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, 1999.
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-23026
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PARAMARK ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3261564
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Harmon Plaza
Secaucus, New Jersey 07094
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (201) 422-0910
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock
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(Title of Class)
Class B Warrants
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(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, 1999 were
$4,392,570.
As of March 15, 2000, there were 3,393,383 shares of Common Stock and
557,750 Class B Warrants outstanding. Based on the average high and low bid
prices of the Common Stock on March 15, 2000, the approximate aggregate market
value of Common Stock held by non-affiliates was $ ___________ (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, December 31, 1997, and December 31, 1998 as listed
in response to Item 13(a)(2).
Transitional Small Business Disclosure Format (check one):
Yes No X
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(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 15, 2000. 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 record keeping purposes of the
Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
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; 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."
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 as a
franchisor of specialty retail bakeries. Current management acquired the Company
from its founders in 1992, subsequently sold the 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 and Class B Warrants are publicly traded on the OTC
Bulletin Board under the symbols "TJCI" and "TJCIZ"
The Company currently owns and operates an approximately 35,000 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
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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 pursuant to a licensing agreement with Triarc
Restaurant Group. See. "Triarc Restaurant Group Licensing Agreement".
The Company is currently selling its line of products in approximately
1,500 supermarket stores including Ralphs Supermarkets, Food-4-Less
Supermarkets, Lucky's Supermarkets, Fred Meyer Supermarkets, Fry's Supermarkets,
Ralley's Supermarkets, Albertsons Supermarkets, Bashas supermarkets and Giant
Supermarkets. During the fiscal year ended December 31, 1999, approximately 66%
of the Company's sales were to Ralph's Supermarkets and Food-4-Less
Supermarkets, a wholly owned subsidiary of Ralphs Supermarkets. See "Risk
Factors - Dependence on Major Customers."
The Company's products include: (a) "T.J. Cinnamons" branded cinnamon
rolls and CinnaChips subject to the terms of a licensing agreement with Triarc
Restaurant Group, and (b) a full line of specialty gourmet bakery products
including rugalach, bundt cakes, upside down pineapple cakes, pull-apart cakes,
chocolate brownies branded under the Hershey's label, iced and uniced layer
cakes, iced and uniced sheet layer cakes, decorated layer and sheet cakes,
cobblers, crumb cakes 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 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.
Triarc Restaurant Group Transactions. In 1996, the Company sold the
T.J. Cinnamons trade name and other intellectual property to Triarc Restaurant
Group ("Triarc") in consideration for (i) a purchase price of $3,540,000, (ii)
additional contingent payments of up to $5.5 million, and (iii) a 99 year
royalty free license agreement to sell T.J. Cinnamons branded products through
wholesale channels of distribution.
In 1998, the Company restructured its agreements with Triarc whereby
the Company terminated the 1996 purchase and license agreements with Triarc in
consideration for payments aggregating $4 million of which $3 million was paid
at closing and $1 million was tendered in the form of a non interest bearing
promissory note payable over a period of 24 months.
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Triarc Restaurant Group License Agreement. The Company is continuing to
manufacture and sell T.J. Cinnamons branded products pursuant to a short term
license agreement with Triarc. This license agreement allows the Company to sell
approved products to approved supermarket accounts based on a 5% royalty on net
sales. The original license agreement expired on December 31, 1998, however,
Triarc has granted the Company three extensions of the term of this license
agreement through March 31, 2000, 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 permanent license agreement
with Triarc whereby the Company will be licensed to market and sell T.J.
Cinnamon branded products for distribution to grocery stores, mass
merchandisers, food service outlets, convenience stores, vending outlets and
airline catering. There can be no assurance that the Company will be successful
in reaching a permanent agreement with Triarc which could have a material
adverse effect on the Company's business, financial condition and results of
operations. For the fiscal year ending December 31, 1999, sales of T.J.
Cinnamons branded products accounted for approximately 20% 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. The company believes 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. Supermarkets with in-store bakeries, the basis of the "thaw and sell"
market in which the Company sells most of its products, have grown steadily
since 1989. 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 in a position to capture an increased
percent 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."
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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
two full time sales managers located in Southern California, and has retained
food brokers specializing in bakery products to develop sales in Northern
California, Arizona, Oregon, Utah, Washington, Nevada, Texas and Colorado. In
addition, the Company will continue to expand nationwide sales in mass
merchandisers, convenience stores, membership club stores and vending retailers
through alliances with brokers specializing in these areas.
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) pullapart cakes; (d) bundt cakes, (e)
brownies sold under the Hershey's label, (f) crumb cakes, (g) iced and uniced
layer and sheet cakes, and (h) other private label specialty 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, 1999,
sales of T.J. Cinnamons branded products accounted for approximately 20% 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: Ralphs Supermarkets, Food-4-Less
Supermarkets, Lucky's Supermarkets, Fred Meyer Supermarkets, Fry's Supermarkets,
Ralley's Supermarkets, Albertsons Supermarkets, Bashas Supermarkets and Giant
Supermarkets. During the fiscal year ended December 31, 1999, approximately 60%
of the Company's sales were to Ralph's and Food-4-Less Supermarkets. 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
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sell products. Most mix manufacturers are looking to increase their business by
aligning with bakeries that can finish their products and market them as fully
baked and packaged products. The Company has developed new business through an
unwritten alliance with Caravan Products, one of its mix manufacturers, and the
Company believes that by strategically aligning itself with other manufacturers
will provide an opportunity for further sales growth. The Company anticipates
that these will be informal alliances benefiting the Company on a transaction by
transaction basis. There can be no assurance that the Company will be successful
in aligning itself with other mix manufacturers or that such alliances will
result in increased revenues.
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 which react to the demand of its customers and trends in
the in-store baking industry. Some of the new products under development are
yogurt cakes, tres letches cakes, and other specialty cakes. See "Risk Factors -
Competition; New Product Development."
CinnaChips. Company has developed a mass production process to produce
the T.J. Cinnamon branded CinnaChip products which are similar to bagel chips
made from cinnamon rolls utilizing a double bake process. The Company has
developed a 5.5 ounce CinnaChip bag for a retail price point of $2.49 to be sold
to supermarkets, mass merchandisers and food service accounts, and a 1.5 ounce
CinnaChip bag with a suggested retail selling price of $0.99 to be sold to
convenience stores, food service accounts, airline catering and vending outlets.
The Company has developed two additional flavor varieties of the CinnaChip for
introduction at a later date: Butter Pecan and Raisin Nut.
Plan of Operation. The Company's plan of operations for fiscal year
2000 calls for the implementation of the Company's overall strategy to build
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 the fiscal year 2000.
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 2000. See "Properties."
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
December 31, 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."
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Manufacturing and Distribution. The Company's existing production
facility is located in El Cajon, California. The lease for this facility expires
in November 2006, and provides for two 5 year extension options. The facility is
approximately 34,500 square feet and has an annual capacity estimated to be
approximately $15 million. The facility has blast freezers, freezers,
refrigerators, proofers, ovens, mixers, conveyers, 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.
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 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
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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,
the Occupational Safety and Health Administration (OSHA) 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 continually makes investments to comply with all federal,
state and local laws, environmental rules and regulations. To date, such
expenditures have not been material with respect to the Company's capital
expenditures, earnings or competitive position, and are not expected to be in
the future. 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 100 employees. 4
employees are employed in executive and administrative functions principally at
the Company's corporate offices in Secaucus, New Jersey; and 6 employees are
employed in executive and administrative functions in the Company's wholesale
bakery in El Cajon, California. The remaining 90 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.
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
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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. The Company anticipates that
it will be subject to an increase in competition from companies whose products
or marketing strategies address these consumer preferences.
The 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."
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, 1999, the Company's net operating loss was $1,016,694. 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, 1999,
the Company had a working capital balance of approximately $362,000. 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
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manufacture and sell T. J. Cinnamons branded products expired on December 31,
1998. Triarc has granted the Company extensions through March 31, 2000. T.J.
Cinnamons branded products accounted for approximately 20% of wholesale sales
for the fiscal year ending December 31, 1999. 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.
The Company does not have existing lines of credit, and there can be no
assurance that such debt financing will be available to the Company in the
future, or that additional debt or equity 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 would have an adverse effect on the Company's business, financial
condition and results of operations.
(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 bakery sweet goods, 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 without the replacement
of these products with new products which meet any changes in consumer
preferences.
(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,
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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 approximately 20% of wholesale sales
for the fiscal year ending December 31, 1999. The failure of the Company to
replace sales of T.J. 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 T.J. Cinnamons and CinnaChips trademarks 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 which the Company anticipates
financing through equipment leases. 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 chains.
During the fiscal year ended December 31, 1999, approximately 60% of the
Company's sales were to Ralph's Supermarkets and Food-4-Less Supermarkets, a
wholly owned subsidiary of Ralph's Supermarkets. The
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Company does not have a purchase agreement with Ralph's and Food-4-Less
Supermarkets, and as a result, 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 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 loss of services of either of these two individuals would have an
adverse effect on the Company's business, financial condition and results of
operations.
(l) Dependence Upon Other Personnel. The Company is 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.
(m) 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.
(n) 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
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successful and of sufficient magnitude, could have a material adverse effect on
the Company's business, financial condition and results of operations.
(o) 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 of the Company's securities
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 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.
(p) 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.
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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. Since
the Company's securities are 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.
(q) 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.
(r) 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. Members
of management, if acting in concert, will have sufficient voting power to
control the outcome of all corporate matters submitted to the vote of
shareholders, including the election of directors, changes in the size and
composition of the Board of Directors, mergers, tender offers, and open-market
purchase programs that could give shareholders of the Company the opportunity to
realize a premium over the then-prevailing market price for their shares. In
addition, the concentration of ownership in several members of management could
have the effect of delaying or preventing a change in control of the Company and
may effect the market price of the Company's common stock.
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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, 2000. The lease provides for a fixed rent of approximately
$3,800 per month. The Company anticipates continuing its occupancy on a
month-to-month lease following the expiration of the term.
The Company leases its wholesale bakery production facility located in El Cajon,
California with the lease term expiring in November 2006. The lease has a
minimum base occupancy charge of $15,800 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 served 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 itself against 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 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock and Class B Warrants are currently traded on
the OTC Bulletin Board ("OTC") under the symbols "TJCI" 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, 1998 and December 31, 1999. These prices reflect
inter-dealer 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, 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
Quarters Ending:
March 31, 1999 ....................... $.29 $13/16
June 30, 1999 ........................ .29 5/16
September 30, 1999 ................... 3/16 3/8
December 31, 1999 .................... 1/8 5/16
The approximate number of stockholders of the Common Stock on record at
December 31, 1999 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, 1997, 1998 and 1999:
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1. 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.
2. 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.
3. 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 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.
4. 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.
5. 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.
6. In 1999, the Company authorized the issuance of 19,500 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 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, 1999
compared to the fiscal year ended December 31, 1998).
The following tables set forth the components of the Company's revenue:
Fiscal Year Ended December 31,
1999 1998
---------- ----------
Wholesale sales $4,392,570 $4,409,441
Company-owned bakery sales 0 86,227
Royalties and licensing fees 0 80,000
---------- ----------
Total Revenue $4,392,570 $4,575,668
Wholesale sales decreased by less than 1% to $4,392,570 for the fiscal
year ended December 31, 1999 from $4,409,411 for the fiscal year ended December
31, 1998. This decrease was primarily the result of a 32% decrease in wholesale
for the six months ended June 30, 1999 as compared to the prior year due to the
cancellation of a sales program with Walmart Super Centers. This decrease was
partially offset by a 42% increase in wholesale sales for the six months ended
December 31, 1999 as compared to the prior year due to the introduction of the
Company's products into new accounts and the development of new gourmet bakery
products. Sales of T.J. Cinnamons branded products accounted for approximately
47% of wholesale sales for the fiscal year ended December 31, 1998 which
decreased to 20% of wholesale sales for the fiscal year ended December 31, 1999.
See "Risk Factors - Loss of Sales from Failure to Renew the Triarc License
Agreement."
Company-owned bakery sales were $0 for the fiscal year ended December
31, 1999 as compared to $86,227 for the fiscal year ended December 31, 1998.
This change resulted from the closing of the retail bakery located in the
Poughkeepsie Galleria Mall in July 1998. The closing of the Poughkeepsie bakery
was one of the conditions of the Triarc agreement.
Royalty and licensing fee revenues decreased to $0 for the fiscal year
ended December 31, 1999 as compared to $80,000 for the fiscal year ended
December 31, 1998. This change resulted from the elimination of franchise
royalty fees as a result of the Triarc transaction in August 1998 whereby the
Company sold all of its rights in the T.J. Cinnamons retail franchise system.
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Cost of goods sold decreased to $3,481,847, or 79% of net wholesale
sales, for the fiscal year ended December 31, 1999, as compared to $3,645,956,
or 83% of net wholesale sales, for the fiscal year ended December 31, 1998. This
decrease resulted from decreases in ingredient and packaging costs based on a
focused procurement effort, and decreases in labor costs due to increased
automation and production efficiencies.
Selling, general and administrative expenses decreased by 8% to
$1,977,526 for the fiscal year ended December 31, 1999 from $2,155,823 for the
fiscal year ended December 31, 1998. This decrease was primarily the result of
management's implementation of a cost containment program which resulted in
reduced management payroll, professional fees and other corporate general and
administrative costs.
Gain from sale of assets was $0 for fiscal year ended December 31, 1999
as compared to $3,312,410 for the fiscal year ending December 31, 1998. 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 $0 for the fiscal year ended
December 31, 1999 as compared to $129,192 for the fiscal year ended December 31,
1998. 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, 1999 decreased
to $18,232 as compared to $145,337 for the fiscal year ended December 31, 1998.
This decrease in interest expense resulted primarily from the decreased interest
expenses associated with the Company's short-term loans and accounts receivable
financing which were repaid in full out of the proceeds of the Triarc
transaction in August 1998.
Other income increased to $68,341 for the fiscal year ended December
31, 1999 from $0 for the fiscal year ended December 31, 1998. The forgiveness of
debt for the fiscal year ended December 31, 1999 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 loss of $1,016,694 for the fiscal year ended
December 31, 1999 as compared to a net gain of $1,811,770 for the fiscal year
ended December 31, 1998.
Liquidity and Capital Resources
At December 31, 1999, the Company had a working capital balance of
approximately $362,000. During the twelve months ended December 31, 1999, 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
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anticipated lines of credit, and the Company's anticipated cash from operations,
should be sufficient to satisfy the Company's cash needs through December 31,
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.
The Company used net cash in operating activities in the amount of
$799,202 for the fiscal year ended December 31, 1999, as compared to $1,734,544
for the fiscal year ended December 31, 1998. The Company used net cash in
investing activities in the amount of $9,659 for the fiscal year ended December
31, 1999, as compared to net cash received from investing activities in the
amount of $2,661,401 for the fiscal year ended December 31, 1998. The Company
received net cash from financing activities in the amount of $213,965 for the
fiscal year ended December 31, 1999 as compared to net used in financing
activities in the amount of $258,545 for the fiscal year ended December 31,
1998.
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 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.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 13(a)(1) in Part IV.
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ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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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, 1999.
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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, 1999.
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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, 1999.
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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, 1999.
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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
2. Exhibits
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
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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 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
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10.16* ........Lease regarding the El Cajon bakery facility
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 Starbake Brands, Inc.
27 ............Financial Data Schedule
- ---------------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 and the amendments thereto.
** Incorporated by reference from the Company's Annual Reports on Form
10-KSB for the fiscal years ended December 31, 1998, 1997, 1996 and 1995.
*** Incorporated by reference from 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, 1999.
-32-
<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 Loccisano Chairman, Chief March 29, 2000
- ------------------------ Executive Officer
Charles N. Loccisano and Director
(Principal Executive
Officer)
/s/ Alan Gottlich President, Chief March 29, 2000
- ------------------------ Financial Officer
Alan S. Gottlich and Director
(Principal Financial and
Accounting Officer)
/s/ Philip Friedman Director March 29, 2000
- ------------------------
Philip Friedman
/s/ Paul Bergrin Director March 29, 2000
- ------------------------
Paul Bergrin
-33-
<PAGE>
PARAMARK ENTERPRISES, INC.
(Formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
For the Years Ended
December 31, 1999 and 1998
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-14
<PAGE>
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, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1999 and
1998. 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, 1999 and 1998, and the results of their operations and their cash flows for
the years ended December 31, 1999 and 1998, in conformity with generally
accepted accounting principles.
/s/ Amper, Politziner & Mattia P.A.
AMPER, POLITZINER & MATTIA P.A.
February 8, 2000
Edison, New Jersey
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
Assets
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current assets
Cash $ 195,977 $ 790,873
Accounts receivable, less allowance for
doubtful accounts of $87,500 385,462 326,217
Current maturities of notes receivable 375,000 500,000
Inventory 279,326 167,956
Prepaid expenses and other current assets, net 110,818 44,352
----------------- -----------------
1,346,583 1,829,398
Property and equipment, net 867,964 517,140
Note receivable, net of current maturities - 375,000
----------------- -----------------
$ 2,214,547 $ 2,721,538
================= =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 927,915 $ 601,593
Current maturities of long-term debt 56,744 13,938
----------------- -----------------
984,659 615,531
Long-term debt, net of current maturities 226,681 55,522
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 3,393,383 and 3,373,883 shares 33,935 33,740
Additional paid-in capital 6,822,032 6,813,704
Accumulated deficit (5,813,653) (4,796,959)
----------------- ------------------
1,042,314 2,050,485
Less treasury stock, at cost (39,107) -
----------------- -----------------
Total stockholders' equity 1,003,207 2,050,485
----------------- -----------------
$ 2,214,547 $ 2,721,538
================= =================
</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>
1999 1998
---- ----
<S> <C> <C>
Revenue
Wholesale sales $ 4,392,570 $ 4,409,441
Sales from Company-owned stores - 86,227
Royalties, licensing fees and other - 80,000
------------------ -----------------
4,392,570 4,575,668
Cost of goods sold 3,481,847 3,645,956
------------------ -----------------
Gross margin 910,723 929,712
Selling, general and administrative 1,977,526 2,155,823
------------------ -----------------
Loss from operations (1,066,803) (1,226,111)
Other income (expense)
Gain on sale of assets - 3,312,410
Other income 68,341 -
Loss on relocation of bakery - (129,192)
Interest, net (18,232) (145,337)
------------------ ------------------
Net income (loss) $ (1,016,694) $ 1,811,770
================== =================
Basic earnings per share $ (.30) $ .57
Diluted earnings per share (.30) .56
Weighted-average common shares outstanding
Basic $ 3,390,925 $ 3,287,156
Diluted 3,390,925 3,328,892
</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>
Common Stock Additional Common Stock Total
------------ Paid-In Accumulated Held in Treasury Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
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 7) 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
Issuance of common
stock for services 19,500 195 8,328 - - - 8,523
Purchase of common
stock held in treasury - - - - 40,800 (39,107) (39,107)
Net loss - - - (1,016,694) - - (1,016,694)
----------- ---------- ----------- ------------- --------- ---------- ------------
Balance at December 31, 1999 3,393,383 $ 33,935 $ 6,822,032 $ (5,813,653) 40,800 $ (39,107) $ 1,003,207
=========== ========== =========== ============= ========= ========== ===========
</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>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,016,694) $ 1,811,770
---------------- --------------
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 119,727 129,477
Noncash stock issuance 8,523 57,150
Provision for doubtful accounts 30,000 (6,500)
Gain on sale of assets - (3,312,410)
Loss on relocation of bakery - 129,192
(Increase) decrease in
Accounts receivable (89,245) (60,206)
Inventories (111,370) 66,866
Prepaid expenses and other current assets (66,466) (9,061)
Increase (decrease) in
Accounts payable and accrued expenses 326,323 (540,822)
---------------- ---------------
Total adjustments 217,492 (3,546,314)
---------------- ---------------
(799,202) (1,734,544)
---------------- ---------------
Cash flows from investing activities
Purchases of property and equipment (470,552) (201,739)
Purchase of treasury stock (39,107) -
Proceeds from sale of assets - 3,668,303
Issuance of note receivable - (1,000,000)
Principal payments received on notes receivable 500,000 194,837
---------------- --------------
(9,659) 2,661,401
---------------- --------------
Cash flows from financing activities
Principal payments on long-term debt (25,288) (858,545)
Proceeds from issuance of long-term debt 239,253 600,000
---------------- --------------
213,965 (258,545)
---------------- ---------------
Net change in cash (594,896) 668,312
Cash - beginning 790,873 122,561
---------------- --------------
Cash - ending $ 195,977 $ 790,873
================ ==============
</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 - Liquidity
---------
Although Paramark Enterprises, Inc. (formerly T. J. Cinnamons,
Inc.) and Subsidiary (the "Company") had operating losses during
1999, the Company anticipates profits during 2000 due to increased
sales through the placement of product in more retail stores which
is anticipated to provide sufficient working capital to meet its
needs for the current year.
Note 2 - Principal Business Activity and Sale of Assets
----------------------------------------------
Operations
----------
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 earned nor received any additional payments as of December 31,
1999.
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.
F-6
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 2 - Principal Business Activity and Sale of Assets - (continued)
----------------------------------------------
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.
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 extensions of the term of this license agreement through
March 31, 2000, and the Company anticipates that Triarc will
continue to renew this license agreement at the end of its current
term.
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
-------------------
Revenue is recognized on specialty bakery products when the
product is shipped. Management establishes estimated accruals for
sales returns from customers.
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 December 31,
1999, the Company had approximately $225,000 invested with one
financial institution.
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)
------------------------------------------
Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out
basis) or market, and consists principally of raw materials.
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
------------------
Basic earnings per share ("EPS") is computed by dividing net
income by the weighted average common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
Note 4 - Note Receivable
---------------
Note receivable from Triarc, as a result of the assignment of the
T. J. Cinnamons, Inc.'s License Agreements (Note 2), 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
Note 5 - Property and Equipment
----------------------
<TABLE>
<S> <C>
Furniture and fixtures $ 68,195
Equipment 836,725
Leasehold improvements 72,507
Construction in progress 139,934
---------------
1,117,361
Less accumulated depreciation and amortization (249,397)
----------------
$ 867,964
===============
</TABLE>
Note 6 - Capital Lease Obligations
-------------------------
The Company has entered into various capital leases for equipment
expiring through 2004, with aggregate monthly payments of $8,535.
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of
the net minimum lease payments as of December 31, 1999.
<TABLE>
<CAPTION>
For the Years Ending
December 31,
--------------------
<S> <C>
2000 $ 102,411
2001 102,411
2002 95,112
2003 57,821
2004 42,292
Thereafter -
---------------
Total minimum lease payments 400,047
Less: amount representing interest 116,622
---------------
Present value of net minimum lease payments 283,425
Less: current maturities 56,744
---------------
Long-term maturities $ 226,681
===============
</TABLE>
The present value of minimum future obligations shown above is
calculated based on interest rates ranging from 8.6% to 19.9%,
with a weighted average of 17.8% determined to be applicable at
the inception of the lease.
Note 7 - Related Party Transactions
--------------------------
Included in accounts payable and accrued expenses are amounts due
to officers of $7,500 at December 31, 1998, 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.
F-9
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 7 - Related Party Transactions - (continued)
--------------------------
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
were $18,500.
Note 8 - Income Taxes
------------
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Loss carryforwards $ 1,561,000 $ 686,000
Installment gain on sale of assets 127,000 877,000
Allowance for doubtful accounts 23,000 23,000
-------------- --------------
Gross deferred tax asset 1,711,000 1,586,000
Valuation allowance (1,711,000) (1,586,000)
-------------- ---------------
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, 1999, the Company has the following net operating
loss carryforwards.
<TABLE>
<CAPTION>
Expiration Date
December 31,
------------
Federal State
<S> <C> <C>
2000 $ - $ 626,000
2001 - 1,306,000
2002 - 1,298,000
2006 - 535,000
2008 257,000 -
2009 1,307,000 -
2010 1,299,000 -
2012 199,000 -
2013 307,000 -
2019 535,000 -
---------------- --------------
$ 3,904,000 $ 3,765,000
================ ==============
</TABLE>
The valuation reserve has been established for those tax credits,
loss carryforwards and deductible temporary differences which are
not presently considered more likely than not to be realized.
F-10
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 8 - Income Taxes - (continued)
------------
The statutory income tax rate differs from the effective tax rate
used in the financial statements as a result of the current year
net operating losses, the benefit of which is not being recognized
in the current year. The valuation allowance increased $125,000 in
1999 due to additional net operating loss carryforwards.
Note 9 - 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:
Risk-free interest rate 5.7%
Expected volatility 175%
Dividend yield -
Expected life 5 years
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>
1999 1998
---- ----
<S> <C> <C>
Pro forma net income (loss) $ (986,694) $ 1,811,770
Pro forma income (loss) per share
Basic $ (.29) $ .44
Diluted (.29) .43
</TABLE>
There was no compensation expense recorded from stock options for
the years ended December 31, 1999 and 1998.
F-11
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 9 - Stock Option Plan - (continued)
-----------------
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
------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding
December 31, 1997 1,177,812 $ 1.62 1,097,812 $ 1.61
Granted 716,672 .50
Exercised - -
Terminated (1,051,000) 1.59
-------------
Outstanding
December 31, 1998 843,484 .65 723,484 .67
Granted - -
Exercised - -
Terminated (57,500) 1.59 665,000 .59
------------- --------- ----------- -----------
Outstanding
December 31, 1999 785,984 $ .58 665,000 $ .59
Weighted-average fair
value of options granted
during the year
1999 1998
---- ----
Where exercise price
equals stock price $ .58 $ .65
</TABLE>
Following is a summary of the status of stock options outstanding
at December 31, 1999:
<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>
$ .50 - .50 736,984 3.0 $ .50 616,984 $ .50
$ 1.58 - 1.94 49,000 6.3 $ 1.74 49,000 $ 1.21
</TABLE>
The Company has outstanding 557,750 redeemable Class B warrants,
each to purchase one share of common stock for $5. No warrants
have been redeemed through December 31, 1999. The Class B
warrants expire May 2001.
F-12
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 10 - Supplemental Cash Flow Information
----------------------------------
During the year ended December 31, 1999, the Company issued
19,500 shares of its common stock as payment for consulting
services rendered and interest expense on certain debt
obligations in the amount of $8,523 and $57,150, respectively,
the fair value of the shares on the dates of issuance.
During the years ended December 31, 1999 and 1998, the Company
paid interest of $11,000 and $169,000, respectively.
Note 11 - Major Customers
---------------
The Company had two major customers who accounted for 74% of
wholesale sales for 1999 and 85% for 1998. These same customers
accounted for substantially all of the Company's accounts
receivable as of December 31, 1999 and 1998.
Note 12 - Commitments and Contingencies
-----------------------------
Rent
----
The Company leases space for its main offices and wholesale
bakery operation under noncancelable operating leases.
Aggregate minimum annual payments due under these leases are as
follows:
Year Ending
December 31,
------------
2000 $ 236,000
2001 190,000
2002 190,000
2003 190,000
2004 190,000
Thereafter 316,000
---------------
Total minimum payments required $ 1,312,000
===============
Rent expense charged to operations for the years ended December
31, 1999 and 1998, amounted to $158,000 and $129,000,
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 13 - Year 2000
---------
All of the Company's internal operating systems were compliant as
of December 31, 1999, however, Year 2000 problems may not surface
until after January 1, 2000. Management estimates that the costs
associated with any additional activities will not have a material
effect on the Company's operations.
F-13
<PAGE>
PARAMARK ENTERPRISES, INC.
(formerly T. J. Cinnamons, Inc.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 14 - 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, 2001. Adoption of this statement is not expected to have a
material effect on the Company's financial position or results of
operations.
F-14
EXHIBIT 21
SUBSIDIARIES
Percentage State of
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
Paramark Enterprises, Starbake Brands, Inc. 100% Delaware
Inc. (Formerly Interbake
Brands, Inc.)
INDEPENDENT AUDITORS' CONSENT
We consent to the Incorporation of our report dated February 8, 2000, on the
financial statements of Paramark Enterprises, Inc. and Subsidiary as of December
31, 1999 and 1998, and for the years then ended, which is included in the Annual
Report on Form 10K of Paramark Enterprises, Inc. and Subsidiary.
/s/ Amper, Politziner & Mattia P.A.
March 20, 2000
Edison, New Jersey
<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, 1999 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 195,997
<SECURITIES> 0
<RECEIVABLES> 847,962
<ALLOWANCES> 87,500
<INVENTORY> 279,326
<CURRENT-ASSETS> 1,346,583
<PP&E> 1,117,361
<DEPRECIATION> 249,397
<TOTAL-ASSETS> 2,214,547
<CURRENT-LIABILITIES> 984,659
<BONDS> 0
0
0
<COMMON> 33,935
<OTHER-SE> 969,272
<TOTAL-LIABILITY-AND-EQUITY> 2,214,547
<SALES> 4,392,570
<TOTAL-REVENUES> 4,392,570
<CGS> 3,481,847
<TOTAL-COSTS> 5,459,373
<OTHER-EXPENSES> (68,341)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,232
<INCOME-PRETAX> (1,016,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,016,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,016,694)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
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