<PAGE> 1
US SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
( )TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____TO ___
COMMISSION FILE NUMBER 33-62038NY
SARATOGA BEVERAGE GROUP, INC.
DELAWARE 14-1749554
(STATE OR OTHER JURISDICTION (IRS EMPLOYER ID NUMBER)
OF INCORPORATION OR ORGANIZATION)
11 GEYSER ROAD, SARATOGA SPRINGS, NEW YORK 12866
(518) 584-6363
(ISSUER'S TELEPHONE NUMBER)
CHECK WHETHER ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(d) FOR 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
--- ---
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE:
COMMON STOCK - 2,646,139 SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE,
AND 522,955 SHARES OF CLASS B COMMON STOCK, $.01 PAR VALUE,
WERE OUTSTANDING AS OF JUNE 30, 1998
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
--- ---
THIS DOCUMENT CONTAINS 12 PAGES
SARATOGA BEVERAGE GROUP, INC.
<PAGE> 2
FORM 10-QSB
INDEX
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 1
(UNAUDITED) AND AS OF DECEMBER 31, 1997
CONSOLIDATED STATEMENTS OF OPERATIONS AND 2
ACCUMULATED DEFICIT FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE SIX 3
MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4-7
ITEM 2 MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL 8-12
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 13
ITEM 2 CHANGES IN SECURITIES 13
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS 13
ITEM 5 OTHER INFORMATION 13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 13-16
SIGNATURES 17
<PAGE> 3
SARATOGA BEVERAGE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,520.409 $ 1,567,973
Short term investments 588,080 1,153,915
Accounts receivable, net of allowance for doubtful
accounts of $110,220 in 1998 and $150,695 in 1997 1,770,537 689,774
Inventories 510,069 360,670
Prepaid expenses and other current assets 38,424 29,993
----------- -----------
Total current assets 4,427,519 3,802,325
Property, plant and equipment, net 1,340,188 1,501,030
Deferred financing cost, net 66,157 83,415
Note receivable 400,000 300,000
Other assets, net 666,210 18,049
----------- -----------
TOTAL ASSETS $ 6,900,074 $ 5,704,819
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,235,866 $ 1,282,889
Current portion of obligation under capital lease 4,672 6,698
----------- -----------
Total current liabilities 1,240,538 1,289,587
Obligation under capital lease 1,208
5% subordinated convertible note 1,500,000 1,500,000
----------- -----------
TOTAL LIABILITIES 2,740,538 2,790,795
----------- -----------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding
Class A common stock, $.01 par value; 50,000,000 shares
authorized; 2,646,139 and 2,407,039 shares issued and
outstanding in 1998 and 1997, respectively 26,461 24,070
Class B common stock, $.01 par value; 2,000,000 shares
authorized; 522,955 and 562,055 shares issued and
outstanding in 1998 and 1997, respectively 5,230 5,621
Paid-in capital 9,857,922 9,346,922
Accumulated deficit (5,730,077) (6,462,589)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,159,536 2,914,024
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,900,074 $ 5,704,819
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE> 4
SARATOGA BEVERAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUE 2,848,520 1,706,322 4,541,675 2,812,095
COST OF GOODS SOLD, EXCLUSIVE OF
DEPRECIATION, AMORTIZATION AND
EQUIPMENT LEASE EXPENSE SHOWN
SEPARATELY BELOW 1,766,864 1,095,871 2,784,356 1,786,568
----------- ----------- ----------- -----------
GROSS PROFIT 1,081,656 610,451 1,757,319 1,025,527
----------- ----------- ----------- -----------
OPERATING EXPENSES:
MARKETING AND SALES 223,664 90,184 351,992 169,110
GENERAL AND ADMINISTRATIVE 250,669 264,001 495,804 481,351
DEPRECIATION, AMORTIZATION, AND
EQUIPMENT LEASE EXPENSE 138,915 95,522 277,395 188,675
----------- ----------- ----------- -----------
613,248 449,707 1,125,191 839,136
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 468,408 160,744 632,128 186,391
OTHER INCOME (EXPENSE):
COMMISSION INCOME 22,838 51,285 54,522 65,081
INTEREST INCOME 39,079 11,108 91,349 12,424
INTEREST EXPENSE (19,647) (4,906) (39,356) (8,103)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE), NET 42,270 57,487 106,515 69,402
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 510,678 218,231 738,643 255,793
PROVISION FOR INCOME TAXES 5,203 6,131
----------- ----------- ----------- -----------
NET INCOME 505,475 218,231 732,512 255,793
ACCUMULATED DEFICIT:
BEGINNING OF PERIOD (6,235,552) (7,229,655) (6,462,589) (7,267,217)
----------- ----------- ----------- -----------
END OF PERIOD $(5,730,077) $(7,011,424) $(5,730,077) $(7,011,424)
=========== =========== =========== ===========
PER SHARE INFORMATION:
BASIC EPS $ 0.16 $ 0.07 $ 0.23 $ 0.09
DILUTED EPS $ 0.14 $ 0.06 $ 0.21 $ 0.08
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 5
SARATOGA BEVERAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 732,512 $ 255,793
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 212,018 188,675
Provision for doubtful accounts (33,722) 38,500
Changes in operating assets and liabilities:
Accounts receivable (1,047,041) (965,091)
Inventories (149,399) (13,094)
Prepaid expenses and other current assets (8,431) (50,188)
Accounts payable and accrued liabilities (47,023) 515,205
----------- -----------
Net cash used in operating activities (341,086) (30,200)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of short term investments 565,835
Issuance of note receivable (100,000)
Purchase of property, plant and equipment (33,662) (38,986)
(Increase) in other assets (648,417) (1,800)
----------- -----------
Net cash used in investing activities (216,244) (40,786)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 1,500,000
Deferred financing costs (80,750)
Principal payments on revolving credit facility (300,000)
Principal reductions on capital lease obligation (3,234) (2,805)
Proceeds from issuance of Class A common stock 1,012,500
Proceeds on the exercise of stock warrants 3,000
Proceeds from the exercise of stock options 43,250
(Purchase) issuance of treasury stock, at cost (499,500) 3,990
Distribution to minority interest (9,367)
----------- -----------
Net cash provided by (used in) financing activities 509,766 1.157,318
----------- -----------
(Decrease) increase in cash and cash equivalents (47,564) 1,086,332
Cash and cash equivalents at beginning of period 1,567,973 387,938
----------- -----------
Cash and cash equivalents at end of period $ 1,520,409 $ 1,474,270
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 24,483
=========== ===========
Interest paid $ 75,392 $ 4,145
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
SARATOGA BEVERAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the
three-month and six-month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
The accompanying 1997 financial statements include the Company and its
wholly-owned subsidiary, Saratoga Springs Distribution Corporation, which was
dissolved in July 1997. The accompanying 1998 financial statements include the
Company and its wholly-owned subsidiary, Rowale Corp., which was incorporated in
the State of Delaware on March 2, 1998.
PER SHARE DATA
Earnings per share is computed using the weighted average number of shares of
Class A and Class B common stock outstanding during each year. Diluted net
income per share includes the effect of all potentially dilutive securities.
Earnings per share amounts for all periods presented have been computed in
accordance with FAS 128, Earnings Per Share.
RECLASSIFICATION
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
4
<PAGE> 7
2. EARNINGS PER SHARE
The calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Numerator:
Net income $505,475 $218,231 Basic $732,512 $255,793
Impact of potential common
shares:
Interest expense on 5%
subordinated convertible
note 18,750 3,958 37,500 3,958
-------- -------- -------- --------
$524,225 $222,189 Diluted $770,012 $259,751
======== ======== ======== ========
Denominator:
Weighted-average
outstanding shares 3,202,061 2,944,364 Basic 3,162,188 2,888,794
Impact of potential
common shares:
Warrants 150,000 150,000
Stock options (1) 126,522 (45,659) 113,256 (94,104)
Convertible debt 428,571 428,571 428,571 428,571
--------- --------- --------- ---------
3,757,154 3,477,276 Diluted 3,704,015 3,373,261
========= ========= ========= =========
</TABLE>
(1) Outstanding warrants and options for 205,678 and 210,678 shares of stock for
the three and six months ended June 30, 1998 were not included in the
calculation of earnings per share because they were considered to be
anti-dilutive. Outstanding warrants and options for 213,690 and 216,690 shares
of stock were considered to be anti-dilutive at June 30, 1997.
In February, 1998, Steel Partners II, L.P. purchased 275,000 shares of
unregistered Class A common stock from the Company at a purchase price of $2.25
per share. Steel Partners II, L.P., an affiliate of a director of the Company is
a private investment fund that invests in smallcap companies.
Carl T. Wolf became co-chairman of the Board and director in February 1998. At
that time he purchased 175,000 shares of unregistered Class A common stock from
the Company at a purchase price of $2.25 per share. In connection therewith, Mr.
Wolf was issued an option to purchase 200,000 shares of Class A common stock at
an exercise price of $2.875 per share. Mr. Wolf resigned from the Board on April
17, 1998 for personal reasons and on that date, the Company repurchased 150,000
shares of unregistered
5
<PAGE> 8
Class A common stock at a price of $2.25 per share. In connection with Mr.
Wolf's resignation, the option was amended to 75,000 shares and the expiration
date of the options was advanced to February 3, 2003.
The Company also repurchased 100,000 shares of unregistered Class A common stock
for $1.62 per share in a private transaction from an unaffiliated shareholder
during the first quarter of 1998.
During the second quarter of 1998 the 250,000 shares held in treasury were
retired.
3. COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS
In June 1997, the Company entered into a three-year master distribution
agreement whereby the Company was granted the exclusive right and license to act
as the master distributor of certain products in the United States until June
2000. The Company will receive a minimum commission of $1.00 per case for each
case of products sold. The Company is responsible for collecting the receivables
from customers and remitting payments to vendors. At June 30, 1998, $304,650 was
included in accounts receivable and $166,119 in accounts payable and accrued
liabilities related to this agreement
At June 30, 1998 and 1997, the Company's cash, cash equivalents, and short term
investment balance includes approximately $2,047,000 and $1,281,000
respectively, with Dean Witter Reynolds, Inc. A principal stockholder of the
Company is an officer of Dean Witter Reynolds, Inc.
4. INCOME TAX
The Company accounts for income taxes according to Financial Accounting Standard
No. 109 (FAS 109). FAS 109 requires the use of the asset and liability method of
accounting for income taxes. Under this method, deferred taxes are recognized
for the tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years for the differences between the financial
statement and tax basis of existing assets and liabilities.
In the six months ended June 30, 1998, the Company offset substantially all
income taxes through the use of net operating loss carryforwards. A full
valuation allowance has been maintained against the Company's net deferred tax
assets.
5. PROPOSED ACQUISITION
On March 31, 1998, the Company filed a Schedule 13D with the Securities and
Exchange Commission relating to The Fresh Juice Company, Inc. ("Fresh Juice") in
accordance with the Securities Exchange Act of 1934, as amended, and the rules
promulgated thereunder. The Company has entered into a Letter of Agreement dated
March 29, 1998 with Fresh Juice regarding a possible acquisition of Fresh Juice
by the Company at a cash purchase price of $3.75 per share. Pursuant to the
Letter of Agreement, Fresh Juice agreed to certain "no-shop" provisions, subject
to its fiduciary duties (the "Exclusivity Period"), through a date not later
than April 25, 1998. On April 24, 1998, the Company and Fresh Juice extended the
Exclusivity Period to the earliest to occur of (i) May 20, 1998; (ii) the
Company notifying Fresh Juice in writing that negotiations toward the possible
acquisition have been terminated; and (iii) seven business
6
<PAGE> 9
days after the date on which Fresh Juice has provided the Company with all due
diligence materials reasonably available to Fresh Juice and reasonably requested
by the Company. Pursuant to the April 24, 1998 letter, the Company agreed not to
acquire, offer to acquire or agree to acquire, in any manner, any assets or
securities of Fresh Juice other than pursuant to the Option Agreement through
the earliest to occur of (i) the execution of a definitive agreement regarding
the possible acquisition; (ii) the termination by Fresh Juice of discussions
with the Company regarding the possible acquisition; and (iii) May 25, 1998. The
Letter of Agreement also provides for certain payments to Fresh Juice in the
event that a definitive agreement is executed and the transaction is not
consummated or if the Company is unable to obtain a fairness opinion. The
proposed transaction is subject to, among other things, due diligence, financial
contingencies and the negotiation and execution of a definitive agreement.
On March 30, 1998, the Company and Fresh Juice entered into a confidentiality
agreement governing the confidentiality of information exchanged by Fresh Juice
and the Company in pursuing the possible acquisition.
Recorded in other assets is an investment in Fresh Juice of 61,400 shares at a
cost of approximately 173,000. Also included in other assets is approximately
475,000 of cost associated with the planned acquisition of Fresh Juice. In the
event that the merger is not consummated, a significant portion of these costs
will be charged to operations.
The Company and Steven Smith, a director, President and shareholder of Fresh
Juice, entered into an Option Agreement dated March 16, 1998 and executed on
March 18, 1998 whereby Mr. Smith has granted to Saratoga the option to purchase
825,000 shares of his common stock in Fresh Juice at $3.00 per share. The Option
Agreement provides for the consideration to be paid to Mr. Smith to be increased
under certain circumstances involving an acquisition of Fresh Juice at a price
in excess of $3.00 per share. Under the terms of the Letter of Agreement, the
consideration to be paid to Mr. Smith for his 825,000 shares of Fresh Juice
common stock would be equal to $3.375 per share. The option contained in the
Option Agreement will expire upon the earliest to occur of (I) the consummation
of an acquisition transaction with Fresh Juice; (ii) the termination of
negotiations toward an acquisition transaction with Fresh Juice; and (iii)
October 31, 1998.
The Company and Fresh Juice are continuing to pursue the possible acquisition.
No merger agreement has been signed.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 131, Disclosures about Segments of an Enterprise and
Related Information. This standard requires companies to disclose certain
information regarding operating segments in interim and annual financial
statements, and is required to first be disclosed in annual financial statements
for fiscal years beginning after December 15, 1997. Management has not yet
determined the extent of additional disclosure that may be required under this
standard resulting from either potential business acquisitions or continuing
business operations.
The Financial Accounting Standards Board has also issued Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities. The standard establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that a company
recognize derivatives as assets or liabilities measured at fair value. This
standard is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Management has not yet determined the impact of adoption of this
accounting standard resulting from either potential business acquisitions or
continuing business operations.
7
<PAGE> 10
SARATOGA BEVERAGE GROUP, INC.
FORM 10-QSB
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
GENERAL
The Company is primarily engaged in the bottling, marketing and distribution of
spring and mineral water products and in packaging products for others
("co-packing"). The Company's product line currently includes: sparkling spring
water, sparkling essence-flavored spring water products, non-carbonated spring
water and non-carbonated spring water with flavors. All of the Company's
products are marketed as premium domestic bottled water primarily under the
proprietary brand name "Saratoga." The Saratoga brand name has been in existence
for 125 years.
The Company's springs and bottling facilities have been operated through the
years by a number of owners, including Anheuser-Busch and, most recently, Evian
Waters of France, a division of BSN, S.A. Anheuser-Busch and Evian Waters of
France each operated the business for approximately two years. The Company was
organized and acquired the assets of its business in April 1992 from the owners
of Evian Waters of France. The Company's bottling facilities, which had been
closed since May 1991 by the previous owners, recommenced operations in May
1992. Since that time, the Company has undertaken the task of rebuilding a
distribution network and customer base for the Saratoga brand beverage products.
Since the end of the 1980s, the bottled water industry has experienced rapid
growth. The industry is divided into two distinct segments: non-carbonated water
and sparkling (carbonated) water. The Company believes that non-carbonated water
is becoming an alternative for municipal tap water and that it is perceived by
consumers as a healthy and refreshing alternative to soft drinks, coffee, and
other beverages. The Company also believes that sparkling water is perceived as
a healthy and refreshing beverage alternative to beer, liquor and wine. The
Company anticipates that sales in the bottled water industry will continue to
grow as consumer trends involving increased health and fitness consciousness,
alcohol moderation, and caffeine and sodium avoidance continue to develop and
grow. The Company believes that it is well-positioned to take advantage of the
anticipated future growth of the bottled water industry.
PRODUCTS
The main product lines sold under the Saratoga label include various types of
bottled water: sparkling spring water, sparkling lemon essence-flavored spring
water, sparkling lime essence-flavored spring water, sparkling berry
essence-flavored spring water and natural non-carbonated spring water. The
company also markets a line of flavored spring water beverages under the name
Saratoga Splash.
The Company's bottled water is sold in a variety of bottle sizes. The sparkling
spring water products are packaged in four different premium sizes: 7.7 ounce,
12 ounce, 28 ounce glass bottles, and a 42.3 ounce PET recyclable bottle. The
non-carbonated water is packaged in 0.5 liter, 1 liter, 1.5 liter and 24 ounce
PET recyclable bottles and 12 ounce glass bottles.
8
<PAGE> 11
On June 30, 1997, the Company entered into an agreement with Mistic Brands, Inc.
("Mistic") that granted the Company the non-exclusive right to use the
formulations and the exclusive right to use the graphic designs utilized by
Mistic in connection with beverages sold under the Saratoga Splash trademark
pursuant to the original agreement. Saratoga pays Mistic a royalty for cases
sold under the Saratoga Splash trademark.
Saratoga Splash is a non-carbonated fruit flavored spring water product. It
currently is available in four flavors: Lemon Frost, Orange Twist, Strawberry
Mist, Blueberry Burst, Grapes Galore, and Raspberry Rush.
In June 1997, the Company entered into a three-year master distribution
agreement whereby the Company was granted the exclusive right and license to act
as the master distributor of certain products in the United States until June
2000. The Company will receive a minimum commission of $1.00 per case for each
case of products sold. The Company is responsible for collecting the receivables
from customers and remitting payments to vendors. At June 30, 1998, $304,650 was
included in accounts receivable and $166,119 in accounts payable and accrued
liabilities related to this agreement.
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results for the three and six month periods ended June 30, 1998 and 1997.
REVENUE
Revenue for the three month period ended June 30, 1998 increased 67% to
$2,848,520 an increase of $1,142,198 from revenue of $1,706,322 for the
comparable period in 1997. Revenue for the six month period ended June 30, 1998
increased 62% to $4,541,675 an increase of $1,729,580 from revenue of $2,812,095
for the comparable period in 1997. The increase in revenue is primarily
attributable to an increase in branded product sales.
GROSS PROFIT MARGINS
The gross profit margin was 38% and 39% respectively for the three and six month
periods ended June 30, 1998 and 36% and 37% for the comparable periods ended
June 30, 1997. The increase in the gross profit percentage in 1998 is primarily
due to a decrease in fixed costs per case attributable to the increase in the
volume of cases produced during the year.
MARKETING AND SALES EXPENSES
Marketing and sales expenses were $223,664, representing 7.9% of revenue and
$351,992 or 7.8% of revenue for the three and six month periods ending June 30,
1998 as compared with 90,184 or 5.3% and 169,100 or 6.0% for the same periods in
1997. The increase in marketing and sales expenses for the three and six month
periods ended June 30, 1998 is primarily attributable to the increase in
customer promotions and incentive sales programs.
9
<PAGE> 12
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and six month periods ended
June 30, 1998 were $250,669 and $495,804, respectively, a decrease of $13,332
and an increase of $14,453 from the same periods in 1997. As a percentage of
total revenue, general and administrative expenses decreased from 15.5% in 1997
to 8.8% in 1998 and from 17.1% in 1997 to 10.9% in 1998 for the three and six
month periods ended June 30. The Company's general and administrative expenses
are comprised primarily of fixed costs and, as total revenue increases, they
decrease as a percentage of total revenue.
OTHER INCOME (EXPENSE)
Net other income for the three and six month periods ended June 30, 1998
decreased $15,217 and increased $37,113, respectively, from the same periods in
1997. The change for both the three and six month periods is primarily
attributable to a decrease of $28,447 and $10,559 in commission income, and a
$27,971 and $78,925 increase in interest income, offset by an increase of
$14,741 and $31,253 in interest expense, respectively. The commission income is
primarily from the sale of beverage products as part of the three-year master
distribution agreement entered into June 1997. Interest income increased
primarily due to income earned on the $1,500,000 proceeds from the 5%
Subordinated Convertible Note and on the proceeds from the issuance of Class A
common stock. Interest expense is accrued on the unpaid principal amount of the
Note. The details of the Note are disclosed in the Liquidity and Capital
Resources section below.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's working capital was $3,186,981 including cash
and cash equivalents of $1,520,409 and short term investments of $588,080. The
current ratio at June 30, 1998 was 3.6 to 1. For the six months ended June 30,
1998 and 1997, cash flows used in operations were $341,086 and $30,200
respectively.
The Company's debt-to-equity ratio at June 30, 1998 was 36.0%. Debt consists of
the $1,500,000 5% Subordinated Convertible Note. Current liabilities include
accounts payable and accruals of $1,085,866 and $4,672 short-term portion of
obligation under capital lease.
On January 31, 1997, the Company and Triarc entered into a Termination Agreement
whereby the Credit Agreement was terminated and as such, the Credit Facility was
terminated and the $300,000 outstanding principal balance was repaid.
On June 12, 1997, the Company entered into a Securities Purchase Agreement with
Parley International, as nominee for Maerki Baumann & Co., A.G. (Zurich)
("Purchaser"), pursuant to which Purchaser acquired $1,500,000 principal amount
of the Company's 5% Subordinated Convertible Notes due 2000 (the "Note") for an
aggregate purchase price of $1,500,000 in a private placement effected under
Section 4(2) of the Securities Act of 1933. Interest on the unpaid principal
amount accrues from the date of issuance at a rate of 5% per annum. Interest
becomes due and payable on each of the first, second and third anniversaries.
The principal amount of the Note is due and payable on the third anniversary of
the Note and is convertible at the option of the holder into shares of the
Company's Class A common stock at a conversion price of $3.50 principal amount
per share. The Note is mandatorily convertible into shares of Class A common
stock in the event that the closing price of Class A common stock exceeds $5.25
for three consecutive trading days.
10
<PAGE> 13
Global Financial Group, Inc. acted as placement agent in connection with the
offering of the Note and, in connection therewith, received a cash commission in
the amount of $80,750 and was issued a warrant to acquire 30,000 shares of Class
A common stock for an exercise price of $3.50 per share. The commission and the
fair value of the warrant, determined to be $22,800. were recorded as deferred
financing costs and are being amortized over the life of the Note, three years.
On December 23, 1997 the Company and Onyx Management Services, LLC ("Onyx")
entered into a loan agreement whereby the Company has agreed to loan Onyx up to
$800,000 (the "Loan") for working capital and general business purposes. As of
June 30, 1998, the Company had loaned and advanced to Onyx a sum of $400,000.
The loan is collateralized by all assets of Onyx.
Onyx agreed to pay interest on the principal amount of the Secured Promissory
Note at a per annum rate equal to the greater of (I) eight percent (8%) or (ii)
the prime rate plus one percent (1%) as in effect on the first day of the
calendar quarter for which such interest shall accrue. Such interest shall be
payable in arrears quarterly on the first day of each calendar quarter,
beginning on April 1, 1998. The effective rate of interest for the quarters
ended March 31, 1998 and June 30, 1998 was 9.5% and interest receivable has been
recorded in the amount of $9,394.
Any unpaid principal amount in excess of $300,000 is payable in full on December
23, 2000. The remaining unpaid principal amount outstanding under this Note
shall become due and payable on December 23, 2001. In addition, the Company
acquired a ten year warrant to purchase 35% of outstanding stock of Onyx. The
warrant may be exercised by issuance of 100,000 shares of the Company's Class A
common stock.
The Company installed a new bottling line in 1998. This line was financed by a
seven year operating lease entered into December, 1997. At June 30, 1998, an
equipment payable in the amount of $19,324 is reflected in current liabilities
and represents the balance payable on the production equipment. The lease
contains a purchase option after 72 months.
PROPOSED ACQUISITION
On March 31, 1998, the Company filed a Schedule 13D with the Securities and
Exchange Commission relating to The Fresh Juice Company, Inc. ("Fresh Juice") in
accordance with the Securities Exchange Act of 1934, as amended, and the rules
promulgated thereunder. The Company has entered into a Letter of Agreement dated
March 29, 1998 with Fresh Juice regarding a possible acquisition of Fresh Juice
by the Company at a cash purchase price of $3.75 per share. Pursuant to the
Letter of Agreement, Fresh Juice agreed to certain "no-shop" provisions, subject
to its fiduciary duties (the "Exclusivity Period"), through a date not later
than April 25, 1998. On April 24, 1998, the Company and Fresh Juice extended the
Exclusivity Period to the earliest to occur of (i) May 20, 1998; (ii) the
Company notifying Fresh Juice in writing that negotiations toward the possible
acquisition have been terminated; and (iii) seven business days after the date
on which Fresh Juice has provided the Company with all due diligence materials
reasonably available to Fresh Juice and reasonably requested by the Company.
Pursuant to the April 24, 1998 letter, the Company agreed not to acquire, offer
to acquire or agree to acquire, in any manner, any assets or securities of Fresh
Juice other than pursuant to the Option Agreement through the earliest to occur
of (i) the execution of a definitive agreement regarding the possible
acquisition; (ii) the termination by Fresh Juice of discussions with the Company
regarding the possible acquisition; and (iii) May 25, 1998. The Letter of
Agreement also provides for certain payments to Fresh Juice in the event that a
definitive agreement is executed and the transaction is not consummated or if
the Company is unable to obtain a fairness opinion. The proposed transaction is
subject to, among other things, due diligence, financial contingencies and the
negotiation and execution of a definitive agreement.
11
<PAGE> 14
On March 30, 1998, the Company and Fresh Juice entered into a confidentiality
agreement governing the confidentiality of information exchanged by Fresh Juice
and the Company in pursuing the possible acquisition.
Recorded in other assets is an investment in Fresh Juice of 61,400 shares at a
cost of approximately 173,000. Also included in other assets is approximately
475,000 of cost associated with the planned acquisition of Fresh Juice. In the
event that the merger is not consummated, a significant option of these costs
will be charged to operations.
The Company and Steven Smith, a director, President and shareholder of Fresh
Juice, entered into an Option Agreement dated March 16, 1998 and executed on
March 18, 1998 whereby Mr. Smith has granted to Saratoga the option to purchase
825,000 shares of his common stock in Fresh Juice at $3.00 per share. The Option
Agreement provides for the consideration to be paid to Mr. Smith to be increased
under certain circumstances involving an acquisition of Fresh Juice at a price
in excess of $3.00 per share. Under the terms of the Letter of Agreement, the
consideration to be paid to Mr. Smith for his 825,000 shares of Fresh Juice
common stock would be equal to $3.375 per share. The option contained in the
Option Agreement will expire upon the earliest to occur of (I) the consummation
of an acquisition transaction with Fresh Juice; (ii) the termination of
negotiations toward an acquisition transaction with Fresh Juice; and (iii)
October 31, 1998.
The Company and Fresh Juice are continuing to pursue the possible acquisition.
No merger agreement has been signed.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 131, Disclosures about Segments of an Enterprise and
Related Information. This standard requires companies to disclose certain
information regarding operating segments in interim and annual financial
statements, and is required to first be disclosed in annual financial statements
for fiscal years beginning after December 15, 1997. Management has not yet
determined the extent of additional disclosure that may be required under this
standard resulting from either potential business acquisitions or continuing
business operations.
The Financial Accounting Standards Board has also issued Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities. The standard establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that a company
recognize derivatives as assets or liabilities measured at fair value. This
standard is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Management has not yet determined the impact of adoption of this
accounting standard resulting from either potential business acquisitions or
continuing business operations.
12
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE.
ITEM 2 - CHANGES IN SECURITIES
NONE.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5 - OTHER INFORMATION
NONE.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Exhibits included herein:
a) Exhibits and Index
EXHIBIT NO.
2.1* (P) Agreement and Plan of Merger
3.1* (P) Restated Certificate of Incorporation of the Company
3.2* (P) By-Laws of the Company
4.1* (P) Specimen of Class A Stock Certificate
4.2*** (P) Non-Callable Warrant A dated December 13, 1995 by the Company
to Triarc Companies, Inc. ("Triarc") to purchase 25% of the
number of shares of Class A Common Stock of Saratoga then
issued and outstanding on a fully-diluted basis
4.3*** (P) Non-Callable Warrant B dated December 13, 1995 by the Company
to Triarc to purchase 26% of the number of shares of Class A
Common Stock of Saratoga then issued and outstanding on a
fully-diluted basis
13
<PAGE> 16
4.4* (P) Form of Underwriter's Warrant
4.5* (P) Form of Escrow Agreement entered into by the current
stockholders of the Company and the Underwriter
9.1* (P) Agreement, dated as of August 12, 1992, by and between Anthony
Malatino and Robin Prever, as amended by Amendment No. 1
thereto dated as of April 30, 1993
10.1* (P) Asset Purchase Agreement, dated as of March 31, 1992, by and
between Saratoga Springs Mineral Water Company and Mineral
Springs Acquisition Group, Inc.
10.2* (P) General Assignment and Bill of Sale, dated April 3, 1992, by
Saratoga Springs Mineral Water Company to Mineral Springs
Acquisition Group, Inc.
10.3* (P) Assignment and Assumption Agreement, dated April 3, 1992,
by and between Saratoga Springs Mineral Water Company and
Mineral Springs Acquisition Group, Inc.
10.4* (P) Assignment, dated April 3, 1992, by Saratoga Springs Mineral
Water Company to Mineral Springs Acquisition Group, Inc.
10.5* (P) Assignment, dated April 3, 1992, by Saratoga Springs Mineral
Water Company to Mineral Springs Acquisition Group, Inc.
10.6* (P) Letter Agreement, dated as of May 1, 1993, by and between the
Company and Mark Wiggins
10.7**+ (P) Employment Agreement entered into by the Registrant and Robin
Prever
10.8* (P) Form of the Saratoga Spring Water Company 1993 Stock Option
Plan
10.9**+ (P) Consulting Agreement entered into by the Company and Leonard
Toboroff
10.10* (P) Form of Consulting Agreement entered into by the Company and
D.H. Blair & Co. (the "Underwriter")
10.11* (P) Note, dated August 31, 1992, from the Company to Fleet Bank of
New York, including guarantees
10.12* (P) Letter from Fleet Bank of New York to the Company regarding
waiver of defaults
10.13* (P) Letter Agreement between the Company and Owens-Brockway Glass
Containers
10.14* (P) Form of Mergers and Acquisitions Agreement entered into by the
Company and the Underwriter
10.15** (P) Partnership Agreement, dated July 21, 1993, by and between JNJ
Distributors, Inc. and Saratoga Springs Distribution Corp., as
amended by Amendment of Partnership Agreement hereto dated
November 9, 1993
10.16** (P) Stock Agreement, dated July 21, 1993, by and between JNJ
Distributors, Inc. and Saratoga Spring Water Company
10.17** (P) Distribution Agreement, dated March 25, 1993, by and between
Joseph Victori Wines, Inc. and JNJ Distributors, Inc.
10.18A*** (P) Credit Agreement, dated as of July 13, 1995, between the
Company and Triarc
10.18B# Termination Agreement dated as of January 31, 1997 between the
Company and Triarc
10.19*** (P) Amendment, Waiver and Acknowledgment Agreement dated as of
December 13, 1995 by and between the Company and Triarc
10.20*** (P) Sales and Marketing Services Agreement dated as of May 1, 1995
between the Company and RCC
10.21*** (P) Cott Co-pack Agreement dated as of June 8, 1995
10.22**** Manufacturing and Distribution Agreement, dated as of July 23,
1996, by and between the Company and Mistic Brands, Inc.
10.23## Bottling Agreement, dated April 16, 1997, by and among the
Company, Hype Corporation, Hype Beverage Corporation, World
Wide Beverage Inc., Hype Water Company, Inc., Hyperholics Inc.,
R.J. Barry Cox and Nigel Spiro
14
<PAGE> 17
10.24##+ Line of Credit dated as of April 10, 1997 to the Company from
Robin Prever and Anthony Malatino
10.25### Saratoga Splash Agreement, dated as of June 30, 1997, by and
between the Company and Mistic Brands, Inc.
10.26### The Master Distribution Agreement dated as of June 16, 1997 by
and among Saratoga Beverage Group, Inc., Hype Corporation,
World Wide Beverage Inc., Global Brands AG, Hype Water Company,
Inc. and Hyperholics Inc.
10.27#### Loan Agreement, Securities Purchase Agreement, Secured
Promissory Note, and Warrants for Messrs. Holliday, Merhi and
Barr in connection with the loan to Onyx Management Services,
LLC
10.28x Stock Option Agreement with Carl T. Wolf dated February 4, 1998
10.29x Securities Purchase Agreement with Carl T. Wolf dated February
12, 1998
10.30x Stock Option Agreement with Steel Partners II, L.P. dated
February 25, 1998
10.31x Securities Purchase Agreement with Carl T. Wolf dated February
25, 1998
10.32x Option Agreement with Steven Smith dated March 16, 1998
10.33x Letter of Agreement with Fresh Juice dated March 29, 1998
10.34x Amended and Restated Stock Option Agreement with Carl T. Wolf
dated April 17, 1998
10.35x Fresh Juice Extension dated April 24, 1998
10.36xx Amendment to By-Laws
22** (P) Subsidiaries
24*** (P) Power of attorney
(*) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2 filed with the Commission on June 16,
1993 (Registration No. 33-62038NY).
(**) Incorporated herein by reference to the Company's form 10-KSB
filed with the Commission on March 30, 1994.
(***) Incorporated herein by reference to the Company's form 10-KSB
filed with the Commission on March 29, 1996.
(****) Incorporated herein by reference to the Company's form 10-QSB
filed with the Commission on November 12, 1996.
(#) Incorporated herein by reference to the Company's form 10-KSB
filed with the Commission on April 15, 1997.
(##) Incorporated herein by reference to the Company's form 10-QSB
filed with the Commission on May 13, 1997.
(###) Incorporated herein by reference to the Company's form 10-QSB
filed with the Commission on August 8, 1997.
(####) Incorporated herein by reference to the Company's form 10-KSB
filed with the Commission on March 20, 1998.
15
<PAGE> 18
(x) Incorporated herewith by reference to the Company's form 10-QSB
filed with the Commission on May 11, 1998
(xx) Incorporated herewith
(+) Management Agreement
(b) Reports on From 8-K: No reports on form 8-K were filed in the quarter ended
March 31, 1998.
16
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereinto duly
authorized.
SARATOGA BEVERAGE GROUP, INC.
(REGISTRANT)
DATE: AUGUST 3, 1998 BY: /S/ ROBIN PREVER
------------------------
ROBIN PREVER
CHIEF EXECUTIVE OFFICER
DATE: AUGUST 3, 1998 BY: /S/ GAYLE HENDERSON
------------------------
GAYLE HENDERSON
CHIEF FINANCIAL OFFICER
17
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT NO.
------- ---
Saratoga Beverage Group, Inc.
Amendment to By-Laws................................................10.36
Exhibit-1
<PAGE> 1
EXHIBIT 10.36
SARATOGA BEVERAGE GROUP, INC.
AMENDMENT TO BY-LAWS
Exhibit-2
<PAGE> 2
SARATOGA BEVERAGE GROUP, INC.
AMENDMENT TO BY-LAWS
Article II, Section 2 is amended by adding the phrase "or the President"
immediately following the word "Directors" in line 4 thereof.
Article II, Section 3 is amended by adding the phrase "or the Co-Chairman"
immediately preceding the word "or" on line 5 thereof.
Article III, Section 1 is amended by inserting the phrase "death," immediately
following "earlier" in line 10 thereof and by deleting the following sentence in
its entirety: "Any director may resign at any time upon notice to the
Corporation."
A new Section 3 is added to Article III to read as follows:
Section 3. Resignation. Any director may resign by delivering
his written resignation to the Corporation at its principal office or
to the President or Secretary. Such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or
upon the happening of some event.
A new Section 4 is added to Article III to read as follows:
Section 4. Removal. Any director may be removed from office
with or without cause by (a) a vote of the holders of a majority of the shares
entitled to vote in the election of directors or (b) a vote of a least
two-thirds of the directors then in office (excluding from the calculation the
director whose removal is sought).
Sections 3-8 of Article III are renumbered 5-10, respectively.
A new Section 11 is added to Article III to read as follows:
Section 11. Chairman of the Board. The Board of Directors may
appoint one or more directors to serve as Chairman or Co-Chairman of the Board
to perform such duties and possess such powers as are assigned to him or to them
by the Board of Directors. The Chairman or Co-Chairman, if more than one, will
serve the Corporation at the pleasure of the Board of Directors and may be
removed at any time, with or without cause, by an affirmative vote of a majority
of the Board of Directors. The Chairman or Co-Chairman, if more than one also
may resign at any time following the resignation procedures set forth in Section
3 above. The Chairman or Co-Chairman, if more than one, shall not be entitled to
receive any compensation as Chairman or Co-Chairman except upon the express vote
of a majority of the remaining directors then in office.
Sections 9 and 10 of Article III are renumbered 12 and 13, respectively.
The original Section 9 (now renumbered as Section 12) of Article III is amended
by replacing it with the word "salary" in line 5 with "compensation".
Exhibit-3
<PAGE> 3
Article IV, Section 1 is amended by deleting from lines 4 and 5 thereof the
phrase "a Chairman of the Board of Directors (who must be a director),"; and by
deleting the phrase ", except in the case of the Chairman of the Board of
Directors," from lines 11 and 12 thereof.
Article IV, Section 2 is amended by deleting from line 11 thereof the words "a
majority" and replacing them with "two-thirds".
Section 4 of Article IV is deleted in its entirety.
Sections 5-11 of Article IV are renumbered 4-10, respectively.
The original Section 5 (now renumbered as Section 4) of Article IV is amended by
replacing it in its entirety as follows:
Section 5. President. The President shall, subject to the
control of the Board of Directors, have general supervision of the
business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The
President shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise
signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these
By-Laws, the Board of Directors or the President. The President shall
attend at all meetings of the stockholders and, if a director, the
Board of Directors. The President shall be the Chief Executive Officer
and, if there be no Chief Operating Officer, the Chief Operating
Officer of the Corporation. The President shall also perform such other
duties and may exercise such other powers as from time to time may be
assigned to him or her by these By-Laws or by the Board of Directors.
The original Section 6 (now renumbered as Section 5) of Article IV is amended by
deleting the clause "(and if there be no Chairman of the Board of Directors),"
from lines 3 and 4 thereof and by further deleting the phrase "no Chairman of
the Board of Directors and" from line 12 thereof.
Article V, Section 1 is amended by deleting from line 4 thereof the phrase "the
Chairman of the Board of Directors."
Exhibit-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,520,409
<SECURITIES> 588,080
<RECEIVABLES> 1,770,537
<ALLOWANCES> 110,220
<INVENTORY> 510,069
<CURRENT-ASSETS> 4,427,519
<PP&E> 3,254,709
<DEPRECIATION> 1,914,521
<TOTAL-ASSETS> 6,900,074
<CURRENT-LIABILITIES> 1,240,538
<BONDS> 1,500,000
0
0
<COMMON> 31,691
<OTHER-SE> 4,127,845
<TOTAL-LIABILITY-AND-EQUITY> 6,900,074
<SALES> 4,541,675
<TOTAL-REVENUES> 4,687,546
<CGS> 2,784,356
<TOTAL-COSTS> 3,136,348
<OTHER-EXPENSES> 773,199
<LOSS-PROVISION> (33,722)
<INTEREST-EXPENSE> 42,590
<INCOME-PRETAX> 738,643
<INCOME-TAX> 6,131
<INCOME-CONTINUING> 732,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 732,512
<EPS-PRIMARY> 0.23<F1>
<EPS-DILUTED> 0.21
<FN>
<F1>THE AMOUNT IS REPORTED AS EPS BASIC NOT EPS PRIMARY.
</FN>
</TABLE>
