<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 September 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)
New York 13-3413467
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
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 September 30, 1996
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value per 7,953,101
<PAGE> 2
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet at September 30, 1996 3-4
Consolidated Unaudited Statements of Operations for the Three and Nine Months
Ended September 30, 1996 and 1995 5
Consolidated Unaudited Statements of Cash Flows for the Nine Months Ended
September 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
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $ 1,551,452
Accounts receivable net of allowance for doubtful accounts
of $53,830(Note 2) 1,585,026
Inventories(Note 2) 812,150
Notes Receivable- Related Party(Note 2) 414,852
Prepaid expenses and other current assets 377,971
-----------
Total current assets 4,741,451
Property and equipment - net(Note 3) 3,428,329
Other assets 350,304
Intangible Assets(Note 2) 967,578
Excess of cost over fair value of assets acquired(Note 2) 8,401,708
-----------
TOTAL ASSETS $17,889,370
===========
</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)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Loans payable(Note 4) $ 10,539
Accounts payable and accrued expenses 2,813,858
Current portion of capital leases payable 70,212
Current portion of long-term debt(Note 5) 599,417
------------
Total current liabilities 3,494,026
Long-term debt(Note 5) 3,402,338
Capital leases payable(Note 6) 280,735
------------
Total liabilities 7,177,099
------------
Contingencies(Note 10)
STOCKHOLDERS' EQUITY(Note 9)
Preferred stock
Class A participating convertible preferred shares, $1 par value,
stated at liquidation value, authorized 200 shares of which 16.5
shares are issued and outstanding 397,898
Common stock
Par value $.01 - 25,000,000 shares authorized,7,953,101 shares
issued and outstanding 79,531
Treasury Stock
65,093 common shares stated at cost (72,820)
Additional paid-in-capital 22,830,910
Accumulated deficit (12,523,248)
------------
Total Stockholders' Equity 10,712,271
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,889,370
============
</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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Net sales $ 4,221,210 $2,965,028 $ 11,506,352 $8,041,424
Cost of sales 3,316,237 2,145,723 8,608,964 5,687,341
-------------------------------- --------------------------------
Gross profit 904,973 819,305 2,897,388 2,354,083
Selling, general and administrative expenses 520,511 416,997 1,842,823 1,759,898
Amortization of excess of cost over fair value
of assets acquired 54,790 72,203 162,706 224,185
-------------------------------- --------------------------------
Income from operations before interest and income taxes 329,672 330,105 891,859 370,000
Interest (income) expense - net 145,245 127,664 419,328 338,359
Income taxes (Note 7) 0 0 0 0
-------------------------------- --------------------------------
Net earnings from continuing operations 184,427 202,441 472,532 31,641
Earnings (Loss) from operations of
discontinued businesses (866,789) 0 (866,789) 357,353
-------------------------------- --------------------------------
Net earnings (Loss) ($ 682,362) $ 202,441 ($ 394,257) $ 388,994
============================= ==============================
EARNINGS PER COMMON SHARE
Earnings from continuing operations $ 0.03 $ 0.10 $ 0.09 $ 0.02
Earnings (Loss) from discontinued operations and
marketable securities ($ 0.12) $ 0.00 ($ 0.16) $ 0.19
-------------------------------- --------------------------------
Total earnings (Loss) per share ($ 0.09) $ 0.10 ($ 0.07) $ 0.21
============================= ==============================
Weighted average shares used in computation 7,173,685 2,123,904 5,523,985 1,844,666
</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
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Cash Flows from operating activities:
Net earnings (Loss) ($ 394,257) $ 388,994
Adjustments to reconcile net earnings (Loss) to net cash
provided by (used in) operating activities:
Income on sale of equipment (60,000) 0
Depreciation and amortization 485,600 255,968
Provision for losses on accounts receivable 48,830 (37,000)
Issuance of common stock for services (40,000) (30,000)
Deferred income 13,310
Adjustments for discontinued operations (866,789) (905,549)
Decrease in accounts receivable (532,631) 768,481
Decrease (increase) in inventory (112,238) (170,239)
Decrease in prepaid expenses 312,737 (303,337)
Increase in accounts payable and accrued expenses (133,393) (315,185)
------------------------------
Net cash used in operating activities (1,278,831) (347,867)
------------------------------
Cash flows from investing activities:
Purchase of fixed assets (2,056,159) (145,536)
Purchase of marketable securities 0 (354,684)
Cash obtained in business acquisitions 7,381
Sale of idle equipment 90,000 18,600
------------------------------
Net cash used in investing activities (1,958,778) (481,620)
------------------------------
Cash flows from financing activities:
Proceeds from notes payable 750,662
Proceeds from sale of debentures 4,027,549
(Coversion of) proceeds from convertible loans 0 (436,199)
Proceeds from sale of common shares 0 1,839,874
Capital leasing transactions 152,846 61,704
Decrease in Leases Receivable 0 222,393
Repayment of notes payable (145,674) (962,050)
------------------------------
Net cash provided by (used in) financing activities 4,785,383 725,722
------------------------------
Increase (decrease) in cash 1,547,774 (103,765)
Cash at beginning of period 3,678 145,873
------------------------------
Cash at end of period $ 1,551,452 $ 42,108
==============================
Supplemental Disclosure:
Interest paid $ 193,673 $ 259,517
==============================
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 has manufactured under
its supervision 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.
At acquisition CCI operated a cheese manufacturing facility (Lensmire
Cheese Factory) in Wisconsin. On August 29, 1996 the Company ceased operation of
that facility due to its inability to demonstrate profitable operation.
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 has been integrated with JR and both are operating 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 was integrated with JR and Deli and operates 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 September 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 September 30, 1996 were as follows:
<TABLE>
<CAPTION>
Raw Finished Promotional
Materials Goods Materials Total
- -------------------------------------------------------------------------
<S> <C> <C> <C>
$228,728 $545,203 $38,219 $812,150
=========================================================================
</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.
DISCONTINUED OPERATIONS
On August 29, 1996 the Company discontinued operation of Lensmire
Cheese Factory, its cheese manufacturing operation located in Cascade,
Wisconsin, due to its inability to demonstrate profitable operation since its
acquisition by the Company in August, 1994.
Since all of the production of Lensmire was transferred to CCI, no
revenues were reported in the income statement of the Company, since there were
eliminated in consolidation.
The assets of Lensmire Cheese Factory have been written down to net
realizable value. The liabilities related to the discontinued business consist
primarily of accounts payable, and accrued expenses and amounted to $135,789 in
the September 30, 1996 Balance Sheet.
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.
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 $158,384 for trademark and
proprietary technology licenses, $85,000 for import licenses and $724,194 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 15 years. The excess cost over the fair value of
assets (less liabilities ) acquired is being amortized over 40 years. Goodwill
at September 30, 1996 for each of the subsidiaries, consisted of the following:
<TABLE>
<S> <C>
CCI 6,787,337
JR 1,256,130
DELI 358,241
---------------
TOTAL 8,401,708
</TABLE>
8
<PAGE> 9
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 $ 60,168 represents an amount due the Company from
Cucina Classica Italiana, S.p.A. relating to costs incurred by the Company on
its behalf. 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 79,804
shares of common stock of Osicom Technologies, Inc. (FIBR) 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 1,420,099
Furniture & Equipment 1,044,951
Vehicles 441,058
Leasehold Improvements 39,955
-----------
Total Cost 3,609,431
Less Accumulated Depreciation (181,102)
-----------
Net $ 3,428,329
===========
</TABLE>
The Property, Plant and Equipment includes $ 342,946 in fixed assets
which were acquired using capital leases.
NOTE 4 -- LOANS PAYABLE
JR has short term loans totaling $23,206 with Banca Nazionale which
bears interest at the prime rate 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 $265,500, $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 $ 3,000 term loan all of which is current, with Shawmut Bank,
which bears no interest and has 6 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
were convertible into the common stock of the Company. All of the debentures
have been converted to common shares as of September 30, 1996.
NOTE 6 -- CAPITAL LEASES
At the balance sheet, date the Company had capital leases totaling
$350,947 of which $70,212 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 September 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) 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.
(2) 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
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 16.5 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, 1,135 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 September 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
13
<PAGE> 14
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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.
Results of operations for Lensmire Cheese Factory have been presented
as discontinued operations in 1996.
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 shareholder 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.
The Company is proceeding with its previously announced redefining of
its business into two separate and distinct public companies through the
spin-off of its rapidly expanding mobile catering and food distribution
business. SARATOGA through its Cucina Classica Italiana, Inc. subsidiary, and
planned future acquisition of Sant Ambroeus, will remain in the cheese and
restaurant business, and the mobile catering business will be given to the
shareholders of SARATOGA in the form of a dividend, thereby creating a new
public company.
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 excluding any gains or losses on
discontinued businesses
- 1995 results excluding any gains or losses on
discontinued businesses
Results of Operations for the Three months Ended September 30, 1996 and
1995
Net sales for the quarter ended September 30, 1996 were $4,221,210
compared with $2,965,028 in 1995. The Company generated gross profit of $ $
904,973 or 21% in 1996, verses $ 819,305 or 28% in 1995. This decrease is a
result of the inclusion in 1996 of Deli King, Inc.'s sales, which are sold at a
significantly lower gross margin (14%).
Selling, general and administrative expenses were $ 520,511, and $
416,997 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.
In addition, on August 29, 1996 the Company discontinued operation of
Lensmire Cheese Factory, its cheese manufacturing operation located in Cascade
Wisconsin, due to its inability to demonstrate profitable operation since
acquisition by the Company in August, 1994.
Since all of Lensmire's production was transferred to CCI, no revenues
were reported in the income statements of the Company, since they were
eliminated in consolidation.
The assets of Lensmire Cheese Factory have been written down to net
realizable value. The liabilities related to the discontinued business consist
primarily of accounts payable and accrued expenses and amounted to $ 135,789 in
the September 30, 1996 Balance Sheet.
The Company reported no provision for income taxes for the quarter
ended September 30, 1996 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
The earnings from continuing operations for the quarter ended September
30, 1996 were $ 184,427, verses $ 202,441 in 1995. Net income (loss) was
($682,363) in the third quarter of 1996, which includes ($866,789) from
discontinued operations, verses income of $ 202,441 in 1995.
Earnings per common share from the operating businesses were $0.03 in
the quarter ended September 30, 1996 verses $0.10 in 1995 on weighted average
shares of 7,173,685 and 2,123,904, respectively.
Earnings for the quarter were down due to one time costs related to the
consolidation of the mobile catering business, and other costs related to new
co-pack production of CCI's products.
16
<PAGE> 17
Results of Operations for the Nine months Ended September 30, 1996 and
1995
Net sales for the nine months ended September 30, 1996 were $
11,506,352 compared with $ 8,041,424 in 1995. The Company generated gross profit
of $ $2,897,388 or 25% in 1996, verses $ 2,354,083 or 29% in 1995.
Selling, general and administrative expenses were $1,842,823 and $
1,759,898 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.
In addition, Management estimates that the elimination of the Wisconsin
cheese making facility will result in reduced operating costs in excess of $
200,000 in 1997 for the CCI subsidiary.
The Company reported no provision for income taxes for the period ended
September 30, 1996 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
The earnings from continuing operations for the nine months ended
September 30, 1996 were $ 472,532 verses $ 31,641 in 1995, and increase of $
440,891 or 1393%. Net income (Loss) was ($394,257), which includes ($ 866,789)
from discontinued operations, in the three quarters of 1996 verses income of
$388,994, in 1995. Earnings per common share from the operating businesses were
$0.09 in the nine months ended September 30, 1996 verses $0.02 in 1995 on
weighted average shares of 5,523,985 and 1,844,666, 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 September 30, 1996 the Company had a net worth of $10,712,271
compared with $ 5,428,614 at September 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.
The Company received proceeds of $ 4,479,000 from the issuance of
convertible debentures during the quarter ended March 31, 1996. The debentures
were convertible into the common shares of the Company. All of the debentures
have been converted to common shares as of September 30, 1996.
Management believes that the Company has sufficient working capital to
meet the needs of its current level of operations.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports filed on Form 8K
None
18
<PAGE> 19
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: November 14, 1996 By: /s/ Scott G. Halperin
---------------------
Scott G. Halperin
Chief Executive Officer
Treasurer
Date: November 14, 1996 By: /s/ Bernard F. Lillis, Jr.
--------------------------
Bernard F. Lillis, Jr.
Chief Accounting Officer
Chief Financial Officer
Secretary
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,551,452
<SECURITIES> 0
<RECEIVABLES> 1,638,856
<ALLOWANCES> 53,830
<INVENTORY> 812,150
<CURRENT-ASSETS> 4,741,451
<PP&E> 3,609,431
<DEPRECIATION> 181,102
<TOTAL-ASSETS> 17,889,370
<CURRENT-LIABILITIES> 3,494,026
<BONDS> 0
0
397,898
<COMMON> 79,531
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,889,370
<SALES> 11,506,352
<TOTAL-REVENUES> 11,506,352
<CGS> 8,608,964
<TOTAL-COSTS> 10,614,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 419,328
<INCOME-PRETAX> 472,532
<INCOME-TAX> 0
<INCOME-CONTINUING> 472,532
<DISCONTINUED> (866,789)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (394,257)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
