-----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, Fjj5iMoQFKTkvOUOLiTEUizoK+9obI4th322Nw0JZl5ugIm9vg3R2amqbahdPLWI ju/kO4fO+VbpyC2ycRT/Mg== 0000950148-97-002938.txt : 19971120 0000950148-97-002938.hdr.sgml : 19971120 ACCESSION NUMBER: 0000950148-97-002938 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971119 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: SEC FILE NUMBER: 000-19721 FILM NUMBER: 97723981 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 FORM 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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 Commission file number 0-19721 SARATOGA BRANDS INC. (Exact name of small business issuer as specified in its charter) New York 13-3413467 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) identification no.) 1835 Swarthmore Avenue, Lakewood, New Jersey 08701 (Address of principal executive offices) (732) 363-3800 (Issuer's telephone number) --------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes[X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common equity as of September 30, 1997
Title of Each Class Number of Shares Outstanding Common Stock, $.001 par value per share 12,144,751
SARATOGA BRANDS INC. AND SUBSIDIARIES INDEX 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Unaudited Balance Sheet at September 30, 1997 3-4 Consolidated Unaudited Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996 5 Consolidated Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 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, 1997
ASSETS Current Assets: Cash $ 18,112 Accounts receivable net of allowance for doubtful accounts of $70,810 (Note 2) 1,822,884 Inventories (Note 2) 483,056 Prepaid expenses and other current assets 220,194 ----------- Total current assets 2,544,246 Property and equipment - net (Note 3) 3,295,890 Other assets (Note 2) 192,977 Intangible assets (Note 2) 1,059,854 Excess of cost over fair value of assets acquired (Note 2) 8,294,436 ----------- TOTAL ASSETS $15,387,403 ===========
The accompanying notes to the consolidated financial statements are an integral part hereof. 3 4 SARATOGA BRANDS INC. AND SUBSIDIARIES CONSOLIDATED UNAUDITED BALANCE SHEET (CONTINUED) SEPTEMBER 30, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES Current Liabilities: Accounts payable and accrued expenses $ 1,836,342 Current portion of capital leases payable (Note 6) 60,897 Current portion of long-term debt (Note 5) 134,086 Current portion of long-term debt - Related Party (Note 4) 112,500 ------------ Total current liabilities 2,143,825 Long-term debt-Related Party(Note 4) 178,125 Long-term debt-Italian Banks (Note 5) 2,393,321 Long-term debt (Note 5) 178,930 Capital leases payable 84,335 ------------ Total liabilities 4,978,536 ------------ Contingencies (Note 9) STOCKHOLDERS' EQUITY (Note 8) Preferred stock 397,898 Class A participating convertible preferred shares, $1 par value, stated at liquidation value, authorized 200 shares of which 16.5 shares are issued and outstanding. Common stock 12,145 Par value $.001 - 25,000,000 shares authorized, 12,144,751 shares issued. Treasury Stock (645) 459 common shares stated at cost Additional paid-in-capital 22,303,033 Accumulated deficit (12,303,564) ------------ Total Stockholders' Equity 10,408,867 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,387,403 ============
The accompanying notes to the consolidated 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, ------------------------------ ----------------------------- 1997 1996 1997 1996 ------------ ----------- ----------- ------------ Net sales $ 3,514,903 $ 4,221,210 $10,375,489 $ 11,506,352 Cost of sales 2,724,284 3,316,237 7,639,979 8,608,964 ------------ ----------- ----------- ------------ Gross profit 790,619 904,973 2,735,510 2,897,388 Selling, general and administrative expenses (Note 12) 448,550 520,511 1,695,890 1,842,822 Amortization of excess of cost over fair value of assets acquired 26,711 54,790 142,626 162,706 ------------ ----------- ----------- ------------ Income from operations before interest and ,taxes 315,358 329,672 896,994 891,860 Interest expense - net (66,285) 145,245 211,490 419,328 Income taxes (Note 7) 0 600 ------------ ----------- ----------- ------------ Net earnings from continuing operations 381,643.03 184,427.00 684,903.71 472,532.00 Loss from operations of discontinued businesses - (866,789.00) - (866,789.00) ------------ ----------- ----------- ------------ Net earnings (loss) $ 381,643 ($ 682,362) $ 684,904 $( 394,257) ============ =========== =========== ============ EARNINGS (LOSS) PER COMMON SHARE Earnings from continuing operations $ 0.03 $ 0.03 $ 0.06 $ 0.09 Loss from operations of discontinued businesses 0.00 (0.12) 0.00 (0.16) ------------ ----------- ----------- ------------ Total earnings (loss) per share $ 0.03 $ (0.09) $ 0.06 $ (0.07) ============ =========== =========== ============ Weighted average shares used in computation 12,011,792 7,173,685 11,452,062 5,523,985
The accompanying notes to the consolidated financial statements are an integral part hereof. 5 6 SARATOGA BRANDS INC. AND SUBSIDIARIES CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30,
1997 1996 ----------- ----------- Cash Flows from operating activities: Net operating profit $ 682,362 $ (394,257) Adjustments to reconcile net operating profit to net cash provided by (used in) operating activities: Income on sale of fixed assets (55,000) (60,000) Deferred income 0 13,310 Depreciation and amortization 431,045 485,600 Provision for losses on accounts rceivable 0 48,830 Issuance of common stock for services 0 (40,000) Adjustments for discontinued operations 0 (866,789) (Increase) decrease in accounts receivable (952,556) (532,631) (Increase) decrease in Investment 1,209,800 (Increase) decrease in inventories (9,711) (112,238) (Increase) decrease in other assets 49,040 0 (Increase) decrease in prepaid expenses 128,027 312,737 Increase in accounts payable and accrued expenses (529,292) (133,393) ----------- ----------- Net cash used in operating activities 953,715 (1,278,831) ----------- ----------- Cash flows from investing activities: Purchase of fixed assets (97,097) (2,056,159) Cash obtained in business acquisitions 0 7,381 Sale of idle equipment 55,000 90,000 ----------- ----------- Net cash provided by (used in) investing activities (42,097) (1,958,778) ----------- ----------- Cash flows from financing activities: Capital Stock Issued in Payment of Debt 420,000 0 Proceeds from notes payable 362,000 750,662 Repayment of notes payable (952,351) (145,674) Proceeds from sale of debentures 0 4,027,549 Purchase of Treasury Stock (781,163) 0 Capital lease repayments (40,186) 0 Capital leasing transactions 16,000 152,846 ----------- ----------- Net cash provided by financing activities (975,700) 4,785,383 ----------- ----------- Increase (decrease) in cash (64,082) 1,547,774 Cash at beginning of period 3,678 ----------- ----------- Cash at end of period $ (64,082) $ 1,551,452 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 214,615 $ 193,673 =========== =========== Summary of non-cash investing activities: Common Stock issued for acquisitions 0 $ 750,000 =========== ===========
The accompanying notes to the consolidated financial statements are an integral part hereof. 6 7 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 --ORGANIZATION AND BUSINESSES Saratoga Brands Inc., ("the Company") a New York corporation, was incorporated on June 12, 1987. From approximately 1987 through September 30, 1993, the Company manufactured and distributed potato and vegetable chips and distributed other snack food products. The Company incurred substantial losses from inception and, in an effort to stem such losses, the Company decided on September 30, 1994 to discontinue its snack food business. On January 28, 1994, the Company acquired Saratoga Technology Inc. ("Tech"), a Company which was engaged in designing, marketing and selling a variety of personal computers for the consumer and service oriented commercial markets. A significant portion of Tech's revenues had been derived from the sale of microcomputers through direct mail channels. During the year, Tech had been incurred difficulties with its major contract supplier, and as a result has been unable to secure continuing direct mail contracts. The business was damaged severely and as a result Tech filed an action in the United States Federal Court against its former supplier. (See exhibit 99) Due to the damages suffered leading to the aforementioned lawsuit, the Company decided to discontinue the operations of Tech effective December 30, 1994. On August 26, 1994, the Company entered the specialty cheese industry, through the acquisition of Cucina Classica Italiana, Inc. ("CCI"), a company located in Lakewood, New Jersey engaged in the production, importation and distribution of premium cheeses and Italian foods. CCI distributes a variety of Italian and Greek cheeses including the Bel Paese(R) brand which has had strong presence in the United States for over 75 years. On December 30, 1994, the company acquired JR's Delis, Inc. ("JR") a Rhode Island based catering and distribution business. JR sold 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, operating out of a modern commissary facility in West Warwick, Rhode Island. On May 7, 1996, the Company acquired the assets of Dotties Caterers, Inc. ("Dotties"), a mobile catering business serving Rhode Island, from the Federal Bankruptcy Court in Providence, RI . Dotties assets were integrated into Deli and became part of that operation. In September of 1996, the Company formed Mobile Caterer's, Inc. ("Mobile") and immediately contributed the stock of Deli, and JR thereto, and thereafter the catering and deli business were operated under Mobile, trading as Deli King. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries: CCI and Mobile. The consolidated balance sheets reflect the accounts of the Company and its two 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, 1997 were as follows:
Finished Raw Materials Goods Total -------- --------- --------- $ 44,778 $ 438,278 $ 483,056 ======== ========= =========
7 8 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED 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 50 years, (see Note 3 for detail by category.) Amortization of leasehold improvements has been provided for on a straight-line basis over the term of the related lease, including renewal period, which is not in excess of the estimated useful lives of the improvements. REVENUE RECOGNITION Revenues are recognized upon shipment of product. PER SHARE DATA The per share data has been calculated using the weighted average number of Common Shares outstanding during each period presented. Outstanding options and warrants have been excluded from the computation due to their antidilutive effect. GOODWILL AND INTANGIBLE ASSETS It is the Company's policy to periodically review the net realizable value of its intangible assets, including goodwill through an assessment of the estimated future cash flows related to such assets. In the event that assets are found to be carried at amounts which are in excess of estimated gross future cash flows, then the intangible assets will be adjusted for impairment to a level commensurate with a discounted cash flow analysis of the underlying assets. Based upon its most recent analysis, the Company believes no impairment of goodwill or intangible assets exists at September 30, 1997. The intangible assets consist of: Trademarks and proprietary technology licenses $ 121,117 Import licenses 65,000 Catering Routes-Deli King, Inc. 873,737 ---------- TOTAL $1,059,854 ==========
Deli King routes establish its rights to sell its products over an established series of stops. The cost of the routes are being amortized over their estimated economic life of 15 years The trademark and proprietary technology licenses are being amortized over 8 years while the import licenses are being amortized over 5 years. Amortization expense was $85,145 for the nine-months ended September 30, 1997. The excess cost over the fair value of assets (less liabilities) acquired is being amortized over 40 years. Goodwill at September 30, 1997 for each of the subsidiaries, consisted of the following:
CCI $ 6,409,121 MOBILE 1,885,315 ----------- Total $ 8,294,436 ===========
8 9 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED 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. CCI's products are distributed nationally, while Mobile's products are regional throughout New England. Most of the Company's customers are food retailers and distributors. Approximately 60% of CCI's sales volume relates to products which are purchased from Egidio Galbani, S.p.A., for which the Company holds exclusive License and Manufacture Agreements in a contract which runs to the year 2000 when it will come up for renewal, the loss would at this time have a material adverse effect on the revenues of CCI. The Company is currently in discussions with Galbani for an extension of this agreement through the year 2005. PROVISION FOR DOUBTFUL ACCOUNTS The Company periodically reviews and adjusts its provision for bad debts to reflect its experience. RECEIVABLE FROM INVESTMENT PARTNERSHIP At December 31, 1996 the Company had an investment in a Bermuda Limited Partnership which manages an investment fund dedicated to growth situations, generally in the high tech field. The Partnership Subscription Agreement provides that the Company may redeem all or part of its investment upon thirty days written notice provided in writing to the Partnership. The Agreement further provides that until June 30, 1997 the Partnership guarantees and holds the Company harmless from any loss in the value of its investment. Prior to June 30, 1997 the Company notified the Partnership both verbally and in writing of its desire to have its investment in the Fund ($ 1,209,800) liquidated and the proceeds returned to the Company. The Manager of the Fund has acknowledged that the liquidation is taking place and that the proceeds will be returned to the Company forthwith. At June 30, 1997 the investment in the Fund was reclassified as a current receivable from the Partnership, and is included in Accounts Receivable at September 30, 1997. The remaining balance due from the Investment Partnership at September 30, 1997 was $ 416,681. OTHER ASSETS Other assets consists of: Capitalized Financing Costs $ 78,026 Unamortized slotting fees 87,760 Deposits 27,191 --------- Total $ 192,977 =========
9 10 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) 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. NOTE 3 -- PROPERTY AND EQUIPMENT - NET Property and equipment - net consisted of the following at September 30, 1997:
USEFUL LIFE ----------- Land $ 611,007 Buildings 1,394,402 50 years Furniture & Equipment 1,007,039 5 - 10 years Vehicles 483,277 5 - 7 years Leasehold Improvements 39,955 5 years Lensmire and Snacks assets not in use 160,000 held for sale ---------- Total Cost 3,695,680 Less Accumulated Depreciation 399,790 ========== Net $3,295,890 ==========
The Property, Plant and Equipment include $ 135,800 in fixed assets, which were acquired using capital leases. The Lensmire property, held for sale, was sold subsequent to the Balance Sheet date. NOTE 4 -- NOTES PAYABLE - RELATED PARTY The Company has a note payable to Roy LaCroix, the former owner of Deli King, Inc., related to the purchase of Deli in the amount of $290,625, $112,500 being the current portion thereof, which is being paid over four years and bears interest at the prime rate plus one percent. NOTE 5 -- LONG-TERM DEBT CCI has a term loan with BNY Financial Corporation of which the current balance is $ 194,700 to be paid $17,700 in 1997, $70,800 in 1998, $70,800 in 1999, and $35,400 in 2000. This loan bears interest at the prime rate plus one percent. Deli has various long-term loans with varrying terms mainly for the purchase of equipment. These loans total $ 118,316 paid $ 39,531 in 1997, $ 51,912 in 1998, and $ 26,873 in 1999. 10 11 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) Loans Payable to Italian Banks CCI entered into a Credit Agreement with three out of five of the Italian Banks which, prior to such agreement, CCI had an oral understanding with the five banks to restructure debt owed by one of CCI's subsidiaries to allow further and new senior debt up to $3,000,000 for growth. The credit agreement provides for minimum annual payments of $300,000, $993,130, $300,000, $300,000, and $300,000 for 1997, 1998, 1999, 2000, and 2001, respectively. The Credit Agreement was entered into on March 14, 1995 between CCI and Banca Nazionale del Lavoro S.p.A. - New York Branch, Banco di Sicilia S.p.A. - New York Branch, and Banca Commerciale Italiana - New York Branch. Two additional banks, Istituto Bancario San Paolo di Torino - New York Branch and Banca Popolare di Milano - New York Branch, had the option to join the agreement, which then subsequently did. At the balance sheet date CCI had indebtedness to the five banks as follows: Banca Nazionale del Lavoro S.p.A. - New York Branch $1,189,721 Banco di Sicilia S.p.A. - New York Branch 222,967 Banca Commerciale Italiana - New York Branch 389,073 Istituto Bancario San Paolo di Torino - New York Branch 218,247 Banca Popolare di Milano - New York Branch 373,313 ---------- $2,393,321 ==========
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 $25,000.00 per month plus accrued interest, which payment shall be received no later than the 10th of each calendar month. The interest related to these payments has been accrued but no payments have been made since February 1996 since the Company is in continued litigation with the banks. 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 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 $600,000.00. 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 exhibit 10 (v) for all terms and conditions of the Agreement. Please see Note 9 - Contingencies for a more detailed discussion of the lawsuit the Company has brought against the three Italian Banks that are parties to the above described credit agreement. As of this date, the banks have not filed a legal action against Nostrano or CCI in an attempt the collect any of the money they claim is owed to them by CCI. Accordingly, we are not showing any of the amount due the Italian Banks as current in the accompanying financial statements. 11 12 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- CAPITAL LEASES At the balance sheet date the Company had capital leases totaling $ 145,232 of which $ 60,897 is the current portion. The leases provide for payments of $ 25,945, $ 59,567, $41,307, and $ 18,413, for 1997, 1998, 1999, and 2000, respectively. 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 six-month period ended June 30, 1997, the Company had no provision for income taxes due to the utilization of net operating loss ("NOL") carryforwards. The Company had NOL carryforwards of approximately $3,700,000 at September 30, 1997, which resulted in a Deferred Tax Asset of approximately $1,332,000. After applying the valuation allowance the Deferred Tax Asset was recorded at $-0- on the balance sheet at September 30, 1997. NOTE 8 -- STOCKHOLDERS' EQUITY The Preferred Stockholders have no voting rights but are entitled to a priority of payment in the amount of the original subscription price paid for each Preferred Share ($16,667 to $25,000), plus a proportionate amount, as defined, on any remaining excess proceeds if there is, among other matters, a sale of all or substantially all of the shares or assets of the Company. The Preferred Stockholders are not entitled to specific dividends; however, should the Company declare any dividends on the common shares, the Preferred Stockholders will be entitled to receive dividends as if they had converted to common shares immediately prior to the dividend declaration. The holders of the Preferred Shares may convert, at their option, at any time, all or part of their shares into common shares. Holders of 29 Preferred Shares and certain holders of the Company's Debentures having had conversion rights with respect to an aggregate of 11.75 additional Preferred Shares granted the Company the right to require the conversion of their shares into common shares at any time on or after the filing by the Company of a registration statement with the Securities and Exchange Commission for the purpose of offering for sale any of the Company's securities. Upon the closing of the Company's 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, 1,527 common shares for possible future issuance to Preferred Stockholders in the event of conversion. At September 30, 1997 their were 16.5 preferred shares outstanding. NOTE 9 -- CONTINGENCIES The Company is party to a lawsuit brought by an employee of a former subsidiary for breach of his employment contract. The Company has denied liability and has filed a counterclaim for misrepresentation. Management believes that the ultimate outcome of this lawsuit will not have a material adverse effect on the company's financial position and future operations. 12 13 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) Additionally, the Company is party to two other lawsuits 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 POPOLARE 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 Section303(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 Popolare di Milano were also named as defendants, but only as part of the rescission causes of action, Neither had participated in the filing. The court granted a defense motion pursuant to the F.R.C.P.12 (b)(6). The defense motion granted was a Motion to Dismiss on the basis that the Company had not established its jurisdictional right to be in federal court. The dismissal was not a determination on the merits of the case. The Banks appealed the decision, but subsequently withdrew their appeal. CCI also filed an appeal. The case was heard before the 2nd Circuit Court of Appeals, which affirmed the decision of the lower Court. Pending the outcome of negotiations between the Company and the Banks to settle this matter amicably, the Company is reserving its right to bring this action in State Court in the State of New York and to petition the United States Supreme Court in regard to the Federal Case discussed above. SCHNECK WELTMAN HASHMALL & MISCHEL V. SARATOGA BRANDS, INC. On May 23, 1994, Schneck Weltman Hashmall & Mischel ("Schneck") commenced an action against the Company claiming damages alleged unpaid legal fees in the amount of $92,591, together with interest, costs and disbursements. The Company denied the substantive claim and is seeking damages on six counterclaims raising issues in the general nature of malpractice. Schneck denies the Company's claims in substance. Certain written discovery devices were served upon Schneck, and as of the date hereof, none of them have been answered. Discovery in the nature of an oral deposition was served upon Schneck by the Company, and those depositions have not taken place. Management believes that the ultimate outcome of any of the aforementioned lawsuits will not have a material adverse effect on the Company's financial position and future operations. 13 14 SARATOGA BRANDS INC. AND SUBSIDIARIES NOTE TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- COMMITMENTS Lease The Company and its subsidiaries maintain office, warehouse and processing facilities pursuant to an operating lease 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 Saratoga and CCI's headquarters as well as housing CCI's 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, 1997 and 1996 was approximately $25,296 and $25,542, 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. On March 20, 1997 the agreement was amended and the initial period was extended to June 13, 2000. The agreement states that CCI would be required to factor substantially all of its trade receivables and would in return receive immediate cash credit for a major portion of these factored receivables as well as a portion of the finished goods inventory. The factoring fee is 1% of the invoice amount and 1% over prime on the amount advance under the factoring agreement. The factoring agreement provides CCI with an ability to receive advances collateralized by invoices and inventory of $2.0 million and letters of credit in favor of suppliers of an additional $1.0 million. CCI has pledged all of its account 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 has 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. As a result of the loss from the discontinued operations of the Lensmire Cheese Factory, CCI was in violation of certain of the above stated covenants at December 31, 1996. However, BNYF waived any penalties related thereto and modified the covenants by amendment to bring CCI into full compliance. 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. 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. OPERATIONS OVERVIEW Results of Operations for the Three months Ended September 30, 1997 and 1996 Net sales for the quarter ended September 30, 1997 were $ 3,514,903 compared with $ 4,221,210 in 1996. The Company generated gross profit of $ 790,619 or 22.5% in 1997 verses $ 904,973 or 21% in 1996. The reduction in Net Sales is the result of the discontinuance of unprofitable lines. While the gross profit decreased, the Gross Profit Percentage increased from 21% to 22.5%. As sales of our more profitable lines increase our gross profit percentage will continue to improve. 15 16 At Deli operating management has been changed, purchasing practices have been improved and selling prices have been adjusted upward. Deli's wholesale routes are in the process of being consolidated and unprofitable segments of the business are being eliminated. At the CCI operation manufacturing of cheese has been eliminated in favor of purchasing the products from more modern and efficient manufacturers. In addition, unprofitable product lines have been eliminated. While the elimination of the unprofitable product lines may result in lower gross sales, it will generate a higher gross profit. Selling, general and administrative expenses were $ 448,550 and $ 520,511 in 1997 and 1996, respectively, a reduction of 14%. This reflects tangible results from the reorganization and cost reductions undertaken in the first quarter at Mobile. Management expects gross margins and net operating profits to improve as the Company continues to take advantage of the economies of scale, lower payroll costs, changes in operating procedures, 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, and has undertaken a substantial cost reduction program in all of its subsidiaries. This consolidation and profit improvement program is expected to continue through fiscal 1997. In addition, in the Third Quarter of 1996 the Company discontinued operation of Lensmire Cheese Factory, its cheese manufacturing operation located in Cascade Wisconsin, due to its inability to demonstrate profitable operations since acquisition by the Company in August, 1994. Since all of Lensmire's production was transferred to CCI, no revenues were reported in the 1996 income statement of the Company, as they were eliminated in consolidation. The assets of Lensmire Cheese Factory have been written down to net realizable value. There are no liabilities related to the discontinued business in the September 30, 1997 Balance Sheet. The Company reported no provision for income taxes for the quarter ended September 30, 1997 as the Company's operating earnings were offset by Net Operating Loss carryforwards. The Net Income from continuing operations for the quarter ended September 30, 1997 were $ 381,643, verses $184,427 in 1996. There was a loss from discontinued operations in the quarter ended September 30, 1996 of $866,789, or ($0.12) per share. Overall earnings per common share were $0.03 in the quarter ended September 30, 1997 verses a loss of ($.09) in 1996 on weighted average shares of 12,011,792 and 7,173,685 respectively. Results of Operations for the Nine months Ended September 30, 1997 and 1996 Net sales for the nine months ended September 30, 1997 were $ 10,375,489 compared with $ 11,506,352 in 1996. The Company generated gross profit of $ 2,735,510 or 26% in 1997 verses $ 2,897,388 or 25% in 1996. This increase in gross profit percentage is a result of the improvement of margins at both the Deli and CCI subsidiaries. At the Deli operation purchasing practices have been improved while selling prices have been adjusted upward. At the CCI operation manufacturing of cheese has been eliminated in favor of purchasing of the products from more modern and efficient manufacturers. In addition, unprofitable product lines have been eliminated. The elimination of the unprofitable product lines has resulted in lower gross sales, but has generated a higher gross profit. Selling, general and administrative expenses were $ 1,695,890 and $ 1,842,822 in 1997 and 1996, respectively, a reduction of 9%. This reflects tangible results from the reorganization and cost reductions undertaken in the first quarter of 1997. 16 17 Management expects gross margins and net operating profits to improve as the Company continues to take advantage of the economies of scale, lower payroll costs, changes in operating policies, 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, and has undertaken a substantial cost reduction program in all of its subsidiaries. This consolidation and profit improvement program is expected to continue through the remainder of fiscal 1997. In addition, in the third quarter of 1996 the Company discontinued the operations 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, as they were eliminated in consolidation. The assets of Lensmire Cheese Factory have been written down to net realizable value. There are no liabilities related to the discontinued business in the September 30, 1997 Balance Sheet. The Company reported no provision for income taxes for the nine months ended September 30, 1997 as the Company's operating earnings were offset by Net Operating Loss carryforwards. The Net Income from continuing operations for the nine months ended September 30, 1997 was $ 684,904 verses $472,532 in 1996. There was a loss from discontinued operations of ($866,789) in the nine months ended September 30, 1996. Overall earnings per common share were $0.06 in the nine months ended September 30, 1997 verses a loss of ($ 0.07) in 1996 on weighted average shares of 11,452,062 and 5,523,985, respectively. Earnings for the first nine months of 1997 were up due to the consolidation of the mobile catering and wholesale distribution businesses, changes in operating procedures at both Mobile and CCI, reduction in payroll, and other cost reductions related to new co-pack production of CCI's products. 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, 1997 the Company had a net worth of $ 10,408,867 compared with $ 10,712,271 at September 30, 1996. The net worth was reduced in part by the purchase and cancellation of approximately 1,600,000 shares of the Company's Common Stock (Treasury Stock) in the amount of $781,163. The Company received proceeds of $ 4,479,000 from the issuance of convertible debentures during the six months ended June 30, 1996. The debentures were converted into 2,861,763 common shares of the Company. All of the debentures have been converted to common shares and none remain outstanding as of September 30, 1997. 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 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 18, 1997 By: /s/ Scott G. Halperin --------------------- Scott G. Halperin Chairman of the Board Chief Executive Officer Date: November 18, 1997 By: /s/ Bernard F. Lillis, Jr. -------------------------- Bernard F. Lillis, Jr. Chief Operating Officer Chief Financial Officer Principal Accounting Officer Treasurer EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED UNAUDITED BALANCE SHEET, CONSOLIDATED UNAUDITED STATEMENT OF OPERATIONS AND CONSOLIDATED UNAUDITED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR SEPTEMBER 30, 1997. U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 18,112 0 1,893,694 (70,810) 483,056 2,554,246 3,695,680 (399,790) 15,387,403 2,143,825 0 0 397,898 12,145 9,998,824 15,387,403 10,375,489 10,375,489 7,639,979 9,335,869 354,716 0 211,490 685,504 600 684,904 0 0 0 684,904 .06 .06
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