-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EANlUvXdxuytZqjvxjlFKfBK6uLBp5AEetIkfTI1EgZizBIJtdwA7tnTJ1irlEGc GHSF5gCUW6aXDjZvueCyrA== 0000949721-98-000012.txt : 19981116 0000949721-98-000012.hdr.sgml : 19981116 ACCESSION NUMBER: 0000949721-98-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE BAKERIES INC CENTRAL INDEX KEY: 0000949721 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 133832215 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13984 FILM NUMBER: 98746758 BUSINESS ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 MAIL ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: WILLIAM GREENBERG JR DESSERTS & CAFES INC DATE OF NAME CHANGE: 19950918 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1939 For the transition period from to Commission File Number: 1-13984 CREATIVE BAKERIES, INC. (Exact name of small business issuer as specified in its charter) New York 13-3832215 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 20 Passaic Avenue, Fairfield, NJ 07004 (Address of principal executive offices) Issuer's telephone number, including area code: (973) 808-9292 ------------------- Former name: William Greenberg Jr. Desserts and Cafes, Inc. 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 Indicate the number of Shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. Class Outstanding at September 30, 1998 Common Stock, par value $0.001 per share 5,101,750 INDEX Part I. Financial information Item 1. Condensed consolidated financial statements: Balance sheet as of September 30, 1998 F-2 Statement of operations for the nine and three months ended September 30, 1998 and 1997 F-3 Statement of cash flows for the nine months ended September 30, 1998 and 1997 F-4 Notes to condensed consolidated financial statements F-5 - F-16 Item 2. Management's discussion and analysis of financial condition Item 3. Legal proceedings Part II. Other information Signatures CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - SEPTEMBER 30, 1998 (Unaudited) ASSETS Current assets: Cash $ 152,992 Accounts receivable, less allowance for doubtful accounts of $40,616 373,202 Inventory 262,688 Prepaid expenses and other current assets 68,144 ----------- Total current assets 857,026 ---------- Property and equipment, net of accumulated depreciation 1,214,805 ----------- Other assets: Covenant not to compete, net of amortization 43,750 Goodwill, net of amortization 991,090 Security deposits and other assets 69,191 ----------- 1,104,031 --------- $ 3,175,862 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 34,320 Notes payable, bank 148,403 Notes payable, other 36,019 Accounts payable 936,349 Estimated liability for restructuring 80,541 Accrued payroll 423,324 Payroll taxes payable 68,037 Accrued expenses and other current liabilities 441,152 ----------- Total current liabilities 2,168,145 ----------- Long-term debt, net of current portion 8,176 ----------- Deferred rent 156,722 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, authorized 2,000,000 shares, none issued Common stock, $.001 par value, authorized 10,000,000 shares, issued and outstanding 5,101,750 shares 5,302 Additional paid in capital 11,195,665 Deficit ( 10,118,859) ----------- 1,082,108 Common stock held in treasury, 169,500 shares 239,289 ----------- 842,819 ----------- $ 3,175,862 =========== See notes to condensed consolidated financial statements. F-2 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
Nine Months Three Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $3,801,101 $6,361,242 $1,136,350 $1,989,915 Cost of sales 2,859,342 4,611,831 844,589 1,416,585 ---------- ---------- ---------- ---------- Gross profit 941,759 1,749,411 291,761 573,330 Operating expenses 1,437,461 3,503,220 346,316 1,008,917 ---------- ---------- ---------- ---------- Loss from operations ( 495,702) ( 1,753,809) ( 54,555) ( 435,587) ---------- ---------- ---------- ---------- Other income (charges): Miscellaneous income 92,598 11,480 58,418 Loss on sale of leasehold improvements ( 143,177) Interest income 8,587 13,872 1,626 2,510 Interest expense ( 23,489) ( 23,390) ( 4,660) ( 349) Gain on sale of equipment 5,400 5,400 ---------- ---------- ---------- ---------- ( 65,481) 7,362 55,384 7,561 ---------- ---------- ---------- ---------- Net income (loss) ($ 561,183) ($1,746,447) $ 829 ($ 428,026) ========== ========== ========== ========== Net loss per common share ($ .11) ($ .44) $ .00 ($ .10) ========== ========== ========== ========== Weighted average number of common shares outstanding 5,086,007 3,972,419 4,972,233 4,264,428 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. F-3 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
1998 1997 ---- ---- Operating activities: Net loss ($561,183) ($1,746,447) Adjustments to reconcile net income to cash provided from operating activities: Depreciation and amortization 228,953 196,891 Loss on sale of leasehold improvements 143,172 Compensatory element of issuance of warrants 57,402 513,446 Changes in other operating assets and liabilities: Accounts receivable 149,725 ( 8,654) Inventory 94,859 ( 92,680) Prepaid expenses and other current assets 3,337 ( 61,499) Security deposits 41,171 ( 9,191) Accounts payable ( 123,003) 24,798 Accrued expenses and other current liabilities ( 226,568) 78,962 Deferred rent ( 36,234) 166,138 -------- ---------- Net cash used in operating activities ( 228,369) ( 938,236) -------- ---------- Investing activities: Purchase of property and equipment ( 10,598) ( 385,200) Purchase of subsidiary ( 900,000) Proceeds from sale of leaseholds 12,000 -------- ---------- Net cash provided by (used in) investing activities 1,402 ( 1,285,200) -------- ---------- Financing activities: Proceeds from issuance of common stock and warrants 112,000 1,747,500 Increase (decrease) in debt ( 58,307) 408,698 Purchase of treasury stock ( 229,289) -------- ---------- Net cash provided by (used in) financing activities ( 185,596) 2,156,198 -------- ---------- Net decrease in cash ( 412,563) ( 67,238) Cash, beginning of period 565,555 288,265 -------- ---------- Cash, end of period $152,992 $ 221,027 ======== ========== Supplemental disclosures: Cash paid during the year for: Interest $ 26,494 $ 23,907 ======== ========== Income taxes $ 0 $ 0 ======== ========== Supplemental schedule of non-cash investing activities and financing activities: Issuance of common stock and warrants regarding acquisition of subsidiary $1,415,000 Issuance of common stock in consideration of legal and consulting fees and accounts payable $ 57,402 -------- ---------- $ 57,402 $1,415,000 ======== ==========
See notes to condensed consolidated financial statements. F-4 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended is not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report for the year ended December 31, 1997 included in its Annual Report filed on Form 10- KSB. 2. Organization of the Company: William Greenberg Jr. Desserts and Cafes, Inc. (the "Company") was incorporated in the State of New York on November 12, 1993. Since its inception through July 10, 1995, the Company was a development stage enterprise and did not generate any revenues and did not carry on any significant operations. Management's efforts were directed toward the development and implementation of a plan to generate sufficient revenues in the bakery industry to cover all of its present and future costs and expenses. On July 10, 1995, the Company acquired the net operating assets of Greenberg Desserts Associates Limited Partnership ("Greenberg's - L.P.") at which time the Company commenced operations and ceased being a development stage enterprise. The deficit accumulated during the development stage aggregated $100,112. On January 17, 1997, the Company purchased all of outstanding capital stock of J.M. Specialties, Inc. ("JMS") in an acquisition to be accounted for as a purchase (the "Acquisition"). The total purchase price aggregated $2,160,000 of which $900,000 was paid in cash and the remaining $2,160,000 through the issuance of 500,000 shares of the Company's common stock at fair market value of $1.75 per share and purchase warrants valued at fair market value of $1.10 per warrant to acquire 350,000 shares of the Company's common stock at an exercise price of $2.50 per share. JMS offers a line of batter and frozen finished cakes, brownies and muffins. In connection with the above described subsequent transactions, the Company transferred all of its business assets to a newly formed wholly-owned subsidiary, WGJ Desserts and Cafes, Inc., in exchange for all of the issued and outstanding shares of common stock of such entity (the "Subsidiary"). As a result, the Company will act as a holding company with two wholly-owned subsidiaries. JMS and WGJ Desserts and Cafes, Inc. Upon obtaining consent of the Company's stockholders, the Company changed its name to Creative Bakeries, Inc. On September 1, 1997, the Company purchased all of the outstanding shares of Chatterley Elegant Desserts, Inc. (Chatterley) in an acquisition to be accounted for as a pooling of interest. The Company issued 1,300,000 of its $.001 par value common stock in exchange for all of the outstanding shares of Chatterley. Chatterley offers a line of tortes, cakes and mousses. F-5 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. Organization of the Company (continued): Effective December, 1997, Chatterley Elegant Desserts, Inc. was formally merged with J.M. Specialties, Inc. under New Jersey law. 3. Principles of consolidation: The consolidated financial statements of Creative Bakeries, Inc. and subsidiaries include the accounts of all significant wholly owned subsidiaries, after elimination of all significant intercompany transactions and accounts. The accounts of J.M. Specialties, Inc. and WGJ Desserts and Cafes, Inc. are included as the subsidiaries of Creative Bakeries, Inc. Financial statements have been restated as of June 30, 1997 to include Chatterley Elegant Desserts, Inc. 4. Acquisition of J.M. Specialties, Inc.: On January 23, 1997, the Company purchased 100% of the outstanding common stock of J.M. Specialties, Inc. ("JMS") in a transaction to be accounted for as a purchase (the "Acquisition"). The purchase price of $2,160,000 consisted of (i) $900,000 in cash, (ii) 500,000 shares of the Company's common stock valued at fair market value of $1.75 per share (aggregating $875,000), and (iii) 350,000 purchase warrants valued at fair value of $1.10 per warrant (aggregating $385,000) to acquire 350,000 shares of the Company's common stock at $2.50 per share. The warrants are in the same form as those described below. JMS, which was founded in 1984, offers a line of both batter and frozen finished cakes, brownies and muffins - with muffins constituting approximately 90% of sales. These products are produced in batches using partially automated equipment at its facility in Parsippany, New Jersey. The product is sold to wholesale customers as well as supermarket distribution centers and is marketed primarily through food distribution companies in New Jersey and New York. In turn, according to JMS's management, the distributor sells approximately forty percent of the product to supermarkets and sixty percent to food service customers, such as hospitals, colleges, restaurants and corporate dining rooms. In connection with the Acquisition, the Company entered into an employment agreement with the selling shareholder pursuant to which he will serve as a director and chief executive officer of the Company at an annual salary level of $250,000 for 1997 and a minimum of $150,000 thereafter. In addition, the Company agreed to provide $600,000 to JMS for working capital. F-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. Acquisition of J.M. Specialties, Inc. (continued): In connection with the acquisition, the Company transferred all of its then owned business assets to a newly formed wholly-owned subsidiary in exchange for all of the issued and outstanding shares if common stock of WGJ Desserts and Cafes, Inc. As a result, the Company currently acts as a holding company with two wholly-owned subsidiaries, JMS and WGJ. Upon obtaining the consent of the Company's stockholders, the Company changed its name to Creative Bakeries, Inc. In order to finance the Acquisition, the Company sold in a private placement 1,875,500 common stock purchase warrants ("the Placement Warrants") at a net price to the Company (after expenses of $315,000) of $1,747,500. Each Placement Warrant entitles the holder thereof to purchase one common share, par value $.001 per share, of the common stock of the Company at an exercise price per share of $2.50 for a term which will expire on December 31, 2000. The Company has the right to redeem the Placement Warrants, in installments, at a redemption price of $.10 per warrant commencing six months after the date of issuance if the stock trades at a designated level for a least five trading days prior to the month preceding the date on which the redemption right may be exercised. The holders of the Placement Warrants have a put option pursuant to which for a 60 day period prior to their expiration date, the holder has the right to require the Company to repurchase the Placement Warrants for a consideration consisting of $.10 per warrant plus 40% of a share of common stock. In addition, the Placement Warrants have standard anti-dilution protection. The assets acquired and the liabilities assumed at December 31, 1996, in connection with the Acquisition, are as follows: Assets: Cash $ 84,129 Accounts receivable 224,378 Notes receivable 60,000 Inventories 274,803 Prepaid expenses 14,063 Property and equipment 483,608 Other assets 27,999 -------- $1,168,980 Liabilities: Long-term debt 23,607 Notes payable - bank 75,000 Accounts payable and accrued expenses 123,938 -------- 222,545 ------- Excess of net assets acquired over liabilities assumed 946,435 Goodwill 1,213,565 --------- $2,160,000 ========== F-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. Acquisition of J.M. Specialties, Inc. (continued): Under the terms of its agreement with InterEquity Capital Partners, L.P., the Company reserved 185,682 shares of its common stock for issuance under the warrant. Management ascribed a fair value of $1.10 per common share which resulted in a charge to operations of $202,393 in the first quarter of operations in 1997. 5. Acquisition of Chatterley Elegant Desserts, Inc.: On September 1, 1997, the Company acquired 100% of the outstanding common shares of Chatterley Elegant Desserts, Inc. (Chatterley) in a transaction to be accounted for as a pooling of interest. The Company issued 1,300,000 of its common shares pursuant to the acquisition, of which 200,000 shares were returned to the Company on March 10, 1998 when the seller's sales agreement was amended. Chatterley, which was founded in 1985, produces a line of cakes, tortes and other dessert items which are made in its facility in Fairfield, New Jersey. The products are sold to wholesale customers as well as supermarkets and other food distributors in New Jersey and New York. In connection with the acquisition of Chatterley Elegant Desserts, Inc., the Company entered into an agreement with the selling shareholder for a two year period commencing September 1, 1997. The agreement calls for an annual salary of $100,000 to be paid to such shareholder. The assets acquired and the liabilities assumed at December 31, 1996, in connection with the acquisition of Chatterley, are as follows: Assets: Accounts receivable $124,950 Inventories 128,576 Prepaid expenses 4,713 Property and equipment 422,493 Other assets 56,700 -------- $737,432 Liabilities: Long-term debt 111,034 Notes payable, others 47,320 Accounts payable and accrued expenses 421,960 Deferred rent 136,958 -------- 717,272 ------- Excess of net assets acquired over liabilities assumed $ 20,160 ======== F-8 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. Property and equipment: The following is a summary of property and equipment at September 30, 1998: Baking equipment $1,715,450 Furniture and fixtures 102,111 Leasehold improvements 419,604 Automotive equipment 12,896 ---------- 2,250,061 Less: Accumulated depreciation and amortization 1,035,256 --------- $1,214,805 ========== 7. Intangible assets: The excess cost over the fair value of the net assets acquired from J.M. Specialties, Inc. aggregated $1,213,545. This goodwill has been amortized over its estimated useful life of fifteen years.Amortization charged to operations amounted to $60,675 in 1998 and 1997. 8. Deferred rent: The accompanying financial statements reflect rent expense on a straight-line basis over the life of the lease. Rent expense charged to operations differs with the cash payments required under the terms of the real property operating leases because of scheduled rent payment increases throughout the term of the leases. The deferred rent liability is the result of recognizing rental expense as required by generally accepted accounting principles. 9. Capital stock: (a) Common stock: On January 17, 1997, the Company issued 500,000 shares of its common shares pursuant to a stock purchase agreement of J.M. Specialties, Inc. (see Notes 2 and 4). On September 1, 1997, the Company issued 1,300,000 shares of its common shares pursuant to a stock purchase agreement of Chatterley Elegant Desserts, Inc. (see Notes 2 and 5). In October, 1997, the Company issued 706,250 shares of its common stock at $1.25 for the total proceeds of $882,812. In June, 1998, the Company issued 100,000 shares of its common stock at $1.12 for total proceeds of $112,000. In July, 1998, the Company issued 30,000 shares of its common stock in lieu of payment of accrued salaries and wages. These salaries amounted to $73,125. The Company also issued 10,000 shares in July in full payment of a note payable. F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. Capital stock (continued): (b) Warrants: (i) Warrants issued to InterEquity Capital: Inorder to obtain financing for the acquisition of Greenberg's -L.P. (see Note 2), the Company sold to the lender for $1,000, a Convertible Note which in accordance with the terms of the conversion agreement, was converted by the lender into a warrant to acquire shares of stock of the Company in a number sufficient to equal 6% of the Company's then outstanding preferred and common stock (163,404 shares of common stock). The warrant expires on July 31, 2001. The warrant contains anti-dilutive provisions throughout its six (6) year life which entitles the holder to its applicable percentages of the Company's capital stock on the date the warrant is exercised. Based upon the issuance of 1,834,000 shares of common stock and 2,485,000 warrants during 1997, the lender is entitled to an additional 320,202 shares of common stock. Accordingly, the financial statements included a charge to operations of $315,120 which represents the market value of the stock at the time the 320,202 warrants were issued by the Company in 1997 and 8,936 warrants in 1998. Compensatory charges recorded on the income statement for 1998 and 1997 amounted to $5,004 and $287,837, respectively. (ii) Warrants issued in 1997: Aspart of the Acquisition, the Company issued on January 17, 1997, 300,000 warrants to JMS's former owner and 50,000 warrants to certain of its employees. Concurrent with the Acquisition on January 17, 1997, the Company issued 50,000 warrants to each of the three (3) of the Company's directors. Two (2) of which are also officers of the Company. Inorder to finance the Acquisition, the Company sold to accredited investors 1,875,000 Placement Warrants at a purchase price to the Company of $1,747,500 (after offering costs of $315,000). All of the warrants issued in 1997, including the Placement Warrants, aggregating 2,425,000 entitles the holder thereof to purchase one common share, par value $.001 per share, of the common stock of the Company at an exercise price per share of $2.50 for a term which will expire on December 31, 2000. The Company has the right to redeem the warrants, in installments, at a redemption price of $.10 per warrant commencing six months after the date of issuance if the stock trades at a designated level for at least five trading days prior to the month preceding the date on which the redemption right may be exercised. F-10 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. Capital stock (continued): (b) Warrants (continued): (ii) Warrants issued in 1997 (continued): The holders of the warrants have a put option pursuant to which for a 60 day period prior to their expiration date, the holder has the right to require the Company to repurchase the warrants for a consideration consisting of $.10 per warrant plus 40% of a share of common stock. In addition, the warrants have standard anti-dilution protection. (iii) Warrants issued in 1998: OnMarch 24, 1998, the Company approved issuance of 120,000 warrants to two members of the board of directors in lieu of cash in payment of services rendered. The warrants, which became effective April 1, 1998, will expire and become valueless at the end of three years. The warrants have an exercise price of $1.375. (c) Stock options: On August 9, 1995, the Company's Board of Directors adopted the Company's 1995 stock option plan (the "Option Plan") pursuant to which options to acquire an aggregate of 100,000 shares of common stock may be granted to employees, officers, directors or consultants to the Company. The Option Plan provides for the grant of both incentive stock options, intended to qualify for preferential tax treatment under Section 422 of the Internal Revenue Code, and nonstatutory stock options that do not qualify for such tax treatment. No options can be granted under the Option Plan at less than 100% of the fair market value of the Company's common stock in the date of grant. No options have been granted under the Option Plan. 10. Commitments and contingencies: Employment Agreements: OnMarch 20, 1997, the Company entered in to an employment contract with the former owners of a company that produced low-fat and fat-free cookies. Pursuant to the contracts, both individuals received a signing bonus aggregating $68,000 and will each receive a salary of $25,000 per annum with an opportunity to earn an additional $50,000 each based on sales performance. In addition, both individuals will be entitled to warrants to acquire an aggregate of 50,000 shares of the Company's common stock in the event that sales volume exceeds $750,000 per annum. As of September 30, 1998, these employment agreements have been terminated. F-11 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Commitments and contingencies (continued): Employment Agreements (continued): In May and June of 1997, the employment contracts of Stephen Fass, a Director and President of the subsidiary, Maria Marfuggi, a Director and President of J.M. Specialties, Inc. and Seth Greenberg, President of the subsidiaries baking division, were officially terminated and settled, as well as the employment agreements of William and Carol Greenberg. These agreements are summarized below: Value of Cash Warrants Settlement Issued Total For Wages at $1.10 Settlement Stephen Fass $ 44,100 $ 55,000 $ 99,100 Maria Marfuggi 36,000 55,000 91,000 Seth Greenberg, William Greenberg and Carol Greenberg 72,003 39,732 111,735 -------- -------- -------- $152,103 $149,732 $301,835 ======== ======== ======== The settlement of these three employment agreements resulted in the Company incurring an additional $89,681 in officers compensation in the quarter ended June 30, 1997. The Company also reached agreement with four other employees with whom the Company had employment agreements. The net effect of these settlements decreased officers compensation, which had been accrued, $72,914 in the quarter ended June 30, 1997. The amount was unpaid as of September 30, 1998. In conjunction with the purchase of Chatterley Elegant Desserts, Inc., The Company entered into an employment agreement with a former employee of Chatterley. The agreement covers a three year period commencing upon the transfer of the Company's shares to the seller of Chatterley on September 1, 1997. In the first year of the contract the employee is to receive warrants to purchase 20,000 shares of the Company's common stock at $2.50 per share. In the second two years of the agreement, the employee is to receive an annual salary of $150,000 per year. The Company has not recognized compensation on the granting of warrants to this employee since the fair value of the warrants is less than the exercise price. As of February 1998, this employee resigned and the employment agreement, according to management, has been terminated. The employee has made written demands for payment but no settlement has been reached. A provision for $100,000 had been made for 1997 to reflect these demands and as of September 30, 1998 is unpaid. F-12 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Commitments and contingencies (continued): The Company and its subsidiary, WGJ Desserts, Inc., have been named as defendants in an action entitled Bacal v Creative Bakeries, Inc. which was filed in the Supreme Court of the State of New York for the County of New York. The complaint in the action alleges that defendants Edmund Abramson, currently a director of the Company and Willa Abramson, who resigned as a director in 1996, allegedly acting on behalf of the Company and Greenberg, entered into an agreement with plaintiff, Murray Bacal, whereby Mr. Bacal would purchase warrants for common stock of the Company and that the Abramson's agreed to repurchase the warrants for the same price at which they were originally sold to him, plus out of pocket expenses. As a consequence, the complaint seeks $131,500 in compensatory damages and $1,000,000 in punitive damages. The time to answer the complaint has not expired. The Company vigorously intends to defend the action. License Agreement: On May 18, 1995, the Company entered into an agreement with Macy's East, Inc. (the "licensor"), pursuant to which it granted the Company a license consisting of the right to operate a cafe in its store located on 34th Street, New York, NY. The cafe offers for sale fresh baked pastries and desserts as well as soups, salads, sandwiches, coffees, teas and other non-alcoholic beverages to the general public. Under the license agreement, the Company must pay the Licensor a fee equal to ten percent (10%) of net sales relating to the cafe. Such license fee charged to operations amounted to $5,069 in 1995. In addition, the Company must spend for advertising an amount equal to three percent (3%) of its net sales. The license commenced in November 1995 and ends on the Saturday nearest to July 31, 1996. The agreement, which has been renewed for the one year, is automatically renewed for successive periods of one year unless either party gives notice to the other at least ninety (90) days prior to the expiration of the initial term or any renewal term that the agreement shall not be renewed. As of March 31, 1998, the Company had terminated this agreement and vacated the premises on such date. Leases: WGJ Desserts and Cafes, Inc., the Company's division located in New York City, was party to a number of lease agreements for its retail stores and baking facility. Due to its efforts to become more cost efficient, the Company vacated five of its six retail locations in 1997. The Company has received releases on all locations. In November 1998, after getting a release, the Company sold its final retail facility. F-13 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Commitments and contingencies (continued): The minimum future rentals on the baking facility are as follows: June 30, 1999 $109,961 June 30, 2000 113,260 June 30, 2001 116,658 June 30, 2002 120,158 June 30, 2003 123,764 Thereafter 356,472 -------- $940,273 ======== The Company is obligated under a triple net lease for use of 29,362 square feet of office and plant space in New Jersey with the lease commencing January 31, 1994 and expiring December 31, 2004. Facility September 30, 1999 $ 189,937 September 30, 2000 198,318 September 30, 2001 200,000 September 30, 2002 200,000 September 30, 2003 200,000 Thereafter 295,361 ---------- $1,283,616 ========== Rent expense for all operating leases amounted to $360,658 in 1998 and $445,795 in 1997 and includes straight-lining of rent adjustments discussed in Note 8. 11. Long-term debt: Equipment with a cost of $297,000 has been pledged as collateral on a note payable in monthly installments of $4,005, including interest. The notes carry interest varying rates of 10.30% to 17.87% and mature between 1998 and 2000. F-14 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. Long-term debt (continued): The total future annual payments as of September 30, 1998 are as follows: September 30, 1999 $34,320 September 30, 2000 8,176 ------- $42,496 ======= 12. Deferred income taxes: Deferred income taxes (benefits) are the result of a deferred tax asset carried on the books of Chatterley Elegant Desserts, Inc. at the end of 1996. A full valuation reserve of this asset, as well as any effect of the Company's large net operating loss carry-forwards, has been made by management as they feel it is not likely to utilize this asset in the future. 13. Earnings per share: Primary earnings per share is computed based in the weighted average number of shares actually outstanding plus the shares that would have been outstanding assuming conversion of the common stock purchase warrants which are considered to be common stock equivalents. However, according to FASB 128, effective for financial statements issued and annual periods issued after December 15, 1997, entities with a loss from continuing operations, the exercise of any potential shares increases the number of shares outstanding and results in a lower loss per share. Thus, potential issuances are excluded from the calculation of earnings per share. These common stock purchase warrants amounted to 2,605,000 in 1998 and 2,586,369 in 1997. Reconciliation of shares used in computation of earnings per share:
1998 1997 -------------------- ------------------ Nine Three Nine Three Months Months Months Months Weighted average of shares actually outstanding 5,086,007 4,972,233 3,972,419 4,264,428 Common stock purchase warrants Primary and fully diluted weighted average common shares outstanding 5,086,007 4,972,233 3,972,419 4,264,428 ========= ========= ========= =========
F-15 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 14. Subsequent events: On November 2, 1998, the Company sold its facility on Madison Avenue, including all furniture and fixtures. The Company received a full release on the lease. The Company maintains a royalty agreement with the buyer. 16 Item 2. Management's Discussion and Analysis Of Financial Condition and Plan of Operation General: In order to concentrate on the wholesale end, the company has been downsisizing its retail operations since 1997. Four stores were shut down as of December 1997. In March '98 the Company closed its operations at the Macy's location. In June '98 the Company closed its commissary at 47th street after entering into a co-packing arrangement with JMJ Baking Corp. In early November 1998 the Company licensed its William Greenberg trade name and operations of its only remaining retail store on Madison Ave., thus completing its exit from direct involvement in retailing. In consideration of the payment of $110,000 in cash, a four-year promissory note in the principal amount of $295,000 and the obligation to pay certain royalties to the Company on mail order sales, the licensee has taken over the operation of the Madison Avenue store. The licensee also has the right to open additional Greenberg stores in certain areas of Manhattan in consideration of certain royalties to be paid to the Company based on retail sales of such additional stores. The Company and the licensee have also agreed to share equally profits derived from the wholesale of Greenberg products. At September 30, 1998 to the extent the Company may have taxable income in future periods, there is available a net operating loss for federal income tax purposes of approximately $7,000,000 which can be used to reduce the tax on income up to that amount through the year 2011. b. Results of Operations: The Company's consolidated revenues aggregated $1,136,350 and $1,989,915 for the three months ended Sep. 30, 1998 and 1997, respectively. The cost of goods sold was $844,589 in 1998 and $1,416,585 in 1997. Operating expenses were $346,316 in 1998 and $1,008,917 in 1997. As a result, the loss from operations for third quarter 1998 and 1997 was $54,555 and $435,587 respectively. The reduction in sales was mainly due to the retrenchment in the retail division. The related much steeper reduction in operating expenses was due to the restructuring at the WGJ Subsidiary with the resultant cost savings. During the first quarter of 1998 the company wrote off the unamortized balance of the leasehold improvements at the Macy's store in the amount of $143,173. The net interest expense for the quarter was $4,660. The resulting net income (loss) aggregated $829 for 1998 $.00 per share and ($428,06) for 1997 ($.10) per share. The retail division and wholesale divisions of WGJ Desserts and Cafes, Inc., (the WGJ subsidiary) sell similar products. Costs are allocated to each division based upon the standard costs of the items sold. Such costs consist of ingredients, direct labor and overhead. Batter Bake-Chatterley Inc., (the BBC subsidiary) offers a line of batter and frozen finished cakes, muffins, tart shells and other desserts. BBC's financial records and affairs are kept separate from the parent but included in the consolidated financial statements at Sep. 30, 1998 and 1997. Plan of Operation: Exit from Retail Operations: After analyzing the Company's retail operations, management concluded that the unprofitable retail division was diverting management's attention away from pursuing profitable opportunities in the Company's other division. Therefore, by December 31, 1997, the company closed down four of its six stores. A fifth store, in Macy's cellar was taken over by Ferrara Bakery from April 1, 1998. The commissary was closed down on June 30, 1998 and the Greenberg tradename operations of the last remaining store on Madison Avenue were licensed to a third party in early November, 1998. The Company retained a 50% interest in the wholesale Greenberg business which it intends to aggressively develop jointly with the licensee. Since there was no justification to maintain the commissary, the Company entered into a co-packing arrangement with JMJ Baking Corp. to supply the product at the same high quality standard. In order to assure the quality, JMJ has employed Greenberg's bakers and has agreed to use only Greenberg's recipes. In connection with the restructuring plan, management had written down property & equipment as of December 31, 1997 by approximately $798,000. A further $143,000 in leasehold improvements was written off in the first quarter of 1998. Finally, the Company had charged 1996 with a $ 450,000 provision for actions aimed at restructuring the Company, of which $369,459 was actually incurred as of Sep 30, 1998. This charge mainly comprises write down of leasehold improvements on stores that have been closed down, provisions for lease obligations on certain retail stores, and charges for consultants involved in the restructuring. By taking the above actions, future periods will not be burdened with the amortization, depreciation or expense of these costs. Wholesale Operations: The next phase in the Company's plan of action is to build up the wholesale end of its business with fewer but higher margin products. This process includes calling on supermarket headquarters and chain restaurant accounts. Brokers have been appointed and sales calls are being scheduled. Liquidity and Capital Resources: Since its inception the Company's only source of working capital has been the $8,345,000 received from the issuance of its securities. In June 1995, The Company issued 180,000 shares of common stock to unrelated parties for $600,000 and in August 1995, the Company issued 60,000 shares of its common stock to unrelated parties for $200,000. In connection with the acquisition of Greenberg's- L.P., the Company received $2,000,000 from the sale of two notes to InterEquity Capital Partners, L.P. ("InterEquity"). During October 1995, the Company received net proceeds of $4,900,000 from the sale of 1,150,000 shares of its common stock in an initial public offering. During January 1997 the Company received net proceeds of $1,650,000 from the private placement of 1,875,500 common stock purchase warrants at $1.10 per warrant. During October 1997 the Company received net proceeds of $883,000 from the exercise of a portion of these common stock warrants. Of the $5,700,000 proceeds from the aforementioned stock sales: (i) $2,125,000 was issued to repay the InterEquity debt including interest; (ii) $2,615,000 was used in operations; (iii) $765,00 was used to purchase property, equipment and leaseholds; and (iv) $195,000 was used for general corporate purposes. The $1,650,000 proceeds from the private placement warrants was used to acquire JMS. Of the $883,000 proceeds from the exercise of warrants $325,000 was used for consolidation and merger of JMS and Chatterley, $341,000 was used for corporate purposes and the balance will be used for on going corporate expenses and to fund new business. As of Sep. 30, 1998, the Company has a negative working capital of approximately $953,340 as compared to a negative working capital of $1,129,729 at Sep. 30, 1997. During 1997, management took actions aimed at restructuring the Company in order to reduce operating costs and enhance the Company's focus and efficiency. Pursuant to the restructuring a new management team was put into place, executive contracts and leases were renegotiated and certain positions were eliminated and an exit strategy out of retailing was completed. The Company is continuing to seek new and profitable avenues of growth during 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated November 12, 1998 CREATIVE BAKERIES, INC. By:_/s/ Phillip Grabow___________ Phillip Grabow Chief Executive Officer EX-27 2 FDS --
5 1 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 152,992 0 373,202 40,616 262,688 857,026 2,250,061 1,035,256 3,175,862 2,168,145 0 0 0 5,302 11,195,665 3,175,862 3,801,101 3,801,101 2,859,342 1,437,461 143,177 0 23,489 (561,183) 0 (561,183) 0 0 0 (561,183) (.11) (.11)
EX-99 3 LICENSE AND SALE AGREEMENT LICENSE AND SALE AGREEMENT License and Sale Agreement entered into as of this 3rd day of November, 1998, by and between Creative Bakeries, Inc., a New York corporation ("Licensor"), and JW Enterprises, Inc., a New York corporation ("Licensee"). WHEREAS, Licensor has developed and is the proprietary owner of the Trade Name (as hereinafter defined) and is willing to grant, upon the terms and conditions hereinafter set forth, the exclusive license to Licensee of the Trade Name in the Territory (as hereinafter defined) and Licensee desires to acquire such license; and WHEREAS, Licensor has agreed to sell to Licensee, and Licensee has agreed to purchase from Licensor, the Equipment (as defined below). NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: 1. Definition of Terms. As used in this Agreement, the following terms shall have the meanings set forth below: "Know-How" shall mean recipes and methods of production, as well as any and all other recipes and methods of production, whether or not capable of precise separate description, but which alone or when accumulated is or may be useful in the production of the baked and other goods sold by the Retail Store and which is now known to or possessed or acquired by Licensor. "Equipment" shall mean all inventory, equipment, fixtures, trade fixtures, improvements and merchandise located at the Retail Store. "Retail Store" shall mean that certain retail store located at 1100 Madison Avenue, New York, New York. "Territory" shall mean and encompass the following: (a) The Borough of Manhattan in the City of New York, north of 34th Street from the East River to the Hudson River; and (b) In the event that during the first three years after the date hereof, Licensee does not open and operate any additional retail stores utilizing the License (as hereinafter defined) within the area described in Subsection (a) of this definition, other than the Retail Store, thereafter the Territory shall mean and encompass the Borough of Manhattan in the City of New York, north of 34th Street from the East River to Fifth Avenue. "Trade Name" shall mean the mark and name "William Greenberg, Jr. Desserts and Cafes" and/or derivatives thereof, including, the logo related thereto, the artwork, design, marketing display design and concept associated therewith, packaging design and trade dress. Scope of License; No Right to Sublicense. 2.1 Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee a royalty-bearing exclusive license commencing on the date hereof to utilize the Trade Name and the Know-How in order to commercialize, produce and sell baked goods and other merchandise through the Retail Store and other retail store(s), subject to the provisions of this Agreement, in the Territory and through worldwide mail order sales (the "License"). Except in connection with an assignment of the New Lease or a subletting of the premises demised under the New Lease, Licensee shall not have the right to sublicense the Trade Name or the Know-How to any third party without the prior written consent of Licensor, which consent shall not be unreasonably withheld or delayed. Any sublicense of the Trade Name and Know-How shall expressly provide that such sublicense is subject to the applicable provisions of this Agreement and that certain Termination, Release and Tri-Party Agreement by and between Licensor, Licensee and Gerel Corporation of even date herewith. 2.2 Licensee shall have the right of first refusal with respect to the opening of any additional retail stores using the Trade Name in the Borough of Manhattan in the City of New York, north of 34th Street from Fifth Avenue to the Hudson River during the two year period subsequent to the third anniversary of the date hereof. 2.3 Licensor hereby agrees to execute an escrow agreement within thirty (30) days of the date hereof in a form reasonably acceptable to both Licensor and Licensee. Said escrow agreement shall provide that in the event (i) Licensee chooses to use a production facility for the baked and other goods sold by the Retail Store other than that which is currently used by Licensor, the Know-How will be provided to such other production facility, PROVIDED that said production facility executes a confidentiality agreement reasonably acceptable to Licensor with respect to the Know-How, and (ii) this License be terminated as permitted under Article 14 hereof, the escrow agreement shall automatically terminate and the Know-How shall be returned to Licensor upon Licensor giving notice to the escrow agent that the License has been terminated. Such escrow agreement shall be deemed supplementary to this Agreement pursuant to 11 US Bankruptcy Code ss.365(n). 3. Sale of Equipment. Licensor hereby grants, conveys, sells, transfers, sets-over and delivers, and by these presents does hereby grant, convey, sell, transfer, set-over and deliver unto Licensee all of Licensor's right, title and interest in and to the Equipment, to have and to hold, all and singular, such Equipment forever. The Equipment is transferred in "AS IS", "WHERE IS" condition without warranties of any kind, express or implied, including any regarding merchantability or fitness for a particular use. Anything contained herein to the contrary notwithstanding, $2,500.00 of the consideration set forth in Section 6.1(i) below shall be deemed consideration for the sale of the Equipment. Licensee hereby agrees to pay any sales or capital gains taxes which Licensor may incur and pay as a result of the sale of the Equipment to Licensee. 4. Purchase of Trade Name and Know-How. 4.1 In the event that Licensor shall dissolve or permanently cease operations, the Licensee shall be entitled to acquire free and clear title to the Trade Name and Know-How upon the payment of $25,000 to Licensor or it successors, assigns or designees (the "Option"). Licensor shall provide Licensee with written notice at least thirty (30) days prior to the date Licensor intends to dissolve or permanently cease operations. Licensee shall thereafter have thirty (30) days to exercise the Option by delivering written notice to Licensor of such election. In the event Licensee fails to exercise the Option within said thirty (30) days Licensee shall be deemed to have forever waived the Option, and Licensee shall thereafter have no cause of action against Licensor with respect to the Trade Name and Know-How. 4.2 Licensor hereby agrees to execute an assignment of the Know-How and the Trade Name in a form reasonably acceptable to both Licensor and Licensee within thirty (30) days of the date hereof. Said assignment shall be held in escrow and shall not to be released until Licensor dissolves or ceases operations and Licensee exercises its option to acquire free and clear title to the Know-How and Trade Name pursuant to this Article 4. The escrow a agreement shall be in a form reasonably acceptable to both Licensor and Licensee. Said escrow agreement shall provide that in the event Licensee does not exercise its right to acquire free and clear title to the Know-How and Trade Name as set forth herein, the assignment shall become null and void and of no force or effect and the escrow agreement shall automatically terminate. Such escrow agreement shall be deemed supplementary to this Agreement pursuant to 11 US Bankruptcy Code ss.365(n). 5. Ownership. Subject to express contrary terms contained in this Agreement, as between Licensor and Licensee, Licensor shall be the sole and exclusive owner of the Trade Name and the Know-How.. --------- 6. Royalties and Payments. 6.1. In consideration of the License granted hereunder and the sale of the Equipment, Licensee has agreed to pay Licensor $405,000 payable on the date hereof by delivery by Licensee to Licensor of (i) a certified or cashiers check in the amount of $110,000 and (ii) Licensee's promissory note in the amount of $295,000 in the Form of Exhibit A hereto (the "Note"). 6.2. In addition to the payment set forth in Section 6.1, the Licensee agrees to pay Licensor royalty payments (the "Percentage Royalties") as set forth below: (a) In the event that Licensee opens and operates any additional retail store(s) utilizing the License (other than the Retail Store) and the annual (measured in 12 month periods ending on each December 31) gross retail sales of any of such store(s) exceeds $400,000 Dollars (the "Breakpoint"), then Licensee shall pay Licensor a royalty of five percent (5%) (the "Retail Royalties") of gross retail sales in excess of the Breakpoint for each such retail store, on a semi-annual basis, for so long as such store(s) remain in operation. In the event the initial opening date of any such additional store does not occur on January 1 of any calendar year, then the Breakpoint shall be pro-rated on a per-diem basis. (b) Licensee shall pay Licensor a royalty, on a semi-annual basis, of three percent (3%) of all annual gross mail order sales of products relating to the Trade Name and the Know-How above $100,000. 6.3 In no event shall the sales derived from Licensee's operations at the Retail Store be included in the calculation of Retail Royalties. 6.4 All amounts of royalties payable by Licensee to Licensor hereunder shall be paid without deducting therefrom any tax, duty, charge or other fee payable in respect of such royalty payment. 6.5 Payments due from Licensee to Licensor shall be deposited by Licensee to the account of Licensor, as Licensor shall specify from time to time in writing. 6.6 Except as otherwise determined, any amount which is not paid when due hereunder shall bear interest per annum at the prime rate as published in The Wall Street Journal from time to time. ----------------------- 6.7 The obligations of Licensee under the Note and to make Percentage Royalty and other payments hereunder are secured by, and entitled to the benefits of, a security interest as provided in that certain Termination, Release and Tri-Party Agreement, dated the date hereof between Licensor, Licensee and Gerel Corporation, the landlord of the Retail Store. 7. Security Interest. 7.1 Licensee hereby grants to Licensor a security interest in the Equipment and all proceeds and accounts receivable therefrom (the "Collateral"), to secure the payment and performance of Tenant's obligations set forth in the Note (the "Security Agreement"). Licensee hereby appoints Licensor its true and lawful attorney-in-fact in its name or otherwise to execute and file any financing statement(s) on behalf of Licensee and to do any and all acts and to execute and file any and all documents which may be necessary to realize, perfect, continue, preserve and protect the security interest upon the Collateral. Upon the occurrence of any event of default in the payment of any amounts due under the Note Licensor shall be entitled to exercise all of the rights and remedies of a secured party under the Uniform Commercial Code. Reasonable attorneys' fees of the Licensor in enforcing any right or exercising any remedy under this Security Agreement shall be deemed a part of the obligation secured hereby. 8. Joint Venture. Licensor and Licensee hereby agree to form a joint venture which shall provide for the equal sharing of the profits derived from the wholesale operations (i.e. sales made at a discount to restaurants, supermarkets, schools, etc.) of the business operated under the Trade Name by Licensee and/or Licensor (the "Joint Venture"). Each party shall provide reasonable access to the books and records maintained by them for the purposes of verifying the wholesale profits. Commencing with calendar year 2001, if at any time within the next three (3) full calendar years (i.e. 2001, 2002 and 2003 ) less than forty percent (40%) of the total wholesale sales volume is derived from the operations of Licensee, Licensor shall have the option to terminate the Joint Venture upon ten (10) days notice to Licensee. Licensor and Licensee shall pay to each other fifty (50%) of their annual net wholesale revenues on or before February 1 of each calendar year the Joint Venture is in existence. Anything contained in this Article 8 to the contrary notwithstanding, in the event Licensor elects to terminate the Joint Venture as provided in this Article 8, both Licensor and Licensee shall retain the right to continue their respective wholesale operations independent of one another. 9. Cooperation. Licensor hereby covenants and agrees to reasonably cooperate and share with Licensee its knowledge and experience with respect to the mail order and wholesale business it conducts from time to time; provided however, that such covenants shall not be deemed to require Licensor to share any trade secrets it may now have or may develop in the future which are not included within the Know-How. ------------ 10. Records and Reporting. 10.1 Licensee shall deliver to Licensor a statement of all Revenues on which Percentage Royalties are due under this Agreement on a semi-annual basis (the "Semi-Annual Royalty Statement") on or before every October 1 and April 1 of each calendar year this License is in effect. Each Semi-Annual Royalty Statement shall present information for gross retail (other than sales from the Retail Store) and mail order sales of the Product by Licensee and such other information (including information regarding customers) as Licensor may reasonably require. 10.2 Licensee shall keep complete and accurate books and records relating to all mail order sales and all sales from locations other than the Retail Store in sufficient detail to allow the accrued Percentage Royalties to be accurately determined and verified. Licensee shall preserve such books and records for a period of six years following the date of any statement delivered hereunder. Licensor (or its duly authorized representatives) shall have the right at its sole cost and expense, from time to time during the Term upon seven (7) business days prior notice and during normal business hours, to inspect the relevant records of Licensee to the extent necessary to verify the accuracy of the reports and payments required hereunder. Licensee shall make its records available for such inspection at such place or places where such records are customarily kept, upon notice from Licensor. Licensor shall hold strictly confidential all such records and information, other than the total amounts of royalties paid, and all information learned in the course of any audit or inspection hereunder, except to the extent necessary for Licensor to reveal such information in order to enforce any rights it may have under this Agreement or if disclosure is required by law. The failure of Licensor to request verification of any report or statement during the Term shall not be considered acceptance of the accuracy of such report. 10.3 Simultaneously with the delivery of each Semi-Annual Royalty Statement, Licensee shall pay to Licensor the Percentage Royalties reported as being due without set-off or reduction of any kind. 10.4 Licensee and Licensor shall file all required tax filings relating to this Agreement. Each party hereto shall maintain all documents supporting such tax filings and shall make such documents available to the other upon its reasonable request. 10.5 All disputes, controversies or differences which may arise between the parties hereto out of, in relation to, or in connection with Article 6 hereof or this Article 10, including, but not limited to, the Semi-Annual Royalty Statements and the completeness and accuracy of the books and records of the Licensee, shall be finally settled and determined by one (1) nationally recognized independent accounting firm if the Licensor and Licensee are able to agree to such a firm and, in the absence of such agreement, by decision of the majority of three (3) nationally recognized accounting firms with one such firm chosen by each party hereto (the "Designated Accounting Firms") and a third such firm chosen jointly by the Designated Accounting Firms. All costs, fees and expenses actually incurred by either party solely with respect to any dispute submitted for resolution pursuant to this Section 10.5 shall be share equally by Licensor and Licensee. Notwithstanding the foregoing, with respect of monetary disputes only, if either Licensor's or Licensee's position in such dispute(s) is determined to be entirely correct, then the prevailing party shall be entitled to collect all of its costs, fees and expenses actually incurred with respect to such dispute. 11. Covenants of Licensee. 11.1 Licensee covenants (a) that the goods and merchandise sold under the Trade Name (the "Product") and the production, distribution and packaging thereof shall be of a high standard and of such taste, appearance and quality at least equal to that currently offered for sale by Licensor from the Retail Store in order to at least maintain the good will pertaining to the Trade Name, (b) that the Product shall be produced, sold, distributed and advertised in accordance with all applicable laws, and (c) that the policy of sale, distribution, and/or exploitation by Licensee shall in no manner reflect adversely upon the Trade Name. Licensee further agrees that all rights granted herein shall be exploited and/or exercised so as not to interfere with, detract from or alter the concepts associated with the Trade Name used by Licensor and that Licensee shall use its commercially reasonable efforts to preserve such concepts. Anything contained herein to the contrary notwithstanding, to the extent Licensee retains the production facilities for the Know-How recommended by Licensor, Licensee shall have not liability under this License for the taste, appearance and quality of the goods produced by such facility. 11.2 Licensee shall comply with any and all national, federal, state, county and municipal statutes, laws, ordinances, regulations, rules or orders (collectively, "Regulations"), including without limitation, all Regulations regarding labor, safety for workers and consumer protection and shall obtain, at its own expense, any variances, special exceptions, zoning approvals and all licenses and other permits required by governmental authorities. 12. Indemnification. 12.1 Licensee shall defend, protect, indemnify, reimburse and hold harmless Licensor and any of its affiliates, representatives or agents, during and after the Term, from and against the full amount of any and all claims, demands, losses, liabilities and expenses, including but not limited to, fees of legal counsel, whether arising during or after the Term, and whether alleged or proven, which arise out of: (a) the Licensee's use of the Trade Name, including the operations of any retail store under the Trade Name (including without limitation, the Retail Store); (b) the termination of this Agreement or the License by Licensor due to Licensee's default under this License, the Note, or that certain Termination, Release and Tri-Party Agreement of even date herewith by and between Licensor, Licensee, and the landlord of the Retail Store; (c) the acts or omissions of Licensee or any of the Licensee's agents, representatives or employees; (d) the inaccuracy or incorrectness in any material respect as of the date hereof of any representation or warranty made by Licensee; or (e) the default by Licensee in the performance of any of its material obligations under this Agreement. Notwithstanding the foregoing, the indemnification contained herein shall not be deemed to include claims by third parties that the Trade Name violates intellectual property rights of said third party. 12.2 Licensor shall defend, protect, indemnify, reimburse and hold harmless Licensee and any of its affiliates, representatives or agents, during and after the Term, from and against the full amount of any and all claims, demands, losses, liabilities and expenses, including but not limited to, fees of legal counsel, arising out of Licensor's operations from the Retail Store prior to the date hereof. 13. Duration of Agreement. This Agreement shall begin on the date first noted above and thereafter shall be perpetual, unless terminated pursuant to Article 15 hereof or otherwise terminated by written agreement of Licensor and Licensee (the "Term"). --------------------- 14. Representations and Warranties of Licensee. (a) Licensee represents and warrants to Licensor that: The execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate corporate action; The performance by Licensee of any of the terms and conditions of this Agreement on its part to be performed does not and will not constitute a breach or violation of any judgment, decree or order or any agreement or understanding, written or oral, to which it is a party or by which it is bound; Licensee is duly organized and validly incorporated under the laws of the State of New York and is in good standing under such laws and is qualified to do business in every jurisdiction in each state where such qualification is necessary; Licensee has the right, power and authority to enter into this Agreement and receive the rights and license granted hereby. (b) Licensor represents and warrants to Licensee that: Gross sales of the Retail Store for the fiscal year ending December 31, 1997, including gross mail order sales, were at least One Million Two Hundred Thousand ($1,200,000) Dollars; The execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate corporate action; The performance by Licensor of any of the terms and conditions of this Agreement on its part to be performed does not and will not constitute a breach or violation of any judgment, decree or order or any agreement or understanding, written or oral, to which it is a party or by which it is bound; Licensor is duly organized and validly incorporated under the laws of the State of New York and is in good standing under such laws and is qualified to do business in every jurisdiction in each state where such qualification is necessary; Licensor has the right, power and authority to enter into this Agreement and receive the rights and license granted hereby. 15. Termination. 15.1 Licensor shall have the right to terminate this Agreement, upon forty-five (45) days' notice to Licensee, only if at any time during the Term Licensee shall default in the payment of any of the amounts due under the Note, provided that Licensee has not cured such default prior thereto. In the event of a default in the payment of Percentage Royalties or a breach of the covenants contained in Article 11 above, Licensor's sole remedy shall be to bring an action against Licensee for (i) the past due Percentage Royalties, and (ii) specific performance of the covenants contained in Article 11 hereof. Any notice of default delivered by Licensor shall specify the nature of said default. This Agreement and the License shall automatically terminate unless subsequently waived by Licensor in writing, if any one of the following events shall occur: (a) Licensee shall become insolvent, suspend its usual business or be declared by a court of competent jurisdiction to cease to exist; (b) Licensee shall make a general assignment for the benefit of its creditors, commence any proceeding relating to it seeking discharge or the reduction of debts, an arrangement, composition, reorganization or any other form of relief from its creditors or from a court or governmental agency pursuant to any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation, law, statute or procedure of any jurisdiction (federal, state or municipal) for relief of financially distressed debtors (each of the foregoing a "Debtor Relief Procedure"); or (c) a Debtor Relief Procedure shall be instituted, initiated or commenced against Licensee hereunder for any obligation of Licensee and an order for relief is entered or the petition is controverted but is not dismissed within 30 days after the commencement of the case or the substantial equivalent occurs or the Debtor Relief Procedure is not dismissed or otherwise terminated within 30 days of its commencement. 15.2 If this Agreement is terminated pursuant to this Article 15, all interests of the Licensee under this Agreement, and in all rights and licenses granted hereunder, shall cease forthwith. In addition, Licensor shall have the right to exercise its rights under the Security Agreement. Such termination shall not affect or diminish Licensee's liability hereunder or Licensee's obligations to Licensor, including without limitation, the obligation to pay accrued and unpaid royalties hereunder, all of which obligations shall survive such termination. 15.3 Anything contained in this Article 15 to the contrary notwithstanding, in the event (i) Licensee disputes the amount of Percentage Royalties owed pursuant to Article 6 hereof, (ii) such dispute is submitted for resolution pursuant to Section 10.5 above, and (iii) Licensee is determined pursuant to Section 10.5 to have defaulted in the payment of Percentage Royalties, Licensee shall have ten (10) days after such determination to cure such default. In the event Licensee shall fail to cure within said ten (10) day period, Licensor shall thereafter have the right to exercise all the rights and remedies granted it pursuant to this Agreement. 16. Notice. All notices, consents, requests, demands and other communications required or permitted to be given under this Agreement (the "Notices"), shall be in writing and delivered personally, by facsimile, or by a nationally recognized overnight courier service, receipt acknowledged, or mailed by registered or certified mail, postage prepaid, return receipt requested, addressed to the parties hereto (or to such address as the parties hereto shall specify by notice given in ------ accordance with this provision): (a) If to the Licensor: Creative Bakeries, Inc. 20 Passaic Avenue Fairfield, N.J. 07004 Attn: Mr. Phil Grabow, President with a copy to: Pryor Cashman Sherman & Flynn LLP 410 Park Avenue New York, New York 10022-4441 Attn: Richard Frazer, Esq. (b) If to the Licensee: JW Enterprises, Inc. 1100 Madison Avenue New York, New York 10028 Attn: Mr. Edward Abrahmson with a copy to: Bondy & Schloss LLP 6 East 43rd Street New York, New York 10017 Attn: Gerald Adler, Esq. All such Notices shall be deemed given when personally delivered or when transmitted by facsimile with confirmation as aforesaid, or, if mailed as aforesaid, on the third business day after the mailing thereof or on the day actually received, if earlier, except for a notice of a change of address which shall be effective and deemed to have been given only upon receipt. 17. Waivers. No waiver of any provision of this Agreement or of any breach hereof shall be effective unless in writing and signed by the party to be bound thereby. The waiver by any party hereto of a breach of any provision of this Agreement, or of any representation, warranty, obligation or covenant in this Agreement by any other party hereto, shall not be construed as a waiver of any subsequent breach of the same or of any other provision, representation, warranty, obligation or ------- covenant of such other party, unless the instrument of waiver expressly so provides. 18. Governing Law. This Agreement shall be governed by an construed in accordance with the laws of the State of New York, with respect to contracts made and to be fully performed therein, without regard to the conflicts of laws principles thereof. ------------- 19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. ------------ 20. Entire Agreement. This Agreement constitutes the sole and entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, representations, warranties, statements, promises, arrangements and understandings, whether oral or written, express or implied, between the parties with respect to the subject matter hereof and may not be changed or modified except by an instrument in writing signed by the party or parties to be bound thereby. This Agreement has been subject to the mutual consultation, negotiation and agreement of the parties hereto and shall not be construed for or against any party hereto on the basis of such party having drafted this Agreement. 21. Assignment. No party hereto may assign this Agreement or its respective rights, benefits or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Licensor, may assign, without the prior consent of Licensee, a portion or all of the Percentage Royalty to such person or entity that the Licensor may designate from time to time by notice to Licensee. - ---------- 22. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their successors, heirs, personal representatives, administrators, executors and permitted assigns. Nothing contained in this Agreement is intended to confer upon any person or entity, other than the parties hereto, or their respective successors, heirs, personal representatives, administrators, executors or permitted assigns, any rights, benefits, obligations, remedies or liabilities under -------------- or by reason of this Agreement. 23. Section Headings. The Section headings used in this Agreement have been used for convenience of reference only and are not to be considered in construing or interpreting this Agreement. ---------------- 24. Severability. If one or more terms or provisions of this Agreement are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Agreement and the balance of this Agreement shall remain in full force and effect. ------------ 25. Further Assurances. The parties shall, at any time and from time to time after the date hereof and through and after the date of execution hereof, upon the reasonable request of the other party, execute, acknowledge, file and deliver or cause to be done, executed, filed or delivered, such further acts, assignments, transfers and assurances as may be reasonably required to effectively consummate this Agreement and the transactions contemplated hereby or to confirm or otherwise effectuate ------------------ the provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Licensor: CREATIVE BAKERIES, INC. Witness: ___________________ By: _____________________ Name: Phil Grabow Title: President Licensee: JW ENTERPRISES, INC. Witness: ___________________ By: _____________________ Name: Judith Adler Title: President -----END PRIVACY-ENHANCED MESSAGE-----