U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer identification no.)
of 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 April 30, 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 March 31, 1998 3-4
Consolidated Unaudited Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 5
Consolidated Unaudited Statements of Cash Flows for the Three
Months Ended March 31, 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 15-16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
PART 1 - Financial Information
ITEM 1. Financial Statements
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Balance Sheet
March 31, 1998
ASSETS
Current Assets:
Cash $297,496
Accounts receivable net of allowance for doubtful
accounts of $82,375 (Note 2) 916,800
Current portion of mortgage note receivable (Note 2) 3,723
Investments (Note 2) 74,330
Inventories (Note 2) 570,252
Prepaid expenses and other current assets 155,474
----------
Total current assets 2,018,075
Long term mortgage note receivable (Note 2) 43,638
Property and equipment - net (Note 3) 3,065,964
Other assets (Note 2) 143,865
Intangible assets (Note 2) 1,232,087
Excess of cost over fair value of assets acquired
(Notes 1 and 2) 270,000
----------
TOTAL ASSETS $6,773,629
==========
The accompanying notes to the consolidated unaudited financial statements are an
integral part hereeof.
3
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Unaudited Balance Sheet (continued)
March 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses (Note 2) $1,889,327
Loans Payable (Note 2) 262,550
Current portion of capital leases payable (Note 6) 77,183
Current portion of long-term debt (Note 5) 125,432
Current portion of long-term debt - related parties
(Note 4) 264,812
----------
Total current liabilities 2,619,304
Long-term debt (Note 5) 113,923
Long-term notes payable - related parties (Note 4) 153,704
Capital leases payable (Note 6) 44,470
----------
Total liabilities 2,931,401
----------
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 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 (Note 1) 527,991
Retained Earnings Since April 1, 1997 (Note 1) 2,912,128
----------
Total Stockholders' Equity 3,842,228
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,773,629
==========
The accompanying notes to the consolidated unaudited financial statements are an
integral part hereeof.
4
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended
March 31,
1998 1997
-----------------------
Net sales $2,916,515 $2,824,675
Cost of sales 2,151,715 2,072,369
-----------------------
Gross profit 764,800 752,306
Selling, general and administrative expenses
(Note 12) 583,431 562,468
-----------------------
Income from operations before interest and income
taxes 181,369 189,838
Interest expense - net 47,918 134,332
Income taxes (Note 7) 600 0
-----------------------
Net Earnings $132,851 $55,506
=======================
EARNINGS (LOSS) PER COMMON SHARE
BASIC
Net Earnings $0.03 $0.01
=======================
Basic weighted average shares used in computation 4,800,589 3,807,834
DILUTED
Net Earnings $0.03 $0.01
=======================
Diluted weighted average shares used in computation 5,299,552 3,807,834
The accompanying notes to the consolidated unaudited financial statements are an
integral part hereeof.
5
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Cash Flows from operating activities:
Net income $132,851 $55,506
Adjustments to reconcile net operating profit to net cash
provided by (used in) operating activities:
Depreciation and amortization 97,982 140,601
Provision for losses on accounts receivable 4,375 0
Gain on sale of unused equipment 0 (55,000)
(Increase) in current portion mortgage receivable (64) 0
Decrease in accounts receivable 13,179 66,195
(Increase) decrease in inventories (126,018) 58,464
Decrease in other assets 17,920 26,189
(Increase) decrease in prepaid expenses (85,850) 59,875
Increase in accounts payable and accrued expenses 192,436 94,347
------------------------
Net cash provided by (used in) operating activities 246,811 446,177
------------------------
Cash flows from investing activities:
Purchase of fixed assets (49,705) (20,310)
Sale of idle equipmnt 0 55,000
Redemption of investment 80,285 0
Purchase of Intangible Assets (routes) (10,502) 0
------------------------
Net cash provided by (used in) investing activities 20,078 34,690
------------------------
Cash flows from financing activities:
Decrease in loans payable (102,000) 0
Repayment of notes payable (32,075) (212,920)
Repayment of notes payable-related party (59,952) 0
Purchase of treasury stock 0 (52,663)
Repayment of capital leases (4,311) (47,683)
------------------------
Net cash provided by financing activities (198,338) (313,266)
------------------------
Increase (decrease) in cash 68,551 167,601
Cash at beginning of year 228,945 82,194
------------------------
Cash at end of year $297,496 $249,795
========================
Supplemental disclosure of cash flows information:
Interest paid $48,221 $65,795
Income taxes paid $600 $0
</TABLE>
The accompanying notes to the consolidated unaudited financial statements are an
integral part hereeof.
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 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 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 three wholly owned
subsidiaries. The acquisitions were recorded as purchases. In consolidation all
inter company balances are eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market. The components of
inventories at March 31, 1998 were as follows:
Raw Finished Repair
Materials Goods Parts Total
----------------------------------------------------------------------
$137,369 $386,319 $46,564 $570,252
======================================================================
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 per share data has been calculated using the weighted average number
of Common Shares outstanding during each period presented on both a basic and
diluted basis in accordance with SFAS 128. Certain outstanding options and
warrants have been excluded from the computation due to their antidilutive
effect. In determining whether options and warrants were dilutive, the average
market value of the Company's common stock for the period from the date of grant
through the end of the year was compared to the exercise price most favorable to
the option or
8
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
warrant holder. 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.
The intangible assets consist of $102,484 for trademark and proprietary
technology licenses, $55,000 for import license, and $1,074,603 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 three months ended March 31, 1998, while accumulated amortization was
$527,590. 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 March 31, 1998, attributable
entirely to CCI was $270,000. There was no impairment to goodwill or intangible
assets at March 31, 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 due from Robert J. Lukasavitz,
related to the sale of CCI's former Mayville, Wisconsin cheese plant in the
amount of $47,361, of which $3,723 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 March 31, 1998 the Company had 31,714 shares of Osicom Technologies,
Inc., traded on the NASDAQ Small Cap Market under the symbol FIBR. The market
value of these shares, was $4.50 per share at March 31, 1998, resulting in a
gain on the investment, which is not reflected in the financial statements, for
the three months
9
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
ended March 31, 1998. The Company anticipates liquidating the balance of the
shares in an orderly fashion within the next 90 days.
OTHER ASSETS
Other assets consists of:
Capitalized Financing Costs $ 34,467
Unamortized Slotting Fees 47,725
Deposits 29,348
Capitalized Distribution Contract 21,875
Other 10,450
---------
Total $ 143,865
=========
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable and Accrued Expenses consist of:
Trade Account Payable to E. Galbani $ 357,708
Other Trade Account Payables 1,043,050
Other Accrued Expenses 488,569
----------
TOTAL $1,889,327
==========
No accrued expense exceeds 5% of total current liabilities.
LOANS PAYABLE
At March 31, 1997 the Company had a $200,000 loan payable to Summit Bank.
This loan is payable in 6 equal monthly principal installments plus accrued
interest beginning on February 1, 1998. The loan is unsecured and bears interest
at the prime rate plus 1 percent, which was 9.5% at March 31, 1997.
Additionally, the Company had miscellaneous loans of $62,550, of which
$23,000 is owned to Ike Suri, an unrelated party, which 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.
10
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 3 -- PROPERTY AND EQUIPMENT - NET
Property and equipment - net consisted of the following at March 31, 1998:
Useful Life
-----------
Land $611,007
Buildings 1,394,402 50 years
Furniture & Equipment 1,013,115 5 - 10 years
Vehicles 503,419 5 - 7 years
Leasehold Improvements 40,551 5 years
Equipment held for sale 10,000
------------
Total Cost 3,572,494
Less Accumulated Depreciation 506,530
------------
Net $3,065,964
============
Depreciation and amortization on Property, Plant and Equipment is computed
on a straight-line basis. The Property, Plant and Equipment includes $152,507 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 $234,375, $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 a note payable to Angelo Dominioni in the amount of
$159,141, of which $127,312 in the current portion thereof, in accordance with
the settlement agreement between the Company and Mr. Dominioni. (See Exhibit
10(ad)) This note is being paid in 18 equal monthly installments of $10,609, and
does not bear interest.
In addition, the Company has a note payable to Scott Halperin, the
Company's Chairman in the amount of $25,000, which is payable on demand and does
not currently bear interest. Both of the above notes are unsecured.
The imputed interest on the notes to Angelo Dominioni and Scott Halperin
has not been reflected in the financial statements due its immateriality.
NOTE 5 -- LONG-TERM DEBT
CCI has a term loan with BNY Financial Corporation of which the current
balance is $159,300 to be paid $53,100 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 $80,555 to be paid $43,451 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 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 March 31, 1998:
Amount
-----------------------------------------------------------
1998 $ 75,802
1999 63,073
2000 4,118
-----------------------------------------------------------
Total minimum lease payments 142,993
Less: amount representing interest (21,340)
-----------------------------------------------------------
Present value of net minimum lease
payments including current
maturities of $77,183 $ 121,653
==============
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 three months ended March 31, 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 $466,000 at March 31,
1998, which resulted in a Deferred Tax Asset of approximately $155,000. After
applying the valuation allowance the Deferred Tax Asset was recorded at $-0- on
the balance sheet at March 31, 1998.
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
12
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
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.
The Company has reserved, in aggregate, 509 common shares for possible
future issuance to Preferred Stockholders in the event of conversion.
At March 31, 1998 their were 16.5 preferred shares outstanding all of
which are convertible into common shares at the holders option.
NOTE 9 -- CONTINGENCIES
None
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's 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:
March 31, 1998
- --------------------------------
Rental
Lakewood, NJ Johnston, RI
--------------------------------
1998 $59,784 $8,550
1999 53,141 7,600
--------------------------------
$112,925 $16,150
================================
Rent expense for the three months ended March 31, 1998 and 1997 were
approximately $22,778 and $22,486, respectively.
13
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 for all terms and conditions of the Agreement.
14
<PAGE>
Item 2. 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 Consolidated Unaudited
Financial Statements and related notes which are contained herein.
Results of Operations for the Three Months Ended March 31, 1998 and 1997
Net sales for the three months ended March 31, 1998 were $2,916,515
compared with $2,824,675 for the same period in 1997, a n increase of 3%. This
marginal increase is primarily a result of an incremental increase in sales as
well the elimination of unprofitable product lines. The Company generated gross
profit of $764,800 or 26% in the first quarter of 1998, verses $752,306 or 26%
in the first quarter of 1997. This is the result of management's attempt
stabilize the gross profit percentage.
Selling, general and administrative expenses were $583,431 and $562,468 in
the first quarter of 1998 and 1997, respectively. This represents a marginal
increase of $20,963, which is in line with a minimal increase 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
March 31, 1998 as the Company's operating earnings were offset by Net Operating
Loss carryforwards.
Net earnings for the three months ended March 31, 1998 was $132,851,
verses $55,506 in the same period in 1997. Earnings per common share were $0.03
in the first quarter of 1998 versus $0.01 in the prior years same period on
diluted weighted average shares of 5,299,552 and 3,807,834, 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 March 31, 1998 the Company had a net worth of $3,842,228 compared with
$1,931,684 (adjusted to reflect the quasi-reorganization effected April 1, 1997)
at March 31, 1997. This increase is the result of operating earnings and the
settlement of certain bank debt in December of 1997
15
<PAGE>
The Company has a limited requirement for capital expenditures in the
immediate future. CCI's factoring arrangement with Bank of New York Financial
Corporation 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 Summit bank, with a
current balance of $200,000 at the prime rate plus 1 percent, to be repaid over
the next 4 months out of cash flow from operations.
Management believes that the Company has sufficient working capital to
meet the needs of its current level of operations.
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.
Forward Looking Statements
The matters discussed in this Item 6 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(b) Reports filed on Form 8K
None
17
<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: May 13, 1998 By: /s/ Scott G. Halperin
---------------------
Scott G. Halperin
Chairman
Chief Executive Officer
Date: May 13, 1998 By: /s/ Bernard F. Lillis, Jr.
--------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
Treasurer
18
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<LEGEND>
Consolidated Unaudited Financial Statements Contained in Form 10QSB
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 297,496
<SECURITIES> 74,330
<RECEIVABLES> 999,175
<ALLOWANCES> (82,375)
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0
397,898
<COMMON> 4,856
<OTHER-SE> 3,439,474
<TOTAL-LIABILITY-AND-EQUITY> 6,773,629
<SALES> 2,916,515
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