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, 2002
Commission File Number: 0-18711
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 on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.001 per share NASDAQ
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 is not contained in this form,and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenue for its most recent fiscal year was $3,318,088. As of December
31, 2002 there were 5,446,750 shares of Company's Common Stock, par value $.001
per share, outstanding. The aggregate market value of the voting stock of the
issuer on December 31, 2002 was approximately 218,000.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
GENERAL
Creative Bakeries, Inc. ("Creative"), offers a broad line of premium quality
pastries, cakes, pies, cookies and other assorted desserts which are produced at
its baking facility. Such baked goods are marketed and distributed on a
wholesale basis to supermarkets, restaurants, and institutional dining
facilities.
Creative was incorporated in November 1993. The Company's executive
offices are located at 20 Passaic Avenue, Fairfield, NJ 07004 and its telephone
number is (973) 808-8248.
The company had two subsidiaries. The sale of William Greenberg Jr.
subsidiary was completed in November 1998. From the remaining subsidiary known
as Batter Bake - Chatterley (BBC), the company sold the Batter Bake business in
December 2001. The Company changed it's name to Brooklyn Cheesecake and Desserts
Company in March 2002.
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 Connecticut and Philadelphia areas as well as key distributor areas
throughout the United States. To do this, the Company intends to appoint food
brokers in various states to handle sales on a commission-only basis.
Continue to expand the fat-free product line targeting existing
customers as well as new customers; and
Enter into co-packing arrangements whereby the Company would introduce
private label products of other bakery operations.
2
Kosher Foods. The Company also is seeking to benefit from the growth of
the kosher food industry. According to Prepared Foods, the kosher food industry
generated approximately $33 billion in sales in 1994 and has been growing at a
rate of approximately 15% per annum. The company's Brooklyn Cheesecake and
Desserts Subsidiary has a kosher certification and the Company believes that it
can benefit from the projected growth of this market.
BUSINESS PHILOSOPHY
High Quality Ingredients. The Company believes that developing and
maintaining premium quality products is the key to its future success. The
Company uses the highest quality ingredients in its products including, AA
creamy butter, 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's goal is to provide its customers with
warm, courteous and efficient service. The Company depends on and enjoys a high
rate of repeat business. The Company believes that the quality of the
relationship between its employees and its customers is critical to its success.
The Company strives to hire and train well-qualified, highly motivated employees
committed to providing superior levels of customer service.
PRODUCTS
Baked Goods
The Brooklyn Cheesecake and Desserts Company Subsidiary markets a full
line of premium quality baked products such as cheese cakes, mousse cakes and
tart shells as well a complete gourmet line of muffins. The Company continues to
develop new products and welcomes customer requests.
Kosher Foods
Kosher foods generally are consumed by persons of the Jewish faith as
well as Muslims, Seven Day Adventists and others who perceive kosher
certification as a seal of purity. Kosher is a biblical term originally used to
denote that which is "fit" and "proper".
The Company's subsidiary has kosher certification and the Company
believes that it can capitalize on the projected growth of this market. The
Company believes that its kosher certifications will enable it to better
penetrate certain market areas. The Company's products are not kosher for
Passover.
CUSTOMERS
INSTITUTIONAL/WHOLESALE
3
The Brooklyn Cheesecake and Desserts Company 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.
INGREDIENTS AND PRINCIPAL SUPPLIERS
The Company seeks to use only the highest quality ingredients
available. The Company has a policy of inspecting all raw ingredients before
their intended use.
The ingredients used by the Company consist primarily of flour, eggs,
sugar, butter and chocolate. All ingredients used by the Company are subject to
substantial price fluctuations. The Company historically has been able to pass
any significant price increases in its ingredients through to its customers.
However, no assurance can be given that the Company will be able to continue
this practice in the future. Any substantial increase in the prices of
ingredients used by the Company could, if not offset by a corresponding increase
in product prices, have a material adverse effect on its business, financial
condition or results of operations. The Company does not believe the loss of any
of its suppliers would have a material adverse effect on its business and
believes that other suppliers could readily provide such products if necessary.
DISTRIBUTION AND MARKETING
The Brooklyn Cheesecake and Desserts Subsidiary bakes all of its products in
its 30,000 square foot facility in Fairfield, New Jersey. Although utilization
of the facility varies based on seasonal fluctuation, the facility operates on
five days a week basis. The Company believes that the Brooklyn Cheesecake and
Desserts Company Subsidiary has the capacity to meet future requirements,
including those arising out of the consolidation with the Company. The Brooklyn
Cheesecake and Desserts Company Subsidiary delivers 90% of its products by
common carrier trucks to its institutional/wholesale customers. About 10% of its
customers pick up their orders directly at the bakery and utilize their own
distribution networks.
Historically, the Company has relied upon word-of-mouth and customer
satisfaction to market its products to new customers and to make existing
customers aware of new products.
COMPETITION
The baking industry is a highly competitive and highly fragmented
industry. The Company competes with national, regional and local bakeries as
well as supermarket chains that have in-store bakeries. Many of these
competitors are larger, more established and have greater financial and other
resources than the Company. Competition in both the retail and
institutional/wholesale baking industry is based on product quality, brand name
loyalty, price and customer service.
TRADEMARKS
4
The JMS Subsidiary has a trademark and design registered with the
United States Patent and Trademark office for The Healthy Bakery'TM' (US
Registration No. 1,644,559). While the Company believes that the trademarks are
valid and enforceable, there can be no assurance as to the degree of protection
its registered trademarks will afford the Company.
GOVERNMENT REGULATION
The Company is subject to numerous state regulations relating to the
preparation and sale of food. It is also subject to federal and state laws
governing the Company's relationship with employees, including minimum wage
requirements, overtime, working and safety conditions, and citizenship
requirements. The failure to obtain or retain required food licenses or to be in
compliance with applicable governmental regulations, or any increase in the
minimum wage rate, employee benefits costs (including costs associated with
mandated health insurance coverage) or other costs associated with employees,
could adversely affect the business, results of operations or financial
condition of the Company.
EMPLOYEES
As of March 26, 2003, the Brooklyn Cheesecake and Desserts Company
Subsidiary together with Creative had approximately 32 full-time employees, of
which 30 are employed in production, and 1 in administration and 1 in an
executive position. The Brooklyn Cheesecake and Desserts Company Subsidiary does
not have a union and the Company believes that it has good relations with its
employees.
ITEM 2. DESCRIPTION OF PROPERTY
As of March 26, 2003, the Company leases in Fairfield, New Jersey
29,362 square feet for its baking facilities. The Company believes that its
existing lease will be renewed when it expires in 2004 or alternative properties
can be leased on acceptable terms. The Company believes that its present
facilities are well maintained, in good condition and are suitable for the
Company to continue to operate and meet its production needs in the foreseeable
future. The Company is also considering subcontracting certain of its production
requirements.
PLAN OF OPERATION
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.
5
ITEM 3. LEGAL PROCEEDING
There are no pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Small Cap Market
under the symbol "CBAK" and the Boston Exchange under the Trading symbol "BYK".
The following table sets forth the range of quarterly high and low bid prices,
as reported on the NASDAQ SmallCap Market, during the last two fiscal years
through March 31, 2002.
Period High Low
----------------------------------------------------------------------------
FISCAL YEAR 2001:
First Quarter .10 .08
Second Quarter .22 .17
Third Quarter .12 .10
Fourth Quarter .22 .07
Fiscal Year 2002:
First Quarter .40 .20
Second Quarter .25 .09
Third Quarter .07 .07
Fourth Quarter .04 .04
The number of shareholders of record of the Common Stock on March 26,
2003 was 41 excluding 2,631,078 shares of Common Stock held by Cede & Co. The
Company believes that it has in excess of 500 shareholders.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying dividends in the foreseeable future. The payment of future
cash dividends by the Company on its Common Stock will be at the discretion of
the Board of Directors and will depend upon the Company's earnings (if any),
general financial condition, cash flows, capital requirements and other
considerations deemed relevant by the Board of Directors.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
6
A. General
Management continues to refine operations and implement controls. Special
emphasis has been placed in ensuring accurate reporting of financial data.
Increasing sales revenues is the most pressing issue. However, funds for
marketing and equipment acquisitions are scarce. The company has a negative cash
flow of $70,461 for the year ending December 31, 2002.
Mini Cakes, Cheesecake and pre-portioned gourmet desserts are the categories
which represent the most potential for sales growth. In addition, the company is
exploring marketing several niche health food items. This includes but is not
limited to low carbohydrate desserts. Marketing efforts continue to target both
food service and retail distributors to carry our product lines.
At December 31, 2002 to the extent the Company may have taxable income in future
periods, there is available a net operating loss for federal income tax purposes
of approximately $8,680,450 which can be used to reduce the tax on income up to
that amount through the year 2019.
B. Results of Operations
The Company's consolidated revenues from continuing operations aggregated
$1,053,920 and $1,141,545 for the quarters ended December 31, 2002 and 2001
respectively, a decrease of 3%. The cost of goods sold was $908,120 and
$1,038,494 respectively, a decrease of 13%. Operating expenses were $65,558 and
$127,591 respectively, a decrease of 49%. As a result, the gain (loss) from
continuing operations before other income (expense) was $80,242 and $(24,540)
respectively, an increase of 400%. The net income (loss) from continuing
operations for the quarter was $39,261 and $(99,824) respectively.
The increase from continuing operations for the 4th quarter of 2002 as compared
to the same period of 2001 was a result of aggressive cost cutting and product
streamlining.
SEGMENT INFORMATION: Not applicable since retail operations were discontinued.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Since its inception the Company's only source of working capital has been the
$8,455,000 received from the issuance of its securities.
7
As of December 31, 2002, the Company had a negative working capital during the
4th quarter from continuing operations of $126,326 as compared to a negative
working capital of $200,131 during the 3rd quarter of 2002. The negative
working capital for December 31,2001 was $20,247.
CAPITAL RESOURCES:
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.
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
Index to Financial Statement....................................................................................F-1
Independent Accountants' Report.................................................................................F-2
Financial Statements:
Balance Sheets as at December 31, 2001 and 2000........................................................F-3
Statement of Operations For the Years Ended December 31, 2001 and 2000.............................. ..F-4
Statements of Stockholders' Equity (Deficiency) For the Years Ended December
31, 2001 and 2000 .....................................................................................F-5
8
Statements of Cash Flows For the Years Ended December 31, 2002 and 2001 ...............................F-6
Notes to Financial Statements .................................................................F-7 to F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
9
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information Concerning the Board of Directors and Executive Officers
The following table sets forth certain information concerning the Board
of Directors, persons nominated to be elected as directors and executive
officers of the Company:
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 46 President and Director Chief Executive Officer, June 1, 2001
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, CreativeBakers Inc. Brooklyn,NY
Richard Fechtor, 72 Director Founder of and since 1974 Executive Vice July 11, 1996
President of Fechtor, Detwiler & Co.,
Inc., the representative of the
underwriters in the Company's initial
public offering; Director of Vascular
Laboratories since 1989
Karen Brenner, 49, President of Fortuna Advisors, Inc., an July 1997
Director investment advisory firm in California
1993 to present; founder
10
Name of Director or
Executive Officer,
Age and Position Principal Occupation Date of Initial
Held with Company For Previous Five Years Election as Director
----------------- ----------------------- --------------------
and President of Karen Brenner, Registered
Investment Advisor, the predecessor to
Fortuna Advisors, Inc., 1984 to 1993;
Managing Partner of F.C. Partners, a
California limited partnership, April
1996 to present; Director on DDL
Electronics, Inc., a publicly held
company, July 1996 to present;
Director of Krug International Corp.,
a publicly held company, July 1996 to
present.
Vincent Bucchimuzzo 49 Executive for CINN Worldwide January 2003
Director Westchester Venture Group
Univest Partners 1982-1995
Anthony Merante 42 Certified Public Accountant January 2003
Director
Mel Foti 50 VP & Manager Credit & Marketing January 2003
Director National Bank Of Egypt, NY Branch
All directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualified. For a period of five years from
October 12, 1995, Fechtor Detwiler & Co., Inc. (the "Representative") has the
right to nominate one member to the Company's Board of Directors. Mr. Fechtor is
the Representative's current nominee to the Board of Directors. There are no
family relationships among any of the directors and executive officers of the
Company.
Officers are appointed by the Board of Directors and serve at the discretion of
the Board.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
11
The Securities and Exchange Commission (the "Commission") has comprehensive
rules relating to the reporting of securities transactions by directors,
officers and shareholders who beneficially own more than 10% of the Company's
Common Shares (collectively, the "Reporting Persons"). These rules are complex
and difficult to interpret. Based solely on a review of Section 16 reports
received by the Company from Reporting Persons, the Company believes that no
Reporting Person has failed to file a Section 16 report on a timely basis during
the most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
Directors of the Company who are not salaried officers receive a fee of $500 for
attending each meeting of the Board of Directors or a committee thereof. In
addition, all directors are reimbursed for their reasonable out-of-pocket
expenses incurred in connection with attending such meetings.
Executive Compensation in 2002
The following table sets forth compensation paid to the Chief Executive Officer
and to executive officers of the Company, excluding those executive officers who
did not receive an annual salary and bonus in excess of $100,000 in the fiscal
year ended December 31, 2001.
Other Annual
Name and Principal Position Year Salary ($) Bonus ($) Compensation
--------------------------- ---- ---------- --------- ------------
Ron Schutte, CEO 2002 $150,000 $0.00 $0.00
No other executive officer received a salary and bonus in excess of $100,000 for
the year ended December 31, 2002. The Company has not granted any stock options,
stock appreciation rights or long-term incentive awards to any executive officer
of the Company since its inception.
Employment Agreements
Simultaneously with the acquisition of Chatterley, the Company entered into
employment agreements with Yona Abrahami and David Abrahami. Their contracts
have since been terminated. These agreements were filed as exhibits B and C
respectively with the Form 8-K/A on November 17, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
12
The following table sets forth the number and percentage of Common Shares
beneficially owned, as of the date of this Amendment to the Annual Report, by:
(i) all persons known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock; (ii) each director of the Company;
(iii) each of the "named executive officers" as defined under the rules and
regulations of the Securities Act of 1933, as amended; and (iv) all directors
and executive officers of the Company as a group (7 persons):
No. of shares beneficially owned Percentage Benef. Owned
Yona Abrahami(3)............................. 500,000 500,000 9.53%
Philip Grabow(4)............................. 500,000 500,000 9.53
Richard Fechtor(5)........................... 142,933 2.0
Raymond J. McKinstry(6)...................... 50,000
InterEquity Capital Partners, L.P.(7)........ 326,805 7.0
Ron Schutte.................................. 350,000
Executive directors and officers as a group.. 1,819,738
Unless otherwise noted, the Company believes that all persons named in the table
have sole voting power with respect to all shares beneficially owned by them. A
person is deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from the date hereof upon the exercise of warrants
or options.
(2) Assumes 5,161,750 shares of Common Stock outstanding as of the March 31,
1998. Each beneficial owner's percentage ownership is determined by assuming
that options or warrants that are held by such person (but not those held by any
other person) and which are exercisable within 60 days from the date hereof have
been exercised.
(3) Ms. Abrahami's address is c/o 20 Passaic Avenue, Fairfield, New Jersey
07004.
13
(3) Mr. Grabow's business address is c/o 20 Passaic Avenue, Fairfield, New
Jersey 07004. Includes 500,000 Common Shares and currently exercisable warrants
to purchase an additional 300,000 shares of Common Stock. See "Certain
Relationships and Related Transactions."
(5) Mr. Fechtor's business address is 155 Federal Street, Boston, Massachusetts
02110. Upon the conversion of a certain note, InterEquity Capital Partners,
L.P., received a six-year warrant exercisable until October 2001 to purchase, on
one occasion, 6% of the issued and outstanding capital shares of the Company on
a fully diluted basis as of the date of exercise. Certain persons associated
with the Representative, received an aggregate 17.5% interest in such warrant,
including Mr. Fechtor, who received a 5% interest in such warrant. As of March
31, 1998, there are 7,644,250 shares of Common Stock outstanding on a fully
diluted basis, 6% of which equals 458,655 shares of Common Stock. Accordingly,
Mr. Fechtor's ownership as shown in the table includes 22,933 shares issuable
upon exercise of such warrant. See "Certain Relationships and Related
Transactions." Also includes 120,000 shares of Common Stock. Excludes 5,500
shares of Common Stock owned by Mr. Fechtor's wife, of which he disclaims
beneficial ownership.
(6) Mr. McKinstry's business address is 40 Queen Street, London EC4R 1DD,
England. Includes currently exercisable warrants to purchase 50,000 Common
Shares.
(7) InterEquity's business address is 220 Fifth Avenue, New York, New York
10001. Includes an 82.5% interest in a six-year warrant exercisable to purchase,
on one occasion, 6% of the issued and outstanding capital shares of the Company
on a fully diluted basis as of the date of exercise. As of March 31, 1998, there
are 7,644,250 shares of Common Stock outstanding, 6% of which equals 458,655
shares of Common Stock. Accordingly, InterEquity's ownership as shown in the
table includes 378,390 shares issuable upon exercise of such warrant. The
warrant is currently exercisable and expires in October 2001.
(8) Mr. Schutte address is 20 Passaic Ave, Fairfield, New Jersey 07004.
(12) Includes currently exercisable warrants to purchase 550,000 shares.
(13) Includes currently exercisable warrants to purchase 606,250 shares.
(14) Includes the shares of Common Stock beneficially owned by Ms. Abrahami, Mr.
Grabow, Mr. Fechtor, Mr. McKinstry, Mr. Schutte,
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The JMS Acquisition
On January 17, 1997, the Company entered into a stock purchase agreement (the
"Stock Purchase Agreement") with Philip Grabow ("Grabow"), pursuant to which, on
January 23, 1997, the Company consummated the purchase from Grabow of all the
outstanding shares of J.M. Specialties, Inc., a New Jersey corporation (the "JMS
Subsidiary"), in exchange for (i) $900,000 in cash, (ii) 500,000 shares (the
"JMS Shares") of the Common Stock of the Company and (iii)
14
350,000 warrants (the "JMS Warrants") exercisable for shares of Common Stock of
the Company (the "JMS Transaction"). Each JMS Warrant entitles Grabow to
purchase one Common Share of the Company at the exercise price of $2.50 per
share until December 31, 2000.
In connection with the Stock Purchase Agreement, Grabow and the Company also
entered (i) a registration rights agreement, dated as of January 23, 1997,
regarding the terms of the registration of the Common Shares of issuable upon
exercise of the JMS Warrants, and (ii) an employment agreement dated as of
January 23, 1997. Pursuant to the employment agreement, Grabow will serve as
President and Chief Executive Officer of the Company at an annual salary level
of $250,000 for the first year, and a minimum of $150,000 thereafter. Also in
connection with the JMS Transaction, effective January 23, 1997, Grabow was
elected to serve as a director of the Company.
JMS Acquisition Indebtedness
The payment of the cash portion of the purchase price for the JMS Subsidiary and
such working capital, was funded through the net proceeds received from the sale
by the Company of 1,500,000 common stock purchase warrants (the "Private
Placement Warrants") at a price of $1.10 per Private Placement Warrant to a
limited number of purchasers that qualified as "accredited investors" under the
Securities Act of 1933. The terms of the Private Placement Warrants are
substantially similar to the JMS Warrants.
The Chatterley Acquisition
On August 28, 1997 the Company entered into a stock purchase agreement with Yona
Abrahami pursuant to which the Company purchased from Ms. Abrahami all the
outstanding shares of Chatterley Elegant Desserts, Inc., a New Jersey
Corporation, in exchange for 1,300,000 shares of the Company's common stock.
Such stock purchase agreement was subsequently amended and Ms. Abrahami agreed
to reduce the purchase price by surrendering 200,000 shares of common stock back
to the Company.
The Purchase of the assets of Brooklyn Cheesecake Company Inc.
On March 7, 2002, the assets of the Brooklyn Cheesecake Company was purchased by
Creative Bakeries Inc. for 300,000 shares of stock and $45,000 in cash. These
assets were owned by the current C.E.O. Ron Schutte
15
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements filed as part of the Company's Form 10-KSB are listed
in Item 7. Financial Statements are included in Part IV hereof at page F-1.
(b) Reports on Form 8-K
On September 11, 1997, the Company filed a Current Report on Form 8-K announcing
completion of the Chatterley acquisition.
(c) Listing of Exhibits
**2.1 Purchase and Sale Agreement, dated June 2, 1995, by and among the
Company, Greenberg Dessert Associates Limited Partnership, SMG Baking
Enterprises, Inc. and its limited partners.
***2.2 Stock Purchase Agreement, dated as of January 17, 1997, by and
between the Company and Philip Grabow, without exhibits.
**3.1 Restated Certificate of Incorporation.
**3.2 Amended and Restated By-laws.
**4.1 Form of certificate for shares of Common Stock.
**4.2 Form of Representatives Warrant.
**4.3 Loan Agreement, dated July 10, 1995, by and between InterEquity
Capital Partners, L.P. and the Company.
**10.1 Employment Agreement, dated July 10, 1995, by and between the
Company and Stephen Fass.
**10.2 Employment Agreement, dated as of July 10, 1995, by and between
the Company and Willa Rose Abramson.
**10.3 Employment Agreement, dated as of July 10, 1995, by and between
the Company and Maria Maggio Marfuggi.
**10.4 Employment Agreement and Consulting Agreement, dated July 10,
1995, by and between the Company and Seth Greenberg.
16
**10.5 Consulting Agreement, dated July 10, 1995, by and between the
Company and William Greenberg Jr.. and Carol Greenberg.
**10.6 Departmental License Agreement effective February 1995 by and
between the Company and Macy's East, Inc.
**10.8 Form of Warrant for InterEquity Capital Partners, L.P.
**10.9 1995 William Greenberg Jr. Desserts and Cafes, Inc. Stock Option
Plan
**10.10 Lease Agreement dated July 1995 between the Company and Murray
Greenstein.
**10.11 Lease Agreement dated January 1994 between Schnecken Baking
Realty Corp. and Gerel Corporation.
**10.12 Assignment and Assumption of Lease dated July 1995 between the
Company and Schnecken Baking Realty Corp.
**10.13 Lease dated April 1991 between Greenberg's 35th Street Baking
Co., Inc. and Rugby Managed Asset Fund.
**10.14 Assignment and Assumption of Lease dated July 1995 between the
Company and Greenberg's 35th Street Baking Co.
**10.15 Lease dated May 1989 as modified in January 1991 between
Greenberg's Triple S. Baking Co., Inc. and Stahl Real Estate Co.
**10.16 Assignment and Assumption of Lease dated July 1995 between the
Company and Greenberg's Triple S. Baking Co., Inc.
**10.17 Consulting Agreement, dated July 10, 1995, by and between the
Company and Marilyn Miller.
**10.18 Form of Indemnity Agreement.
**10.19 Sublease dated December 1995 between Timothy's Coffees of the
World, Inc., and the Company.
****10.20 Lease dated March 8, 1995 between Harran Holding Corp., c/o
A. J. Clarke Management and the Company.
****10.21 Agreement dated January 13, 1996 by and between the Company
and Barry Kaplan Associates.
17
*****10.22 Employment Agreement, dated January 23, 1997, by and between
the Company and Philip Grabow.
*****10.23 Form of Warrant for the Private Placement made in
conjunction with the JMS Subsidiary acquisition.
******10.24 Stock Purchase Agreement dated August 28, 1997, between the
Company and Yona Abrahami.
******10.25 Employment Agreement dated August 28, 1992 between the
Company and Yona Abrahami.
******10.26 Employment Agreement dated August 28, 1992 between the
Company and David Abrahami.
*10.27 Amendment to Stock Purchase Agreement dated March 10, 1997,
between the Company and Yona Abrahami.
*21.1 List of Subsidiaries of the Company, the state of incorporation
of each, and the names under which such subsidiaries do business.
---------------------
* Filed Herewith.
** Incorporated by reference to the Company's Registration Statement on Form
SB-2 Registration Number 33-96094.
*** Incorporated by reference to Schedule
13-D filed by Philip Grabow on SEC File Number 005-48185.
**** Incorporated by reference to the Company's Annual Report for the fiscal
year ended December 31, 1995, on Form 10-KSB Commission File Number 1-13984.
***** Incorporated by reference to the Company's Annual Report for the fiscal
year ended December 31, 1996, on Form 10-KSB Commission.
****** Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 11, 1997 and Form 8-K/A, dated November 17, 1997.
18
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 March 31, 2003.
CREATIVE BAKERIES, 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, 2003.
Signatures Title
---------- -----
/s/ Ron Schutte President, Chief Executive Officer/Director
----------------------------------------
Ron Schutte
/s/ Vincent Bucchimuzzo Director
----------------------------------------
Vincent Bucchimuzzo
/s/ Richard Fechtor Director
----------------------------------------
Richard Fechtor
/s/ Anthony Merante Director
----------------------------------------
Anthony Merante
/s/ Karen Brenner Director
----------------------------------------
Karen Brenner
/s/ Mel Foti Director
----------------------------------------
Mel Foti
19
CREATIVE BAKERIES, INC.
YEAR ENDED DECEMBER 31, 2002
CONTENTS
Page
----
Independent auditors' report F-1
Consolidated financial statements:
Consolidated balance sheet F-2
Consolidated statement of operations F-3
Consolidated statement of stockholders' equity F-4
Consolidated statement of cash flows F-5
Notes to consolidated financial statements F-6 - F-12
[LETTERHEAD OF ZELLER WEISS & KAHN, LLP]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Creative Bakeries, Inc.
We have audited the accompanying consolidated balance sheet of Creative
Bakeries, Inc. as of December 31, 2002, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years ended December
31, 2002 and 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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
audits provide 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 Creative Bakeries, Inc. as
of December 31, 2002, and the results of its operations and cash flows for the
years ended December 31, 2002 and 2001, 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, 2002 and 2001 and as of
December 31, 2002 has a working capital deficiency in the amount of $126,326,
which raise 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 6, 2003
Mountainside, New Jersey
F-1
CREATIVE BAKERIES, INC.
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2002
ASSETS
Current assets:
Cash and cash equivalents $ 51,155
Accounts receivable, less allowance for doubtful
accounts of $4,200 185,277
Inventories 190,945
Prepaid expenses 63,768
-----------
Total current assets 491,145
-----------
Property and equipment, net 329,555
-----------
Other assets:
Security deposits 4,714
Tradename and licensing agreements,
net of amortization 128,106
-----------
132,820
-----------
$ 953,520
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 459,823
Accrued expenses 67,593
Notes payable, officer 90,055
-----------
Total current liabilities 617,471
-----------
Other liabilities:
Deferred rent 72,600
Net liabilities of discontinued operations
less assets to be disposed of 134,265
-----------
206,865
-----------
Stockholders' equity:
Preferred stock $.001 par value, authorized 2,000,000
shares, none issued
Common stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 5,446,750 shares 5,447
Additional paid in capital 11,346,093
Deficit ( 11,222,356)
-----------
Total stockholders' equity 129,184
-----------
$ 953,520
===========
See notes to consolidated financial statements.
F-2
CREATIVE BAKERIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
Net sales $3,318,088 $3,770,507
Cost of sales 2,893,226 3,279,919
---------- ----------
Gross profit 424,862 490,588
Selling, general and administrative expenses 636,302 771,248
---------- ----------
Loss from operations ( 211,440) ( 280,660)
---------- ----------
Other income (expense):
Loss on impairment of goodwill ( 670,995)
Gain from sale of disposition of assets 100,000
Interest income 1,029
Miscellaneous income 3,910
Interest expense ( 2,055) ( 8,521)
Cancellation of certain liabilities 48,711
---------- ----------
( 2,055) ( 525,866)
---------- ----------
Loss from continuing operations ( 213,495) ( 806,526)
Discontinued operations:
Income from operations of New York
facility 379,722 18,937
---------- ----------
Net income (loss) $ 166,227 ($ 787,589)
========== ==========
Earnings per common share
Basic and fully diluted:
Continuing operations ($ 0.04) ($ 0.16)
Discontinued operations $ 0.07 ( 0.01)
---------- ----------
Net income (loss) per share $ 0.03 ($ 0.15)
========== ==========
Weighted average number of common
shares outstanding 5,346,828 5,245,250
========== ==========
See notes to consolidated financial statements.
F-3
CREATIVE BAKERIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
Common stock
-----------------
Number Additional Total
of Paid in Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------ ------ ------- ------- ----- ------
Balance at December 31, 2000 5,245,250 $5,245 $11,364,074 ($10,600,994) ($119,029) $649,296
Treasury stock issued for services ( 23,544) 28,544 5,000
Net loss for the year ended December 31, 2001 ( 787,589) ( 787,589)
--------- ------ ----------- ----------- -------- --------
Balance at December 31, 2001 5,245,250 5,245 11,340,530 ( 11,388,583) ( 90,485) ( 133,293)
Treasury stock issued as employee incentives ( 12,067) 18,317 6,250
Stock issued in exchange for tradename rights 201,500 202 17,630 72,168 90,000
Net income for the year ended December 31, 2002 166,227 166,227
--------- ------ ----------- ----------- -------- --------
Balance at December 31, 2002 5,446,750 $5,447 $11,346,093 ($11,222,356) ($ 0) $129,184
========= ====== =========== =========== ======== ========
See notes to consolidated financial statements.
F-4
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
Operating activities:
Loss from continuing operations ($213,495) ($806,526)
Adjustments to reconcile loss from
continuing operations to cash used in
continuing operations:
Depreciation and amortization 136,828 164,001
Common stock issued for services 6,250 5,000
Loss on impairment of long-lived asset 670,995
Forgiveness of debt ( 48,711)
Gain on sale of equipment ( 100,000)
Changes in other operating assets and
liabilities from continuing operations:
Accounts receivable 115,247 45,257
Inventory ( 38,367) 88,548
Prepaid expenses 673 ( 22,170)
Security deposits 250 500
Accounts payable 38,352 ( 101,609)
Accrued expenses ( 170,502) ( 23,393)
Deferred rent ( 21,933) ( 21,497)
-------- --------
Net cash used in operating activities ( 146,697) ( 149,605)
Net cash provided by discontinued
operations 1,020 5,343
-------- --------
Net cash used in operating activities ( 145,677) ( 144,262)
-------- --------
Investing activities:
Proceeds from sale of equipment 100,000
Purchase of property and equipment ( 85,714) ( 2,500)
Proceeds from sale of goodwill 47,578
-------- --------
Net cash provided by (used in)
investing activities ( 85,714) 145,078
Net cash provided by investing
activities from discontinued operations 70,875 98,750
-------- ---------
Net cash provided by (used in)
investing activities ( 14,839) 243,828
-------- --------
Financing activities:
Proceeds from officers' notes payable 90,055
Payment of debt ( 107,270)
-------- --------
Net cash provided by (used in)
financing activities 90,055 ( 107,270)
-------- --------
Net decrease in cash and cash equivalents ( 70,461) ( 7,704)
Cash and cash equivalents, beginning of year 121,616 129,320
-------- --------
Cash and cash equivalents, end of year $ 51,155 $121,616
======== ========
Supplemental disclosures:
Cash paid during the year for:
Interest:
Continuing operations $ 9,555
======== ========
Discontinued operations $ 0 $ 0
======== ========
See notes to consolidated financial statements.
F-5
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. Going concern:
During the year ended December 31, 2002, the Company incurred a loss from
continuing operations in the amount of $213,495, and had a net working
capital deficiency of $126,326. 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.
During the year 2002, Creative Bakeries Inc. acquired the assets of the
Brooklyn Cheesecake Company. Upon completion of the acquisition, the
operating name of the company was changed from Chatterley Elegant Desserts
to Brooklyn Cheesecakes and Desserts Company. The product line continues to
be streamlined and greater emphasis has been placed on marketing portion
controlled dessert items.
The Company intends to raise capital either through an offering of
preferred stock or conventional financing. The proceeds would be used to
upgrade the production process.
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. 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.
Recent accounting pronouncements:
In April 2002, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Revision of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Among several accounting issues, the statement changes the treatment and
classification of gain or loss on extinguishment of debt as it relates to
characterization as an extraordinary item. The Company has adopted this
statement for the year ended December 31, 2002.
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.
F-6
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2. Accounting policies (continued):
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.
Comprehensive income:
There were no items of other comprehensive income in 2002 and 2001, and
thus, net income is equal to comprehensive income for each of those years.
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.
3. Correction of an estimate:
The Company has determined that the estimate of liabilities needed to
dispose of its discontinued operations described in Note 17 was overstated.
Current income from discontinued operations presented in the statement of
operations includes $79,841 related to this adjustment.
4. Nature of operations, risks and uncertainties:
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, 2002, the Company had no
uninsured cash balances.
F-7
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
4. Nature of operations, risks and uncertainties (continued):
The Company maintained sales with three customers which comprised more than
10% of total sales for the year. If these sales levels were to change this
could have a significant impact on the Company's operations.
At December 31, 2002 there were two customers whose balances included in
accounts receivable comprised more than 10% of total accounts receivable.
If these customers were to default on these amounts it could have a
significant impact on the Company's operations.
5. Accounts receivable:
Following is a summary of receivables at December 31, 2002:
Trade accounts $189,477
Less allowance for doubtful accounts (4,200)
--------
$185,277
========
6. Inventories:
Inventories at December 31 consist of:
Finished goods and work in process $ 45,837
Raw materials 61,946
Supplies 83,162
--------
$190,945
========
7. Property and equipment:
The following is a summary of property and equipment at December 31,
2002:
Baking equipment $1,349,326
Furniture and fixtures 97,978
Leasehold improvements 180,422
----------
1,627,726
Less: Accumulated depreciation
and amortization 1,298,171
----------
$ 329,555
==========
Depreciation expense charged to operations was $124,934 and $123,545 in
2002 and 2001, 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
F-8
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
8. Tradename and licensing agreements:
On March 7, 2002, the Company purchased the rights to the tradenames
Brooklyn Cheesecake Company, Inc. and Brooklyn Cheesecake and 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 $4,875 for the year ended
December 31, 2002.
The Company has a licensing agreement for the William Greenberg Desserts
name which is being amortized on the straight-line basis over a seven year
term. Amortization expense was $7,019 for the year ended December 31, 2002.
9. Notes payable, officer:
An officer of the Company made loans to the Company during the year
totalling $48,000. In addition, the officer has a balance of $40,000 due on
the sale of equipment to the Company as described in Note 15. The notes are
due on demand and accrue interest at a rate of 7% per annum. Interest due
on the notes amounted to $2,055 at December 31, 2002.
10. Common stock:
During the year the Company issued 325,000 restricted shares of its common
stock. 25,000 shares were issued under an employee stock incentive plan
(see Note 14), granted in February, 2002. The additional 300,000 shares
were issued pursuant to the purchase agreement for the tradename and logo
of Brooklyn Cheesecake Company, Inc. entered into in March 2002 as
described in Note 16. The Company utilized all of its remaining 123,500
shares previously held as treasury stock plus new share issues to complete
the stock transactions.
11. Commitments and contingencies:
The Company is obligated under a triple net lease for use of 29,362 square
feet of office and plant space in New Jersey with the lease expiring on
December 31, 2004.
The minimum future rentals on the baking facility are as follows:
Facility
--------
December 31, 2003 $200,000
December 31, 2004 230,000
--------
$430,000
========
Rent expense amounted to $228,065 in 2002 and $229,833 in 2001 and includes
straight-line amortization of rent adjustments discussed in Note 2.
The Company also leases a vehicle under an operating lease agreement that
expires in December 2004. Total lease expense for 2002 was $7,200. Future
minimum rentals are as follows:
December 31, 2003 $ 7,200
December 31, 2004 7,200
-------
$14,400
=======
F-9
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
12. Off-balance-sheet risk:
The Company is a third co-guarantor on a vehicle lease for a former officer
of the Company with a lease buyout of approximately $12,000. The entire
amount has been escrowed with an attorney by the former officer of the
Company.
13. 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.
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 $8,271,270. The Company has made no provision for a deferred
tax asset due to the net operating loss carryforward because a valuation
allowance has 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 $8,271,270 may be offset against future
taxable income. The carryforward losses expire at the end of the years 2006
through 2020.
14. Warrants:
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 contains
anti-dilutive provisions throughout its six (6) year life which entitles
the holder to its applicable percentages of the Company's capital stock on
the date the warrant is exercised. The warrant, representing 314,715
shares, was to expire on October 1, 2001 and the lender inquired regarding
exercising its right under the warrant before the expiration date. Upon
consultation with management, the lender who is in bankruptcy, has not
acted on its option to exercise as of December 31, 2002. At December 31,
2002, the Company also had outstanding common stock purchase warrants in
the amount of 1,866,500 with an exercise price of $.6875 each, which expire
on December 31, 2003.
F-10
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
15. Common stock options:
On February 8, 2002, the Company effectuated a non-statutory stock option
plan for the purpose of advancing the interests of the Company and its
stockholders by helping the Company retain the services of key management
employees. The total number of shares set aside for the plan was 75,000.
Under the plan, the option exercise price approximates the fair market
value of the Company's common stock at the date of the grant. The remaining
options become exercisable as follows:
August 31, 2003 25,000 shares
August 31, 2004 25,000 shares
In addition, the Company had 125,000 shares under a stock option plan which
become exercisable May 1, 2003.
The Company has elected to follow APB-25 (Accounting for Stock Issued to
Employees) in accounting for its employee stock options. Accordingly, no
compensation expense is recognized in the Company's financial statements
because the exercise price of the Company's employee stock options equals
the market price of the Company's common stock on the date of grant. The
Company has determined that the pro forma net income impact under Financial
Accounting Standards Board Statement No. 123 (Accounting for Stock-Based
Compensation) does not produce a material difference. The Company has noted
that the volatility of the stock makes valuation by any other method
inconsequential.
16. Earnings per share:
Primary earnings per share is computed based on the weighted average number
of shares actually outstanding plus the shares that would have been
outstanding assuming conversion of the common stock purchase warrants which
are considered to be common stock equivalents. However, according to FASB
128, effective for financial statements issued and annual periods beginning
after December 15, 1997, entities with a loss from continuing operations
should not include the exercise of potential shares in the calculation of
earnings per share since the increase would result in a lower loss per
share. Thus, common stock purchase warrants and stock options as described
in Notes 14 and 15 are excluded from the calculation of earnings per share.
Reconciliation of shares used in computation of earnings per share:
2002 2001
---- ----
Weighted average of shares actually
outstanding 5,346,828 5,245,250
--------- ---------
Common stock purchase warrants
Primary and fully diluted weighted
average common shares outstanding 5,346,828 5,245,250
========= =========
17. Related party transactions:
In March 2002, the Company purchased the tradename and logo of Brooklyn
Cheesecake Company, Inc. in exchange for 300,000 shares of the Company's
common stock. Brooklyn Cheesecake Company, Inc. was wholly owned by the
current chief executive officer of Creative Bakeries, Inc. The Company also
purchased $45,000 of baking equipment in the same purchase transaction.
F-11
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
18. Reclassification of prior period results:
Certain items of income and expense from continued and discontinued
operations have been reclassified to conform to the current year's
presentation as described in the recent accounting pronouncements in Note
1.
19. Discontinued operations:
In 1998, the Company adopted a formal plan to close WGJ Desserts and Cafes,
Inc., its New York manufacturing facility, which was done in July of 1998
and to dispose of its one remaining retail store, which was accomplished in
November 1998.
Net liabilities of WGJ Desserts, Inc. consisted of the following as of
December 31, 2002:
Liabilities:
Accounts payable $112,462
Accrued expenses 21,803
--------
134,265
--------
Information relating to discontinued operations for WGJ Desserts and Cafes,
Inc. for the year ended December 31, 2002 and 2001 is as follows:
2002 2001
---- ----
Correction of estimated liabilities
on disposition of assets $ 79,841
Cancellation of settlement
warrants payable 302,267
Cancellation of accrued expenses $59,759
Interest income 1,884 9,178
-------- -------
383,992 68,937
Cancellation on sale of trademark rights (50,000)
Reduction of note receivable
upon settlement (4,270)
-------- -------
Income from discontinued operations $379,722 $18,937
======== =======
F-12
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as..................................'TM'