10KSB 1 v02488_10ksb.txt 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, 2003 Commission File Number: 0-13984 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 Title of Each Class on Which Registered ----------------------------- --------------------- Common Stock, $.001 per share OTCBB 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. [ ] Issuer's revenue for its most recent fiscal year was $3,369,742. As of December 31, 2003 there were 5,496,750 shares of Company's Common Stock, par value $.001 per share, outstanding. The aggregate market value of the voting stock of the issuer held by non affiliates on December 31, 2003 was approximately $342,567. Transitional Small Business Disclosure Format (check one):Yes__ No _X_ CREATIVE BAKERIES, INC. FORM 10-KSB YEAR ENDED DECEMBER 31, 2003 TABLE OF CONTENTS PART I Page Item 1. Description of Business 3 Item 2. Description of Property 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a vote of Security Holders 5 PART II Item 5. Market for Common Equity and Related Stockholder Matters 5 Item 6. Management's Discussion and Analysis of Financial Condition and Plan of Operations 5 Item 7. Financial Statements 14 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 30 Item 8A. Controls and Procedures 30 PART III Item 9. Directors and Executive Officers of the Registrant 30 Item 10. Executive Compensation 32 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 32 Item 12. Certain Relationships and Related Transactions 33 Item 13. Exhibits and Reports on Form 8-K 34 Item 14. Principal Accountant Fees and Services 36 SIGNATURES 37 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Creative Bakeries, Inc. ("Creative" or the "Company"), 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 changed the name of its operating subsidiary to Brooklyn Cheesecake and Desserts Company in March 2002. 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 wholly owned subsidiary Brooklyn Cheesecake and Desserts Company 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 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. The Company maintained sales from one customer for 16% of total sales for the year. A second customer accounted for 17%. 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 3 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 27,362 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 The JMS Subsidiary has a trademark and design registered with the United States Patent and Trademark office for The Healthy Bakery(R) (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. 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. 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 31, 2004, Brooklyn Cheesecake and Desserts Company 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 the relationship with its employees is good. 4 ITEM 2. DESCRIPTION OF PROPERTY As of March 30, 2004, the Company leases in Fairfield, New Jersey 27,362 square feet for its baking facility and corporate headquarters. The Company has amended its lease extending the term through August 31, 2008. The Company believes that its present facility is well maintained, in good condition and is suitable for the Company to continue to operate and meet its production needs for the foreseeable future. ITEM 3. LEGAL PROCEEDING None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Over the Counter Bulletin Board under the symbol "CBAK". The following table sets forth the range of quarterly high and low bid prices, as reported during the last two fiscal years. Period High Low ------------------------------------------------------------------------ FISCAL YEAR 2002: First Quarter .40 .20 Second Quarter .25 .09 Third Quarter .07 .07 Fourth Quarter .04 .04 FISCAL YEAR 2003: First Quarter .15 .04 Second Quarter .12 .10 Third Quarter .10 .04 Fourth Quarter .12 .06 The number of shareholders of record of the Common Stock on March 17, 2004 was 45 excluding 2,519,578 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 is subject to the terms of the $250,000 loan obtained in October 2003, as wells as, 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 - Recent Developments In October of 2003, the Company entered into an amendment to the building lease at 20 Passaic Avenue, Fairfield, NJ. The amended lease will save an estimated $70,000 per annum. Additionally in October 2003, the Company obtained a $250,000 loan. These funds were used to purchase packaging and processing equipment and for working capital. 5 Management believes that the modest increase in net sales for 2003, as compared to 2002, does not accurately reflect the marketing efforts achieved. As a result of product streamlining, approximately 15% of items sold to customers in 2002 were no longer available in 2003. The estimated $550,000 of replaced sales revenue were from new customers purchasing primarily cheesecake items. The net effect was a slight increase in the gross profit margin. Branding opportunities for cheesecake and other dessert items packaged under the Brooklyn Cheesecake & Desserts Company label continue to be expanded. Branded products have been sold on television and the internet by ShopNBC. A local Pizza Hut franchise group in New Jersey has featured Brooklyn Cheesecake on their dessert menu displaying the distinctive Brooklyn Cheesecake logo. Private label opportunities have also been expanded for both cheesecake and individual portioned dessert items. Distribution of cheesecake in Japan has increased. The Company continues to explore markets for niche health food items. This includes low carbohydrate desserts. Management will continue to refine operations and reduce costs. This includes evaluating items carried over from past financial reports. At December 31, 2003 to the extent the company may have taxable income in future periods, there is an available net operating loss for federal income tax purposes of approximately $8,417,800, which can be used to reduce the tax on income up to that amount through the year 2021. BUSINESS STRATEGY The Company's business strategy is comprised of the following: o 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: o 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. o Continue to expand the fat-free product line targeting existing customers as well as new customers. o Enter into co-packing arrangements whereby the Company would introduce private label products of other bakery operations. o 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. 6 Customer 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. RESULTS OF OPERATIONS The Company's consolidated revenues from continuing operations aggregated $3,369,742 and $3,318,088 for the years-ended December 31, 2003 and 2002 respectively, an increase of $51,654, or 1.6%. This is in comparison to a decrease of $452,419, or 12%, to $3,318,088 from $3,770,507 for the years-ended December 31, 2002 and 2001 respectively. The increase in 2003 is due to the increase in cheesecake sales. The 2002 decrease is a result of the sale of the batter business in 2001. The cost of goods sold were $2,904,140 and $2,893,226 for the years-ended December 31, 2003 and 2002 respectively, an increase of $10,914, or 0.4%; as opposed to a decrease of $386,693, or 11.8%, to $2,893,226 from $3,279,919 for the years-ended December 31, 2002 and 2001 respectively. Cost of goods sold increased in 2003, due to an increase in sales. The decrease in 2002 was a direct result of the sale of the batter business. Selling, general and administrative expenses were $784,253 and $636,302 for the years-ended December 31, 2003 and 2002 respectively, an increase of $147,951, or 18.87%. The increase in 2003 was due in part to additional legal fees. This is in comparison to a decrease of $131,036, or 17%, to $636,302 from $767,338 for the year-ended December 31, 2002 and 2001 respectively. The decrease was a result of aggressive cost cutting and product streamlining. In 2003, the Company amended its factory lease and as a result recorded income of $57,978 from an adjustment for rent straight-lining. Interest expense increased in 2003 to $20,206 from $2,055, an increase of $18,151, or 883%, as opposed to a decrease in 2002 to $2055 from $7492, a decrease of $5,437, or 265%. The 2003 increase was a result of increased borrowing. The 2001 expense includes various bank charges. During 2002, management effectively maintained its cash accounts and substantially reduced these fees. The result of not having the 2001 items: loss on impairment of goodwill, gain from sale of disposition of assets, and cancellation of certain liabilities, repeat in 2002 and 2003 created losses from continuing operations to be less than the loss in 2001. The loss from continuing operations increased in 2003 to $280,879 from $213,945, an increase of $66,934, or 31.3%. This is in comparison to a decrease in 2002 to $213,495 from $806,526 in 2001, a decrease of $593,031, or 73.5%. Income from discontinued operations were $134,265 and $379,722 for the years-ended December 31, 2003 and 2002 respectively, a decrease of $245,457, or 65%. Whereas, income from discontinued operations increased to $379,722 in 2002 from $18,937 in 2001, an increase of $953,816, or 1905%. Each year's amount was a result of the write off of old accounts payable related to the WGJ Desserts operation sold in 1998. At the end of each period management wrote-off payables for which the statute of limitations had expired. The aggregate of these adjustments amounted to a net loss in 2003 of $146,614 and net income in 2002 of $166,227, a decrease in income of $312,841, or 188%. This is in comparison to an increase in income of $953,816, or 574%, from ($787,589) in 2001 to $166,227 in 2002. SEGMENT INFORMATION Not applicable since retail operations were discontinued. 7 LIQUIDITY AND CAPITAL RESOURCES 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, 2003, the Company had a negative working capital of $381,077 as compared to a negative working capital of $126,326 at December 31,2002. During 2003, the Company was able to secure a $250,000 loan from an unrelated party. Additionally, the Company received loans from the chairman and another director totaling $104,000 (see Certain Relationships and Related Transactions). The proceeds of the loans were used to acquire equipment and for working capital. 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. RISK FACTORS The Following information sets forth facts that could cause our actual results to differ materially from those contained in forward looking statements we have made in this annual report and those we may make from time to time. If We Are Unable to Obtain Additional Funds, We May Have to Significantly Curtail the Scope of Our Operations and Alter Our Business Model. Management believes that profitable operations are essential for the Company to become viable. The present business plan contemplates profitable operations will be achieved. However, in the event that profitable operations are not achieved, our present financial resources should allow us to continue operations through June 30, 2004. If additional financing is required and not available when required or is not available on acceptable terms, we may be unable to continue our operations at current levels or at all. We are engaged in seeking additional financing and we continue to impose actions designed to minimize our operating loses. We would consider strategic opportunities, including investment in the Company, a merger or other acceptable transactions, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurances that additional capital will be available to us on acceptable terms, or at all. If we are unable to obtain additional financing or to arrange a suitable strategic opportunity, our business will be placed in significant financial jeopardy. Our Independent Auditors have Stated that Our Recurring Losses from Operations and Our Accumulated Deficit Raise Substantial Doubt About Our Ability to Continue as a Going Concern. The reports of our independent Certified Public Accountants dated March 17, 2004 and March 6, 2003 for the December 31, 2003 and 2002 consolidated financial statements, respectively contained an explanatory paragraph that states that our recurring losses from operations and accumulated deficit raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. We believe we will need to raise more money to finance our operations and sustain our business model. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to raise additional financing will likely place us in significant financial jeopardy. 8 Our Financial Condition Has Adversely Affected Our Ability to Pay Suppliers on a Timely Basis Which May Jeopardize Our Ability to Continue Our Operations Necessary to Continue Shipment and Sales of Our Products. As of December 31, 2003 our accounts payable totaled $416,159 of which $47,163 were over sixty (60) days old. While we have negotiated payment plans with our major suppliers and vendors whereby we pay C.O.D. with a nominal pay down of any past due amounts, there can be no assurances that we will be able to continue these payment plans or obtain the necessary materials and/or ingredients to produce our baked goods. If we are unable to obtain additional financing on acceptable terms, our ability to make timely payments to our critical suppliers will be jeopardized and we will be unable to obtain critical supplies and services to maintain and continue to manufacture, ship and to sell our products. The Company And the Price Of Our Shares May Be Adversely Affected By the Public Sale of a Significant Number of the Shares Eligible For Future Sale. All but a very small number of the outstanding shares of our Common Stock are freely tradable. Sales of Common Stock in the public market could materially adversely affect the market price of our Common Stock. Such sales may also inhibit our ability to obtain future equity or equity-related financing on acceptable terms. At our Annual Meeting of Stockholders, we intend to ask our stockholders to approve an increase in the number of authorized shares of Common Stock from 10,000,000 shares to 20,000,000 shares. Based upon current Common Stock outstanding and convertible securities, we may have an insufficient number of authorized common shares. The issuance and registration of additional shares could have a significant adverse effect on the trading price of our Common Stock. We Have Not Issued Shares of Common Stock We May be Required to Issue Pursuant to a Warrant. Inter-Equity Capital Partners, L.P., is a holder of a warrant for six percent (6%) of the total number of shares of each class of our capital stock outstanding, on a fully diluted basis after giving effect to the exercise of the warrant and all other warrants, options and rights to acquire any shares of our capital stock and the conversion of all the convertible securities (if any) thereto issued by us. Inter-Equity Capital Partners, L.P., exercised its warrant on October 15, 2001 but we have refrained from issuing the underlying shares. In lieu of the shares, we have offered to make cash payments of $10,000. If we cannot agree to a resolution of this matter, we may be required to issue 326,805 shares to Inter Equity Capital Partners, L.P. We Have Obtained Secured Financing With the Pledge of All of Our Assets Which Will Have Priority Over Security Interests of Any Holders of Our Preferred Shares. We have procured interim financing in the amount of $250,000 from an unaffiliated lender. As part of this financing, we were required to pledge and grant a security interest in all the assets of the Company as a condition precedent. In the event of default, the lender will obtain, in addition to other remedies, the right to all of our assets as well as the right to appoint qualified members to our Board of Directors that would constitute a majority. In addition, we have previously procured financing from the following directors: Ronald L. Schutte, the Chief Executive Officer and Chairman of the Board, in the amount of $141,217 and Anthony J. Merante, a Director of the Company, in the amount of $47,352. We intend to grant security interest to these two directors that will be subordinate to the recent $250,000 financing. 9 We Have Incurred Losses in the Past and We Expect To Incur Losses in the Future. We have incurred losses in each year since our inception. Our net loss after write off of certain old liabilities, for the fiscal year ended December 31, 2003 was $146,614 and our accumulated deficit as of December 31, 2003 was $11,368,970. We expect operating losses to continue through 2004 as we continue our marketing and sales activities and conduct additional development of our products. RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK The Price of Our Common Stock is Subject to Volatility Our Common Stock has traded as low as $.04 per share and as high as $.15 per share in the twelve (12) month ended December 31, 2003. Our average trading volume is extremely low. As such, a significant sale of our Common Stock may result in a major fluctuation of the market price. Some other factors leading to the volatility include: o Price and volume fluctuation in the stock market at large which do not relate to our operating performance; o Fluctuation in our operating results; o Concerns about our ability to finance our continuing operations; o Financing arrangements which may require the issuance of a significant number of shares in relation to the number shares of our Common Stock currently outstanding; o Fluctuations in market demand and supply of our products. Our Common Stock is Currently Traded on the Over-The-Counter-Bulletin-Board and an Investor's Availability to Trade Our Common Stock May Be Limited by Trading Volume The trading volume in our common shares has been relatively limited. A consistently active trading market for our Common Stock may not continue on the Over-The-Counter-Bulletin-Board. The average trading volume in our Common Stock on the Over-The-Counter-Bulletin-Board for the year ended December 31, 2003 was approximately 2,111 shares. RISKS RELATED TO OUR BUSINESS We are Currently Dependent on a Few Major Customers for a Significant Portion of Our Revenues We currently record sales from approximately 36 customers. Two of these customers accounts for in excess of 10% of our revenues. We intend to establish long-term relationships with our customers and continue to expand our customer base. While we diligently seek to become less dependent on any one customer, it is likely that certain business relationships may result in one or more customers contributing to a significant portion of our revenue in any given year for the foreseeable future. The loss of one or more of these significant customers may result in a material adverse effect on our revenues and our ability to become profitable or our ability to continue our business operations. 10 We Have Limited Ability to Sell and Market Our Products At the current time, we have limited marketing capability as compared with many of our competitors and we do not have a large sales, promotion and marketing budget as we are constrained by our lack of working capital and our ability to raise the necessary cash flow from our business operations to re-invest in our marketing programs. As a result of our limited marketing capabilities, we are forced to rely upon customer referrals and a part-time sales force. Our competitors have direct advertising and sales promotion programs for their products as well as sales and marketing personnel that may have a competitive advantage over us in contacting prospective customers. Our position in the industry is considered minor in comparison to that of our competitors, and while we continue to develop and explore new marketing methods and techniques and programs directed toward foreign customers, our ability to compete at the present time is limited. Our success depends upon the ability to market, penetrate and expand markets and form alliances with distributors. However, there can be no assurances that: o Our direct selling efforts will be effective; o We will obtain an expanded degree of market acceptance; o We will be able to successfully form relationships with distributors to market our products. We Depend Upon the Marketability of Primary Products Frozen cheesecake, pre-portioned desserts and tart shells are our primary products. We may have to cease operations if any of our primary products fails to achieve market acceptance and/or generate significant revenues. Additionally, the marketability of our products is dependent upon customer taste, preference and acceptance, which are variables that may be beyond our ability to control. We May Not Be Able to Successfully Develop and Market New Products That We Plan to Introduce We plan to develop new baked goods for production. There are numerous developmental issues that may preclude the introduction of these products into commercial sale. If we are unable to establish market acceptance for these products, we may have to abandon them or alter our business plan. Such modifications to our business plan will likely delay achievement of milestones related to revenue increases and achievement of profitability. We May Experience Problems in Manufacturing Sufficient Quantities and Commercial Quantities of Our Products We may encounter difficulties in the production of our current and any future products due to such reasons as: o Lack of working capital necessary to gain market acceptance; o Limited equipment and resources to produce product; o Quality control and assurance; o Supplies of ingredients; and o Shortages of qualified personnel. Any of the foregoing or other difficulties would affect our ability to meet increases in demand should our products gain market acceptance. We Claim Certain Proprietary Rights in Connection with the Combination of Ingredients and Manufacture of Our Products 11 Although we do not possess any patent protection for the formulation and production of our products, we believe that the combination of ingredients and our method of production are unique and important to our ability to produce quality baked goods and desserts. As we do not possess intellectual property protection, there is the risk that we may not be able to prevent a competitor from duplicating our recipes or our methods of production. We Use Certain Names that Do Not Have Protection under Federal or State Trademark Laws. Our use of the names, "Creative Bakeries, Inc.," "Brooklyn Cheesecake Company, Inc." and "Brooklyn Cheesecake and Desserts Company," under which Creative Bakeries conducts business and has established goodwill may be subject to legal challenge since there are other businesses operating under similar names and we have not registered trademarks for these names with either federal or state agencies. In addition, we utilize packaging with depictions of the Brooklyn Bridge in designed or stylized formats in conjunction with the names, "Brooklyn Cheesecake Company, Inc." and "Brooklyn Cheesecake and Deserts Company," which have not been registered with either federal or state agencies. In that we do not possess registered trademarks for our trade names or trade dress, we may face opposition to our usage of same that may require us to discontinue usage of certain trade names or packaging, which in turn will require us to re-establish goodwill associated with our product names and packaging. We are seeking trademark registrations with the United States Patent and Trademark Office but there can be no assurances that we will be successful in obtaining a registered mark. Attraction and Retention of Key Personnel Our future success depends in significant part on the continued services of key sales and senior management personnel. The loss of Ronald L. Schutte, our Chairman and Chief Executive Officer, or other key employees could have a material adverse affect on our business, results of operations and financial condition. There can be no assurances that we can attract, assimilate or retain other highly qualified personnel in the future. We Do Not Have a Current Contract with Our Chairman and Chief Executive Officer Our Chairman and Chief Executive Officer, Ronald L. Schutte, is instrumental in the day-to-day operations and long-range success of our Company. In the event Mr. Schutte is unable to perform his job or is unwilling to, we will face an immediate void in the management of our Company that may be difficult and/or impossible to fill in a timely manner. Additionally, we do not currently have an employment agreement with Mr. Schutte and as such there are no restrictions on either the Company or Mr. Schutte ending his employment at any time. We Have Limited Product Liability Insurance Due to the High Cost of Same We manufacture, market and sell baked goods and dessert products. In the event our products are tainted/spoiled or cause illness in consumers, we may face potential claims. Due to the high cost of product liability insurance, we only maintain insurance coverage of $2,000,000 to protect against claims associated with the consumption of our product. Any claim against us, whether or not successful, may result in our expenditure of substantial funds and litigation. Further, any claims may require management's time and use of our resources and may have a materially adverse impact on us. 12 Geographic Concentration in New York City Tri-State Area Most of Creative Bakeries' retail and institutional/wholesale customers are located in the New York City metropolitan area. Adverse changes in economic conditions in the New York City metropolitan area are more likely to affect the Company's business, financial condition and results of operations than if its operations were spread over a larger market area. Government Regulation: Maintenance of Licenses and Certification Creative Bakeries 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 the 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 our business, financial condition or results of operations. In addition, the Company's products are certified as kosher by independent entities. We believe that we will continue to meet the kosher certification requirements. However, the failure to retain or obtain such certification in the future could have a material adverse effect on our business, financial condition or results of operations. Continuing Changes in Food Service Industry The results of operations of food service businesses are affected by, among other things, changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns and the type, number and location of competing units. Multi-unit food service companies also can be substantially adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating difficulties stemming from one unit or a limited number of units, or health concerns as to particular types of food or methods of preparing food. There can be no assurance that the Company will be able to maintain the quality of its food products. In addition, dependence on frequent deliveries of fresh ingredients also subjects food service businesses, such as Creative Bakeries, to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. Competition The baking industry is a highly competitive and highly fragmented industry. Creative Bakeries 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 we do. Competition in both the retail and institutional/wholesale baking industry is based on product quality, brand name loyalty, price and customer service. Competitors with significant economic resources in the baking industry could, at any time, enter the wholesale or retail bakery/cafe business. Quarterly Fluctuations; Seasonality; Possible Volatility of Stock Price Creative Bakeries' operating results may be subject to seasonal fluctuations, especially during the Thanksgiving, Christmas, Chanukah, Easter and Passover seasons. Such variations could cause the market price of the Common Stock to fluctuate substantially. In addition, the stock markets in the United States have, from time to time, experience significant price and volume fluctuations that are unrelated or disproportionate to the operating performance of individual companies. Such fluctuations may adversely affect the price of the Company's Common Stock. 13 Possible Adverse Effect of Issuance of Preferred Stock Creative Bakeries' Restated Certificate of Incorporation authorizes the issuance of 2,000,000 shares of Preferred Stock, with designations, rights and preferences as determined from time to time by the Board of Directors. As a result of the foregoing, the Board of Directors can issue, without further shareholder approval, Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock could, under certain circumstances, discourage, delay or prevent a change in control of the Company. 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 Report of Zeller Weiss & Kahn, LLP, Independent Auditors 15 Consolidated balance sheet 16 Consolidated statement of operations 17 Consolidated statement of stockholders' equity 18 Consolidated statement of cash flows 19 Notes to consolidated financial statements 20-30 14 INDEPENDENT AUDITORS' REPORT Board of Directors Creative Bakeries, Inc. We have audited the accompanying consolidated balance sheet of Creative Bakeries, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2003 and 2002. 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, 2003, and the results of its operations and cash flows for the years ended December 31, 2003 and 2002, 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, 2003 and 2002 and as of December 31, 2003 has a working capital deficiency in the amount of $493,733, which raises 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 17, 2004 Mountainside, New Jersey 15 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2003 ASSETS Current assets: Cash and cash equivalents $ 82,523 Accounts receivable, less allowance for doubtful accounts of $400 174,983 Inventories 173,519 Prepaid expenses 66,076 Total current assets 497,101 Property and equipment, net 301,015 Other assets: Security deposits 4,714 Loan acquisition costs, net of amortization 12,798 Tradename and licensing agreements, net of amortization 122,106 139,618 $ 937,734 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Long-term debt, current portion $ 28,100 Notes payable 297,352 Accounts payable 416,159 Accrued expenses 87,861 Notes payable, officer 45,737 Warrants payable 115,625 Total current liabilities 990,834 Other liabilities: Long-term debt, net of current portion 69,435 Deferred rent 5,520 74,955 Stockholders' equity (deficiency): 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 5,496,750 shares 5,497 Additional paid in capital 11,235,418 Deficit ( 11,368,970) Total stockholders' equity (deficiency) (128,055) $ 937,734 See notes to consolidated financial statements. 16 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003 AND 2002 2003 2002 ----------- ----------- Net sales $ 3,369,742 $ 3,318,088 Cost of sales 2,904,140 2,893,226 ----------- ----------- Gross profit 465,602 424,862 ----------- ----------- Selling, general and administrative expenses 784,253 636,302 Change in estimate of straight-line rent (57,978) Interest expense, net 20,206 2,055 ----------- ----------- 746,481 638,357 ----------- ----------- Loss from continuing operations (280,879) (213,495) Discontinued operations: Income from operations of New York facility 134,265 379,722 ----------- ----------- Net income (loss) ($ 146,614) $ 166,227 =========== =========== Earnings per common share Basic and fully diluted: Continuing operations ($ 0.05) ($ 0.04) Discontinued operations 0.02 0.07 ----------- ----------- Net income (loss) per share ($ 0.03) $ 0.03 =========== =========== Weighted average number of common shares outstanding 5,461,545 5,346,828 =========== =========== See notes to consolidated financial statements. 17 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED DECEMBER 31, 2003 AND 2002 Common stock ------------
Total Number Additional Stockholders' of Paid in Accumulated Treasury Equity Shares Amount Capital Deficit Stock (Deficiency) --------- ------- ----------- ------------ --------- ------------ Balance at December 31, 2001 5,245,250 $5,245 $11,340,530 ($11,388,583) ($90,485) ($133,293) Treasury stock issued for services (12,067) 18,317 6,250 Stock issued in exchange for trade name rights 201,500 202 17,630 72,168 90,000 Net income for the year ended December 31, 2002 166,227 166,227 --------- ------- ----------- ------------ --------- ------------ Balance at December 31, 2002 5,446,750 5,447 11,346,093 (11,222,356) ($ 0) 129,184 Stock issued for professional services 50,000 50 4,950 5,000 Reclassification of warrants payable (115,625) (115,625) Net loss for the year ended December 31, 2003 (146,614) (146,614) --------- ------- ----------- ------------ --------- ------------ Balance at December 31, 2003 5,496,750 $5,497 $11,235,418 ($11,368,970) ($_____0) ($128,055) ========= ======= =========== ============ ========= ============
See notes to consolidated financial statements. 18 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003 AND 2002 (Unaudited)
2003 2002 --------- --------- Operating activities: Loss from continuing operations ($280,879) ($213,495) Adjustments to reconcile loss from continuing operations to cash used in continuing operations: Depreciation and amortization 91,981 136,828 Common stock issued for services 5,000 6,250 Change in straight-line rent accounting estimate (57,978) Interest on accrued long-term debt 7,480 Changes in other operating assets and liabilities from continuing operations: Accounts receivable 10,294 115,247 Inventory 17,426 (38,367) Prepaid expenses (2,308) 673 Security deposits 250 Accounts payable (43,664) 38,352 Accrued expenses 20,268 (168,447) Deferred rent (9,102) (21,933) --------- --------- Cash used in operating activities (241,482) (144,642) Cash provided by discontinued operations 1,020 --------- --------- Net cash used in operating activities (241,482) (143,622) --------- --------- Investing activities: Purchase of property and equipment (53,282) (85,714) Cash (used in) investing activities from continuing operations (53,282) (85,714) --------- --------- Cash provided by investing activities from discontinued operations 70,875 --------- --------- Net cash (used in) investing activities (53,282) (14,839) --------- --------- Financing activities: Proceeds from officers' notes payable 54,000 88,000 Proceeds from notes payable 300,000 Payment of officers' note payable (8,263) Payment of notes payable (2,648) Loan acquisition costs (16,957) --------- --------- Net cash provided by financing activities 326,132 88,000 --------- --------- Net increase(decrease) in cash and cash equivalents 31,368 (70,461) Cash and cash equivalents, beginning of year 51,155 121,616 --------- --------- Cash and cash equivalents, end of year $ 82,523 $ 51,155 ========= =========
See notes to consolidated financial statements. 19 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 1. Going concern: During the year ended December 31, 2003, the Company incurred a loss from continuing operations in the amount of $280,879, and had a net working capital deficiency of $493,733. 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 certain equipment and the name and logo of the Brooklyn Cheesecake Company (see Notes 8 and 21). Upon completion of the acquisition, the operating name of the company was changed from Chatterley Elegant Desserts to Brooklyn Cheesecakes and Desserts Company. As per regulation S-X article 11, 210.11-01, no proforma information is being presented for this purchase since the Company was inactive and the presentation is not material to an understanding of future operations. 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. The Company's product line continues to be streamlined and greater emphasis has been placed on marketing portion controlled dessert items. 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 as of the year ended December 31, 2002. 20 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 2. Accounting policies (continued): 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. 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 2003 and 2002, 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. 21 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 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 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, 2003, the Company had uninsured cash balances of $66,083. The Company maintained sales with two 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, 2003 there were four 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. 4. Accounts receivable: Following is a summary of receivables at December 31, 2003: Trade accounts $175,383 Less allowance for doubtful accounts ( 400) --------- $174,983 ======== An analysis of the allowances for doubtful accounts for the year ending December 31, 2003 is as follows: Allowance for doubtful accounts, 01/01/03 $ 4,200 Direct write-offs against the allowance 6,766 -------- ( 2,966) Less: Bad debt expense 2,966 Plus: Additions to allowance for doubtful accounts 400 -------- Allowance for doubtful accounts, 12/31/03 $ 400 ======== 5. Inventories: Inventories at December 31 consist of: Finished goods and work in process $ 36,789 Raw materials 47,602 Supplies 89,128 --------- $173,519 ======== 22 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 6. Property and equipment: The following is a summary of property and equipment at December 31, 2003: Baking equipment $1,402,608 Furniture and fixtures 97,978 Leasehold improvements 180,422 ---------- 1,681,008 Less: Accumulated depreciation and amortization 1,379,993 ---------- $ 301,015 ========== Depreciation expense charged to operations was $81,822 and $124,934 in 2003 and 2002, 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 7. Loan acquisition costs: The Company incurred loan acquisition costs in the amount of $16,957 in connection with one of the notes payable financings the Company entered into in 2003. These costs are being amortized over the life of the loan. Loan amortization expense for the year ended December 31, 2003 amounted to $4,159. 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 $6,000 and $4,875, respectively, for the years ended December 31, 2003 and 2002. The Company has a licensing agreement for the use of the trademark and name of one of its subsidiaries and various recipes and methods used in the production of baked and other goods. The agreement calls for royalties to be paid upon reaching certain sales levels by the licensee. The carrying amount of the license agreement at December 31, 2003 was $42,981. 23 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 9. Warrants payable: The Company has 1,156,250 outstanding warrants that allow the holder to redeem the warrants for consideration of $.10 and 40% of one share of common stock. The holder of these warrants is a director of the Company. Management has elected to have the expiration date of the warrants extended for a one-year period through December 31, 2004 in exchange for not redeeming the warrants. If the warrants were to be redeemed the Company would have to repurchase the warrants for a total monetary consideration of $115,625 plus shares of the Company's common stock (see Note 18). 10. Long-term debt During 2002, an officer of the Company made loans to the Company in the amount of $88,000. On January 1, 2003 this short-term note was amended by an agreement extending the maturity date to December 31, 2005. The note bears interest at 8.5% per annum. Interest only payments are due on the principal balance outstanding at each month's end for the first eighteen months and principal and interest payments are due monthly thereafter until note maturity. If any amount owing under the note is not paid when due the interest rate on that unpaid portion shall be 12.5% per annum. The balance on the note was $95,480 at December 31, 2003, including accrued interest. 11. Common stock: During 2003 the Company issued 50,000 restricted shares of its common stock in exchange for legal services. The shares were valued at $5,000 which approximated the quoted stock price at the time of issuance. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. During 2002 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. 24 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 12. Statement of cash flows supplemental disclosures: Cash paid during the year for: Interest: Continuing operations $12,059 $ 0 ======= ===== Discontinued operations $ 0 $ 0 ======= ===== Non-cash investing and financing transactions: Stock issued for services $5,000 $ 0 ======== ===== Reclassification of warrants payable $115,625 $ 0 ======== ===== 13. Commitments and contingencies: The Company entered into an amendment under an existing lease for use of 27,362 square feet of office and plant space in New Jersey. The terms call for a reduction in annual rent in the first year from $200,000 to $136,800. The amendment also shifts responsibility for snow removal and landscaping from the lessee to the lessor. The new rental amounts commenced September 1, 2003 and expire December 31, 2008. The minimum future rentals on the baking facility are as follows: December 31, 2004 $139,200 December 31, 2005 148,000 December 31, 2006 158,000 December 31, 2007 164,000 December 31, 2008 112,000 -------- $721,200 ======== Rent expense including real estate taxes and common area charges amounted to $226,377 in 2003 and $228,065 in 2002 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 2003 was $7,200. Future minimum rentals are as follows: December 31, 2004 7,200 ======== The Company entered into an agreement for legal services commencing on November 1, 2003. The agreement calls for a monthly retainer fee of $1,500 of which $750 is to be paid in cash and $750 to be paid through the issuance of an equivalent number of restricted common shares based on an agreed upon market value formula. The shares are to be issued on a quarterly basis. At December 31, 2003 the Company included in its liabilities $1,500 representing 9,677 shares of common stock to be issued under the agreement at the end of January 2004. 25 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 13. Commitments and Contingencies (continued): The Company has 1,156,250 outstanding common stock purchase warrants that give the warrant holder the right to elect that the Company repurchase each warrant for consideration consisting of $.10 per warrant plus 40% of one share of the Company's common stock or exercise the warrants at $.6875 per warrant less the $.10 feature. The warrants originally expired on December 31, 2000 and have been extended for a one-year period over the last two years. The Company has again extended the expiration date of the warrants from December 31, 2003 to December 31, 2004 in exchange for the warrant holders' forbearance. The total number of shares represented by the warrants is 462,500. These shares have been included in the computations of outstanding common stock options and warrants at Note 19. 14. 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 lease expires on March 31, 2004. 15. 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 $8,417,800. 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 approximately $8,417,800 may be offset against future taxable income. The carryforward losses expire at the end of the years 2006 through 2021. 26 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 16. 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. The lender, who is in bankruptcy, held discussions with the Company's management and did not act upon the warrant. The Company has not heard from the lender since and it is management's opinion the warrant will not be exercised. The representative shares have been included in the computation of outstanding stock options per Note 19. At December 31, 2003, the Company also had outstanding 1,156,250 common stock purchase warrants with an exercise price of $.6875 each, which expire on December 31, 2004. These warrants are the same warrants as described in Note 15, commitments and contingencies, and are exercisable as described in Note 15 or they can be used to purchase 40% of one share of common stock per one warrant. The warrants are included in the computation of outstanding stock options and warrants in Note 19. 19. Common stock options: In May 2001 and February 2002, the Company granted stock options to some of its employees for the purpose of advancing the interests of the Company and its stockholders by assisting the Company to obtain and retain the services of key management employees and officers. The Board of Directors has full authority and discretion to determine the eligible participants to be granted the options, the exercise option price, the date of issuance and the date of expiration. The total number of shares set aside was 325,000. At the grant date the option exercise price was equal to the fair market value of the Company's stock. The options expire five years from the grant date and there were no options granted during the calendar year 2003. 27 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 19. Common stock options (continued): Information relating to stock option and warrant activity for 2003 is as follows:
Weighted Average Number of Exercise Shares Price --------------------- --------------------- Outstanding at December 31, 2002 1,386,315 $0.50 Granted 0 0.00 Cancelled (284,100) (0.66) --------------------- --------------------- Outstanding at December 31, 2003 1,102,215 $0.45 ===================== ===================== Options exercisable at December 31, 2002 1,211,315 $0.55 ===================== ===================== Options exercisable at December 31, 2003 1,077,215 $0.46 ===================== ===================== Stock Options Outstanding Weighted Avg Weighted Number of Remaining Average Range of Shares Contractual Exercise Exercise Prices Outstanding Life in Years Price --------------------- --------------------- --------------------- $.05-.25 325,000 3.75 $0.11 $.26-.50 314,715 1.00 0.50 $.51-.75 462,500 1.00 0.66 --------------------- --------------------- --------------------- 1,102,215 1.15 $0.45 ===================== ===================== ===================== Stock Options Exercisable Weighted Avg Weighted Number of Remaining Average Range of Shares Contractual Exercise Exercise Prices Outstanding Life in Years Price --------------------- --------------------- --------------------- $.05-.25 300,000 3.92 $0.07 $.26-.50 314,715 1.00 0.50 $.51-.75 462,500 1.00 0.66 --------------------- --------------------- --------------------- 1,077,215 1.48 $0.46 ===================== ===================== =====================
20. 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 18 and 19 are excluded from the calculation of earnings per share. 28 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 20. Earnings per share (continued): Reconciliation of shares used in computation of earnings per share: 2003 2002 ---- ---- Weighted average of shares actually outstanding 5,461,545 5,346,828 --------- --------- Common stock options and purchase warrants Primary and fully diluted weighted average common shares outstanding 5,461,545 5,346,828 ========= ========= 21. 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. 22. 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. In November 2002, the Company received the last of its payments on the note receivable from the sale of its discontinued operations. The company determined that the statute of limitations had expired as of December 31, 2003 and 2002 on old accounts payable related to WGJ Desserts and wrote them off accordingly. Income from discontinued operations presented in the statement of operations for the year ending December 31, 2003 and 2002 includes $134,625 and $379,722, respectively, related to this adjustment. The Company does not anticipate any further income or loss from its discontinued operations in the future. Information relating to discontinued operations for WGJ Desserts and Cafes, Inc. for the year ended December 31, 2003 and 2002 is as follows: 2003 2002 -------- -------- Correction of estimated liabilities on disposition of assets $ - $ 79,841 Cancellation of indebtedness to former shareholders and certain other accounts payable - 302,267 Cancellation of accrued expenses 134,625 - Interest income - 1,884 -------- -------- 134,625 383,992 Reduction of note receivable upon settlement - ( 4,270) -------- -------- Income from discontinued operations $134,625 $379,722 ======== ======== 29 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES As of the year-end period covered by this Annual Report on Form 10-KSB, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the forgoing, our Chief Executive Officer has concluded that our disclosure controls and procedures were effective as of the year ended December 31, 2003. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 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: 30
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, 47 Chief Executive Officer, June 1, 2001 President and Director 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,Creative Bakers Inc. Brooklyn, NY Richard Fechtor, 73 Founder of and since 1974 Executive Vice July 11, 1996 Director 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, 50 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. Vincent Bucchimuzzo, 50 Executive for CINN Worldwide January 2003 Director Westchester Venture Group Univest Partners 1982-1995 Anthony Merante, 43 Certified Public Accountant January 2003 Director Mel Foti, 51 VP & Manager Credit & January 2003 Director Marketing National Bank Of Egypt, NY Branch
All directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified. Officers are appointed by the Board of Directors and serve at the discretion of the Board. Section 16(a) Beneficial Ownership Reporting Compliance 31 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 beneficial ownership report on a timely basis during the most recent fiscal year, except for Messrs Schutte and Merante who filed beneficial ownership reports late. ITEM 10. EXECUTIVE COMPENSATION Compensation of Directors Directors of the Company who are not salaried officers receive a fee of $1,000 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 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 $100,000, for the three years ended December 31, 2003
--------------------------------- ---------- -------------------- ------------------ -------------- Name and Principal Position Year Salary ($) Bonus ($) Other Annual Compensation --------------------------------- ---------- -------------------- ------------------ -------------- Ron Schutte, CEO 2003 $100,000 $0.00 $0.00 --------------------------------- ---------- -------------------- ------------------ -------------- 2002 $150,000 $0.00 $0.00 --------------------------------- ---------- -------------------- ------------------ -------------- 2001 $150,000 $0.00 $0.00 --------------------------------- ---------- -------------------- ------------------ --------------
No other executive officer received a salary and bonus in excess of $100,000 for the three years ended December 31, 2003. 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. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth the number and percentage of Common Shares beneficially owned, as of December 31, 2003, 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 (6 persons): 32
----------------------------------------- -------------------------------------- -------------------------- NAME OF BENEFICIAL OWNER NO. OF SHARES BENEFICIALLY OWNED PERCENT ----------------------------------------- -------------------------------------- -------------------------- DIRECTORS AND EXECUTIVE OFFICERS: ----------------------------------------- -------------------------------------- -------------------------- Ronald L. Schutte 660,000 (1) 12.0% ----------------------------------------- -------------------------------------- -------------------------- David Abrahami 450,000 8.3% ----------------------------------------- -------------------------------------- -------------------------- Yona Gonen 451,000 8.3% ----------------------------------------- -------------------------------------- -------------------------- Philip Grabow 800,000 (2) 14.6% ----------------------------------------- -------------------------------------- -------------------------- Righthand & Co. 500,000 9.2% ----------------------------------------- -------------------------------------- -------------------------- Anthony J. Merante 50,000 * ----------------------------------------- -------------------------------------- -------------------------- Inter Equity Capital Partners, L.P. 326,805 6.0% ----------------------------------------- -------------------------------------- -------------------------- Richard Fechtor 242,933(3) 4.5% ----------------------------------------- -------------------------------------- -------------------------- Karen Brenner 40,000 (4) * ----------------------------------------- -------------------------------------- -------------------------- Vincent Bucchimuzzo 0 N/A ----------------------------------------- -------------------------------------- -------------------------- Carmelo L. Foti 0 N/A ----------------------------------------- -------------------------------------- -------------------------- Fortuna and Fortuna Unplugged 550,000(5) 10.0% ----------------------------------------- -------------------------------------- -------------------------- Directors and Nominal Executives as a 702,933 12.9% Group (6 persons) ----------------------------------------- -------------------------------------- --------------------------
* Less than 1% (1) Includes 250,000 options exercisable at $.07 per share. (2) Includes 300,000 warrants convertible at $.68 per share. The warrants expired December 31, 2003. (3) Includes 100,000 warrants convertible at $.68 per share. The warrants expired December 31, 2003. (4) Includes 40,000 warrants convertible at $.68 per share. The warrants expired December 31, 2003. (5) Includes 550,000 warrants convertible at $.68 per share. The warrants expired November 1, 2004. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Notes from an Officer and member of the Board of Directors An officer, Ron Schutte, of the Company made loans to the Company during 2003 in the amount of $54,000. The revolving credit note dated April 2, 2003 bears interest at the variable rate of the officer's corresponding bank credit line from which the note originates. The interest rate at December 31, 2003 was 8.5% per annum. Monthly payments of principal and interest correspond to the minimum monthly amount due on the credit line which was $1,270 at December 31, 2003. If any amount under the note is not paid when due the interest rate on that unpaid portion shall be at 12.5% until paid. The note matures October 15, 2004. A note payable effective August 18, 2003 was received in the amount of $50,000 from Anthony J. Merante, a member of the Board of Directors. The note bears interest at the variable corresponding rate of the Board Members' credit line which at December 31, 2003 was 8.25%. Monthly payments of principal and interest correspond to the minimum monthly amount due on the credit line which was $947 at year-end. If any amount owing under the note is not paid when due the interest rate on the unpaid portion shall be 12.5% until paid. The note matures October 15, 2004. The Purchase of the assets of Brooklyn Cheesecake Company Inc. On March 7, 2002, the assets of the Brooklyn Cheesecake Company were purchased by Creative Bakeries Inc. for 300,000 shares of stock and $45,000 in cash. These assets were owned by our current C.E.O. and board member Ron Schutte. 33 ITEM 13. REPORTS ON FORM 8-K AND EXHIBITS REPORTS ON FORM 8-K None. 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. **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. 34 **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. *****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. *10.28 Sixth Amendment to Lease dated October 31, 2003 between the Company and Airport Plaza Shopping Center, L.L.C. *10.29 Loan and Security Agreement dated October 9, 2003 between the Company and Fairfield Gourmet Food Corp. *******21.1 List of Subsidiaries of the Company, the state of incorporation of each, and the names under which such subsidiaries do business. *31.1 Certification of Chief Executive Officer and president pursuant to the Sarbanes-Oxley Act of 2002. *32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley-Act of 2002. _____________________ * 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. 35 ***** 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. ******* Incorporated by reference to the Company's Annual Report for the fiscal year ended December 31, 2003, on Form 10KSB/A No. 2. ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES Approximately $27,000 for the December 31, 2003 audit, review of 2003 quarterly financial information and preparation of 2002 corporation income taxes. 36 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, 2004. 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, 2004. Signatures Title ---------- ----- /s/Ron Schutte --------------------------------- President, Chief Executive Ron Schutte Officer/Director /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 37