NOR MAY ANY RIGHTS UNDER THE LEASE BE WAIVED, EXCEPT BY AN
INSTRUMENT IN WRITING SIGNED BY THE PARTY CHARGED WITH SUCH AMENDMENT OR WAIVER.
Executed and delivered by duly authorized representatives of the parties hereto
as of the date set forth below.
DATED AS OF: May 15, 1997
FLEET CAPITAL CORPORATION SUPREMA SPECIALTIES, INC.
By: /s/ Deborah Hayes By: /s/ Paul Lauriero
--------------------------- -------------------------
Name: Deborah Hayes Name: Paul Lauriero
Title: Vice President Title: Executive Vice President
5
EXHIBIT 21
List of the Company's Subsidiaries
Suprema Specialties West
Suprema Northeast
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Suprema Specialties, Inc. and Subsidiary
Paterson, New Jersey
We hereby consent to the incorporation by reference in the Form S-8 of our
reports dated August 20, 1997, relating to the consolidated financial statements
and schedule of Suprema Specialties, Inc. and Subsidiaries appearing in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
Woodbridge, New Jersey
August 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K FOR JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 480,225
<SECURITIES> 0
<RECEIVABLES> 15,137,298
<ALLOWANCES> 470,290
<INVENTORY> 22,462,421
<CURRENT-ASSETS> 39,379,026
<PP&E> 7,118,626
<DEPRECIATION> 983,544
<TOTAL-ASSETS> 47,042,542
<CURRENT-LIABILITIES> 6,832,637
<BONDS> 0
0
0
<COMMON> 45,628
<OTHER-SE> 15,243,330
<TOTAL-LIABILITY-AND-EQUITY> 47,042,542
<SALES> 88,311,454
<TOTAL-REVENUES> 88,311,454
<CGS> 73,263,129
<TOTAL-COSTS> 11,356,143
<OTHER-EXPENSES> 1,259,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,231,820
<INCOME-PRETAX> 201,281
<INCOME-TAX> 80,500
<INCOME-CONTINUING> 120,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,781
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
