10QSB 1 tcgiq32001.txt FORM 10QSB - SEPTEMBER 30, 2001 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, 2001 [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 Commission files 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 of (IRS Employer identification no.) 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 November 15, 2001 Title of Each Class Number of Shares Outstanding Common Stock, $.001 par value per share 2,440,098 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements THE CLASSICA GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheet (Unaudited) September 30, 2001 ASSETS Current Assets: Cash and cash equivalents $159,166 Accounts receivable 355,738 Inventories 535,861 Prepaid expenses and other current assets 54,918 ------------ Total current assets 1,105,683 Property and equipment, net 911,256 Intangible assets, net 1,746,610 Other assets 425,087 Net assets from discontinued operations 658,578 ------------ TOTAL ASSETS $4,847,214 ============ See notes to the consolidated financial statements (Unaudited). 2 THE CLASSICA GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheet (Unaudited) (continued) September 30, 2001 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current Liabilities: Current portion of long-term debt $81,720 Accounts payable and accrued expenses 1,556,771 ------------ Total current liabilities 1,638,491 Long-term debt, less current portion 117,356 ------------ Total liabilities 1,755,847 ------------ 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, 2,440,098 shares issued and outstanding 2,440 Additional paid-in-capital 3,552,227 Accumulated deficit (861,198) ------------ Total Stockholders' Equity 3,091,367 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,847,214 ============ 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 nine months ended September 30, September 30, 2001 2000 2001 2000 -------------------------------------------------------- Net sales $2,086,697 $ 2,130,033 $ 5,758,212 $ 5,736,203 Cost of sales 1,592,533 1,572,289 4,315,698 4,149,630 -------------------------------------------------------- Gross profit 494,164 557,744 1,442,514 1,586,573 Selling, general and administrative expenses 406,427 463,058 1,223,295 1,306,595 -------------------------------------------------------- Income from operations 87,737 94,686 219,219 279,978 Interest expense - net 33,442 44,417 115,550 150,642 -------------------------------------------------------- Income from continuing operations 54,295 50,269 103,669 129,336 Loss from discontinued operations (110,488) (299,681) (241,179) (696,828) -------------------------------------------------------- Net (loss) $ (56,193) $ (249,412) $ (137,510) $ (567,492) ======================================================== EARNINGS PER COMMON SHARE BASIC & DILUTED Income from continuing operations $ 0.02 $ 0.04 $ 0.05 $ 0.10 Loss from discontinued operations (0.04) (0.23) (0.12) (0.55) -------------------------------------------------------- Net (loss) ($0.02) ($0.19) ($0.07) ($0.45) ======================================================== Weighted average shares outstanding, basic and diluted 2,419,527 1,309,988 2,067,508 1,257,756 See notes to the consolidated financial statements (Unaudited). 4 THE CLASSICA GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2001 and 2000 September 30, 2001 2000 ------------------------- Cash flows from operating activities: Net income continuing operations $ 103,669 $ 129,336 (Loss) from discontinued operations (241,179) (696,828) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 172,254 172,833 Decrease in accounts receivable 137,478 (468,419) (Increase) Decrease in inventories (100,463) 26,042 Decrease in prepaid expenses and other assets 97,497 (19,483) (Increase) Decrease in other assets (32,598) 576,978 (Increase) Decrease in accounts payable and accrued expenses (231,863) (384,110) ------------------------- Net cash (used in) operating activities (95,205) (663,651) ------------------------- Cash flows from investing activities: Purchase of fixed assets (97,213) (42,312) Increase in intangible assets (39,286) - (Increase) Decrease in net assets discontinued operations (20,968) 42,154 ------------------------- Net cash provided by (used in) investing activities (157,467) (158) Cash flows from financing activities: Repayment of long-term debt (51,627) (99,746) Issuance of capital stock-exercise of options 438,750 979,775 ------------------------- Net cash (used in) provided by financing activities 387,123 880,029 ------------------------- Net increase in cash and cash equivalents 134,451 216,220 Cash-discontinued operations (6,389) (8,442) Cash and cash equivalents at beginning of period 31,104 26,550 ------------------------- Cash and cash equivalents at end of period continuing operations $ 159,166 $ 234,328 ========================= Supplemental disclosure of cash flows information: Interest paid $ 115,550 $ 147,375 ========================= 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 September 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 September 30, 2001: Furniture & equipment $1,543,585 Leasehold Improvements 74,978 ------------- Total cost 1,618,563 Less accumulated depreciation and amortization (707,307) ------------- Fixed assets, net $911,256 ============= 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 least 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 September 30, 2001: Goodwill $300,000 Importing licenses 39,286 Patents 1,552,328 ----------- 1,891,614 Accumulated amortization (145,004) ----------- Intangible assets, net $ 1,746,610 =========== 7 THE CLASSICA GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 5 -- SEGMENT REPORTING Industry segment information at September 30, 2001 is summarized as follows: Total Operating Revenues Profit(Loss) -------------------------------------- CCI $ 5,705,193 $ 473,995 CMT - (37,333) -------------------------------------- Total Segment 5,705,193 436,662 Eliminations and other corporate income(expenses) 53,019 (217,443) -------------------------------------- Consolidated $ 5,758,212 219,219 ===================== Interest expense 115,550 ----------------- Income from continuing operations $ 103,669 ================= Depreciation Capital and Amortization Identifiable Expenditures Expense Assets ---------------------------------------------------- CCI $ 61,516 $ 148,510 $1,589,948 CMT 35,797 - 201,568 Corporate - 23,744 2,397,120 Discontinued Op. - 658,578 ---------------------------------------------------- Consolidated $ 97,313 $ 172,254 $4,847,214 ==================================================== 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 of the remaining assets is approximately December 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 nine months ended September 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 nine months ended September 30, 2001 and 2000 were $361,157 and $1,924,387 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 September 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 September 30, 2001 and 2000 Net sales for the three months ended September 30, 2001 were $2,086,697 compared with $2,130,033 in 2000, a decrease of $43,336, or 2.0%. This decrease is the result of the general downturn in the economy exacerbated by the events of September 11, 2001. Near the end of the second quarter and the beginning of the third quarter CCI had been gaining back some of the lost sales in the leisure services market (airlines and steamship companies) that it had lost near the end of 2000 and earlier this year. Immediately after the events of September 11th several orders in this segment of the market were cancelled. Further, CCI experienced difficulty getting its imported products released at the Port of New York, and for a period of approximately two weeks the Company did not receive any imported Galbani products for delivery to its customers. The receipt of imported products has now returned to normal. The Company generated gross profit of $494,164 or 23.7% of net sales in 2001 compared to $557,744 or 26.2% of net sales in 2000. This slight decrease in gross profit percentage was the result of CCI's sales product mix reflecting a continued shift toward lower margin products (grated and shredded cheese products) in the third quarter of 2001. The Company, with the recovery of the leisure services market was starting to experience a product mix shift toward the higher margin products in the first two months of the third quarter. However, as the result of the events of September 11th, that product mix shift ceased, and, with the loss of two weeks of imported product sales in September the product mix during the quarter was once again dominated by the lower margin products. Selling, general and administrative expenses were $406,427 and $463,058 in 2001 and 2000, respectively. This represents a decrease of $56,631 or 2.7% of net sales. This decrease reflects the result of certain cost control measures taken at CCI coupled with a reduction in expenditures related to the certain costs of the discontinued Deli King operation offset by the inclusion of $5,732 of start-up costs of the microwave processing business. Income from continuing operations for the three months ended September 30, 2001 was $54,295 versus $50,269 in 2000. This represents an increase of $4,026 due to the factors discussed above. Interest expense was $33,442 and $44,417 for the three months ended September 30, 2001 and 2000 respectively. The decrease is the result of orderly pay-down of the Company's term obligations, and the recent reduction in interest rates. 9 Results of Operations for the Nine Months Ended September 30, 2001 and 2000 Net sales for the nine months ended September 30, 2001 were $5,758,212 compared with $5,736,203 in 2000, an increase of $22,009, or 0.4%. Most of this increase is the result of CCI gaining back some of the lost sales in the leisure services market (airlines and steamship companies) that it had lost near the end of 2000 and earlier this year. Immediately after the events of September 11th several orders in this segment of the market were cancelled. Further, CCI experienced difficulty getting its imported products released at the Port of New York, and for a period of approximately two weeks the Company did not receive any imported Galbani products for delivery to its customers. Accordingly, gains that were made during the second quarter and the first two months of the third quarter were negatively impacted by the events of September 11th. The receipt of imported products have now returned to normal. The Company generated gross profit of $1,442,514 or 25.1% of net sales in 2001 verses $1,586,573 or 27.6% of net sales in 2000. The decrease in gross profit margin was the result of CCI's sales product mix reflecting a continued shift toward lower margin products (grated and shredded cheese products) in the third quarter of 2001. The Company, with the recovery of the leisure services market was starting to experience a product mix shift toward the higher margin products in the first two months of the third quarter. However, as the result the events of September 11th, that product mix shift ceased, and, with the loss of two weeks of imported product sales in September the product mix during the quarter was once again dominated by the lower margin products. Selling, general and administrative expenses were $1,223,295 and $1,306,595 in 2001 and 2000, respectively. This represents a decrease of $83,800 or 1.4% 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 $37,333 of start-up costs of the microwave processing business. Income from continuing operations for the nine months ended September 30, 2001 was $103,669 versus $129,336 in 2000. This represents a reduction of $25,667 due to the factors discussed above. Interest expense was $115,550 and $150,642 for the nine months ended September 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 nine months ended September 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 September 30, 2001, the Company had a net worth of $3,091,367 compared to $3,016,026 at September 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 will seek independent financing. 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 September 30, 2001, the Company had capital leases with an unamortized balance of $199,076. 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 September 30, 2001 are not necessarily indicative of results to be expected for the entire year. Anticipated Opportunities New Business - Classica Microware Technologies, Inc. Classica Microwave Technologies, Inc. ("CMT") is currently testing and developing its 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 product testing for various clients. 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 clients and other TCGI companies. 11 In October, in response to alleged bacterial terrorism attacks utilizing the Anthrax bacteria in the U.S. Mail, the Company began the design and testing of a modification of its food processing sterilization system for sterilization against the Bacillus anthracis disseminated in or on paper. The physical design of the system is presently under way in the Company's laboratory in Scandiano, Italy. In late October, the Company conducted tests utilizing its laboratory facility in New Jersey to demonstrate that its technology will kill certain bacteria, using a nonpathogenic strain of living bacteria and spores. The results of those tests and detailed descriptions of the how the tests were conducted was reported in a press release on November 8, 2001. In reporting the results the Microbiologist who conducted the tests reported that "...assuming that the various members of the genus Bacillus produce spores of similar heat resistance (to the ones used in the test) it would appear that the microwave process used in this investigation could lend itself to commercial utilization." Due to the danger involved in handling the bacillus and in exposing our employees and the employees of our independent laboratory to the bacillus, the Company has not yet tested the system using Bacillus anthracis or its spores. On October 26, 2001 the Company filed an application with the United States Commissioner of Patents and Trademarks for a patent for its method for sterilization against the Bacillus anthracis disseminated in or on paper. Management has not yet fully determined the commercial viability of the system for the sterilization against the Bacillus anthracis disseminated on or in paper. However, the Company believes that it is capable of manufacturing or causing to be manufactured such a system, and has the ability to produce its first marketable unit within 120 days. Further, the Company believes it has adequate capital resources available, including independent financing, to develop, test and market this product, assuming its commercial viability. There can be no assurance that we will successfully develop and market such a system. 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 is dependent upon five factors; (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. 12 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. 13 PART II - OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K (a) Exhibits None (b) Reports filed on Form 8K None 14 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: November 19, 2001 By: /s/ Scott G. Halperin --------------------- Scott G. Halperin Chairman Chief Executive Officer Date: November 19, 2001 By: /s/ Bernard F. Lillis, Jr. -------------------------- Bernard F. Lillis, Jr. Chief Operating Officer Chief Financial Officer Principal Accounting Officer Treasurer 15