-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CxIIDsaTPoi0Qa7Cm72t4EGqWcu1+rNSCjZf77qzB06AUhG/glVRpF/DlCSTzcN6 3JVuZT3/WP0YI6udV0/Mvg== 0001144204-04-007582.txt : 20040525 0001144204-04-007582.hdr.sgml : 20040525 20040524175327 ACCESSION NUMBER: 0001144204-04-007582 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE BAKERIES INC CENTRAL INDEX KEY: 0000949721 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 133832215 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13984 FILM NUMBER: 04828034 BUSINESS ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 9738088248 MAIL ADDRESS: STREET 1: 20 PASSAIC AVE CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: WILLIAM GREENBERG JR DESSERTS & CAFES INC DATE OF NAME CHANGE: 19950918 10QSB 1 v03680_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark one) (X) Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2004 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1939 For the transition period from ________ to _______ Commission File Number 1-13984 CREATIVE BAKERIES, INC. (Exact name of Registrant as specified in its Charter) NEW YORK 13-3832215 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 20 PASSAIC AVENUE, FAIRFIELD, NJ 07004 -------------------------------------- (Address of principal executive offices) (973) 808-9292 (Registrant's telephone number, including area code) Former name: William Greenberg Jr. Desserts and Cafes, Inc. CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO_____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES_____ NO X _ As of May 14, 2004, there were 5,496,750 shares of the registrant's common stock, par value $0.001 per share, outstanding. CREATIVE BAKERIES, INC. AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31, 2004 AND 2003 INDEX
PART I. FINANCIAL INFORMATION Item 1. Condensed consolidated financial statements: Balance sheet as of March 31, 2004 (unaudited) F-2 Statement of operations for the three months ended March 31, 2004 and 2003 (unaudited) F-3 Statement of cash flows for the three months ended March 31, 2004 and 2003 (unaudited) F-4 Notes to condensed consolidated financial Statements F-5 - F-10 Item 2. Management's discussion and analysis of financial condition Item 3. Controls and Procedures
PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-A SIGNATURES CERTIFICATIONS PART I. FINANCIAL INFORMATION CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - March 31, 2004 (UNAUDITED)
ASSETS Current assets: Cash and cash equivalents $ 858 Accounts receivable, less allowance for doubtful accounts of $400 210,562 Inventories 192,885 Prepaid expenses 47,837 ------------ Total current assets 452,142 ------------ Property and equipment, net 300,737 ------------ Other assets: Security deposits 4,714 Loan acquisition costs, net of amortization 7,998 Tradename and licensing agreements, net of amortization 120,606 ------------ 133,318 $ 886,197 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 36,244 Notes payable 327,158 Accounts payable 489,250 Accrued expenses 74,236 Notes payable, officer 85,358 Warrants payable 115,625 ------------ Total current liabilities 1,127,871 ------------ Other liabilities: Long-term debt, net of current portion 61,265 Deferred rent 9,660 ------------ 70,925 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 (11,553,514) ------------ (312,599) $ 886,197 ============
See notes to condensed consolidated financial statements. F-2 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED March 31, 2004 AND 2003 (UNAUDTIED) Three Months Ended March 31, 2004 2003 ----------- ----------- Net sales $ 515,171 $ 628,036 Cost of sales 492,335 574,498 ----------- ----------- Gross profit 22,836 53,538 ----------- ----------- Selling, general and administrative expenses 194,363 173,838 Interest expense 13,017 1,540 ----------- ----------- 207,380 175,378 ----------- ----------- Net (loss) ($ 184,544) ($ 121,840) =========== =========== Earnings per common share: Primary and fully diluted: Net (loss) per common share ($ 0.03) ($ 0.02) =========== =========== Weighted average number of common shares outstanding 5,496,750 5,446,750 =========== =========== See notes to condensed consolidated financial statements. F-3 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
2004 2003 ---- ---- Operating activities: Net loss ($184,544) ($121,840) Adjustments to reconcile net loss from operations to cash used in operating activities: Depreciation and amortization 25,578 21,623 Interest accrued on long-term debt 2,029 Changes in other operating assets and liabilities from continuing operations: Accounts receivable (35,579) 6,011 Inventory (19,366) 10,864 Prepaid expenses 18,239 21,299 Accounts payable 73,091 25,821 Accrued expenses (13,625) (8,194) Deferred rent 4,140 (5,483) -------- -------- Net cash used in operating activities (130,037) (49,899) Investing activities: Purchase of property and equipment (19,000) -------- -------- Net cash used in investing activities (19,000) -------- -------- Financing activities: Proceeds from officers' note payable 41,443 Proceeds from notes payable 32,315 Payment of officers' note payable (3,877) Payment of notes payable (2,509) -------- -------- Net cash provided by financing activities 67,372 -------- -------- Net decrease in cash and cash equivalents (81,665) (49,899) Cash and cash equivalents, beginning of period 82,523 51,155 -------- -------- Cash and cash equivalents, end of period $ 858 $ 1,256 ======== ======== Supplemental disclosures: Cash paid during the year for: Interest: $ 10,076 $ 0 ======== ========
See notes to condensed consolidated financial statements. F-4 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 1. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended is not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report for the year ended December 31, 2003 included in its Annual Report filed on Form 10-KSB. Going concern: The Company has incurred losses from continuing operations over the last several quarters. Management has described its plan of action in regard to this uncertainty in its latest annual report filed December 31, 2003. 2. Principles of consolidation: The accompanying condensed 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. 3. Nature of operations, risks and uncertainties: The Company is a manufacturer of baking and confectionery products, which are sold to supermarkets, food distributors, educational institutions, restaurants, mail order and to the public. Although the Company sells its products throughout the United States, its main customer base is on the East Coast of the United States. The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. The Company maintains all of its cash balances in New Jersey financial institutions. The balances are insured by the Federal Deposit Insurance Company (FDIC) up to $100,000. At March 31, 2004, the Company had no uninsured cash balances. F-5 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 4. Accounts receivable: Following is a summary of receivables at March 31, 2004: Trade accounts $ 210,962 Less allowance for doubtful accounts ( 400) ---------- $ 210,562 5. Inventories: Inventories at March 31, 2004 consist of: Finished goods $ 55,623 Raw materials 41,058 Supplies 96,204 ---------- $ 192,885 6. Property and equipment: The following is a summary of property and equipment at March 31, 2004. Baking equipment $1,421,608 Furniture and fixtures 97,978 Leasehold improvements 180,422 ---------- 1,700,008 Less: Accumulated depreciation and amortization 1,399,271 ----------- $ 300,737 Depreciation expense was $19,278 and $20,123, respectively, for the quarters ended March 31, 2004 and 2003. 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 quarter ended March 31, 2004 amounted to $4,800. F-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 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 $1,500 for each of the quarters ended March 31, 2004 and 2003. 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 March 31, 2004 was $42,981. 9. Notes payable: During the quarter a member of the Board of Directors made additional loans to the Company in the amount of $29,806, net of repayments. The loans carry an interest rate of 8.25% and are due on demand. The terms of the loan transactions by the Company's Board member were on a fair and reasonable basis and on terms more favorable to the Company than could have been obtained with non-affiliated parties as a result of the tenuous financial condition at the time. The Company has a note payable in the amount of $250,000 that requires the Company to meet certain covenant requirements. At March 31, 2004 the Company was not in compliance with one of the covenants in respect to certain sales levels. The Company's Chief Executive Officer has negotiated an alternative source of capital to replace this note and pay it in full. 10. Notes payable, officer: During the quarter an officer made additional loans to the Company in the amount of $37,566, net of repayments. The loans carry an interest rate of 8.25% and are due on demand. The terms of the loan transactions by the Company's officer were on a fair and reasonable basis and on terms more favorable to the Company than could have been obtained with non-affiliated parties as a result of the tenuous financial condition at the time. F-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 11. 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 $97,509 at March 31, 2004, including accrued interest. Maturities for long-term debt are as follows: March 31, 2005 $ 36,244 March 31, 2006 61,265 -------- $ 97,509 12. Commitments and contingencies: In August 2003, the Company entered into an amendment under a net lease for its office and plant facility in New Jersey. The terms call for a 2,000 square foot reduction in rental space and a reduction in current annual rent from $200,000 to $136,800 during the first year. The amendment also shifts responsibility for snow removal and landscaping from the lessee to the lessor. The rental amounts under the lease amendment commenced September 1, 2003 and expire August 31, 2008. The minimum future rentals on the facility over the next five years are as follows: March 31, 2005 $141,000 March 31, 2006 151,000 March 31, 2007 159,500 March 31, 2008 165,500 Thereafter 70,000 -------- $687,000 Rental expense for all operating leases were $51,051 and $59,238, respectively, for the quarters ended March 31, 2004 and 2003. 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. F-8 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 12. Commitments and contingencies (continued): The Company entered into an agreement for legal services commencing November 1, 2003. The agreement calls for half of the monthly retainer fee of $1,500 to be paid through the issuance of an equivalent number of restricted common shares based on an agreed upon market value formula. At March 31, 2004 18,741 shares of the Company's common stock were due under the agreement with 9,063 shares representing the amount due under the agreement for the quarter ending March 31, 2004. 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. 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 than not to be realized. The Company has a loss carryforward of approximately $9,000,000 that may be offset against future taxable income. The carryforward losses expire at the end of the years 2006 through 2023. F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 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. 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 as described in the Company's December 31, 2003 annual report filed on Form 10-KSB. At March 31, 2004 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 11, commitments and contingencies, and are exercisable as described in Note 11 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 as described in the Company's December 31, 2003 annual report filed on Form 10-KSB. 15. 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 are excluded from the calculation of earnings per share. Reconciliation of shares used in computation of earnings per share: 2004 2003 ---- ---- Weighted average of shares actually outstanding 5,496,750 5,446,750 --------- --------- Common stock purchase warrants Primary and fully diluted weighted average common shares outstanding 5,496,750 5,446,750 ========= ========= F-10 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Inclement weather, record high commodities prices and reduced purchases from a high volume customer, contributed to a first quarter loss of $ 184,544. The reduction in gross sales for the first quarter of 2004 as compared to the same period of 2003, was the result of attempting to raise prices on marginally priced items. A large retailer of muffins representing approximately $150,000 in sales for the same period of 2003, discontinued using most of our muffin products. In the short run the loss of sales revenue contributed to the severe lack of working capital, however, in the long run the products discontinued were not included in the planned product mix of the future. Management continues to recruit quality employees who can be multi-tasked to maximize efficiency of operations and reduce costs. Key employees were hired to work in the accounting department, warehouse operations and quality control. New product development to support items for export, low carbohydrate markets, and portion controlled specialty vendors continues to be a high priority for management. Management will continue to refine operations and control costs. Active solicitation for companies to be acquired by or merged with Brooklyn Cheesecakes & Desserts Company, continue to be evaluated. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003 The Company had consolidated net sales of $515,171 and $628,036 for the three months ended March 31, 2004 and 2003 respectively, a decrease of $112,865, or 18%. The decrease in sales is a result of the large retailer's discontinued use of our muffin products. The cost of sales were $492,535 and $574,498 for the three months ended March 31, 2004 and 2003 respectively, a decrease of $81,963, or 14%. The reduction was a direct result of the decreased sales. Gross profit percentages for the three months ended March 31, 2004 and 2003 were 4% and 9%, respectively. Increased costs was the leading contribution to this decline. Operating expenses totaled $194,363 and $173,838 for the three months ended March 31, 2004 and 2003. This was an increase of $20,525, or 12%. This was a result of increased professional fees, healthcare costs, and amortization of loan costs. Interest expense was $13,017 and $1,540 for the three-months ended March 31, 2004 and 2003 respectively, an increase of $11,477 or 745%. The increase is a result of additional borrowing. SEGMENT INFORMATION Not applicable since retail operations were discontinued. 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 March 31, 2004, the Company had a negative working capital from continuing operations of approximately $675,729 as compared to a negative working capital of $232,026 at March 31, 2003. 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. 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 quarterly 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 report of our independent Certified Public Accounts dated March 17, 2004 for the December 31, 2003 consolidated financial statements 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. 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 March 31, 2004 our accounts payable totaled $489,250 of which $161,131 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 anticipated to be held this year, 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 30,000,000 shares and an increase in the number of authorized shares of Preferred Stock 10,000,000 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 1, 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 314,715 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 $182,867 and Anthony J. Merante, a Director of the Company, in the amount of $77,158. We intend to grant security interest to these two directors that will be subordinate to the recent $250,000 financing. 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 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 $0.04 per share and as high as $1.02 per share in the twelve (12) month ended March 31, 2004. 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 month ended March 31, 2004 was approximately 2,652 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. One 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. 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 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. 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, experienced 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. 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. ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-QSB, 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 quarter ended March 31, 2004. 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 II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of 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. (b) Reports on Form 8-K None. 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 May 24, 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 May 24, 2004. Signatures Title ----- /s/Ron Schutte President, Chief Executive Officer/Director ------------------------------- Ron Schutte EX-31.1 2 v03680_ex31-1.txt EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT OF 2002 I, Ron Schutte, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Creative Bakeries, Inc; 2. Based on my knowledge, this quarterly 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 quarterly report, fairly presents 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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 24, 2004 /s/ Ron Schutte - ------------------------------------ Ron Schutte Chairman and Chief Executive Officer EX-32.1 3 v03680_ex32-1.txt EXHIBIT 32.1 SECTION 1350 CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Creative Bakeries, Inc. (the "Company") on form 10-QSB for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on or about the date hereof, I Ronald Schutte President and Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge, that (i) the Report fully complies with the requirements of Section 13(a) and Section 15(d) of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly present, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. Date: May 24, 2004 /s/ Ronald Schutte ----------------------------------- Ronald Schutte President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Creative Bakeries, Inc. and will be retained by and furnished to the Securities and Exchange Commissions or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----