<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13260
SILVERADO FOODS, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1369218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6846 SOUTH CANTON, SUITE 110, TULSA, OKLAHOMA 74136
(Address of principal executive offices)
(918) 496-2400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to field such reports), and (2) has been subject to such filing
requirements of the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1997
----- --------------------------------
Common Stock, $.01 Par Value 11,333,654
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------ ------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 82,520 $ 164,118
Accounts receivable, net 3,696,399 4,605,632
Inventories, net 4,266,241 5,974,719
Prepaid expenses and other 653,015 543,709
Deferred tax assets - 16,663
Net assets held for disposal 618,507 188,324
------------ ------------
Total current assets 9,316,682 11,493,165
------------ ------------
NOTES RECEIVABLE 1,436,266 1,315,584
PROPERTY, PLANT AND EQUIPMENT, net 11,343,173 11,829,580
GOODWILL AND OTHER INTANGIBLES, net 10,044,336 13,137,613
------------ ------------
Total assets $ 32,140,457 $ 37,775,942
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,684,639 $ 8,637,272
Trade accounts payable 7,690,520 8,338,029
Accrued liabilities 4,297,266 2,324,039
Other liabilities 41,878 290,311
------------ ------------
Total current liabilities 19,714,303 19,589,651
------------ ------------
LONG-TERM DEBT, less current maturities 13,049,209 13,442,197
DEFERRED TAX LIABILITIES - 16,663
OTHER 3,842,534 3,587,632
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000 shares authorized 116,887 72,583
Warrants 61,563 61,563
Additional paid-in-capital 27,379,565 18,843,454
Accumulated deficit (31,958,952) (17,773,149)
------------ ------------
Total shareholders' equity (deficit) (4,400,937) 1,204,451
------------ ------------
Less: Treasury Stock (64,652) (64,652)
------------ ------------
Total shareholders' equity (deficit) (4,465,589) 1,139,799
------------ ------------
Total liabilities and shareholders' equity $ 32,140,457 $ 37,775,942
------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 11,688,032 $12,043,592 $ 35,188,880 $ 33,500,037
COST OF SALES 8,702,222 8,618,363 24,947,424 22,560,112
------------ ----------- ------------ ------------
Gross profit 2,985,810 3,425,229 10,241,456 10,939,925
------------ ----------- ------------ ------------
OPERATING EXPENSES:
General and administrative 4,654,080 1,713,108 9,763,355 5,304,417
Selling and marketing 2,918,797 2,496,323 8,598,859 7,073,465
Depreciation 128,179 64,084 376,492 200,891
Amortization of goodwill and other intangibles 358,184 347,307 804,297 932,154
------------ ----------- ------------ ------------
8,059,240 4,620,822 19,543,003 13,510,927
------------ ----------- ------------ ------------
OPERATING LOSS (5,073,430) (1,195,593) (9,301,547) (2,571,002)
OTHER INCOME (EXPENSE):
Interest (849,268) (381,170) (1,977,852) (1,012,668)
Accretion of debenture discount - - (1,150,000) -
Other, net (5,815) (21,397) (28,840) (61,549)
------------ ----------- ------------ ------------
(855,083) (402,567) (3,156,692) (1,074,217)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (5,928,513) (1,598,160) (12,458,239) (3,645,219)
------------ ----------- ------------ ------------
DISCONTINUED OPERATIONS
Operating Loss - (439,598) (277,277) (754,447)
Loss on Disposal (70,311) - (1,450,287) -
------------ ----------- ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (70,311) (439,598) (1,727,564) (754,447)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
NET LOSS (5,998,824) (2,037,758) (14,185,803) (4,399,666)
============ =========== ============ ============
LOSS PER COMMON AND COMMON EQUIVALENT
SHARE FROM CONTINUING OPERATIONS $ (0.66) $ (0.26) $ (1.54) $ (0.59)
LOSS FROM DISCONTINUED OPERATIONS $ (0.01) $ (0.07) $ (0.21) $ (0.12)
------------ ----------- ------------ ------------
LOSS PER SHARE $ (0.67) $ (0.33) $ (1.75) $ (0.71)
============ =========== ============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------- -------------------- ADDITIONAL
NUMBER NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
--------- -------- --------- --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 7,258,243 $ 72,583 (26,995) $(64,652) $ 61,563 $18,843,454 $(17,773,149) $ 1,139,799
Issuance of common stock in
connection with debent 1,575,251 15,753 - - - 1,606,497 - 1,622,250
conversion
Contribution of capital - - - - - 2,595,601 - 2,595,601
Accretion of debenture
discount - - - - - 1,150,000 - 1,150,000
Issuance of common stock
in connection with settlement
of royalty agreement 200,000 2,000 - - - (2,000) - -
Purchase of common stock
by forgiveness of indebtedness 1,807,033 18,071 - - - 2,344,493 - 2,362,564
Purchase of common stock by
management 8,000 80 - - - 9,920 - 10,000
Issuance of common stock in
connection with settlement
of employment agreement 840,000 8,400 - - - 831,600 - 840,000
Net loss - - - - - - (14,185,803) (14,185,803)
---------- -------- ------- -------- -------- ----------- ------------ ------------
BALANCE, SEPTEMBER 30, 1997 11,688,527 $116,887 (26,995) $(64,652) $ 61,563 $27,379,565 $(31,958,952) $ (4,465,589)
---------- -------- ------- -------- -------- ----------- ------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(14,185,803) $ (4,399,666)
------------ ------------
Adjustments to reconcile net loss to cash
used in operating activities--
Depreciation and amortization 1,670,672 1,480,561
Accretion of debenture discount 1,150,000 -
Increase in allowance for doubtful accounts 1,000,000 -
Loss on sale of assets 1,378,357 -
Change in assets and liabilities, net of
effect of acquisitions
(Increase) decrease in accounts receivable 645,674 (1,784,429)
(Increase) decrease in inventory 1,299,015 (878,886)
(Increase) decrease in prepaid expenses
and other (59,306) (143,411)
Increase in assets held for disposal (538,140) -
Increase in payables and accrued liabilities 2,275,984 3,217,201
(Increase) decrease in intangibles
and other 6,469 (709,123)
------------ ------------
Total adjustments 8,828,725 1,181,913
------------ ------------
Cash used in operating activities (5,357,078) (3,217,753)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (778,553) (2,876,398)
Payments for acquisitions - (4,361,505)
Proceeds from dispositions 1,009,239 -
Note receivable (200,000) -
------------ ------------
Cash provided by (used in)investing
activities 30,686 (7,237,903)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance 10,000 -
Proceeds from exercise of warrants - 30,859
Borrowings from long-term debt 10,873,473 11,245,187
Payments on notes payable (5,638,679) (887,058)
------------ ------------
Cash provided by financing activities 5,244,794 10,388,988
------------ ------------
NET INCREASE (DECREASE) IN CASH (81,598) (66,668)
CASH, beginning of period 164,118 128,401
------------ ------------
CASH, end of period $ 82,520 $ 61,733
============ ============
Non-cash Financing Activities:
Issuance of stock for acquisition $ - $ 600,000
Issuance of stock for debenture conversion 1,622,250 -
Addition to paid-in-capital for debenture
discount accretion 1,150,000 -
Contribution of capital 2,595,601 -
Capitalized lease obligation - 5,115,153
Receipt of note receivable for sale of assets 1,012,383 -
Stock issued for buyout option of royalty - 2,000,000
Purchase of common stock by forgiveness of
indebtedness 2,362,564 -
Issuance of common stock in connection with
termination of employment agreements 840,000 -
Issuance of additional shares for buyout option
of royalty 2,000 -
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for-
Interest $ 820,464 $ 677,073
Income taxes - -
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. GENERAL:
The accompanying consolidated financial statements have been prepared by
Silverado Foods, Inc. (the "Company") without audit and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included in the Company's annual report and Form 10-K as of December 31,
1996. The foregoing financial statements include only normal recurring accruals
and all adjustments, which the Company considers necessary for a fair
presentation.
2. DETAILS TO CONSOLIDATED BALANCE SHEETS:
Inventories consist primarily of finished goods and packaging supplies, which
are stated at the lower of cost (first-in, first-out basis) or market as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw Materials $ 2,804,573 $ 2,348,945
Finished Goods 1,503,447 3,709,774
----------- -----------
4,308,020 6,058,719
Less: Allowance for excess and
obsolete inventory (41,779) (84,000)
----------- -----------
$ 4,266,241 $ 5,974,719
=========== ===========
</TABLE>
3. LOSS PER SHARE:
For the three months ended September 30, 1997 and September 30, 1996, the loss
per share calculation includes the weighted average number of shares outstanding
for the period which were 8,942,884 and 6,233,395, respectively. For the nine
months ended September 30, 1997 and September 30, 1996, the loss per share
calculation includes the weighted average number of shares outstanding for the
period, which were 8,095,436 and 6,210,914, respectively.
In March 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" was issued. SFAS No. 128 replaces primary earnings per
share with basic earnings per share, and diluted earnings per share with fully
diluted earnings per share. Under SFAS No. 128 the loss per share calculations
includes the weighted average number of shares outstanding for the three and
nine-month periods ended September 30, 1997 which were 10,824,097 and 8,767,481.
The loss per share amounts are as follows:
<PAGE>
<TABLE>
<CAPTION>
Three Nine
Months Months
Ending Ending
September 30, 1997
----------------------
<S> <C> <C>
Basic EPS:
Continuing Operations $ (.54) $ (1.42)
Discontinued Operations (.01) (.20)
------- ------
Total (.55) (1.62)
======= ======
</TABLE>
4. NOTES RECEIVABLE
In April 1996, the Company sold its Gift and Gourmet division in consideration
for a note receivable of $1,370,000 bearing interest at 11%. The terms of the
note receivable called for interest only for the first two years and principal
and interest over the remaining four years. No gain or loss was recognized on
this transaction. During the second quarter of 1997, the Company provided a
reserve against this note receivable in the amount of $1,000,000 due to the
uncertainties surrounding the collection of this note receivable. Subsequent to
September 30, 1997, the Company entered into an agreement to reacquire
substantially all of the Gift and Gourmet assets previously sold in exchange for
forgiveness of amounts owed to the Company by the purchaser. The Company plans
to resell these assets and does not expect a gain or loss from the disposal of
these assets.
On June 6, 1997, the Company sold certain assets originally acquired from the
MarveLoaf Corp. for $1,062,000 including cash of $50,000 and a note receivable
for $1,012,000. Interest is payable at 10% on March 31, 1998 and March 31,
1999. In addition, principal payments of $12,500 plus interest will be due
quarterly beginning January 15, 2000 through 2006. No gain or loss was
recognized on this sale.
5. SHAREHOLDERS' EQUITY
In connection with the acquisition of Nonni's in 1993, the Company entered into
a royalty agreement with three individuals that were the owners of Nonni's. This
royalty agreement was terminated in July 1996 by issuing 700,000 shares of
common stock with a guaranteed market price of $5.71 per share for the period of
April 1, 1997 through December 31, 1997, payable in cash or stock at the
Company's option plus an additional 200,000 shares that was contingent upon
certain sales targets which were met during 1997. Through June 30,1997, certain
shares were sold by these individuals at a price below the guaranteed market
price. The Company is now obligated to issue approximately 2,894,329 shares in
connection with those shares, which were sold as of September 30, 1997.
On September 30, 1997, the Company's chairman, Lawrence Field, acquired
1,790,694 shares of common stock at the closing market price as recorded by the
American Stock Exchange on September 30, 1997 ($1 5/16), the proceeds of which
was the forgiveness of $2,350,000 of indebtedness by the Company to Mr. Field.
In addition, the Company's chairman has agreed to convert to equity an
additional $1,500,000 of amounts due him by the Company during the fourth
<PAGE>
quarter at the prevailing market price of the Company's common stock at the time
of conversion.
<PAGE>
PART I
FINANCIAL
INFORMATION
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto. The following
table presents, as a percentage of net sales, certain selected financial data
for the Company for the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Gross Profit 26 28 29 33
General and Administrative 40 14 28 16
Selling and Marketing 25 21 24 21
Depreciation and Amortization of Intangibles 4 3 3 3
Interest & Other 7 3 9 3
Loss from Continuing Operations (50) (13) (35) (11)
Loss from Discontinued Operations (1) (4) (5) (2)
Net Loss (51) (17) (40) (13)
</TABLE>
RESULTS OF OPERATIONS
The continuing operations information excludes the results from operations of
the Company's non-snack tray direct store delivery business located in southern
California which has been discontinued and the Company's catalog division which
was sold during the third quarter. No income tax benefit has been recognized in
connection with these discontinued operations due to the Company's net operating
loss carry forward position.
PERIOD TO PERIOD COMPARISONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Net Sales. Total net sales for the three-month period ended September 30, 1997
decreased 3% to $11,688,000, versus $12,044,000 for the same period of 1996. All
of the decrease was due to the snack tray segment whose sales declined from
$5,656,000 to 5,312,000 and accounted for 45% of total sales for the quarter
ending September 30, 1997 compared to 46% for the same period of 1996. The
decrease in sales was due to a 5% reduction in the number of lower margin
customer accounts that were cancelled by the Company, a slight decline in the
average revenue dollar per exchange, and the sale of the Omaha Market Center of
approximately $40,000. Sales in the specialty baked goods segment remained
constant between the three months ended September 30, 1997 and September 30,
1996. Brand sales in the Company's biscotti product lines increased by
$1,213,000 compared to the prior year quarter while sales for the bagel bar
brands declined by $623,000 and sales for the Company's Maxi Crisp product line
declined by $592,000.
<PAGE>
Gross Profit. Gross profit for the three months ended September 30, 1997 was
$2,986,000, a 13% decrease over the comparable period in 1996 of $3,425,000.
Gross profit as a percentage of net sales decreased from 28% to 26%. Total gross
profit in the snack tray segment was $2,035,000, a decrease of 12% over the
prior year quarter and decreased as a percentage of net sales from 40% to 38%.
This decrease in gross margin was a result of lower sales as discussed above and
higher purchased product cost for the snack tray segment when compared to the
same period of 1996. In the specialty baked goods segment, gross profit
decreased from $1,105,000 to $951,000. This decrease in gross profit was due to
lower margins from the biscotti brand sales resulting from a higher mix of sales
to customers with a lower gross margins versus the sales mix to customers for
the same period of 1996, and additional reserves for obsolete raw materials and
packaging of $80,000.
General and Administrative. General and administrative expenses increased
from $1,713,000 to $4,654,000, an increase of $2,941,000 and increased as a
percentage of net sales from 14% to 40%. The majority of this increase was due
to a charge of $2,055,000 related to the buyout of employment agreements from
the former owners of the Company's Nonni's biscotti brands, the terms of which
call for cash payments of $1,215,000 and the issuance of 840,000 shares of
common stock. In addition, the Company incurred approximately $420,000 of
consulting fees in the course of preparing its strategic operating plan for 1998
and beyond. The snack tray segment's general and administrative expenses
increased by $190,000 or 19% due to higher payroll and other corporate expenses
in the day to day operations.
Selling and Marketing. Selling and marketing expenses increased from
$2,496,000 to $2,919,000, an increase of 17% over the comparable period of 1996
and increased as a percentage of net sales from 21% to 25%. This increase was
due to increased sales and marketing expenses associated in the specialty baked
goods segment related to new packaging design for Nonni's biscotti brands and
market research expenses associated with new product development for bagel bar
brands. Of the total increase, $167,000 was in the snack tray segment and was
due to sales expenses associated with ongoing account maintenance for new snack
tray accounts.
Depreciation and Amortization of Intangibles. Depreciation and amortization
of goodwill and other intangibles increased from $411,000 to $486,000, an
increase of 18% over the same period of 1996. The 1997 amount includes $128,000
of depreciation expense and $358,000 of amortization expense for the third
quarter of 1997. The 1997 amount also includes $150,000 of amortization expense
incurred to completely amortize certain snack category intangible assets. The
1996 amount includes $64,000 of depreciation and $347,000 of amortization
expenses. In addition to these amounts, cost of goods sold includes
depreciation expenses of $172,000 and $77,000 for the three months ended
September 30, 1997 and 1996, respectively.
Interest and Other. Interest and other expenses increased from $402,000 to
$855,000, an increase of $453,000. During the third quarter, approximately
$260,000 of deferred financing fees associated with the first quarter 1997
Regulation S financing were expensed due to the conversion of the debentures to
common stock.
Loss from Continuing Operations. Losses from continuing operations increased
from $1,598,000 to $5,890,000, an increase of $4,292,000. This increase came
from both the snack tray segment
<PAGE>
and the specialty baked goods segment and was due to the expenses associated
with the employment agreement buyouts discussed above, higher sales and
marketing expenses combined with higher depreciation, amortization and interest
expenses more fully discussed above.
During the third quarter, the Company made the decision to downsize and
decentralize its snack tray business by divesting all but a few key Honor Snack
markets. The Omaha, Nebraska market center sale was accomplished in the third
quarter. The Company does not anticipate a material book gain or loss from this
divestiture.
Loss from Discontinued Operations. During the fourth quarter of 1996, the
Company made the decision to sell its fresh bread direct store delivery
distribution business located in southern California and in the second quarter
of 1997, a decision was made to sell the catalog division located in Palestine,
Texas. The Catalog Division sale closed in the third quarter. Therefore, the
results from these businesses for comparable quarters is shown as discontinued
operations and decreased from $440,000 to $70,000 from the third quarter of 1996
to the third quarter of 1997.
Net Loss. The Company's net loss increased from $2,038,000 to $5,998,000, an
increase of $3,960,000 over the comparable period for 1996. The increased losses
are more fully discussed above.
PERIOD TO PERIOD COMPARISONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Net Sales. Total net sales increased 5% from $33,500,000 to $35,189,000.
Sales in the specialty baked goods segment increased by $1,959,000 or 13% while
sales in the snack tray segment decreased by $270,000 to $17,422,000 or 2%. The
increase in the specialty baked goods segment was due to higher biscotti brand
sales over the same period of 1996 increasing by 22% or $1,673,000, higher sales
from the Company's bagel bar brands increasing 39% or $1,988,000, offset by
lower sales from the Maxi-Crisp product lines which decreased $1,702,000 or 71%.
Gross Profit. Gross profit decreased from $10,940,000 to $10,241,000, a decrease
of 6%. Gross profit as a percentage of net sales decreased from 33% to 29%.
Gross margins for the snack tray segment decreased as a percentage of sales from
43% to 41%. In the specialty baked goods segment, gross margins declined as a
percentage of sales from 22% to 17%. This decrease was a result of lower gross
margins from both biscotti brand sales and bagel bar brand sales due to a higher
mix of lower margin sales to warehouse club customers during the first nine
months of 1997 versus the same period of 1996.
General and Administrative. General and administrative expenses increased
from $5,304,000 to $9,763,000, an increase of 84% and increased as a percentage
of net sales from 16% to 28%. The snack tray segment's general and
administrative expenses increased by $450,000 and the specialty baked goods
segment's expenses increased by $4,009,000. In the specialty baked goods
segment, $2,055,000 was due to the employment agreement buyout of the three
former owners of the Company's Nonni biscotti brands discussed above and a
$1,000,000 charge during the second quarter of 1997 as a reserve provision on a
note receivable from the 1996 sale of the
<PAGE>
Gift & Gourmet business. In addition, the Company has incurred approximately
$450,000 in consulting fees in the course of preparing its strategic operating
plan for 1998 and beyond.
Selling and Marketing. Selling and marketing expenses increased from
$7,073,000 to $8,599,000 an increase of 22% and increased as a percentage of net
sales from 21% to 24%. The snack tray segment's selling and marketing expenses
increased by $412,000 to $4,828,000 while the specialty baked goods segment's
expenses increased by $1,114,000. This latter increase in expenses was due to
higher demonstration expenses associated with the bagel bar product brands,
costs associated with new packaging designs for Nonni's biscotti brands, and
market research expenses associated with new product development for bagel bar
brands.
Depreciation and Amortization of Intangibles. Amortization of goodwill and
other intangibles increased 4% to $1,181,000 when compared to the same nine
months of 1996.
Interest and Other. Interest and other expenses increased from $1,074,000 to
$3,157,000, an increase of $2,083,000. Of this amount, $1,150,000 related to
the issuance of certain Regulation S debentures that occurred in the first
quarter of 1997 that had a convertible feature at a discount to the market price
of the common stock of the Company. This intrinsic value associated with the
discount must be charged to interest expense over the holding period that the
debentures are held by the debenture holder. In addition, approximately
$260,000 of deferred financing fees associated with the first quarter 1997
Regulation S financing were expensed in the third quarter due to the conversion
of the debentures to common stock.
Loss from Continuing Operations. Losses from continuing operations increased
from $3,645,000 to $12,459,000, an increase of $8,814,000. Of this amount,
$2,055,000 related to the employment agreement termination, $1,150,000 related
to the interest expense charge related to the Regulation S debentures, and other
increases from general and administrative and sales and marketing expenses as
noted above.
Loss from Discontinued Operations. Losses from discontinued operations increased
from $754,000 to $1,728,000, an increase of $974,000. During the fourth quarter
of 1996, the Company made the decision to sell its distribution business located
in southern California and in the second quarter of 1997, a decision was made to
sell its catalog division located in Palestine, Texas. The sale of the catalog
division closed in the third quarter. Therefore, the results from these
businesses for comparable quarters is shown as discontinued operations.
Net Loss. The Company's net loss increased from $4,400,000 to $14,186,000,
an increase of $9,786,000 due to the reasons discussed above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $5,357,000 for the nine months ended
September 30, 1997 compared to $3,218,000 for the nine months ended September
30, 1996. Net cash provided by investing activities was $31,000 compared to
$7,238,000 used for the comparable period in 1996. Net cash generated from
financing activities during the first nine months ended September 30, 1997
totaled $5,245,000 from net borrowings on long term debt.
The Company has a revolving credit facility of $7 million which was fully drawn
as of September 30, 1997. Borrowings are based upon 80% of eligible accounts
receivable and 50% of eligible inventories. The term of this revolver is for a
period of three years (due in 1998) with interest at Wall Street Journal-
Southwest Edition prime payable monthly and principal due at maturity. At
September 30, 1997, the Company's borrowings under this line of credit exceeded
the amounts available based upon the borrowing base of eligible accounts
receivable and inventories. The Company's chairman and his spouse guarantee
borrowings under this facility.
In addition, the Company has a $6 million note payable with another bank due in
two years. The terms of this note call for interest only during the first year
with principal and interest during the second year on a five-year amortization.
This note payable is collateralized by certain assets of the Company and is
guaranteed by the Company's chairman and his spouse along with another family
member of the Company's chairman.
Currently, the Company is reviewing alternatives to refinance the working
capital revolver and the note payable with other financial institutions. The
$7,000,000 revolver is classified as current in the financial statements as of
September 30, 1997. In the event that the Company is unable to close a
financing transaction, the Company's chairman has agreed to fund any capital and
operating requirements.
The Company is subject to various covenants associated with its revolving line
of credit and term note, such as limitations on payments of dividends and on the
sale of a substantial portion of assets and on future indebtedness.
The Company currently does not meet all of the American Stock Exchange's
criteria for continued listing on the stock exchange. The Company has met with
the Exchange periodically over the past two years, including a recent meeting in
October 1997, to apprise the Exchange of its current financial condition,
historical operating results as well as its preliminary 1998 budget, and current
cashflow requirements. Due to the Company's failure to meet the Exchange's
listing requirements, there can be no assurance in the future that the Company's
common shares will continue to be listed on the American Stock Exchange.
The Company is currently in default on its revolving line of credit with a bank
due to amounts borrowed in excess of the eligible borrowing base. The Company
is currently reviewing alternatives to refinance this working capital revolver
as well as other long-term debt. In the event that the Company is unable to
close a financing transaction, the Company's chairman has agreed to fund any
future capital and operating cash requirements.
<PAGE>
FORWARD LOOKING STATEMENTS
This Management's Discussion and analysis of Financial Condition and Results of
Operations include certain statements that may be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements in this Form 10-Q, other than statements of historical facts, that
address activities, events or developments that the Company expects, believes or
anticipates will or may occur in the future are forward looking statements.
Although the Company believes the expectations expressed in such forward-looking
statements are based on reasonable assumptions within the bounds of its
knowledge of its business, such statements are not guarantees of future
performance and actual results or developments may differ materially from those
in the forward looking statements. Forward-looking statements involve risks and
uncertainties including, but not limited to, general economic trends, continued
acceptance of the Company's product in the marketplace, competitive factors,
manufacturing and raw material costs, the Company's dependence upon third-party
suppliers, and other risks detailed from time to time in the Company's periodic
reports filed with the Securities and Exchange Commission. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
During the third quarter of 1997, the Company issued a total of 200,682
shares of common stock in connection with the conversion of convertible
debentures previously issued by the Company in transactions effected pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended (the
"Act"). The recipients of such shares of common stock were accredited investors
(as defined in Regulation D promulgated under the Act). The shares of common
stock issued upon such conversion were exempt from registration under the Act
pursuant to Section 3(a)(9) of the Act. No commission or other remuneration was
paid to a broker or placement agent in connection with such conversion. The
dates of the Company's issuance instructions to its transfer agent and the
conversion price per shares for each of such conversions is as follows:
<TABLE>
<CAPTION>
Date Conversion Price Number of Shares
- ---- ---------------- ----------------
<S> <C> <C>
July 9, 1997 $0.80 96,069
July 21, 1997 0.70 60,000
August 1, 1997 0.64 44,613
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 1997, the Company's borrowings on its bank
revolving credit facility exceeded the borrowing base of eligible accounts
receivable and inventories. The principal amount owed by the Company under such
revolving credit facility is $7,000,000. The Company is current with respect to
its required payments under such revolving credit facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Silverado Foods, Inc.
---------------------
Registrant
By: /s/ Dorvin D. Lively
---------------------------------------
Dorvin D. Lively
Vice President, Chief Financial Officer
and Secretary (Duly Authorized
Officer and Principal
Accounting Officer)
Date: November 14, 1997
<PAGE>
INDEX TO EXHIBITS
The following documents are included, as exhibits to this Form 10-Q. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
27.0 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 82,520
<SECURITIES> 0
<RECEIVABLES> 3,696,399
<ALLOWANCES> 0
<INVENTORY> 4,266,241
<CURRENT-ASSETS> 9,316,682
<PP&E> 11,343,173
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,140,457
<CURRENT-LIABILITIES> 19,714,303
<BONDS> 0
0
0
<COMMON> 116,887
<OTHER-SE> 32,140,457
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 35,188,880
<TOTAL-REVENUES> 35,188,880
<CGS> 24,947,424
<TOTAL-COSTS> 19,543,003
<OTHER-EXPENSES> 28,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,127,852
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,458,239)
<DISCONTINUED> (1,727,564)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,185,803)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
