-----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, BD4O6ULuJ7KOA1/gBHjyLHqohBX603V6OYDHqqobzNN4LojVlEXwtmbQ03VsiXF3 E+S+mADcCRFDqeDlTybXOA== 0000949721-97-000009.txt : 19971117 0000949721-97-000009.hdr.sgml : 19971117 ACCESSION NUMBER: 0000949721-97-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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: 97718251 BUSINESS ADDRESS: STREET 1: 222 NEW RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9738088248 MAIL ADDRESS: STREET 1: 222 NEW RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 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, 1997 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 November 12, 1997 Common Stock, par value $0.001 per share 4,455,500 INDEX Part I. Financial information Item 1. Condensed consolidated financial statements: Balance sheet as of September 30, 1997 F-2 Statement of operations for the nine and three months ended September 30, 1997 and 1996 F-3 Statement of cash flows for the nine months ended September 30, 1997 and 1996 F-4 Notes to condensed consolidated financial statements F-5 - F-17 Item 2. Management's discussion and analysis of financial condition Part II. Other information Signatures CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - SEPTEMBER 30, 1997 (Unaudited) ASSETS Current assets: Cash $ 221,027 Accounts receivable, less allowance for doubtful accounts of $26,800 508,092 Notes receivable, related party 57,300 Interest receivable 14,326 Inventory 442,483 Prepaid insurance 43,547 Prepaid expenses and other current assets 90,068 ----------- Total current assets 1,376,843 --------- Property and equipment, net of accumulated depreciation 1,643,037 ----------- Other assets: Covenant not to compete, net of amortization 68,750 Goodwill, net of amortization 1,215,086 Security deposits and other assets 204,899 ----------- 1,488,735 --------- $ 4,508,615 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 49,793 Notes payable, shareholders 225,000 Notes payable, bank 149,379 Notes payable, other 39,586 Accounts payable 972,248 Estimated liability for restructuring 350,000 Accrued payroll: Stockholders/officers 326,045 Other 25,335 Accrued expenses nd other current liabilities 369,186 ---------- Total current liabilities 2,506,572 ---------- Long-term debt, net of current portion 234,740 ----------- Deferred rent 43,546 ------ 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 4,455,500 shares in 1997 and 3,060,000 in 1996 4,456 Additional paid in capital 10,420,676 Deficit ( 8,701,375) ----------- 1,723,757 --------- $ 4,508,615 =========== 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, 1997 AND 1996 (Unaudited) Nine Months Three Months Ended September 30, Ended September 30,
1997 1996 1997 1996 ---- ---- ---- ---- Net sales $6,361,242 $6,762,495 $1,989,915 $2,273,250 Cost of sales 4,611,831 4,901,769 1,416,585 1,631,121 ---------- ---------- ---------- ---------- Gross profit 1,749,411 1,860,726 573,330 642,129 Operating expenses 3,503,220 3,541,264 1,008,917 1,181,398 ---------- ---------- ---------- ---------- Loss from operations ( 1,753,809) ( 1,680,538) ( 435,587) ( 539,269) ---------- ---------- ---------- ---------- Other income (charges): Rental and storage income 11,480 51,182 51,182 Gain on sale of equipment 5,400 5,400 Interest income 13,872 42,691 2,510 2,227 Interest expense ( 23,390) ( 23,479) ( 349) ( 7,198) ---------- ---------- ---------- ---------- 7,362 70,394 7,561 46,211 ---------- ---------- ---------- ---------- Loss before extraordinary item ( 1,746,447) ( 1,610,144) ( 428,026) ( 493,058) Extraordinary item-gain on extinguishment of debt 31,375 31,375 ---------- ---------- ---------- ---------- Net loss ($1,746,447) ($1,578,769) ($ 428,026) ($ 461,683) ========== ========== ========== ========== Net loss per common share ($ 0.30) ($ 0.41) ($ 0.07) ($ 0.12) ========== ========== ========== ========== Weighted average number of common shares outstanding 5,789,369 3,806,628 6,289,428 3,806,628 ========== ========== ========== ==========
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, 1997 AND 1996 (Unaudited)
1997 1996 ---- ---- Operating activities: Loss before extraordinary item ($1,746,447) ($1,610,144) Adjustments to reconcile net income to cash provided from operating activities: Depreciation and amortization 196,891 345,508 Extraordinary item 31,375 Compensatory element of issuance of warrants 513,446 Changes in other operating assets and liabilities: Accounts receivable ( 8,654) 11,186 Inventory ( 92,680) ( 35,718) Interest receivable ( 1,916) ( 2,396) Prepaid expenses and other current assets ( 59,583) ( 180,073) Accounts payable 24,798 ( 44,433) Accrued expenses and other current liabilities 178,962 48,769 Estimated liability for restructuring ( 100,000) Deferred rent 166,138 8,277 ---------- ---------- Net cash used in operating activities ( 929,045) ( 1,427,649) ---------- ---------- Investing activities: Purchase of subsidiary ( 900,000) Decrease in note receivable, related party 2,700 119,250 Purchase of property and equipment ( 387,900) ( 364,302) Increase in security deposits ( 9,191) ( 35,308) ---------- ---------- Net cash used in investing activities ( 1,294,391) ( 280,360) ---------- ---------- Financing activities: Proceeds from issuance of common stock and warrants 1,747,500 Increase in notes payable, bank 74,379 Increase in notes payable, shareholders 225,000 Increase in debt 109,319 ( 84,410) ---------- ---------- Net cash provided by (used in) financing activities 2,156,198 ( 84,410) ---------- ---------- Net decrease in cash ( 67,238) ( 1,792,419) Cash, beginning of period 288,265 3,097,161 ---------- ---------- Cash, end of period $ 221,027 $1,304,742 ========== ========== Supplemental disclosures: Cash paid during the year for: Interest ($ 23,907) $ 23,639 ========== ========== 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 ==========
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, 1996 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 $2,215,000 of which $900,000 was paid in cash and the remaining $1,315,000 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 400,000 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 Chatterly Elegant Desserts, Inc. (Chatterly) 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 Chatterly. Chatterly offers a line of tortes, cakes and mousses. F-5 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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., WGJ Desserts and Cafes, Inc. and Chatterly Elegant Desserts, Inc. are included as the subsidiaries of Creative Bakeries, Inc. 4. Acquisition of Greenberg Dessert Associates Limited Partnership: On June 2, 1995, the Company entered into an agreement to purchase the operating assets (net of $155,700 in assumed liabilities), properties and rights of Greenberg Dessert Associates Limited Partnership (Greenberg's - L.P.) for $2,000,000, consisting of $1,967,300 in cash and a promissory note in the amount of $32,700. This Acquisition, which was consummated on July 10, 1995, was accounted for as a purchase. The excess of the purchase price over the value of the net assets acquired was recorded as goodwill. In addition, the Company incurred legal fees of $26,000, which related to the Greenberg's - L.P. acquisition. The net assets purchased and the liabilities assumed of Greenberg's - L.P. are summarized below: Assets purchased: Furniture, fixtures and leasehold improvements $1,130,000 Inventories 40,000 Covenant not to compete 125,000 ---------- 1,295,000 Liabilities assumed: Note payable - bank ( 123,000) Rent payable ( 32,700) ---------- Net assets acquired 1,139,300 Purchase price, including $73,500 of acquisition costs 2,073,500 ---------- Excess of purchase price over net assets acquired ($ 934,200) ========== The business acquired from Greenberg's - L.P. was founded in 1946 and is a recognized provider of premium quality baked goods and desserts. The Company currently owns and operates six (6) retail bakery stores located in Manhattan, N.Y. All baking is done at its main commercial bakery which is located on West 47th Street, N.Y., N.Y. From this location, it services commercial and catering customers as well as supplying all baked goods to its six retail stores. F-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. Acquisition of Greenberg Dessert Associates Limited Partnership (continued): In order to finance this acquisition, on July 10, 1995 the Company obtained $2,000,000 from InterEquity Capital Partners, L.P., ("InterEquity") in the form of (i) an amortizing note in the aggregate amount of $1,999,000 (the "Amortizing Note") and (ii) a $1,000 note which was convertible into shares of common stock of the Company or a warrant to acquire shares of the Company's stock (the "Convertible Note" and together with the Amortizing Note, the "Notes"). Interest on the Note was 14.5% per annum. The Company also paid InterEquity a commitment fee of $50,000. The Notes were collateralized by a security interest in the Company's assets as well as a collateral assignment of all of the Company's leases and a pledge of an aggregate of 1,025,000 shares of common stock owned by the two founding stockholders and the Company's President. The Amortizing Note was payable on or prior to July 31, 2000, with interest only for the first 12 months and 48 equal monthly installments of principal and interest commencing July 31, 1996 through June 30, 2000. The Convertible Note was payable in full on July 31, 2000 with interest only payable monthly commencing July 31, 1995. This financing agreement allowed InterEquity to convert the Convertible Note into shares of the Company's capital stock or a warrant to acquire shares of stock of the Company in a number sufficient to equal up to 6% of the Company's then outstanding preferred and/or common shares of stock. The Notes were repaid in full in October 1995 from the proceeds of the sale to the public of the Company's common stock which was consummated in October 1995. InterEquity exercised its option under the terms of the Convertible Note to purchase a warrant for $1,000 to acquire shares equal to 6% of the Company's outstanding preferred and common shares. The warrant expires in October, 2001 and contains anti-dilutive provisions which entitle InterEquity to 6% of the Company's capital stock on the date the warrant is converted into capital stock. The loan agreement also requires the Company to keep in reserve shares sufficient to satisfy the required amount to be issued to InterEquity upon conversion. The holder of any shares issued pursuant to such conversion may demand, under certain conditions, that the Company purchase such capital shares for an amount equal to a multiple of earnings as defined or the fair value of the shares as determined by independent appraisal. Such put is only available to the holder(s) of such shares from July 10, 2000 through July 31, 2005 and then only if the Company's classes of capital stock subject to the put are not listed for trading on a national securities exchange and/or are not quoted on an automated quotation system. F-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. Acquisition of Greenberg Dessert Associates Limited Partnership (continued): The $856,871 difference between the fair value of the 163,404 shares of the Company's common stock reserved for issuance under the warrant and the $1,000 proceeds from the warrant was charged to operations in 1995. Management ascribed a fair value of $5.25 per common share which approximated the market value of the Company's common stock at the date InterEquity purchased the warrant. As a result of the Company's issuance of 61,500 common shares during 1996, InterEquity is entitled to 3,925 additional shares of the Company's common stock based upon the anti-dilutive provision of its warrant. Accordingly, $11,775 was charged to operations in 1996 which represented the market value of the warrants on the date the warrants were issued. 5. 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 $2,215,000 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) 400,000 purchase warrants valued at fair value of $1.10 per warrant (aggregating $440,000) to acquire 400,000 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 the first year and a minimum of $150,000 thereafter. In addition, the Company agreed to provide $600,000 to JMS for working capital. F-8 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. 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 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 1,268,565 --------- $2,215,000 ========== F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Acquisition of J.M. Specialties, Inc. (continued): Under the terms of its agreement with InterEquity Capital Partners, L.P., the Company reserved 179,229 shares of its common stock for issuance under the warrant. Management ascribed a fair value of $1.10 per common share which resulted a charge to operations of $197,229 in the first quarter of operations in 1997. 6. Acquisition of Chatterly Elegant Desserts, Inc.: On September 1, 1997, the Company acquired 100% of the outstanding common shares of Chatterly Elegant Desserts, Inc. (Chatterly) 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. Chatterly, 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 Chatterly 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 Chatterly, are as follows: Assets: Accounts receivable $151,750 Inventories 135,000 Prepaid expenses 4,713 Property and equipment 422,493 Other assets 54,073 -------- $768,029 Liabilities: Long-term debt 111,034 Notes payable, others 47,320 Accounts payable and accrued expenses 375,238 Deferred rent 136,958 -------- 670,550 ======= Excess of net assets acquired over liabilities assumed 97,479 Goodwill 2,521 ----- $100,000 ======== F-10 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. Property and equipment: The Company's baking equipment, furniture and fixtures and leasehold improvements were deemed to be impaired and written down to management's estimate of their fair value at December 31, 1996. Fair value, was determined by management's estimation of the net sales value if the property assets were offered for sale. An impairment loss in the amount of $797,559 was charged to operations during the fourth quarter of 1996. The following is a summary of property and equipment at September 30, 1997: Baking equipment $1,713,628 Furniture and fixtures 110,850 Leasehold improvements 713,096 Automotive equipment 12,896 ---------- 2,550,470 Less: Accumulated depreciation and amortization 907,433 ------- $1,643,037 ========== 8. Intangible assets: The acquisition agreement of Greenberg's - L.P. contained a provision for a covenant not to compete of $125,000 which management is amortizing over its five year term. Amortization of the covenant charged to operations was $18,750 in 1997 and 1996. The excess cost over the fair value of the net assets acquired from Greenberg's - L.P. aggregated $934,200. This goodwill had been amortized over its estimated useful life of fifteen years. Amortization charged to operations in 1996 was $46,734. Continuing operating losses has caused management to reevaluate the goodwill acquired in the purchase of Greenberg's - L.P. In the fourth quarter of 1996, management completed its reevaluation and determined that the goodwill had no continuing value and the unamortized portion of $840,780 was charged to operations in the fourth quarter of 1996. On December 30, 1993, John McDonough, a fifty percent shareholder in J. M. Specialties, Inc., sold 100 shares of the Company's common stock to Philip Grabow, making Mr. Grabow the owner of all of the Company's outstanding shares. As part of this transaction, J. M. Specialties, Inc. entered into a covenant not to compete with Mr. McDonough, whereby Mr. McDonough agreed not to manage, operate, join, control, or participate, in or be consulted as an officer, employee, sole proprietor, partner, shareholder or otherwise, with or for any business which in any such matter, directly or indirectly, has competed or will F-11 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. Intangible assets (continued): compete with J. M. Specialties, Inc. As consideration for entering into this agreement, the Company agreed to pay Mr. McDonough $1,000 per week, commencing the first week of January, 1994 and continuing through December 31, 1998 until a total of $260,000 has been paid. Because no interest rate was stated in this agreement, $29,358 was deemed to be interest, as per Accounting Principles Board Opinion No. 21, leaving a value of $230,642 to be assigned to the covenant not to compete. In April of 1996, Mr. McDonough passed away, leaving the remaining balance of the note to his estate. In October of 1996, J. M. Specialties, Inc. negotiated with the Estate of Mr. John McDonough and paid the remaining balance of the note of $147,179 with a lump sum payment of $115,000 leaving an extraordinary gain of $32,179 on the extinguishment of the debt as of September 30, 1996. Amortization expense amounted to $34,125 for the period ended September 30, 1997. 9. 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. 10. Capital stock: (a) Common stock: In November 1996, the Company issued 11,000 shares of its common stock to two (2) employees valued at $33,000 for services rendered. In November and December 1996, the Company issued an aggregate of 26,000 shares of its common stock valued at $54,510 to two law firms in settlement of amounts owed for legal services. F-12 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Capital stock (continued): (a) Common stock (continued): In November 1996, 25,000 shares of common stock were issued to a consultant pursuant to an exercise of an option at $2.00 per share resulting in a charge to operations of $50,000 which represented the value of his services. 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 5). On September 1, 1997, the Company issued 1,300,000 shares of its common shares pursuant to a stock purchase agreement of Chatterly Elegant Desserts, Inc. (see Notes 2 and 6). (b) Warrants: (i) Warrants issued in 1995: In order 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 1,834,000 shares of common stock and 2,425,000 warrants during 1997, the lender is entitled to an additional 262,677 shares of common stock. Accordingly, the financial statements include a charge to operations of $288,946 which represents the market value of the stock at the time the 262,677 warrants were issued by the Company. (ii) Other warrants issued in 1997: As part of the Acquisition, the Company issued on January 17, 1997, 350,000 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. In order 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). F-13 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Capital stock (continued): (b) Warrants (continued): (ii) Other warrants issued in 1997 (continued): 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. 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. 11. Commitments and contingencies: Employment Agreements: On March 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. F-14 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. 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. In conjunction with the purchase of Chatterly Elegant Desserts, Inc., The Company entered into an employment agreement with a former employee of Chatterly. The agreement covers a three year period commencing upon the transfer of the Company's shares to the seller of Chatterly 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. F-15 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. Commitments and contingencies (continued): License Agreement (continued): 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 an addendum to the above agreement, during 1996 the Company opened a second cafe in the Macy's 34th Street store and has placed four (4) kiosks in various Macy's locations outside New York City. The additional locations all operate under the provisions of the original agreement described above. Long-term debt: Equipment with a cost of $297,000 has been pledged as collateral in a note payable in monthly installments of $5,374, including interest. The notes carry interest varying rates of 10.30% to 17.87% and mature between 1998 and 2000. The total future annual payments as of September 30, 1997 are as follows: September 30, 1998 $49,793 September 30, 1999 32,568 September 30, 2000 10,979 ------- $93,340 ======= F-16 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Related party transactions: The Company shares warehouse facilities with J. P. Veggies, Inc. Mr. Grabow and his family, own 40 percent of J. P. Veggies, Inc. The Company charges J. P. Veggies, Inc. for the manufacturing and packing of product and for certain sales and administrative support provided by J. M. Specialties, Inc. These billings were included in the Company's net sales and amounted to $35,540 in 1997 and $71,926 in 1996. The Company has a demand note receivable with a related party that carries interest at five percent. The balance at September 30, 1997 amounted to $57,300. 13. Reconciliation of shares used in computation of earnings per share. 1997 1996 ---- ---- Weighted average of shares actually outstanding 3,203,000 3,060,000 Common stock purchase warrants 2,586,369 746,628 --------- --------- Primary and fully diluted weighted average common shares outstanding 5,789,369 3,806,628 ========= ========= F-17 Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operation General: The Company was incorporated in November 1993 and was in the development stage through July 1995. From April 1994 through June 1995, the Company assembled its core management, raised approximately $ 600,000 from equity financing, and negotiated a definitive agreement to purchase the operating assets and business of Greenberg's L.P. In July 1995, the Company completed the acquisition for a purchase price of $ 1,967,300 in cash and a promissory note for $ 32,700. In connection with the acquisition, the Company obtained a $ 2,000,000 term loan and applied a portion of the net proceeds from its initial public offering, consummated in October 1995 to pay in full the principal and accrued interest under the term loan. The acquisition was accounted for as a purchase and the excess of the purchase price over the value of the net assets acquired was recorded as goodwill. At September 30, 1997 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 $ 6,500,000 which can be used to reduce the tax on income up to that amount through the year 2011. b. Results of Operations: Historical: The Company from its inception on November 12, 1993 through July 10,1995 was in the developmental stage and did not carry on any significant operations nor generate any revenues. Management's efforts were directed towards the development and implementation of a plan to generate sufficient revenues in the baking industry to cover all of its costs and expenses. The Company did not generate any revenues until July 10, 1995 when it acquired the operating assets of Greenberg's L.P. The Company's consolidated revenues aggregated $ 6,361,242 and $ 6,762,495 for the nine months ended September 30, 1997 and 1996, respectively. The cost of goods sold was $4,611,831 in 1997 and $ 4,901,769 in 1996. Operating expenses were $ 3,503,220 in 1997 and $3,541,264 in 1996. As a result, the loss from operations for the nine months ended September 30, 1997 and 1996 was $1,746,447 and $ 1,578,769 respectively. The Company's consolidated revenues aggregated $ 1,989,913 and $ 2,273,250 for the three months ended September 30, 1997 and 1996, respectively, a decrease of 13%. The cost of goods sold for 1997 was $1,416,585 and $ 1,631,121 in 1996, a decrease of $ 214,536 or 14%. In addition, operating expenses decreased $ 172,481 from $1,181,398 in 1996 to $ 1,008,917 in 1997, or 15%. The net loss in 1997 was $ 428,026 and $ 461,683 in 1996, a decrease of $33,657 or 8%. Management attributes this positive trend to its restructuring efforts and its implementation of new management. In the first nine months of 1997, the Company incurred costs associated with issuance of the warrants. These costs, for services rendered and loan fees to Interequity, were charged to operating costs and amounted to approximately $ 486,946 of which $198,000 was used to pay certain payroll obligations when employment contracts were settled. In addition, one of the Company's subsidiaries, JM Specialties, Inc., paid one time signing bonuses to two employees amounting to $68,000 For the nine months ended September 30, 1996, the Company earned interest income of $ 42,691 which arose mainly from investing a portion of the net proceeds it received upon the consummation of the initial public offering in liquid cash equivalents. The 1997 statements of operations reflect a charge in the amount of $ 288,946, which represents the fair market value of 262,677 warrants, issued to a lender in order to satisfy the obligation under a written agreement. These warrants were valued at $1.10. The resulting net loss aggregated $ 1,746,447 for 1997 ($.30) per share and $ 1,578,769 for 1996 ($.41) per share. The retail division and wholesale divisions of the Parent Company, William Greenberg Jr. Desserts and Cafes, Inc., sell similar products which are baked at the company's centralized baking facility. Costs are allocated to each division based upon the standard costs of the items sold. Such costs consist of ingredients, direct labor and overhead. Since the acquisition of the Greenberg- L.P., management has concentrated their efforts on running the wholesale segment as a separate business. J.M. Specialties, Inc., offers a line of batter and frozen finished cakes, brownies, and muffins. J.M Specialties, Inc.'s financial records and affairs are kept separate from the parent but included in the consolidated financial statements at September 30, 1997 and 1996. Selling, general and administrative expenses of the retail segment consist of (i) expenses incurred in each of the five retail stores and (ii) expenses allocated from the Company's centralized operating facility which are based primarily on sales volume. The increase in selling, general and administrative expenses as a percentage of sales during 1997, as compared to 1996, was primarily the result of the effect of the issuance of common stock purchase warrants for services rendered, salaries, and fees ($516,000) and the settlement and termination of various employment agreements. The decrease in depreciation and amortization for 1997 as compared to 1996 is attributable to depreciation and amortization from assets written down or written off for the year ended December 31, 1996. c. Plan of Operation: Reorganization of New York City Baking Operations: During the first six months of 1997 management has taken numerous steps to restructure its New York City baking operation in a concentrated efforts to reduce operating costs. Their plans have involved a restructuring of the entire management team. Duties have been divided between manufacturing, wholesale, and retail operations. The commissary at 47th Street, New York City has been redesigned with resulting savings in labor and overhead. Purchasing has been centralized which has also resulted in savings. Leases have been renegotiated, employment contracts, which have seriously impacted the Company's cash flows, have been either renegotiated or terminated. In connection with the restructuring plan, management has written down its baking equipment, leasehold improvements and fixtures as of December 31, 1996, by approximately $ 800,000 due to impairment in their value. In addition, management has determined unamortized goodwill of approximately $ 840,000 has no continuing value and accordingly it was written off during 1996. Finally, the Company had charged 1996 with a $ 450,000 provision for actions aimed at restructuring the Company, of which $100,000 was actually incurred as of June 30, 1997. This restructuring charge is predominantly comprised of costs associated with the elimination of certain positions, provisions for lease obligations on certain retail stores, and charges for consultants involved in the restructuring. By taking the above-mentioned actions, future periods, will not be burdened with the amortization, depreciation or expense of these costs. Management feels that as a result of the restructuring and elimination of costs, savings for the fiscal year 1997 will be in excess of $ 1,000,000. Acquisition of J.M. Specialties Inc.: On January 17, 1997, the Company entered into a stock purchase agreement (Stock Purchase Agreement) with Philip Grabow (Grabow), pursuant to which, January 23, 1997, the Company consummated the purchase from Grabow of all the outstanding shares of J.M. Specialties, Inc., a New Jersey Corporation (JMS Subsidiary), in exchange for (I) $ 900,000 in cash, (ii) 500,000 shares (the Shares) of the Common Stock of the Company and (iii) 400,000 warrants (the Warrants) exercisable for shares of Common Stock of the Company (the Transaction). Each warrant entitles Grabow to purchase one share of Company common stock at the exercise price of $ 2.50 per share until December 31, 2000. In connection with the Stock Purchase Agreement , Grabow and the Company also entered (i) a registration rights agreement, dated as of January 23, 1997, regarding the terms of the registration of the Shares of Common Stock of the Company issuable upon exercise of the Warrants, and (ii) and employment agreement dated January 23, 1997. Pursuant to the employment agreement, Grabow will serve as president and Chief Executive Officer of the Company at the annual salary level of $250,000 for the first year, and a minimum of $ 150,000 thereafter. Also in connection with the Transaction, effective January 23, 1997, Grabow was elected to serve as a director of the Company as a result of the Transaction, Grabow beneficially owns 850,000 shares (or 24.5%) of the common stock of the Company. With the acquisition of the JMS subsidiary, the Company now also offers a line of batter in frozen- finished cakes, brownies, and muffins, which constitute approximately 90% of the JMS Subsidiary's sales. These products are manufactures in batches using partially automated equipment at the JMS Subsidiary's facility in Parsippany, NJ. The products are sold to wholesale customers as well as supermarket distribution centers and are marketed primarily through food distribution companies in New York and New Jersey. The management of the Company believes that distributors sell approximately 40% of the products to supermarket and 60% to food service customers. To develop new accounts, JMS Subsidiary personnel present the products at food shows, contact possible customers directly to have them order the product from their distributor an through direct mailings to customers. The JMS Subsidiary's current food distribution include SYSCO Foods, Alliant Foods, Rykoff-Sexton and over 75 other accounts consisting of supermarket distribution centers, Food service distributors, and independent bakery distributors. The product ultimately ends up at Food Service accounts such as the Museum Of Natural History, Various colleges, Hospitals, corporate feeders, and retailers, such as Shop Rite, Path Mark, A& P etc. The JMS Subsidiary started business in October 1994 as a company making gourmet batter product. The product line was then extended to Sugar Free then Fat-Free and finally frozen finished baked product. According to the Company's management , this change reflects the change in the marketplace where consumers wanted more Fat Free products and customers wanted frozen finished products to minimize customer time to bake and finish batter product. Management of the JMS Subsidiary believes that the reputation of the JMS Subsidiary has grown considerably as a result of the product's taste, texture, and price value. The product has no preservatives, hydrogenated oil or chemicals: rather it uses natural ingredients. In connection with the Transaction, the Company provided $ $600,000 to the JMS Subsidiary for working capital purposes. The payment of the cash portion of the purchase price for the JMS Subsidiary and such working capital aggregated $ 1,500,000, was funded through net proceeds received from the sale by the Company of $1,875,000 common stock purchase warrants (the Private Placement Warrants) at a price of $ 1.10 per Private Placement warrant to a limited number of purchasers that qualify as accredited investors under the Securities Act of 1933.The terms of the Private Placement Warrants are substantially similar to the Warrants. (iii) Other Acquisitions: On March 20, 1997, the Company entered into an employment contract with the former owners of a company that produced low-fat and fat- free cookies. Pursuent to the contract 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 performance. In addition both individuals will be entitled to an aggregate of $ 50,000 warrants in the event that sales volume exceeds $ 750,000 per annum. Currently, a contract has been signed to produce fat free cookies for Safeway Supermarkets under their Healthy Advantage label. This contract is estimated to take effect September 1997. The Company is also pursuing other contracts with various Supermarket chains. (iv) (A)Acquisition of Chatterly Elegant Desserts, Inc.: On March 17, 1997, the company entered into a stock purchase agreement with Yona Abrahami, pursuant to which on September 1, 1997 the Company consummated the purchase from Abrahami of all of the outstanding shares of Chatterly Elegant Desserts, Inc., a New Jersey Corporation (Chatterly subsidiary) in exchange for 1,300,000 shares of the Company's stock. (B) JMS and Chatterly consolidation: By the end of October 1997 the process of merging the operations of JMS and Chatterly was almost completed. By the end of November 1997 the JMS facility will be fully vacated and the merger will have been fully completed. This merger will result in estimated savings of between $ 400,000 and $ 600,000 per year. These savings are in addition to the savings from the restructuring of the Greenberg operations. The acquisition of Chatterly adds considerable management strength to the Company's operations. The efficiencies derived from the merger of JMS and Chatterly positions the Company to aggressively pursue new business with improved profit margins. The Management will implement new marketing programs with focus on growing the wholesale end of the business. Liquidity and Capital Resources: Since its inception the Company's only source of working capital has been the $ 8,342,000 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 proceed of $1,747,500 from the private placement of 1,875,000 common stock purchase warrants at $1.10 per warrant. During October 1997 the Company received net proceeds of $882,000 from the excersize of a portion of these common stock purchase 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) $ 765,000 was used to purchase property, equipment and leaseholds; and (iv) $ 195,000 was used for general corporate purposes. The $ 1,747,500 proceeds from the private placement warrants was used to purchase JMS. The $882,000 proceeds from the excersize of warrants are earmarked for consolidation and merger of JMS and Chatterly ($ 325,000) and to fund new business. As of September 30, 1997, the Company has a negative working capital of approximately $ 1,129,729 as compared to a negative working capital of $ 1,134,000 at December 31, 1996. During the first half of 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. The Company expects that the aforementioned actions will stop the cash outflows, which it has experienced since inception. Selling, general and administrative expenses of the retail segment consist of (i) expenses incurred in each of the five retail stores and (ii) expenses allocated from the Company's centralized operating facility which are based primarily on sales volume. The increase in selling, general and administrative expenses as a percentage of sales during 1997 as compared to 1996 was primarily the result of the effect of the issuance of common stocks purchase warrants for services rendered, salaries, and fees ($714,717). The decrease in amortization for 1997 as compared to 1996, is attributable to amortization from assets written down or written off for the year ended December 31, 1996. EX-27 2 FDS --
5 1 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 221,027 0 508,092 26,800 442,483 1,376,843 2,550,470 907,433 4,508,615 2,506,572 0 0 0 4,456 10,420,676 4,508,615 6,361,242 6,361,242 4,611,831 3,503,220 0 0 23,390 (1,746,447) 0 (1,746,447) 0 0 0 (1,746,447) (0.30) (0.30)
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