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, 1998
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)
20 Passaic Avenue, Fairfield, NJ 07004
(Address of principal executive offices)
Issuer's telephone number, including area code: (973) 808-9292
-----------------
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 June 30, 1998
Common Stock, par value $0.001
per share 5,261,750
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of June 30, 1998 F-2
Statement of operations for the six and three
months ended June 30, 1998 and 1997 F-3
Statement of cash flows for the six months
ended June 30, 1998 and 1997 F-4
Notes to condensed consolidated financial
statements F-5 - F-16
Item 2. Management's discussion and analysis of
financial condition
Item 3. Legal proceedings
Part II. Other information
Signatures
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Current assets:
Cash $ 309,151
Accounts receivable, less allowance for doubtful
accounts of $40,616 419,984
Inventory 265,811
Prepaid expenses and other current assets 83,678
-----------
Total current assets 1,078,624
Property and equipment, net of accumulated depreciation 1,264,772
-----------
Other assets:
Covenant not to compete, net of amortization 50,000
Goodwill, net of amortization 1,089,381
Security deposits and other assets 71,912
-----------
1,211,293
$ 3,554,689
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 38,385
Notes payable, bank 149,379
Notes payable, other 19,643
Accounts payable 1,059,880
Estimated liability for restructuring 80,541
Accrued payroll 408,719
Payroll taxes payable 124,717
Accrued expenses and other current liabilities 452,880
-----------
Total current liabilities 2,334,144
Long-term debt, net of current portion 13,759
-----------
Deferred rent 169,466
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, authorized 2,000,000
shares, none issued
Common stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 5,261,750 shares 5,262
Additional paid in capital 11,151,746
Deficit ( 10,119,688)
-----------
1,037,320
$ 3,554,689
</TABLE>
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 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $2,664,751 $4,371,327 $1,294,949 $2,251,933
Cost of sales 2,014,753 3,195,246 1,000,099 1,577,461
---------- ---------- ---------- ----------
Gross profit 649,998 1,176,081 294,850 674,472
Operating expenses 1,091,145 2,507,413 460,764 884,142
---------- ---------- ---------- ----------
Loss from operations ( 441,147) ( 1,331,332) ( 165,914) ( 209,670)
---------- ---------- ---------- ----------
Other income (charges):
Miscellaneous income 34,180 34,180
Loss on sale of
leasehold improvements ( 143,177)
Interest income 6,961 11,362 2,823 5,585
Interest expense ( 18,829) ( 23,041) ( 5,851) ( 17,213)
---------- ---------- ---------- ----------
( 120,865) ( 11,679) 31,152 ( 11,628)
---------- ---------- ---------- ----------
Net loss ($ 562,012) ($1,343,011) ($ 134,762) ($ 221,298)
========== ========== ========== ==========
Net loss per common
share ($ .11)($ .43)($ .03) ($ .07)
========== ========== ========== ==========
Weighted average number
of common shares
outstanding 5,173,352 3,060,000 5,184,826 3,060,000
========== ========== ========== ==========
</TABLE>
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, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net loss ($562,012) ($1,343,011)
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 150,277 138,320
Loss on sale of leasehold improvements 143,173
Compensatory element of issuance of warrants 1,023 421,730
Changes in other operating assets and liabilities:
Accounts receivable 105,943 91,420
Inventory 91,736 36,599
Prepaid expenses and other current assets ( 12,197) ( 29,155)
Security deposits 38,450 ( 7,236)
Accounts payable ( 65,885) ( 461,271)
Accrued expenses and other current liabilities ( 172,765) 191,823
Deferred rent ( 23,490) 23,644
-------- ----------
Net cash used in operating activities ( 305,747) ( 937,137)
-------- ----------
Investing activities:
Purchase of property and equipment ( 10,598) ( 41,187)
Purchase of subsidiary ( 900,000)
Proceeds from sale of leaseholds 12,000
--------
Net cash provided by (used in) investing
activities 1,402 ( 941,187)
-------- ----------
Financing activities:
Proceeds from issuance of common stock and
warrants 112,000 1,747,500
Decrease in notes payable, shareholders ( 36,876) ( 834)
Decrease in debt ( 27,183) ( 12,161)
-------- ----------
Net cash provided by financing activities 47,941 1,734,505
-------- ----------
Net decrease in cash ( 256,404) ( 143,819)
Cash, beginning of period 565,555 288,265
-------- ----------
Cash, end of period $309,151 $ 144,446
======== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 18,348 $ 23,041
======== ==========
Income taxes $ 0 $ 0
======== ==========
Supplemental schedule of non-cash investing activities and financing activities:
Issuance of common stock and warrants
regarding acquisition of subsidiary $ 0 $1,280,161
Issuance of common stock in consideration
of legal and consulting fees 0 59,500
-------- ----------
$ 0 $1,339,661
======== ==========
</TABLE>
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, 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.
On January 17, 1997, the Company 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 $2,160,000 of which $900,000 was paid in cash and the
remaining $2,160,000 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 350,000 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.
On September 1, 1997, the Company purchased all of the outstanding
shares of Chatterly Elegant Desserts, Inc. (Chatterly) in an
acquisition to be accounted for as a pooling of interest. The Company
issued 1,300,000 of its $.001 par value common stock in exchange for
all of the outstanding shares of Chatterly. Chatterly offers a line of
tortes, cakes and mousses.
F-5
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Organization of the Company (continued):
Effective December, 1997, Chatterly Elegant Desserts, Inc. was formally
merged with J.M. Specialties, Inc. under New Jersey law.
3. Principles of consolidation:
The consolidated financial statements of Creative Bakeries, 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
Creative Bakeries, Inc. Financial statements have been restated as of
June 30, 1997 to include Chatterly Elegant Desserts, Inc.
4. 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
$2,160,000 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) 350,000 purchase warrants
valued at fair value of $1.10 per warrant (aggregating $385,000) to
acquire 350,000 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 1997 and a minimum of $150,000
thereafter. In addition, the Company agreed to provide $600,000 to JMS
for working capital.
F-6
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of J.M. Specialties, Inc. (continued):
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 consent of 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 1,213,565
---------
$2,160,000
==========
F-7
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of J.M. Specialties, Inc. (continued):
Under the terms of its agreement with InterEquity Capital Partners,
L.P., the Company reserved 185,682 shares of its common stock for
issuance under the warrant. Management ascribed a fair value of $1.10
per common share which resulted a charge to operations of $202,393 in
the first quarter of operations in 1997.
5. Acquisition of Chatterly Elegant Desserts, Inc.:
On September 1, 1997, the Company acquired 100% of the outstanding
common shares of Chatterly Elegant Desserts, Inc. (Chatterly) in a
transaction to be accounted for as a pooling of interest. The Company
issued 1,300,000 of its common shares pursuant to the acquisition, of
which 200,000 shares were returned to the Company on March 10, 1998
when the seller's sales agreement was amended.
Chatterly, which was founded in 1985, produces a line of cakes, tortes
and other dessert items which are made in its facility in Fairfield,
New Jersey. The products are sold to wholesale customers as well as
supermarkets and other food distributors in New Jersey and New York.
In connection with the acquisition of Chatterly Elegant Desserts, Inc.,
the Company entered into an agreement with the selling shareholder for
a two year period commencing September 1, 1997. The agreement calls for
an annual salary of $100,000 to be paid to such shareholder.
The assets acquired and the liabilities assumed at December 31, 1996,in
connection with the acquisition of Chatterly, are as follows:
Assets:
Accounts receivable $124,950
Inventories 128,576
Prepaid expenses 4,713
Property and equipment 422,493
Other assets 56,700
--------
$737,432
Liabilities:
Long-term debt 111,034
Notes payable, others 47,320
Accounts payable and accrued expenses 421,960
Deferred rent 136,958
--------
717,272
-------
Excess of net assets acquired over
liabilities assumed $ 20,160
========
F-8
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Property and equipment:
The following is a summary of property and equipment at June 30, 1998:
Baking equipment $1,715,450
Furniture and fixtures 102,111
Leasehold improvements 419,604
Automotive equipment 12,896
----------
2,250,061
Less: Accumulated depreciation
and amortization 985,289
-------
$1,264,772
==========
7. Intangible assets:
The excess cost over the fair value of the net assets acquired from
J.M. Specialties, Inc. aggregated $1,213,545. This goodwill has been
amortized over its estimated useful life of fifteen years. Amortization
charged to operations amounted to $40,450 in 1998 and 1997.
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:
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).
On September 1, 1997, the Company issued 1,300,000 shares of its common
shares pursuant to a stock purchase agreement of Chatterly Elegant
Desserts, Inc. (see Notes 2 and 5).
In October, 1997, the Company issued 706,250 shares of its common stock at
$1.25 for the total proceeds of $882,812.
In June, 1998, the Company issued 100,000 shares of its common stock at
$1.12 for total proceeds of $112,000.
F-9
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Capital stock (continued):
(b) Warrants:
(i) Warrants issued to InterEquity Capital:
Inorder 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 of 1,834,000 shares of common stock and
2,485,000 warrants during 1997, the lender is entitled to an
additional 320,202 shares of common stock. Accordingly, the
financial statements included a charge to operations of
$315,120 which represents the market value of the stock at the
time the 320,202 warrants were issued by the Company in 1997
and 19,149 warrants in 1998.
Compensatory charges recorded on the income statement for 1998 and 1997
amounted to $10,723 and $287,837, respectively.
(ii) Warrants issued in 1997:
As part of the Acquisition, the Company issued on January 17,
1997, 300,000 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).
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.
F-10
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Capital stock (continued):
(b) Warrants (continued):
(ii) Warrants issued in 1997 (continued):
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.
(iii) Warrants issued in 1998:
On March 24, 1998, the Company approved issuance of 120,000
warrants to two members of the board of directors in lieu of
cash in payment of services rendered. The warrants, which
became effective April 1, 1998, will expire and become
valueless at the end of three years. The warrants have an
exercise price of $1.375.
(c) Stock options:
On August 9, 1995, the Company's Board of Directors adopted the
Company's 1995 stock option plan (the "Option Plan") pursuant to which
options to acquire an aggregate of 100,000 shares of common stock may
be granted to employees, officers, directors or consultants to the
Company. The Option Plan provides for the grant of both incentive stock
options, intended to qualify for preferential tax treatment under
Section 422 of the Internal Revenue Code, and nonstatutory stock
options that do not qualify for such tax treatment. No options can be
granted under the Option Plan at less than 100% of the fair market
value of the Company's common stock in the date of grant. No options
have been granted under the Option Plan.
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. As of June 30, 1998, these
employment agreements have been terminated.
F-11
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and contingencies (continued):
Employment Agreements (continued):
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, as
well as the employment agreements of William and Carol Greenberg. 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, William
Greenberg and Carol
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. The amount was unpaid as of
June 30, 1998.
In conjunction with the purchase of Chatterly Elegant Desserts, Inc.,
The Company entered into an employment agreement with a former employee
of Chatterly. The agreement covers a three year period commencing upon
the transfer of the Company's shares to the seller of Chatterly on
September 1, 1997. In the first year of the contract the employee is to
receive warrants to purchase 20,000 shares of the Company's common
stock at $2.50 per share. In the second two years of the agreement, the
employee is to receive an annual salary of $150,000 per year. The
Company has not recognized compensation on the granting of warrants to
this employee since the fair value of the warrants is less than the
exercise price. As of February 1998, this employee resigned and the
employment agreement, according to management, has been terminated. The
employee has made written demands for payment but no settlement has
been reached. A provision for $100,000 had been made for 1997 to
reflect these demands and as of June 30, 1998 is unpaid.
F-12
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and contingencies (continued):
The Company and its subsidiary, WGJ Desserts, Inc., have been named as
defendants in an action entitled Bacal v Creative Bakeries, Inc. which
was filed in the Supreme Court of the State of New York for the County
of New York. The complaint in the action alleges that defendants Edmund
Abramson, currently a director of the Company and Willa Abramson, who
resigned as a director in 1996, allegedly acting on behalf of the
Company and Greenberg, entered into an agreement with plaintiff, Murray
Bacal, whereby Mr. Bacal would purchase warrants for common stock of
the Company and that the Abramson's agreed to repurchase the warrants
for the same price at which they were originally sold to him, plus out
of pocket expenses. As a consequence, the complaint seeks $131,500 in
compensatory damages and $1,000,000 in punitive damages. The time to
answer the complaint has not expired. The Company vigorously intends to
defend the action.
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 of March
31, 1998, the Company has terminated this agreement and will vacate the
premises on such date.
Leases:
WGJ Desserts and Cafes, Inc., the Company's division located in New York
City, was party to a number of lease agreements for its retail stores
and baking facility. Due to its efforts to become more cost efficient,
the Company vacated five of its six retail locations in 1997. The
Company has received releases on all locations.
F-13
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and contingencies (continued):
The minimum future rentals on the remaining retail store and the baking
facility are as follows:
June 30, 1999 $ 215,654
June 30, 2000 112,429
June 30, 2001 115,802
June 30, 2002 119,274
June 30, 2003 91,685
Thereafter 383,356
----------
$1,038,200
==========
The Company is obligated under a triple net lease for use of 29,362
square feet of office and plant space in New Jersey with the lease
commencing January 31, 1994 and expiring December 31, 2004. The Company
is also obligated under noncancellable operating leases for automotive
equipment that expire over the next three years. The lease terms
include minimum annual rent for the term of the lease as follows:
Facility Auto
June 30, 1999 $ 186,625 $10,695
June 30, 2000 196,637 1,664
June 30, 2001 200,000
June 30, 2002 200,000
June 30, 2003 200,000
Thereafter 340,000
---------- -----------
$1,323,262 $12,359
========== =========
Rent expense for all operating leases amounted to $190,277 in 1998 and
$414,367 in 1997 and includes straight-lining of rent adjustments
discussed in Note 8.
11. Related party transactions:
The Company shared warehouse facilities with J. P. Veggies, Inc. in 1997.
Mr. Grabow and his family, own 96 percent of J. P. Veggies, Inc. The
Company charged 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. This relationship was
terminated when J.M. Specialties moved its facility in 1997.
F-14
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Long-term debt:
Equipment with a cost of $297,000 has been pledged as collateral on a
note payable in monthly installments of $4,005, including interest. The
notes carry interest varying rates of 10.30% to 17.87% and mature
between 1998 and 2000.
The total future annual payments as of June 30, 1998 are as follows:
June 30, 1999 $38,385
June 30, 2000 13,759
-------
$52,144
=======
13. Deferred income taxes:
Deferred income taxes (benefits) are the result of a deferred tax asset
carried on the books of Chatterly Elegant Desserts, Inc. at the end of
1996. A full valuation reserve of this asset, as well as any effect of
the Company's large net operating loss carry-forwards, has been made by
management as they feel it is not likely to utilize this asset in the
future.
14. Earnings per share:
Primary earnings per share is computed based in the weighted average
number of shares actually outstanding plus the shares that would have
been outstanding assuming conversion of the common stock purchase
warrants which are considered to be common stock equivalents. However,
according to FASB 128, effective for financial statements issued and
annual periods issued after December 15, 1997, entities with a loss
from continuing operations, the exercise of any potential shares
increases the number of shares outstanding and results in a lower loss
per share. Thus, potential issuances are excluded from the calculation
of earnings per share. These common stock purchase warrants amounted to
2,605,000 in 1998 and 2,375,000 in 1997.
Reconciliation of shares used in computation of earnings per share:
1998 1997
-------------------- -----------
Six Three Six Three
Months Months Months Months
Weighted average of shares
actually outstanding 5,173,352 5,184,826 3,060,000 3,060,000
Common stock purchase
warrants
Primary and fully diluted
weighted average common
shares outstanding 5,173,352 5,184,826 3,060,000 3,060,000
========= ========= ========= =========
F-15
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. Subsequent events:
As of July 1, 1998, the Company entered into an agreement with an
unaffiliated facility to produce all of its products for the WGJ
Desserts division. The Company's equipment and labor are being utilized
by this new facility. The agreement, not yet formalized in writing,
contains termination clause for either party as long as a six month
notice is given.
The Company is currently negotiating with the landlord of its baking
facilities at 47th Street to either terminate the obligation or to
sublease to an outside bakery.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION
a. General:
After retrenching its retail operation to just the Madison Avenue flagship
store, the Company has further reduced its fixed overhead by closing down the
commissary and entering into a co-packing arrangement effective July 1, 1998.
At June 30, 1998, 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 $6,500,000 which can be used to reduce the tax on income up to
that amount through the year 2011.
b. Results of Operations:
The Company's consolidated revenues aggregated $1,294,949 and $2,251,933 for the
three months ended June 30, 1998 and 1997, respectively. The cost of goods sold
was $1,000,099 in 1998 and $1,577,461 in 1997. Operating expenses were $460,764
in 1998 and $884,142 in 1997. As a result, the loss from operations for second
quarter 1998 and 1997 was $134,762 and $209,670, respectively. The reduction in
sales was mainly due to the retrenchment in the retail division. The related,
much steeper reduction in operating expenses was mainly due to the restructuring
at the WGJ Subsidiary with the resultant cost savings.
During the first quarter of 1998 the Company wrote off the unamortized balance
of the leasehold improvements at the Macy's store in the amount of $143,177.
The net interest for the quarter was $3,028.
The resulting net loss aggregated $134,762 for 1998 ($.03) per share and
$221,298 for 1997 ($.07) per share.
The retail division and wholesale divisions of WGJ Desserts and Cafes, Inc. (the
WGJ subsidiary) sell similar products. Costs are allocated to each division
based upon the standard cost of the items sold. Such costs consist of
ingredients, direct labor and overhead.
Batter Bake-Chatterly, Inc. (the BBC subsidiary) offers a line of batter and
frozen finished cakes, muffins, tart shells and other desserts. BBC's financial
records and affairs are kept separate from the parent but included in the
consolidated financial statements at June 30, 1998 and 1997.
c. Plan of Operation:
Reorganization of Retail Operations:
After analyzing the Company's retail operations, management concluded that only
its flagship store on Madison Avenue was profitable. The rest of the stores were
not only unprofitable but were diverting management's attention away from
pursuing profitable opportunities in the Company's other division. Therefore by
December 31, 1997, the Company closed down four of its six stores. A fifth
store, in Macy's cellar was taken over by Ferrara Bakery from April 1, 1998 and
the Company continues to run the Madison Avenue store. Since there was no
justification to maintain the commissary with its attendant overhead to service
just one store, the Company decided to close down the commissary as of June 30,
1998 and has entered into a co-packing arrangement with JMJ Baking Corp. to
supply the product at the same high quality standard. In order to assure the
quality, JMJ has employed Greenberg's bakers and has agreed to use only
Greenberg's recipes.
<PAGE>
In connection with the restructuring plan, management has written down property
& equipment as of December 31, 1996 by approximately $798,000. A further
$168,000 in leasehold improvements was written off in the first quarter of 1998.
Finally, the Company had charged 1996 with a $450,000 provision for actions
aimed at restructuring the Company, of which $370,000 was actually incurred as
of March 31, 1998. This charge mainly comprises write down of leasehold
improvements on stores that have ben closed down, provisions for lease
obligations on certain retail stores and charges for consultants involved in the
restructuring. By taking the above actions, future periods will not be burdened
with the amortization, depreciation or expense of these costs.
We took a step back at the retail end in order to move forward. We are now at a
point where we have minimized the losses and are now pursuing ways of growing
the business profitability. A number of options such as potential licensing
agreements are available to us.
Wholesale Operations:
The next phase in the Company's plan of action is to build up the wholesale end
of its business with fewer but profitable products. This process includes
calling on supermarket headquarters and chain restaurant accounts. Brokers have
been appointed and sales calls and visits are being made.
d. Liquidity and Capital Resources:
Since its inception the Company's only source of working capital has been the
$8,345,000 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 for 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. During January 1997,
the Company received net proceeds of $1,650,000 from the private placement of
1,875,000 common stock purchase warrants at $1.10 per warrant. During October
1997, the Company received net proceeds of $883,000 from the exercise of a
portion of these common stock warrants. 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) $765,000
was used to purchase property, equipment and leaseholds; and (iv) $195,000 was
used for general corporate purposes. The $1,650,000 proceeds from the private
placement warrants was used to acquire JMS. Of the $883,000 proceeds from the
exercise of warrants, $325,000 was used for consolidation and merger of JMS and
Chatterly, $341,000 was used for corporate purposes and the balance will be used
for ongoing corporate expenses and to fund new business.
As of June 30, 1998, the Company has a negative working capital of approximately
$1,255,520 as compared to a negative working capital of $715,629 at June 30,
1997. During 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 wee
eliminated and certain stores were closed down. The Company is continuing its
cost cutting efforts during 1998.
<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 13,1998
CREATIVE BAKERIES, INC.
BY:_/s/ Phillip Grabow______________
Phillip Grabow
Chief Executive Officer
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