SARATOGA HOLDINGS I, INC.
3,465,292 SHARES OF COMMON STOCK
Saratoga Resources, Inc., a Delaware corporation, intends to spin off its
wholly-owned subsidiary, Saratoga Holdings I, Inc., a Texas corporation, by
distributing as a dividend to its own stockholders, one share of the common
stock of Saratoga Holdings for each share of the parent's stock. However,
because California does not appear to provide an exemption from registration for
the distribution of the common stock, the parent will pay the dividend in cash
to stockholders who reside in those states at a rate of $0.003 per share for a
total amount of approximately $18.92. Shareholders in other states will not be
entitled to receive cash instead of shares because Saratoga Holdings intends to
conserve its cash resources for operations and because there are exemptions in
all other relevant states. The parent's stockholders will not be charged for the
dividend shares and neither Saratoga Holdings nor the parent will receive any
proceeds from this distribution.
Prior to this offering, there has been no public market for the common
stock.
WE URGE YOU TO READ THIS PROSPECTUS CAREFULLY SINCE IT CONTAINS
INFORMATION THAT IS IMPORTANT TO YOU. ALSO, PAY PARTICULAR ATTENTION TO THE
"RISK FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is May 17, 1999
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to buy
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY INFORMATION...............................................4
THE OFFERING.................................................................4
RISK FACTORS.................................................................5
Because Saratoga Holdings does not have any significant operating
history, it is difficult to determine whether its business
strategy will be successful .....................................5
Because Saratoga Holdings does not have sufficient capital to
pay its expenses, it would not be
able to continue its operations without a loan from its
affiliate........................................................5
If the accounts receivable owned by Saratoga Holdings are not
collected, Saratoga Holdings will
not have any source of revenues..................................5
Because Saratoga Holdings is not a licensed debt collection
company, it cannot collect its
accounts receivable directly ....................................5
Because Saratoga Resources must rely upon a third party to
collect its accounts receivable, it has
less control over the collection process.........................6
Because the president of Saratoga Resources is affiliated with
the collection agency that collects
our accounts receivable and with the company that sold
accounts receivable to us, there
is a conflict of interest that could be detrimental to
Saratoga Holdings ...............................................6
Because directors and officers will continue to hold a
controlling interest in Saratoga Holdings,
the ability of investors to influence our corporate
activities after the offering will be very
limited .....................................................6
Because Saratoga Holdings has only one employee who has
experience with its business, the loss
of Mr. Johnson could have a material adverse effect on its
business.........................................................6
The loss of services of Mr. Cooke would have a detrimental
effect on Saratoga Holdings......................................6
Saratoga Holdings is relying on a third party for compliance
with federal and state debt collection
regulations and would suffer adverse consequences for its
failure to do so ................................................7
Because there is no trading market for Saratoga Holdings' common
stock, you may have
difficulty valuing and selling its shares .......................7
Regulations affecting Saratoga Holdings may make it more
difficult for you to resell its shares...........................7
Because Saratoga Holdings does not have insurance coverage, any
liability that we suffer beyond
what is covered by our collection agent's insurance could
have an adverse affect on our
business and on the price of your shares.........................7
Because there is substantial competition for the purchase of
accounts receivable, we may be required to pay higher
prices for additional portfolios of receivables .................7
The year 2000 issue could adversely effect our business................8
FORWARD-LOOKING INFORMATION..................................................8
SARATOGA HOLDINGS............................................................8
INFORMATION CONCERNING THE PARENT ...........................................9
USE OF PROCEEDS..............................................................9
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION..........................9
Federal Income Tax Consequences ......................................10
DETERMINATION OF OFFERING PRICE.............................................11
PLAN OF DISTRIBUTION........................................................11
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Introduction..........................................................11
Method of Distribution and Subsequent Trading.........................11
Regulations Affecting the Price and Marketability of Saratoga
Holdings Stock .................................................12
DIVIDENDS...................................................................12
CAPITALIZATION..............................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION....................................14
Liquidity.............................................................15
The Year Two Thousand.................................................16
THE BUSINESS................................................................16
The Industry..........................................................18
Business Strategy.....................................................19
Research and Development Activities...................................20
Compliance with Environmental Laws....................................20
Competition for Accounts Receivable...................................20
Customers and Suppliers...............................................20
Government Regulation.................................................21
Employees.............................................................21
Properties............................................................21
WHERE YOU CAN GET MORE INFORMATION..........................................22
MANAGEMENT..................................................................22
Directors and Executive Officers......................................22
Advisory Board........................................................23
Compensation of Directors and Executive Officers......................23
PRINCIPAL SHAREHOLDERS......................................................24
Ownership of the Common Stock of Saratoga Holdings....................24
Ownership of the Parent's Common Stock................................25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................25
DESCRIPTION OF SECURITIES...................................................26
Common Stock..........................................................26
Preferred Stock.......................................................26
Anti-Takeover Provisions..............................................26
Indemnification of Officers and Directors; Limitation of
Director Liability..............................................27
SHARES ELIGIBLE FOR FUTURE SALE.............................................27
TRANSFER AGENT..............................................................29
LEGAL MATTERS...............................................................29
EXPERTS.....................................................................29
INDEX TO FINANCIAL STATEMENTS..............................................F-1
INDEPENDENT AUDITOR'S REPORT...............................................F-2
BALANCE SHEET..............................................................F-3
NOTES TO FINANCIAL STATEMENTS..............................................F-7
Dealer Prospectus Delivery Obligation
Until November 8, 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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PROSPECTUS SUMMARY INFORMATION
Saratoga Resources, Inc. incorporated Saratoga Holdings I, Inc. under the
laws of the State of Texas on October 29, 1998 with a view toward the
distribution of the dividend shares as described in this prospectus. Saratoga
Holdings is in the business of purchasing portfolios of accounts receivable at a
discount and of collecting receivables or reselling them in the same or in
differently configured portfolios. Saratoga Holdings is not a licensed debt
collection agency, and thus has retained a third party to collect those accounts
in exchange for a commission equal to 30% of the amount collected. Saratoga
Holdings had no predecessors and no history prior to its date of incorporation.
Saratoga Holdings' present address is c/o Saratoga Resources, Inc., 301 Congress
Avenue, Suite 1550, Austin, Texas 78701, telephone: (512) 478-5717.
THE OFFERING
Type of Security Offered Common Stock, $0.001 par value
per share
Number of Outstanding Shares 3,766,667 shares
Common Stock Offered as Dividend Shares 3,465,292 shares
Common Stock Outstanding After Offering 3,766,667 shares
The parent had 3,465,292 shares outstanding as of March 15, 1999. It will
distribute shares of Saratoga Holdings common stock to all of its stockholders
except those residing in California. Instead of 6,308 shares of Saratoga
Holdings' common stock, the parent will pay stockholders in those states cash in
the aggregate amount of approximately $18.92 or $0.003 per share. The only
reason that shareholders in California will receive cash is the fact that
California state law does not provide an exemption from state registration for
this transaction. Shareholders in other states will not be entitled to receive
cash instead of shares because Saratoga Holdings intends to conserve its cash
resources for operations and because there are exemptions in all other relevant
states. Because the total amount of cash distributed in California will only be
approximately $18.92, in the opinion of management, this payment should not
benefit the shareholders of Saratoga Resources who reside in California to the
detriment of any other shareholder of Saratoga Resources.
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RISK FACTORS
You should consider the common stock of Saratoga Holdings to be an
investment involving a high degree of risk. Please read all of this prospectus
and carefully consider the risk involved with this investment, including the
factors listed below. This prospectus describes Saratoga Holdings, its finances
and products. Federal and state securities laws require that we include in this
prospectus all important information that investors will need to make an
investment decision. You should rely only on the information contained in this
prospectus to make your investment decision. We have not authorized anyone to
provide you with information that is different from what is contained in this
prospectus.
BECAUSE SARATOGA HOLDINGS DOES NOT HAVE ANY SIGNIFICANT OPERATING HISTORY, IT IS
DIFFICULT TO DETERMINE WHETHER ITS BUSINESS STRATEGY WILL BE SUCCESSFUL
Because of our lack of operating history, there is no assurance that
Saratoga Holdings will be successful or that the stock of Saratoga Holdings will
have any value. Saratoga Holdings was organized in October 1998 and did not
begin operations until after it purchased accounts receivable on November 12,
1998.
BECAUSE SARATOGA HOLDINGS DOES NOT HAVE SUFFICIENT CAPITAL TO PAY ITS EXPENSES,
IT WOULD NOT BE ABLE TO CONTINUE ITS OPERATIONS WITHOUT A LOAN FROM ITS
AFFILIATE
Without the loan and administrative support from its parent, Saratoga
Holdings does not have sufficient capital to conduct its business and presently
has no other credit facilities or identifiable sources of additional capital.
Saratoga Holdings had initial assets totaling
$11,300, of which approximately $10,300
was spent to acquire accounts receivables. The only other current source of
capital is a revolving loan from a subsidiary of the parent to cover expenses up
to $40,000 during the first 18 months of operations. Although Thomas F. Cooke
will control the management of both the parent and Saratoga Holdings immediately
after this offering, he has advised both companies that he plans to treat them
as separate, independent entities.
IF THE ACCOUNTS RECEIVABLE OWNED BY SARATOGA HOLDINGS ARE NOT COLLECTED,
SARATOGA HOLDINGS WILL NOT HAVE ANY SOURCE OF REVENUES
There is no assurance that we will be able to collect our receivables
which is our only source of revenue. On November 12, 1998, we acquired 149
accounts receivable having an aggregate unpaid balance of $223,907.05 in
exchange for a purchase price of $10,299.72. We purchased the receivables
without recourse which means that the seller of the receivables will not be
obligated to us for any amount if we are unable to collect any or all of the
them. In addition, the seller did not provide Saratoga Holdings with any
representations as to the character, accuracy or sufficiency of the information
provided to us about the receivables. Therefore, even if the receivables are
uncollectible, we may not have any remedy or recourse against the seller.
BECAUSE SARATOGA HOLDINGS IS NOT A LICENSED DEBT COLLECTION COMPANY, IT CANNOT
COLLECT ITS ACCOUNTS RECEIVABLE DIRECTLY
Saratoga Holdings does not have any license to operate as a debt
collection company. Instead of obtaining the necessary licenses, it has
transferred its accounts receivable to a licensed debt collection
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company for collection. There is no assurance that Saratoga Holdings would be
able to obtain the necessary licenses to operate as a debt collection company
even if it applied for them. Therefore, it may always be necessary for it to
rely upon a third party to collect its accounts.
BECAUSE SARATOGA RESOURCES MUST RELY UPON A THIRD PARTY TO COLLECT ITS ACCOUNTS
RECEIVABLE, IT HAS LESS CONTROL OVER THE COLLECTION PROCESS
Our success in collecting the accounts receivable is largely
dependent upon the efforts of a third
party debt collection company that is affiliated with Mr. Johnson,
the President of Saratoga Holdings.
Saratoga Holdings has entered into a service agreement that provides that the
collection company will use reasonable efforts to collect the receivables and
authorizes it to settle any of the receivables for 50% or more of the
outstanding balance. In exchange for the services provided under the service
agreement, the collections company is entitled to retain 30% of the amount
collected as a commission.
BECAUSE THE PRESIDENT OF SARATOGA RESOURCES IS AFFILIATED WITH THE COLLECTION
AGENCY THAT COLLECTS OUR ACCOUNTS RECEIVABLE AND WITH THE COMPANY THAT SOLD
ACCOUNTS RECEIVABLE TO US, THERE IS A CONFLICT OF INTEREST THAT COULD BE
DETRIMENTAL TO SARATOGA HOLDINGS
Randall Johnson, the president of Saratoga Holdings, is also a
shareholder, officer and director of both the company that sold the receivables
to Saratoga Holdings and of the company we have retained to collect the
receivables. We may purchase additional receivables from the same company and
may retain the same collection company to collect any or all of those additional
receivables. Because of Mr. Johnson's conflict of interest, the purchase of the
receivables by Saratoga Holdings and the agreement with the collection company
to collect the accounts receivable may benefit the seller and the collection
company at the expense of Saratoga Holdings.
BECAUSE DIRECTORS AND OFFICERS WILL CONTINUE TO HOLD A CONTROLLING INTEREST IN
SARATOGA HOLDINGS, THE ABILITY OF INVESTORS TO INFLUENCE OUR CORPORATE
ACTIVITIES AFTER THE OFFERING WILL BE VERY LIMITED
Mr. Thomas F. Cooke, both individually and as the sole director
of Saratoga Holdings, will
control Saratoga Holdings' policies and procedures both before and
after the offering. After the sale of the
shares and the distribution of the dividend shares, Thomas F. Cooke, the sole
director, chief executive officer and secretary of Saratoga Holdings, will be
the owner of approximately 59% of our common stock and will also control an
additional 308,741 shares held by the parent and 150,000 shares held by the
parent's wholly-owned subsidiaries.
BECAUSE SARATOGA HOLDINGS HAS ONLY ONE EMPLOYEE WHO HAS EXPERIENCE WITH ITS
BUSINESS, THE LOSS OF MR. JOHNSON COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS
Mr. Johnson is the sole employee of Saratoga Holdings who has any
experience with respect to our business. The loss of the services of Mr. Johnson
could have a material adverse effect on the business. If Mr. Johnson resigned
and we could not find a replacement for him, we could be forced to rely on
outside advisors. However, because Saratoga Holdings has extremely limited
funds, it is unlikely that it would be able to afford to pay any outside
consultant. In addition, Mr. Johnson is not employed by Saratoga Holdings on a
full time basis. We estimate that he will devote approximately one-third of his
time to the affairs of Saratoga Holdings, including the collection of the
receivables.
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THE LOSS OF SERVICES OF MR. COOKE WOULD HAVE A DETRIMENTAL EFFECT ON
SARATOGA HOLDINGS
The success of our business is dependent upon the continued services of
Mr. Thomas F. Cooke, the sole director, chief executive officer, secretary and
treasurer of Saratoga Holdings. If Mr. Cooke were to resign, Saratoga Holdings
would probably not be successful.
SARATOGA HOLDINGS IS RELYING ON A THIRD PARTY FOR COMPLIANCE WITH FEDERAL AND
STATE DEBT COLLECTION REGULATIONS AND WOULD SUFFER ADVERSE CONSEQUENCES FOR ITS
FAILURE TO DO SO
We are relying on the third party that is collecting our accounts
receivable to comply with all federal and state regulations affecting the
business. This includes compliance with various federal and state statutes,
including the Federal Fair Debt Collection Practices Act which establishes
specific guidelines and procedures which debt collectors must follow in
communicating with consumer debtors, including the time, place and manner of
communications. It also includes compliance with the Fair Credit Reporting Act
which regulates the consumer credit reporting industry and which may impose
liability on Saratoga Holdings to the extent that the adverse credit information
reported on a consumer to a credit bureau is false or inaccurate. The debt
collection business is also subject to state regulation. Saratoga Holdings is
not licensed as a debt collection company and does not anticipate applying for
any license. Instead, Saratoga Holdings is relying upon an unaffiliated third
party to collect its receivables. If the collection company fails to comply with
applicable statutes and regulations, that could have a material adverse effect
on Saratoga Holdings.
BECAUSE THERE IS NO TRADING MARKET FOR SARATOGA HOLDINGS' COMMON STOCK, YOU MAY
HAVE DIFFICULTY VALUING AND SELLING ITS SHARES
There is currently no market for trading Saratoga Holdings' common stock
and no assurance that a market will ever develop or, if established, will be
maintained. Saratoga Holdings' common stock does not now, and may never qualify
for listing on the Nasdaq SmallCap Market(SM) or any securities exchange. In the
absence of an over-the-counter market in Saratoga Holdings' common stock, or
listing on an exchange, holders of the common stock will be unable to sell their
shares through normal brokerage channels and may be unable to determine the
value of their securities accurately. Consequently, selling our shares will
probably be more difficult because, for example, smaller quantities of shares
could be bought and sold, and transactions could be delayed. Saratoga Holdings
has not had any discussions with any market makers regarding participation as a
market maker for these securities.
REGULATIONS AFFECTING SARATOGA HOLDINGS MAY MAKE IT MORE DIFFICULT FOR YOU TO
RESELL ITS SHARES
Because of the low price of our common stock and the fact that it is not
listed on The Nasdaq SmallCap Market(SM) or any exchange, the shares may be
subject to a number of regulations which may affect the price of the shares and
your ability to sell the shares in the secondary market.
BECAUSE SARATOGA HOLDINGS DOES NOT HAVE INSURANCE COVERAGE, ANY LIABILITY THAT
WE SUFFER BEYOND WHAT IS COVERED BY OUR COLLECTION AGENT'S INSURANCE COULD HAVE
AN ADVERSE AFFECT ON OUR BUSINESS AND ON THE PRICE OF YOUR SHARES
Saratoga Holdings currently does not carry any insurance, but instead
relies on general liability insurance carried by the company it has retained to
collect the receivables. If Saratoga Holdings suffered a liability beyond the
limits of or outside the scope of the collection company's insurance coverage,
it could have an adverse effect on our business.
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BECAUSE THERE IS SUBSTANTIAL COMPETITION FOR THE PURCHASE OF ACCOUNTS
RECEIVABLE, WE MAY BE REQUIRED TO PAY HIGHER PRICES FOR ADDITIONAL PORTFOLIOS OF
RECEIVABLES
We compete with other debt collection companies and wholesalers of
accounts receivable for the purchase of quality accounts receivable. Competition
for the purchase of accounts receivable is significant. Various industry sources
list as many as 300 purchasers of bad debt in the United States. There are
numerous companies specializing in the purchase of accounts receivable that have
substantially greater resources and broader geographic coverage than Saratoga
Holdings.
If we decided to expand our business into the accounts receivable
management business, we would encounter significant competition.
THE YEAR 2000 ISSUE COULD ADVERSELY EFFECT OUR BUSINESS
If various third parties, including any company collecting our accounts
receivable, do not successfully achieve year 2000 compliance, Saratoga Holdings'
business and results of operations could be adversely affected, resulting from,
among other things, Saratoga Holdings' inability to properly exchange and/or
receive data. In addition, if our transfer agent does not achieve year 2000
compliance, that would have an adverse effect on your ability to trade the
common stock.
FORWARD-LOOKING INFORMATION
Some of the statements contained in this prospectus relate to future
expectations, contain projections of results of operations or financial
conditions or include other forward-looking information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and
assumptions. Important factors that may cause actual results to differ from
projections include, for example,
o the success or failure of our efforts to implement our business
strategy
o our ability to collect or resell the receivables on favorable
terms
o our ability to purchase additional portfolios of past due
accounts receivable
o our ability to engage other collection companies to collect our
receivables
o the effect of changing economic conditions
o our ability to attract and retain qualified employees
o other risks which may be described in our future filings with the SEC,
however we do not promise to update forward-looking information to
reflect, for example, actual results or changes in assumptions.
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SARATOGA HOLDINGS
Saratoga Resources, Inc. incorporated Saratoga Holdings I, Inc. under the
laws of the State of Texas on October 29, 1998 with a view toward beginning a
new debt collection business and making the distribution of the dividend shares
as described in this prospectus. Saratoga Holdings is in the business of
purchasing portfolios of accounts receivable at a discount and, through third
party contractors, of collecting receivables or reselling them in the same or in
differently configured portfolios. As of November 12, 1998, its total assets
consisted of one portfolio of accounts receivable with a face value of
$223,907.05 for which it paid approximately $10,300 in cash. With respect to
this first portfolio, Saratoga Holdings has retained a third party to collect
those accounts in exchange for a commission equal to 30% of the amount
collected. Saratoga Holdings had no predecessors and no history prior to its
date of organization.
Saratoga Holdings is a wholly owned subsidiary of Saratoga Resources,
Inc., a Delaware corporation. The parent of Saratoga Holdings is in the business
of oil and natural gas development, through a subsidiary, which is separate and
distinct from Saratoga Holdings' business. The purpose of the spin-off of
Saratoga Holdings is to separate the two businesses so that over time the
management of each of the businesses will be able to focus solely on its own
business. Another purpose of the spin-off is to provide employees of Saratoga
Holdings with stock-based incentives which are tied solely to Saratoga Holdings.
In addition, Saratoga Holdings hopes to enhance access to financing by enabling
the financial community to focus on Saratoga Holdings.
INFORMATION CONCERNING THE PARENT
Saratoga Resources is a Delaware corporation whose main focus is the
development of and exploration for oil and natural gas reserves, primarily in
the Gulf Coast area of the United States. The parent conducts all of its
operations through its subsidiaries, Saratoga Resources, Inc., a Texas
corporation, Lobo Energy, Inc., a Texas corporation, and Lobo Operating, Inc., a
Texas corporation. In 1996, the parent and its subsidiaries entered into a
Compromise and Settlement Agreement providing for the foreclosure sale of all of
its assets. Under the terms of that agreement, all of the parent's material
liabilities were settled. The parent's principal asset at the time of the
completion of the sale consisted of approximately $1,500,000 in cash which was
available for the pursuit of new business opportunities or for other corporate
purposes. The parent and its subsidiaries, as of December 31, 1998, had
approximately $290,000 in cash and $57,000 of other assets, principally
equipment. At December 31, 1998, the parent employed two part-time employees,
including Thomas F. Cooke who serves as the chief executive officer and an
office manager. The parent, through its subsidiaries, is generating prospects
for oil and natural gas exploration and development through the use of its
extensive database of seismic information and well log information. In addition,
it is evaluating acquisition and merger opportunities in the oil and gas
industry as well as other industries.
Saratoga Resources is a public company and had 3,465,292 shares of common
stock outstanding as of March 25, 1999. As of that date, it had approximately
1,350 stockholders.
USE OF PROCEEDS
Neither Saratoga Holdings nor its sole shareholder will receive any
proceeds from this offering.
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FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion is a summary of the material U.S. federal income
tax consequences of the distribution of Saratoga Holdings' shares to its
parent's stockholders. However, it is not a complete discussion of all potential
tax effects that might be relevant to the distribution. It also is limited to
domestic non-corporate stockholders. It may not apply to some classes of
taxpayers, including corporations, nonresident aliens, insurance companies,
tax-exempt organizations, financial institutions, securities dealers, and
broker-dealers. Taxpayers in any of these or similar categories should consult
their own tax advisors regarding the tax consequences of the distribution.
The following summary is based on laws, regulations, rulings, practice and
judicial decisions in effect at the date of this registration statement.
Legislative, regulatory, or interpretive changes, or future court decisions or
interpretations may or may not be retroactive and could affect the tax
consequences described herein. PLEASE CONSULT WITH YOUR OWN TAX ADVISOR AS TO
THE TAX CONSEQUENCES TO YOU OF THE DISTRIBUTION OF SARATOGA HOLDINGS' SHARES.
FEDERAL INCOME TAX CONSEQUENCES
The parent does not intend to request a ruling from the Internal Revenue
Service regarding the federal income tax consequences of the distribution.
However, based on the facts of the proposed transaction, it is the opinion of
management of the parent that the transaction will not qualify as a tax free
spin off under Section 355 of the Internal Revenue Code of 1986. Rather, the
parent will report the transaction as a taxable distribution.
The amount of the distribution for tax purposes is equal to the fair
market value of Saratoga Holdings' common stock on the date of the distribution.
The net book value of Saratoga Holdings on the date of the distribution is
expected to be approximately $0.003 per share. This is the amount that the
parent intends to report as the taxable value of the distribution per share.
However, if the spin off is delayed and, during the delay, the net book value of
Saratoga Holdings increases, this may result in a higher tax to the parent's
shareholders.
Holders of the parent's common stock will be taxed on the distribution as
a dividend to the extent of the parent's consolidated current and accumulated
earnings and profits, computed as of the close of the tax year in which the
distribution occurs. For the year ended December 31, 1998, the parent had no
accumulated consolidated earnings and profits. The parent does not anticipate
having any current consolidated earnings and profits for the year ending
December 31, 1999. Thus, no portion of the distribution should be taxed as an
ordinary dividend.
Instead, the distribution should first reduce a shareholder's adjusted
basis in the common stock of the parent, but not below zero. If the amount of
the distribution would have the effect of reducing a shareholder's adjusted
basis in his common stock of the parent below zero, the excess will be treated
as a gain from the sale or exchange of property. If the common stock of the
parent is a capital asset in the hands of the shareholder, the gain will be a
capital gain, either long-term or short-term depending upon whether the
shareholder held the parent's common stock for more than 12 months. The maximum
federal income tax rate on long-term capital gains is 20%, while the maximum
federal income tax rate on short-term capital gains is 39.6%.
A shareholder's tax basis in the Saratoga Holdings common stock received
in the distribution will equal the fair market value of the common stock on the
date of the distribution. The holding period for
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measuring a shareholder's gain or loss on a subsequent sale of the Saratoga
Holdings common stock will generally begin on the day following the date of the
distribution.
The foregoing statements are the opinion of the parent's management. The
Internal Revenue Service is not bound by and may not agree with the position of
management regarding the value of the Saratoga Holdings common stock or the
other matters discussed above. If the Internal Revenue Service were to
successfully assert that a substantially higher value should be placed on the
amount of the distribution, the tax impact would increase significantly and
would not be minimal. The parent would recognize gain to the extent the value
placed on the amount of the distribution exceeded its adjusted basis in the
stock which approximates the net book value of Saratoga Holdings. The
shareholders of the parent would be taxed on the amount determined for the
distribution as a dividend to the extent of any current year or accumulated
earnings and profits of the parent, including any gain recognized by the parent
on the distribution of the Saratoga Holdings' common stock, and would recognize
gain on the balance of the distribution to the extent it exceeded their adjusted
basis in shares of the parent owned by them.
AS A SHAREHOLDER OF THE PARENT YOU ARE URGED TO CONSULT WITH A TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE DISTRIBUTION, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
CHANGE IN THE LAWS.
DETERMINATION OF OFFERING PRICE
There is no market for trading Saratoga Holdings' securities. The net book
value of Saratoga Holdings on the date of the distribution is expected to be
approximately $0.003 per share which is the price that the parent paid for all
of the common stock of Saratoga Holdings that is currently outstanding.
PLAN OF DISTRIBUTION
INTRODUCTION
In October, 1998, the parent purchased 3,766,667 shares of common stock
from Saratoga Holdings for $11,300 in cash. The board of directors of the parent
believes that it will be beneficial to spin off approximately 3,465,292 of those
shares in order to pursue strategic alternatives and to position Saratoga
Holdings for future growth. Saratoga Holdings' management believes that this
transaction has the greatest potential for enhancing the competitive position of
the business and thereby enhancing overall shareholder value. The board of
directors of the parent has declared a stock dividend, and has authorized the
distribution of the dividend shares subject to the effectiveness of the
registration statement covering the shares.
It is expected that Saratoga Holdings will expend a total of approximately
$26,003 for legal fees, printing, organization costs and other costs involved in
the distribution of the dividend shares to the shareholders of the parent.
METHOD OF DISTRIBUTION AND SUBSEQUENT TRADING
No underwriters are involved or are expected to be involved in the
offering. The parent will distribute the common stock of Saratoga Holdings to
its shareholders as a dividend for no consideration. It intends to mail
certificates representing the dividend shares on or about August 12, 1999 or as
soon thereafter as reasonably possible to holders of the parent's common stock
of record on August 9, 1999. It will distribute the dividend on the basis of one
share of Saratoga Holdings' common stock for
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each one share of its own issued and outstanding common stock. It does not
anticipate issuing certificates for fractional shares. The parent will not
require the holders of the parent's common stock to make any payment or take any
other action in connection with the dividend shares.
There would be approximately 1,350 shareholders of Saratoga Holdings if
the parent distributed Saratoga Holdings' shares to all of the parent's
shareholders. However, because Saratoga Holdings will distribute cash instead of
shares to those shareholders who reside in California, Saratoga Holdings
believes that there will be approximately 1,237 shareholders of Saratoga
Holdings after the distribution. Saratoga Holdings has not applied to register
this offering in any state. If any other state does not have an exemption for
the offering, Saratoga Holdings probably will distribute cash instead of shares
in that state as well. No shares of Saratoga Holdings may be traded in any state
until Saratoga Holdings complies with all of the state's securities laws. In
addition, there is no assurance that any shares of Saratoga Holdings will be
eligible for sale or resale in any jurisdiction.
The parent or Saratoga Holdings will mail a copy of this prospectus to
each holder of record of the parent's common stock on August 9, 1999 together
with stock certificates representing the dividend shares or cash, as applicable.
Saratoga Holdings will also mail copies of this prospectus to brokers and
dealers who are known to trade or make a market in the parent's common stock and
to other brokers and dealers who may reasonably be expected in the future to
trade or make a market in Saratoga Holdings' common stock. However, Saratoga
Holdings does not anticipate that an active market for its common stock will
develop within the foreseeable future. Moreover, there can be no assurance that
any trading market will develop at any time.
REGULATIONS AFFECTING THE PRICE AND MARKETABILITY OF SARATOGA HOLDINGS STOCK
Because of the low price of our common stock and the fact that it is not
listed on The Nasdaq SmallCap Market(SM) or any exchange, the shares may be
subject to a number of regulations which may affect the price of the shares and
your ability to sell the shares in the secondary market.
For example, Rule 15g-9 under the Securities Exchange Act may affect the
ability of broker-dealers to sell the shares and may affect your ability to sell
the common stock in the secondary market. Rule 15g-9 generally applies to shares
that are not listed on The Nasdaq SmallCap Market(SM) or any stock exchange. The
rule imposes additional sales practice requirements on broker-dealers that sell
low-priced securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction.
In addition, because the penny stock rules probably will apply to our
shares, investors in this offering probably will find it more difficult to sell
their securities. The Securities and Exchange Commission's regulations define a
penny stock to be any equity
security that has a market price or exercise
price of less than $5.00 per share, subject to some exceptions. The penny stock
rules require a broker-dealer to deliver a standardized risk disclosure document
prepared by the Securities and Exchange Commission, to provide the customer with
additional information including current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, monthly account statements showing the market value of each penny
stock held in the customer's account, and to make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
requirements probably will reduce the level of trading activity in the secondary
market for the common stock and may severely and adversely affect the ability of
broker-dealers to sell our securities.
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DIVIDENDS
Saratoga Holdings has not paid any dividends on its common stock and does
not anticipate paying any dividends in the foreseeable future.
CAPITALIZATION
The following table shows the capitalization of Saratoga Holdings as of
March 25, 1999. The offering will not result in any changes to the
capitalization.
Debt $ 0.00
Shareholder's Equity
Preferred stock, $0.001 par value, 100,000
shares authorized, none issued or outstanding --
Common stock, $0.001 par value, 100,000,000
shares authorized, 3,766,667 issued and outstanding $ 3,766.66
Additional paid in capital $ 7,533.33
Total Shareholder's Equity $11,300.00
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Saratoga Holdings has no operations or assets other than, as of December
31, 1998, a portfolio of accounts receivable with an aggregate unpaid balance of
$223,907.05 for which it paid approximately $10,300 in cash. The majority of the
accounts receivable represent consumer debt, mostly relating to past due credit
card obligations.
Effective November 12, 1998, Saratoga Holdings entered into a service
agreement under which it has engaged a debt collection company to collect the
receivables. The service agreement authorizes the collection company to settle
any of the receivables transferred for collection for 50% or more of the
outstanding balance. In exchange for the services provided under the service
agreement, the collection company is entitled to retain a commission equal to
30% of the amount collected.
Based upon the experience of its president, who is also an officer and
director of the seller of the portfolio and of the collection company, Saratoga
Holdings believes that total collections from an average portfolio of this type
should be approximately 20% to 35% of the face value of the portfolio, depending
upon the quality of the portfolio and the success of collection efforts. Factors
which influence the quality of a portfolio include the availability of
documentation on the accounts receivable, the age of the receivables and the
demographics of the debtors. According to Premium Recoveries, based upon its
experience in the collection business, an average portfolio of this size and
type should result in potential collections of approximately $45,000 to $90,000.
After deducting commissions and expenses, Saratoga Holdings should receive
approximately $31,000 to $63,000, provided, however, no assurance can be given
that these accounts will be collected to this extent.
As of April 30, 1999, Premium Recoveries reports that it has collected
approximately $2000 of the accounts receivable and has commitments to pay of
approximately $45,000. Based upon its experience, the stage in the collection
process and the number of debtors located in this case, Premium Recoveries
believes that it is likely to receive additional commitments over the next few
months which could bring total commitments to as much as $75,000. According to
Premium Recoveries, with respect to most portfolios, these commitments to pay
typically result in the collection over a period of approximately three to six
months of approximately 35% to 65% of the total amount committed. Assuming
average performance, and taking into consideration the age of the accounts
receivable in this portfolio, the quality of the documentation of the
receivables, the demographics of the debtors and the number of debtors contacted
to date, Premium Recoveries believes that collections from this portfolio should
exceed $37,000 prior to commencing legal activity and could result in gross
collections between $45,000 and $90,000 after legal action. After pursuing these
collection efforts, Saratoga Holdings intends to sell the balance of the
portfolio and anticipates that it may be able to do so for approximately half of
its original cost of the receivables that remain uncollected.
Saratoga Holdings intends to apply all or a substantial portion of any
amounts recovered from the collection of the receivables (after payment of the
commissions) to purchase additional receivables. It does not intend to use these
amounts to cover expenses associated with this offering. Rather, Saratoga
Holdings intends to pay its expenses by drawing down on its $40,000 line of
credit discussed below.
We hope that we will be able to collect a sufficient amount from the
portfolio to reinvest the net collections in a new portfolio approximately every
six to eight months. Saratoga Holdings believes that it is likely that, in
addition to reinvesting net collections, it will attempt to borrow money or
enter into a joint venture in order to purchase a substantially larger
portfolio. Saratoga Holdings may purchase additional receivables from the same
seller or from other sellers which include the following:
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o the 50 largest banks in the United States;
o other credit agencies and lenders; and
o large wholesalers of accounts receivable that purchase
receivables from lenders.
Saratoga Holdings uses several criteria to select accounts for purchase in
an effort to determine the overall collectibility of the accounts. These
criteria include age, collection experience, and the demographics of the
package. Saratoga Holdings looks for portfolios that are predominately comprised
of accounts with the following characteristics:
o they are less than three years in default;
o they previously have not been placed with a collection agency; and
o they represent debts originating in states whose populations
generally have higher personal incomes and less restrictive debt
collection laws.
Information about portfolios for sale is available from various sources,
including a daily publication titled the DEBT SALES BULLETIN which is published
by Faulkner & Gray. Based upon its review of this report and other research,
Saratoga Holdings believes that it would take seven to ten days to locate a
suitable portfolio and to close on the purchase of that new portfolio.
LIQUIDITY
Because Saratoga Holdings has limited cash, its independent accountants
believe there is substantial doubt about its ability to continue as a going
concern. However, Saratoga Holdings believes that it will be able to meet its
obligations because its only material expenses (other than commissions which
will be paid out of collections) are legal and accounting and, after this
registration statement becomes effective, reporting expenses. A wholly owned
subsidiary of the parent has provided a revolving line of credit to Saratoga
Holdings up to a maximum of $40,000 at an interest rate of 10% per year to cover
these legal, accounting and reporting expenses for the first 18 months of
operations. The terms of the line of credit are set forth in a note dated
effective November 12, 1998. If Saratoga Holdings does not become profitable,
the lender intends to treat the debt as a capital contribution.
As of the date of this prospectus, Saratoga Holdings has not borrowed on
the revolving line of credit because it has not paid the expenses associated
with this offering. Saratoga Holdings anticipates that it will borrow on the
line of credit in the near future and intends to repay the line of credit
pursuant to the terms of the note which becomes due and payable on April 11,
2000. Saratoga Holdings does not intend to repay any amounts outstanding under
the line of credit prior to April 11, 2000 or to make the repayment of this
indebtedness a criteria for consideration of an acquisition.
Saratoga Holdings hopes that eventually it will be able to support some of
its operations though the collection of accounts receivable. Based upon reports
from Premium Recoveries, Saratoga Holdings expects collection efforts with
respect to its initial portfolio to be successful and that it will use net
collections to purchase its next portfolio in June or July of this year. In
addition to cash collected, Saratoga Holdings may attempt to borrow money to use
toward the purchase of additional receivables or to enter into a joint venture.
Saratoga Holdings would offer the accounts receivable purchased with the
proceeds of the loan as collateral for the loan.
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THE YEAR TWO THOUSAND
Saratoga Holdings, like many companies, faces the Year 2000 issue. Many
computer programs use two digits rather than four (for example, "98" for 1998)
to define dates. As a result, any programs that have time-sensitive software may
recognize a date using "00" for the year 2000 as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things a temporary inability
to process transactions or engage in other normal business activities.
Saratoga Holdings does not own or operate any computer systems. However,
it uses the computer hardware and software of the parent for general accounting
and business purposes. The parent believes that its computer systems and
software are Year 2000 compliant because it purchased them within the past two
years. However, the parent is in the process of seeking assurances of this fact
from its hardware and software vendors. If any of these systems are not Year
2000 compliant, the parent will modify or replace portions of its hardware and
software prior to the end of this year.
In addition, Saratoga Holdings has gathered information about the Year
2000 compliance status of various third parties, including its transfer agent
and the company that it has retained to collect its current portfolio of
accounts receivable. The collection company has reported to Saratoga Holdings
that it is Year 2000 compliant and the transfer agent has represented that it is
in the process of becoming Year 2000 compliant. To date, Saratoga Holdings is
not aware of any third party with a Year 2000 Issue that would materially impact
its results of operations, liquidity, or capital resources. However, Saratoga
Holdings has no means of ensuring that all third parties will be Year 2000
compliant.
Because Saratoga Holdings does not have any of its own computer hardware
or software, Saratoga Holdings believes that there will be no material cost
involved in its Year 2000 compliance efforts. For that same reason, Saratoga
Holdings has no contingency plan in place.
THE BUSINESS
Saratoga Holdings is in the business of collecting, through third party
contractors, past-due accounts receivables. Saratoga Holdings intends to grow
its business by reinvesting a substantial portion of the net collections in the
purchase of additional receivables.
Saratoga Holdings purchased its first portfolio of accounts receivable
from The Premium Group. However, The Premium Group is under no obligation to
provide any additional portfolios to Saratoga Holdings. The Premium Group became
involved in the accounts receivable management business in 1994 under the name
Capital Analysis Partners. Since 1994, The Premium Group has been involved in
the purchase and resale of over $500 million in accounts receivable and is
ranked in the top 50 firms in the United States in this industry based on
industry information compiled by COLLECTIONS & CREDIT RISK magazine. The Premium
Group, like Saratoga Holdings, purchases portfolios of accounts receivable for
collection by outside collection agencies including Premium Recoveries, or for
resale to third parties. The Premium Group typically purchases portfolios
through joint ventures with existing or new investor funds. In addition, it
provides consulting services to debt originators and other accounts receivable
management firms to help them improve their cash flow from operations. As of
April 1, 1999, The Premium Group, in connection with seven joint venture
partners, had approximately $560,000 in assets under collection with outside
collection agencies including Premium Recoveries. The Premium Group employs five
individuals who, under the direction of Mr. Johnson, are responsible for
analyzing portfolios, closing the purchase of portfolios, and post-sale service
and support of the portfolios.
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Saratoga Holdings expects to purchase a new portfolio of accounts
receivable in June or July 1999. It hopes to purchase additional portfolios
approximately every six to eight months after that subject to successful
collections. Therefore, Saratoga Holdings hopes that it will be able to purchase
another portfolio between February and May 2000 and approximately every six to
eight months after that date. If collection efforts on the current portfolio are
unsuccessful, Saratoga Holdings may attempt to borrow additional funds to
purchase the new portfolio. The management of Saratoga Holdings has reviewed
industry publications which provide information regarding sources of delinquent
accounts receivable and has discussed the possibility of purchasing accounts
receivable with a number of sources including several banks and resellers of
accounts receivable. Based upon information from these sources, Saratoga
Holdings believes that there are many sources of delinquent accounts receivable
and that it will be able to purchase additional portfolios according to its
business strategy. Saratoga Holdings anticipates that it may also borrow funds
in order to purchase a larger portfolio, using the portfolio as collateral, or
it may enter into a joint venture with a third party investor. Saratoga Holdings
has identified and discussed this possibility with approximately eight third
party investors who have expressed interest. Based upon its research of the
industry, Saratoga Holdings anticipates that once it determines that it has
sufficient cash or borrowing capacity to purchase its next portfolio, it will
take approximately seven to ten days to locate and complete the purchase.
Like The Premium Group, Saratoga Holdings is not licensed as a debt
collection company and does not collect receivables directly. Instead, it has
retained Premium Recoveries to collect the accounts in exchange for a
commission. Saratoga Holdings has chosen not to become licensed because of the
significant cost and time associated with that process. It believes that
outsourcing those services, on a competitive basis, is the most fiscally sound
approach until it is in a position to purchase a higher volume of accounts
receivable. However, Saratoga Holdings plans to perform the collection function
directly within the next 18 months. It intends to acquire the necessary licenses
through the purchase of already existing collection agencies. Saratoga Holdings
has discussed this possibility with approximately 11 collection agencies,
however, it has not as entered into any formal letter of intent.
Saratoga Holdings has a contract with Premium Recoveries for the
collection of its current portfolio. Premium Recoveries is an affiliate of The
Premium Group. It has a staff of seven, all of whom are supervised by Mr.
Johnson. The owners of the Premium Group acquired Premium Recoveries in 1998.
According to industry publications, there are approximately 6,500 collection
agencies in the United States. Premium Recoveries now ranks in the top 150 based
upon industry information compiled by COLLECTION & CREDIT RISK magazine. It is a
member in good standing with the American Collectors Association (ACA).
Premium Recoveries does not have any agreement with Saratoga Holdings
regarding the collection of any additional portfolios. When it purchases
additional portfolios of accounts receivable, Saratoga Holdings will either
renew its contract with Premium Recoveries or will choose a new collection
agency. If Saratoga Holdings chooses a new collection agency, it will exclude
interested officers and directors of Saratoga Holdings from the decision making
process. Premium Recoveries has indicated to Saratoga Holdings that it is
willing to renew or extend the term of the collection agreement which Saratoga
Holdings to cover new portfolios of accounts receivable. Saratoga Holdings will
determine whether to renew or extend the agreement based upon the success of
collection efforts from its first portfolio. The management of Saratoga Holdings
has been investigating other relationships with collection agencies and, based
on discussions with them, and the fact that there are approximately 6,500
collection agencies in the United States, believes that it will have the option
of retaining other agencies to collect its receivables upon similar terms. Based
upon discussions with at least two independent collection agencies, Saratoga
Holdings
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believes that it would take less than one week to retain a new collection agency
to collect additional portfolios on the same or similar terms upon which it has
retained Premium Recoveries.
We anticipate that the funds necessary to pursue our business will be
derived from the net proceeds we collect from our first portfolio. Premium
Recoveries has advised us that, as of April 30, 1999, they have been able to
locate approximately 90% of the debtors, which is an unusually large percentage.
Premium Recoveries currently estimates that collections from the first portfolio
should range from approximately $45,000 to approximately $90,000 and expects to
recover these amounts over approximately a five to eighteen month time period.
Premium Recoveries believes that it will have collected sufficient funds from
the portfolio to enable Saratoga Holdings to purchase an additional portfolio in
June or July 1999. However, in order to purchase a substantially larger
portfolio, Saratoga Holdings hopes to either borrow additional funds or enter
into a joint venture as discussed above. Saratoga Holdings has identified and
discussed this possibility with approximately eight third party investors who
have expressed interest. Saratoga Holdings intends to build its business by
repeating this process and by acquiring collection companies.
THE INDUSTRY
The debt collection industry exists because lenders, including banks and
other credit agencies, create portfolios of past due accounts receivable from
loans which have not been repaid. These past due receivables may be placed with
a collection company, or they may be sold at a discount from their face value.
The face value of the receivables is the total principal balance of the
portfolio of receivables on the date that it was charged off or sold by the
originator. The face value does not include interest which has accrued since the
receivables were charged off. The price of a portfolio of receivables is
determined by the age of the portfolio and by how many times it has been placed
for collection. The age of receivables may range from 180 days since the date of
the last payment by the debtor to seven years since the date of last payment by
the debtor. Generally, the price of 180 day old receivables that have not been
placed for collection is approximately 10 cents on the principal dollar. The
price for five to seven year old receivables that have been placed for
collection three or more times may be as little as one-half cent on the
principal dollar.
Receivables are typically purchased without recourse which means that the
seller of the receivables will not be obligated to the purchaser if the
purchaser is unable to collect the debt. In addition, the sellers typically do
not provide purchasers with any representations as to the character, accuracy or
sufficiency of the information provided to a purchaser about the receivables.
Therefore, even if the purchaser cannot collect the receivables, the purchaser
may not have any remedy or recourse against the seller.
Generally, collection companies spend approximately four to six months
attempting to collect a portfolio of receivables. The portfolio collection
process includes the following steps.
o The collection company will analyze and score the portfolio to determine
the collectibility of each account, based upon factors such as
demographics and credit ratings.
o The collection company will send each account a letter stating that all
payments and correspondence should be directed to the collection agency.
By federal law, the letter must contain specific information regarding the
type of debt and the balance due, and a statement that the letter is an
attempt to collect the debt.
o The collection company follows up the letter with phone calls in which the
collection company attempts to negotiate a settlement of the debt for a
percentage of the amount owed.
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o The collection company may refer some of the accounts to collection
attorneys who may file a lawsuit. Once a judgment is rendered in a case,
the debtor's assets are identified and attached, or, in some states, wages
may be garnished.
o After the collection company has completed the collection cycle, and
assuming collection efforts as to a particular account have not been
successful, the collection company may sell those uncollected accounts for
approximately one-third to one-half of the account's original purchase
price.
BUSINESS STRATEGY
Saratoga Holdings' current strategy is to grow its business by reinvesting
a substantial portion of its net collections into the purchase of additional
accounts receivable. In addition, Saratoga Holdings anticipates that it may
expand its operations in several ways,
including the following:
o it may participate with other entities in buying large portfolios of
past-due receivables and enter into arrangements with other companies for
the collection and servicing of accounts;
o it may form separate entities, such as limited partnerships, through which
to raise funds for the purchase of portfolios, and to engage in the
collection of portfolios directly or by contracting this function to third
parties;
o it may acquire portfolios of delinquent receivables and subdivide
receivables into two or more separate portfolios to be sold or retained
for collection;
o it may pursue merger and acquisition opportunities in the receivables
collection or other related industries, or enter into strategic alliances
with third parties to further expand Saratoga Holdings' revenue base.
Saratoga Holdings has a large number of authorized but unissued shares and
could use those shares as a vehicle to achieve a reverse acquisition without
being required to obtain shareholder approval of the transaction; however, at
this time, Saratoga Holdings does not have any agreements or understandings with
respect to any merger, acquisition or other business combination. Saratoga
Holdings has no intention of acquiring a business in an unrelated industry.
To the extent that it pursues any material merger or acquisition in its
own industry or a related industry, Saratoga Holdings will seek shareholder
approval of the transaction. If an acquisition involves the purchase of
outstanding shares of Saratoga Holdings by a third party, the officers and
directors intend to provide all shareholders with the opportunity to participate
in the transaction on similar terms and conditions. Management believes that its
fiduciary duties to the other shareholders of Saratoga Holdings would prevent
members of management from agreeing to sell their shares to a third party in an
acquisition without providing the same opportunity to the other shareholders.
Saratoga Holdings is not able to determine whether any future acquisition will
result in a change of control or a change in management. However, the management
of Saratoga Holdings currently intends to continue to operate the business even
if Saratoga Holdings receives an offer for a merger or an acquisition and hopes
that it will be able to add to and increase the strength of its management team
as a result of acquisitions. Saratoga Holdings intends to provide its
shareholders with complete disclosure, including audited financial statements,
of the target in connection with any merger or acquisition. Saratoga Holdings
does not intend to enter into any material acquisition without the affirmative
vote of its shareholders or to make an acquisition beyond that stated in this
section. In addition, neither Saratoga Holdings nor any of its affiliates has
any intent to engage in promotional or market related activities which would
cause Saratoga Holdings to be
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characterized as a blank check company under the rules and regulations of the
Securities and Exchange Commission.
Mr. Thomas Cooke would be central in any efforts Saratoga Holdings makes
to expand its business and in some cases might be in a position to negotiate a
finders' fee or other compensation for those services. Mr. Cooke has represented
to Saratoga Holdings that he will not negotiate any finders' fees, consulting
fees or other special compensation in connection with any efforts he makes to
achieve a business combination. Saratoga Holdings does not intend to rely on
outside business consultants other than collection companies.
RESEARCH AND DEVELOPMENT ACTIVITIES
Saratoga Holdings has not spent any material amount on research or
development activities since its inception on October 29, 1998.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Saratoga Holdings does not believe that it will incur any material cost
relating to efforts to comply with environmental laws.
COMPETITION FOR ACCOUNTS RECEIVABLE
Saratoga Holdings competes with debt collection companies and with
wholesalers of accounts receivable for the purchase of accounts receivable.
Competition for the purchase of accounts receivable is significant. Various
industry sources list as many as 300 purchasers of bad debt in the United
States. There are numerous companies specializing in the purchase of accounts
receivable that have substantially greater resources and broader geographic
coverage than Saratoga Holdings. Notwithstanding this fact, there are numerous
portfolios available for sale, many of which are identified in industry
bulletins and periodicals. Therefore, notwithstanding the competition for
portfolios, Saratoga Holdings believes that, once it has the available resources
to purchase a new portfolio, it could complete the transaction within
approximately seven to ten days.
If Saratoga Holdings decided to expand its business into the accounts
receivable management business, it would encounter significant competition. The
accounts receivable management industry includes more than 6,500 service
providers, including large national corporations in addition to many regional
and local firms. Most if not all of these companies have substantially greater
resources, offer more diversified services and operate in broader geographic
areas than Saratoga Holdings. More importantly, these companies have greater
resources with which to purchase accounts receivable. In addition, in many
instances, the accounts receivable collection services are performed in-house.
CUSTOMERS AND SUPPLIERS
Saratoga Holdings does not provide goods or services. Saratoga Holdings
purchased its first portfolio from The Premium Group at a premium through a
related transaction. Saratoga Holdings is currently dependent upon its
relationship with Premium Recoveries for collection of those accounts
receivable. Saratoga Holdings does not have any ongoing contractual commitment
from The Premium Group to supply any additional accounts receivable, therefore,
The Premium Group is under no obligation to provide additional accounts to
Saratoga Holdings. Saratoga Holdings does not know whether it will purchase
additional portfolios from The Premium Group. Its agreement with Premium
Recoveries for the collection of accounts receivable extends for a period of 12
months until November 11, 1999. After that
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time, it automatically renews on a month to month basis and therefore may be
canceled by either party upon 30 days written notice. If its relationship with
Premium Recoveries were not renewed or were canceled, Saratoga Holdings would
search for another debt collection company to replace Premium Recoveries. Based
upon the fact that there are over 6,500 collection agencies in the United States
and based upon its conversations with at least two other collection agencies,
Saratoga Holdings believes that it would be able to retain a new collection
agency within approximately a seven day period on the same or similar terms as
its present agreement with Premium Recoveries. Saratoga Holdings has identified
several collection companies which would be candidates and has spoken with at
least two of them. Saratoga Holdings does not anticipate collecting accounts
receivable directly unless it acquires a licensed debt collection company
through a business combination.
GOVERNMENT REGULATION
The accounts receivable industry is regulated under various federal and
state statutes. Saratoga Holdings is not licensed as a debt collection company.
Instead of applying for any licenses, Saratoga Holdings has retained a licensed
debt collection company to collect its receivables in exchange for a commission.
Saratoga Holdings is relying upon the debt collection company to comply with
numerous federal and state laws and regulations. These include the Federal Fair
Debt Collection Practices Act which establishes specific guidelines and
procedures which debt collectors must follow in communicating with consumer
debtors, including the time, place and manner of communications. It also
includes the Fair Credit Reporting Act which regulates the consumer credit
reporting industry and which may impose liability on Saratoga Holdings to the
extent that the adverse credit information reported on a consumer to a credit
bureau is false or inaccurate.
The debt collection business is also subject to state regulation. Saratoga
Holdings is not licensed as a debt collection company and does not anticipate
applying for any license. The company that presently is collecting the
receivables for Saratoga Holdings is licensed as a debt collection company and
has agreed that it will comply with all state and federal laws in connection
with its collection of Saratoga Holdings' accounts receivable. If the collection
company fails to comply with applicable statutes and regulations, that could
have a material adverse effect on Saratoga Holdings. There can be no assurance
that additional federal or state legislation, or changes in regulatory
implementation, would not limit the activities of debt collection companies in
the future or significantly increase the cost of regulatory compliance.
EMPLOYEES
Saratoga Holdings currently has two employees, neither of which is full
time. Saratoga Holdings estimates that both of its employees will devote
approximately
one-third or more of their time to the affairs
of Saratoga Holdings.
PROPERTIES
Saratoga Holdings has no property or office of its own. It is utilizing,
without charge, the address and telephone number of the parent as its office.
Currently Saratoga Holdings has no plans for office facilities in the future.
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WHERE YOU CAN GET MORE INFORMATION
If you want more information, write or call us at:
Saratoga Holdings I, Inc.
c/o Saratoga Resources, Inc.,
301 Congress Avenue, Suite 1550
Austin, Texas 78701
Telephone: (512) 478-5717
Our fiscal year ends on December 31. We do not presently file reports or
any other information with the Securities and Exchange Commission, however, we
intend to furnish our shareholders annual reports containing audited financial
statements and other appropriate reports. In addition, we intend to become a
reporting company and file annual, quarterly and current reports, proxy
statement or other information with the SEC. You may read and copy any reports,
statements or other information we file at the SEC's public reference room in
Washington D.C. You can request copies of these documents, upon payment of a
duplicating fee by writing to the SEC. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our
SEC filings are also available to the public on the SEC Internet site at
http://www.sec.gov.
This prospectus contains information concerning Saratoga Holdings as of
December 31, 1998 unless another date is specified. The delivery of this
prospectus at any time does not constitute a representation that the information
contained in it is correct as of any other date, and the delivery of this
prospectus shall not imply that there has not been a change in the business or
affairs of Saratoga Holdings since that date. No dealer, salesman or other
person has been authorized to furnish information or to make any representations
other than what is set forth in this prospectus. You should not rely on any
information or representation other than the information set forth in this
prospectus.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Saratoga Holdings and their
respective ages and positions are as follows:
NAME AGE POSITION
---- --- --------
Randall B. Johnson 50 President
Thomas F. Cooke 50 Chief Executive Officer,
Secretary and Director
RANDALL B. JOHNSON has served as president of Saratoga Holdings since its
formation on October 29, 1998. In addition, since 1992, Mr. Johnson has served
as the managing partner of Capital Analysis Partners, which, from 1992 through
1995 was in the business of making venture capital investments ranging in size
from $100,000 to over $5,000,000. In 1994, Capital Analysis Partners became
involved in the accounts receivable management business. In 1997, it changed its
name to CAP Ventures and in 1998 to The Premium Group. Mr. Johnson continues to
serve as the managing partner of The Premium Group. In addition, since August,
1998, Mr. Johnson has served as the vice president of Premium
22
<PAGE>
Recoveries, Inc., a commercial collection agency located in Austin, Texas and a
subsidiary of The Premium Group.
THOMAS F. COOKE is the sole director, chief executive officer and the
secretary of Saratoga Holdings. Mr. Cooke has held these positions with Saratoga
Holdings since its formation on October 29, 1998. Mr. Cooke was one of the
co-founders of the parent in 1990. He also has been a self employed independent
oil and gas producer for the past 16 years. Mr. Cooke has served as a director
and chairman of the board of the parent since September of 1993, and as chief
executive officer since April 1996. Mr. Cooke also served as chief operating
officer of the parent from 1993 to 1996. Mr. Cooke's employment by the parent
was on a full-time basis prior to the formation of Saratoga Holdings. Mr. Cooke
now divides his time between the two corporations. Mr. Cooke is also a principal
shareholder of the parent.
Both Mr. Johnson and Mr. Cooke may be deemed a parent or promoter of
Saratoga Holdings as those terms are defined in the rules and regulations
promulgated under the Securities Act of 1933.
Each officer holds office for a term expiring at the next annual meeting
of shareholders and upon the election and qualification of his successor.
Officers serve at the pleasure of the board of directors of Saratoga Holdings.
ADVISORY BOARD
To assist its officers and directors, Saratoga Holdings has assembled an
advisory board consisting of four individuals to provide it with direction for
future growth. These individuals were chosen by Saratoga Holdings because of
their business experience and other individual qualities which management
believes will assist Saratoga Holdings with the implementation of its business
strategy. The members of the advisory board are Gale L. Galloway, Randall B.
Johnson, James F. O'Donnell and A. Bryan Spires, M.D.
MR. GALE L. GALLOWAY has served as chairman and chief executive officer of
three Fortune 500 companies which have been listed on the New York Stock
Exchange. Mr. Galloway currently serves as chairman of the board and chief
executive officer of GLG Energy, Inc., LIG Acquisitions Corporation and Gas
Transmission U.K. Limited.
MR. RANDALL B. JOHNSON, who also serves as president of Saratoga Holdings,
has been instrumental in the purchase and resale of over $500 million in
delinquent credit card debt since 1994.
MR. JAMES F. O'DONNELL is chairman and chief executive officer of
O'Donnell Investment Management Corporation. The O'Donnell Group of funds
currently has approximately $1.7 billion in assets under its administration and
is listed on the Toronto and Montreal Stock Exchanges.
MR. BRYAN SPIRES has served as Medical Director of the Central Texas
Division of BlueCross BlueShield and the Texas Board of Medical Examiners and is
familiar with accounts receivable issues in the medical profession.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Saratoga Holdings has paid no remuneration to its director or officers,
other than as provided in the following paragraph, and does not anticipate the
payment of remuneration, other than as provided below, until the board of
directors determines otherwise.
23
<PAGE>
Saratoga Holdings has granted Mr. Johnson a three-year option to purchase
25,000 shares of Saratoga Holdings' common stock at an exercise price of $0.50
per share. There are no other outstanding options or warrants to purchase shares
of Saratoga Holdings' common stock.
PRINCIPAL SHAREHOLDERS
Prior to the distribution of the dividend shares, the parent owns 100% of
the issued and outstanding common stock of Saratoga Holdings. After the
distribution of the dividend shares, the parent will own approximately 8.4%.
OWNERSHIP OF THE COMMON STOCK OF SARATOGA HOLDINGS
The following table sets forth information regarding the beneficial
ownership of the common stock of Saratoga Holdings as adjusted to reflect the
distribution of the dividend shares by the following:
o each director of Saratoga Holdings,
o each named executive officer of Saratoga Holdings,
o each person known or believed to own beneficially 5% or more of
the common stock, and
o all directors and executive officers as a group.
Unless otherwise indicated, each person will have sole voting and dispositive
power with respect to his or her shares. Shares of common stock that are not
outstanding but that can be acquired by a person within 60 days upon exercise of
an option or similar right are included in the number of shares beneficially
owned and in computing the percentage for such person but are not included in
the number of shares beneficially owned and in computing the percentage for any
other person. The information in this table assumes that Saratoga Holdings will
have 3,766,667 shares outstanding after the offering.
NAME AND ADDRESS
OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT BENEFICIALLY OWNED
------------------- ---------------- --------------------------
Thomas F. Cooke 2,679,163 71.1%
301 Congress Avenue, Suite 1550
Austin, Texas 78701
Randall B. Johnson 25,000 >1%
308 West Seventh Street, Suite A
Georgetown, Texas 78626
Kevin M. Smith 238,295 6.3%
2000 Dairy Ashford, Suite 410
Houston, Texas 77077
Saratoga Resources, Inc. 458,741 12.2%
301 Congress Avenue, Suite 1550
Austin, Texas 78701
All Officers and Directors 3,401,199 89.7%
as a Group
- -----------------
24
<PAGE>
Shares of Saratoga Holdings held by Mr. Cooke include 109,148 shares of
common stock beneficially owned by June Cooke, the spouse of Mr. Cooke, and
308,741 shares owned by Saratoga Resources, a company controlled by Mr. Cooke,
and 150,000 shares held by wholly owned subsidiaries of Saratoga Resources.
Shares owned by Saratoga Resources include 150,000 shares held by its wholly
owned subsidiaries. All shares of Saratoga Holdings held by Mr. Johnson are in
the form of immediately exercisable options to purchase 25,000 shares of common
stock. Shares of Saratoga Holdings held by Mr. Smith include 20,000 shares of
common stock beneficially owned by Sandra Smith, the spouse of Mr. Smith. Mr.
Smith is a director of the parent but not of Saratoga Holdings.
OWNERSHIP OF THE PARENT'S COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of the 3,465,292 issued and outstanding shares of common stock of the
parent by the following:
o each director of Saratoga Holdings,
o each named executive officer of Saratoga Holdings,
o each person known or believed to own beneficially 5% or more of
the common stock, and
o all directors and executive officers as a group.
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER OF THE PARENT PERCENT BENEFICIALLY OWNED
Thomas F. Cooke 2,220,422 64.1%
301 Congress Avenue, Suite 1550
Austin, Texas 78701
All Officers and Directors 2,220,422 64.1%
of Saratoga Holdings
as a Group
- ------------------
Shares of the parent held by Mr. Cooke include 109,148 shares of common
stock beneficially owned by June Cooke, the spouse of Mr. Cooke.
The principals and controlling persons of Saratoga Resources consist only
of Mr. Cooke and Mr. Kevin Smith.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Cooke and Mr. Johnson may be considered to be promoters of Saratoga
Holdings for purposes of the securities laws. A promoter includes anyone who
takes initiative in founding or organizing a business.
Saratoga Holdings is a wholly owned subsidiary of Saratoga Resources. Mr.
Thomas Cooke, the chief executive officer, secretary and sole director of
Saratoga Holdings is also the president and holder of a majority of the shares
of the parent. The parent purchased 3,766,667 shares of Saratoga Holdings on or
about November 12, 1998 at a price of $0.003 per share.
Mr. Randall B. Johnson, the president of Saratoga Holdings is also the
managing partner, an officer, director and a shareholder of The Premium Group
and Premium Recoveries, Inc. Saratoga Holdings purchased the receivables for
approximately $10,300 in cash from The Premium Group under the terms of a
Purchase Agreement dated November 12, 1998 between Saratoga Holdings and Premium
25
<PAGE>
Group. At that time, the portfolio of receivables had a face value
of $223,907.05. The Premium Group
previously had purchased the receivables in June 1998 for a purchase
price of $9,750.
In addition, Saratoga Holdings entered into a services agreement also
dated November 12, 1998 with Premium Recoveries under which Premium Recoveries
has agreed to use its reasonable efforts to collect the receivables in exchange
for a commission equal to 30% of the amount collected. Saratoga Holdings
believes that the 30% commission is standard in the industry.
In addition, Saratoga Holdings has granted to Mr. Johnson a three-year
option to purchase 25,000 shares of its common stock for $0.50 per share.
DESCRIPTION OF SECURITIES
The authorized capital stock of Saratoga Holdings consists of 100,000,000
shares of common stock, $0.001 par value, and 100,000 shares of undesignated
preferred stock, $0.001 par value.
COMMON STOCK
The holders of Saratoga Holdings' common stock are entitled to one vote
per share on all matters submitted to a vote of shareholders voting with the
holders of Saratoga Holdings' preferred stock as a single class, except where
class voting is required by the Texas Business Corporation Act or by a
Certificate of Designation adopted by the Board of Directors. Cumulative voting
in the election of directors is prohibited. Accordingly, the holders of a
majority of the combined number of outstanding shares of common stock and
Saratoga Holdings' preferred stock entitled to vote in any election of directors
may elect all of the directors standing for election.
Holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding preferred
stock. Upon a liquidation, dissolution or winding up of Saratoga Holdings, the
holders of common stock are entitled to receive ratably the net assets of
Saratoga Holdings available after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred stock. The holders
of common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of common stock are, and the shares issued in the
offering will be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
There are 100,000 shares of undesignated preferred stock authorized and no
shares of preferred stock issued or outstanding.
ANTI-TAKEOVER PROVISIONS
Some of Saratoga Holdings' Articles of Incorporation and Bylaws, and the
indemnification agreements with directors and officers of Saratoga Holdings may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider to be in that
shareholder's best interest, including attempts that might result in a premium
over the market price for the shares held by shareholders.
26
<PAGE>
Under the terms of Saratoga Holdings' Articles of Incorporation, Saratoga
Holdings' Board of Directors may issue additional shares of common stock or
establish one or more series of preferred stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations that the Board of Directors fixes without
shareholder approval. Any additional issuance of common stock or designation of
rights, preferences, privileges and limitations with respect to preferred stock
could have the effect of impeding or discouraging the acquisition of control of
Saratoga Holdings by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of Saratoga Holdings' management.
Specifically, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal was not in Saratoga
Holdings' best interest, shares could be issued by the Board of Directors
without shareholder approval in one or more transactions that might prevent or
render more difficult or costly the completion of the takeover transactions by
diluting the voting or other rights of the proposed acquiror or insurgent
shareholder group, by putting a substantial voting lock in institutional or
other hands that might undertake to support the position of the incumbent Board
of Directors, by effecting an acquisition that might complicate or preclude the
takeover, or otherwise. Saratoga Holdings' Articles of Incorporation and Bylaws
provide that special meetings of shareholders generally can be called only by
the President or Board of Directors or 10% or more of the voting shareholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; LIMITATION OF DIRECTOR
LIABILITY
Saratoga Holdings has entered or proposes to enter into indemnification
agreements with all of its directors and executive officers, which, among other
things, indemnify directors of Saratoga Holdings against liability arising from
shareholder claims of a breach of duty by a director if a director votes against
a transaction that would result in a change of control of Saratoga Holdings.
Saratoga Holdings' Articles of Incorporation also provide that its directors
shall not be liable for monetary damages caused by an act or omission occurring
in their capacity as directors. This provision does not eliminate the duty of
care, and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Texas law as
provided in Section 2.02-1 of the Texas Business Corporation Act. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to Saratoga Holdings, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to a director and for payment
of dividends or acts or omissions for which a director is made expressly liable
by applicable statute. The limitations on liability provided for in Saratoga
Holdings' Articles of Incorporation do not restrict the availability of
non-monetary remedies and do not affect a director's responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Saratoga Holdings under the foregoing provisions, or otherwise, Saratoga
Holdings has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Saratoga Holdings will have outstanding
3,766,667 shares of common stock. The dividend shares distributed to the holders
of the parent's common stock will not be "restricted securities" under Rule 144
and therefore will be freely tradeable in the public market without restriction
or further registration under the Securities Act of 1933, except for any shares
acquired by affiliates of Saratoga Holdings as that term is defined in Rule 144
promulgated under the Securities Act. The remaining 308,741 outstanding shares
of common stock of Saratoga Holdings to be retained by the
27
<PAGE>
parent following this offering will be restricted securities within the meaning
of Rule 144 and may be publicly resold only if registered under the Securities
Act or sold in accordance with an eligible exemption from registration, such as
Rule 144. All of the parent's restricted shares will be available for resale in
the public market commencing on or about November 12, 1999, subject to volume
and other restrictions under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate of Saratoga
Holdings, who beneficially owns restricted securities acquired from Saratoga
Holdings or an affiliate of Saratoga Holdings at least one year prior to the
sale is entitled to sell within any three-month period a number of shares that
does not exceed the greater of the following:
o 1% of the then outstanding shares of common stock, and
o the average weekly reported trading volume of the common stock during the
four calendar weeks immediately preceding the date on which notice of such
sale is filed with the Securities and Exchange Commission, provided manner
of sale and notice requirements and requirements as to the availability of
current public information concerning Saratoga Holdings are satisfied.
Under Rule 144(k), a person who has not been an affiliate of Saratoga Holdings
for a period of three months preceding a sale of securities by him, and who
beneficially owns restricted securities acquired from Saratoga Holdings or an
affiliate of Saratoga Holdings at least two years prior to the sale, would be
entitled to sell the shares without regard to volume limitations, manner of sale
provisions, notification requirements or requirements as to the availability of
current public information concerning Saratoga Holdings.
Shares held by persons who are deemed to be affiliates of Saratoga
Holdings, including any shares acquired by affiliates in the offering, are
subject to volume limitations, manner of sale provisions, notification
requirements and requirements as to the availability of current public
information concerning Saratoga Holdings, regardless of how long the shares have
been owned or how they were reacquired. In addition, the sale of any restricted
securities beneficially owned by an affiliate of Saratoga Holdings and not
registered in this offering is subject to the one-year holding requirement of
Rule 144. As defined in Rule 144, an affiliate of an issuer is a person that
directly or indirectly through the use of one or more intermediaries, controls,
or is controlled by, or is under common control with, such issuer. Approximately
71.1% of the common stock of Saratoga Holdings after the distribution will be
beneficially owned by Mr. Cooke, an affiliate of Saratoga Holdings. These shares
will be regarded as unrestricted shares held by an affiliate and therefor
subject to the provisions of Rule 144, other than the holding period requirement
of Rule 144(d). If Mr. Cooke ceases to be an affiliate of Saratoga Holdings, his
shares would be marketable under Rule 144(k) three months thereafter.
Saratoga Holdings has outstanding non-statutory options to purchase an
aggregate of 25,000 shares of common stock, all of which are exercisable as of
the date of this prospectus. Shares of common stock issued upon exercise of
options may be subject to Rule 144.
Prior to the offering, there has been no public market for the common
stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
common stock in the public market could adversely affect prevailing market
prices and the ability of Saratoga Holdings to raise equity capital in the
future.
28
<PAGE>
Saratoga Resources currently holds all of the issued and outstanding
common stock of Saratoga Holdings. Saratoga Holdings has not paid or declared
any cash dividends with respect to its common stock.
TRANSFER AGENT
The Transfer Agent for the common stock is ChaseMellon Shareholder
Services.
LEGAL MATTERS
Jenkens & Gilchrist, A Professional Corporation, 600 Congress Avenue,
Suite 2200, Austin, Texas 78701 has acted as legal counsel to Saratoga Resources
and Saratoga Holdings in connection with
this prospectus and related matters.
EXPERTS
The financial statements of Saratoga Holdings included in this
registration statement and prospectus have been audited by Ernst & Young LLP and
are included in reliance upon the authority of that firm as experts in
accounting and auditing.
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................................F-2
Audited Financial Statements
Balance Sheet..............................................................F-3
Statement of Operations....................................................F-4
Statement of Changes in Stockholder's Equity...............................F-5
Statement of Cash Flows....................................................F-6
Notes to Financial Statements..............................................F-7
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
Saratoga Holdings I, Inc.
We have audited the accompanying balance sheet of Saratoga Holdings I, Inc. as
of December 31, 1998, and the related statements of changes in stockholder's
equity and cash flows for the period from October 29, 1998 ("inception") to
December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Saratoga Holdings I, Inc. at
December 31, 1998, and the results of its cash flows for the period from October
29, 1998 ("inception") to December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that Saratoga
Holdings I, Inc. will continue as a going concern. As more fully described in
Note 2, the Company had no operating activities prior to October 29, 1998 and
had limited cash, working capital and available sources of financing at December
31, 1998. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Austin, Texas
March 31, 1999
F-2
<PAGE>
Saratoga Holdings I, Inc.
Balance Sheet
December 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
Current assets - cash ........................................... $ 1
Investment in past due accounts receivable ...................... 10
---
Total assets .................................................... $11
===
LIABILITIES AND STOCKHOLDER'S EQUITY
Preferred stock, par value $.001; 100,000 shares ................ $--
authorized; none outstanding
Common stock, par value $.001; 100,000,000 shares
authorized; 3,766,667
shares issued and outstanding ................................. 4
Additional paid-in capital....................................... 7
Retained earnings................................................ --
---
Total liabilities and stockholder's equity ...................... $11
===
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Saratoga Holdings I, Inc.
Statement of Operations
For the Period Ended December 31, 1998
Revenues $ --
Expenses --
-------
Net Income $ --
=======
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Saratoga Holdings I, Inc.
Statement of Changes in Stockholder's Equity
(in thousands)
COMMON STOCK
---------------- ADDITIONAL TOTAL
NUMBER OF PAR PAID-IN STOCKHOLDER'S
SHARES VALUE CAPITAL EQUITY
------ ----- ------- ------
Balances at December 31, 1997 ... -- $ -- $ -- $ --
Issuance of Common Stock ......... 3,767 4 7 11
-----------------------------------------
Balances at December 31, 1998 .... 3,767 $ 4 $ 7 $ 11
=========================================
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Saratoga Holdings I, Inc.
Statement of Cash Flows
Period from October 29, 1998 ("inception") to December 31, 1998
(in thousands)
OPERATING ACTIVITIES
Investment in past due accounts receivable ................. $(10)
----
Net cash used in operating activities ...................... (10)
FINANCING ACTIVITIES
Issuance of common stock ................................... 11
----
Net cash provided by financing activities .................. 11
Net increase in cash ....................................... 1
Cash at beginning of period ................................ --
----
Cash at end of period ...................................... $ 1
====
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ..................................... $--
Cash paid for income taxes ................................. $--
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Saratoga Holdings I, Inc.
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
Saratoga Holdings I, Inc. (Saratoga Holdings), a Texas corporation, is a wholly
owned subsidiary of Saratoga Resources, Inc. As of December 31, 1998, Saratoga
Holdings has no operations other than those related to a portfolio of past due
account receivables purchased on November 12, 1998. Saratoga Holdings is in the
business of purchasing portfolios of accounts receivable at a discount and of
collecting receivables or reselling them in the same or in differently
configured portfolios.
The Company was incorporated on October 29, 1998, and on November 12, 1998,
Saratoga Resources, Inc., the parent company of Saratoga Holdings, purchased
3,766,667 shares of Saratoga Holdings' common stock for $11,300. It is the
intention of Saratoga Resources, Inc. to register 3,465,292 of those shares with
the Securities and Exchange Commission and to distribute them to the
stockholders of Saratoga Resources, Inc. in the form of a dividend, except for
7,366 of those shares for which the parent company intends to pay cash dividends
of $0.003 per share, or $22.10, due to registration restrictions of the states
in which those shares are held.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company had no operating activities
prior to November 12, 1998 and had limited cash, working capital and available
sources of financing at December 31, 1998, raising substantial doubt about the
entity's ability to continue as a going concern.
The Company currently has limited expenses other than legal, accounting and
commissions which the Company intends to pay with collections of the past due
account receivable, as more fully described in these notes. If Saratoga Holdings
is successful in publicly registering its common stock, it will have additional
reporting expenses. A wholly owned subsidiary of Saratoga Resources, Inc. has
agreed to pay Saratoga Holdings' legal, accounting and reporting expenses up to
$40,000 for the first 18 months of Saratoga Holdings' operations subject to
repayment if Saratoga Holdings becomes profitable. This agreement is documented
by a note
F-7
<PAGE>
Saratoga Holdings I, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
dated November 12, 1998 which provides for interest at the rate of 10% per
annum. In addition, Saratoga Holdings hopes that it will be able to support some
of its operations through the collection of accounts
receivable.
USE OF ESTIMATES
The preparation of the Company's financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued Statement No. 130,
REPORTING COMPREHENSIVE INCOME ("Statement 130"), which establishes standards
for reporting comprehensive income and its components in a full set of financial
statements. The adoption of Statement 130 did not have an effect on the
Company's financial statements as the Company has no elements of comprehensive
income.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which prescribes accounting and
reporting standards for all stock-based compensation plans, including employee
stock options. As allowed by Statement No. 123, the Company has elected to
account for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB
25).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. This statement
prescribes the use of the liability method whereby deferred tax asset and
liability account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
F-8
<PAGE>
Saratoga Holdings I, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of December 31, 1998, the Company did not have any temporary differences.
Accordingly, there are no deferred tax assets or liabilities recorded.
3. INVESTMENT IN PAST DUE ACCOUNTS RECEIVABLE
On November 12, 1998, Saratoga Holdings acquired a portfolio of past due
accounts receivable for approximately $10,300 and recorded it at cost. These
receivables represent amounts previously due various major retail businesses
arising from the sale of various consumer products and are considered a
concentration of credit risk due to their past-due nature. The face amount of
these receivables totals $223,907. The ultimate collection of these receivables
will depend on a variety of factors, many of which are outside the Company's
control. Any collections will reduce the asset balance until it is $-0-, with
any remaining collections recorded as revenue.
4. PREFERRED STOCK
Saratoga Holdings may issue preferred stock in one or more series which will
have such designations, preferences, limitations and relative rights as
authorized by the Board of Directors.
5. STOCK OPTIONS
On November 12, 1998, Saratoga Holdings issued an option to an officer of the
Company to acquire 25,000 shares of its common stock at $0.50 per share. The
option, which was fully vested upon grant but unexercised as of December 31,
1998, expires November 11, 2001 if not previously exercised.
The Company has elected to account for its employee stock options under APB 25
and related interpretations. Under APB 25, because the exercise price of the
Company's employee stock options is greater than the estimated market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and income per share is required by
Statement of Financial Accounting Standards Board No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS No. 123"), which requires that the information
be determined as if the Company has accounted for its employee stock options
under the fair value method prescribed by SFAS No. 123. The fair value for these
options was estimated at the date of grant using a minimum value
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<PAGE>
Saratoga Holdings I, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS (CONTINUED)
option pricing model with the following weighted-average assumptions for 1998: a
risk-free interest rate of approximately 6%; a dividend yield of 0% and a
weighted-average expected life of three years.
The minimum value option valuation model results in an option value similar to
the option value that would result from using the Black-Scholes option valuation
model with a near zero volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma compensation expense for 1998 was not material.
6. RELATED PARTY TRANSACTIONS
Randall Johnson, the President of Saratoga Holdings, is also a shareholder,
officer and director of both the company that sold the past due accounts
receivable to Saratoga Holdings and of the company that Saratoga Holdings has
hired to collect the receivables. The seller acquired the receivables in June
1998 for $9,750 and sold them to Saratoga Holdings in November 1998 for $10,300
which Tom Cooke, CEO of Saratoga Resources, Inc., determined to be the fair
market price. Saratoga Holdings may purchase additional receivables from the
same company or other companies and may retain the same company or other
companies to collect any additional receivables. Because of Mr. Johnson's
conflict of interest, the purchase of the receivables by Saratoga Holdings and
the agreement with the collection company to collect the receivables may benefit
the seller and the collections company at the expense of Saratoga Holdings.
The Company has a revolving loan from a subsidiary of its parent to cover
expenses up to $40,000 during its first 18 months of operations. The loan has an
interest rate of 10% and, at December 31, 1998, no amounts were outstanding
under the loan agreement.
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