U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 identification no.)
incorporation or organization)
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 September 30, 1998
Title of Each Class Number of Shares Outstanding
Common Stock, $.001 par value per share 4,851,206
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet at
September 30, 1998 3-4
Consolidated Unaudited Statements of Income
for the Three and Nine Months Ended
September 30, 1998 and 1997 5
Consolidated Unaudited Statements of
Cash Flows for the Nine Months Ended
September 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 15-18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
2
<PAGE>
PART 1 - Financial Information
ITEM 1. Financial Statements
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Balance Sheet
September 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $ 325,650
Accounts receivable net of allowance for doubtful accounts
of $77,875 1,356,607
Current portion of mortgage note receivable 3,858
Investments 74,330
Inventories 511,741
Prepaid expenses and other current assets 228,510
----------
Total current assets 2,500,696
Long term mortgage note receivable 41,688
Property and equipment - net 3,092,385
Other assets 139,958
Intangible assets 1,169,751
Excess of cost over fair value of assets acquired 255,000
----------
TOTAL ASSETS $7,199,478
==========
</TABLE>
See notes to consolidated unaudited financial statements.
3
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Balance Sheet (continued)
September 30, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
<S> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 1,237,375
Loans Payable 220,500
Current portion of capital leases payable 30,658
Current portion of long-term debt 316,284
-----------
Total current liabilities 1,804,817
Long-term debt 831,225
Capital leases payable 7,735
-----------
Total liabilities 2,643,777
-----------
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 4,851
Par value $.001 - 25,000,000 shares authorized,
4,851,206 shares issued and outstanding
Treasury Stock (645)
153 common shares stated at cost
Additional paid-in-capital 522,916
Retained Earnings Since April 1, 1997 3,630,681
-----------
Total Stockholders' Equity 4,555,701
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,199,478
===========
</TABLE>
See notes to consolidated unaudited financial statements.
4
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Statements of Income
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 3,361,014 $ 3,514,903 $10,205,998 $10,375,489
Cost of sales 2,361,293 2,724,284 7,171,527 7,639,979
-----------------------------------------------------
Gross profit 999,721 790,619 3,034,471 2,735,510
Selling, general and
administrative expenses 568,436 475,261 2,014,153 1,839,116
-----------------------------------------------------
Income from operations
before interest 431,285 315,358 1,020,318 896,394
Interest expense 48,434 18,706 168,914 296,481
-----------------------------------------------------
Net Earnings $ 382,851 $ 296,652 $ 851,404 $ 599,913
=====================================================
EARNINGS PER COMMON SHARE
SHARE-BASIC & DILUTED
Net Earnings $ 0.08 $ 0.07 $ 0.18 $ 0.15
=====================================================
Basic weighted
average shares 4,854,336 4,023,931 4,837,074 3,917,354
Diluted weighted
average shares 4,954,670 4,023,931 4,860,886 3,917,354
</TABLE>
See notes to consolidated unaudited financial statements.
5
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
Cash Flows from operating activities:
Net income $ 851,404 $ 599,913
Adjustments to reconcile net operating profit
to net cash provided by (used in)
operating activities:
Income on sale of fixed assets 0 (55,000)
Depreciation and amortization 283,751 431,045
Provision for losses on accounts receivable (125) 0
(Increase) in accounts receivable (422,128) (952,556)
(increase) decrease in investment 0 1,209,800
(Increase) decrease in inventories (67,507) (9,711)
(Increase) decrease in prepaid expenses &
other assets (158,886) 177,067
(Decrease) in accounts payable and
accrued expenses (459,516) (446,843)
---------------------------
Net cash provided by (used in)
operating activities 26,993 953,715
---------------------------
Cash flows from investing activities:
Decrease in mortgage note receivable 2,717 0
Purchase of fixed assets (195,050) (97,097)
Decrease in other assets 21,827 0
Sale of idle equipment 0 55,000
Redemption of investment 80,285 0
---------------------------
Net cash provided by (used in) investing
activities (90,221) (42,097)
---------------------------
Cash flows from financing activities:
Capital stock issued in payment of debt 0 420,000
Proceeds from long term debt 750,000 0
Proceeds from notes payable 0 362,000
Repayment of notes payable (144,050) (952,351)
Repayment of long term debt (353,366) 0
Purchase and retirement of treasury stock (5,080) (781,163)
Repayment of capital leases (87,571) (40,186)
Capital leasing transactions 0 16,000
---------------------------
Net cash provided by financing activities 159,933 (975,700)
---------------------------
Increase (decrease) in cash 96,705 (64,082)
Cash at beginning of period 228,945 82,194
---------------------------
Cash at end of period $ 325,650 $ 18,112
===========================
Supplemental disclosure of cash flows information:
Interest paid $ 161,372 $ 214,615
</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>
The intangible assets consist of $83,851 for trademark and proprietary
technology licenses, $45,000 for import license, and $1,040,900 for Deli's
catering routes which establish its rights to sell its products over an
established series of stops. Amortization expense on intangibles was $103,250
for the nine months ended September 30, 1998, while accumulated amortization was
$596,424. 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 September 30, 1998, attributable
entirely to CCI was $255,000. There was no impairment to goodwill or intangible
assets at September 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 $45,546, of which
$3,858 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 September 30, 1998 the Company had an investment in marketable
securities having a market value of $74,330 at September 30, 1998. The Company
anticipates liquidating the balance of the investment in an orderly fashion
within the next 90 days.
9
<PAGE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable and Accrued Expenses consist of:
Trade Account Payable to E. Galbani $ 322,528
Other Trade Accounts Payables 826,450
Other Accrued Expenses 88,397
-----------
TOTAL $ 1,237,375
===========
No accrued expense exceeds 5% of total current liabilities.
LOANS PAYABLE
At September 30, 1998 the Company had a $200,000 loan payable to a
Bank. This loan is payable in monthly installments of $50,000 plus interest on
the first day of each month through January 1, 1999. The loan is unsecured and
bears interest at the prime rate plus 1 percent, which was 9.5% at September 30,
1998.
Additionally, the Company has a miscellaneous loan of $20,500, which
does not bear interest and is payable on demand. The loan is unsecured. The
imputed interest on the above loan 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 September 30, 1998 were as follows:
Raw Finished Repair
Materials Goods Parts Total
------------------------------------------------
$61,031 $399,021 $51,689 $511,741
================================================
10
<PAGE>
NOTE 4 -- Property and equipment - net
Property and equipment - net consisted of the following at September 30, 1998:
Useful Life
-----------
Land $ 611,007
Buildings 1,394,402 50 years
Furniture & Equipment 1,174,111 5 - 10 years
Vehicles 492,918 5 - 7 years
Leasehold Improvements 45,401 5 years
------------
Total Cost 3,717,839
Less Accumulated Depreciation 625,454
============
Net $3,092,385
============
Depreciation and amortization on Property, Plant and Equipment is
computed on a straight-line basis. The Property, Plant and Equipment includes
$298,170 in fixed assets which were acquired using capital leases.
NOTE 5 - LONG-TERM DEBT
The Company has a note payable related to the purchase of Deli in the
amount of $178,125, $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 $95,484, all
of which is current. The balance of this note is being paid in 9 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.
CCI has a term loan with a bank in the amount of $123,900 to be paid
$17,700 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 a term loan with a bank in the amount of $750,000 to be paid
$9,375 in 1998, $37,500 in 1999, $37,500 in 2000, $37,500 in 2001, $37,500 in
2002 and $590,625 in 2003. The loan bears interest at 8% per annum. The loan is
secured by a first mortgage on the Deli King real estate in West Warwick, Rhode
Island.
11
<PAGE>
NOTE 6 -- 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 September 30, 1998:
Amount
--------------------------------------------
1998 $ 36,790
1999 9,282
--------------------------------------------
Total minimum lease payments 46,072
Less: amount representing interest (7,679)
--------------------------------------------
Present value of net minimum lease
payments including current
maturities of $30,658 $ 38,393
============================================
NOTE 7 -- Income Taxes:
For the three months ended September 30, 1998, the Company had no
provision for income taxes due to the utilization of net operating loss ("NOL")
carryforwards.
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 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>
The Company has reserved, in aggregate, 509 common shares for possible
future issuance to Preferred Stockholders in the event of conversion.
At September 30, 1998 their were 16.5 preferred shares outstanding all
of which are convertible into common shares at the holders option.
NOTE 9 -- 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:
September 30, 1998
------------------
Rental
Lakewood, NJ Johnston, RI
--------------------------------
1998 $19,928 $2,850
1999 53,141 7,600
--------------------------------
$73,069 $10,450
================================
Rent expense for the nine months ended September 30, 1998 and 1997 were
approximately $68,334 and $60,734, 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
13
<PAGE>
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 September 30, 1998 and 1997
Net sales for the three months ended September 30, 1998 were $3,361,014
compared with $3,514,903 for the same period in 1997, a decrease of 4.4%. This
reduction is primarily a result of the elimination of unprofitable product
lines. The Company generated gross profit of $999,721 or 29.7% in the third
quarter of 1998 verses $790,619 or 22.5% in the third quarter of 1997. This is
the result of management's continued elimination of unprofitable product lines.
Selling, general and administrative expenses were $568,436 and $475,261
in the third quarter of 1998 and 1997, respectively. This represents an increase
of $93,175, 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 September 30, 1998 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
Net earnings for the three months ended September 30, 1998 was
$382,851, verses $296,652 in the same period in 1997. Earnings per common share
were $0.08 in the third quarter of 1998 versus $0.07 in the prior years same
period on diluted weighted average shares of 4,954,670 and 4,860,886,
respectively.
Results of Operations for the Nine Months Ended September 30, 1998 and 1997
Net sales for the nine months ended September 30, 1998 were $10,205,998
compared with $10,375,489 for the same period in 1997, a minimal decrease
resulting from the continued elimination of unprofitable product lines. The
Company generated gross profit of $3,034,471 or 29.7% in the first nine months
of 1998, verses $2,735,510 or 26.4% in the first nine months of 1997. This is
again the result of the elimination of unprofitable product lines.
Selling, general and administrative expenses were $2,014,153 and
$1,839,116 in the first nine months of 1998 and 1997, respectively. This
represents an increase of $175,037, which is in line with an increase in
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 nine months
ended September 30, 1998 as the Company's operating earnings were offset by Net
Operating Loss carryforwards.
Net earnings for the nine months ended September 30, 1998 was $851,404,
verses $599,913 in the same period in 1997. Earnings per common share were $0.18
in the first nine months of 1998 versus $0.15 in the prior years same period on
diluted weighted average shares of 4,860,886 and 3,917,354, 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 September 30, 1998 the Company had a net worth of $4,555,701
compared with $2,476,091 (adjusted to reflect the quasi-reorganization effected
April 1, 1997) at September 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
exists a mortgage in the amount of $750,000. See Note 5 to the consolidated
unaudited financial statements for a complete description of the mortgage. 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 $200,000 at the prime rate plus 1 percent. This loan is to
be repaid during the next 4 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 nine months ended
September 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
The Company has implemented a program to assess mitigate and remediate
the potential impact of the "Year 2000" problem throughout the Company. A "Year
2000" problem will occur where date-sensitive software uses two digit date
fields, sorting the Year 2000 ("00") before the year 1999 ("99"). The Year 2000
problem can arise in hardware, software, or any other equipment or process that
uses embedded software or other technology. The failure of such systems to
properly recognize dates after December 31 1999 could result in data corruption
and processing errors.
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.
In addition, the Company has implemented a program to determine the
Year 2000 compliance status of its material vendors, suppliers, service
providers and customers, and based on currently available information does not
anticipate any material impact to the Company based on the failure of such third
parties to be Year 2000 compliant. However, the process of evaluating the Year
2000 compliance status of material third parties is continually ongoing and,
therefore, no guaranty or warranty can be made as `to such third parties' future
compliance status and its potential effect on the Company. The Company believes
there exists a sufficient number of suppliers of raw material for its business
so that if any supplier is unable to deliver raw materials due to Year 2000
problems, alternate sources will be available and that any supply interruption
will not be material to the Company's operations. There can be no assurances,
however, that the Company would be able to obtain all of its supply requirements
from such alternate sources in a timely way or on terms comparable with that of
its current suppliers.
17
<PAGE>
The information set forth in the preceding three paragraphs constitutes
a "Year 2000 Readiness Disclosure" pursuant to the Year 2000 Information and
Readiness Disclosure Act. (P.L. 105-271, signed into law October 19, 1998).
The preceding "Year 2000 Issue" discussion contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Section 27A Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Issue" discussion, the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation the Company's belief that its internal systems are Year 2000
compliant. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause these differences include, but are not
limited to, the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date-sensitive
lines of computer code or to replace embedded computer chips in affected systems
or equipment; and the actions of governmental agencies or other third parties
with respect to Year 2000 problems.
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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(b) Reports filed on Form 8K
None
19
<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: November 13, 1998 By: /s/ Scott G. Halperin
--------------------------
Scott G. Halperin
Chairman
Chief Executive Officer
Date: November 13, 1998 By: /s/ Bernard F. Lillis, Jr.
---------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
Treasurer
20
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