<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 March 31, 1997
[ ] 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 (I.R.S. Employer identification no.)
of 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 March 31, 1997
<TABLE>
<CAPTION>
Title of Each Class Number of Shares Outstanding
<S> <C>
Common Stock, $.01 par value per share 12,991,889
</TABLE>
<PAGE> 2
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet at March 31, 1997 3-4
Consolidated Unaudited Statements of Operations for the Three Months
Ended March 31, 1997 and 1996 5
Consolidated Unaudited Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 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 BALANCE SHEET
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash $ 249,795
Accounts receivable net of allowance for doubtful accounts
of $75,310 (Note 2) 804,133
Investments 1,209,800
Inventories (Note 2) 414,881
Prepaid expenses and other current assets 288,346
------------
Total current assets 2,966,955
Property and equipment - net (Note 3) 3,326,872
Notes Receivable - Related Party (Note 2) 167,863
Other assets (Note 2) 215,828
Intangible assets (Note 2) 1,122,045
Excess of cost over fair value of assets acquired (Note 2) 8,673,888
------------
TOTAL ASSETS $16,473,451
============
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part hereof.
3
<PAGE> 4
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
MARCH 31, 1997
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 2,459,981
Current portion of capital leases payable (Note 6) 68,095
Current portion of long-term debt (Note 5) 457,194
Current portion of long-term debt - Related Party (Note 4) 112,500
--------------
Total current liabilities 3,097,770
Long-term debt (Note 5) 2,986,469
Capital leases payable 53,640
--------------
Total liabilities 6,137,879
--------------
Contingencies (Note 9)
STOCKHOLDERS' EQUITY (Note 8)
Preferred stock 397,898
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.
Common stock 129,919
Par value $.01 - 25,000,000 shares authorized, 12,991,889 shares
issued and outstanding
Treasury Stock (159,876)
140,959 common shares stated at cost
Additional paid-in-capital 22,900,593
Accumulated deficit (12,932,962)
--------------
Total Stockholders' Equity 10,335,572
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,473,451
==============
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part hereof.
4
<PAGE> 5
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1996
------------- -------------
<S> <C> <C>
Net sales $ 2,824,675 $ 4,124,021
Cost of sales 2,072,369 3,443,310
------------- -------------
Gross profit 752,306 680,711
Selling, general and administrative expenses (Note 12) 504,510 321,554
Amortization of excess of cost over fair value
of assets acquired 57,958 53,959
------------- -------------
Income from operations before interest and income taxes 189,838 305,198
Interest expense - net 134,332 130,661
Income taxes (Note 7) 0 0
------------- -------------
Net earnings from operations 55,506 174,537
Earnings (loss) from discontinued businesses 0 (25,829)
------------- -------------
Net Earnings (loss) $ 55,506 $ 148,708
============= =============
EARNINGS (LOSS) PER COMMON SHARE
Earnings from continuing operations $ 0.01 $ 0.05
(Loss) earnings from discontinued business $ -- $ (0.01)
------------- -------------
Total Earnings (loss) per share $ 0.01 $ 0.04
============= =============
Weighted average shares used in computation 10,823,502 3,813,129
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part hereof.
5
<PAGE> 6
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash Flows from operating activities:
Net operating profit $ 55,506 $ 148,708
Adjustments to reconcile net operating profit to net cash
provided by (used in) operating activities:
Income on sale of fixed assets (55,000) (60,000)
Deferred income 0 13,310
Depreciation and amortization 140,601 146,812
Issuance of common stock for services 0 (40,000)
(Increase) decrease in accounts receivable 66,195 (61,460)
(Increase) decrease in inventories 58,464 14,883
(Increase) decrease in other assets 26,189 0
(Increase) decrease in prepaid expenses 59,875 (64,127)
Increase in accounts payable and accrued expenses 94,347 (857,984)
------------- -------------
Net cash used in operating activities 446,177 (759,858)
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (20,310) (86,368)
Cash obtained in business acquisitions 0 7,381
Sale of idle equipment 55,000 60,000
------------- -------------
Net cash provided by (used in) investing activities 34,690 (18,987)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable 0 200,000
Repayment of notes payable (212,920) (137,078)
Proceeds from sale of debentures 0 4,027,549
Purchase of Treasury Stock (52,663) 0
Capital lease repayments (47,683) (14,523)
Capital leasing transactions 0 28,800
------------- -------------
Net cash provided by financing activities (313,266) 4,104,748
------------- -------------
Increase (decrease) in cash 167,601 3,325,903
Cash at beginning of period 82,194 3,678
------------- -------------
Cash at end of period $ 249,795 $ 3,329,581
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 65,795 $ 43,407
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part hereof.
6
<PAGE> 7
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED 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. The business was damaged
severely and as a result Tech filed an action in the United States Federal Court
against its former supplier. (See exhibit 99) Due to the damages suffered
leading to the aforementioned lawsuit, 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 distributes 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 has been integrated with JR and both are operating out of
Deli's modern commissary facility in West Warwick, Rhode Island.
On May 7, 1996, the Company acquired the assets of Dotties Caterers,
Inc. ("Dotties"), a mobile catering business serving Rhode Island. Dotties was
integrated with JR and Deli and operates out of Deli's facility.
In July 1996, the Board of Directors of Saratoga determined that due to
the differences between the operations of the cheese business and the deli
business, shareholder value would be enhanced by separating the two businesses.
Saratoga therefore formed Mobile Caterers, Inc. ("Mobile") and contributed all
of the stock of the two subsidiaries which operate the deli business, Deli King,
Inc. ("Deli King") and JR's Delis, Inc. ("JR's"), to Mobile. The Company is
currently awaiting approval of the registration statement filed with the
Securities and Exchange Commission on March 14, 1996, and upon approval the
Company intends to distribute 100% of the stock in Mobile to the current Company
shareholders.
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, Mobile, Deli, JR, Snacks,
and Tech. 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. Prior
year amounts have been reclassified to conform with current presentation
primarily related to the discontinued operations.
7
<PAGE> 8
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. The components of
inventories at March 3, 1997 were as follows:
<TABLE>
<CAPTION>
Raw Finished Total
Materials Goods
- - -------------- ------------- -------------
<S> <C> <C>
$ 70,744 $ 344,137 $ 414,881
============== ============= =============
</TABLE>
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 50 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 September 30, 1996, the Company discontinued operations of its
Lensmire Cheese Factory ("Lensmire") due to its inability to demonstrate
profitable operations. Accordingly, the activities for the periods presented
relating to the Lensmire Cheese Factory have been presented as discontinued
operations. Lensmire had net sales of $885,229 to CCI in 1996, which are not
included in the net sales of the Company. Had Lensmire not been discontinued in
1996 these sales would have been eliminated in consolidation. Lensmire had
selling, general and administrative expenses of $44,921 and interest expense
of $1,371 in 1996. At March 31, 1997 Lensmire had current assets of $706,
fixed assets of $150,000, and $514 in other assets. Lensmire's liabilities at
March 31, 1997 consisted of $1,650 in accounts payable.
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 financial statements reflect share amounts after having given effect
to a reverse stock split of 10:1 which became effective August 28, 1995.
GOODWILL AND INTANGIBLE ASSETS
It is the Company's policy to periodically review the net realizable
value of its intangible assets, including goodwill through an assessment of the
estimated future cash flows related to such assets. In the event that assets are
found to be carried at amounts which are in excess of estimated gross future
cash flows, then the intangible assets will be adjusted for impairment to a
level commensurate with a discounted cash flow analysis of the underlying
assets. Based upon its most recent analysis, the Company believes no impairment
of goodwill or intangible assets exists at March 31, 1997. The intangible assets
consist of $139,751 for trademark and proprietary technology licenses, $75,000
for import license, and $907,295 for Deli's catering routes which establish its
rights to sell its products over an
8
<PAGE> 9
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
established series of stops. Amortization expense was $29,318 for the
three-months ended March 31, 1997. The trademark and proprietary technology
licenses are being amortized over 8 years while the import licenses are being
amortized over 5 years and the cost of the routes are being amortized over their
estimated economic life of 15 years. The excess cost over the fair value of
assets (less liabilities) acquired is being amortized over 40 years. Goodwill at
March 31, 1997 for each of the subsidiaries, consisted of the following:
<TABLE>
<S> <C>
CCI $6,766,715
JR 1,239,498
Deli 667,675
-----------
Total $8,673,888
===========
</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.
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 the Company's sales volume relates to products
which are purchased from Edigo Galbani, S.p.A., for which the Company holds
exclusive License and Manufacture Agreements in a contract which runs to the
year 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
$167,863 represents an amount due the Company from Cucina Classica
Italiana, S.p.A. ("SPA") relating to costs incurred by the Company on its
behalf. CCI was purchased by Saratoga from SPA. This note bears interest at 8%
and is anticipated to be received within one year.
PROVISION FOR DOUBTFUL ACCOUNTS
The Company periodically reviews and adjusts its provision for bad debts
to reflect its experience.
INVESTMENTS
The Company has an investment in an investment fund totaling $1,209,800
at March 31, 1997. This fund is dedicated to growth situations, generally in the
High Tech field. It is estimated that Saratoga's investment accounts for less
than five percent of the total fund assets. It is estimated that the fair value
of this investment has not changed since the investment date.
PREPAID EXPENSES
Of this amount $157,802 consists of advances against future commissions
to be earned by David Teolis in accordance with an agreement which entitles Mr.
Teolis to 10% of the revenues generated by him to a maximum of $300,000 in
commission.
9
<PAGE> 10
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
OTHER ASSETS
Other assets consists of:
<TABLE>
<S> <C>
Capitalized Financing Costs $ 88,890
Unamortized slotting fees 100,081
Deposits 26,857
--------
Total $215,828
========
</TABLE>
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.
NOTE 3 -- PROPERTY AND EQUIPMENT - NET
Property and equipment - net consisted of the following at March 31,
1997:
<TABLE>
<CAPTION>
USEFUL LIFE
-----------
<S> <C> <C>
Land $ 611,007
Buildings 1,394,402 50 years
Furniture & Equipment 931,252 5 - 10 years
Vehicles 482,277 5 - 7 years
Leasehold Improvements 39,955 5 years
Lensmire and Snacks assets not in use 160,000 held for sale
----------
Total Cost 3,618,893
Less Accumulated Depreciation 292,021
==========
Net $3,326,872
==========
</TABLE>
The Property, Plant and Equipment include $120,804 in fixed assets which were
acquired using capital leases.
10
<PAGE> 11
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 -- NOTES PAYABLE - RELATED PARTY
The Company has a note payable to Roy LaCroix related to the purchase of
Deli in the amount of $356,250, $112,500 being the current portion thereof,
which is being paid over four years and bears interest at the prime rate plus
one percent.
NOTE 5 -- LONG-TERM DEBT
The Company arranged for short-term loans totaling $420,000, for which
the entire amount was outstanding at the balance sheet date. These loans were
unsecured and bore interest at 8% per year and subsequent to the balance sheet
date they were converted to common stock of the Company, and in accordance with
Statement of Financial Accounting Standards No. 6, Classification of short-term
Obligations Expected to Be Refinanced, the Company has classified these loans as
non-current liabilities.
CCI has a term loan with BNY Financial Corporation of which the current
balance is $230,100 to be paid $53,100 in 1997, $70,800 in 1998, $70,800 in
1999, and $35,400 in 2000. This loan bears interest at the prime rate plus one
percent.
CCI entered into a Credit Agreement with three out of five of the
Italian Banks which, prior to such agreement, CCI had an oral understanding with
the five banks to restructure debt owed by one of CCI's subsidiaries to allow
further and new senior debt up to $3,000,000 for growth. The credit agreement
provides for minimum annual payments of $300,000, $993,130, $300,000, $300,000,
and $300,000 for 1997, 1998, 1999, 2000, and 2001, respectively.
The Credit Agreement was entered into on March 14, 1995 between CCI and
Banca Nazionale del Lavoro S.p.A. - New York Branch, Banco di Sicilia S.p.A. -
New York Branch, and Banca Commerciale Italiana - New York Branch.
Two additional banks, Istituto Bancario San Paolo di Torino - New York
Branch and Banca Populare di Milano - New York Branch, have the option to join
the agreement.
At the balance sheet, date CCI had indebtedness to the five banks as
follows:
<TABLE>
<S> <C>
Banca Nazionale del Lavoro S.p.A. - New York Branch $1,189,721
Banco 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 $25,000.00 per month plus accrued interest, which payment shall
be received no later than the 10th of each calendar month. The interest related
to these payments has been accrued but no payments have been made since February
1996 since the Company is in continued litigation with the banks.
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 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 $600,000.00.
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
11
<PAGE> 12
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
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 exhibit 10 (v)
for all terms and conditions of the Agreement.
Deli has various long-term loans with varrying terms mainly for the
purchase of equipment. These loans total $144,258 paid $85,473 in 1997,
$41,912 in 1998, and $16,873 in 1999.
NOTE 6 -- CAPITAL LEASES
At the balance sheet date the Company had capital leases totaling
$121,735 of which $68,095 is the current portion. The leases provide for
payments of $52,346, $42,607, $24,347, and $2,435, for 1997, 1998, 1999, and
2000, respectively.
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 March 31, 1997, the Company had no provision for
income taxes due to the utilization of net operating loss ("NOL") carryforwards
and the current years loss.
The Company had NOL carryforwards of approximately $3,700,000 at March
31, 1997, which resulted in a Deferred Tax Asset of approximately $1,332,000.
After applying the valuation allowance the Deferred Tax Asset was recorded at
$-0- on the balance sheet at March 31, 1997.
NOTE 8 -- 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 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
12
<PAGE> 13
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
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.
At March 31, 1997 their were 16.5 preferred shares outstanding.
NOTE 9 -- CONTINGENCIES
The Company is party to a lawsuit brought by an employee of a former
subsidiary for breach of his employment contract. The Company has denied
liability and has filed a counterclaim for misrepresentation.
Any losses, which may be incurred by the Company connected with these
matters, have been reflected in Snack's loss from discontinued operations.
Additionally, the Company is party to several other lawsuits 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
ss.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.
The court granted a defense motion pursuant to the F.R.C.P.12 (b)(6).
The Banks appealed the decision, but subsequently withdrew their appeal. CCI
also filed an appeal. The case is currently pending before the 2nd Circuit Court
of Appeals.
Schneck Weltman Hashmall & Mischel v. Saratoga Brands, Inc.
On May 23, 1994, Schneck Weltman Hashmall & Mischel ("Schneck")
commenced an action against the Company claiming damages alleged unpaid legal
fees in the amount of $92,591, together with interest, costs and disbursements.
The Company denied the substantive claim and is seeking damages on six
counterclaims raising issues in the general nature of malpractice. Schneck
denies the Company's claims in substance. Certain written discovery devices were
served upon Schneck, and as of the date hereof, none of them have been answered.
Discovery in the nature of an oral deposition was served upon Schneck by the
Company, and those depositions have not taken place.
Management believes that the ultimate outcome of any of the
aforementioned lawsuits will not have a material adverse effect on the Company's
financial position and future operations.
13
<PAGE> 14
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 -- 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 quarter ended March 31, 1997 and 1996 was approximately
$22,486 and $23,157, 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 1% 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
account 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 has 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. As a result of the loss from the discontinued operations of
the Lensmire Cheese Factory, CCI was in violation of certain of the above stated
covenants, however, BNYF waived any penalties related thereto and modified the
covenants to bring CCI into full compliance.
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 for Lensmire Cheese Factory and Snacks have been
presented as discontinued operations in 1997 and 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, will
remain in the cheese 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:
- 1997 results excluding any gains or losses on discontinued
businesses
- 1996 results excluding any gains or losses on discontinued
businesses
Results of Operations for the Three months Ended March 31, 1997 and 1996
Net sales for the quarter ended March 31, 1997 were $2,824,675 compared
with $4,124,021 in 1996. The Company generated gross profit of $752,306 or 27%
in 1997 verses $680,711 or 17% in 1996. This increase is a result of the
improvement of profit margins at both the Deli King and CCI subsidiaries.
At the Deli King operation purchasing practices have been improved while
selling prices have been adjusted upward. At the CCI operation manufacturing of
cheeses has been eliminated in favor of purchasing of the products from more
modern and efficient manufacturers. In addition, unprofitable product lines have
been eliminated. The elimination of the unprofitable product lines has resulted
in lower gross sales, but has generated a higher gross profit.
Selling, general and administrative expenses were $504,510 and
$321,554 in 1997 and 1996, 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, and has undertaken a substantial cost
reduction program in all of its subsidiaries. This consolidation and profit
improvement program is expected to continue through fiscal 1997.
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 $1,650 in
the March 31, 1997 Balance Sheet.
The Company reported no provision for income taxes for the quarter ended
March 31, 1997 as the Company's operating earnings were offset by Net Operating
Loss carryforwards.
The earnings from continuing operations for the quarter ended March 31,
1997 were $55,506, verses $174,537 in 1996. Net income (loss) was $55,506 in
the first quarter of 1997, verses income of $148,708 in 1996.
Earnings per common share from the operating businesses were $0.01 in
the quarter ended March 31, 1997 verses $0.04 in 1996 on weighted average
shares of 10,823,502 and 3,813,129, 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
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 March 31, 1997 the Company had a net worth of $10,335,572 compared
with $8,205,881 at March 31, 1996.
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 March 31, 1997.
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: May 13, 1997 By: /s/ Scott G. Halperin
--------------------------------
Scott G. Halperin
Chief Executive Officer
Treasurer
Date: May 13, 1997 By: /s/ Bernard F. Lillis, Jr.
--------------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENT
OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB
FOR MARCH 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 249,795
<SECURITIES> 0
<RECEIVABLES> 879,443
<ALLOWANCES> 75,310
<INVENTORY> 414,881
<CURRENT-ASSETS> 2,966,955
<PP&E> 3,618,893
<DEPRECIATION> (292,021)
<TOTAL-ASSETS> 16,473,451
<CURRENT-LIABILITIES> 3,097,770
<BONDS> 0
0
397,898
<COMMON> 129,919
<OTHER-SE> 9,807,755
<TOTAL-LIABILITY-AND-EQUITY> 16,473,451
<SALES> 2,824,675
<TOTAL-REVENUES> 2,824,675
<CGS> 2,072,369
<TOTAL-COSTS> 2,576,879
<OTHER-EXPENSES> 192,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,332
<INCOME-PRETAX> 55,506
<INCOME-TAX> 0
<INCOME-CONTINUING> 55,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,506
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
