Filed Pursuant to Rule 424(b)(1)
Registration No. 333-69514
4,050,000 Shares
[graphic]
SUPREMA SPECIALTIES, INC.
Common Stock
We are selling 3,500,000 shares of common stock, and certain selling
shareholders named in this prospectus are selling 550,000 shares of common
stock. We will not receive any proceeds from the sale of common stock by the
selling shareholders.
Our common stock is quoted on the Nasdaq National Market under the symbol
"CHEZ". On November 7, 2001, the last reported sale price of our common stock on
the Nasdaq National Market was $13.10 per share.
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Before investing in our common stock you should review the "Risk Factors"
beginning on page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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Per Share Total
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Public offering price ............................... $12.75 $51,637,500
Underwriting discount ............................... $ 0.89 $ 3,604,500
Proceeds to Suprema, before expenses ................ $11.86 $41,510,000
Proceeds to selling shareholders .................... $11.86 $ 6,523,000
</TABLE>
The underwriters have an option to purchase up to an additional 357,500 shares
of common stock from us and 250,000 shares of common stock from the selling
shareholders, for a total of 607,500 additional shares, within 30 days from the
date of this prospectus to cover over-allotments.
The underwriters expect to deliver the shares to purchasers on or about November
14, 2001.
JANNEY MONTGOMERY SCOTT LLC
PACIFIC GROWTH EQUITIES, INC.
ROTH CAPITAL PARTNERS, LLC
The date of this prospectus is November 7, 2001
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[Picture of Various Company Products]
TABLE OF CONTENTS
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Page
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Prospectus Summary ...................................................... 1
Risk Factors ............................................................ 4
Forward-Looking Statements .............................................. 9
Use of Proceeds ......................................................... 10
Price Range of Common Stock ............................................. 11
Dividend Policy ......................................................... 11
Capitalization .......................................................... 12
Selected Consolidated Financial Information ............................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 14
Business ................................................................ 20
Management .............................................................. 27
Description of Securities ............................................... 31
Shares Eligible for Future Sale ......................................... 33
Principal and Selling Shareholders ...................................... 35
Underwriting ............................................................ 38
Legal Matters ........................................................... 39
Experts ................................................................. 40
Available Information ................................................... 40
Incorporation of Information by Reference ............................... 40
Index to Consolidated Financial Statements .............................. F-1
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You should rely only on the information contained in this prospectus. We have
not, nor have the selling shareholders or the underwriters, authorized any other
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. We are not,
nor are the selling shareholders or the underwriters, making any offer to sell
these securities in any jurisdiction where the offer and sale is not permitted.
You should assume that the information appearing in this prospectus is only
accurate as of the date on the front of this prospectus. Our business, financial
condition, results of operation and prospects may have changed since that date.
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References in this prospectus, and the documents incorporated by reference
in this prospectus, to "Suprema," "we," "our" and "us" refer to Suprema
Specialties, Inc., a New York corporation, and its wholly owned subsidiaries
Suprema Specialties West, Inc., Suprema Specialties Northeast, Inc. and
Suprema Specialties Northwest Inc.
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Suprema Specialties, Inc. and the names of our products are tradenames or
trademarks of Suprema. This prospectus also contains trademarks and tradenames
of other companies.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, including "Risk Factors" and our consolidated financial statements and
notes to those statements appearing elsewhere in this prospectus and
incorporated by reference in this prospectus.
SUPREMA
Suprema Specialties, Inc. manufactures and markets gourmet all natural
Italian cheeses. Our product lines consist primarily of mozzarella, ricotta,
parmesan, romano and provolone cheeses, which we produce domestically, as well
as parmesan and pecorino romano cheeses, which we import. Certain of our
domestically produced cheeses include "lite" and lower fat versions containing
less fat and fewer calories.
We sell our cheeses through all three channels of distribution in the food
industry: foodservice, food ingredient and retail. Over 95% of our revenue is
derived from the foodservice channel, where we market and sell our bulk cheeses
under the Suprema brand name, as well as under private label, to national and
regional foodservice distributors, which in turn sell our cheeses to
restaurants, hotels, caterers and others. We sell our cheeses to food
manufacturers in the food ingredient channel, who use our cheeses as ingredients
in prepared foods, such as frozen pizza and various pasta dishes. In the retail
distribution channel, we sell our cheeses primarily to supermarket chains,
grocery stores, delicatessens and gourmet shops, including Food Town, Shaw's,
Giant, King Kullen, Stop'N Shop and Krogers.
We market our cheeses under the Suprema and Suprema Di Avellino(R) brand
names, and are increasing our efforts to build Suprema as a nationally
recognized cheese brand by, among other things, increasing our use of
promotional material, participating in trade shows and entering into co-
branding relationships. For example, we recently entered into a one-year
exclusive agreement with Sbarro, Inc. to supply all of its whole milk ricotta
and grated romano cheese needs to its over 800 restaurants in North America. As
part of this agreement, Suprema will have its name and logo displayed within
Sbarro stores.
We have experienced significant growth in recent years. Net sales, income
from operations and net earnings grew at compound annual rates of 57.2%, 51.9%
and 84.8%, respectively, from the fiscal year ended June 30, 1998 through the
fiscal year ended June 30, 2001. We achieved record results from operations for
our fiscal year ended June 30, 2001, with net sales, income from operations and
net earnings increasing to $420.4 million, $24.8 million and $8.9 million,
respectively, from $278.5 million, $16.7 million and $6.4 million, respectively,
for our fiscal year ended June 30, 2000.
Key elements of our strategy for continuing to increase sales and profits
include:
o Remaining a low-cost producer;
o Further penetrating large distributors in the foodservice channel;
o Continuing to produce a full line of high quality products;
o Strengthening the Suprema brand name; and
o Pursuing potential strategic acquisitions.
We manufacture and package cheeses at our three facilities located in
Manteca, California, Blackfoot, Idaho and Ogdensburg, New York. At our Paterson,
New Jersey facility, we shred or grate, and then package, bulk cheeses that we
manufacture or import. Our Paterson facility is also our corporate headquarters.
We were incorporated under the laws of the State of New York in August 1983.
Our executive offices are located at 510 East 35th Street, Paterson, New Jersey
07543, and our telephone number is (973) 684-2900. We maintain a website at
www.supremachez.com. Information contained in our website does not constitute
part of this prospectus.
1
THIS OFFERING
Unless otherwise stated, information included in this prospectus assumes no
exercise by the underwriters of the over-allotment option.
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Common stock offered by Suprema ................... 3,500,000 shares
Common stock offered by the selling shareholders .. 550,000 shares
Common stock outstanding after this offering ...... 9,792,538 shares
Use of proceeds ................................... To repay outstanding indebtedness.
Risk factors ...................................... You should read "Risk Factors" beginning on page 4 for a
discussion of factors that you should carefully consider before
deciding to invest in our common stock.
Nasdaq National Market symbol ..................... CHEZ
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The shares being offered by the selling shareholders will be issued upon the
exercise by the selling shareholders of outstanding common stock options
immediately prior to this offering. The common stock outstanding after this
offering is based upon shares issued and outstanding as of the date of this
prospectus and includes shares that will be issued upon the exercise of options
by the selling shareholders. It excludes:
o 1,326,333 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $6.90 per share;
o 23,667 shares reserved for issuance upon the exercise of options available
for future grants under our employee stock option plans;
o 280,000 shares of common stock reserved for issuance upon exercise of
outstanding warrants at a weighted average exercise price of $8.78; and
o 607,500 shares reserved for possible issuance upon the sale by Suprema and
the selling shareholders of shares of common stock to cover over-
allotments, if any, by the underwriters.
2
SUMMARY FINANCIAL INFORMATION
The following table shows summary historical consolidated financial
information of Suprema. The historical financial information as of June 30, 2001
and for each of the three years in the period ended June 30, 2001 has been
derived from our audited consolidated financial statements and related notes
included in this prospectus. You should read this information together with
those financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which is also included in this
prospectus. Summarized historical consolidated financial information of Suprema
for the years ended June 30, 1997 and 1998 has been derived from our audited
consolidated financial statements which do not appear in the documents included
in or incorporated by reference in this prospectus.
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Fiscal Years Ended June 30,
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1997 1998 1999 2000 2001
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(In thousands, except per share data)
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Consolidated Statement of Earnings Data:
Net sales ................................ $88,311 $108,140 $176,281 $278,482 $420,363
Gross margin ............................. 15,048 18,745 29,929 45,549 64,953
Income from operations ................... 3,692 7,084 11,463 16,742 24,823
Net earnings ............................. 121 1,406 4,208 6,385 8,874
Earnings per share:
Basic ................................... $ 0.03 $ 0.31 $ 0.93 $ 1.44 $ 1.63
Diluted ................................. $ 0.02 $ 0.30 $ 0.86 $ 1.23 $ 1.41
Shares used in per share calculations:
Basic. .................................. 4,552 4,563 4,537 4,432 5,429
Diluted. ................................ 5,040 4,745 4,884 5,186 6,294
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As of June 30, 2001
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Actual As Adjusted
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(In thousands)
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Consolidated Balance Sheet Data:
Cash and cash equivalents ............................ $ 610 $ 610
Working capital. ..................................... 143,990 143,990
Total assets ......................................... 190,412 190,412
Total debt (including current portion) ............... 111,686 68,767
Total liabilities .................................... 147,584 104,665
Shareholders' equity ................................. 42,828 85,747
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The information under "As Adjusted" in the balance sheet data above reflects
our receipt of the estimated net proceeds from our sale of 3,500,000 shares of
common stock in this offering, after deducting the underwriting discounts,
commissions and non-accountable expense allowance, as well as the estimated
offering expenses payable by us, and our application of those net proceeds
together with the proceeds we receive from the exercise by the selling
shareholders of their options to acquire the shares to be sold by them in this
offering. A full description of our use of the net proceeds is described in the
section in this prospectus entitled "Use of Proceeds."
3
RISK FACTORS
Investing in our common stock involves risks. You should carefully consider
the risks described below together with all of the other information included in
or incorporated by reference into this prospectus before making an investment
decision. The risks and uncertainties described below are not the only ones
facing our company. If any of the following risks actually occur, our business,
financial condition or operating results could be harmed. In such case, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
Risks Related to Our Business
We depend on several principal customers, and the loss of one or more of these
customers or our inability to collect accounts receivable from our customers
could materially adversely affect our business.
An increasing portion of our revenue has been derived from a concentrated
customer base. Sales of cheese products to our five largest customers accounted
for approximately 64% of our net sales in fiscal year 2001 and 57% of our net
sales in fiscal year 2000. Each of these customers represented at least 10% of
our annual net sales. Other than our agreement with Sbarro, Inc., we generally
do not maintain agreements with any of our customers, who otherwise purchase
cheese products from us pursuant to purchase orders placed in the ordinary
course of business. Accordingly, there can be no assurance that any of our
customers will continue to purchase products from us or that their purchases
will be at the same or greater levels than in prior periods. The loss of any of
our principal customers, a reduction in the amount of product our principal
customers order from us or delays in collection or uncollectibility of accounts
receivable from these or other customers could have an adverse effect on our
financial condition, results of operations and liquidity.
Because we are smaller than many of our competitors, we may lack the financial
and other resources needed to capture increased market share in our distribution
channels.
We face significant competition in the marketing and sales of our products.
In the foodservice and food ingredient channels, our products compete on the
basis of price, quality and service. We compete in these distribution channels
with companies, such as Dairy Farmers of America, Beatrice Cheese Company and
Stella Foods, which have significantly greater financial resources, product
development and manufacturing capabilities and regional and national marketing
staffs than we do. In the retail distribution channel, our products compete for
consumer recognition and shelf space with cheese products that have achieved
significant regional and local brand name recognition and consumer loyalty. Many
of our competitors in the retail channel, such as Kraft, Sorrento and Sargento,
have greater financial and other resources than we do, which enable them to more
effectively compete, both generally and in response to efforts by additional
competitors to enter new markets and market new products.
We also compete in all three distribution channels with other importers of
foreign cheese and companies manufacturing substitute cheese products. We cannot
assure you that we will be able to continue to compete successfully,
particularly as we seek to enter into new markets for foodservice, food
ingredient and retail distribution.
Because we depend on foreign sources of supply, we may be unable to obtain
adequate supplies.
A significant portion of our bulk cheese requirements are manufactured by
foreign producers located principally in Europe and South America. These foreign
sources supplied us with 25% of our cheese requirements in each of fiscal year
2001 and fiscal year 2000. Accordingly, we are subject to various risks inherent
in foreign trade, including economic and political instability, shipping delays,
fluctuations in foreign currency exchange rates, custom duties, import quotas
and other trade restrictions. These factors could have a significant impact on
our operating margins and our ability to obtain supplies and deliver products on
a timely and competitive basis. Parmesan cheese imported both from Argentina and
Italy is currently subject to United States import quotas and custom duties.
Significant increases in the level of custom duties or import quotas could have
an adverse effect on our business.
4
Fluctuations in the availability of raw materials we use could adversely affect
our operations.
We have a supply agreement with Allied Federated Cooperatives Inc., which
provides that, subject to specified minimum amounts, we will purchase from them
all of our milk requirements used in the manufacture of cheese products at our
Ogdensburg facility. Allied's failure to provide milk products to us, in the
absence of alternative sources of supply, could have an adverse effect on our
Ogdensburg facility's production and, therefore, our business. We are also
dependent on a limited number of other suppliers for all of our requirements of
raw materials, consisting primarily of milk, used in the manufacture of cheese
at our Manteca facility. Our three largest suppliers accounted for, in the
aggregate, approximately 34% of our product requirements in fiscal year 2001 and
36% of our product requirements in fiscal year 2000, with one milk supplier
accounting for 12% of our requirements in fiscal year 2001 and 14% of our
requirements in fiscal year 2000.
Other than with Allied, we generally purchase raw milk from dairy
cooperatives and other dairy vendors under one-year purchase agreements. Our
purchases of bulk cheese are made pursuant to purchase orders placed in the
ordinary course of business. Failure or delay by principal suppliers in
supplying cheese and milk products to us on favorable terms, or at all, could
result in material interruptions in our operations. Our inability to obtain
adequate supplies as a result of any of the foregoing factors or otherwise could
render us unable to fulfill our obligations to customers, which could adversely
affect our business.
If we are not an efficient producer, our profitability will suffer as a result
of the highly competitive environment in which we operate.
Our success depends in part on our ability to be an efficient producer in a
highly competitive industry. Our ability to reduce costs further is limited to
the extent efficiencies have already been achieved. Our failure to reduce costs
through productivity gains or otherwise or our inability to eliminate redundant
costs resulting from any acquisitions we may make would weaken our competitive
position.
A default under our secured credit arrangements could result in a foreclosure of
our assets by our creditors.
Substantially all of our assets are pledged as collateral to secure
outstanding borrowings under the loan agreements with our primary commercial
lenders. Any default under the documents governing our indebtedness could result
in our indebtedness becoming immediately due and payable and result in a
foreclosure on our assets by our creditors, which would have a significant
adverse effect on the market value of our common stock.
As of June 30, 2001, we had approximately $111.7 million of long-term
indebtedness outstanding of which approximately $99.3 million was outstanding
under our revolving credit facility.
We depend on our key personnel, including Mark Cocchiola, and the loss of the
services of Mr. Cocchiola or any other key personnel or the failure to hire
additional key personnel could materially adversely affect our business.
Our success is largely dependent on the personal efforts of Mark Cocchiola,
our Chairman, President and Chief Executive Officer. We believe that his
expertise and knowledge of the natural cheese products industry are critical
factors in our continued growth and success. Although we have entered into an
employment agreement with Mr. Cocchiola, the loss of the services of Mr.
Cocchiola could have a material adverse effect on our business and prospects.
The agreement governing our revolving credit facility provides that the loss of
services of Mr. Cocchiola is deemed an event of default upon which the lenders
may declare the principal amount borrowed under the facility together with
accrued interest and all other payment obligations to be immediately due and
payable. In addition, the agreement governing our subordinated loan provides
that, upon the loss of Mr. Cocchiola, the lenders could require Suprema to
repurchase the principal amount of the subordinated debt.
Our success is also dependent upon our ability to hire and retain additional
qualified marketing, technical and other personnel, and there can be no
assurance that we will be able to do so.
5
Our co-founder and Executive Vice President, Paul Lauriero, passed away in
August 2001. Mr. Lauriero was primarily responsible for overseeing the
procurement of raw materials for production and the general operations of our
facilities. Mark Cocchiola has assumed the primary responsibilities on an
interim basis, and other responsibilities have been assumed by other members of
senior management. We are considering employing an individual to assume some or
all of the responsibilities previously performed by Mr. Lauriero. However we
have not entered into any negotiations or agreements at this time. We are
unable, at this time, to determine the impact of the loss of Mr. Lauriero's
services on our operations.
If we cannot successfully negotiate a material union contract, when our current
contracts expire, we may experience work stoppages which would negatively impact
our business.
Approximately 62% of our workforce is represented by a union. Our contract
with union employees at our Manteca facility expires in December 2004, and our
contract with union employees at our Ogdensburg facility expires in November
2003. Although we have not experienced any significant labor disputes or work
stoppages to date, a work stoppage due to a failure to renegotiate a union
contact, or otherwise, could have a material adverse effect on our business.
We may make acquisitions which could subject us to a number of operational
risks.
In order to grow our business and maintain our competitive position, we may,
in the future, acquire other businesses or significant assets or product lines
relating to our business. We cannot predict whether or when any acquisitions
will occur. Acquisitions commonly involve certain risks, and we cannot assure
you that any acquired business will be successfully integrated into our
operations or will perform as we expect. Any future acquisitions could involve
certain other risks, including the assumption of additional liabilities,
potentially dilutive issuances of equity securities and diversion of
management's attention from other business concerns. Furthermore, we may issue
equity securities or incur debt to pay for any future acquisitions. If we issue
equity securities, your percentage ownership of our company would be reduced. If
we issue debt, our financial condition may be negatively affected by the
requirement to pay interest and other debt-related costs. In addition, our
operations may be restricted by the covenants associated with this debt.
Risks Related To Our Industry
Changing consumer preferences or nutritional and health-related concerns may
adversely affect our business.
We are subject to changing consumer preferences and nutritional and health-
related concerns. Our business could be affected by certain consumer concerns
about dairy products, such as the cholesterol, calorie, sodium, lactose and fat
content of such products, and we could become subject to increased competition
from companies whose products or marketing strategies address these consumer
concerns.
Product liability claims could have an adverse effect on our business.
We, like any other seller of food, face the risk of exposure to product
liability claims in the event that our quality control procedures fail and the
consumption of our products causes injury or illness. With respect to product
liability claims, we believe that we have sufficient primary and excess umbrella
liability insurance. However, this insurance may not continue to be available at
a reasonable cost, or, if available, may not be adequate to cover liabilities.
We generally seek contractual indemnification and insurance coverage from
parties supplying us products, but this indemnification or insurance coverage is
limited, as a practical matter, to the creditworthiness of the indemnifying
party, and their carriers, if any, as well as the insured limits of any
insurance provided by suppliers. If we do not have adequate insurance or
contractual indemnification available, product liability claims relating to
defective products could have a material adverse effect on our financial
condition, results of operations and liquidity.
6
Government regulation could increase our costs of production and increase our
legal and regulatory expenditures.
We are subject to extensive regulation by the United States Food and Drug
Administration, the United States Department of Agriculture and other state and
local authorities in jurisdictions where our products are manufactured,
processed or sold. Among other things, these regulations govern the
manufacturing, importation, processing, packaging, storage, distribution and
labeling of our 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 as well as general
"Good Manufacturing Practices" with respect to manufacturing and production
processes. Our manufacturing and processing facilities and products are also
subject to periodic compliance inspections by federal, state and local
authorities. We are also subject to environmental regulations governing the
discharge of water and food waste. We believe that we are currently in
substantial compliance with all material governmental laws and regulations and
we maintain all material permits and licenses relating to our material
operations. Amendments to existing statutes and regulations, adoption of new
statutes and regulations, increased production at our existing facilities as
well as our expansion into new operations and jurisdictions will require us to
obtain additional licenses and permits and could require us to adapt or alter
methods of operations at costs which could be substantial. We cannot assure you
that we will be able, for financial or other reasons, to comply with applicable
laws and regulations and licensing requirements. Failure to comply with
applicable laws and regulations could subject us to civil remedies, including
fines, injunctions, recalls or seizures, as well as possible criminal sanctions,
which could have a material adverse effect on our business.
We are in a low margin business and our profitability may be negatively impacted
during periods of food price deflation.
The food service distribution industry is characterized by relatively high
inventory turnover with relatively low profit margins. We make a significant
portion of our sales at prices that are based on the cost of products we sell,
plus a percentage markup. As a result, our profit levels may be negatively
impacted during periods of food price deflation. The food service industry is
sensitive to national and economic conditions. Our operating results also are
sensitive to, and may be adversely affected by, other factors that could affect
our operating costs, including unexpected increases in fuel or other
transportation-related costs. There can be no assurance that one or more of
these factors will not adversely affect our future operating results.
Risks Related To This Offering
The market price of our stock could be subject to fluctuations.
The market price of our common stock has been subject to significant
fluctuations during the preceding twelve months. The market price of our common
stock could be subject to further fluctuations in response to factors such as
the following, some of which are beyond our control:
o variations in our operating results;
o operating results that vary from the expectations of securities analysts
and investors;
o changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
o announcements by us or our competitors of major business developments, such
as new products, services or technologies or significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o announcements by third parties of significant claims or proceedings
against us;
o future sales of our common stock; and
o general market conditions.
7
Future sales of our common stock could cause the market price of our common
stock to drop significantly, even if our business is doing well.
After this offering, we will have issued and outstanding 9,792,538 shares of
common stock, including the 4,050,000 shares of common stock that we and the
selling shareholders are selling in this offering. Of the outstanding shares of
common stock, 4,999,718 may be resold in the public market immediately and an
additional 742,820 shares will become available for resale 90 days after the
date of this prospectus due to an agreement the holders of these shares have
entered into with the underwriters. However, the underwriters can waive this
restriction and allow these shareholders to sell their shares at any time.
We also have issued options to purchase 1,876,333 shares of our common stock
under our employee stock option plans. Of these outstanding options, options to
purchase an aggregate of 550,000 shares of our common stock will be exercised by
the selling shareholders named in this prospectus to acquire the shares to be
sold by them in this offering. A significant number of the remaining shares
underlying our outstanding options have previously been registered and, subject
to the applicable vesting requirements, upon exercise of these options the
underlying shares may be resold into the public market. In addition, we also
have reserved 280,000 shares for issuance pursuant to outstanding warrants
issued by us. We have granted registration rights to the holders of warrants to
purchase 120,000 shares of common stock issuable upon exercise of those
warrants, which rights have been waived in connection with this offering. The
market price of our common stock could decline as a result of the sales of these
shares or the perception that sales of these shares could occur.
Provisions in our Charter and Share Purchase Rights Plan and New York law may
prevent an acquisition of Suprema.
Certain provisions of our Certificate of Incorporation and our Share Purchase
Rights Plan could have the effect, either alone or in combination with each
other, of making more difficult, or discouraging an acquisition of our company
deemed undesirable by our Board of Directors. Under our Certificate of
Incorporation, there are approximately 44,000,000 unreserved shares of common
stock and 2,500,000 shares of preferred stock available for future issuance
without shareholder approval. The Share Purchase Rights Plan, commonly known as
a "poison pill," states that, in the event that an individual or entity acquires
15% of the outstanding shares of our company, shareholders other than the
acquiror may purchase additional shares of our common stock for a fixed price.
The existence of authorized but unissued capital stock, together with the
existence of the Share Purchase Rights Plan, could have the effect of
discouraging an acquisition of our company.
In addition, we are subject to certain anti-takeover provisions under Section
912 of the New York Corporation Law. Section 912 provides that, with certain
exceptions, a New York corporation may not engage in a business combination with
any interested shareholder for a period of five years following the date such
shareholder became an interested shareholder. An interested shareholder is a
person that owns, directly or indirectly, 20% or more of the outstanding voting
stock of a corporation or is an affiliate or associate of a corporation and was
the owner of 20% or more of the outstanding voting stock of the corporation at
any time within the prior five years. These provisions could have the effect of
discouraging, delaying or preventing a takeover of Suprema, which could
otherwise be in the best interest of our shareholders, and have an adverse
effect on the market price for our common stock.
We do not expect to pay dividends.
We have not paid any cash dividends on our common stock to date and do not
expect to pay dividends for the foreseeable future. Under existing loan
agreements with our principal lender, we are not permitted to pay dividends
without the lender's consent.
8
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend the forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements in these sections. All statements regarding our expected financial
position and operating results, our business strategy and our plans are
forward-looking statements. These statements can sometimes be identified by our
use of words such as "may," "anticipate," "expect," "intend," "estimate" or
similar expressions. Our expectations in any forward-looking statements may not
turn out to be correct. Our actual results could be materially different from
those discussed in or implied by these statements, and you may consider these
differences important to your investment decision. Important factors that could
cause our actual results to be materially different include those discussed
under "Risk Factors." You should not place undue reliance on the forward-looking
statements, which speak only as of the date the statements were made.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The risk factors described in the
preceding pages, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward- looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could materially and adversely affect our business, operating results
and financial condition.
9
USE OF PROCEEDS
The net proceeds we will receive from the sale by us of 3,500,000 shares of
our common stock in this offering, after deducting the underwriting discounts,
commissions and non-accountable expense allowance, as well as the estimated
offering expenses payable by us, are estimated to be $40,930,000, or $45,169,950
if the portion of the underwriter's over-allotment option granted by us is
exercised in full. We will not receive any proceeds from the sale of shares by
the selling shareholders.
We will receive aggregate proceeds of approximately $1,989,167 from the
exercise by the selling shareholders of their options to acquire the shares to
be sold by them in this offering. If the underwriters exercise their over-
allotment option in full, we will receive additional aggregate proceeds of
approximately $1,276,694 from the exercise by the selling shareholders of
options to acquire shares to be sold by them to the underwriters to cover the
exercise of the underwriters' over-allotment option.
We expect to use all of the net proceeds received by us from our sale of
shares in this offering as well as the proceeds we receive from the exercise by
the selling shareholders of their options in connection with this offering, to
repay amounts outstanding under our revolving credit facility.
Borrowings under our revolving credit facility were approximately $99.3
million at June 30, 2001. The credit facility matures on February 15, 2004 and
borrowings under the credit facility bear interest per annum at 175 basis points
above the London inter-bank offering rate, or LIBOR. The interest rate on the
credit facility was 7.50% per annum at June 30, 2001. The proceeds from our
borrowings under the credit facility were used primarily for working capital and
general corporate purposes.
10
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the over-the-counter market under the
symbol "CHEZ" on April 25, 1991. On March 22, 1993, our common stock commenced
trading on the Nasdaq National Market System. The following table sets forth the
high and low sale prices of our common stock for the periods indicated below.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Fiscal Year Ended June 30, 2000
First Quarter................................... $ 9.13 $6.88
Second Quarter.................................. 9.75 7.00
Third Quarter................................... 10.50 7.75
Fourth Quarter.................................. 10.50 7.94
Fiscal Year Ended June 30, 2001
First Quarter................................... $10.63 $7.69
Second Quarter.................................. 8.56 7.38
Third Quarter................................... 10.25 7.50
Fourth Quarter.................................. 14.99 8.06
Fiscal Year Ended June 30, 2002
First Quarter................................... $17.54 $6.90
Second Quarter (through November 7, 2001)....... $15.00 $9.92
</TABLE>
The closing price of our common stock on November 7, 2001 was $13.10. As of
the date of this prospectus, we had 5,742,538 shares of common stock
outstanding, which were held by 67 record holders. We believe that this number
does not include an estimated 1,000 beneficial owners of our common stock who
currently hold such securities in the name of depository institutions.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon our earnings, capital requirements,
financial condition and other relevant factors. We presently intend to retain
all earnings to finance the growth and development of our business and do not
expect to declare or pay any cash dividends in the foreseeable future. Our
agreement with our lending institutions currently prohibits the payment of cash
dividends, other than dividends on shares of preferred stock whose issuance is
permitted under the loan agreement.
11
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001, on an
actual basis and as adjusted to give effect to our receipt of estimated net
proceeds of $42,919,167 from the sale of the 3,500,000 shares of common stock by
us in this offering, after deducting the underwriting discounts, commissions and
non-accountable expense allowance, as well as the estimated offering expenses
payable by us, and our application of those net proceeds, together with the
proceeds we receive from the exercise by the selling shareholders of their
options to acquire the shares to be sold by them in this offering. A full
description of our use of the net proceeds is described in the section in this
prospectus entitled "Use of Proceeds." You should read this table together with
the consolidated financial statements and the related notes included in this
prospectus.
<TABLE>
<CAPTION>
As of June 30, 2001
---------------------------
Actual As Adjusted
------------ ------------
<S> <C> <C>
Total debt (including current portion) .......... $111,686,344 $ 68,767,177
============ ============
Shareholders' equity:
Preferred stock, $0.01 par value; 2,500,000
shares authorized:
Series A redeemable convertible preferred
stock; 500,000 shares designated; none
issued and outstanding ......................
Common stock, $0.01 par value; 50,000,000 shares authorized; 5,867,920 issued
and outstanding; 9,917,920 issued and
outstanding, as adjusted .................... 58,679 99,179
Additional paid-in capital..................... 19,444,319 62,322,986
Retained earnings.............................. 24,872,451 24,872,451
Treasury stock, at cost; 224,877 shares issued. (1,547,620) (1,547,620)
------------ ------------
Shareholders' equity........................... 42,827,829 85,746,996
------------ ------------
Total capitalization ............................ $154,514,173 $154,514,173
============ ============
</TABLE>
The above table excludes the following shares:
o 1,326,333 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $6.90;
o 23,667 shares reserved for issuance upon exercise of options available for
future grants under our employee stock option plans;
o 280,000 shares of common stock reserved for issuance upon exercise of
outstanding warrants at a weighted average exercise price of $8.78; and
o 607,500 shares reserved for possible issuance upon the sale by Suprema and
the selling shareholders of shares of common stock to cover over-
allotments, if any, by the underwriters.
12
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table shows selected historical consolidated financial
information of Suprema as of June 30, 2000 and 2001 and for each of the three
years in the period ended June 30, 2001. We have derived this information from
our audited consolidated financial statements and related notes included in this
prospectus. You should read this information together with those financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which is also included in this prospectus. We derived the
selected historical consolidated financial information as of June 30, 1997, 1998
and 1999 and for the years ended June 30, 1997 and 1998 from our audited
consolidated financial statements which do not appear in the documents included
in or incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
------------------------------------------------------
1997(1) 1998(2) 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Earnings Data:
Net sales ................................ $ 88,311 $108,140 $176,281 $278,482 $420,363
Cost of sales ............................ 73,263 89,395 146,352 232,933 355,410
-------- -------- -------- -------- --------
Gross margin ............................. 15,048 18,745 29,929 45,549 64,953
Selling and shipping expenses ............ 9,176 8,025 14,045 21,893 31,360
General and administrative expenses ...... 2,180 3,636 4,421 6,914 8,770
-------- -------- -------- -------- --------
Income from operations. .................. 3,692 7,084 11,463 16,742 24,823
Interest expense ......................... (2,232) (2,917) (4,329) (5,921) (10,033)
Other .................................... (1,259) -- -- -- --
-------- -------- -------- -------- --------
Earnings before income taxes ............. 201 4,167 7,134 10,822 14,790
Income taxes ............................. 81 1,750 2,926 4,437 5,916
-------- -------- -------- -------- --------
Net earnings ............................. $ 121 $ 1,406 $ 4,208 $ 6,385 $ 8,874
======== ======== ======== ======== ========
Earnings per share:
Basic ................................... $ 0.03 $ 0.31 $ 0.93 $ 1.44 $ 1.63
Diluted ................................. $ 0.02 $ 0.30 $ 0.86 $ 1.23 $ 1.41
Shares used in per share calculations:
Basic ................................... 4,552 4,563 4,537 4,432 5,429
Diluted ................................. 5,040 4,745 4,884 5,186 6,294
<CAPTION>
As of June 30,
------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ................ $ 480 $ 490 $ 358 $ 950 $ 610
Working capital .......................... 32,546 43,872 56,266 95,816 143,990
Total assets. ............................ 47,043 62,081 81,999 124,960 190,412
Total debt (including current portion) ... 23,772 35,494 44,125 78,971 111,686
Total liabilities ........................ 31,754 45,387 61,488 98,992 147,584
Shareholders' equity ..................... 15,289 16,695 20,511 25,968 42,828
</TABLE>
---------------
(1) The statement of earnings data for the fiscal year ended June 30, 1997 gives
effect to a write-off of approximately $944,000 of costs related to
marketing service agreements and a charge of approximately $1,259,000
associated with a loss we incurred on a sale leaseback transaction which was
completed during the fourth quarter of our fiscal year ended June 30, 1997.
(2) The statement of earnings data for the fiscal year ended June 30, 1998 gives
effect to our incurring an extraordinary loss on extinguishment of debt of
approximately $1,773,000 ($1,011,000, net of tax) resulting from our early
retirement of subordinated debt and repurchase of warrants attached to the
subordinated debt.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We manufacture and market gourmet all natural Italian cheeses. Our product
lines consist primarily of mozzarella, ricotta, parmesan, romano and provolone
cheeses, which we produce domestically, as well as parmesan and pecorino romano
cheeses, which we import. Certain of our domestically produced cheeses include
"lite" and lower fat versions containing less fat and fewer calories. In the
fiscal years 1999, 2000 and 2001, aggregate sales of parmesan and romano cheese,
which are classified as "hard" cheese, accounted for 37%, 52% and 62%,
respectively, of our revenue. For the fiscal years 1999, 2000 and 2001, sales of
mozzarella cheese, which is classified as "soft" cheese, accounted for
approximately 48%, 29% and 22%, respectively, of our revenue.
We sell our cheeses through three channels of distribution in the food
industry: foodservice, food ingredient and retail. For fiscal years 1999, 2000
and 2001, sales of our cheeses to foodservice companies accounted for
approximately 91%, 91% and 97%, respectively, of our revenue; sales of our
cheeses to food ingredient companies accounted for approximately 6%, 7% and 2%,
respectively, of our revenue; and sales of our cheeses to retailers accounted
for 3%, 2% and 1%, respectively, of our revenue.
We maintain four facilities located in Manteca, California, Ogdensburg, New
York, Blackfoot, Idaho and Paterson, New Jersey. Our cheese production
facilities are located in key milk shed regions, allowing us to minimize
transportation costs for our raw milk supplies and maintain a low cost
infrastructure. Historically, a majority of our cost of goods sold has consisted
of the price we pay for raw milk. The prices for elements of our cheeses, other
than milk, are fixed or relatively fixed. We generally purchase raw milk from
dairy cooperatives and other dairy vendors under one-year purchase arrangements.
The price we pay for raw milk under these arrangements is indexed to the CME
Block Cheddar Market, the commodity index on which our bulk cheese prices are
based. As a result, our gross profit margin is largely insulated from
fluctuations in the price of raw milk. However, as the CME Block Cheddar Market
index decreases, reducing the price we receive for our products, our gross
margin also decreases due to the proportionately larger impact of those elements
of our cost of goods sold, the prices of which are fixed or relatively fixed in
nature. Conversely, as the CME Block Cheddar Market increases, our gross margin
increases. Over the past three years ended June 30, 2001, our gross margin as a
percentage of sales has decreased from approximately 17% to 15%.
We record revenue when our products are shipped to customers. Our customers
generally do not have the right to return products that have been shipped.
14
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to net sales represented by certain items reflected in our
consolidated statement of earnings.
<TABLE>
<CAPTION>
Fiscal Years Ended
June 30,
----------------------
1999 2000 2001
----- ----- -----
<S> <C> <C> <C>
Net sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 83.0 83.6 84.5
----- ----- -----
Gross margin ............................. 17.0 16.4 15.5
Selling and shipping expenses ............ 8.0 7.9 7.5
General and administrative expenses ...... 2.5 2.5 2.1
----- ----- -----
Income from operations. .................. 6.5 6.0 5.9
Interest expense, net .................... 2.5 2.1 2.4
----- ----- -----
Earnings before income taxes ............. 4.0 3.9 3.5
Income taxes ............................. 1.6 1.6 1.4
----- ----- -----
Net earnings ............................. 2.4% 2.3% 2.1%
===== ===== =====
</TABLE>
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net sales for the fiscal year ended June 30, 2001 were approximately
$420,363,000 as compared to approximately $278,482,000 for the fiscal year ended
June 30, 2000, an increase of approximately $141,881,000 or 50.9%. This increase
reflects an increase primarily in sales volume for our foodservice products,
most of which represented sales to existing customers, partially offset by the
lower average selling price for cheese to our customers, as a result of the
lower average CME Block Cheddar Market.
Our gross margin increased by approximately $19,404,000, from approximately
$45,549,000 for the fiscal year ended June 30, 2000 to approximately $64,953,000
for the fiscal year ended June 30, 2001, primarily as a result of the increase
in sales volume. Our gross margin as a percentage of sales decreased from 16.4%
in the fiscal year ended June 30, 2000 to 15.5% for the comparable fiscal year
in 2001. The decrease in gross margin as a percentage of sales was primarily due
to the lower average selling price for cheese to our customers due to the lower
average CME Block Cheddar Market during the fiscal year ended June 30, 2001. The
decrease in gross margin as a percentage of sales was also due to the shift
toward lower margin sales associated with the foodservice markets.
Selling and shipping expenses increased by approximately $9,467,000 from
approximately $21,893,000 for the fiscal year ended June 30, 2000 to
approximately $31,360,000 for the fiscal year ended June 30, 2001. The increase
in selling and shipping expenses was primarily due to increases in advertising
to strengthen the Suprema brand name, commission expenses and shipping expenses
in support of our revenue growth. As a percentage of sales, selling and shipping
expenses decreased from 7.9% in the fiscal year ended June 30, 2000 to 7.5% in
the fiscal year ended June 30, 2001. The decrease in selling and shipping
expenses as a percentage of sales principally reflects economies of scale
realized with additional sales volume, partially offset by the increases in
advertising, commission expenses and shipping expenses in support of our revenue
growth.
General and administrative expenses increased by approximately $1,857,000
from approximately $6,914,000 for the fiscal year ended June 30, 2000 to
approximately $8,771,000 for the fiscal year ended June 30, 2001. The increase
in general and administrative expenses was primarily a result of an increase in
personnel and other administrative expenses associated with our revenue growth.
As a percentage of sales, general and administrative expenses decreased to 2.1%
for the fiscal year ended June 30, 2001, from 2.5% for fiscal 2000, primarily
due to the increase in our revenue, which was partially offset by an increase in
personnel and other administrative expenses associated with our revenue growth.
15
Net interest expense increased to approximately $10,033,000 for the fiscal
year ended June 30, 2001 from approximately $5,921,000 for the fiscal year ended
June 30, 2000. The increase was primarily the result of our expanded borrowing
requirements necessary for working capital needs.
The provision for income taxes for the fiscal year ended June 30, 2001
increased by approximately $1,479,000 as compared to the fiscal year ended June
30, 2000 primarily as a result of increased taxable income.
Net earnings increased by approximately $2,489,000 to approximately
$8,874,000 for the fiscal year ended June 30, 2001, from approximately
$6,385,000 for the fiscal year ended June 30, 2000, due to the reasons discussed
above.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net sales for the fiscal year ended June 30, 2000 were approximately
$278,482,000, as compared to approximately $176,281,000 for the fiscal year
ended June 30, 1999, an increase of approximately $102,201,000, or 58.0%. This
increase reflects an increase primarily in sales volume for foodservice products
manufactured by us, most of which represented sales to existing customers.
Our gross margin increased by approximately $15,620,000, from approximately
$29,929,000 for the fiscal year ended June 30, 1999 to approximately $45,549,000
for the fiscal year ended June 30, 2000, primarily as a result of the increased
sales volume. Our gross margin as a percentage of sales decreased slightly from
17.0% in the fiscal year ended June 30, 1999 to 16.4% in the fiscal year ended
June 30, 2000. The decrease in gross margin as a percentage of net sales was
primarily due to the lower average selling price for cheese to our customers (as
a result of the lower average CME Block Cheddar Market) during the fiscal year
ended June 30, 2000, and to a lesser extent, the shift toward lower margin sales
associated with the foodservice markets.
Selling and shipping expenses increased by approximately $7,847,000 from
approximately $14,046,000 during the fiscal year ended June 30, 1999 to
approximately $21,893,000 during the fiscal year ended June 30, 2000. The
increase in selling and shipping expenses was primarily due to increases in
advertising and promotional allowances to strengthen the Suprema brand name,
commission expense and shipping expenses in support of our revenue growth. As a
percentage of sales, selling and shipping expenses decreased slightly from 8.0%
for the fiscal year ended June 30, 1999 to 7.9% for the fiscal year ended June
30, 2000. The decrease in selling and shipping expenses as a percentage of sales
was primarily due to the increase in our revenue growth, which was partially
offset by the increases in advertising and promotional allowances, commission
expense and shipping expenses in support of our revenue growth.
General and administrative expenses increased by approximately $2,493,000,
from approximately $4,421,000 for the fiscal year ended June 30, 1999 to
approximately $6,914,000 for the fiscal year ended June 30, 2000. The increase
in general and administrative expenses was primarily due to an increase in
personnel and other administrative expenses associated with our revenue growth.
As a percentage of sales, general and administrative expenses remained constant
at 2.5% for both the fiscal year ended June 30, 1999 and June 30, 2000.
Net interest expense increased to approximately $5,921,000 for the fiscal
year ended June 30, 2000 from approximately $4,329,000 for the fiscal year ended
June 30, 1999. The increase in interest expense was primarily the result of our
expanded borrowing requirements necessary to finance working capital needs.
The provision for income taxes for the fiscal year ended June 30, 2000
increased by approximately $1,511,000 compared to fiscal year ended June 30,
1999 primarily as a result of increased taxable income.
Net earnings increased by approximately $2,177,000 to approximately
$6,385,000 in the fiscal year ended June 30, 2000 from approximately $4,208,000
in the fiscal year ended June 30, 1999 due to the reasons discussed above.
16
Quarterly Results of Operations
The following table sets forth in thousands, except per share data, certain
unaudited quarterly financial information:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
------------- ------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......... $61,381 $65,323 $75,564 $76,214 $88,948 $92,742 $108,636 $130,037
Cost of sales ..... 51,397 54,152 63,472 63,912 74,919 78,373 91,998 110,120
------- ------- ------- ------- ------- ------- -------- --------
Gross margin ...... 9,984 11,171 12,092 12,302 14,029 14,369 16,638 19,917
Selling and
shipping expenses 5,123 5,486 6,265 5,019 6,836 6,740 8,663 9,121
General and
administrative
expenses......... 1,248 1,680 1,491 2,495 1,619 1,871 2,082 3,198
------- ------- ------- ------- ------- ------- -------- --------
Income from
operations....... 3,613 4,005 4,336 4,788 5,574 5,758 5,893 7,598
Interest expense,
net.............. 1,260 1,418 1,582 1,660 2,262 2,424 2,118 3,229
------- ------- ------- ------- ------- ------- -------- --------
Earnings before
income taxes..... 2,353 2,587 2,754 3,128 3,311 3,334 3,775 4,370
Income tax expense 940 1,083 1,132 1,282 1,324 1,266 1,579 1,747
------- ------- ------- ------- ------- ------- -------- --------
Net earnings ...... $ 1,413 $ 1,504 $ 1,622 $ 1,846 $ 1,987 $ 2,068 $ 2,196 $ 2,623
======= ======= ======= ======= ======= ======= ======== ========
Earnings per
share:
Basic ............ $ 0.31 $ 0.34 $ 0.37 $ 0.35 $ 0.41 $ 0.37 $ 0.39 $ 0.46
Diluted .......... $ 0.27 $ 0.29 $ 0.31 $ 0.35 $ 0.36 $ 0.33 $ 0.34 $ 0.38
</TABLE>
The following table sets forth, as a percentage of net sales, certain
unaudited quarterly financial information:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
------------- ------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ..... 83.7 82.9 84.0 83.9 84.2 84.5 84.7 84.7
----- ----- ----- ----- ----- ----- ----- -----
Gross margin ...... 16.3 17.1 16.0 16.1 15.8 15.5 15.3 15.3
Selling and
shipping expenses 8.3 8.4 8.3 6.6 7.7 7.3 8.0 7.0
General and
administrative
expenses......... 2.1 2.6 2.0 3.3 1.8 2.0 1.9 2.5
----- ----- ----- ----- ----- ----- ----- -----
Income from
operations....... 5.9 6.1 5.7 6.3 6.3 6.2 5.4 5.8
Interest expense .. 2.1 2.2 2.1 2.2 2.6 2.6 2.0 2.5
----- ----- ----- ----- ----- ----- ----- -----
Earnings before
income taxes..... 3.8 3.9 3.6 4.1 3.7 3.6 3.4 3.3
Income tax expense 1.5 1.6 1.6 1.7 1.5 1.4 1.4 1.3
----- ----- ----- ----- ----- ----- ----- -----
Net earnings ...... 2.3% 2.3% 2.1% 2.4% 2.2% 2.2% 2.0% 2.0%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Our diluted earnings per share for the fiscal year 2000 quarters do not, in
the aggregate, equal our fiscal year 2000 earnings per share due to the effects
of options and warrants in certain quarters.
Liquidity and Capital Resources
At June 30, 2001, we had working capital of approximately $143,990,000 as
compared to approximately $95,816,000 at June 30, 2000, an increase of
approximately $48,004,000. The increase in working capital is primarily due to
our improved operating results as well as the proceeds from long term borrowings
of $33,378,000 used to support our increased accounts receivable and inventory
levels in support of our increased sales volume.
Net cash used in operating activities in the fiscal year ended June 30, 2001
was approximately $36,958,000 as compared to $32,649,000 in the fiscal year
ended June 30, 2000 and $7,704,000 in the fiscal year ended June 30, 1999. The
increase in the use of cash in operations was primarily the result of increases
in accounts receivable and inventories in support of our increased sales volume,
as well as increases in
17
prepaid expenses and other current assets, partially offset by net earnings and,
for the fiscal year ended June 30, 2001, increases in accounts payable. The
percentage increase of our accounts receivable was greater than the percentage
increase of our revenue primarily as a result of extended payment terms that we
grant to certain of our significant customers to which sales increased at a
greater rate than our aggregate sales. We have not, however, experienced any
material bad debt write-offs and we do not, generally, issue our customers a
right of a return with respect to delivered products. The percentage increase in
our inventory, which increased primarily as a result of our increase in sales
volume, was less than the percentage increase in our revenue. The cash used in
operations was financed through cash flow from financing activities, primarily
proceeds from existing credit facilities and, for the fiscal year ended June 30,
2001, our underwritten public offering which we completed in August and
September 2000. Net cash used in investing activities in the fiscal year ended
June 30, 2001 was approximately $4,084,000, as compared to $677,000 in the
fiscal year ended June 30, 2000 and $667,000 in the fiscal year ended June 30,
1999. Our investing activities during the fiscal year ended June 30, 2001
related to continued expenditures for fixed assets, including the purchase from
Snake River Cheese, L.L.C. of land and the building located in Blackfoot, Idaho,
and capital equipment utilized in our California and New York manufacturing
facilities. Investing activities during the fiscal year ended June 30, 2000
related to continued expenditures for fixed assets, including capital equipment
for our Manteca and Ogdensburg manufacturing facilities. We intend to finance
any additional significant capital expenditures through operating leases. As a
result, at June 30, 2001, we had cash of approximately $610,000 as compared to
approximately $950,000 at June 30, 2000 and $358,000 at June 30, 1999.
We have a revolving credit facility with several commercial banks. In
September 2001, the line of credit under this facility was increased to
$130,000,000 through February 15, 2004. The rate of interest on amounts borrowed
under the revolving credit facility is the adjusted LIBOR plus 175 basis points.
The interest rate as of June 30, 2001 was 7.5% per annum. The facility is
collateralized by substantially all existing and acquired assets as defined in
the credit facility, and is guaranteed by our subsidiaries, and the pledge of
all of the stock of our subsidiaries. Advances under this credit facility are
limited to 85.0% of eligible accounts receivable and 60.0% of most inventory, as
defined in the agreement. The credit facility agreement contains restrictive
covenants, including the maintenance of consolidated net worth and the
maintenance of leverage and fixed charge ratios, as defined in the agreement,
and a restriction on dividends to common shareholders. As of June 30, 2001, we
were in compliance with these covenants. The credit facility agreement further
provides that the loss of services of Mark Cocchiola may be deemed an event of
default upon which the principal amount borrowed under the facility together
with accrued interest and all other payment obligations may become immediately
due and payable. At June 30, 2001, our total outstanding debt to the banks was
approximately $99,265,000.
In August 2000, we completed an underwritten public offering for shares of
our common stock of which 1,100,000 shares were sold by us and 100,000 shares
were sold by certain selling shareholders at a public offering price of $8.00
per share. Gross proceeds of the shares we sold were $8,800,000, and we received
net proceeds of approximately $7,404,000. We received no proceeds from the
shares sold by selling shareholders. In addition, in association with the public
offering, the underwriters were granted an option to purchase up to an
additional 80,000 shares of common stock from us and 100,000 shares of common
stock from the selling shareholders to cover over-allotments.
On September 15, 2000, the underwriters exercised their over-allotment
option. Gross proceeds of the over-allotment shares we sold were $640,000 and we
received net proceeds of $570,000. We received no proceeds from the shares sold
by selling shareholders.
In May 1999, our Board of Directors approved a stock repurchase program to
acquire up to $3,200,000 of our common stock. As of June 30, 2001, we have
repurchased 224,877 shares of our common stock for a cost of approximately
$1,548,000.
In March 1998, we entered into a Loan and Security Agreement with Albion
Alliance Mezzanine Fund, L.P. and the Equitable Life Assurance Society of the
United States as the lenders, pursuant to which $10,500,000 was loaned to us.
The loan is unsecured and is subordinated to the revolving credit facility
discussed above. The loan bears interest at 16.5% per annum. Interest is payable
monthly at a rate of 12.0% per annum with the balance deferred until February 1,
2003 when it is due in full. The loan is payable in
18
three installments of the principal amount of $3,500,000, together with accrued
and unpaid interest thereon, on each March 1, beginning in the year 2004. The
Loan and Security Agreement provides that, upon the loss of Mark Cocchiola, the
lenders could require Suprema to repurchase the principal amount of the
subordinated loan. In addition, in connection with the execution and delivery of
the Loan and Security Agreement, we delivered to the lender a warrant to
purchase 105,000 shares of our common stock at $4.125 per share, the market
price at the date of the agreement. The warrant was exercised pursuant to a
cashless exercise in July 2001.
In March 1996, we purchased our Paterson, New Jersey production facility
which we 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 purchase price for the facility. 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 bore interest at 8.51% per annum was being amortized at
a fifteen year rate and required a balloon payment at the end of year five of
approximately $840,000. On March 29, 1999, we refinanced the mortgage on our
Paterson facility for the principal amount of $929,573. The seven year note
which bears interest at 7.85% per annum, is being amortized at a fifteen year
rate and requires a balloon payment at the end of year seven of approximately
$501,000. At June 30, 2001, we had outstanding obligations of approximately
$815,000 under the mortgage for the Paterson facility.
We believe that cash flow from operating activities and borrowings available
under our revolving credit facility will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures until at least June 30,
2002. Thereafter, we may need to raise additional funds to fund our operations
and potential acquisitions, if any. Any such additional financing, if needed,
might not be available on reasonable terms or at all.
Foreign Currency
We are 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
our ability to obtain supplies and deliver finished products on a timely and
competitive basis. We have no material hedged monetary assets, liabilities or
commitments denominated in currencies other than the United States dollar.
Effect of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 standardizes accounting and reporting for
derivative instruments and for hedging activities. This statement was adopted
for our 2001 fiscal year. SFAS 133 did not have any significant effect on our
financial statements.
In July 2001, SFAS 141, Business Combinations, and SFAS 142, Goodwill and
other Intangible Assets, were issued. SFAS 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets. SFAS 142
requires, among other things, that companies no longer amortize goodwill, but
instead test goodwill for impairment at least annually. SFAS 142 is required to
be applied for fiscal years beginning after December 15, 2001. Currently, we
have not recorded any goodwill and we intend to assess how the adoption of SFAS
141 and SFAS 142 will impact our financial position and results of operations
with respect to any future acquisition we may make.
Quantitative and Qualitative Disclosures About Market Risk
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
approximate fair value because of the current nature of these instruments. The
carrying amounts reported for revolving credit and long-term debt approximate
fair value because the interest rates on these instruments are subject to
changes with market interest rates.
19
BUSINESS
General
We manufacture and market gourmet all natural Italian cheeses. Our product
lines consist primarily of mozzarella, ricotta, parmesan, romano and provolone
cheeses, which we produce domestically, as well as parmesan and pecorino romano
cheeses, which we import. Certain of our domestically produced cheeses include
"lite" and lower fat versions containing less fat and fewer calories.
We sell our cheeses through three channels of distribution in the food
industry: foodservice, food ingredient and retail. Over 95% of our revenue is
derived from the food service channel, where we market and sell our bulk cheeses
under the Suprema brand name, as well as under private label, to national and
regional foodservice distributors, which in turn sell our cheeses to
restaurants, hotels, caterers and others. We sell our cheeses to food
manufacturers in the food ingredient channel, who use our cheeses as ingredients
in prepared foods, such as frozen pizza and various pasta dishes. In the retail
distribution channel, we sell our cheeses principally in the Northeast and
Mid-Atlantic regional markets, as well as Florida and the Chicago Metropolitan
area, primarily to supermarket chains, grocery stores, delicatessens and gourmet
shops, including Food Town, Shaw's, Giant, King Kullen, Stop'N Shop and Krogers.
We market our cheeses under the Suprema and Suprema Di Avellino brand names,
and are increasing our efforts to build Suprema as a nationally recognized
cheese brand by, among other things, increasing our use of promotional
materials, participating in trade shows and entering into co-branding
relationships. For example, we recently entered into a one-year exclusive
agreement with Sbarro, Inc. to supply all of its whole milk ricotta and grated
romano cheese needs to its over 800 Sbarro restaurants in North America. As part
of this agreement, Suprema will have its name and logo displayed within Sbarro
stores.
Industry Overview
According to a report published by Business Trend Analysts, Inc., the U.S.
cheese market had $19.9 billion of sales in 1998, which are projected to grow to
approximately $29.8 billion in 2008. Natural cheese products, which are
non-processed and do not contain any preservatives, additives, sweeteners,
dehydrated fillers or artificial flavors, represent a significant sub-category
of the overall cheese market. The U.S. market for natural cheese products had
sales of $11.8 billion in 1998, which are projected to grow to approximately
$18.6 billion in 2008. Production of Italian cheeses, which are natural cheese
products, accounted for approximately 38% of U.S. cheese produced in 1998, and
is projected to increase to 42% of U.S. cheese production in 2008. Approximately
3.1 billion pounds of Italian cheese were produced in the United States in 1998,
which is projected to increase 68% to 5.2 billion pounds by 2008.
Consumer trends have shown an increase in dining away from home and/or
purchasing prepared meals for home consumption. These trends, together with an
increase in the number of fast-food establishments, which use various types of
cheeses in many of their product offerings, have contributed to the rise in
sales of specialty Italian and other ethnic cheeses. According to Business Trend
Analysts, Inc., Italian cheese is gaining market share through increased
distribution in the foodservice industry. Over the past twenty years,
consumption of mozzarella cheese has more than tripled while consumption of
parmesan, ricotta and provolone has doubled. Business Trend Analysts, Inc.
estimates that per capita consumption of Italian cheese will grow at an average
of 4.5% per year, while growth in per capita American cheese consumption will
average only about 0.9% per year.
Natural cheese products are mainly sold through three channels of
distribution: foodservice, food ingredient and retail. The foodservice channel
encompasses all providers of prepared meals including, among others,
restaurants, hotels and caterers. The food ingredient channel produces frozen
foods such as pizzas and various pasta dishes, food toppings and desserts. The
retail channel includes supermarket chains, grocery stores, delicatessens,
gourmet shops and other retail outlets. According to a recent McKinsey &
Company, Inc. report of the foodservice industry, the foodservice and food
ingredient channels are expected to comprise $87.0 billion of the $140 billion
in new food spending, representing 61.0% of total growth, between 2000 and 2010.
Over the same ten year period, the retail channel is expected to comprise $53.0
billion, or 39%, of this
20
incremental growth. The report indicates that this expected growth in food
spending will be fueled by social changes that have altered the nations eating
habits. For example:
o As generations age, they are more likely to spend significantly more
dollars away from home on food;
o As the number of households earning over $50,000 increases to 30% of total
households, the amount of money spent on food prepared outside the home
will also rise; and
o As dual income families consume their time in the workforce they tend to
rely more on foods prepared away from home.
The foodservice channel is also experiencing increasing consolidation.
According to the McKinsey report, the top ten foodservice manufacturers
increased their share of total revenue from 29% in 1990 to an estimated 36% in
2000. In addition, the top ten distributors held 28% of the market share in
2000, representing an increase from 17% in 1990.
Competitive Strengths
We are a Low Cost Producer. All of our production facilities are located in
key milk shed regions of the United States including New York, California, the
leading milk producing state, and Idaho, which is one of the fastest growing
milk producing states. By locating in areas where there is an abundant supply of
milk at competitive price levels we are able to minimize transportation costs
for our raw milk supplies and maintain a low cost infrastructure. In addition,
we invest in our production facilities, employ certain production techniques and
maintain an ongoing maintenance program to ensure that our facilities run
efficiently.
We Have Established Relationships with National Accounts. We have established
ourselves as a reliable supplier of consistently high quality products with
major national accounts such as Sysco, Multifoods Distribution and Lisanti
Foods. We believe that our developed relationships will enable us to further
penetrate these customers and their affiliates. Our focus on customer
satisfaction and our geographic diversity allows us to service our national
foodservice and food ingredient customers across the United States.
We Produce High Quality and Consistent Products. We maintain rigorous quality
control programs in all of our production facilities. We design these programs
so that our products meet or exceed our stringent quality control measures,
ensuring that our customers receive high quality cheese with consistent taste
and performance characteristics. We believe that our focus on the quality and
consistency of our products has been a primary factor in our ability to achieve
significant and increasing sales growth over the last three fiscal years.
We Produce a Full Line of Gourmet All Natural Italian Cheeses. We produce a
full line of gourmet all natural Italian cheeses consisting of mozzarella,
ricotta, parmesan, romano and provolone, including "lite" and lower fat versions
of certain of these cheeses. By offering a broad range of products, we can
service customers in the three primary food industry distribution channels:
foodservice, food ingredient and retail. Our broad product offering also enables
us to be the single source provider of our customers' Italian cheese needs.
We Have an Experienced Management Team. We have an experienced management
team committed to achieving our goals. Our President and Chief Executive Officer
is a founder of Suprema and has been involved in the cheese manufacturing
business since 1975. In addition, our Vice Presidents have significant
experience in the food production and marketing industry. We feel that this team
has emphasized quality in the execution of our business plan, particularly in
the areas of customer relations, productivity and employee excellence.
Business Strategy
Our business goal is to increase sales and profits by continuing to provide
high quality cheeses while expanding our distribution channels. Key elements of
our strategy for achieving this goal include:
21
Remaining a Low Cost Producer. The geographic location of our production
facilities in close proximity to areas of abundant supplies of milk assists us
in controlling the transportation component of our production costs. Moreover,
we believe that our production capacity, as increased by the recent addition of
our third production facility, provides us with increased purchasing leverage
for raw materials and supplies through increased volume discounts. We intend to
continue to invest in our facilities to enable us to decrease costs and increase
operating efficiencies. By maximizing our operating efficiencies we believe that
we will maintain our competitive pricing structure and further leverage our
continued sales growth.
Further Penetrating Large Foodservice Distributors in the Foodservice
Industry. Similar to the cheese industry, the foodservice industry is highly
fragmented. In recent years, as part of the consolidation of the foodservice
industry, many of the larger foodservice distributors acquired smaller
distributors. Many of the divisions of these foodservice distributors make
individual purchasing decisions, creating what we believe is an opportunity for
suppliers such as ourselves to further penetrate these large distributors. Many
of the largest foodservice distributors and food ingredient manufacturers are
currently clients. With our broad line of high quality all natural Italian
cheeses, we believe we can increase sales to these clients.
Continuing to Produce a Full Line of High Quality Products. We believe that
we have maintained a working environment that stresses excellence and quality.
We have been recognized by our industry for our high quality products,
including: the award for Best Hard Cheese at the 2001 California State Fair
Commercial Cheese Competition; the award for Best of Division for our provolone
cheese, gold medals for our provolone and mozzarella cheeses and a bronze medal
for our skim milk ricotta cheese in the California State Fair Commercial Cheese
Competition in July 2001; and six gold medals, four silver medals and one bronze
medal for our mozzarella and provolone cheeses and the "Agriculture 2000 Open
Class Cheese Award of Excellence" from the New York State Fair in October 1999.
We believe that the quality and consistency of our products and our high level
of customer service and satisfaction are each key elements in our ability to
maintain and expand existing customer relationships and establish strong
relationships with new customers. We intend to continue to invest in training
and use compensation tools such as employee stock options to continue to
motivate our employees.
Strengthening the Suprema Brand Name. We intend to increase recognition of
the Suprema brand name in the foodservice and food ingredient channels through
the use of promotional material such as brochures, circulars, and stand alone
displays, as well as through various co-op advertising programs and co- branding
opportunities such as our recently signed one-year exclusive agreement with
Sbarro, Inc. under which we will supply its whole milk ricotta and grated romano
cheese needs to its over 800 restaurants in North America. As part of the
agreement, Sbarro has agreed to display the Suprema logo within Sbarro stores.
Pursuing Potential Strategic Acquisitions. The cheese industry is highly
fragmented and regionalized, and we believe that there are potential acquisition
opportunities for Suprema. In December 2000, we acquired our Blackfoot, Idaho
production facility. We intend to continue to pursue strategic acquisitions of
facilities and/or businesses that are complementary to our business or that
enable us to expand our production capacity or distribution channels. In
addition, certain strategic acquisitions may enable us to expand our product
lines to other specialty cheeses and to increase our brand recognition.
Products, Production Process and Packaging
We domestically produce mozzarella, ricotta, provolone and grated and
shredded parmesan and romano cheeses, including "lite" and lower fat versions of
certain of these products which contain less fat and fewer calories. We also
import parmesan and pecorino (sheep's milk) romano cheeses for production and
resale. Foreign producers, located principally in Europe and South America,
supplied us with 25% of our bulk cheese requirements in each of fiscal year 2000
and fiscal year 2001. Our cheeses are natural and do not contain any
preservatives, additives, sweeteners, dehydrated fillers or artificial
flavorings. Our cheese products are premium quality all natural cheeses that
meet or exceed all federal and industry standards for purity, freshness, taste,
appearance and texture.
The flavor, aroma and texture of cheese is heavily dependent on the
ingredients and cultures used in the manufacturing process and the period of
time during which the cheese is aged. However, all natural cheeses go through a
similar production process. The basic ingredient of cheese is milk, usually
derived from cows,
22
sheep or goats. First, milk is separated and standardized to obtain the desired
fat content for the cheese. It is then pasteurized and transferred to tanks
where starter culture and rennet, an enzyme usually obtained from the stomach of
calves, reacts with proteins in the milk to convert it into curd, the main
element of cheese. This curd also contains a large proportion of whey, a watery
substance full of sugar.
Once the milk has sufficiently coagulated, the remaining whey is drained off.
If only a little whey is drained, the cheese will be a soft cheese; if all of
the whey is removed from the curds, the cheese will be a hard cheese. Cheese
producers vary the curd-whey ratio to produce a variety of cheese textures.
Once the curd consistency has been determined, the mixture is heated,
squeezed, twisted, pulled or kneaded to refine the cheese's texture. Provolone,
for example, is stretched and kneaded to give it its more elastic texture.
Mozzarella curds are chopped and shredded, cooked in hot water, kneaded and
stretched, cooked in hot water once again, then shaped and placed in cold water
for preservation. When the cheese producer has achieved the desired consistency,
the curds are patted into cheese molds and salted. Salt plays an important role
in the formation of the cheese's rind or outer coating.
The most important stage in cheese production is the ripening stage. Once the
cheese has settled into molds, it is left in controlled environments with
constant temperature to age. Some cheeses take only two weeks to mature and
others can take as long as seven years. During this time, natural microbes begin
to hatch within the cheese, giving it its particular flavors.
Once aged, cheeses are packaged and shipped to consumers. Today, most types
of cheeses are made in commercial factories, where state-of-the-art equipment
and technology prevent contamination and an overgrowth of bacteria. We use
various techniques to preserve the freshness of our products, including,
controlled atmosphere, heat sealed packaging and a moisture reduction process
which extends the shelf-life of our grated and shredded cheeses.
We offer many of our products to our foodservice and food ingredient
customers in shrink-wrapped plastic packaging and in plastic pillow packs which
ensure continued freshness and gourmet quality. In addition to standard sizes,
we also package our products in customized sizes, which can range from five
pound to 40 pound blocks, in order to meet the specific needs of our foodservice
distributors and food manufacturer customers. We market and sell our products to
the foodservice and food ingredient channels under the Suprema brand name as
well under private label.
We offer most of our retail products in convenient, resealable, tamper-
resistant, clear plastic cups and shakers in order to maximize both freshness
and taste as well as to promote visual appeal. We believe that our packaging
enhances the gourmet quality and image of our cheeses. We offer our cheeses in a
wide variety of retail package sizes, ranging from 6 ounces to 3 pounds. We
market and sell our products to retail groups under the Suprema Di Avellino
brand name as well as under private label.
Sales and Marketing
We employ regional sales representatives to market our products as well as a
national account representative who is responsible for sales to our customers
who have national operations. Senior management is responsible for planning and
coordinating our marketing programs and maintains a hands-on relationship with
select key accounts. In addition, we engage independent commissioned food
brokers throughout the United States for marketing to our customers. To achieve
greater market penetration, we intend to continue to strengthen and expand our
sales force and food broker network.
We believe that product recognition by customers, consumers and food brokers
is an important factor in the marketing of our products. We market our products
and brand name by participating in trade shows, establishing co- branding
relationships, through the use of promotional materials, including full color
product brochures, circulars, free standing product displays, newspaper inserts
and through various co-op advertisement programs. Our Vice President of Sales is
responsible for overseeing our marketing efforts and for managing and
coordinating our sales efforts and supervising our regional sales
representatives and brokers.
23
Customers
We sell our cheeses nationally to foodservice industry distributors and food
manufacturers, principally in bulk. For the years ended June 30, 1999, 2000 and
2001, sales of cheese products to foodservice distributors accounted for
approximately 91%, 91% and 97%, respectively, of our net sales. Sales to food
manufacturers accounted for approximately 6%, 7% and 2%, respectively, of our
net sales.
Our retail products are sold to supermarket chains, grocery stores,
delicatessens and gourmet shops. Our customers include well known chain stores,
such as Food Town, Shaw's, Giant, King Kullen, Stop'N Shop and Krogers. For the
years ended June 30, 1999, 2000 and 2001, sales of cheese products to retailers
accounted for approximately 3%, 2% and 1%, respectively, of our net sales.
We generally sell our cheeses upon receipt of customer purchase orders and
fill orders within approximately seven days. Other than our agreement with
Sbarro, Inc., we generally do not have long term purchase agreements with our
customers. For the fiscal year ended June 30, 2000, A&J Foods, Inc., Tricon
Commodities International, Inc. and Noble J.G. Cheese Company accounted for
approximately 15%, 13% and 12%, respectively, of our net sales. For the fiscal
year ended June 30, 2001, A&J Foods, Inc., Tricon Commodities International,
Inc., Battaglia and Company, Noble J.G. Cheese Company and California Goldfield
Cheese Traders accounted for approximately 17%, 15%, 12%, 10% and 10%,
respectively, of our net sales. As of June 30, 2001, these five customers
represented 20%, 20%, 15%, 13% and 13%, respectively, of our net accounts
receivable.
Production Facilities
We manufacture our all natural cheeses at our West Coast facility in Manteca,
California, our Northeast facility in Ogdensburg, New York and our facility in
Blackfoot, Idaho.
Our Manteca facility consists of approximately 110,000 square feet, which we
operate pursuant to a ten year lease that expires in August 2005 and that may be
extended at our option for two additional five-year periods. At our Manteca
facility, raw milk is purchased from milk cooperatives and, through our state-
of-the-art equipment, produced into cheese. The Manteca facility, which has
shredding capabilities, whey processing equipment and storage and shipping
facilities, manufactures the full line of our products, including mozzarella,
provolone, ricotta and domestic parmesan and romano.
Our Ogdensburg facility consists of an aggregate of approximately 72,000
square feet and contains a cheese manufacturing operation, as well as storage
and shipping facilities and whey processing equipment. We manufacture mozzarella
and provolone cheeses at this facility. We lease this facility pursuant to a
lease which expires in July 2017, which we may elect to terminate on each fifth
year anniversary of its commencement.
We purchased our Blackfoot facility in December 2000. We manufacture
mozzarella, monterey jack and cheddar cheese at this facility. This facility
consists of approximately 37,000 square feet and contains a cheese manufacturing
operation, as well as storage and shipping facilities and whey processing
equipment.
We also maintain an East Coast facility in Paterson, New Jersey which we own,
subject to a mortgage, and which consists of approximately 32,000 square feet.
This facility contains production, storage and shipping facilities, including
state-of-the-art equipment for grating, shredding and packaging our products,
and has been further expanded to include a refrigerated/freezer storage
facility. At this facility, bulk cheese from our three manufacturing facilities,
as well as imported bulk cheese, is shredded or grated, packaged and
distributed. Our Paterson facility also serves as our corporate headquarters.
Each of our facilities serves as a distribution point for various geographic
markets throughout the United States. Our Manteca and Ogdensburg facilities are
operating at approximately 80% of production capacity. Our Paterson facility is
operating at approximately 67% of production capacity and our Blackfoot facility
is operating at approximately 20% of production capacity.
We employ a Director of Operations at each facility who makes pre-production
inspections and monitors critical manufacturing and processing functions. We
also employ a Director of Quality Control who oversees the Quality Control
Departments at each of our facilities. Our Quality Control Departments are
responsible
24
for testing raw ingredients to ensure that they are free of contaminants,
inspecting production equipment and testing finished products to ensure both
quality and compliance with customer specifications. In addition, we regularly
send random samples of each product to outside laboratories, which perform
routine physical, chemical and micro-biological tests.
We believe that our current facilities are adequate to handle our current
sales volume and subsequent growth.
Suppliers
Our principal ingredient is raw milk. We have a supplier agreement with
Allied Federated Cooperatives Inc. that runs through 2017, which provides that,
subject to specified minimum amounts, we will purchase from them all of our milk
requirements used in the manufacture of cheese products at our Ogdensburg, New
York facility. We are also dependent on a limited number of other suppliers for
all of our requirements of raw materials, primarily milk used in the manufacture
of cheese at our Manteca, California facility. We believe that there are
numerous alternative sources of supply available to us, including for raw milk
which is currently provided by our suppliers. For our fiscal year 2000 and
fiscal year 2001, our three largest suppliers accounted for, in the aggregate,
approximately 34% and 36%, respectively, of our product requirements, with one
milk supplier accounting for 14% and 12%, respectively, of our requirements.
Other than our agreement with Allied Federated Cooperatives Inc., we generally
purchase raw milk from diary cooperatives and other dairy vendors under one-year
purchase agreements.
Our purchases of bulk cheese are made pursuant to purchase orders placed in
the ordinary course of business. We import certain of our bulk cheeses directly
from Europe and, to a lesser extent, South America. We purchase cheese supplies
in large quantities in order to obtain volume discounts and place orders for
imported bulk cheese approximately four to six months in advance of anticipated
production requirements. For the fiscal years ended June 30, 1999, 2000 and
2001, approximately 18%, 25% and 25%, respectively, of our supply requirements
were imported.
Trademarks
In September 1992, we registered the name Suprema Di Avellino with the United
States Patent and Trademark Office. We have received notices of allowance from
the United States Patent Office with respect to the trademarks "Chez" and "Pizza
Chez."
Government Regulation
We are subject to extensive regulation by the United States Food and Drug
Administration, the United States Department of Agriculture, and other state and
local authorities in jurisdictions in which our products are manufactured,
processed or sold, regarding the importation, manufacturing, processing,
packaging, storage, distribution and labeling of our 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 as well as general "Good Manufacturing Practices" with
respect to manufacturing and production processes. Our manufacturing and
processing facilities and products are subject to compliance with federal and
state regulations regarding work safety and environmental matters as well as
periodic inspection by federal, state and local authorities. We believe that we
are currently in substantial compliance with all material governmental laws and
regulations and maintain all material permits and licenses relating to our
material operations. Amendments to existing statutes and regulations, adoption
of new statutes and regulations as well as our expansion into new operations and
jurisdictions will require us to obtain additional licenses and permits and
could require us to adapt or alter methods of operations at costs which could be
substantial.
Advertising relating to our products is subject to review of the Federal
Trade Commission and state agencies to monitor and prevent unfair or deceptive
trade practices.
25
Competition
We face significant competition in the marketing and sales of our products.
Our foodservice and food ingredient products compete on the basis of price,
quality and service with products of companies such as Dairy Farmers of America,
Beatrice Cheese Company and Stella Foods. Our retail products compete for brand
recognition and shelf space with products of companies that have achieved
significant consumer loyalty, such as Kraft, Sorrento and Sargento, as well as
private label. Many of these companies have greater financial and other
resources than we do which enables them to procure supermarket shelf space and
to implement extensive advertising and promotional programs. We also compete in
all three distribution channels with importers of foreign cheese and companies
manufacturing substitute cheese products.
We believe the principal competitive factors in the marketing of cheeses are
price, quality, freshness, brand recognition and packaging convenience. Because
our current products are positioned as all natural and gourmet, we generally
price them at a premium to certain competitive products.
We are subject to evolving consumer preferences, nutritional and health-
related concerns. We believe that the absence of preservatives, additives,
sweeteners, dehydrated fillers or artificial flavorings increases the appeal of
our products to consumers. In addition, in response to certain consumer concerns
we have certain all natural "lite" and lower fat cheese products which contain
less fat and fewer calories. We expect to see increased competition from other
companies whose products or marketing strategies address these consumer
concerns.
Employees
As of the date of this prospectus, we had 286 full-time employees, of which
16 are employed in executive capacities and management positions, 28 are engaged
in sales and marketing and administrative capacities and 242 are engaged in
production and operations. Approximately 62% of our total workforce is
represented by a union. We have entered into a contract with our union employees
in Manteca, California which expires in December 2004. We have entered into a
contract with our union employees in Ogdensburg, New York which expires in
November 2003. We consider relations with our employees to be satisfactory.
Legal Proceedings
We are a party to certain litigation arising in the ordinary course of
business. While any litigation has an element of uncertainty, we believe that
the final resolution of any of these matters will not have a material effect on
our operations.
26
MANAGEMENT
Our current directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
Mark Cocchiola ..................... 45 Chairman of the Board, Chief Executive Officer and President
Steven Venechanos .................. 42 Chief Financial Officer, Secretary and Director
Thomas Egan ........................ 60 Senior Vice President
Anthony Distinti ................... 82 Vice President
Marco Cocchiola .................... 76 Director
Dr. Rudolph Acosta, Jr. ............ 46 Director
Paul DeSocio ....................... 59 Director
Barry Rutcofsky .................... 44 Director
</TABLE>
Mark Cocchiola has been President and a director of Suprema since our
inception in 1983 and Chairman of the Board and Chief Executive Officer since
February 1991. Mark Cocchiola is the son of Marco Cocchiola.
Steven Venechanos has been employed by Suprema since April 1994 and became
Chief Financial Officer and Secretary of Suprema in April 1995. He was appointed
a director of Suprema in September 2001. From June 1990 until joining Suprema,
he was employed in a variety of positions at Breed Technologies, a manufacturer
of airbag sensors.
Thomas Egan has been Vice President of Suprema since May 1993 and Senior Vice
President since June 1995. From May 1992 through May 1993, he was Sales Manager
of Blue Ridge Farms, a salad manufacturer. From October 1990 through May 1992,
Mr. Egan was President of TEF Sales Corp., a sales and marketing consulting firm
specializing in the cheese importing business.
Anthony Distinti has been Vice President of Human Resources of Suprema since
November 1997. Mr. Distinti has been employed in the food industry most of his
life in various capacities and has more than forty years experience in human
resources.
Marco Cocchiola has been a director of Suprema since February 1991 and
Operations Manager since our inception in 1983. Mr. Cocchiola was Secretary of
Suprema from February 1991 to June 1993. Marco Cocchiola is the father of Mark
Cocchiola.
Rudolph Acosta, Jr., M.D. has been a director of Suprema since August 1993.
He has been engaged in the private practice of medicine since August 1986.
Paul DeSocio has been a director of Suprema since August 1993. He has been
the President and a director of Autoprod, Inc., a manufacturer of food packaging
machinery since May 1989. From 1980 through May 1989, Mr. DeSocio was a Vice
President of Autoprod, Inc.
Barry Rutcofsky has been a director of Suprema since February 2001. He has
served as an Executive Vice-President of Take-Two Interactive Software, Inc., a
developer, publisher and distributor of interactive software games since May
2001. He was Co-Chairman of the Board of Take Two Interactive Software, Inc.
from July 2000 to May 2001 and was President of Take-Two Interactive from August
1999 to July 2000. Prior to joining Take-Two, Mr. Rutcofsky was a partner of the
New York law firm of Tenzer Greenblatt LLP (now known as Blank Rome Tenzer
Greenblatt LLP). Mr. Rutcofsky joined Tenzer Greenblatt LLP in April 1987.
Paul Lauriero, a director and Executive Vice President and a co-founder of
Suprema passed away in August 2001. Mr. Lauriero was primarily responsible for
overseeing the procurement of raw materials for production and the general
operations of our facilities. Mark Cocchiola has assumed the primary
responsibilities on an interim basis, and other responsibilities have been
assumed by other members of senior management. We are considering employing an
individual to assume some or all of the responsibilities previously performed by
Mr. Lauriero. However, we have not entered into any negotiations or agreements
at this time. We cannot, at this time, determine the impact of the loss of Mr.
Lauriero's services on our
27
operations. We are the beneficiary of a key-man life insurance policy we had
obtained on the life of Mr. Lauriero in the amount of $1.0 million, and we
anticipate receiving the proceeds from this policy.
Our directors are elected at the annual meeting of shareholders to hold
office until the annual meeting of shareholders for the ensuing year or until
their successors have been duly elected and qualified.
Officers are elected annually by our directors and serve at the discretion of
the Board.
Compensation of Directors
Non-employee directors receive compensation in the amount of $500 for each
meeting attended in person and $250 for each meeting attended by telephone
conference call for serving on the Board. Directors are reimbursed for all
out-of-pocket expenses incurred in attending Board meetings.
In addition, under our 1991 and 1998 stock option plans and 1999 stock
incentive plan, non-employee directors, other than directors who become members
of a stock option committee appointed by our Board pursuant to a stock option or
incentive plan, are eligible to be granted non-qualified stock options.
Directors who are employees, and are not members of a stock option committee,
are eligible to be granted incentive stock options and non- qualified stock
options under our stock option plans. Our Board or the compensation committee of
the Board has discretion to determine the number of shares subject to each
incentive stock option, the exercise price and other terms and conditions
thereof, but their discretion as to the exercise price, the term of each
incentive stock option and the number of incentive stock options that may vest
in any year, is limited by the terms of the stock option or incentive plans and
the Internal Revenue Code of 1986, as amended. In addition, the 1999 stock
incentive plan provides for the grant of other stock- based awards as may be
determined by our Board or the compensation committee.
Board Committees
We have established a compensation committee that is currently composed of
Dr. Rudolph Acosta and Mr. Paul DeSocio. The function of the compensation
committee is to evaluate and determine the compensation of our executive
officers pursuant to recommendations made by Mark Cocchiola, our Chief Executive
Officer.
We have established an audit committee that is currently composed of Messrs.
DeSocio and Rutcofsky and Dr. Acosta. The function of the audit committee is to
review and monitor our corporate financial reporting, external audits, internal
control functions and compliance with laws and regulations that could have a
significant effect on our financial condition or results of operations. In
addition, the audit committee has the responsibility to consider and recommend
the appointment of, and to review fee arrangements with, our independent
auditors.
Executive Compensation
Summary Compensation. The following table discloses compensation awarded by
Suprema for the fiscal years ended June 30, 2001, 2000 and 1999, to our Chief
Executive Officer, Executive Vice President, Senior Vice President, Chief
Financial Officer and Vice President, the "Named Executives," who are the only
executive officers whose salary and bonus exceeded $100,000 during the fiscal
year ended June 30, 2001.
28
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Number of
Annual Compensation Securities
--------------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
--------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Mark Cocchiola ........................... 2001 $250,000 $706,984 100,000 $17,716
Chairman of the Board, Chief 2000 250,000 508,594 100,000 15,615
Executive Officer and President 1999 252,700 324,201 50,000 15,010
Paul Lauriero ............................ 2001 250,000 706,984 100,000 16,616
Executive Vice President(2) 2000 250,000 508,594 100,000 13,679
1999 252,700 324,201 50,000 12,648
Thomas Egan .............................. 2001 164,903 -- 10,000 6,000
Senior Vice President 2000 153,750 -- 15,000 9,196
1999 133,077 -- 30,000 6,000
Steven Venechanos ........................ 2001 154,807 60,000 92,000 6,000
Chief Financial Officer and Secretary 2000 153,750 -- 25,000 13,500
1999 120,000 -- 30,000 6,000
Anthony Distinti ......................... 2001 125,000 20,000 -- --
Vice President 2000 119,731 -- -- --
1999 96,500 -- -- --
</TABLE>
---------------
(1) Consists of automobile allowance, medical insurance premium reimbursement
and compensation paid in lieu of vacation.
(2) Mr. Lauriero passed away in August 2001. Mark Cocchiola has assumed the
primary responsibilities previously performed by Mr. Lauriero, on an interim
basis, and other responsibilities have been assumed by other members of
senior management.
Option Grants in Last Fiscal Year. The following table discloses information
concerning options granted in fiscal year 2001 to the Named Executives. The
options granted to Mark Cocchiola and Mr. Lauriero were exercisable in full from
the date of grant. The options granted to Mr. Egan and Mr. Venechanos vest in
three annual installments commencing one year from the original date of grant of
the options.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable
Number of Percent of Value At Assumed
Securities Total Options Annual
Underlying Granted to Exercise Rates of Stock Price
Name Options Employees in Price Expiration Appreciation for
---- Granted Fiscal Year ($/Sh) Date Option Term
---------- ------------- -------- ---------- ---------------------
5% 10%
-------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark Cocchiola ........................... 100,000 25.2% $7.50 01/02/11 $471,671 $1,195,307
Paul Lauriero ............................ 100,000 25.2 7.50 01/02/11 471,671 1,195,307
Thomas Egan .............................. 10,000 2.5 7.50 01/02/11 47,167 119,531
Steven Venechanos ........................ 92,000 23.2 7.50 01/02/11 433,937 1,099,682
Anthony Distinti ......................... -- -- -- -- -- --
</TABLE>
Amounts reported in the "potential realizable value" columns above are
hypothetical values that may be realized upon exercise of the options
immediately prior to the expiration of their term, calculated assuming
appreciation at the indicated annual rate compounded annually for the entire
term of the option (ten years). The 5% and 10% assumed rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock price. The gains
shown are net of the option exercise price, but do not include deductions for
taxes or other expenses associated with the exercise of the option or the sale
of the underlying shares.
29
Aggregated Option Exercises and Fiscal Year-End Option Values. The following
table sets forth information concerning the number of options owned by the Named
Executives and the value of unexercised stock options held by the Named
Executives as of June 30, 2001. No stock options were exercised by the Named
Executives during fiscal year 2001. The year-end values in the table represents
the difference between the exercise price of such options and the fiscal
year-end fair market value of our common stock. The last sale price, or fair
market value, of our common stock on June 29, 2001, the last trading day prior
to June 30, 2001, was $14.75 per share.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at June 30, 2001 at June 30, 2001($)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Cocchiola(1)........ -- -- 475,000 -- $4,603,853 --
Paul Lauriero(1)......... -- -- 455,000 -- 4,373,313 --
Thomas Egan.............. -- -- 90,000 30,000 1,005,760 $ 331,631
Steven Venechanos(1)..... -- -- 131,334 118,666 1,466,663 1,082,140
Anthony Distinti......... -- -- 10,000 -- 115,000 --
</TABLE>
---------------
(1) The Shares being offered by Mr. Cocchiola, Mr. Lauriero's estate and Mr.
Venechanos in this offering will be issued upon the exercise of a portion of
these options sufficient to purchase 193,423, 303,640 and 52,937 shares of
common stock, respectively, immediately prior to this offering.
Employment Agreements
Mark Cocchiola has entered into an employment agreement with us that
currently expires in May 2006 and which may be automatically extended for one-
year periods after the initial term. The agreement provides for the full-time
employment of Mr. Cocchiola at an annual salary of $250,000 and an annual bonus
equal to 5% of our pre-tax profits in excess of $650,000 for the preceding year.
Mr. Cocchiola received a bonus of $324,201 in fiscal year 1999, $508,574 in
fiscal year 2000 and $706,984 in fiscal year 2001. The agreement provides that
Mr. Cocchiola will not compete with Suprema during the term of his employment
and for a period of one year following termination by either us or Mr. Cocchiola
for any reason. The agreement also provides that if Mr. Cocchiola's employment
is terminated under certain circumstances, including a "change of control," he
will be entitled to receive severance pay equal to the higher of (i) $1,250,000
or (ii) five times the total compensation paid to him by Suprema (including
salary, bonus, perquisites and the value of options granted to Mr. Cocchiola)
during the 12 month period prior to the date of termination.
30
DESCRIPTION OF SECURITIES
Suprema is authorized to issue 50,000,000 shares of common stock, par value
$.01 per share and 2,500,000 shares of preferred stock, par value $.01 per
share. As of the date of this prospectus, there were 5,742,538 shares of common
stock and no shares of preferred stock issued and outstanding.
Common Stock
The holders of our common stock are entitled to one vote for each share held
of record on all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. The holders of common stock are entitled to receive
dividends when, as and if declared by the Board in its discretion out of funds
legally available therefor. In the event of the liquidation, dissolution or
winding up of Suprema, the holders of common stock are entitled to ratably share
the assets of Suprema, if any, legally available for distribution to them after
payment of the debts and liabilities of Suprema and after provision has been
made for each class of stock, if any, having preference over the common stock.
Holders of shares of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the common stock. All of the outstanding shares of common stock
are, and the shares of common stock offered hereby will be, when issued upon
payment of the consideration set forth in this prospectus, fully paid and
non-assessable.
Preferred Stock
We are authorized to issue 2,500,000 shares of preferred stock. The preferred
stock can be issued from time to time in one or more series which may rank
senior to the common stock with respect to the payment of dividends and in the
event of liquidation, dissolution or winding-up of our company. Our Board has
the power, without shareholder approval, to issue shares of one or more series
of preferred stock, at any time, and for such consideration and with such
relative rights, privileges, preferences and other terms as the Board may
determine, including terms relating to dividend and redemption rates,
liquidation preferences and conversion or other rights. The rights and terms of
any new series of preferred stock could adversely affect the voting power or
other rights of the holders of the common stock or could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of our company.
Our Board has previously designated a class of 500,000 shares of Series A
redeemable convertible preferred stock whose terms provide that it may be
converted at the rate of one share of common stock for each share of preferred
stock at any time prior to redemption at a conversion price of $3.00 per share.
The preferred stock is redeemable at our option at any time after the first
anniversary of issuance, provided that the daily average of the high and low
price of our common stock equals or exceeds $5.00 per share for ten consecutive
days. The redemption price would be $3.00 per share, plus accrued and unpaid
dividends. Quarterly dividends are payable in cash at an annual dividend rate of
10% and are cumulative. The preferred stock has a preference on liquidation of
$3.00 per share plus accumulated but unpaid dividends. The preferred stock is
non-voting stock, unless we fail to pay dividends on the preferred stock for
four consecutive quarters, in which case the holders of the preferred stock
would be entitled to vote as a class to elect an additional director to the
Board.
Options
As of the date of this prospectus, options to purchase a total of 1,876,333
shares of our common stock were outstanding and options to acquire up to 23,667
shares of our common stock may be granted in the future under our existing stock
option plans. Of the outstanding options, an aggregate of 550,000 options will
be exercised by the selling shareholders named in this prospectus to acquire the
shares to be sold by them in this offering.
31
Warrants
In connection with our 1996 public offering, we issued the underwriter
warrants to purchase 150,000 shares of common stock, exercisable until June 30,
2002, at an exercise price of $6.875 per share. All of these warrants are
outstanding as of the date of this prospectus.
In connection with our 2000 public offering, we issued the underwriter
warrants to purchase 120,000 shares of common stock, exercisable until August
24, 2005, at an exercise price of $11.20 per share. All of these warrants are
outstanding as of the date of this prospectus.
In March 2001, we issued to our public relations firm, warrants to purchase
10,000 shares of common stock at an exercise price of $8.25 per share. These
warrants will become exercisable in March 2002 and will expire in March 2011.
Registration Rights
Holders of 120,000 shares of our common stock issuable upon the exercise of
outstanding warrants are entitled to certain rights with respect to the
registration of these shares under the Securities Act.
If we register any of our common stock, either for our own account or for the
account of other security holders, the holders of warrants are otherwise
entitled to notice of the registration and to include their shares of common
stock in the registration. The holders of the warrants, however, have waived
their registration rights in connection with this offering.
In all cases, a holder's right to include shares in a registration is subject
to the ability of the underwriters to limit the number of shares included in
this offering. All fees, costs and expenses of all of these registrations will
be paid by us, and all selling expenses will be paid by the holders of the
securities being registered. Sales of these shares could have an adverse effect
on the trading price of our common stock.
Anti-takeover Effects of Certain Provisions of Our By-Laws and Shareholders
Rights Plan
Certain By-Law Provisions. Our By-Laws contain provisions that could make
more difficult the acquisition of control of Suprema by various means, such as a
tender offer, open market purchases, a proxy contest or otherwise. For instance,
special meetings of the shareholders may only be called by our President and our
By-Laws establish advance notice procedures with regard to shareholder proposals
for annual or special meetings. The effect of these provisions may be to
discourage certain types of transactions which may involve an actual or
threatened change of control of Suprema and to encourage persons seeking to
acquire control of Suprema to consult first with our Board to negotiate the
terms of any proposed business combination or offer.
Shareholders Rights Plan. In March 1996, we adopted a Shareholders Rights
Plan and declared a dividend of one purchase right (a "Right") for each
outstanding share of our common stock. The dividend was paid to holders of
record of our common stock as of the close of business on March 18, 1996. Each
Right entitles the registered holder to purchase from us one share of our common
stock at a price of $20.00 per share (the "Purchase Price"), subject to
adjustment in certain circumstances. The description and terms of the Rights are
set forth in a Rights Agreement (the "Rights Agreement") between Suprema and
Continental Stock Transfer & Trust Company, as Rights Agent. A copy of the
Rights Agreement, which includes as Exhibit B the form of Rights Certificate and
as Exhibit C the Summary of Rights to Purchase Common Stock, is an exhibit to
the registration statement of which this prospectus forms a part.
Rights are evidenced by and are transferable only in connection with the
common stock certificates outstanding prior to the Distribution Date (as defined
below). As soon as practical following the earlier to occur of (i) ten days
after a public announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") have acquired or obtained the right to acquire
beneficial ownership of 15% or more of our outstanding common stock or (ii) ten
business days after the commencement of, or public announcement of an intention
of a person or group to commence, a tender or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of 15% or
more of our outstanding common stock (the "Distribution Date"), separate
certificates evidencing the Rights ("Right
32
Certificates") will be mailed to holders of record of our common stock as of the
close of business on the Distribution Date and such separate Right Certificates
alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire on
March 17, 2006, unless extended or unless the Rights are earlier redeemed or
exchanged by us, as described below. The Rights, the Purchase Price, and the
number of shares or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution.
In the event that following the Distribution Date, (i) Suprema is the
surviving corporation in a merger or consolidation with an Acquiring Person and
the common stock is not changed or exchanged, (ii) a person becomes the
beneficial owner of 25% or more of the then outstanding shares of our common
stock (except pursuant to an all-cash tender offer for all outstanding shares of
our common stock), (iii) an Acquiring Person engages in one or more "self-
dealing" transactions as set forth in the Rights Agreement, or (iv) during such
time as there is an Acquiring Person, an event set forth in the Rights Agreement
occurs which results in such Acquiring Person's percentage ownership of any
class of equity securities of Suprema or its subsidiaries being increased by
more than 1% (e.g., a reverse stock split), the Rights Agreement provides that a
proper provision shall be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof, common stock (or, in
certain circumstances, cash, property or other securities of Suprema) having a
value equal to two times the exercise price of the Right. However, Rights are
not exercisable following the occurrence of any of the events set forth above
until such time as the Rights are no longer redeemable by Suprema.
In the event that, at any time following the Stock Acquisition Date, as
defined in the Rights Agreement, (i) Suprema is acquired in a merger or
consolidation in which Suprema is not the continuing or surviving corporation,
(ii) Suprema is acquired in a merger or consolidation in which Suprema is the
continuing or surviving corporation and Suprema's common stock is changed into
or exchanged for other securities or property, or (iii) 50% or more of Suprema's
assets or earning power is sold or transferred, each holder of a Right (except
Rights which have previously been voided as provided in the Rights Agreement)
shall have the right to receive, upon exercise of the Right, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
Listing
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "CHEZ."
Transfer Agent
The transfer agent for our common stock is Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such sales may occur, could materially and
adversely affect prevailing market prices of our common stock and our ability to
raise equity capital in the future.
After this offering, we will have 9,792,538 shares of our common stock issued
and outstanding. This amount does not include 224,877 treasury shares. A total
of 9,049,718 of our outstanding shares, including the shares sold by us and the
selling shareholders in this offering, will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by our affiliates, as that term is defined in Rule 144, may
generally only be sold in compliance with the limitations of Rule 144, which is
summarized below.
The remaining 742,820 of our outstanding shares, representing 7.6% of our
total shares of common stock to be issued and outstanding after this offering,
are restricted securities under the terms of the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 or other applicable
exemption promulgated under the Securities Act. Our Chairman of the Board, Chief
Executive Officer and President, a member of our Board and representatives of
33
the estate of our former Executive Vice President and director, who collectively
own 90.7% of these restricted securities, have agreed that they will not,
directly or indirectly, sell or otherwise dispose of their shares of common
stock, as discussed below in "Underwriting."
We have issued options to purchase 1,876,333 shares of common stock under our
employee stock option plans. Options to purchase 550,000 shares of common stock
will be exercised by the selling shareholders named in this prospectus to
acquire shares to be sold in this offering. A significant number of the
remaining shares underlying these options have previously been registered for
resale and, subject to the applicable vesting requirements, upon exercise of
those options the underlying shares may be resold into public market. In
addition, we also have reserved 280,000 shares for issuance pursuant to
outstanding warrants previously issued by us. We have granted registration
rights to the holders of warrants to purchase 120,000 shares of common stock
issuable upon exercise of those warrants, which rights have been waived in
connection with this offering.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of our common stock then outstanding; or
o the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar week preceding the filing of a
notice on Form 144 with the SEC concerning that sale.
Sales under Rule 144 are also subject to specific manner-of-sale provisions,
notice requirements and to the availability of current public information about
us.
Under Rule 144(k) as currently in effect, a person who is not one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than one of our
affiliates, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, Rule 144(k) shares may be sold
immediately upon completion of this offering.
We are unable to predict the effect that sales made under Rule 144, pursuant
to future registration statements, or otherwise, may have on any then prevailing
market price for shares of the common stock. Nevertheless, sales of a
substantial amount of common stock in the public market, or the perception that
such sales could occur, could adversely affect market prices.
We have also agreed with the underwriters not to sell any shares of common
stock or securities exercisable for shares of our common stock for a period of
90 days after commencement of this offering without the underwriters' prior
written consent. However, even without such consent, we may issue stock upon
exercise of the warrants or the stock options described above.
34
PRINCIPAL AND SELLING SHAREHOLDERS
The following table shows information regarding the beneficial ownership of
our common stock as of the date of this prospectus and as adjusted to reflect
our sale and the sale by the selling shareholders of shares offered by this
prospectus for:
o each person or entity known by us to beneficially own more than 5% of our
common stock;
o each of our named executive officers;
o each of our directors;
o all of our directors and executive officers as a group; and
o selling shareholders under this prospectus.
The percentage of beneficial ownership in the table below both prior to and
after this offering is based on 5,742,538 shares of common stock outstanding as
of the date of this prospectus and 9,792,538 shares of common stock outstanding
after completion of this offering assuming no exercise of the underwriters'
over-allotment option.
All of the shares of common stock to be sold by the selling shareholders are
included in this offering. The selling shareholders have also granted the
underwriters an option to purchase up to 250,000 shares of common stock to cover
over-allotments, if any. The shares being offered by the selling shareholders in
this offering, including in connection with sales upon the exercise of the
underwriters' option to purchase shares from the selling shareholders to cover
over-allotments, will be issued upon the exercise by the selling shareholders of
outstanding common stock options. Mark Cocchiola has been our Chief Executive
Officer and President and Chairman of our Board during the last three years.
Steven Venechanos has been our Chief Financial Officer and Secretary during the
last three years and was appointed a director in September 2001. Paul Lauriero
is recently deceased and, prior to his death, officer and director of Suprema
during the last three years.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to this Shares of After this Offering
Offering (3) Common (3)
------------------- Stock ------------------- Shares Offered in
Name and Address (1)(2) Number Percent To Be Sold Number Percent Over-allotment
----------------------- --------- ------- ---------- --------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Five Percent Shareholders:
Estate of Paul Lauriero (4) .............. 675,619(5) 10.9% 303,640(6) 371,979 3.7% 32,143(7)
FMR Corp (8) ............................. 506,100 8.8 -- 506,100 5.2 --
Wellington Management Company, LLP (9) ... 417,500 7.3 -- 417,500 4.3 --
Oberweis Asset Management, Inc.
James D. Oberweis (10) .................. 316,000 5.5 -- 316,000 3.2 --
Special Situations Fund III, L.P.
Special Situations Cayman Fund, L.P.
Austin W. Marxe and
David Greenhouse (11)................... 371,451 6.5 -- 371,451 3.8 --
Directors and Executive Officers:
Mark Cocchiola ........................... 1,110,634(12) 17.5 193,423(13) 917,211 9.0 154,386(14)
Steven Venechanos ........................ 160,332(15) 2.7 52,937(16) 107,395 1.1 63,471(17)
Thomas Egan .............................. 104,999(15) 1.8 -- 104,999 1.1 --
Marco Cocchiola .......................... 68,411(18) 1.2 -- 68,411 * --
Anthony Distinti ......................... 10,000(15) * -- 10,000 * --
Dr. Rudolph Acosta ....................... 6,666(19) * -- 6,666 * --
Paul DeSocio ............................. 6,666(15) * -- 6,666 * --
Barry Rutcofsky .......................... -- -- -- -- -- --
All directors and executive officers as a
group (8 persons)....................... 1,467,708(20) 21.9 246,360(21) 1,221,348 11.6 217,857(22)
</TABLE>
---------------
* Less than one percent.
(foonotes continued on next page)
35
(foonotes continued from previous page)
(1) The address of each beneficial owner, unless otherwise noted, is in care of
Suprema, 510 East 35th Street, Paterson, New Jersey 07543.
(2) Unless otherwise noted, we believe that all persons referred to in the
table have sole voting and investment power with respect to all shares of
our common stock reflected as beneficially owned by them.
(3) Options to purchase our common stock which are currently exercisable or
become exercisable by the listed person within 60 days are included in the
number of shares beneficially owned by the listed person and that person's
percentage ownership calculation.
(4) Paul Lauriero, formerly an officer and director of Suprema passed away on
August 27, 2001. The shares of our common stock previously beneficially
owned by Mr. Lauriero are currently owned and administered by his estate.
(5) Includes (i) 455,000 shares that may be purchased upon the exercise of
exercisable options, (ii) 22,539 shares held of record by Mr. Lauriero's
wife and (iii) 45,079 shares held of record by Mr. Lauriero's children.
(6) Represents shares underlying options which are currently exercisable at
prices ranging from $3.06 to $7.50 per share.
(7) Represents shares underlying options which are currently exercisable at a
price of $7.50 per share.
(8) According to a Schedule 13G filed with the Securities and Exchange
Commission, the shares are owned by Fidelity Low Priced Stock Fund, an
investment company registered under the Investment Company Act of 1940
("Fidelity Fund"). Fidelity Management Research Company ("Fidelity
Management"), a wholly owned subsidiary of FMR Corp. is the investment
adviser to Fidelity Fund. Edward C. Johnson 3d the Chairman of FMR Corp.,
FMR Corp. through its control of Fidelity Management and Fidelity
Management each has sole investment power over the shares. The address for
each of FMR Corp., Fidelity Management and Mr. Johnson is 82 Devonshire
Street, Boston, Massachusetts 02109.
(9) According to a Schedule 13G filed with the Securities and Exchange
Commission, the shares were acquired by and held for the accounts of
Wellington Trust Company, NA, a wholly owned subsidiary of Wellington
Management Company, LLP ("Wellington"). Wellington has shared investment
power with respect to 417,500 shares and shared voting power with respect
to 360,100 shares. The address for Wellington is 75 State Street, Boston,
Massachusetts 02109.
(10) According to a Schedule 13G filed with the Securities and Exchange
Commission, the shares are held by The Oberweis Fund for which Oberweis
Asset Management, Inc. ("OAM"), an investment adviser registered under
Section 203 of the Investment Advisors Act of 1940, acts as investment
advisor. The Oberweis Fund has delegated shared voting and investment power
over the shares to OAM. James D. Oberweis is the principal shareholder of
OAM. The address for OAM and Mr. Oberweis is 951 Ice Cream Drive, Suite
200, North Aurora, Illinois 60542.
(11) According to a Schedule 13G filed with the Securities and Exchange
Commission, 283,451 shares are owned by Special Situations Fund III, L.P.,
a Delaware limited partnership ("Special Fund III") and 88,000 shares are
owned by Special Situations Cayman Fund, L.P., a Cayman Islands limited
partnership ("Special Cayman Fund"). August W. Marxe and David Greenhouse
serve as officers, directors and members or principal shareholders of (i)
MGP Advisers Limited Partnership, a Delaware limited partnership ("MGP")
and the general partner and investment advisor to Special Fund III, and
(ii) AWM Investment Company, Inc., a Delaware corporation, the general
partner of MGP and the general partner and investment advisor to Special
Cayman Fund. Messrs. Marxe and Greenhouse share voting and investment power
over the shares held by each of Special Fund III and Special Cayman Fund.
Their address is 153 East 53rd Street, New York, New York 10022.
(12) Includes (i) 575,000 shares that may be purchased upon exercise of
exercisable options owned by Mr. Cocchiola, (ii) 18,332 shares that may be
purchased upon exercise of exercisable options owned by Mr. Cocchiola's
wife and (iii) 2,000 shares held of record by Mr. Cocchiola's wife.
(foonotes continued on next page)
36
(foonotes continued from previous page)
(13) Represents shares underlying options which are currently exercisable at
prices ranging from $3.06 to $3.25 per share.
(14) Represents shares underlying options which are currently exercisable at
prices ranging from $3.068 to $7.50 per share.
(15) Represents shares that may be purchased upon exercise of exercisable
options.
(16) Represents shares underlying options which are currently exercisable at
prices ranging from $3.063 to $3.25 per share.
(17) Represents shares underlying options which are currently exercisable at the
price of $3.25 per share.
(18) Includes 63,332 shares that may be purchased upon exercise of exercisable
options.
(19) Represents shares that may be purchased upon exercise of exercisable
options. Does not include 800 shares owned by Dr. Acosta's children, with
respect to which Dr. Acosta disclaims any beneficial interest.
(20) Includes an aggregate of 945,327 shares issuable upon exercise of options
beneficially owned by Suprema's executive officers and directors.
(21) Represents the aggregate number of shares underlying exercisable options,
to be sold by the selling shareholders in this offering who are directors
and executive officers.
(22) Represents the aggregate number of shares underlying exercisable options
held by the selling shareholders who are directors and executive officers,
which may be sold by such selling shareholders to cover over- allotments.
37
UNDERWRITING
We and the selling shareholders are offering the shares of common stock
described in this prospectus through a number of underwriters. Janney Montgomery
Scott LLC, Pacific Growth Equities, Inc. and Roth Capital Partners, LLC are the
representatives of the underwriters. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell and the selling shareholders have
agreed to sell to the underwriters, and each underwriter has agreed to purchase,
the number of shares of common stock listed next to its name below at the public
offering prices less the underwriting discount on the cover page of this
prospectus.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Janney Montgomery Scott LLC .............. 1,923,750
Pacific Growth Equities, Inc. ........... 1,518,750
Roth Capital Partners, LLC ............... 607,500
----------------
Total .................................... 4,050,000
================
</TABLE>
The underwriting agreement is subject to a number of terms and conditions and
provides that the underwriters must buy all of the shares if they buy any of
them. The underwriters will sell the shares to the public when and if the
underwriters buy the shares from us. The common stock is offered subject to a
number of conditions including:
o receipt and acceptance of the common stock by the underwriters; and
o the right on the part of the underwriters to reject orders in whole or in
part.
The underwriters will initially offer the shares to the public at the price
per share shown on the cover page of this prospectus and to certain dealers at
such price less a concession not in excess of $0.50 per share. The underwriters
may also allow, and any other dealers may reallow, a concession of not more than
$0.10 per share to certain other dealers. After the public offering of the
common stock is complete, if all of the shares are not sold at the public
offering price, the underwriters may change the public offering price and the
other selling terms. No change in the selling terms will vary the proceeds to be
received by us as specified on the cover page of this prospectus.
We have granted the underwriters an option to buy up to 357,500 additional
shares of common stock, and the selling shareholders have granted the
underwriters an option to buy up to 250,000 additional shares of common stock at
the same price per share as the public offering price, less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise these options at any time within 30 days after the date of this
prospectus only to cover over-allotments in the sale of the shares of common
stock offered by this prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters. The underwriting discounts and
commissions are equal to the public offering price per share less the amount
paid to Suprema and the selling shareholders. These amounts are shown assuming
no exercise and full exercise of the underwriters' overallotment option to
purchase additional shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share underwriting discounts and commissions $ 0.89 $ 0.89
Total underwriting discounts and commissions to
be paid by us and the selling shareholders..... $3,604,500 $4,145,175
</TABLE>
The expenses of this offering, not including underwriting discounts and
commissions, and a non-accountable expense allowance of $200,000 to be paid to
certain representatives of the underwriters, are estimated to be approximately
$380,000 and will be paid by us. These expenses include the SEC filing fee,
printing expenses, transfer agent and registration and other miscellaneous fees.
Our executive officers and directors have entered into lock-up agreements
with the underwriters. Under these agreements, subject to certain exceptions,
our officers and directors have agreed that they will not, directly or
indirectly, offer, sell, contract to sell, or otherwise dispose of or hedge any
common stock or
38
securities convertible into or exchangeable for shares of common stock
(including any shares issued upon exercise of options) without the prior written
consent of Janney Montgomery Scott LLC. These restrictions will be in effect for
a period of 90 days after the commencement of this offering. Janney Montgomery
Scott LLC may, in its sole discretion and at any time without notice, release
any or all of the securities subject to these lock-up agreements.
We have agreed that for a period of 90 days after the date of this prospectus
we will not offer, sell, contract to sell or otherwise dispose of any shares of
our common stock or securities convertible into or exchangeable for any shares
of our common stock or grant options to purchase any shares of our common stock,
without the prior written consent of Janney Montgomery Scott LLC, except (i)
issuances pursuant to the exercise of options and warrants outstanding on the
date of this prospectus and (ii) grants of employee stock options pursuant to
the terms of a plan in effect on the date of this prospectus and issuances
pursuant to the exercise of such options.
In connection with this offering and in compliance with applicable securities
laws, Janney Montgomery Scott LLC, Pacific Growth Equities, Inc. and Roth
Capital Partners, LLC, on behalf of the underwriters, may purchase and sell
shares of common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in this offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
the common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of common stock made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when Janney
Montgomery Scott LLC, Pacific Growth Equities, Inc. or Roth Capital Partners,
LLC, in covering syndicate short positions or making stabilizing purchases,
repurchases shares originally sold by that syndicate member.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
In addition, in connection with this offering, the underwriters (and selling
group members) may engage in passive market making transactions in the common
stock on the Nasdaq National Market, prior to the pricing and completion of this
offering. Passive market making consists of displaying bids on the Nasdaq
National Market no higher than the bid prices of independent market makers and
making purchases at prices no higher than those independent bids and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the common stock during a specified period and must be
discontinued when such limit is reached. Passive market making may cause the
price of the common stock to be higher than the price that otherwise would exist
in the open market in the absence of such transactions. If passive market making
is commenced, it may be discontinued at any time.
Suprema and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to
make in respect of any of those liabilities.
LEGAL MATTERS
The legality of the common stock offered hereby has been passed upon for
Suprema by Blank Rome Tenzer Greenblatt LLP, New York, New York. Certain legal
matters will be passed upon for the underwriters by Pepper Hamilton LLP.
39
EXPERTS
The financial statements and schedules included and incorporated by reference
in this Prospectus have been audited by BDO Seidman, LLP, independent certified
public accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein and incorporated herein by reference, and are
included and incorporated herein in reliance upon such reports given upon the
authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC.
Our SEC filings are available to the public over the Internet at the SEC's
website at www.sec.gov. You may also read and copy any document we file with the
SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You can also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of its Public Reference Room.
INCORPORATION OF INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus the
information we have previously filed with it. The information incorporated by
reference is an important part of this prospectus. We incorporate by reference
the documents listed below:
o Our Annual Report on Form 10-K for the fiscal year ended June 30, 2001, as
filed with the SEC on September 28, 2001; and
o Our Current Report on Form 8-K, as filed with the SEC on October 22, 2001.
Any statement contained in a document incorporated by reference herein is
modified or superseded for all purposes to the extent that a statement contained
in this prospectus or in any other subsequently filed document which is
incorporated by reference modifies or replaces such statement.
You may request a copy of these filings at no cost, by writing or telephoning
us at the following address:
Mark Cocchiola, President
Suprema Specialties, Inc.
510 East 35th Street
Paterson, New Jersey 07543
(973) 684-2900
40
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ....................... F-2
Consolidated Balance Sheets as of June 30, 2000 and 2001 ................. F-3
Consolidated Statements of Earnings for the Fiscal Years Ended June 30,
1999, 2000 and 2001..................................................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended June 30, 1999, 2000 and 2001...................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30,
1999, 2000 and 2001..................................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
</TABLE>
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Suprema Specialties, Inc.
Paterson, New Jersey
We have audited the accompanying consolidated balance sheets of Suprema
Specialties, Inc. and Subsidiaries, as of June 30, 2000 and 2001, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Woodbridge, New Jersey
August 7, 2001
F-2
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------------
2000 2001
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 950,121 $ 609,527
Accounts receivable, net of allowances of
$770,290 at June 30, 2000 and 2001,
respectively ................................ 62,326,908 101,882,264
Inventories................................... 51,630,343 74,514,662
Prepaid expenses and other current assets..... 755,067 985,627
Deferred income taxes......................... 89,000 308,000
------------ ------------
Total Current Assets....................... 115,751,439 178,300,080
Property, plant and equipment, net .............. 7,181,208 10,560,513
Other assets .................................... 2,027,069 1,551,696
------------ ------------
Total assets ............................... $124,959,716 $190,412,289
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 13,989,065 $ 26,434,121
Current portion of capital leases............. 609,690 510,155
Mortgage payable--current..................... 53,574 57,785
Income taxes payable.......................... 1,539,000 2,587,759
Accrued expenses and other current liabilities 3,743,917 4,720,335
------------ ------------
Total current liabilities.................. 19,935,246 34,310,155
Deferred income taxes ........................... 749,000 780,900
Revolving credit loan ........................... 65,887,000 99,265,262
Subordinated debt ............................... 10,500,000 10,500,000
Long-term capital leases ........................ 1,105,637 595,481
Mortgage payable ................................ 814,920 757,661
Other liabilities ............................... - 1,375,001
------------ ------------
$ 98,991,803 $147,584,460
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value; 2,500,000
shares authorized: Series A redeemable
convertible preferred stock; 500,000 shares
designated; none issued and outstanding at
June 30, 2000 and 2001 ...................... -- --
Common stock, $.01 par value; 50,000,000
shares authorized; 4,655,564 and 5,867,920
shares issued and outstanding at June 30,
2000 and 2001, respectively ................. 46,555 58,679
Additional paid-in capital.................... 11,365,207 19,444,319
Retained earnings............................. 15,998,771 24,872,451
Treasury stock at cost; 213,370 at June 30,
2000 and 224,877 shares at June 30, 2001 .... (1,442,620) (1,547,620)
------------ ------------
Total shareholders' equity................. 25,967,913 42,827,829
------------ ------------
Total liabilities and shareholders' equity. $124,959,716 $190,412,289
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1999 2000 2001
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ..................................................... $176,281,035 $278,481,969 $420,363,142
Cost of sales ................................................. 146,351,545 232,932,864 355,409,651
------------ ------------ ------------
Gross margin ............................................. 29,929,490 45,549,105 64,953,491
------------ ------------ ------------
Expenses:
Selling and shipping expenses .............................. 14,045,503 21,892,885 31,360,045
General and administrative expenses ........................ 4,421,124 6,913,721 8,770,662
------------ ------------ ------------
Total operating expenses ................................... 18,466,627 28,806,606 40,130,707
------------ ------------ ------------
Income from operations ........................................ 11,462,863 16,742,499 24,822,784
Interest, net .............................................. (4,328,838) (5,920,618) (10,033,104)
------------ ------------ ------------
Earnings before income taxes .................................. 7,134,025 10,821,881 14,789,680
Income taxes .................................................. 2,926,000 4,437,000 5,916,000
------------ ------------ ------------
Net earnings .................................................. $ 4,208,025 $ 6,384,881 $ 8,873,680
============ ============ ============
Basic earnings per share ...................................... $ 0.93 $ 1.44 $ 1.63
============ ============ ============
Diluted earnings per share .................................... $ 0.86 $ 1.23 $ 1.41
============ ============ ============
Basic weighted average shares outstanding ..................... 4,536,605 4,431,850 5,429,122
============ ============ ============
Diluted weighted average shares outstanding ................... 4,883,685 5,185,809 6,294,250
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional Treasury stock
------------------- paid-in --------------------- Retained
Shares Amount capital Shares Amount earnings
--------- ------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 ............................... 4,562,800 $45,628 $11,243,347 78,370 $ (396,370) $ 5,405,865
Exercise of stock options and warrants ............... 1,667 16 4,151 -- -- --
Exercise of warrants ................................. 34,430 344 (344) -- -- --
Net earnings ......................................... -- -- -- -- -- 4,208,025
Acquisition of treasury stock ........................ -- -- -- 78,370 (396,370) --
--------- ------- ----------- ------- ----------- -----------
Balance, June 30, 1999 ............................... 4,598,897 45,988 11,247,154 78,370 (396,370) 9,613,890
Exercise of stock options and warrants ............... 26,667 267 118,353 -- -- --
Exercise of warrants ................................. 30,000 300 (300) -- -- --
Net earnings ......................................... -- -- -- -- -- 6,384,881
Acquisition of treasury stock ........................ -- -- -- 135,000 (1,046,250) --
--------- ------- ----------- ------- ----------- -----------
Balance, June 30, 2000 ............................... 4,655,564 46,555 11,365,207 213,370 (1,442,620) 15,998,771
Public offering of common stock ...................... 1,200,000 12,000 7,962,161 -- -- --
Exercise of stock options and warrants ............... 12,356 124 116,951 -- -- --
Net earnings ......................................... -- -- -- -- -- 8,873,680
Acquisition of treasury stock ........................ -- -- -- 11,507 (105,000) --
--------- ------- ----------- ------- ----------- -----------
Balance, June 30, 2001 ............................... 5,867,920 $58,679 $19,444,319 224,877 $(1,547,620) $24,872,451
========= ======= =========== ======= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
1999 2000 2001
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................................................... $ 4,208,025 $ 6,384,881 $ 8,873,680
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization................................................. 876,875 1,431,340 1,330,042
Provision for doubtful accounts............................................... 100,000 200,000 --
Deferred income tax provision (recovery)...................................... 122,000 (232,000) (187,100)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (12,867,732) (26,519,366) (39,555,356)
Inventories................................................................. (7,406,790) (15,711,623) (22,884,319)
Prepaid expenses and other current assets................................... 92,094 (159,044) (230,560)
Prepaid income taxes........................................................ 235,348 -- --
Other assets................................................................ (371,770) (1,072,541) (149,627)
Accounts payable............................................................ 4,653,677 1,865,966 12,445,056
Income taxes payable........................................................ 1,710,000 (171,000) 1,048,759
Accrued expenses and other current liabilities.............................. 944,619 1,334,078 976,418
Other liability............................................................. -- -- 1,375,001
------------ ------------- -------------
Net cash used in operating activities...................................... (7,703,654) (32,649,309) (36,958,006)
------------ ------------- -------------
Cash flows from investing activities:
Payments for purchase of property and equipment................................. (667,270) (676,600) (4,084,347)
------------ ------------- -------------
Net cash used in investing activities...................................... (667,270) (676,600) (4,084,347)
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from revolving credit loan............................................. 54,302,599 85,920,000 144,934,999
Repayment of revolving credit loan.............................................. (45,123,000) (50,474,599) (111,556,737)
Principal payments of mortgage.................................................. (47,182) (49,194) (53,048)
Principal payments of capital leases............................................ (500,966) (550,761) (609,691)
Proceeds from public offering (net)............................................. -- -- 7,974,161
Proceeds from exercise of stock options......................................... 4,167 118,620 117,075
Acquisition of treasury stock................................................... (396,370) (1,046,250) (105,000)
------------ ------------- -------------
Net cash provided by financing activities.................................. 8,239,248 33,917,816 40,701,759
------------ ------------- -------------
Net increase (decrease) in cash................................................... (131,676) 591,907 (340,594)
Cash, beginning of year........................................................... 489,890 358,214 950,121
------------ ------------- -------------
Cash, end of year................................................................. $ 358,214 $ 950,121 $ 609,527
============ ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................................................... $ 3,774,024 $ 5,413,000 $ 9,501,000
============ ============= =============
Income taxes.................................................................. $ 830,000 $ 4,858,000 $ 5,054,000
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
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 wholly-owned subsidiaries ("Suprema" or the "Company")
manufacture, process and market a variety of premium, gourmet natural Italian
cheese products. The Company operates in a single business segment. The Company
sells its product to food service, food service manufacturers, and retail
customers. Sales to food service customers accounted for approximately 91%, 91%,
and 97% of the Company's sales for the year ended June 30, 1999, 2000 and 2001,
respectively. Sales to food manufacturers accounted for approximately 6%, 7%,
and 2% for the year ended June 30, 1999, 2000, and 2001, respectively. Sales to
retail customers accounted for 3%, 2%, and 1% of net sales for the years ended
June 30, 1999, 2000, and 2001, respectively.
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. ("West"), Suprema Specialties Northeast, Inc.
("Northeast") and Suprema Specialties Northwest, Inc. ("Northwest"). 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 that are probable of exercise, or
the useful lives of the assets. Equipment under capitalized leases is being
amortized over the useful lives of the assets.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When such impairment exists, the
related assets will be written down to fair value. No impairment losses have
been recorded in each of the three years in the period ended June 30, 2001.
Financing Costs
The Company amortizes the deferred financing costs incurred in connection
with the Company's borrowings over the life of the related indebtedness (3-10
years). Such net costs amounted to $1,734,494 and $1,209,000 at June 30, 2000
and 2001, respectively. These amounts are included in other current assets and
other assets.
Revenue Recognition
The Company records revenues when products are shipped. Customers do not have
the right to return products shipped.
The Company adopted Emerging Issue Task Force (EITF) 00-25, "Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer." The
impact of adopting this policy had an immaterial effect on the Company's net
sales.
Shipping and Handling Costs
During fiscal year 2001, the Company adopted EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs." Shipping and handling costs charged to
customers are included in the Company's net sales.
F-7
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2 -- Significant Accounting Policies -- (Continued)
All shipping and handling costs, which approximated $3,000,000, were charged to
selling and shipping expenses.
Advertising Costs
The Company expenses advertising costs as incurred.
Stock-Based Compensation
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. The Company provides pro
forma disclosures of earnings and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".
Income Taxes
Income taxes are recorded using the liability method, 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 basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
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.
Financial Instruments
The carrying amounts of financial instruments, including cash, accounts
receivable, accounts payable and accrued liabilities, approximate fair value
because of the current nature of these instruments. The carrying amounts
reported for revolving credit and long-term debt approximate fair value because
the interest rates on these instruments are subject to changes with market
interest rates or approximate rates for loans with similar terms and maturities.
Computation of Earnings Per Share
Basic earnings per share has been computed using the weighted average number
of shares of common stock outstanding. Diluted earnings per share includes the
assumed exercise of stock options and warrants using the treasury stock method
that could potentially dilute earnings per share.
Effect of New Accounting Pronouncements
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133, as amended by SFAS 137, was adopted for the
Company's 2001 fiscal year. The adoption of SFAS 133 did not have any effect on
the Company's financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141. Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
SFAS requires, among other things, that companies no longer amortize goodwill,
but instead test
F-8
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2 -- Significant Accounting Policies -- (Continued)
goodwill for impairment at least annually. SFAS 142 is required to be applied
for fiscal years beginning after December 15, 2001. Currently, the Company has
not recorded any goodwill and will assess how the adoption of SFAS 141 and SFAS
142 will impact its financial position and results of operations in any future
acquisitions.
Note 3 -- Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
2000 2001
----------- -----------
<S> <C> <C>
Raw materials ............................ $11,872,836 $23,879,855
Finished goods ........................... 38,430,322 48,986,084
Packaging ................................ 1,327,185 1,648,723
----------- -----------
$51,630,343 $74,514,662
=========== ===========
</TABLE>
Note 4 -- Property, plant and equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------
2000 2001
---------- -----------
<S> <C> <C>
Property and plant ................................. $1,577,696 $ 3,220,497
Equipment .......................................... 5,857,907 7,491,653
Leasehold improvements ............................. 1,102,952 1,951,592
Furniture and fixtures ............................. 215,015 227,832
Delivery equipment ................................. 2,739 2,639
Construction in progress ........................... 700,537 646,982
---------- -----------
9,456,846 13,541,195
Less: Accumulated depreciation and amortization .... 2,275,638 2,980,682
---------- -----------
$7,181,208 $10,560,513
========== ===========
</TABLE>
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. The Company incurred costs of
$1,088,436 primarily related to prepayment penalties on the capital leases.
These direct costs have been included in other assets and are being amortized
over eight years, the life of the operating lease.
In December 2000, the Company entered into a sale-leaseback transaction
whereby production equipment related to the Blackfoot Idaho facility with a net
book value of $4,500,000 was sold for $6,000,000 and leased back under an
operating lease. This transaction resulted in a gain of $1,500,000 which will be
recognized to income in proportion to rental expense over 7 years, the life of
the operating lease. The deferred gain as of June 30, 2001, of $1,375,001, is
included in other liabilities.
Included in property, plant and equipment are plant and equipment acquired
under capital leases with an initial cost of $3,419,067 and accumulated
amortization of $1,125,654 and $1,466,274 as of June 30, 2000 and 2001,
respectively.
F-9
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5 -- Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal ................................. $2,243,000 $3,735,000 $4,883,000
State ................................... 561,000 934,000 1,220,000
---------- ---------- ----------
2,804,000 4,669,000 6,103,100
---------- ---------- ----------
Deferred:
Federal ................................. 104,000 (213,000) (172,000)
State ................................... 18,000 (19,000) (15,100)
---------- ---------- ----------
122,000 (232,000) (187,100)
---------- ---------- ----------
Provision for income taxes ............... $2,926,000 $4,437,000 $5,916,000
========== ========== ==========
</TABLE>
The following reconciles income taxes at the U.S. statutory rate to the
provision for income taxes:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
<S> <C> <C> <C>
Computed tax expense at statutory rates....................... $2,425,600 $3,679,000 $5,029,000
State taxes, net of federal tax benefit....................... 382,100 555,000 776,000
Travel and entertainment expenses not deductible.............. 34,000 43,000 34,000
Officers life insurance not deductible........................ 5,500 7,000 8,000
Other, net.................................................... 78,800 153,000 69,000
---------- ---------- ----------
$2,926,000 $4,437,000 $5,916,000
========== ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
2000 2001
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation .......................................... $ 240,000 $ 225,000
Product introduction costs ............................ 46,000 --
Deferred sale leaseback costs ......................... 286,000 186,000
Financing fees ........................................ 396,000 369,900
--------- ---------
Total deferred tax liabilities: ....................... 968,000 780,900
Deferred tax assets:
Accounts receivable reserve ........................... (308,000) (308,000)
--------- ---------
$ 660,000 $ 472,900
========= =========
</TABLE>
Note 6 -- Long-Term Debt
Revolving Credit Loan
In January 2001, the long-term revolving credit facility (the "Facility")
between the Company and its commerical banks was amended to increase the
Facility to $125,000,000. The commitment for the revolving credit facility is
through February 15, 2004. The rate of interest on amounts borrowed under the
Facility is the adjusted LIBOR rate, as defined, plus 175 basis points (7.50%
per annum at June 30, 2001). The Facility is collateralized by all existing and
after-acquired assets of the Company, as defined in the Facility agreement, and
is guaranteed by all of the Company's subsidiaries. Advances under this Facility
are limited to 85.0% of eligible accounts receivable and 60.0% of all inventory
except packaging material, as defined in
F-10
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6 -- Long-Term Debt -- (Continued)
the Facility agreement. The Facility agreement contains restrictive financial
covenants, including the maintenance of consolidated net worth, and the
maintenance of leverage and fixed charge ratios, as defined in the agreement,
and a restriction on dividends to common shareholders. As of June 30, 2001, the
Company was in compliance with the covenants under the Facility agreement.
Borrowings under the facility are required to be used for working capital
purposes.
At June 30, 2001, the Company had approximately $25,700,000 available for
additional borrowings under the Facility.
Subordinated Debt Facility
In March 1998, the Company entered into a Loan and Security Agreement with
Albion Alliance Mezzanine Fund, L.P. and The Equitable Life Assurance Society of
the United States (collectively, the "Funds") pursuant to which the Funds loaned
$10,500,000 to the Company. The loan is unsecured and is subordinated to the
loan of the Company's senior lender. The loan bears interest at 16.50% per
annum. Interest is payable monthly at the rate of 12.0% per annum with 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 the principal amount of
$3,500,000, together with accrued and unpaid interest thereon, on each March 1,
beginning in the year 2004. In addition, in connection with the execution and
delivery of the Loan Agreement, the Company delivered to the Funds, a Warrant to
purchase 105,000 shares of the Company's common stock exercisable at $4.125 (the
market price at the date of the agreement). The values ascribed to such warrants
and the related amortization expense were not material. The warrant is
exercisable through March 1, 2008.
Mortgage Payable
On March 29, 1996, the Company purchased its Paterson, New Jersey 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 bore interest at 8.51% per
annum. On March 29, 1999, the Company refinanced the mortgage for the principal
amount of $929,573. The seven year note, which bears interest at 7.85% per annum
is being amortized at a fifteen year rate and requires a balloon payment at the
end of year seven of approximately $501,000.
Debt Maturities
Principal payments on long-term debt over the next five years ended June 30,
and thereafter are as follows:
<TABLE>
<S> <C>
2001 ..................................................... $ 57,785
2002 ..................................................... 62,650
2003 ..................................................... 67,748
2004 ..................................................... 102,837,587
2005 ..................................................... 4,053,070
Thereafter ............................................... 3,500,000
</TABLE>
F-11
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 7 -- Capital Leases
There are various equipment and furniture and fixtures financed under capital
leases. These leases have interest rates ranging from 6.70% to 11.50% per annum.
At June 30, 2001, the Company's future minimum lease payments under capital
leases are as follows:
<TABLE>
<S> <C>
2002 ....................................................... $ 642,431
2003 ....................................................... 590,629
2004 ....................................................... 91,701
----------
Total minimum lease payments ............................... 1,324,761
Less: amount representing interest ......................... 219,125
----------
Present value of minimum lease payments .................... 1,105,636
Less: current portion ...................................... 510,155
----------
Long-term portion of capital leases ........................ $ 595,481
==========
</TABLE>
Note 8 -- Commitments and Contingencies
Leases
The Company rents certain production facilities and equipment under lease
arrangements classified as operating leases. The lease for the production
facilities in Manteca, California, which was renewed in December 1994, expires
ten years from the date of completion of construction of each segment of the
facility with two five year renewal options. The Company also leases its
Ogdensburg, New York facility. The lease is for 17 years with options to
terminate the lease each five years at the Company's option. Rent expense was
approximately $2,971,000, $4,107,000 and $5,182,000 for the years ended June 30,
1999, 2000 and 2001, respectively. Future minimum rental payments under
non-cancelable operating leases are approximately: 2002 - $5,792,000; 2003 -
$5,792,000; 2004 - $5,792,000; 2005 - $4,857,000; 2006 - $3,410,000 and
thereafter $3,415,000.
Employment Agreements
The Company has entered into an employment agreement with Mark Cocchiola, its
President and CEO, that currently expires in May 2006. The agreement provides
for the full-time employment of Mr. Cocchiola at an annual salary of $250,000,
and an annual bonus equal to 5% of pre-tax profits in excess of $650,000. The
agreement also provides that if employment is terminated under certain
circumstances, including a "change of control," he will be entitled to receive
severance pay equal to the higher of (i) $1,250,000 or (ii) five times the total
compensation paid to him by the Company (including salary, bonus, perquisites
and the value of options granted to Mr. Cocchiola) during the 12 month period
prior to the date of termination.
Contingencies
On or about April 26, 2001, an employee at the Manteca facility filed an
Application before the Workers' Compensation Appeals Board for the State of
California against the Company alleging "serious and willful misconduct" on the
Company's part in its alleged failure to accommodate his limited ability to work
as a result of his alleged injury arising out of employment. Thereafter, on or
about August 2, 2001, a second employee at the Manteca facility filed an
Application before the same Workers' Compensation Appeals Board against the
Company claiming injuries sustained while employed. The second employee alleges
"serious and willful misconduct" while employed. If the Applications are
granted, the employees will be entitled to receive additional benefits
consisting of one-half of the compensation otherwise recoverable under the
Workers' Compensation laws. Management believes that it has valid defenses to
the Applications and will vigorously defend the claims made by the employees.
The Company is a party to legal proceedings arising in the normal conduct of
business. Management believes that the final outcome of these proceedings,
including the proceedings discussed in the paragraph
F-12
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 8 -- Commitments and Contingencies -- (Continued)
immediately above, will not have a material adverse effect on the Company's
financial position, results of operations, and cash flows.
Note 9 -- Shareholders' Equity
Stock Offering
In August 2000, the Company completed a public offering for 1,200,000 shares
of its $.01 par value common stock of which 1,100,000 shares were issued by the
Company and 10,000 shares were offered by selling shareholders. Gross proceeds
from the offering were approximately $8,000,000. The Company received no
proceeds from the shares issued during the offering from those shares offered by
the selling shareholders.
Stock Option Plan
On February 11, 1991, the Company adopted the 1991 Stock Option Plan. In
December 1998, the Company adopted the 1998 Stock Option Plan. In February 2001,
the Company adopted the 1999 stock option plan (collectively, the "Plans").
Under the Plans, officers, directors and key employees of the Company are
eligible to receive up to 900,000, 500,000, and 500,000 incentive and/or
non-qualified stock options, respectively. The Plans, which expire in February
2001, November 2008, and February 2011, respectively, are administered by the
board of directors. The selection of participants, allotment of shares,
determination of price and other conditions of the grant of options are
determined by the board of directors at its sole discretion in order to attract
and retain persons instrumental to the success of the Company. Incentive stock
options granted under the Plans vest evenly over the first three years and are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the fair market value of the common stock
on the date of grant, except that the term of an incentive stock option granted
under the Plan to a shareholder owning more than 10% of the outstanding common
stock may not exceed five years and its exercise price may not be less than 110%
of the fair market value of the common stock on the date of the grant.
F-13
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 -- Shareholders' Equity -- (Continued)
Stock option transactions under the Plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average 1991
Exercise Plan
Price Per Share ($) Shares
------------------- -------
<S> <C> <C>
Outstanding at June 30, 1998 .................. $3.58 751,500
Granted ...................................... 3.17 134,250
Exercised or forfeited ....................... 2.50 (1,667)
----- -------
Outstanding at June 30, 1999 .................. 3.52 884,083
Granted ...................................... -- --
Exercised or forfeited ....................... 5.46 (26,917)
----- -------
Outstanding at June 30, 2000 .................. 4.97 857,166
Granted ...................................... -- --
Exercised or forfeited ....................... 7.50 (30,000)
----- -------
Outstanding at June 30, 2001 .................. 3.25 827,166
===== =======
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average 1998
Exercise Plan
Price Per Share ($) Shares
------------------- -------
<S> <C> <C>
Outstanding at June 30, 1998 .................. -- --
Granted ...................................... $4.63 143,000
Exercised or forfeited ....................... -- --
----- -------
Outstanding at June 30, 1999 .................. 4.63 143,000
Granted ...................................... 7.66 356,000
Exercised or forfeited ....................... -- --
----- -------
Outstanding at June 30, 2000 .................. 4.63 499,000
Granted ...................................... 7.50 30,000
Exercised or forfeited ....................... 4.63 (31,833)
----- -------
Outstanding at June 30, 2001 .................. 6.68 497,167
===== =======
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average 1999
Exercise Plan
Price Per Share ($) Shares
------------------- -------
<S> <C> <C>
Outstanding at June 30, 1998 .................. -- --
Granted ...................................... -- --
Exercised or forfeited ....................... -- --
----- -------
Outstanding at June 30, 1999 .................. -- --
Granted ...................................... -- --
Exercised or forfeited ....................... -- --
----- -------
Outstanding at June 30, 2000 .................. -- --
Granted ...................................... $7.50 367,000
Exercised or forfeited ....................... 7.50 --
----- -------
Outstanding at June 30, 2001 .................. 7.50 367,000
===== =======
</TABLE>
F-14
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 -- Shareholders' Equity -- (Continued)
The weighted average fair value of options granted under all plans during:
<TABLE>
<S> <C>
1999..................................... $1.79
2000..................................... $4.39
2001..................................... $4.71
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 2001:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted-
Average
Range of Number of Remaining
Exercise Options Contractual Weighted-Average Number Weighted-Average
Prices Outstanding Life (Years) Exercise Price($) Exercisable Exercise Price
----------------------------- ----------- ------------ ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
1991 Plan:
$2.50 to $3.50............................... 827,166 5.40 years $3.21 787,206 $3.22
1998 Plan:
$4.63 to $7.00............................... 111,000 7.75 years $5.96 74,037 $5.96
$7.00 to $9.00............................... 386,167 8.50 years $7.64 121,097 $7.66
$4.63 to $9.00............................... 497,167 8.30 years $6.68 195,134 $7.01
1999 Plan:
$7.50........................................ 367,000 9.50 years $7.50 200,000 $7.50
</TABLE>
Under the accounting provisions of SFAS 123, the Company's net earnings and
earnings per share would have been:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
<S> <C> <C> <C>
Earnings:
-- as reported ............................................... $4,208,025 $6,384,881 $8,873,680
-- pro forma ................................................. $3,999,219 $5,997,267 $8,378,291
Basic earnings per share:
-- as reported ............................................... $0.93 $1.44 $1.63
-- pro forma ................................................. $0.88 $1.35 $1.54
Diluted earnings per share:
-- as reported ............................................... $0.86 $1.23 $1.41
-- pro forma ................................................. $0.82 $1.16 $1.33
</TABLE>
The pro forma effect on net earnings and earnings per share for fiscal years
2001, 2000 and 1999 may not be representative of the pro forma effect in future
years because it includes compensation cost on a straight-line basis over the
vesting periods of the grants and does not take into consideration the pro forma
compensation costs for grants made prior to 1996. 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 44% in 2001, 46% in 2000 and 44% in 1999; risk free
interest rate of 5.2% in 2001, 6.4% in 2000 and 5.0% in 1999; expected lives of
10 years; and no dividend yield.
Warrants
In connection with the Company's 1996 public offering, the Company issued the
underwriter warrants to purchase 150,000 shares of common stock exercisable
until June 30, 2002 at an exercise price of $6.875 per share. In connection with
the Company's August 2000 public offering, the Company issued warrants to the
underwriters of such offering to purchase 120,000 shares of common stock;
exercisable at $11.20 per share through August 2005. In March 2001, the Company
issued warrants to purchase 10,000 shares of common
F-15
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 -- Shareholders' Equity -- (Continued)
stock to its public relations firm, at an exercise price of $8.25 per share,
exercisable from March 2002 through March 2011. The exercise price of all of the
foregoing warrants was no less than the fair market value of the common stock on
the date of their respective issuance.
Stock Repurchase Program
In May 1999, the Board of Directors approved a stock repurchase program to
acquire up to $3,200,000 of the Company's common stock. As of June 30, 2001, the
Company has repurchased 224,877 shares of its common stock for a cost of
approximately $1,548,000.
Treasury Stock
During the fiscal years ended June 30, 2001 and 2000, the Company, pursuant
with its stock repurchase plan, purchased 11,507 and 135,000 shares of its
common stock at a cost of $105,000 and $1,046,250, respectively.
Note 10 -- Earnings Per Share
Basic and diluted earnings per share for each of the three years ended June
30, 1999, 2000 and 2001 are calculated as follows:
<TABLE>
<CAPTION>
Net Earnings Shares Per share
(Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
For the year ended June 30, 1999:
Basic earnings per share ................................................. $4,208,025 4,536,605 $ 0.93
Effect of assumed conversion of employee stock options ................... -- 347,080 (0.07)
---------- --------- ------
Diluted earnings per share ............................................... $4,208,025 4,883,685 $ .86
========== ========= ======
For the year ended June 30, 2000:
Basic earnings per share ................................................. $6,384,881 4,431,850 $ 1.44
Effect of assumed conversion of employee stock options and warrants ...... -- 753,959 (0.21)
---------- --------- ------
Diluted earnings per share ............................................... $6,384,881 5,185,809 $ 1.23
========== ========= ======
For the year ended June 30, 2001:
Basic earnings per share $8,873,680 5,429,122 $ 1.63
Effect of assumed conversion of employee stock options and warrants ...... -- 865,128 (0.22)
---------- --------- ------
Diluted earnings per share ............................................... $8,873,680 6,294,250 $ 1.41
========== ========= ======
</TABLE>
Note 11 -- Concentration of Credit Risk
The Company provides credit to customers on an unsecured basis after
evaluating customer creditworthiness. The Company grants extended payment terms
to its largest customers.
The Company also provides an allowance for bad debts for accounts receivable
where there is a possibility for loss.
The Company maintains demand deposits with major banks. At June 30, 2000 and
2001, all of the Company's cash was held with these major banks.
Note 12 -- Major Customers
During the fiscal year ended June 30, 1999, the Company had sales to A&J
Foods, Inc. representing approximately 18% of net sales.
F-16
SUPREMA SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 12 -- Major Customers -- (Continued)
During the fiscal year ended June 30, 2000, the Company had sales to A&J
Foods, Inc., Tricon Commodities International, Inc. and Noble J.G. Cheese
Company representing approximately 15%, 13% and 12% of net sales,
respectively.
During the fiscal year ended June 30, 2001, the Company had sales to A&J
Foods, Inc., Tricon Commodities International, Inc., Battaglia and Company,
Noble J.G. Cheese Company, and California Goldfield Cheese Traders of
approximately 17%, 15%, 12%, 10%, and 10% of net sales, respectively. At June
30, 2001, these five customers represented 20%, 20%, 15%, 13% and 13% of net
accounts receivable, respectively.
Note 13 -- Employee Benefits
In July 1998, the Company instituted a 401(k) plan for all employees who are
not covered under the collective bargaining agreement. Under the plan, the
Company matches each eligible employees' contribution up to 25% of the
employee's first 8% of contributions. Contributions made by the Company during
the year amounted to approximately $40,000 for each of the years ended June 30,
1999, 2000 and 2001.
Note 14 -- Subsequent Event
In August 2001, the Company's Executive Vice President passed away. The
Company has not been able to determine the impact of the loss of his services on
operations. The Company is the beneficiary of a $1,000,000 key man life
insurance policy on the life of the former Executive Vice President and
anticipates receiving the proceeds from this policy.
Note 15 -- Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for the 2001
and 2000 fiscal years (in thousands of dollars except per share data):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
2000
Net sales ................................ $61,381 $65,323 $ 75,564 $ 76,214
Gross profit ............................. 9,984 11,171 12,092 12,302
Income from operations ................... 3,613 4,005 4,336 4,788
Net earnings ............................. 1,413 1,504 1,622 1,846
======= ======= ======== ========
Basic earnings per share ................. $ 0.31 $ 0.34 $ 0.37 $ 0.42
======= ======= ======== ========
Diluted earnings per share ............... $ 0.27 $ 0.29 $ 0.31 $ 0.35
======= ======= ======== ========
2001
Net sales ................................ $88,948 $92,742 $108,636 $130,038
Gross profit ............................. 14,028 14,369 16,638 19,918
Income from operations ................... 5,573 5,758 5,893 7,598
Net earnings ............................. 1,987 2,068 2,196 2,623
======= ======= ======== ========
Basic earnings per share ................. $ 0.41 $ 0.37 $ 0.39 $ 0.46
======= ======= ======== ========
Diluted earnings per share ............... $ 0.36 $ 0.33 $ 0.34 $ 0.38
======= ======= ======== ========
</TABLE>
F-17
[graphic]