UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission file number 0-19263
SUPREMA SPECIALTIES, INC.
(Exact Name of Registrant as
specified in its charter)
New York 11-2662625
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 EAST 35TH STREET
PATERSON, NEW JERSEY 07543
(Address of principal executive offices)
(Zip Code)
(973) 684-2900
(Registrant's telephone number, including area code)
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__
As of February 4, 1999 there were 4,521,830 outstanding shares of the issuer's
Common Stock, $.01 par value.
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of 3
December 31, 1998 and June 30, 1998
Consolidated Statements of Earnings 4
For The Three and Six Month Periods Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows 5
For the Six Month Periods Ended
December 31, 1998 and 1997
Notes to Consolidated Financial 7
Statements
ITEM 2. Management's Discussion and Analysis of 10
Financial Condition and Results of
Operations
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dec. 31, June 30,
1998 1998
------------ ------------
(unaudited)
------------
ASSETS
CURRENT ASSETS:
Cash $ 506,642 $ 489,890
Accounts receivable, net of allowances
of $407,290 at Dec. 31, 1998 and
$407,290 at June 30, 1998 30,226,169 23,239,810
Inventories 32,716,590 28,511,930
Prepaid expenses and other current assets 271,928 688,117
Deferred income taxes 188,000 188,000
------------ ------------
Total current assets 63,909,329 53,117,747
PROPERTY AND EQUIPMENT, NET 7,500,403 6,999,695
OTHER ASSETS 2,241,211 1,728,616
------------ ------------
$ 73,650,943 $ 61,846,058
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,524,370 $ 7,469,422
Current portion of long-term obligations 525,252 500,964
Mortgage payable - short term 45,367 43,457
Income taxes payable 1,068,162 245,498
Accrued expenses and other current
liabilities 927,464 1,467,034
Deferred income taxes -- --
------------ ------------
Total current liabilities 15,090,615 9,726,375
DEFERRED INCOME TAXES 475,340 475,340
REVOLVING CREDIT LOAN 26,320,599 21,262,000
SUBORDINATED DEBT 10,500,000 10,500,000
LONG-TERM CAPITAL LEASES 1,997,702 2,266,090
MORTGAGE PAYABLE - LONG TERM 898,241 921,413
------------ ------------
55,282,497 45,151,218
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000
shares authorized, 4,562,800 and 4,562,800
issued and outstanding at Dec 31, 1998
and June 30, 1998 45,628 45,628
Additional paid-in capital 11,243,347 11,243,347
Retained earnings 7,261,951 5,405,865
------------ ------------
18,550,926 16,694,840
Less: 39,970 shares treasury
stock at cost (182,480) --
TOTAL STOCKHOLDERS' EQUITY 18,368,446 16,694,840
------------ ------------
$ 73,650,943 $ 61,846,058
============ ============
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 45,652,119 $ 26,113,427 $ 81,550,947 $ 51,269,867
Cost of sales 37,726,704 21,642,311 67,500,083 42,526,560
------------ ------------ ------------ ------------
Gross margin 7,925,415 4,471,116 14,050,864 8,743,307
------------ ------------ ------------ ------------
Expenses:
Selling and shipping 3,928,240 2,071,651 6,842,203 4,230,736
General and administrative 1,180,045 742,817 1,972,945 1,405,621
------------ ------------ ------------ ------------
5,108,285 2,814,468 8,815,148 5,636,357
------------ ------------ ------------ ------------
Income from operations 2,817,130 1,656,648 5,235,716 3,106,950
Other income (expense)
Interest expense, net (1,053,080) (605,715) (2,089,630) (1,245,868)
Other -- -- -- --
------------ ------------ ------------ ------------
(1,053,080) (605,715) (2,089,630) (1,245,868)
------------ ------------ ------------ ------------
Earnings Before Income Taxes
And Extraordinary Item 1,764,050 1,050,933 3,146,086 1,861,082
Income Taxes 723,000 441,000 1,290,000 773,000
------------ ------------ ------------ ------------
Earnings Before
Extraordinary Item 1,041,050 609,933 1,856,086 1,088,082
Extraordinary Loss On
Extinguishment Of Debt
(Net of Taxes) -- (1,011,001) -- (1,011,001)
Net earnings $ 1,041,050 $ (401,068) $ 1,856,086 $ 77,081
============ ============ ============ ============
<CAPTION>
EARNINGS PER SHARE OF COMMON STOCK:
<S> <C> <C> <C> <C>
Basic earnings per share
before extraordinary item $ .23 $ .13 $ .41 $ .24
===== ===== ===== =====
Basic earnings (loss) per share related
to extraordinary item -- (.22) -- (.22)
===== ===== ===== =====
Basic earnings (loss) per share .23 (.09) .41 .02
===== ===== ===== =====
Diluted Earnings per share
before extraordinary item .21 .13 .39 .23
===== ===== ===== =====
Diluted earnings (loss) per share related
to extraordinary item -- (.22) -- (.22)
===== ===== ===== =====
Diluted earnings (loss) per share .21 (.09) .39 .01
===== ===== ===== =====
<CAPTION>
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Basic 4,543,257 4,562,800 4,552,385 4,562,800
Diluted 4,923,816 4,650,981 4,803,857 4,817,441
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
December 31,
----------------------------
1998 1997
----------- -----------
INCREASE (DECREASE) IN CASH:
CASH FLOW FROM OPERATING ACTIVITIES:
Net Earnings $ 1,856,086 $ 77,081
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Loss on extinguishment of debt 1,011,001
Depreciation and amortization 282,257 241,154
Provision for doubtful accounts -- --
(Increase) decrease in assets:
Accounts receivable (6,986,359) (5,824,400)
Inventories (4,204,660) (1,119,635)
Prepaid expenses and other
current assets 416,189 (547,174)
Prepaid Income Taxes -- (202,722)
Other assets (512,595) 218,067
Increase (decrease) in liabilities:
Accounts payable 5,054,948 (54,387)
Income taxes payable 822,664 --
Accrued expenses and other current
liabilities (539,570) 99,930
Deferred income taxes -- 244,743
----------- -----------
Net cash used in operating
activities (3,811,040) (5,856,342)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Net payments for purchase of
property and equipment (782,965) (415,106)
Purchase of treasury stock (182,480) --
----------- -----------
Net cash used in investing
activities (965,445) (415,106)
----------- -----------
See notes to consolidated financial statements.
5
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(unaudited)
Six Months Ended
December 31,
-----------------------------
1998 1997
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from revolving credit loan $ 20,897,599 $ 12,985,981
Principal payments of revolving credit loan (15,839,000) (9,805,361)
Principal payments of capital leases (244,100) (204,477)
Principal payments of mortgage (21,262) (19,510)
Proceeds from bridge loan financing -- 8,825,000
Payment of subordinated debt (5,578,639)
Net cash provided by financing
activities 4,793,237 6,202,994
------------ ------------
NET (DECREASE) INCREASE IN CASH 16,752 (68,454)
CASH, BEGINNING OF PERIOD 489,890 480,225
------------ ------------
CASH, END OF PERIOD $ 506,642 $ 411,771
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid during the period for:
Interest $ 1,742,065 $ 605,714
============ ============
Income Taxes $ 475,337 $ 12,500
============ ============
Noncash investing and financing transactions:
Purchases of property and equipment through
capital leases $ -- $ 150,000
============ ============
See notes to consolidated financial statements.
6
<PAGE>
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
The unaudited balance sheet as of December 31, 1998, the unaudited
consolidated statements of earnings for the three and six month periods
ended December 31, 1998 and 1997 and the unaudited consolidated statements
of cash flows for the six month periods ended December 31, 1998 and 1997
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management,
all adjustments (which include normal recurring accruals) necessary to
present fairly the financial position, results of operations and cash flows
at December 31, 1998 and 1997 and for the three and six month periods
presented, have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The attached financial
statements should be read in connection with the consolidated financial
statements and notes thereto included in the Company's 1998 Annual Report
on Form 10-K for the year ended June 30, 1998.
The results of operations for the three and six months ended December 31,
1998 are not necessarily indicative of the results to be expected for the
entire fiscal year.
2. INVENTORIES
Inventories are summarized as follows:
Dec. 31, 1998 June 30, 1998
------------- -------------
Finished goods $26,264,142 $24,046,053
Raw materials 5,584,471 3,640,655
Packaging 867,977 825,222
----------- -----------
$32,716,590 $28,511,930
=========== ===========
3. SUBORDINATED DEBT FACILITY
In October 1995, the Company entered into a Loan and Security Agreement
(the "1995 Loan Agreement") with CoreStates Enterprise Fund (the "Fund"), a
division of CoreStates Bank, N.A. pursuant to which the fund loaned $5.0
million to the Company. In connection with the execution and delivery of
the 1995 Loan Agreement, the Company delivered a warrant to the Fund
exercisable for nominal additional consideration to purchase 354,990 shares
of the Company's Common Stock. After October 1, 2000, or upon the
occurrence of certain other rights, the fund had 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, $1.1 million. The corresponding debt
discount was being 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.
In October 1997, the Company entered into an agreement with Fleet Bank,
N.A. pursuant to which the bank provided bridge financing of $10 million to
the Company. Approximately $6.7 million ($5.6 million during the second
quarter and $1.1 million during the third quarter of fiscal year 1998) of
the proceeds from such financing was used to retire $5.0 million of
subordinated debt with the Fund and repurchase from the Fund warrants to
purchase 354,990 shares of the Company's Common Stock. The balance of the
proceeds was used for general working capital
7
<PAGE>
purposes. These transactions resulted in an extraordinary loss of
approximately $1,011,000, net, during the second quarter of fiscal year
1998. The extraordinary loss was comprised of the prepayment penalty of
$1,279,000 and the write-off of deferred financing costs and debt discount
of $494,000, net of the combined tax benefit of $762,000. The fair value of
the warrants was determined pursuant to the contractually agreed value
among the relevant parties.
In March, 1998, the Company entered into a Loan and Security Agreement,
(the "1998 Loan Agreement") with Albion Alliance Mezzanine Fund, L.P. and
the Equitable Life Assurance Society of the United States ("Alliance")
pursuant to which Alliance loaned $10.5 million to the Company. The loan is
unsecured and is subordinated to the loan of the Company's senior lender.
The loan bears interest at 16.5% with 12% interest payable currently and
the balance deferred until February 1, 2003 when it is due in full. The
principal amount of the loan is payable in three installments of $3.5
million on each March 1, beginning in the year 2004. In addition, in
connection with the execution and delivery of the 1998 Loan Agreement, the
Company delivered a warrant to Alliance to purchase up to 105,000 shares of
the Company's Common Stock at an exercise price of $4.12 per share. The
warrant is exercisable until March 1, 2006. Proceeds of the Alliance loan
were used to retire the bridge loan facility agreement with Fleet Bank,
N.A.
4. LONG-TERM REVOLVING CREDIT LOAN
In December 1998, the loan agreement between the Company and Fleet Bank,
N.A. that provides the Company with a revolving credit facility (the
"Facility") was amended to increase the Facility from $30 million to $35
million. The commitment for the revolving credit facility is through
November 2000. The rate of interest on amounts borrowed under the Facility
is the adjusted LIBOR rate, as defined, plus 200 basis points. 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. Advances under the
Facility are limited to 80% of eligible accounts receivable, 40% of all
inventory except packaging material, as defined in the agreement. The
Facility Agreement contains 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 in the
agreement, and a restriction on dividends to common shareholders. As of
December 31, 1998 the Company believes that it is in compliance with the
covenants under the Facility Agreement. Borrowings under the Facility are,
and are required to be used for working capital purposes.
5. TREASURY STOCK
During the six months ended December 31, 1998, the Company in accordance
with its stock repurchase plan, purchased 38,970 shares of its common stock
at a cost of approximately $182,480.
6. EARNINGS PER SHARE
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which
provides for the calculation of "basic" and "diluted" earnings per share.
This Statement effective for financial statements issued for periods ending
after December 15, 1997, requires restatement of all prior period EPS data
presented. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per
share reflect, in periods in which they have a dilutive effect, the effect
of common shares issuable upon exercise of stock options. All periods
presented have been restated to comply with provisions of SFAS No. 128.
8
<PAGE>
The earnings per share for the three and six month periods ended December
31, 1998 and 1997 were computed by dividing the weighted average number of
shares outstanding into net earnings.
The weighted average number of issued and outstanding common shares for the
three and six month periods ended December 31, 1998 is based upon the
4,562,800 shares outstanding at the beginning of the year less a proration
of the 38,970 shares of treasury stock repurchased during the six months
ended December 31, 1998. Also included in the weighted average number of
common shares are incremental shares attributable to assumed exercise of
options and warrants.
The weighted average number of issued and outstanding common shares for the
three and six month periods ended December 31, 1997 is based upon the
4,562,800 shares outstanding at the beginning of the year. Also included in
the weighted average number of common shares are incremental shares
attributable to assumed exercise of options and warrants.
Basic and diluted earnings per share for three and six months ended
December 31, 1998 and 1997 are calculated as follows:
<TABLE>
<CAPTION>
Three months ended Dec. 31, 1998 Three months ended Dec. 31, 1997
----------------------------------------- ----------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
before extraordinary item $1,041,050 4,543,257 $.23 $ 609,933 4,562,800 $.13
Basic earnings per share
after extraordinary item 1,041,050 4,543,257 .23 (401,068) 4,562,800 (.09)
Effect of assumed conversion
of warrants and employee
stock options 380,559 88,181
---------- ---------- ---- ---------- ---------- -----
Diluted earnings per share
before extraordinary item $1,041,050 4,923,816 $.21 $ 609,933 4,650,981 $.13
Diluted earnings per share
after extraordinary item 1,041,050 4,923,816 .21 $ (401,068) 4,650,981 $(.09)
<CAPTION>
Six months ended Dec. 31, 1998 Six months ended Dec. 31, 1997
----------------------------------------- ----------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
before extraordinary item $1,856,086 4,552,385 $.41 $1,088,082 4,562,800 $.24
Basic earnings per share
after extraordinary item 1,856,086 4,552,385 .41 $ 77,081 4,562,800 .02
Effect of assumed conversion
of warrants and employee
stock options 251,472 254,641
---------- ---------- ---- ---------- ---------- ----
Diluted earnings per share
before extraordinary item $1,856,086 4,803,857 $.39 $1,088,082 4,817,441 $.23
Diluted earnings per share
after extraordinary item $1,856,086 4,803,857 $.39 $ 77,081 4,817,441 $.01
</TABLE>
7. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company repurchased an additional
1,000 shares of its common stock at a cost of approximately $4,891.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward- looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements of the Company in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to the Company's growth
strategy, customer concentration, outstanding indebtedness, seasonality,
expansion and other activities of competitors, changes in federal or state laws
and the administration of such laws, protection of trademarks and other
proprietary rights, and the general condition of the economy and its effect on
the securities markets and other risks detailed in the Company's other filings
with the Securities and Exchange Commission. The words "believe," "expect,"
"anticipate," "intend," and "plan," and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date the statement
was made.
Results of Operations - Three months ended Dec. 31, 1998 vs. three months ended
Dec. 31, 1997.
Net sales for the three month period ended December 31, 1998 were approximately
$45,652,000 as compared to approximately $26,113,000 for the three months ended
December 31, 1997, an increase of approximately $19,539,000 or 74.8%. This
increase reflects an increase in sales volume for food service products
manufactured by the Company, as well as an increase in the average selling price
for cheese (as a result of the higher CME Block Cheddar Market, the commodity
index on which bulk cheese prices are based).
The Company's gross margin increased by approximately $3,454,000 from
approximately $4,471,000 in the three month period ended December 31, 1997 to
approximately $7,925,000 in the three month period ended December 31, 1998,
primarily as a result of an increase in the Company's sales volume as well as an
increase in the average selling price as a result of the higher CME Block
Cheddar Market. The Company's gross margin as a percentage of sales increased to
17.4% in the three month period ended December 31, 1998 from 17.1 % in the three
month period ended December 31, 1997. The increase in gross margin as a
percentage of sales was primarily due to increased sales during the three months
ended December 31, 1998, partially offset by higher costs associated with the
Ogdensburg New York facility and the shift toward lower margin sales associated
with the food service markets.
Selling and shipping expenses increased approximately $1,856,000 from
approximately $2,072,000 for the three month period ended December 31, 1997 to
approximately $3,928,000 for the three month period ended December 31, 1998. The
increase in selling and shipping expenses is primarily due to increases in
advertising and promotional allowances, commission expense and shipping expenses
in support of the Company's revenue growth. As a percentage of sales, selling
and shipping expenses increased from 7.9% in the three month period ended
December 31, 1997 to 8.6% in the three month period ended December 31, 1998. The
increase in selling and shipping expenses as a percentage of sales is primarily
due to increases in advertising and promotional allowances, commission expense
and shipping expenses in support of the Company's revenue growth.
General and administrative expenses increased by approximately $437,000 to
approximately $1,180,000 for the three month period ended December 31, 1998 as
compared to $743,000 for the comparable period in 1997. The increase in general
and administrative expenses is primarily due to an increase in personnel and
other administrative expenses associated with the Company's revenue growth. As a
percentage of sales, general and administrative expenses decreased to 2.6% for
the three month period ended December 31, 1998, from 2.8% for the comparable
period in 1997. The decrease in general and administrative expenses as a
percentage of sales is primarily due to the increase in the Company's revenue
growth, partially offset by an increase in personnel and other administrative
expenses.
10
<PAGE>
Net interest expense increased to approximately $1,053,000 for the three month
period ended December 31, 1998 from approximately $606,000 for the three month
period ended December 31, 1997. The increase in interest expense was primarily
due to the Company's expanded borrowing requirements necessary for working
capital needs.
The provision for income taxes for the three month period ended December 31,
1998 increased by approximately $282,000 compared to the three month period
ended December 31, 1997 as a result of increased taxable income.
The Company took an extraordinary charge on the extinguishment of the
Subordinated Debt Notes net of tax of approximately $1,011,000 during the
quarter ended December 31, 1997. (See note 3 of Notes to Consolidated Financial
Statements). The charge was the result of prepayment penalties related to the
early extinguishment of the subordinated debt and associated fees.
Net earnings before the extraordinary charge on the extinguishment of debt
increased by approximately $431,000 to approximately $1,041,000 for the three
month period ended December 31, 1998, from approximately $610,000 for the
comparable period ended December 31, 1997 due to the increase in gross margin as
a result of increased sales volumes and higher average selling price of the
Company's food service product, partially offset by the increases in selling and
shipping expenses, general and administrative expenses and interest expense.
Net earnings increased by approximately $1,442,000 to approximately $1,041,000
for the three month period ended December 31, 1998, from a loss of approximately
$401,000 for the comparable period ended December 31, 1997 due to the reasons
discussed above.
Results of Operations - Six months ended Dec. 31, 1998 vs. six months ended Dec.
31, 1997.
Net sales for the six month period ended December 31, 1998 were approximately
$81,551,000 as compared to approximately $51,270,000 for the six months ended
December 31, 1997, an increase of approximately $30,281,000 or 59.1%. This
increase reflects an increase in sales volumes for food service products
manufactured by the Company as well as an increase in the average selling price
for cheese (as a result of the higher CME Block Cheddar Market, the commodity
index on which bulk cheese prices are based).
The Company's gross margin increased by approximately $5,308,000, from
approximately $8,743,000 in the six month period ended December 31, 1997 to
approximately $14,051,000 in the six month period ended December 31, 1998,
primarily as a result of an increase in sales volume for food service products
manufactured by the Company as well as an increase in the average selling price
as a result of the higher CME Block Cheddar Market. The Company's gross margin
as a percentage of sales increased slightly from 17.1% in the six months ended
December 31, 1997 to 17.2% for the comparable six month period in 1998. The
increase in gross margin as a percentage of sales was primarily due to increased
sales during the six months ended December 31, 1998, partially offset by higher
costs associated with the Ogdensburg New York facility and the shift toward
lower margin sales associated with the food service markets.
Selling and shipping expenses increased by approximately $2,611,000 from
approximately $4,230,000 for the six month period ended December 31, 1997 to
approximately $6,842,000 for the six month period ended December 31, 1998. The
increase in selling and shipping expenses is primarily due to increases in
advertising and promotional allowances, commission expense and shipping expenses
in support of the Company's revenue growth. As a percentage of sales, selling
and shipping expenses increased slightly from 8.3% for the six month period
ended December 31, 1997 to 8.4% for the six month period ended December 31,
1998. The increase in selling and shipping expenses as a percentage of sales is
primarily due to increases in advertising and promotional allowances, commission
expense and shipping expenses in support of the Company's revenue growth.
General and administrative expenses increased by approximately $567,000 from
approximately $1,406,000 for the six month period ended December 31, 1997 to
approximately $1,973,000 for the comparable period in fiscal 1999. The increase
in general and administrative expenses is primarily a result of an increase in
personnel and associated administrative expenses. As a percentage of sales
however, general and administrative expenses decreased to 2.4% for the six month
period ended December 31, 1998, from 2.7% for the comparable period in 1997,
primarily due to the increase in the company's revenue growth, partially offset
by an increase in personnel and other administrative expenses.
11
<PAGE>
Net interest expense increased to approximately $2,090,000 for the six month
period ended December 31, 1998 from approximately $1,246,000 for the six month
period ended December 31, 1997. The increase was primarily the result of the
Company's expanded borrowing requirements necessary for working capital needs.
The provision for income taxes for the six month period ended December 31, 1998,
increased by approximately $517,000 as compared to the six month period ended
December 31, 1997 primarily as a result of increased taxable income.
The Company took an extraordinary charge on the extinguishment of the
Subordinated Debt Notes net of tax of approximately $1,011,000 during the
quarter ended December 31, 1997. (See note 3) The charge was the result of
prepayment penalties related to the early extinguishment of the subordinated
debt and associated fees.
Net earnings before the extraordinary charge on the extinguishment of debt
increased by approximately $768,000 to approximately $1,856,000 for the six
month period ended December 31, 1998, from approximately $1,088,000 for the
comparable period ended December 31, 1997 due to the increase in gross margin as
a result of increased sales volumes and higher average selling price for the
food service products, partially offset by the increases in selling and shipping
expenses, general and administrative expenses and interest expense.
Net earnings increased by approximately $1,779,000 to approximately $1,856,000
for the six month period ended December 31, 1998, from approximately $77,000 for
the comparable period ended December 31, 1997 due to the reasons discussed
above.
Financial Position, Liquidity and Capital Resources
At December 31, 1998 the Company had working capital of approximately
$48,819,000, as compared with $43,391,000 at June 30, 1998, an increase of
approximately $5,428,000. The increase in working capital is primarily due to
the increase in accounts receivable and inventory levels in support of the
Company's increased sales volumes, as well as increases in other assets and a
decrease in accrued liabilities and other current liabilities, partially offset
by increases in accounts payable, and a decrease in prepaid expenses and other
current assets
The Company also typically financed equipment purchases through capital lease
financing transactions. At December 31, 1998, the Company had obligations of
approximately $2,523,000 under capital leases.
In March 1996, the Company purchased its Paterson production facility which it
previously had leased. At December 31, 1998, the Company had outstanding
obligations of approximately $944,000 under the mortgage financing the purchase
of the Paterson facility.
The Company has a revolving credit facility, ("the Facility") that, in December
1998, was amended and increased the bank's potential commitment to $35,000,000
through November, 2000. The rate of interest on amounts borrowed under the
Facility is the adjusted LIBOR rate, plus 200 basis points. The Facility is
collateralized by substantially all existing and acquired assets of the Company,
as defined in the Facility, and is guaranteed by Suprema Specialties West, Inc.
and Suprema Specialties Northeast, Inc. Advances under this Facility are limited
to 80% of eligible accounts receivable, and 40% of most inventory. 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 December 31, 1998 the
Company believes it is in compliance with these covenants. At December 31, 1998
the Company's total outstanding debt to the bank was $26,320,599.
In October 1997, the Company entered into an agreement with Fleet Bank, N.A.
pursuant to which the bank provided bridge financing of $10.0 million to the
Company. Approximately $6.7 million of the proceeds from such bridge loan was
used to retire $5.0 million of subordinated debt with CoreStates Enterprise Fund
and repurchase from CoreStates warrants to purchase 354,990 shares of Suprema's
common stock. The balance of the proceeds was used for general working capital
purposes. As a result of prepayment penalties related to the early
extinguishment of the CoreStates debt and associated fees, Suprema took an
extraordinary charge of approximately $1.7 million (approximately $1.0 million
net of tax) during the second quarter ended December 31, 1997. In March 1998,
the Company entered into a Loan and Security Agreement with Albion Alliance
Mezzanine Fund, L.P. and an affiliate ("the Fund"), (see note 3 of Notes to
Consolidated Financial Statements) pursuant to which the Fund loaned $10.5
million to the Company. Proceeds of the loan were used to retire the bridge
financing agreement with Fleet Bank, N.A. entered into in October 1997.
12
<PAGE>
Management believes that with an increase in its line of credit facility from
$30,000,000 to $35,000,000, the Company has adequate working capital to meet its
reasonably foreseeable cash requirements.
Net cash used in operating activities in the six month period ended December 31,
1998 was approximately $3,811,000 as compared to $5,856,000 in the comparable
period of the prior year. The use of cash in operations was primarily the result
of increases in accounts receivable and inventories in support of the Company's
increased revenue growth, and other assets and a decrease in prepaid expenses
and other current assets as well as accrued expenses and other current
liabilities, partially offset by an increase in net earnings as adjusted for
non-cash expenses, and increases in accounts payable and income taxes payable.
The cash used in operations was financed through cash flow from financing
activities. Net cash used in investing activities in the six month period ended
December 31, 1998 was approximately $965,000, as compared to $415,000 in the six
month period ended December 31, 1997, as a result of continued expenditures for
fixed assets (including capital equipment utilized in the Company's California
manufacturing facility and the Ogdensburg, New York manufacturing facility), as
well as the repurchase of the Company's stock. As a result, at December 31, 1998
the Company had cash of $506,642 as compared to $411,771 as at December 31,
1997.
Year 2000 Issue
The Company has assessed the potential issues associated with the year 2000 and
believes that its costs to address such issues will not be material. The Company
anticipates that all of its operating systems are Year 2000 compliant. The
Company also believes that costs or consequences of an incomplete or untimely
resolution would not result in the occurrence of a material event or uncertainty
reasonably likely to have a material adverse effect on the Company. However, the
Company has not determined whether its principal suppliers and customers are
Year 2000 compliant. In the event any of the Company's principal suppliers and
customers are not Year 2000 compliant, it may have a material adverse effect on
the Company.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 27. Financial Data Schedule.
Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(registrant)
Date: February 11, 1999 By: /s/ Mark Cocchiola
---------------------------------
Mark Cocchiola
President &
Chief Executive Officer
Date: February 11, 1999 By: /s/ Steven Venechanos
---------------------------------
Steven Venechanos
Chief Financial Officer &
Secretary
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AT DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 506,642
<SECURITIES> 0
<RECEIVABLES> 30,633,459
<ALLOWANCES> 407,290
<INVENTORY> 32,716,590
<CURRENT-ASSETS> 63,909,329
<PP&E> 7,500,403
<DEPRECIATION> 0
<TOTAL-ASSETS> 73,650,943
<CURRENT-LIABILITIES> 15,090,615
<BONDS> 0
45,628
0
<COMMON> 0
<OTHER-SE> 18,505,298
<TOTAL-LIABILITY-AND-EQUITY> 73,650,943
<SALES> 45,652,119
<TOTAL-REVENUES> 45,652,119
<CGS> 37,726,704
<TOTAL-COSTS> 37,726,704
<OTHER-EXPENSES> 5,108,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,053,080
<INCOME-PRETAX> 1,764,050
<INCOME-TAX> 723,000
<INCOME-CONTINUING> 1,041,050
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,041,050
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.21
</TABLE>
