U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
Commission file number 0-19721
SARATOGA BRANDS INC.
(Name of small business issuer in its charter)
New York 13-3413467
(State or other jurisdiction (IRS Employer identification no.)
of incorporation or organization)
1835 Swarthmore Avenue, Lakewood, New Jersey 08701
(Address of principal executive offices) (Zip Code)
(732) 363-3800
(Issuer's telephone number)
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Securities registered under section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
_______________________________ __________________________________________
_______________________________ __________________________________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes.X. No...
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is met contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year:
Revenues for the fiscal year ended December 31, 1998 were $12,754,266
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act).
Note; If determining whether a person is an affiliate will involve
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
The aggregate market value of the voting stock held by non-affiliates as of
March 31, 1999 was $3,475,072.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes .......No ....... N/A
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
Common Stock, $.001 par value per share 5,046,661 (as of March 31, 1999)
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Format (Check one): Yes ____; No__X__
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PART 1
Item 1. Business
Description of business
Saratoga Brands Inc. (the "Company") is a New York corporation,
headquartered in Lakewood, New Jersey. The Company has two principal business
lines: (i) producing and importing specialty cheeses and Italian foods (the
"cheese business") and (ii) producing and distributing delicatessen and snack
foods to mobile caterers, vending companies, wholesale distributors and
institutions (the "deli business"). In July 1996, Saratoga 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's cheese business, Cucina Classica Italiana, Inc. ("CCI"),
engaged in the production, importation and distribution of premium cheeses and
Italian foods, is located at the Company's headquarters in Lakewood, New Jersey.
Mobile operates in a 28,000 square foot facility located in West Warwick,
Rhode Island. From this facility, often referred to as a commissary, Mobile
produces "prepared foods" such as sandwiches, soups, salads, pasta, baked goods
and other entrees, and distributes these products along with delicatessen and
other food items such as snacks and beverages. Mobile sells these products to
mobile catering truck customers, vending companies, wholesale distributors and
institutions; and additionally provides support services to its mobile catering
truck customers. The mobile catering and wholesale division's of Mobile generate
approximately 75% and 25%, respectively, of Mobile's revenues.
Products
The Cheese Business. CCI is a leading producer of specialty Italian cheeses
and Greek-style Feta and a major importer of Italian specialty cheeses, and
Prosciutto di Parma (Italian ham). CCI distributes its products nationally with
its heaviest areas of distribution located on the East and West Coasts of the
U.S. Its customers are other importers and large distributors who sell to
smaller distributors and retail accounts. Sixty five percent of sales are food
service; i.e., sales to restaurants, airlines, cruise ships.
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CCI markets Italian specialty and Greek-style Feta cheeses. Bel Paese(R) is
a semi-soft natural cheese, manufactured in 5 lb. bulk wheels and 6 oz. mini
wheels, In reply to: several flavors such as Basil and Sun-dried Tomatoes.
Greek-style Feta cheese and Feta flavored with dill, oregano, sun-dried tomatoes
and basil, and with peppercorn are produced in random and in exact weight
portions. Freshly grated and shredded Romano and Parmesan cheeses are also
produced by CCI and are sold both in bulk for institutional use and in
consumer-sized cups. Dry grated Parmesan and Romano are available in canisters
under the Cucina Classica Italiana(R) brand. CCI produces annually approximately
300,000 pounds of Bel Paese(R) and 150,000 pounds of Feta.
Galbani(R) Mascarpone and Bel Paese(R) Medallions are CCI's imported
products. 750,000 pounds of Galbani Mascarpone, a specialty dessert cheese was
imported in 1998. CCI imports more than 50% of the nation's imported Mascarpone
sales. In 1998 the company imported 250,000 pounds or approximately four and one
half million individual medallions of Bel Paese Process Medallions, a soft,
spreadable cheese.
Prosciutto di Parma and Gorgonzola Dolcelatte(R), the Italian blue-mold
cheese, round out the line with 1998 imports of 35,000 pounds and 55,000 pounds,
respectively.
From other Italian exporters, CCI also imports Parmigiano Reggiano, Grana
Padano, and Pecorino Romano which are sold in whole wheels, pre-cut portions or
freshly grated in deli cups.
The Mobile Catering and Wholesale Business. Mobile produces approximately
seventy percent of the prepared foods sold by the Company, and this production
consists of approximately 60% sandwiches and 40% soup, pasta or other entrees.
Sandwiches are produced fresh daily based on previous day orders from the mobile
catering customers and weekly orders from the vending and wholesale customers.
Each sandwich is produced individually as part of a production run by sandwich
type, using recipes developed by the Company, to ensure the consistency of
proper quantity and quality of ingredients.
Soups, pastas and other entrees are prepared in bulk and then packaged in
individual portion size containers. The in-house prepared food products provide
the largest profit margin of the Company's products. The bulk of the remaining
30% of the prepared foods are purchased from third parties and are frozen. These
frozen items provide the Company's second largest profit margin.
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The Company's bakery produces approximately 80% of the pastries and Danish
sold, with the remaining products originating from other local bakeries and
larger local and national suppliers.
The remaining products include beverages, snacks and candy. Beverage
products include such national brands as Coca-Cola, 7-Up, Dr. Pepper and various
others, including mineral waters, fruit juices, iced tea and hot tea and coffee.
Mobile Catering Business - This division of Mobile derives revenues from
three principal activities: the sale of prepared foods, snacks, beverages and
supplies (ice, containers, plastic utensils, etc.); to independent catering
operators; the operation of a mobile catering truck service facility and the
rental of catering routes and trucks.
The Company believes that approximately 65% of the area mobile catering
truck operators obtain their goods from Mobile's West Warwick, Rhode Island
facility. Mobile has operated in this area since 1985. Approximately 35% of Deli
King's sales consist of products produced under one of the Company's brand names
at the Company's kitchen and bakery. The remaining sales consist of
approximately 15% third party prepared foods, 10% purchased snacks and 40%
beverages. As is customary in the business, the mobile catering operators place
orders at the end of each day to be picked up the following morning and paid
primarily in cash.
The mobile catering division's customers are all mobile catering operators.
These mobile caterers include persons operating their own vehicles on their own
routes; persons operating their own vehicles on routes rented from Mobile; and
persons renting one of the 27 catering trucks owned by Mobile for use on their
own routes or routes rented from Mobile. The mobile caterer must pay a fixed
amount per week for routes rented from the Company and a weekly rental for the
use of catering trucks owned by the Company. These operators are independent
from the Company. Mobile served approximately 60 mobile catering trucks as of
December 31, 1998.
Mobile controls 26 catering routes which it "rents" to operators for a
weekly fee. These controlled routes, which are also referred to as owned routes,
represent an established series of regular stops served by the same vehicle.
Each stop is usually a business where the employees depend on the caterer for
their snacks, beverages or meals. In some areas, where the business is located
some distance from any restaurant or market, the mobile caterer may be the only
source of food and drink items during the workday.
In addition to supplying the mobile caterers with food, drink and the
related supplies, Mobile has a full service facility staffed with mechanics for
the maintenance and repair of mobile catering vehicles and equipment. The
facility is able to service and repair equipment used for mobile refrigeration,
food warming and hot beverage brewing.
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Wholesale Business - This division of Mobile markets a significant number
of the Catering division's products to vending companies, DSD operations, other
commissaries, and in the upcoming year via the internet.
The wholesale division is currently developing new products and or new
sku's for sale to the club stores. Some of these products include Home Meal
Replacement entrees, pizza, and pastries packaged for retail sale.
New Products and Expansion
CCI is continually seeking to expand its product line by either producing
or importing new products.
In late 1998, CCI developed a strategy to begin selling its current as well
as additional product on the internet. CCI plans on marketing gourmet food
baskets developed exclusively for sale to its customers. CCI anticipates a fully
operational fully integrated Web Site where customers will have the ability to
consummate purchases completely electronically by mid 1999.
Mobile is constantly seeking new food and beverage products. The
preponderance of advertising for such products, which is found in most types of
media, creates consumer awareness of new items. The Company is constantly being
approached by its suppliers with new products. As a member of the Mobile
Independent Catering Association, the Company receives publications and attends
trade shows, which present potential new products.
At the present time, the Company's kitchen and bakery operate at capacities
of approximately 35% and 20%, respectively. Management believes that the Company
will maintain its current competitive position and that the mobile catering
business can be expanded by opening additional distribution locations. Such
satellite operations would be located beyond a 30-mile radius from the current
facility. Any new locations would operate as distribution and service facilities
where third party products would be warehoused. Prepared foods produced in the
current kitchen and bakery would be shipped to any such new location. Management
estimates that the production capacity of the current location can supply up to
three satellite operations. While management believes implementation of such
growth plans is feasible, no assurance can be given as to the success of any
efforts to expand.
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Competitive Position
The Cheese Business - CCI maintains a strong presence in the Italian
specialty food market. CCI provides point-of-sale materials to help product
sell-through at the retail level and uses consumer and trade media increase
product awareness nationwide.
Mobile catering business - Management believes that Mobile has
approximately 65% of the mobile catering business in the geographic area it
serves. Maintenance of its customer base is dependent on the ability of Mobile
to provide superior service and reliability. The underlying relationship of the
mobile caterer with its customers is dependent on service, reliability
(customers expect the catering trucks to arrive within a few minutes of the same
time each day) and on product selection and quality. The Company employs route
managers whose function is to review the performance of the mobile caterers as
it relates to their service and reliability. The goal is to ensure that the
Company's quality standards are kept at high levels.
Management recognizes that some mobile caterers provide their own
sandwiches and other entree items by preparing them in their home kitchens, and
that they provide soft drinks, candy and other items by purchasing them from
large discount retail outlets. Management believes that these caterers make up
an insignificant percentage of the remaining 35% of the market. Management
believes that substantially all of the remaining 35% of the mobile catering
market are supplied by only one other commissary, Freeman's Catering in
Providence, Rhode Island.
Time is a valuable commodity to the mobile caterer. For that reason,
drivers are limited in the distance they can travel from their route area to
obtain their products. Management believes that for this reason the mobile
caterer must choose between Mobile and its one major competitor. Due to the high
cost of opening a new facility and the small number of persons with the
expertise necessary for such an undertaking, there is little likelihood that
another competitor will enter the market.
Wholesale Business - The wholesale division will compete directly with
other wholesalers of similar products. At this time the Company has not
identified any competitors producing identical products to those we are either
offering or anticipate offering in the future. The niche of the wholesale
division will be to fill a gap in supplying fresh "Home Meal Replacement"(HMR)
meals, as well as gourmet quality pastries, where little competition exists.
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Raw Materials
The raw materials or ingredients used in Mobile's products are available
from many suppliers. The deli business has a core group of 50 vendors with which
it has developed good relationships. Because of the large number of potential
suppliers in the food and beverage industry, the Company is not dependent on any
one supplier. The prepared food ingredients include many well-known national
brands such as Oscar Meyer, Kayem, Boars Head, Dubuque and Louis Rich
(lunchmeats) and Heinz and Kraft dressings and spreads.
Product Line Exclusivity License & Trademark Agreements
CCI is the exclusive U.S. importer of the Galbani line of Italian specialty
cheeses and pork products. Egidio Galbani, S.p.A. of Milan, Italy, is a major
force in the European Dairy Market with an annual sales volume of about 2
billion dollars and is a subsidiary of GROUPE DANONE, with an annual sales
volume of approximately 15 billion dollars.
CCI has the exclusive right to import Galbani products into the U.S., and
is the only company worldwide with the license to manufacture cheeses bearing
the Galbani trademarks. The Product Exclusivity and License to Manufacture
Agreements are granted in a contract which runs through the year 2000 when it
will be subject to renewal. CCI is currently negotiating with Galbani to extend
the agreement into the 21st century.
CCI's trademarks are Cucina Classica Italiana(R), Classika(R) and
Tal-Fino(R). CCI is currently applying for the trademark Classica and uses the
(TM) symbol to denote its application.
Except for prepared foods and baked goods produced by and unique to the
deli business, the deli business has no product line exclusivity or any
trademarks under its control. The products produced by the deli business may use
recipes slightly different than for those same products made elsewhere. However,
this is a benefit in that the deli business sells generic, traditional foods,
which must be prepared in a manner consistent with the common recipes for each
type of dish.
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Government Regulations
All of the Company's subsidiaries are subject to regulations of the U.S.
Department of Agriculture (USDA) and The U.S. Food and Drug Administration
(FDA).
The USDA establishes regulations for cheese identity and also oversees the
importation of meat products into the U.S. The FDA regulates cheese labeling and
has established strict guidelines regarding ingredients and nutritional
information. The State of Rhode Island has jurisdiction over the activities of
the deli business. Mobile is subject to federal, state and local health and food
regulations. These regulations generally provide standards for sanitation,
storage, food quality and grade, shelf lives and product labeling. Management
strives to keep the deli business in full compliance with these regulations.
On August 22, 1997 Mobile completed the purchase of a USDA certified
processing operation in Johnston, Rhode Island, a short distance from its
current operation. The purchase was completely funded through operating cash
flows. This facility will produce meat products and HMR meals for Mobile. It is
anticipated that the addition of these products will enhance Mobile's revenues,
as well as increase Mobile's customer base.
Research & Development
Research and development costs relate to developing new cheeses (reduced
fat, spreadable versions of current semi-soft cheeses, new flavor extensions to
existing lines) for CCI. Research costs for both operations are minimal. In the
most recent two years, Mobile has not expended a material amount on research and
development. However, Mobile is continually looking to acquire new products from
third parties. In addition, the Company's kitchen and bakery work to develop new
products to follow industry trends although the monetary expenditure for such
efforts has been minimal to date.
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Cost and Effects of Compliance with Environmental Laws
The costs and effects of compliance with environmental laws are not
material to our operations.
Current Employees
The company and its subsidiaries currently employ 48 persons of which 43
are full time.
Item 2. Description of Property
CCI leases a 20,000 square foot facility at 1835 Swarthmore Avenue,
Lakewood, New Jersey 08701, of which approximately 3,000 square feet serves as
office space. This facility serves as Saratoga and CCI's headquarters as well as
a shredding and grating operation and warehouse. The facility is a fireproof
high bay warehouse located on 3.5 acres with ample expansion potential. The
warehouse contains 13,000 cubic feet of cooler space. This facility is leased at
a basic rent of $6,642.68 per month or $79,712 annually. The lease has a five
year term, which began in 1994, with no rent escalation and an option to renew
for an additional five years at an annual rent of $91,975.
Mobile owns a 28,000 square foot building on 3.88 acres in West Warwick,
Rhode Island. The facility includes administrative and sales offices, warehouse,
frozen and cold storage space, food production areas and equipment service bays.
Mobile's leases its 2,000 square foot USDA facility at 269 Greenville
Avenue, Johnston, Rhode Island. This facility is leased 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 base rent of $975 per month or
$11,700 annually.
Item 3. Legal Proceedings
The Company currently has no material legal proceedings by or against the
Company, or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
None
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common shares are traded on the over-the-counter market
through the NASDAQ Small Cap Market Trading System under the symbol STGA. The
following table sets forth the range of high and low bid quotations for the
common stock for the period indicated, as reported on NASDAQ, after having given
effect to a reverse stock split of 1:3 which became effective November 24, 1997,
as though the split had occurred prior to the periods reported below. The
quotations are inter-dealer prices in the over-the-counter market without retail
mark-ups, markdowns or commissions, and may not represent actual transactions.
1998 1997
Common Shares Common Shares
Period High Low High Low
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January 1 - March 31 2.68 1.25 3.93 1.6875
April 1 - June 30 2.34 1.37 3.00 0.8438
July 1 - September 30 1.96 0.81 1.50 0.8906
October 1 - December 31 1.37 0.81 1.56 0.8438
As of March 31, 1999, there were approximately 240 holders of record of the
Company's common stock.
The Company has not paid a cash dividend on its common stock since its
inception. The Company expects that for the foreseeable future, any earnings
will be retained for use in the business or other corporate purposes, and it is
not expected that cash or share dividends will be paid. However, there are no
restrictions on the payment of dividend, either by contract or regulation.
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Item 6. Management's Discussion and Analysis or Plan of Operation
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Audited Consolidated Financial
Statements and related notes which are contained in Item 7 herein.
Results of Operations for the Years Ended December 31, 1998 and 1997
Net sales for the year ended December 31, 1998 were $12,754,266 compared
with $13,712,800 in 1997, a decrease of $958,534. This decrease is primarily a
result of the abandonment of JR's operation. The Company generated gross profit
of $3,003,253 or 23.5% in 1998, verses $3,622,861 or 26.4% in 1997. The decrease
in gross profit margin was the result of the reduction in gross revenue thereby
increasing fixed production costs as a percentage, as well as a shift in the
product mix at CCI and a significantly large number of returns in the now
abandoned operation.
Selling, general and administrative expenses were $2,191,187 and $2,417,793
in 1998 and 1997, respectively. This represents a reduction of $226,606 or 9.4%.
This reduction is the result of a streamlining of the operations at all levels
of the Company, as well as the elimination of product lines.
Management expects gross margins to improve as the Company begins to regain
sales volume lost by the abandonment of JR's operation. However, there can be no
assurance that any such improvements in the margins will be achieved. To this
end, the Company's Deli King subsidiary is seeking additional wholesale
customers, as well as developing products for sale through mass merchants. The
Company reported no provision for Federal income taxes for the years ended
December 31, 1998 and 1997, as the Company's taxable operating earnings were
offset by net operating loss carryforwards. The Company reported a provision for
state income taxes of $31,000 and $0 for the years ended December 31, 1998 and
1997 respectively.
Income before extraordinary item for the year ended December 31, 1998 was
$24,168 versus $679,964 in 1997 or $0.00 and $0.17 per share on diluted weighted
average shares of 5,117,693 and 3,957,141 respectively. This represents a
reduction of $655,796 of which $482,307 resulted from the loss on an abandoned
operation. The balance, $166,657, after giving effect for the state tax
provision, management believes is the result of a change in product mix at CCI
and lower volume at Mobile. Management believes that increased volume in both
divisions will correct this problem in the future.
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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 December 31, 1998 the Company had a net worth of $3,727,466 compared
with $3,709,377 at December 31, 1997.
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 $1,200,000 against which there exists a mortgage in the amount of
$741,000. The 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 12 months.
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
developing new markets via current marketing channels and the internet, and (4)
controlling and containing production, operating and administrative costs.
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Year 2000 Readiness
This disclosure is a year 2000 ("Year 2000") Readiness Disclosure within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1988 to
the extent that the disclosure relates to the Year 2000 processing of the
Company.
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 is not expected to have a material adverse 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.
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).
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The preceding Year 2000 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 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 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.
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Item 7. Financial Statements
Response submitted as a separate section of this report commencing on
page F-1.
Item 8. Changes in and Disagreement With Accountants on Accounting and Financial
Disclosure
Effective May 11, 1998, Saratoga Brands Inc. (the "Company") dismissed its
prior certifying accountants, Broza, Block & Rubino Certified Public
Accountants, PA ("BBR") and retained as its new certifying accountants, Deloitte
& Touche LLP ("Deloitte"). BBR's report on Saratoga's financial statements for
the fiscal years ended December 31, 1994 through December 31, 1997, which were
the only fiscal years during which BBR was the certifying accountant for the
Company, contained no adverse opinions or disclaimer of opinions, and was not
qualified as to uncertainties, audit scope or accounting principles. The
decision to change accountants was approved by the Audit Committee and the Board
of Directors of the Company. As required by applicable rules of the Securities
and Exchange Commission, the Company notified BBR that during the two most
recent fiscal years and the interim period from December 31, 1997 through May
11, 1998 the Company was unaware of any disputes between the Company and BBR as
to matters of accounting principles or practices, financial statement
disclosure, or audit scope of procedure, which disagreements, if not resolved to
the satisfaction of BBR, would have caused it to make a reference to the subject
matter of the disagreements in connection with its reports and requested BBR to
confirm this, a copy of which as filed with the Form 8-K.
Effective May 11, 1998, the Company engaged Deloitte as its independent
accountants. During the most recent fiscal year end and the subsequent interim
periods to the date hereof, the Company did not consult Deloitte regarding any
of the matters or events set forth in item 304 (a) (2) and (i) and (ii) of
Regulation S-B.
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Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 10. Executive Compensation
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 13. Exhibits and Reports on Form 8-K
(a) (1) and (2) The response to this portion of Item 13 is submitted as a
separate report commencing on Page F-1.
(a) (3)
Exhibit No. Description of Exhibit Note
3. (a) - - Certificate of Incorporation 1
(b) - - By-Laws, as amended 1
4. (a) - - Form of Warrant Agency Agreement between Registrant Thomas 1
James Associates, Inc. and American Stock Transfer & Trust
Company with
attached form of Warrant
(b) - - Form of Private Placement I Warrant 1
(c) - - Form of Private Placement II Warrant 1
(d) - - Form of Private Placement Warrant 1
10.(a) - - Lease agreement between Saratoga Brands and Hoffman Investors 1
Corp. dated August 18, 1992
16
<PAGE>
(b) - - Amended Employment Agreement between Registrant and Daniel J. 1
Feld dated January 26, 1994
(c) - - Option Agreement, as amended between Registrant and Daniel J. 1
Feld respecting 77,949 (as adjusted) Common Shares
(d) - - Incentive Option Plan dated June 12, 1991 1
(e) - - Form of Incentive Stock Option contract 1
(f) - - Restricted Stock Purchase Agreement 1
(g) - - Factoring Agreement dated October 23, 1992 between Saratoga 1
Brands Inc. and Platinum Funding Corp.
(h) - - Form of Owner Operator distributor Agreement 1
(i) - - Form of Agreement between the Company and holder of the 11% 1
subordinated Notes and Warrants to purchase common shares
(j) - - Asset Purchase Agreement, dated as of January 5, 1994, 1
between Saratoga Brands Inc. and Mellons Limited
(k) - - Voting and Limitation of Transfer Agreement between Daniel J. 2
Feld, Registrant and Mellons, Limited.
(l) - - Amended and Restated Employment Agreement between Registrant 2
and Daniel J. Feld
(m) - - Non-Compete Agreement between the Registrant and Agama, Inc. 2
(n) - - Non-Compete Agreement between Mellons Limited and the 2
Registrant.
(o) - - Lease Agreement between Cucina Classica Italiana, Inc. and 3
Arthur Sommers
(p) - - Lease Agreement between Cucina Classica Italiana, Inc. and 3
Angelo Dominioni.
(q) - - Lease Agreement between JR's Delis, Inc. and Chicken by 3
Chickadee Farms, Inc.
(r) - - Employment Agreement between the Registrant and Scott G. 3
Halperin, dated August 16, 1995
(s) - - Acquisition Agreement between the Registrant and Cucina 4
Classica Italiana, S.p.A.
(t) - - Acquisition Agreement between the Registrant and Goldberg, 5
Feinstein and Sons Company
(u) - - Amendment to the Acquisition Agreement between the Registrant 6
and Goldberg, Feinstein and Sons Company
17
<PAGE>
(v) - - Credit Agreement between Cucina Classica Italiana, Inc. and 7
Banca Nazionale del Lavoro S.p.A. - New York Branch, Istituto
Bancario San Paolo di Torino - New York Branch, Banco di
Sicilia S.p.A. - New York Branch, Banca Populare di Milano -
New York Branch, and Banca Commerciale Italiana - New
York Branch
(w) - - Termination Agreement between the Registrant and Daniel J. 8
Feld
(x) - - Merger and Real Estate Purchase Agreement Between the Company 9
and Roy LaCroix for the purchase of Deli King, Inc.
(y) - - Credit Agreement between Cucina Classica Italiana, Inc. 10
and Banca Nazionale del Lavoro S.p.A. - New York Branch,
dated December 15, 1997
(z) - - Credit Agreement between Cucina Classica Italiana, Inc. 10
and BancaCommerciale Italiana - New York Branch, dated
December 15, 1997
(aa) - - Forgiveness Agreement between Cucina Classica Italiana, 10
Inc. and Istituto Bancario San Paolo di Torino - New York
Branch, dated December 29, 1997
(ab) - - Forgiveness Agreement between Cucina Classica Italiana, Inc. 10
and Banca Populare di Milano - New York Branch, dated
December 29, 1997
(ac) - - Forgiveness Agreement between Cucina Classica Italiana, Inc. 10
and Banco di Sicilia S.p.A. - New York Branch, dated
December 31, 1997
(ad) - - Settlement Agreement between Saratoga Brands, Inc., Angelo M. 10
Dominioni, Valerie A. Dominioni, Silvana L. Dominioni,
Robert J. Castellano, and Cucina Classica Italiana, SpA,
dated December 31, 1997
(ae) - - Employment Agreement between the Registrant and Scott G. 10
Halperin, dated August 1, 1997
(af) - - Employment Agreement between the Registrant and Bernard F. 10
Lillis, Jr., dated August 1, 1997
(ag) - - Lease Agreement between Deli King, Inc. and Giovanni and Lina 10
Conti, dated September 1, 1997.
(ah) - - Investment Banking Agreement between the Company and M.H. 10
Meyerson and Co., Inc.
18
<PAGE>
NOTES
1. Filed with the Company's registration statement on form S-1 (File No.
33-36937), and incorporated herein.
2. Filed with the Company's Form 8-K filed on February 14, 1995, and
incorporated herein.
3. Filed with the Company's 1994 Form 10-KSB, and incorporated herein.
4. Filed with the Company's Form 8-K filed on November 4, 1994, and
incorporated herein.
5. Filed with the Company's Form 8-K filed on November 10, 1994, and
incorporated herein.
6. Filed with the Company's Form 8-K filed on March 28, 1995, and
incorporated herein.
7. Filed with the Company's Form 8-K filed on March 14, 1995, and
incorporated herein.
8. Filed with the Company's Form 8-K filed on August 18, 1994, and
incorporated herein.
9. Filed with the Company's Form 8-K dated April 29, 1996, and
incorporated herein.
10. Filed with the Company's Form 8-K dated June 8, 1998 and
incorporated herein.
(b) Reports on Form 8-K.
Form 8-K Filed on June 8, 1998 -
Item 4. Changes in Registrant's Certifying Accountant
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SARATOGA BRANDS INC.
By:/s/ Scott G. Halperin Date: April 15, 1999
------------------------------
Scott G. Halperin
Chairman of the Board
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By:/s/ Scott G. Halperin Date: April 15, 1999
------------------------------
Scott G. Halperin
Chairman of the Board
Chief Executive Officer
Audit Committee Member
By:/s/ Bernard F. Lillis, Jr. Date: April 15, 1999
------------------------------
Bernard F. Lillis, Jr.
Chief Operating Officer
Chief Financial Officer
Principal Accounting Officer
Director
By:/s/ Joseph M. Greene Date: April 15, 1999
------------------------------
Joseph M. Greene
Director
Audit Committee Member
20
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
INDEX
FINANCIAL STATEMENTS
Included in Part II
Reports of Independent Certified Public Accountants
Consolidated Balance Sheet at December 31, 1998
Consolidated Statements of Income for the Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and
1997
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
December 31, 1998 and 1997
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Saratoga Brands Inc. and Subsidiaries
Lakewood, New Jersey
We have audited the accompanying consolidated balance sheet of Saratoga Brands
Inc. and Subsidiaries ("the Company") as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the Company
for the year ended December 31, 1997 were audited by other auditors whose
report, dated February 28, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 6, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Saratoga Brands, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations, cash
flows and changes in stockholders' equity for the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Saratoga Brands, Inc. and Subsidiaries for the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BROZA, BLOCK & RUBINO
Certified Public Accountants
Asbury Park, New Jersey
February 28, 1998
F-3
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998
ASSETS
Current Assets:
Cash and cash equivalents $108,357
Accounts receivable - net of allowance for doubtful accounts
of $80,555 917,399
Inventories 492,838
Prepaid expenses and other current assets 75,463
----------
Total current assets 1,594,057
Fixed Assets - net 3,096,718
Other assets 587,413
Intangible assets - net 1,179,363
Excess of cost over fair value of assets acquired - net 247,500
----------
TOTAL ASSETS $6,705,051
==========
Notes to Consolidated Financial Statements
F-4
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Balance Sheet (continued)
December 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $1,362,713
Current portion of long-term debt 628,956
Current portion of capital lease obligations 57,170
----------
Total current liabilities 2,048,839
Long-term debt 795,400
Capital lease obligations 133,346
----------
Total liabilities 2,977,585
----------
COMMITTMENTS AND CONTINGENCIES
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 5,047
Par value $.001 - 25,000,000 shares authorized,5,046,661
shares issued and outstanding
Additional paid-in-capital 521,076
Retained Earnings since April 1, 1997 2,803,445
----------
Total Stockholders' Equity 3,727,466
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,705,051
==========
Notes to Consolidated Financial Statements
F-5
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended
December 31,
----------- -----------
1998 1997
Net sales $12,754,266 $13,712,800
Cost of sales 9,751,013 10,089,939
----------- -----------
Gross profit 3,003,253 3,622,861
Selling, general and administrative expenses 2,191,187 2,417,793
Loss on abandoned operation 482,307 --
----------- -----------
Income from Operations 329,759 1,205,068
Interest expense - net 274,591 525,104
----------- -----------
Income before taxes and extraordinary item 55,168 679,964
Income tax provision 31,000 --
----------- -----------
Income before extraordinary item 24,168 679,964
Extraordinary Item - earnings from forgiveness of debt, net -- 2,154,820
----------- -----------
Net Income $24,168 $2,834,784
=========== ===========
EARNINGS PER COMMON SHARE
BASIC AND DILUTED
Income before extraordinary item $-- $0.17
Extraordinary Item -- 0.55
----------- -----------
Net income $-- $0.72
=========== ===========
Basic weighted average shares used in computation 4,901,804 3,956,925
Diluted weighted average shares used in computation 5,117,693 3,957,141
Notes to Consolidated Financial Statements
F-6
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
1998 1997
------------ -----------
Cash Flows from operating activities:
Net income $24,168 $2,834,784
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 431,118 411,055
Forgiveness of debt -- (2,154,820)
Provision for losses on accounts receivable 2,555 7,190
Loss on sale of equipment 1,550 --
(Increase) decrease in accounts receivable 14,400 (252,716)
(Increase) decrease in inventories (48,604) 29,111
(Increase) decrease in prepaid expenses and
other current assets (1,912) 278,597
(Decrease) increase in accounts payable and
accrued expenses (334,178) 487,243
------------ -----------
Net cash provided by operating activities 89,097 1,640,444
------------ -----------
Cash flows from investing activities:
Decrease in note receivable related parties -- 167,863
Purchase of fixed assets (295,259) (127,191)
Increase in other assets (226,677) (152,541)
Redemption of investment -- 1,209,800
Increase in intangible assets (61,232) (234,468)
------------ -----------
Net cash (used in) provided by investing activities (583,168) 863,463
------------ -----------
Cash flows from financing activities:
Proceeds of long term debt 750,000 580,518
Repayment of long term debt (441,069) (1,079,358)
Common Stock Issued in settlement of debt -- 123,438
Purchase of treasury stock -- (1,938,300)
Proceeds from capital leasing transactions 168,775 16,000
Repayment of capital leases (104,223) (59,454)
------------ -----------
Net cash provided by (used in) financing activities 373,483 (2,357,156)
------------ -----------
Increase (decrease) in cash (120,588) 146,751
Cash and cash equivalents at beginning of year 228,945 82,194
------------ -----------
Cash and cash equivalents at end of year $108,357 $228,945
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $266,869 $299,248
Income taxes paid $1,350 $600
Notes to Consolidated Financial Statements
F-7
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Consolidated Statement of Changes in
Stockholders' Equity For the Years Ended
December 31, 1998 and 1997
<TABLE>
<CAPTION>
CLASS "A" PARTICIPATING
CONVERTIBLE PREFERRED
SHARES TREASURY SHARES,
------------------ COMMON SHARES AT COST
AMOUNT ------------------ -------------------
NUMBER STATED AT ADDITIONAL
OF LIQUIDATION NUMBER OF PAID-IN NUMBER OF RETAINED EARNINGS
SHARES VALUE SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 16.5 $397,898 3,074,916 $3,076 $23,027,435 (90,653) ($107,213) ($12,988,468) $10,332,728
=====================================================================================================
Rounding on 1:3
reverse split 134 -
Shares issued in Italian
Bank Settlement 200,000 200 123,238 123,438
Shares issued CCI SpA 224,000 224 (163,520) (163,296)
Issuance of common shares
as compensation and awards 1,574,084 1,574 (363,189) (361,615)
Shares acquired and retired (485,667) (486) (728,014) (728,500)
Revaluation of Deli King
Acquisition (671,994) (671,994)
Conversion of Loans 280,000 280 419,720 420,000
Treasury shares cancelled (90,500) (91) (159,184) 90,500 106,568 (52,707)
Quasi Reorganization (8,023,460) (8,023,460)
Net Income for the
period 1/01-3/31/97 55,506 55,506
Quasi Reorganization (20,956,422) 20,956,422 -
Earnings after April 1, 1997 2,779,277 2,779,277
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 16.5 397,898 4,776,967 4,777 528,070 (153) (645) 2,779,277 3,709,377
=====================================================================================================
Issuance of Common Shares for options exercised 269,847 270 (6,349) (6,079)
Treasury shares cancelled (153) (645) 153 645 -
Net Income 24,168 24,168
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1998 16.5 $397,898 5,046,661 $5,047 $521,076 - $ - $2,803,445 $3,727,466
=====================================================================================================
<CAPTION>
</TABLE>
Notes to Consolidated Financial Statements
F-8
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 --ORGANIZATION AND BUSINESSES
Saratoga Brands Inc., ("the Company") a New York corporation, was
incorporated on June 12, 1987. The Company entered the specialty cheese
industry, through the acquisition of Cucina Classica Italiana, Inc. ("CCI"), a
company located in Lakewood, New Jersey.
On December 30, 1994, the company acquired JR's Delis, Inc. ("JR") a Rhode
Island based catering and distribution business. JR sold and delivered deli
products to 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 operates out of Deli's modern commissary
facility in West Warwick, Rhode Island. From that point JR was operated as the
Direct Store Delivery ("DSD") Division of Deli.
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 Deli and operates out of Deli's facility.
In the fourth quarter of 1998 Deli abandoned the operation of JR due to
its inability to demonstrate profitable operations.
QUASI-REORGANIZATION
Effective April 1, 1997, the Board of Directors of the Company directed
that the Company undergo a quasi-reorganization which is an elective accounting
procedure intended to restate assets and liabilities to current values and
eliminate any accumulated deficit in retained earnings.
This resulted in a reduction in the carrying value of goodwill in the
amount of $8,023,460, which has been accounted for as a direct shareholders'
equity transaction. Further, the Company's accumulated deficit as of April 1,
1997 ($20,956,422) was eliminated against additional paid-in-capital.
FORGIVENESS OF DEBT
In December of 1997 the Company entered into agreements with 5 Italian
banks, retiring all liabilities to these banks for payment of $500,000 and
200,000 unregistered shares of the Company's common stock. The aforementioned
payment and shares represented the entire payment to the banks.
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. All material intercompany balances are
eliminated.
F-9
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out method. The components of inventories at December 31, 1998
were as follows:
Raw Materials Finished Goods Total
--------------- ---------------- ---------
$203,780 $289,058 $492,838
=============== ================ =========
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is computed utilizing the straight line
method over the estimated useful lives of the related assets as follows:
Fixed Assets 5 - 50 years
Identifiable Intangible Assets 5 - 15 years
The Company will assess the recoverability of fixed assets and intangible
assets based on existing facts and circumstances and projected earnings before
interest, depreciation and amortization on an undiscounted basis. Should the
Company's assessment indicate impairment an appropriate write-down will be
recorded.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product.
GOODWILL
Goodwill, which represents costs in excess of the fair value of the net
assets acquired, is amortized on the straight line basis over 10 years.
The Company assesses the recoverability of goodwill at each reporting
period based on existing facts and circumstances and projected earnings before
interest, depreciation and amortization on an undiscounted basis. Should the
Company's assessment indicate an impairment, an appropriate write-down will be
recorded.
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
when purchased to be cash equivalents.
F-10
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
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 one supplier under a exclusive contract which runs through
the year 2000 when it will come up for renewal.
ADVERTISING COSTS
The Company expenses production costs of print, radio and television
advertisements as of the first date the advertisements take place. All other
advertising costs are expensed as incurred. Advertising expenses included in
selling, administrative and general expenses were $41,769 in 1998 and $37,845 in
1997.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
COMPREHENSIVE INCOME
Effective in 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). The Company,
at this time, has no items of comprehensive income other than net income.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 applies to all entities
and to all types of derivatives, and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The adoption of SFAS No. 133 in not
expected to materially affect the financial position or results of operations of
the Company.
F-11
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 3 - FIXED ASSETS
Fixed assets consists of the following at December 31, 1998:
Useful Life
-----------
Land $611,007
Buildings 1,394,402 50 years
Furniture & equipment 965,823 5 - 10 years
Vehicles 501,419 5 - 7 years
Leasehold Improvements 45,401 5 years
Capital leases 289,996
---------------
Total Cost 3,808,048
Less accumulated
depreciation and
amortization (711,330)
===============
Fixed assets, net $3,096,718
===============
Depreciation and amortization is computed on a straight-line basis.
Depreciation and amortization expense was $263,247 and $219,542 for 1998 and
1997, respectively.
NOTE 4 - OTHER ASSETS
Other assets consists of the following at December 31, 1998:
Pledged Collateral Account $335,145
Deferred Financing Costs 59,047
Notes Receivable 111,468
Deposits 46,186
Other 35,567
--------------
Total $587,413
==============
The pledged collateral account contains certain assets of the Company used
to guaranty its obligations to one of its suppliers.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consists of the following at December 31, 1998:
Trademarks and licenses $555,785
Catering routes 1,254,622
--------------
1,810,407
Accumulated amortization (631,044)
--------------
Intangible assets, net $1,179,363
==============
Amortization of intangibles was $137,871 and $123,800 for 1998 and 1997,
respectively.
F-12
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 6 -- LONG-TERM DEBT
Long term debt consists of the following at December 31, 1998:
Bank - unsecured loan payable in six equal
monthly principal installments plus accrued
interest beginning January 1, 1999; bearing
interest at prime plus 1%. Prime was 7.75%
at December 31, 1998 $300,000
Term Loan - payable in installments through
2000. Interest at prime plus 1%. Secured by
accounts receivable, inventories and fixed assets 106,200
Term Loan - payable $37,500 annually
through 2002, With a balloon payment in
2003. Interest at 8%. Secured by building. 740,625
Note Payable, unsecured - payable in monthly
installments of $9,375. Interest at prime plus 1%. 159,375
Note Payable, unsecured - payable in monthly
installments of $10,609. Non-interest bearing. 63,654
Other 54,502
-----------
Subtotal 1,424,356
Less Current Maturities 628,956
-----------
Long-term debt $795,400
===========
Maturities of Long Term Debt are as follows:
1999 $628,956
2000 129,775
2001 37,500
2002 37,500
590,625
-----------
$1,424,356
===========
F-13
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 7 - LEASE OBLIGATIONS
At December 31, 1998, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments:
Capital Operating Leases
Year Ending December 31, Leases Lakewood, Johnston, RI
----------------------------------------------------------------------------
1999 $76,990 $53,141 $7,600
2000 48,766 -- --
2001 44,974 -- --
2002 44,974 -- --
2003 26,631 -- --
--------------------------------------
Total minimum lease payments 242,335 53,141 7,600
Less: amount representing interest (51,819) (a) (b)
----------
Present value of net minimum lease
payments including current
maturities of $57,170 $190,516
==========
(a) The lease has a five-year term expiring on August 31 1999. The Company
has an option to renew for an additional five years at an annual
rental of $91,975.
(b) The lease has a two year term expiring on September 1, 1999, renewable
for an additional two years at an annual rental of $11,700.
Rent expense for the years ended December 31, 1998 and 1997 was $114,168
and $106,494, respectively.
F-14
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 8 -- EARNINGS PER SHARE
In accordance with SFAS No. 128 "Earnings Per Share," the basic earnings
per share have been computed based upon the weighted average number of common
shares outstanding. Diluted earnings per share gives effect to outstanding
options and warrants. The financial statements reflect share amounts after
having given effect to a reverse stock split of 1:3 on November 24, 1997.
Earnings per common share have been computed as follows:
Year Ended
-------------------------------------------
December 31, 1998 December 31, 1997
-------------------------------------------
Basic Diluted Basic Diluted
-------- -------- ----------- ----------
Income before extraordinary item $ 24,168 $24,168 $679,964 $679,964
Extraordinary item - - 2,154,820 2,154,820
-------- -------- ----------- ----------
Net Income $ 24,168 $24,168 $2,834,784 $2,834,784
======== ======== =========== ==========
Average common shares outstanding 4,901,804 4,901,804 3,956,925 3,956,925
Stock options and warrants - 215,889 - 216
-------- -------- ----------- ----------
Total average equivalent shares 4,901,804 5,117,693 3,956,925 3,957,141
Income per share before
extraordinary item $- $- $0.17 $0.17
Extraordinary item - - 0.55 0.55
-------- -------- ----------- ----------
Net income per share $- $ - $0.72 $0.72
======== ======== =========== ==========
Options and warrants to purchase 559,836 and 743,634 shares of common stock
at prices ranging from $1.25 to $5.25 per share were outstanding in 1998 and
1997, respectively, but were not included in the computation of diluted earnings
per share because the exercise price of the options and warrants exceeded the
average market price and would have been antidilutive.
F-15
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 9 -- Income Taxes
The income tax provision (benefit) is comprised of the following for
the years ended:
December 31,
1998 1997
------------------------
Current
Federal $-- $ --
State 31,000 --
Deferred
Federal (1,194,000) (200,000)
State -- --
------------------------
Subtotal (1,163,000) (200,000)
Valuation allowance 1,194,000 200,000
------------------------
Income tax provision $31,000 $--
========================
The balance sheet classification of the deferred income tax assets and
liabilities is as follows:
December 31,
------------------------
1998 1997
Non-current Non-current
------------------------
Assets $1,394,000 $200,000
Liabilities -- --
------------------------
Subtotal 1,394,000 200,000
Less: Valuation
allowance (1,394,000) (200,000)
-----------------------
Total $-- $--
=======================
During the years ended December 31, 1998 and 1997, the increase in the
valuation allowance was $1,194,000 and $200,000, respectively. These charges
reflect increases in the valuation allowance related to the deferred tax asset
which the Company has concluded is not likely to be realized, partially offset
in 1998 by a decrease in the valuation allowance related to the utilization of
the Company's net operating loss carryforwards.
The Company will continue to assess the recoverability of its deferred
income tax asset and adjustments may be necessary based on the evidence
available at that time. The difference between the expected rate of tax and the
actual tax expense relates entirely to state tax expense and the valuation
allowance.
F-16
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 10 -- 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.
The Company has reserved, in aggregate, 314 common shares for possible
future issuance to Preferred Stockholders in the event of conversion.
At December 31, 1997 their were 16.5 preferred shares outstanding all of
which are convertible into common shares at the holders option.
NOTE 11 -- COMMITMENTS
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. The Company is not in compliance with the minimum income and minimum
net worth covenants at December 31, 1998. The Company has obtained a letter
dated April 5, 1999, from BNYF waiving these two covenant violations and the
related penalties. Based upon projected results for the upcoming year, the
Company believes it will be in compliance with it covenants.
F-17
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
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) for
all terms and conditions of the Agreement.
NOTE 12 -- STOCK PLANS
The Company's 1998 Incentive and Nonqualified Stock Option Plan provides
for the granting of options to purchase 800,000 shares of common stock to
certain employees of the Company. Exercise and vesting terms for options granted
under this plan are determined at each grant date. All options were granted at
not less than fair market value at dates of grant. At the end of 1998, 580,000
options were available for grant under the plan and 800,000 shares of common
stock were reserved for issuance under the 1998 Incentive and Nonqualified Stock
Option Plan. The Company's 1998 Director Stock Option Plan provides for the
granting of options to purchase 200,000 shares of common stock to certain
directors of the Company. Exercise and vesting terms for options granted under
this plan are determined at each grant date. All options were granted at not
less than fair market value at dates of grant. At the end of 1998, 120,000
options were available for grant under the plan and 200,000 shares of common
stock were reserved for issuance under the 1998 Director Stock Option Plan.
Under the terms of the 1994 Stock Award Plan 1,400,000 shares of common stock
may be granted to officers, directors, employees and consultants of the Company
through 2004. Various options and warrants to acquire 823,017 shares were
granted to employees and consultants to the Company under the Plan during the
period from 1994 through 1997. All options and warrants granted under the Plan
were granted at not less than fair market value at the date of grant. Certain
options and warrants granted under the Plan remain outstanding and are included
in the summary below. SFAS No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") was effective for the Company for fiscal 1998. SFAS No. 123
encourages (but does not require) compensation expense to be measured based on
fair value of the equity instrument awarded. In accordance with APB No. 25
"Accounting for Stock Issued to Employees" no compensation cost has been
recognized in the Consolidated Statements of Income for the Company's stock
option plans. If compensation cost for the Company's stock option plans had been
determined in accordance with the fair value method prescribed by SFAS No. 123,
the Company's net income would have been $(77,106) and $2,306,293 for 1998 and
1997 respectively. Diluted earnings per share would have been $(0.02) and $0.58
for 1998 and 1997 respectively. This pro forma information may not be
representative of the amounts to be expected in future years as the fair value
method of accounting prescribed by SFAS No. 123 has not been applied to options
granted prior to 1996.
F-18
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Stock options transactions are summarized as follows:
<TABLE>
<CAPTION>
1998 Options 1998 Warrants 1997 Options 1997 Warrants
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 443,184 0.8750 379,833 2.1341 65,050 2.5000 66,667 1.5000
Granted 140,000 0.9285 160,000 1.9688 1,957,843 1.8100 313,166 2.2691
Excercised, Net (78,739) 0.9285 -- (1,579,709) 1.8400 --
- ---------------------------------------------------------------------------------------------------
Outstanding,
end of year 504,445 0.8879 539,833 2.0851 443,184 1.8100 379,833 2.1341
Options or
warrants
exercisable
at year-end 504,445 0.8878 464,833 2.0869 443,184 1.8100 379,833 2.1341
Weighted-average 0.8289 1.6900
fair value of
options granted
during the year
<CAPTION>
</TABLE>
The fair value of each option granted is estimated on the date of each
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998 and 1997, respectively: risk free
interest rate 5.2% and 5.2%; expected life within 5 years; expected volatility
of 180.3% and 161.02%; dividend yield 0% and 0%. The fair values generated by
the Black-Scholes model may not be indicative of the future benefit, if any,
that may be received by the option holder.
Note 13-- SEGMENT REPORTING
The Company adopted Statement Financial Accounting Standard No.131,
Disclosures about Segments of an Enterprise and Related Information (SFAS 131),
in 1998. This statement establishes standards for reporting information about
operating segments in annual financial statements and selected information in
interim financial statements. It also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the Chief Executive
Officer.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. There are no
material inter-segment sales or transfers. Substantially all revenues are
generated within the United States and all revenue producing assets are located
therein.
F-19
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Industry segment information is summarized as follows:
Total Revenues Operating Profits
1998 1997 1998 1997
----------------------------------------------------
CCI $8,148,937 $8,360,289 $991,581 $1,159,412
Mobile 4,438,026 5,352,428 (284,309) 112,163
----------------------------------------------------
Total Segment 12,586,963 13,712,717 707,272 1,271,575
Eliminations and other
corporate income(expenses) 167,303 83 (377,513) (66,507)
----------------------------------------------------
Consolidated $12,754,266 $13,712,800 329,759 1,205,068
==========================
Interest expense 274,591 525,104
--------------------------
Consolidated income before
income taxes and
extraordinary item $55,168 $679,964
==========================
Depreciation and Identifiable
Capital Expenditures Amortization Expense Assets
------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
CCI $263,325 $65,239 $142,345 $126,306 $1,686,341 $1,603,977
Mobile 31,934 61,952 258,773 217,037 4,287,016 4,320,448
Corporate - - 30,000 67,712 731,694 723,232
------------------------------------------------------------------
Consolidated $295,259 $127,191 $431,118 $411,055 $6,705,051 $6,647,657
==================================================================
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts. The following methods and assumptions
were used by the Company in estimating fair value disclosures for financial
instruments:
o Cash and cash equivalents, trade receivables, short-term borrowings and
current maturities of long-term debt: The amounts reported in the
consolidated balance sheet approximate fair value.
o Long-term debt: The amount reported in the consolidated balance sheet
approximates fair market value, since such debt was primarily variable rate
debt.
F-20
<PAGE>
SARATOGA BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 15- RESTATEMENT OF FINANCIAL STATEMENTS
The financial statements for the year ended December 31, 1997 have been
restated to reflect the reclassification of $450,281 of interest expense
forgiven by the banks from extraordinary item to current operations. The
restatement does not change the net earnings for the period previously reported.
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This shedule contains summary financial information extracted from Consolidated
Audited Financial Statements contained in Form 10KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 108,357
<SECURITIES> 0
<RECEIVABLES> 997,954
<ALLOWANCES> (80,555)
<INVENTORY> 492,838
<CURRENT-ASSETS> 1,594,057
<PP&E> 3,808,048
<DEPRECIATION> (711,330)
<TOTAL-ASSETS> 6,705,051
<CURRENT-LIABILITIES> 2,048,839
<BONDS> 0
0
397,898
<COMMON> 5,047
<OTHER-SE> 3,324,521
<TOTAL-LIABILITY-AND-EQUITY> 6,705,051
<SALES> 12,754,266
<TOTAL-REVENUES> 12,754,266
<CGS> 9,751,013
<TOTAL-COSTS> 12,415,952
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,555
<INTEREST-EXPENSE> 274,591
<INCOME-PRETAX> 55,168
<INCOME-TAX> 31,000
<INCOME-CONTINUING> 24,168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,168
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
