10QSB 1 tcgiq22001.txt THE CLASSICA GROUP, INC. 2ND QUARTER 10QSB 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