-----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, JOdaQXg8jw3o/z22NnzS1T2hd/3jQC7k05PycfTptjXKKXm1HN6xbPMdUxFo6iLu hWcS+7/QLI75Oev3ET3DpQ== 0000950117-99-000780.txt : 19990416 0000950117-99-000780.hdr.sgml : 19990416 ACCESSION NUMBER: 0000950117-99-000780 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-13984 FILM NUMBER: 99594859 BUSINESS ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 MAIL ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: WILLIAM GREENBERG JR DESSERTS & CAFES INC DATE OF NAME CHANGE: 19950918 10KSB40 1 CREATIVE BAKERIES, INC. 10-KSB40 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended: December 31, 1998 Commission File Number: 0-18711 Creative Bakeries, Inc. --------------------------------------------- (Name of Small Business Issuer in Its Charter) New York 13-3832215 - ------------------------------- ----------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 20 Passaic Avenue, Fairfield, NJ 07004 - ---------------------------------------- ----------------------------- (Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (973) 808-8248 Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on Title of Each Class Which Registered - ------------------- ------------------------- Common Stock, $.001 per share NASDAQ
Securities registered under Section 12 (g) of the Exchange Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenue for its most recent fiscal year was $4,906,296. As of December 31, 1998 there were 5,141,750 shares of Company's Common Stock, par value $.001 per share, outstanding. The aggregate market value of the voting stock held by of the issuer on 12/31/98 was approximately $ 8,998,000. Transitional Small Business Disclosure Format (check one): Yes No X --- --- ITEM 1. DESCRIPTION OF THE BUSINESS GENERAL Creative Bakeries, Inc. ("Creative"), through its two operating subsidiaries, WGJ Desserts and Cafes, Inc. (the "WGJ Subsidiary") and Batter Bake-Chatterley Inc. (the "BBC Subsidiary") (Creative, the WGJ Subsidiary and the BBC Subsidiary to be hereinafter collectively referred to as the "Company" unless the context indicates otherwise) offers a broad line of premium quality pastries, cakes, pies, cookies and other assorted desserts which are produced at its baking facilitY. Such baked goods are marketed and distributed on a wholesale basis to supermarkets, restaurants and institutional dining facilities as well as by mail order. The Company has recently completed a corporate restructuring pursuant to which it has eliminated its William Greenberg retail operations while consolidating the operations of JMS Specialities, Inc. ("JMS"), which the Company acquired in January 1997, and of Chatterley Elegant Desserts, Inc. a New Jersey corporation ("Chatterley"), which the Company acquired in August 1997. The Company is continuing to pursue its strategy of seeking acquisition or merger candidates which would expand the Company's existing product offerings and geographic markets. There can be no assurance that the Company will be able to successfully identify such candidates on terms acceptable to the Company or at all. Creative was incorporated in November 1993. The Company's executive offices are located at 20 Passaic Avenue, Fairfield, NJ 07004 and its telephone number is (973) 808-8248. BUSINESS STRATEGY The Company's business strategy is comprised of the following: Retail: After carefully analyzing its retail operations, management has concluded that the additional William Greenberg stores it had recently opened were not generating the level of sales required to become profitable and that the resources required to increase retail sales would be better utilized in expanding its wholesale division. The Company therefore closed down all the retail stores. Institutional/Wholesale: With the acquisitions of JMS and Chatterley, the Company plans to increase its penetration in the institutional/wholesale food market by expanding its marketing efforts to restaurants, hotels and corporate dining facilities and by offering its products to supermarkets on a national basis. The Company plans to expand both its product line and geographic distribution through the following strategies: Expand geographic distribution by acquiring new food distributors in the Connecticut and Philadelphia areas as well as key distributor areas throughout the United States. To do this, the Company intends to appoint food brokers in various states to handle sales on a commission-only basis. Continue to expand the fat-free product line targeting existing customers as well as new customers; and Enter into co-packing arrangements whereby the Company would introduce private label products of other bakery operations. Mail Order. The WGJ Subsidiary is offering its products through other specialty food retailers and through its mail order catalogue business. Mail order sales accounted for approximately 1% of total sales for each fiscal year ended December 31, 1998, 1997 and 1996 respectively. Kosher Foods. The Company also is seeking to benefit from the growth of the kosher food industry. According to Prepared Foods, the kosher food industry generated approximately $33 billion in sales in 1994 and has been growing at a rate of approximately 15% per annum. The WGJ Subsidiary and the BBC Subsidiary each have a kosher certification and the Company believes that it can benefit from the projected growth of this market. BUSINESS PHILOSOPHY High Quality Ingredients. The Company believes that developing and maintaining premium quality products is the key to its future success. The Company uses fresh ingredients in its products including, AA creamy butter, fresh eggs, premium fruits, nuts, and chocolates blended for the Company's unique recipes. The Company seeks to maintain rigorous standards for freshness, quality, and consistency. Customer Service. The Company's goal is to provide its customers with warm, courteous and efficient service. The Company depends on and enjoys a high rate of repeat business. The Company believes that the quality of the relationship between its employees and its customers is critical to its success. The Company strives to hire and train well-qualified, highly motivated employees committed to providing superior levels of customer service. PRODUCTS Baked Goods The BBC Subsidiary markets a full line of premium quality baked products such as cheese cakes, mousse cakes and tart shells. Additionally the Company has now expanded its offerings to include a line of frozen batter and baked products such as a variety of Gourmet Frozen Muffin Batter products, No Sugar Added Batters as well as a selection of Fully Baked Thaw & Sell muffins and cakes. The Company continues to develop new products and welcomes customer requests. Kosher Foods Kosher foods generally are consumed by persons of the Jewish faith as well as Muslims, Seven Day Adventists and others who perceive kosher certification as a seal of purity. Kosher is a biblical term originally used to denote that which is "fit" and "proper". The Company's subsidiaries have kosher certifications and the Company believes that it can capitalize on the projected growth of this market. The 3 Company believes that its kosher certifications will enable it to better penetrate certain market areas. The Company's products are not kosher for Passover. CUSTOMERS RETAIL The WGJ Subsidiary has licensed the "William Greenberg Jr." name to a retail operator who sells its products directly to individual consumers. The retailer also sells its specialty desserts to customers for parties, weddings, bar mitzvahs and other special occasions. INSTITUTIONAL/WHOLESALE This market is mainly served through the BBC Subsidiary. With the acquisition of Chatterley the Company now offers its institutional and wholesale customers an expanded line of baked goods, batter and frozen-finished cakes, brownies and muffins. The BBC Subsidiary sells its products through food distributors to hotels, hospitals and institutional feeders such as coffee shops, Marriott, Restaurant Associates,etc. The products are also sold retail through food distributors and direct to supermarket distribution centers. MAIL ORDER The WGJ Subsidiary sells select products through mail order. These products are shipped via overnight delivery and second day delivery throughout the United States and internationally. The Company has a toll-free number (800)564-2470 for its mail order operations. INGREDIENTS AND PRINCIPAL SUPPLIERS The Company seeks to use only the highest quality ingredients available. The Company has a policy of inspecting all raw ingredients before their intended use. The ingredients used by the Company consist primarily of flour, eggs, sugar, butter and chocolate. The WGJ Subsidiary obtains its principal ingredients from three suppliers in each of their respective industries. All ingredients used by the Company are subject to substantial price fluctuations. The Company historically has been able to pass any significant price increases in its ingredients through to its customers. However, no assurance can be given that the Company will be able to continue this practice in the future. Any substantial increase in the prices of ingredients used by the Company could, if not offset by a corresponding increase in product prices, have a material adverse effect on its business, financial condition or results of operations. The Company does not believe the loss of any of its suppliers would have a material adverse effect on its business and believes that other suppliers could readily provide such products if necessary. 4 DISTRIBUTION AND MARKETING The WGJ Subsidiary no longer operates the commissary and does not directly operate any retail stores either. Instead it has licensed its name to a an operator who runs retail and wholesale operations. The BBC Subsidiary bakes all of its products at its 30,000 square foot facility in Fairfield, New Jersey. Although utilization of the facility varies based on seasonal fluctuation, the facility is operated on the basis of two shifts, five days a week. The Company believes that the BBC Subsidiary has the capacity to meet future requirements, including those arising out of the consolidation with the Company. The BBC Subsidiary delivers 90% of its products by truck to its institutional/wholesale customers. About 10% of its customers pick up their orders directly at the bakery and utilize their own distribution networks. Historically, the Company has relied upon word-of-mouth and customer satisfaction to market its products to new customers and to make existing customers aware of new products. COMPETITION The baking industry is a highly competitive and highly fragmented industry. The Company competes with national, regional and local bakeries as well as supermarket chains that have in-store bakeries. Many of these competitors are larger, more established and have greater financial and other resources than the Company. Competition in both the retail and institutional/wholesale baking industry is based on product quality, brand name loyalty, price and customer service. The WGJ Subsidiary competes with all restaurants and beverage outlets that serve bakery items and/or coffee, including a growing number of specialty coffee stores in the New York City metropolitan area, although its main business continues to be as a full service bakery servicing wholesale and retail clientele. The specialty coffee/cafe business has become increasingly competitive and relatively few barriers exist to entry. Some of the WGJ Subsidiary's major competitors include Au Bon Pain, Brothers Gourmet Coffees, Eclair, New World Coffee, Starbucks and Timothy's Coffee of the World. Some of the BBC Subsidiary's major competitors include Karps, Bake-N-Joy, Pillsbury, and Quaker Oats. Competitors with significant economic resources in the baking industry or existing non-specialty and specialty coffee/cafe businesses could, at any time, enter the institutional/wholesale or retail bakery/cafe business. TRADEMARKS The WGJ Subsidiary has trademarks registered with the United States Patent and Trademark office for the trademarks Wm. Greenberg Jr.'TM', William Greenberg Jr.'TM', William Greenberg Jr. Dessert'TM' and William Greenberg Jr. Desserts and Cafes'TM'. The JMS Subsidiary has a trademark and design registered with the United States Patent and Trademark office for The Healthy Bakery'TM' (US Registration No. 1,644,559). While the Company believes that the trademarks are valid and enforceable, there can be no assurance as to the degree of protection its 5 registered trademarks will afford the Company. GOVERNMENT REGULATION The Company is subject to numerous state regulations relating to the preparation and sale of food. It is also subject to federal and state laws governing the Company's relationship with employees, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements. The failure to obtain or retain required food licenses or to be in compliance with applicable governmental regulations, or any increase in the minimum wage rate, employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associated with employees, could adversely affect the business, results of operations or financial condition of the Company. EMPLOYEES The WGJ Subsidiary no longer has any employees. As of April 1, 1999, the BBC Subsidiary together with Creative had approximately 45 full-time employees, of whom 37 are employed in production, 2 in sales, 4 in administration and 2 in executive positions. The BBC Subsidiary does not have a union and the Company believes that it has good relations with its employees. ITEM 2. DESCRIPTION OF PROPERTY As of April 1, 1999, the Company leases in Fairfield, New Jersey 29,362 square feet for its baking facilities. The Company believes that its existing lease will be renewed when it expires in 2004 or alternative properties can be leased on acceptable terms. The Company believes that its present facilities are well maintained, in good condition and are suitable for the Company to continue to operate and meet its production needs in the foreseeable future. The Company is also considering subcontracting certain of its production requirements. PLAN OF OPERATION WGJ Subsidiary: The company has completed its plan of closing down the commissary and the retail operations. The company has licensed the "William Greenberg Jr." brand to an operator who continues to run the Madison Avenue store and the wholesale business. This has effectively stopped any further losses on the part of the WGJ subsidiary and provides opportunity to rebuild the business in certain areas such as Mail Order Business. In connection with the restructuring plan, management had written down its baking equipment, leasehold improvements and fixtures as of December 31, 1996, by approximately $ 850,000 in 1996 and to $35,000 in 1998 due to impairment in their value. In addition, management has determined unamortized goodwill of 6 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 $369,459 was actually incurred as of December 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 affected by amortization, depreciation or expense of these costs. Acquisition of JM Specialties, Inc. The Company acquired JM Specialties Inc. in January 1997 and appointed Phil Grabow as the CEO and President of the Company. 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. Pursuant to the contract both individuals received a signing bonus aggregating $68,000. These employment contracts have been terminated. Acquisition of Chatterley Elegant Desserts, Inc. On August 28, 1997 the Company entered into a stock purchase agreement ("Stock Purchase Agreement") with Yona Abrahami, pursuant to which the Company purchased from Ms. Abrahami all the outstanding shares of Chatterley Elegant Desserts, Inc., a New Jersey Corporation, in exchange for 1,300,000 shares of the Company's common stock. The Stock Purchase Agreement was subsequently amended and Ms. Abrahami surrendered to the Company 200,000 shares of the Company's common stock. The acquisition has been accounted for as a pooling-of-interests. Chatterley leases a 35,000 sq.ft. baking and office facility. Its products are highly regarded by upscale super markets such as Kings and by executive chefs in some of the finest hotels and restaurants. Currently, the Company is pursuing contracts with various Supermarket chains for both private label and The Healthy Bakery label which is a trademark of the Company. JMS and Chatterley Consolidation As planned, the JMS facility in Parsippany was closed and the consolidation of its operations into Chatterley's Fairfield facility was completed in 1997. JM Specialties Inc. and Chatterley Elegant Desserts Inc. have been formally merged to form the BBC Subsidiary. Management believes that the merger of JMS and Chatterley adds considerable strength to the Company's marketing plan. The efficiencies derived 7 from the merger of JMS and Chatterley positions the Company to aggressively pursue new business with improved profit margins. Management intends to implement new marketing programs with a focus on increasing the wholesale division of the business. Brokers have been hired for New England, Philadelphia & Western Pennsylvania and the Southern Florida markets with other areas to follow with a view to expanding from a tri-State (New York, New Jersey and Connecticut) base to a regional and ultimately, a national bakery and dessert company. Future mergers and acquisitions: In line with its goal of "growth through mergers and acquisitions", the company is negotiating a merger with Paramark Corporation. If successful, it will provide a springboard for further expansion. The Company continues to seek opportunities in markets it does not currently serve. It has secured a contract to produce Private Label cookies and muffins. It is estimated that the Private Label business will provide upto a $1 million in revenue. The company has also secured orders from Fund Raising business which will amount to approximately $800,000 in annual sales. This is a seasonal business which will be delivered between September and December. 8 ITEM 3. LEGAL PROCEEDINGS This is with reference to the request, dated March 17, 1999, by Creative Bakeries, Inc. and its subsidiaries (the "Company"), that we furnish you with certain information in connection with your examination of the financial statements of the Company as of December 31, 1998. Our engagement has been limited to specific matters as to which we were consulted by the Company. You should note that we do not represent the Company in connection with its general affairs. We call your attention to the fact that we have not made an independent investigation of the Company's affairs in order to respond to the request for information. Our response is, therefore, based essentially upon the information contained in our files and, therefore, it is probable that there exist particular matters of a legal nature with respect to which we have not been consulted. Please be advised that our response is directed only to matters which have been given substantive attention by this firm on behalf of the Company in the form of legal consultation and, where appropriate, legal representation during the appropriate period. In the preparation of this response, our procedures have been limited to an endeavor to determine from lawyers currently in our firm who have performed services for the Company during the applicable period whether such services involved substantive attention in the form of legal consultation or representation concerning matters coming within the scope of our response. Please be further advised that insofar as information is requested with respect to "loss contingencies" (as that term is defined in ABA Statement of Policy referred to in the last paragraph of this letter), our response is limited to pending or overtly threatened litigation (the latter involving only those instances where a potential claimant has manifested to the Company an awareness of a present intention to assert a possible claim or assessment) as to which we have devoted substantive attention on behalf of the Company in the form of legal consultation or representation, and we do not undertake to comment upon contractually assumed obligations (such as guarantees of indebtedness of others) or unasserted possible 9 claims or assessments unless the Company has specifically identified the same and has expressly requested our comments. The Company's inquiry letter, dated March 17, 1999 does not specifically identify any such matters as to which our comments have been expressly requested. Subject to the foregoing and to the last three paragraphs of this letter, please be advised as follows: 1. As of December 31, 1998 and as of the date hereof, we were not devoting substantive attention on behalf of the Company in the form of legal consultation or legal representation in connection with pending or threatened litigation within the scope of our response as hereinabove set forth except as follows: A. Murray Bacal v. Creative Bakeries, Inc., Edmund Abramson and William Abramson, William Hl. Greenberg Jr. Dessert & Cafes, Inc. and Richard Fechtor. This case was filed in Supreme Court, New York County on April 1, 1998. The action was brought to recover damages allegedly sustained by plaintiff by reason of an alleged breach of a contract between plaintiff and defendants Edmund Abramson and William Abramson pursuant to which plaintiff agreed to purchase warrants in the stock of William H. Greenberg Jr. Dessert & Cafes, Inc. (the predecessor to Creative Bakeries, Inc.) Plaintiff alleges that the Abramsons had agreed to purchase the warrants back from him if he exercised that prerogative. Plaintiff alleges that, pursuant to the contract, he tendered $123,750 to the Abramsons, that he subsequently exercised his option and demanded the return of his original investment and out of pocket expenses, and that the Abramsons refused to return his money. His cause of action against Creative Bakeries and Greenberg (collectively, the "Creative Bakeries Defendants") sounds in fraud, and is specifically alleged against defendant Richard Fechtor, who is sued both in his personal capacity and as a corporate representative of Creative Bakeries.(1) Fechtor, according to the complaint, represented to plaintiff that if he purchased the warrants he could received the return of his monies together with out of pocket expenses at any time, and plaintiff claims that he is - ------------------ (1) We are not representing Richard Fechtor in this action. 10 entitled to $1,000,000 in punitive damages from Fechtor and/or the Creative Bakeries Defendants based on this "fraudulent" inducement. On December 14, 1998, the Creative Bakeries Defendants moved by order to show cause to dismiss the complaint in its entirety as against them based on the fact that, inter alia, the action involves a private transaction between plaintiff and the Abramsons, and the complaint fails to state a cause of action as against the Creative Bakeries Defendants. After a full briefing and oral argument, the papers were taken by the court on submission, and we are awaiting a ruling on the motion. B. The Company has been named as a defendant in Ackerman v. Allan Sloan, et al., Adv. Proc. No. 899-8042-288 (Bankr. E.D.N.Y.), an adversary proceeding brought in the United States Bankruptcy Court for the Eastern District of New York by the Chapter 7 Trustee of Alliotte Bakery Cafe, Inc. The complaint alleges that the Company, while operating as William Greenberg Jr. Desserts & Cafes, Inc., used customer lists and property of the Chapter 7 debtor for a period of several weeks sometime after June 1997, without having paid fair value or consideration. While the Company does not believe it committed any actionable conduct, the Company does not believe that the claim is material because it is believed to involve a potential exposure of only several thousand dollars. The Company has not yet filed a formal response to the complaint. C. Martas v. Greenberg. In this action, the Welfare and Pension Funds of Local 3 (Bakers' union) seek to recover unpaid contributions to the Welfare Fund of $137,063.43 and to the Pension Fund of $49,673.54 plus 11% interest, plus costs and attorneys fees and liquidated damages equal to 20% of the principal amounts. Thus the total sought is approximately $186,000 in unpaid contributions plus about $36,000 in penalties, plus interest, plus attorneys fees. The parties have reached an agreement in principle to settle this matter for the sum of $50,000, payable over time. Greenberg's last offer was to pay $12,000 in May and then $2,500/month until paid. The Funds, conceptually, want more money up front and larger payments but we are waiting for them to get back to us with exact terms. 11 D. A demand has been made by counsel to Yona Gonen (formerly Abrahami) for amounts alleged to be owed to Ms. Gonen in the amount of $69,926.09 and $9,995.90 owed to Good Eats, Inc. and unspecified amounts owed to attorneys and accountants by Chatterly Elegant Desserts ("Chatterly"). We refer you to the Company with respect to this matter. E. A demand for repayment of a $10,000 loan allegedly owed to David Abrahami by Chatterly has been made by counsel to Mr. Abrahami. We refer you to the Company with respect to this matter. F. The Company has received notice of two separate actions for unpaid insurance premiums filed in New York Civil Court by Aetna US Healthcare and Oxford Health Plan, seeking $6,978.77 and $12,028.02, respectively. No response has yet been made. 2. As of December 31, 1998, the Company was indebted to us for legal fees and disbursements in the aggregate amount of $12,787.93 heretofore billed to the Company. We have also accrued fees and disbursements for legal services rendered to the Company during the period ended December 31, 1998 which had not yet been billed, in the aggregate amount of $7,039.37. This letter is solely for your information and assistance in connection with your examination of, and report with respect to, the financial statements of the Company as of December 31, 1998, and may not be quoted or otherwise referred to in any financial statements of the Company or any other related or unrelated document or documents, nor should it be filed with or furnished to any governmental agency or other person, without the prior written consent of this firm. If in the course of your audit there should come to your attention a matter involving a possible loss contingency which you believe may have been the subject of legal consultation or representation by us and which is not covered by the Company's request and this response, please bring that matter to our attention so that there may be no misunderstanding concerning the reason for its omission. 12 This response is limited by, and in accordance with, the ABA Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information (December 1975); without limiting the generality of the foregoing, the limitations set forth in such Statement on the scope and use of this response (Paragraphs 2 and 7) are specifically incorporated herein by reference and any description herein of any "loss contingencies" is qualified in its entirety by Paragraph 5 of the Statement and the accompanying Commentary (which is an integral part of the Statement). Consistent with the last sentence of Paragraph 6 of the ABA Statement of Policy and pursuant to the Company's request, this will confirm as correct the Company's understanding as set forth in its audit inquiry letter to us that whenever, in the course of performing legal services for the Company with respect to a matter recognized by us to involve an unasserted possible claim or assessment that may call for financial statement disclosure, we have formed a professional conclusion that the Company must disclose or consider disclosure concerning such possible claim or assessment, we, as a matter of professional responsibility to the Company, will so advise the Company and will consult with the Company concerning the question of such disclosure and of the applicable requirements of Statement of Financial Accounting Standards No. 5. In this regard, however, we assume no obligation to advise you of any such unasserted possible claim or assessment unless the Company has specifically identified such matter and has expressly requested, in an inquiry letter or supplement thereto, that we provide you with information with respect thereto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Nasdaq Small Cap Market under the symbol "CBAK" and the Boston Exchange under the Trading symbol "BYK". The following table sets forth the range of quarterly high and low bid prices, as reported on the NASDAQ SmallCap Market, during the last two fiscal years through March 31, 1999.
Period High Low - -------------------------------------------------------------------- FISCAL YEAR 1997: First Quarter 3 3/8 1 1/2 Second Quarter 2 7/16 1 13/16 Third Quarter 2 7/16 1 5/8 Fourth Quarter 2 7/16 1 1/4 Fiscal Year 1998: First Quarter 1 3/4 1 1/4 Second Quarter 1 3/4 1 1/4 Third Quarter 1 1/16 11/16 Fourth Quarter 2 3/8 1 1/8
The number of shareholders of record of the Common Stock on March 31, 1999 was 34 excluding 2,445,216 shares of Common Stock held by Cede & Co. The Company believes that it has in excess of 500 shareholders. The Company has never paid cash dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. The payment of future cash demands by the Company on its Common Stock will be at the discretion of the Board of Directors and will depend upon the Company's earnings (if any), general financial condition, cash flows, capital requirements and other considerations deemed relevant by the Board of Directors. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS General 15 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 December 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 $7,100,000 which can be used to reduce the tax on income up to that amount through the year 2011. 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 from continuing operations aggregated $3,814,440 and $5,014,558 for the years ended December 31, 1998 and 1997 respectively, a decrease of 24%. The cost of goods sold was $3,137,519 and $4,224,113 for 1998 and 1997 respectively, a decrease of 26%, due to the overall decrease in sales. Operating expenses were $1,300,317 and $1,867,242 for 1998 and 1997, respectively, a decrease of 31%, mainly attributable to the termination of certain management personnel and reduction in the number of such personnel. As a result, the loss from continuing operations was $576,796 and $1,464,235 for 1998 and 1997 respectively, a decrease of 61%. Management attributes this positive trend to its overall restructuring efforts. Depreciation and amortization for 1998 decreased as compared to 1997 due to assets written down or written off for the year ended December 31, 1998. In 1998, 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 $5,005. During 1998 the Company earned interest income of $10,195 which arose mainly from investing a portion of the net proceeds it received upon the private placement and exercise of warrants. 16 The company's consolidated revenues from its discontinued operation, the WGJ subsidiary were $1,064,856 in 1998 and 3,443,005 in 1997. The WGJ subsidiary showed a loss from operations of $282,045 in 1998 and $1,171,121 in 1997 and a net loss of $347,728 in 1998 and $1,089,611 in 1997. The 1998 statements of operations reflect a charge in the amount of $5,005 which represents the fair market value of 10789 warrants, issued to a lender in order to satisfy an obligation under a written agreement. These warrants were valued at $0.47 The net loss from continuing operations aggregated $? per share for 1998 and $.68? per share for 1997. SEGMENT INFORMATION The following is the breakdown of operating data between Retail and Wholesale for both its continuing and discontinued operations:
1998 % of 1997 % of Change % of ---- sales ---- sales ------ sales ----- ----- ----- Operating data: Net Sales: Retail (discontinued) 1,064,856 100 $2,604,229 100 -1,539,373 100 Wholesale (continuing) 3,841,440 100 5,853,334 100 -2,011,894 100 Total 4,906,296 100 $8,457,563 100 -3,551,267 100 Operating Income (Loss): Retail (discontinued) (282,045) 29 ($ 751,868) 57 - 469,823 -28 Wholesale (continuing) (384,237) 27 ( 1,558,745) 16 -1,174,508 11 (666,282) 27 ( 2,310,613) 29 -1,644,331 -02 General Corp. Exp. (212,159) 03 ( 243,233) 24 - 31,074 -21 Net Loss (619,458) 30 ($2,553,846) 53 -1,934,388 -23 Balance Sheet Data: Identifiable Assets: Retail $ 599,901 $ 312,905 286,996 Wholesale 1,471,966 2,036,453 - 564,487 2,071,867 2,349,358 - 277,491 General Corporate 772,362 1,904,406 -1,132,044 Total $2,844,229 $4,253,764 -1,409,535
17 PLAN OF OPERATION WGJ Subsidiary: The company has completed its plan of closing down the commissary and the retail operations. The subsidiary has licensed its brand to an operator who continues to run the Madison Avenue store and the wholesale business. This has effectively stopped any further losses on the part of the WGJ subsidiary and provides opportunity to rebuild the business in certain areas such as Mail Order Business. In connection with the restructuring plan, management has written down its baking equipment, leasehold improvements and fixtures as of December 31, 1998, by approximately $1,288,000000 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 $369,459 was actually incurred as of December 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 affected by amortization, depreciation or expense of these costs. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY Since its inception the Company's only source of working capital has been the $8,455,000 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 18 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 $1,747,500 from the private placement of 1,875,500 common stock purchase warrants at $1.10 per warrant. During October 1997 the Company received net proceeds of $883,000 from the exercise of a portion of these common stock warrants. Of the $5,700,000 proceeds from the aforementioned stock sales: (i) $2,125,000 was issued to repay the InterEquity debt including interest; (ii) $2,615,000 was used in operations; (iii) $765,000 was used to purchase property, equipment and leaseholds; and (iv) $195,000 was used for general corporate purposes. The $1,650,000 proceeds from the private placement warrants was used to acquire JMS. Of the $883,000 proceeds from the exercise of warrants $325,000 was used for consolidation and merger of JMS and Chatterley, $388,000 was used for corporate expenses and the remaining $170,000 will be used for working capital purposes. As of December 31, 1998, the Company had a negative working capital from continuing operations of approximately $385,696 as compared to a negative working capital of $89,287 at December 31, 1997. During 1998, management took actions with a view towards restructuring the Company in order to reduce operating costs and enhance the Company's efficiency. Pursuant to such 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 expects, although there can be no assurance, that the aforementioned actions will reduce and reverse the negative cash flow which it has experienced since inception. CAPITAL RESOURCES: On January 23, 1997, the Company purchased JMS for $900,000 in cash, 500,000 shares of the Company's common stock valued at $875,000 and $400,000 purchase warrants valued at $440,000. In order to finance the acquisition, the Company sold in a private placement 1,875,500 common stock purchase warrants at a net price to the Company of $1,747,500. 19 In October 1997 the Company raised $883,000 in connection with the exercise of the warrants from the private placement related to the purchase of JMS. If and when the market price of the Company's stock increases and exceeds the exercise price of the warrants previously issued, the Company may receive additional funds upon the exercise of its warrants to operate and fund future expansion and acquisitions. The Company is looking for opportunities to acquire other companies which would improve its cash flow and capital positions in both the short- and long-term. Management believes that funds for such acquisition can be raised in transactions similar to the sale of stock purchase warrants which funded the JMS acquisition. Although the Company has previously been successful in obtaining sufficient capital funds through issuance of common stock and warrants, there can be no assurance that the Company will be able to do so in the future. INFLATION AND SEASONALITY: To date, inflation has not had a significant impact on the Company's operations. The Company's revenues are affected by seasons with revenues anticipated to increase during holiday seasons such as Thanksgiving, Christmas, Jewish New Year, Easter and Passover. STATEMENTS REGARDING FORWARD-LOOKING INFORMATION This annual report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company including statements relating to the cost savings, revenue enhancements and marketing and other advantages that are expected to be realized from the Company's plans to restructure and consolidate its operations and grow through strategic acquisitions. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. Such risks and uncertainties include, without limitation: (1) expected cost savings from the restructured or consolidated operations cannot be fully realized; (2) difficulties relating to the integration of new businesses 20 that may be acquired; (3) the impact of competition on revenues and margins; (4) increases in the costs of ingredients; and (5) other risks and uncertainties as may be detailed from time to time in the Company's public announcements and Commission filings. ITEM 7. FINANCIAL STATEMENTS Independent auditor's report F-1 Consolidated financial statements: Balance sheet F-2 Statement of loss F-3 Statement of stockholders' equity F-4 Statement of cash flows F-5 Notes to consolidated financial statements F-6 - F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable 21 [LETTERHEAD OF ZELLER WEISS & KAHN, LLP] INDEPENDENT AUDITORS' REPORT ---------------------------- Board of Directors Creative Bakeries, Inc. We have audited the accompanying consolidated balance sheet of Creative Bakeries, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of loss, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Creative Bakeries, Inc. as of December 31, 1998 and 1997, and the results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company incurred a significant net loss for the year ended December 31, 1998 and as of December 31, 1998 has a working capital deficiency in the amount of $385,695, which raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plans in regard to these matters are discussed in the notes to the financial statements. Zeller Weiss & Kahn April 7, 1999 F-1 CREATIVE BAKERIES, INC. CONSOLIDTAED BALANCE SHEET - DECEMBER 31, 1998 ASSETS Current assets: Cash and cash equivalents $ 129,626 Accounts receivable, less allowance for doubtful accounts of $40,480 262,476 Loans receivable 19,002 Inventories 235,592 Prepaid expenses and other current assets 52,815 ----------- Total current assets 699,511 ----------- Property and equipment, net 722,214 ----------- Other assets: Goodwill, net of amortization 970,853 Security deposits 5,464 ----------- 976,317 ----------- $ 2,398,042 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 33,405 Notes payable, bank 148,079 Loans payable, other 9,549 Accounts payable 525,640 Payroll taxes payable 120,816 Accrued expenses 247,717 ----------- Total current liabilities 1,085,206 ----------- Other liabilities: Long-term debt, net of current portion 2,496 Deferred rent 151,338 Net liabilities of discontinued operations less assets to be disposed of 676,881 ----------- 830,815 ----------- Stockholders' equity: Preferred stock $.001 par value, authorized 2,000,000 shares, no shares issued and outstanding Common stock, $.001 par value, authorized 10,000,000 shares, issued and outstanding 5,101,750 shares 5,102 Additional paid in capital 11,206,588 Deficit (10,482,200) ----------- 729,490 Common stock held in treasury, 184,500 shares ( 247,369) ----------- 482,121 ----------- $ 2,398,042 ===========
See notes to consolidated financial statements. F-2 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF LOSS YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ---- Restated -------- Net sales $3,841,440 $5,014,558 Cost of sales 3,137,519 4,224,113 ---------- ---------- Gross profit 703,921 790,445 Selling, general and administrative expenses 1,300,317 1,867,242 ---------- ---------- Loss from continuing operations ( 591,392) ( 1,076,797) ----------- ----------- Other income (expenses): Gain (loss) from sale of disposition of assets 35,383 ( 57,963) Interest income 10,195 17,385 Compensatory charges ( 5,004) ( 287,837) Rental income 21,193 Interest expense ( 25,978) ( 31,101) ----------- ----------- 19,600 ( 338,323) ---------- ----------- Loss from continuing operations ( 576,796) ( 1,415,120) Income taxes, deferred 49,115 ----------- ---------- Loss from continuing operations ( 576,796) ( 1,464,235) ----------- ---------- Discontinued operations: Loss from operations of New York facility to be disposed of ( 42,662) ( 1,089,611) Estimated loss on disposal of New York facility ( 305,066) ----------- --------- ( 347,728) ( 1,089,611) ----------- ---------- Net loss ($ 924,524) ($2,553,846) =========== ========== Earnings per common share: Primary and fully diluted: Loss from continuing operations ( 0.11) ( 0.40) Loss from discontinued facility ( 0.01) ( 0.28) Estimated loss on disposal of New York facility ( 0.06) ----------- ---------- ( 0.18) ( 0.68) =========== ========== Weighted average number of common shares outstanding 5,040,900 3,703,217 =========== ==========
See notes to consolidated financial statements. F-3 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998 AND 1997
Common stock ------------------ Number Additional Total of Paid in Accumulated Stockholders' Shares Amount Capital Deficit Equity ------ ------ ------- ------- ------ Balance at December 31, 1997 2,621,500 $2,622 $ 6,746,564 ($ 6,999,703) ($ 250,517) Warrants issued January 17, 1997, less expenses of the offering of $315,000 1,747,500 1,747,500 Common shares issued regarding acquisition of J.M. Specialties, Inc. 500,000 500 874,500 875,000 Warrants issued regarding acquisition of J.M. Specialties, Inc. 385,000 385,000 Common stock issued in consideration of legal and consulting services 34,000 34 59,466 59,500 Fair market value of warrant to acquire 185,682 shares of common stock issued to a lender in order to obtain financing for the purchase of the operating assets of Greenberg Desserts Associates Limited Partnership, valued at $1.09 per share 202,393 202,393 Shares issued regarding the acquisition of Chatterly Elegant Desserts, Inc. to be treated as a pooling of interest 1,300,000 1,300 18,861 20,161 Fair market value of warrant to acquire 84,017 shares of common stock issued to a lender in order to obtain financing for the purchase of the operating assets of Greenberg Desserts Associates Limited Partnership, valued at $.8124 per share 68,263 68,263 Common shares issued October 1997 when warrants exercised at $1.25 per share 706,250 706 882,106 882,812 Fair market value of warrant to acquire 50,506 shares of common stock issued to a lender in order to obtain financing for the purchase of the operating assets of Greenberg Desserts Associates Limited Partnership, valued at $.8805 per share 44,470 44,470 Net loss for the year ended December 31, 1997 ( 2,557,973) ( 2,557,973) --------- ------ ----------- ----------- ---------- Balance at December 31, 1997 5,161,750 5,162 11,029,123 ( 9,557,676) 1,476,609 Common stock issued June 30, 1998 100,000 100 111,900 112,000 Fair market value of warrant to acquire 19,149 shares of common stock issued to a lender in order to obtain financing for the purchase of the operating assets of Greenberg Desserts Associates Limited Partnership, valued at $.560 per share 5,005 5,005 --------- ------ ----------- ----------- ---------- 5,261,750 5,262 11,146,028 ( 9,557,676) 1,593,614 Common stock issued in settlement of accrued obligations 40,000 40 60,360 60,400 Cancellation of shares regarding the purchase of Chatterly Elegant Desserts, Inc. ( 200,000) ( 200) 200 Net loss for the year ended December 31, 1998 ( 924,524) ( 924,524) --------- ------ ----------- ----------- ---------- Balance at December 31, 1998 5,101,750 $5,102 $11,206,588 ($10,482,200) $ 729,490 ========= ====== =========== =========== ==========
See notes to consolidated financial statements. F-4 CREATIVE BAKERIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ---- Restated -------- Operating activities: Net loss from continuing operations ($576,796) ($1,464,235) Adjustments to reconcile income from continuing operations to cash provided from continuing operations: Depreciation 154,443 227,315 Amortization 80,910 80,910 Stock issued in consideration of services 40,000 59,500 Compensatory element of issuance of warrants 5,005 287,837 Gain on sale of fixed assets ( 35,383) 238,888 Changes in other operating assets and liabilities from continuing operations: Accounts receivable 182,795 ( 100,196) Inventory 107,417 60,370 Prepaid expenses and other assets 11,253 ( 60,022) Security deposits 18,850 3,674 Accounts payable ( 32,118) 260,745 Accrued expenses and other current liabilities ( 65,360) 399,897 Deferred rent ( 1,540) 15,919 -------- --------- Net cash provided by (used in) continuing operations ( 110,524) 10,602 Net cash used in discontinued operations ( 35,510) ( 1,089,611) -------- ---------- Net cash used in operating activities ( 146,034) ( 1,079,009) -------- ---------- Investing activities: Proceeds from sale of fixed assets 35,383 Purchase of property and equipment ( 11,970) ( 210,185) Purchase of treasury stock ( 247,369) ( 900,000) -------- ---------- Net cash used in investing activities ( 223,956) ( 1,110,185) -------- ---------- Financing activities: Proceeds from financing 75,000 Issuance of common stock and warrants 112,000 2,630,312 Payment of debt ( 91,696) ( 45,935) -------- ---------- Net cash provided by financing activities 20,304 2,584,377 -------- ---------- Net increase (decrease) in cash and cash equivalents ( 349,686) 395,183 Cash and cash equivalents, beginning of year 479,312 84,129 -------- ---------- Cash and cash equivalents, end of year $129,626 $ 479,312 ======== ========== Supplemental disclosure: Cash paid during the year for: Interest paid during the year Continuing operations $ 25,978 $ 33,805 ======== ========== Discontinued operations $ 0 $ 0 ======== ========== Income taxes paid during the year Continuing operations $ 0 $ 0 ======== ======== Discontinued operations $ 0 $ 0 ======== ========
See notes to consolidated financial statements. F-5 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 1. Realization of assets - going concern: Although the Company is currently operating its businesses, the continuation of such business as going concerns is contingent upon, among other things, the continued forbearance by the Company's creditors from exercising their rights in connection with delinquent accounts payable and payroll obligations. Management has indicated its plan to meet its obligations is dependent upon cash flows, if any, generated from JMS and Chatterly Elegant Desserts, Inc. and the acquisition of additional businesses. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts of the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. William Greenberg Jr. Desserts and Cafes, Inc. was incorporated in the State of New York on November 12, 1993. In 1997, the Company transferred all of its business assets and liabilities to a newly formed wholly-owned subsidiary, WGJ Desserts and Cafes, Inc. At this time the Company's name was changed to Creative Bakeries, Inc. WGJ Desserts and Cafes, Inc. operated a number of retail locations as well as operating a bakery facility, all located in New York City. As of June 1998, WGJ Desserts and Cafes, Inc. shut down its manufacturing facility and effective November 1998, sold its final retail store. Although the Company has not vacated its manufacturing facilities, all operations have ceased. During the year ended December 31, 1998, the Company incurred a loss from continuing operations in the amount of $576,796 and a net loss of $924,524, and as of December 31, 1998 had a net working capital deficiency of $385,695. During 1998, the Company discontinued operations of its two remaining retail stores. In June the Company also closed its manufacturing plant in New York. During 1997, the Company incurred restructuring costs in the form of consulting fees, salary settlement costs and losses incurred on the abandonment of assets at the retail facilities closed late in the year. These costs amounted to $369,458 and were offset against the estimated restructuring costs recorded at the end of 1996. In connection with the restructuring plan, the Company determined the carrying value of its baking equipment, furniture and fixtures and leasehold improvements exceeded their fair market value. Therefore, in accordance with SFAS No. 121 "Accounting for the Impairment of Long- Lived Assets", a provision for impairment losses aggregating $305,066 was charged and included as part of other expenses in the accompanying statement of operations for the year ended December 31, 1998. Such impairment loss represents the excess of the carrying value of $340,066 over management's estimate of the fair market value of the assets of $35,000. F-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 1. Realization of assets - going concern (continued): In view of these matters, management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. 2. Organization of the Company: Creative Bakeries, Inc., formally 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 Dessert 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. As more fully described elsewhere herein, the Company, on January 17, 1997, purchased all the 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 $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 350,000 shares of the Company's common stock at a price of $2.50 per share. JMS offers a line of batter and frozen finished cakes, brownies and muffins. In order to finance the Acquisition, the Company raised net proceeds of $1,747,500 from the issuance of 1,875,000 common stock purchase warrants which are exercisable at a price of $2.50 per share. In connection with the above described 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 three wholly-owned subsidiaries, JMS, WGJ Desserts and Cafes, Inc. and Chatterly Elegant Desserts, 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 shares to Chatterly, of which 200,000 shares were returned in 1998. Chatterly offers a line of tortes, cakes and mousses. F-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 2. Organization of the Company (continued): J.M. Specialties, Inc., t/a Batter Bake, was incorporated in the State of New Jersey in 1985. The Company manufactures muffins, batter and baked goods which are sold to supermarkets, food distributors, educational institutions and restaurants. The Company has expanded its product line to include yogurt and fat-free items. Although the Company sells its products throughout the United States, its main customer base is on the East Coast of the United States. Chatterly Elegant Desserts, Inc. was incorporated in the State of New Jersey in February 1985. The Company manufactures baking and confectionery products. The Company's customers are retailers located in the Northeast portion of the United States. Effective December 1997, Chatterly Elegant Desserts, Inc. was formally merged with J.M. Specialties, Inc. under New Jersey law. Because of the consolidation of the two companies facilities, management feels this merger was beneficial and cost efficient. 3. Summary of significant accounting policies: Restated financial statements: The accompanying financial statements for 1997 have been restated to show the effect of the discontinued operations discussed in Note 17. Revenue recognition: The Company recognizes revenues in accordance with generally accepted accounting principles in the period in which its products are shipped to its wholesale or mail order customers. Retail store sales are recorded when the consumer purchases the Company's products at one of its retail stores. Expenses are recorded in the period in which they are incurred, in accordance with generally accepted accounting principles. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentrations of credit risk: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions which at times may be in excess of the FDIC insurance limit. Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the large number of customers comprising the Company's customer base. In addition, the Company performs ongoing credit evaluations of its customers' financial condition and, as consequence, believes that its trade accounts receivable credit risk exposure is limited. F-8 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 3. Summary of significant accounting policies (continued): Inventories: Inventories are stated at the lower of cost (first-in - first-out) or market. Cash and cash equivalents: For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with the maturity of three months or less, as well as money market funds, to be cash equivalents. Property and equipment and depreciation: Property and equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method over the following useful lives:
Years ----- Machinery and equipment 10 Furniture and computers 5 Leasehold improvements 10-15
Expenditures for major renewals and betterment that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are eliminated from the accounts and the resulting gain or loss, is any, is reflected in income. As discussed in Note 1, management had determined that there had been an impairment to the value of the property of WGJ Desserts and Cafes, Inc. (formerly William Greenberg Jr. Desserts and Cafes, Inc.) in 1998 and 1996 and property and equipment had been written down to their net realizable value. Allowance for doubtful accounts: An allowance for doubtful accounts has been established by management based on a review of open accounts receivable at each balance sheet and their respective collectibility. Intangibles: The covenant not to compete is amortized over the term of the agreement and goodwill is amortized over its estimated useful life of forty years (see Note 6). F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 3. Summary of significant accounting policies (continued): Income taxes: Deferred income taxes: Deferred income taxes arise from timing differences resulting from income and expense items reported for financial/accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results differ from these estimates. 4. 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. 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 $2,160,000 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 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-10 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 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 1,213,565 ---------- $2,160,000 ==========
F-11 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 5. Acquisition of J.M. Specialties, Inc. (continued): Under the terms of the 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 $1.09 per common share which resulted in a charge to operations of $202,393 in the first quarter of 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 of which 200,000 shares were returned in 1998. 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-12 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 6. Acquisition of Chatterly Elegant Desserts, Inc. (continued): Under the terms of its agreement with InterEquity Capital Partners, L.P., the Company reserved 84,017 shares of its common stock for issuance under the warrant. Management ascribed a fair value of $.8125 per common share which resulted a charge to operations of $68,263 in the third quarter of operations in 1997. 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, 1998. 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 $305,066 was charged to operations during the fourth quarter of 1998. The following is a summary of property and equipment at December 31, 1998: Baking equipment $1,429,395 Furniture and fixtures 74,664 Leasehold improvements 180,422 ---------- 1,684,481 Less: Accumulated depreciation and amortization 962,267 ---------- $ 722,214 ==========
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 $25,000 in 1998 and 1997. F-13 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 8. Intangible assets (continued): The excess cost over the fair value of the net assets acquired from J.M. Specialties, Inc. aggregated $1,213,565. This goodwill has been amortized over its estimated useful life of fifteen years. Amortization charged to operations amounted to $80,900 in 1998 and 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: 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). In March 1997, the Company issued 34,000 shares of common stock to a law firm in settlement of amounts owed for services. 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). 200,000 shares were subsequently returned in 1998. In October 1997, the Company issued 706,250 shares of its common stock at $1.25 for total proceeds of $882,812. In June 1998, the Company sold 100,000 shares of its common stock for proceeds of $110,000. In July 1998, the Company issued 40,000 in settlement of certain obligations due a former shareholder and unrelated debtor of Chatterly Elegant Desserts, Inc. The total amount of the settlement was $60,400. F-14 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 10. Capital stock (continued): (b) Warrants: (i) Warrants issued to InterEquity Capital: Inorder to obtain financing for the acquisition of Greenberg's - L.P. (see Note 2), the Company sold to the lender for $1,000, a Convertible Note which in accordance with the terms of the conversion agreement, was converted by the lender into a warrant to acquire shares of stock of the Company in a number sufficient to equal 6% of the Company's then outstanding preferred and common stock (163,404 shares of common stock). The warrant expires on July 31, 2001. The warrant contains anti-dilutive provisions throughout its six (6) year life which entitles the holder to its applicable percentages of the Company's capital stock on the date the warrant is exercised. Based upon the issuance of 100,000 shares of common stock in 1998, the lender was entitled to an additional 19,149 shares of common stock. Accordingly, the financial statements include a charge to operations of $10,809 which represents the market value of the stock at the time the 19,149 warrants were issued by the Company. Compensatory charges recorded on the income statement for 1998 amounted to $10,809 and $287,837 in 1997. (ii) Other 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). (ii) Other warrants issued in 1997 (continued): All of the warrants issued in 1997, including the Placement Warrants, aggregating 2,485,000 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 between $2.50 and $3.00 for a term which will expire on December 31, 2000. F-15 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 10. Capital stock (continued) (b) Warrants (continued): 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: 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 ======== ======== ========
F-16 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 11. Commitments and contingencies (continued) Employment Agreements (continued): 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 by $72,914 in the quarter ended June 30, 1997. This amount was settled in July of 1998 by issuing 30,000 shares of the Company's common shares which has a fair value of $45,089. The Company recorded the difference to income in the third quarter of 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 has been made in 1997 to reflect these demands and is still carried as a liability as of December 31, 1998. Litigation matters: 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. On December 14, 1998, the Company moved by order to show cause to dismiss the complaint in its entirety as against the Company based on the fact that the action involves a private transaction between the plaintiff and the Abramson's, and the complaint fails to state a cause of action against Creative Bakeries, Inc. After a full briefing and oral argument, the papers were taken by the court on submission and the Company is awaiting a ruling on that motion. F-17 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 11. Commitments and contingencies (continued): Litigation matters (continued): The Company has also been named as a defendant in an action entitled Ackerman v Alan Sloan, an adversary proceeding brought in the United States Bankruptcy Court by the Chapter 7 trustee of Alliotto Bakery Cafe, Inc. The complaint alleges that the Company, while operating as William Greenberg, Jr. Desserts and Cafes, Inc. used customer lists and property of the Chapter 7 debtor for a period of several weeks sometime after June 1998 without having paid fair value or consideration. While the Company does not believe it committed any actionable conduct, the Company does not believe the claim is material because it is believed to involve a potential exposure of only several thousand dollars. The Company has not yet filed a formal response to the claim. 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 its six retail locations in 1998 and 1997. The Company has received releases on all locations. The Company favorably settled the lease of one of its retail stores in 1998. In the settlement, the landlord forgave $21,040 in back rent which had previously been recorded by the Company as expense, resulting in income being realized in the current year. During 1997, the Company sublet one of its retail locations, receiving rental income of $73,500, the amount of the rent expense. This lease was terminated in February 1998 with no further obligation to the Company. The minimum future rentals on the baking facility is as follows: December 31, 1999 $ 46,949 December 31, 2000 48,357 December 31, 2001 49,809 December 31, 2002 51,302 December 31, 2003 52,842 Thereafter 110,488 -------- $359,747 ========
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. F-18 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 11. Commitments and contingencies (continued):
Facility ----------- December 31, 1999 $ 192,250 December 31, 2000 200,000 December 31, 2001 200,000 December 31, 2002 200,000 December 31, 2003 200,000 Thereafter 230,000 ---------- $1,222,250 ==========
Rent expense for all operating leases amounted to $442,794 in 1998 and $808,385 in 1997 and includes straight-lining of rent adjustments discussed in Note 10. 12. Long-term debt: Equipment with a cost of $197,000 has been pledged as collateral on a note payable in monthly installments of $2,909, 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 December 31, 1998 are as follows: December 31, 1999 $33,405 December 31, 2000 2,495 ------- $35,900 =======
13. Earnings per share: Primary earnings per share is computed based in the weighted average number of shares actually outstanding plus the shares that would have been outstanding assuming conversion of the common stock purchase warrants which are considered to be common stock equivalents. However, according to FASB 128, effective for financial statements issued and annual periods issued after December 15, 1997, entities with a loss from continuing operations, the exercise of any potential shares increases the number of shares outstanding and results in a lower loss per share. Thus, potential issuances are excluded from the calculation of earnings per share. These common stock purchase warrants amounted to 2,485,000 in 1998 and 1997. F-19 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 13. Earnings per share (continued): Reconciliation of shares used in computation of earnings per share:
1998 1997 ---- ---- Weighted average of shares actually outstanding 5,040,900 3,703,217 Common stock purchase warrants --------- --------- Primary and fully diluted weighted average common shares outstanding 5,040,900 3,703,217 ========= =========
14. Inventories: Inventories consist of the following: Raw materials $ 82,128 Finished goods 65,818 Packaging supplies, labels, etc. 87,646 -------- $235,592 ========
15. Supplemental schedule of non-cash investing and financing activities:
1998 1997 ---- ---- Issuance of common stock and warrants regarding acquisition of subsidiaries $1,280,161 Common shares issued in consideration of legal, consulting fees and other obligations $40,000 59,500 ------- ---------- $40,000 $1,339,661 ======= ==========
F-20 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 16. Note receivable: On November 3, 1998, the Company sold its one remaining retail facility for $405,000 which represented disposition of equipment and a license to sell under the "William Greenberg, Jr. Desserts and Cafes" name. The agreement called for a cash down payment of $110,000 with the remainder being paid on a note receivable due in semi-annual installments of $36,875 plus interest at prime. The maturities of the notes are as follows: December 31, 1999 $ 73,750 December 31, 2000 73,750 December 31, 2001 73,750 December 31, 2002 73,750 -------- $295,000 ========
In the event that the licensee opens and operates any additional retail store(s) utilizing the license (other than the original retail store) and the annual gross retail sales of any such store(s) exceeds $400,000, then the licensee shall pay the licensor (the Company) a five percent royalty on all sales in excess of the $400,000 of sales in each store. The licensee shall pay the licensor a royalty on a semi-annual basis of 3% of all mail order sales in excess of $100,000. 17. Discontinued operations: In 1998, the Company adopted a formal plan to close WGJ Desserts and Cafes, Inc., its New York manufacturing facility, which was done in July of 1998 and to dispose of its one remaining retail store, which was accomplished in November 1998. The New Jersey facility was unaffected and still continues to sell and manufacture. The sale of the final retail location resulted in a selling price of $405,000 which includes a note receivable of $295,000. The sale resulted in a gain of $321,350 which is included in other income. Net liabilities, less assets to be disposed of, of WGJ Desserts, Inc. consisted of the following as of December 31, 1998: Accounts payable $ 402,289 Loans payable 100,000 Accrued payroll 327,823 Accrued expenses 248,607 Deferred rent 44,349 ---------- 1,123,068 ----------
F-21 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 17. Discontinued operations (continued): Cash 45,556 Notes receivable 300,000 Interest receivable 3,633 Property and equipment 35,000 Covenant not to compete 37,500 Security deposits 24,498 ---------- 446,187 ---------- $ 676,881 ==========
Information relating to discontinued operations for WGJ Desserts and Cafes, Inc. for the year ended December 31, 1998 and 1997 is as follows:
1998 1997 ---- ---- Net sales $1,064,856 $3,443,005 Cost of sales 687,677 2,156,370 ---------- ---------- Gross profit 377,179 1,286,635 Operating expenses 659,224 2,457,756 ---------- ---------- Net loss from operations ( 282,045) ( 1,171,121) ---------- ---------- Settlement income 64,439 Gain on sale of fixed assets 10,000 Miscellaneous expense ( 6,863) Interest expense ( 2,704) Loss on abandonment of leasehold improvements ( 143,176) Rental income 73,500 Gain on sale of 82nd Street facility 321,350 Interest income 3,633 714 ---------- ---------- 239,383 81,510 ---------- ---------- Net loss from operations ( 42,662) ( 1,089,611) Estimated loss on disposal of New York facility ( 305,066) ---------- ---------- ($ 347,728) ($1,089,611) ========== ==========
F-22 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 18. Other matters: The year 2000 issue relates to the inability of many electronic data processing (EDP) systems to accurately process year-date data beyond the year 1999. Unless year 2000 problems are remedied, significant problems relating to the integrity of all electronically processed information based on time will occur. Additionally, there are many other operational issues that need to be assessed, such as computer-run maintenance systems, as well as systems that may be indirectly controlled by computer by way of a chip embedded in their designs. The effect, if any, at this time about the problems that could occur and the costs to remedy can not be determined. F-23 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information Concerning the Board of Directors and Executive Officers The following table sets forth certain information concerning the Board of Directors, persons nominated to be elected as directors and executive officers of the Company:
Name of Director or Date of Executive Officer, Principal Occupation Initial Age and Position For Previous Five Years Election Held with Company ----------------------- as Director - ---------------- ----------- Philip Grabow, 58, Chief Executive Officer, January 23, 1997 President and Director October 1985 to January 1997 of JMS Richard Fechtor, 67, Founder of and since July 11, 1996 Director 1974 Executive Vice President of Fechtor, Detwiler & Co., Inc., the representative of the underwriters in the Company's initial public offering; Director of Vascular Laboratories since 1989 Raymond J. McKinstry, Investment manager with August 1995 50, Director Astair & Partners, Limited, a London based brokerage company, 1987 to present Kenneth Sitomer, 51, Chief Operating Officer July 1997 Director of Sam and Libby, Inc., a publicly held company, 1993 to present; private consultant to footwear industry 1992 to March 1993; President and Chief Executive Officer of Russ Togs, Inc., a publicly held company listed on the New York Stock Exchange, 1989 to
22
Name of Director or Date of Executive Officer, Principal Occupation Initial Age and Position For Previous Five Years Election Held with Company ----------------------- as Director - ---------------- ----------- 1992. Karen Brenner, 44, President of Fortuna July 1997 Director Advisors, Inc., an investment advisory firm in California 1993 to present; founder and President of Karen Brenner, Registered Investment Advisor, the predecessor to Fortuna Advisors, Inc., 1984 to 1993; Managing Partner of F.C. Partners, a California limited partnership, April 1996 to present; Director on DDL Electronics, Inc., a publicly held company, July 1996 to present; Director of Krug International Corp., a publicly held company, July 1996 to present. Yona Abrahami, 49 Founder and President of August 1997 Director Chatterley
All directors hold office until the next annual meeting of shareholders or until their successors are elected and qualified. For a period of five years from October 12, 1995, Fechtor Detwiler & Co., Inc. (the "Representative") has the right to nominate one member to the Company's Board of Directors. Mr. Fechtor is the Representative's current nominee to the Board of Directors. There are no family relationships among any of the directors and executive officers of the Company. Officers are appointed by the Board of Directors and serve at the discretion of the Board. Compliance With Section 16(a) of the Securities Exchange Act of 1934 23 The Securities and Exchange Commission (the "Commission") has comprehensive rules relating to the reporting of securities transactions by directors, officers and shareholders who beneficially own more than 10% of the Company's Common Shares (collectively, the "Reporting Persons"). These rules are complex and difficult to interpret. Based solely on a review of Section 16 reports received by the Company from Reporting Persons, the Company believes that no Reporting Person has failed to file a Section 16 report on a timely basis during the most recent fiscal year. ITEM 10. EXECUTIVE COMPENSATION Compensation of Directors Directors of the Company who are not salaried officers receive a fee of $500 for attending each meeting of the Board of Directors or a committee thereof. In addition, all directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending such meetings. Executive Compensation in 1998 The following table sets forth compensation paid to the Chief Executive Officer and to executive officers of the Company, excluding those executive officers who did not receive an annual salary and bonus in excess of $100,000 in the fiscal year ended December 31, 1997.
Name and Other Annual Principal Position Year Salary ($) Bonus ($) Compensation - ------------------ ---- ---------- --------- ------------ Philip Grabow, CEO 1998 $150,000 $0.00 $0.00 Yona Abrahami, VP 1998 $100,000 $0.00 $0.00
No other executive officer received a salary and bonus in excess of $100,000 for the year ended December 31, 1997. The Company has not granted any stock options, stock appreciation rights or long-term incentive awards to any executive officer of the Company since its inception. Employment Agreements 24 Simultaneously with the acquisition of Chatterley, the Company entered into employment agreements with Yona Abrahami and David Abrahami. David Abrahami's contract has since been terminated. These agreements were filed as exhibits B and C respectively with the Form 8-K/A on November 17, 1997. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT?? The following table sets forth the number and percentage of Common Shares beneficially owned, as of the date of this Amendment to the Annual Report, by: (i) all persons known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock; (ii) each director of the Company; (iii) each of the "named executive officers" as defined under the rules and regulations of the Securities Act of 1933, as amended; and (iv) all directors and executive officers of the Company as a group (7 persons):
Name Number of Percentage - ---- Shares Beneficially Beneficially Owned(2) Owned(1) -------- ------------ Yona Abrahami(3)......................... 1,100,000 21.3% Philip Grabow(4)......................... 800,000 14.6% Richard Fechtor(5)....................... 142,933 2.8% Raymond J. McKinstry(6).................. 50,000 * InterEquity Capital Partners, L.P.(7).... 378,390 6.8% Kenneth Sitomer(8)....................... -- -- Karen Brenner(9)......................... -- -- Ashwin R. Shah(10)....................... 500 -- Willa Abrahamson(11)..................... 400,000 7.7% Fortuna Investment Partners(12).......... 550,000 9.6% 100 Wilshire Blvd. Suite 1500 Santa Monica, CA 90401 Baileys Family Trust..................... 606,250 10.5%
25 P.O. Box 9109 Newport Beach, CA 92658 All executive officers and directors as a group 2,097,519 19.1% (7 persons)(14)..........................
- ------------------------- * Less than 1%. (1) Unless otherwise noted, the Company believes that all persons named in the table have sole voting power with respect to all shares beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options. (2) Assumes 5,161,750 shares of Common Stock outstanding as of the March 31, 1998. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof have been exercised. (3) Ms. Abrahami's address is c/o 20 Passaic Avenue, Fairfield, New Jersey 07004. (3) Mr. Grabow's business address is c/o 20 Passaic Avenue, Fairfield, New Jersey 07004. Includes 500,000 Common Shares and currently exercisable warrants to purchase an additional 300,000 shares of Common Stock. See "Certain Relationships and Related Transactions." (5) Mr. Fechtor's business address is 155 Federal Street, Boston, Massachusetts 02110. Upon the conversion of a certain note, InterEquity Capital Partners, L.P., received a six-year warrant exercisable until October 2001 to purchase, on one occasion, 6% of the issued and outstanding capital shares of the Company on a fully diluted basis as of the date of exercise. Certain persons associated with the Representative, received an aggregate 17.5% interest in such warrant, including Mr. Fechtor, who received a 5% interest in such warrant. As of March 31, 1998, there are 7,644,250 shares of Common Stock outstanding on a fully diluted basis, 6% of which equals 458,655 shares of Common Stock. Accordingly, Mr. Fechtor's ownership as shown in the table includes 22,933 shares issuable upon exercise of such warrant. See "Certain Relationships and Related Transactions." Also includes 120,000 shares of Common Stock. Excludes 5,500 shares of Common Stock owned by Mr. Fechtor's wife, of which he disclaims beneficial ownership. (6) Mr. McKinstry's business address is 40 Queen Street, London EC4R 1DD, England. Includes currently exercisable warrants to purchase 50,000 Common Shares. 26 (7) InterEquity's business address is 220 Fifth Avenue, New York, New York 10001. Includes an 82.5% interest in a six-year warrant exercisable to purchase, on one occasion, 6% of the issued and outstanding capital shares of the Company on a fully diluted basis as of the date of exercise. As of March 31, 1998, there are 7,644,250 shares of Common Stock outstanding, 6% of which equals 458,655 shares of Common Stock. Accordingly, InterEquity's ownership as shown in the table includes 378,390 shares issuable upon exercise of such warrant. The warrant is currently exercisable and expires in October 2001. (8) Mr. Sitomer's address is 303 East 57th Street, New York, New York 10022. (9) Ms. Brenner's address is P.O. Box 9109, Newport Beach, California 92660. (10) Mr. Shah's address is c/o 20 Passaic Avenue, Fairfield, New Jersey 07004. (11) Mr. Abrahamson's address is 1800 NE 115th Street, Miami, FL 53181. (12) Includes currently exercisable warrants to purchase 550,000 shares. (13) Includes currently exercisable warrants to purchase 606,250 shares. (14) Includes the shares of Common Stock beneficially owned by Ms. Abrahami, Mr. Grabow, Mr. Fechtor, Mr. McKinstry, Mr. Sitomer, Ms. Brenner and Mr. Shah. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The JMS Acquisition On January 17, 1997, the Company entered into a stock purchase agreement (the "Stock Purchase Agreement") with Philip Grabow ("Grabow"), pursuant to which, on January 23, 1997, the Company consummated the purchase from Grabow of all the outstanding shares of J.M. Specialties, Inc., a New Jersey corporation (the "JMS Subsidiary"), in exchange for (i) $900,000 in cash, (ii) 500,000 shares (the "JMS Shares") of the Common Stock of the Company and (iii) 350,000 warrants (the "JMS Warrants") exercisable for shares of Common Stock of the Company (the "JMS Transaction"). Each JMS Warrant entitles Grabow to purchase one Common Share of the Company 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 Common Shares of issuable upon exercise of the JMS Warrants, 27 and (ii) an employment agreement dated as of January 23, 1997. Pursuant to the employment agreement, Grabow will serve as President 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. Also in connection with the JMS Transaction, effective January 23, 1997, Grabow was elected to serve as a director of the Company. JMS Acquisition Indebtedness The payment of the cash portion of the purchase price for the JMS Subsidiary and such working capital, was funded through the net proceeds received from the sale by the Company of 1,500,000 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 qualified as "accredited investors" under the Securities Act of 1933. The terms of the Private Placement Warrants are substantially similar to the JMS Warrants. The Chatterley Acquisition On August 28, 1997 the Company entered into a stock purchase agreement with Yona Abrahami pursuant to which the Company purchased from Ms. Abrahami all the outstanding shares of Chatterley Elegant Desserts, Inc., a New Jersey Corporation, in exchange for 1,300,000 shares of the Company's common stock. Such stock purchase agreement was subsequently amended and Ms. Abrahami agreed to reduce the purchase price by surrendering 200,000 shares of common stock back to the Company. 28 PART IV ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Financial Statements The financial statements filed as part of the Company's Form 10-KSB are listed in Item 7. Financial Statements are included in Part IV hereof at page F-1. (b) Reports on Form 8-K On September 11, 1997, the Company filed a Current Report on Form 8-K announcing completion of the Chatterley acquisition. (c) Listing of Exhibits **2.1 Purchase and Sale Agreement, dated June 2, 1995, by and among the Company, Greenberg Dessert Associates Limited Partnership, SMG Baking Enterprises, Inc. and its limited partners. ***2.2 Stock Purchase Agreement, dated as of January 17, 1997, by and between the Company and Philip Grabow, without exhibits. **3.1 Restated Certificate of Incorporation. **3.2 Amended and Restated By-laws. **4.1 Form of certificate for shares of Common Stock. **4.2 Form of Representatives Warrant. **4.3 Loan Agreement, dated July 10, 1995, by and between InterEquity Capital Partners, L.P. and the Company. **10.1 Employment Agreement, dated July 10, 1995, by and between the Company and Stephen Fass. **10.2 Employment Agreement, dated as of July 10, 1995, by and between the Company and Willa Rose Abramson.
29 **10.3 Employment Agreement, dated as of July 10, 1995, by and between the Company and Maria Maggio Marfuggi. **10.4 Employment Agreement and Consulting Agreement, dated July 10, 1995, by and between the Company and Seth Greenberg. **10.5 Consulting Agreement, dated July 10, 1995, by and between the Company and William Greenberg Jr.. and Carol Greenberg. **10.6 Departmental License Agreement effective February 1995 by and between the Company and Macy's East, Inc. **10.8 Form of Warrant for InterEquity Capital Partners, L.P. **10.9 1995 William Greenberg Jr. Desserts and Cafes, Inc. Stock Option Plan **10.10 Lease Agreement dated July 1995 between the Company and Murray Greenstein. **10.11 Lease Agreement dated January 1994 between Schnecken Baking Realty Corp. and Gerel Corporation. **10.12 Assignment and Assumption of Lease dated July 1995 between the Company and Schnecken Baking Realty Corp. **10.13 Lease dated April 1991 between Greenberg's 35th Street Baking Co., Inc. and Rugby Managed Asset Fund. **10.14 Assignment and Assumption of Lease dated July 1995 between the Company and Greenberg's 35th Street Baking Co. **10.15 Lease dated May 1989 as modified in January 1991 between Greenberg's Triple S. Baking Co., Inc. and Stahl Real Estate Co. **10.16 Assignment and Assumption of Lease dated July 1995 between the Company and Greenberg's Triple S. Baking Co., Inc.
30 **10.17 Consulting Agreement, dated July 10, 1995, by and between the Company and Marilyn Miller. **10.18 Form of Indemnity Agreement. **10.19 Sublease dated December 1995 between Timothy's Coffees of the World, Inc., and the Company. ****10.20 Lease dated March 8, 1995 between Harran Holding Corp., c/o A. J. Clarke Management and the Company. ****10.21 Agreement dated January 13, 1996 by and between the Company and Barry Kaplan Associates. *****10.22 Employment Agreement, dated January 23, 1997, by and between the Company and Philip Grabow. *****10.23 Form of Warrant for the Private Placement made in conjunction with the JMS Subsidiary acquisition. ******10.24 Stock Purchase Agreement dated August 28, 1997, between the Company and Yona Abrahami. ******10.25 Employment Agreement dated August 28, 1992 between the Company and Yona Abrahami. ******10.26 Employment Agreement dated August 28, 1992 between the Company and David Abrahami. *10.27 Amendment to Stock Purchase Agreement dated March 10, 1997, between the Company and Yona Abrahami. *21.1 List of Subsidiaries of the Company, the state of incorporation of each, and the names under which such subsidiaries do business.
- --------------------- * Filed Herewith. 31 ** Incorporated by reference to the Company's Registration Statement on Form SB-2 Registration Number 33-96094. *** Incorporated by reference to Schedule 13-D filed by Philip Grabow on SEC File Number 005-48185. **** Incorporated by reference to the Company's Annual Report for the fiscal year ended December 31, 1995, on Form 10-KSB Commission File Number 1-13984. ***** Incorporated by reference to the Company's Annual Report for the fiscal year ended December 31, 1996, on Form 10-KSB Commission. ****** Incorporated by reference to the Company's Current Report on Form 8-K, dated September 11, 1997 and Form 8-K/A, dated November 17, 1997.
32 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 14, 1999. CREATIVE BAKERIES, INC. By: /s/ Philip Grabow -------------------------------- Philip Grabow President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 14, 1999.
Signatures Title ----- /s/Philip Grabow President, Chief Executive - ------------------------- Officer/Director Philip Grabow /s/Ashwin R. Shah Chief Financial Officer - ------------------------- (Principal Accounting Officer) Philip Grabow - ------------------------- Director Richard Fector /s/Raymond J. McKinstry Director - ------------------------- Raymond J. McKinstry /s/Kenneth Sitomer Director - ------------------------- Kenneth Sitomer /s/Karen Brenner Director - ------------------------- Karen Brenner /s/Yona Abrahami Director - ------------------------- Yona Abrahami
33 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as............................... 'TM' EX-10 2 EXHIBIT 10.27 EXHIBIT 10.27 AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT is made as of this 10th day of March, 1998, between Creative Bakeries, Inc., a New York corporation ("Purchaser") and Yona Abrahami ("Seller"). All capitalized terms not defined herein shall have the meanings ascribed to such terms in the Stock Purchase Agreement (as such term is defined below). W I T N E S S E T H: WHEREAS, Purchaser, Seller and Chatterley Elegant Desserts, Inc. (the "Company") entered into that certain Stock Purchase Agreement dated as August 27, 1997 (the "Stock Purchase Agreement"), pursuant to which Purchaser purchased from Seller all of the capital stock of the Company (the "Stock"); WHEREAS, in payment of the purchase price (the "Purchase Price") for the Stock, Purchaser delivered to Seller 1,300,000 shares of common stock of Purchaser ("Creative Shares"); WHEREAS, Purchaser has made a claim (the "Claim") for indemnification against Seller based upon certain alleged misrepresentations and warranties of Seller contained in the Stock Purchase Agreement relating to certain financial statements of the Company furnished by Seller to Purchaser; WHEREAS, the parties hereto have reached a mutually satisfactory resolution of all issues and disputes relating to the Claim; and WHEREAS, the parties wish to make certain other amendments to the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants, agreements and warranties herein contained, the parties agree as follows: 1. Amendment to Stock Purchase Agreement. 1.1 Non-Survival of Financial Statement Representations. Notwithstanding anything in the Stock Purchase Agreement to the contrary, the provisions of Sections 4.10, 4.13(a), 4.14(a)(iii), the first sentence of 4.14(b), 4.20 and 4.21 of the Stock Purchase Agreement shall be deleted in their entirety and shall have no further force and effect and each party hereto shall have no further liability or obligation to any other party hereto pursuant to such provision. In addition, effective as of the date of the Stock Purchase Agreement, (i) the phrase in the second sentence of Section 4.17 of the Stock Purchase Agreement which reads "... the Company has paid in all respects or accrued all amounts due thereunder to be satisfied or provided for through the date hereof ..." shall be deleted and (ii) the first sentence of Section 4.26 of the Stock Purchase Agreement is amended to add the phrase "as amended by the Amendment Agreement dated March 10, 1998" after the word "Agreement" and to delete the phrase "nor the Company Financial Statements, nor any other financial statements." 1.2 Non-Survival of Representations and Warranties. The Stock Purchase Agreement is hereby further amended to provide that the remaining representations and warranties (other than representations and warranties relating to Taxes which shall survive for the applicable statute of limitations) contained therein shall not survive beyond the second anniversary of the Stock Purchase Agreement (the "Survival Period") and all claims for indemnification under Section 6.2 of the Stock Purchase Agreement must be made to Seller in writing prior to expiration of the applicable Survival Period. 1.3 Release of Certain Matters. Purchaser hereby irrevocably waives and surrenders any and all rights and claims in respect of, and hereby irrevocably releases and discharges Seller from and against all actions, claims, and demands (at law or in equity) which Purchaser and/or its successors and assigns ever had, now have or hereafter can, shall or may have, relating to or arising out of any alleged misrepresentations and/or breaches of warranty or from any inaccuracies contained in those provisions of the Stock Purchase Agreement referred to in the first sentence of Section 1.1 hereof including, without limitation, the failure to reflect certain accounts payable of the Company in the financial statements of the Company furnished to Purchaser, any obligation of the Company to pay incentive bonuses to four employees of the Company identified by the Seller, any obligation of the Company with respect to common area charges under its building lease or any loss incurred by the Company solely arising out of any lien encumbering the landlord's real property created or incurred by the landlord (but not directly created or incurred by the Company or directly encumbering the Company's leasehold interest) (collectively, the "Disclosed Obligations") or based on any oral representations (whether made by Seller or by David Abrahami, a former officer of the Company), agreements or understandings including, but not limited to, those relating to the past and projected operating profitability and/or income and expenses of the Company or relating to the determination of the Purchase Price (collectively, the "Negotiations"). 3 2. Adjustment of Purchase Price. 2.1 Resolution of Dispute. The parties hereto acknowledge and agree that they have, subject to the terms and conditions hereof, reached a mutually satisfactory resolution of all issues and disputes relating to the Claim, and that such resolution is final and binding upon all parties hereto. Each of the parties hereby irrevocably agrees that, subject to the terms and conditions hereof, there shall be no further adjustment of the Purchase Price pursuant to any claim pursuant to the terms of those provisions of the Stock Purchase Agreement referred to in the first sentence of Section 1.1 hereof or based upon the Disclosed Obligations or the Negotiations and Purchaser hereby irrevocably waives and surrenders any and all claims and rights that it has or may have to seek or propose any further adjustment of the Purchase Price pursuant to the terms of those provisions of the Stock Purchase Agreement referred to in the first sentence of Section 1.1 hereof or based upon Disclosed Obligations or the Negotiations. 2.2 Adjustment; Revocation of Board Resolution. The parties hereby agree that the Purchase Price adjustment shall be to adjust the number of Creative Shares paid as the Purchase Price to 1,100,000 which adjustment shall be made by Seller delivering certificates evidencing 200,000 Creative Shares to Purchaser duly endorsed to Purchaser or with appropriately executed stock transfer powers attached. Purchaser shall promptly cause its Board of Directors to rescind the resolution previously adopted by such Board placing a "stop transfer" instruction on the remaining Creative Shares owned by Seller. 3. Covenants of the Parties. The parties covenant and agree to the following: 3.1 Covenant Not to Sue. Purchaser shall not initiate any legal action against David Abrahami based on 4 those provisions of the Stock Purchase Agreement referred to in the first sentence of Section 1.1 hereof or based upon the Disclosed Obligations or the Negotiations; provided, however, that Purchaser reserves the right to assert any of the foregoing as defenses and/or counterclaims (the "Counterclaims") in any action initiated by David Abrahami; provided, further, however, that in the event that David Abrahami shall initiate legal action against Seller arising out, or related to, or in connection with, the assertion of the Counterclaims, Purchaser shall reimburse Seller for her reasonable attorneys' fees and expenses in defending such action and claims arising out of the Counterclaims up to $40,000. 3.2 Confidentiality; No Admission. None of the parties shall disclose or publicize the terms of this Agreement or the transactions contemplated hereby without the prior written consent of the other party subject, in the case of Purchaser, to its disclosure obligations under applicable securities laws or pursuant to any listing agreement. Seller's execution of, and entry into, this Amendment Agreement, and her transfer of 200,000 Creative Shares to Purchaser, do not constitute, and/or may not be deemed or construed to be, an admission, declaration against interest or concession by Seller, whether express or implied, as to any wrongdoing, liability or responsibility with respect to any or all of the claims raised by Purchaser, whether as to herself or as to others, and neither this Amendment Agreement nor any of its contents shall be admissible in evidence, or used in any way for any purpose, in any subsequent litigation, arbitration, mediation or other dispute resolution proceedings, involving Purchaser, including, but not limited to, claim presentations, pleadings, motions, hearings, trial, depositions, written discovery proceedings, oral or written presentations or cross-examination of witnesses. 5 3.3 Assumption of Liabilities. Purchaser acknowledges that, by operation of law, any currently unpaid obligations of the Company existing on the Closing Date of the Stock Purchase Agreement which are disclosed on Schedule A attached hereto continue to be obligations of the Company to be paid, discharged and/or otherwise satisfied in the business judgment of management of the Company or pursuant to lawful procedures afforded to creditors related to the enforcement of orders and/or judgments for the payment of money. 4. Miscellaneous. 4.1 Amendment. This Agreement may be amended, modified or supplemented only by written agreement of the parties. 4.2 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 4.3 Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof. 4.4. Binding Agreement. No party hereto may assign its rights or delegate its obligations hereunder without the prior written consent of the other parties hereto. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 4.5 Entire Understanding. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the subject matter hereof. Except as amended pursuant to this Agreement, the provisions of the Stock Purchase Agreement and any other agreements between the parties relating to 6 the Stock Purchase Agreement including, without limitation, the assumption or retention of certain liabilities of the Company, shall remain in full force and effect. 4.6 Benefit of the Parties. Nothing herein contained shall confer or is intended to confer on any third party or entity which is not a party to this Agreement any rights under this Agreement. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. CREATIVE BAKERIES, INC. By: ___________________________________ Name: __________________________ Title: _________________________ --------------------------------------- Yona Abrahami 8 EX-21 3 EXHIBIT 21.1 EXHIBIT 21.1 List of Subsidiaries
Name State of Incorporation - ---- ---------------------- WGJ Deserts and Cafes, Inc. New York Batter-Bake Chatterley Inc. New Jersey
34 -----END PRIVACY-ENHANCED MESSAGE-----