U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _______ to _______
PARADISE TAN, INC.
(Exact name of small business issuer as specified in its charter)
Texas | 75-2524355 |
(State or other jurisdiction of | (IRS Employer Identification No.) |
incorporation or organization) | |
6700 Denton Highway, Suite H, Watauga, Texas 76148
(Address of principal executive offices)
(817)581-2366
(Issuer's telephone number)
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 [ ]
Number of shares of common stock outstanding as of May 20, 2005: 23,384,114
Number of shares of preferred stock outstanding as of May 20, 2005: 135,998
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| PART II | |
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| Item 6.Exhibits | 18 |
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Consolidated Balance Sheet |
At March 31, 2005 (unaudited) |
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ASSETS | | | |
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CURRENT ASSETS | | | |
| Cash (unrestricted) | | $ | 35,609 | |
| Cash (restricted) | | | 647,844 | |
| Accounts receivable | | | 25,517 | |
| Inventory | | | 10,052 | |
| TOTAL CURRENT ASSETS | | | 719,022 | |
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FIXED ASSETS | | | | |
| Office equipment | | | 30,473 | |
| Furniture and fixtures | | | 24,788 | |
| Tanning equipment | | | 1,253,262 | |
| Transportation equipment | | | 26,119 | |
| Leasehold improvements | | | 257,552 | |
| Accumulated depreciation | | | (848,146 | ) |
| NET FIXED ASSETS | | | 744,048 | |
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OTHER ASSETS | | | | |
| Deposits | | | 13,974 | |
| TOTAL OTHER ASSETS | | | 13,974 | |
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| TOTAL ASSETS | | $ | 1,477,044 | |
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LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | |
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CURRENT LIABILITIES | | | | |
| Accounts payable and accrued expenses | | $ | 118,608 | |
| Accounts payable - related parties | | | 137,101 | |
| Current portion of notes payable | | | 1,330,734 | |
| Current portion of capitalized lease obligation | | | 47,147 | |
| TOTAL CURRENT LIABILITIES | | | 1,633,590 | |
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LONG-TERM LIABILITIES | | | | |
| Notes payable | | | 34,651 | |
| Capitalized lease obligation | | | 57,625 | |
| Accrued interest on preferred stock | | | 353,595 | |
| TOTAL LONG-TERM LIABILITIES | | | 445,871 | |
| TOTAL LIABILITIES | | | 2,079,461 | |
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STOCKHOLDERS' DEFICIT | | | | |
| Common stock (100,000,000 shares authorized, 23,384,114 | | | | |
| shares issued and outstanding, par value $.01) | | | 233,841 | |
| Common stock subscription receivable | | | (28,000 | ) |
| Preferred stock 8% cumulative (1,000,000 shares authorized, | | | | |
| 135,998 shares issued and outstanding, par value $10) | | | 1,359,980 | |
| Additional paid-in capital | | | 3,350,184 | |
| Retained deficit | | | (5,518,422 | ) |
| TOTAL STOCKHOLDERS' DEFICIT | | | (602,417 | ) |
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| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 1,477,044 | |
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| See notes to financial statements. |
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Consolidated Statements of Operations |
For the Three Months Ended March 31, 2005 and 2004 |
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| | | 2005 | | 2004 | |
REVENUES AND RELATED COSTS | | | | | |
| Tanning services from company operated salons | | $ | 234,378 | | $ | 237,310 | |
| Product sales from company operated salons | | | (20,878 | ) | | (20,218 | ) |
| NET REVENUES | | | 213,500 | | | 217,092 | |
| Cost of product sales from company operated salons | | | - | | | - | |
| GROSS PROFIT | | | 213,500 | | | 217,092 | |
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EXPENSES: | | | | | | | |
| Advertising | | $ | 44,264 | | $ | 14,299 | |
| Auto and truck | | | 2,875 | | | 3,026 | |
| Bank and credit card charges | | | - | | | 1,841 | |
| Commissions | | | 2,898 | | | 2,691 | |
| Consulting fees | | | 8,000 | | | 33,905 | |
| Contract labor | | | 182 | | | 146 | |
| Depreciation | | | 66,500 | | | 45,256 | |
| Directors fees | | | - | | | 4,500 | |
| Dues and subscriptions | | | 23 | | | - | |
| Employee benefits | | | 328 | | | 598 | |
| Equipment rental | | | 404 | | | 1,993 | |
| Insurance | | | 6,351 | | | 3,733 | |
| Licenses and taxes | | | - | | | 8,531 | |
| Miscellaneous | | | 5,069 | | | 315 | |
| Office expense | | | 2,073 | | | 590 | |
| Operational expense | | | 12,029 | | | 12,248 | |
| Outside services | | | 3,161 | | | 1,897 | |
| Printing | | | - | | | 1,397 | |
| Postage and freight | | | 495 | | | 156 | |
| Professional fees | | | 26,704 | | | 828 | |
| Rent | | | 58,601 | | | 50,042 | |
| Repairs and maintenance | | | 922 | | | 2,088 | |
| Salaries and related taxes | | | 91,297 | | | 82,240 | |
| Telephone | | | 5,333 | | | 1,929 | |
| Utilities | | | 1,439 | | | 3,565 | |
| TOTAL EXPENSES | | | 338,948 | | | 277,814 | |
| OPERATING (LOSS) | | | (125,448 | ) | | (60,722 | ) |
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OTHER INCOME (EXPENSE): | | | | | | | |
| Gain on sale of equipment | | | - | | | 9,702 | |
| Other income (expense) | | | 27,179 | | | (1,914 | ) |
| Interest expense | | | (41,914 | ) | | (35,071 | ) |
| | | | (14,735 | ) | | (27,283 | ) |
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| NET LOSS | | $ | (140,183 | ) | $ | (88,005 | ) |
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| Basic Loss per Share | | $ | (0.006 | ) | $ | (0.004 | ) |
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| Fully Diluted Loss per Share | | $ | (0.006 | ) | $ | (0.004 | ) |
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| Weighted Average Shares Outstanding | | | 23,384,114 | | | 20,384,114 | |
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| See notes to financial statements. |
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Consolidated Statement of Stockholders' Deficit |
For the Three Months Ended March 31, 2005 |
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| | | | | | | | | | | Additional | | | |
| | | Common | | Common | | Preferred | | Preferred | | Paid in | | Retained | |
| | | Stock | | Shares | | Stock | | Shares | | Capital | | Deficit | |
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| Balances, January 1, 2005 | | $ | 233,841 | | | 23,384,114 | | $ | 1,359,980 | | | 135,998 | | $ | 3,350,184 | | $ | (5,378,239 | ) |
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| Net loss for quarter | | | - | | | - | | | - | | | - | | | - | | | (140,183 | ) |
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| Balances, March 31, 2005 | | $ | 233,841 | | | 23,384,114 | | $ | 1,359,980 | | | 135,998 | | $ | 3,350,184 | | $ | (5,518,422 | ) |
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| See notes to financial statements. |
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Consolidated Statements of Cash Flows |
For the Three Months Ended March 31, 2005 and 2004 |
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| | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net loss | | $ | (140,183 | ) | $ | (88,005 | ) |
| Adjustments to reconcile net loss to net | | | | | | | |
| cash used in operating activities: | | | | | | | |
| Depreciation | | | 66,500 | | | 45,256 | |
| Gain on sale of fixed assets | | | - | | | (9,702 | ) |
| Accrued interest on preferred stock | | | 27,200 | | | 27,200 | |
| (Increase) decrease in operating assets: | | | | | | | |
| Accounts receivable | | | (25,517 | ) | | (8,685 | ) |
| Increase (decrease) in operating liabilities: | | | | | | | |
| Accounts payable and accrued expenses | | | (8,051 | ) | | (33,671 | ) |
| Accounts payable - related parties | | | 28,806 | | | (351,937 | ) |
| NET CASH (USED IN) OPERATING ACTIVITIES | | | (51,245 | ) | | (419,544 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | |
| Purchases of fixed assets | | | (21,081 | ) | | (76,407 | ) |
| NET CASH (USED IN) INVESTING ACTIVITIES | | | (21,081 | ) | | (76,407 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Borrowings of notes payable | | | 126,297 | | | 524,741 | |
| Repayments of notes payable | | | (55,750 | ) | | (102,584 | ) |
| Collection of note receivable | | | 26,996 | | | - | |
| Principal repayments on capitalized lease obligation | | | (7,717 | ) | | (2,871 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 89,826 | | | 419,286 | |
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| NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 17,500 | | | (76,665 | ) |
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CASH AND CASH EQUIVALENTS: | | | | | | | |
| Beginning of period | | | 665,953 | | | 702,725 | |
| End of period | | $ | 683,453 | | $ | 626,060 | |
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| See notes to financial statements. |
PARADISE TAN, INC. & SUBSIDIARY
MARCH 31, 2005 (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly our financial position at March 31, 2005, the results of operations for the three month periods ended March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. The results for the period ended March 31, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2005. These financial statement should be read in conjunction with the financial statements and notes for the year ended December 31, 2004 appearing in our annual report on Form 10-KSB as filed with the Securities and Exchange Commission.
Revenue Recognition - We currently operate tanning salons in and around the Dallas/Fort Worth, Texas metropolitan area and in Arizona. All salons are operated by us, or under the terms of franchise and license agreements, by franchisees who are independent entrepreneurs or by licensees operating under license agreements between local business people and us.
Management's Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Per Share - Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the periods. Diluted income per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were 5,739,995 common stock equivalents (CSE) excluded from the computation of diluted loss per share.
Fixed Assets -Fixed assets are recorded at cost and include expenditures that substantially increase the productive lives of the existing assets. Maintenance and repair costs are expensed as incurred. Depreciation is provided using the straight-line method. Depreciation of property and equipment is calculated over the management prescribed recovery periods, which range from 5 years for equipment to 7 years for tanning beds.
When a fixed asset is disposed of, its cost and related accumulated depreciation are removed from the accounts. The difference between undepreciated cost and proceeds from disposition is recorded as a gain or loss.
Long-lived assets - In accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", long-lived assets and certain identifiable intangible assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long- lived assets. We review long-lived assets to determine that carrying values are not impaired.
Fair value of financial instruments - Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. The carrying amounts of financial instruments including inventory, notes receivable, accounts payable and accrued expenses approximated fair value because of the immediate short-term maturity of these instruments.
NOTE 2 - SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131,“Disclosures about Segments of an Enterprise and Related Information”requires companies to report information about operating segments in interim and annual financial statements. It also requires segment disclosures about products and services, geographic areas and major customers. The Company determined that it did not have any material, separately reportable operating segments as of March 31, 2005 and 2004.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In prior years, we entered into a Finance Agreement with an unrelated consulting entity. As part of the agreement, we retained the services of this entity on a 90 day exclusive basis for the purpose of raising debt capital in the initial request of $10,000,000. We are committed to paying this entity a success fee of seven percent on the amount of funds received as a result of its efforts on the initial request and ninety percent of this aforementioned fee on funds in excess of the initial request. The initial amount under contract was increased to $20,000,000 in 2003.
In prior years, we also entered into an agreement with an unrelated merchant banking entity. As part of the agreement, we retained the exclusive services of this entity for the purpose of providing financial advisory, investment banking and other consulting services in connection with our efforts to raise capital. We are committed to paying this entity a cash fee of five percent on the amount of loans received as a result of its efforts and an additional common stock fee of two percent of the common shares outstanding at the signing of the agreement, payable upon success only.
In prior years, we also entered into a $10,000,000 Stock Purchase Agreement with an unrelated entity. As part of the agreement, we agreed to sell up to $10,000,000 of its common stock to this entity. This agreement supersedes the previous $3,000,000 equity agreement entered into in 2003. No specific terms such as discounts, etc. were set forth. All common shares must be registered and approved as free trading with the Securities and Exchange Commission. As of the date of this report, no actual common stock has been sold pursuant to this agreement.
Pursuant to a unanimous vote at the Board of Directors meeting dated April 16, 2003, we approved and are committed to pay a related entity of one of our directors an amount equal to fifty percent of the monies collected from equity financings to be applied towards consulting work.
We are committed to three employment agreements at December 31, 2004 through various dates.
Pursuant to one of the agreements, our Co-Treasurer shall receive an annual base salary of $6,000 originally through September 1, 2004. The term was automatically extended for an additional two year period. Upon the successful completion of a certain financing package with Chuckanut Capital Group, Ltd., this executive’s base salary will be increased to $8,000 within three months following the successful completion date.
Pursuant to one of the other agreements, our Vice President shall receive an annual base salary of $6,000 through August 5, 2004. The term was automatically extended for an additional two year period. Upon the successful completion of a certain financing package with Chuckanut Capital Group, Ltd., this executive’s base salary will be increased to $8,000 within three months following the successful completion date.
Pursuant to one of the other agreements, the our President shall receive an annual base salary of $75,000 for a three year term through August 5, 2006. Upon the successful completion of a certain financing package with Chuckanut Capital Group, Ltd., this executive’s base salary will be increased to $120,000 within three months following the successful completion date. The base salary will be increased by a minimum of 5% on each anniversary of the commencement date.
We are committed to a consulting agreement at December 31, 2004. Pursuant to the agreement and related addendum dated September 1, 2004, we are obligated to pay a monthly payment of $10,000 to a related party corporation in exchange for financial consulting services. This corporation’s officer is our former Director. The agreement expires on May 15, 2008.
Operating lease commitments
We lease office space from third parties under various operating leases which expire on varying dates through September 2009 at various monthly rental payments. As of March 31, 2005, we have outstanding commitments with respect to the above non-cancelable operating leases.
Capital lease commitments
We are leasing salon equipment under three separate noncancelable capital leases that expire on various dates through April, 2007. The obligations under these capital leases have been recorded in the accompanying consolidated balance sheet at the net present value of the future minimum lease payments, discounted at an interest rate of 10%. The book value of the collective equipment was approximately $100,000 at March 31, 2005.
NOTE 4 - GOING CONCERN
We have suffered recurring losses from operations, has negative working capital, has a stockholders’ deficit, and has material restrictions on its cash as of March 31, 2005. In addition, we have yet to generate an internal cash flow from its business operations and has generated operating losses since its inception. These factors raise substantial doubt as to our ability to continue as a going concern.
Management’s plans with regard to these matters encompass the following actions: 1) obtain funding from new investors to alleviate our working deficiency, and 2) implement a plan to increase cash flows. Our continued existence is dependent upon its ability to resolve it liquidity problems and increase profitability in our current business operations. However, the outcome of management’s plans cannot be ascertained with any degree of certainty. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these risks and uncertainties.
NOTE 5 - COMMON STOCK AND RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2005, we did not issue any common or preferred shares or warrants.
NOTE 6 - LITIGATION
In prior years, we received a notice from the National Association of Securities Dealers requesting certain information about us. In our opinion, the effects of any negative ramifications to us are remote and immaterial.
We have a judgment filed against it in the amount of $63,881. This amount, along with unpaid interest, is included in accounts payable in the accompanying consolidated balance sheet at March 31, 2005.
We are hereby providing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward looking statements made in this quarterly report on Form 10-QSB. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "likely will result," "are expected to," "will continue," "is anticipated," "estimated," "intends," "plans" and "projection") are not historical facts and may be forward-looking statements and involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.
We caution that the factors described herein could cause actual results to differ materially from those expressed in any forward-looking statements and that the investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events or circumstances. Consequently, no forward-looking statement can be guaranteed.
New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Overview
We develop, market, franchise, license, and operate retail locations offering indoor tanning services and related products to the general public under the Paradise TanÔ name. "Indoor tanning" refers to the use of specially designed fluorescent lamps emitting specific wavelengths of ultraviolet light to cause a customer's skin to develop a tan in response. We are a Texas corporation formed in 1994.
We opened our first tanning center in 1994. During the first two years of operations, we opened three more tanning centers in the Dallas/Fort Worth, Texas area, bringing the total to four. In 1997, we opened its first concept indoor tanning center that would become the prototype for future locations. With the prototype center, we started its franchising program under Paradise Franchising International, Inc. (the “Franchise Company”), and our wholly owned subsidiary. Franchised locations pay us an initial franchise fee of $24,000 and monthly fees ranging from $250 to $350, based on gross revenues. Franchisees receive training, assistance in maintaining profitable operations and join in cooperative advertising programs. In 2001, we also started a licensing program. Licensees pay a flat monthly fee of $350; in return licensees are allowed to use the Paradise TanÔ name and logo and are part of the cooperative advertising program. Licensees do not receive training or operational assistance unless they pay additional consulting fees on a fee-for-service basis.
We currently have seven company-owned and operated indoor tanning centers and four franchised or licensed centers in the Dallas/Fort Worth and Phoenix Arizona metropolitan areas. Our current strategy is to repurchase all of the franchised or licensed locations in the Dallas/Fort Worth area and convert them to company-owned locations. The average Paradise TanÔ indoor tanning center consists of between 1,600 and 2,600 square feet of leased space located in retail shopping areas, with each location containing between eleven to twenty tanning beds and booths. In addition to providing tanning services, our locations sell private label lotions, shirts and other items. We are considering sales of other products we believe would be attractive to our customers, including nutritional bars and supplements. We can give no assurances that it will expand its product line or that any new products would be successful.
Most of our revenues are from sales of memberships in its indoor tanning centers. We also earn revenue from the sales of lotions and apparel, franchise fees and license fees. There are many levels of memberships and each entitles the member to use our facilities as often as desired, commensurate with safety considerations and level of the membership. See "Government Regulations." Memberships are sold on a pre-paid basis with a monthly payment option, but terms and conditions of memberships can be modified from time to time to reflect special offers, new store promotions and other discounts.
Industry Overview. The U.S. indoor tanning industry began in 1979. According to industry sources, the total U.S. indoor tanning industry is estimated to have annual revenues of over $5 billion in 2003, with an estimated 20,000 to 25,000 locations that concentrate strictly on tanning. The three largest segments of the indoor tanning industry are tanning sessions (services), the manufacture of tanning devices and the manufacture and sale of tanning lotions specifically designed for indoor tanning. Industry sources estimate that approximately 10,000 tanning beds are sold annually in the United States to retail indoor tanning locations, with a total installed base of approximately 178,000 units, at an average price of $7,000 per bed. These sales do not include home sales or other equipment and accessories. Currently, there are approximately 32 to 42 tanning lotion manufacturers, although that number varies. According to industry sources, the largest manufacturer of tanning products, ETS, Inc., produces revenues in excess of $40 million annually. The Company has targeted the largest segment of the indoor tanning industry, tanning services, as its primary business and the retail sale of indoor tanning lotions as its secondary objective.
Small independent operators currently dominate the indoor tanning service industry, the average operator having one or two locations in a single metropolitan area. These operators are traditionally undercapitalized and rely primarily upon their personal financial resources. Independently operated tanning centers usually offer limited choices to customers as to hours of operation and tanning devices and do not have standardized operating or marketing procedures. Most marketing by such operators is by word of mouth, local print advertising and couponing. After research, we have been unable to identify any single entity that accounts for more than 1% of the national indoor tanning services market. The Company believes the growing number of tanning centers, together with greater consumer acceptance of indoor tanning, has resulted in significant increases in industry sales, with steady revenue growth over the past three years.
Business Strategy. Our business strategy is designed to achieve further growth in the indoor tanning services industry, to utilize its concept store to dominate any market area it enters, to establish a national corporate presence and to develop consumer recognition of the Paradise TanÔ and Paradise Tanning CentersÔ names.
The tanning services segment of the market consists almost exclusively of small independently owned indoor tanning centers that offer limited hours of access with two to ten tanning beds. Management believes that the current state of the indoor tanning industry is comparable to the videotape rental industry approximately ten years ago. During the early 1980's, independent videotape rental stores dominated that industry and offered a limited number of movie titles from small shops during limited operating hours. Since that time, the videotape rental industry has become dominated by a small number of large companies offering larger stores, substantially larger product inventories and increased hours of operation, along with a wide variety of related products and services (videotape sales, used tape sales, equipment, popcorn, candy and the like). These larger and better capitalized operators have eliminated much of the independent competition and captured significant market share.
We already developed a standard concept for providing indoor tanning services. Since we opened our first indoor tanning center in 1994, we have refined the concept through a number of evolutionary changes. These refinements have included more sophisticated management and operational control systems than found in typical tanning stores, distinctive interior and exterior designs, standardized color schemes, uniform store layouts and facilities. We are confident that the concept store has been sufficiently refined for introduction into new markets.
The concept store is an integrated marketing approach evident in both the exterior and interior of the stores. Each new Paradise TanÔ indoor tanning center has a standardized design and color scheme that combine to give each store a consistent architectural look. Each 1,600 to 2,600 square foot concept store is equipped with eleven to twenty state of the art tanning beds and booths. With average tanning sessions of ten to twenty minutes, members have continuous access and availability of equipment to fit individual tanning needs and schedules. A typical Paradise TanÔ indoor tanning center will operate somewhat longer hours than a typical family owned tanning center. Location hours vary by season. We believe that implementation of the concept store will force competitors within a market area to compete on a similar level, requiring them to raise significant capital within a short period of time or withdraw from the market.
Along with a standardized interior design, color scheme and upscale atmosphere, our Paradise TanÔ locations use a consistent set of management and financial information and control systems that we have developed. These control systems include the use of a computerized database to ensure that customers are tanning within safe limits for their age and skin type. We also require training of its employees and managers and those of its franchisees. The Company has the right to require its management, employees and those of its franchisees to attend continuing training if necessary. The use of management and financial control systems allows us to monitor the financial health of our company-owned locations and those of its franchisees; these controls include daily and weekly gross sales reports, monthly and quarterly profit and loss statements and annual financial statements for each Paradise TanÔ company-owned and franchised location.
Our next phase is to rapidly expand the number of indoor tanning centers in existing markets to increase market penetration and expand its market areas. Within the next fifteen months, we plan to open or acquire, on average, approximately one company-owned and operated store per quarter for the next six quarters, for a total of up to six new stores. Further expansion beyond this period will depend upon (i) our ability to generate sufficient cash flow from its operations to open additional stores, (ii) the use of franchising, (iii) successfully obtaining additional debt or equity capital through institutional borrowings or additional offerings or (iv) a combination of the above.
We currently estimate that the cost to construct and equip a Paradise TanÔ concept store is approximately $150,000 to $175,000. Of this amount, approximately $65,000 is required for leasehold improvements and equipment meeting our specifications and $85,000 to purchase tanning beds, booths and related equipment, inventory and miscellaneous expenses. The cost of acquisition of an existing indoor tanning center from a competitor and refurbishing it as a Paradise TanÔ indoor tanning center will vary from location to location.
One of the latest innovations in the tanning industry is UV Free Tanning. UV Free Tanning allows a person to get a tan with the application of a mist sprayed onto the skin to produce a tan. We are in talks with a manufacturer to utilize their equipment to supply our Paradise Tanning CentersÔ locations. We currently operate seven UV Free Tanning units with plans to expand this to all of our current and future locations.
We also plan to capitalize on growing consumer awareness of the Paradise TanÔ brand by offering a full line of tanning products, including lotions and accelerators. We do not currently plan to manufacture its own product lines, but intends to utilize contract manufacturers that will private label our formulations. We believe that offering its own tanning products on a national basis will promote brand recognition and benefit sales of its indoor tanning services.
Seasonality. The indoor tanning business is seasonal, with most memberships sold in the period from January through June. Paradise TanÔ uses an "autodraft" system, which automatically deducts monthly payments from a customer's bank account. This allows for cash flow throughout the year, but also allows the customer to cancel at any time. Customers may also put memberships "on hold," which allows the customer to remain as a member without having fees deducted for a set period of time.
Advertising and Promotion. We currently use several methods of advertising and promotion, including print and broadcast media in the two markets that it serves. Franchisees are required to participate in chain-wide advertising and local advertising. Most of our advertising dollars are spent in the local area through direct mail coupon offers. Each mailing is targeted by zones containing several postal zip codes that coincide with the market area of a particular store or group of stores. We place our direct mail advertising primarily with national direct mail advertising companies. As we expand, we can benefit from price reductions and preferential bookings offered by its advertising companies for larger mass mailings. We also uses billboards to target specific demographic market areas and as a general promotion to increase brand recognition with the general public. We have used television advertising on a seasonal basis. The main chain-wide advertising today consists of the expenses for developing and maintaining our website and related efforts to gain wider recognition of the Paradise TanÔ brand name in the industry and with consumers.
As the number of Paradise TanÔ indoor tanning centers in a market area becomes sufficient to justify an increase in the amount of the advertising budget devoted to broadcast advertising, we intend to expand its use of radio and television advertising. We also offer referral promotions to existing members, which has proven to be an effective low-cost marketing tool.
Trademarks. We have filed trademark applications with the United States Patent and Trademark Office (the "PTO") to obtain exclusive use of its trademarks Paradise TanÔ and Paradise Tanning CentersÔ and associated artwork. We regard our trademarks as valuable assets and believes they have significant value in the marketing of its services and associated products. We intend to protect its intellectual property vigorously against infringement. Since, however, we have yet received approval of its applications from the PTO, there can be no assurance that we will obtain the right of exclusive use of its trademarks. If the PTO fails to grant such trademark registrations, it could have a material adverse effect on our business, financial condition and results of operations.
Competition. Competition within the tanning services industry is extremely high, with an estimated 20,000 to 25,000 tanning centers nationwide. The indoor tanning services market is highly fragmented, with no one company having a national presence. When the Company opens a Paradise Tanning CenterÔ in a new market area, it must compete against established local operators that have gained name recognition with local consumers. Because the Company competes against numerous operators, there is a substantial likelihood that competitors in some markets will have significantly greater financial, advertising and marketing resources than the Company.
We compete on the basis of convenience, variety and quality of services offered, price, value, name recognition, advertising and marketing. In addition, we believe that its concept, which sets us apart from other competitors, will be an important factor in its ability to compete on a regional and national basis.
Although significant new competitors may enter a market in which we operate, we believe this risk is somewhat mitigated by barriers to entry, such as high start up costs and lead times necessary to develop management systems and to adequately train managerial personnel. We believe that our most significant competitive limitation has been the lack of capital necessary to implement its business strategy. Our limited capital has affected the scope of its advertising and promotional activities and the ability to expand its business through the opening of new locations within its current markets and to open centers in new markets.
Governmental Regulation. Both state and federal laws and regulations affect the indoor tanning services industry. The applicable federal laws and regulations do not affect us directly, but are primarily targeted at manufacturers of tanning booths, beds and other devices used by us in its day-to-day operations. The principal federal laws regulating the manufacture of indoor tanning devices are the Federal Food, Drug and Cosmetic Act administered by the Federal Food and Drug Administration (the "FDA"), the Public Health Service Act and the Radiation Control for Health and Safety Act. Because of the potential for injury and misuse of tanning devices, the FDA has issued stringent rules and regulations governing the manufacture and use of indoor tanning devices. These regulations include limits on the ultraviolet light emitted by indoor tanning devices, safe operation of such devices, timers, warning labels and the like.
We believe that the laws governing the manufacture and use of tanning devices are both necessary and appropriate. We purchase only indoor tanning devices that meet or exceed the standards required by the FDA. For the personal safety of its customers, our employee monitor the use of its tanning beds and booths to assure compliance with the FDA guidelines. Our tanning beds and booths are installed, maintained and repaired by qualified employees or contractors in accordance with manufacturer's specifications.
State regulation of the indoor tanning industry varies from state to state. Many states have no laws or regulations regarding indoor tanning. As of the date of this registration statement, twenty-eight states have either adopted or are in the process of adopting laws and regulations dealing with the indoor tanning industry. State laws primarily regulate the health and safety aspects of indoor tanning operations rather than regulating the indoor tanning devices used. Both Texas and Arizona have adopted the FDA rules regarding indoor tanning devices. Typically, states require a minimum customer age of 13 (with parental consent and supervision), use of protective eyewear during any tanning session, maintenance of proper exposure distance and maximum exposure time as recommended by the manufacturer and availability of suitable physical aids such as handrails. Texas requires a minimum age of 13 years, with parental consent. Arizona does not have an age limit. Our internal policies require that customers be at least 14 years old. Customers aged 14 and 15 years must be accompanied by a parent and have written parental consent. Customers that are 16 or 17 years old require written parental consent. Violation of the federal or state laws or regulations could result in criminal or civil penalties. Our internal controls allow us to monitor the compliance of our company-owned, franchised and licensed locations with the existing state regulations.
We currently operate in the states of Texas and Arizona, both of which have adopted laws and regulations regarding the indoor tanning industry. Both states require the licensing of indoor tanning facilities. In Texas, the indoor tanning regulations are administered by the Texas Department of Health. The Arizona Radiation Regulatory Agency enforces Arizona's indoor tanning regulations. Our locations meet or exceed the regulatory standards required by the Texas and Arizona laws and regulations.
We have designed its Paradise Tanning CenterÔ concept, including management controls and operating systems, to comply with applicable federal and state regulations and to monitor each location's compliance. Management believes that our operations meet or exceed the requirements of all applicable or proposed statutes and regulations.
RESULTS OF OPERATIONS
Net Loss
We had a net loss of $140,183 and $88,005, or $.006 and $.004 per common share for the three months ended March 31, 2005 and 2004, respectively. The change in net loss was primarily due to increased advertising, salaries and professional fees in 2005 compared to the same period in 2004.
Sales
Revenues decreased $2,932 or 1% to $234,378 for the three months ended March 31, 2005, from $237,310 for the three months ended March 31, 2004. The decrease was miniscule.
Expenses
Selling, general, and administrative expenses for the three months ended March 31, 2005 increased $61,134 or 22% to $338,948. In comparison with the three month period ended March 31, 2004, selling, general and administrative expenses increased due to increases in advertising, salaries and professional fees in 2005 compared to the same period in 2004. Depreciation increased $21,244 from $45,256 during the three months ended March 31, 2004 due to acquisitions of property in equipment since the prior period.
Liquidity and Capital Resources
On March 31, 2005, we had cash of $683,453 and a working capital deficit of $914,568. This compares with cash of $665,953 and a working capital deficit of $978,596 at December 31, 2004. The increase in cash and decrease in working capital deficit was due to an increase in net loss for the three months ended March 31, 2005 less the effects of depreciation. Operating activities had a net usage of cash in the amount of $51,245 during the three months ended March 31, 2005 reflecting an excess of expenditures over revenues and increased depreciation as mentioned above.
Net cash used in investing activities for the three months ended March 31, 2005 was $21,081 as compared with net cash used in investing activities of $76,407 for the three months ended March 31, 2004. The decrease in net cash used in investing activities is attributable to fewer purchases of property and equipment during the three months ended March 31, 2005 compared to the comparable period in 2004.
Net cash provided by financing activities for the three months ended March 31, 2005 was $89,826 as compared with net cash provided by financing activities of $419,286 for the three months ended March 31, 2004. The decrease in net cash provided by financing activities is attributable to more borrowings of notes payable in 2004 compared to a large infusion in 2005.
We do not have any material risk with respect to changes in foreign commodities prices or interest rates. We do not believe that we have any other relevant market risk with respect to the categories intended to be discussed in this item of this report.
Quarterly Evaluation of Controls
As of the end of the period covered by this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of (i) our disclosure controls and procedures ("Disclosure Controls"), and (ii) our internal control over financial reporting ("Internal Controls"). This evaluation ("Evaluation") was performed by our President, Chief Executive Officer and Treasurer, Ronald Schaefer ("CEO") and Daniel Sturdivant, our Chief Financial Officer. In this section, we present the conclusions of our CEO and CFO based on and as of the date of the Evaluation, (i) with respect to the effectiveness of our Disclosure Controls, and (ii) with respect to any change in our Internal Controls that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our Internal Controls.
CEO and CFO Certifications
Attached to this annual report, as Exhibits 31.1 and 31.2, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains the information concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete understanding of the topic presented.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to the Company is made known to the CEO and the CFO by others, particularly during the period in which the applicable report is being prepared. Internal Controls, on the other hand, are procedures which are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized, (ii) the Company's assets are safeguarded against unauthorized or improper use, and (iii) our transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with accounting principals generally accepted in the United States.
Limitations on the Effectiveness of Controls
Our management does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances so of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision -making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of a system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Scope of the Evaluation
The CEO and CFO's evaluation of our Disclosure Controls and Internal Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the Evaluation, the CEO and CFO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls, and to make modifications if and as necessary. Our external auditors also review Internal Controls in connection with their audit and review activities. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
Among other matters, we sought in our Evaluation to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether we had identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important for both the Evaluation, generally, and because the Rule 13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO disclose that information to our Board (audit committee), and to our independent auditors, and to report on related matters in this section of the annual report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions". These are control issues that could have significant adverse affect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce, to a relatively low level, the risk that misstatement cause by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employee in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Evaluation, and in each case, if a problem was identified; we considered what revisions, improvements and/or corrections to make in accordance with our ongoing procedures.
Conclusions
Based upon the Evaluation, the Company's CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to the Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented inconformity with accounting principals generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.
PART II. OTHER INFORMATION
In prior years, we received a notice from the National Association of Securities Dealers requesting certain information about us. In our opinion, the effects of any negative ramifications to us are remote and immaterial.
We have a judgment filed against it in the amount of $63,881. This amount, along with unpaid interest, is included in accounts payable in the accompanying consolidated balance sheet at March 31, 2005.
None.
None.
None.
None.
(a) Exhibits.
(b) On January 10, 2005, we filed an 8-K regarding a resignation of our director from the board.
(c) - --Signature page follows-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARADISE TAN, INC.
(Registrant)
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| | PARADISE TAN, INC. (Registrant) |
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| Date: May 20, 2005 | By: | /s/ Daniel Sturdivant |
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Daniel Sturdivant Chief Financial Officer |
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| Date: May 20, 2005 | By: | /s/ Ronald Schaefer |
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Ronald Schaefer President and Treasurer |
