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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended: December 31, 1998
Commission File Number: 0-18711
Creative Bakeries, Inc.
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(Name of Small Business Issuer in Its Charter)
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New York 13-3832215
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 Passaic Avenue, Fairfield, NJ 07004
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(Address of Principal Executive Offices) (Zip Code)
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Issuer's telephone number: (973) 808-8248
Securities registered under Section 12(b) of the Exchange Act:
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Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.001 per share NASDAQ
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Securities registered under Section 12 (g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenue for its most recent fiscal year was $4,906,296. As of
December 31, 1998 there were 5,141,750 shares of Company's Common Stock, par
value $.001 per share, outstanding. The aggregate market value of the voting
stock held by of the issuer on 12/31/98 was approximately $ 8,998,000.
Transitional Small Business Disclosure Format (check one):
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Yes No X
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ITEM 1. DESCRIPTION OF THE BUSINESS
GENERAL
Creative Bakeries, Inc. ("Creative"), through its two operating
subsidiaries, WGJ Desserts and Cafes, Inc. (the "WGJ Subsidiary") and Batter
Bake-Chatterley Inc. (the "BBC Subsidiary") (Creative, the WGJ Subsidiary and
the BBC Subsidiary to be hereinafter collectively referred to as the "Company"
unless the context indicates otherwise) offers a broad line of premium quality
pastries, cakes, pies, cookies and other assorted desserts which are produced at
its baking facilitY. Such baked goods are marketed and distributed on a
wholesale basis to supermarkets, restaurants and institutional dining facilities
as well as by mail order. The Company has recently completed a corporate
restructuring pursuant to which it has eliminated its William Greenberg retail
operations while consolidating the operations of JMS Specialities, Inc. ("JMS"),
which the Company acquired in January 1997, and of Chatterley Elegant Desserts,
Inc. a New Jersey corporation ("Chatterley"), which the Company acquired in
August 1997. The Company is continuing to pursue its strategy of seeking
acquisition or merger candidates which would expand the Company's existing
product offerings and geographic markets. There can be no assurance that the
Company will be able to successfully identify such candidates on terms
acceptable to the Company or at all.
Creative was incorporated in November 1993. The Company's executive offices
are located at 20 Passaic Avenue, Fairfield, NJ 07004 and its telephone number
is (973) 808-8248.
BUSINESS STRATEGY
The Company's business strategy is comprised of the following:
Retail: After carefully analyzing its retail operations, management has
concluded that the additional William Greenberg stores it had recently opened
were not generating the level of sales required to become profitable and that
the resources required to increase retail sales would be better utilized in
expanding its wholesale division. The Company therefore closed down all the
retail stores.
Institutional/Wholesale: With the acquisitions of JMS and Chatterley, the
Company plans to increase its penetration in the institutional/wholesale food
market by expanding its marketing efforts to restaurants, hotels and corporate
dining facilities and by offering its products to supermarkets on a national
basis. The Company plans to expand both its product line and geographic
distribution through the following strategies:
Expand geographic distribution by acquiring new food distributors in the
Connecticut and Philadelphia areas as well as key distributor areas throughout
the United States. To do this, the Company intends to appoint food brokers in
various states to handle sales on a commission-only basis.
Continue to expand the fat-free product line targeting existing customers
as well as new customers; and
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Enter into co-packing arrangements whereby the Company would introduce
private label products of other bakery operations.
Mail Order. The WGJ Subsidiary is offering its products through other
specialty food retailers and through its mail order catalogue business. Mail
order sales accounted for approximately 1% of total sales for each fiscal year
ended December 31, 1998, 1997 and 1996 respectively.
Kosher Foods. The Company also is seeking to benefit from the growth of the
kosher food industry. According to Prepared Foods, the kosher food industry
generated approximately $33 billion in sales in 1994 and has been growing at a
rate of approximately 15% per annum. The WGJ Subsidiary and the BBC Subsidiary
each have a kosher certification and the Company believes that it can benefit
from the projected growth of this market.
BUSINESS PHILOSOPHY
High Quality Ingredients. The Company believes that developing and
maintaining premium quality products is the key to its future success. The
Company uses fresh ingredients in its products including, AA creamy butter,
fresh eggs, premium fruits, nuts, and chocolates blended for the Company's
unique recipes. The Company seeks to maintain rigorous standards for freshness,
quality, and consistency.
Customer Service. The Company's goal is to provide its customers with warm,
courteous and efficient service. The Company depends on and enjoys a high rate
of repeat business. The Company believes that the quality of the relationship
between its employees and its customers is critical to its success. The Company
strives to hire and train well-qualified, highly motivated employees committed
to providing superior levels of customer service.
PRODUCTS
Baked Goods
The BBC Subsidiary markets a full line of premium quality baked products
such as cheese cakes, mousse cakes and tart shells. Additionally the Company has
now expanded its offerings to include a line of frozen batter and baked products
such as a variety of Gourmet Frozen Muffin Batter products, No Sugar Added
Batters as well as a selection of Fully Baked Thaw & Sell muffins and cakes. The
Company continues to develop new products and welcomes customer requests.
Kosher Foods
Kosher foods generally are consumed by persons of the Jewish faith as well
as Muslims, Seven Day Adventists and others who perceive kosher certification as
a seal of purity. Kosher is a biblical term originally used to denote that which
is "fit" and "proper".
The Company's subsidiaries have kosher certifications and the Company
believes that it can capitalize on the projected growth of this market. The
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Company believes that its kosher certifications will enable it to better
penetrate certain market areas. The Company's products are not kosher for
Passover.
CUSTOMERS
RETAIL
The WGJ Subsidiary has licensed the "William Greenberg Jr." name to a
retail operator who sells its products directly to individual consumers. The
retailer also sells its specialty desserts to customers for parties, weddings,
bar mitzvahs and other special occasions.
INSTITUTIONAL/WHOLESALE
This market is mainly served through the BBC Subsidiary. With the
acquisition of Chatterley the Company now offers its institutional and wholesale
customers an expanded line of baked goods, batter and frozen-finished cakes,
brownies and muffins.
The BBC Subsidiary sells its products through food distributors to hotels,
hospitals and institutional feeders such as coffee shops, Marriott, Restaurant
Associates,etc. The products are also sold retail through food distributors and
direct to supermarket distribution centers.
MAIL ORDER
The WGJ Subsidiary sells select products through mail order. These products
are shipped via overnight delivery and second day delivery throughout the United
States and internationally. The Company has a toll-free number (800)564-2470 for
its mail order operations.
INGREDIENTS AND PRINCIPAL SUPPLIERS
The Company seeks to use only the highest quality ingredients available.
The Company has a policy of inspecting all raw ingredients before their intended
use.
The ingredients used by the Company consist primarily of flour, eggs,
sugar, butter and chocolate. The WGJ Subsidiary obtains its principal
ingredients from three suppliers in each of their respective industries. All
ingredients used by the Company are subject to substantial price fluctuations.
The Company historically has been able to pass any significant price increases
in its ingredients through to its customers. However, no assurance can be given
that the Company will be able to continue this practice in the future. Any
substantial increase in the prices of ingredients used by the Company could, if
not offset by a corresponding increase in product prices, have a material
adverse effect on its business, financial condition or results of operations.
The Company does not believe the loss of any of its suppliers would have a
material adverse effect on its business and believes that other suppliers could
readily provide such products if necessary.
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DISTRIBUTION AND MARKETING
The WGJ Subsidiary no longer operates the commissary and does not directly
operate any retail stores either. Instead it has licensed its name to a an
operator who runs retail and wholesale operations.
The BBC Subsidiary bakes all of its products at its 30,000 square foot
facility in Fairfield, New Jersey. Although utilization of the facility varies
based on seasonal fluctuation, the facility is operated on the basis of two
shifts, five days a week. The Company believes that the BBC Subsidiary has the
capacity to meet future requirements, including those arising out of the
consolidation with the Company. The BBC Subsidiary delivers 90% of its products
by truck to its institutional/wholesale customers. About 10% of its customers
pick up their orders directly at the bakery and utilize their own distribution
networks.
Historically, the Company has relied upon word-of-mouth and customer
satisfaction to market its products to new customers and to make existing
customers aware of new products.
COMPETITION
The baking industry is a highly competitive and highly fragmented industry.
The Company competes with national, regional and local bakeries as well as
supermarket chains that have in-store bakeries. Many of these competitors are
larger, more established and have greater financial and other resources than the
Company. Competition in both the retail and institutional/wholesale baking
industry is based on product quality, brand name loyalty, price and customer
service.
The WGJ Subsidiary competes with all restaurants and beverage outlets that
serve bakery items and/or coffee, including a growing number of specialty coffee
stores in the New York City metropolitan area, although its main business
continues to be as a full service bakery servicing wholesale and retail
clientele. The specialty coffee/cafe business has become increasingly
competitive and relatively few barriers exist to entry. Some of the WGJ
Subsidiary's major competitors include Au Bon Pain, Brothers Gourmet Coffees,
Eclair, New World Coffee, Starbucks and Timothy's Coffee of the World. Some of
the BBC Subsidiary's major competitors include Karps, Bake-N-Joy, Pillsbury, and
Quaker Oats. Competitors with significant economic resources in the baking
industry or existing non-specialty and specialty coffee/cafe businesses could,
at any time, enter the institutional/wholesale or retail bakery/cafe business.
TRADEMARKS
The WGJ Subsidiary has trademarks registered with the United States Patent
and Trademark office for the trademarks Wm. Greenberg Jr.'TM', William Greenberg
Jr.'TM', William Greenberg Jr. Dessert'TM' and William Greenberg Jr. Desserts
and Cafes'TM'. The JMS Subsidiary has a trademark and design registered with the
United States Patent and Trademark office for The Healthy Bakery'TM' (US
Registration No. 1,644,559). While the Company believes that the trademarks are
valid and enforceable, there can be no assurance as to the degree of protection
its
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registered trademarks will afford the Company.
GOVERNMENT REGULATION
The Company is subject to numerous state regulations relating to the
preparation and sale of food. It is also subject to federal and state laws
governing the Company's relationship with employees, including minimum wage
requirements, overtime, working and safety conditions, and citizenship
requirements. The failure to obtain or retain required food licenses or to be in
compliance with applicable governmental regulations, or any increase in the
minimum wage rate, employee benefits costs (including costs associated with
mandated health insurance coverage) or other costs associated with employees,
could adversely affect the business, results of operations or financial
condition of the Company.
EMPLOYEES
The WGJ Subsidiary no longer has any employees.
As of April 1, 1999, the BBC Subsidiary together with Creative had
approximately 45 full-time employees, of whom 37 are employed in production, 2
in sales, 4 in administration and 2 in executive positions. The BBC Subsidiary
does not have a union and the Company believes that it has good relations with
its employees.
ITEM 2. DESCRIPTION OF PROPERTY
As of April 1, 1999, the Company leases in Fairfield, New Jersey 29,362
square feet for its baking facilities. The Company believes that its existing
lease will be renewed when it expires in 2004 or alternative properties can be
leased on acceptable terms. The Company believes that its present facilities are
well maintained, in good condition and are suitable for the Company to continue
to operate and meet its production needs in the foreseeable future. The Company
is also considering subcontracting certain of its production requirements.
PLAN OF OPERATION
WGJ Subsidiary:
The company has completed its plan of closing down the commissary and the
retail operations.
The company has licensed the "William Greenberg Jr." brand to an operator
who continues to run the Madison Avenue store and the wholesale business. This
has effectively stopped any further losses on the part of the WGJ subsidiary and
provides opportunity to rebuild the business in certain areas such as Mail Order
Business.
In connection with the restructuring plan, management had written down its
baking equipment, leasehold improvements and fixtures as of December 31, 1996,
by approximately $ 850,000 in 1996 and to $35,000 in 1998 due to impairment in
their value. In addition, management has determined unamortized goodwill of
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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 $369,459 was
actually incurred as of December 31, 1998. This charge mainly comprises
write-down of leasehold improvements on stores that have been 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 affected by amortization, depreciation or expense of these
costs.
Acquisition of JM Specialties, Inc.
The Company acquired JM Specialties Inc. in January 1997 and appointed Phil
Grabow as the CEO and President of the Company.
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. Pursuant
to the contract both individuals received a signing bonus aggregating $68,000.
These employment contracts have been terminated.
Acquisition of Chatterley Elegant Desserts, Inc.
On August 28, 1997 the Company entered into a stock purchase agreement
("Stock Purchase Agreement") with Yona Abrahami, pursuant to which the Company
purchased from Ms. Abrahami all the outstanding shares of Chatterley Elegant
Desserts, Inc., a New Jersey Corporation, in exchange for 1,300,000 shares of
the Company's common stock. The Stock Purchase Agreement was subsequently
amended and Ms. Abrahami surrendered to the Company 200,000 shares of the
Company's common stock. The acquisition has been accounted for as a
pooling-of-interests.
Chatterley leases a 35,000 sq.ft. baking and office facility. Its products
are highly regarded by upscale super markets such as Kings and by executive
chefs in some of the finest hotels and restaurants.
Currently, the Company is pursuing contracts with various Supermarket
chains for both private label and The Healthy Bakery label which is a trademark
of the Company.
JMS and Chatterley Consolidation
As planned, the JMS facility in Parsippany was closed and the consolidation
of its operations into Chatterley's Fairfield facility was completed in 1997.
JM Specialties Inc. and Chatterley Elegant Desserts Inc. have been formally
merged to form the BBC Subsidiary.
Management believes that the merger of JMS and Chatterley adds considerable
strength to the Company's marketing plan. The efficiencies derived
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from the merger of JMS and Chatterley positions the Company to aggressively
pursue new business with improved profit margins. Management intends to
implement new marketing programs with a focus on increasing the wholesale
division of the business. Brokers have been hired for New England, Philadelphia
& Western Pennsylvania and the Southern Florida markets with other areas to
follow with a view to expanding from a tri-State (New York, New Jersey and
Connecticut) base to a regional and ultimately, a national bakery and dessert
company.
Future mergers and acquisitions:
In line with its goal of "growth through mergers and acquisitions", the
company is negotiating a merger with Paramark Corporation. If successful, it
will provide a springboard for further expansion.
The Company continues to seek opportunities in markets it does not
currently serve. It has secured a contract to produce Private Label cookies and
muffins. It is estimated that the Private Label business will provide upto a $1
million in revenue. The company has also secured orders from Fund Raising
business which will amount to approximately $800,000 in annual sales. This is a
seasonal business which will be delivered between September and December.
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ITEM 3. LEGAL PROCEEDINGS
This is with reference to the request, dated March 17, 1999, by Creative
Bakeries, Inc. and its subsidiaries (the "Company"), that we furnish you with
certain information in connection with your examination of the financial
statements of the Company as of December 31, 1998.
Our engagement has been limited to specific matters as to which we were
consulted by the Company. You should note that we do not represent the Company
in connection with its general affairs. We call your attention to the fact that
we have not made an independent investigation of the Company's affairs in order
to respond to the request for information. Our response is, therefore, based
essentially upon the information contained in our files and, therefore, it is
probable that there exist particular matters of a legal nature with respect to
which we have not been consulted.
Please be advised that our response is directed only to matters which have
been given substantive attention by this firm on behalf of the Company in the
form of legal consultation and, where appropriate, legal representation during
the appropriate period. In the preparation of this response, our procedures have
been limited to an endeavor to determine from lawyers currently in our firm who
have performed services for the Company during the applicable period whether
such services involved substantive attention in the form of legal consultation
or representation concerning matters coming within the scope of our response.
Please be further advised that insofar as information is requested with
respect to "loss contingencies" (as that term is defined in ABA Statement of
Policy referred to in the last paragraph of this letter), our response is
limited to pending or overtly threatened litigation (the latter involving only
those instances where a potential claimant has manifested to the Company an
awareness of a present intention to assert a possible claim or assessment) as to
which we have devoted substantive attention on behalf of the Company in the form
of legal consultation or representation, and we do not undertake to comment upon
contractually assumed obligations (such as guarantees of indebtedness of others)
or unasserted possible
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claims or assessments unless the Company has specifically identified the same
and has expressly requested our comments. The Company's inquiry letter, dated
March 17, 1999 does not specifically identify any such matters as to which our
comments have been expressly requested.
Subject to the foregoing and to the last three paragraphs of this letter,
please be advised as follows:
1. As of December 31, 1998 and as of the date hereof, we were not devoting
substantive attention on behalf of the Company in the form of legal consultation
or legal representation in connection with pending or threatened litigation
within the scope of our response as hereinabove set forth except as follows:
A. Murray Bacal v. Creative Bakeries, Inc., Edmund Abramson and William
Abramson, William Hl. Greenberg Jr. Dessert & Cafes, Inc. and Richard Fechtor.
This case was filed in Supreme Court, New York County on April 1, 1998. The
action was brought to recover damages allegedly sustained by plaintiff by reason
of an alleged breach of a contract between plaintiff and defendants Edmund
Abramson and William Abramson pursuant to which plaintiff agreed to purchase
warrants in the stock of William H. Greenberg Jr. Dessert & Cafes, Inc. (the
predecessor to Creative Bakeries, Inc.) Plaintiff alleges that the Abramsons had
agreed to purchase the warrants back from him if he exercised that prerogative.
Plaintiff alleges that, pursuant to the contract, he tendered $123,750 to
the Abramsons, that he subsequently exercised his option and demanded the return
of his original investment and out of pocket expenses, and that the Abramsons
refused to return his money. His cause of action against Creative Bakeries and
Greenberg (collectively, the "Creative Bakeries Defendants") sounds in fraud,
and is specifically alleged against defendant Richard Fechtor, who is sued both
in his personal capacity and as a corporate representative of Creative
Bakeries.(1) Fechtor, according to the complaint, represented to plaintiff that
if he purchased the warrants he could received the return of his monies together
with out of pocket expenses at any time, and plaintiff claims that he is
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(1) We are not representing Richard Fechtor in this action.
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entitled to $1,000,000 in punitive damages from Fechtor and/or the Creative
Bakeries Defendants based on this "fraudulent" inducement.
On December 14, 1998, the Creative Bakeries Defendants moved by order to
show cause to dismiss the complaint in its entirety as against them based on the
fact that, inter alia, the action involves a private transaction between
plaintiff and the Abramsons, and the complaint fails to state a cause of action
as against the Creative Bakeries Defendants. After a full briefing and oral
argument, the papers were taken by the court on submission, and we are awaiting
a ruling on the motion.
B. The Company has been named as a defendant in Ackerman v. Allan Sloan, et
al., Adv. Proc. No. 899-8042-288 (Bankr. E.D.N.Y.), an adversary proceeding
brought in the United States Bankruptcy Court for the Eastern District of New
York by the Chapter 7 Trustee of Alliotte Bakery Cafe, Inc. The complaint
alleges that the Company, while operating as William Greenberg Jr. Desserts &
Cafes, Inc., used customer lists and property of the Chapter 7 debtor for a
period of several weeks sometime after June 1997, without having paid fair value
or consideration. While the Company does not believe it committed any actionable
conduct, the Company does not believe that the claim is material because it is
believed to involve a potential exposure of only several thousand dollars. The
Company has not yet filed a formal response to the complaint.
C. Martas v. Greenberg. In this action, the Welfare and Pension Funds of
Local 3 (Bakers' union) seek to recover unpaid contributions to the Welfare Fund
of $137,063.43 and to the Pension Fund of $49,673.54 plus 11% interest, plus
costs and attorneys fees and liquidated damages equal to 20% of the principal
amounts. Thus the total sought is approximately $186,000 in unpaid contributions
plus about $36,000 in penalties, plus interest, plus attorneys fees.
The parties have reached an agreement in principle to settle this matter
for the sum of $50,000, payable over time. Greenberg's last offer was to pay
$12,000 in May and then $2,500/month until paid. The Funds, conceptually, want
more money up front and larger payments but we are waiting for them to get back
to us with exact terms.
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D. A demand has been made by counsel to Yona Gonen (formerly Abrahami) for
amounts alleged to be owed to Ms. Gonen in the amount of $69,926.09 and
$9,995.90 owed to Good Eats, Inc. and unspecified amounts owed to attorneys and
accountants by Chatterly Elegant Desserts ("Chatterly"). We refer you to the
Company with respect to this matter.
E. A demand for repayment of a $10,000 loan allegedly owed to David
Abrahami by Chatterly has been made by counsel to Mr. Abrahami. We refer you to
the Company with respect to this matter.
F. The Company has received notice of two separate actions for unpaid
insurance premiums filed in New York Civil Court by Aetna US Healthcare and
Oxford Health Plan, seeking $6,978.77 and $12,028.02, respectively. No response
has yet been made.
2. As of December 31, 1998, the Company was indebted to us for legal fees
and disbursements in the aggregate amount of $12,787.93 heretofore billed to the
Company. We have also accrued fees and disbursements for legal services rendered
to the Company during the period ended December 31, 1998 which had not yet been
billed, in the aggregate amount of $7,039.37.
This letter is solely for your information and assistance in connection
with your examination of, and report with respect to, the financial statements
of the Company as of December 31, 1998, and may not be quoted or otherwise
referred to in any financial statements of the Company or any other related or
unrelated document or documents, nor should it be filed with or furnished to any
governmental agency or other person, without the prior written consent of this
firm.
If in the course of your audit there should come to your attention a matter
involving a possible loss contingency which you believe may have been the
subject of legal consultation or representation by us and which is not covered
by the Company's request and this response, please bring that matter to our
attention so that there may be no misunderstanding concerning the reason for its
omission.
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This response is limited by, and in accordance with, the ABA Statement of
Policy Regarding Lawyers' Responses to Auditors' Requests for Information
(December 1975); without limiting the generality of the foregoing, the
limitations set forth in such Statement on the scope and use of this response
(Paragraphs 2 and 7) are specifically incorporated herein by reference and any
description herein of any "loss contingencies" is qualified in its entirety by
Paragraph 5 of the Statement and the accompanying Commentary (which is an
integral part of the Statement). Consistent with the last sentence of Paragraph
6 of the ABA Statement of Policy and pursuant to the Company's request, this
will confirm as correct the Company's understanding as set forth in its audit
inquiry letter to us that whenever, in the course of performing legal services
for the Company with respect to a matter recognized by us to involve an
unasserted possible claim or assessment that may call for financial statement
disclosure, we have formed a professional conclusion that the Company must
disclose or consider disclosure concerning such possible claim or assessment,
we, as a matter of professional responsibility to the Company, will so advise
the Company and will consult with the Company concerning the question of such
disclosure and of the applicable requirements of Statement of Financial
Accounting Standards No. 5. In this regard, however, we assume no obligation to
advise you of any such unasserted possible claim or assessment unless the
Company has specifically identified such matter and has expressly requested, in
an inquiry letter or supplement thereto, that we provide you with information
with respect thereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Small Cap Market under
the symbol "CBAK" and the Boston Exchange under the Trading symbol "BYK". The
following table sets forth the range of quarterly high and low bid prices, as
reported on the NASDAQ SmallCap Market, during the last two fiscal years through
March 31, 1999.
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Period High Low
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FISCAL YEAR 1997:
First Quarter 3 3/8 1 1/2
Second Quarter 2 7/16 1 13/16
Third Quarter 2 7/16 1 5/8
Fourth Quarter 2 7/16 1 1/4
Fiscal Year 1998:
First Quarter 1 3/4 1 1/4
Second Quarter 1 3/4 1 1/4
Third Quarter 1 1/16 11/16
Fourth Quarter 2 3/8 1 1/8
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The number of shareholders of record of the Common Stock on March 31, 1999
was 34 excluding 2,445,216 shares of Common Stock held by Cede & Co. The Company
believes that it has in excess of 500 shareholders.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The payment of future
cash demands by the Company on its Common Stock will be at the discretion of the
Board of Directors and will depend upon the Company's earnings (if any), general
financial condition, cash flows, capital requirements and other considerations
deemed relevant by the Board of Directors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
General
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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 December 31, 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 $7,100,000 which can be used to reduce the tax on
income up to that amount through the year 2011.
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's consolidated revenues from continuing operations aggregated
$3,814,440 and $5,014,558 for the years ended December 31, 1998 and 1997
respectively, a decrease of 24%. The cost of goods sold was $3,137,519 and
$4,224,113 for 1998 and 1997 respectively, a decrease of 26%, due to the overall
decrease in sales. Operating expenses were $1,300,317 and $1,867,242 for 1998
and 1997, respectively, a decrease of 31%, mainly attributable to the
termination of certain management personnel and reduction in the number of such
personnel. As a result, the loss from continuing operations was $576,796 and
$1,464,235 for 1998 and 1997 respectively, a decrease of 61%. Management
attributes this positive trend to its overall restructuring efforts.
Depreciation and amortization for 1998 decreased as compared to 1997 due to
assets written down or written off for the year ended December 31, 1998.
In 1998, 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 $5,005.
During 1998 the Company earned interest income of $10,195 which arose
mainly from investing a portion of the net proceeds it received upon the private
placement and exercise of warrants.
16
<PAGE>
<PAGE>
The company's consolidated revenues from its discontinued operation, the
WGJ subsidiary were $1,064,856 in 1998 and 3,443,005 in 1997. The WGJ subsidiary
showed a loss from operations of $282,045 in 1998 and $1,171,121 in 1997 and a
net loss of $347,728 in 1998 and $1,089,611 in 1997.
The 1998 statements of operations reflect a charge in the amount of $5,005
which represents the fair market value of 10789 warrants, issued to a lender in
order to satisfy an obligation under a written agreement. These warrants were
valued at $0.47
The net loss from continuing operations aggregated $? per share for 1998
and $.68? per share for 1997.
SEGMENT INFORMATION
The following is the breakdown of operating data between Retail and
Wholesale for both its continuing and discontinued operations:
<TABLE>
<CAPTION>
1998 % of 1997 % of Change % of
---- sales ---- sales ------ sales
----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Operating data:
Net Sales:
Retail (discontinued) 1,064,856 100 $2,604,229 100 -1,539,373 100
Wholesale (continuing) 3,841,440 100 5,853,334 100 -2,011,894 100
Total 4,906,296 100 $8,457,563 100 -3,551,267 100
Operating Income
(Loss):
Retail (discontinued) (282,045) 29 ($ 751,868) 57 - 469,823 -28
Wholesale (continuing) (384,237) 27 ( 1,558,745) 16 -1,174,508 11
(666,282) 27 ( 2,310,613) 29 -1,644,331 -02
General Corp. Exp. (212,159) 03 ( 243,233) 24 - 31,074 -21
Net Loss (619,458) 30 ($2,553,846) 53 -1,934,388 -23
Balance Sheet Data:
Identifiable Assets:
Retail $ 599,901 $ 312,905 286,996
Wholesale 1,471,966 2,036,453 - 564,487
2,071,867 2,349,358 - 277,491
General Corporate 772,362 1,904,406 -1,132,044
Total $2,844,229 $4,253,764 -1,409,535
</TABLE>
17
<PAGE>
<PAGE>
PLAN OF OPERATION
WGJ Subsidiary:
The company has completed its plan of closing down the commissary and the
retail operations.
The subsidiary has licensed its brand to an operator who continues to run
the Madison Avenue store and the wholesale business. This has effectively
stopped any further losses on the part of the WGJ subsidiary and provides
opportunity to rebuild the business in certain areas such as Mail Order
Business.
In connection with the restructuring plan, management has written down its
baking equipment, leasehold improvements and fixtures as of December 31, 1998,
by approximately $1,288,000000 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 $369,459 was actually incurred as of
December 31, 1998. This charge mainly comprises write-down of leasehold
improvements on stores that have been 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
affected by amortization, depreciation or expense of these costs.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Since its inception the Company's only source of working capital has been
the $8,455,000 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
18
<PAGE>
<PAGE>
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 $1,747,500 from the private
placement of 1,875,500 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 Chatterley, $388,000 was used for corporate expenses and the
remaining $170,000 will be used for working capital purposes.
As of December 31, 1998, the Company had a negative working capital from
continuing operations of approximately $385,696 as compared to a negative
working capital of $89,287 at December 31, 1997. During 1998, management took
actions with a view towards restructuring the Company in order to reduce
operating costs and enhance the Company's efficiency. Pursuant to such
restructuring, a new management team was put into place, executive contracts and
leases were renegotiated and certain positions were eliminated and certain
stores were closed down. The Company expects, although there can be no
assurance, that the aforementioned actions will reduce and reverse the negative
cash flow which it has experienced since inception.
CAPITAL RESOURCES:
On January 23, 1997, the Company purchased JMS for $900,000 in cash,
500,000 shares of the Company's common stock valued at $875,000 and $400,000
purchase warrants valued at $440,000.
In order to finance the acquisition, the Company sold in a private
placement 1,875,500 common stock purchase warrants at a net price to the Company
of $1,747,500.
19
<PAGE>
<PAGE>
In October 1997 the Company raised $883,000 in connection with the exercise
of the warrants from the private placement related to the purchase of JMS.
If and when the market price of the Company's stock increases and exceeds
the exercise price of the warrants previously issued, the Company may receive
additional funds upon the exercise of its warrants to operate and fund future
expansion and acquisitions. The Company is looking for opportunities to acquire
other companies which would improve its cash flow and capital positions in both
the short- and long-term. Management believes that funds for such acquisition
can be raised in transactions similar to the sale of stock purchase warrants
which funded the JMS acquisition.
Although the Company has previously been successful in obtaining sufficient
capital funds through issuance of common stock and warrants, there can be no
assurance that the Company will be able to do so in the future.
INFLATION AND SEASONALITY:
To date, inflation has not had a significant impact on the Company's
operations. The Company's revenues are affected by seasons with revenues
anticipated to increase during holiday seasons such as Thanksgiving, Christmas,
Jewish New Year, Easter and Passover.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This annual report contains certain forward-looking statements with respect
to the financial condition, results of operations and business of the Company
including statements relating to the cost savings, revenue enhancements and
marketing and other advantages that are expected to be realized from the
Company's plans to restructure and consolidate its operations and grow through
strategic acquisitions. Such forward-looking statements involve certain risks
and uncertainties that could cause actual results to differ materially from
those contemplated by such forward-looking statements. Such risks and
uncertainties include, without limitation: (1) expected cost savings from the
restructured or consolidated operations cannot be fully realized; (2)
difficulties relating to the integration of new businesses
20
<PAGE>
<PAGE>
that may be acquired; (3) the impact of competition on revenues and margins; (4)
increases in the costs of ingredients; and (5) other risks and uncertainties as
may be detailed from time to time in the Company's public announcements and
Commission filings.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditor's report F-1
Consolidated financial statements:
Balance sheet F-2
Statement of loss F-3
Statement of stockholders' equity F-4
Statement of cash flows F-5
Notes to consolidated financial statements F-6 - F-23
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable
21
<PAGE>
<PAGE>
[LETTERHEAD OF ZELLER WEISS & KAHN, LLP]
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Creative Bakeries, Inc.
We have audited the accompanying consolidated balance sheet of Creative
Bakeries, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of loss, stockholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of
Creative Bakeries, Inc. as of December 31, 1998 and 1997, and the results of its
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying financial statements, the Company incurred a significant net loss
for the year ended December 31, 1998 and as of December 31, 1998 has a working
capital deficiency in the amount of $385,695, which raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Management's plans in regard to these matters are
discussed in the notes to the financial statements.
Zeller Weiss & Kahn
April 7, 1999
F-1
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC.
CONSOLIDTAED BALANCE SHEET - DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 129,626
Accounts receivable, less allowance for doubtful
accounts of $40,480 262,476
Loans receivable 19,002
Inventories 235,592
Prepaid expenses and other current assets 52,815
-----------
Total current assets 699,511
-----------
Property and equipment, net 722,214
-----------
Other assets:
Goodwill, net of amortization 970,853
Security deposits 5,464
-----------
976,317
-----------
$ 2,398,042
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 33,405
Notes payable, bank 148,079
Loans payable, other 9,549
Accounts payable 525,640
Payroll taxes payable 120,816
Accrued expenses 247,717
-----------
Total current liabilities 1,085,206
-----------
Other liabilities:
Long-term debt, net of current portion 2,496
Deferred rent 151,338
Net liabilities of discontinued operations
less assets to be disposed of 676,881
-----------
830,815
-----------
Stockholders' equity:
Preferred stock $.001 par value, authorized 2,000,000
shares, no shares issued and outstanding
Common stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 5,101,750 shares 5,102
Additional paid in capital 11,206,588
Deficit (10,482,200)
-----------
729,490
Common stock held in treasury, 184,500 shares ( 247,369)
-----------
482,121
-----------
$ 2,398,042
===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC.
CONSOLIDATED STATEMENT OF LOSS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- Restated
--------
<S> <C> <C>
Net sales $3,841,440 $5,014,558
Cost of sales 3,137,519 4,224,113
---------- ----------
Gross profit 703,921 790,445
Selling, general and administrative expenses 1,300,317 1,867,242
---------- ----------
Loss from continuing operations ( 591,392) ( 1,076,797)
----------- -----------
Other income (expenses):
Gain (loss) from sale of disposition of assets 35,383 ( 57,963)
Interest income 10,195 17,385
Compensatory charges ( 5,004) ( 287,837)
Rental income 21,193
Interest expense ( 25,978) ( 31,101)
----------- -----------
19,600 ( 338,323)
---------- -----------
Loss from continuing operations ( 576,796) ( 1,415,120)
Income taxes, deferred 49,115
----------- ----------
Loss from continuing operations ( 576,796) ( 1,464,235)
----------- ----------
Discontinued operations:
Loss from operations of New York facility
to be disposed of ( 42,662) ( 1,089,611)
Estimated loss on disposal of New York facility ( 305,066)
----------- ---------
( 347,728) ( 1,089,611)
----------- ----------
Net loss ($ 924,524) ($2,553,846)
=========== ==========
Earnings per common share:
Primary and fully diluted:
Loss from continuing operations ( 0.11) ( 0.40)
Loss from discontinued facility ( 0.01) ( 0.28)
Estimated loss on disposal of New York
facility ( 0.06)
----------- ----------
( 0.18) ( 0.68)
=========== ==========
Weighted average number of common shares
outstanding 5,040,900 3,703,217
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common stock
------------------
Number Additional Total
of Paid in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 2,621,500 $2,622 $ 6,746,564 ($ 6,999,703) ($ 250,517)
Warrants issued January 17, 1997, less expenses
of the offering of $315,000 1,747,500 1,747,500
Common shares issued regarding acquisition of J.M.
Specialties, Inc. 500,000 500 874,500 875,000
Warrants issued regarding acquisition of J.M. Specialties,
Inc. 385,000 385,000
Common stock issued in consideration of legal and consulting
services 34,000 34 59,466 59,500
Fair market value of warrant to acquire 185,682 shares of
common stock issued to a lender in order to obtain financing
for the purchase of the operating assets of Greenberg
Desserts Associates Limited Partnership, valued at $1.09
per share 202,393 202,393
Shares issued regarding the acquisition of Chatterly Elegant
Desserts, Inc. to be treated as a pooling of interest 1,300,000 1,300 18,861 20,161
Fair market value of warrant to acquire 84,017 shares of common
stock issued to a lender in order to obtain financing for the
purchase of the operating assets of Greenberg Desserts
Associates Limited Partnership, valued at $.8124 per share 68,263 68,263
Common shares issued October 1997 when warrants exercised at
$1.25 per share 706,250 706 882,106 882,812
Fair market value of warrant to acquire 50,506 shares of common
stock issued to a lender in order to obtain financing for the
purchase of the operating assets of Greenberg Desserts
Associates Limited Partnership, valued at $.8805 per share 44,470 44,470
Net loss for the year ended December 31, 1997 ( 2,557,973) ( 2,557,973)
--------- ------ ----------- ----------- ----------
Balance at December 31, 1997 5,161,750 5,162 11,029,123 ( 9,557,676) 1,476,609
Common stock issued June 30, 1998 100,000 100 111,900 112,000
Fair market value of warrant to acquire 19,149 shares of common
stock issued to a lender in order to obtain financing for the
purchase of the operating assets of Greenberg Desserts
Associates Limited Partnership, valued at $.560 per share 5,005 5,005
--------- ------ ----------- ----------- ----------
5,261,750 5,262 11,146,028 ( 9,557,676) 1,593,614
Common stock issued in settlement of accrued obligations 40,000 40 60,360 60,400
Cancellation of shares regarding the purchase of Chatterly
Elegant Desserts, Inc. ( 200,000) ( 200) 200
Net loss for the year ended December 31, 1998 ( 924,524) ( 924,524)
--------- ------ ----------- ----------- ----------
Balance at December 31, 1998 5,101,750 $5,102 $11,206,588 ($10,482,200) $ 729,490
========= ====== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- Restated
--------
<S> <C> <C>
Operating activities:
Net loss from continuing operations ($576,796) ($1,464,235)
Adjustments to reconcile income from
continuing operations to cash provided
from continuing operations:
Depreciation 154,443 227,315
Amortization 80,910 80,910
Stock issued in consideration of services 40,000 59,500
Compensatory element of issuance of warrants 5,005 287,837
Gain on sale of fixed assets ( 35,383) 238,888
Changes in other operating assets and
liabilities from continuing operations:
Accounts receivable 182,795 ( 100,196)
Inventory 107,417 60,370
Prepaid expenses and other assets 11,253 ( 60,022)
Security deposits 18,850 3,674
Accounts payable ( 32,118) 260,745
Accrued expenses and other current
liabilities ( 65,360) 399,897
Deferred rent ( 1,540) 15,919
-------- ---------
Net cash provided by (used in) continuing
operations ( 110,524) 10,602
Net cash used in discontinued operations ( 35,510) ( 1,089,611)
-------- ----------
Net cash used in operating activities ( 146,034) ( 1,079,009)
-------- ----------
Investing activities:
Proceeds from sale of fixed assets 35,383
Purchase of property and equipment ( 11,970) ( 210,185)
Purchase of treasury stock ( 247,369) ( 900,000)
-------- ----------
Net cash used in investing activities ( 223,956) ( 1,110,185)
-------- ----------
Financing activities:
Proceeds from financing 75,000
Issuance of common stock and warrants 112,000 2,630,312
Payment of debt ( 91,696) ( 45,935)
-------- ----------
Net cash provided by financing activities 20,304 2,584,377
-------- ----------
Net increase (decrease) in cash and cash
equivalents ( 349,686) 395,183
Cash and cash equivalents, beginning of year 479,312 84,129
-------- ----------
Cash and cash equivalents, end of year $129,626 $ 479,312
======== ==========
Supplemental disclosure:
Cash paid during the year for:
Interest paid during the year
Continuing operations $ 25,978 $ 33,805
======== ==========
Discontinued operations $ 0 $ 0
======== ==========
Income taxes paid during the year
Continuing operations $ 0 $ 0
======== ========
Discontinued operations $ 0 $ 0
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Realization of assets - going concern:
Although the Company is currently operating its businesses, the
continuation of such business as going concerns is contingent upon,
among other things, the continued forbearance by the Company's
creditors from exercising their rights in connection with delinquent
accounts payable and payroll obligations. Management has indicated its
plan to meet its obligations is dependent upon cash flows, if any,
generated from JMS and Chatterly Elegant Desserts, Inc. and the
acquisition of additional businesses. These conditions, among others,
raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts of the amount and classification of liabilities that
might result should the Company be unable to continue as a going
concern.
William Greenberg Jr. Desserts and Cafes, Inc. was incorporated in the
State of New York on November 12, 1993. In 1997, the Company
transferred all of its business assets and liabilities to a newly
formed wholly-owned subsidiary, WGJ Desserts and Cafes, Inc. At this
time the Company's name was changed to Creative Bakeries, Inc. WGJ
Desserts and Cafes, Inc. operated a number of retail locations as well
as operating a bakery facility, all located in New York City. As of
June 1998, WGJ Desserts and Cafes, Inc. shut down its manufacturing
facility and effective November 1998, sold its final retail store.
Although the Company has not vacated its manufacturing facilities,
all operations have ceased.
During the year ended December 31, 1998, the Company incurred a loss
from continuing operations in the amount of $576,796 and a net loss of
$924,524, and as of December 31, 1998 had a net working capital
deficiency of $385,695. During 1998, the Company discontinued
operations of its two remaining retail stores. In June the Company also
closed its manufacturing plant in New York.
During 1997, the Company incurred restructuring costs in the form of
consulting fees, salary settlement costs and losses incurred on the
abandonment of assets at the retail facilities closed late in the year.
These costs amounted to $369,458 and were offset against the estimated
restructuring costs recorded at the end of 1996.
In connection with the restructuring plan, the Company determined the
carrying value of its baking equipment, furniture and fixtures and
leasehold improvements exceeded their fair market value. Therefore, in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets", a provision for impairment losses aggregating $305,066
was charged and included as part of other expenses in the accompanying
statement of operations for the year ended December 31, 1998. Such
impairment loss represents the excess of the carrying value of $340,066
over management's estimate of the fair market value of the assets of
$35,000.
F-6
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Realization of assets - going concern (continued):
In view of these matters, management believes that actions presently
being taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to continue as a
going concern.
2. Organization of the Company:
Creative Bakeries, Inc., formally 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 Dessert
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.
As more fully described elsewhere herein, the Company, on January 17,
1997, purchased all the 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 $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 350,000 shares of the Company's
common stock at a price of $2.50 per share. JMS offers a line of batter
and frozen finished cakes, brownies and muffins.
In order to finance the Acquisition, the Company raised net proceeds of
$1,747,500 from the issuance of 1,875,000 common stock purchase
warrants which are exercisable at a price of $2.50 per share.
In connection with the above described 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 three wholly-owned subsidiaries, JMS, WGJ Desserts and Cafes, Inc.
and Chatterly Elegant Desserts, 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 shares to Chatterly, of which 200,000 shares were
returned in 1998. Chatterly offers a line of tortes, cakes and mousses.
F-7
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. Organization of the Company (continued):
J.M. Specialties, Inc., t/a Batter Bake, was incorporated in the State
of New Jersey in 1985. The Company manufactures muffins, batter and
baked goods which are sold to supermarkets, food distributors,
educational institutions and restaurants. The Company has expanded its
product line to include yogurt and fat-free items. Although the Company
sells its products throughout the United States, its main customer base
is on the East Coast of the United States.
Chatterly Elegant Desserts, Inc. was incorporated in the State of New
Jersey in February 1985. The Company manufactures baking and
confectionery products. The Company's customers are retailers located
in the Northeast portion of the United States.
Effective December 1997, Chatterly Elegant Desserts, Inc. was formally
merged with J.M. Specialties, Inc. under New Jersey law. Because of the
consolidation of the two companies facilities, management feels this
merger was beneficial and cost efficient.
3. Summary of significant accounting policies:
Restated financial statements:
The accompanying financial statements for 1997 have been restated to
show the effect of the discontinued operations discussed in Note 17.
Revenue recognition:
The Company recognizes revenues in accordance with generally accepted
accounting principles in the period in which its products are shipped
to its wholesale or mail order customers. Retail store sales are
recorded when the consumer purchases the Company's products at one of
its retail stores. Expenses are recorded in the period in which they
are incurred, in accordance with generally accepted accounting
principles.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and trade accounts receivable. The Company places its cash with high
credit quality financial institutions which at times may be in excess
of the FDIC insurance limit. Concentrations of credit risk with
respect to trade accounts receivable are generally limited due to the
large number of customers comprising the Company's customer base. In
addition, the Company performs ongoing credit evaluations of its
customers' financial condition and, as consequence, believes that its
trade accounts receivable credit risk exposure is limited.
F-8
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
3. Summary of significant accounting policies (continued):
Inventories:
Inventories are stated at the lower of cost (first-in - first-out) or
market.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with the maturity of three
months or less, as well as money market funds, to be cash
equivalents.
Property and equipment and depreciation:
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the
following useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Machinery and equipment 10
Furniture and computers 5
Leasehold improvements 10-15
</TABLE>
Expenditures for major renewals and betterment that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expenses as incurred. When
assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are eliminated from the accounts and the
resulting gain or loss, is any, is reflected in income. As discussed in
Note 1, management had determined that there had been an impairment to
the value of the property of WGJ Desserts and Cafes, Inc. (formerly
William Greenberg Jr. Desserts and Cafes, Inc.) in 1998 and 1996 and
property and equipment had been written down to their net realizable
value.
Allowance for doubtful accounts:
An allowance for doubtful accounts has been established by management
based on a review of open accounts receivable at each balance sheet
and their respective collectibility.
Intangibles:
The covenant not to compete is amortized over the term of the agreement
and goodwill is amortized over its estimated useful life of forty
years (see Note 6).
F-9
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
3. Summary of significant accounting policies (continued):
Income taxes:
Deferred income taxes:
Deferred income taxes arise from timing differences resulting from
income and expense items reported for financial/accounting and tax
purposes in different periods. Deferred taxes are classified as
current or non-current, depending on the classification of the assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
differ from these estimates.
4. 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., WGJ
Desserts and Cafes, Inc. and Chatterly Elegant Desserts, Inc. are
included as the subsidiaries of Creative Bakeries, Inc.
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
$2,160,000 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 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-10
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
5. 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 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:
<TABLE>
<S> <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 1,213,565
----------
$2,160,000
==========
</TABLE>
F-11
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
5. Acquisition of J.M. Specialties, Inc. (continued):
Under the terms of the 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 $1.09
per common share which resulted in a charge to operations of $202,393
in the first quarter of 1997.
6. 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 in 1998.
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:
<TABLE>
<S> <C> <C>
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
========
</TABLE>
F-12
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
6. Acquisition of Chatterly Elegant Desserts, Inc. (continued):
Under the terms of its agreement with InterEquity Capital Partners,
L.P., the Company reserved 84,017 shares of its common stock for
issuance under the warrant. Management ascribed a fair value of $.8125
per common share which resulted a charge to operations of $68,263 in
the third quarter of operations in 1997.
7. Property and equipment:
The Company's baking equipment, furniture and fixtures and leasehold
improvements were deemed to be impaired and written down to
management's estimate of their fair value at December 31, 1998. 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 $305,066 was charged to operations during the fourth quarter
of 1998.
The following is a summary of property and equipment at December 31,
1998:
<TABLE>
<S> <C>
Baking equipment $1,429,395
Furniture and fixtures 74,664
Leasehold improvements 180,422
----------
1,684,481
Less: Accumulated depreciation
and amortization 962,267
----------
$ 722,214
==========
</TABLE>
8. 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 $25,000 in 1998 and 1997.
F-13
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
8. Intangible assets (continued):
The excess cost over the fair value of the net assets acquired from
J.M. Specialties, Inc. aggregated $1,213,565. This goodwill has been
amortized over its estimated useful life of fifteen years. Amortization
charged to operations amounted to $80,900 in 1998 and 1997.
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:
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 5).
In March 1997, the Company issued 34,000 shares of common stock to a law
firm in settlement of amounts owed for services.
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 6). 200,000 shares were subsequently
returned in 1998.
In October 1997, the Company issued 706,250 shares of its common stock
at $1.25 for total proceeds of $882,812.
In June 1998, the Company sold 100,000 shares of its common stock for
proceeds of $110,000.
In July 1998, the Company issued 40,000 in settlement of certain
obligations due a former shareholder and unrelated debtor of Chatterly
Elegant Desserts, Inc. The total amount of the settlement was $60,400.
F-14
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
10. 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 100,000 shares of common stock in
1998, the lender was entitled to an additional 19,149 shares of
common stock. Accordingly, the financial statements include a
charge to operations of $10,809 which represents the market
value of the stock at the time the 19,149 warrants were issued
by the Company.
Compensatory charges recorded on the income statement for 1998 amounted
to $10,809 and $287,837 in 1997.
(ii) Other 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).
(ii) Other warrants issued in 1997 (continued):
All of the warrants issued in 1997, including the Placement
Warrants, aggregating 2,485,000 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
between $2.50 and $3.00 for a term which will expire on
December 31, 2000.
F-15
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
10. Capital stock (continued)
(b) Warrants (continued):
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:
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:
<TABLE>
<CAPTION>
Value of
Cash Warrants
Settlement Issued Total
For Wages at $1.10 Settlement
------------- ---------- ----------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
F-16
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
11. Commitments and contingencies (continued)
Employment Agreements (continued):
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 by $72,914 in the quarter
ended June 30, 1997. This amount was settled in July of 1998 by issuing
30,000 shares of the Company's common shares which has a fair value of
$45,089. The Company recorded the difference to income in the third
quarter of 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 has been made in 1997 to reflect
these demands and is still carried as a liability as of December 31,
1998.
Litigation matters:
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. On December
14, 1998, the Company moved by order to show cause to dismiss the
complaint in its entirety as against the Company based on the fact that
the action involves a private transaction between the plaintiff and the
Abramson's, and the complaint fails to state a cause of action against
Creative Bakeries, Inc. After a full briefing and oral argument, the
papers were taken by the court on submission and the Company is
awaiting a ruling on that motion.
F-17
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
11. Commitments and contingencies (continued):
Litigation matters (continued):
The Company has also been named as a defendant in an action entitled
Ackerman v Alan Sloan, an adversary proceeding brought in the United
States Bankruptcy Court by the Chapter 7 trustee of Alliotto Bakery
Cafe, Inc. The complaint alleges that the Company, while operating as
William Greenberg, Jr. Desserts and Cafes, Inc. used customer lists and
property of the Chapter 7 debtor for a period of several weeks sometime
after June 1998 without having paid fair value or consideration. While
the Company does not believe it committed any actionable conduct, the
Company does not believe the claim is material because it is believed
to involve a potential exposure of only several thousand dollars. The
Company has not yet filed a formal response to the claim.
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 its six retail locations in 1998 and 1997. The
Company has received releases on all locations.
The Company favorably settled the lease of one of its retail stores in
1998. In the settlement, the landlord forgave $21,040 in back rent
which had previously been recorded by the Company as expense, resulting
in income being realized in the current year.
During 1997, the Company sublet one of its retail locations, receiving
rental income of $73,500, the amount of the rent expense. This lease
was terminated in February 1998 with no further obligation to the
Company.
The minimum future rentals on the baking facility is as follows:
<TABLE>
<S> <C>
December 31, 1999 $ 46,949
December 31, 2000 48,357
December 31, 2001 49,809
December 31, 2002 51,302
December 31, 2003 52,842
Thereafter 110,488
--------
$359,747
========
</TABLE>
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.
F-18
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
11. Commitments and contingencies (continued):
<TABLE>
<CAPTION>
Facility
-----------
<S> <C>
December 31, 1999 $ 192,250
December 31, 2000 200,000
December 31, 2001 200,000
December 31, 2002 200,000
December 31, 2003 200,000
Thereafter 230,000
----------
$1,222,250
==========
</TABLE>
Rent expense for all operating leases amounted to $442,794 in 1998 and
$808,385 in 1997 and includes straight-lining of rent adjustments
discussed in Note 10.
12. Long-term debt:
Equipment with a cost of $197,000 has been pledged as collateral on a
note payable in monthly installments of $2,909, 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 December 31, 1998 are as follows:
<TABLE>
<S> <C>
December 31, 1999 $33,405
December 31, 2000 2,495
-------
$35,900
=======
</TABLE>
13. 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
2,485,000 in 1998 and 1997.
F-19
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
13. Earnings per share (continued):
Reconciliation of shares used in computation of earnings per share:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average of shares actually
outstanding 5,040,900 3,703,217
Common stock purchase warrants --------- ---------
Primary and fully diluted weighted
average common shares outstanding 5,040,900 3,703,217
========= =========
</TABLE>
14. Inventories:
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials $ 82,128
Finished goods 65,818
Packaging supplies, labels, etc. 87,646
--------
$235,592
========
</TABLE>
15. Supplemental schedule of non-cash investing and financing activities:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Issuance of common stock and warrants
regarding acquisition of subsidiaries $1,280,161
Common shares issued in consideration
of legal, consulting fees and other
obligations $40,000 59,500
------- ----------
$40,000 $1,339,661
======= ==========
</TABLE>
F-20
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
16. Note receivable:
On November 3, 1998, the Company sold its one remaining retail facility
for $405,000 which represented disposition of equipment and a license
to sell under the "William Greenberg, Jr. Desserts and Cafes" name. The
agreement called for a cash down payment of $110,000 with the remainder
being paid on a note receivable due in semi-annual installments of
$36,875 plus interest at prime.
The maturities of the notes are as follows:
<TABLE>
<S> <C>
December 31, 1999 $ 73,750
December 31, 2000 73,750
December 31, 2001 73,750
December 31, 2002 73,750
--------
$295,000
========
</TABLE>
In the event that the licensee opens and operates any additional retail
store(s) utilizing the license (other than the original retail store)
and the annual gross retail sales of any such store(s) exceeds
$400,000, then the licensee shall pay the licensor (the Company) a five
percent royalty on all sales in excess of the $400,000 of sales in each
store. The licensee shall pay the licensor a royalty on a semi-annual
basis of 3% of all mail order sales in excess of $100,000.
17. Discontinued operations:
In 1998, the Company adopted a formal plan to close WGJ Desserts and
Cafes, Inc., its New York manufacturing facility, which was done in
July of 1998 and to dispose of its one remaining retail store, which
was accomplished in November 1998. The New Jersey facility was
unaffected and still continues to sell and manufacture.
The sale of the final retail location resulted in a selling price of
$405,000 which includes a note receivable of $295,000. The sale
resulted in a gain of $321,350 which is included in other income.
Net liabilities, less assets to be disposed of, of WGJ Desserts, Inc.
consisted of the following as of December 31, 1998:
<TABLE>
<S> <C>
Accounts payable $ 402,289
Loans payable 100,000
Accrued payroll 327,823
Accrued expenses 248,607
Deferred rent 44,349
----------
1,123,068
----------
</TABLE>
F-21
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
17. Discontinued operations (continued):
<TABLE>
<S> <C>
Cash 45,556
Notes receivable 300,000
Interest receivable 3,633
Property and equipment 35,000
Covenant not to compete 37,500
Security deposits 24,498
----------
446,187
----------
$ 676,881
==========
</TABLE>
Information relating to discontinued operations for WGJ Desserts and
Cafes, Inc. for the year ended December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $1,064,856 $3,443,005
Cost of sales 687,677 2,156,370
---------- ----------
Gross profit 377,179 1,286,635
Operating expenses 659,224 2,457,756
---------- ----------
Net loss from operations ( 282,045) ( 1,171,121)
---------- ----------
Settlement income 64,439
Gain on sale of fixed assets 10,000
Miscellaneous expense ( 6,863)
Interest expense ( 2,704)
Loss on abandonment of leasehold
improvements ( 143,176)
Rental income 73,500
Gain on sale of 82nd Street facility 321,350
Interest income 3,633 714
---------- ----------
239,383 81,510
---------- ----------
Net loss from operations ( 42,662) ( 1,089,611)
Estimated loss on disposal of
New York facility ( 305,066)
---------- ----------
($ 347,728) ($1,089,611)
========== ==========
</TABLE>
F-22
<PAGE>
<PAGE>
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
18. Other matters:
The year 2000 issue relates to the inability of many electronic data
processing (EDP) systems to accurately process year-date data beyond
the year 1999. Unless year 2000 problems are remedied, significant
problems relating to the integrity of all electronically processed
information based on time will occur.
Additionally, there are many other operational issues that need to be
assessed, such as computer-run maintenance systems, as well as systems
that may be indirectly controlled by computer by way of a chip embedded
in their designs.
The effect, if any, at this time about the problems that could occur and
the costs to remedy can not be determined.
F-23
<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
Information Concerning the Board of Directors and Executive
Officers
The following table sets forth certain information concerning the Board of
Directors, persons nominated to be elected as directors and executive officers
of the Company:
<TABLE>
<CAPTION>
Name of Director or Date of
Executive Officer, Principal Occupation Initial
Age and Position For Previous Five Years Election
Held with Company ----------------------- as Director
- ---------------- -----------
<S> <C> <C>
Philip Grabow, 58, Chief Executive Officer, January 23, 1997
President and Director October 1985 to January
1997 of JMS
Richard Fechtor, 67, Founder of and since July 11, 1996
Director 1974 Executive Vice
President of Fechtor,
Detwiler & Co., Inc., the
representative of the
underwriters in the Company's
initial public offering;
Director of Vascular
Laboratories since 1989
Raymond J. McKinstry, Investment manager with August 1995
50, Director Astair & Partners,
Limited, a London based
brokerage company, 1987
to present
Kenneth Sitomer, 51, Chief Operating Officer July 1997
Director of Sam and Libby, Inc.,
a publicly held company,
1993 to present; private
consultant to footwear
industry 1992 to March
1993; President and
Chief Executive Officer
of Russ Togs, Inc., a
publicly held company
listed on the New York
Stock Exchange, 1989 to
</TABLE>
22
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name of Director or Date of
Executive Officer, Principal Occupation Initial
Age and Position For Previous Five Years Election
Held with Company ----------------------- as Director
- ---------------- -----------
<S> <C> <C>
1992.
Karen Brenner, 44, President of Fortuna July 1997
Director Advisors, Inc., an
investment advisory firm in
California 1993 to present;
founder and President of
Karen Brenner, Registered
Investment Advisor, the
predecessor to Fortuna
Advisors, Inc., 1984 to 1993;
Managing Partner of
F.C. Partners, a California
limited partnership, April
1996 to present; Director on
DDL Electronics, Inc., a
publicly held company, July
1996 to present; Director of
Krug International Corp., a
publicly held company, July
1996 to present.
Yona Abrahami, 49 Founder and President of August 1997
Director Chatterley
</TABLE>
All directors hold office until the next annual meeting of shareholders or
until their successors are elected and qualified. For a period of five years
from October 12, 1995, Fechtor Detwiler & Co., Inc. (the "Representative") has
the right to nominate one member to the Company's Board of Directors. Mr.
Fechtor is the Representative's current nominee to the Board of Directors. There
are no family relationships among any of the directors and executive officers of
the Company.
Officers are appointed by the Board of Directors and serve at the
discretion of the Board.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
23
<PAGE>
<PAGE>
The Securities and Exchange Commission (the "Commission") has comprehensive
rules relating to the reporting of securities transactions by directors,
officers and shareholders who beneficially own more than 10% of the Company's
Common Shares (collectively, the "Reporting Persons"). These rules are complex
and difficult to interpret. Based solely on a review of Section 16 reports
received by the Company from Reporting Persons, the Company believes that no
Reporting Person has failed to file a Section 16 report on a timely basis during
the most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
Directors of the Company who are not salaried officers receive a fee of
$500 for attending each meeting of the Board of Directors or a committee
thereof. In addition, all directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with attending such meetings.
Executive Compensation in 1998
The following table sets forth compensation paid to the Chief Executive
Officer and to executive officers of the Company, excluding those executive
officers who did not receive an annual salary and bonus in excess of $100,000 in
the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation
- ------------------ ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
Philip Grabow, CEO 1998 $150,000 $0.00 $0.00
Yona Abrahami, VP 1998 $100,000 $0.00 $0.00
</TABLE>
No other executive officer received a salary and bonus in excess of
$100,000 for the year ended December 31, 1997. The Company has not granted any
stock options, stock appreciation rights or long-term incentive awards to any
executive officer of the Company since its inception.
Employment Agreements
24
<PAGE>
<PAGE>
Simultaneously with the acquisition of Chatterley, the Company entered into
employment agreements with Yona Abrahami and David Abrahami. David Abrahami's
contract has since been terminated. These agreements were filed as exhibits B
and C respectively with the Form 8-K/A on November 17, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT??
The following table sets forth the number and percentage of Common Shares
beneficially owned, as of the date of this Amendment to the Annual Report, by:
(i) all persons known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock; (ii) each director of the Company;
(iii) each of the "named executive officers" as defined under the rules and
regulations of the Securities Act of 1933, as amended; and (iv) all directors
and executive officers of the Company as a group (7 persons):
<TABLE>
<CAPTION>
Name Number of Percentage
- ---- Shares Beneficially
Beneficially Owned(2)
Owned(1) --------
------------
<S> <C> <C>
Yona Abrahami(3)......................... 1,100,000 21.3%
Philip Grabow(4)......................... 800,000 14.6%
Richard Fechtor(5)....................... 142,933 2.8%
Raymond J. McKinstry(6).................. 50,000 *
InterEquity Capital Partners, L.P.(7).... 378,390 6.8%
Kenneth Sitomer(8)....................... -- --
Karen Brenner(9)......................... -- --
Ashwin R. Shah(10)....................... 500 --
Willa Abrahamson(11)..................... 400,000 7.7%
Fortuna Investment Partners(12).......... 550,000 9.6%
100 Wilshire Blvd.
Suite 1500
Santa Monica, CA 90401
Baileys Family Trust..................... 606,250 10.5%
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
P.O. Box 9109
Newport Beach, CA 92658
All executive officers
and directors as a group 2,097,519 19.1%
(7 persons)(14)..........................
</TABLE>
- -------------------------
* Less than 1%.
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting power with respect to all shares beneficially owned
by them. A person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days from the date hereof upon the
exercise of warrants or options.
(2) Assumes 5,161,750 shares of Common Stock outstanding as of the March 31,
1998. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
from the date hereof have been exercised.
(3) Ms. Abrahami's address is c/o 20 Passaic Avenue, Fairfield, New Jersey
07004.
(3) Mr. Grabow's business address is c/o 20 Passaic Avenue, Fairfield, New
Jersey 07004. Includes 500,000 Common Shares and currently exercisable
warrants to purchase an additional 300,000 shares of Common Stock. See
"Certain Relationships and Related Transactions."
(5) Mr. Fechtor's business address is 155 Federal Street, Boston, Massachusetts
02110. Upon the conversion of a certain note, InterEquity Capital Partners,
L.P., received a six-year warrant exercisable until October 2001 to
purchase, on one occasion, 6% of the issued and outstanding capital shares
of the Company on a fully diluted basis as of the date of exercise. Certain
persons associated with the Representative, received an aggregate 17.5%
interest in such warrant, including Mr. Fechtor, who received a 5% interest
in such warrant. As of March 31, 1998, there are 7,644,250 shares of Common
Stock outstanding on a fully diluted basis, 6% of which equals 458,655
shares of Common Stock. Accordingly, Mr. Fechtor's ownership as shown in
the table includes 22,933 shares issuable upon exercise of such warrant.
See "Certain Relationships and Related Transactions." Also includes 120,000
shares of Common Stock. Excludes 5,500 shares of Common Stock owned by Mr.
Fechtor's wife, of which he disclaims beneficial ownership.
(6) Mr. McKinstry's business address is 40 Queen Street, London EC4R 1DD,
England. Includes currently exercisable warrants to purchase 50,000 Common
Shares.
26
<PAGE>
<PAGE>
(7) InterEquity's business address is 220 Fifth Avenue, New York, New York
10001. Includes an 82.5% interest in a six-year warrant exercisable to
purchase, on one occasion, 6% of the issued and outstanding capital shares
of the Company on a fully diluted basis as of the date of exercise. As of
March 31, 1998, there are 7,644,250 shares of Common Stock outstanding, 6%
of which equals 458,655 shares of Common Stock. Accordingly, InterEquity's
ownership as shown in the table includes 378,390 shares issuable upon
exercise of such warrant. The warrant is currently exercisable and expires
in October 2001.
(8) Mr. Sitomer's address is 303 East 57th Street, New York, New York 10022.
(9) Ms. Brenner's address is P.O. Box 9109, Newport Beach, California 92660.
(10) Mr. Shah's address is c/o 20 Passaic Avenue, Fairfield, New Jersey 07004.
(11) Mr. Abrahamson's address is 1800 NE 115th Street, Miami, FL 53181.
(12) Includes currently exercisable warrants to purchase 550,000 shares.
(13) Includes currently exercisable warrants to purchase 606,250 shares.
(14) Includes the shares of Common Stock beneficially owned by Ms. Abrahami, Mr.
Grabow, Mr. Fechtor, Mr. McKinstry, Mr. Sitomer, Ms. Brenner and Mr. Shah.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The JMS Acquisition
On January 17, 1997, the Company entered into a stock purchase agreement
(the "Stock Purchase Agreement") with Philip Grabow ("Grabow"), pursuant to
which, on January 23, 1997, the Company consummated the purchase from Grabow of
all the outstanding shares of J.M. Specialties, Inc., a New Jersey corporation
(the "JMS Subsidiary"), in exchange for (i) $900,000 in cash, (ii) 500,000
shares (the "JMS Shares") of the Common Stock of the Company and (iii) 350,000
warrants (the "JMS Warrants") exercisable for shares of Common Stock of the
Company (the "JMS Transaction"). Each JMS Warrant entitles Grabow to purchase
one Common Share of the Company 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 Common Shares of issuable upon
exercise of the JMS Warrants,
27
<PAGE>
<PAGE>
and (ii) an employment agreement dated as of January 23, 1997. Pursuant to the
employment agreement, Grabow will serve as President 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. Also in connection with the JMS Transaction,
effective January 23, 1997, Grabow was elected to serve as a director of the
Company.
JMS Acquisition Indebtedness
The payment of the cash portion of the purchase price for the JMS
Subsidiary and such working capital, was funded through the net proceeds
received from the sale by the Company of 1,500,000 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 qualified as
"accredited investors" under the Securities Act of 1933. The terms of the
Private Placement Warrants are substantially similar to the JMS Warrants.
The Chatterley Acquisition
On August 28, 1997 the Company entered into a stock purchase agreement with
Yona Abrahami pursuant to which the Company purchased from Ms. Abrahami all the
outstanding shares of Chatterley Elegant Desserts, Inc., a New Jersey
Corporation, in exchange for 1,300,000 shares of the Company's common stock.
Such stock purchase agreement was subsequently amended and Ms. Abrahami agreed
to reduce the purchase price by surrendering 200,000 shares of common stock back
to the Company.
28
<PAGE>
<PAGE>
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements filed as part of the Company's Form 10-KSB are
listed in Item 7. Financial Statements are included in Part IV hereof at page
F-1.
(b) Reports on Form 8-K
On September 11, 1997, the Company filed a Current Report on Form 8-K
announcing completion of the Chatterley acquisition.
(c) Listing of Exhibits
<TABLE>
<S> <C>
**2.1 Purchase and Sale Agreement, dated June 2, 1995, by and among the
Company, Greenberg Dessert Associates Limited Partnership, SMG Baking
Enterprises, Inc. and its limited partners.
***2.2 Stock Purchase Agreement, dated as of January 17, 1997, by and
between the Company and Philip Grabow, without exhibits.
**3.1 Restated Certificate of Incorporation.
**3.2 Amended and Restated By-laws.
**4.1 Form of certificate for shares of Common Stock.
**4.2 Form of Representatives Warrant.
**4.3 Loan Agreement, dated July 10, 1995, by and between InterEquity
Capital Partners, L.P. and the Company.
**10.1 Employment Agreement, dated July 10, 1995, by and between the Company
and Stephen Fass.
**10.2 Employment Agreement, dated as of July 10, 1995, by and between the
Company and Willa Rose Abramson.
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
<S> <C>
**10.3 Employment Agreement, dated as of July 10, 1995, by and between the
Company and Maria Maggio Marfuggi.
**10.4 Employment Agreement and Consulting Agreement, dated July 10, 1995,
by and between the Company and Seth Greenberg.
**10.5 Consulting Agreement, dated July 10, 1995, by and between the Company
and William Greenberg Jr.. and Carol Greenberg.
**10.6 Departmental License Agreement effective February 1995 by and between
the Company and Macy's East, Inc.
**10.8 Form of Warrant for InterEquity Capital Partners, L.P.
**10.9 1995 William Greenberg Jr. Desserts and Cafes, Inc.
Stock Option Plan
**10.10 Lease Agreement dated July 1995 between the Company and Murray
Greenstein.
**10.11 Lease Agreement dated January 1994 between Schnecken Baking Realty
Corp. and Gerel Corporation.
**10.12 Assignment and Assumption of Lease dated July 1995 between the
Company and Schnecken Baking Realty Corp.
**10.13 Lease dated April 1991 between Greenberg's 35th Street Baking Co.,
Inc. and Rugby Managed Asset Fund.
**10.14 Assignment and Assumption of Lease dated July 1995 between the
Company and Greenberg's 35th Street Baking Co.
**10.15 Lease dated May 1989 as modified in January 1991 between Greenberg's
Triple S. Baking Co., Inc. and Stahl Real Estate Co.
**10.16 Assignment and Assumption of Lease dated July 1995 between the
Company and Greenberg's Triple S. Baking Co., Inc.
</TABLE>
30
<PAGE>
<PAGE>
<TABLE>
<S> <C>
**10.17 Consulting Agreement, dated July 10, 1995, by and between the
Company and Marilyn Miller.
**10.18 Form of Indemnity Agreement.
**10.19 Sublease dated December 1995 between Timothy's Coffees of the
World, Inc., and the Company.
****10.20 Lease dated March 8, 1995 between Harran Holding Corp., c/o A. J.
Clarke Management and the Company.
****10.21 Agreement dated January 13, 1996 by and between the Company and
Barry Kaplan Associates.
*****10.22 Employment Agreement, dated January 23, 1997, by and between the
Company and Philip Grabow.
*****10.23 Form of Warrant for the Private Placement made in conjunction with
the JMS Subsidiary acquisition.
******10.24 Stock Purchase Agreement dated August 28, 1997, between the Company
and Yona Abrahami.
******10.25 Employment Agreement dated August 28, 1992 between the Company and
Yona Abrahami.
******10.26 Employment Agreement dated August 28, 1992 between the Company and
David Abrahami.
*10.27 Amendment to Stock Purchase Agreement dated March 10, 1997, between
the Company and Yona Abrahami.
*21.1 List of Subsidiaries of the Company, the state of incorporation of
each, and the names under which such subsidiaries do business.
</TABLE>
- ---------------------
* Filed Herewith.
31
<PAGE>
<PAGE>
<TABLE>
<S> <C>
** Incorporated by reference to the Company's Registration
Statement on Form SB-2 Registration Number 33-96094.
*** Incorporated by reference to Schedule 13-D filed by
Philip Grabow on SEC File Number 005-48185.
**** Incorporated by reference to the Company's Annual Report for the fiscal
year ended December 31, 1995, on Form 10-KSB Commission File Number
1-13984.
***** Incorporated by reference to the Company's Annual Report for the fiscal
year ended December 31, 1996, on Form 10-KSB Commission.
****** Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 11, 1997 and Form 8-K/A, dated November 17, 1997.
</TABLE>
32
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on April 14, 1999.
CREATIVE BAKERIES, INC.
By: /s/ Philip Grabow
--------------------------------
Philip Grabow
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on April 14, 1999.
<TABLE>
<CAPTION>
Signatures Title
-----
<S> <C>
/s/Philip Grabow President, Chief Executive
- ------------------------- Officer/Director
Philip Grabow
/s/Ashwin R. Shah Chief Financial Officer
- ------------------------- (Principal Accounting Officer)
Philip Grabow
- ------------------------- Director
Richard Fector
/s/Raymond J. McKinstry Director
- -------------------------
Raymond J. McKinstry
/s/Kenneth Sitomer Director
- -------------------------
Kenneth Sitomer
/s/Karen Brenner Director
- -------------------------
Karen Brenner
/s/Yona Abrahami Director
- -------------------------
Yona Abrahami
</TABLE>
33
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................... 'TM'
<PAGE>
<PAGE>
EXHIBIT 10.27
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT is made as of this 10th day of March, 1998,
between Creative Bakeries, Inc., a New York corporation ("Purchaser") and Yona
Abrahami ("Seller"). All capitalized terms not defined herein shall have the
meanings ascribed to such terms in the Stock Purchase Agreement (as such term is
defined below).
W I T N E S S E T H:
WHEREAS, Purchaser, Seller and Chatterley Elegant Desserts, Inc. (the
"Company") entered into that certain Stock Purchase Agreement dated as August
27, 1997 (the "Stock Purchase Agreement"), pursuant to which Purchaser purchased
from Seller all of the capital stock of the Company (the "Stock");
WHEREAS, in payment of the purchase price (the "Purchase Price") for the
Stock, Purchaser delivered to Seller 1,300,000 shares of common stock of
Purchaser ("Creative Shares");
WHEREAS, Purchaser has made a claim (the "Claim") for indemnification
against Seller based upon certain alleged misrepresentations and warranties of
Seller contained in the Stock Purchase Agreement relating to certain financial
statements of the Company furnished by Seller to Purchaser;
WHEREAS, the parties hereto have reached a mutually satisfactory resolution
of all issues and disputes relating to the Claim; and
WHEREAS, the parties wish to make certain other amendments to the Stock
Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
agreements and warranties herein contained, the parties agree as follows:
<PAGE>
<PAGE>
1. Amendment to Stock Purchase Agreement.
1.1 Non-Survival of Financial Statement Representations.
Notwithstanding anything in the Stock Purchase Agreement to the
contrary, the provisions of Sections 4.10, 4.13(a), 4.14(a)(iii),
the first sentence of 4.14(b), 4.20 and 4.21 of the Stock
Purchase Agreement shall be deleted in their entirety and shall
have no further force and effect and each party hereto shall have
no further liability or obligation to any other party hereto
pursuant to such provision. In addition, effective as of the date
of the Stock Purchase Agreement, (i) the phrase in the second
sentence of Section 4.17 of the Stock Purchase Agreement which
reads "... the Company has paid in all respects or accrued all
amounts due thereunder to be satisfied or provided for through
the date hereof ..." shall be deleted and (ii) the first sentence
of Section 4.26 of the Stock Purchase Agreement is amended to add
the phrase "as amended by the Amendment Agreement dated March 10,
1998" after the word "Agreement" and to delete the phrase "nor
the Company Financial Statements, nor any other financial
statements."
1.2 Non-Survival of Representations and Warranties. The Stock
Purchase Agreement is hereby further amended to provide that the
remaining representations and warranties (other than
representations and warranties relating to Taxes which shall
survive for the applicable statute of limitations) contained
therein shall not survive beyond the second anniversary of the
Stock Purchase Agreement (the "Survival Period") and all claims
for indemnification under Section 6.2 of the Stock Purchase
Agreement must be made to Seller in writing prior to expiration
of the applicable Survival Period.
1.3 Release of Certain Matters. Purchaser hereby irrevocably
waives and surrenders any and all rights and claims in respect
of, and hereby irrevocably releases and discharges Seller from
and against all actions, claims, and demands (at law or
<PAGE>
<PAGE>
in equity) which Purchaser and/or its successors and assigns ever
had, now have or hereafter can, shall or may have, relating to or
arising out of any alleged misrepresentations and/or breaches of
warranty or from any inaccuracies contained in those provisions
of the Stock Purchase Agreement referred to in the first sentence
of Section 1.1 hereof including, without limitation, the failure
to reflect certain accounts payable of the Company in the
financial statements of the Company furnished to Purchaser, any
obligation of the Company to pay incentive bonuses to four
employees of the Company identified by the Seller, any obligation
of the Company with respect to common area charges under its
building lease or any loss incurred by the Company solely arising
out of any lien encumbering the landlord's real property created
or incurred by the landlord (but not directly created or incurred
by the Company or directly encumbering the Company's leasehold
interest) (collectively, the "Disclosed Obligations") or based on
any oral representations (whether made by Seller or by David
Abrahami, a former officer of the Company), agreements or
understandings including, but not limited to, those relating to
the past and projected operating profitability and/or income and
expenses of the Company or relating to the determination of the
Purchase Price (collectively, the "Negotiations").
3
<PAGE>
<PAGE>
2. Adjustment of Purchase Price.
2.1 Resolution of Dispute. The parties hereto acknowledge and
agree that they have, subject to the terms and conditions hereof,
reached a mutually satisfactory resolution of all issues and
disputes relating to the Claim, and that such resolution is final
and binding upon all parties hereto. Each of the parties hereby
irrevocably agrees that, subject to the terms and conditions
hereof, there shall be no further adjustment of the Purchase
Price pursuant to any claim pursuant to the terms of those
provisions of the Stock Purchase Agreement referred to in the
first sentence of Section 1.1 hereof or based upon the Disclosed
Obligations or the Negotiations and Purchaser hereby irrevocably
waives and surrenders any and all claims and rights that it has
or may have to seek or propose any further adjustment of the
Purchase Price pursuant to the terms of those provisions of the
Stock Purchase Agreement referred to in the first sentence of
Section 1.1 hereof or based upon Disclosed Obligations or the
Negotiations.
2.2 Adjustment; Revocation of Board Resolution. The parties hereby
agree that the Purchase Price adjustment shall be to adjust the
number of Creative Shares paid as the Purchase Price to 1,100,000
which adjustment shall be made by Seller delivering certificates
evidencing 200,000 Creative Shares to Purchaser duly endorsed to
Purchaser or with appropriately executed stock transfer powers
attached. Purchaser shall promptly cause its Board of Directors
to rescind the resolution previously adopted by such Board
placing a "stop transfer" instruction on the remaining Creative
Shares owned by Seller.
3. Covenants of the Parties. The parties covenant and agree to the following:
3.1 Covenant Not to Sue. Purchaser shall not initiate any legal
action against David Abrahami based on
4
<PAGE>
<PAGE>
those provisions of the Stock Purchase Agreement referred to in
the first sentence of Section 1.1 hereof or based upon the
Disclosed Obligations or the Negotiations; provided, however,
that Purchaser reserves the right to assert any of the foregoing
as defenses and/or counterclaims (the "Counterclaims") in any
action initiated by David Abrahami; provided, further, however,
that in the event that David Abrahami shall initiate legal action
against Seller arising out, or related to, or in connection with,
the assertion of the Counterclaims, Purchaser shall reimburse
Seller for her reasonable attorneys' fees and expenses in
defending such action and claims arising out of the Counterclaims
up to $40,000.
3.2 Confidentiality; No Admission. None of the parties shall disclose
or publicize the terms of this Agreement or the transactions
contemplated hereby without the prior written consent of the
other party subject, in the case of Purchaser, to its disclosure
obligations under applicable securities laws or pursuant to any
listing agreement. Seller's execution of, and entry into, this
Amendment Agreement, and her transfer of 200,000 Creative Shares
to Purchaser, do not constitute, and/or may not be deemed or
construed to be, an admission, declaration against interest or
concession by Seller, whether express or implied, as to any
wrongdoing, liability or responsibility with respect to any or
all of the claims raised by Purchaser, whether as to herself or
as to others, and neither this Amendment Agreement nor any of its
contents shall be admissible in evidence, or used in any way for
any purpose, in any subsequent litigation, arbitration, mediation
or other dispute resolution proceedings, involving Purchaser,
including, but not limited to, claim presentations, pleadings,
motions, hearings, trial, depositions, written discovery
proceedings, oral or written presentations or cross-examination
of witnesses.
5
<PAGE>
<PAGE>
3.3 Assumption of Liabilities. Purchaser acknowledges that, by
operation of law, any currently unpaid obligations of the Company
existing on the Closing Date of the Stock Purchase Agreement
which are disclosed on Schedule A attached hereto continue to be
obligations of the Company to be paid, discharged and/or
otherwise satisfied in the business judgment of management of the
Company or pursuant to lawful procedures afforded to creditors
related to the enforcement of orders and/or judgments for the
payment of money.
4. Miscellaneous.
4.1 Amendment. This Agreement may be amended, modified or
supplemented only by written agreement of the parties.
4.2 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.3 Applicable Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of
New York without giving effect to the principles of conflicts of
law thereof.
4.4. Binding Agreement. No party hereto may assign its rights or
delegate its obligations hereunder without the prior written
consent of the other parties hereto. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted
assigns.
4.5 Entire Understanding. This Agreement sets forth the entire
agreement and understanding of the parties hereto with respect to
the subject matter hereof. Except as amended pursuant to this
Agreement, the provisions of the Stock Purchase Agreement and any
other agreements between the parties relating to
6
<PAGE>
<PAGE>
the Stock Purchase Agreement including, without limitation, the
assumption or retention of certain liabilities of the Company,
shall remain in full force and effect.
4.6 Benefit of the Parties. Nothing herein contained shall confer or
is intended to confer on any third party or entity which is not a
party to this Agreement any rights under this Agreement.
7
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
CREATIVE BAKERIES, INC.
By: ___________________________________
Name: __________________________
Title: _________________________
---------------------------------------
Yona Abrahami
8
<PAGE>
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
WGJ Deserts and Cafes, Inc. New York
Batter-Bake Chatterley Inc. New Jersey
</TABLE>
34
