<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, 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
of incorporation or organization) identification no.)
1835 Swarthmore Avenue, Lakewood, New Jersey 08701
(Address of principal executive offices)
(732) 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[X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common equity
as of September 30, 1997
<TABLE>
<CAPTION>
Title of Each Class Number of Shares Outstanding
<S> <C>
Common Stock, $.001 par value per share 12,144,751
</TABLE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
Consolidated Unaudited Balance Sheet at September 30, 1997 3-4
Consolidated Unaudited Statements of Operations for the Three and Nine Months
Ended September 30, 1997 and 1996 5
Consolidated Unaudited Statements of Cash Flows for the Nine Months Ended
September 30, 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 UNAUDITED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $ 18,112
Accounts receivable net of allowance for doubtful accounts
of $70,810 (Note 2) 1,822,884
Inventories (Note 2) 483,056
Prepaid expenses and other current assets 220,194
-----------
Total current assets 2,544,246
Property and equipment - net (Note 3) 3,295,890
Other assets (Note 2) 192,977
Intangible assets (Note 2) 1,059,854
Excess of cost over fair value of assets acquired (Note 2) 8,294,436
-----------
TOTAL ASSETS $15,387,403
===========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part hereof.
3
<PAGE> 4
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 1,836,342
Current portion of capital leases payable (Note 6) 60,897
Current portion of long-term debt (Note 5) 134,086
Current portion of long-term debt - Related Party (Note 4) 112,500
------------
Total current liabilities 2,143,825
Long-term debt-Related Party(Note 4) 178,125
Long-term debt-Italian Banks (Note 5) 2,393,321
Long-term debt (Note 5) 178,930
Capital leases payable 84,335
------------
Total liabilities 4,978,536
------------
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 12,145
Par value $.001 - 25,000,000 shares authorized, 12,144,751 shares
issued.
Treasury Stock (645)
459 common shares stated at cost
Additional paid-in-capital 22,303,033
Accumulated deficit (12,303,564)
------------
Total Stockholders' Equity 10,408,867
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,387,403
============
</TABLE>
The accompanying notes to the consolidated 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,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 3,514,903 $ 4,221,210 $10,375,489 $ 11,506,352
Cost of sales 2,724,284 3,316,237 7,639,979 8,608,964
------------ ----------- ----------- ------------
Gross profit 790,619 904,973 2,735,510 2,897,388
Selling, general and administrative expenses (Note 12) 448,550 520,511 1,695,890 1,842,822
Amortization of excess of cost over fair value of assets
acquired 26,711 54,790 142,626 162,706
------------ ----------- ----------- ------------
Income from operations before interest and ,taxes 315,358 329,672 896,994 891,860
Interest expense - net (66,285) 145,245 211,490 419,328
Income taxes (Note 7) 0 600
------------ ----------- ----------- ------------
Net earnings from continuing operations 381,643.03 184,427.00 684,903.71 472,532.00
Loss from operations of discontinued
businesses - (866,789.00) - (866,789.00)
------------ ----------- ----------- ------------
Net earnings (loss) $ 381,643 ($ 682,362) $ 684,904 $( 394,257)
============ =========== =========== ============
EARNINGS (LOSS) PER COMMON SHARE
Earnings from continuing operations $ 0.03 $ 0.03 $ 0.06 $ 0.09
Loss from operations of discontinued
businesses 0.00 (0.12) 0.00 (0.16)
------------ ----------- ----------- ------------
Total earnings (loss) per share $ 0.03 $ (0.09) $ 0.06 $ (0.07)
============ =========== =========== ============
Weighted average shares used in computation 12,011,792 7,173,685 11,452,062 5,523,985
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part hereof.
5
<PAGE> 6
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from operating activities:
Net operating profit $ 682,362 $ (394,257)
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 431,045 485,600
Provision for losses on accounts rceivable 0 48,830
Issuance of common stock for services 0 (40,000)
Adjustments for discontinued operations 0 (866,789)
(Increase) decrease in accounts receivable (952,556) (532,631)
(Increase) decrease in Investment 1,209,800
(Increase) decrease in inventories (9,711) (112,238)
(Increase) decrease in other assets 49,040 0
(Increase) decrease in prepaid expenses 128,027 312,737
Increase in accounts payable and accrued expenses (529,292) (133,393)
----------- -----------
Net cash used in operating activities 953,715 (1,278,831)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (97,097) (2,056,159)
Cash obtained in business acquisitions 0 7,381
Sale of idle equipment 55,000 90,000
----------- -----------
Net cash provided by (used in) investing activities (42,097) (1,958,778)
----------- -----------
Cash flows from financing activities:
Capital Stock Issued in Payment of Debt 420,000 0
Proceeds from notes payable 362,000 750,662
Repayment of notes payable (952,351) (145,674)
Proceeds from sale of debentures 0 4,027,549
Purchase of Treasury Stock (781,163) 0
Capital lease repayments (40,186) 0
Capital leasing transactions 16,000 152,846
----------- -----------
Net cash provided by financing activities (975,700) 4,785,383
----------- -----------
Increase (decrease) in cash (64,082) 1,547,774
Cash at beginning of period 3,678
----------- -----------
Cash at end of period $ (64,082) $ 1,551,452
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 214,615 $ 193,673
=========== ===========
Summary of non-cash investing activities:
Common Stock issued for acquisitions 0 $ 750,000
=========== ===========
</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
(CONTINUED)
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 sold 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, operating out of a 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, from the
Federal Bankruptcy Court in Providence, RI . Dotties assets were integrated into
Deli and became part of that operation.
In September of 1996, the Company formed Mobile Caterer's, Inc.
("Mobile") and immediately contributed the stock of Deli, and JR thereto, and
thereafter the catering and deli business were operated under Mobile, trading as
Deli King.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its two wholly owned subsidiaries: CCI and Mobile. The consolidated
balance sheets reflect the accounts of the Company and its two 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, 1997 were as follows:
<TABLE>
<CAPTION>
Finished
Raw Materials Goods Total
-------- --------- ---------
<S> <C> <C>
$ 44,778 $ 438,278 $ 483,056
======== ========= =========
</TABLE>
7
<PAGE> 8
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED 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 50 years, (see Note 3 for detail by category.) 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.
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 September 30, 1997.
The intangible assets consist of:
<TABLE>
<S> <C>
Trademarks and proprietary technology licenses $ 121,117
Import licenses 65,000
Catering Routes-Deli King, Inc. 873,737
----------
TOTAL $1,059,854
==========
</TABLE>
Deli King routes establish its rights to sell its products over an
established series of stops. The cost of the routes are being amortized over
their estimated economic life of 15 years The trademark and proprietary
technology licenses are being amortized over 8 years while the import licenses
are being amortized over 5 years. Amortization expense was $85,145 for the
nine-months ended September 30, 1997.
The excess cost over the fair value of assets (less liabilities)
acquired is being amortized over 40 years. Goodwill at September 30, 1997 for
each of the subsidiaries, consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
CCI $ 6,409,121
MOBILE 1,885,315
-----------
Total $ 8,294,436
===========
</TABLE>
8
<PAGE> 9
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED 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. CCI's products are
distributed nationally, while Mobile's products are regional throughout New
England. Most of the Company's customers are food retailers and distributors.
Approximately 60% of CCI's sales volume relates to products which are
purchased from Egidio 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. The Company is currently in discussions
with Galbani for an extension of this agreement through the year 2005.
PROVISION FOR DOUBTFUL ACCOUNTS
The Company periodically reviews and adjusts its provision for bad debts
to reflect its experience.
RECEIVABLE FROM INVESTMENT PARTNERSHIP
At December 31, 1996 the Company had an investment in a Bermuda Limited
Partnership which manages an investment fund dedicated to growth situations,
generally in the high tech field. The Partnership Subscription Agreement
provides that the Company may redeem all or part of its investment upon thirty
days written notice provided in writing to the Partnership. The Agreement
further provides that until June 30, 1997 the Partnership guarantees and holds
the Company harmless from any loss in the value of its investment.
Prior to June 30, 1997 the Company notified the Partnership both
verbally and in writing of its desire to have its investment in the Fund ($
1,209,800) liquidated and the proceeds returned to the Company. The Manager of
the Fund has acknowledged that the liquidation is taking place and that the
proceeds will be returned to the Company forthwith.
At June 30, 1997 the investment in the Fund was reclassified as a
current receivable from the Partnership, and is included in Accounts Receivable
at September 30, 1997. The remaining balance due from the Investment Partnership
at September 30, 1997 was $ 416,681.
OTHER ASSETS
Other assets consists of:
<TABLE>
<S> <C>
Capitalized Financing Costs $ 78,026
Unamortized slotting fees 87,760
Deposits 27,191
---------
Total $ 192,977
=========
</TABLE>
9
<PAGE> 10
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
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 September 30,
1997:
<TABLE>
<CAPTION>
USEFUL LIFE
-----------
<S> <C> <C>
Land $ 611,007
Buildings 1,394,402 50 years
Furniture & Equipment 1,007,039 5 - 10 years
Vehicles 483,277 5 - 7 years
Leasehold Improvements 39,955 5 years
Lensmire and Snacks assets not in use 160,000 held for sale
----------
Total Cost 3,695,680
Less Accumulated Depreciation 399,790
==========
Net $3,295,890
==========
</TABLE>
The Property, Plant and Equipment include $ 135,800 in fixed assets,
which were acquired using capital leases. The Lensmire property, held for sale,
was sold subsequent to the Balance Sheet date.
NOTE 4 -- NOTES PAYABLE - RELATED PARTY
The Company has a note payable to Roy LaCroix, the former owner of Deli
King, Inc., related to the purchase of Deli in the amount of $290,625, $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
CCI has a term loan with BNY Financial Corporation of which the current
balance is $ 194,700 to be paid $17,700 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.
Deli has various long-term loans with varrying terms mainly for the
purchase of equipment. These loans total $ 118,316 paid $ 39,531 in 1997, $
51,912 in 1998, and $ 26,873 in 1999.
10
<PAGE> 11
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
Loans Payable to Italian Banks
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 Popolare di Milano - New York Branch, had the option to join
the agreement, which then subsequently did.
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 222,967
Banca Commerciale Italiana - New York Branch 389,073
Istituto Bancario San Paolo di Torino - New York Branch 218,247
Banca Popolare di Milano - New York Branch 373,313
----------
$2,393,321
==========
</TABLE>
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 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.
Please see Note 9 - Contingencies for a more detailed discussion of the
lawsuit the Company has brought against the three Italian Banks that are parties
to the above described credit agreement.
As of this date, the banks have not filed a legal action against
Nostrano or CCI in an attempt the collect any of the money they claim is owed to
them by CCI. Accordingly, we are not showing any of the amount due the Italian
Banks as current in the accompanying financial statements.
11
<PAGE> 12
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 -- CAPITAL LEASES
At the balance sheet date the Company had capital leases totaling $
145,232 of which $ 60,897 is the current portion. The leases provide for
payments of $ 25,945, $ 59,567, $41,307, and $ 18,413, 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 six-month period ended June 30, 1997, the Company had no
provision for income taxes due to the utilization of net operating loss ("NOL")
carryforwards.
The Company had NOL carryforwards of approximately $3,700,000 at
September 30, 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 September 30, 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
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
September 30, 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. Management
believes that the ultimate outcome of this lawsuit will not have a material
adverse effect on the company's financial position and future operations.
12
<PAGE> 13
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
Additionally, the Company is party to two 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
POPOLARE 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
Section303(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
Popolare 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 defense motion granted was a Motion to Dismiss on the basis that the Company
had not established its jurisdictional right to be in federal court. The
dismissal was not a determination on the merits of the case.
The Banks appealed the decision, but subsequently withdrew their appeal.
CCI also filed an appeal. The case was heard before the 2nd Circuit Court of
Appeals, which affirmed the decision of the lower Court. Pending the outcome of
negotiations between the Company and the Banks to settle this matter amicably,
the Company is reserving its right to bring this action in State Court in the
State of New York and to petition the United States Supreme Court in regard to
the Federal Case discussed above.
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
Lease
The Company and its subsidiaries maintain office, warehouse and
processing facilities pursuant to an operating lease 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 Saratoga and CCI's headquarters as well as
housing CCI's 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, 1997 and 1996 was
approximately $25,296 and $25,542, 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. On March 20, 1997 the agreement was amended and the initial
period was extended to June 13, 2000. 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 its 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 at December 31, 1996. However, BNYF waived any penalties related
thereto and modified the covenants by amendment 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.
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.
OPERATIONS OVERVIEW
Results of Operations for the Three months Ended September 30, 1997 and
1996
Net sales for the quarter ended September 30, 1997 were $ 3,514,903
compared with $ 4,221,210 in 1996. The Company generated gross profit of $
790,619 or 22.5% in 1997 verses $ 904,973 or 21% in 1996. The reduction in Net
Sales is the result of the discontinuance of unprofitable lines. While the gross
profit decreased, the Gross Profit Percentage increased from 21% to 22.5%. As
sales of our more profitable lines increase our gross profit percentage will
continue to improve.
15
<PAGE> 16
At Deli operating management has been changed, purchasing practices have
been improved and selling prices have been adjusted upward. Deli's wholesale
routes are in the process of being consolidated and unprofitable segments of the
business are being eliminated. At the CCI operation manufacturing of cheese has
been eliminated in favor of purchasing the products from more modern and
efficient manufacturers. In addition, unprofitable product lines have been
eliminated. While the elimination of the unprofitable product lines may result
in lower gross sales, it will generate a higher gross profit.
Selling, general and administrative expenses were $ 448,550 and $
520,511 in 1997 and 1996, respectively, a reduction of 14%. This reflects
tangible results from the reorganization and cost reductions undertaken in the
first quarter at Mobile.
Management expects gross margins and net operating profits to improve as
the Company continues to take advantage of the economies of scale, lower payroll
costs, changes in operating procedures, 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, in the Third Quarter of 1996 the Company discontinued
operation of Lensmire Cheese Factory, its cheese manufacturing operation located
in Cascade Wisconsin, due to its inability to demonstrate profitable operations
since acquisition by the Company in August, 1994.
Since all of Lensmire's production was transferred to CCI, no revenues
were reported in the 1996 income statement of the Company, as they were
eliminated in consolidation.
The assets of Lensmire Cheese Factory have been written down to net
realizable value. There are no liabilities related to the discontinued business
in the September 30, 1997 Balance Sheet.
The Company reported no provision for income taxes for the quarter ended
September 30, 1997 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
The Net Income from continuing operations for the quarter ended
September 30, 1997 were $ 381,643, verses $184,427 in 1996. There was a loss
from discontinued operations in the quarter ended September 30, 1996 of
$866,789, or ($0.12) per share.
Overall earnings per common share were $0.03 in the quarter ended
September 30, 1997 verses a loss of ($.09) in 1996 on weighted average shares of
12,011,792 and 7,173,685 respectively.
Results of Operations for the Nine months Ended September 30, 1997 and
1996
Net sales for the nine months ended September 30, 1997 were $ 10,375,489
compared with $ 11,506,352 in 1996. The Company generated gross profit of $
2,735,510 or 26% in 1997 verses $ 2,897,388 or 25% in 1996. This increase in
gross profit percentage is a result of the improvement of margins at both the
Deli and CCI subsidiaries.
At the Deli operation purchasing practices have been improved while
selling prices have been adjusted upward. At the CCI operation manufacturing of
cheese 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 $ 1,695,890 and $
1,842,822 in 1997 and 1996, respectively, a reduction of 9%. This reflects
tangible results from the reorganization and cost reductions undertaken in the
first quarter of 1997.
16
<PAGE> 17
Management expects gross margins and net operating profits to improve as
the Company continues to take advantage of the economies of scale, lower payroll
costs, changes in operating policies, 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 the
remainder of fiscal 1997.
In addition, in the third quarter of 1996 the Company discontinued the
operations 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, as they were eliminated
in consolidation.
The assets of Lensmire Cheese Factory have been written down to net
realizable value. There are no liabilities related to the discontinued business
in the September 30, 1997 Balance Sheet.
The Company reported no provision for income taxes for the nine months
ended September 30, 1997 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
The Net Income from continuing operations for the nine months ended
September 30, 1997 was $ 684,904 verses $472,532 in 1996. There was a loss from
discontinued operations of ($866,789) in the nine months ended September 30,
1996.
Overall earnings per common share were $0.06 in the nine months ended
September 30, 1997 verses a loss of ($ 0.07) in 1996 on weighted average shares
of 11,452,062 and 5,523,985, respectively.
Earnings for the first nine months of 1997 were up due to the
consolidation of the mobile catering and wholesale distribution businesses,
changes in operating procedures at both Mobile and CCI, reduction in payroll,
and other cost reductions related to new co-pack production of CCI's products.
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, 1997 the Company had a net worth of $ 10,408,867
compared with $ 10,712,271 at September 30, 1996. The net worth was reduced in
part by the purchase and cancellation of approximately 1,600,000 shares of the
Company's Common Stock (Treasury Stock) in the amount of $781,163.
The Company received proceeds of $ 4,479,000 from the issuance of
convertible debentures during the six months ended June 30, 1996. The debentures
were converted into 2,861,763 common shares of the Company. All of the
debentures have been converted to common shares and none remain outstanding as
of September 30, 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
<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 18, 1997 By: /s/ Scott G. Halperin
---------------------
Scott G. Halperin
Chairman of the Board
Chief Executive Officer
Date: November 18, 1997 By: /s/ Bernard F. Lillis, Jr.
--------------------------
Bernard F. Lillis, Jr.
Chief Operating Officer
Chief Financial Officer
Principal Accounting Officer
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
UNAUDITED BALANCE SHEET, CONSOLIDATED UNAUDITED STATEMENT OF OPERATIONS AND
CONSOLIDATED UNAUDITED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-QSB FOR SEPTEMBER 30, 1997.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 18,112
<SECURITIES> 0
<RECEIVABLES> 1,893,694
<ALLOWANCES> (70,810)
<INVENTORY> 483,056
<CURRENT-ASSETS> 2,554,246
<PP&E> 3,695,680
<DEPRECIATION> (399,790)
<TOTAL-ASSETS> 15,387,403
<CURRENT-LIABILITIES> 2,143,825
<BONDS> 0
0
397,898
<COMMON> 12,145
<OTHER-SE> 9,998,824
<TOTAL-LIABILITY-AND-EQUITY> 15,387,403
<SALES> 10,375,489
<TOTAL-REVENUES> 10,375,489
<CGS> 7,639,979
<TOTAL-COSTS> 9,335,869
<OTHER-EXPENSES> 354,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211,490
<INCOME-PRETAX> 685,504
<INCOME-TAX> 600
<INCOME-CONTINUING> 684,904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 684,904
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
