-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F7BnESu2wKRsvJXNny3wnUPkGvTZbEeJbnpbSBiSx7P72wlZFBhIZ4IXdy9GluPv efJz+b/2ikIzrVIGEoom/w== 0000950148-96-002752.txt : 19961121 0000950148-96-002752.hdr.sgml : 19961121 ACCESSION NUMBER: 0000950148-96-002752 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961120 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SARATOGA BRANDS INC CENTRAL INDEX KEY: 0000868075 STANDARD INDUSTRIAL CLASSIFICATION: DAIRY PRODUCTS [2020] IRS NUMBER: 133413467 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19721 FILM NUMBER: 96669830 BUSINESS ADDRESS: STREET 1: 1835 SWARTHMORE AVENUE CITY: LAKEWOOD STATE: NJ ZIP: 08701 BUSINESS PHONE: 3103154979 MAIL ADDRESS: STREET 1: 1835 SWARTHMORE AVE CITY: LAKEWOOD STATE: NJ ZIP: 08701 FORMER COMPANY: FORMER CONFORMED NAME: EMPIRE SPECIALTY FOODS INC /NY/ DATE OF NAME CHANGE: 19600201 10QSB 1 10QSB 1 U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 Commission file number 0-19721 SARATOGA BRANDS INC. (Exact name of small business issuer as specified in its charter) New York 13-3413467 (State or other jurisdiction of (I.R.S. Employer identification no.) incorporation or organization) 1835 Swarthmore Avenue, Lakewood, New Jersey 08701 (Address of principal executive offices) (908) 363-3800 (Issuer's telephone number) --------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X.. No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes .......No ....... APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common equity as of September 30, 1996 Title of Each Class Number of Shares Outstanding Common Stock, $.01 par value per 7,953,101 2 SARATOGA BRANDS INC. AND SUBSIDIARIES INDEX
PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Unaudited Balance Sheet at September 30, 1996 3-4 Consolidated Unaudited Statements of Operations for the Three and Nine Months Ended September 30, 1996 and 1995 5 Consolidated Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 6 Notes to Consolidated Unaudited Financial Statements 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-17 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18
2 3 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SARATOGA BRANDS INC. AND SUBSIDIARIES CONSOLIDATED UNAUDITED BALANCE SHEET SEPTEMBER 30, 1996
ASSETS Current Assets: Cash $ 1,551,452 Accounts receivable net of allowance for doubtful accounts of $53,830(Note 2) 1,585,026 Inventories(Note 2) 812,150 Notes Receivable- Related Party(Note 2) 414,852 Prepaid expenses and other current assets 377,971 ----------- Total current assets 4,741,451 Property and equipment - net(Note 3) 3,428,329 Other assets 350,304 Intangible Assets(Note 2) 967,578 Excess of cost over fair value of assets acquired(Note 2) 8,401,708 ----------- TOTAL ASSETS $17,889,370 ===========
The accompanying notes to consolidated unaudited financial statements are an integral part hereof. 3 4 SARATOGA BRANDS INC. AND SUBSIDIARIES CONSOLIDATED UNAUDITED BALANCE SHEET (CONTINUED) SEPTEMBER 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current Liabilities: Loans payable(Note 4) $ 10,539 Accounts payable and accrued expenses 2,813,858 Current portion of capital leases payable 70,212 Current portion of long-term debt(Note 5) 599,417 ------------ Total current liabilities 3,494,026 Long-term debt(Note 5) 3,402,338 Capital leases payable(Note 6) 280,735 ------------ Total liabilities 7,177,099 ------------ Contingencies(Note 10) STOCKHOLDERS' EQUITY(Note 9) Preferred stock 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 397,898 Common stock Par value $.01 - 25,000,000 shares authorized,7,953,101 shares issued and outstanding 79,531 Treasury Stock 65,093 common shares stated at cost (72,820) Additional paid-in-capital 22,830,910 Accumulated deficit (12,523,248) ------------ Total Stockholders' Equity 10,712,271 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,889,370 ============
The accompanying notes to consolidated unaudited financial statements are an integral part hereof. 4 5 SARATOGA BRANDS INC. AND SUBSIDIARIES CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 -------------------------------- -------------------------------- Net sales $ 4,221,210 $2,965,028 $ 11,506,352 $8,041,424 Cost of sales 3,316,237 2,145,723 8,608,964 5,687,341 -------------------------------- -------------------------------- Gross profit 904,973 819,305 2,897,388 2,354,083 Selling, general and administrative expenses 520,511 416,997 1,842,823 1,759,898 Amortization of excess of cost over fair value of assets acquired 54,790 72,203 162,706 224,185 -------------------------------- -------------------------------- Income from operations before interest and income taxes 329,672 330,105 891,859 370,000 Interest (income) expense - net 145,245 127,664 419,328 338,359 Income taxes (Note 7) 0 0 0 0 -------------------------------- -------------------------------- Net earnings from continuing operations 184,427 202,441 472,532 31,641 Earnings (Loss) from operations of discontinued businesses (866,789) 0 (866,789) 357,353 -------------------------------- -------------------------------- Net earnings (Loss) ($ 682,362) $ 202,441 ($ 394,257) $ 388,994 ============================= ============================== EARNINGS PER COMMON SHARE Earnings from continuing operations $ 0.03 $ 0.10 $ 0.09 $ 0.02 Earnings (Loss) from discontinued operations and marketable securities ($ 0.12) $ 0.00 ($ 0.16) $ 0.19 -------------------------------- -------------------------------- Total earnings (Loss) per share ($ 0.09) $ 0.10 ($ 0.07) $ 0.21 ============================= ============================== Weighted average shares used in computation 7,173,685 2,123,904 5,523,985 1,844,666
The accompanying notes to consolidated unaudited financial statements are an integral part hereof. 5 6 SARATOGA BRANDS INC. AND SUBSIDIARIES CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 ---------------------------------- Cash Flows from operating activities: Net earnings (Loss) ($ 394,257) $ 388,994 Adjustments to reconcile net earnings (Loss) to net cash provided by (used in) operating activities: Income on sale of equipment (60,000) 0 Depreciation and amortization 485,600 255,968 Provision for losses on accounts receivable 48,830 (37,000) Issuance of common stock for services (40,000) (30,000) Deferred income 13,310 Adjustments for discontinued operations (866,789) (905,549) Decrease in accounts receivable (532,631) 768,481 Decrease (increase) in inventory (112,238) (170,239) Decrease in prepaid expenses 312,737 (303,337) Increase in accounts payable and accrued expenses (133,393) (315,185) ------------------------------ Net cash used in operating activities (1,278,831) (347,867) ------------------------------ Cash flows from investing activities: Purchase of fixed assets (2,056,159) (145,536) Purchase of marketable securities 0 (354,684) Cash obtained in business acquisitions 7,381 Sale of idle equipment 90,000 18,600 ------------------------------ Net cash used in investing activities (1,958,778) (481,620) ------------------------------ Cash flows from financing activities: Proceeds from notes payable 750,662 Proceeds from sale of debentures 4,027,549 (Coversion of) proceeds from convertible loans 0 (436,199) Proceeds from sale of common shares 0 1,839,874 Capital leasing transactions 152,846 61,704 Decrease in Leases Receivable 0 222,393 Repayment of notes payable (145,674) (962,050) ------------------------------ Net cash provided by (used in) financing activities 4,785,383 725,722 ------------------------------ Increase (decrease) in cash 1,547,774 (103,765) Cash at beginning of period 3,678 145,873 ------------------------------ Cash at end of period $ 1,551,452 $ 42,108 ============================== Supplemental Disclosure: Interest paid $ 193,673 $ 259,517 ============================== Summary of Non Cash Investing Activities: Common Stock issued for acquisitions $ 750,000 $ 0 ==============================
The accompanying notes to consolidated unaudited financial statements are an integral part hereof. 6 7 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 --ORGANIZATION AND BUSINESSES Saratoga Brands Inc., ("the Company") a New York corporation, was incorporated on June 12, 1987. From approximately 1987 through September 30, 1993, the Company manufactured and distributed potato and vegetable chips and distributed other snack food products. The Company incurred substantial losses from inception and, in an effort to stem such losses, the Company decided on September 30, 1994 to discontinue its snack food business. On January 28, 1994, the Company acquired Saratoga Technology Inc. ("Tech"), a Company which was engaged in designing, marketing and selling a variety of personal computers for the consumer and service oriented commercial markets. A significant portion of Tech's revenues had been derived from the sale of microcomputers through direct mail channels. During the year, Tech had been incurred difficulties with its major contract supplier, and as a result has been unable to secure continuing direct mail contracts, and as a result the Company decided to discontinue the operations of Tech effective December 30, 1994. On August 26, 1994, the Company entered the specialty cheese industry, through the acquisition of Cucina Classica Italiana, Inc. ("CCI"), a company located in Lakewood, New Jersey engaged in the production, importation and distribution of premium cheeses and Italian foods. CCI has manufactured under its supervision a variety of Italian and Greek cheeses including the Bel Paese(R) brand which has had strong presence in the United states for over 75 years. At acquisition CCI operated a cheese manufacturing facility (Lensmire Cheese Factory) in Wisconsin. On August 29, 1996 the Company ceased operation of that facility due to its inability to demonstrate profitable operation. On December 30, 1994, the company acquired JR's Delis, Inc. ("JR") a Rhode Island based catering and distribution business. JR sells deli products to more than 900 convenience stores and retail outlets in Rhode Island, Massachusetts and Connecticut. On April 29, 1996, (effective January 1, 1996), the Company acquired Deli King, Inc. ("Deli"), a food processor, distributor and mobile catering business serving Rhode Island, eastern Connecticut and southeastern Massachusetts. Deli has been integrated with JR and both are operating out of Deli's modern commissary facility in West Warwick, Rhode Island. On April 7, 1996, the Company acquired the operations of Dotties Caterers, Inc. ("Dotties"), a mobile catering business serving Rhode Island. Dotties was integrated with JR and Deli and operates out of a satellite facility in Pawtucket, Rhode Island. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its six wholly-owned subsidiaries: CCI, JR, Deli, Dotties, Snacks, and Tech through September 30, 1996, with the exception of the financial statements of Deli which are included only from January 1, 1996, the effective date of acquisition, and the financial statements of Dotties which are included only as of April 7, 1996. The consolidated balance sheets reflect the accounts of the Company and its six wholly-owned subsidiaries. The acquisitions were recorded as purchases. In consolidation all inter company balances are eliminated. INVENTORIES Inventories are stated at the lower of cost or market. The components of inventories at September 30, 1996 were as follows:
Raw Finished Promotional Materials Goods Materials Total - ------------------------------------------------------------------------- $228,728 $545,203 $38,219 $812,150 =========================================================================
7 8 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEPRECIATION AND AMORTIZATION Depreciation of fixed assets is computed utilizing the straight-line method over the estimated useful lives of the related assets which range from 5 to 31 years. Amortization of leasehold improvements has been provided for on a straight-line basis over the term of the related lease, including renewal period, which is not in excess of the estimated useful lives of the improvements. REVENUE RECOGNITION Revenues are recognized upon shipment of product. DISCONTINUED OPERATIONS On August 29, 1996 the Company discontinued operation of Lensmire Cheese Factory, its cheese manufacturing operation located in Cascade, Wisconsin, due to its inability to demonstrate profitable operation since its acquisition by the Company in August, 1994. Since all of the production of Lensmire was transferred to CCI, no revenues were reported in the income statement of the Company, since there were eliminated in consolidation. The assets of Lensmire Cheese Factory have been written down to net realizable value. The liabilities related to the discontinued business consist primarily of accounts payable, and accrued expenses and amounted to $135,789 in the September 30, 1996 Balance Sheet. PER SHARE DATA The per share data has been calculated using the weighted average number of Common Shares outstanding during each period presented. Outstanding options and warrants have been excluded from the computation due to their antidilutive effect. EXCESS OF COST OVER FAIR MARKET VALUE OF ASSETS ACQUIRED, AND INTANGIBLE ASSETS The Company evaluates the amortization period of the excess of cost over fair market value of assets acquired (goodwill) and intangible assets on an ongoing basis in light of changes in business conditions, events or circumstances that may indicate the potential impairment of goodwill or intangible assets. The intangible assets consist of $158,384 for trademark and proprietary technology licenses, $85,000 for import licenses and $724,194 for Deli King routes. The trademark and proprietary technology licenses are being amortized over 8 years, the import licenses are being amortized over 5 years and the Deli King routes over 15 years. The excess cost over the fair value of assets (less liabilities ) acquired is being amortized over 40 years. Goodwill at September 30, 1996 for each of the subsidiaries, consisted of the following: CCI 6,787,337 JR 1,256,130 DELI 358,241 --------------- TOTAL 8,401,708
8 9 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. CONCENTRATIONS The Company does not have any single customers which 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 60% of CCI's sales volume relates to products which are purchased from Edigo Galbani, S.p.A., for which CCI holds exclusive License and Manufacture Agreements in a contract which runs through December 31, 2000, when it will come up for renewal, the loss would at this time have a material adverse effect on the revenues of CCI. NOTES RECEIVABLE - RELATED PARTY Of this amount $ 60,168 represents an amount due the Company from Cucina Classica Italiana, S.p.A. relating to costs incurred by the Company on its behalf. The balance of $354,684 is due the Company by Barry Witz, a director of Saratoga, and R II Partners, Inc., which amount is collateralized by 79,804 shares of common stock of Osicom Technologies, Inc. (FIBR) a company traded on the NASDAQ Small Cap Market System. PROVISION FOR DOUBTFUL ACCOUNTS The Company periodically reviews and adjusts its provision for bad debts to reflect its experience. FOREIGN CURRENCY TRANSACTIONS The Company imports products from various countries, however, all material transactions are denominated in United States currency. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 9 10 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- PROPERTY AND EQUIPMENT - NET Land $ 663,368 Buildings 1,420,099 Furniture & Equipment 1,044,951 Vehicles 441,058 Leasehold Improvements 39,955 ----------- Total Cost 3,609,431 Less Accumulated Depreciation (181,102) ----------- Net $ 3,428,329 ===========
The Property, Plant and Equipment includes $ 342,946 in fixed assets which were acquired using capital leases. NOTE 4 -- LOANS PAYABLE JR has short term loans totaling $23,206 with Banca Nazionale which bears interest at the prime rate and is due on demand. NOTE 5 -- LONG-TERM DEBT CCI has a term loan with BNY Financial Corporation of which the current balance is $265,500, $70,800 being the current portion thereof. This loan bears interest at the prime rate plus one percent. On March 14, 1995, CCI agreed to assume the debt of its wholly owned subsidiary, Nostrano, Inc. CCI did so under the duress imposed by three of the five Italian Banks who on February 17, 1995, filed an action under 303(b) of Title 11, when CCI was not indebted to any of them. The information herein below reflects the information contained in CCI's books and records which resulted from the petitioning banks' coercion. Please refer to Note 10--Contingencies as to CCI's efforts to reverse the aforestated status. Prior to March 14, 1995, Nostrano, Inc. a wholly owned subsidiary of CCI, together with CCI were negotiating with the five Italian Banks to restructure Nostrano's debt to the Banks to allow for further and new senior debt up to $3,000,000 for growth. The credit agreement was entered into on March 14, 1995 between CCI and the New York branches of Banca Nazionale del Lavorno S.p.A., Banco di Sicilia S.p.A. , Banca Commerciale Italiana, Bancario San Paolo di Torino and Banca Populare di Milano and provides for minimal annual payments of $300,000 for 1995, 1996, 1997, 1998 and 1999. 10 11 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of the balance sheet date, there was an indebtedness to the five banks which is reflected on the consolidated unaudited balance sheet as follows: Banca Nazionale del Lavoro S.p.A. - New York Branch $1,189,721 Banca di Sicilia S.p.A. - New York Branch 622,776 Banca Commerciale Italiana - New York Branch 389,073 Istituto Bancario San Paolo di Torino - New York Branch 218,247 Banca Populare di Milano - New York Branch 373,313 ---------- $2,793,130
The current portion due the Italian Banks is $300,000. The Agreement provides for interest to the banks at prime rate through maturity of the note and 3% over prime thereafter. It calls for monthly installments to the banks in the aggregate of $25,000 per month plus accrued interest, which payment shall be received no later than the 10th of each calendar month. In addition to the regular monthly installments, CCI shall pay to the banks in respect of the principal of the Bank Debt, within 30 days after the end of each calendar quarter, an amount equal to 20% of CCI's consolidated net cash flow for such fiscal quarter; provided however, that in no event shall the amount of principal of the Bank Debt required to be paid for any fiscal year of CCI (inclusive of regular monthly installments of principal payable under this Agreement) exceed $600,000. On January 31, 1998, if CCI has not sooner reduced the principal amount of the Bank Debt to $1,500,000, CCI shall make a mandatory payment of principal so as to reduce the outstanding principal amount of the Bank Debt to $1,500,000. CCI shall be required to pay the outstanding principal of the Bank Debt, and all accrued and unpaid interest in full on the maturity date, which is January 31, 2000. Each amount of principal or interest required to be paid on the Bank Debt shall be paid to the Banks severally, in proportions corresponding to their respective Bank Percentages. The Bank Debt is guaranteed by three of CCI's wholly owned subsidiaries, Nostrano, Inc., Lensmire Cheese Factory, Inc. and Gailco, Inc. CCI may prepay the Bank Debt at any time in whole or in part, without penalty or premium. The security interest granted to the banks in the Agreement (other than the security interest in the assets of Nostrano, Inc.) shall be subject and subordinate to, and the Banks will agree to subordinate their debt to, the prior payment in full of up to $3,000,000 of indebtedness held by a bank or trust company. The foregoing does not purport to be a complete statement of all terms and conditions contained in the Agreement. Reference is made to Note 10--Contingencies for additional information regarding CCI's effort to reverse this transaction. JR has a $ 3,000 term loan all of which is current, with Shawmut Bank, which bears no interest and has 6 monthly payments of $500 remaining. JR also has a balloon loan for $24,710 due on February 1, 1997 with Washington Trust, which bears interest at 11% and payments for interest only are being made on this loan. Both of the JR loans are secured by the personal guarantees of Jordan Russo, the President of JR, and a relative. The Company received proceeds of $4,479,000 from the issuance of 9% convertible debentures during the quarter ended March 31, 1996. The debentures were convertible into the common stock of the Company. All of the debentures have been converted to common shares as of September 30, 1996. NOTE 6 -- CAPITAL LEASES At the balance sheet, date the Company had capital leases totaling $350,947 of which $70,212 is the current portion. 11 12 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- INCOME TAXES: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under Statement No. 109, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Additionally, deferred tax balances are adjusted in periods that include the enactment of tax rate changes. The adoption of this statement, which was made on a prospective basis, did not have a material impact on the Company's financial condition or results of operations. Prior to 1993, the Company followed the accounting for income taxes prescribed by Statement No. 96. For the quarter ended September 30, 1996, the Company had no provision for income taxes due to the utilization of net operating loss ("NOL") carryforwards and the current years loss. No credit for income taxes was reported as realization of any future benefit was not assured. NOTE 8 -- RELATED PARTY TRANSACTIONS (1) R II Partners, Inc., a beneficial shareholder to the Company is indebted to the Company in the amount of $177,342. This amount is anticipated to be repaid within one year with interest. (2) Brite Lite Industries, Inc. a company owned by Mr. Witz, Chairman of the Company is indebted to the Company in the amount of $177,342. This amount is anticipated to be repaid within one year with interest. NOTE 9 -- 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 16.5 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 56 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, 1,135 common shares for possible future issuance to Preferred Stockholders in the event of conversion. 12 13 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- CONTINGENCIES Company is party to one material lawsuit as detailed below: Cucina Classica Italiana, Inc. V. Banca Nazionale del Lavoro S.p.A., Banco di Sicilia S.p.A., Banca Commerciale Italiana, Istituto Bancario San Paolo di Torino, and Banca Populare di Milano CCI filed an action on February 15, 1996 in The United States District Court for the Southern District of New York alleging RICO violations, fraud and abuse of process amongst the causes of action against Banca Nazionale del Lavoro S.p.A., Banco di Sicilia S.p.A., and Banca Commerciale Italiana. The action was in response to the aforesaid defendants having filed an action against CCI under Section 303(b) when CCI was not indebted to any of the defendants. The law firm and a partner in that firm were also named as defendants for their participation in the filing. The relief sought by CCI includes money damages in addition to rescission of a contract to pay the debts of Nostrano, Inc., a subsidiary of CCI, which CCI agreed to as a condition of the banks releasing CCI from the involuntary proceeding. Two other banks, Istituto Bancario San Paolo di Torino, and Banca Populare di Milano were also named as defendants, but only as part of the rescission causes of action. Neither had participated in the filing. NOTE 11 -- COMMITMENTS Leases The Company and its subsidiaries maintain office, warehouse and processing facilities pursuant to an operating leases as detailed below. CCI leases a 20,000 square foot facility at 1835 Swarthmore Avenue, Lakewood, New Jersey 08701, of which approximately 3,000 square feet serves as office space. This facility serves as CCI's headquarters as well as a shredding and grating operation and warehouse. The facility is a fireproof high bay warehouse located on 3.5 acres with ample expansion potential. The warehouse contains 13,000 cubic feet of cooler space. This facility is leased from Arthur Sommers at a basic rent of $6,642.68 per month or $79,712 annually. The lease has a five year term, with no rent escalation and an option to renew for an additional five years at an annual rent of $91,975. Rent expense for the quarters ended September 30, 1996 and 1995 were approximately $25,542 and $ 21,126, respectively. Factoring Agreement On June 15, 1995, CCI entered into a factoring agreement with BNY Financial Corporation ("BNYF") for three years that is renewable after the initial period. The agreement states that CCI would be required to factor substantially all of its trade receivables and would in return receive immediate cash credit for a major portion of these factored receivables as well as a portion of the finished goods inventory. The factoring fee is .7% of the invoice amount and 1% over prime on 13 14 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The group of 5 Italian banks party to a Credit agreement with CCI have subordinated to the BNYF credit agreement in the amount of $3.0 million. 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. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes thereto. Results of operations from Snacks and Tech have been presented as discontinued operations during 1995. Results of operations for Lensmire Cheese Factory have been presented as discontinued operations in 1996. BUSINESS STRATEGY Our greatest challenge is maintaining and accelerating our current operating momentum while directing our cash resources toward profitable high-return projects. To ensure a continued focus on building shareholder value, we have clearly defined operating and financial objectives and strategies. Our primary operating objective is to increase long-term operating cash flows through profitable increases in sales volume. We plan to achieve our operating objective through the continued implementation and execution of the following strategies: - Creating and executing innovative and superior marketing programs. - Balancing volume growth with improved margins and sustainable increases in market share. - Developing profitable business partnerships with our customers. - Increasing our investment in high-profit, high-volume distribution channels. - Providing financial incentives to our employees which increase their focus on enhancing shareholder value. Our primary financial objective is to deliver a superior return on investment to our shareholders. We plan to achieve this objective through the continued implementation and execution of the following strategies: - Maintaining a capital structure which maximizes our financial flexibility, given current investment opportunities. - Identifying and completing acquisitions that result in long-term value. - Allocating resources appropriately between capital expenditures, infrastructure, share repurchases, acquisitions, and debt repayment. The Company is proceeding with its previously announced redefining of its business into two separate and distinct public companies through the spin-off of its rapidly expanding mobile catering and food distribution business. SARATOGA through its Cucina Classica Italiana, Inc. subsidiary, and planned future acquisition of Sant Ambroeus, will remain in the cheese and restaurant business, and the mobile catering business will be given to the shareholders of SARATOGA in the form of a dividend, thereby creating a new public company. 15 16 OPERATIONS OVERVIEW In the opinion of management, the most meaningful comparison of operating results compares only earnings from continuing operations. Accordingly, "comparable" results in the following discussions represent the following: - 1996 results excluding any gains or losses on discontinued businesses - 1995 results excluding any gains or losses on discontinued businesses Results of Operations for the Three months Ended September 30, 1996 and 1995 Net sales for the quarter ended September 30, 1996 were $4,221,210 compared with $2,965,028 in 1995. The Company generated gross profit of $ $ 904,973 or 21% in 1996, verses $ 819,305 or 28% in 1995. This decrease is a result of the inclusion in 1996 of Deli King, Inc.'s sales, which are sold at a significantly lower gross margin (14%). Selling, general and administrative expenses were $ 520,511, and $ 416,997 in 1996 and 1995, respectively. Management expects gross margins and net operating profits to improve as the Company continues to integrate its acquisitions and take advantage of the economies of scale, the discontinuance of unprofitable products, and the launching of new products. To this end, the Company is consolidating the buying power and resources of its subsidiaries. This consolidation is expected to continue through fiscal 1996. In addition, on August 29, 1996 the Company discontinued operation of Lensmire Cheese Factory, its cheese manufacturing operation located in Cascade Wisconsin, due to its inability to demonstrate profitable operation since acquisition by the Company in August, 1994. Since all of Lensmire's production was transferred to CCI, no revenues were reported in the income statements of the Company, since they were eliminated in consolidation. The assets of Lensmire Cheese Factory have been written down to net realizable value. The liabilities related to the discontinued business consist primarily of accounts payable and accrued expenses and amounted to $ 135,789 in the September 30, 1996 Balance Sheet. The Company reported no provision for income taxes for the quarter ended September 30, 1996 as the Company's operating earnings were offset by Net Operating Loss carryforwards. The earnings from continuing operations for the quarter ended September 30, 1996 were $ 184,427, verses $ 202,441 in 1995. Net income (loss) was ($682,363) in the third quarter of 1996, which includes ($866,789) from discontinued operations, verses income of $ 202,441 in 1995. Earnings per common share from the operating businesses were $0.03 in the quarter ended September 30, 1996 verses $0.10 in 1995 on weighted average shares of 7,173,685 and 2,123,904, respectively. Earnings for the quarter were down due to one time costs related to the consolidation of the mobile catering business, and other costs related to new co-pack production of CCI's products. 16 17 Results of Operations for the Nine months Ended September 30, 1996 and 1995 Net sales for the nine months ended September 30, 1996 were $ 11,506,352 compared with $ 8,041,424 in 1995. The Company generated gross profit of $ $2,897,388 or 25% in 1996, verses $ 2,354,083 or 29% in 1995. Selling, general and administrative expenses were $1,842,823 and $ 1,759,898 in 1996 and 1995, respectively. Management expects gross margins and net operating profits to improve as the Company continues to integrate its acquisitions and take advantage of the economies of scale, the discontinuance of unprofitable products, and the launching of new products. To this end, the Company is consolidating the buying power and resources of its subsidiaries. This consolidation is expected to continue through fiscal 1996. In addition, Management estimates that the elimination of the Wisconsin cheese making facility will result in reduced operating costs in excess of $ 200,000 in 1997 for the CCI subsidiary. The Company reported no provision for income taxes for the period ended September 30, 1996 as the Company's operating earnings were offset by Net Operating Loss carryforwards. The earnings from continuing operations for the nine months ended September 30, 1996 were $ 472,532 verses $ 31,641 in 1995, and increase of $ 440,891 or 1393%. Net income (Loss) was ($394,257), which includes ($ 866,789) from discontinued operations, in the three quarters of 1996 verses income of $388,994, in 1995. Earnings per common share from the operating businesses were $0.09 in the nine months ended September 30, 1996 verses $0.02 in 1995 on weighted average shares of 5,523,985 and 1,844,666, respectively. LIQUIDITY AND CAPITAL RESOURCES Our sources of capital include, but are not limited to, the issuance of public or private placement debt, bank borrowings and the issuance of equity securities. At September 30, 1996 the Company had a net worth of $10,712,271 compared with $ 5,428,614 at September 30, 1995. The Company was able to convert loans outstanding in the amount of $617,000 by issuing shares of its common stock in private transactions which contributed to the Company's equity. The Company received proceeds of $ 4,479,000 from the issuance of convertible debentures during the quarter ended March 31, 1996. The debentures were convertible into the common shares of the Company. All of the debentures have been converted to common shares as of September 30, 1996. Management believes that the Company has sufficient working capital to meet the needs of its current level of operations. 17 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports filed on Form 8K None 18 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf the undersigned thereunto duly authorized SARATOGA BRANDS INC. (Registrant) Date: November 14, 1996 By: /s/ Scott G. Halperin --------------------- Scott G. Halperin Chief Executive Officer Treasurer Date: November 14, 1996 By: /s/ Bernard F. Lillis, Jr. -------------------------- Bernard F. Lillis, Jr. Chief Accounting Officer Chief Financial Officer Secretary 19 EX-27 2 FINACIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE COMPANY'S CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1,551,452 0 1,638,856 53,830 812,150 4,741,451 3,609,431 181,102 17,889,370 3,494,026 0 0 397,898 79,531 0 17,889,370 11,506,352 11,506,352 8,608,964 10,614,493 0 0 419,328 472,532 0 472,532 (866,789) 0 0 (394,257) (.07) (.07)
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