SARATOGA INTERNATIONAL HOLDINGS CORP.
8756 - 122nd Avenue NE Kirkland, WA 98033
888-878-9683 425-827-7817 FAX 425-827-221
March 20, 2000
Division of Corporation Finance
United States
Securities and Exchange
Washington, DC 20549
Attn: Barry N. Summer, Assistant Director
Mail Stop 4-7
Re: Saratoga International Holdings Corp.
Form 10-SB
File No. 0-29081
Filed January 24, 2000
Dear Mr. Summer:
An amended Form 10-SB was electronically filed March 20, 2000. Enclosed are two
(2) copies of the amended Form 10-SB marked to show changes made in response to
your comments of February 29, 2000. The amended Form 10-SB includes the addition
of unaudited financial statements for the three month periods ended January 31,
1999 and January 31, 2000.
Attached hereto is a separate summary of our responses to your comments with
notes of the location of the changes in the revised materials.
We appreciate your promptness in responding to our initial Form 10-SB filing and
trust that the amended Form 10-SB includes all of the revisions necessary to
meet the requirements of the Rules and Regulations promulgated by the SEC.
Please contact Terry Picken, Saratoga's Executive Vice-President or the
undersigned at the above phone and fax numbers should you have any questions or
should you require additional information.
Sincerely,
/s/ Patrick F. Charles
- ----------------------
Patrick F. Charles, President & CEO
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Saratoga International Holdings Corp.
Form 10-SB
File No. 0-29081
Filed January 24, 2000
Summary of Responses to SEC Comments of
February 29, 2000
The following are our responses to your comments with notes of the location of
the changes in the revised materials:
General
Comment Number
1. "Saratoga": has been used throughout the document to refer to our company.
2. We have attempted to eliminate redundancies that appear throughout the Form
10-SB including the example referred to.
3. Definitions in parenthesis when the meanings clear from their context were
eliminated throughout the document including the examples referred to.
Description of Business
Business Activity
Comment Number
4. Paragraph 2 has been added under Business Activity to describe the
"technology" needed to be developed to market products and services.
5. Paragraph 3 has been added to describe consideration paid to Internet
Interview Inc. for the undeveloped technology.
6. Paragraph 4 has been added to describe the employment contract signed by
Mr. Morsey, and other affiliations between and among the parties to this
transaction.
7. Paragraph 5 has been revised to describe Saratoga Telecom's updated current
marketing plan and the final paragraph of this section has been added to
describe Saratoga's overall plan of growth, which was inadvertently omitted
with the first filing. Paragraphs 9-12 were added to describe Saratoga's
acquisition of Virtual subsequent to the previous filing.
8. Paragraph 6 has been added to describe the status of the technology and
paragraph 7 has been revised to describe the number of websites that are
actively selling Saratoga phone cards.
9. Paragraph 3 under Plan of Operations has been revised to clarify how a
"virtual" card is used.
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10. Saratoga did not acquire, nor did it otherwise own or operate, any tire
and oil distribution businesses and, therefore, Saratoga has no
potential environmental liability. Paragraph 5 under the sub caption
Organization and General History has been revised to disclose that no
tire and oil distribution businesses were acquired.
Management's Discussion and Analysis
Plan of Operation, Page 4
Comment Number
11. The first paragraph of this section has been added to provide an
estimate of when Saratoga expects to become operational. Paragraph 11
has been added to describe the plan of operations for Virtual Media.
12. Paragraph 8 has been added to provide disclosures for Cable and
Wireless similar to those provided by Teleglobe and the full name has
been confirmed as set forth in the added paragraph.
13. Paragraph 19 has been revised to disclose the total dollar amount of
proceed raises in the private offerings.
14. Paragraph 16 has been revised to identify the non-cash charges.
15. Paragraph 20 has been added to describe the terms of the $276,000 Note
payable.
16. The $228,000 loss on investment for the year ended October 31, 1999 is
discussed in Note 3, Divestiture.
17. There are no transactions with Messrs. Morsey and Capozzi that are required
to be disclosed under item 4.04 of Regulation SB.
Financial Statements
Consolidated Balance Sheet
Comment Number
18. The balance sheet has been revised to reflect common stock subscribed as a
reduction of shareholders' equity.
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Financial Statements - Notes
Organization and History
Comment Number
19. This transaction between Knightsbridge (legal acquirer) and Western
(accounting acquirer) has been accounted for as a reverse merger since
Knightsbridge issued so many shares (11,577,000 shares) to the former
owners of Western that they became the majority owners of the resultant
combined organization. The result of this event is that the legal and
accounting treatments of this transaction will diverge, with the accounting
acquirer being the acquirer for financial reporting purposes. In addition,
the legal acquirer (i.e. Knightsbridge) changed its name to Western on July
28, 1998, the date of the reverse merger, and this was disclosed in order
to alert the reader. Also, as stated, in the fourth paragraph we indicated
that the historical financial statements are Westerns and, as such, the
historical operations of Knightsbridge were eliminated in consolidation.
Thus, the common stock of the legal acquirer remained on the balance sheet
while the accumulated deficit balance of Knightsbridge, on the date of the
reverse acquisition, was eliminated by adjustment to additional paid in
capital. Thus, the balance sheet, statement of operations, stockholders'
equity, and cash flow are that of the accounting acquirer, Western.
Knightsbridge had been a development stage company prior to the reverse
merger and had one investment for approximately $306,000 in Language Force
Inc., as disclosed in note 10, that was worthless and thus has been written
off by new management, Western. In addition, Knightsbridge had
approximately $113,000 in liabilities of which $63,000 was paid in fiscal
1998 by the merged entity and $50,000 was forgiven, as disclosed in note
10, in fiscal 1999. Further, Knightsbridge had spent approximately $198,000
on legal and consulting fees to developing their business plans. None of
these expenses or equity balance as of the date of the reverse merger are
related in any way to the operations of Western.
As requested the following wording in the fourth paragraph "under the
purchase method of accounting" has been deleted.
20. There were no material abandoning or disposing of material operations by
Knightsbridge in the 12 months prior to the reverse merger. The
shareholders' of Knightsbridge held about 20% of the outstanding stock of
Western (i.e. Saratoga) after the reverse merger and only one member from
Knightsbridge is now actively involved with Western. Harold P. Capozzi is a
member of the board of directors, has no other involvement or
responsibilities, and holds about .37% of the outstanding common stock of
Saratoga. Therefore, none of the former officers, directors and/or
shareholders of Knightsbridge manage or have a controlling voting interest.
21. The net loss from Knightsbridge for approximately $198,000 was eliminated
in consolidation and was not included in the statement of operations. The
accumulated deficit balance at December 1, 1997 for $488,219 is from
Knightsbridge and the net
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loss from Knightsbridge prior to the reverse merger for $197,909 was
adjusted to additional paid in capital. The total of these two equals the
recapitalization adjustment for $686,128. Thus, the ending accumulated
deficit represents the operations of the accounting acquirer, Western.
In order to make this presentation clearer we have netted these amounts in
the opening additional paid in capital balance so that the reader will only
see the activity of the accounting acquirer.
22. We have complied as requested. These acquisition costs have been charged to
expense.
Financial Statements - Notes
Summary of Significant Accounting Policies
Comment Number
23. Disclosed as requested. Note 2 j
24. Disclosed as requested. Note 2 k and l
25. Disclosed as requested. In accordance with SOP 98-1, cost capitalization
commences when an entity has completed the conceptual formulation, design,
testing of possible project alternatives, including the process of vendor
selection for purchased software, if any. These early-phase costs or
preliminary project stage costs were expensed as required by SOP 98-1.
Costs incurred subsequent to the preliminary project stage have been
capitalized and will be amortized over the assets expected economic useful
life of two years. The costs included in the capitalization were payroll,
related payroll costs, and external direct costs of materials and services
consumed in developing the web site. Management excluded general and
administrative costs and overhead cost as required by SOP 98-1.
Financial Statements - Notes
Intangible Asset
Comment Number
26. a), 26. b), 26. c). We have changed the life of the operational right
acquired to two years after giving greater consideration to the effects of
technological obsolescence. We have added expanded language to the Business
Activity section and Note 3 relating to the intangible asset. The
operational right acquired from internet Interview Inc. was an intangible
asset held by Interview, not a part of their core business, consisting of a
conceptual blueprint of how to enter into the business of selling virtual
prepaid phone cards over the internet. Interview went on to sell its
business to a third party unrelated to both Saratoga and Interview. The
asset purchased did not have the attributes of a business. It was not a
separate entity, a subsidiary or a division. The asset purchased was never
in operation and never produced income. There were no physical facilities,
no employees, no market distribution system, no sales force, no
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customer base, no production techniques and no trade names. Mr. Morsey
joined Saratoga because he was the originator of the conceptual blueprint
and because Interview, his employer, was sold to a third party. We have
reviewed EITF 98-3 and Rule 11-01(d) of Regulation S-X and conclude that
the purchase of the operational right was the acquisition of a single
intangible asset not a business acquisition.
Financial Statements - Notes
Loss Per Share
Comment Number
27. We have deleted the following phrase from Note 2. i) "which becomes
effective for financial statements for fiscal years ending after December
15, 1997". In addition, the wording "less undeclared and not recorded
cumulative Series A Convertible Preferred stock dividends of $15,110 for
the year ended October 31, 1999" was deleted from the explanation of the
diluted EPS calculation. We have revised the following phrase regarding
basic earnings (loss) per share as follows:
"Basic net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for the period. For the year ended October 31,
1999 and the three months ended January 31, 2000, Saratoga added undeclared
and not recorded cumulative Series A Convertible Preferred stock dividends
of $15,110 and $7,555 respectively to the net loss in order to arrive at
the net loss available to common shareholders in accordance with SFAS No.
128."
28. We have complied as requested by adding language to Note 2 i. In performing
this calculation for fiscal 1998, we treated the number of shares issued by
the legal acquirer to the shareholders of the accounting acquiree as
outstanding for the period from the beginning of the current reporting year
until the date of the reverse merger. For the period after the transaction,
the number of shares considered outstanding was the actual number of shares
of the legal parent company outstanding during that period. Next, the
average number of shares outstanding for the full year being reported upon
was computed by averaging these two amounts.
The statement of changes in stockholders' equity reflects the issuance of
the stock issued by the legal acquirer, Knightsbridge, to effect the
reverse merger. As presented on page F-5, we show 11,577,000 shares of
common stock issued in the reverse merger.
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Financial Statements - Notes
Divestiture
Comment Number
29.1Saratoga did not dispose of the entity Western Oil and Tire Distributors,
Inc. In March 1999 Western Oil and Tire Distributors, Inc. changed its name
to Saratoga International Holdings Corp. At the same time Saratoga
concluded that its efforts to finance and complete a roll-up of retail tire
and oil distribution companies would be more difficult than originally
planned and decided to focus its attention on development of an internet
business. Also at the same time Saratoga decided to separate its efforts in
the oil and tire field by spinning-off these development efforts and some
related liabilities to shareholders in the form of stock of a new entity.
The Company was a development stage enterprise with no operating business
or business segment. Our analysis of APB 30, paragraphs 13 and 14 is that
the Western Project was not a business nor a segment of a business because
it was in the development stage, no acquisitions were ever made and no
operations were commenced. The Western project had no recorded assets, was
never sold or abandoned and had no expected future results of operations to
be accounted for on the books of Saratoga. Our conclusion is that there was
no disposal of a segment of a business, therefore no disposition was
presented. We have added explanatory language to the Plan of Operations
discussion on Page 7 and we have added explanatory language to the Note 3
discussing the divestiture.
29.2,29.4 and 29.5 Western Oil & Tire Distributors Inc. was a company in the
development stage during the entire period from inception December 1997
until March 19, 1999. WOTD did not acquire any oil and tire businesses nor
did it have any other operations.
All rights, title and interest to the WOTD name, business development plan
and development efforts were transferred by Saratoga to a newly formed
subsidiary, International Internet Petroleum & Tire Distributors, Inc.
together with debt obligations of $399,942 related to the Western project.
Of the $400,00 in debt obligations transferred $377,742 represented a note
obligation to an unrelated third party with a principal and interest
balloon payment due date of March 3, 2003. The Note was issued in a cash
financing transaction prior to Saratoga's reverse merger transaction with
Knightsbridge. Since Saratoga was not in a position to provide
International with cash or other tangible assets, Saratoga issued 5,000,000
shares of its common stock at $0.05 per share valued at $250,000.
The WOTD Project had a net deficit, therefore the $149,242 difference
between the $399,242 liability accepted by International and the $250,000
worth of Saratoga common stock received by International was treated as a
contribution to the capital of Saratoga by the shareholders of
International who accepted the WOTD Project deficit representing prior
costs of the Project. The $149,242 was accounted for as additional
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paid-in capital. The $149,242 is a non monetary item with an estimated fair
value of the difference between the $399,242 of liabilities and $250,000 of
stock transferred to International. The values of the liabilities and the
stock are more readily determinable therefore were used to determine the
value of the non monetary contribution to the capital of Saratoga.
Subsequent to the spin-off date, the third party holder of the $377,742
note payable agreed to accept an equity security in payment of the debt
obligation, provided that the equity security was issued by Saratoga, a
publicly traded company and the original issuer of the note, rather than by
International which was a non-trading company.
The note was paid by Saratoga by the issuance of the 377,742 shares of its
8 percent convertible redeemable preferred stock valued at $1 per share to
the note holder. As consideration for relief of the debt obligation,
International issued 377,742 redeemable preferred shares at $1 per share to
Saratoga effective the date of settlement of the debt obligation, April 30,
1999. Saratoga recorded the preferred shares it received from International
at $377,742. Prior to October 31, 1999 the net investment in International
of approximately $377,742 was written off on Saratoga's books in accordance
with accounting practices governing decline in value of investments other
than temporarily impaired.
DR CR
Equity in investment in subsidiary $ 500
Note payable $ 377,742
Accounts payable $ 21,500
Paid-in Capital Common
contribution to capital by
International shareholders $ 149,242
Investment in subsidiary $ 500
Common Stock - Par $ 5,000
Paid-in Capital Common $ 245,000
To record 5,000,000 shares of common stock issued to International and the
transfer of debt obligations directly relating to the Western project in
conjunction with the International spin-off transaction effective March 19,
1999 and to remove the accounts representing Saratoga's investment in
International. Also to transfer the estimated fair value of the accumulated
deficit accepted by the International shareholders.
DR CR
Equity in investment in subsidiary $ 500
Note payable $ 377,742
Accounts payable $ 21,500
Paid-in Capital Common
contribution to capital by
International shareholders $ 149,242
Investment in subsidiary $ 500
Common Stock - Par $ 5,000
Paid-in Capital Common $ 245,000
To record 5,000,000 shares of common stock issued to International and the
transfer of debt obligations directly relating to the Western project in
conjunction with the International spin-off transaction effective March 19,
1999 and to remove the accounts representing Saratoga's investment in
International. Also to transfer the estimated fair value of the accumulated
deficit accepted by the International shareholders.
The accounting entry relating to the spin-off transaction on Saratoga's books is
as follows:
DR CR
Equity in investment in subsidiary $ 500
Note payable $ 377,742
Accounts payable $ 21,500
Paid-in Capital Common
contribution to capital by
International shareholders $ 149,242
Investment in subsidiary $ 500
Common Stock - Par $ 5,000
Paid-in Capital Common $ 245,000
To record 5,000,000 shares of common stock issued to International and the
transfer of debt obligations directly relating to the Western project in
conjunction with the International spin-off transaction effective March 19,
1999 and to remove the accounts representing Saratoga's investment in
International. Also to transfer the estimated fair value of the accumulated
deficit accepted by the International shareholders.
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The accounting entries relating to Saratoga's subsequent payment of the
debt obligation transferred to International are as follows:
DR CR
Receivable - International $ 377,742
Note payable - CVI $ 377,742
To record the transfer of the
CVI note back to Saratoga from
International
Note payable - CVI $ 377,742
Preferred Stock issued $ 377,742
To record 477,742 shares of 8%
convertible redeemable preferred
stock at $1 per share issued by
Saratoga in settlement of the CVI
note payable
Investment - International $ 377,742
preferred stock
Receivable - International $ 377,742
To record 377,742 shares of
redeemable preferred stock at $1
per share received from and issued
by International as consideration
for Saratoga's payment of the CVI
Note Payable previously transferred
to International by Saratoga in
conjunction with the March 19, 1999
spin-off transaction
DR CR
Impairment loss on International $ 377,741
Preferred Stock
Investment - International Preferred $ 377,741
Stock to recognize the impairment
in value of the International
Preferred Stock
Saratoga's obligation as issuer of the Note payable transferred to
International was removed upon settlement of the note in April, 1999.
Saratoga has no continuing obligation to fund International.
The 5,000,000 shares of Saratoga's common stock were issued to
International in conjunction with the spin-off transaction to provide
International with capital in lieu of cash which was not available by
Saratoga at the time of the spin-off.
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Management decided to leave the Saratoga shares in place as capital for
International following Saratoga's settlement of the transferred debt
obligation since the shareholders of Saratoga and International were
the same on the effective date of the spin-off and the settlement of
the CVI Note payable was not contemplated at the time of the spin-off.
The International preferred shares issued to Saratoga were not within
the scope of SFAS 115 because they were equity securities that did not
have readily determinable fair values.
29.3We added the phrase "restricted as to tradability" to Note 3. The 5,000,000
shares issued to International were issued without registration pursuant to
an exemption from registration under Section 4(2) of the Securities Act of
1933. These shares cannot freely trade until registered and, currently,
there are no other restrictions or special features (e.g. registration
rights) related to these securities. The lack of tradability negatively
affects the liquidity and the holding period of the investment and thus the
value of the investment. We have objective evidence of this difference in
value when we paid unrelated third parties for services with restricted
shares versus free trading shares which generally involved a discount from
the trade price of at least 20% and often more than 20%. Saratoga stock is
traded on the OTC Bulletin Board in relatively small volumes. This fact has
an affect on value of a block as large as 5,000,000 shares. In quantifying
the marketability discount we first considered numerous restricted stock
studies performed between 1966 and 1995. The studies have clearly provided
a number of variables that should be considered for a specific security in
predicting its restricted stock discount. They are as follows:
o Revenues/Sales
o Earnings (i.e. reported net income)
o Trading Market (i.e., NYSE, ASE or OTC)
o Stability of earnings and stock price
Other important factors considered were the number of shares issued by the
registrant, the registrant's financial performance, condition, outlook,
expected holding period and the required holding period return an investor
would require for these illiquid securities versus the same investment if
it were liquid.
Since the entire restriction relates to lack of marketability we considered
the estimate of 20%, given all the specific facts, to be reasonable.
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Financial Statements - Notes
Common Stock Issuances
Comment Number
30. On the date of the reverse merger, there was no active traded market for
the stock of the legal acquirer, Knightsbridge. Further, since this
transaction involved a public shell with nominal assets and liabilities no
goodwill should be recognized. This treatment is consistent with the
accounting imposed by APB 16, accounting for purchase business combinations
and what we understand to be the SEC's staff current position.
Stock Option Compensation.
31. The sale of 3.6 million common shares were issued to unrelated third
parties. The disclosure has been revised accordingly.
Non-recurring Expenses.
32. There were 1,000,000 Warrants issued in June, 1999 in exchange for the
operational right purchased from Internet interview, Inc. These Warrants
were valued using the Black-Scholes option pricing model. These Warrants
were exercisable immediately when issued and there was no commitment for
performance by Interview. The issue date was the measurement date. The
value computed was $102,666 which was capitalized as an intangible asset
and amortized over two years. (See Notes 2 d, 3 and 9). The 2,000,000
Warrants issued to PMR and Associates in May 1999 and the 1,700,000
Warrants issued to PMR and Associates in February, 1999 were valued using
the Black-Scholes option pricing model. The Warrants were exercisable
immediately when issued and there was no commitment for performance by PMR
and Associates. The issue date was the measurement date. The values
computed were $2,391 for the 2,000,000 Warrants issued in June, 1999 and
$5,076 for Warrants issued in February, 1999. These amounts were charged to
consulting expense.
33. We have complied as requested. We have added a table to the shareholders'
equity Note.
34. a) Disclosure has been added to Note 10. The 2,000,000 shares held in
escrow have been removed from equity as of the date of inception. We
believe that shares held in escrow should not be considered outstanding
because they were held in escrow under the contingency that LFI honors the
Agreement. These share are not entitled to a vote under the Agreement. APB
16 paragraph 78 provides guidance on accounting for shares held in escrow
under similar circumstances.
34. b) Disclosure has been added to Note 10. Knightsbridge and Language Force,
Inc. entered into a Purchase and Sale Agreement in June 1997. This
Agreement provided that an escrow agent would be mutually appointed.
Although an escrow agent was
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appointed and the shares of both companies were deposited with the escrow
agent, a formal escrow agreement was not finalized before LFI gave notice
to Knightsbridge prior to October 31, 1997 that LFI did not intend to
fulfill the Agreement and would take steps to have the Agreement rescinded.
The Purchase and Sale Agreement defined some duties and responsibilities of
the escrow agent including verifying Board of Director approval of each
company, receipt of the shares from each company and payment of $220,000 by
Knightsbridge to LFI. The escrow agent was also required to obtain
confirmation from Knightsbridge to release their shares to LFI.
Additionally, the escrow agent was to release shares to the parties based
on payments made by Knightsbridge. Subsequent to the notice from LFI that
LFI did not intend to fulfill the Agreement, Knightsbridge discontinued
making payments to LFI. The escrow agent is holding the shares of both
companies until the matter is resolved and is expected to dispose of the
shares in accordance with the terms of a resolution. Both parties have
agreed that the original agreement should be rescinded and have agreed to
binding arbitration to resolve the manner in which to finalize rescission
of the agreement. An arbitration hearing is scheduled for this matter on
April 4, 2000.
34. c) Disclosure has been added to Note 10. The 8,000,000 shares contingently
issuable in connection with the LFI matter have not been accounted for
since they have not been issued and management believes it is unlikely
these shares will ever be issued in the future. They have not been
considered in the loss per share calculations because they would be
anti-dilutive.
35. The options granted to AJAY were valued using the Black-Scholes option
pricing model using the same variables disclosed in the shareholders equity
Note. The options were exercisable immediately when issued and there were
no commitments for performance by AJAY. The issue date was the measurement
date. The value computed was $21,128 which was charged to consulting
expense.
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Exhibit 21
SUBSIDIARIES OF THE SMALL
BUSINESS ISSUER
The Registrant has two wholly-owned subsidiaries.
o Saratoga Telecom Corp. incorporated in the State of Nevada in 1999.
o Virtual Media Group Inc. incorporated in the state of Washington in 2000.
E-3
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1999 OCT-31-2000
<PERIOD-END> OCT-31-1999 JAN-31-2000
<CASH> 241,589 72,811
<SECURITIES> 0 0
<RECEIVABLES> 0 10,671
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 349,313 173,325
<PP&E> 10,752 30,842
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 441,798 273,117
<CURRENT-LIABILITIES> 290,221 286,268
<BONDS> 0 0
0 0
377,742 377,742
<COMMON> 52,058 54,698
<OTHER-SE> (278,223) (445,591)
<TOTAL-LIABILITY-AND-EQUITY> 441,798 273,117
<SALES> 2,660 6,671
<TOTAL-REVENUES> 2,660 6,671
<CGS> 23,810 4,798
<TOTAL-COSTS> 1,062,539 396,929
<OTHER-EXPENSES> 50,000 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 393,369 122,040
<INCOME-PRETAX> (1,445,833) (512,298)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,445,833) (512,298)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,445,833) (512,298)
<EPS-BASIC> (0.04) (0.01)
<EPS-DILUTED> (0.04) (0.01)
</TABLE>
