U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934
Commission file number 0-19721
SARATOGA BRANDS INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3413467
(State or other jurisdiction of (I.R.S. Employer
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 |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common equity as
of July 31, 1998
Title of Each Class Number of Shares Outstanding
Common Stock, $.001 par value per share 4,855,706
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet at June 30, 1998 3-4
Consolidated Unaudited Statements of Operations
for the Three and Six Months Ended June 30,
1998 and 1997 5
Consolidated Unaudited Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997 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
2
<PAGE>
PART 1 - Financial Information
ITEM 1. Financial Statements
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Balance Sheet
June 30, 1998
ASSETS
Current Assets:
Cash $ 256,023
Accounts receivable net of allowance for
doubtful accounts of $77,875 1,135,839
Current portion of mortgage note receivable 3,790
Investments 74,330
Inventories 512,170
Prepaid expenses and other current assets 140,570
----------
Total current assets 2,122,722
Long term mortgage note receivable 42,672
Property and equipment - net 3,025,744
Other assets 128,492
Intangible assets 1,204,168
Excess of cost over fair value of assets acquired 262,500
----------
TOTAL ASSETS $6,786,298
==========
See notes to consolidated unaudited financial statements.
3
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Balance Sheet (continued)
June 30, 1998
Current Liabilities:
Accounts payable and accrued expenses $ 1,594,381
Loans Payable 360,050
Current portion of capital leases payable 62,767
Current portion of long-term debt 371,962
-----------
Total current liabilities 2,389,160
Long-term debt 195,985
Capital leases payable 23,223
-----------
Total liabilities 2,608,368
-----------
Commitments
STOCKHOLDERS' EQUITY
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 4,856
Par value $.001 - 25,000,000 shares authorized,
4,855,706 shares issued and outstanding
Treasury Stock (645)
153 common shares stated at cost
Additional paid-in-capital 527,991
Retained Earnings Since April 1, 1997 3,247,830
-----------
Total Stockholders' Equity 4,177,930
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,786,298
===========
See notes to consolidated unaudited financial statements.
4
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 3,928,469 $ 4,035,911 $ 6,844,984 $ 6,860,586
Cost of sales 2,658,519 2,843,325 4,810,234 4,915,695
-----------------------------------------------------------------
Gross profit 1,269,950 1,192,586 2,034,750 1,944,891
Selling, general and administrative expenses 861,686 801,388 1,445,717 1,363,855
-----------------------------------------------------------------
Income from operations before interest 408,264 391,198 589,033 581,036
Interest expense - net 72,562 143,443 120,480 277,775
-----------------------------------------------------------------
Net Earnings $ 335,702 $ 247,755 $ 468,553 $ 303,261
=================================================================
EARNINGS (LOSS) PER COMMON SHARE
SHARE-BASIC & DILUTED
Net Earnings $ 0.07 $ 0.06 $ 0.10 $ 0.08
=================================================================
Basic weighted average shares
used in computation 4,855,706 4,203,017 4,828,300 3,865,176
Diluted weighted average shares
used in computation 4,956,040 4,203,017 4,928,634 3,865,176
</TABLE>
See notes to consolidated unaudited financial statements.
5
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Cash Flows from operating activities:
Net income $468,553 $303,261
Adjustments to reconcile net operating profit to net cash
provided by (used in) operating activities:
Depreciation and amortization 185,140 291,810
Provision for losses on accounts receivable 115 0
(Increase) in accounts receivable (201,370) (657,594)
(Increase) decrease in inventories (67,936) (20,850)
(Increase) decrease in prepaid expenses& other assets (70,946) 18,725
(Decrease) in accounts payable and accrued expenses (102,510) (72,226)
------------------------
Net cash provided by (used in) operating activities 211,046 (136,874)
------------------------
Cash flows from investing activities:
Decrease in mortgage note receivable 1,801 0
Purchase of fixed assets (54,956) (36,244)
Decrease in other assets 33,293 0
Redemption of investment 80,285 0
Purchase of Intangible Assets (routes) (16,989) 0
------------------------
Net cash provided by (used in) investing activities 43,434 (36,244)
------------------------
Cash flows from financing activities:
Capital stock issued in payment of debt 0 420,000
Proceeds from notes payable 300,000 0
Repayment of notes payable (304,500) (203,521)
Repayment of notes payable-related party (119,906) 0
Repayment of long term debt (63,022) 0
Purchase of treasury stock 0 (52,663)
Repayment of capital leases (39,974) (29,234)
------------------------
Net cash provided by financing activities (227,402) 134,582
------------------------
Increase (decrease) in cash 27,078 (38,536)
Cash at beginning of period 228,945 82,194
------------------------
Cash at end of period $256,023 $43,658
========================
Supplemental disclosure of cash flows information:
Interest paid $119,778 $160,550
</TABLE>
See notes to consolidated unaudited financial statements.
6
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 --ORGANIZATION AND BUSINESSES
Saratoga Brands Inc., ("the Company") a New York corporation, was
incorporated on June 12, 1987. From approximately 1987 through September 30,
1993, the Company manufactured and distributed potato and vegetable chips and
distributed other snack food products. The Company incurred substantial losses
from inception and, in an effort to stem such losses, the Company decided on
September 30, 1994 to discontinue its snack food business.
On January 28, 1994, the Company acquired Saratoga Technology Inc.
("Tech"), a Company which was engaged in designing, marketing and selling a
variety of personal computers for the consumer and service oriented commercial
markets. A significant portion of Tech's revenues had been derived from the sale
of microcomputers through direct mail channels. During the year, Tech had been
incurred difficulties with its major contract supplier, and as a result has been
unable to secure continuing direct mail contracts. The business was damaged
severely and as a result Tech filed an action in the United States Federal Court
against its former supplier. (See exhibit 99) Due to the damages suffered
leading to the aforementioned lawsuit, the Company decided to discontinue the
operations of Tech effective December 30, 1994.
On August 26, 1994, the Company entered the specialty cheese industry,
through the acquisition of Cucina Classica Italiana, Inc. ("CCI"), a company
located in Lakewood, New Jersey engaged in the production, importation and
distribution of premium cheeses and Italian foods. CCI 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 sold deli products to more
than 600 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 filed a registration
statement filed with the Securities and Exchange Commission on March 14, 1997,
and upon approval the Company intended to distribute 100% of the stock in Mobile
to the current Company shareholders. In July, 1997 the Board of Directors of
Saratoga reconsidered the spin off and determined that it was not in the best
interest of the Company and its Shareholders. Accordingly, the Company filed
Form-15 on August 18, 1997 withdrawing the registration of Mobile Caterers, Inc.
ACQUISITION OF DELI KING, INC. BY SARATOGA BRANDS, INC.
On April 29, 1996 (the "closing date") Saratoga acquired Deli King, Inc.
for a purchase price of $1,500,000. The acquisition was accounted for by using
the purchase method of accounting. Under the terms of the Merger and Real Estate
Purchase Agreement dated February 14, 1996, the acquisition was effective
January 1, 1996.
7
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
On the closing date, Saratoga delivered 504,202 shares of common stock to
an escrow agent for the benefit of Roy A. LaCroix, Sr. (LaCroix) to be delivered
to LaCroix in eight equal quarterly installments commencing on the one year
anniversary of the closing date. The market price of the stock at the closing
date was $2.97 per share, while the market price on December 31, 1996 was $0.72
per share. The Saratoga shares represented the entire payment of the purchase
price and there were no contingent payments, options, or other commitments
related to this transaction.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its 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, using the first-in, first-out
method, or market.
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.
PER SHARE DATA
The financial statements reflect share amounts after having given effect
to a reverse stock split of 1:3, which became effective November 24, 1997.
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 undiscounted future cash flows of the business unit. In the event that
assets are found to be carried at amounts which are in excess of estimated
undiscounted 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.
8
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
The intangible assets consist of $93,167 for trademark and proprietary
technology licenses, $50,000 for import license, and $1,061,001 for Deli's
catering routes which establish its rights to sell its products over an
established series of stops. Amortization expense on intangibles was $34,417 for
the six months ended June 30, 1998, while accumulated amortization was $562,006.
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 10 years. Goodwill at June 30, 1998, attributable entirely
to CCI was $262,500. There was no impairment to goodwill or intangible assets at
June 30, 1998.
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 who 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 30% 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 through 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.
MORTGAGE NOTES RECEIVABLE
The Company has a mortgage note receivable related to the sale of CCI's
former Mayville, Wisconsin cheese plant in the amount of $46,462, of which
$3,790 is the current portion thereof. The mortgage bears interest at 7%, and
has equal monthly payments of $581 through April 5, 2000, and a balloon payment
of $39,538 on May 5, 2000.
PROVISION FOR DOUBTFUL ACCOUNTS
The Company periodically reviews and adjusts its provision for bad debts
to reflect its experience.
INVESTMENTS
At June 31, 1998 the Company had 31,714 shares of Osicom Technologies. The
market value of these shares, was $2.63 per share at June 30, 1998, resulting in
a gain on the investment, which is not reflected in the financial statements,
for the six months ended June 30, 1998. The Company anticipates liquidating the
balance of the shares in an orderly fashion within the next 90 days.
9
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable and Accrued Expenses consist of:
Trade Account Payable to E. Galbani $ 442,008
Other Trade Accounts Payables 804,033
Other Accrued Expenses 348,340
-------------
TOTAL $ 1,594,381
=============
No accrued expense exceeds 5% of total current liabilities.
LOANS PAYABLE
At June 30, 1997 the Company had a $300,000 loan payable to a Bank. This
loan, including interest, is due August 15, 1998. The loan is unsecured and
bears interest at the prime rate plus 1 percent, which was 9.5% at June 30,
1998.
Additionally, the Company had miscellaneous loans of $60,050, of which
$20,500 does not bear interest and is payable on demand. These loans are
unsecured. The imputed interest on the above loans has not been reflected in the
financial statements due its immateriality.
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 --INVENTORIES
The components of inventories at June 30, 1998 were as follows:
Raw Finished Repair
Materials Goods Parts Total
- -------------- ------------- ----------------- -----------------------
$88,375 $372,106 $51,689 $512,170
============== ============= ================= =======================
10
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT - NET
Property and equipment - net consisted of the following at June 30, 1998:
Useful Life
-----------
Land $ 611,007
Buildings 1,394,402 50 years
Furniture & Equipment 1,040,797 5 - 10 years
Vehicles 493,419 5 - 7 years
Leasehold Improvements 40,551 5 years
Equipment held for sale 10,000
--------------
Total Cost 3,590,176
Less Accumulated Depreciation 564,432
==============
Net $ 3,025,744
==============
Depreciation and amortization on Property, Plant and Equipment is computed
on a straight-line basis. The Property, Plant and Equipment includes $170,507 in
fixed assets which were acquired using capital leases.
NOTE 5 -- NOTES PAYABLE - RELATED PARTIES
The Company has a note payable related to the purchase of Deli in the
amount of $206,250, $112,500 being the current portion thereof, which is being
paid over four years and bears interest at the prime rate plus one percent.
The Company has an unsecured note payable in the amount of $127,312, all
of which is current. The balance of this note is being paid in 12 equal monthly
installments and does not bear interest. The imputed interest on the note has
not been reflected in the financial statements due its immateriality.
In addition, the Company has an unsecured note payable to its Chairman in
the amount of $25,000, which is payable on demand and does not currently bear
interest. The imputed interest on the note has not been reflected in the
financial statements due its immateriality.
NOTE 6 -- LONG-TERM DEBT
CCI has a term loan with a bank in the amount of $141,600 to be paid
$35,400 in 1998, $70,800 in 1999, and $35,400 in 2000. This loan bears interest
at the prime rate plus one percent. CCI has pledged all of accounts receivable,
inventories, real estate and equipment as collateral for this term loan.
Deli has various long-term loans with varrying terms mainly for the
purchase of equipment. These loans total $67,785to be paid $30,681 in 1998 and
$37,104 in 1999. These loans are secured by the underlying equipment.
11
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 -- CAPITAL LEASES
The following is a schedule of future minimum lease payments under all
capitalized leases together with the present value of the net minimum lease
payments as of June 30, 1998:
Amount
----------------------------------------------
1998 $ 35,786
1999 63,073
2000 4,118
----------------------------------------------
Total minimum lease payments 102,977
Less: amount representing interest (16,987)
----------------------------------------------
Present value of net minimum lease
payments including current
maturities of $62,767 $ 85,990
===========
NOTE 8 -- INCOME TAXES:
For the three months ended June 30, 1998, 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 $132,000 at June 30,
1998, which resulted in a Deferred Tax Asset of approximately $44,000. After
applying the valuation allowance the Deferred Tax Asset was recorded at $-0- on
the balance sheet at June 30, 1998.
NOTE 9 -- STOCKHOLDERS' EQUITY
The Preferred Stockholders have no voting rights but are entitled to a
priority of payment in the amount of the original subscription price paid for
each Preferred Share ($16,667 to $25,000), plus a proportionate amount, as
defined, on any remaining excess proceeds if there is, among other matters, a
sale of all or substantially all of the shares or assets of the Company. The
Preferred Stockholders are not entitled to specific dividends; however, should
the Company declare any dividends on the common shares, the Preferred
Stockholders will be entitled to receive dividends as if they had converted to
common shares immediately prior to the dividend declaration. The holders of the
Preferred Shares may convert, at their option, at any time, all or part of their
shares into common shares. Holders of 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 19 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.
12
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
The Company has reserved, in aggregate, 509 common shares for possible future
issuance to Preferred Stockholders in the event of conversion.
At June 30, 1998 their were 16.5 preferred shares outstanding all of which
are convertible into common shares at the holders option.
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 CCI
lease has a five-year term expiring on August 31 1999, with no rent escalation
and an option to renew for an additional five years at an annual rent of
$91,975.
Mobile leases its 2,000 square foot USDA facility at 269 Greenville
Avenue, Johnston, Rhode Island. This facility is leased from Giovanni and Lina
Conti at a basic rent of $950 per month or $11,400 annually. The lease has a 2
year term expiring on September 1, 1999, renewable for an additional 2 years at
a basic rent of $975 or $11,700 annually.
The approximate minimum annual rental commitment is as follows:
June 30, 1998
---------------------------
Rental
Lakewood, NJ Johnston, RI
---------------------------
1998 $39,856 $5,700
1999 53,141 7,600
---------------------------
$92,997 $13,300
===========================
Rent expense for the six months ended June 30, 1998 and 1997 were
approximately $45,556 and $39,856, 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
13
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
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.
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. CCI is in full compliance with all of the above stated covenants.
Investment Banking Agreement
On October 28, 1997 the Company entered into an investment banking
agreement between the Company and M.H. Meyerson & Co., Inc. ("Meyerson") Under
the terms of the agreement Meyerson is to provide investment banking services to
the Company on a non-exclusive basis for a five year term. In connection with
the agreement the Company granted Meyerson warrants to purchase 83,334 shares of
the Company's common stock at a price of $1.50 per share, and 83,333 shares at a
price of $1.80 per share, a total of 166,667 shares of common stock of the
Company. The warrants vest one third at each purchase price on October 28 1997,
one-third at each purchase on April 28 1998, and one-third at each purchase
price on October 28, 1998. The warrants are cancelled upon termination of the
agreement; however, once vested the warrants shall remain in force until either
exercised or upon expiration thereof on October 28, 2002. Additionally, the
Company paid a one-time fee in the amount of $25,000, which is being amortized
over the life of the agreement.
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(ad)
incorporated by reference to the Company's December 31, 1997 Form 10-KSB for all
terms and conditions of the Agreement.
14
<PAGE>
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Unaudited
Financial Statements and related notes which are contained herein.
Results of Operations for the Three Months Ended June 30, 1998 and 1997
Net sales for the three months ended June 30, 1998 were $3,928,469
compared with $4,035,911 for the same period in 1997, a decrease of 3%. This
reduction is primarily a result of the elimination of unprofitable product
lines. The Company generated gross profit of $1,269,950 or 32.3% in the first
quarter of 1998 verses $1,192,586 or 29.5% in the first quarter of 1997. This is
the result of management's continued elimination of unprofitable product lines.
Selling, general and administrative expenses were $861,686 and $801,388 in
the first quarter of 1998 and 1997, respectively. This represents an increase of
$60,298, which is in line with an increase in administrative costs. Management
expects gross margins to improve as the Company begins to integrate 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.
The Company reported no provision for income taxes for the quarter ended
June 30, 1998 as the Company's operating earnings were offset by Net Operating
Loss carryforwards.
Net earnings for the three months ended June 30, 1998 was $335,702, verses
$247,755 in the same period in 1997. Earnings per common share were $0.07 in the
first quarter of 1998 versus $0.06 in the prior years same period on diluted
weighted average shares of 4,956,040 and 4,203,017, respectively.
Results of Operations for the Six Months Ended June 30, 1998 and 1997
Net sales for the six months ended June 30, 1998 were $6,844,984 compared
with $6,860,586 for the same period in 1997, a minimal decrease resulting from
the continued elimination of unprofitable product lines. The Company generated
gross profit of $2,034,750 or 29.7% in the first half of 1998, verses $1,944,891
or 28.4% in the first half of 1997. This is again the result of the elimination
of unprofitable product lines.
Selling, general and administrative expenses were $1,445,717 and
$1,363,855 in the first half of 1998 and 1997, respectively. This represents an
increase of $81,862, which is in line with an increase administrative costs.
Management expects gross margins to improve as the Company
15
<PAGE>
begins to integrate 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.
The Company reported no provision for income taxes for the six months
ended June 30, 1998 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
Net earnings for the six months ended June 30, 1998 was $468,553, verses
$303,261 in the same period in 1997. Earnings per common share were $0.10 in the
first half of 1998 versus $0.08 in the prior years same period on diluted
weighted average shares of 4,928,634 and 3,865,176, respectively.
Liquidity and Capital Resources
The Company's sources of capital include, but are not limited to, the
issuance of public or private debt, bank borrowings and the issuance of equity
securities.
At June 30, 1998 the Company had a net worth of $4,177,930 compared with
$2,179,439 (adjusted to reflect the quasi-reorganization effected April 1, 1997)
at June 30, 1997. This increase is the result of operating earnings and the
settlement of certain bank debt in December of 1997
The Company has a limited requirement for capital expenditures in the
immediate future. CCI's factoring arrangement has adequate availability to
provide working capital to support sales growth in that division. Mobile owns
real estate with a market value of approximately $1,000,000 against which there
are no loans or liens. This asset provides adequate collateral to support
borrowing for working capital needs in that subsidiary.
Additionally, the Company has a loan outstanding with a bank, with a
current balance of $300,000 at the prime rate plus 1 percent. This loan is to be
repaid during the next six months.
Management believes that the Company has sufficient working capital to
meet the needs of its current level of operations.
Seasonality
The Company's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter and six months ended June
30, 1998 are not necessarily indicative of results to be expected for the entire
year.
16
<PAGE>
Anticipated Future Growth
Management believes that the future growth of the Company will be the
result of four efforts; (1) acquisition of other companies in the food and food
related industries, (2) increasing sales to existing customers by offering new
products and product lines, (3) obtaining new customers in the existing markets
and developing new markets, and (4) controlling and containing production,
operating and administrative costs.
Year 2000 Readiness
Management has reviewed the possible effects of the Year 2000 problem in
so far as it relates to the Company; and has determined that the Company is
currently utilizing Year 2000 compatible equipment and software. The Year 2000
problem will therefore not have a material effect on the operations of the
Company.
Management believes that the Company is adequately prepared for the year
2000, however, as a contingency management periodically reviews any factors
which might change the Company's state of readiness, for which the risks are
minimal. Management does not believe that there will be any material costs
associated with Year 2000 issues.
Forward Looking Statements
The matters discussed in this Item 2 may contain forward-looking
statements that involve risk and uncertainties. The forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially due to a
variety of factors, including without limitation the presence of competitors
with broader product lines and greater financial resources; intellectual
property rights and litigation, needs of liquidity; and the other risks detailed
from time to time in the company's reports filed with the Securities and
Exchange Commission.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(b) Reports filed on Form 8K
None
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf the
undersigned thereunto duly authorized
SARATOGA BRANDS INC.
---------------------------------
(Registrant)
Date: August 13, 1998 By: /s/ Scott G. Halperin
---------------------------
Scott G. Halperin
Chairman
Chief Executive Officer
Date: August 13, 1998 By: /s/ Bernard F. Lillis, Jr.
---------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
Treasurer
19
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 256,023
<SECURITIES> 74,330
<RECEIVABLES> 1,213,714
<ALLOWANCES> (77,875)
<INVENTORY> 512,170
<CURRENT-ASSETS> 2,122,722
<PP&E> 3,590,176
<DEPRECIATION> (564,432)
<TOTAL-ASSETS> 6,786,298
<CURRENT-LIABILITIES> 2,389,160
<BONDS> 0
0
397,898
<COMMON> 4,856
<OTHER-SE> 3,775,176
<TOTAL-LIABILITY-AND-EQUITY> 6,786,298
<SALES> 6,844,984
<TOTAL-REVENUES> 6,844,984
<CGS> 4,810,234
<TOTAL-COSTS> 6,255,951
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<INTEREST-EXPENSE> 120,480
<INCOME-PRETAX> 468,553
<INCOME-TAX> 0
<INCOME-CONTINUING> 468,553
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