<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934
Commission file number 0-19721
SARATOGA BRANDS INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
New York 13-3413467
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer identification no.)
</TABLE>
1835 Swarthmore Avenue, Lakewood, New Jersey 08701
(Address of principal executive offices)
(908) 363-3800
(Issuer's telephone number)
---------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes ...X.. No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes .......No .......
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common equity as
of June 30, 1996
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value per 6,383,945
<PAGE> 2
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet at June 30, 1996 3-4
Consolidated Unaudited Statements of Operations for the Three and Six Months
Ended June 30, 1996 and 1995 5
Consolidated Unaudited Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 6
Notes to Consolidated Unaudited Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets:
Cash $ 2,125,266
Accounts receivable net of allowance for doubtful accounts
of $89,992 (Note 2) 1,144,500
Inventories (Note 2) 1,012,300
Notes Receivable- Related Party (Note 2) 713,591
Prepaid expenses and other current assets 288,904
-----------
Total current assets 5,284,561
Property and equipment - net (Note 3) 3,673,856
Other assets 614,723
Intangible Assets (Note 2) 947,051
Excess of cost over fair value of assets acquired (Note 2) 8,265,575
-----------
TOTAL ASSETS $18,785,766
===========
</TABLE>
The accompanying notes to consolidated unaudited financial statements are an
integral part hereof.
3
<PAGE> 4
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED BALANCE SHEET (CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
<S> <C>
Current Liabilities:
Loans payable (Note 4) $ 112,340
Accounts payable and accrued expenses 2,892,832
Current portion of capital leases payable 76,898
Current portion of long-term debt (Note 5) 281,504
------------
Total current liabilities 3,363,574
Long-term debt (Note 5) 3,871,109
Convertible Debentures (Note 5) 1,308,300
Capital leases payable (Note 6) 175,408
------------
Total liabilities 8,718,391
------------
Contingencies (Note 10)
STOCKHOLDERS' EQUITY (Note 9)
--------------------
Preferred stock 566,703
Class A participating convertible preferred shares, $1 par value,
stated at liquidation value, authorized 200 shares of which 23.5
shares are issued and outstanding
Common stock 63,839
Par value $.01 - 25,000,000 shares authorized, 6,383,945 shares
issued and outstanding
Treasury Stock (645)
4,593 common shares stated at cost
Additional paid-in-capital 21,278,214
Accumulated deficit (11,840,736)
------------
Total Stockholders' Equity 10,067,375
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,785,766
============
</TABLE>
The accompanying notes to consolidated unaudited financial statements are an
integral part hereof.
4
<PAGE> 5
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $3,161,121 $2,203,510 $7,285,142 $5,076,396
Cost of sales 1,869,879 1,595,887 5,292,727 3,541,618
---------- ---------- ---------- ----------
Gross profit 1,291,242 607,623 1,992,415 1,534,778
Selling, general and administrative expenses 955,836 605,673 1,322,311 1,342,901
Amortization of excess of cost over fair value
of assets acquired 53,958 75,834 107,916 151,982
---------- ---------- ---------- ----------
Income from operations before interest and
income taxes 281,448 (73,884) 562,188 39,895
Interest (income) expense - net 142,051 111,123 274,083 210,695
Income taxes (Note 7) -- -- -- --
---------- ---------- ---------- ----------
Net earnings from continuing operations 139,397 (185,007) 288,105 (170,800)
Earnings from operations of discontinued
businesses -- 289,744 -- 357,353
---------- ---------- ---------- ----------
Net earnings $ 139,397 $ 104,737 $ 288,105 $ 186,553
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Earnings from continuing operations $ 0.03 $ (0.11) $ 0.06 $ (0.10)
Earnings from discontinued operations and
marketable securities $ 0.00 $ 0.16 $ 0.00 $ 0.21
---------- ---------- ---------- ----------
Total earnings per share $ 0.03 $ 0.05 $ 0.06 $ 0.11
========== ========== ========== ==========
Weighted average shares used in
computation 5,567,010 1,759,163 4,690,070 1,702,733
</TABLE>
The accompanying notes to consolidated unaudited financial statements are an
integral part hereof.
5
<PAGE> 6
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows from operating activities:
Net earnings $ 288,105 $ 186,553
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Income on sale of equipment (60,000)
Depreciation and amortization 265,540 172,733
Provision for losses on accounts receivable (29,000)
Issuance of common stock for services (40,000) (3,708)
Deferred income 13,310
Adjustments for discontinued operations (216,388)
Decrease in accounts receivable 483,634 1,148,652
Due from factor (267,460)
Increase in miscellaneous receivable from affiliates (3,024)
Decrease (increase) in inventory 131,213 (112,288)
Decrease in prepaid expenses (178,513) (382,552)
Increase in accounts payable and accrued expenses (1,161,038) (912,147)
----------- -----------
Net cash used in operating activities (528,233) (148,145)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (1,880,098) (161,649)
Cash obtained in business acquisitions 7,381 0
Sale of idle equipment 60,000 18,600
-----------
Net cash used in investing activities (1,812,717) (143,049)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 750,000 276,981
Proceeds from sale of debentures 4,027,549
Proceeds from sale of common shares 1,395,410
Capital leasing transactions 40,972 81,515
Decrease in Leases Receivable 222,393
Repayment of notes payable (355,983) (1,646,840)
----------- -----------
Net cash provided by (used in) financing activities 4,462,538 329,459
----------- -----------
Increase (decrease) in cash 2,121,588 38,265
Cash at beginning of period 3,678 107,608
-----------
Cash at end of period $ 2,125,266 $ 145,873
=========== ===========
Supplemental Disclosure:
Interest paid $ 125,906 $ 208,515
=========== ===========
Summary of Non Cash Investing Activities:
Common Stock issued for acquisitions $ 750,000 $ 0
=========== ===========
</TABLE>
The accompanying notes to consolidated unaudited financial statements are an
integral part hereof.
6
<PAGE> 7
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 --ORGANIZATION AND BUSINESSES
Saratoga Brands Inc., ("the Company") a New York corporation, was
incorporated on June 12, 1987. From approximately 1987 through September 30,
1993, the Company manufactured and distributed potato and vegetable chips and
distributed other snack food products. The Company incurred substantial losses
from inception and, in an effort to stem such losses, the Company decided on
September 30, 1994 to discontinue its snack food business.
On January 28, 1994, the Company acquired Saratoga Technology Inc.
("Tech"), a Company which was engaged in designing, marketing and selling a
variety of personal computers for the consumer and service oriented commercial
markets. A significant portion of Tech's revenues had been derived from the sale
of microcomputers through direct mail channels. During the year, Tech had been
incurred difficulties with its major contract supplier, and as a result has been
unable to secure continuing direct mail contracts, and as a result the Company
decided to discontinue the operations of Tech effective December 30, 1994.
On August 26, 1994, the Company entered the specialty cheese industry,
through the acquisition of Cucina Classica Italiana, Inc. ("CCI"), a company
located in Lakewood, New Jersey engaged in the production, importation and
distribution of premium cheeses and Italian foods. CCI operates a Wisconsin
facility, which manufactures a variety of Italian and Greek cheeses including
the Bel Paese(R) brand which has had strong presence in the United states for
over 75 years.
On December 30, 1994, the company acquired JR's Delis, Inc. ("JR") a
Rhode Island based catering and distribution business. JR sells deli products to
more than 900 convenience stores and retail outlets in Rhode Island,
Massachusetts and Connecticut.
On April 29, 1996, (effective January 1, 1996), the Company acquired
Deli King, Inc. ("Deli"), a food processor, distributor and mobile catering
business serving Rhode Island, eastern Connecticut and southeastern
Massachusetts. Deli will be integrated with JR and both will operate out of
Deli's modern commissary facility in West Warwick, Rhode Island.
On April 7, 1996, the Company acquired the operations of Dotties
Caterers, Inc. ("Dotties"), a mobile catering business serving Rhode Island.
Dotties will be integrated with JR and Deli and will operate out of a satellite
facility in Pawtucket, Rhode Island.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its six wholly-owned subsidiaries: CCI, JR, Deli, Dotties, Snacks,
and Tech through June 30, 1996, with the exception of the financial statements
of Deli which are included only from January 1, 1996, the effective date of
acquisition, and the financial statements of Dotties which are included only as
of April 7, 1996. The consolidated balance sheets reflect the accounts of the
Company and its six wholly-owned subsidiaries. The acquisitions were recorded as
purchases. In consolidation all inter company balances are eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market. The components
of inventories at June 30, 1996 were as follows:
<TABLE>
<CAPTION>
Raw Finished Promotional
Materials Goods Materials Total
--------- ----- --------- -----
<S> <C> <C> <C>
$187,259 $786,312 $38,729 $1,012,300
======== ======== ======= ==========
</TABLE>
7
<PAGE> 8
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of fixed assets is computed utilizing the straight-line
method over the estimated useful lives of the related assets which range from 5
to 31 years. Amortization of leasehold improvements has been provided for on a
straight-line basis over the term of the related lease, including renewal
period, which is not in excess of the estimated useful lives of the
improvements.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product.
PER SHARE DATA
The per share data has been calculated using the weighted average
number of Common Shares outstanding during each period presented. Outstanding
options and warrants have been excluded from the computation due to their
antidilutive effect. The effect of the conversion of the Debentures (Note 6)
have been included in the calculation as if all of the outstanding debentures
had been converted. The financial statements reflect share amounts after having
given effect to a reverse stock split of 10:1 which became effective August 28,
1995.
EXCESS OF COST OVER FAIR MARKET VALUE OF ASSETS ACQUIRED, AND
INTANGIBLE ASSETS
The Company evaluates the amortization period of the excess of cost
over fair market value of assets acquired (goodwill) and intangible assets on an
ongoing basis in light of changes in business conditions, events or
circumstances that may indicate the potential impairment of goodwill or
intangible assets. The intangible assets consist of $167,701 for trademark and
proprietary technology licenses, $90,000 for import licenses and $689,350 for
Deli King routes. The trademark and proprietary technology licenses are being
amortized over 8 years, the import licenses are being amortized over 5 years and
the Deli King routes over 10 years. The excess cost over the fair value of
assets (less liabilities ) acquired is being amortized over 40 years. Goodwill
at June 30, 1996 for each of the subsidiaries, consisted of the following:
<TABLE>
<S> <C>
CCI $6,832,662
JR 1,278,063
DELI 154,850
----------
TOTAL $8,265,575
==========
</TABLE>
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
8
<PAGE> 9
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONCENTRATIONS
The Company does not have any single customers which account for more
than 10% of the Company's trade receivables or sales. The Company's products are
distributed nationally. Most of the Company customers are food retailers and
distributors.
Approximately 60% of CCI's sales volume relates to products which are
purchased from Edigo Galbani, S.p.A., for which CCI holds exclusive License and
Manufacture Agreements in a contract which runs through December 31, 2000, when
it will come up for renewal, the loss would at this time have a material adverse
effect on the revenues of CCI.
NOTES RECEIVABLE - RELATED PARTY
Of this amount $225,428 represents an amount due the Company from
Cucina Classica Italiana, S.p.A. relating to costs incurred by the Company on
its behalf. Loans totaling $133,479 were made to Agama, Inc., a Company owned in
part by the CEO of Saratoga, which loans are anticipated to be repaid in 1996.
The balance of $354,684 is due the Company by Barry Witz, a director of
Saratoga, and R II Partners, Inc., which amount is collateralized by 88,671
shares of common stock of Builders Warehouse Association, Inc. (BWAI) a company
traded on the NASDAQ Small Cap Market System.
PROVISION FOR DOUBTFUL ACCOUNTS
The Company periodically reviews and adjusts its provision for bad
debts to reflect its experience.
FOREIGN CURRENCY TRANSACTIONS
The Company imports products from various countries, however, all
material transactions are denominated in United States currency.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
9
<PAGE> 10
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT - NET
<TABLE>
<S> <C>
Land $663,368
Buildings 1,595,389
Furniture & Equipment 546,835
Vehicles 938,310
Leasehold Improvements 46,827
Construction in Progress 76,617
--------------------
Total Cost 3,867,346
Less Accumulated Depreciation (193,490)
--------------------
Net $3,673,856
====================
</TABLE>
The Property, Plant and Equipment includes $238,764 in fixed assets
which were acquired using capital leases.
NOTE 4 -- LOANS PAYABLE
JR has short term loans totaling $12,240 with Banca Nazionale which
bears interest at the prime rate and is due on demand.
Deli has a short-term loan in the amount of $ 100,000 with Roy LaCroix,
Sr. The former owner of Deli King, Inc., which bears interest at 9 1/2% and is
due on demand.
NOTE 5 -- LONG-TERM DEBT
CCI has a term loan with BNY Financial Corporation of which the current
balance is $285,383, $70,800 being the current portion thereof. This loan bears
interest at the prime rate plus one percent.
On March 14, 1995, CCI agreed to assume the debt of its wholly owned
subsidiary, Nostrano, Inc. CCI did so under the duress imposed by three of the
five Italian Banks who on February 17, 1995, filed an action under 303(b) of
Title 11, when CCI was not indebted to any of them. The information herein below
reflects the information contained in CCI's books and records which resulted
from the petitioning banks' coercion. Please refer to Note 10--Contingencies as
to CCI's efforts to reverse the aforestated status.
Prior to March 14, 1995, Nostrano, Inc. a wholly owned subsidiary of
CCI, together with CCI were negotiating with the five Italian Banks to
restructure Nostrano's debt to the Banks to allow for further and new senior
debt up to $3,000,000 for growth. The credit agreement was entered into on March
14, 1995 between CCI and the New York branches of Banca Nazionale del Lavorno
S.p.A., Banco di Sicilia S.p.A. , Banca Commerciale Italiana, Bancario San Paolo
di Torino and Banca Populare di Milano and provides for minimal annual payments
of $300,000 for 1995, 1996, 1997, 1998 and 1999.
10
<PAGE> 11
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of the balance sheet date, there was an indebtedness to the five banks which
is reflected on the consolidated unaudited balance sheet as follows:
<TABLE>
<S> <C>
Banca Nazionale del Lavoro S.p.A. - New York Branch $1,189,721
Banca di Sicilia S.p.A. - New York Branch 622,776
Banca Commerciale Italiana - New York Branch 389,073
Istituto Bancario San Paolo di Torino - New York Branch 218,247
Banca Populare di Milano - New York Branch 373,313
----------
$2,793,130
</TABLE>
The current portion due the Italian Banks is $300,000. The Agreement
provides for interest to the banks at prime rate through maturity of the note
and 3% over prime thereafter. It calls for monthly installments to the banks in
the aggregate of $25,000 per month plus accrued interest, which payment shall be
received no later than the 10th of each calendar month.
In addition to the regular monthly installments, CCI shall pay to the
banks in respect of the principal of the Bank Debt, within 30 days after the end
of each calendar quarter, an amount equal to 20% of CCI's consolidated net cash
flow for such fiscal quarter; provided however, that in no event shall the
amount of principal of the Bank Debt required to be paid for any fiscal year of
CCI (inclusive of regular monthly installments of principal payable under this
Agreement) exceed $600,000.
On January 31, 1998, if CCI has not sooner reduced the principal amount
of the Bank Debt to $1,500,000, CCI shall make a mandatory payment of principal
so as to reduce the outstanding principal amount of the Bank Debt to $1,500,000.
CCI shall be required to pay the outstanding principal of the Bank
Debt, and all accrued and unpaid interest in full on the maturity date, which is
January 31, 2000. Each amount of principal or interest required to be paid on
the Bank Debt shall be paid to the Banks severally, in proportions corresponding
to their respective Bank Percentages. The Bank Debt is guaranteed by three of
CCI's wholly owned subsidiaries, Nostrano, Inc., Lensmire Cheese Factory, Inc.
and Gailco, Inc. CCI may prepay the Bank Debt at any time in whole or in part,
without penalty or premium.
The security interest granted to the banks in the Agreement (other than
the security interest in the assets of Nostrano, Inc.) shall be subject and
subordinate to, and the Banks will agree to subordinate their debt to, the prior
payment in full of up to $3,000,000 of indebtedness held by a bank or trust
company.
The foregoing does not purport to be a complete statement of all terms
and conditions contained in the Agreement. Reference is made to Note
10--Contingencies for additional information regarding CCI's effort to reverse
this transaction.
JR has a $4,000 term loan all of which is current, with Shawmut Bank,
which bears no interest and has 8 monthly payments of $500 remaining. JR also
has a balloon loan for $24,710 due on February 1, 1997 with Washington Trust,
which bears interest at 11% and payments for interest only are being made on
this loan. Both of the JR loans are secured by the personal guarantees of Jordan
Russo, the President of JR, and a relative.
The Company received proceeds of $4,479,000 from the issuance of 9%
convertible debentures during the quarter ended March 31, 1996. The debentures
are convertible into the common stock of the Company at a rate that depends on
certain market conditions. At June 30, 1996 debentures representing a liability
of $1,308,300 remain outstanding.
NOTE 6 -- CAPITAL LEASES
At the balance sheet, date the Company had capital leases totaling $
252,306 of which $76,898 is the current portion.
11
<PAGE> 12
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 -- INCOME TAXES:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under Statement No.
109, deferred tax assets and liabilities are determined based upon 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. Additionally, deferred tax balances are
adjusted in periods that include the enactment of tax rate changes. The adoption
of this statement, which was made on a prospective basis, did not have a
material impact on the Company's financial condition or results of operations.
Prior to 1993, the Company followed the accounting for income taxes prescribed
by Statement No. 96.
For the quarter ended June 30, 1996, the Company had no provision for
income taxes due to the utilization of net operating loss ("NOL") carryforwards
and the current years loss. No credit for income taxes was reported as
realization of any future benefit was not assured.
NOTE 8 -- RELATED PARTY TRANSACTIONS
(1) Agama, Inc., a company owned in part by Mr. Halperin is
indebted to the company in the amount $133,479. This loan is
anticipated to be repaid within one year with interest.
(2) R II Partners, Inc., a beneficial shareholder to the Company
is indebted to the Company in the amount of $177,342. This
amount is anticipated to be repaid within one year with
interest.
(3) Brite Lite Industries, Inc. a company owned by Mr. Witz,
Chairman of the Company is indebted to the Company in the
amount of $177,342. This amount is anticipated to be repaid
within one year with interest.
NOTE 9 -- STOCKHOLDERS' EQUITY
On August 28, 1995, a 1 for 10 reverse split of the Company's common
stock was effectuated. All of the common share transactions described herein
have been restated to reflect the effect of this reverse split.
The Preferred Stockholders have no voting rights but are entitled to a
priority of payment in the amount of the original subscription price paid for
each Preferred Share ($16,667 to $25,000), plus a proportionate amount, as
defined, on any remaining excess proceeds if there is, among other matters, a
sale of all or substantially all of the shares or assets of the Company. The
Preferred Stockholders are not entitled to specific dividends; however, should
the Company declare any dividends on the common shares, the Preferred
Stockholders will be entitled to receive dividends as if they had converted to
common shares immediately prior to the dividend declaration. The holders of the
Preferred Shares may convert, at their option, at any time, all or part of their
shares into common shares. Holders of 29 Preferred Shares and certain holders of
the Company's Debentures having had conversion rights with respect to an
aggregate of 11.75 additional Preferred Shares granted the Company the right to
require the conversion of their shares into common shares at any time on or
after the filing by the Company of a registration statement with the Securities
and Exchange Commission for the purpose of offering for sale any of the
Company's securities. Upon the closing of the Company's initial public offering
of its common shares in September 1991, the Company exercised its right and
converted said Preferred Shares and Debentures into common shares. Each
outstanding Preferred Share is convertible into approximately 56 common shares,
subject to certain adjustments as defined in the Amended Certificate of
Incorporation. Subsequent to the initial public offering of the Company's common
shares, holders of eight Preferred Shares converted into common shares.
The Company has reserved, in aggregate, 1,527 common shares for
possible future issuance to Preferred Stockholders in the event of conversion.
12
<PAGE> 13
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 -- CONTINGENCIES
Company is party to one material lawsuit as detailed below:
Cucina Classica Italiana, Inc.
V. Banca Nazionale del Lavoro S.p.A., Banco di Sicilia S.p.A., Banca
Commerciale Italiana, Istituto Bancario San Paolo di Torino, and Banca Populare
di Milano
CCI filed an action on February 15, 1996 in The United States District
Court for the Southern District of New York alleging RICO violations, fraud and
abuse of process amongst the causes of action against Banca Nazionale del Lavoro
S.p.A., Banco di Sicilia S.p.A., and Banca Commerciale Italiana. The action was
in response to the aforesaid defendants having filed an action against CCI under
Section 303(b) when CCI was not indebted to any of the defendants. The law firm
and a partner in that firm were also named as defendants for their participation
in the filing.
The relief sought by CCI includes money damages in addition to
rescission of a contract to pay the debts of Nostrano, Inc., a subsidiary of
CCI, which CCI agreed to as a condition of the banks releasing CCI from the
involuntary proceeding.
Two other banks, Istituto Bancario San Paolo di Torino, and Banca
Populare di Milano were also named as defendants, but only as part of the
rescission causes of action. Neither had participated in the filing.
NOTE 11 -- COMMITMENTS
Leases
The Company and its subsidiaries maintain office, warehouse and
processing facilities pursuant to an operating leases as detailed below.
CCI leases a 20,000 square foot facility at 1835 Swarthmore Avenue, Lakewood,
New Jersey 08701, of which approximately 3,000 square feet serves as office
space. This facility serves as CCI's headquarters as well as a shredding and
grating operation and warehouse. The facility is a fireproof high bay warehouse
located on 3.5 acres with ample expansion potential. The warehouse contains
13,000 cubic feet of cooler space. This facility is leased from Arthur Sommers
at a basic rent of $6,642.68 per month or $79,712 annually. The lease has a five
year term, with no rent escalation and an option to renew for an additional five
years at an annual rent of $91,975.
Rent expense for the quarters ended June 30, 1996 and 1995 were
approximately $25,542 and $21,126, respectively.
Factoring Agreement
On June 15, 1995, CCI entered into a factoring agreement with BNY
Financial Corporation ("BNYF") for three years that is renewable after the
initial period. The agreement states that CCI would be required to factor
substantially all of its trade receivables and would in return receive immediate
cash credit for a major portion of these factored receivables as well as a
portion of the finished goods inventory. The factoring fee is .7% of the invoice
amount and 1% over prime on the amount advance under the factoring agreement.
The factoring agreement provides CCI with an ability to receive advances
collateralized by invoices and inventory of $2.0 million and letters of credit
in favor of suppliers of an additional $1.0 million. CCI has pledged all of
accounts receivable, inventories, real estate and equipment as collateral
13
<PAGE> 14
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
for this credit agreement. The group of 5 Italian banks party to a Credit
agreement with CCI have subordinated to the BNYF credit agreement in the amount
of $3.0 million.
This agreement has covenants in regards to minimum factoring of
invoices, minimum net worth, quick ratio and profitability on a standalone
basis. The agreement provides for covenant violation penalties which include
increased interest.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Unaudited Consolidated
Financial Statements and related notes thereto.
Results of operations from Snacks and Tech have been presented as
discontinued operations during 1995.
BUSINESS STRATEGY
Our greatest challenge is maintaining and accelerating our current
operating momentum while directing our cash resources toward profitable
high-return projects. To ensure a continued focus on building shareholder value,
we have clearly defined operating and financial objectives and strategies.
Our primary operating objective is to increase long-term operating cash
flows through profitable increases in sales volume. We plan to achieve our
operating objective through the continued implementation and execution of the
following strategies:
- Creating and executing innovative and superior
marketing programs.
- Balancing volume growth with improved margins and
sustainable increases in market share.
- Developing profitable business partnerships with our
customers.
- Increasing our investment in high-profit, high-volume
distribution channels.
- Providing financial incentives to our employees which
increase their focus on enhancing share-owner value.
Our primary financial objective is to deliver a superior return on
investment to our shareholders. We plan to achieve this objective through the
continued implementation and execution of the following strategies:
- Maintaining a capital structure which maximizes our
financial flexibility, given current investment
opportunities.
- Identifying and completing acquisitions that result
in long-term value.
- Allocating resources appropriately between capital
expenditures, infrastructure, share repurchases,
acquisitions, and debt repayment.
15
<PAGE> 16
OPERATIONS OVERVIEW
In the opinion of management, the most meaningful comparison of operating
results compares only earnings from continuing operations. Accordingly,
"comparable" results in the following discussions represent the following:
- 1996 results all of which are from continuing
operations.
- 1995 results excluding any gains or losses on
discontinued businesses
Results of Operations for the Three months Ended June 30, 1996 and 1995
Net sales for the quarter ended June 30, 1996 were $3,161,121 compared
with $2,203,510 in 1995. The Company generated gross profit of $ $1,291,242 or
41% in 1996, verses $607,623 or 28% in 1995. This gross profit increase is a
result of increased purchasing power as well as aggressive buying strategies.
Selling, general and administrative expenses were $955,836, and
$734,228 in 1996 and 1995, respectively.
Management expects gross margins and net operating profits to improve
as the Company continues to integrate its acquisitions and take advantage of the
economies of scale, the discontinuance of unprofitable products, and the
launching of new products. To this end, the Company is consolidating the buying
power and resources of its subsidiaries. This consolidation is expected to
continue through fiscal 1996.
The Company reported no provision for income taxes for the quarter
ended June 30, 1996 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
The earnings from continuing operations for the quarter ended June 30,
1996 were $139,397, verses a loss of $185,007 in 1995. Net income was $139,397
in the second quarter of 1996 verses $104,737, in 1995, which includes 289,744
from discontinued operations.
Earnings per common share from the operating businesses were $0.03 in
the quarter ended June 30, 1996 verses a loss of ($0.11) in 1995 on weighted
average shares of 5,567,010 and 1,759,163, respectively.
Results of Operations for the Six months Ended June 30, 1996 and 1995
Net sales for the six months ended June 30, 1996 were $7,285,142
compared with $5,076,396 in 1995. The Company generated gross profit of $
$1,992,415 or 27% in 1996, verses $1,534,778 or 30% in 1995.
Selling, general and administrative expenses were $1,322,311 and
$1,342,901 in 1996 and 1995, respectively.
Management expects gross margins and net operating profits to improve
as the Company continues to integrate its acquisitions and take advantage of the
economies of scale, the discontinuance of unprofitable products, and the
launching of new products. To this end, the Company is consolidating the buying
power and resources of its subsidiaries. This consolidation is expected to
continue through fiscal 1996.
The Company reported no provision for income taxes for the period ended
June 30, 1996 as the Company's operating earnings were offset by Net Operating
Loss carryforwards.
16
<PAGE> 17
The earnings from continuing operations for the six months ended June
30, 1996 were $288,105, verses a loss of $170,800 in 1995. Net income was
$288,105 in the first half of 1996 verses $186,553, in 1995, which includes
$357,353 from discontinued operations.
Earnings per common share from the operating businesses were $0.06 in the six
months ended June 30, 1996 verses a loss of ($0.10) in 1995 on weighted average
shares of 4,690,070 and 1,702,733, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of capital include, but are not limited to, the issuance of
public or private placement debt, bank borrowings and the issuance of equity
securities.
At June 30, 1996 the Company had a net worth of $10,067,375 compared
with $4,808,782 at June 30, 1995. The Company was able to convert loans
outstanding in the amount of $617,000 by issuing shares of its common stock in
private transactions which contributed to the Company's equity.
Additionally, the Company had $1,308,300 in 9% debentures
outstanding at the end of the quarter ended June 30, 1996 which are convertible
into the common stock of the Company at a rate that depends on certain market
conditions.
Management believes that the Company has sufficient working capital to
meet the needs of its current level of operations.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf the
undersigned thereunto duly authorized
SARATOGA BRANDS INC.
(Registrant)
Date: August 14, 1996 By: /s/ Scott G. Halperin
---------------------
Scott G. Halperin
Chief Executive Officer
Treasurer
Date: August 14, 1996 By: /s/ Bernard F. Lillis, Jr.
--------------------------
Bernard F. Lillis, Jr.
Chief Accounting Officer
Chief Financial Officer
19
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports filed on Form 8K
None
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,125,266
<SECURITIES> 0
<RECEIVABLES> 1,144,500
<ALLOWANCES> 89,992
<INVENTORY> 1,012,300
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 3,673,856
<TOTAL-ASSETS> 18,785,766
<CURRENT-LIABILITIES> 3,363,574
<BONDS> 1,308,300
0
566,703
<COMMON> 63,839
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,785,766
<SALES> 7,285,142
<TOTAL-REVENUES> 7,285,142
<CGS> 5,292,727
<TOTAL-COSTS> 6,997,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274,083
<INCOME-PRETAX> 288,105
<INCOME-TAX> 0
<INCOME-CONTINUING> 288,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 288,105
<EPS-PRIMARY> .06
<EPS-DILUTED> .04
</TABLE>
