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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
Commission file number 0-19721
SARATOGA BRANDS INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
New York 13-3413467
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer identification no.)
</TABLE>
1835 Swarthmore Avenue, Lakewood, New Jersey 08701
(Address of principal executive offices) (Zip Code)
(908) 363-3800
(Issuer's telephone number)
___________________
Securities registered under section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
___________________ ___________________
___________________ ___________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.10 par value
________________________________________________________________
(Title of class)
________________________________________________________________
(Title of class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is met contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year: Revenues for the fiscal
year ended December 31, 1996 were $14,780,268.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act).
Note; If determining whether a person is an affiliate will involve unreasonable
effort and expense, the issuer may calculate the aggregate market value of the
common equity held by non-affiliates on the basis of reasonable assumptions, if
the assumptions are stated.
The aggregate market value of the voting stock held by non-affiliates as of
January 31, 1997 was $11,279,334.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST 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 N/A
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value per share 10,632,387 (as of January 31, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
Transitional Small Business Disclosure Format (Check one): Yes ; No [X] .
---- ----
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PART 1
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Saratoga Brands Inc. (the "Company") is a New York corporation,
headquartered in Lakewood, New Jersey. Saratoga has two principal business
lines: (i) producing and importing specialty cheeses and Italian foods (the
"cheese business") and (ii) producing and distributing delicatessen and snack
foods to mobile caterers and convenience stores (the "deli business"). 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.
The Company's cheese business, Cucina Classica Italiana, Inc. ("CCI"),
engaged in the production, importation and distribution of premium cheeses and
Italian foods, is located at the Company's headquarters in Lakewood, New Jersey.
Deli King and JR's, operate in a 28,000 square foot facility located in
West Warwick, Rhode Island. From this facility, often referred to as a
commissary, Deli King and JR's produce "prepared foods" such as sandwiches,
soups, salads, pasta, baked goods and other entrees, and distribute these
products along with delicatessen and other food items such as snacks and
beverages. Deli King sells these products to mobile catering truck customers and
provides support services to these customers as well. JR's sells the same food
products to more than 800 convenience stores and retail outlets in Rhode Island,
Massachusetts and Connecticut. Deli King and JR's generate approximately 75% and
25%, respectively, of the Company's revenues.
PRODUCTS.
CCI is a leading producer of specialty Italian cheeses and Greek-style
Feta and a major importer of Italian specialty cheeses, Prosciutto di Parma
(Italian ham), and Italian specialty rice. CCI distributes its products
nationally with its heaviest areas of distribution located on the East and West
Coasts of the U.S. Its customers are other importers and large distributors who
sell to
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smaller distributors and retail accounts. Sixty percent of sales are food
service; i.e., sales to restaurants, airlines, cruise ships.
CCI markets Italian specialty and Greek-style Feta cheeses. Bel
Paese(R) is a semi-soft cheese, manufactured in 5 lb. bulk wheels and in
varieties flavored with Basil and Sun-dried Tomatoes. Greek-style Feta cheese
and Feta flavored with dill, oregano, sun-dried tomatoes and basil, and with
peppercorn are produced in random and in exact weight portions. Freshly grated
and shredded Romano and Parmesan cheeses are also produced by CCI and are sold
in consumer-sized cups. Dry grated Parmesan and Romano are available in
canisters under the Cucina Classica Italiana(R) brand. CCI produces annually
325,000 pounds of Bel Paese(R) and 200,000 pounds of Feta.
Galbani(R) Mascarpone and Bel Paese(R) Medallions are CCI's imported
products. 875,000 pounds of Galbani Mascarpone, a specialty dessert cheese was
imported in 1996. CCI controls more than 50% of the nation's imported Mascarpone
sales. In 1996 the company imported 325,000 pounds or approximately six million
individual medallions of Bel Paese Process Medallions, a soft, spreadable
cheese.
Prosciutto di Parma and Gorgonzola Dolcelatte(R), the Italian blue-mold
cheese, round up the line with 1996 imports of 40,000 pounds and 27,000 pounds,
respectively.
From other Italian exporters, CCI also imports Parmigiano Reggiano,
Grana Padano, Pecorino Romano (are sold in whole wheels, pre-cut portions or
freshly grated in deli cups) and Arborio rice used in the Italian dish risotto.
Although Deli King and JR's sell to different types of customers, the
majority of the products which they sell are identical. Approximately seventy
percent of the prepared foods sold by the Company are produced by the Company,
and this production consists of approximately 60% sandwiches and 40% soup, pasta
or other entrees. Sandwiches are produced fresh daily based on previous day
orders from the mobile catering customers and weekly orders from the convenience
store customers. Each sandwich is produced individually as part of a production
run by sandwich type, using recipes developed by the Company, to ensure the
consistency of proper quantity and quality of ingredients. Soups, pastas and
other entrees are prepared in bulk and then packaged in individual portion size
containers. The in-house prepared food products provide the largest profit
margin of the Company's products. The bulk of the remaining 30% of the prepared
foods are purchased from third parties and are frozen. These frozen items
provide the Company's second largest profit margin.
The Company's bakery produces 30% of the pastries and Danish sold, with
the remaining products originating from other local bakeries and larger local
and national suppliers.
The remaining products include beverages, snacks and candy. Beverage
products include such national brands as Coca-Cola, 7-Up, Dr. Pepper and various
others, including mineral waters, fruit juices, iced tea and hot tea and coffee.
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Mobile Catering Business - Deli King derives revenues from three
principal activities: the sale of prepared foods, snacks, beverages and supplies
(ice, containers, plastic utensils, etc.); to independent catering operators;
the operation of a mobile catering truck service facility and the rental of
catering routes and trucks.
The Company believes that approximately 70% of the area mobile catering
truck operators obtain their goods from Deli King's West Warwick, Rhode Island
facility. Deli King has operated in this area since 1985. Approximately 35% of
Deli King's sales consist of products produced under the one of the Company's
brand names at the Company's kitchen and bakery. The remaining sales consist of
approximately 15% third party prepared foods, 10% purchased snacks and 40%
beverages. As is customary in the business, the mobile catering operators place
orders at the end of each day to be picked up the following morning and paid
primarily in cash.
Deli King's customers are all mobile catering operators. These mobile
caterers include persons operating their own vehicles on their own routes;
persons operating their own vehicles on routes rented from Deli King; and
persons renting one of the 27 catering trucks owned by Deli King for use on
their own routes or routes rented from Deli King. The mobile caterer must pay a
fixed amount per week for routes rented from the Company, and a weekly rental
for the use of catering trucks owned by the Company. These operators are
independent from the Company. Deli King served approximately 60 mobile catering
trucks as of December 31, 1996.
Deli King controls 30 catering routes which it "rents" to operators for
a weekly fee. These controlled routes, which are also referred to as owned
routes, represent an established series of regular stops served by the same
vehicle. Each stop is usually a business where the employees depend on the
caterer for their snacks, beverages or meals. In some areas, where the business
is located some distance from any restaurant or market, the mobile caterer may
be the only source of food and drink items during the work day.
In addition to supplying the mobile caterers with food, drink and the
related supplies, Deli King has a full service facility staffed with mechanics
for the maintenance and repair of mobile catering vehicles and equipment. The
facility is able to service and repair equipment used for mobile refrigeration,
food warming and hot beverage brewing.
Convenience Store Business - JR's sells the same food products as Deli
King to more than 800 convenience stores and retail outlets in Rhode Island,
Massachusetts, New Hampshire and Connecticut. These products include sandwiches
prepared in the commissary and other products supplied by third parties
including cold cuts, cheeses, muffins, cakes, cookies, candies, snacks such as
jerky, pretzels and nuts and bottled beverages. JR's products have shelf lives
from seven days to six months.
JR's sales force includes driver-sales people who deliver the products
in refrigerated trucks. These driver-sales people are employees who are paid a
base salary plus a 5% commission.
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Approximately 40% of JR's sales are made on open account terms with payment due
in 14 days. The remaining 60% of sales are made on a cash basis. Each
driver-sales person must cash out or balance his or her cash receipts and open
account sales to inventory changes on a daily basis. JR's operates seven trucks.
NEW PRODUCTS AND EXPANSION.
CCI is continually seeking expand its product line by either producing
or importing new products.
Both Deli King and JR's are constantly seeking new food and beverage
products. The preponderance of advertising for such products, which is found in
most types of media, creates consumer awareness of new items. The Company is
constantly being approached by its suppliers with new products. As a member of
the Mobile Independent Catering Association, the Company receives publications
and attends trade shows which present potential new products.
At the present time, the Company's kitchen and bakery operate at
capacities of approximately 35% and 20%, respectively. Management believes that
the Company will maintain its current competitive position and that the mobile
catering business can be expanded by opening additional distribution locations.
Such satellite operations would be located beyond a 30 mile radius from the
current facility. Any new locations would operate as distribution and service
facilities where third party products would be warehoused. Prepared foods
produced in the current kitchen and bakery would be shipped to any such new
location. Management estimates that the production capacity of the current
location can supply up to three satellite operations. While management believes
implementation of such growth plans is feasible, no assurance can be given as to
the success of any efforts to expand.
COMPETITIVE POSITION.
CCI maintains a strong presence in the Italian specialty food market.
CCI offers trade promotions to its major customers, provides point-of-sale
materials to help product sell-through at the retail level, offers consumers
various incentives to buy its products and uses consumer and trade media
increase product awareness nationwide.
While JR operates in a competitive market, of the three largest fresh
sandwich makers in the New England area, JR is the only such producer also
providing a full line of other products.
Mobile catering business - Management believes that Deli King has approximately
70% of the mobile catering business in the geographic area it serves.
Maintenance of its customer base is dependent on the ability of Deli King to
provide superior service and reliability. The underlying
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relationship of the mobile caterer with its customers is dependent on service,
reliability (customers expect the catering trucks to arrive within a few minutes
of the same time each day) and on product selection and quality. The Company
employs route managers whose function is to review the performance of the mobile
caterers as it relates to their service and reliability. The goal is to ensure
that the Company's quality standards are kept at high levels.
Management believes that substantially all of the remaining 30% of the
mobile catering market is supplied by only one other commissary. Therefore, all
mobile caterers in the area must choose between Deli King and its competitor.
Due to the nature of the business, mobile caterers are severely limited by the
time and distance they can travel to obtain their products. Management believes
that there is little likelihood that another competitor will enter the market
due to the cost associated with opening a new facility and the small number of
persons with the expertise necessary for such an undertaking.
Convenience Store Business - JR's Delis is one of the three companies competing
for the convenience store business in the six New England states. While the two
competitors of JR's are approximately the same size as JR's, only JR's offers a
full line of snacks, baked goods, beverages and other food items in addition to
fresh sandwiches. Management believes that convenience store operators prefer
the efficiency of dealing with JR's rather than with its sandwich-only
competitors.
RAW MATERIALS.
The raw materials or ingredients used in the Deli King and JR's
products are available from many suppliers. The deli business has a core group
of 50 vendors with which it has developed good relationships. Because of the
large number of potential suppliers in the food and beverage industry, the
Company is not dependent on any one supplier. The prepared food ingredients
include many well known national brands such as Oscar Meyer, Kayem, Boars Head,
Dubuque and Louis Rich (lunch meats) and Heinz and Kraft dressings and spreads.
PRODUCT LINE EXCLUSIVITY LICENSE & TRADEMARK AGREEMENTS.
CCI is the exclusive U.S. importer of the Galbani line of Italian
specialty cheeses and pork products. Egidio Galbani, S.p.A. of Milan, Italy, is
a major force in the European Dairy Market with an annual sales volume of about
2 billion dollars and is a subsidiary of GROUPE DANONE, with an annual sales
volume of approximately 15 billion dollars.
CCI has the exclusive right to import Galbani products into the U.S.,
and is the only company worldwide with the license to manufacture cheeses
bearing the Galbani trademarks. The Product Exclusivity and License to
Manufacture Agreements are granted in a contract which runs
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to the year 2000 when it will be subject to renewal. CCI is currently
negotiating with Galbani to extend the agreement into the 21st century.
CCI's trademarks are: Cucina Classica Italiana(R), Classika(R) and
Tal-Fino(R). CCI is currently applying for the trademark Classica and uses the
(TM) symbol to denote its application.
Except for prepared foods and baked goods produced by and unique to the
deli business, the deli business has no product line exclusivity or any
trademarks under its control. The products produced by the deli business may use
recipes slightly different than for those same products made elsewhere. However,
this is a benefit in that the deli business sells generic, traditional foods
which must be prepared in a manner consistent with the common recipes for each
type of dish.
GOVERNMENT REGULATIONS.
All of the Company's subsidiaries are subject to regulations of the
U.S. Department of Agriculture (USDA) and The U.S. Food and Drug Administration
(FDA).
The USDA establishes regulations for cheese identity and also oversees
the importation of meat products into the U.S. The FDA regulates cheese labeling
and has established strict guidelines regarding ingredients and nutritional
information. The State of Wisconsin has strict guidelines for its milk
production and cheese plant operations and the Wisconsin Department of Industry
and Consumer Protection reviews quarterly financial statements of the Wisconsin
factories. The State of Rhode Island has jurisdiction over the activities of the
deli business . Both Deli King and JR's are subject to federal, state and local
health and food regulations. These regulations generally provide standards for
sanitation, storage, food quality and grade, shelf lives and product labeling.
Management strives to keep the deli business in full compliance with these
regulations.
The deli business is currently applying for certification from the
United States Department of Agriculture (USDA), which requires that its
commissary be modified to USDA specifications. If the Company obtains this
certification, it expects to be able to expand its product lines.
RESEARCH & DEVELOPMENT.
Research and development costs relate to developing new cheeses
(reduced fat, spreadable versions of current semi-soft cheeses, new flavor
extensions to existing lines) for CCI. Research costs for both operations are
minimal. In the most recent two years, neither Deli King nor JR's has expended a
material amount on research and development. However, both Deli King and JR's
are continually looking to acquire new products from third parties. In addition,
the Company's kitchen and bakery work to develop new products to follow industry
trends although the monetary expenditure for such efforts has been minimal to
date.
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COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS.
The costs and effects of compliance with environmental laws are not
material to our operations.
CURRENT EMPLOYEES.
The company and its subsidiaries currently employ 44 persons of which
43 are full time.
ACQUIRED BUSINESSES.
On April 26, 1996 the Company entered the mobile catering business with
the acquisition of Deli King. The acquisition of this business was effective
January 1, 1996 while the real estate and building were acquired on April 26,
1996.
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.
ITEM 2. DESCRIPTION OF PROPERTY
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
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, which began in 1994, with no rent escalation and
an option to renew for an additional five years at an annual rent of $91,975.
CCI owns a 15,000 square foot facility at WT365 County Road V, Cascade,
Wisconsin 53011. This facility, which is owned free of mortgages, consists of
wooden construction with a series of additions of masonry and fireproof steel
construction. This facility is located in an agricultural dairy farming area and
has the capacity of producing 1,000,000 pounds of cheese per year. This plant
contains a 3,000 square foot cooler. The plant is situated on 1.5 acres. CCI
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additionally owns 4.25 acres across the road from this facility which serves as
a spray field for the purpose of properly disposing of waste water generated in
the cheese plant. This facility also contains a small office, a small apartment,
which is rented to the cheese maker, and outside storage buildings located on
the premises. This facility has been inactive since August of 1996.
CCI additionally owns a facility at Zion Church Road at Madison Street,
Mayville, Wisconsin 53050, which is owned free of mortgages. This facility was
CCI's primary cheese manufacturing facility until 1993. It is located in an
agricultural dairy farm area. In December of 1992, CCI terminated cheese making
operations at this plant due to a declaration given by the Environmental
Protection Agency declaring it wetlands. Today this facility is used for storage
only.
Deli King owns a 28,000 square foot building on 3.88 acres in West
Warwick, Rhode Island. The facility includes administrative and sales offices,
warehouse, frozen and cold storage space, food production areas and equipment
service bays. The space is shared with JR's.
ITEM 3. LEGAL PROCEEDINGS
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 for 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 was
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.
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
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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.
The court granted a defense motion pursuant to the F.R.C.P.12(b)(6).
The Banks have appealed the decision. CCI also filed an appeal. The case is
currently pending before the 2nd Circuit Court of Appeals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares are traded on the over-the-counter market
through the NASDAQ Small Cap Market Trading System under the symbol STGA. The
following table sets forth the range of high and low bid quotations for the
common stock for the period indicated, as reported on NASDAQ, after having given
effect to a reverse stock split of 10:1 which became effective August 28, 1995,
as though the split had occurred prior to the periods reported below. The
quotations are inter-dealer prices in the over-the-counter market without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
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<TABLE>
<CAPTION>
1996 1995
COMMON SHARES COMMON SHARES
PERIOD HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
January 1 - March 31 4.5000 2.9375 10.6000 6.2500
April 1 - June 30 3.9688 2.2500 9.7000 4.0630
July 1 - September 30 2.3125 0.7188 5.6250 2.8750
October 1 - December 31 1.3125 0.6563 4.8750 3.0000
</TABLE>
As of January 31, 1997, there were approximately 225 holders of record
of the Company's common stock.
The Company has not paid a cash dividend on its common stock since its
inception. The Company expects that for the foreseeable future, any earnings
will be retained for use in the business or other corporate purposes, and it is
not expected that cash or share dividends will be paid.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Audited Consolidated
Financial Statements and related notes which are contained in Item 7 herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net sales for the year ended December 31, 1996 were $14,694,985
compared with $11,009,018 in 1995, an increase of 25.1%. This increase is a
result of the acquisition of Deli in 1996. The Company generated gross profit of
$4,198,010 or 28.4% in 1996, verses 3,048,690 or 27.7% in 1995. The increase in
gross profit margin was the a result of reduced sales of lower margin products,
specifically, bulk feta cheese and dry grated canisters of cheese. Selling,
general and administrative expenses were $3,348,061 and $2,074,303 in 1996 and
1995, respectively.
Management expects gross margins to continue to improve as the Company
continues to integrate its acquisitions and take advantage of the combined
economies of scale and to some degree the launching of new products. However,
there can be no assurance that any such improvements in the margins will be
achieved. To this end, the Company is consolidating the buying power and
resources of its subsidiaries. This consolidation is expected to continue
through fiscal 1997.
The Company reported no provision for income taxes for the years ended
December 31, 1996 as the Company's operating earnings were offset by losses and
Net Operating Loss carryforwards.
The earnings from operations for the year ended December 31, 1996 was
$113,842, verses $281,041 in 1995. Additionally, the Company had a loss from
discontinued operations of $973,469 in 1996 verses earnings of $167,690 in 1995.
Net losses were $859,627 in 1996 verses earnings of $448,731 in 1995. Losses per
common share were $0.14 in 1996 verses earnings of $0.22 in 1995 on weighted
average shares of 6,279,683 and 1,999,772 in 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of capital include, but are not limited to, the issuance of
public or private debt, bank borrowings and the issuance of equity securities.
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At December 31, 1996 the Company had a net worth of $10,332,728
compared with $5,780,501 at December 31, 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 $4,130,000 from the issuance of
convertible debentures during the year. The debentures were convertible into the
common shares of the Company. All of the debentures have been converted to
common shares as of December 31, 1996.
Management believes that the Company has sufficient working capital to
meet the needs of its current level of operations.
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ITEM 7. FINANCIAL STATEMENTS
Response submitted as a separate section of this report commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth all directors and executive officers of
the Company.
NAME OF INDIVIDUAL AGE CAPACITY IN WHICH SERVED
Scott G. Halperin 35 Chief Executive Officer,
Treasurer, and a Director
Barry Witz 56 Chairman of the Board
Bernard F. Lillis, Jr. 53 Chief Financial Officer
SCOTT G. HALPERIN, has been a director of the Company since January 28, 1994.
From August 1994 to present, Mr. Halperin has been Chief Executive Officer of
the Company. He has also been serving as Treasurer since May, 1994. From July
1993 to the present, Mr. Halperin has also served as President and Chief
Executive Officer of Agama, Inc., a firm that pursues mergers and
acquisitions. From April, 1987 to July, 1993, Mr. Halperin was General
Manager and Corporate Controller of Osicom Technologies, Inc.
BARRY WITZ, was appointed Chairman of the Board of Directors of the Company on
January 28, 1995. Mr. Witz is focused on turn-around situations, in which he
can bring his financial and legal expertise to assist in financial
restructurings, recapitalizations, mergers and acquisitions. Mr. Witz has
acted as an attorney for the United States Securities and Exchange
Commission, he has been an officer of the New York Stock Exchange, and was a
Senior Partner in the law firm of Arvey, Hodes, Costello, Berman, Wood,
Luckinger and Epstein. Since 1994, he has
13
<PAGE> 15
been Chairman of the Board, Director, CEO and President of Brite Lite
Industries, Inc., a privately held company.
BERNARD F. LILLIS, JR., Chief Financial Officer, has been Chief Financial
Officer since April of 1996. Prior to joining Saratoga he served as Chief
Financial Officer of one of the largest suppliers of construction aggregate
in the New York Metropolitan Area for fourteen years. Previously he was Vice
President Finance & Administration of a Princeton (NJ) management consulting
firm for seven years. Mr. Lillis also served as Deputy City Manager-Finance
of Rochester, New York, and began his career with Deloitte & Touche
(previously Haskins & Sells), Certified Public Accountants. He is a Certified
Public Accountant, a recipient of the New York State Society of CPA's Award
for Outstanding Scholastic Achievement in Accounting, and a member of the New
York, New Jersey and Pennsylvania Societies of CPA's, and the Institute of
Management Accountants.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation that the Company paid
during its last three fiscal years to its Chief Executive Officer, and Chairman
of CCI. No other officer had compensation in excess of $100,000.
<TABLE>
<CAPTION>
FISCAL OTHER ANNUAL
NAME AND TITLE YEAR SALARY COMPENSATION AWARDS SECURITIES UNDERLYING OPTIONS
- - - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Scott G. Halperin, 1996 $0 $ 6,000 N/A 543,445 shares common
CEO and Treasurer 1995 $133,846 $16,050 N/A 175,000 shares common
" " 1994 $81,154 $16,050 25,000 shares common 50,000 shares common
Angelo Dominioni 1996 $0 $ 6,000 N/A 79,956 shares common
Chairman of 1995 $115,960 $ 6,000 N/A 167,039 shares common
Subsidiary (CCI) 1994 $113,479 $ 6,000 N/A N/A
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 31, 1997, the number of
shares of Common Stock owned by (i) each person (including any "group," as that
term is defined in Section 13(d) (3) of the Securities Exchange Act of 1934, as
amended) known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company and (iii)
all directors and executive officers of the Company as a group.
14
<PAGE> 16
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) OUTSTANDING SHARES OWNED
<S> <C> <C>
Scott G. Halperin 740,220 7.0%
c/o Saratoga Brands Inc.
1835 Swarthmore Avenue
Lakewood, New Jersey 08701
Barry Witz 823,700 7.7%
505 South Beverly Drive, #1066
Beverly Hills, California 90212
All directors and executive officer 1,608,920 15.1%
as a group (3 persons)
</TABLE>
- - - - ---------------
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of stock
beneficially owned by them.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 13 is
submitted as a separate report commencing on Page F-1.
(a) (3)
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Note
- - - - ----------- ---------------------- ----
<S> <C> <C>
3. (a) - - Certificate of Incorporation 1
(b) - - By-Laws, as amended 1
4. (a) - - Form of Warrant Agency Agreement between Registrant Thomas 1
James Associates, Inc. and American Stock Transfer & Trust
Company with attached form of Warrant
(b) - - Form of Private Placement I Warrant 1
(c) - - Form of Private Placement II Warrant 1
(d) - - Form of Private Placement Warrant 1
10. (a) - - Lease agreement between Saratoga Brands and Hoffman 1
Investors Corp. dated August 18, 1992
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C> <C>
(b) - - Amended Employment Agreement between Registrant and Daniel 1
J. Feld dated January 26, 1994
(c) - - Option Agreement, as amended between Registrant and Daniel 1
J. Feld respecting 77,949 (as adjusted) Common Shares
(d) - - Incentive Option Plan dated June 12, 1991 1
(e) - - Form of Incentive Stock Option contract 1
(f) - - Restricted Stock Purchase Agreement 1
(g) - - Factoring Agreement dated October 23, 1992 between Saratoga 1
Brands Inc. and Platinum Funding Corp.
(h) - - Form of Owner Operator distributor Agreement 1
(i) - - Form of Agreement between the Company and holder of the 11% 1
subordinated Notes and Warrants to purchase common shares
(j) - - Asset Purchase Agreement, dated as of January 5, 1994, 1
between Saratoga Brands Inc. and Mellons Limited
(k) - - Voting and Limitation of Transfer Agreement between Daniel 2
J. Feld, Registrant and Mellons, Limited.
(l) - - Amended and Restated Employment Agreement between Registrant 2
and Daniel J. Feld
(m) - - Non-Compete Agreement between the Registrant and Agama, Inc. 2
(n) - - Non-Compete Agreement between Mellons Limited and the 2
Registrant.
(o) - - Lease Agreement between Cucina Classica Italiana, Inc. and 3
Arthur Sommers
(p) - - Lease Agreement between Cucina Classica Italiana, Inc. and 3
Angelo Dominioni.
(q) - - Lease Agreement between JR's Delis, Inc. and Chicken by 3
Chickadee Farms, Inc.
(r) - - Employment Agreement between the Registrant and Scott G. 3
Halperin, dated August 16, 1995
(s) - - Acquisition Agreement between the Registrant and Cucina 4
Classica Italiana, S.p.A.
(t) - - Acquisition Agreement between the Registrant and Goldberg, 5
Feinstein and Sons Company
(u) - - Amendment to the Acquisition Agreement between the 6
Registrant and Goldberg, Feinstein and Sons Company
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
(v) - - Credit Agreement between Cucina Classica Italiana, Inc. and 7
Banca Nazionale del Lavoro S.p.A. - New York Branch,
Istituto Bancario San Paolo di Torino - New York Branch,
Banco di Sicilia S.p.A. - New York Branch, Banca Populare di
Milano - New York Branch, and Banca Commerciale Italiana -
New York Branch
(w) - - Termination Agreement between the Registrant and Daniel J. 8
Feld
(x) - - Merger and Real Estate Purchase Agreement Between the 9
Company and Roy LaCroix for the purchase of Deli King, Inc.
</TABLE>
NOTES
1. Filed with the Company's registration statement on form S-1
(File No. 33-36937), and incorporated herein.
2. Filed with the Company's Form 8-K filed on February 14, 1995,
and incorporated herein.
3. Filed with the Company's 1994 Form 10-KSB, and incorporated
herein.
4. Filed with the Company's Form 8-K filed on November 4, 1994,
and incorporated herein.
5. Filed with the Company's Form 8-K filed on November 10, 1994,
and incorporated herein.
6. Filed with the Company's Form 8-K filed on March 28, 1995, and
incorporated herein.
7. Filed with the Company's Form 8-K filed on March 14, 1995, and
incorporated herein.
8. Filed with the Company's Form 8-K filed on August 18, 1994,
and incorporated herein.
9. Filed with the Company's Form 8-K dated Apil 29, 1996, and
incorporated herein.
(b) Reports on Form 8-K.
17
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SARATOGA BRANDS, INC.
By: /s/ Scott G. Halperin Date: April 30, 1997
--------------------------------
Scott G. Halperin
Chief Executive Officer
Treasurer
Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Scott G. Halperin Date: April 30, 1997
--------------------------------
Scott G. Halperin
Chief Executive Officer
Treasurer
Director
By: /s/ Barry Witz Date: April 30, 1997
--------------------------------
Barry Witz
Chairman of the Board
By: /s/ Bernard F. Lillis, Jr. Date: April 30, 1997
--------------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
18
<PAGE> 20
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
FINANCIAL STATEMENTS
INCLUDED IN PART II
Report of Independent Certified Public Accountants
Consolidated Balance Sheet at December 31, 1996
Consolidated Statements of Operations for the Years Ended December 31, 1996 and
1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and
1995
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements
INCLUDED IN PART IV
Schedule VIII Valuation and Qualifying Accounts
F-1
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
Saratoga Brands, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of SARATOGA BRANDS,
INC. AND SUBSIDIARIES as of December 31, 1996 and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the two years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SARATOGA BRANDS,
INC. AND SUBSIDIARIES as of December 31, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
F-2
<PAGE> 22
We have also audited Schedule VIII, for the year ended December 31, 1996
included in the 1996 annual report of SARATOGA BRANDS, INC. AND SUBSIDIARIES on
Form 10KSB. In our opinion, the schedule presents fairly the information
required to be set forth therein.
BROZA, BLOCK & RUBINO
Certified Public Accountants
April 30, 1997
F-3
<PAGE> 23
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets:
Cash $ 82,194
Accounts receivable net of allowance for doubtful
accounts of $70,810 (Note 2) 688,828
Investments 1,209,800
Inventories (Note 2) 473,345
Prepaid expenses and other current assets 348,221
-----------
Total current assets 2,802,388
Property and equipment - net (Note 3) 3,359,888
Notes Receivable - Related Party (Note 2) 167,863
Other assets (Note 2) 242,017
Intangible assets (Note 2) 1,151,363
Excess of cost over fair value of assets acquired (Note 2) 8,731,845
-----------
TOTAL ASSETS $16,455,364
===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part hereof.
F-4
<PAGE> 24
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
<S> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 2,184,134
Current portion of capital leases payable (Note 6) 72,861
Current portion of long-term debt (Note 5) 534,202
Current portion of long-term debt - 112,500
Related Party (Note 4)
------------
Total current liabilities 2,903,697
Long-term debt (Note 5) 2,859,882
Long-term notes payable - related party (Note 4) 262,500
Capital leases payable 96,557
------------
Total liabilities 6,122,636
------------
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 92,247
Par value $.01 - 25,000,000 shares authorized, 9,224,746 shares
issued and outstanding
Treasury Stock (107,213)
90,959 common shares stated at cost
Additional paid-in-capital 22,938,264
Accumulated deficit (12,988,468)
------------
Total Stockholders' Equity 10,332,728
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,455,364
============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part hereof.
F-5
<PAGE> 25
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996 1995
---------------------------
<S> <C> <C>
Net sales $14,694,985 $11,009,018
Cost of sales 10,496,975 7,960,328
---------------------------
Gross profit 4,198,010 3,048,690
Selling, general and administrative expenses (Note 12) 3,348,061 2,074,303
Amortization of excess of cost over fair value of
assets acquired 193,865 211,923
---------------------------
Income from operations before interest and income taxes 656,084 762,464
Interest expense - net 541,642 481,423
Income taxes (Note 7) 600 0
---------------------------
Net earnings from operations 113,842 281,041
Earnings (loss) from discontinued businesses (973,469) 167,690
---------------------------
Net Earnings (loss) $ (859,627) $ 448,731
===========================
EARNINGS (LOSS) PER COMMON SHARE
Earnings from continuing operations $ 0.02 $ 0.14
(Loss) earnings from discontinued business $ (0.16) $ 0.08
---------------------------
Total Earnings (loss) per share $ (0.14) $ 0.22
===========================
Weighted average shares used in computation 6,279,683 1,999,772
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part hereof.
F-6
<PAGE> 26
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Cash Flows from operating activities:
Net operating profit $ 113,842 $ 179,253
Adjustments to reconcile net operating profit to net cash
provided by (used in) operating activities:
Loss on sale of securities 0 0
Income (Loss) from discontinued businesses (973,469) 269,478
Changes in working capital-discontinued businesses 164,606 (1,206,269)
Depreciation and amortization 321,418 391,470
Provision for losses on accounts receivable 65,810 (44,000)
Provision for obsolete inventory 0 (3,807)
Gain on sale of unused equipment 95,977 (18,600)
Issuance of common stock for services 56,972 97,662
(Increase) decrease in accounts receivable 165,087 31,898
(Increase) decrease in inventories 451,043 (301,288)
(Increase) decrease in prepaid expenses 342,487 (2,909)
Increase in accounts payable and accrued expenses (529,435) (48,061)
----------------------------------
Net cash used in operating activities 274,338 (655,173)
----------------------------------
Cash flows from investing activities:
Decrease in loans payable (16,871) 0
(Increase) decrease in loans receivable 542,252 0
Purchase of fixed assets (2,553,432) (271,640)
Proceeds from sale of equipment 0 18,600
Increase (decrease) in other assets 107,751 0
Purchase of Investment (1,209,800) 0
Purchase of Intangible Assets (965,195) 0
----------------------------------
Net cash provided by (used in) investing activities (4,095,295) (253,040)
----------------------------------
Cash flows from financing activities:
Proceeds from notes payable 738,626 0
Repayment of notes payable (940,470) (1,342,317)
Proceeds from stock transactions 4,130,000 2,114,300
Capitalized financing expense 0 (132,000)
Decrease in leases receivable 0 222,393
Capital leasing transactions (28,683) (58,093)
----------------------------------
Net cash provided by financing activities 3,899,473 804,283
----------------------------------
Increase (decrease) in cash 78,516 (103,930)
Cash at beginning of year 3,678 107,608
----------------------------------
Cash at end of year $ 82,194 $ 3,678
==================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part hereof.
F-7
<PAGE> 27
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Supplemental disclosure of cash flows information:
Interest paid $ 348,709 $ 444,668
Income taxes paid $ 600 0
Summary of non-cash and financing activities:
Fair value of assets received in acquisition of businesses $1,629,082 0
Liabilities assumed in acquisition of businesses $ 581,678 0
Goodwill recognized in acquisition of businesses $ 452,596 0
Shares of common stock issued to acquire Deli King, Inc. 504,202 0
Shares of common stock issued in settlement of liabilities to consultants 634,756 121,400
</TABLE>
F-8
<PAGE> 28
SARATOGA BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
CLASS "A" PARTICIPATING
CONVERTIBLE PREFERRED
SHARES
---------------------------------------
<TABLE>
<CAPTION>
CLASS "A" PARTICIPATING
CONVERTIBLE PREFERRED
SHARES TREASURY SHARES,
---------------------- COMMON SHARES AT COST
AMOUNT ---------------- -----------------
NUMBER STATED AT NUMBER ADDITIONAL NUMBER
OF LIQUIDATION OF PAID-IN OF
SHARES VALUE SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT TOTAL
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 28.25 $587,499 1,418,736 $14,187 $15,203,347 (459) ($645) ($12,577,572) $3,226,816
======================================================================================================
Issuance of common shares as
compensation for
consulting services
and employee awards 457,807 4,578 922,196 926,774
Sale of common shares - Net 120,117 1,201 373,799 375,000
Issuance of Common shares
for conversion of
convertible loans and
exercise of warrants 566,865 5,669 797,511 803,180
Other -4.75 (20,796) 184 2 20,794 0
Net Income for the year
ended December 31, 1995 448,731 448,731
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 23.5 $566,703 2,563,709 $25,637 $17,317,647 (459) ($645) ($12,128,841) $5,780,501
======================================================================================================
Issuance of common shares
as compensation for
consulting services
and employee awards 2,677,880 26,779 30,194 56,973
Purchase of Treasury Shares (90,500) (106,568) (106,568)
Conversion of
Preferred Shares -7 (168,805) 392 3 168,801 (1)
Conversion of
Convertible Debentures 2,861,563 28,616 4,065,835 4,094,451
Issuance of Common shares
for conversion of
convertible loans and
exercise of warrants 617,000 6,170 610,830 617,000
Issued for acquisition
of DeliKing Inc. 504,202 5,042 744,958 750,000
Net Income for the year
ended December 31, 1996 (859,627) (859,627)
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 16.5 397,898 9,224,746 92,247 22,938,264 (90,959) (107,213) (12,988,468) 10,332,728
======================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part hereof.
F-9
<PAGE> 29
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO 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. 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 operates a Wisconsin
facility, which manufactures a variety of Italian and Greek cheeses including
the Bel Paese(R) brand which has had strong presence in the United states for
over 75 years.
On December 30, 1994, the company acquired JR's Delis, Inc. ("JR") a
Rhode Island based catering and distribution business. JR sells deli products to
more than 900 convenience stores and retail outlets in Rhode Island,
Massachusetts and Connecticut.
On April 29, 1996, (effective January 1, 1996), the Company acquired
Deli King, Inc. ("Deli"), a food processor, distributor and mobile catering
business serving Rhode Island, eastern Connecticut and southeastern
Massachusetts. Deli 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.
F-10
<PAGE> 30
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. The components
of inventories at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Raw Finished Total
Materials Goods
<S> <C> <C>
------------------------------------------------------------------
$64,004 $409,341 $473,345
==================================================================
</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 $144,468 and interest expense of
$3,121 in 1996. At December 31, 1996 Lensmire had current assets of $281, fixed
assets of $150,000, and $630 in other assets. Lensmire's liabilities at December
31, 1996 consisted of $18,391 in accounts payable and accrued expenses, and
$5,619 in capital leases payable. In 1995, Lensmire had net sales of $1,197,622,
which were eliminated in consolidation. Additionally, Lensmire had selling,
general and administrative expenses of $254,622 and interest expense of $6,894
in 1995.
Snacks had income from its discontinued operation in 1996 totaling
$125,133. Snacks only remaining assets consisted of $10,000 in fixed assets.
Snacks had income from its discontinued operations of $429,206 in 1995.
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
F-11
<PAGE> 31
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996. The intangible assets consist of $149,068 for trademark and
proprietary technology licenses, $80,000 for import license, and $922,295 for
Deli's catering routes which establish its rights to sell its products over an
established series of stops. Amortization expense was $42,900 for the year ended
December 31, 1996. 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 December
31, 1996 for each of the subsidiaries, consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
CCI $ 6,811,927
JR 1,247,924
Deli 671,994
---------------------
Total $ 8,731,845
=====================
</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 December 31, 1996. 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 $156,709 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.
F-12
<PAGE> 32
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER ASSETS
Other assets consists of:
<TABLE>
<CAPTION>
<S> <C>
Capitalized Financing Costs $ 94,815
Unamortized slotting fees 119,753
Deposits 27,449
--------------
Total $ 242,017
==============
</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 December 31,
1996:
<TABLE>
<CAPTION>
USEFUL LIFE
-----------
<S> <C> <C>
Land $611,007
Buildings 1,394,402 50 years
Furniture & Equipment 913,942 5 - 10 years
Vehicles 479,277 5 - 7 years
Leasehold Improvements 39,955 5 years
Lensmire and Snacks assets not in use 160,000 held for sale
----------
Total Cost 3,598,583
Less Accumulated Depreciation 238,695
----------
Net $3,359,888
==========
</TABLE>
The Property, Plant and Equipment includes $120,804 in fixed assets
which were acquired using capital leases.
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 $375,000, $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
F-13
<PAGE> 33
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company arranged for short term loans totaling $58,000, 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 $247,800 to be paid $70,800 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>
<CAPTION>
<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 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.
F-14
<PAGE> 34
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deli has various long term loans with varying terms mainly for the
purchase of equipment. These loans total $295,154 paid $163,402 in 1997, $86,574
in 1998, $35,655 in 1999 and $9,523 in 2000.
NOTE 6 -- CAPITAL LEASES
At the balance sheet date the Company had capital leases totaling
$169,418 of which $72,861 is the current portion. The leases provides for
payments of $72,861, $58,751, $34,092, and $3,714, 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 year ended December 31, 1996, 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
December 31, 1996, 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 December 31, 1996.
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 December 31, 1996 there were 16.5 preferred shares outstanding.
F-15
<PAGE> 35
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
The court granted a defense motion pursuant to the F.R.C.P.12(b)(6).
The Banks have appealed the decision. 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.
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.
F-16
<PAGE> 36
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The approximate minimum annual rental commitment is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
RENTAL
---------------
<S> <C>
1997 89,832
1998 84,832
1999 79,712
---------------
$254,376
===============
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 were
approximately $97,249 and $97,013, 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
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. 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.
NOTE 11 -- STOCK PLANS
In March 1990, the Company adopted an Incentive Stock Option Plan
("Incentive Plan") and reserved an aggregate of 1,425 Common Shares for purchase
under the Incentive Plan. The Incentive Plan was designed to serve as an
incentive for attracting and retaining qualified and competent employees by
providing them with the ability to acquire a proprietary interest in the Company
through ownership of shares of Common Stock. Pursuant to the Incentive Plan,
options granted will be incentive stock options intended to comply with the
requirements of section 422 (A) of the Internal Revenue Code of 1986, as
amended.
All matters relating to the Incentive Plan are administered by the
Company's Board of Directors, including selection of participants, allotment of
shares, determination of price and other conditions of purchase. However, the
exercise price of options granted and the exercise periods under the Incentive
Plan may not be less than 100% of fair market value of the shares of Common
Stock on the date of grant nor more than ten years, respectively (110% of fair
market value and five years, respectively, in the options granted to employees
who own more than 10% of the outstanding shares of Common Stock of the Company.
The aggregate fair market value (determined as of the date the option is
granted) of the shares of Common Stock that any person may purchase in any
calendar year pursuant to the exercise of Incentive stock Options may not exceed
$100,000. Options granted under the Incentive Plan are not transferable other
than by will or by the laws of the descent or distribution.
In September 1992, the Board of Directors established a Non-Qualified
Stock Option Plan for officers, directors, employees, consultants to the Company
and other persons expected to make a significant contribution to the Company.
25,000 shares were reserved for issuance under this plan. The Non-Qualified
Stock Option Plan was
F-17
<PAGE> 37
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
terminated on May 24, 1994 and all outstanding shares were
replaced with shares issued under The 1994 Stock Option Plan as described below.
The Board of Directors adopted the 1994 Stock Option Plan (the "Option
Plan") and the 1994 Restricted Stock Purchase Plan on February 16, 1994. Under
the Option Plan, the Company may grant options to purchase up to 140,000 shares
to employees or non-employee consultants of the Company and its subsidiaries.
The exercise price of options granted under the Option Plan may not be less than
100% (110% for holders of 10% or more of the Company's outstanding shares) of
the fair market value of the shares on the date of grant for incentive stock
options ("ISO's") as defined in the Internal Revenue Code, and 85% (100% for
"covered employees" as defined in the Internal Revenue Code) of the fair market
value of the shares on the date of grant for non-incentive stock options. In
addition, ISO's which become exercisable by any one optionee may not exceed a
fair market value of $100,000 in any calendar year. The Board of Directors
granted options to purchase an aggregate of 50,000 to two directors, one of whom
was an officer and an aggregate of 50,000 to two outside consultants. Such
options carry a ten year term and are not exercisable until nine years after the
date of grant, subject to acceleration based on the Company achieving certain
levels of gross revenues or market capitalization. The exercise price of the
options is $25.00 per share. The Company has also granted options to purchase an
aggregate of 14,150 common shares to four former directors, two of whom had also
been officers, at an exercise price of $25.00 per share, which was later reduced
to $11.875 pursuant to the Termination Agreement of Daniel J. Feld (Exhibit
10(w). These options will replace a like number of options issued to these
individuals under the Non-Qualified Stock Option Plan, which was never submitted
for shareholder approval. Consequently, the Non-Qualified Stock Option Plan and
all options granted under it terminated with shareholder approval of the 1994
plans, which was obtained on May 24, 1994.
Under the terms of the 1994 Restricted Stock Purchase Plan, the Company
may award up to 45,000 common shares which will be subject to such restrictions
as the committee appointed by the Board of Directors may deem advisable.
Restricted shares may only be allocated to key executive and sales employees or
outside consultants of the Company. The committee has awarded an aggregate of
30,000 restricted shares to two former directors of the Company, one of whom was
also an officer, and 15,000 restricted shares to an outside consultant at a
purchase price $.10 per share. The restrictions places upon these shares were
removed upon the effectiveness of Daniel J. Feld's Termination Agreement.
The Company has registered all of the aforementioned shares issued
under the 1994 plans, with the Securities and Exchange Commission.
In addition, the Board of Directors granted options to purchase 50,000
shares of the Company's common stock at a price of $3.125 per share to one of
its directors.
In March of 1994, the Board of Director of the Company approved the
1994 Stock Award Plan. This plan was intended to attract, retain, motivate and
reward officers, directors, employees of and consultants to the Company, and
subsidiaries of the Company, who are and will be contributing to the success of
the business of the Company; to competitive incentive compensation
opportunities; and to further opportunities for stock ownership by such
employees and consultants in to increase their proprietary interest in the
Company. 135,000 shares of the Company's common stock were registered with the
Securities and Exchange Commission under this plan on Form S-8.
113,559 shares were issued under this plan in the 1994 fiscal year.
Various options were granted to employees and consultants to the
company during 1996. These options as well as options remaining outstanding from
1995 are summarized as follows:
<TABLE>
<CAPTION>
BALANCE AT OPTIONS OPTIONS OPTIONS BALANCE AT
PLAN DECEMBER 31, 1995 ISSUED CANCELLED EXERCISED DECEMBER 31, 1996
- - - - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The 1994 Stock Option Plan 1,177,122 2,026,810 (331,012) (2,677,770) 195,150
</TABLE>
F-18
<PAGE> 38
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- ADVERTISING COSTS
The Company generally expenses production costs of print, radio and
television advertisements as of the first date the advertisements take place.
Advertising expenses included in selling, administrative and general expenses
were $141,454 in 1996 and $80,255 in 1995. As of December 31, 1996 advertising
costs of approximately $21,812 were recorded primarily in prepaid expenses and
other assets in the accompanying balance sheet.
F-19
<PAGE> 39
SARATOGA BRANDS INC. AND SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BEGINNING COSTS AND CHARGED TO DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES COSTS OR EXPENSE (DESCRIBE) END OF PERIOD
- - - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $92,581 $ 21 $ 0 ($21,792) 1 $70,810
</TABLE>
(1) Represents an amount written off during the period against fully
reserved accounts.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 82,194
<SECURITIES> 0
<RECEIVABLES> 759,638
<ALLOWANCES> 70,810
<INVENTORY> 473,345
<CURRENT-ASSETS> 2,802,388
<PP&E> 3,598,583
<DEPRECIATION> 238,695
<TOTAL-ASSETS> 16,455,364
<CURRENT-LIABILITIES> 2,903,697
<BONDS> 0
0
397,898
<COMMON> 92,247
<OTHER-SE> 9,842,583
<TOTAL-LIABILITY-AND-EQUITY> 16,455,364
<SALES> 14,694,985
<TOTAL-REVENUES> 14,694,985
<CGS> 10,496,975
<TOTAL-COSTS> 13,845,036
<OTHER-EXPENSES> 194,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 541,642
<INCOME-PRETAX> 114,442
<INCOME-TAX> 600
<INCOME-CONTINUING> 113,842
<DISCONTINUED> (973,469)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (859,627)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
