U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
Commission file number 0-19721
THE CLASSICA GROUP, INC.
Formerly Saratoga Brands, Inc.
(Name of small business issuer 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) (Zip Code)
(732) 363-3800
(Issuer's telephone number)
---------------------------------
Securities registered under section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
____________________________ ____________________________________________
____________________________ ____________________________________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of class)
_____________________________________________________________________
(Title of class)
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.........
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is met contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year: Revenues for the
fiscal year ended December 31, 1999 were $11,702,540
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act).
Note; If determining whether a person is an affiliate will involve
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
The aggregate market value of the voting stock held by non-affiliates as of
March 31, 2000 was $ 9,102,981.50
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST 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 ....... N/A
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
Common Stock, $.001 par value per share 1,241,833 (as of March 31, 2000)
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Format (Check one): Yes ; No .
<PAGE>
PART 1
Item 1. Business
Description of business
The Classica Group, Inc. (formerly Saratoga Brands Inc.) (the "Company") is
a New York corporation, headquartered in Lakewood, New Jersey. The Company has
two principal business lines: (i) producing and importing specialty cheeses and
Italian foods (the "cheese business") and (ii) producing and distributing
delicatessen and snack foods to mobile caterers, vending companies, wholesale
distributors and institutions (the "deli business").
The Company's cheese business, Cucina Classica Italiana, Inc. ("CCI"), is
engaged in the production, importation and distribution of premium cheeses and
Italian foods, and is located at the Company's headquarters in Lakewood, New
Jersey.
Deli King, Inc. ("Deli King") operates in a 28,000 square foot facility
located in West Warwick, Rhode Island. From this facility, often referred to as
a commissary, Deli King produces "prepared foods" such as sandwiches, soups,
salads, pasta, baked goods and other entrees, and distributes these products
along with delicatessen and other food items such as snacks and beverages.
Deli King is currently in the process of moving its facility to a more
strategic location, which management believes will enable Deli King to regain
lost business and further grow the business to new levels.
Classica Microwave Technologies, Inc. ("CMT") is the Company's newest
business. CMT was formed in the first quarter of 2000 to provide solutions to
serious bacterial problems facing the food industry. In addition, CMT will
provide an innovative microwave based processing system designed to maximize
productivity while reducing operating costs in food processing. CMT has engaged
one of the leading European experts in the field of microwave technology as a
consultant. Utilizing this technology along with the CMT's proprietary knowledge
of the application of the technology will enable CMT to enter the hi-tech food
processing industry without many of the costs associated with research and
development. CMT has patents pending and will file for specific patents in
conjunction with certain specific applications of the technology. This
technology will give CMT various opportunities for revenue generation including
system sales, assisting clients with product development, joint ventures with
users of the system, and acquisition possibilities.
2
<PAGE>
Products
The Cheese Business. CCI is a producer of specialty Italian-style cheeses
and Greek-style Feta and a major importer of Italian specialty cheeses, and
Procuitto di Parma (Italian ham). CCI distributes its products nationally with
its heaviest areas of distribution located on the East and West Coasts of the
United States. Its customers are other importers and large distributors who sell
to smaller distributors and retail accounts. Sixty five percent of sales are
food service; i.e., sales to restaurants, airlines and cruise ships.
CCI markets Italian specialty and Greek-style Feta cheeses. Bel Paese(R) is
a semi-soft natural cheese, manufactured in 5 lb. bulk wheels and 6 oz. mini
wheels. In reply to customer demand, several flavors such as Basil and Sun-dried
Tomatoes, Roasted Garlic, and Hot Red Pepper flavored Bel Paese have been added
to the line. Greek-style Feta cheese and Feta flavored with dill, oregano,
sun-dried tomatoes and basil, and with peppercorn are produced in random and in
exact weight portions. Freshly grated and shredded Romano and Parmesan cheeses
are also produced by CCI and are sold both in bulk for institutional use and in
consumer-sized cups. Dry grated Parmesan and Romano are available in canisters
under the Cucina Classica Italiana(R) brand. CCI annually produces approximately
300,000 pounds of Bel Paese(R) and 150,000 pounds of Feta.
Galbani(R) Mascarpone, Gorgonzola Dolcelatte and Bel Paese(R) Medallions
are CCI's imported products. 750,000 pounds of Galbani Mascarpone, a specialty
dessert cheese was imported in 1999. CCI imports more than 50% of the nation's
imported Mascarpone. In 1999, the Company imported 250,000 pounds or
approximately four and one half million individual medallions of Bel Paese
Process Medallions, a soft, spreadable cheese.
Procuitto di Parma and Gorgonzola Dolcelatte(R), the Italian blue-mold
cheese, round out the line with 1999 imports of 35,000 pounds and 55,000 pounds,
respectively.
CCI also imports Parmigiano Reggiano, Grana Padano, and Pecorino Romano,
which are sold in whole wheels, pre-cut portions or freshly grated in deli cups.
The Mobile Catering and Wholesale Business. Deli King produces
approximately 70% of the prepared foods sold by the Company, and this production
consists of approximately 60% sandwiches and 40% USDA approved meat products,
soups, pasta dishes, and other entrees. Sandwiches are produced fresh daily
based on previous day orders from the mobile catering truck operators and weekly
or more frequently based upon orders from the vending and wholesale customers.
The sandwiches are produced using recipes developed by Deli King to ensure the
consistency of proper quantity and quality of ingredients, or, in the case of
wholesale and vending customers, to the customer's specifications.
Soups, pastas and other entrees are prepared in bulk and then packaged
either in individual portion size containers or the appropriate size container
for the customers intended use. The in-house prepared food products provide the
largest profit margin of Deli King's products. The bulk of the remaining 30% of
the prepared foods are purchased from third parties. Frozen items provide the
Company's second largest profit margin. Certain meat and meat products are
purchased in bulk and repacked at Deli King's USDA facility in Johnston, Rhode
Island.
3
<PAGE>
Deli King's bakery produces approximately 80% of the pastries and Danish
sold, with the remaining products originating from other local bakeries and
larger local and national suppliers.
The remaining products include beverages, snacks and candy. Beverage
products include such national brands as Coca-Cola, Pepsi, 7-Up, Dr. Pepper and
various others, including mineral waters, fruit juices, iced tea and hot tea and
coffee.
Mobile Catering Business - This division of Deli King derives revenues from
three principal activities: (1) the sale of prepared foods, snacks, beverages
and supplies (ice, containers, plastic utensils, etc.) to independent catering
truck operators who own their own truck and route, (2) the rental of catering
routes and trucks to persons who wish to become mobile caterers but do not have
the capital or credit to purchase a truck or their own route, and (3) the
operation of a mobile catering truck service facility. Deli King management
believes that approximately 55% of the area mobile catering truck operators
obtain their goods from Deli King's West Warwick, Rhode Island facility. Deli
King has operated in this market area since 1985. Approximately 35% of Deli
King's sales consist of products produced fewer under one of the Company's brand
names at its kitchen and bakery, and at its offsite USDA facility. The remaining
sales consist of approximately 15% third party prepared foods, 10% purchased
snacks and 40% beverages. As is customary in the business, the mobile catering
operators place orders at the end of each day for sandwiches to be picked up the
following morning along with other products selected from the commissary, and
paid for primarily in cash.
The mobile catering division's customers are substantially all mobile
catering truck operators. There is a small amount of "cash and carry" business
from people planning parties and other walk-ins. The mobile caterers include
persons operating their own vehicles on their own routes; persons operating
their own vehicles on routes rented from Deli King; and persons renting one of
the 18 catering trucks owned by Deli King for use on their own routes or routes
rented from Deli King. The mobile caterer pays a fixed amount per week for a
route rented from Deli King and a weekly rental for the use of a catering truck
owned by Deli King. These operators are independent from Deli King. The West
Warwick commissary serves approximately 60 mobile catering trucks daily as of
December 31, 1999.
Deli King controls 21 catering routes, which it "rents" to operators for a
weekly fee. These controlled routes, which are also referred to as owned routes,
represent an established series of regular stops served by the same vehicle.
Each stop is usually a business where the employees depend on the caterer for
their snacks, beverages or meals. In some areas, where the business is located
some distance from any restaurant or market, the mobile caterer may be the only
source of food and drink items during the workday.
In addition to supplying the mobile caterers with food, drink and the
related supplies, Deli King has a full service facility staffed with mechanics
for the maintenance and repair of mobile catering vehicles and equipment. The
facility is able to service and repair equipment used for mobile refrigeration,
food warming and hot beverage brewing.
4
<PAGE>
Wholesale Business - This division of Deli King markets a significant
number of the Catering division's products to vending companies, DSD (direct
store delivery) operations, other commissaries, and soon through the Internet.
The wholesale division is currently developing new products for sale to the
club stores. Some of these products include Home Meal Replacement entrees,
pizza, and pastries packaged for retail sale.
New Products and Expansion
CCI is continually seeking to expand its product line by either producing
or importing new products. Currently, CCI is working with S.p.A. Egidio Galbani
("Galbani") on a marketing project to determine if there is a market for
Galbani's short shelf life products, such as fresh mozzarella, in the United
States.
In 1999, CCI developed a strategy to sell its current as well as new
products on the Internet. CCI plans to market gourmet food baskets, developed
exclusively for sale to its customers, specialty bakery products, pizza, and its
cheeses and Italian specialty products. CCI anticipates a fully operational,
fully integrated Web Site where customers will have the ability to consummate
purchases completely electronically by mid 2000.
Deli King is constantly seeking new food and beverage products. The
preponderance of advertising for such products, which is found in most types of
media, creates consumer awareness of new items. Deli King is constantly being
approached by potential suppliers with new products. As a member of the Mobile
Industrial Caterers Association, ("MICA"), the Company receives publications and
attends trade shows, which present potential new products.
At the present time, Deli King's kitchen and bakery operate at capacities
of approximately 40% and 35% respectively. Management believes that the Company
will maintain its current competitive position and that moving to a new facility
nearer to the geographic area where the majority of the routes are located will
expand the mobile catering business and better utilize the kitchen and bakery
facilities. In addition, Deli King believes it can expand its business by
opening or servicing distribution locations. Such satellite operations would be
located beyond a 30-mile radius from Deli King's facility. The new locations
would operate as distribution and service facilities where third party products
would be warehoused. Prepared foods produced in Deli King's kitchen and bakery
would be shipped to the satellite locations fresh daily. Management estimates
that the production capacity of the new main facility will be capable of
supplying up to three satellite operations. While management believes
implementation of such growth plans is feasible, no assurance can be given as to
the success of any efforts to expand.
5
<PAGE>
Competitive Position
The Cheese Business - CCI maintains a strong presence in the Italian
specialty food market. CCI offers trade promotions to its major customers,
provides point-of-sale materials to help product sell-through at the retail
level, offers consumers various incentives to buy its products and uses consumer
and trade media to increase product awareness nationwide.
Mobile catering business - Management believes that Deli King has
approximately 55% of the mobile catering business in the geographic area it
serves. Maintenance of its customer base is dependent on the ability of Deli
King to provide superior service and reliability. The underlying relationship of
the mobile caterer with its customers is dependent on service, reliability
(customers expect the catering trucks to arrive within a few minutes of the same
time each day) and on product selection and quality. Deli King employs route
managers whose function is to review the performance of the mobile caterers as
it relates to their service and reliability. The goal is to ensure that the
Company's quality standards are kept at high levels.
Management recognizes that some mobile caterers provide their own
sandwiches and other entree items by preparing them in their home kitchens, and
that they acquire soft drinks, candy and other items by purchasing them from
large discount retail outlets. Management believes that these caterers make up
an insignificant percentage of the remaining 45% of the market. Management
believes that substantially all of the remaining 45% of the mobile catering
market are supplied by only one other commissary in Providence, Rhode Island.
Time is a valuable commodity to the mobile caterer. For that reason,
drivers are limited in the distance they can travel from their route area to
obtain their products. Management further believes that for this reason the
mobile caterer must choose between Deli King and its one major competitor.
Management believes that moving to its new facility, closer to the epicenter of
the routes, will permit Deli King to gain a substantial number of new customers
and recapture some of its previous customers who have gone to competitors
because of convenience.
Wholesale Business - the wholesale division competes directly with other
wholesalers of similar products. At this time, the Company has not identified
any competitors producing identical products to those we are either offering or
anticipate offering in the future. The niche of the wholesale division will be
to fill a gap in supplying fresh "Home Meal Replacement"(HMR) meals, as well as
gourmet quality pastries, where little competition exists.
6
<PAGE>
Raw Materials
The raw materials or ingredients used in Deli King's products are available
from many suppliers. The deli business has a core group of 50 vendors with which
it has developed good relationships. Because of the large number of potential
suppliers in the food and beverage industry, Deli King is not dependent on any
one supplier. The prepared food ingredients include many well-known national
brands such as Oscar Meyer, Kayem, Boars Head, Dubuque and Louis Rich
(lunchmeats) and Heinz and Kraft dressings and spreads.
Product Line Exclusivity License & Trademark Agreements
CCI is the exclusive U.S. importer of the Galbani line of Italian specialty
cheeses and meat products. Egidio Galbani, S.p.A. of Milan, Italy, is a major
force in the European Dairy Market with an annual sales volume of about US$1.4
billion dollars and is a subsidiary of GROUPE DANONE, with an annual sales
volume of approximately US$15 billion dollars.
CCI has the exclusive right to import Galbani products into the U.S., and
is the only company worldwide with the license to manufacture cheeses bearing
the Galbani trademarks. The Product Exclusivity and License to Manufacture
Agreements are granted in a contract, which runs through the year 2000 when it
will be subject to renewal. CCI is currently negotiating with Galbani to extend
the agreement into the 21st century. Management believes that failure to get an
exclusive right to import and manufacture Galbani products will not have a
material effect on operations.
CCI's trademarks are Cucina Classica Italiana(R), Classika(R) and
Tal-Fino(R). CCI is currently applying for the trademark Classica and uses the
(TM) symbol to denote its application.
Except for prepared foods and baked goods produced by and unique to the
deli business, the deli business has no product line exclusivity or any
trademarks under its control. The products produced by the deli business may use
recipes slightly different than for those same products made elsewhere. However,
this is a benefit in that the deli business sells generic, traditional foods,
which must be prepared in a manner consistent with the common recipes for each
type of dish.
Government Regulations
All of the Company's subsidiaries are subject to regulations of the U.S.
Department of Agriculture (USDA) and The U.S. Food and Drug Administration
(FDA).
The USDA establishes regulations for cheese identity and also oversees the
importation of meat products into the U.S. The FDA regulates cheese labeling and
has established strict guidelines regarding ingredients and nutritional
information. The State of Rhode Island has jurisdiction over the activities of
the deli business. Deli King is subject to federal, state and local health and
food regulations. These regulations generally provide standards for sanitation,
storage, food quality and grade, shelf lives and product labeling. Management
strives to keep the deli business in full compliance with these regulations.
7
<PAGE>
In 1997, Deli King acquired a USDA certified processing operation in
Johnston, Rhode Island, a short distance from its current operation. This
facility produces meat products and HMR meals for the Company under strict USDA
supervision.
Research & Development
Research costs for both operations are minimal. In recent years, CCI has
expended research and development costs related to developing new cheeses
(reduced fat, spreadable versions of current semi-soft cheeses, new flavor
extensions to existing lines). In the most recent two years, Deli King has not
expended a material amount on research and development. However, Deli King is
continually looking to acquire new products from third parties. In addition,
Deli King's kitchen and bakery work to develop new products to follow industry
trends although the monetary expenditure for such efforts has been minimal to
date.
Cost and Effects of Compliance with Environmental Laws
The costs and effects of compliance with environmental laws are not
material to our operations.
Current Employees
The Company and its subsidiaries currently employ 48 people of which 43 are
full time.
Item 2. Description of Property
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 the Company CCI's headquarters as well as
a cheese drying, 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 at a basic rent of $7,665 per month or $91,980 annually. The
lease was renewed in August 1999 for a five-year term with no rent escalation.
Deli King owns a 28,000 square foot building on 3.88 acres in West Warwick,
Rhode Island. The facility includes administrative and sales offices, warehouse,
frozen and cold storage space, food production areas and equipment service bays.
Deli King leases its 2,000 square foot USDA facility at 269 Greenville
Avenue, Johnston, Rhode Island. This facility is leased at a basic rent of $975
per month or $11,700 annually. The lease was renewed in September 1999 for a
2-year term expiring on September 1, 2001.
8
<PAGE>
Item 3. Legal Proceedings
There currently are no material legal proceedings by or against the
Company, or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common shares are traded on the over-the-counter market
through the NASDAQ Small Cap Market Trading System under the symbol TCGI. The
following table sets forth the range of high and low bid quotations for the
common stock for the period indicated, as reported by NASDAQ, after giving
effect to a retroactive reverse stock split of 1:5 effective October 7, 1999.
The quotations are inter-dealer prices in the over-the-counter market without
retail mark-ups, markdowns or commissions, and may not represent actual
transactions.
1999 1998
Common Shares Common Shares
Period High Low High Low
-------------------------------------------------------
January 1 - March 31 $9.0630 $4.2190 $13.4400 $6.2500
April 1 - June 30 5.0000 2.1880 11.7200 6.8800
July 1 - September 30 1.2500 1.0940 9.8500 4.0700
October 1 - December 31 1.9380 1.0000 6.8800 4.0700
As of March 31, 2000, there were approximately 240 holders of record of the
Company's common stock.
The Company has not paid a cash dividend on its common stock since its
inception. The Company expects that for the foreseeable future, any earnings
will be retained for use in the business or other corporate purposes, and it is
not expected that cash or share dividends will be paid. However, there are no
restrictions on the payment of dividends, either by contract or regulation.
9
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion and analysis contains forward-looking statements,
which involve risk and uncertainties. When used herein, the words "anticipated,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements which the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed or implied by these forward-looking
statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Audited Consolidated Financial
Statements and related notes, which are contained in Item 7 herein.
Results of Operations for the Years Ended December 31, 1999 and 1998
Net sales for the year ended December 31, 1999 were $11,702,540 compared
with $12,754,266 in 1998, a decrease of $1,051,726, or 8.2%. This decrease is
the result of a reduction in sales of $1,274,198 or 28.7% at the Company's Deli
King subsidiary, partially offset by an increase of $408,500 or 5.0% in CCI's
net sales. The reduction in net sales at the Deli King subsidiary resulted from
the abandonment of the direct store delivery division (JR's Delis, Inc.) at the
end of 1998, and the loss of a significant number of independent caterers who
left to move to a commissary with a location closer to the area serviced by
their routes. Subsequent to year-end, Deli King has taken steps to move its
operation. Management believes that this move will improve the profitability of
the mobile catering business by substantially increasing its revenues. The
increase in revenues at CCI was primarily the result of an increase in the
volume of sale of imported cheese products and CCI's own grated and shredded
cheese products.
The Company generated gross profit of $2,577,291 or 22.0% of net sales in
1999, verses $3,003,253 or 23.5% of net sales in 1998. The decrease in gross
profit margin was the result of a reduction in gross profit of $406,552 or 50.8%
at the Deli King subsidiary. CCI's gross profit increased to $2,202,312 or 25.7%
of net sales in 1999 compared to $2,035,694 or 24.9% of net sales in 1998, an
increase of $166,618. CCI's gross profit will continue to increase as CCI
continues to shift its product mix to maximize profitability.
Selling, general and administrative expenses were $2,617,338 and $2,191,187
in 1999 and 1998, respectively. This represents an increase of $426,151 or 19.4%
of net sales. This increase is the result of increased costs at the Deli King
subsidiary resulting from an attempt to increase wholesale business as a result
of the loss of caterers due to our undesirable location, and increased costs at
the CCI subsidiary resulting from the employment of a Vice President-Market &
Sales (a new position), expenditures for brand design, new packaging, and sales
literature, and internal non-capital costs of developing a new e-commerce
website.
10
<PAGE>
Results from operations for the year ended December 31, 1999 was a loss of
$(797,913) versus income of $329,759 in 1998. This represents a reduction of
$1,127,672 of which $705,000 resulted from a non-cash write-down for the
impairment of certain long-lived assets and identifiable intangibles assets at
Deli King. Additionally, $52,866 resulted from the loss on the abandoned
operation at Deli King. CCI's results from operations for 1999 were $959,375
compared to $904,419 in 1998, an increase of $54,956.
Interest expense was $297,810 and $274,591 for the years ended December 31,
1999 and 1998 respectively. The increase is the result of additional capital
leases and short-term debt of $300,000 at December 31, 1998, which was paid off
during 1999.
The Company reported no provision for Federal income taxes for the years
ended December 31, 1999 and 1998, as the Company had a net loss for 1999 and
taxable operating earnings were offset by net operating loss carry forwards in
1998. The Company reported a provision for state income taxes of $28,000 and
$31,000 for the years ended December 31, 1999 and 1998, respectively.
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 December 31, 1999, the Company had a net worth of $2,603,743 compared to
$3,727,466 at December 31, 1998. The Company has limited requirements for
capital expenditures in the immediate future, except for the costs related to
moving the Deli King operation to its new facility, and the start-up of the new
CMT subsidiary. To that end, on February 1, 2000, the Company issued 210,000
shares of its common stock in a private placement, for which it yielded net
proceeds of $300,000.
CCI's factoring arrangement with GMAC Commercial Credit, LLC has adequate
availability to provide working capital to support sales growth in that
division.
Deli King owns real estate with a market value of approximately $1,450,000
against which there exists a mortgage in the amount of $703,125 at December 31,
1999. Additionally, Deli King has a loan collateralized by its fleet of trucks
in the amount of $131,934 at December 31, 1999. Except for a capital lease on
two of its computer all other Deli King assets are owned free and clear, and
provide adequate collateral to support borrowing for working capital needs in
that subsidiary.
The Company utilizes capital leases for the acquisition of operating assets
at the subsidiaries when appropriate. At December 31, 1999, the Company has
capital leases with an unamortized balance of $331,152.
Management believes that the Company has sufficient working capital to meet
the needs of its current level of operations.
11
<PAGE>
Anticipated Future Growth
New Business - Classica Microware Technologies, Inc.
Classica Microwave Technologies, Inc. ("CMT") is currently testing
microwave processing systems for use food processing. CMT is anticipating the
delivery of its first laboratory system in early May of 2000. This system will
have 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. We anticipate installing a second laboratory system utilizing
this drying process.
The above system will provide longer fresh refrigerated and
non-refrigerated shelf life without dependency on additives or preservatives of
any kind. We will also have the ability to develop new products for the
expansion of the product lines of our other companies.
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 developing new markets via current marketing channels and the
internet, and (5) controlling and containing production, operating and
administrative costs.
Year 2000
The Company began assessing the possible impact of the Year 2000 ("Y2K")
issues on its business operations early in 1999. The issue arose because of
information technology ("IT"), which utilized a two-digit date field. Y2K
introduced the potential for error and miscalculations related to IT and non-IT
systems which were not designed to accommodate a date of year 2000 and beyond.
As of April 12, 2000, the Company had encountered no significant Y2K related
problems.
The Company successfully implemented a program to assess, mitigate and
remediate the potential impact of the Year 2000 problem throughout the Company.
The cost of remediation efforts was immaterial, and as such, the Year 2000
problem did not have a material effect on the financial position of the Company,
nor the results of its operations.
12
<PAGE>
Item 7. Financial Statements
Response submitted as a separate section of this report commencing on page
F-1.
Item 8. Changes in and Disagreement With Accountants on Accounting and
Financial Disclosure
NONE
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 10. Executive Compensation
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference from the proxy statement, which will be filed
within 30 days of the filing of this report.
Item 13. Exhibits and Reports on Form 8-K
NONE
Exhibit No. Description of Exhibit Note
3. (a) - - Certificate of Incorporation 1
(b) - - By-Laws, as amended 1
13
<PAGE>
4. (a) - - Form of Warrant Agency Agreement between Registrant Thomas 1
James Associates, Inc. and American Stock Transfer & Trust
Company with
attached form of Warrant
(b) - - Form of Private Placement I Warrant 1
(c) - - Form of Private Placement II Warrant 1
(d) - - Form of Private Placement Warrant 1
10.(a) - - Lease agreement between Saratoga Brands and Hoffman Investors 1
Corp. dated August 18, 1992
(b) - - Amended Employment Agreement between Registrant and Daniel J. 1
Feld dated January 26, 1994
(c) - - Option Agreement, as amended between Registrant and Daniel J. 1
Feld respecting 15,584 (as adjusted) Common Shares
(d) - - Incentive Option Plan dated June 12, 1991 1
(e) - - Form of Incentive Stock Option contract 1
(f) - - Restricted Stock Purchase Agreement 1
(g) - - Factoring Agreement dated October 23, 1992 between Saratoga 1
Brands Inc. and Platinum Funding Corp.
(h) - - Form of Owner Operator distributor Agreement 1
(i) - - Form of Agreement between the Company and holder of the 11% 1
subordinated Notes and Warrants to purchase common shares
(j) - - Asset Purchase Agreement, dated as of January 5, 1994, 1
between Saratoga Brands Inc. and Mellons Limited
(k) - - Voting and Limitation of Transfer Agreement between Daniel J. 2
Feld, Registrant and Mellons, Limited.
(l) - - Amended and Restated Employment Agreement between Registrant 2
and Daniel J. Feld
(m) - - Non-Compete Agreement between the Registrant and Agama, Inc. 2
(n) - - Non-Compete Agreement between Mellons Limited and the 2
Registrant.
(o) - - Lease Agreement between Cucina Classica Italiana, Inc. and 3
Arthur Sommers
(p) - - Lease Agreement between Cucina Classica Italiana, Inc. and 3
Angelo Dominioni.
(q) - - Lease Agreement between JR's Delis, Inc. and Chicken by 3
Chickadee Farms, Inc.
(r) - - Employment Agreement between the Registrant and Scott G. 3
Halperin, dated August 16, 1995
(s) - - Acquisition Agreement between the Registrant and Cucina 4
Classica Italiana, S.p.A.
(t) - - Acquisition Agreement between the Registrant and Goldberg, 5
Feinstein and Sons Company
14
<PAGE>
(u) - - Amendment to the Acquisition Agreement between the Registrant 6
and Goldberg, Feinstein and Sons Company
(v) - - Credit Agreement between Cucina Classica Italiana, Inc. and 7
Banca Nazionale del Lavoro S.p.A. - New York Branch, Istituto
Bancario San Paolo di Torino - New York Branch, Banco di
Sicilia S.p.A. - New York Branch, Banca Populare di Milano -
New York Branch, and Banca Commerciale Italiana - New
York Branch
(w) - - Termination Agreement between the Registrant and Daniel J. 8
Feld
(x) - - Merger and Real Estate Purchase Agreement Between the Company 9
and Roy LaCroix for the purchase of Deli King, Inc.
(y) - - Credit Agreement between Cucina Classica Italiana, Inc. 10
and Banca Nazionale del Lavoro S.p.A. - New York Branch,
dated December 15, 1997
(z) - - Credit Agreement between Cucina Classica Italiana, Inc. 10
and BancaCommerciale Italiana - New York Branch, dated
December 15, 1997
(aa) - - Forgiveness Agreement between Cucina Classica Italiana, 10
Inc. and Istituto Bancario San Paolo di Torino - New York
Branch, dated December 29, 1997
(ab) - - Forgiveness Agreement between Cucina Classica Italiana, Inc. 10
and Banca Populare di Milano - New York Branch, dated
December 29, 1997
(ac) - - Forgiveness Agreement between Cucina Classica Italiana, Inc. 10
and Banco di Sicilia S.p.A. - New York Branch, dated
December 31, 1997
(ad) - - Settlement Agreement between Saratoga Brands, Inc., Angelo M. 10
Dominioni, Valerie A. Dominioni, Silvana L. Dominioni,
Robert J. Castellano, and Cucina Classica Italiana, SpA,
dated December 31, 1997
(ae) - - Employment Agreement between the Registrant and Scott G. 10
Halperin, dated August 1, 1997
(af) - - Employment Agreement between the Registrant and Bernard F. 10
Lillis, Jr., dated August 1, 1997
(ag) - - Lease Agreement between Deli King, Inc. and Giovanni and Lina 10
Conti, dated September 1, 1997.
(ah) - - Investment Banking Agreement between the Company and M.H. 10
Meyerson and Co., Inc.
15
<PAGE>
NOTES
1. Filed with the Company's registration statement on form S-1 (File No.
33-36937), and incorporated herein.
2. Filed with the Company's Form 8-K filed on February 14, 1995, and
incorporated herein.
3. Filed with the Company's 1994 Form 10-KSB, and incorporated herein.
4. Filed with the Company's Form 8-K filed on November 4, 1994, and
incorporated herein.
5. Filed with the Company's Form 8-K filed on November 10, 1994, and
incorporated herein.
6. Filed with the Company's Form 8-K filed on March 28, 1995, and
incorporated herein.
7. Filed with the Company's Form 8-K filed on March 14, 1995, and
incorporated herein.
8. Filed with the Company's Form 8-K filed on August 18, 1994, and
incorporated herein.
9. Filed with the Company's Form 8-K dated April 29, 1996, and
incorporated herein.
10. Filed with the Company's Form 8-K dated June 8, 1998 and
incorporated herein.
(b) Reports on Form 8-K.
Form 8-K Filed on June 8, 1998
Item 4. Changes in Registrant's Certifying Accountant
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE CLASSICA GROUP, INC.
(Formerly Saratoga Brands, Inc.)
By: /s/ Scott G. Halperin Date: April 14, 2000
-------------------------------
Scott G. Halperin
Chairman of the Board
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Scott G. Halperin Date: April 14, 2000
-------------------------------
Scott G. Halperin
Chairman of the Board
Chief Executive Officer
Audit Committee Member
By: /s/ Bernard F. Lillis, Jr. Date: April 14, 2000
-------------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
Director
By: /s/ Joseph M. Greene Date: April 14, 2000
-------------------------------
Joseph M. Greene
Director
Audit Committee Member
By: /s/ Alan Rubin Date: April 14, 2000
-------------------------------
Alan Rubin
Director
17
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
INDEX
FINANCIAL STATEMENTS
Included in Part II
Independent Auditors' Report
Reports of Independent Certified Public Accountants
Consolidated Balance Sheet at December 31, 1999
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999 and 1998
Notes to Consolidated Financial Statements
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Classica Group, Inc. and Subsidiaries
(formerly Saratoga Brands, Inc. and Subsidiaries)
Lakewood, New Jersey
We have audited the accompanying consolidated balance sheet of The Classica
Group, Inc. and Subsidiaries (formerly Saratoga Brands Inc. and Subsidiaries)
(the "Company") as of December 31, 1999, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for the years
ended December 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 10, 2000
F-2
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Consolidated Balance Sheet
December 31, 1999
ASSETS
Current Assets:
Cash and cash equivalents $26,550
Accounts receivable - net of allowance for doubtful accounts
of $46,132 826,186
Inventories 657,416
Prepaid expenses and other current assets 144,747
-----------------
Total current assets 1,654,899
Fixed assets - net 2,689,828
Other assets 651,286
Intangible assets - net 1,075,955
-----------------
TOTAL ASSETS $6,071,968
=================
See notes to the Conslidated Financial Statements.
F-3
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Consolidated Balance Sheet (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $2,208,989
Current portion of long-term debt 177,667
Current portion of capital lease obligations 78,111
---------------
Total current liabilities 2,464,767
Long-term debt 750,417
Capital lease obligations 253,041
---------------
Total liabilities 3,468,225
---------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)
STOCKHOLDERS' EQUITY
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 1,009
Par value $.001 - 25,000,000 shares authorized,1,009,333 share
issued and outstanding
Additional paid-in-capital 525,114
Retained earnings 1,679,722
---------------
Total stockholders'equity 2,603,743
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,071,968
===============
See notes to the Conslidated Financial Statements.
F-4
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998
For the Year Ended
December 31,
----------------------------------
1999 1998
Net sales $ 11,702,540 $ 12,754,266
Cost of sales 9,125,249 9,751,013
---------------------------------
Gross profit 2,577,291 3,003,253
Selling, general and administrative expenses 2,617,338 2,191,187
Impairment of long-lived assets 705,000 -
Loss on abandoned operation 52,866 482,307
---------------------------------
(Loss) income from operations (797,913) 329,759
Interest expense - net 297,810 274,591
---------------------------------
(Loss) income before income taxes (1,095,723) 55,168
Income taxes 28,000 31,000
---------------------------------
Net (loss) income $ (1,123,723) $ 24,168
=================================
EARNINGS PER COMMON SHARE
BASIC & DILUTED
Net (loss) income $ (1.11) $ 0.02
=================================
Basic weighted average shares used in computation 1,009,333 980,361
Diluted weighted average shares
used in computation 1,009,333 1,023,539
See notes to the Conslidated Financial Statements.
F-5
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
For the Year Ended
December 31,
1999 1998
------------------------------
Cash Flows from operating activities:
Net income $(1,123,723) $ 24,168
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 486,010 431,118
Impairment of assets 705,000 -
Provision for losses (recoveries)
on accounts receivable (34,423) 2,555
Loss on sale of equipment - 1,550
Increase in accounts receivable 125,636 14,400
Increase in inventories (164,578) (48,604)
Increase in prepaid expenses and other
current assets (69,284) (1,912)
Increase in other assets (63,873) (226,677)
(Decrease) increase in accounts payable and
accrued expenses 846,277 (334,178)
------------------------------
Net cash provided by operating activities 707,042 (137,580)
Cash flows from investing activities:
Purchase of fixed assets (433,213) (295,259)
Increase in intangible assets - (61,232)
Net cash (used in) provided by
investing activities (433,213) (356,491)
Cash flows from financing activities:
Proceeds of long term debt 150,250 750,000
Repayment of long term debt (646,522) (441,069)
Proceeds from capital leasing transactions 228,125 168,775
Repayment of capital leases (87,489) (104,223)
Net cash provided by (used in)
financing activities (355,636) 373,483
Decrease in cash and cash equivalents (81,807) (120,588)
Cash and cash equivalents at beginning of year 108,357 228,945
Cash and cash equivalents at end of year 26,550 $108,357
Supplemental disclosure of cash flow information:
Interest paid $299,398 $266,869
Income taxes paid $1,344 $1,350
See notes to the Conslidated Financial Statements.
F-6
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
CLASS "A" PARTICIPATING
CONVERTIBLE PREFERRED
SHARES
-----------------------
TREASURY SHARES,
COMMON SHARES AT COST
AMOUNT ---------------------- ---------------------
STATED AT ADDITIONAL
NUMBER OF LIQUIDATION NUMBER OF PAID-IN NUMBER OF RETAINED
SHARES VALUE SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS TOTAL
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 16.5 $ 397,898 955,394 $ 955 $ 531,892 (31) $ (645) $ 2,779,277 $3,709,377
-------------------------------------------------------------------------------------------------
Issuance of Common Shares
for options exercised 53,970 54 (6,133) (6,079)
Treasury shares cancelled (31) (645) 31 $ 645 -
Net Income 24,168 24,168
-------------------------------------------------------------------------------------------------
Balance at December 31, 1998 16.5 397,898 1,009,333 1,009 525,114 - - 2,803,445 3,727,466
-------------------------------------------------------------------------------------------------
Net (loss) (1,123,723)(1,123,723)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1999 16.5 $ 397,898 1,009,333 $ 1,009 $ 525,114 - - $ 1,679,722 $2,603,743
=================================================================================================
<CAPTION>
</TABLE>
See notes to the Conslidated Financial Statements.
F-7
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
F-8
NOTE 1 --ORGANIZATION AND BUSINESSES
The Classica Group, Inc. (formerly Saratoga Brands, Inc.) (the "Company")
is a distributor of specialty cheeses and through its subsidiaries operate a
food processor, distributor and mobile catering business servicing Rhode Island,
eastern Connecticut and southeastern Massachusetts. In the fourth quarter of
1998, the Company abandoned the operation of its Direct Store Delivery operation
due to its inability to demonstrate profitable operations. Revenues associated
with this operation were $729,166 in 1998.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances are
eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out method. The components of inventories at December 31, 1999
were as follows:
Raw Materials Finished Goods Total
-------------------------------------------------------
118,937 $538,479 $657,416
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is computed utilizing the straight line
method over the estimated useful lives of the related assets as follows:
Fixed assets 3 - 38.5 years
Identifiable intangible assets 5 - 15 years
The Company will assess the recoverability of fixed assets and intangible
assets based on existing facts and circumstances and projected undiscounted cash
flows generated by such assets. Should the Company's assessment indicate
impairment an appropriate write-down will be recorded on a discounted cash flow
basis. The Company recorded an impairment charge of $705,000 for the year ended
December 31, 1999. See Note 3.
F-8
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
REVENUE RECOGNITION
Revenues are recognized upon shipment of product.
GOODWILL
Goodwill, which represents costs in excess of the fair value of the net
assets acquired, is amortized on the straight-line basis over 10 years.
The Company will assess the recoverability of goodwill annually based on
existing facts and circumstances on an undiscounted cash flow basis. Should the
Company's assessment indicate impairment, an appropriate write-down will be
recorded on a discounted cash flow basis.
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
when purchased to be cash equivalents.
CONCENTRATION OF RISK
The Company does not have any single customer who accounts for more than
10% of the Company's trade receivables or sales. The Company's products are
distributed nationally. Most of the Company's customers are food retailers and
distributors.
Approximately 30% of the Company's sales volume relates to products which
are purchased from one supplier under an exclusive contract which runs through
the year 2000 when it will come up for renewal. The Company is currently
negotiating the renewal of the contract. Management believes failure to get an
exclusive contract will not have a material effect on operations.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
F-9
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
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.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 as amended by
SFAS No. 137, applies to all entities and to all types of derivatives, and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The adoption of SFAS No. 133 is not expected to materially affect the financial
position or results of operations of the Company.
NOTE 3 - IMPAIRMENT LOSS
In the fourth quarter of fiscal 1999, the Company recorded a non-cash
accounting charge related to an impairment of certain long-lived and
identifiable intangible assets. The asset impairment was computed in accordance
with Company policy as described in Note 2. This resulted in a pre-tax non cash
charge of $705,000 or $.70 per share.
NOTE 4 - FIXED ASSETS
Fixed assets consists of the following at December 31, 1999:
Useful Life
-----------
Land $ 611,007
Buildings 894,402 38.5 years
Furniture & equipment 1,177,038 3-10 years
Vehicles 517,681 5 - 7 years
Leasehold Improvements 45,400 5 years
Equipment held for sale 10,000
Capital leases 460,732
------------
Total cost 3,716,260
Less accumulated depreciation
and amortization (1,026,432)
------------
Fixed assets, net $2,689,828
============
F-10
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
Depreciation and amortization is computed on a straight-line basis.
Depreciation and amortization expense was $315,102 and $263,247 for 1999 and
1998, respectively. An impairment loss of $705,000, including $525,000 related
to fixed assets was recorded as a reduction of the carrying value of such assets
for the year ended December 31, 1999. See Note 3.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consists of the following at December 31, 1999:
Goodwill $300,000
Trademarks and licenses 555,785
Catering routes 1,074,622
-----------
2,110,407
Accumulated amortization (854,452)
-----------
Intangible assets, net $ 1,075,955
===========
Amortization of intangibles was $170,908 and $137,871 for 1999 and 1998,
respectively. An impairment loss of $705,000, including $180,000 relating to the
catering routes was recorded as a reduction of the carrying value for the year
ended December 31, 1999. See Note 3.
NOTE 6 - OTHER ASSETS
Other assets consist of the following at December 31, 1999:
Pledged collateral account $323,642
Deferred financing costs 36,135
Accounts and notes receivable 221,311
Deposits 43,812
Other 26,386
-------------------
Total $651,286
===================
F-11
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
NOTE 7-- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1999:
Term Loan - payable in installments through 2000.
Interest at prime (8.50% at December 31, 1999)
plus 1%. Secured by accounts receivable, inventories
and fixed assets. $ 35,400
Term Loan - payable $37,500 annually through 2002.
Balloon payment in 2003. Interest at 8%.
Secured by building. 703,125
Note Payable, unsecured- payable in monthly installments of
$9,375. Interest at prime (8.50% at December 31, 1999),
plus 1%. 46,875
Note Payable - payable in monthly installments of $4,837
Interest at 9.865%. Secured by certain vehicles. 131,934
Other 10,750
----------
Subtotal 928,084
Less current maturities 177,667
----------
Long -term debt $750,417
----------
Maturities of long-term debt are as follows:
2000 $177,667
2001 89,509
2002 70,283
2003 590,625
------------
$928,084
============
F-12
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
NOTE 8 - LEASE OBLIGATIONS
At December 31, 1999, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments:
Capital Operating Leases
Year Ending December 31, Leases Lakewood, NJ Johnston, RI
- --------------------------------------------------------------------------------
2000 $ 108,357 $ 91,975 $ 11,700
2001 106,442 91,975 7,800
2002 100,079 91,975 -
2003 76,599 91,975 -
2004 12,478 61,317 -
---------------------------------------------
Total minimum lease payments 403,955 429,217 19,500
==============================
Less: amount representing interest (72,803) (a) (b)
---------------
Present value of net minimum lease
payments including current
maturities of $78,111 $ 331,152
===============
(a) The lease had a five-year term expiring on August 31 1999. The Company
renewed the lease for an additional five years at an annual rental of
$91,975.
(b) The lease had a two- year term expiring on September 1, 1999. The
Company renewed the lease for an additional two years at an annual
rental of $11,700.
Rent expense for the years ended December 31, 1999 and 1998 was $118,679 and
$114,168, respectively.
F-13
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
NOTE 9-- EARNINGS PER SHARE
In accordance with SFAS No. 128 "Earnings Per Share," basic earnings per
share has been computed based upon the weighted average number of common shares
outstanding. Diluted earnings per share gives effect to outstanding options and
warrants. The financial statements reflect share amounts after giving effect to
a reverse stock split of 1 for 5 on October 7, 1999. Earnings per common share
have been computed as follows:
Year Ended
------------------------------------------------
December 31, 1999 December 31, 1998
Basic Diluted Basic Diluted
------------------------- ---------------------
Net (Loss) Income $(1,123,723) $(1,123,723) $ 24,168 $ 24,168
================================================
Average common shares
outstanding 1,009,333 1,009,333 980,361 980,361
Stock options and warrants - - - 43,178
------------------------------------------------
Total average equivalent shares 1,009,333 1,009,333 980,361 1,023,539
Net (Loss) income per share $ (1.11) $ (1.11) $ 0.02 $ 0.02
================================================
Options and warrants to purchase 697,649 and 111,968 of common stock at
prices ranging from per share were outstanding in 1999 and 1998, respectively,
but were not included in the computation of diluted earnings per share because
would have been antidilutive.
F-14
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
NOTE 10- Income Taxes
The income tax provision is comprised of the following for the years ended:
December 31,
1999 1998
------------------------
Current
Federal $ - $ -
State 28,000 31,000
Deferred
Federal (94,152) (1,194,000)
State - -
------------------------
Subtotal (66,152) (1,163,000)
Valuation allowance 94,152 1,194,000
------------------------
Income tax provision $ 28,000 $ 31,000
========================
The balance sheet classification of the deferred income
tax assets and liabilities is as follows:
December 31, December 31,
1999 1998
Non-current Non-current
----------------------------------------------
Assets $ 1,488,152 $ 1,394,000
Liabilities - -
----------------------------------------------
Subtotal 1,488,152 1,394,000
Less: Valuation allowance (1,488,152) (1,394,000)
----------------------------------------------
Total $ - $ -
==============================================
During the years ended December 31, 1999 and 1998, the increase in the
valuation allowance was $94,152 and $1,194,000, respectively. These charges
reflect increases in the valuation allowance related to the deferred tax asset
which the Company has concluded is not likely to be realized.
F-15
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
The Company will continue to assess the recoverability of its deferred
income tax asset and adjustments may be necessary based on the evidence
available at that time. The difference between the statutory rate of tax and the
actual tax expense relates entirely to state tax expense.
NOTE 11 -- STOCKHOLDERS' EQUITY
At December 31, 1999 there were 16.5 preferred shares outstanding all of
which are convertible into common shares at the holder's option.
NOTE 12-- COMMITMENTS
Factoring Agreement
The Company is a party to a factoring agreement with GMAC Commercial
Credit, LLC (GMAC)(formerly Bank of New York Financial Corporation), through
June 15, 2001. The Company is required to factor substantially all of its trade
receivables in return for 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
advanced under the factoring agreement. The prime rate was 8.75% at December 31,
1999. The factoring agreement provides The Company 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. The Company has
pledged all of its accounts receivable, inventories, real estate and equipment
as collateral for this credit agreement.
Investment Banking Agreement
On October 28, 1997, the Company entered into an investment banking
agreement with M.H. Meyerson & Co., Inc. ("Meyerson"). Under the terms of the
agreement, Meyerson is to provide investment-banking services to the Company on
a non-exclusive basis for a five-year term. In connection with the agreement,
the Company granted Meyerson warrants to purchase16,667 shares of the Company's
common stock at a price of $7.50 per share and 16,667 shares at a price of $9.00
per share, a total of 33,334 shares of common stock of the Company. At December
31, 1999, all warrants were fully vested. The warrants are cancelable upon
termination of the agreement; however, once vested the warrants shall remain in
force until either exercised or upon expiration thereof on October 28, 2002.
Additionally, the Company paid a one-time fee in the amount of $25,000, which is
being amortized over the life of the agreement.
F-16
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
NOTE 13 -- STOCK PLANS
The Company's 1998 Incentive and Nonqualified Stock Option Plan was amended
in 1999 to provide for the granting of options to purchase 600,000 shares of
common stock to certain employees of the Company. Exercise and vesting terms for
options granted under this plan are determined at each grant date. All options
were granted at not less than fair market value at dates of grant. At the end of
1999, 121,540 options were available for grant under the plan and 600,0000
shares of common stock were reserved for issuance under the 1998 Incentive and
Nonqualified Stock Option Plan.
The Company's 1998 Director Stock Option Plan provides for the granting of
options to purchase 40,000 shares of common stock to certain directors of the
Company. Exercise and vesting terms for options granted under this plan are
determined at each grant date. All options were granted at not less than fair
market value at dates of grant. At the end of 1999, 13,000 options were
available for grant under the plan and 40,000 shares of common stock were
reserved for issuance under the 1998 Director Stock Option Plan.
SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") was
effective for the Company for fiscal 1998. SFAS No. 123 encourages (but does not
require) compensation expense to be measured based on fair value of the equity
instrument awarded. In accordance with APB No. 25 "Accounting for Stock Issued
to Employees" no compensation cost has been recognized in the Consolidated
Statements of Operations for the Company's stock option plans, as all options
have been granted to employees and non-employee directors with exercise prices
equal to or greater than the fair market value of the underlying stock on the
date of grant. If compensation cost for the Company's stock option plans had
been determined in accordance with the fair value method prescribed by SFAS No.
123, the Company's net (loss) would have been $(1,581,174) and $(77,106) for
1999 and 1998, respectively. Diluted loss per share , would have been $(1.57)
and $(0.02) for 1999 and 1998, respectively. This pro forma information may not
be representative of the amounts to be expected in future years as the fair
value method of accounting prescribed by SFAS No. 123 has not been applied to
options granted prior to 1996.
F-17
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
Stock options transactions are summarized as follows:
<TABLE>
<CAPTION>
1999 Options 1999 Warrants 1998 Options 1998 Warrants
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 100,889 $4.44 107,967 $10.43 88,637 $4.38 75,967 10.67
Granted 505,460 1.25 - - 28,000 4.63 32,000 9.84
Forfeited (16,667) 3.75
- - - - (15,748) 4.63 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 589,682 $1.83 107,967 $10.43 100,889 $4.44 107,967 $10.43
====================================================================================================
Options and warrants
exercisable at year-end 584,349 $1.83 107,967 $10.43 100,889 $4.44 92,967 $10.43
=======================================================================================
601,016
=============
Weighted-average fair value of $ 0.88 $ 4.1445
options granted during the year
<CAPTION>
</TABLE>
The following table summarizes stock options and warrants outstanding and
exercisable at December 31, 1999:
Weighted Outstanding Exercisable
----------------------------------------
Average Average Average
Exercise Options & Remaining Options & Exercise Options & Exercise
Price Range Warrants Life Warrants Price Warrants Price
- --------------------------------------------------------------------------------
$ 1.25 $ 5.00 602,350 7.42 602,349 $ 1.75 597,016 $ 1.75
6.25 8.75 49,733 3.18 49,734 7.45 49,734 7.45
9.00 12.50 43,066 2.30 43,066 9.88 43,066 9.88
16.80 20.00 2,500 2.00 2,500 16.80 2,500 16.80
- --------------------------------------------------------------------------------
697,649 6.78 697,649 $ 2.71 692,316 $ 2.71
========= ========= =========
The fair value of each option granted is estimated on the date of each
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1999 and 1998, respectively: risk free
interest rate 5.5% and 5.2%; expected life 3 years and 10 years; expected
volatility of 62% and 180.3%; dividend yield 0% and 0%. The fair values
generated by the Black-Scholes model may not be indicative of the future
benefit, if any, which may be received by the option holder.
F-18
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
Note 14-- SEGMENT REPORTING
The Company adopted Statement Financial Accounting Standard No.131,
"Disclosures about Segments of an Enterprise and Related Information (SFAS 131),
in 1998.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. There are no
material inter-segment sales or transfers. All revenues are generated within the
United States and all revenue producing assets are located therein.
Industry segment information is summarized as follows:
Total Revenues Operating Profits
1999 1998 1999 1998
CCI $ 8,557,437 $ 8,148,937 $1,079,757 $ 991,581
Deli 3,163,828 4,438,026 (1,222,010) (284,309)
---------------------------------------------------
Total Segment 11,721,265 12,586,963 (142,253) 707,272
Eliminations and other
corporate income(expenses) (18,725) 167,303 (655,660) (377,513)
---------------------------------------------------
Consolidated $ 11,702,540 $ 12,754,266 (797,913) 329,759
========================
Interest expense 297,810 274,591
---------------------------
Consolidated (loss) income before
income taxes $ (1,095,723) $ 55,168
===========================
Depreciation and Identifiable
Capital Expenditures Amortization Expense Assets
1999 1998 1999 1998 1999 1998
CCI $ 405,915 $ 263,325 $ 180,063 $ 142,345 $ 2,178,099 $ 1,686,341
Deli 27,298 31,934 275,947 258,773 3,323,768 4,287,016
Corporate - - 30,000 30,000 570,101 731,694
================================================================
Consolidated $ 433,213 $ 295,259 $ 486,010 $ 431,118 $ 6,071,968 $ 6,705,051
================================================================
F-19
<PAGE>
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
(Formerly Saratoga Brands, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
(Continued)
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts. The following methods and assumptions
were used by the Company in estimating fair value disclosures for financial
instruments:
Cash and cash equivalents, trade receivables, short-term borrowings and
current maturities of long-term debt: the amounts reported in the
consolidated balance sheet approximate fair value.
Long-term debt: The amount reported in the consolidated balance sheet
approximates fair market value, since such debt was primarily variable rate
debt.
Note 16- SUBSEQUENT EVENT
PRIVATE PLACEMENT - On February 1, 2000, the Company issued 210,000 shares
of common stock in a private placement for which it received net proceeds of
$300,000.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This shedule contains summary financial information extracted from Consolidated
Audited Financial Statements contained in Form 10KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,550
<SECURITIES> 0
<RECEIVABLES> 872,318
<ALLOWANCES> (46,132)
<INVENTORY> 657,416
<CURRENT-ASSETS> 1,654,899
<PP&E> 3,716,260
<DEPRECIATION> (1,026,432)
<TOTAL-ASSETS> 6,071,968
<CURRENT-LIABILITIES> 2,464,766
<BONDS> 0
0
397,898
<COMMON> 1,009
<OTHER-SE> 1,648,837
<TOTAL-LIABILITY-AND-EQUITY> 6,071,968
<SALES> 11,702,540
<TOTAL-REVENUES> 11,702,540
<CGS> 9,125,249
<TOTAL-COSTS> 12,500,493
<OTHER-EXPENSES> 3,375,204
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,810
<INCOME-PRETAX> (1,095,723)
<INCOME-TAX> 28,000
<INCOME-CONTINUING> (1,123,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,123,723)
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
