SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
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 small business issuer as specified in its charter)
New York 13-3832215
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
222 New Road Parsippany, N J 07054
(Address of principal executive offices)
Issuer's telephone number, including area code: (201) 808-8248
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 the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 6, 1997
Common Stock, par value $0.001
per share 3,155,500
<PAGE>
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of June 30, 1997 F-2
Statement of operations for the six months and
three months ended June 30, 1997 and 1996 F-3
Statement of cash flows for the six months
ended June 30, 1997 and 1996 F-4
Notes to condensed consolidated financial
statements F-5 - F-16
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - JUNE 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash $ 144,447
Accounts receivable, less allowance for doubtful
accounts of $26,800 384,756
Notes receivable, related party 59,300
Interest receivable 13,600
Inventory 318,704
Prepaid insurance 79,959
Prepaid expenses and other current assets 69,364
-----------
Total current assets 1,070,130
---------
Property and equipment 1,288,481
Other assets:
Covenant not to compete, net of amortization 75,000
Goodwill, net of amortization 1,220,705
Security deposits 152,032
-----------
1,447,737
---------
$ 3,806,348
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, bank $ 89,486
Accounts payable 637,773
Estimated liability for restructuring 350,000
Accrued payroll:
Stockholders/officers 373,861
Other 33,513
Accrued expenses nd other current liabilities 301,126
-------
Total current liabilities 1,785,759
Deferred rent 89,785
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, $.001 par value, authorized 2,000,000
shares, none outstanding
Common stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 3,155,500 shares in
1997 and 3,060,000 in 1996 3,156
Additional paid in capital 10,230,260
Deficit ( 8,302,612)
-----------
1,930,804
---------
$ 3,806,348
===========
See notes to condensed consolidated financial statements.
F-2
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 31, 1997 AND 1996
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $3,337,935 $3,391,630 $1,655,149 $1,758,295
Cost of sales 2,409,771 2,412,178 1,102,159 1,294,886
---------- ---------- ---------- ----------
Gross profit 928,164 979,452 552,990 463,409
Operating expenses 2,278,116 2,067,441 926,493 1,064,226
---------- ---------- ---------- ----------
Loss from operations ( 1,349,952) ( 1,087,989) ( 373,503) ( 600,817)
---------- ---------- ---------- ----------
Other income (charges):
Interest income 11,363 40,464 5,585 8,825
Interest expense ( 9,095) ( 5,671) ( 5,032) ( 2,695)
---------- ---------- ---------- ----------
2,268 34,793 553 6,130
---------- ---------- ---------- ----------
Net loss ($1,347,684) ($1,053,196) ($ 372,950) ($ 594,687)
============ ============ ========== ==========
Net loss per common
share ($ .24) ($ .28) ($ .06) ($ .16)
========== ============ =========== ==========
Weighted average number
of common shares
outstanding 5,628,103 3,802,703 5,908,503 3,802,703
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
F-3
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
1997 1996
---- ----
Cash flows from operating activities:
Net loss ($1,347,684) ($1,053,196)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 73,779 45,016
Amortization 12,500 82,702
Compensatory element of issuance of warrants 421,730
Changes in other operating assets and liabilities:
Accounts receivable 114,682 59,873
Inventory 31,099 ( 25,312)
Interest receivable 1,190 ( 2,652)
Prepaid expenses and other current assets ( 20,487) ( 122,423)
Accounts payable ( 409,677) ( 190,812)
Accrued expenses and other current liabilities 166,897 2,955
Deferred rent 21,183 16,555
---------- ----------
Net cash used in operating activities ( 934,788) ( 1,187,294)
---------- ----------
Investing activities:
Purchase of subsidiary ( 900,000)
Purchase of property and equipment ( 40,173) ( 335,085)
Decrease in note receivable, related party 700 75,000
Increase in rent security deposits ( 7,936) ( 36,100)
---------- ----------
Net cash used in investing activities ( 947,409) ( 296,185)
---------- ----------
Financing activities:
Proceeds from issuance of common stock and
warrants 1,747,500
Payment of debt ( 9,121) ( 114,638)
---------- ----------
Net cash provided by (used in) financing
activities 1,738,379 ( 114,638)
---------- ----------
Net increase (decrease) in cash ( 143,818) ( 1,598,117)
Cash, beginning of period 288,265 3,097,161
---------- ----------
Cash, end of period $ 144,447 $1,499,044
========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 9,095 $ 5,671
========== ==========
Income taxes $ 0 $ 0
========== ==========
Supplemental schedule of non-cash investing activities and financing activities:
Issuance of common stock and warrants
regarding acquisition of subsidiary $1,315,000
See notes to condensed consolidated financial statements.
F-4
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 included in its Annual Report filed on Form 10-
KSB.
2. Organization of the Company:
William Greenberg Jr. Desserts and Cafes, Inc. (the "Company") was
incorporated in the State of New York on November 12, 1993. Since its
inception through July 10, 1995, the Company was a development stage
enterprise and did not generate any revenues and did not carry on any
significant operations. Management's efforts were directed toward the
development and implementation of a plan to generate sufficient revenues
in the bakery industry to cover all of its present and future costs and
expenses. On July 10, 1995, the Company acquired the net operating assets
of Greenberg Desserts Associates Limited Partnership ("Greenberg's -
L.P.") at which time the Company commenced operations and ceased being a
development stage enterprise. The deficit accumulated during the
development stage aggregated $100,112.
The Company, on January 17, 1997 purchased all of outstanding capital
stock of J.M. Specialties, Inc. ("JMS") in an acquisition to be accounted
for as a purchase (the "Acquisition"). The total purchase price
aggregated $2,215,000 of which $900,000 was paid in cash and the
remaining $1,315,000 through the issuance of 500,000 shares of the
Company's common stock at fair market value of $1.75 per share and
purchase warrants valued at fair market value of $1.10 per warrant to
acquire 400,000 shares of the Company's common stock at an exercise price
of $2.50 per share. JMS offers a line of batter and frozen finished
cakes, brownies and muffins.
In connection with the above described subsequent transactions, the
Company transferred all of its business assets to a newly formed
wholly-owned subsidiary, WGJ Desserts and Cafes, Inc., in exchange for
all of the issued and outstanding shares of common stock of such entity
(the "Subsidiary"). As a result, the Company will act as a holding
company with two wholly-owned subsidiaries. JMS and WGJ Desserts and
Cafes, Inc. Upon obtaining consent of the Company's stockholders, the
Company changed its name to Creative Bakeries, Inc.
F-5
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Principles of consolidation:
The consolidated financial statements of William Greenberg Jr. Desserts
and Cafes, Inc. and subsidiaries include the accounts of all significant
wholly owned subsidiaries, after elimination of all significant
intercompany transactions and accounts. The accounts of J.M.
Specialties, Inc. and WGJ Desserts and Cafes, Inc. are included as the
subsidiaries of William Greenberg Jr. Desserts and Cafes, Inc.
4. Acquisition of Greenberg Dessert Associates Limited Partnership:
On June 2, 1995, the Company entered into an agreement to purchase the
operating assets (net of $155,700 in assumed liabilities), properties and
rights of Greenberg Dessert Associates Limited Partnership (Greenberg's -
L.P.) for $2,000,000, consisting of $1,967,300 in cash
and a promissory note in the amount of $32,700. This Acquisition, which
was consummated on July 10, 1995, was accounted for as a purchase. The
excess of the purchase price over the value of the net assets acquired
was recorded as goodwill. In addition, the Company incurred legal fees of
$26,000, which related to the Greenberg's - L.P. acquisition.
The net assets purchased and the liabilities assumed of Greenberg's -
L.P. are summarized below:
Assets purchased:
Furniture, fixtures and leasehold improvements $1,130,000
Inventories 40,000
Covenant not to compete 125,000
----------
1,295,000
Liabilities assumed:
Note payable - bank ( 123,000)
Rent payable ( 32,700)
----------
Net assets acquired 1,139,300
Purchase price, including $73,500 of acquisition costs 2,073,500
----------
Excess of purchase price over net assets acquired ($ 934,200)
==========
The business acquired from Greenberg's - L.P. was founded in 1946 and is a
recognized provider of premium quality baked goods and desserts. The
Company currently owns and operates six (6) retail bakery stores located
in Manhattan, N.Y. All baking is done at its main commercial bakery which
is located on West 47th Street, N.Y., N.Y. From this location, it services
commercial and catering customers as well as supplying all baked goods to
its six retail stores.
The Company entered in consulting and/or employment agreements with a
partner and three (3) key members of Greenberg's - L.P. management (see
Note 11).
F-6
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of Greenberg Dessert Associates Limited Partnership
(continued):
In order to finance this acquisition, on July 10, 1995 the Company
obtained $2,000,000 from InterEquity Capital Partners, L.P.,
("InterEquity") in the form of (i) an amortizing note in the aggregate
amount of $1,999,000 (the "Amortizing Note") and (ii) a $1,000 note which
was convertible into shares of common stock of the Company or a warrant
to acquire shares of the Company's stock (the "Convertible Note" and
together with the Amortizing Note, the "Notes"). Interest on the Note was
14.5% per annum. The Company also paid InterEquity a commitment fee of
$50,000. The Notes were collateralized by a security interest in the
Company's assets as well as a collateral assignment of all of the
Company's leases and a pledge of an aggregate of 1,025,000 shares of
common stock owned by the two founding stockholders and the Company's
President. The Amortizing Note was payable on or prior to July 31, 2000,
with interest only for the first 12 months and 48 equal monthly
installments of principal and interest commencing July 31, 1996 through
June 30, 2000. The Convertible Note was payable in full on July 31, 2000
with interest only payable monthly commencing July 31, 1995. This
financing agreement allowed InterEquity to convert the Convertible Note
into shares of the Company's capital stock or a warrant to acquire shares
of stock of the Company in a number sufficient to equal up to 6% of the
Company's then outstanding preferred and/or common shares of stock.
The Notes were repaid in full in October 1995 from the proceeds of the
sale to the public of the Company's common stock which was consummated in
October 1995. InterEquity exercised its option under the terms of the
Convertible Note to purchase a warrant for $1,000 to acquire shares equal
to 6% of the Company's outstanding preferred and common shares. The
warrant expires in October, 2001 and contains anti-dilutive provisions
which entitle InterEquity to 6% of the Company's capital stock on the
date the warrant is converted into capital stock. The loan agreement also
requires the Company to keep in reserve shares sufficient to satisfy the
required amount to be issued to InterEquity upon conversion. The holder
of any shares issued pursuant to such conversion may demand, under
certain conditions, that the Company purchase such capital shares for an
amount equal to a multiple of earnings as defined or the fair value of
the shares as determined by independent appraisal. Such put is only
available to the holder(s) of such shares from July 10, 2000 through July
31, 2005 and then only if the Company's classes of capital stock subject
to the put are not listed for trading on a national securities exchange
and/or are not quoted on an automated quotation system.
F-7
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of Greenberg Dessert Associates Limited Partnership
(continued):
The $856,871 difference between the fair value of the 163,404 shares of
the Company's common stock reserved for issuance under the warrant and the
$1,000 proceeds from the warrant was charged to operations in 1995.
Management ascribed a fair value of $5.25 per common share which
approximated the market value of the Company's common stock at the date
InterEquity purchased the warrant. As a result of the Company's issuance
of 61,500 common shares during 1996, InterEquity is entitled to 3,925
additional shares of the Company's common stock based upon the
anti-dilutive provision of its warrant. Accordingly, $11,775 was charged
to operations in 1996 which represented the market value of the warrants
on the date the warrants were issued.
5. Acquisition of J.M. Specialties, Inc.:
On January 23, 1997, the Company purchased 100% of the outstanding common
stock of J.M. Specialties, Inc. ("JMS") in a transaction to be accounted
for as a purchase (the "Acquisition"). The purchase price of $2,215,000
consisted of (i) $900,000 in cash, (ii) 500,000 shares of the Company's
common stock valued at fair market value of $1.75 per share (aggregating
$875,000), and (iii) 400,000 purchase warrants valued at fair value of
$1.10 per warrant (aggregating $440,000) to acquire 400,000 shares of the
Company's common stock at $2.50 per share. The warrants are in the same
form as those described below.
JMS, which was founded in 1984, offers a line of both batter and frozen
finished cakes, brownies and muffins - with muffins constituting
approximately 90% of sales. These products are produced in batches using
partially automated equipment at its facility in Parsippany, New Jersey.
The product is sold to wholesale customers as well as supermarket
distribution centers and is marketed primarily through food distribution
companies in New Jersey and New York. In turn, according to JMS's
management, the distributor sells approximately forty percent of the
product to supermarkets and sixty percent to food service customers, such
as hospitals, colleges, restaurants and corporate dining rooms.
In connection with the Acquisition, the Company entered into an
employment agreement with the selling shareholder pursuant to which he
will serve as a director and chief executive officer of the Company at an
annual salary level of $250,000 for the first year and a minimum of
$150,000 thereafter. In addition, the Company agreed to provide $600,000
to JMS for working capital.
F-8
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Acquisition of JMS Specialties, Inc.:
In connection with the acquisition, the Company transferred all of its
then owned business assets to a newly formed wholly-owned subsidiary in
exchange for all of the issued and outstanding shares if common stock of
WGJ Desserts and Cafes, Inc. As a result, the Company currently acts as a
holding company with two wholly-owned subsidiaries, JMS and WGJ. Upon
obtaining the Company's stockholders, the Company changed its name to
Creative Bakeries, Inc.
In order to finance the Acquisition, the Company sold in a private
placement 1,875,500 common stock purchase warrants ("the Placement
Warrants") at a net price to the Company (after expenses of $315,000) of
$1,747,500. Each Placement Warrant entitles the holder thereof to
purchase one common share, par value $.001 per share, of the common stock
of the Company at an exercise price per share of $2.50 for a term which
will expire on December 31, 2000.
The Company has the right to redeem the Placement Warrants, in
installments, at a redemption price of $.10 per warrant commencing six
months after the date of issuance if the stock trades at a designated
level for a least five trading days prior to the month preceding the date
on which the redemption right may be exercised.
The holders of the Placement Warrants have a put option pursuant to which
for a 60 day period prior to their expiration date, the holder has the
right to require the Company to repurchase the Placement Warrants for a
consideration consisting of $.10 per warrant plus 40% of a share of
common stock. In addition, the Placement Warrants have standard
anti-dilution protection.
The assets acquired and the liabilities assumed at December 31, 1996, in
connection with the Acquisition, are as follows:
Assets:
Cash $ 84,129
Accounts receivable 224,378
Notes receivable 60,000
Inventories 274,803
Prepaid expenses 14,063
Property and equipment 483,608
Other assets 27,999
--------
$1,168,980
Liabilities:
Long-term debt 23,607
Notes payable - bank 75,000
Accounts payable and accrued expenses 123,938
--------
222,545
Excess of net assets acquired over
liabilities assumed 946,435
Goodwill 1,268,565
---------
$2,215,000
==========
F-9
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Property and equipment:
The Company's baking equipment, furniture and fixtures and leasehold
improvements were deemed to be impaired and written down to managements
estimate of their fair value at December 31, 1996. Fair value, was
determined by management's estimation of the net sales value if the
property assets were offered for sale. An impairment loss in the amount
of $797,559 was charged to operations during the fourth quarter of 1996.
The following is a summary of property and equipment at June 30, 1997:
Baking equipment $1,196,269
Furniture and fixtures 103,314
Leasehold improvements 586,564
----------
1,886,147
Less: Accumulated depreciation
and amortization 597,666
-------
$1,288,481
==========
7. Intangible assets:
The acquisition agreement of Greenberg's - L.P. contained a provision for
a covenant not to compete of $125,000 which management is amortizing over
its five year term. Amortization of the covenant charged to operations was
$12,500 in 1997 and 1996.
The excess cost over the fair value of the net assets acquired from
Greenberg's - L.P. aggregated $934,200. This goodwill has been
amortized over its estimated useful life of fifteen years. Amortization
charged to operations in 1996 was $31,156.
Continuing operating losses has caused management to reevaluate the
goodwill acquired in the purchase of Greenberg's - L.P. In the fourth
quarter of 1996, management completed its reevaluation and determined that
the goodwill had no continuing value and the unamortized portion of
$840,780 was charged to operations in the fourth quarter of 1996.
On December 30, 1993, John McDonough, a fifty percent shareholder in
J. M. Specialties, Inc., sold 100 shares of the Company's common stock
to Philip Grabow, making Mr. Grabow the owner of all of the Company's
outstanding shares. As part of this transaction, J. M. Specialties,
Inc. entered into a covenant not to compete with Mr. McDonough, whereby
Mr. McDonough agreed not to manage, operate, join, control, or
participate, in or be consulted as an officer, employee, sole
proprietor, partner, shareholder or otherwise, with or for any business
which in any such matter, directly or indirectly, has competed or will
F-10
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Intangible assets (continued):
compete with J. M. Specialties, Inc. As consideration for entering into
this agreement, the Company agreed to pay Mr. McDonough $1,000 per week,
commencing the first week of January, 1994 and continuing through
December 31, 1998 until a total of $260,000 has been paid. Because no
interest rate was stated in this agreement, $29,358 was deemed to be
interest, as per Accounting Principles Board Opinion No. 21, leaving a
value of $230,642 to be assigned to the covenant not to compete.
In April of 1996, Mr. McDonough passed away, leaving the remaining
balance of the note to his estate. In October of 1996, J. M.
Specialties, Inc. negotiated with the Estate of Mr. John McDonough and
paid the remaining balance of the note of $147,179 with a lump sum
payment of $115,000 leaving an extraordinary gain of $32,179 on the
extinguishment of the debt as of December 31, 1996.
Amortization expense amounted to $22,750 for the period ended June 30,
1996.
8. Deferred rent:
The accompanying financial statements reflect rent expense on a
straight-line basis over the life of the lease. Rent expense charged to
operations differs with the cash payments required under the terms of
the real property operating leases because of scheduled rent payment
increases throughout the term of the leases. The deferred rent liability
is the result of recognizing rental expense as required by generally
accepted accounting principles.
9. Capital stock:
(a) Common stock:
In November 1996, the Company issued 11,000 shares of its common stock to
two (2) employees valued at $33,000 for services rendered. In November
and December 1996, the Company issued an aggregate of 26,000 shares of
its common stock valued at $54,510 to two law firms in settlement of
amounts owed for legal services.
F-11
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Capital stock (continued):
(a) Common stock (continued):
In November 1996, 25,000 shares of common stock were issued to a
consultant pursuant to an exercise of an option at $2.00 per share
resulting in a charge to operations of $50,000 which represented the
value of his services.
On January 17, 1997, the Company issued 500,000 shares of its common
shares pursuant to a stock purchase agreement of J.M. Specialties, Inc.
(see Notes 2 and 4).
(b) Warrants:
(i) Warrants issued in 1995:
In order to obtain financing for the acquisition of Greenberg's
-L.P. (see Note 2), the Company sold to the lender for $1,000,
a Convertible Note which in accordance with the terms of the
conversion agreement, was converted by the lender into a
warrant to acquire shares of stock of the Company in a number
sufficient to equal 6% of the Company's then outstanding
preferred and common stock (163,404 shares of common stock). The
warrant expires on July 31, 2001. The warrant contains
anti-dilutive provisions throughout its six (6) year life which
entitles the holder to its applicable percentages of the
Company's capital stock on the date the warrant is exercised.
Based upon the issuance 534,000 shares of common stock and
2,425,000 warrants during 1997, the lender is entitled to an
additional 179,229 shares of common stock. Accordingly, the
financial statements include a charge to operations of $197,230
which represents the market value of the stock at the time the
179,229 warrants were issued by the Company.
(ii) Other warrants issued in 1997:
As part of the Acquisition, the Company issued on January 17, 1997,
350,000 warrants to JMS's former owner and 50,000 warrants to
certain of its employees.
Concurrent with the Acquisition on January 17, 1997, the Company
issued 50,000 warrants to each of the three (3) of the Company's
directors. Two (2) of which are also officers of the Company.
In order to finance the Acquisition, the Company sold to accredited
investors 1,875,000 Placement Warrants at a purchase price to the
Company of $1,747,500 (after offering costs of
( $315,000).
F-12
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Capital stock (continued):
(b) Warrants (continued):
(ii) Other warrants issued in 1997 (continued):
All of the warrants issued in 1997, including the Placement
Warrants, aggregating 2,425,000 entitles the holder thereof to
purchase one common share, par value $.001 per share, of the
common stock of the Company at an exercise price per share of
$2.50 for a term which will expire on December 31, 2000.
The Company has the right to redeem the warrants, in installments,
at a redemption price of $.10 per warrant commencing six months
after the date of issuance if the stock
trades at a designated level for at least five trading days prior
to the month preceding the date on which the redemption right may
be exercised.
The holders of the warrants have a put option pursuant to which
for a 60 day period prior to their expiration date, the holder
has the right to require the Company to repurchase the warrants
for a consideration consisting of $.10 per warrant plus 40% of a
share of common stock. In addition, the warrants have standard
anti-dilution protection.
10. Commitments and contingencies:
Employment Agreements:
On March 20, 1997, the Company entered in to an employment contract with
the former owners of a company that produced low-fat and fat-free
cookies. Pursuant to the contracts, both individuals received a signing
bonus aggregating $68,000 and will each receive a salary of $25,000 per
annum with an opportunity to earn an additional $50,000 each based on
sales performance. In addition, both
individuals will be entitled to warrants to acquire an aggregate of
50,000 shares of the Company's common stock in the event that sales
volume exceeds $750,000 per annum.
F-13
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and contingencies (continued):
Employment Agreements (continued):
In order to supplement its cash flow, in August 1996, the Company reduced
payments to all employees under contract by 50%. The unpaid portion at
March 31, 1997 aggregating $343,653 has been accrued and will be paid at
such time as the Company has sufficient funds.
In May and June of 1997, the employment contracts of Stephen Fass, a
Director and President of the subsidiary, Maria Marfuggi, a Director
and President of J.M. Specialties, Inc. and Seth Greenberg, President
of the subsidiaries baking division, were officially terminated and
settled
.
These agreements are summarized below:
Value of
Cash Warrants
Settlement Issued Total
For Wages at $1.10 Settlement
Stephen Fass $ 44,100 $ 55,000 $ 99,100
Maria Marfuggi 36,000 55,000 91,000
Seth Greenberg 72,003 39,732 111,735
-------- -------- --------
$152,103 $149,732 $301,835
======== ======== ========
The settlement of these three employment agreements resulted in the
Company incurring an additional $89,681 in officers compensation in the
quarter ended June 30, 1997.
The Company also reached agreement with four other employees with whom the
Company had employment agreements. The net effect of these settlements
decreased officers compensation, which had been accrued, $72,914 in the
quarter ended June 30, 1997.
F-14
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and contingencies (continued):
License Agreement:
On May 18, 1995, the Company entered into an agreement with Macy's East,
Inc. (the "licensor"), pursuant to which it granted the Company a
license consisting of the right to operate a cafe in its store located
on 34th Street, New York, NY. The cafe offers for sale fresh baked
pastries and desserts as well as soups, salads, sandwiches, coffees,
teas and other non-alcoholic beverages to the general public. Under the
license agreement, the Company must pay the Licensor a fee equal to ten
percent (10%) of net sales relating to the cafe. Such license fee
charged to operations amounted to $5,069 in 1995. In addition, the
Company must spend for advertising an amount equal to three percent (3%)
of its net sales. The license commenced in November 1995 and ends on the
Saturday nearest to July 31, 1996. The agreement, which has been renewed
for the one year, is automatically renewed for successive periods of one
year unless either party gives notice to the other at least ninety (90)
days prior to the expiration of the initial term or any renewal term
that the agreement shall not be renewed.
As an addendum to the above agreement, during 1996 the Company opened a
second cafe in the Macy's 34th Street store and has placed four (4)
kiosks in various Macy's locations outside New York City. The additional
locations all operate under the provisions of the original agreement
described above.
11. Related party transactions:
The Company shares warehouse facilities with J. P. Veggies, Inc. Mr.
Grabow and his family, own 40 percent of J. P. Veggies, Inc. The
Company charges J. P. Veggies, Inc. for the manufacturing and packing of
product and for certain sales and administrative support provided by
J. M. Specialties, Inc. These billings were included in the Company's
net sales and amounted to $35,540 in 1997 and $44,023 in 1996.
The Company has a demand note receivable with a related party that carries
interest at five percent. The balance at June 30, 1997 amounted to
$59,300.
F-15
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Reconciliation of shares used in computation of earnings per share.
1997 1996
---- ----
Weighted average of shares actually
outstanding 3,060,000 3,060,000
Common stock purchase warrants 2,544,703 742,703
--------- ---------
Primary and fully diluted weighted
average common shares outstanding 5,604,703 3,802,703
========= =========
13. Subsequent events:
On March 17, 1997, the Company signed a letter of intent to acquire all of
the capital stock of a bakery. Financial statements of Chatterly Elegant
Desserts, Inc. have not been provided since the proposed acquisition does
not meet the test for a significant subsidiary as required under
Regulation SX 210-02(w). The combined investment in and advances at the
proposed acquisition date did not exceed 10% of consolidated assets at
June 30, 1997.
F-16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Plan of
Operation
General:
The Company was incorporated in November 1993 and was in the development
stage through July 1995. From April 1994 through June 1995, the Company
assembled its core management, raised approximately $ 600,000 from equity
financing, and negotiated a definitive agreement to purchase the operating
assets and business of Greenberg's - L.P. In July 1995, the Company completed
the acquisition for a purchase price of $ 1,967,300 in cash and a promissory
note for $ 32,700. In connection with the acquisition, the Company obtained a $
2,000,000 term loan and applied a portion of the net proceeds from its initial
public offering, consummated in October 1995 to pay in full the principal and
accrued interest under the term loan. The acquisition was accounted for as a
purchase and the excess of the purchase price over the value of the net assets
acquired was recorded as goodwill.
At June 30, 1997 to the extent the Company may have taxable income in
future periods, there is available a net operating loss for federal income tax
purposes of approximately $ 5,900,000 which can be used to reduce the tax on
income up to that amount through the year 2011.
b. Results of Operations:
Historical:
The Company from its inception on November 12, 1993 through July 10, 1995
was in the developmental stage and did not carry on any significant operations
nor generate any revenues. Management's efforts were directed towards the
development and implementation of a plan to generate sufficient revenues in the
baking industry to cover all of its costs and expenses. The Company did not
generate any revenues until July 10, 1995 when it acquired the operating assets
of Greenberg's -L.P.
The Company consolidated revenues aggregated $ 3,337,935 and $3,391,630 for
the six months ended June 30, 1997 and 1996, respectively. The cost of goods
sold was $ 2,409,771 in 1997 and $ 2,412,178 in 1996. Operating expenses were $
2,278,116 in 1997 and $ 2,067,441 in 1996. As a result, the loss from operations
for the six months ended June 30, 1997 and 1996 was $1,347,684 and $ 1,053,196
respectively.
The Company's consolidated revenues aggregated $ 1,655,149 and $1,758,295
for the three months ended June 30, 1997 and 1996, respectively, a decrease of
5.8%. The cost of goods sold for 1997 was $ 1,102,159 and $ 1,294,886 in 1996, a
decrease of $ 192,727, or 14.8%. In addition, operating expenses decreased $
137,733 from $ 1,064,226 in 1996 to $ 926,493 in 1997, a decrease of $ 221,737
or 37.2%. Management attributes this positive trend to its restructuring efforts
and its implementation of new management.
In the first six months of 1997, the Company incurred costs associated with
issuance of the warrants. These costs, for services rendered and loan fees to
Interequity, were charged to operating costs and amounted to approximately
$623,000 of which $ 198,000 was used to pay certain payroll obligations when
employment contracts were settled. In addition, one of the Company's
subsidiaries, JM Specialties, Inc., paid one time signing bonuses to two
employees amounting to $ 68,000.
For the six months ended June 30, 1996, the Company earned interest income
of $ 31,639 which arose mainly from investing a portion of the net proceeds it
received upon the consummation of the initial public offering in liquid cash
equivalents.
The 1997 statements of operations reflect a charge in the amount of $
197,230, which represents the fair market value of 179,299 warrants, issued to a
lender in order to satisfy the obligation under a written agreement. These
warrants were valued at $ 1.10.
The resulting net loss aggregated $ 1,347,684 for 1997 ($.24) per share and
$ 1,053,196 for 1996 ($.28) per share.
The retail division and wholesale divisions of the Parent Company, William
Greenberg Jr. Desserts and Cafes, Inc., sell similar products which are baked at
the company's centralized baking facility. Costs are allocated to each division
based upon the standard costs of the items sold. Such costs consist of
ingredients, direct labor and overhead. Since the acquisition of the
Greenberg-L.P., management has concentrated their efforts on running the
wholesale segment as a separate business.
J.M. Specialties, Inc., offers a line of batter and frozen finished cakes,
brownies, and muffins. J.M Specialties, Inc.'s financial records and affairs are
kept separate from the parent but included in the consolidated financial
statements at June 30, 1997 and 1996.
Selling, general and administrative expenses of the retail segment consist
of (i) expenses incurred in each of the five retail stores and (ii) expenses
allocated from the Company's centralized operating facility which are based
primarily on sales volume. The increase in selling, general and administrative
expenses as a percentage of sales during 1997, as compared to 1996, was
primarily the result of the effect of the issuance of common stock purchase
warrants for services rendered, salaries, and fees ($425,000) and the settlement
and termination of various employment agreements.
The decrease in depreciation and amortization for 1997 as compared to 1996
is attributable to depreciation and amortization from assets written down or
written off for the year ended December 31, 1996.
c. Plan of Operation:
Reorganization of New York City Baking Operations:
During the first six months of 1997 management has taken numerous steps to
restructure its New York City baking operation in a concentrated efforts to
reduce operating costs. Their plans have involved a restructuring of the entire
management team. Duties have been divided between manufacturing, wholesale, and
retail operations. The commissary at 47th Street, New York City has been
redesigned with resulting savings in labor and overhead. Purchasing has been
centralized which has also resulted in savings. Leases have been renegotiated,
employment contracts, which have seriously impacted the Company's cash flows,
have been either renegotiated or terminated.
In connection with the restructuring plan, management has written down its
baking equipment, leasehold improvements and fixtures as of December 31, 1996,
by approximately $ 800,000 due to impairment in their value. In addition,
management has determined unamortized goodwill of approximately $ 840,000 has no
continuing value and accordingly it was written off during 1996. Finally, the
Company had charged 1996 with a $ 450,000 provision for actions aimed at
restructuring the Company, of which $100,000 was actually incurred as of June
30, 1997. This restructuring charge is predominantly comprised of costs
associated with the elimination of certain positions, provisions for lease
obligations on certain retail stores, and charges for consultants involved in
the restructuring. By taking the above-mentioned actions, future periods, will
not be burdened with the amortization, depreciation or expense of these costs.
Management feels that as a result of the restructuring and elimination of
costs, savings for the fiscal year 1997 will be in excess of $ 1,000,000.
Acquisition of J.M. Specialties Inc.:
On January 17, 1997, the Company entered into a stock purchase agreement
("Stock,Purchase Agreement") with Philip Grabow ("Grabow"), pursuant to which,
January 23, 1997, the Company consummated the purchase from Grabow of all the
outstanding shares of J.M. Specialties, Inc., a New Jersey Corporation ("JMS
Subsidiary"), in exchange for (I) $ 900,000 in cash, (ii) 500,000 shares (the
"Shares") of the Common Stock of the Company and (iii) 400,000 warrants (the
"Warrants") exercisable for shares of Common Stock of the Company (the
"Transaction"). Each warrant entitles Grabow to purchase one share of Company
common stock at the exercise price of $ 2.50 per share until December 31, 2000.
In connection with the Stock Purchase Agreement , Grabow and the Company also
entered (i) a registration rights agreement, dated as of January 23, 1997,
regarding the terms of the registration of the Shares of Common Stock of the
Company issuable upon exercise of the Warrants, and (ii) and employment
agreement dated January 23, 1997. Pursuant to the employment agreement, Grabow
will serve as president and Chief Executive Officer of the Company at the annual
salary level of $250,000 for the first year, and a minimum of $ 150,000
thereafter. Also in connection with the Transaction, effective January 23, 1997,
Grabow was elected to serve as a director of the Company as a result of the
Transaction, Grabow beneficially owns 850,000 shares (or 24.5%) of the common
stock of the Company.
With the acquisition of the JMS subsidiary, the Company now also offers a
line of batter in frozen- finished cakes, brownies, and muffins, which
constitute approximately 90% of the JMS Subsidiary's sales. These products are
manufactures in batches using partially automated equipment at the JMS
Subsidiary's facility in Parsippany, NJ. The products are sold to wholesale
customers as well as supermarket distribution centers and are marketed primarily
through food distribution companies in New York and New Jersey. The management
of the Company believes that distributors sell approximately 40% of the products
to supermarket and 60% to food service customers.
To develop new accounts, JMS Subsidiary personnel present the products at
food shows, contact possible customers directly to have them order the product
from their distributor an through direct mailings to customers. The JMS
Subsidiary's current food distribution include SYSCO Foods, Alliant Foods,
Rykoff-Sexton and over 75 other accounts consisting of supermarket distribution
centers, Food service distributors, and independent bakery distributors. The
product ultimately ends up at Food Service accounts such as the Museum Of
Natural History, Various colleges, Hospitals, corporate feeders, and retailers,
such as Shop Rite, PathMark, A & P etc.
The JMS Subsidiary started business in October 1994 as a company making
gourmet batter product. The product line was then extended to Sugar Free then
Fat-Free and finally frozen finished baked product.
According to the Company's management , this change reflects the change in
the marketplace where consumers wanted more Fat -Free products and customers
wanted frozen - finished products to minimize customer time to bake and finish
batter product.
Management of the JMS Subsidiary believes that the reputation of the JMS
Subsidiary has grown considerably as a result of the product's taste, texture,
and price value. The product has no preservatives, hydrogenated oil or
chemicals: rather it uses natural ingredients.
In connection with the Transaction, the Company provided $ $600,000 to the
JMS Subsidiary for working capital purposes. The payment of the cash portion of
the purchase price for the JMS Subsidiary and such working capital aggregated $
1,500,000, was funded through net proceeds received from the sale by the Company
of $1,875,000 common stock purchase warrants (the "Private Placement Warrants")
at a price of $ 1.10 per Private Placement warrant to a limited number of
purchasers that qualify as "accredited investors" under the Securities Act of
1933.The terms of the Private Placement Warrants are substantially similar to
the Warrants.
(iii) Other Acquisitions:
On March 20, 1997, the Company entered into an employment contract with the
former owners of a company that produced low-fat and fat- free cookies.Pursuent
to the contract both individuals received a signing bonus aggregating $ 68,000
and will each receive a salary of $ 25,000 per annum with an opportunity to earn
an additional $50,000 each based on performance. In addition both individuals
will be entitled to an aggregate of $ 50,000 warrants in the event that sales
volume exceeds $ 750,000 per annum.
Currently, a contract has been signed to produce fat free cookies for
Safeway Supermarkets under their Healthy Advantage label. This contract is
estimated to take effect July 1997. The Company is also pursuing other contracts
with various Supermarket chains.
Pending Negotiations:
On March 17, 1997, the Company signed a letter of intent to acquire the
Stock of a bakery. The acquisition if consummated, will be accounted for as a
pooling of interests.
Plans call for closing the JMS facility and merging it with the bakery with
which the letter of intent has been signed. This merger will result in estimated
savings of between $ 400,000.00 and $ 600,000.00 per year. These savings are in
addition to the estimated savings from the restructuring. There can be no
assurance that a definitive agreement will be reached or, if reached that a
closing thereunder will occur.
Liquidity and Capital Resources:
Since its inception the Company's only source of working capital has been
the $ 7,460,000 received from the issuance of its securities.
In June 1995, The Company issued 180,000 shares of common stock to
unrelated parties for $ 600,000 and in August 1995, the Company issued 60,000
shares of its common stock to unrelated parties for $ 200,000. In connection
with the acquisition of Greenberg's- L.P., the Company received $2,000,000 from
the sale of two notes to InterEquity Capital Partners, L.P. ("InterEquity").
During October 1995, the Company received net proceeds of $4,900,000 from the
sale of 1,150,000 shares of its common stock in an initial public offering. Of
the $5,700,000 proceeds from the aforementioned stock sales: (i) $ 2,125,000 was
issued to repay the InterEquity debt including interest; (ii) $ 2,615,000 was
used in operations; (iii) $ 765,00 was used to purchase property, equipment and
leaseholds; and (iv) $ 195,000 was used for general corporate purposes.
As of June 30, 1997, the Company has a negative working capital of
approximately $ 715,629 as compared to a negative working capital of $ 1,134,000
at December 31, 1996. During the first half of 1997, management took actions
aimed at restructuring the Company in order to reduce operating costs and
enhance the Company's focus and efficiency. Pursuant to the restructuring a new
management team was put into place, executive contracts and leases were
renegotiated and certain positions were eliminated. The Company expects that the
aforementioned actions will stop the cash outflows, which it has experienced
since inception.
Selling, general and administrative expenses of the retail segment consist
of (i) expenses incurred in each of the five retail stores and (ii) expenses
allocated from the Company's centralized operating facility which are based
primarily on sales volume. The increase in selling, general and administrative
expenses as a percentage of sales during 1997 as compared to 1996 was primarily
the result of the effect of the issuance of common stocks purchase warrants for
services rendered, salaries, and fees ($623,000).
The decrease in amortization for 1997 as compared to 1996, is attributable
to amortization from assets written down or written off for the year ended
December 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated August 8, 1997
CREATIVE BAKERIES, INC.
BY:___/s/Philip Grabow
Philip Grabow
Chief Executive Officer
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