10KSB/A 1 a35352.txt CREATIVE BAKERIES, INC. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended: December 31, 2002 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 $3,318,088. As of December 31, 2002 there were 5,446,750 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, 2002 was approximately 218,000. 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 sale of William Greenberg Jr. subsidiary was completed in November 1998. From the remaining subsidiary known as Batter Bake - Chatterley (BBC), the company sold the Batter Bake business in December 2001. The Company changed it's name to Brooklyn Cheesecake and Desserts Company in March 2002. BUSINESS STRATEGY The Company's business strategy is comprised of the following: 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. 2 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 Brooklyn Cheesecake and Desserts 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 the highest quality ingredients in its products including, AA creamy butter, whole 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 Brooklyn Cheesecake and Desserts Company Subsidiary markets a full line of premium quality baked products such as cheese cakes, mousse cakes and tart shells as well a complete gourmet line of muffins. 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 INSTITUTIONAL/WHOLESALE 3 The Brooklyn Cheesecake and Desserts Company Subsidiary sells its products through food distributors to hotels, hospitals and institutional feeders such as corporate caters, restaurants, coffee shops 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. 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 Brooklyn Cheesecake and Desserts Subsidiary bakes all of its products in its 30,000 square foot facility in Fairfield, New Jersey. Although utilization of the facility varies based on seasonal fluctuation, the facility operates on five days a week basis. The Company believes that the Brooklyn Cheesecake and Desserts Company Subsidiary has the capacity to meet future requirements, including those arising out of the consolidation with the Company. The Brooklyn Cheesecake and Desserts Company Subsidiary delivers 90% of its products by common carrier trucks 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. TRADEMARKS 4 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 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 March 26, 2003, the Brooklyn Cheesecake and Desserts Company Subsidiary together with Creative had approximately 32 full-time employees, of which 30 are employed in production, and 1 in administration and 1 in an executive position. The Brooklyn Cheesecake and Desserts Company 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 March 26, 2003, 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 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. 5 ITEM 3. LEGAL PROCEEDING There are no pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. 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, 2002.
Period High Low ---------------------------------------------------------------------------- FISCAL YEAR 2001: First Quarter .10 .08 Second Quarter .22 .17 Third Quarter .12 .10 Fourth Quarter .22 .07 Fiscal Year 2002: First Quarter .40 .20 Second Quarter .25 .09 Third Quarter .07 .07 Fourth Quarter .04 .04
The number of shareholders of record of the Common Stock on March 26, 2003 was 41 excluding 2,631,078 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 dividends 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS 6 A. General Management continues to refine operations and implement controls. Special emphasis has been placed in ensuring accurate reporting of financial data. Increasing sales revenues is the most pressing issue. However, funds for marketing and equipment acquisitions are scarce. The company has a negative cash flow of $70,461 for the year ending December 31, 2002. Mini Cakes, Cheesecake and pre-portioned gourmet desserts are the categories which represent the most potential for sales growth. In addition, the company is exploring marketing several niche health food items. This includes but is not limited to low carbohydrate desserts. Marketing efforts continue to target both food service and retail distributors to carry our product lines. At December 31, 2002 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 $8,680,450 which can be used to reduce the tax on income up to that amount through the year 2019. B. Results of Operations The Company's consolidated revenues from continuing operations aggregated $1,053,920 and $1,141,545 for the quarters ended December 31, 2002 and 2001 respectively, a decrease of 3%. The cost of goods sold was $908,120 and $1,038,494 respectively, a decrease of 13%. Operating expenses were $65,558 and $127,591 respectively, a decrease of 49%. As a result, the gain (loss) from continuing operations before other income (expense) was $80,242 and $(24,540) respectively, an increase of 400%. The net income (loss) from continuing operations for the quarter was $39,261 and $(99,824) respectively. The increase from continuing operations for the 4th quarter of 2002 as compared to the same period of 2001 was a result of aggressive cost cutting and product streamlining. 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. 7 As of December 31, 2002, the Company had a negative working capital during the 4th quarter from continuing operations of $126,326 as compared to a negative working capital of $200,131 during the 3rd quarter of 2002. The negative working capital for December 31,2001 was $20,247. CAPITAL RESOURCES: 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: 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 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, 2001 and 2000........................................................F-3 Statement of Operations For the Years Ended December 31, 2001 and 2000.............................. ..F-4 Statements of Stockholders' Equity (Deficiency) For the Years Ended December 31, 2001 and 2000 .....................................................................................F-5
8 Statements of Cash Flows For the Years Ended December 31, 2002 and 2001 ...............................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 9 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, Age and Position Principal Occupation Date of Initial Held with Company For Previous Five Years Election as Director ----------------- ----------------------- -------------------- Ron Schutte 46 President and Director Chief Executive Officer, June 1, 2001 Aug. 2000 - May 2001 Brooklyn Cheesecake Company Apr. 1999 - Jul 2000 Crestwood Consulting Mar 1997 - Mar 1999 Mother's Kitchen July 1982 - Feb 1997 Pres, CreativeBakers Inc. Brooklyn,NY Richard Fechtor, 72 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 Karen Brenner, 49, President of Fortuna Advisors, Inc., an July 1997 Director investment advisory firm in California 1993 to present; founder
10
Name of Director or Executive Officer, Age and Position Principal Occupation Date of Initial Held with Company For Previous Five Years Election as Director ----------------- ----------------------- -------------------- 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. Vincent Bucchimuzzo 49 Executive for CINN Worldwide January 2003 Director Westchester Venture Group Univest Partners 1982-1995 Anthony Merante 42 Certified Public Accountant January 2003 Director Mel Foti 50 VP & Manager Credit & Marketing January 2003 Director National Bank Of Egypt, NY Branch
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 11 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 2002 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 $100,000 in the fiscal year ended December 31, 2001.
Other Annual Name and Principal Position Year Salary ($) Bonus ($) Compensation --------------------------- ---- ---------- --------- ------------ Ron Schutte, CEO 2002 $150,000 $0.00 $0.00
No other executive officer received a salary and bonus in excess of $100,000 for the year ended December 31, 2002. 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 Simultaneously with the acquisition of Chatterley, the Company entered into employment agreements with Yona Abrahami and David Abrahami. Their contracts have 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 12 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):
No. of shares beneficially owned Percentage Benef. Owned Yona Abrahami(3)............................. 500,000 500,000 9.53% Philip Grabow(4)............................. 500,000 500,000 9.53 Richard Fechtor(5)........................... 142,933 2.0 Raymond J. McKinstry(6)...................... 50,000 InterEquity Capital Partners, L.P.(7)........ 326,805 7.0 Ron Schutte.................................. 350,000 Executive directors and officers as a group.. 1,819,738
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. 13 (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. (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. Schutte address is 20 Passaic Ave, Fairfield, New Jersey 07004. (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. Schutte, 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) 14 350,000 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, 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. The Purchase of the assets of Brooklyn Cheesecake Company Inc. On March 7, 2002, the assets of the Brooklyn Cheesecake Company was purchased by Creative Bakeries Inc. for 300,000 shares of stock and $45,000 in cash. These assets were owned by the current C.E.O. Ron Schutte 15 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. **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. 16 **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. **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. 17 *****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. **** 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. 18 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 March 31, 2003. CREATIVE BAKERIES, INC. By: /s/ Ron Schutte ------------------ 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, 2003.
Signatures Title ---------- ----- /s/ Ron Schutte President, Chief Executive Officer/Director ---------------------------------------- Ron Schutte /s/ Vincent Bucchimuzzo Director ---------------------------------------- Vincent Bucchimuzzo /s/ Richard Fechtor Director ---------------------------------------- Richard Fechtor /s/ Anthony Merante Director ---------------------------------------- Anthony Merante /s/ Karen Brenner Director ---------------------------------------- Karen Brenner /s/ Mel Foti Director ---------------------------------------- Mel Foti
19 CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT OF 2002 I, Ron Schutte., certify that: 1. I have reviewed this annual report on Form 10-KSB/A of Creative Bakeries, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 16, 2003 /s/ Ron Schutte --------------- Ron Schutte Chairman and Chief Executive Officer CREATIVE BAKERIES, INC. YEAR ENDED DECEMBER 31, 2002 CONTENTS
Page ---- Independent auditors' report F-1 Consolidated financial statements: Consolidated balance sheet F-2 Consolidated statement of operations F-3 Consolidated statement of stockholders' equity F-4 Consolidated statement of cash flows F-5 Notes to consolidated financial statements F-6 - F-12
[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, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2002 and 2001. 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 auditing standards generally accepted in the United States of America. 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, 2002, and the results of its operations and cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. 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 continuing operations for the years ended December 31, 2002 and 2001 and as of December 31, 2002 has a working capital deficiency in the amount of $126,326, 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 6, 2003 Mountainside, New Jersey F-1 CREATIVE BAKERIES, INC. CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2002 ASSETS Current assets: Cash and cash equivalents $ 51,155 Accounts receivable, less allowance for doubtful accounts of $4,200 185,277 Inventories 190,945 Prepaid expenses 63,768 ----------- Total current assets 491,145 ----------- Property and equipment, net 329,555 ----------- Other assets: Security deposits 4,714 Tradename and licensing agreements, net of amortization 128,106 ----------- 132,820 ----------- $ 953,520 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 459,823 Accrued expenses 67,593 Notes payable, officer 90,055 ----------- Total current liabilities 617,471 ----------- Other liabilities: Deferred rent 72,600 Net liabilities of discontinued operations less assets to be disposed of 134,265 ----------- 206,865 ----------- Stockholders' equity: Preferred stock $.001 par value, authorized 2,000,000 shares, none issued Common stock, $.001 par value, authorized 10,000,000 shares, issued and outstanding 5,446,750 shares 5,447 Additional paid in capital 11,346,093 Deficit ( 11,222,356) ----------- Total stockholders' equity 129,184 ----------- $ 953,520 ===========
See notes to consolidated financial statements. F-2 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001 ---- ---- Net sales $3,318,088 $3,770,507 Cost of sales 2,893,226 3,279,919 ---------- ---------- Gross profit 424,862 490,588 Selling, general and administrative expenses 636,302 771,248 ---------- ---------- Loss from operations ( 211,440) ( 280,660) ---------- ---------- Other income (expense): Loss on impairment of goodwill ( 670,995) Gain from sale of disposition of assets 100,000 Interest income 1,029 Miscellaneous income 3,910 Interest expense ( 2,055) ( 8,521) Cancellation of certain liabilities 48,711 ---------- ---------- ( 2,055) ( 525,866) ---------- ---------- Loss from continuing operations ( 213,495) ( 806,526) Discontinued operations: Income from operations of New York facility 379,722 18,937 ---------- ---------- Net income (loss) $ 166,227 ($ 787,589) ========== ========== Earnings per common share Basic and fully diluted: Continuing operations ($ 0.04) ($ 0.16) Discontinued operations $ 0.07 ( 0.01) ---------- ---------- Net income (loss) per share $ 0.03 ($ 0.15) ========== ========== Weighted average number of common shares outstanding 5,346,828 5,245,250 ========== ==========
See notes to consolidated financial statements. F-3 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002 AND 2001
Common stock ----------------- Number Additional Total of Paid in Accumulated Treasury Stockholders' Shares Amount Capital Deficit Stock Equity ------ ------ ------- ------- ----- ------ Balance at December 31, 2000 5,245,250 $5,245 $11,364,074 ($10,600,994) ($119,029) $649,296 Treasury stock issued for services ( 23,544) 28,544 5,000 Net loss for the year ended December 31, 2001 ( 787,589) ( 787,589) --------- ------ ----------- ----------- -------- -------- Balance at December 31, 2001 5,245,250 5,245 11,340,530 ( 11,388,583) ( 90,485) ( 133,293) Treasury stock issued as employee incentives ( 12,067) 18,317 6,250 Stock issued in exchange for tradename rights 201,500 202 17,630 72,168 90,000 Net income for the year ended December 31, 2002 166,227 166,227 --------- ------ ----------- ----------- -------- -------- Balance at December 31, 2002 5,446,750 $5,447 $11,346,093 ($11,222,356) ($ 0) $129,184 ========= ====== =========== =========== ======== ========
See notes to consolidated financial statements. F-4 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002 AND 2001 (Unaudited)
2002 2001 ---- ---- Operating activities: Loss from continuing operations ($213,495) ($806,526) Adjustments to reconcile loss from continuing operations to cash used in continuing operations: Depreciation and amortization 136,828 164,001 Common stock issued for services 6,250 5,000 Loss on impairment of long-lived asset 670,995 Forgiveness of debt ( 48,711) Gain on sale of equipment ( 100,000) Changes in other operating assets and liabilities from continuing operations: Accounts receivable 115,247 45,257 Inventory ( 38,367) 88,548 Prepaid expenses 673 ( 22,170) Security deposits 250 500 Accounts payable 38,352 ( 101,609) Accrued expenses ( 170,502) ( 23,393) Deferred rent ( 21,933) ( 21,497) -------- -------- Net cash used in operating activities ( 146,697) ( 149,605) Net cash provided by discontinued operations 1,020 5,343 -------- -------- Net cash used in operating activities ( 145,677) ( 144,262) -------- -------- Investing activities: Proceeds from sale of equipment 100,000 Purchase of property and equipment ( 85,714) ( 2,500) Proceeds from sale of goodwill 47,578 -------- -------- Net cash provided by (used in) investing activities ( 85,714) 145,078 Net cash provided by investing activities from discontinued operations 70,875 98,750 -------- --------- Net cash provided by (used in) investing activities ( 14,839) 243,828 -------- -------- Financing activities: Proceeds from officers' notes payable 90,055 Payment of debt ( 107,270) -------- -------- Net cash provided by (used in) financing activities 90,055 ( 107,270) -------- -------- Net decrease in cash and cash equivalents ( 70,461) ( 7,704) Cash and cash equivalents, beginning of year 121,616 129,320 -------- -------- Cash and cash equivalents, end of year $ 51,155 $121,616 ======== ======== Supplemental disclosures: Cash paid during the year for: Interest: Continuing operations $ 9,555 ======== ======== 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, 2002 AND 2001 1. Going concern: During the year ended December 31, 2002, the Company incurred a loss from continuing operations in the amount of $213,495, and had a net working capital deficiency of $126,326. Although the Company is currently operating its businesses, their continuation is contingent upon, among other things, the continued forbearance by the Company's creditors from exercising their rights in connection with delinquent accounts payables. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. During the year 2002, Creative Bakeries Inc. acquired the assets of the Brooklyn Cheesecake Company. Upon completion of the acquisition, the operating name of the company was changed from Chatterley Elegant Desserts to Brooklyn Cheesecakes and Desserts Company. The product line continues to be streamlined and greater emphasis has been placed on marketing portion controlled dessert items. The Company intends to raise capital either through an offering of preferred stock or conventional financing. The proceeds would be used to upgrade the production process. In view of these matters management believes that the 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. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 2. Accounting policies: Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Recent accounting pronouncements: In April 2002, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Revision of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". Among several accounting issues, the statement changes the treatment and classification of gain or loss on extinguishment of debt as it relates to characterization as an extraordinary item. The Company has adopted this statement for the year ended December 31, 2002. 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 or less to be cash equivalents. Inventories: Inventories are stated at the lower of cost (first-in-first-out) or market. F-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 2. Accounting policies (continued): 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. 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 2002 and 2001, and thus, net income is equal to comprehensive income for each of those years. Use of estimates: 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. Per share amounts: Net earnings per share are calculated by dividing net earnings by the weighted average shares of common stock of the Company and weighted average of common stock equivalents outstanding for the period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. 3. Correction of an estimate: The Company has determined that the estimate of liabilities needed to dispose of its discontinued operations described in Note 17 was overstated. Current income from discontinued operations presented in the statement of operations includes $79,841 related to this adjustment. 4. 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 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, 2002, the Company had no uninsured cash balances. F-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 4. Nature of operations, risks and uncertainties (continued): The Company maintained sales with three customers which comprised more than 10% of total sales for the year. If these sales levels were to change this could have a significant impact on the Company's operations. At December 31, 2002 there were two customers whose balances included in accounts receivable comprised more than 10% of total accounts receivable. If these customers were to default on these amounts it could have a significant impact on the Company's operations. 5. Accounts receivable: Following is a summary of receivables at December 31, 2002: Trade accounts $189,477 Less allowance for doubtful accounts (4,200) -------- $185,277 ========
6. Inventories: Inventories at December 31 consist of: Finished goods and work in process $ 45,837 Raw materials 61,946 Supplies 83,162 -------- $190,945 ========
7. Property and equipment: The following is a summary of property and equipment at December 31, 2002: Baking equipment $1,349,326 Furniture and fixtures 97,978 Leasehold improvements 180,422 ---------- 1,627,726 Less: Accumulated depreciation and amortization 1,298,171 ---------- $ 329,555 ==========
Depreciation expense charged to operations was $124,934 and $123,545 in 2002 and 2001, respectively. 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
F-8 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 8. Tradename and licensing agreements: On March 7, 2002, the Company purchased the rights to the tradenames Brooklyn Cheesecake Company, Inc. and Brooklyn Cheesecake and Desserts Company, Inc. and the related corporate logo in exchange for 300,000 shares of the Company's common stock, valued on the purchase date at $90,000. The tradename rights are being amortized on the straight-line basis over a fifteen year term. Amortization expense was $4,875 for the year ended December 31, 2002. The Company has a licensing agreement for the William Greenberg Desserts name which is being amortized on the straight-line basis over a seven year term. Amortization expense was $7,019 for the year ended December 31, 2002. 9. Notes payable, officer: An officer of the Company made loans to the Company during the year totalling $48,000. In addition, the officer has a balance of $40,000 due on the sale of equipment to the Company as described in Note 15. The notes are due on demand and accrue interest at a rate of 7% per annum. Interest due on the notes amounted to $2,055 at December 31, 2002. 10. Common stock: During the year the Company issued 325,000 restricted shares of its common stock. 25,000 shares were issued under an employee stock incentive plan (see Note 14), granted in February, 2002. The additional 300,000 shares were issued pursuant to the purchase agreement for the tradename and logo of Brooklyn Cheesecake Company, Inc. entered into in March 2002 as described in Note 16. The Company utilized all of its remaining 123,500 shares previously held as treasury stock plus new share issues to complete the stock transactions. 11. 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 are as follows:
Facility -------- December 31, 2003 $200,000 December 31, 2004 230,000 -------- $430,000 ========
Rent expense amounted to $228,065 in 2002 and $229,833 in 2001 and includes straight-line amortization of rent adjustments discussed in Note 2. The Company also leases a vehicle under an operating lease agreement that expires in December 2004. Total lease expense for 2002 was $7,200. Future minimum rentals are as follows: December 31, 2003 $ 7,200 December 31, 2004 7,200 ------- $14,400 =======
F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 12. Off-balance-sheet risk: The Company is a third co-guarantor on a vehicle lease for a former officer of the Company with a lease buyout of approximately $12,000. The entire amount has been escrowed with an attorney by the former officer of the Company. 13. 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. 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 approximately $8,271,270. 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's loss carryforward of $8,271,270 may be offset against future taxable income. The carryforward losses expire at the end of the years 2006 through 2020. 14. Warrants: In order to obtain financing for the acquisition of Greenberg's - L.P., a discontinued subsidiary, the Company sold to a 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. 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. The warrant, representing 314,715 shares, was to expire on October 1, 2001 and the lender inquired regarding exercising its right under the warrant before the expiration date. Upon consultation with management, the lender who is in bankruptcy, has not acted on its option to exercise as of December 31, 2002. At December 31, 2002, the Company also had outstanding common stock purchase warrants in the amount of 1,866,500 with an exercise price of $.6875 each, which expire on December 31, 2003. F-10 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 15. Common stock options: On February 8, 2002, the Company effectuated a non-statutory stock option plan for the purpose of advancing the interests of the Company and its stockholders by helping the Company retain the services of key management employees. The total number of shares set aside for the plan was 75,000. Under the plan, the option exercise price approximates the fair market value of the Company's common stock at the date of the grant. The remaining options become exercisable as follows: August 31, 2003 25,000 shares August 31, 2004 25,000 shares
In addition, the Company had 125,000 shares under a stock option plan which become exercisable May 1, 2003. The Company has elected to follow APB-25 (Accounting for Stock Issued to Employees) in accounting for its employee stock options. Accordingly, no compensation expense is recognized in the Company's financial statements because the exercise price of the Company's employee stock options equals the market price of the Company's common stock on the date of grant. The Company has determined that the pro forma net income impact under Financial Accounting Standards Board Statement No. 123 (Accounting for Stock-Based Compensation) does not produce a material difference. The Company has noted that the volatility of the stock makes valuation by any other method inconsequential. 16. Earnings per share: Primary earnings per share is computed based on 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 beginning after December 15, 1997, entities with a loss from continuing operations should not include the exercise of potential shares in the calculation of earnings per share since the increase would result in a lower loss per share. Thus, common stock purchase warrants and stock options as described in Notes 14 and 15 are excluded from the calculation of earnings per share. Reconciliation of shares used in computation of earnings per share:
2002 2001 ---- ---- Weighted average of shares actually outstanding 5,346,828 5,245,250 --------- --------- Common stock purchase warrants Primary and fully diluted weighted average common shares outstanding 5,346,828 5,245,250 ========= =========
17. Related party transactions: In March 2002, the Company purchased the tradename and logo of Brooklyn Cheesecake Company, Inc. in exchange for 300,000 shares of the Company's common stock. Brooklyn Cheesecake Company, Inc. was wholly owned by the current chief executive officer of Creative Bakeries, Inc. The Company also purchased $45,000 of baking equipment in the same purchase transaction. F-11 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 18. Reclassification of prior period results: Certain items of income and expense from continued and discontinued operations have been reclassified to conform to the current year's presentation as described in the recent accounting pronouncements in Note 1. 19. 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. Net liabilities of WGJ Desserts, Inc. consisted of the following as of December 31, 2002: Liabilities: Accounts payable $112,462 Accrued expenses 21,803 -------- 134,265 --------
Information relating to discontinued operations for WGJ Desserts and Cafes, Inc. for the year ended December 31, 2002 and 2001 is as follows:
2002 2001 ---- ---- Correction of estimated liabilities on disposition of assets $ 79,841 Cancellation of settlement warrants payable 302,267 Cancellation of accrued expenses $59,759 Interest income 1,884 9,178 -------- ------- 383,992 68,937 Cancellation on sale of trademark rights (50,000) Reduction of note receivable upon settlement (4,270) -------- ------- Income from discontinued operations $379,722 $18,937 ======== =======
F-12 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as..................................'TM'