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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 March 31 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
WILLIAM GREENBERG JR. DESSERTS & CAFES, 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
--------------
Check whether the icauer (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 May 13. 1997
-------------------------- ---------------------------
Common Stock, par value $0.001
per share 3,155,500
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INDEX
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Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of March 31, 1997 F-2
Statement of operations for the three months
ended March 31, 1997 and 1996 F-3
Statement of cash flows for the three months
ended March 31, 1997 and 1996 F-4
Notes to condensed consolidated financial
statements F-5 - F-15
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
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Signatures
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 800,229
Accounts receivable, less allowance for doubtful
accounts of $18,500 331,711
Notes receivable, related party 60,000
Interest receivable 13,160
Inventory 390,390
Prepaid insurance 70,448
Prepaid expenses and other current assets 42,318
-----------
Total current assets 1,708,256
-----------
Property and equipment 1,288,928
-----------
Other assets:
Covenant not to compete, net of amortization 81,250
Goodwill, net of amortization 1,228,635
Security deposits 144,921
-----------
1,454,806
-----------
$ 4,451,990
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 17,000
Notes payable, bank 74,772
Accounts payable 946,792
Estimated liability for restructuring 450,000
Accrued payroll:
Stockholders/officers 343,653
Other 31,521
Accrued expenses nd other current liabilities 367,879
-------
Total current liabilities 2,231,617
---------
Deferred rent 79,192
---------
Long-term debt, net of current portion 2,357
---------
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 ( 8,094,592)
-----------
2,138,824
-----------
$ 4,451,990
===========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Net sales $1,682,786 $1,633,335
Cost of sales 1,307,612 1,117,292
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Gross profit 375,174 516,043
Operating expenses 1,516,623 1,003,215
---------- ----------
Loss from operations (1,141,449) ( 487,172)
---------- ----------
Other income (charges):
Interest income 5,777 31,639
Interest expense ( 4,063) ( 2,976)
---------- ----------
1,714 28,663
---------- ----------
Net loss before income taxes (1,139,735) ( 458,509)
Provision for income taxes 0 0
---------- ----------
Net loss ($1,139,735) ($458,509)
========== ==========
Net loss per common share ($ 0.21) ($ 0.12)
---------- ----------
Weighted average number of common shares
outstanding 5,363,203 3,802,703
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-3
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,139,735) ($ 458,509)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 27,680 44,276
Amortization 6,250 41,351
Compensatory element of issuance of warrants 421,730
Changes in other operating assets and liabilities:
Accounts receivable 167,727 ( 1,556)
Inventory ( 40,587) ( 67,187)
Interest receivable ( 750) ( 1,500)
Prepaid expenses and other current assets 16,070 ( 25,390)
Accounts payable ( 658) ( 44,433)
Accrued expenses and other current liabilities 201,450 48,769
Deferred rent 10,590 8,277
---------- ----------
Net cash used in operating activities ( 330,233) ( 455,902)
---------- ----------
Investing activities:
Purchase of subsidiary ( 900,000)
Purchase of property and equipment ( 335,085)
Decrease in note receivable, related party 75,000
Increase in rent security deposits ( 825) ( 36,000)
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Net cash used in investing activities ( 900,825) ( 296,085)
---------- ----------
Financing activities:
Proceeds from issuance of common stock and
warrants 1,747,500
Payment of debt ( 4,478) ( 78,920)
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Net cash provided by (used in) financing
activities 1,743,022 ( 78,920)
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Net increase in cash 511,964 ( 830,907)
Cash, beginning of period 288,265 3,097,161
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Cash, end of period $ 800,229 $2,266,254
========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 4,063 $ 3,069
========== ==========
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
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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, 1997 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. Subject to obtaining consent of the Company's stockholders,
the Company changed its name to Creative Bakeries, Inc.
F-5
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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
11% 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
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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 and 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
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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.
Subject to obtaining the Company's stockholders, the Company intends to
change 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:
<TABLE>
<S> <C> <C>
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
==========
</TABLE>
F-9
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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 March 31, 1997:
Baking equipment $1,162,419
Furniture and fixtures 96,991
Leasehold improvements 586,564
----------
1,845,974
Less: Accumulated depreciation
and amortization 557,046
----------
$1,288,928
==========
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 $6,250 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 $15,578.
Continuing operating losses has caused management to reevaluate the
goodwill acquired in the purchase of Greenberg's - L.P. In the first
quarter of 1997, 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
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, 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 $11,375 for the period ended March 31,
1996.
8. Long-term debt:
Note payable, secured by machinery and equipment with a cost of $91,000
and payable in monthly installments of $1,417, excluding interest. The
note matures in 1998.
9. 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.
10. 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
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WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. 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:
Aspart 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.
Inorder 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
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<PAGE>
WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. 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 of 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.
11. 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
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<PAGE>
WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. 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.
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.
12. 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 $26,888 in 1997 and $24,759 in 1996.
The Company has a demand note receivable with a related party that
carries interest at five percent. The balance at March 31, 1997
amounted to $60,000.
F-14
<PAGE>
<PAGE>
WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. 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 2,303,203 742,703
--------- ---------
Primary and fully diluted weighted
average common shares outstanding 5,363,203 3,802,703
========= =========
14. 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 March 31, 1997.
As of April 1, 1997, pursuant to settlement discussions, the employment
of Stephen Fass, a director and President of the Subsidiary, Maria
Marfuggi, a director and President of JMS, and Seth Greenberg,
President of the Subsidiary's baking division, terminated. At the
present time, the respective parties have not yet concluded their
settlement discussions. Management intends to seek an amicable
settlement with the named parties as a result of such terminations;
however, each of the named parties have an employment agreement with
the Company. No contingency loss has been charged to operations insofar
as counsel does not know the extent of the liability, if any, to the
Company.
During the period from January 1997 through March 1997 six (6) of the
Company's vendors have each commenced actions which seek payment of
delinquent accounts payable balances aggregating approximately $80,000.
The Company is attempting to settle these matters without litigation,
however, there has been no final settlements to date.
F-15
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Plan
of Operation
a. 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 ofthe net assets acquired was recorded as goodwill.
At March 31, 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 $5,600,000 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 $1,682,786 and $1,633,335 for
the three months ended March 31, 1997 and 1996, respectively. The cost of
goods sold was $1,307,612 in 1997 and $1,117,292 in 1996. Operating
expenses were $1,516,623 in 1997 and $1,003,215 in 1996. As a result, the
loss from operations for the months ended March 31, 1997 and 1996 was
$1,141,449 and $487,172.
During the first quarter 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
1
<PAGE>
<PAGE>
$425,000. 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 three months ended March 31, 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 $1,139,735 for 1997 ($.21) per share and
$458,509 for 1996 ($.12) per share.
The increase in cost of sales as a percentage of sales for 1997 as compared to
1996 is attributable to (i) an increase in baking personnel and labor rates,
(II) increased costs in the development of new baked products, and (iii)
increase in the cost of ingredients and packaging materials. The Company was
unable to pass most of these increased costs on to its customers.
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 March 31, 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).
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
2
<PAGE>
<PAGE>
C. PLAN OF OPERATION:
(i) REORGANIZATION OF NEW YORK CITY BAKING OPERATIONS:
During the first 3-1/2 months of 1997 management has taken numerous steps to
restructure its New York City baking operation in a concentrated effort to
reduce operating costs. Their plans, already in progress, involve 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. This restructuring charge is predominantly comprised
of costs associated with the elimination of certain positions and provisions
for lease obligations on certain retail stores. By taking the above-mentioned
actions, future periods, will not be burdened with the amortization or
depreciation 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.
(II) 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
3
<PAGE>
<PAGE>
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 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, Path Mark, 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
4
<PAGE>
<PAGE>
portion of the purchase price for the EMS 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.
(IV) 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.
(D) 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
5
<PAGE>
<PAGE>
$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 March 31, 1997, the Company has a negative working capital of
approximately $523,361 as compared to $1,134,000 at December 31, 1996. During
the first quarter 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 ($425,000).
The decrease in depreciation and amortization for 1997 as compared to 1996, is
attributable to depreciation and amortization from assets written down or
written off for the year ended December 31, 1996.
6
<PAGE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WILLIAM GREENBERG JR. DESSERTS AND CAFES, INC.
Date: May 14, 1997 PHILIP GRABOW Philip Grabow
---------------------------------------------
Chairman of the Board
Chief Executive Officer and Officer
(Principal Financial Officer and Officer
duly authorized to sign on behalf of the Registrant
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 800,229
<SECURITIES> 0
<RECEIVABLES> 350,211
<ALLOWANCES> 18,500
<INVENTORY> 390,390
<CURRENT-ASSETS> 1,708,256
<PP&E> 1,288,928
<DEPRECIATION> 557,046
<TOTAL-ASSETS> 4,451,990
<CURRENT-LIABILITIES> 2,231,617
<BONDS> 0
<COMMON> 3,156
0
0
<OTHER-SE> 10,230,260
<TOTAL-LIABILITY-AND-EQUITY> 4,451,990
<SALES> 1,682,786
<TOTAL-REVENUES> 1,682,786
<CGS> 1,307,612
<TOTAL-COSTS> 1,516,623
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 5,777
<INCOME-PRETAX> (1,139,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,139,735)
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<NET-INCOME> (1,139,735)
<EPS-PRIMARY> ($.21)
<EPS-DILUTED> ($.21)
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