10KSB40 1 a32351.txt CREATIVE BAKERIES, INC. 10KSB40 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, 2001 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 $3,770,507. As of December 31, 2001 there were 5,245,250 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, 2001 was approximately 1,049,050. 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. 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 2 Enter into co-packing arrangements whereby the Company would introduce private label products of 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 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 BBC 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 Chatterley Desserts 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 Chatterley Desserts 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 Chatterely 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 is operated on the basis of two shifts, five days a week. The Company believes that the Chatterely Subsidiary has the capacity to meet future requirements, including those arising out of the consolidation with the Company. The Chatterley 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 The JMS Subsidiary has a trademark and design registered with the United 4 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 31, 2002, the BBC Subsidiary together with Creative had approximately 37 full-time employees, of which 30 are employed in production, 2 in sales, 4 in administration and 1 in executive positions. The BBC Subsidiary does not have a union and the Company believes that it has good relations with its employees. ITEM 2. DESCRIPTION OF PROPERTY As of March 31, 2002, 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 Management has determined unamortized goodwill of approximately $671,000 has no continuing value and accordingly it was written off during 2001. 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. 6 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, 2001.

Period High Low ----------------------------------------------------------------- FISCAL YEAR 2000: First Quarter 11/16 7/16 Second Quarter 7/8 1/2 Third Quarter 3/4 1/2 Fourth Quarter 1/8 .12 Fiscal Year 2001: First Quarter .09 .08 Second Quarter .22 .22 Third Quarter .11 .11 Fourth Quarter .20 .13

The number of shareholders of record of the Common Stock on February 28, 2002 was 41 excluding 2,637,778 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS General The Company had licensed William Greenberg Jr. to a retail operator. During the 4the quarter of 2000 the company also sold the license to the same operator. Since the operator defaulted on the payment terms, the company has regained the license. At December 31, 2001 to the extent the Company may have taxable income in future periods, there is available a net operating loss for federal income tax 7 purposes of approximately $8,680,450 which can be used to reduce the tax on income up to that amount through the year 2019. The Batter Bake name, customers and muffin batter operation was sold to Fairfield Gourmet Foods, Fairfield, NJ on December 1, 2001. Management determined that the category of muffin batter did not offer sufficient growth opportunity. The company will focus on its bakery operations and promote its cheesecake and its higher end dessert items. The company is also in negotiations to acquire the assets of the Brooklyn Cheesecake Company. This acquisition is expected to occur in early March of 2002. Results of Operations The Company's consolidated revenues from continuing operations aggregated $3,770,507 and $4,377,601 for the years ended December 31, 2001 and 2000 respectively, a decrease of 14%. The cost of goods sold was $3,279,919 and $3,606,332 respectively, an increase of 9%. Operating expenses were $766,248 and $1,053,350 respectively, a decrease of 27%. As a result, the loss from continuing operations was $275,660 and $282,081 respectively, a decrease of 2%. Due to Management's intensive cost cutting efforts, the net loss was reduced marginally in spite of the drop in sales volume. Depreciation and amortization for 2001 decreased as compared to 2000 due to assets written down or written off for the year ended December 31, 2001. The company's consolidated revenues from its discontinued operation, the WGJ subsidiary were $0 in 2001 and in 2000. The WGJ subsidiary showed a loss from operations of $40,822 in 2001 vs. a gain of $48,701 in 2000. 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. As of December 31, 2001, the Company had a negative working capital from continuing operations of approximately $20,407 as compared to a negative working capital of $182,731 at December 31, 2000. CAPITAL RESOURCES: On January 23, 1997, the Company purchased JMS for $900,000 in cash, 500,000 shares of the Company's common stock valued at $875,000 and $400,000 purchase warrants valued at $440,000. 8 In order to finance the acquisition, the Company sold in a private placement 1,875,500 common stock purchase warrants at a net price to the Company of $1,747,500. In October 1997 the Company raised $883,000 in connection with the exercise of the warrants from the private placement related to the purchase of JMS. If and when the market price of the Company's stock increases and exceeds the exercise price of the warrants previously issued, the Company may receive additional funds upon the exercise of its warrants to operate and fund future expansion and acquisitions. The Company is looking for opportunities to acquire other companies which would improve its cash flow and capital positions in both the short- and long-term. Management believes that funds for such acquisition can be raised in transactions similar to the sale of stock purchase warrants which funded the JMS acquisition. Although the Company has previously been successful in obtaining sufficient capital funds through issuance of common stock and warrants, there can be no assurance that the Company will be able to do so in the future. INFLATION AND SEASONALITY: 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................................................................ Independent Accountants' Report.............................................................F-1 9 Financial Statements: Balance Sheets as at December 31, 2001 and 2000........................................F-2 Statement of Operations For the Years Ended December 31, 2001 and 2000....................................................F-3 Statements of Stockholders' Equity (Deficiency) For the Years Ended December 31, 2001 and 2000 ...................................................F-4 Statements of Cash Flows For the Years Ended December 31, 2001 and 2000 ...............F-5 Notes to Financial Statements .................................................F-6 to F-12 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable 10 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 Election Held with Company For Previous Five Years as Director -------------------- ----------------------- ------------------------ Ron Schutte 45 Chief Executive Officer, Aug. 2000 - May 2001 June 1, 2001 President and Director Brooklyn Cheesecake Company Apr. 1999 - Jul 2000 Crestwood Consulting Mar 1997 - Mar 1999 Mother's Kitchen Richard Fechtor, 71 Founder of and since 1974 Executive Vice July 11, 1996 Director President of Fechtor, Detwiler & Co., Inc., the representative of the underwriters in the Company's initial public offering; Director of Vascular Laboratories since 1989 Raymond J. McKinstry, 54, Investment manager with Astair & Partners, August 1995 Director Limited, a London based brokerage company, 1987 to present Karen Brenner, 48, President of Fortuna Advisors, Inc., an July 1997 Director investment advisory firm in California 1993 to present; founder and President of Karen Brenner, Registered Investment Advisor, the predecessor to Fortuna Advisors, Inc., 1984 to 1993; Managing Partner of F.C. Partners, a California limited partnership, April

11

Name of Director or Executive Officer, Age and Position Principal Occupation Date of Initial Election Held with Company For Previous Five Years as Director -------------------- ----------------------- ------------------------ 1996 to present; Director on DDL Electronics, Inc., a publicly held company, July 1996 to present; Director of Krug International Corp., a publicly held company, July 1996 to present. Yona Abrahami, 53 Founder and President of Chatterley August 1997 Director January 1997 Former C.E.O. Creative Bakeries Inc. 1997 Philip Grabow 62 - 2001

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 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 2001 12 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.

Name and Principal Position Year Salary ($) Bonus ($) Other Annual Compensation --------------------------- ---- ---------- -------- ------------------------- Ron Schutte, CEO 2001 $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, 2001. 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 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(1).........................................500,000 9.53% Philip Grabow(2).........................................500,000 9.53 Richard Fechtor(3).......................................142,933 2.0 Raymond J. McKinstry(4)...................................50,000 InterEquity Capital Partners, L.P.(5)....................378,390 7.0 Ron Schutte(6)............................................50,000 Executive directors and officers as a group ...........1,621,323

13 (1) Ms. Abrahami's address is c/o 20 Passaic Avenue, Fairfield, New Jersey 07004. (2) 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." (3) 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. (4) Mr. McKinstry's business address is 40 Queen Street, London EC4R 1DD, England. Includes currently exercisable warrants to purchase 50,000 Common Shares. (5) 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, 14 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. (6) Mr. Schutte address is 20 Passaic Ave, Fairfield, New Jersey 07004. 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) 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 15 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. 16 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. **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. 17 **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. *****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. 18 ******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. 19 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, 2002. 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, 2002.

Signatures Title ----- /s/Ron Schutte President, Chief Executive Officer/Director ---------------------------------- Ron Schutte Director ---------------------------------- Richard Fechtor /s/ Raymond J. McKinstry Director ---------------------------------- Raymond J. McKinstry /s/Karen Brenner Director ---------------------------------- Karen Brenner /s/Yona Abrahami Director ---------------------------------- Yona Abrahami

20 CREATIVE BAKERIES, INC. YEAR ENDED DECEMBER 31, 2001 CONTENTS Page Independent auditors' report F-1 Consolidated financial statements: Balance sheet F-2 Statement of operations F-3 Statement of stockholders' equity (deficiency) F-4 Statement of cash flows F-5 Notes to consolidated financial statements F-6 - F-12 -------------------------------------------------------------------------------- Zeller Weiss & Kahn, LLP CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------------------------------------- 1084 Route 22 West Melvin H. Zeller, CPA Stephen E. Rosenthal, CPA Mountainside, NJ 07092 Harold N. Binenstock, CPA Alfred J. Padovano, CPA TEL: 908-789-0011 Philip E. Hunrath, CPA FAX: 908-789-0027 Peter J. Quigley, CPA 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, 2001, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for the years ended December 31, 2001 and 2000. 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, 2001, and the results of its operations and cash flows for the years ended December 31, 2001 and 2000, 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 operations for the years ended December 31, 2001 and 2000 and as of December 31, 2001 has a working capital deficiency in the amount of $20,407, 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. March 6, 2002 F-1 CREATIVE BAKERIES, INC. CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2001 ASSETS Current assets: Cash and cash equivalents $ 121,616 Accounts receivable, less allowance for doubtful accounts of $15,500 300,524 Inventories 152,578 Prepaid expenses and other current assets 71,616 ------------ Total current assets 646,334 ------------ Property and equipment, net 368,775 ------------ Other assets: Goodwill, net of amortization 50,000 Security deposits 4,964 ------------ 54,964 ------------ $ 1,070,073 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Loans payable, other $ 7,500 Accounts payable 421,471 Accrued expenses 237,770 ------------ Total current liabilities 666,741 ------------ Other liabilities: Deferred rent 94,533 Net liabilities of discontinued operations less assets to be disposed of 442,092 ------------ 536,625 ------------ Stockholders' equity (deficiency): 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 5,245,250 shares 5,245 Additional paid in capital 11,340,530 Deficit (11,388,583) ------------ (42,808) Common stock held in treasury, 158,500 shares (90,485) ------------ (133,293) ------------ $ 1,070,073 ============ See notes to consolidated financial statements. F-2 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- Net sales $3,770,507 $4,377,601 Cost of sales 3,279,919 3,606,332 ----------- ----------- Gross profit 490,588 771,269 Selling, general and administrative expenses 771,248 1,053,350 ----------- ----------- Loss from operations (280,660) (282,081) ----------- ----------- Other income (expenses): Loss on impairment of goodwill (670,995) Gain from sale of disposition of assets 100,000 5,750 Interest income 1,029 3,876 Miscellaneous income 3,910 872 Interest expense (8,521) (14,491) ----------- ----------- (574,577) (3,993) ----------- ----------- Loss from continuing operations (855,237) (286,074) Discontinued operations: Income (loss) from operations of New York facility to be disposed of (40,822) 48,701 ----------- ----------- Loss before extraordinary items (896,059) (237,373) ----------- ----------- Extraordinary items: Gain on extinguishment of debt, continuing operations 48,711 Gain on extinguishment of debt, discontinued operations 59,759 ----------- 108,470 ----------- Net loss ($ 787,589) ($ 237,373) =========== =========== Earnings per common share: Basic and fully diluted: Continuing operations ($ 0.16) ($ 0.05) Discontinued operations ($ 0.01) 0.01 Extraordinary items: Continuing operations 0.01 Discontinued operations 0.01 ----------- ----------- Net loss per share ($ 0.15) ($ 0.04) =========== =========== Weighted average number of common shares outstanding 5,245,250 5,245,250 =========== =========== See notes to consolidated financial statements. F-3 CREATIVE BAKERIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED DECEMBER 31, 2001 AND 2000

Common stock ------------ Total Number Additional Stockholders' of Paid in Accumulated Treasury Equity Shares Amount Capital Deficit Stock (Deficiency) ------ ------ ------- ------- ----- ------------ Balance at December 31, 1999 5,245,250 $5,245 $11,510,064 ($10,363,621) ($334,244) $817,444 Purchase of treasury stock (112,774) (112,774) Treasury stock issued upon exercise of warrants (145,990) 327,989 181,999 Net loss for the year ended December 31, 2000 (237,373) (237,373) --------- ------ ----------- ------------ --------- --------- 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) ========= ====== =========== ============ ========= ==========

See notes to consolidated financial statements. F-4 CREATIVE BAKERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000

2001 2000 ---- ---- Operating activities: Loss from continuing operations ($855,237) ($286,074) Adjustments to reconcile loss from continuing operations to cash used in continuing operations: Depreciation and amortization 164,001 208,716 Common stock issued for services 5,000 Loss on impairment of long-lived asset 670,995 Forgiveness of debt (48,711) Gain on sale of equipment (100,000) (5,750) Changes in other operating assets and liabilities from continuing operations: Accounts receivable 45,257 (31,642) Inventory 88,548 42,158 Prepaid expenses and other current assets (22,170) 38,284 Security deposits 500 Accounts payable (101,609) 105,588 Accrued expenses and other current liabilities 25,318 (114,398) Deferred rent (21,497) (21,555) -------- -------- Net cash used in operating activities (149,605) (64,673) Net cash provided by discontinued operations 5,343 35,214 -------- -------- Net cash used in operating activities (144,262) (29,459) -------- -------- Investing activities: Proceeds from sale of equipment 100,000 25,000 Purchase of property and equipment (2,500) (10,150) Proceeds from sale of goodwill 47,578 -------- -------- Net cash provided by investing activities 145,078 14,850 Net cash provided by (used in) investing activities from discontinued operations 98,750 (1,250) -------- -------- Net cash provided by investing activities 243,828 13,600 -------- -------- Financing activities: Proceeds from issuance of common stock and warrants 182,000 Purchase of treasury stock (112,774) Payment of debt (107,270) (39,018) -------- -------- Net cash provided by (used in) financing activities (107,270) 30,208 -------- -------- Net increase (decrease) in cash and cash equivalents (7,704) 14,349 Cash and cash equivalents, beginning of period 129,320 114,971 -------- -------- Cash and cash equivalents, end of period $121,616 $129,320 -------- -------- Supplemental disclosures: Cash paid during the year for: Interest: Continuing operations $ 9,555 $ 14,028 ======== ======== 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, 2001 AND 2000 1. Going concern: During the year ended December 31, 2001, the Company incurred a loss from continuing operations in the amount of $855,237 and a net loss of $787,589, and had a net working capital deficiency of $20,407. 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 2001, the Company's board of directors brought in a new management team which has evaluated the Company's operations and made changes to the production and purchasing aspects of the business as well as cutting overhead expenses. The Company also plans to raise capital through an offering of preferred stock of which the proceeds would be used to streamline and modernize the production process, thus increasing profit margins. The Company also has plans to acquire an additional business through a mainly stock exchange transaction (see Note 18). 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 account 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. Intangible assets: Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition and was being amortized on the straight-line method over forty years. The goodwill was determined to be impaired during the year and has been written down to net realizable value (see Notes 7 and 8). F-6 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 2. Accounting policies (continued): Intangible assets (continued): The Company's covenant not to compete is being amortized over a period of five years. 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 2001 and 2000, 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. 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, 2001, the Company had uninsured cash balances of $94,091. The Company maintained sales with a customer which comprised more than 10% of total sales for the year. If this sales level were to change this could have a significant impact on the Company's operations. At December 31, 2001 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. F-7 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 4. Accounts receivable: Following is a summary of receivables at December 31, 2001: Trade accounts $316,024 Less allowance for doubtful accounts (15,500) -------- $300,524 ======== 5. Inventories: Inventories at December 31 consist of: Finished goods $ 47,711 Raw materials 64,877 Supplies 39,990 -------- $152,578 ======== 6. Property and equipment: The following is a summary of property and equipment at December 31, 2001: Baking equipment $1,280,226 Furniture and fixtures 81,364 Leasehold improvements 180,422 ---------- 1,542,012 Less: Accumulated depreciation and amortization 1,173,237 ---------- $ 368,775 ========== Depreciation expense charged to operations was $98,545 and $102,803 in 2001 and 2000, 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, 2001 AND 2000 7. Intangible assets: The excess cost over the fair value of the net assets acquired from J.M. Specialties, Inc. aggregated $1,213,565. This goodwill has been amortized over its estimated useful life of fifteen years. Amortization charged to operations amounted to $40,456 in 2001 and $80,912 in 2000. As of December 31, 2001 the goodwill has been determined to be impaired and management has written down the asset to net realizable value (see Note 8). 8. Impairment of goodwill: The Company has determined that the goodwill relating to its subsidiary J.M. Specialties, Inc. is impaired and has taken a one-time charge of $493,573 on its statement of operations for the third quarter of 2001 and a further charge of $177,422 for the year ended December 31, 2001. The batter business to which the goodwill relates has seen decreasing profit margins and sales over the last several quarters and a decision to sell the line comprised of ten customers, was approved by the Board of Directors. The sale was completed in December, 2001 for $200,000, including $45,758 for goodwill, $100,000 for equipment and $52,422 for related inventory. The Company will receive an earnout for the years 2004 through 2007 based on sales on a declining percentage basis from 4% to 1%. Management's estimate of the amounts to be received in the earnout is $50,000. The amount of the impairment loss at December 31, 2001 is determined as follows: Asset cost $1,213,565 Less: accumulated amortization 444,992 ---------- Carrying amount 768,573 Sale of goodwill (47,578) Estimated fair value of goodwill (50,000) ---------- Impairment loss $ 670,995 ========== 9. 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, 2002 200,000 December 31, 2003 200,000 December 31, 2004 230,000 -------- $630,000 ======== F-9 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 9. Commitments and contingencies (continued): Rent expense amounted to $229,833 in 2001 and $222,617 in 2000 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 2001 was $7,200. Future minimum rentals are as follows: December 31, 2002 $ 7,200 December 31, 2003 7,200 December 31, 2004 7,200 ------- $21,600 ======= 10. 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. 11. 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 $8,680,450. 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 $8,680,450 may be offset against future taxable income. The carryforward losses expire at the end of the years 2006 through 2019. F-10 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 12. Warrants: In order to obtain financing for the acquisition of Greenberg's - L.P. (see Note 2), the Company sold to the lender for $1,000, a Convertible Note which in accordance with the terms of the conversion agreement, was converted by the lender into a warrant to acquire shares of stock of the Company in a number sufficient to equal 6% of the Company's then outstanding preferred and common stock (163,404 shares of common stock). The warrant contains anti-dilutive provisions throughout its six (6) year life which entitles the holder to its applicable percentages of the Company's capital stock on the date the warrant is exercised. Based upon the issuance of 143,500 shares of common stock in 1999, the lender was entitled to an additional 8,610 shares of common stock. Accordingly, the financial statements include a charge to operations of $4,305 for 1999 which represents the market value of the stock at the time the warrants were issued by the Company. The above warrant, representing 171,215 shares, was to expire on October 1, 2001 and the lender exercised 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, 2001. In addition, at December 31, 2001 the Company had 1,816,500 outstanding common stock purchase warrants. These warrants have not been utilized in the calculation of earnings per share in the statement of operations due to their anti-dilutive effect. 250,000 warrants become eligible for exercise as described in Note 13. The balance of the warrants, their option prices and expiration dates are as follows: 270,000 warrants at $0.52 December 31, 2002 1,296,500 warrants at $0.6875 December 31, 2002 13. Employment agreement: On May 1, 2001 the Company entered into a one year employment contract with its new chief executive officer. The agreement sets compensation at an annual salary of $150,000 plus a signing bonus of 50,000 registered shares of the Company's common stock, deliverable after ninety days of employment, which was completed by August 1, 2001. The contract also makes available a stock option plan whereby shares of common stock can be purchased at two anniversary dates of the beginning of employment at the stock price which existed at that date. 125,000 shares of the Company's common stock is available for exercise on May 1, 2002 and another 125,000 shares on May 1, 2003. 14. Related party transaction: Included in accounts receivable and accounts payable are amounts owed to Brooklyn Cheesecake Company, Inc., an entity owned by the chief executive officer of the Company, in the amounts of $60,406 and $45,267 respectively. The amount is owed for inventory sales and purchases used in the normal course of operations. F-11 CREATIVE BAKERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 15. Discontinued operations: In 1998, the Company adopted a formal plan to close WGJ Desserts and Cafes, Inc., its New York manufacturing facility, which was done in July of 1998 and to dispose of its one remaining retail store, which was accomplished in November 1998. The New Jersey facility was unaffected and still continues to sell and manufacture. The sale of the final retail location resulted in a selling price of $405,000 which includes a note receivable with a balance of $73,750 at December 31, 2001. On November 3, 1998, the Company sold its one remaining retail facility for $405,000 which represented disposition of equipment and a license to sell under the "William Greenberg, Jr. Desserts and Cafes" name. The agreement called for a cash down payment of $110,000 with the remainder being paid on a note receivable due in semi-annual installments of $36,875 plus interest at prime. The note matures November, 2002. Net liabilities, less assets to be disposed of, of WGJ Desserts, Inc. consisted of the following as of December 31, 2001: Liabilities: Accounts payable $112,461 Accrued expenses 403,912 -------- 516,373 -------- Assets: Notes receivable 73,750 Interest receivable 531 -------- 74,281 -------- $442,092 ======== Information relating to discontinued operations for WGJ Desserts and Cafes, Inc. for the year ended December 31, 2001 and 2000 is as follows: 2001 2000 ---- ---- Operating expenses $50,000 $43,347 ------- ------- Net loss from operations (50,000) (43,347) ------- ------- Sale of Trademark 75,000 Interest income 9,178 17,048 ------- ------- 9,178 92,048 ------- ------- Income (loss) before extraordinary item (40,822) 48,701 ------- ------- Extraordinary item: Forgiveness of debt 59,759 ------- Net income $18,937 $48,701 ======= ======= 16. Extraordinary items: During 2001, the Company recognized an extraordinary gain of $48,711 ($0.01 per share) from continuing operations and an extraordinary gain of $59,759 ($0.01 per share) from discontinued operations. The extraordinary gains resulted from forgiveness of certain accounts payable liabilities. 17. Subsequent events: The Company has entered into an agreement to acquire the assets of Brooklyn Cheesecake Company, Inc. in exchange for 300,000 shares of the Company's common stock and $45,000 for equipment, the purchased Company's name and goodwill. The purchase is expected to be completed in March, 2002. F-12 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as................................'TM'