SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-23026
PARAMARK ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3261564
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Harmon Plaza
Secaucus, New Jersey 07094
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (201) 422-0910
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock
(Title of Class)
Class A Warrants
(Title of Class)
Class B Warrants
(Title of Class)
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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 contained in this Form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. Yes X No
The issuer's revenues for the fiscal year ended December 31, 1998 were
$4,575,668.
As of March 17, 1999, there were 3,373,883 shares of Common Stock,
1,453,000 Class A Warrants, and 557,750 Class B Warrants outstanding. Based on
the average high and low bid prices of the Common Stock on March 17, 1999, the
approximate aggregate market value of Common Stock held by non-affiliates was $
1,370,000 (1).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1999 Definitive Proxy Statement, which
statement will be filed not later that 120 days after the end of the fiscal year
covered by this Report, are incorporated by reference in Part III hereof.
Certain exhibits are incorporated by reference to the Registrant's
Registration Statement on Form SB-2 and the amendments thereto, and the
Registrant's Annual Reports on Form 10-KSB for the fiscal years ended December
31, 1995, December 31, 1996 and December 31, 1997 as listed in response to Item
13(a)(2).
Transitional Small Business Disclosure Format (check one): Yes No X
(1) The aggregate dollar value of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock, multiplied by the average of
the high and low bid prices for the Company's Common Stock on March 25,
1999. The information provided shall in no way be construed as an admission
that any officer, director or 10% stockholder in the Company may or may not
be deemed an affiliate of the Company, or that he/it is the beneficial
owner of the shares reported as being held by him/it, and any such
inference is hereby disclaimed. The information provided herein is included
solely for recordkeeping purposes of the Securities and Exchange
Commission.
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PART I
ITEM 1. BUSINESS
General
For a discussion of certain factors which should be considered in
evaluating the Company and its business, see "Risk Factors".
Paramark Enterprises, Inc., formerly T.J. Cinnamons, Inc. (the
"Company"), a Delaware corporation was originally formed in December 1985. The
Company was one of the first operators and franchisors in the United States of
retail bakeries specializing in gourmet cinnamon rolls and related products.
Current management acquired the Company from its founders in 1992, subsequently
sold the T.J. Cinnamons retail bakeries and franchise system in 1996 to Triarc
Restaurant Group, and developed the Company into a wholesale manufacturer and
distributor of specialty bakery products. The Company's Common Stock, Class A
Warrants and Class B Warrants are publicly traded on the OTC Bulletin Board
under the symbols "TJCI", "TJCIW", and "TJCIZ"
The Company currently owns and operates an approximately 18,000 square
foot bakery production facility in El Cajon, California, and distributes its
products through wholesale channels of distribution throughout the United
States. The Company's business plan is centered on building sales and
distribution by implementing three interrelated strategies: (1) expand
opportunities to offer the Company's specialty bakery products in supermarkets
and other grocery outlets, (2) explore opportunities to offer the Company's
products in alternative forms of distribution including mass merchandisers, food
service, convenience stores, vending outlets, airline catering and food service
environments, and (3) continue to expand the sales and distribution of T.J.
Cinnamons branded products focusing primarily on the unique T.J. Cinnamons
CinnaChips pursuant to a licensing agreement with Triarc Restaurant Group.
The Company is currently selling its line of products in approximately
1,500 supermarket and wholesale club stores including Ralphs Supermarkets,
Walmart Super Centers, Lucky's Supermarkets, H.E. Butt Supermarkets, Giant
Supermarkets, Sams Wholesale Club's and Costco Wholesale Club's. During the
fiscal year ended December 31, 1998, approximately 85% of the Company's sales
were to Ralph's Supermarkets and Walmart. See "Risk Factors Dependence on Major
Customers."
The Company's products include: (a) "T.J. Cinnamons" branded cinnamon
rolls and CinnaChips, and (b) a full line of specialty gourmet bakery products
including rugalach sold in four flavor varieties, bundt cakes sold in four
flavor varieties, upside down pineapple cakes, pull-apart cakes, chocolate
brownies branded under the Hershey's label, 7" chocolate and white iced layer
cakes, 4" mini chocolate and white iced layer cakes, 1/4" chocolate and white
iced sheet cakes, cobblers, assorted Danish and other specialty bakery products.
Management believes that the Company is favorably positioned to
participate in a growing trend among supermarket chain's in-store bakeries to
discontinue on-premises baking, and to purchase products that are made off
premises and delivered to them frozen. After delivery, such products are
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thawed, date coded, and placed on the shelves for sale to customers. This "thaw
and sell" strategy eliminates the need to employ experienced bakers, and develop
extensive cost control systems and operating systems to ensure quality and
consistency of bakery products, all of which are extremely costly.
The Company's executive offices are located at One Harmon Plaza,
Secaucus, New Jersey 07094 and its telephone number is (201) 422-0910.
The Triarc Transactions. In August 1996, the Company sold to Arby's,
Inc. d/b/a/ Triarc Restaurant Group ("Triarc") certain of its operating assets,
comprised of the "T.J. Cinnamons" and other related trade names, trademarks,
service marks, logos, signs, emblems, distinctive recipes, secret formulas and
technical information ( the "Intellectual Property"), and also assigned to it
various manufacturer and distributor agreements.
In consideration for the sale of the Intellectual Property, the Company
received (i) a 99 year royalty free license to produce and sell T.J. Cinnamons
branded products through wholesale channels of distribution (see below), and
(ii) a base purchase price of $3,540,000, with $1,790,000 paid at the closing,
$1,650,000 paid in the form of a 15 month promissory note, and $100,000 paid in
the form of a 24 month promissory note. In addition, the transaction provided
for contingent additional payments of up to $5.5 million over time dependent
upon the amount of T.J. Cinnamons product sales by Triarc exceeding a minimum
base system wide sales of $26.3 million.
Under the terms of the Triarc license agreement, Triarc granted the
Company the rights to use the Intellectual Property for (a) the sale of certain
T.J. Cinnamons branded products to supermarket chains approved by Triarc, and
(b) to continue to operate a T.J. Cinnamons bakery located in Poughkeepsie, New
York. The Company also continued to act as franchisor under the existing T.J.
Cinnamons franchise agreements, although day-to-day management responsibilities
were assumed by Triarc pursuant to a management agreement. The term of the
license agreement aggregated 99 years, consisting of an initial term of 20
years, together with three 20 year renewal options, and one 19 year renewal
option. Each renewal option is subject to the Company's compliance with the
terms of the license agreement and executing a general release in favor of
Triarc.
In August 1998, the Company restructured its agreements with Triarc and
entered into a new agreement pursuant to which the Company sold all of its
rights and interests under the existing T.J. Cinnamons franchise agreements,
terminated the purchase agreement with Triarc dated June 3, 1996 which provides
for contingent additional payments of up to $5.5 million, and terminated the 99
year royalty free license agreement and management agreement entered into with
Triarc and affiliates dated August 29, 1996. Under the terms of this 1998
agreement with Triarc, the Company received payments aggregating $4,000,000 of
which $3,000,000 was paid in cash at closing and $1,000,000 was tendered in the
form of a noninterest bearing promissory note payable over 24 months. The Triarc
agreement further provided for a contingent additional payment of up to
$1,000,000 conditioned upon the Company's attainment of certain sales targets of
T.J. Cinnamons products for the fiscal year ended December 31, 1998. Based on
actual sales for the fiscal year ended December 31, 1998, the Company did not
meet these sales targets and as a result, the Company did not receive any of the
conditional additional payments under the Triarc agreement.
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The Company is continuing to manufacture and sell T.J. Cinnamons
products pursuant to a short term license agreement with Triarc. This license
agreement allows the Company to sell certain products to approved supermarket
accounts based on a 5% royalty on net sales with an original term which expired
on December 31, 1998. Triarc has granted the Company two 3 month extensions of
the term of this license agreement through June 30, 1999, and the Company
anticipates that Triarc will continue to renew this license agreement at the end
of its current term. In addition, the Company is currently negotiating a license
agreement with Triarc whereby the Company will be licensed to market and sell
CinnaChips in bags (similar to bagel chips and cookies) for distribution to mass
merchandisers, food service outlets, convenience stores, vending outlets and
airline catering. For the fiscal year ending December 31, 1998, sales of T.J.
Cinnamons branded products accounted for approximately 47% of the Company's
total wholesale sales. See "Risk Factors - Potential Loss of Wholesale Sales
Resulting from a Termination of the Triarc License Agreement."
Industry Overview. There are 8,000 supermarket companies operating
24,000 in-store bakeries and generating annual sales in excess of $15 billion.
Growth can attributed to the addition of new stores and the entry of mass
merchandisers such as Wal-Mart and Kmart into the grocery industry. Though gross
profit margins remain high for the in-store bakeries, 1997 saw a decline of
gross profit margins to 51.8% down from 52.3% in 1996. This decline can be
attributed to the increased use of finished baked goods in the in-store bakery
departments. Management believes that these trends in the supermarket bakery
industry will provide the Company with an opportunity for growth.
The "sweet goods" and "cookie" categories each represent 7.9% of the
industry-wide bakery sales and combined represent 15.8% of such sales. As this
industry grows and as the need for high quality value-added products increases,
the Company believes that manufacturers who position themselves as leaders in
the upscale, gourmet bakery market will be capturing more of the total sales.
Management believes that the shift from full time to part time labor in
the in-store bakery departments of supermarkets and wholesale club stores has
created a shortage of skilled bakers and is fostering a climate that is ripe for
"new" products the preparation of which requires little or no expertise.
Management further believes that all of the trends and barometers point toward
new product development in "fully baked", "thaw and sell", and "prepackaged"
product lines that meet the quality profile of today's in-store bakery products.
The Company's goal is to capitalize on these trends and market dynamics in order
to become a leader in the off premises manufacture of finished thaw and sell
bakery products for sale to supermarket and wholesale club customers. The
Company believes that this trend is very likely to continue into the next
decade, resulting in the Company's ideal positioning of its "thaw and sell" line
of gourmet bakery products. There can, however, be no assurance that the Company
can achieve its sales and earnings goals. See "Risk Factors - Competition."
Business Strategy. To develop the wholesale sales of its non-branded
specialty bakery products, the Company will focus its selling effort in specific
geographic areas contiguous to the bakery and its trading area. The Company has
hired a Regional Sales Manager located in California to further develop sales in
Southern California through an alliance with Le Grand Marketing, a food broker
specializing in bakery products, and to develop sales in Northern California,
Arizona, Oregon, Utah, Washington, Nevada and Colorado through the appointment
of new food brokerage firms to cover each of these areas.
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In addition, the Company will continue to expand nationwide sales in membership
club stores through an alliance with American Sales and Marketing.
The Company has focused its marketing efforts on the following core
products: (a) T.J. Cinnamons gourmet cinnamon rolls and gourmet sticky rolls;
(b) T.J. Cinnamons CinnaChips; (c) private label rugalach; (d) private label
bundt cakes, (e) gourmet brownies sold under the Hershey's label, and (d) other
private label specialty cakes. The private label rugalach are made utilizing the
Company's own recipe in the following flavor varieties: chocolate chip, cinnamon
apple, raspberry walnut and apricot pecan. The gourmet bundt cakes in four
flavor varieties, and the specialty cakes include upside down pineapple cakes,
pull-apart cakes, 7" chocolate and white iced layer cakes, 4" mini 7" chocolate
and white iced layer cakes, and 1/4" chocolate and white iced sheet cakes. All
of these products are sold in various packaging and sizes, and are shipped
through both fresh and frozen distribution. For the fiscal year ending December
31, 1998, sales of T.J. Cinnamons branded products accounted for 47% of the
Company's total wholesale sales. In the event that Triarc fails to renew the
license agreement, management believes that it will be able to replace the T.J.
Cinnamons product sales with sales of other private label and branded products.
However, no assurance can be given that the Company will be successful in
replacing the sales generated by the T.J. Cinnamons branded products. See "Risk
Factors - Potential Loss of Wholesale Sales Resulting from a Failure to Renew
the Triarc License Agreement."
The Company is targeting its product line to in-store bakery and
in-store deli areas of supermarket chains, focusing on large multi-unit
accounts. The Company is supporting all initial sales with a marketing budget
for in-store sampling and demonstrations and store circular promotions.
The Company is currently selling its products in approximately 1,500
locations including the following accounts: Ralph's Supermarkets, Food-4-Less
Supermarkets, Walmart Super Centers, Luckys Supermarkets, H.E. Butt
Supermarkets, Giant Supermarkets, Costco Wholesale Clubs and Sam's Wholesale
Clubs. During the fiscal year ended December 31, 1998, approximately 85% of the
Company's sales were to Ralph's Supermarkets and Walmart. See "Risk Factors -
Dependence on Major Customers."
Management believes that the continuous development and introduction of
new gourmet bakery products at attractive pricing will further develop the
Company's sale of its "private label" specialty bakery products to both the
retail grocery and food service trade. However, there can be no assurance that
the Company will be able to implement its business strategy, or if implemented,
that the business strategy will permit the Company to accomplish its sales and
earnings goals. See "Risk Factors - Management of Growth."
Mix manufacturers have seen a decline in the use of their products in
the in-store bakeries. Most chains staff their bakeries with retail clerks union
employees rather than paying the high hourly labor rates of the retail bakers
union employees. This shift in union affiliation has forced supermarket bakeries
to switch from scratch or mix formula products to bake-off and thaw and sell
products. Most mix manufacturers are looking to increase their business by
aligning with bakeries that can finish their products in a finished form. The
Company believes that by strategically aligning itself with these manufacturers
will provide an opportunity for growth.
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The Company plans, as an integral part of its competitive posture, to
introduce new products rapidly and continuously. The Company believes that a key
to its success is its ability to develop innovative new products and
merchandising programs reacting to demand of its customers and trends in the
in-store baking industry. Some of the new products under development are
biscotti, mandel toast, puff pastries, bread and rice puddings, crumb cakes, and
yogurt cakes. See "Risk Factors - Competition; New Product Development."
CinnaChips. Company has developed a mass production process to produce
the CinnaChip products which are similar to bagel chips made from cinnamon rolls
utilizing a double bake process. The CinnaChips are currently sold in plastic
tub containers ranging in size from 8 ounces to 20 ounces which are sold in
in-store bakeries of large supermarket chains and wholesale club stores. The
Company has developed a paper bag packaging system to compete in the same
category as bagel chips and cookies. The Company is developing a 5.5 ounce
CinnaChip bag for a retail price point of $2.49 to be utilized for mass
merchandisers, food service accounts, and convenience stores, and a 1.75 ounce
CinnaChip bag with a suggested retail selling price of $1.00 to be utilized for
food service accounts, airline catering and vending outlets. The Company has
also developed two additional flavor varieties of the CinnaChip: Butter Pecan
and Raisin Nut. The Company has retained a consultant to develop the packaging
and marketing materials and pursue the marketing and sales effort of this new
product.
In addition, the Company has entered into a verbal co-packing agreement
with La Francaise Bakeries, Inc., a licensee of the T.J. Cinnamons brand for
grocery distribution, to produce T.J. Cinnamon CinnaChips in 8 ounce tubs.
LaFrancaise is a large manufacturer of sweet bakery products with current
distribution in over 7,000 grocery stores. LaFrancaise has developed a T.J.
Cinnamons display unit which will be placed in the in-store bakery sections of
supermarkets. This display unit will have four T.J. Cinnamons SKU's, one of
which will be the Company's CinnaChip products. To date, LaFrancaise has began
testing the display unit in 20 grocery stores in various markets nationwide.
Plan of Operation. The Company's plan of operations for fiscal year
1999 calls for the implementation of the Company's overall strategy to build
substantial sales of new and existing gourmet bakery products sold as private
label products to major supermarket chains, wholesale club stores, convenience
stores, specialty stores, vending outlets and food service accounts.
The Company anticipates further automation of its manufacturing
facility in California during 1999. Furthermore, the Company intends to explore
the possible acquisition of an existing bakery business located in the
northeast. The most likely acquisition candidate will be a company that
manufactures and distributes specialty bakery products, and whose manufacturing,
marketing, sales, distribution and administrative operations complement those of
the Company, although no specific acquisitions are currently contemplated.
The Company's executive offices are located in Secaucus, New Jersey.
Management believes that its office space will be sufficient to meet the
Company's forecasted administrative needs and its bakery will have sufficient
capacity to meet its forecasted production capacity based on the sales volume
anticipated for fiscal year 1999. See "Properties."
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The Company believes that its current working capital, together with
its anticipated lines of credit, and the Company's anticipated cash from
operations, should be sufficient to satisfy the Company's cash needs through
June 30, 2000. This expectation is, however, based in part on anticipated
increases in revenues. Should such revenue increases not occur or should they be
materially smaller than anticipated, or should demand be greater than
anticipated, the Company might find it necessary to seek additional financing or
to reduce planned expenditures on marketing and product expansion if efficient
financing cannot be obtained or obtained timely on terms acceptable to the
Company. See "Risk Factors - Need for Additional Financing."
Manufacturing and Distribution. The Company's existing production
facility is located in El Cajon, California. The lease for this facility expires
in April 2001. The facility is approximately 18,000 square foot and has an
annual capacity estimated to be approximately $10 million. The facility has
blast freezers, freezers, refrigerators, proofers, ovens, mixers, depositors and
other equipment necessary for the production of the Company's products. The
Company also has an automated bakery production line which sheets, forms, fills,
rolls and cuts the various bakery products, as well as an automated packaging
line which cools and packages the fully baked products. Management anticipates
that further automation of the production and packaging processes will result in
a substantial reduction in labor costs thereby increasing the Company's gross
margins.
The Company intends to explore the possibility of acquiring an existing
bakery business and/or entering into a co-packing relationship with a
manufacturer located in the Northeast. The Company is continuing to have ongoing
merger discussions with Creative Bakeries, Inc. located in Fairfield, New
Jersey, however, the Company has not completed its due diligence and given the
current level of the Company's stock price, it appears that plans to merge the
two companies on not proceeding on the previously announced schedule.
All products sold are delivered via outside trucking companies, and the
Company has a minimum half truck load order requirement for all products shipped
to areas of the country other than California. The Company has set up a daily
distribution system for the Ralphs Supermarket chain. The Company has a leased
truck and delivers its fresh baked cinnamon rolls and brownies to the Ralphs
central distribution warehouse five days a week. These products are baked fresh
and have a 5 to 7 day shelf life. All other products sold to Ralphs Supermarkets
and other accounts, excluding CinnaChips, are blast frozen immediately following
baking and packaging, and are distributed in master cases through frozen
distribution. These products are thawed at the supermarket and sold as a fresh
product in the in-store bakery section of the supermarkets. The CinnaChips have
a six to nine month shelf life depending on the type of packaging, and are
distributed fresh at room temperature due to their extended shelf life, and sold
as a shelf stable product by the end users.
Quality Control. The Company's products are produced in accordance with
the Company's recipes, quality standards and proprietary formulations. In order
to maintain the high quality of its bakery products, the Company maintains
specifications for its ingredients and periodically reviews the standards of its
purchased ingredients against these specifications. The Company is not dependent
on any one supplier for its ingredients and only those ingredients that meet
specified criteria are selected. Ingredients are carefully inspected by the
Company before they enter its plant. Product consistency is
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ensured by inspection at critical flow points by quality assurance employees,
although all workers are responsible for monitoring the quality of the product
and may stop the production process, if necessary. Product sampling occurs on
the production floor to ensure that products are consistent with the Company's
standards.
Provisions and Supplies. The Company purchases its core ingredients
from a number of different suppliers. The Company negotiates directly with its
suppliers for all primary food and paper ingredients, to ensure an adequate
supply and to obtain competitive prices. Pursuant to the Triarc license
agreement, the Company purchases its cinnamon roll dry mix from Dawn Food
Products, Inc. in accordance with the T.J. Cinnamons proprietary secret formulas
and quality standards. The T.J. Cinnamon proprietary cinnamon spice formulation
is purchased from McCormick & Company, Inc. and various other T.J. Cinnamons
proprietary blends are produced by Dawn Food Products, Inc. Although the
Company's relationship with its suppliers is generally on an order-by-order
basis, the Company believes alternate sources of supply for all essential food
and paper products are available, or on short notice can be made available, at
comparable prices.
Governmental Regulations. The Company is subject to various federal,
state, and local laws affecting its business. The Company is subject to
regulation by the Food and Drug Administration, the United States Department of
Agriculture, the Federal Trade Commission, the Environmental Protection Agency
and various state agencies with respect to the production, packaging, labeling
and distribution of its food products, and believes that it is material
compliance with all applicable rules and regulations of such federal and state
agencies. The principal federal laws that regulate the Company with respect to
the production, packaging, labeling and distribution of its food products
include: (i) The Food, Drug and Cosmetic Act of 1938, which ensures that foods
are produced under sanitary conditions and are properly labeled; (ii) the Fair
Packaging and Labeling Act, which regulates trade practices and requires that
consumers receive accurate information regarding the quality and value of
products; (iii) the National Label Education Act, which regulates information
which must be included on food labels; and (iv) the Federal Trade Commission
Act, which regulates methods of competition, advertising and trade practices
The Company's bakery is also subject to regulation by various other
governmental agencies, including state and local licensing, zoning, land use,
construction and environmental regulations and various health, safety and fire
standards. The Company is also subject to the Fair Labor Standards Act and
various state laws governing such matters as minimum wages, overtime and working
conditions.
The Company has not made nor does it anticipate making any material
capital expenditures in order to comply with environmental regulations. There
can be no assurance, however, that new environmental regulations may be adopted
which would require the Company to make material capital expenditures to comply
therewith. See "Risk Factors - Governmental Regulations; Minimum Wages."
Employees. The Company has a total of approximately 71 employees. 4
employees are employed in executive and administrative functions principally at
the Company's corporate offices in Secaucus, New Jersey; and 7 employees are
employed in the Company's wholesale bakery in El Cajon, California. The
remaining 60 employees are full time hourly employees employed in the El Cajon
manufacturing facility. The Company is not a party to any collective bargaining
agreements, and considers its labor relations to be satisfactory.
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Competition. The retail bakery industry and the restaurant industry,
particularly the quick-service segment, is highly competitive with respect to
price, service, food quality (including taste, freshness, healthfulness and
nutritional value) and location. There are numerous well-established competitors
possessing substantially greater financial, marketing, personnel and other
resources than the Company. These competitors include national and regional
bakeries, supermarkets with in-store bakeries and quick-service restaurants
chains, many of which specialize in or offer bakery products. Many quick-service
restaurant chains are expanding their menus to include products competitive with
the Company's cinnamon rolls and other specialty bakery products. The Company
can also be expected to face competition from a broad range of other restaurants
and food service establishments.
Many of the Company's competitors have achieved significant national,
regional and local brand name and product recognition and engage in extensive
advertising and promotional programs, both generally and in response to efforts
by additional competitors to enter new markets or introduce new products.
The retail bakery industry and the quick-service restaurant industry
are characterized by the frequent introduction of new products, accomplished by
substantial promotional campaigns. In recent years, numerous companies in these
industries have introduced products positioned to capitalize on growing consumer
preference for food products that are or are perceived to be healthful,
nutritious, low in calories and low in fat content. It can be expected that the
Company will be subject to increasing competition from companies whose products
or marketing strategies address these consumer preferences.
A majority of the Company's revenue is derived from sales of products
to grocery retail outlets. The wholesale food distribution business is highly
competitive. The principal competitive factors include price, service, extent of
product offered, strength of brand offered and store promotional support. These
intense competitive factors may result in a reduction in the Company's gross
margins which could have a materially adverse effect on the Company's financial
condition and results of operations.
There can be no assurance that consumers will regard the products sold
under the Company's name by in-store bakeries as sufficiently distinguishable
from competitive products, that substantially equivalent products will not be
introduced by the Company's other competitors or that the Company will be able
to compete successfully. See "Risk Factors - Competition."
Forward Looking Statements
When used in this Annual Report, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"projected", "intends to" or similar expressions are intended to identify
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including but not limited to the Company's history of losses and
cash flow deficit; possible loss of wholesale sales resulting from a failure to
extend the Triarc License Agreement; need for additional financing; dietary
trends; consumer preferences; competition; new product development; management
of growth; non-exclusivity of Triarc license agreement; trademarks and service
marks; limited manufacturing and warehouse facilities; dependence on major
customers; dependence upon key and other personnel;
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government regulations; minimum wages; insurance and potential liability; lack
of liquidity; volatility of market price of common stock and warrants; possible
adverse effect of penny stock rules and liquidity of the Company's securities;
dividend policy; and control by directors and executive officers, that could
cause the Company's actual results to differ materially from historical earnings
and those presently anticipated or projected. Such factors, which are discussed
in "Risk Factors", "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the notes to consolidated
financial statements, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods expressed in
the Annual Report. As a result, potential investors are cautioned not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. See "Risk Factors" "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risk Factors
In addition to the other information in this report, the following information
should be considered carefully by investors in evaluating the Company and its
business.
(a) History of Operating Losses; Operating Cash Flow Deficit. The
Company has had net operating losses since 1988. For the fiscal year ended
December 31, 1998, the Company's net operating loss was $1,226,111, however, due
to a gain from the sale of assets resulting from the Triarc transaction, the
Company's net income for the fiscal year ended December 31, 1998 was $1,811,770.
The Company has been and is currently experiencing an operating cash flow
deficit primarily because its current expenses exceed its current revenues. At
December 31, 1998 the Company had a working capital balance of approximately
$1,214,000. There can be no assurance that the Company will achieve profitable
operations and a positive cash flow. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations."
(b) Potential Loss of Wholesale Sales Resulting from a Failure to Renew
the Triarc License Agreement. The Triarc license agreement pursuant to which the
Company is licensed to manufacture and sell T. J. Cinnamons branded products
expired on December 31, 1998. Triarc has granted the Company two three month
extensions through June 30, 1999. T.J. Cinnamons branded products accounted for
approximately 47% of wholesale sales for the fiscal year ending December 31,
1998. The failure of the Company to replace such sales with other products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
(c) Need for Additional Financing. The Company will require additional
capital in connection with the manufacture, marketing and sale of its products.
In order to develop new products, manufacture, merchandise, market, and sell its
new and existing product line, and otherwise implement its plan of operations,
the Company will be required, among other things, to raise additional capital.
While the Company has existing lines of credit, there can be no assurance that
such debt financing will be available to the Company in the future or that such
debt financing will be available in the amounts required by the Company or on
terms acceptable to the Company. The failure of the Company to obtain financing
in adequate amounts and on acceptable terms could have an adverse effect on the
Company's business, financial condition and results of operations.
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(d) Dietary Trends; Consumer Preferences. In recent years, numerous
companies in the retail bakery industry have introduced products positioned to
capitalize on growing consumer preference for bakery products that are, or are
perceived to be, healthy, nutritious, and low in calories, cholesterol and fat
content. The Company's primary products are relatively high in calories,
cholesterol and fat content. A decline in the sale of cinnamon rolls and related
products, due to industry trends, changing consumer preferences including taste,
eating habits, demographic trends and traffic patterns, or because of health
related or other dietary concerns or other reasons, could have an adverse effect
on the Company's business, financial condition and results of operations.
(e) Competition; New Product Development. The retail bakery industry is
highly competitive with respect to price and food quality including taste,
freshness, healthfulness and nutritional value. A number of established
companies with significant brand name recognition currently compete with the
Company in the various markets for market share. Many of these companies have
far more available capital, broader product lines, and greater marketing and
sales resources than does the Company, and many devote significantly more
resources to the development of new products than does the Company. The Company
will seek to compete on the basis of the Company's innovation and speed of
execution in expanding its existing product line and launching new products.
However, there can be no assurance that such competitors will not develop direct
competing brands with more market acceptance, or which can be sold at lower
prices than products that have been, or may be, developed by the Company. These
intense competitive factors may result in a reduction in the Company's gross
margins which could have a materially adverse effect on the Company's business,
financial condition and results of operations.
(f) Management of Growth. The Company's ability to manage growth
effectively and expand its operations will be dependent on its ability to expand
and improve its operational, technical, financial and sales systems, and to
develop the skills of its managers and supervisors, and to hire, motivate and
manage its employees. Expansion of the Company's manufacturing, sales and
distribution operations will be dependent upon, amongst other things, continued
growth in the bakery industry, the Company's ability to withstand intense price
competition, its ability to obtain new customers, and retain sales and other
personnel. There can be no assurance that the Company will be successful in
managing its growth and expanding its business. The Company's failure to manage
its growth or expand its business could have a material adverse effect on its
business, financial condition and results of operations.
(g) Non-Exclusivity of the Triarc License Agreement. The Company
manufactures and sells T.J. Cinnamons branded products pursuant to a
non-exclusive license agreement with Triarc. Triarc, or other licensees of
Triarc, may sell T.J. Cinnamons branded products through wholesale channels of
distribution, and as a result, the Company may be forced to compete with Triarc
and/or Triarc's other licensees for supermarket sales of the T.J. Cinnamons
branded products. Triarc's resources greatly exceed the Company's resources, and
it is anticipated that Triarc's resources will continue to exceed the Company's
resources in the near future. Accordingly, if Triarc, either directly or
indirectly, attempt to enter into the Company's trading area, the Company may be
unable to compete effectively which may limit the Company's growth. T.J.
Cinnamons branded products accounted for 47% of wholesale sales for the fiscal
year ending December 31, 1998. The failure of the Company to replace sales of
T.J.
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Cinnamons branded products with other products could have an adverse effect
on the Company's business, financial condition and results of operations.
(h) Trademarks and Service Marks. The Company's business is dependent
upon its license of the trademarks and services marks pursuant to the Triarc
license agreement . The Company believes these trademarks and service marks have
significant value and are important to the marketing of its products. However,
in addition to the non-exclusivity of the Triarc license agreement, there can be
no assurance that the Company will be able to retain these rights pursuant to
its license agreement, that these marks do not or will not violate the
proprietary rights of others, that the marks would be upheld if challenged or
that the Company would not be prevented from using these marks. The occurrence
of any of the aforementioned events could have an adverse effect on the
Company's business, financial condition and results of operations.
(i) Limited Manufacturing and Warehouse Facilities. The Company has
only one manufacturing and warehouse facility located in El Cajon, California,
with limited production capacity. The Company plans to improve its production
capability by implementing further automation of its production and packaging
processes through new equipment purchases. There can be no assurance that the
Company, will, in the future, be able to manufacture and warehouse products in
adequate quantities to meet future demand. Accordingly, the Company may have to
seek additional manufacturing capacity and warehouse facilities.
(j) Dependence on Major Customers. The Company's current revenues
consist primarily of sales to a limited number of large supermarket and
wholesale club chains. During the fiscal year ended December 31, 1998,
approximately 85% of the Company's sales were to Ralph's Supermarkets and
Walmart. The Company's success will depend upon a continuous stream of orders
for its various products from existing customers and an increasing number of new
customers. There can be no assurance, however, that the Company's prior sales to
existing accounts will result in any new and/or repeat orders from these or
other similar accounts. The failure of such accounts to carry the Company's
products or to place repeat orders for the Company's products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
(k) Dependence Upon Key and Other Personnel. The success of the Company
will be largely dependent on the efforts of certain key personnel of the Company
including Charles Loccisano, its Chairman and Chief Executive Officer, and Alan
Gottlich its President and Chief Financial Officer. The loss of the service of
any such persons would have a material adverse effect on the Company. The
Company maintains "key-man" insurance on Charles Loccisano and Alan Gottlich in
the amount of $1,000,000 and $500,000, respectively. The Company has entered
into three year employment agreements with each of Messrs. Loccisano and
Gottlich. The Company will also be dependent upon its ability to retain existing
and hire additional qualified personnel. The competition for qualified personnel
in the food industry is intense and, accordingly, there can be no assurance that
the Company will be able to retain or hire other necessary personnel. If the
Company is required to provide its employees higher wages or more extensive or
costly benefits as a result of competitive reasons or changes in governmental
regulations, the expenses associated with the Company's operations could be
substantially increased without an offsetting increase in the Company's
revenues.
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(l) Government Regulations; Minimum Wages. The Company also is subject
to various federal, state and local laws affecting its business. The Company's
wholesale bakery is subject to regulation by various governmental agencies,
including state and local licensing, zoning, land use, construction and
environmental regulations and various health, sanitation, safety and fire
standard laws and regulations. In addition, suspension of certain licenses or
approvals, or failure to comply with applicable regulations or otherwise, could
interrupt the operations of the Company's manufacturing facility or otherwise
adversely affect the manufacturing facility of the Company. Any such
interruption could have a material adverse effect on the Company's revenues and
results of operations. The Company is also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions. Since
a substantial portion of the Company's manufacturing facility personnel are paid
or expected to be paid at rates based on the federal minimum wage, increases in
such minimum wage will increase the Company's labor costs. If the Company is
required to pay higher wages to its employees, the expenses associated with the
Company's operations could be increased without a corresponding increase in
revenues.
(m) Insurance and Potential Liability. The Company maintains insurance,
including insurance relating to personal injury, in amounts that the Company
currently considers adequate. Nevertheless, a partially or completely uninsured
or underinsured claim against the Company, if successful and of sufficient
magnitude, could have a material adverse effect on the Company's business,
financial condition and results of operations.
(n) Lack of Liquidity; Volatility of Market Price of Common Stock and
Warrants. The Common Stock and Warrants of the Company were delisted from the
Nasdaq SmallCap Market on January 7, 1998 and are presently quoted and traded on
the OTC Bulletin Board. As a result, the purchaser may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Common Stock and Warrants. Consequently, there can be no assurance that an
active and liquid market for the Common Stock or the uniform quotation of prices
for the Common Stock can be sustained. The market price for the Company's Common
Stock and Warrants may also be significantly affected by such factors as the
introduction of new products by the Company or its competitors. Additionally, in
recent years, the stock market has experienced a high level of price and volume
volatility, and market prices for many companies, particularly small and
emerging growth companies, the securities of which trade in the over-the-counter
market, have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. The market price and liquidity of the
Company's Common Stock and Warrants may also be significantly affected by the
general business condition of the Company.
As a result of the delisting of the Company's securities from the
Nasdaq SmallCap Market, sales of the Company's securities are within the scope
of Securities and Exchange Commission rules that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other that their established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouses). For transactions covered by that rule, the
broker-dealer must make a special suitability determination with respect to each
purchaser, and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell the Company's securities and also may affect the ability
of
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current shareholders to sell their securities in the secondary market. There
can be no assurance that trading of the Company's securities will not be
adversely affected by the Company's failure to comply with these or other
regulations that could adversely effect the market for such securities.
(o) Effect of Penny Stock Rules on Liquidity for the Company's
Securities. The Securities and Exchange Commission (the "Commission")
regulations define a "penny stock" to be an equity security not registered on a
national securities exchange, or for which quotation information is disseminated
on the Nasdaq SmallCap Market that has a market price (as therein defined) of
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exemptions. For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to a transaction in a penny
stock, of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The foregoing required penny stock restrictions apply to the Company's
securities if such securities continue to be listed on the OTC Bulletin Board,
and have certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average return
criteria. In any event, even if the Company's securities were exempt from such
restrictions, the Company would remain subject to Section 15(b)(6) of the
Securities Exchange Act of 1934, as amended, which gives the Commission the
authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. If the
Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be materially and adversely
affected. Any disruption in the liquid market of the Company's Common Stock
could limit the Company's access to the equity markets in the future, and could
have a materially adverse effect on the Company's business, financial conditions
and results of operations.
(p) Dividend Policy. To date, the Company has not paid any dividends on
its Common Stock. The Board of Directors does not anticipate declaring any cash
dividends on its Common Stock in the foreseeable future. Future dividends, if
any, will be dependent upon the results of operations and financial condition of
the Company, tax considerations, industry standards, economic conditions,
general business practices and other factors.
(q) Control by Directors and Executive Officers. The directors,
executive officers and their affiliates own approximately 42% of the Company's
outstanding Common Stock excluding currently exercisable stock options and 49%
of the Company's outstanding Common Stock including currently exercisable stock
options and, therefore, are in a position to elect all of the Company's
directors who, in turn, elect all of the Company's executive officers.
Accordingly, such stockholders are able to, directly or indirectly, control all
of the affairs of the Company.
(r) Year 2000 Compliance. Many currently installed computer systems and
software products use two digits rather than four to define the applicable year.
In other words, date-sensitive
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software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activity.
The Company retained outside computer consultants to update its network
system in order to address Year 2000 issues. The upgrades were installed and
tested in September 1998 at a cost of approximately $6,000. The Company believes
that as a result of these upgrades, its computer systems are Year 2000
compliant.
As part of its Year 2000 compliance program, the Company will contact
and survey all of its vendors and suppliers with whom the Company does a
material amount of business to determine whether these parties' systems (insofar
as they relate to the Company's business) are subject to Year 2000 issues. The
failure of the Company's vendors and suppliers to convert their systems on a
timely basis may have a material adverse effect on the Company's operations. The
Company has not developed a contingency plan in the event these vendors and
suppliers are not Year 2000 compliant on a timely basis.
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ITEM 2. PROPERTIES
The Company leases its executive offices at One Harmon Plaza, Secaucus,
New Jersey. The offices occupy approximately 2,200 square feet with a lease term
expiring May 31, 1999. The lease provides for a fixed rent of approximately
$3,800 per month.
The Company leases its wholesale bakery production facility located in
El Cajon, California with the lease term expiring in April 2001. The lease has a
minimum base occupancy charge of $7,967 per month plus charges for a
proportionate share of building operating expenses and real estate taxes. with
an increase of 4% per annum, plus charges for a proportionate share of building
operating expenses and real estate taxes.
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ITEM 3. LEGAL PROCEEDINGS
In November 1998, the Company filed a civil action against Sweet Goods
LLC, Gary Kleinman and Robert Statman (the "Defendants") in the Superior Court
of New Jersey. The claim is for the collection of invoices aggregating
approximately $115,000 representing the value of certain baked goods delivered
to the defendants. On February 1, 1999, the Defendants filed an
answer/counterclaim related to the alleged defective nature of the baked goods
provided and the resultant loss of certain alleged key customer accounts. No
specific damages were outlined in the counterclaim, which the Company believes
are without merit. the Company and the defendants have serves interrogatories to
one another, and the Company intends to depose the defendants in the near future
as part of its discovery process. The Company intends to vigorously pursue its
claims and defend the Defendants counterclaims.
In addition, the Company from time to time has been involved in routine
litigation, including litigation with various vendors and creditors. None of
these litigation matters in which the Company has been involved is material to
its financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to vote of its stockholders,
through the solicitation of proxies or otherwise during the fourth quarter of
fiscal 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock, Class A Warrants and Class B Warrants are
currently traded on the OTC Bulletin Board ("OTC") under the symbols "TJCI",
"TJCIW", and "TJCIZ". Prior to January 7, 1998, the Company's Common Stock,
Class A Warrants and Class B Warrants were traded on the Nasdaq SmallCap Market
under the same symbols.
The following table sets forth, for the periods indicated, the range of
high and low bid prices of the Common Stock as reported by Nasdaq for the twelve
months ended December 31, 1997 and December 31, 1998. These prices reflect
interdealer prices and do not include retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions.
High Low
Quarters Ending:
March 31, 1997 .................... $3 1/8 $1 9/16
June 30, 1997 ..................... 2 7/16 1 3/8
September 30, 1997 ............... 2 3/16 1 5/16
December 31, 1997 ................. 1 11/16 7/16
Quarters Ending:
March 31, 1998 .................... $7/16 $1/4
June 30, 1998 ..................... 9/16 3/8
September 30, 1998........ 3/4 9/16
December 31, 1998 ................. 1 1/16 .08
The approximate number of stockholders of the Common Stock on record at
December 31, 1997 was approximately 500, not including beneficial owners whose
shares are held by banks, brokers and other nominees.
The Company has not paid any dividends in the past. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors. As a Delaware corporation, the Company may not declare and pay
dividends on its capital stock if the amount if the amount paid exceeds an
amount equal to the excess of the Company's net assets over paid-in-capital, or,
if there is no excess, its net profits for the current and/or immediately
preceding fiscal year. Future dividends, if any, will be dependent upon the
results of operations and financial condition of the Company, tax
considerations, industry standards, economic conditions, general business
practices and other factors.
Sales of Unregistered Securities
The following sales of unregistered securities occurred during the
Company's fiscal years ended December 31, 1996, 1997 and 1998:
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1. In 1996, the Company authorized the issuance of 5,000 shares of the Company's
Common Stock to Philip Friedman, a member of the Company's Board of Directors.
These shares were issued without an underwriter or placement agent in
consideration for consulting services rendered. The exemption from registration
for the grant was claimed pursuant to Section 4(2) of the Securities Act of
1933, as amended, in reliance upon the fact that such sale did not involve a
public offering.
2. In 1996, the Company authorized the issuance of 12,000 shares of the
Company's Common Stock to Harry Goldberg. These shares were issued without an
underwriter or placement agent in consideration for consulting services
rendered. The exemption from registration for the grant was claimed pursuant to
Section 4(2) of the Securities Act of 1933, as amended, in reliance upon the
fact that such sale did not involve a public offering.
3. In 1996, the Company authorized the issuance of 1,000 shares of the Company's
Common Stock to Alan Weingarden. These shares were issued without an underwriter
or placement agent in consideration for consulting services rendered. The
exemption from registration for the grant was claimed pursuant to Section 4(2)
of the Securities Act of 1933, as amended, in reliance upon the fact that such
sale did not involve a public offering.
4. In November 1996, the Company authorized the issuance of 125,000 shares of
the Company's Common Stock to the Charles N. Loccisano Irrevocable Trust f/b/o
Michael Loccisano and to the Charles N. Loccisano Irrevocable Trust f/b/o
Marissa Loccisano. These shares were issued without an underwriter or placement
agent in consideration for shares previously conveyed by the Trust, on behalf of
the Company, to Dan Feldman, a past member of the Company's Board of Directors,
in exchange for his agreement to serve as a Director. The exemption from
registration for the grant was claimed pursuant to Section 4(2) of the
Securities Act of 1933, as amended, in reliance upon the fact that such sale did
not involve a public offering.
5. In 1997, the Company authorized the issuance of 1,250 shares of the Company's
Common Stock to Kaya Yurtkuran. These shares were issued without an underwriter
or placement agent in consideration for consulting services rendered. The
exemption from registration for the issuance was claimed pursuant to Section
4(2) of the Securities Act of 1933, as amended, in reliance upon the fact that
such sale did not involve a public offering.
6. In November 1997, in order to bring the Company into compliance with
requirements necessary for continued listing on the Nasdaq SmallCap Market,
Charles Loccisano, the Company's Chairman and Chief Executive Officer, and Alan
Gottlich, the Company's President and Chief Financial Officer, purchased an
aggregate of 20,000 shares of redeemable Series B preferred stock at a price of
$5.00 per share. In January 1998, following delisting of the Company's
securities from the Nasdaq SmallCap Market and as a result of additional funds
loaned to the Company by Messrs. Loccisano and Gottlich, these shares of Series
B preferred stock were redeemed by the Company at a price of $5.00 per share.
7. In 1998, the Company authorized the issuance of 3,000 shares of the Company's
Common Stock to Gelt Financial Corporation. These shares were issued without an
underwriter or placement agent in consideration for providing the Company with a
working capital line of credit. The exemption from
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registration for the issuance was claimed pursuant to Section 4(2) of the
Securities Act of 1933, as amended, in reliance upon the fact that such sale did
not involve a public offering.
8. In 1998, the Company authorized the issuance of 800 shares of the Company's
Common Stock to KenTech, Inc. These shares were issued without an underwriter or
placement agent in consideration for consulting services rendered. The exemption
from registration for the issuance was claimed pursuant to Section 4(2) of the
Securities Act of 1933, as amended, in reliance upon the fact that such sale did
not involve a public offering.
9. In 1998, the Company authorized the issuance of 300,000 shares of the
Company's Common Stock to Charles Loccisano, the Company's Chairman and Chief
Executive Officer, and Alan Gottlich, the Company's President and Chief
Financial Officer. These shares were issued without an underwriter or placement
agent in consideration for providing the Company with a working line of credit
in the amount of $500,000. The exemption from registration for the issuance was
claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended, in
reliance upon the fact that such sale did not involve a public offering.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
RESULTS OF OPERATIONS (for the fiscal year ended December 31, 1998
compared to the fiscal year ended December 31, 1997).
The following tables set forth the components of the Company's revenue:
Fiscal Year Ended December 31,
1998 1997
Wholesale sales $4,409,441 $3,475,463
Company-owned bakery sales 86,227 202,998
Royalties and licensing fees 80,000 199,920
---------- ----------
Total Revenue $4,575,668 $3,878,381
Wholesale sales increased by 27% to $4,409,441 for the fiscal year
ended December 31, 1998 from $3,475,463 for the fiscal year ended December 31,
1997. This increase in wholesale sales was primarily the result of the
successful launching of a variety of new bakery products (both T.J. Cinnamons
branded and non-branded products) and penetration into approximately 1,500
grocery store and wholesale club accounts. T.J. Cinnamons branded products
accounted for approximately 47% of wholesale sales for the fiscal year ended
December 31, 1998. See "Risk Factors - Loss of Sales from Failure to Renew the
Triarc License Agreement."
Company-owned bakery sales decreased 58% to $86,227 for the fiscal year
ended December 31, 1998 from $202,998 for the fiscal year ended December 31,
1997. This decrease resulted primarily from the closing of the retail bakery
located in the Poughkeepsie Galleria Mall in July 1999. The closing of the
Poughkeepsie bakery was one of the conditions of the Triarc agreement.
Royalty and licensing fee revenues decreased 60% to $80,000 for the
fiscal year ended December 31, 1998 from $199,920 for the fiscal year ended
December 31, 1997. This decrease was primarily the result of a decrease in
franchise royalty fees which resulted from the closing of the Triarc transaction
in August 1998, whereby the Company sold all of its rights in the T.J. Cinnamons
retail franchise system.
Cost of goods sold increased to $3,645,956 for the fiscal year ended
December 31, 1998, as compared to $3,043,984 for the fiscal year ended December
31, 1997. This increase was primarily the result of the increased cost of goods
sold associated with increased wholesale sales to supermarkets chains and
membership club chains.
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Selling, general and administrative expenses decreased by 6% to
$2,155,823 for the fiscal year ended December 31, 1998 from $2,283,036 for the
fiscal year ended December 31, 1997. This decrease was primarily the result of
decreases in corporate selling, general and administrative costs.
Gain from sale of assets was $3,312,410 for fiscal year ended December
31, 1998 as compared to $0 for the fiscal year ending December 31, 1997. The
gain from sale of assets in fiscal 1998 resulted from the sale of assets to
Triarc in August 1998. See "Business - Triarc Transactions."
Loss from the relocation of bakery was $129,192 for the fiscal year
ended December 31, 1998 as compared to $0 for the fiscal year ended December 31,
1997. The loss from relocation of bakery resulted from expenses incurred in
connection with the relocation of the Company's manufacturing facility from
Santa Ana, California to El Cajon, California in June 1998 resulting from the
expiration of the lease term. These expenses included moving costs, training of
new employees, additional rent and storage costs and other costs incurred as a
direct result of the move.
Interest expense for the fiscal year ended December 31, 1998 increased
to $145,337 as compared to $8,106 for the fiscal year ended December 31, 1997.
This increase in interest expense resulted primarily from the increased interest
expenses associated with the Company's short-term loans and accounts receivable
financing from Gelt Financial Corporation and credit lines from Charles
Loccisano, the Company's Chairman and CEO, and Alan Gottlich, the Company's
President and CFO, offset by the interest earned on the notes receivable from
Triarc Restaurant Group. All short term and credit line funding was repaid in
full out of the proceeds of the Triarc transaction in August 1998.
Extraordinary item - forgiveness of debt decreased to $0 for the fiscal
year ended December 31, 1998 from $80,088 for the fiscal year ended December 31,
1997. The forgiveness of debt for the fiscal year ended December 31, 1997 was
due to reductions in accounts payable and accrued liabilities resulting from
discounted settlements and write-offs of certain accounts payable.
The Company had a net gain of $1,811,770 for the fiscal year ended
December 31, 1998 as compared to a net loss of $1,376,657 for the fiscal year
ended December 31, 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company had a working capital balance of
approximately $1,214,000. During the twelve months ended December 31, 1998, the
Company experienced cash flow deficits from its operating activities primarily
because its operating expenses exceeded its operating revenues. The Company
believes that its current working capital, together with its anticipated lines
of credit, and the Company's anticipated cash from operations, should be
sufficient to satisfy the Company's cash needs through June 30, 2000. This
expectation is, however, based in part on anticipated increases in revenues.
Should such revenue increases not occur or should they be materially smaller
than anticipated, or should demand be greater than anticipated, the Company
might find it necessary to seek additional financing or to reduce planned
expenditures on marketing and product expansion if efficient financing cannot be
obtained or obtained timely on terms acceptable to the Company.
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The Company used net cash in operating activities in the amount of
$1,734,544 for the fiscal year ended December 31, 1998, as compared to
$1,076,277 for the fiscal year ended December 31, 1997. The Company received net
cash from investing activities in the amount of $2,661,401 for the fiscal year
ended December 31, 1998, as compared to net cash received from investing
activities in the amount of $1,113,156 for the fiscal year ended December 31,
1997. The Company used net cash in financing activities in the amount of
$258,545 for the fiscal year ended December 31, 1998 as compared to net cash
provided by financing activities in the amount of $36,015 for the fiscal year
ended December 31, 1997.
In September 1997, the Company entered into a loan agreement with Gelt
Financial Corporation for a credit line in the amount of $200,000 which was
subsequently increased to $300,000 secured by Wal-Mart accounts receivable. The
terms of this loan agreement provided for a service fee of 1.5% of each advance
together with interest at a rate of 675 basis points above the prime rate. In
addition, the Company granted Gelt 3,000 shares of the Company's Common Stock as
a loan origination fee. The credit line balance was $0 on December 31, 1998.
In October 1997, the Company offered for sale units in a convertible
preferred stock private placement with Commonwealth Associates acting as the
placement agent. This offering was held open to investors through January 1998,
and was not consummated as orders for the minimum number of shares were not
obtained. Without alternative sources of financing to fund the Company's
operating deficits, in January 1998, Charles Loccisano, the Company's Chairman
and Chief Executive Officer, and Alan Gottlich, the Company's President and
Chief Financial Officer, provided the Company with loans aggregating $282,500.
In March 1998, based on the need for additional funding resulting from the
receipt of large purchase orders from Walmart Super Centers, the previous
Loccisano and Gottlich loans were repaid in full and Messrs. Loccisano and
Gottlich agreed to provide the Company with a credit line for up to $500,000
with interest payable quarterly at the applicable federal rate of 5.39% per
annum. The credit line had a term of one year, or such shorter period if the
Company obtains alternative sources of funds to fund its operations, and was
secured by payments due to the Company under its purchase agreement with Triarc.
In consideration for providing this credit line facility, the Company granted
Messrs. Loccisano and Gottlich an aggregate of 300,000 unregistered shares of
Common Stock. This credit line was repaid in full in August 1998 out of the
proceeds of the Triarc agreement.
In November 1997, Charles Loccisano, the Company's Chairman and Chief
Executive Officer, and Alan Gottlich, the Company's President and Chief
Financial Officer, purchased an aggregate of 20,000 shares of redeemable Series
B preferred stock at a price of $5.00 per share. In January 1998, following a
delisting of the Company's securities from the Nasdaq SmallCap Market and as a
result of additional funds loaned to the Company by Messrs. Loccisano and
Gottlich, these shares of Series B preferred stock were redeemed by the Company
at a price of $5.00 per share.
In July 1998, the Company borrowed $150,000 from Gelt Financial
Corporation. The loan provided for interest at the rate of 5% above the prime
rate, and was secured by all the payments due the Company under the purchase
agreement dated June 3, 1996 entered into with Triarc Restaurant Group. In order
to induce Gelt Financial Group to enter into this loan, the Company paid Gelt
Financial Group a placement fee in the amount of $15,625 and agreed to issue
Gelt Financial Group 15,000 shares of the Company's
25
<PAGE>
unregistered common stock. This loan was repaid in full in August 1998 out of
the proceeds of the Triarc agreement.
In August 1998, Charles Loccisano, the Company's Chairman and Chief
Executive Officer, and Alan Gottlich, the Company's President and Chief
Financial Officer, provided the Company with short term bridge loans aggregating
$100,000. These loans provided for a loan fee of 5% representing the initial
loan fees and interest on the loan. These loans were repaid in full in August
1998 out of the proceeds of the Triarc agreement.
In August 1998, the Company closed an agreement with Triarc pursuant to
which the Company sold all of its rights and interests under the existing T.J.
Cinnamons franchise agreements and terminated the purchase agreement with Triarc
dated June 3, 1996 and the license agreement and management agreement entered
into with Triarc and affiliates dated August 29, 1996. Under the terms of this
agreement, the Company received payments aggregating $4,000,000 of which
$3,000,000 was paid in cash at closing and $1,000,000 was paid in the form of a
noninterest bearing promissory note payable over 24 months. The Triarc agreement
further provided for a contingent additional payment of up to $1,000,000
conditioned upon the Company's attainment of certain sales targets of T.J.
Cinnamons products for the fiscal year ended December 31, 1998. Based on actual
sales for the fiscal year ended December 31, 1998, the Company did not achieve
these sales targets, and as a result, the Company did not receive any of the
conditional additional payments under the Triarc agreement.
The Company has an interoffice network of personal computers operating
under a Novell network. All of the Company's PC's utilize the Windows 95
operating system and the Company runs its accounting system on MAS 90. The
Company retained outside computer consultants to update its network system in
order to address Year 2000 issues including upgrading the MAS 90 accounting
system and other spreadsheet and word processing programs. The upgrades were
installed and tested in September 1998 at a cost of approximately $6,000
including consulting fees. The Company believes that as a result of these
upgrades, its computer systems are year 2000 compliant (meaning they recognize
years in the Year 2000 and beyond).
As part of its Year 2000 compliance program, the Company will contact
and survey all of its vendors and suppliers with whom the Company does a
material amount of business to determine whether these parties' systems are
subject to Year 2000 issues. The failure of the Company's vendors and suppliers
to convert their systems on a timely basis may have a material adverse effect on
the Company's operations. The Company is in the process of developing a
contingency plan in the event these vendors and suppliers are not Year 2000
compliant on a timely basis, however, no such contingency plan has been
developed to date.
26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 13(a)(1) in Part IV.
27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 31, 1997, the Company dismissed Goldstein, Golub, Kessler &
Co. P.C. ("GGK") as its independent auditors. Such dismissal was approved by the
Company's Board of Directors. GGK's report upon the Company's financial
statements for its fiscal year ended December 31, 1995 did not contain an
adverse opinion or a disclaimer of opinion, nor was such report qualified or
modified as to audit scope or accounting principles. The report was prepared
assuming that the Company will continue as a going concern. During the Company's
fiscal years ended December 31, 1995 and to the date of GGK's dismissal (the
"Interim Period"): (i) there were no disagreements (of nature contemplated by
Item 304 (a) (1) (iv) of Regulation S-B) between the Company and GGK; and (ii)
there were no reportable events of nature contemplated by Item 304 (a) (1) (iv)
(B) of Regulation S-B.
On January 31, 1997, the Company engaged Arthur Andersen LLP ("AA") as its
independent public accountants for the Company's fiscal year ended December 31,
1996. During the Company's fiscal year ended December 31, 1995 and the Interim
Period, the Company did not consult with AA with respect to any of the matters
contemplated by Item 304 (a) (1) (iv) (B) of Regulation S-B.
On February 14, 1997, AA resigned its position as the Company's independent
auditors. Such resignation was necessitated because AA concluded that it had a
conflict of interest in reporting on the Company's financial statements for the
fiscal year ended December 31, 1996 due to the fact that during 1996 AA had
rendered financial advisory services to the Company for which it received a fee.
During the Company's engagement of AA through the date of AA's withdrawal (the
"Second Interim Period"): (i) there were no disagreements (of nature
contemplated by Item 304 (a) (1) (iv) of Regulation S-B) between the Company and
GGK; and (ii) there were no reportable events of nature contemplated by Item 304
(a) (1) (iv) (B) of Regulation S-B.
On February 21, 1997, the Company engaged Amper, Politziner & Mattia
("AP&M") as its independent public accountants for the Company's fiscal year
ended December 31, 1996. During the Company's fiscal year ended December 31,
1995, the Interim Period and the Second Interim Period, the Company did not
consult with AP&M with respect to any of the matters contemplated by Item 304
(a) (2) (i) - (ii) of Regulation S-B.
28
<PAGE>
Part III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required for this item is incorporated by reference to
the Company's Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to December
31, 1998.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required for this item is incorporated by reference to the
Company's Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to December
31, 1998.
30
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is incorporated by reference to the
Company's Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to December
31, 1998.
31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is incorporated by reference to the
Company's Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to December
31, 1998.
32
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
(a) Documents filed as part of this report.
1. Financial Statements
Independent Auditor's Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-15
<TABLE>
<CAPTION>
2. Exhibits
<S> <C> <C>
1.1 * ................ Underwriting Agreement with Paragon Capital Corporation
2.1 * ................ Certificate of Ownership and Merger regarding the merger of
Signature Acquisition Corp. with and into T.J. Cinnamons, Inc.
2.2 * ................ Certificate of Ownership and Merger regarding the merger of
Signature Foods, Inc. with and into T.J. Cinnamons, Inc.
2.3 *** ................ Purchase Agreement between the Registrant and Triarc
Restaurant Group
3.1 * ................ Restated Certificate of Incorporation of the Registrant
3.2 * ................ By-Laws of the Registrant
9.1 * ................ Modification Agreement (the "Modification Agreement") among
Signature Foods, Inc., The Charles N. Loccisano Irrevocable
Trust f/b/o Michael Loccisano, The Charles N. Loccisano
33
<PAGE>
Irrevocable Trust f/b/o Marissa Loccisano, The Ted H. Rice
and Joyce Rice Family Trust, U/T/I dated August 8, 1986, The
Roger L. Cohen Trust U/T/D/ dated January 26, 1984 and the
Kenneth D. Hill Revocable Trust U/T/I dated march 29, 1989,
Signature Acquisition Corp., the Registrant, Charles N.
Loccisano and Alan S. Gottlich relating to a Stock Purchase
Agreement (the "Stock Purchase Agreement") among them
9.2 * ................ Waiver of Default under the Modification Agreement, as
amended
9.3 * ................ Amendment to Stock Purchase Agreement
9.4 * ................ Stock Purchase Agreement
10.1 * ................ Trademark and Technology License and Manufacturing Agreement
("License Agreement") by and between Signature Acquisition
Corp. and Pro Bakers Ltd.
10.1(a) * ................ Amendment to License Agreement
10.1(b) * ................ Second Amendment to License Agreement
10.1(c) ** ................ Termination of the License Agreement
10.2 * ................ 1993 Stock Option Plan
10.3 * ................ 1996 Amended and Restated Stock Option Plan
10.4 * ................ Employment Agreement with Charles Loccisano
10.5 * ................ Employment Agreement with Alan Gottlich
10.9 * ................ Lease regarding the Company's principal executive offices
10.13 * ................ License agreement with Triarc Restaurant Group
10.14 ** ................ Management Agreement with TJ Holding Company, Inc.
10.15 ** ................ Lease regarding the Santa Ana bakery facility
10.16 * ................ Lease regarding the El Cajon bakery facility
34
<PAGE>
10.17 *** ................ Agreement between and among TJ Holding Company, Inc., Arby's, Inc.,
d/b/a Triarc Restaurant Group and Paramark Enterprises, Inc.
10.18 *** ................ Wholesale License Agreement between Arby's, Inc., d/b/a Triarc
Restaurant Group and Paramark Enterprises, Inc.
16.1 ** ................ Letter from Goldstein Golub and Kessler, the Registrant's
former independent accountant
16.2 ** ................ Letter from Arthur Andersen LLP
21 ................ Subsidiaries of the Company
Interbake Brands, Inc.
27 ................ Financial Data Schedule
- ---------------------
<FN>
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 and the amendments thereto.
** Incorporated by reference to the Company's Annual Reports on Form
10-KSB for the fiscal years ended December 31, 1997, 1996 and 1995.
*** Incorporated by reference to the Company's Current Reports on Form 8-K
dated June 18, 1996 and July 9, 1998.
(b) The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1998.
</FN>
</TABLE>
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARAMARK ENTERPRISES, INC.
By: /s/ Charles N. Loccisano
Charles N. Loccisano, Chairman
In accordance with the Exchange Act, this report has been signed by the
following person on behalf of the Company and in the capacities and on the dates
stated.
Signature Title(s) Date
/s/ Charles N. Loccisano Chairman, Chief March 29, 1999
Charles N. Loccisano Executive Officer
and Director
(Principal Executive
Officer)
/s/ Alan S. Gottlich President, Chief March 29, 1999
Alan S. Gottlich Financial Officer
and Director
(Principal Accounting
Officer)
/s/ Philip Friedman Director March 29, 1999
Philip Friedman
/s/ Paul Bergrin Director March 29, 1999
Paul Bergrin
36
<PAGE>
PARAMARK ENTERPRISES, INC.
(Formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
For the Years Ended
December 31, 1998 and 1997
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-13
<PAGE>
[Amper, Politziner & Mattia P.A. letterhead]
Independent Auditors' Report
To the Board of Directors and Stockholders of
Paramark Enterprises, Inc.
(formerly T. J. Cinnamons, Inc.) and Subsidiary
We have audited the accompanying consolidated balance sheets of Paramark
Enterprises, Inc. (formerly T. J. Cinnamons, Inc.) and Subsidiary at December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paramark
Enterprises, Inc. (formerly T. J. Cinnamons, Inc.) and Subsidiary as of December
31, 1998 and 1997 and the results of their operations and their cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ Amper, Politziner & Mattia P.A.
AMPER, POLITZINER & MATTIA P.A.
February 5, 1999
Edison, New Jersey
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
Assets
<TABLE>
<CAPTION>
1998 1997
---- ----
Current assets
<S> <C> <C>
Cash $ 790,873 $ 122,561
Accounts receivable, less allowance for
doubtful accounts of $57,500 and $64,000 326,217 259,271
Current maturities of notes receivable 500,000 69,837
Inventory 167,956 234,822
Prepaid expenses and other current assets, net 44,352 35,291
----------- -----------
1,829,398 721,782
Property and equipment, net 517,140 453,296
Note receivable, net of current maturities 375,000 --
Goodwill, net -- 476,667
----------- -----------
$ 2,721,538 $ 1,651,745
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 601,593 $ 1,142,415
Current maturities of long-term debt 13,938 258,545
----------- -----------
615,531 1,400,960
Long-term debt, net of current maturities 55,522 69,460
Commitments and contingencies
Stockholders' equity
Preferred stock - $.01 par value; authorized 1,000,000 shares,
none issued -- --
Common stock - $.01 par value; authorized 10,000,000 shares,
issued and outstanding 3,373,883 and 3,070,083 shares 33,740 30,702
Additional paid-in capital 6,813,704 6,759,352
Accumulated deficit (4,796,959) (6,608,729)
----------- -----------
Total stockholders' equity 2,050,485 181,325
----------- -----------
$ 2,721,538 $ 1,651,745
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
Revenue
<S> <C> <C>
Wholesale sales $ 4,409,441 $ 3,475,463
Sales from Company-owned stores 86,227 202,998
Royalties, licensing fees and other 80,000 199,920
----------------- -----------------
4,575,668 3,878,381
Cost of goods sold 3,645,956 3,043,984
----------------- -----------------
Gross margin 929,712 834,397
Selling, general and administrative 2,155,823 2,283,036
----------------- -----------------
Loss from operations (1,226,111) (1,448,639)
Other income (expense)
Gain on sale of assets 3,312,410 -
Loss on relocation of bakery (129,192) -
Interest, net (145,337) (8,106)
----------------- -----------------
Income (loss) before extraordinary item 1,811,770 (1,456,745)
Extraordinary item - forgiveness of debt - 80,088
----------------- -----------------
Net income (loss) $ 1,811,770 $ (1,376,657)
================= =================
</TABLE>
<TABLE>
<CAPTION>
Basic Diluted Basic Diluted
EPS EPS EPS EPS
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item $ .57 $ .56 $ (.48) $ (.48)
Extraordinary item - - .03 .03
-------- --------- -------- ---------
Net income (loss) $ .57 $ .56 $ (.45) $ (.45)
======== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Weighted-average common shares
outstanding
<S> <C> <C>
Basic $ 3,287,156 $ 3,069,775
Diluted 3,328,892 3,069,775
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31,
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,068,833 $ 30,689 $ 6,757,491 $ (5,232,072) $ 1,556,108
Issuance of common stock
for services 1,250 13 1,861 - 1,874
Net loss - - - (1,376,657) (1,376,657)
-------------- ----------- -------------- ------------- --------------
Balance at December 31, 1997 3,070,083 30,702 6,759,352 (6,608,729) 181,325
Issuance of common stock
for services 3,800 38 1,102 - 1,140
Issuance of common stock for
consideration for officer loan
to Company (Note 8) 300,000 3,000 53,250 - 56,250
Net income - - - 1,811,770 1,811,770
-------------- ----------- -------------- ------------- --------------
Balance at December 31, 1998 3,373,883 $ 33,740 $ 6,813,704 $ (4,796,959) $ 2,050,485
============== =========== ============== ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ 1,811,770 $ (1,376,657)
------------------ -----------------
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 129,477 114,273
Provision for doubtful accounts (6,500) 1,760
Noncash interest expense 57,150 -
Gain on sale of assets (3,312,410) -
Loss on relocation of bakery 129,192 -
Gain from forgiveness of debt - (80,088)
(Increase) decrease in
Accounts receivable (60,206) 76,166
Inventories 66,866 (152,621)
Prepaid expenses and other current assets (9,061) 5,089
Increase (decrease) in
Accounts payable and accrued expenses (540,822) 389,184
Other current liabilities - (53,383)
------------------ -----------------
Total adjustments (3,546,314) 300,380
------------------ -----------------
(1,734,544) (1,076,277)
------------------ -----------------
Cash flows from investing activities
Purchases of property and equipment (201,739) (240,518)
Proceeds from sale of assets 3,668,303 -
Issuance of note receivable (1,000,000) -
Principal payments received on notes receivable 194,837 1,353,674
------------------ -----------------
2,661,401 1,113,156
------------------ -----------------
Cash flows from financing activities
Principal payments on long-term debt (858,545) (830,215)
Proceeds from issuance of long-term debt 600,000 866,230
------------------ -----------------
(258,545) 36,015
------------------ -----------------
Net change in cash 668,312 72,894
Cash - beginning 122,561 49,667
------------------ -----------------
Cash - ending $ 790,873 $ 122,561
================== =================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Principal Business Activity and Sale of Assets
Operations
Paramark Enterprises, Inc. (formerly T. J. Cinnamons, Inc.) and
Subsidiary (the "Company"), is engaged in the wholesale
manufacturing and distribution of specialty bakery products in
supermarket and wholesale club stores throughout the United
States. In 1996, the Company formed Interbake Brands, Inc. as a
wholly-owned subsidiary to conduct all wholesale bakery
operations.
Sale of Assets
In August 1996, the Company closed a purchase agreement ("the
Transaction") with Triarc Restaurant Group d/b/a Arby's, Inc.
("Triarc") through which (a) Triarc purchased the trademarks,
service marks, recipes and secret formulas of the Company, (b)
Triarc licensed back to the Company the rights to operate existing
franchised bakery locations and to distribute T. J. Cinnamons
branded products through retail grocery outlets, and (c) the
Company entered into a management agreement with Triarc to manage
the franchise system.
The sales price of the transaction was $3,470,000, for which the
Company has received payment. In addition, the Transaction
provided the potential for contingent payments to the Company up
to a maximum of an additional $5,500,000 over time dependent upon
the amount of T. J. Cinnamons product sales by Triarc exceeding a
minimum base system-wide sales of $26.3 million. The Company has
not received any additional payments as of December 31, 1998.
Additionally, major stockholders of the Company, with holdings of
1,013,390 shares of the Company's common stock as of December 31,
1997, signed a stock sale restriction agreement. Under the terms
of this agreement, these stockholders were prohibited, through
August 1998, without prior written consent of Triarc, to sell more
than 2.5% of the total issued and outstanding shares of the
Company. Subsequent to August 1998, and during the existence of
the license agreement with Triarc, the threshold was increased
from 2.5% to 10%.
Following the closing of the Transaction, the Company's operations
have been concentrated exclusively on its wholesale development
activities.
Assignment of the T. J. Cinnamons, Inc.'s License Agreements
In August 1998, the Company restructured its agreements with
Triarc and entered into a new agreement pursuant to which the
Company sold all of its rights and interests under the existing T.
J. Cinnamons franchise agreements and terminated the purchase
agreement with Triarc dated June 3, 1996 and the license agreement
and management agreement entered into with Triarc dated August 29,
1996. Under the terms of this agreement, the Company received
$4,000,000, the total sales price, of which $3,000,000 was paid in
cash at closing and $1,000,000 was in the form of a non-interest
bearing promissory note receivable over 24 months (Note 4). This
resulted in a gain, net of goodwill (Note 3) and related costs, of
approximately $3,300,000. The Triarc agreement further provided
for a contingent additional payment of up to $1,000,000
conditioned upon the Company's attainment of certain sales targets
of T. J. Cinnamons products for the fiscal year ended December 31,
1998. Based on actual sales for the fiscal year ended December 31,
1998, the Company did not meet these sales targets and, as a
result, the Company did not receive any of the contingent
additional payments under the Triarc agreement.
F-6
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Principal Business Activity and Sale of Assets - (continued)
Assignment of the T. J. Cinnamons, Inc.'s License Agreements -
(continued)
The Company is continuing to manufacture and sell T. J. Cinnamons
products pursuant to a license agreement with Triarc. This license
agreement allows the Company to sell certain products to approved
supermarket accounts based on a 5% royalty on net sales with a
term which expired on December 31, 1998. Triarc has granted the
Company two three month extensions of the term of this license
agreement through June 30, 1999, and the Company anticipates that
Triarc will continue to renew this license agreement at the end of
its current term.
Note 2 - Liquidity
In August 1998, the Company restructured (see Note 1) and entered
into a new agreement with Triarc to provide working capital.
Although the Company anticipates operating losses during 1999, the
Company believes that the available cash on hand and the operating
plan for 1999 will provide sufficient working capital to meet its
needs for the current year.
Note 3 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company (formerly T. J. Cinnamons, Inc.) and its wholly-owned
subsidiary Interbake Brands, Inc., after elimination of all
significant intercompany balances and transactions.
Revenue Recognition
In conjunction with the Transaction, the Company entered into a
management agreement with Triarc for the management of the
franchise system. Under this agreement which terminated in August
1998, royalty fees collected were recorded as revenue paid to
Triarc via a management fee.
Royalty revenue was based upon a percentage of sales of the
Company's franchisees and was recognized by the Company when sales
were made by the franchisee. Licensing fees were based on a
percentage of sales for using the Company's trademark and/or trade
name. Licensing fees were recognized when the sale is made by the
licensor.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash
investments. The Company restricts cash and cash investments to
financial institutions with high credit standings. At November 30,
1998, the Company had approximately $700,000 invested with one
financial institution.
Inventory
Inventory is stated at the lower of cost (first-in, first-out
basis) or market, and consists principally of raw materials.
F-7
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 3 - Summary of Significant Accounting Policies - (continued)
Property and Equipment
Depreciation of property and equipment is provided by the
straight-line method over the estimated useful lives of the
related assets or the term of lease, whichever is shorter.
Goodwill
The excess of cost over fair value of net assets acquired
("goodwill") is a result of the Transaction dated August 1996.
This transaction resulted in Paramark obtaining the rights to use
the TJCI trademark and recipes. Goodwill has been amortized using
the straight-line method over a ten-year life. As a result of the
termination of the Triarc license agreement in August 1998, the
Company wrote off the net goodwill of $440,000.
Stock Option Plan
The Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its
employee stock options and warrants. Under this method,
compensation cost is measured as the amount by which the market
price of the underlying stock exceeds the exercise price of the
stock option, at the date that the number of the options granted
and the exercise price are known.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Earnings Per Share
The Company has adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." In
accordance with SFAS 128, primary earnings per share have been
replaced with basic earnings per share and fully-diluted earnings
per share have been replaced with diluted earnings per share,
which includes potentially dilutive securities, such as
outstanding options and convertible securities. Net income (loss)
per common share is calculated by dividing net income (loss) by
the weighted-average number of shares of common stock outstanding
for each period presented.
Note 4 - Note Receivable
Note receivable from Triarc, as a result of the assignment of the
T. J. Cinnamons, Inc.'s License Agreements (Note 1), is due in
monthly installments of $41,667, maturing in September 2000.
F-8
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Note 5 - Property and Equipment
<S> <C>
Furniture and fixtures $ 47,624
Equipment 526,678
Leasehold improvements 72,508
----------------
646,810
Less accumulated depreciation and amortization 129,670
$ 517,140
Note 6 - Accounts Payable and Accrued Expenses
Trade accounts payable $ 503,572
Other accrued expenses 98,021
----------------
$ 601,593
Note 7 - Long-term Debt
Note payable to a financing institution, monthly payments
of $2,184, including interest at 19.4%, due September
2002, collateralized by production equipment $ 69,460
Less current maturities of long-term debt 13,938
----------------
Long-term debt, net of current maturities $ 55,522
================
</TABLE>
Note 8 - Related Party Transactions
Included in accounts payable and accrued expenses are amounts due
to officers, $7,500 and $188,000 at December 31, 1998 and 1997,
respectively, which are to be paid in the ordinary course of
business.
In January 1998, officers of the Company loaned $500,000 to the
Company. This was required to be repaid within one year, with
interest payable quarterly at 5.39% per annum. In consideration
for the loan, the officers were granted 300,000 shares of the
Company's common stock. The fair value of the shares was recorded
as interest expense.
The loan was repaid in August 1998.
In July 1998, an officer of the Company loaned $100,000 to the
Company. This amount, plus an origination fee of $5,000, was
required to be repaid on the earlier of October 29, 1998 or the
day that a closing occurs pursuant to the Triadic Restaurant Group
agreement. The loan was repaid in August 1998 due to the closing
of the agreement.
Interest expense and fees, related to loans from officers for 1998
and 1997, were $18,500 and $53,900.
Note 9 - Forgiveness of Debt
Forgiveness of debt of $80,088 for the year ended December 31,
1997 resulted from negotiations with vendors.
F-9
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Note 10 - Income Taxes
December 31,
1998 1997
<S> <C> <C>
Loss carryforwards $ 686,000 $ 1,100,000
Installment gain on sale of assets 877,000 675,000
Allowance for doubtful accounts 23,000 -
------------------ ------------------
Gross deferred tax asset 1,586,000 1,775,000
Valuation allowance (1,586,000) (1,775,000)
------------------ ------------------
Net deferred tax asset $ - $ -
================== ==================
</TABLE>
The provision for income taxes for the year ended December 31,
1998 was reduced $450,000 by the benefit of net operating loss
carryforwards.
At December 31, 1998, the Company has net operating loss
carryforwards for financial reporting purposes of approximately
$1,700,000 available to offset future taxable income. These
carryforwards expire in the years 2009 through 2012 for federal
income tax purposes, and 2001 through 2004 for state income tax
purposes. Utilization of the net operating loss carryforwards may
be significantly limited, based on changes in the Company's
ownership.
Note 11 - Stock Option Plan
The Company's 1993 Incentive Stock Option Plan has authorized the
grant of options to management personnel for up to 450,000 shares
of the Company's common stock. All options granted have ten-year
terms, other than 10% stockholders options which have five-year
terms, and vest and become fully exercisable upon grant.
The Company's 1996 Stock Option Plan has authorized the grant of
options to directors, management and consultants for up to 500,000
shares of the Company's common stock.
All options granted have ten-year terms, other than 10%
stockholders options which have five-year terms, and vest and
become fully exercisable upon grant.
Pro forma information regarding net income and earnings per share
has been determined as if the Company had accounted for its
employee stock options under the fair-value method. The fair value
for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Risk-free interest rate 5.7% 6.0%
Expected volatility 175% 73%
Dividend yield - -
Expected life 5 years 3 years
</TABLE>
F-10
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 11 - Stock Option Plan - (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option-valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Pro forma net income (loss) $ 1,811,770 $ (1,376,657)
Pro forma income (loss) per share
Basic $ .44 $ (.45)
Diluted .43 (.45)
</TABLE>
There was no compensation expense recorded from stock options for
the years ended December 31, 1998 and 1997.
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows:
<TABLE>
<CAPTION>
Weighted-Average Number of Weighted-Average
Options Exercise Price Exercisable Exercise Price
Outstanding
<S> <C> <C> <C> <C>
December 31, 1996 405,312 $ 1.68 405,312 $ 1.68
Granted 752,500 1.59
Exercised - -
Terminated (10,000) 1.94
--------------
Outstanding
December 31, 1997 1,147,812 $ 1.62 1,097,812 $ 1.61
Granted 716,672 .50
Exercised - -
Terminated (1,051,000) 1.59
--------------
Outstanding
December 31, 1998 813,484 $ .65 643,484 $ .67
Weighted-average fair
value of options granted
during the year 1998 1997
Where exercise price
equals stock price $ .50 $ .38
</TABLE>
F-11
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 11 - Stock Option Plan - (continued)
Following is a summary of the status of stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Weighted-
Average Weighted- Weighted-
Exercise Remaining Average Average
Price Range Number Contractual Life Exercise Price Number Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$ .50 - .50 714,484 4.0 $ .50 594,484 $ .50
$ 1.50 - 1.94 99,000 7.3 $ 1.74 49,000 $ 1.21
</TABLE>
The Company has outstanding 1,453,000 redeemable Class A
warrants, each to purchase one share of common stock, and one
Class B warrant for $4; and 557,750 redeemable Class B warrants,
each to purchase one share of common stock for $5. No warrants
have been redeemed through December 31, 1998. The Class A
warrants expire May 1999, and the Class B warrants expire May
2001.
Note 12 - Earnings Per Share
For 1998, dilutive potential common shares, all of which relate
to the stock options, were 41,736.
Note 13 - Supplemental Cash Flow Information
During the year ended December 31, 1998, the Company issued
303,800 shares of its common stock as payment for consulting
services rendered and interest expense on certain debt
obligations in the amount of $240 and $57,150, respectively, the
fair value of the shares on the dates of issuance.
During the years ended December 31, 1998 and 1997, the Company
paid interest of $169,000 and $84,000, respectively.
Note 14- Major Customers
The Company had two major customers who accounted for 85% of
wholesale sales for 1998 and 77% for 1997. These same customers
accounted for substantially all of the Company's accounts
receivable as of December 31, 1998 and 1997.
Note 15 - Commitments and Contingencies
Rent
The Company leases space for its main offices and wholesale
bakery operation under noncancelable operating leases.
F-12
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 15 - Commitments and Contingencies - (continued)
Rent - (continued)
Aggregate minimum annual payments due under these leases are as
follows:
Year Ending
December 31,
1999 $ 115,000
2000 96,000
2001 32,000
-----------------
$ 243,000
Rent expense charged to operations for the years ended December
31, 1998 and 1997 amounted to $129,000 and $168,000, respectively.
Litigation
The Company is presently, and from time to time, involved in
routine litigation, including litigation with vendors, suppliers,
and franchisees. In management's opinion, none of the litigation
in which the Company is currently involved is material to its
financial condition or results of operations.
Note 16 - Year 2000
The Company recognizes the need to ensure that its operations will
not be adversely impacted by the Year 2000 software failures. All
of the Company's internal operating systems are on schedule for
compliance and should be completed by August 1999. The Company has
been upgrading its systems since September 1998 and has notified
all of its customers of the need for upgrade where necessary. All
costs to develop these software changes were expensed as incurred
during 1998, which represent approximately $6,000. The remaining
costs to modify the Company's systems for Year 2000 compliance are
expected to be less than $5,000.
In addition to Year 2000 software and equipment implementation
activities, the Company intends to contact major suppliers to
assess their compliance. The Company cannot assess the effect of
Year 2000 programs implemented by their customers and suppliers.
Note 17 - New Accounting Standards
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards for
derivatives as either assets or liabilities and measures them at
fair value. Under certain conditions, the gains or losses from
derivatives may be offset against those from the items the
derivatives hedge against. Otherwise, gains and losses from
derivatives are recognized currently in the results of operations.
The Company will adopt SFAS 133 in the fiscal year ending December
31, 1999. Adoption of this statement is not anticipated to have a
material effect on the Company's financial position or results of
operations.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Paramark Enterprises, Inc. as of December
31, 1998 and the fiscal year then ended, and it is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<NAME> PARAMARK ENTERPRISES, INC.
<CIK> 0000915661
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 790,873
<SECURITIES> 0
<RECEIVABLES> 883,717
<ALLOWANCES> 57,500
<INVENTORY> 167,956
<CURRENT-ASSETS> 1,829,398
<PP&E> 646,810
<DEPRECIATION> 129,670
<TOTAL-ASSETS> 2,721,538
<CURRENT-LIABILITIES> 615,531
<BONDS> 0
0
0
<COMMON> 33,740
<OTHER-SE> 2,016,745
<TOTAL-LIABILITY-AND-EQUITY> 2,721,538
<SALES> 4,495,668
<TOTAL-REVENUES> 4,575,668
<CGS> 3,645,956
<TOTAL-COSTS> 5,801,779
<OTHER-EXPENSES> 129,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,337
<INCOME-PRETAX> 1,811,770
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,811,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,811,770
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56
</TABLE>
