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 June 30, 2001
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
Commission file number 0-19721
THE CLASSICA GROUP, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3413467
(State or other jurisdiction (IRS Employer identification no.)
of incorporation or organization)
1835 Swarthmore Avenue, Lakewood, New Jersey 08701
(Address of principal executive offices)
(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 .......No .......
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common
equity as of August 15, 2001
Title of Each Class Number of Shares Outstanding
Common Stock, $.001 par value per share 2,367,598
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
June 30, 2001
ASSETS
Current Assets:
Cash and cash equivalents $106,660
Accounts receivable 295,601
Inventories 508,852
Prepaid expenses and other current assets 72,465
---------------------
Total current assets 983,578
Property and equipment, net 922,564
Intangible assets, net 1,757,566
Other asets 450,184
Net assets from discontinued operations 636,303
---------------------
TOTAL ASSETS $4,750,195
=====================
See notes to the consolidated financial statements (Unaudited).
2
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited) (continued)
June 30, 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Current portion of long-term debt $106,720
Accounts payable and accrued expenses 1,579,675
---------------------
Total current liabilities 1,686,395
Long-term debt, less current portion 139,990
---------------------
Total liabilities 1,826,385
---------------------
STOCKHOLDERS' EQUITY
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 $.001 - 25,000,000 shares authorized,
2,367,598 shares issued and outstanding 2,368
Additional paid-in-capital 3,328,549
Accumulated deficit (805,005)
---------------------
Total Stockholders' Equity 2,923,810
---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,750,195
=====================
See notes to the consolidated financial statements (Unaudited).
3
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For the three months ended For the six months ended
June 30, June 30,
2001 2000 2001 2000
----------------------------------------------------
Net sales $2,049,043 $ 1,812,888 $ 3,671,515 $ 3,606,170
Cost of sales 1,527,788 1,330,283 2,723,165 2,577,341
----------------------------------------------------
Gross profit 521,255 482,605 948,350 1,028,829
Selling, general and
administrative expenses 448,202 437,163 816,868 843,537
----------------------------------------------------
Income from operations 73,053 45,442 131,482 185,292
Interest expense - net 45,286 53,713 82,108 106,225
----------------------------------------------------
Income (loss) from
continuing operations 27,767 (8,271) 49,374 79,067
Loss from discontinued
operations (3,707) (156,958) (130,691) (397,147)
----------------------------------------------------
Net income (loss) $ 24,060 $ (165,229) $ (81,317) $(318,080)
====================================================
EARNINGS PER COMMON SHARE
BASIC & DILUTED
Income (loss) from
continuing operations $ 0.01 $ (0.01) $ 0.03 $ 0.07
Loss from discontinued
operations (0.00) (0.12) (0.07) (0.33)
----------------------------------------------------
Net income (loss) $0.01 ($0.13) ($0.04) ($0.26)
====================================================
Weighted average shares
outstanding,
basic and diluted 1,928,601 1,259,811 1,888,582 1,207,553
See notes to the consolidated financial statements (Unaudited).
4
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2001 and 2000
June 30,
2001 2000
------------------------
Cash flows from operating activities:
Net income continuing operations $ 49,374 $ 79,067
(Loss) from discontinued operations (130,691) (397,147)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 114,458 261,901
Provision for losses on accounts receivable - 33,266
Decrease in accounts receivable 197,615 63,595
(Increase) Decrease in inventories (73,454) 72,970
Decrease in prepaid expenses and other assets 79,950 32,638
(Increase) in other assets (57,695) -
(Increase) in accounts payable
and accrued expenses (208,959) (70,104)
------------------------
Net cash (used in) provided by operating activities (29,402) 76,186
------------------------
Cash flows from investing activities:
Purchase of fixed assets (61,781) (103,575)
Increase in intangible assets (39,286) -
(Increase) Decrease in net assets
discontinued operations 1,307 8,442
------------------------
Net cash (used in) investing activities (99,760) (95,133)
------------------------
Cash flows from financing activities:
Repayment of long-term debt (28,993) (165,731)
Proceeds of long-term debt 25,000 -
Issuance of capital stock-private placement - 300,000
Issuance of capital stock-exercise of options 215,001 75,625
------------------------
Net cash provided by financing activities 211,008 209,894
------------------------
Net increase in cash and cash equivalents 81,846 190,947
Cash-discontinued operations (6,290) (8,442)
Cash and cash equivalents at beginning of period 31,104 26,550
------------------------
Cash and cash equivalents at end of period
continuing operations $ 106,660 $ 209,055
========================
Supplemental disclosure of cash flows information:
Interest paid $ 82,108 $ 133,173
========================
See notes to the consolidated financial statements (Unaudited).
5
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 --ORGANIZATION AND BASIS OF PRESENTATION
The Classica Group, Inc. (the "Company") is a holding company and through
its subsidiary companies is a national distributor of specialty cheeses and
Italian meat products, and provides solutions to serious bacterial problems
facing the food industry in addition to providing an innovative microwave based
processing system designed to maximize productivity while reducing operating
costs in food processing. A majority of the Company's customers are food
retailers and distributors.
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended December 31, 2000 pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments that are of a normal and recurring nature and are necessary to
fairly present the results of operations, the financial position and cash flows
of the Company have been made on a consistent basis. This report should be read
in conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB Annual Report for the year ended December 31, 2000.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany balances are
eliminated.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The Company has
recorded a full valuation allowance related to the deferred tax asset at June
30, 2001.
NOTE 2 -PER SHARE DATA
The per share data has been calculated using the weighted average number of
Common Shares outstanding during each period presented on both a basic and
diluted basis in accordance with SFAS 128. Outstanding options and warrants have
been excluded from the computation due to their antidilutive effect.
6
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - Property and equipment
Property, plant and equipment are carried at cost, less accumulated
depreciation and amortization computed on a straight-lint basis over the lesser
of the estimated useful lives of the assets (generally three to ten years for
equipment, furniture, and equipment and the lease term for leasehold
improvements).
Property and equipment consists of the following at June 30, 2001:
Furniture & equipment $1,508,053
Leasehold Improvements 74,978
---------------
Total cost 1,583,031
Less accumulated depreciation and amortization (660,467)
---------------
Fixed assets, net $922,564
===============
NOTE 4 -Goodwill and Intangible Assets
Patents are amortized over their estimated useful lives, which range from 1
to 20 years. Intangible assets are reviewed for impairment whenever events or
circumstances indicate impairment might exist, or at lease annually. Goodwill
represents the excess of the fair value of the net assets acquired in
acquisitions by the Company, and is being amortized on the straight-line method
over 10 years. The Company assesses the recoverability of its assets by
comparing projected undiscounted cash flows associated with those assets against
their respective carrying amounts. Impairment, if any, is based on the excess of
the carrying amount over the fair value of those assets.
Intangible assets consists of the following at June 30, 2001:
Goodwill $300,000
Importing licenses 39,286
Patents 1,552,328
-----------
1,891,614
Accumulated amortization (134,048)
-----------
Intangible assets, net $ 1,757,566
===========
7
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 -- SEGMENT REPORTING
Industry segment information at June 30, 2001 is summarized as follows:
Total Operating
Revenues Profit(Loss)
--------------- --------------
CCI $ 3,615,200 $ 293,473
CMT - (9,252)
--------------- --------------
Total Segment 3,615,200 284,221
Eliminations and other
corporate income(expenses) 56,315 (152,739)
--------------- --------------
Consolidated $ 3,671,515 131,482
===============
Interest expense 82,108
--------------
Income from continuing operations $ 49,374
==============
Depreciation
Capital and Amortization Identifiable
Expenditures Expense Assets
----------------------------------------------------
CCI $ 46,189 $ 98,629 $1,587,565
CMT 15,592 - 15,880
Corporate - 15,829 2,510,447
Discontinued Op. - 636,303
----------------------------------------------------
Consolidated $ 61,781 $ 114,458 $4,750,195
====================================================
NOTE 6 - Discontinued Operations
December 28, 2000 the company adopted a formal plan to discontinue the
operations of its Deli King, Inc. ("Deli King") mobile catering subsidiary and
to dispose of the assets of the business segment. The anticipated disposal date
is approximately September 1, 2001. The assets of Deli King to be sold consist
primarily of inventories, catering routes, property, plant and equipment.
Operating results of Deli King for the six months ended June 30, 2001 are shown
separately in the accompanying income statement. The income statement for 2000
has been restated and operating results of the Deli King are also shown
separately.
Net sales of Deli King for the six months ended June 30, 2001 and 2000 were
$361,157 and $1,391,628 respectively. These amounts are not included in net
sales in the accompanying financial statements.
Net Assets to be disposed of at their expected net realizable values, have been
separately classified in the accompanying balance sheet at June 30, 2001.
8
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Consolidated Unaudited
Financial Statements and related notes, which are contained herein.
Results of Operations for the Three Months Ended June 30, 2001 and 2000
Net sales for the three months ended June 30, 2001 were $2,049,043
compared with $1,812,888 in 2000, an increase of $236,155, or 13.0%. This
increase is the result of the recovery of a group of CCI customers in the
leisure services market (airlines and steamship companies), and some timing
differences in purchasing by CCI's customers in 2001 from the first quarter
(which reported a reduction in sales of $170,810) to the second quarter.
The Company generated gross profit of $521,255 or 25.4% of net sales in
2001 verses $482,605 or 26.6% of net sales in 2000. This slight decrease in
gross profit percentage was the result of CCI's sales product mix reflecting a
shift toward lower margin products (grated and shredded cheese products) in the
second quarter of 2001. With the recovery of the leisure services market the
product mix should shift toward the higher margin products during the remainder
of 2001.
Selling, general and administrative expenses were $448,202 and $437,163
in 2001 and 2000, respectively. This represents an increase of $11,039 or 0.5%
of net sales. This increase reflects the inclusion of $21,241 of start-up costs
of the microwave processing business offset by the result of certain cost
control measures taken at CCI coupled with a reduction in expenditures related
to the certain unidentified costs of the discontinued Deli King operation.
Income from continuing operations for the three months ended June 30,
2001 was $27,767 versus a loss of ($8,271) in 2000. This represents an increase
of $36,038 due to the factors discussed above.
Interest expense was $45,286 and $53,713 for the three months ended
June 30, 2001 and 2000 respectively. The decrease is the result of orderly
pay-down of the Company's term obligations.
9
Results of Operations for the Six Months Ended June 30, 2001 and 2000
Net sales for the six months ended June 30, 2001 were $3,671,515
compared with $3,606,170 in 2000, an increase of $65,345, or 1.8%. Most of this
increase is the result of the recovery of a group of customers of CCI in the
leisure services market (airlines and steamship companies).
The Company generated gross profit of $948,350 or 25.8% of net sales in
2001 verses $1,028,829 or 28.5% of net sales in 2000. The decrease in gross
profit margin was the result of a shift toward lower margin products (grated and
shredded cheese products) in 2001. With the recovery of the leisure services
market the product mix should shift toward the higher margin products during the
remainder of 2001.
Selling, general and administrative expenses were $816,868 and $843,537
in 2001 and 2000, respectively. This represents a decrease of $26,669 or 0.7% of
net sales. This decrease is the result of cost control measures taken at CCI
coupled with a reduction in expenditures related to the certain unidentified
costs of the discontinued Deli King operation. Also included in SG&A is $32,201
of start-up costs of the microwave processing business.
Income from continuing operations for the six months ended June 30,
2001 was $49,374 versus $79,067 in 2000. This represents a reduction of $29,693
due to the factors discussed above.
Interest expense was $82,108 and $106,225 for the six months ended June
30, 2001 and 2000 respectively. The decrease is the result of orderly pay-down
of the Company's term obligations.
The Company reported no provision for Federal income taxes for the six
months ended June 30, 2001 and 2000, as the Company had net losses for both
periods.
10
Liquidity and Capital Resources
The Company's sources of capital include, but are not limited to, the
issuance of public or private debt, bank borrowings, capital leases and the
issuance of equity securities.
At June 30, 2001, the Company had a net worth of $2,923,810 compared to
$2,661,288 at June 30, 2000.
The Company has limited requirements for capital expenditures in the
immediate future, except for the start-up of the new CMT subsidiary for which
the Company is planning a private placement.
CCI's factoring arrangement with GMAC Commercial Credit, LLC has
adequate availability to provide working capital to support sales growth in that
division.
The Company utilizes capital leases for the acquisition of operating
assets at its subsidiaries when appropriate. At June 30, 2001, the Company had
capital leases with an unamortized balance of $221,710.
Management believes that the Company has sufficient working capital to
meet the needs of its current level of operations, with the exception of the
requirements of CMT.
Seasonality
The Company's business is subject to the effects of seasonality.
Consequently, the operating results for the quarter ended June 30, 2001 are not
necessarily indicative of results to be expected for the entire year.
Anticipated Future Growth
New Business - Classica Microware Technologies, Inc.
Classica Microwave Technologies, Inc. ("CMT") is currently testing
microwave-processing systems for use in food processing. CMT took delivery in
April of its laboratory system and it is fully operational. In July the company
began its first product testing for a client in the liquid products industry.
The system has the ability to develop and test food products for companies
looking to ensure the bacterial integrity of their products. In addition, CMT's
engineer has been successful in designing a microwave system capable of drying
various food products. CMT anticipates installing a second laboratory system
utilizing this drying process.
These systems provide longer refrigerated and non-refrigerated shelf
life without dependency on additives or preservatives of any kind. The Company
now has the ability to develop new products for the expansion of the product
lines of its other companies.
11
CMT expects to have several revenue sources including; the development
of food products having bacterial integrity and extended refrigerated and
non-refrigerated shelf life, the sale of systems to food processors concerned
about the bacterial integrity of their products, and strategic joint ventures
for product development and sales with existing food processors.
Management believes that the future growth of the Company will be the
result of five efforts; (1) the operations of the Company's new Classica
Microwave Technologies, Inc. subsidiary (2) acquisition of other companies in
the food and food related industries, (3) increasing sales to existing customers
by offering new products and product lines, (4) obtaining new customers in the
existing markets and developing new markets via current marketing channels,
alternative channels (discount, drug, membership clubs and super centers), and
the internet, and (5) controlling and containing production, operating and
administrative costs.
Forward Looking Statements
The matters discussed in this Item 2 may contain forward-looking statements that
involve risk and uncertainties. The forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Actual results may differ materially due to a variety of factors,
including without limitation the presence of competitors with broader product
lines and greater financial resources; intellectual property rights and
litigation, needs of liquidity; and the other risks detailed from time to time
in the Company's reports filed with the Securities and Exchange Commission.
12
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Reports filed on Form 8K
None
13
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
THE CLASSICA GROUP, INC.
------------------------
(Registrant)
Date: August 17, 2001 By: /s/ Scott G. Halperin
---------------------
Scott G. Halperin
Chairman
Chief Executive Officer
Date: August 17, 2001 By: /s/ Bernard F. Lillis, Jr.
--------------------------
Bernard F. Lillis, Jr.
Chief Operating Officer
Chief Financial Officer
Principal Accounting Officer
Treasurer
14