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, 2004
Commission File Number: 0-13984
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC.
(Formerly Creative Bakeries, Inc.)
(Name of Small Business Issuer in Its Charter)
New York 13-3832215
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 Passaic Avenue, Fairfield, NJ 07004
-------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (973) 808-8248
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $.001 per share OTCBB
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__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. [ ]
Issuer's revenue for its most recent fiscal year was $3,035,323. As of December
31, 2004 there were 8,495,296 shares of Company's Common Stock, par value $.001
per share, outstanding. The aggregate market value of the voting stock of the
issuer held by non-affiliates on December 31, 2004 was approximately $466,147.
Transitional Small Business Disclosure Format (check one):Yes __No _X_
1
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC.
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
FORM 10-KSB
YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 3
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 5
Item 6. Management's Discussion and Analysis of Financial
Condition and Plan of Operations 6
Item 7. Financial Statements 13
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 32
Item 8A. Controls and Procedures 32
Item 8B. Other Information 33
PART III
Item 9. Directors and Executive Officers of the Registrant 33
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
35
Item 12. Certain Relationships and Related Transactions 35
Item 13. Exhibits 36
Item 14. Principal Accountant Fees and Services 40
SIGNATURES 41
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Brooklyn Cheesecake & Desserts Company, Inc. ("Brooklyn Cheesecake" or the
"Company"), offers a high-end gourmet line of premium quality frozen
cheesecakes, sugar free cheesecakes, traditional apple cakes, and tart shells.
The products are marketed and distributed on a wholesale basis through
foodservice distributors, export, fund raising distributors and e-commerce.
Brooklyn Cheesecake & Desserts Company, Inc. 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.
The Company's operates through its wholly owned subsidiary Brooklyn
Cheesecake & Desserts Company.
PRODUCTS
Baked Goods
The Brooklyn Cheesecake & Desserts Company Subsidiary markets a full line
of premium quality frozen baked products such as cheesecakes, apple cakes and
tart shells. We continue to work toward developing new products and seek to
cater to specific 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".
Our wholly owned subsidiary Brooklyn Cheesecake & Desserts Company has
kosher certification and we believe that we can capitalize on the projected
growth of this market. We believe that our kosher certifications will enable us
to better penetrate certain market areas despite the fact that our products are
currently not kosher for Passover.
CUSTOMERS
Our operating subsidiary sells its products through food distributors to
hotels, hospitals and institutional feeders such as corporate caters,
restaurants, coffee shops etc. The products are also sold retail through food
distributors and direct to supermarket distribution centers as well as exported
to Japan and sold through high-end school and organization fundraiser
distributors.
We accounted for sales from one customer of 26% of our total sales for the
year ended December 31, 2004. For the year ended December 31, 2003 sales to two
customers accounted for 16% and 17% of total sales.
INGREDIENTS AND PRINCIPAL SUPPLIERS
We seek to use only the highest quality ingredients available. We inspect
all raw ingredients before their intended use.
The primary ingredients that we use consist of cream cheese, flour, eggs,
sugar, and chocolate. All ingredients that we use are subject to substantial
price fluctuations. Historically we have been able to pass any significant price
increases in ingredients through to our customers however, no assurance can be
given that we will be able to continue this practice in the future. Any
substantial increase in the prices of ingredients could, if not offset by a
corresponding increase in product prices, have a material adverse effect on our
business, financial condition or results of operations. We do not believe the
loss of any of our suppliers would have a material adverse effect on our
business and believe that other suppliers could readily provide such products if
necessary.
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DISTRIBUTION AND MARKETING
Our Brooklyn Cheesecake & Desserts subsidiary bakes all of its products in
our Fairfield, New Jersey facility. Although utilization of the facility varies
based on seasonal fluctuation, the facility operates on a five day a week basis.
We believe that the Brooklyn Cheesecake & Desserts Company subsidiary has the
capacity to meet future requirements. Our Brooklyn Cheesecake & Desserts Company
subsidiary delivers 31% of its products by common carrier trucks to its
institutional/wholesale customers. About 69% of its customers pick up their
orders directly at our bakery and utilize their own distribution networks.
Historically, we have relied upon word-of-mouth and customer satisfaction
to market our 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. We compete 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.
Competition in both the retail and institutional/wholesale baking industry is
based on product quality, brand name loyalty, price and customer service.
TRADEMARKS
Our JMS subsidiary has a trademark and design registered with the United
States Patent and Trademark office for the mark The Healthy Bakery(R) (US
Registration No. 1,644,559) and has a pending application for the marks Brooklyn
Cheesecake Company Inc.(Serial # 78/324,044) and Brooklyn Cheesecakes & Desserts
Company, Inc. (Serial # 78/324,035). While the Company believes that the
trademarks are valid and enforceable, there can be no assurance as to the degree
of protection its registered trademarks will afford the Company.
PLAN OF OPERATION
Future mergers and acquisitions:
The Company continues to seek business in markets it does not currently
serve and is continuing to pursue mergers and acquisition opportunities.
GOVERNMENT REGULATION
We are subject to numerous state regulations relating to the preparation
and sale of food. We are also subject to federal and state laws governing our
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 our
business, results of operations or financial condition.
EMPLOYEES
As of December 31, 2004, Brooklyn Cheesecake & Desserts Company had
approximately 34 employees, of which 20 are full-time production, 10 are
seasonal production, and 3 in administration and 1 in an executive position. The
Brooklyn Cheesecake & Desserts Company Subsidiary does not have a union and the
Company believes that the relationship with its employees is good.
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ITEM 2. DESCRIPTION OF PROPERTY
We currently lease our 27,362 square foot baking facility and corporate
headquarters in Fairfield, New Jersey. We have a lease that extends through
August 31, 2008. We believe that our present facility is well maintained, in
good condition and is suitable for us to continue to operate and meet our
production needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDING
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Over the Counter Bulletin
Board ("OTCBB") under the symbol "BCAK" effective February 23, 2005. Prior to
that, the Company's Common Stock was quoted on the OTCBB under the symbol
"CBAK". The following table sets forth the range of quarterly high and low bid
prices, as reported during the last two fiscal years.
Period High Low
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FISCAL YEAR 2003:
First Quarter .15 .04
Second Quarter .12 .10
Third Quarter .10 .04
Fourth Quarter .12 .06
Fiscal Year 2004:
First Quarter 1.02 .07
Second Quarter .50 .14
Third Quarter .35 .12
Fourth Quarter .12 .06
The number of shareholders of record of the Common Stock on December 31,
2004 was 55 excluding 2,579,578 shares of Common Stock held by Cede & Co. The
Company believes that it has in excess of 200 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 dividends is subject to 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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
GENERAL - Recent Developments
Management has streamlined the company's product line to focus on the
production of cheesecake, tart shells and apple cakes. The margins and markets
for the three categories preserved offer the greatest earnings potential.
Branding opportunities for cheesecake packaged under the Brooklyn
Cheesecake & Desserts Company label continue to be expanded. A commercial grade
web site is in the process of being developed. The site is anticipated to be
launched by the end of April 2005. Target audiences include both individual and
corporate gift givers.
Private label opportunities have also been expanded for both cheesecake
and tart shells. Distribution of cheesecake in Japan has been increasing at a
steady level.
Management will continue to refine operations and reduce costs. The
Company has been approved for a grant from the State of New Jersey to obtain ISO
9000 certification. This is a quality management program, which is certified by
third party auditing. This certification is international recognized
As of December 31, 2004, and to the extent the Company may have taxable
income in future periods; there is an available net operating loss for federal
income tax purposes of approximately $8,886,000, which can be used to reduce the
tax on income up to that amount through the year 2024.
BUSINESS STRATEGY
The Company's business strategy is comprised of the following:
Institutional/Wholesale: 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 state of Connecticut and in the Philadelphia Pennsylvania 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.
- Develop Web Site for E-Commerce business
- Obtain ISO 9000 Certification
- Enter into co-packing arrangements whereby the Company would produce
private label products for other bakery operations.
Kosher Foods. The Company also is seeking to benefit from the growth of
the kosher food industry. According to prepared foods, the food industry trade
publication, 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
Company's Brooklyn Cheesecake & Desserts Subsidiary has a kosher certification
and the Company believes that it can benefit from the projected growth of this
market.
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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 the highest quality ingredients in its products including, cream
cheese, whole 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 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.
RESULTS OF OPERATIONS
The Company's consolidated revenues from continuing operations aggregated
$3,035,323 and $3,369,742 for the years-ended December 31, 2004 and 2003
respectively, a decrease of $334,419, or 9.9%. This is in comparison to an
increase of $51,654, or 1.6%, to $3,369,742 from $3,318,088 for the years-ended
December 31, 2003 and 2002 respectively. The decrease in 2004 is a result of
raising prices for which customers either changed vendors of discontinued items.
The increase in 2003 is due to the increase in cheesecake sales.
The cost of goods sold were $2,555,536 and $2,904,140 for the years-ended
December 31, 2004 and 2003 respectively, a decrease of $348,604, or 12%; as
opposed to an increase of $10,914, or 0.4%, to $2,904,140 from $2,893,226 for
the years-ended December 31, 2003 and 2002 respectively. The decrease in 2004
was due to the decrease in sales. Cost of goods sold increased in 2003, due to
an increase in sales.
Selling, general and administrative expenses were $963,669 and $784,253
for the years-ended December 31, 2004 and 2003 respectively, an increase of
$179,416, or 22.9%. This is in comparison to an increase of $147,951, or 23.3%,
to $784,253 from $636,302 for the year-ended December 31, 2003 and 2002
respectively. The 2004 increase was a result of management's upgrading of
various department personnel. The increase in 2003 was due in part to additional
legal fees.
In 2003, the Company had a cancellation of debt, which was a result of
renegotiating its current warehouse lease. The write-off was for an accumulated
rent straight-lining liability of $57,978. There was no cancellation of debt in
2004.
During 2004 the Company wrote-off the $42,981, balance of trade name
rights after selling such rights for $25,000. Additionally, the Company sold
fully depreciated equipment for $10,000. There were no similar transactions in
2003.
Interest expense increased in 2004 to $96,213 from $20,206, an increase of
$76,007, or 376.2%, in comparison to an increase in 2003 to $20,206 from $2,055,
an increase of $18,151, or 883%. The 2004 and 2003 increases were a result of
increased borrowing.
Other income of $13,752 is the final payment of royalties from the sale of
the batterbake line. There was no similar transaction in 2003.
The loss from continuing operations increased in 2004 to $574,324 from
$280,879, an increase of $293,445, or 104.5%. This is in comparison to an
increase in 2003 to $280,879 from $213,945 in 2002, an increase of $66,934, or
31.3%.
Income from discontinued operations was $134,265 for the ended December
31, 2003. This income was a result of the write off of old accounts payable
related to the WGJ Desserts operation sold in 1998. Management wrote-off the
payables since the statute of limitations had expired. The aggregate of these
adjustments amounted to a net loss in 2004 of $574,324 and net loss in 2003 of
$146,614, a decrease in income of $427,710, or 291.72%. This is in comparison to
a net loss in 2003 of $146,614 and net income in 2002 of $166,227, a decrease in
income of $312,841, or 188%.
7
SEGMENT INFORMATION
Not applicable since retail operations were discontinued.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception the Company's only source of working capital has been
the $8,455,000 received from the issuance of its securities.
As of December 31, 2004, the Company had a negative working capital of
$659,923 as compared to a negative working capital of $493,733 at December
31,2003.
During 2004, the Company was able to secure a $317,000 loan from the
chairman of the Board of Directors. Additionally, the Company received loans
from the chairman and another director totaling $104,000 (see Certain
Relationships and Related Transactions). The proceeds of the loans were used to
acquire equipment and for working capital.
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:
The Company's revenues are affected by seasons with higher revenues during
holiday seasons such as Thanksgiving, Christmas, Jewish New Year, Easter and
Passover.
RISK FACTORS
The Follot 6 0 wing information sets forth facts that could cause our
actual results to differ materially from those contained in forward looking
statements we have made in this annual report and those we may make from time to
time.
If We Are Unable to Obtain Additional Funds, We May Have to Significantly
Curtail the Scope of Our Operations and Alter Our Business Model.
Management believes that profitable operations are essential for the
Company to become viable. The present business plan contemplates profitable
operations will be achieved. However, in the event that profitable operations
are not achieved, our present financial resources should allow us to continue
operations through June 30, 2005. If additional financing is required and not
available when required or is not available on acceptable terms, we may be
unable to continue our operations at current levels or at all. We are engaged in
seeking additional financing and we continue to impose actions designed to
minimize our operating loses. We would consider strategic opportunities,
including investment in the Company, a merger or other acceptable transactions,
to sustain our operations. We do not currently have any agreements in place with
respect to any such strategic opportunity, and there can be no assurances that
additional capital will be available to us on acceptable terms, or at all. If we
are unable to obtain additional financing or to arrange a suitable strategic
opportunity, our business will be placed in significant financial jeopardy.
Our Independent Auditors have Stated that Our Recurring Losses from
Operations and Our Accumulated Deficit Raise Substantial Doubt About Our Ability
to Continue as a Going Concern.
8
The reports of our independent Certified Public Accountants dated March
15, 2005 and March 17, 2004 for the December 31, 2004 and 2003 consolidated
financial statements, respectively contained an explanatory paragraph that
states that our recurring losses from operations and accumulated deficit raise
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty. We believe we will need to raise
more money to finance our operations and sustain our business model. We may not
be able to obtain additional financing on acceptable terms, or at all. Any
failure to raise additional financing will likely place us in significant
financial jeopardy.
Our Financial Condition Has Adversely Affected Our Ability to Pay
Suppliers on a Timely Basis Which May Jeopardize Our Ability to Continue Our
Operations Necessary to Continue Shipment and Sales of Our Products.
As of December 31, 2004 our accounts payable totaled $450,981 of which
$33,235 were over sixty (60) days old. While we have negotiated payment plans
with our major suppliers and vendors, there can be no assurances that we will be
able to continue these payment plans or obtain the necessary materials and/or
ingredients to produce our baked goods. If we are unable to obtain additional
financing on acceptable terms, our ability to make timely payments to our
critical suppliers will be jeopardized and we will be unable to obtain critical
supplies and services to maintain and continue to manufacture, ship and to sell
our products.
The Company And the Price Of Our Shares May Be Adversely Affected By the
Public Sale of a Significant Number of the Shares Eligible For Future Sale.
All but a very small number of the outstanding shares of our Common Stock
are freely tradable. Sales of Common Stock in the public market could materially
adversely affect the market price of our Common Stock. Such sales may also
inhibit our ability to obtain future equity or equity-related financing on
acceptable terms. At our Annual Meeting of Stockholders held August 4, 2004 our
stockholders approved an increase in the number of authorized shares of Common
Stock from 10,000,000 shares to 30,000,000 shares. The issuance and registration
of additional shares could have a significant adverse effect on the trading
price of our Common Stock.
We Have Obtained Secured Financing With the Pledge of All of Our Assets
Which Will Have Priority Over Security Interests of Any Holders of Our Preferred
Shares.
We have previously procured interim financing to continue our operations
at arms length transaction from the following directors: Ronald L Schutte, the
Chief Executive Officer and Chairman of the Board, in the amount of $633,560 and
Anthony J. Merante, Director of the Company, in the amount of $85,931. A
$317,000 note to Mr. Schutte is secured by all the assets. In the event of
default, the directors will obtain, in addition to other remedies, the right to
all of our assets as well as the right to appoint qualified members to our Board
of Directors that would constitute a majority.
We Have Incurred Losses in the Past and We Expect To Incur Losses in the
Future.
We have incurred losses in each year since our inception. Our net loss for
the year ended December 31, 2004 was $574,324 and our accumulated deficit as of
December 31, 2004 was $11,943,294. We expect operating losses to continue
through 2005 as we continue our marketing and sales activities and conduct
additional development of our products.
RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
The Price of Our Common Stock is Subject to Volatility
Our Common Stock has traded as low as $.06 per share and as high as $1.02
per share in the twelve (12) month ended December 31, 2004. Our average trading
volume is extremely low. As such, a significant sale of our Common Stock may
result in a major fluctuation of the market price. Some other factors leading to
the volatility include:
o Price and volume fluctuation in the stock market at large which do
not relate to our operating performance;
9
o Fluctuation in our operating results;
o Concerns about our ability to finance our continuing operations;
o Financing arrangements which may require the issuance of a
significant number of shares in relation to the number shares of our
Common Stock currently outstanding;
o Fluctuations in market demand and supply of our products.
Our Common Stock is Currently Traded on the
Over-The-Counter-Bulletin-Board and an Investor's Availability to Trade Our
Common Stock May Be Limited by Trading Volume
The trading volume in our common shares has been relatively limited. A
consistently active trading market for our Common Stock may not continue on the
Over-The-Counter-Bulletin-Board. The average trading volume in our Common Stock
on the Over-The-Counter-Bulletin-Board for the year ended December 31, 2004 was
approximately 4,712 shares.
RISKS RELATED TO OUR BUSINESS
We are Currently Dependent on a Few Major Customers for a Significant
Portion of Our Revenues
We currently record sales from approximately 31 customers. One customer
and two customers accounted for in excess of 10% of our revenues in the years
ended December 31, 2004 and 2003, respectively. We intend to establish long-term
relationships with our customers and continue to expand our customer base. While
we diligently seek to become less dependent on any one customer, it is likely
that certain business. The loss of one or more of these significant customers
may result in a material adverse effect on our revenues and our ability to
become profitable or our ability to continue our business operations.
We Have Limited Ability to Sell and Market Our Products
At the current time, we have limited marketing capability as compared with
many of our competitors and we do not have a large sales, promotion and
marketing budget as we are constrained by our lack of working capital and our
ability to raise the necessary cash flow from our business operations to
re-invest in our marketing programs. As a result of our limited marketing
capabilities, we are forced to rely upon customer referrals and a part-time
sales force. Our competitors have direct advertising and sales promotion
programs for their products as well as sales and marketing personnel that may
have a competitive advantage over us in contacting prospective customers. Our
position in the industry is considered minor in comparison to that of our
competitors, and while we continue to develop and explore new marketing methods
and techniques and programs directed toward foreign customers, our ability to
compete at the present time is limited. Our success depends upon the ability to
market, penetrate and expand markets and form alliances with distributors.
However, there can be no assurances that:
o Our direct selling efforts will be effective;
o We will obtain an expanded degree of market acceptance;
o We will be able to successfully form relationships with distributors
to market our products.
We Depend Upon the Marketability of Primary Products
Frozen cheesecake, pre-portioned desserts and tart shells are our primary
products. We may have to cease operations if any of our primary products fails
to achieve market acceptance and/or generate significant revenues. Additionally,
the marketability of our products is dependent upon customer taste, preference
and acceptance, which are variables that may be beyond our ability to control.
We May Not Be Able to Successfully Develop and Market New Products That We
Plan to Introduce
10
We plan to develop new baked goods for production. There are numerous
developmental issues that may preclude the introduction of these products into
commercial sale. If we are unable to establish market acceptance for these
products, we may have to abandon them or alter our business plan. Such
modifications to our business plan will likely delay achievement of milestones
related to revenue increases and achievement of profitability.
We May Experience Problems in Manufacturing Sufficient Quantities and
Commercial Quantities of Our Products
We may encounter difficulties in the production of our current and any
future products due to such reasons as: o Lack of working capital necessary to
gain market acceptance;
o Limited equipment and resources to produce product;
o Quality control and assurance;
o Supplies of ingredients; and
o Shortages of qualified personnel.
Any of the foregoing or other difficulties would affect our ability to
meet increases in demand should our products gain market acceptance.
We Claim Certain Proprietary Rights in Connection with the Combination of
Ingredients and Manufacture of Our Products
Although we do not possess any patent protection for the formulation and
production of our products, we believe that the combination of ingredients and
our method of production are unique and important to our ability to produce
quality baked goods and desserts. As we do not possess intellectual property
protection, there is the risk that we may not be able to prevent a competitor
from duplicating our recipes or our methods of production.
We Use Certain Names that Do Not Have Protection under Federal or State
Trademark Laws.
Our use of the names, "Brooklyn Cheesecake & Desserts Company, Inc.,"
"Brooklyn Cheesecake Company, Inc." and "Brooklyn Cheesecake & Desserts
Company," under which Brooklyn Cheesecake & Desserts Company, Inc. conducts
business and has established goodwill may be subject to legal challenge since
there are other businesses operating under similar names and we have not
registered trademarks for these names with either federal or state agencies. In
addition, we utilize packaging with depictions of the Brooklyn Bridge in
designed or stylized formats in conjunction with the names, "Brooklyn Cheesecake
Company, Inc." and "Brooklyn Cheesecake & Deserts Company," which have not been
registered with either federal or state agencies. In that we do not possess
registered trademarks for our trade names or trade dress, we may face opposition
to our usage of same that may require us to discontinue usage of certain trade
names or packaging, which in turn will require us to re-establish goodwill
associated with our product names and packaging. We are seeking trademark
registrations with the United States Patent and Trademark Office but there can
be no assurances that we will be successful in obtaining a registered mark.
Attraction and Retention of Key Personnel
Our future success depends in significant part on the continued services
of key sales and senior management personnel. The loss of Ronald L. Schutte, our
Chairman and Chief Executive Officer, or other key employees could have a
material adverse affect on our business, results of operations and financial
condition. There can be no assurances that we can attract, assimilate or retain
other highly qualified personnel in the future.
We Have Limited Product Liability Insurance Due to the High Cost of Same
11
We manufacture, market and sell baked goods and dessert products. In the
event our products are tainted/spoiled or cause illness in consumers, we may
face potential claims. Due to the high cost of product liability insurance, we
only maintain insurance coverage of $2,000,000 to protect against claims
associated with the consumption of our product. Any claim against us, whether or
not successful, may result in our expenditure of substantial funds and
litigation. Further, any claims may require management's time and use of our
resources and may have a materially adverse impact on us.
Geographic Concentration in New York City Tri-State Area
Most of Brooklyn Cheesecake & Desserts Company, Inc. retail and
institutional/wholesale customers are located in the New York City metropolitan
area. Adverse changes in economic conditions in the New York City metropolitan
area are more likely to affect the Company's business, financial condition and
results of operations than if its operations were spread over a larger market
area.
Government Regulation: Maintenance of Licenses and Certification
Brooklyn Cheesecake & Desserts Company, Inc. is subject to numerous state
regulations relating to the preparation and sale of food. It is also subject to
federal and state laws governing the Company's relationship with employees,
including minimum wage requirements, overtime, working and safety conditions,
and citizenship requirements. The failure to obtain or retain the required food
licenses or to be in compliance with applicable governmental regulations, or any
increase in the minimum wage rate, employee benefits costs (including costs
associated with mandated health insurance coverage) or other costs associated
with employees, could adversely affect our business, financial condition or
results of operations. In addition, the Company's products are certified as
kosher by independent entities. We believe that we will continue to meet the
kosher certification requirements. However, the failure to retain or obtain such
certification in the future could have a material adverse effect on our
business, financial condition or results of operations.
Continuing Changes in Food Service Industry
The results of operations of food service businesses are affected by,
among other things, changes in consumer tastes, national, regional and local
economic conditions, demographic trends, traffic patterns and the type, number
and location of competing units. Multi-unit food service companies also can be
substantially adversely affected by publicity resulting from poor food quality,
illness, injury or other health concerns or operating difficulties stemming from
one unit or a limited number of units, or health concerns as to particular types
of food or methods of preparing food. There can be no assurance that the Company
will be able to maintain the quality of its food products. In addition,
dependence on frequent deliveries of fresh ingredients subjects food service
businesses to the risk that shortages or interruptions in supply, caused by
adverse weather or other conditions, could adversely affect the availability,
quality and cost of ingredients.
Competition
The baking industry is a highly competitive and highly fragmented
industry. Brooklyn Cheesecake & Desserts Company, Inc. competes with national,
regional and local bakeries as well as supermarket chains that have in-store
bakeries. Many of these competitors are larger; more established and have
greater financial and other resources than we do. Competition in both the retail
and institutional/wholesale baking industry is based on product quality, brand
name loyalty, price and customer service. Competitors with significant economic
resources in the baking industry could, at any time, enter the wholesale or
retail bakery/cafe business.
Quarterly Fluctuations; Seasonality; Possible Volatility of Stock Price
Brooklyn Cheesecake & Desserts Company, Inc. operating results may be
subject to seasonal fluctuations, especially during the Thanksgiving, Christmas,
Chanukah, Easter and Passover seasons. Such variations could cause the market
price of the Common Stock to fluctuate substantially. In addition, the stock
markets in the United States have, from time to time, experience significant
price and volume fluctuations that are unrelated or disproportionate to the
operating performance of individual companies. Such fluctuations may adversely
affect the price of the Company's Common Stock.
12
Possible Adverse Effect of Issuance of Preferred Stock
Brooklyn Cheesecake & Desserts Company, Inc Restated Certificate of
Incorporation authorizes the issuance of 2,000,000 shares of Preferred Stock,
with designations, rights and preferences as determined from time to time by the
Board of Directors. As a result of the foregoing, the Board of Directors can
issue, without further shareholder approval, Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock could, under certain circumstances, discourage, delay or prevent
a change in control of the Company.
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 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
Report of Sherb & Co., LLP, Independent Registered Public
Accounting Firm 14
Independent Auditors' Report 15
Consolidated Balance Sheet 16
Consolidated Statements of Operations 17
Consolidated Statements of Stockholders' Equity (Deficiency) 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-31
13
Report of Independent Registered Public Accounting Firm
To The Board of Directors and shareholders
Brooklyn Cheesecake & Desserts Company, Inc.
We have audited the accompanying consolidated balance sheet of Brooklyn
Cheesecake & Desserts Company, Inc. and Subsidiaries as of December 31, 2004,
and the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the year ended December 31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brooklyn Cheesecake &
Desserts Company, Inc. as of December 31, 2004, and the results of its
operations and cash flows for the year ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
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 significant losses from
continuing operations for the years ended December 31, 2004 and 2003 and as of
December 31, 2004 has a working capital deficiency in the amount of $659,923,
which raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are discussed in
the notes to the financial statements. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Sherb & Co., LLP
----------------------------
Certified Public Accountants
New York, New York
March 15, 2005
14
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brooklyn Cheesecake & Desserts Company, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for the year ended December
31, 2003 of Brooklyn Cheesecake & Desserts Company, Inc. (formerly Creative
Bakeries, Inc.). 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and cash flows of
Brooklyn Cheesecake & Desserts Company, Inc. (formerly Creative Bakeries, Inc.)
for the year ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
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 significant losses from
continuing operations for the year ended December 31, 2003, which raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are discussed in the notes to the
financial statements. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ZELLER WEISS & KAHN, LLP
March 17, 2004
Mountainside, New Jersey
15
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 35,225
Accounts receivable, less allowance for doubtful
accounts of $400 300,331
Inventories 103,802
Prepaid expenses 49,139
------------
Total current assets 488,497
------------
Property and equipment, net 318,475
------------
Other assets:
Security deposits 5,765
Tradename , net of
amortization
73,125
Total other assets 78,890
------------
$ 885,862
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts
payable
$ 450,981
Accrued expenses 43,935
Capital lease obligation 8,424
Notes payable 46,971
Notes payable, officer 598,109
------------
Total current liabilities 1,148,420
------------
Other liabilities:
Capital lease obligation, net of current portion 38,505
Notes payable, net of current portion 41,460
Notes Payable, officer, net of current portion 35,451
Deferred rent 19,680
------------
Total other liabilities 135,096
------------
Stockholders' deficiency:
Preferred stock $.001 par value, authorized 2,000,000
shares, none issued --
Common stock, $.001 par value, authorized 30,000,000
shares, issued and outstanding 8,495,302 shares 8,495
Additional paid in capital 11,537,145
Accumulated deficit (11,943,294)
------------
Total stockholders' deficiency (397,654)
------------
$ 885,862
============
See notes to consolidated financial statements.
16
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------
2004 2003
----------- -----------
Net sales $ 3,035,323 $ 3,369,742
Cost of sales 2,555,536 2,904,140
----------- -----------
Gross profit 479,787 465,602
Selling, general and administrative expenses 963,669 784,253
----------- -----------
Loss from operations (483,882) (318,651)
----------- -----------
Change in estimate of straight-line rent -- (57,978)
Sale of Trade name rights (25,000) --
Write-off of Trade name rights 42,981 --
Gain on sale of assets (10,000) --
Interest expense, net 96,213 20,206
Other Income (13,752) --
----------- -----------
Total other expense (income) 90,442 (37,772)
----------- -----------
Loss from continuing operations (574,324) (280,879)
Discontinued operations:
Income from operations of
New York facility -- 134,265
----------- -----------
Net loss ($ 574,324) ($ 146,614)
=========== ===========
Earnings per common share Basic and fully diluted:
Continuing operations $ (0.09) $ (0.05)
Discontinued operations
-- 0.02
----------- -----------
Net loss per share $ (0.09) $ (0.03)
=========== ===========
Weighted average number of common
shares outstanding 6,363,545 5,461,545
=========== ===========
See notes to consolidated financial statements.
17
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock
--------------------------- Total
Number Additional Stockholders'
of Paid in Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
------------ ------------ ------------ ------------ ------------
Balance at January 1, 2003 5,446,750 $ 5,447 $ 11,346,093 (11,222,356) $ 129,184
Stock issued for professional services 50,000 50 4,950 -- 5,000
Reclassification of warrants payable -- -- (115,625) -- (115,625)
Net loss for the year ended December 31, 2003 (146,614) (146,614)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 5,496,750 $ 5,497 11,235,418 (11,368,970) (128,055)
============ ============ ============ ============ ============
Stock issued for salary 665,738 $ 665 $ 99,935 $ -- $ 100,600
Stock issued for professional services 69,534 69 10,431 -- 10,500
Stock issued for repayment of debt 327,869 328 49,672 -- 50,000
Stock issued for warrant 314,715 315 (315) -- --
Exchange of warrants payable 1,220,696 1,221 114,404 -- 115,625
Stock issued for Directors' fees 400,000 400 27,600 -- 28,000
Net loss for the year ended December 31, 2004 (574,324) (574,324)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 8,495,302 $ 8,495 $ 11,537,145 $(11,943,294) $ (397,654)
============ ============ ============ ============ ============
See notes to consolidated financial statements.
18
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
2004 2003
--------- ---------
Operating activities:
Loss from continuing operations ($574,324) ($280,879)
Adjustments to reconcile loss from continuing
operations to cash used in continuing operations:
Depreciation and amortization 100,068 91,981
Common stock issued for services 139,100 5,000
Write-off of tradename right 42,981 --
Change in straight-line rent accounting estimate -- (57,978)
Interest on accrued long-term debt -- 7,480
Changes in operating assets and liabilities from continuing operations:
Accounts receivable (125,348) 10,294
Inventories 69,717 17,426
Prepaid expenses 16,937 (2,308)
Security deposits (1,051) --
Accounts payable 84,822 (43,664)
Accrued expenses (43,926) 20,268
Deferred rent 14,160 (9,102)
--------- ---------
Net cash used in operating activities (276,864) (241,482)
--------- ---------
Investing activities:
Purchase of property and equipment (98,730) (53,282)
--------- ---------
Net cash used in investing activities (98,730) (53,282)
--------- ---------
Financing activities:
Proceeds from officers' notes payable 518,388 54,000
Proceeds from notes payable 59,908 300,000
Payment of officers' note payable -- (8,263)
Payment of notes payable (250,000) (2,648)
Loan acquisition costs -- (16,957)
--------- ---------
Net cash provided by financing activities 328,296 _326,132
--------- ---------
Net (decrease) increase in cash and cash equivalents (47,298) 31,368
Cash and cash equivalents, beginning of year 82,523 51,155
--------- ---------
Cash and cash equivalents, end of year $ 35,225 $ 82,523
========= =========
Cash paid during the year for:
Interest: $ 88,865 $ 12,059
========= =========
Non-cash investing and financing transactions:
Reclassification of warrants payable $(115,625) $ 115,625
========= =========
Issuance of common shares for debt $ 50,000 $ --
========= =========
See notes to consolidated financial statements.
19
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. Going concern:
During the years ended December 31, 2004 and 2003, the Company incurred
losses frt 6 6 om continuing operations in the amount of $574,324 and
$280,879, respectively, and as of December 31, 2004 had a net working
capital deficiency of $659,923. Although the Company is currently
operating its businesses, their continuation is contingent upon, among
other things, the continued forbearance by the Company's creditors from
exercising their rights in connection with delinquent accounts payables.
These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
The Company intends to raise capital either through an offering of
convertible debentures or conventional financing. The proceeds would be
used to upgrade the production process. The Company's product line
continues to be streamlined, and greater emphasis has been placed on
marketing portion controlled dessert items.
In view of these matters management believes that the 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.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result
should the Company be unable to continue as a going concern.
2. Summary of significant accounting policies:
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and all of its wholly owned
subsidiaries. Intercompany transactions and balances have been eliminated
in consolidation.
Cash and cash equivalents:
For the purpose of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Inventories:
Inventories are stated at the lower of cost (first-in-first-out) or
market.
Property and equipment:
The cost of property, plant and equipment is depreciated over the
estimated useful lives of the related assets. The cost of leasehold
improvements is depreciated over the lesser of the length of the related
leases or the estimated useful lives of the assets. Depreciation is
computed on the straight-line method for financial reporting purposes and
on the modified cost recovery system method for income tax basis.
Deferred rent:
The accompanying consolidated 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 expenses as required by generally accepted
accounting principles.
20
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2. Summary of significant accounting policies (continued):
Use of estimates:
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and
events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
Per share amounts:
Net earnings per share are calculated by dividing net earnings by the
weighted average shares of common stock of the Company and weighted
average of common stock equivalents outstanding for the period. Common
stock equivalents represent the dilutive effect of the assumed exercise of
certain outstanding stock options.
Earnings Per Share:
Basic earnings per share ("EPS") is determined by dividing net income for
the period by the weighted average number of common shares outstanding
during the same period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock, which would then share in the earnings of the Company. Stock
options have been excluded as common stock equivalents in the diluted
earnings per share because their effect would be anti-dilutive. 325,000
stock options have been excluded.
Recognition of Revenue:
Income from sales of product is recognized when the orders are completed
and shipped or possession of product is taken by the customer provided
that collection of the resulting receivable is reasonably assured. The
Company's goods are shipped both Free on Board ("F.O.B.") shipping point
and F.O.B. destination.
Shipping and Handling Costs
The Company follows the guidance of EITF 00-10, "Accounting for Shipping
and Handling Fee and Costs". The Company's shipping costs of $65,468 and
$73,364 for the periods ending December 31, 2004 and 2003, respectively,
and are included in warehouse and delivery expenses.
Income Taxes:
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The Company
recognizes deferred tax assets and liabilities based on the differences
between the book bases and the tax bases of the assets and liabilities,
using the effective tax rates in the years in which the differences are
expected to reverse. A valuation allowance is recorded when it is probable
that some or all of a deferred tax asset will not be realized.
Impairment of Long-Lived Assets:
The Company reviews long-lived assets for impairment whenever
circumstances and situations change such that there is an indication that
the carrying amounts may not be recovered. The recoverability of assets
held and used in operations is measured by a comparison of the carrying
amount of the assets to the future net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
21
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2. Summary of significant accounting policies (continued):
During the year ended December 31, 2004 the Company expensed $42,981
remaining on their William Greenberg Tradename, due to their carrying
amount exceeding their fair value.
Stock Based Compensation:
As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure," which amended SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") 25, "Accounting for Stock Issued to Employees," and
related interpretations including FASB Interpretation ("FIN") 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB 25. Under APB 25, if the exercise price of the
Company's employee stock options or stock purchase warrants equals or
exceeds the market price of the underlying stock on the date of grant no
compensation expense is recognized.
Fair Value of Financial Instruments:
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, accrued expenses, notes payable and long-term debt. The
carrying amounts of the financial instruments reported in the consolidated
balance sheet approximate fair value based on the short-term maturities of
these instruments.
Reclassifications:
Certainreclassifications have been made to the prior year's consolidated
financial statements to conform to current year's presentation.
Recent accounting pronouncements:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and
handling costs, and wasted materials (spoilage) are required to be
recognized as current period costs. The provisions of SFAS No.151 are
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. Management is currently evaluating the provisions of SFAS
No. 151 and does not expect the adoption will have a material impact on
the Company's financial position, results of operations or cash flows.
In December 2004, the FASB finalized SFAS No. 123R "Share-Based
Payment" ("SFAS 123R"), amending SFAS No. 123, effective beginning the
Company's first quarter of fiscal 2006. SFAS 123R will require the Company
to expense stock options based on grant date fair value in its financial
statements. Further, adoption of SFAS No. 123R will require additional
accounting related to income tax effects and additional disclosure
regarding cash flow effects resulting from share-based payments
arrangements. The effect of expensing stock options on the Company's
results of operations using a Black-Scholes option-pricing model as
presented in Note 2. The adoption of SFAS 123R will not effect the
Company's cash flows or financial position, but may have an adverse impact
on results of operations if options are granted in the future.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment for APB Opinion No. 29". This statement amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance.
22
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2. Summary of significant accounting policies (continued):
A nonmonetary exchange has commercial substance if future cash flows of
the entity are expected to change significantly as a result of the
exchange. The provisions of SFAS No. 153 are effective for the Company's
fiscal year ended December 31, 2006. The adoption of SFAS No. 153 is not
expected to have a material impact on the Company's consolidated financial
position, liquidity, or results of operations.
In January 2003, as revised December 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at the
risk for the entity to finance its activities without additional financial
support from other parties. FIN 46 is effective for the periods ending
after December 15, 2003 for certain types of entities and after December
15, 2004 for other types of entities.
On March 3, 2005 the FASB issued FASB Staff Position FIN 46 (R)-5, which
addresses whether a reporting enterprise should consider whether it holds
an implicit variable interest in a variable interest entity ("VIE") or a
potential VIE when specific conditions exist. The guidance shall be
applied to the first reporting period beginning after March 3, 2005, but
early application is permitted for periods which financial statements have
not yet been issued. The adoption of FIN 46 (R)-5 is not expected to have
a material impact on the Company's consolidated financial position,
liquidity, or results of operations.
3. Concentration of credit risk and major customers:
The Company is a manufacturer of baking and confectionery products, which
are sold to supermarkets, food distributors, educational institutions,
restaurants, mail order and to the public. Although the Company sells its
products throughout the United States, its main customer base is on the
East Coast of the United States.
The Company maintains all of its cash balances in New Jersey financial
institutions. The balances are insured by the Federal Deposit Insurance
Company (FDIC) up to $100,000. At December 31, 2004, the Company had
uninsured cash balances of $21,082.
At December 31, 2004 there were two customers whose balances included in
accounts receivable comprised 41% and 14% of total accounts receivable.
During the years ended December 31, 2004 that customer accounted for 26%
of total revenue. In the year ended December 31, 2003 two customers that
accounted 16% and 17% of revenue.
Purchases from three suppliers for the year ended December 31, 2004
represented approximately 75% of non-affiliated purchases. For the year
ended December 31, 2003 purchases from three suppliers represented
approximately 50% of non-affiliated purchases. At December 31, 2004,
amounts due to the suppliers amounted to 60% of accounts payable.
4. Accounts receivable:
Following is a summary of receivables at December 31, 2004:
Trade accounts $ 300,731
Less allowance for doubtful accounts (400)
---------
$ 300,331
23
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
5. Inventories:
Inventories at December 31 consist of:
Finished goods $ 33,955
Raw materials 31,288
Supplies 38,559
--------
$103,802
6. Property and equipment:
The following is a summary of property and equipment at December 31, 2004:
Baking equipment $1,492,810
Furniture and fixtures 106,509
Leasehold improvements 180,422
----------
1,779,741
Less: Accumulated depreciation
and amortization 1,461,266
----------
$ 318,475
Depreciation expense charged to operations was $81,270 and $81,822 in 2004
and 2003, respectively.
The useful lives of property and equipment for purposes of computing
depreciation are:
Years
-----
Machinery and equipment 10
Furniture and computers 5
Leasehold improvements 10-15
7. Loan acquisition costs:
The Company incurred loan acquisition costs in the amount of $16,957 in
connection with one of the notes payable financings the Company entered
into in 2003. These costs are being amortized over the life of the loan.
This loan was repaid in 2004, and all remaining costs were expensed. Loan
amortization expense for the year ended December 31, 2004 and 2003
amounted to $12,798 and $4,159, respectively.
8. Tradename and licensing agreements:
On March 7, 2002, the Company purchased the rights to the tradenames
Brooklyn Cheesecake Company, Inc. and Brooklyn Cheesecake & Desserts
Company, Inc. and the related corporate logo in exchange for 300,000
shares of the Company's common stock, valued on the purchase date at
$90,000. The tradename rights are being amortized on the straight-line
basis over a fifteen-year term. Amortization expense was $6,000 and
$6,000, respectively, for the years ended December 31, 2004 and 2003.
The following is a schedule of future amortizations on the trade name:
Years Ended December 31,
------------------------
2005 $ 6,000
2006 6,000
2007 6,000
2008 6,000
2009 6,000
Thereafter 43,125
----------
$ 73,125
==========
The Company had a fully amortized licensing agreement for the use of the
trademark and name of one of its WGJ subsidiary and various recipes and
methods used in the production of baked and other goods. The agreement
called for royalties to be paid upon reaching certain sales levels by the
licensee. The Company sold this licensing agreement in 2004 for $25,000.
24
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
9. Notes payable to executive officer:
a) Note dated May 21, 2004 in the amount of $54,000, payable on demand,
with interest at the rate of 8.5% per annum. The note is unsecured.
This note consolidates into a single promissory note, several loan
advances received by the Company in the first and second quarters of
2004.
b) Note dated June 15, 2004 in the amount of $317,000, with interest at
the rate of 13% per annum. Interest payments are due on the last day
of each month with the note maturing on August 31, 2004. The note is
secured by all of the Company's assets. The note was extended to
November 30, 2004 and April 30, 2005, respectively.
c) Note payable effective April 2, 2003 in the original amount of
$50,000, with a variable interest rate that was 8.4% at December 31,
2004. Monthly payment of principal and interest are approximately
$1,300. Note is unsecured and due on demand. The outstanding balance
on the loan was $47,051 at December 31, 2004.
d) Note dated January 1, 2003 in the original amount of $88,000 with an
interest rate of 8.5% per annum. The note is unsecured. Interest
only payments were due for the first eighteen months and principal
and interest payments are due monthly thereafter until the maturity
date of December 31, 2005. The balance on the note was $103,858 at
December 31, 2004 including accrued interest.
e) Note dated December 31, 2004 in the amount of $111,651, payable on
demand, with interest at the rate of 8.5% per annum. The note is
unsecured. This note consolidates in a single promissory note
several loan advances received by the Company in the third and
fourth quarters of 2004.
Maturities for the next five years are as follows:
December 31, 2005 $598,109
December 31, 2006 11,400
December 31, 2007 11,400
December 31, 2008 11,400
December 31, 2009 1,251
--------
$633,560
10. Long-term debt:
Note dated May 25, 2004 in the amount of $28,000, payable on demand, with
interest at the rate of 8.5% per annum. The note is unsecured. This note
consolidates in a single promissory note several loan advances received
during the first and second quarters of 2004. The holder of the note is a
member of the Board of Directors.
Note payable effective August 18, 2003 in the original amount of $50,000,
with a variable interest rate that was 9.25% at December 31, 2004. Monthly
payments of principal and interest are approximately $1,000. Note is
unsecured and due on demand. The outstanding balance on the loan was
$49,020 at December 31, 2004. The holder of the note is a member of the
Board of Directors.
25
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
10. Long-term debt (continued):
Note dated June 28, 2004 in the amount of $2,500, payable on demand, with
interest at the rate of 8.5% per annum. The note is unsecured. The holder
of the note is a member of the Board of Directors.
Note dated December 31, 2004 in the amount of $8,911, payable on demand,
with interest at the rate of 8.5% per annum. The note is unsecured. This
note consolidates in a single promissory note several loan advances
received during the third and fourth quarters of 2004. The holder of the
note is a member of the Board of Directors.
Maturities for the next five years are as follows:
December 31, 2005 $46,971
December 31, 2006 7,560
December 31, 2007 7,560
December 31, 2008 7,560
December 31, 2009 7,560
Thereafter 11,280
-------
$88,431
11. Leases - Capital:
Capitalized lease with an order date of March 9, 2004, in the amount of
$47,940 plus a 10% buyout amount of $4,794. Monthly payments of principal
and interest in the amount of $1,051 commencing April 7, 2004, payable
over 60 months. The lease matures in April 2009. The balance of the lease
was $46,929 at December 31, 2004. The note is guaranteed by a member of
the Board of Directors.
At December 31,2004 equipment held under capital leases is summarized as
below:
2004
-------
Manufacturing equipment $53,129
Less: Accumulated depreciation 2,656
-------
$50,743
=======
Minimum Future Lease Payments
Minimum future lease payments under capital leases as of December 31,
2004 for each of the next five years and in the aggregate are:
Year Ended December 31,
2005 $ 12,612
2006 12,612
2007 12,612
2008 12,612
2009 7,947
--------
Total minimum lease payments 58,395
Less: Amount representing interest 11,466
--------
Present value of net minimum lease payment $ 46,929
========
The interest rate on the capitalized lease is 9.7% and is imputed based on
the lower of the Company's incremental borrowing rate at the inception of
the lease or the lessor's implicit rate of return.
26
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
12. Common stock:
The following common stock issuances were made in the year ended December
31, 2004:
- The Company issued 665,738 shares of common stock for services
valued at $100,600. Of these shares, 655,738 were issued to an
officer of the Company, valued at $100,000, or $0.15 per share, the
closing trading price on the date of issuance.
- The Company issued 69,534 shares of common stock for services
rendered valued at $10,500, pursuant to a monthly service retainer
agreement. These shares were issued at various times during the year
and have per share values ranging from approximately $0.04 to $0.22
per shares depending on the closing trading price on the date of
issuance.
- The Company issued 327,869 shares of common stock in settlement of a
loan payable of $50,000. These shares are valued at approximately
$0.15 per shares the closing trading price on the date of issuance.
- In payment of fees to Company Board members the Company issued
400,000 shares of common stock, valued at $28,000. These shares are
valued at approximately $0.07 per shares the closing trading price
on the date of issuance.
- During the year ended December 31, 2004 the Company settled their
warrant liability payable of $115,625 as it related to 1,156,250
outstanding common stock purchases warrants. These warrants had
given the warrant holder the right to elect that the Company
repurchase each warrant for consideration consisting of $.10 per
warrant plus 40% of one share of the Company's common stock or
exercise the warrants at $.6875 per warrant less the $.10 feature.
The warrants were to have originally expired on December 31, 2000,
and had been extended for a one-year at each subsequent year end
until December 31, 2004, in exchange for the warrant holders'
forbearance, requiring that the Company repurchase the warrants.
Under the terms of settlement for these warrants, the Company issued
1,220,696 shares of common stock (i) 758,197 shares of common stock,
which was equivalent to the approximately $0.1525 market value per
share, or $115,625, which settled the Company's obligation to
repurchase at $0.10 per share each of the 1,156,250 shares
underlying the warrant and (ii) 462,500 shares of common stock,
which settled the Company's obligation to redeem the warrants at 40%
of one share for each of the 1,156,250 shares underlying the
warrant.
The total value recorded for these shares is the par value of the
1,220,696 shares or $1,221. These warrants were sold by the
Company's prior management in January 1997 as part of a private
placement in order to finance the purchase of the Company's JM
Specialties subsidiary.
27
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
- In July 1995, in order to obtain financing for the acquisition of
Greenberg's -L.P., a discontinued subsidiary, the Company sold to a
lender for $1,000, a Convertible Note which in accordance with the
terms of the conversion agreement, was converted by the lender into
a warrant to acquire shares of stock of the Company in a number
sufficient to equal 6% of the Company's then outstanding preferred
and common stock. The warrant contained anti-dilutive provisions
throughout its six (6) year life which entitles the warrant holder
to its applicable percentages of the Company's capital stock on the
date the warrant is exercised. Under the terms of the warrant, a
total of 314,715 shares, were potentially issuable on the date that
the warrant expired on October 1, 2001. The lender had inquired
regarding exercising its right under the warrant before the
expiration date. The lender, who was in bankruptcy, had held
discussions with the Company's management, and did not act upon the
warrant. A trustee for lender, and the Company acted on the warrant
on August 23, 2004. The Company issued 314,715 shares of common
stock to the trustee, in what the Company believes is satisfaction
of their obligation under these warrants at the time of their
expiration. The Company has not heard from the lender's bankruptcy
trustee, and has determined that their obligation under this warrant
has been satisfied. The Company has recorded these 314,715 shares
issued at $1,000 based on the original amount of the Company
received for the right to convert the Convertible note into the
warrant.
In February 2005, the Company amended their Certificate of Incorporation
and increased the number of authorized common shares to 30,000,000 from a
previous 10,000,000 shares.
13. Commitments and contingencies:
The Company entered into an amendment under an existing lease for use of
27,362 square feet of office and plant space in New Jersey. The terms call
for a reduction in annual rent in the first year from $200,000 to
$136,800. The amendment also shifts responsibility for snow removal and
landscaping from the lessee to the lessor. The new rental amounts
commenced September 1, 2003 and expire December 31, 2008.
The minimum future rentals on the baking facility are as follows:
December 31, 2005 148,000
December 31, 2006 158,000
December 31, 2007 164,000
December 31, 2008 112,000
-------
$582,000
Rent expense including real estate taxes and common area charges amounted
to $160,661 in 2004 and $226,377 in 2003 and includes straight-line
amortization of rent adjustments discussed in Note 2.
The Company entered into an agreement for legal services commencing on
November 1, 2003. The agreement calls for a monthly retainer fee of $1,500
of which $750 is to be paid in cash and $750 to be paid through the
issuance of an equivalent number of restricted common shares based on an
agreed upon market value formula. The shares are to be issued on a
quarterly basis.
28
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
14. Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS No. 109") "Accounting for Income
Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and income tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected
to affect taxable income.
The Company had a net loss of $574,324 during the year ended December 31,
2004 and had no Federal or State income tax obligations. The Company had
no significant deferred tax effects resulting from the temporary
differences that give rise to deferred tax assets and deferred tax
liabilities for the year ended December 31, 2004 other than net operating
losses.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the
tax payable or refundable for the period, plus or minus the change during
the period in deferred tax assets and liabilities. There was no cumulative
effect of adoption or current effect in continuing operations mainly
because the Company has accumulated a net operating loss carryforward of
approximately $8,886,000. The valuation allowance for deferred tax assets
increased by approximately $160,000 during the year ended December 31,
2004. The Company has made no provision for a deferred tax asset nor for
the increase in such, due due to a valuation allowance having been
provided which is equal to the deferred tax asset. It cannot be determined
at this time that a deferred tax asset is more likely that not to be
realized.
The Company's loss carryforward of approximately $8,886,000 may be offset
against future taxable income. The carryforward losses expire at the end
of the years 2005 through 2024.
29
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
15. Common stock options:
The Board of Directors has full authority and discretion to determine the
eligible participants to be granted the options, the exercise option
price, the date of issuance and the date of expiration. The total number
of shares set aside was 325,000. At the grant date the option exercise
price was equal to the fair market value of the Company's stock. The
options expire five years from the grant date. There were no options
granted during the calendar years 2004 and 2003.
Information relating to stock option and warrant activity for 2004 is as
follows:
Weighted
Shares Average
Underlying Exercise
Options Price
---------- ----------
Outstanding at January 1, 2003 1,386,315 $ 0.50
Granted -- --
Cancelled (284,000) (0.66)
---------- ----------
Outstanding at December 31, 2003 1,102,215 $ 0.45
Granted -- --
Cancelled (777,215) 0.36
---------- ----------
Outstanding at December 31, 2004 325,000 $ 0.10
========== ==========
Options exercisable at December 31, 2003 1,077,215 $ 0.46
========== ==========
Options exercisable at December 31, 2004 325,000 $ 0.10
========== ==========
Stock Options Outstanding
Weighted Avg Weighted
Shares Remaining Average
Range of Underlying Contractual Exercise
Exercise Prices Options Life in Years Price
--------------- ----------- -------------- ----------
$.05-.25 325,000 1.91 $0.10
=========== ============== ==========
Stock Options Exercisable
Weighted Avg Weighted
Shares Remaining Average
Range of Underlying Contractual Exercise
Exercise Prices Options Life in Years Price
--------------- ----------- -------------- ----------
$.05-.25 325,000 1.91 $0.10
=========== ============== ==========
30
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. AND SUBSIDIARIES
(FORMERLY CREATIVE BAKERIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
16. Discontinued operations:
In 1998, the Company adopted a formal plan to close their WGJ subsidiary.,
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. In November 2002, the Company received the last of its
payments on the note receivable from the sale of its discontinued
operations. The Company determined that the statute of limitations had
expired as of December 31, 2003 and 2002 on old accounts payable related
to WGJ and wrote them off accordingly. Income from discontinued operations
presented in the statement of operations for the year ending December 31,
2003 includes $134,625, related to this adjustment. The Company does not
anticipate any further income or loss from its discontinued operations in
the future.
17. Subsequent Events
Effective March 1, 2005, the Company entered into an agreement, with a
computer consulting service, for the development and launching of a
commercial grade E-commerce website for the sale of the Company's
cheesecakes and bake goods over the Internet. Under the terms of the
agreement, the principals of computer consulting company, along with
E-commerce developers employed by the computer consultants who participate
in the website design and development, will receive an aggregate of
2,500,000 shares of restricted common stock of the Company; 1,050,000
shares will be issued upon commencement of the work as set forth in the
agreement with the balance of 1,450,000 shares to be issued upon
completion and launching of the site for commercial activity. The shares
of common stock when issued will be subject to a voting rights agreement
whereby the holders of the shares will provide the Company's chairman a
proxy to vote the shares. The Company has not valued the shares issued
under these agreements as of March 31, 2005.
In January 2005 the Company issued 1,460,000 options to employees and
Board member at an exercise price of $0.08 per share, which is approximate
fair value of the Company's common stock at the time of grant.
As of January 1, 2005, the Company entered into an employment agreement
with the Chief Executive Officer. The agreement is for a period of three
years. Compensation will be $200,000 annually with $100,000 paid in equal,
weekly installments and $100,000 payable in either cash or stock, the
manner of which will be determined by mutual agreement between the Company
and the Chief Executive Officer. The agreement also entitles the Chief
Executive Officer to a bonus equal to 250% of salary as determined by the
compensation committee. The agreement also grants 500,000 options at $0.08
per share.
As of January 1, 2005, the Company entered into an employment agreement
with the Chief Financial Officer. The agreement is for a period of three
years. Compensation will be $96,000 annually with $48,000 paid in equal,
weekly installments and $48,000 payable in either cash or stock, the
manner of which will be determined by mutual agreement between the Company
and the Chief Financial Officer. The agreement also entitles the Chief
Financial Officer to a bonus equal to 250% of salary as determined by the
compensation committee. The agreement also grants 200,000 options at $0.08
per share.
31
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 17, 2004, the Company's former certified accountants, Zeller,
Weiss & Kahn LLP ("Zeller") informed the Company that they had resigned.
Zeller was previously appointed as the Company's certifying accountants on
January 1, 1997. Zeller's reports on the financial statements of the Company for
its fiscal years ended December 31, 2003 and 2002 did not contain an adverse
opinion or a disclaimer of opinion nor were such reports qualified or modified
as to uncertainty, audit scope or accounting principles, except that the report
of Zeller on the financial statement of the Company for its fiscal years ended
December 31, 2003 and 2002 included the following separate paragraph:
"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
significant losses from continuing operations for the years ended
December 31,2003 and 2002 and as of December 31,2003 has a working
capital deficiency in the amount of $493,733, which raises
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are discussed
in the noted to the financial statements. The accompanying financial
statements do not include any adjustments that might result from the
outcome of this uncertainty."
During the time reports were issued and the interim period in which Zeller
served as the Company's certifying accountants there were no disagreement(s)
with Zeller on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Zeller, would have caused Zeller to make
reference to the subject matter of such disagreement(s) in connection with its
audit report
On January 13, 2005, the Company's Board of Directors engaged Sherb & Co.,
LLP ("Sherb") to audit the consolidated financial statements of the Company.
During the Company's two most recent fiscal years and through January 13, 2005,
the Company has not consulted with Sherb regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements, and neither a written report nor oral advice was provided that was
an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B
ITEM 8A. CONTROLS AND PROCEDURES
As of the year-end period covered by this Annual Report on Form 10-KSB, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on the
forgoing, our Chief Executive Officer has concluded that our disclosure controls
and procedures were effective as of the year ended December 31, 2004.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable and not absolute assurance of achieving
the desired control objectives. In reaching a reasonable level of assurance,
management was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. In addition, the design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
32
ITEM 8B. OTHER INFORMATION
On August 31, 2004, the $317,000 note payable to an officer matured. The note
was extended to November 30, 2004 and April 30, 2005, respectively.
On December 9, 2004 the Company entered into a Warrant Exchange and Release
Agreement with the Bailey Family Trust, Fortuna Investment Partners, and Fortuna
Unplugged whereby the Company exchanged warrants totaling $115,625 for 1,220,696
shares of common stock.
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 and executive officers of the Company:
------------------------------------------ --------------------------------------------- -------------------------
Name of Director or
Executive Officer,
Age and Position Principal Occupation Date of Initial
Held with Company For Previous Five Years Election as Director
------------------------------------------ --------------------------------------------- -------------------------
Ron Schutte, 48 Chief Executive Officer, June 1, 2001
President and Director Aug. 2000 - May 2001
Brooklyn Cheesecake Company
Apr. 1999 - Jul 2000
Crestwood Consulting
Mar 1997 - Mar 1999
Mother's Kitchen
July 1982 - Feb 1997
Pres,Creative Bakers Inc.
Brooklyn, NY
------------------------------------------ --------------------------------------------- -------------------------
Anthony Merante, 44 Certified Public Accountant January 2003
Vice-President and Chief Financial Officer
Director
------------------------------------------ --------------------------------------------- -------------------------
Carmelo Foti, 52 VP & Manager Credit & Marketing National January 2003
Director Bank Of Egypt, NY Branch
------------------------------------------ --------------------------------------------- -------------------------
Vincent Bucchimuzzo, 51 Executive for CINN Worldwide January 2003
Director Westchester Venture Group
Univest Partners 1982-1995
------------------------------------------ --------------------------------------------- -------------------------
Liborio Borsellino Partner, RBC and Associates August 2004
Director
------------------------------------------ --------------------------------------------- -------------------------
David Rabe President, Interpro Systems, Inc. August 2004
Director
------------------------------------------ --------------------------------------------- -------------------------
33
All directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified.
Officers are appointed by the Board of Directors and serve at the discretion of
the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
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 beneficial ownership report on a timely
basis during the most recent fiscal year, except for Messrs Schutte and Merante
who filed beneficial ownership reports late.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
Directors of the Company receive a fee of $1,000 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
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 $100,000, for the three
years ended December 31, 2004
Other Annual
Name and Principal Position Year Salary ($) Bonus ($) Compensation
--------------------------- ---- ---------- --------- -------------
Ron Schutte, CEO 2004 $200,000 $0.00 $0.00
2003 $100,000 $0.00 $0.00
2002 $150,000 $0.00 $0.00
No other executive officer received a salary and bonus in excess of $100,000 for
the three years ended December 31, 2004.
34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the number and percentage of Common Shares
beneficially owned, as of December 31, 2004, 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 (6 persons):
----------------------------------------- -------------------------------------- --------------------------
Name of Beneficial Owner No. of Shares Beneficially Owned Percent
----------------------------------------- -------------------------------------- --------------------------
Directors and Executive Officers:
----------------------------------------- -------------------------------------- --------------------------
Ronald L. Schutte 1,137,167 (1) 13.4%
----------------------------------------- -------------------------------------- --------------------------
Anthony J. Merante 449,298 5.3%
----------------------------------------- -------------------------------------- --------------------------
Yona Gonen 451,000 5.3%
----------------------------------------- -------------------------------------- --------------------------
Philip Grabow 500,000 5.9%
----------------------------------------- -------------------------------------- --------------------------
Righthand & Co. 500,000 5.9%
----------------------------------------- -------------------------------------- --------------------------
Bailey Family Trust 840,041 9.9%
----------------------------------------- -------------------------------------- --------------------------
ICM Asset Managment 882,000 10.4%
----------------------------------------- -------------------------------------- --------------------------
Fortuna & Fortuna Unplugged 580,655 6.8%
----------------------------------------- -------------------------------------- --------------------------
Directors and Nominal Executives as a 1,786,465 21.0%
Group (6 persons)
----------------------------------------- -------------------------------------- --------------------------
* Less than 1%
(1) Includes 250,000 options exercisable at $.07 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Notes from Chairman and Chief Executive Officer
Note dated May 21, 2004 in the amount of $54,000, payable on demand, with
interest at the rate of 8.5% per annum. The note is unsecured. This note
consolidates into a single promissory note, several loan advances received by
the Company in the first and second quarters of 2004.
Note dated June 15, 2004 in the amount of $317,000, with interest at the rate of
13% per annum. Interest payments are due on the last day of each month with the
note maturing on August 31, 2004. The note is secured by all of the Company's
assets. The note was extended to November 30, 2004 and April 30, 2005,
respectively.
Note payable effective April 2, 2003 in the original amount of $50,000, with a
variable interest rate that was 8.4% at December 31, 2004. Monthly payment of
principal and interest are approximately $1,300. Note is unsecured and due on
demand. The outstanding balance on the loan was $47,051 at December 31, 2004.
Note dated January 1, 2003 in the original amount of $88,000 with an interest
rate of 8.5% per annum. The note is unsecured. Interest only payments were due
for the first eighteen months and principal and interest payments are due
monthly thereafter until the maturity date of December 31, 2005. The balance on
the note was $103,858 at December 31, 2004 including accrued interest.
Note dated December 31, 2004 in the amount of $111,651, payable on demand, with
interest at the rate of 8.5% per annum. The note is unsecured. This note
consolidates in a single promissory note several loan advances received by the
Company in the third and fourth quarters of 2004.
35
Notes from Vice-President and Chief Financial Officer
Note dated May 25, 2004 in the amount of $28,000, payable on demand, with
interest at the rate of 8.5% per annum. The note is unsecured. This note
consolidates in a single promissory note several loan advances received during
the first and second quarters of 2004. The holder of the note is a member of the
Board of Directors.
Note payable effective August 18, 2003 in the original amount of $50,000, with a
variable interest rate that was 9.25% at December 31, 2004. Monthly payments of
principal and interest are approximately $1,000. Note is unsecured and due on
demand. The outstanding balance on the loan was $49,020 at December 31, 2004.
The holder of the note is a member of the Board of Directors.
Note dated December 31, 2004 in the amount of $8,911, payable on demand, with
interest at the rate of 8.5% per annum. The note is unsecured. This note
consolidates in a single promissory note several loan advances received during
the third and fourth quarters of 2004. The holder of the note is a member of the
Board of Directors.
The Purchase of the assets of Brooklyn Cheesecake Company Inc.
On March 7, 2002, the assets of the Brooklyn Cheesecake Company were purchased
by Brooklyn Cheesecake & Desserts Company, Inc, f/k/a Creative Bakeries Inc. for
300,000 shares of stock and $45,000 in cash. These assets were owned by our
current C.E.O. and board member Ron Schutte.
ITEM 13. EXHIBITS
EXHIBITS
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. Incorporated by reference
to the Company's Registration Statement on Form SB-2 Registration
Number 33-96094.
2.2 Stock Purchase Agreement, dated as of January 17, 1997, by and between
the Company and Philip Grabow, without exhibits. Incorporated by
reference to Schedule 13-D filed by Philip Grabow on SEC File Number
005-48185.
3.1 Restated Certificate of Incorporation. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
3.2 Amended and Restated By-laws. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
3.3 Amendment to Certificate of Incorporation. Incorporated by reference to
the Company's Current Report on Form 8-K, dated February 23, 2005.
4.1 Form of certificate for shares of Common Stock. Incorporated by
reference to the Company's Registration Statement on Form SB-2
Registration Number 33-96094.
4.2 Form of Representatives Warrant. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
4.3 Loan Agreement, dated July 10, 1995, by and between InterEquity Capital
Partners, L.P. and the Company. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
36
10.1 Employment Agreement, dated July 10, 1995, by and between the Company
and Stephen Fass. Incorporated by reference to the Company's
Registration Statement on Form SB-2 Registration Number 33-96094.
10.2 Employment Agreement, dated as of July 10, 1995, by and between the
Company and Willa Rose Abramson.
10.3 Employment Agreement, dated as of July 10, 1995, by and between the
Company and Maria Maggio Marfuggi. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
10.4 Employment Agreement and Consulting Agreement, dated July 10, 1995, by
and between the Company and Seth Greenberg. Incorporated by reference
to the Company's Registration Statement on Form SB-2 Registration
Number 33-96094.
10.5 Consulting Agreement, dated July 10, 1995, by and between the Company
and William Greenberg Jr. and Carol Greenberg. Incorporated by
reference to the Company's Registration Statement on Form SB-2
Registration Number 33-96094.
10.6 Departmental License Agreement effective February 1995 by and between
the Company and Macy's East, Inc. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
10.8 Form of Warrant for InterEquity Capital Partners, L.P. Incorporated by
reference to the Company's Registration Statement on Form SB-2
Registration Number 33-96094.
10.9 1995 William Greenberg Jr. Desserts and Cafes, Inc. Stock Option Plan.
Incorporated by reference to the Company's Registration Statement on
Form SB-2 Registration Number 33-96094.
10.10 Lease Agreement dated July 1995 between the Company and Murray
Greenstein. Incorporated by reference to the Company's Registration
Statement on Form SB-2 Registration Number 33-96094.
10.11 Lease Agreement dated January 1994 between Schnecken Baking Realty
Corp. and Gerel Corporation. Incorporated by reference to the Company's
Registration Statement on Form SB-2 Registration Number 33-96094.
10.12 Assignment and Assumption of Lease dated July 1995 between the Company
and Schnecken Baking Realty Corp. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
10.13 Lease dated April 1991 between Greenberg's 35th Street Baking Co., Inc.
and Rugby Managed Asset Fund. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
10.14 Assignment and Assumption of Lease dated July 1995 between the Company
and Greenberg's 35th Street Baking Co. Incorporated by reference to the
Company's Registration Statement on Form SB-2 Registration Number
33-96094.
10.15 Lease dated May 1989 as modified in January 1991 between Greenberg's
Triple S. Baking Co., Inc. and Stahl Real Estate Co. Incorporated by
reference to the Company's Registration Statement on Form SB-2
Registration Number 33-96094.
37
10.16 Assignment and Assumption of Lease dated July 1995 between the Company
and Greenberg's Triple S. Baking Co., Inc. Incorporated by reference to
the Company's Registration Statement on Form SB-2 Registration Number
33-96094.
10.17 Consulting Agreement, dated July 10, 1995, by and between the Company
and Marilyn Miller. Incorporated by reference to the Company's
Registration Statement on Form SB-2 Registration Number 33-96094.
10.18 Form of Indemnity Agreement. Incorporated by reference to the Company's
Registration Statement on Form SB-2 Registration Number 33-96094.
10.19 Sublease dated December 1995 between Timothy's Coffees of the World,
Inc., and the Company. Incorporated by reference to the Company's
Registration Statement on Form SB-2 Registration Number 33-96094.
10.20 Lease dated March 8, 1995 between Harran Holding Corp., c/o A. J.
Clarke Management and the Company. 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.
10.21 Agreement dated January 13, 1996 by and between the Company and Barry
Kaplan Associates. 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.
10.22 Employment Agreement, dated January 23, 1997, by and between the
Company and Philip Grabow. Incorporated by reference to the Company's
Annual Report for the fiscal year ended December 31, 1996, on Form
10-KSB Commission.
10.23 Form of Warrant for the Private Placement made in conjunction with the
JMS Subsidiary acquisition. Incorporated by reference to the Company's
Annual Report for the fiscal year ended December 31, 1996, on Form
10-KSB Commission.
10.24 Stock Purchase Agreement dated August 28, 1997, between the Company and
Yona Abrahami. 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.
10.25 Employment Agreement dated August 28, 1992 between the Company and Yona
Abrahami. 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.
10.26 Employment Agreement dated August 28, 1992 between the Company and
David Abrahami. 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.
10.27 Amendment to Stock Purchase Agreement dated March 10, 1997, between the
Company and Yona Abrahami. Incorporated by reference to the Company's
Annual Report for the fiscal year ended December 31, 2002, on Form
10KSB/A No. 2.
10.28 Sixth Amendment to Lease dated October 31, 2003 between the Company and
Airport Plaza Shopping Center, L.L.C. Incorporated by reference to the
Company's Annual Report for the fiscal year ended December 31, 2003, on
Form 10KSB/A No. 2.
10.29 Loan and Security Agreement dated October 9, 2003 between the Company
and Fairfield Gourmet Food Corp. Incorporated by reference to the
Company's Annual Report for the fiscal year ended December 31, 2003, on
Form 10KSB/A No. 2.
38
*10.30 Loan and Security Agreement dated September 1, 2004 between the Company
and Ronald L Schutte.
*10.31 Note dated September 1, 2004 between the Company and Ronald L Schutte.
*10.32 Loan and Security Agreement dated December 1, 2004 between the Company
and Ronald L Schutte.
*10.33 Note dated December 1, 2004 between the Company and Ronald L Schutte.
*10.34 Employment agreement dated January 1, 2005 between the Company and
Ronald L Schutte.
*10.35 Employment agreement dated January 1, 2005 between the Company and
Anthony J. Merante.
10.36 Website Development and Service Agreement between the Company and
Burbro Capital, Inc. dated as of March 1, 2005. Incorporated by
reference to the Company's Current Report on Form 8-K dated March 7,
2005.
*10.37 Form of Warrant Exchange and Release Agreement between the Company and
Bailey Family Trust, Fortuna Investment Partners and Fortuna Unplugged
dated December 9, 2004.
*10.38 Promissory Note dated December 31, 2004 between the Company and Anthony
J. Merante.
21.1 List of Subsidiaries of the Company, the state of incorporation of
each, and the names under which such subsidiaries do business.
Incorporated by reference to the Company's Annual Report for the fiscal
year ended December 31, 2002, on Form 10KSB/A No. 2.
*31.1 Certification of Chief Executive Officer and president pursuant to the
Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer and vice-president pursuant to
the Sarbanes-Oxley Act of 2002.
*32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes Oxley-Act of 2002.
*32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes Oxley-Act of 2002.
----------
* Filed Herewith.
39
ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
The following table shows the fees that we paid or accrued for the audit and
other services provided by our principal Accountant for the 2004 and 2003 fiscal
years.
Fiscal 2004 Fiscal 2003
----------- -----------
Audit Fees $ 34,919 $ 27,000
Audit-Related Fees 0 0
Tax Fees 0 0
All Other Fees 0 0
-------- --------
Total $ 34,919 $ 27,000
======== ========
Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.
Audit-Related Fees -- This category consists of assurance and related services
by the independent auditors that are reasonably related to the performance of
the audit or review of our financial statements and are not reported above under
"Audit Fees." The services for the fees disclosed under this category include
consultation regarding our correspondence with the SEC and other accounting
consulting.
Tax Fees -- This category consists of professional services rendered by our
independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.
All Other Fees -- This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees
charged by our independent auditors. Under the procedure, the Board approves the
engagement letter with respect to audit, tax and review services. Other fees are
subject to pre-approval by the Board, or, in the period between meetings, by a
designated member of Board. Any such approval by the designated member is
disclosed to the entire Board at the next meeting. The audit and tax fees paid
to the auditors with respect to fiscal year 2004 were pre-approved by the entire
Board of Directors.
40
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 15, 2005.
BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC.
By: /s/Ron Schutte
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 31, 2005.
Signatures Title
------------------------------ ------------------------------------
/s/Ron Schutte President, Chief Executive
------------------------------ Officer/Director
Ron Schutte
/s/ Anthony Merante Vice-President, Chief Financial
------------------------------ Officer/Director
Anthony Merante
/s/ Carmelo Foti Director
------------------------------
Carmelo Foti
/s/ Vincent Bucchimuzzo Director
------------------------------
Vincent Bucchimuzzo
/s/Liborio Borsellino Director
------------------------------
Liborio Borsellino
/s/David Rabe Director
------------------------------
David Rabe
41