-----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, I16J+1VarQ+bbVQRLIfh8TVE+qVlnNFu7wT9vyWLS6sRwqcSRQWxMGAO1CjPi0HI aWbymdVeHmbJIXwCi5/TVg== 0000950117-01-000654.txt : 20010402 0000950117-01-000654.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950117-01-000654 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 10KSB SEC ACT: SEC FILE NUMBER: 001-13984 FILM NUMBER: 1588096 BUSINESS ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 9738088248 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 10KSB 1 0001.txt CREATIVE BAKERIES, INC. 10KSB 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, 2000 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 $4,377,601. As of December 31, 2000 there were 5,245,250 shares of Company's Common Stock, par value $.001 per share, outstanding. The aggregate market value of the voting stock of the issuer on December 31, 2000 was approximately 629,430.00. Transitional Small Business Disclosure Format (check one): Yes No X --- --- PART I ITEM 1. DESCRIPTION OF THE BUSINESS GENERAL Creative Bakeries, Inc. ("Creative"), 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. 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. The company had two subsidiaries. The William Greenberg Jr. subsidiary has been sold and it now has one subsidiary known as Batter Bake - Chatterley (BBC). BUSINESS STRATEGY The Company's business strategy is comprised of the following: Retail: Over the past two years the company has eliminated its retail operations. Institutional/Wholesale: 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. 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 company's BBC Subsidiary has 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 subsidiary has kosher certification and the Company believes that it can capitalize on the projected growth of this market. The 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 which sold its products directly to individual consumers has been sold to a retail operator. 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. 3 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. 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. 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 4 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 JMS Subsidiary has a trademark and design registered with the United States Patent and Trademark office for The Healthy BakeryTM (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 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 As of April 1, 2001, the BBC Subsidiary together with Creative had approximately 41 full-time employees, of whom 36 are employed in production, 2 in sales, 1 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, 2001, 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 5 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 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 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 $370,159 was actually incurred as of December 31, 2000. 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. Future mergers and acquisitions: The Company continues to seek business in markets it does not currently serve and is continuing to pursue mergers and acquisition opportunities. 6 ITEM 3. LEGAL PROCEEDING There are no pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. 7 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, 2001.
Period High Low - ------------------------------------------------------------------ FISCAL YEAR 1999: First Quarter 1 1/2 3/4 Second Quarter 13/16 5/8 Third Quarter 1/2 3/8 Fourth Quarter 9/16 3/8 Fiscal Year 2000: First Quarter 11/16 7/16 Second Quarter 7/8 1/2 Third Quarter 3/4 1/2 Fourth Quarter 1/8 .12
The number of shareholders of record of the Common Stock on February 28, 2001 was 30 excluding 2,655,778 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 The Company had licensed William Greenberg Jr. to a retail operator. During the 4the quarter of 2000 the company also sold the license to the same operator. At December 31, 2000 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 7,897,694 which can be used to reduce the tax on income up to that amount through the year 2018. 8 Results of Operations The Company's consolidated revenues from continuing operations aggregated $4,377,601 and $4,500,405 for the years ended December 31, 2000 and 1999 respectively, a decrease of 2%. The cost of goods sold was $3,606,332 and $3,485,812 for 2000 and 1999 respectively, an increase of 4%. Operating expenses were $1,053,350 and $1,123,732 for 2000 and 1999 respectively, a decrease of 6%. As a result, the loss from continuing operations was $282,081 and $109,139 for 2000 and 1999 respectively, an increase of 259%. The deterioration resulted from lower sales and increased cost of sales due to increased material costs and unfavourable product mix. Depreciation and amortization for 2000 decreased as compared to 1999 due to assets written down or written off for the year ended December 31, 2000. The company's consolidated revenues from its discontinued operation, the WGJ subsidiary were $0 in 2000 and in 1999. The WGJ subsidiary showed a gain from operations of $48,701 in 2000 vs a loss of $109,139 in 1999. The gain in 2000 was derived from interest income on note receivable and sale of William Greenberg Jr. license. SEGMENT INFORMATION: Not applicable since retail operations were discontinued. 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. As of December 31, 2000, the Company had a negative working capital from continuing operations of approximately $182,731 as compared to a negative working capital of $196,106 at December 31, 1999. CAPITAL RESOURCES: On January 23, 1997, the Company purchased JMS for $900,000 in cash, 500,000 shares of the Company's common stock 9 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. 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: Increased material costs have narrowed the company's margins. The Company's revenues are affected by seasons with higher revenues 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 10 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 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 Index to Financial Statement....................................................................................F-1 Independent Accountants' Report.................................................................................F-2 Financial Statements: Balance Sheets as at December 31, 2000 and 1999........................................................F-3 Statement of Operations For the Years Ended December 31, 2000 and 1999.................................F-4 Statements of Stockholders' Equity (Deficiency) For the Years Ended December 31, 2000 and 1999.........F-5 Statements of Cash Flows For the Years Ended December 31, 2000 and 1999................................F-6 Notes to Financial Statements.................................................................F-7 to F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable 11 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 Executive Officer, Principal Occupation Date of Initial Election Age and Position For Previous Five Years as Director Held with Company ----------------------- ----------- - ----------------- Philip Grabow, 60, President and Chief Executive Officer, October 1985 to January 23, 1997 Director January 1997 of JMS Richard Fechtor, 69, Director Founder of and since 1974 Executive Vice July 11, 1996 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, 52, Investment manager with Astair & Partners, August 1995 Director Limited, a London based brokerage company, 1987 to present Kenneth Sitomer, 53, Chief Operating Officer of Sam and Libby, July 1997 Director 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
12
Name of Director or Executive Officer, Principal Occupation Date of Initial Election Age and Position For Previous Five Years as Director Held with Company ----------------------- ----------- - ----------------- 1992. Karen Brenner, 46, President of Fortuna Advisors, Inc., an July 1997 Director 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, 51 Founder and President of Chatterley August 1997 Director
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 13 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 2000 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 $100,000 in the fiscal year ended December 31, 2000.
Name and Other Annual Principal Position Year Salary ($) Bonus ($) Compensation - ------------------ ---- ---------- --------- ------------ Philip Grabow, CEO 2000 $150,000 $0.00 $0.00 Yona Abrahami, VP 2000 $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, 2000. 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 14 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):
Number of Shares Percentage Beneficially Beneficially Name Owned(1) Owned(2) - ---- -------- -------- 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) .................. 5000 -- 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%
15 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. 16 (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, 17 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. 18 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. 19 **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. 20 **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. ** 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. 21 **** 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. 22 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 March 31, 2000.
Signatures Title ----- /s/Philip Grabow President, Chief Executive Officer/Director - -------------------------------- Philip Grabow - -------------------------------- Director - -------------------------------- Richard Fechtor /s/Raymond J. McKinstry Director - -------------------------------- Raymond J. McKinstry /s/Kenneth Sitomer Director - -------------------------------- Kenneth Sitomer /s/Karen Brenner Director - -------------------------------- Karen Brenner 23 /s/Yona Abrahami Director - -------------------------------- Yona Abrahami 24 CREATIVE BAKERIES, INC. YEAR ENDED DECEMBER 31, 2000 CONTENTS Page Independent auditors' report F-1 Consolidated financial statements: Balance sheet F-2 Statement of income (loss) F-3 Statement of stockholders' equity F-4 Statement of cash flows F-5 - F-6 Notes to consolidated financial statements F-7 - F-15 [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, 2000, and the related consolidated statements of income (loss), stockholders' equity, and cash flows for the years ended December 31, 2000 and 1999. 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Creative Bakeries, Inc. as of December 31, 2000, and the results of its operations and cash flows for the years ended December 31, 2000 and 1999, 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 significant losses from operations for the years ended December 31, 2000 and 1999 and as of December 31, 2000 has a working capital deficiency in the amount of $182,731, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are discussed in the notes to the financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. ZELLER WEISS & KAHN, LLP March 16, 2001 F-1 CREATIVE BAKERIES, INC. CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2000 ASSETS Current assets: Cash and cash equivalents $ 129,320 Accounts receivable, less allowance for doubtful accounts of $15,500 345,781 Inventories 241,126 Prepaid expenses and other current assets 49,446 ------------ Total current assets 765,673 ------------ Property and equipment, net 489,820 ------------ Other assets: Goodwill, net of amortization 809,029 Security deposits 5,464 ------------ 814,493 ------------ $ 2,069,986 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable, bank $ 107,270 Accounts payable 621,182 Accrued expenses 219,952 ------------ Total current liabilities 948,404 ------------ Other liabilities: Deferred rent 116,031 Net liabilities of discontinued operations less assets to be disposed of 356,256 ------------ 472,287 ------------ 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 5,245,250 shares 5,245 Additional paid in capital 11,364,073 Deficit (10,600,994) ------------ 768,324 Common stock held in treasury, 208,500 shares (119,029) ------------ 649,295 ------------ $ 2,069,986 ============ See notes to consolidated financial statements. F-2 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ---- ---- Net sales $4,377,601 $4,500,405 Cost of sales 3,606,332 3,485,812 ----------- ----------- Gross profit 771,269 1,014,593 Selling, general and administrative expenses 1,053,350 1,123,732 ----------- ----------- Loss from operations (282,081) (109,139) ----------- ----------- Other income (expenses): Sale of marketable securities 3,216 Gain (loss) from sale of disposition of assets 5,750 (800) Interest income 3,876 8,506 Miscellaneous income 872 Interest expense (14,491) (13,926) ----------- ----------- (3,993) (3,004) ----------- ----------- Loss from continuing operations (286,074) (112,143) Discontinued operations: Income (loss) from operations of New York facility to be disposed of 48,701 (39,713) ----------- ----------- Loss before extraordinary items (237,373) (151,856) ----------- ----------- Extraordinary items: Gain on extinguishment of debt, continuing operations 30,000 Gain on extinguishment of debt, discontinued operations 240,435 ----------- 270,435 ----------- Net income (loss) $ (237,373) $ 118,579 =========== =========== Earnings per share information: Basic earnings: Continuing operations $ (0.05) $ (0.02) Discontinued operations 0.01 (0.01) Extraordinary items: Continuing operations 0.01 Discontinued operations 0.04 ----------- ----------- Net income per share $ (0.04) $ 0.02 =========== =========== Diluted earnings: Continuing operations (.05) $ (0.02) Discontinued operations .01 (0.01) Extraordinary items: Continuing operations Discontinued operation 0.03 ----------- ----------- Net income per share (.04) $ 0.00 =========== =========== See notes to consolidated financial statements. F-3 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000 AND 1999
Common stock ----------------------- Number Additional Total of Paid in Accumulated Treasury Stockholders' Shares Amount Capital Deficit Stock Equity ---------- ---------- ----------- ------------ ------------ ---------- Balance at December 31, 1998 5,101,750 $5,102 $11,206,588 $(10,482,200) $(247,369) $ 482,121 Exercise of warrants on January 26, 1999 150,000 150 187,350 187,500 Common stock issued in settlement of accrued obligations 53,500 53 111,760 111,813 Cancellation of shares regarding the purchase of Chatterley Elegant Desserts, Inc. (60,000) (60) 60 Fair market value of warrant to acquire 8,610 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 $.500 per share 4,305 4,305 Purchase of treasury stock (95,625) (95,625) Treasury stock issued in settlement of accrued obligations 8,750 8,750 Net income for the year ended December 31, 1999 118,579 118,579 --------- ------ ----------- ------------ --------- --------- Balance at December 31, 1999 5,245,250 5,245 11,510,063 (10,363,621) (334,244) 817,443 Purchase of treasury stock (112,774) (112,774) Treasury stock issued upon exercise of warrants (145,990) 327,989 181,999 Net loss for the year ended December 31, 2000 (237,373) (237,373) --------- ------ ----------- ------------ --------- --------- Balance at December 31, 2000 5,245,250 $5,245 $11,364,073 $(10,600,994) $(119,029) $ 649,295 ========= ====== =========== ============ ========= =========
See notes to consolidated financial statements. F-4 CREATIVE BAKERIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ---- ---- Operating activities: Loss from continuing operations $(286,074) $(112,143) Income from extraordinary items 30,000 Adjustments to reconcile income from continuing operations to cash provided from continuing operations: Depreciation and amortization 208,716 195,629 Gain on sale of marketable securities (3,216) (Gain) loss on sale of fixed assets (5,750) 800 Compensatory element of issuance of warrants 4,305 Changes in other operating assets and liabilities from continuing operations: Accounts receivable (31,642) (51,663) Inventory 42,158 (47,692) Prepaid expenses and other current assets 38,284 (15,913) Accounts payable 105,588 (10,048) Accrued expenses and other current liabilities (114,398) (20,102) Deferred rent (21,555) (13,752) --------- --------- Net cash used in operating activities (64,673) (43,795) Net cash provided by (used in) discontinued operations 35,214 (119,306) --------- --------- Net cash used in operating activities (29,459) (163,101) --------- --------- Investing activities: Proceeds from sale of marketable securities 4,533 Proceeds from sale of fixed assets 25,000 5,000 Purchase of property and equipment (10,150) (25,027) --------- --------- Net cash provided by (used in) investing activities 14,850 (15,494) Net cash used in investing activities from discontinued operations (1,250) 73,750 --------- --------- Net cash provided by investing activities 13,600 58,256 --------- --------- Financing activities: Proceeds from issuance of common stock and warrants 182,000 187,500 Purchase of treasury stock (112,774) (95,625) Payment of debt (39,018) (47,241) --------- --------- Net cash provided by financing activities 30,208 44,634 --------- --------- See notes to consolidated financial statements. F-5 CREATIVE BAKERIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ---- ---- Net increase (decrease) in cash and cash equivalents 14,349 (60,211) ------- -------- Cash and cash equivalents, beginning of period 114,971 129,626 Cash and cash equivalents, discontinued operations, beginning of period 45,556 ------- -------- 114,971 175,182 ------- -------- Cash and cash equivalents, end of period 129,320 114,971 Cash and cash equivalents, discontinued operations, end of period 0 0 -------- -------- $129,320 $114,971 ======== ======== Supplemental disclosures: Cash paid during the year for: Interest paid during the year Continuing operations $ 14,028 $ 15,042 ======== ======== 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-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 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 Chatterley 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, 2000, the Company incurred a loss from continuing operations in the amount of $286,074 and net loss of $237,373, and as of December 31, 2000 had a net working capital deficiency of $182,731. During 1998, the Company discontinued operations of its two remaining retail stores. In June, 1998, 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-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 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. Accounting policies: Principles of consolidation: The accompanying consolidated financial statements include the account of the Company and all of its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Cash and cash equivalents: For the purpose of the statement of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months of less to be cash equivalents. Inventories: Inventories are stated at the lower of cost (first-in-first-out) or market. Property and equipment: The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the related leases or the estimated useful lives of the assets. Depreciation is computed on the straight-line method for financial reporting purposes and on the modified cost recovery system method for income tax basis. Intangible assets: Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition and is being amortized on the straight-line method over forty years. The Company's covenant not to compete is being amortized over a period of five years. Deferred rent: The accompanying consolidated 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 expenses as required by generally accepted accounting principles. Comprehensive income: There were no items of other comprehensive income in 2000 and 1999, and thus, net income is equal to comprehensive income for each of those years. F-8 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 3. Nature of operations, risks and uncertainties: The Company is a manufacturer of baking and confectionery products which are sold to supermarkets, food distributors, educational institutions, restaurants, mail order and to the public. Although the Company sells its products throughout the United States, its main customer base is on the East Coast of the United States. The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. The Company maintains all of its cash balances in New Jersey financial institutions. The balances are insured by the Federal Deposit Insurance Company (FDIC) up to $100,000. At December 31, 2000, the Company had uninsured cash balances of $62,177. 4. Accounts receivable: Following is a summary of receivables at December 31, 2000: Trade accounts $361,281 Less allowance for doubtful accounts (15,500) -------- $345,781 ======== At December 31, 2000, accounts receivable in the amount of $361,281 was pledged as collateral in connection with the Company's line of credit. 5. Inventories: Inventories at December 31 consist of: Finished goods $ 84,058 Raw materials 67,363 Supplies 89,705 -------- $241,126 ======== 6. 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 as determined by management's estimation of the net sales value if the property assets were offered for sale. F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 6. Property and equipment (continued): The following is a summary of property and equipment at December 31, 2000: Baking equipment $1,280,226 Furniture and fixtures 78,864 Leasehold improvements 180,422 ---------- 1,539,512 Less: Accumulated depreciation and amortization 1,049,692 ---------- $ 489,820 ========== Depreciation expense charged to operations was $102,803 and $114,717 in 2000 and 1999, respectively. Machinery and equipment with a cost of $197,000 is pledged as collateral for the Company's line of credit. The useful lives of property and equipment for purposes of computing depreciation are: Years ----- Machinery and equipment 10 Furniture and computers 5 Leasehold improvements 10-15 7. Intangible assets: 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 $80,912 in 2000 and 1999. 8. Note payable, bank: As of December 31, 2000, the Company had an available revolving line of credit with Hudson United Bank in the amount of $150,000, of which $107,270 had been utilized at December 31, 2000. The interest rate at December 31, 2000 was 11.0%. F-10 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 9. Commitments and contingencies: 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 expiring on December 31, 2004. The minimum future rentals on the baking facility is as follows: Facility -------- December 31, 2001 $200,000 December 31, 2002 200,000 December 31, 2003 200,000 December 31, 2004 230,000 -------- $830,000 ======== Rent expense amounted to $209,466 in 2000 and $210,120 in 1999 and includes straight-line amortization of rent adjustments discussed in Note 2. The Company also leases two vehicles under operating lease agreements that expire in January and November 2004. Total lease expense for 2000 was $1,288. Future minimum rentals are as follows: December 31, 2001 $11,328 December 31, 2002 11,328 December 31, 2003 11,328 December 31, 2004 6,944 ------- $40,928 ======= 10. Income taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS No. 109") "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. F-11 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 10. Income taxes (continued): Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. There was no cumulative effect of adoption or current effect in continuing operations mainly because the Company has accumulated a net operating loss carryforward of $7,897,694. The Company has made no provision for a deferred tax asset due to the net operating loss carryforward because a valuation allowance has been provided which is equal to the deferred tax asset. It cannot be determined at this time that a deferred tax asset is more likely that not to be realized. The Company has a loss carryforward of $7,897,694 that may be offset against future taxable income. The carryforward losses expire at the end of the years 2006 through 2018. 11. Capital stock: (a) Common stock: In January 1999, the Company issued 40,000 shares in settlement of certain accrued obligations due a former shareholder. In January 1999, the Company issued 150,000 shares of its common stock at $1.25, for total proceeds of $187,500. In May 1999, the Company issued 13,500 shares of its common stock in settlement of certain obligations due a former employee of William Greenberg, Jr. Desserts and Cafes, Inc. The total amount of the settlement was $11,813. In December 1999, the Company cancelled 60,000 shares of its common stock regarding the purchase of Chatterley Elegant Desserts, Inc. In March 2000, the Company issued 350,000 shares of its common stock at $.52, for total proceeds of $187,500. (b) Warrants: In order to obtain financing for the acquisition of Greenberg's - L.P. (see Note 2), the Company sold to the lender for $1,000, a Convertible Note which in accordance with the terms of the conversion agreement, was converted by the lender into a warrant to acquire shares of stock of the Company in a number sufficient to equal 6% of the Company's then outstanding preferred and common stock (163,404 shares of common stock). The warrant expires on July 31, 2001. The warrant contains anti-dilutive provisions throughout its six (6) year life which entitles the holder to its applicable percentages of the Company's capital stock on the date the warrant is exercised. Based upon the issuance of 143,500 shares of common stock in 1999, the lender was entitled to an additional 8,610 shares of common stock. Accordingly, the financial statements include a charge to operations of $4,305 for 1999 which represents the market value of the stock at the time the warrants were issued by the Company. F-12 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 12. 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 1,689,575 in 1999. Reconciliation of shares used in computation of earnings per share: 2000 1999 ---- ---- Weighted average of shares actually outstanding 5,245,250 5,288,280 Common stock purchase warrants 1,689,575 --------- --------- Primary and fully diluted weighted average common shares outstanding 5,245,250 6,977,855 ========= ========= 13. Supplemental schedule of non-cash investing and financing activities: 2000 1999 ---- ---- Issuance of common shares in consideration of legal, consulting fees and other obligations $0 $53,500 -- ------- $0 $53,500 == ======= 14. 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 with a balance of $147,500 at December 31, 2000. F-13 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 14. Discontinued operations (continued): 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. On December 28, 2000, the Company sold all trademarks relating to "William Greenberg Jr.," "Wm. Greenberg Jr.", "William Greenberg Jr. Desserts", and "William Greenberg Jr. Desserts & Cafes", as well as the trade name and know how, for $75,000 which is included in other income. The agreement called for a cash down payment of $25,000, with the remainder being paid on March 31, 2001. The Company received the down payment of $25,000 January 5, 2001. The maturities of the notes are as follows: December 31, 2001 $148,750 December 31, 2002 73,750 -------- $222,500 ======== 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. Net liabilities, less assets to be disposed of, of WGJ Desserts, Inc. consisted of the following as of December 31, 2000: Liabilities: Accounts payable $176,288 Accrued expenses 403,912 -------- 580,200 -------- Assets: Notes receivable 222,500 Interest receivable 1,444 -------- 223,944 -------- $356,256 ======== F-14 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 AND 1999 14. Discontinued operations (continued): Information relating to discontinued operations for WGJ Desserts and Cafes, Inc. for the year ended December 31, 2000 and 1999 is as follows: 2000 1999 ---- ---- Operating expenses $ 43,347 $ 35,664 -------- -------- Net loss from operations (43,347) (35,664) -------- -------- Loss on sale of fixed assets (25,500) Sale of Trademark 75,000 Interest income 17,048 21,450 -------- -------- 92,048 (4,050) -------- -------- Net income (loss) $ 48,701 $(39,714) ======== ======== 15. Extraordinary items: During 1999, the Company recognized an extraordinary gain of $30,000 ($0.00 per share) from continuing operations and an extraordinary gain of $240,435 ($0.03 per share) from discontinued operations. The extraordinary gains resulted from forgiveness of certain accrued liabilities and obligations under an operating lease. F-15 EX-17 2 0002.txt 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 EX-21 3 0003.txt 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
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