-----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, FMAkS0gOeRynk0400qh2fJXLYMQ2fqC92JEw1vmdiOjoxuzHwzWck06xZUdM8vCJ IJ477zQuBtXvXbAHr1mnSA== 0000949721-98-000008.txt : 19980515 0000949721-98-000008.hdr.sgml : 19980515 ACCESSION NUMBER: 0000949721-98-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: 98620139 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 March 31, 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 May 12, 1998 Common Stock, par value $0.001 per share 5,161,750 INDEX
Part I. Financial information Item 1. Condensed consolidated financial statements: Balance sheet as of March 31, 1998 F-2 Statement of operations for the three months ended March 31, 1998 and 1997 F-3 Statement of cash flows for the three months ended March 31, 1998 and 1997 F-4 Notes to condensed consolidated financial statements F-5 - F-15 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 - MARCH 31, 1998 (Unaudited)
ASSETS Current assets: Cash $ 317,539 Accounts receivable, less allowance for doubtful accounts of $24,898 451,544 Inventory 270,997 Prepaid expenses and other current assets 67,075 ----------- Total current assets 1,107,155 Property and equipment, net of accumulated depreciation 1,309,253 ----------- Other assets: Covenant not to compete, net of amortization 56,250 Goodwill, net of amortization 1,109,591 Security deposits and other assets 82,772 ----------- 1,248,613 $ 3,665,021 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 37,958 Notes payable, bank 149,379 Notes payable, other 38,431 Accounts payable 1,002,844 Estimated liability for restructuring 80,541 Accrued payroll 459,946 Payroll taxes payable 176,321 Accrued expenses and other current liabilities 467,740 ----------- Total current liabilities 2,413,160 Long-term debt, net of current portion 20,286 ----------- Deferred rent 182,212 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 5,161,750 shares 5,162 Additional paid in capital 11,029,123 Deficit ( 9,984,922) ----------- 1,049,363 $ 3,665,021 ===========
See notes to condensed consolidated financial statements. F-2 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
1998 1997 ---- ---- Net sales $1,369,802 $2,119,394 Cost of sales 1,014,654 1,617,785 ---------- ---------- Gross profit 355,148 501,609 Operating expenses 630,381 1,634,751 ---------- ---------- Loss from operations ( 275,233) ( 1,133,142) ---------- ---------- Other income (charges): Rental and storage income 11,480 Loss on sale of leasehold improvements ( 143,173) Interest income 4,138 5,777 Interest expense ( 12,978) ( 5,828) ---------- ---------- ( 152,013) 11,429 ---------- ---------- Net loss ($ 427,246) ($1,121,713) ========== ========== Net loss per common share ($ .08) ($ .36) ========== ========== Weighted average number of common shares outstanding 5,161,750 3,060,000 ========== ==========
See notes to condensed consolidated financial statements. F-3 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
1998 1997 ---- ---- Operating activities: Net loss ($427,246) ($1,121,713) Adjustments to reconcile net income to cash provided from operating activities: Depreciation and amortization 67,597 62,398 Loss on sale of leasehold improvements 143,173 Compensatory element of issuance of warrants 421,730 Changes in other operating assets and liabilities: Accounts receivable 56,634 183,349 Inventory 86,550 ( 36,337) Prepaid expenses and other current assets ( 73,645) 13,739 Accounts payable ( 30,552) ( 71,291) Accrued expenses and other current liabilities ( 55,074) 205,589 Deferred rent ( 10,744) 14,604 -------- ---------- Net cash used in operating activities ( 243,307) ( 327,932) -------- ---------- Investing activities: Purchase of property and equipment ( 5,128) Purchase of subsidiary ( 900,000) Proceeds from sale of leaseholds 12,000 Decrease in security deposits 27,590 ( 825) -------- ---------- Net cash provided by (used in) investing activities 34,462 ( 900,825) -------- ---------- Financing activities: Proceeds from issuance of common stock and warrants 1,747,500 Increase in loans payable, other 8,431 Decrease in notes payable, shareholders ( 26,519) Decrease in debt ( 21,083) ( 16,572) -------- ---------- Net cash provided by (used in) financing activities ( 39,171) 1,730,928 -------- ---------- Net increase (decrease) in cash ( 248,016) 502,171 Cash, beginning of period 565,555 254,768 -------- ---------- Cash, end of period $317,539 $ 756,939 ======== ========== Supplemental disclosures: Cash paid during the year for: Interest $ 12,978 $ 5,763 ======== ========== Income taxes $ 0 $ 0 ======== ========== Supplemental schedule of non-cash investing activities and financing activities: Issuance of common stock and warrants regarding acquisition of subsidiary $ 0 $1,260,000 ======== ==========
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 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 2. Organization of the Company (continued): Effective December, 1997, Chatterly 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 March 31, 1997 to include Chatterly 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 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 a charge to operations of $202,393 in the first quarter of operations in 1997. 5. 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, of which 200,000 shares were returned to the Company on March 10, 1998 when the seller's sales agreement was amended. 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 $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 March 31, 1998: Baking equipment $1,711,451 Furniture and fixtures 100,640 Leasehold improvements 419,604 Automotive equipment 12,896 ---------- 2,244,591 Less: Accumulated depreciation and amortization 935,338 ------- $1,309,253 ========== 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 $20,225 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 Chatterly 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. 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: 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 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 include 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. Compensatory charges recorded on the income statement for 1997 amounted to $287,837 which represents the value of the warrants of $315,126 less $27,289 accrued and charged to 1996. (ii) Warrants issued in 1997: As part 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. 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). 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: On March 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: 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-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 March 31, 1998. 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. 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 March 31, 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 has terminated this agreement and will vacate 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. F-13 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Commitments and contingencies (continued): The minimum future rentals on the remaining retail store and the baking facility are as follows: March 31, 1999 $ 238,847 March 31, 2000 111,599 March 31, 2001 114,947 March 31, 2002 118,394 March 31, 2003 121,943 Thereafter 410,241 ---------- $1,115,971 ========== 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. The Company is also obligated under noncancellable operating leases for automotive equipment that expire over the next three years. The lease terms include minimum annual rent for the term of the lease as follows: Facility Auto March 31, 1999 $ 183,312 $11,031 March 31, 2000 194,938 2,664 March 31, 2001 200,000 239 March 31, 2002 200,000 March 31, 2003 200,000 Thereafter 385,000 ---------- ---------- $1,363,250 $13,934 ========== ======= Rent expense for all operating leases amounted to $139,519 in 1998 and $234,448 in 1997 and includes straight-lining of rent adjustments discussed in Note 8. 11. Related party transactions: The Company shared warehouse facilities with J. P. Veggies, Inc. Mr. Grabow and his family, own 96 percent of J. P. Veggies, Inc. The Company charged 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. This relationship was terminated when J.M. Specialties moved its facility in 1997. F-14 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. 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. The total future annual payments as of March 31, 1998 are as follows: March 31, 1999 $37,958 March 31, 2000 20,286 ------- $58,244 ======= 13. Deferred income taxes: Deferred income taxes (benefits) are the result of a deferred tax asset carried on the books of Chatterly 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. 14. 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 2,375,000 in 1997. Reconciliation of shares used in computation of earnings per share:
1998 1997 ---- ---- Weighted average of shares actually outstanding 5,161,750 3,060,000 Common stock purchase warrants Primary and fully diluted weighted average common shares outstanding 5,161,750 3,060,000 ========= =========
F-15 Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operation a. General: The Company has completed its first full quarter after retrenching its retail operations at the WGJ subsidiary from five stores to two at the end of December 1997. From April 1, 1998, the Macy's store was taken over by Ferrara Bakery leaving only the flagship store on Madison and 82nd in operation. At March 31, 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 $4,500,000 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 $1,369,802 and $2,119,394 for the three months ended March 31, 1998 and 1997, respectively. The cost of goods sold was $1,014,654 in 1998 and $1,617,785 in 1997. Operating expenses were $630,381 in 1998 and $1,634,751 in 1997. As a result, the loss from operations for first quarter 1998 and 1997 was $275,233 and $1,133,142 respectively. The reduction in sales was mainly due to the retrenchment in the retail division. The related, much steeper reduction in operating expenses was mainly 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 $8,840. The resulting net loss aggregated $427,246 for 1998 ($.08) per share and $1,121,713 for 1997 ($.36) per share. The retail division and wholesale divisions of WGJ 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 consists of ingredients, direct labor and overhead. Batter Bake-Chatterly, 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 March 31, 1998 and 1997. c. Plan of Operation: Reorganization of Retail Operations: After analyzing the Company's retail operations, management concluded that only its flagship store on Madison Avenue was profitable. The rest of the stores were not only unprofitable but were 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 and the Company continues to run the Madison Avenue store. In connection with the restructuring plan, management has written down property and equipment as of December 31, 1996, by approximately $789,000. 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 $370,000 was actually incurred as of March 31, 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. We took a step back at the retail end in order to move forward. We are now at a point where we have minimized the losses and are now pursuing ways of growing the business profitably. 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 profitable products. This process includes calling on supermarket headquarters and chain restaurant accounts. Brokers have been appointed and sales calls and visits are being made. d. Liquidity of Capital Resources: Since its inception the Company's only source of working capital has been the $8,233,000 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 sale (i) $2,125,000 was used 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 net $1,747,500 of 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 Chatterly, $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 March 31, 1998, the Company has a negative working capital of approximately $1,306,005 as compared to a negative working capital of $523,198 at March 31, 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 certain stores were closed down. The Company is continuing its cost cutting efforts during 1998. Item 3. Legal Proceedings: The Company is currently subject to the following legal proceedings: The Company and the WGJ subsidiary have been named as defendants in an action entitled Bacal v. Creative Bakeries, Inc., et al, Index # 600819/98, 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 and Willa Abramson, allegedly acting on behalf of the Company and the WGJ subsidiary entered into an agreement with plaintiff, Murray Bacal, whereby Mr. Bacal would purchase warrants for common stock of Greenberg and that the Abramsons agreed to repurchase the warrants for the same price at which they were originally sold to him, plus our of pocket expenses. As a consequence, the complaint seeks $131,550 in compensatory damages and $1,000,000 in punitive damages, together with the costs and disbursements of the action. The Company intends to vigorously defend the action. The Company is party to a dispute regarding, among other things, compensation claimed to be owed to David Abrahami, a former employee of the Company. Counsel for Mr. Abrahami has made a written demand to the Company for approximately $300,000 in unpaid compensation by letter, dated February 12, 1998. No settlement has been reached with Mr. Abrahami regarding his claim for unpaid compensation. The Company is also subject to various litigation incidental to its business, none of which are deemed material by management. EX-27 2 FDS --
5 1 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 317,539 0 451,544 24,898 270,997 1,107,155 2,244,591 935,338 3,665,021 2,413,160 0 0 0 5,162 11,029,123 3,665,021 1,369,802 1,369,802 1,014,654 630,381 143,173 0 12,978 (427,246) 0 (427,246) 0 0 0 (427,246) (.08) (.08)
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