Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB-Quarterly or Transition Report
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 0-23026
Paramark Enterprises, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 22-3261564
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
135 Seaview Drive, Secaucus, New Jersey 07094
(Address of principal executive offices)
201-422-0910
(Issuer's telephone number including area-code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
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 * No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date:
Common Stock, $.01 par value - 2,925,833 shares as of November 12, 1996
Paramark Enterprises Inc.
Part I FINANCIAL INFORMATION
Item I FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Balance Sheets at December 31, 1995 and 3
September 30, 1996.
Statement of Operations for the three months 4
ended September 30, 1995 and September 30, 1996 and
for the nine months ended September 30, 1995 and
September 30, 1996.
Statement of Cash Flows for the nine months ended 5
September 30, 1995 and September 30, 1996.
Notes to Financial Statements 6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
Part II OTHER INFORMATION 13
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
PARAMARK ENTERPRISES, INC.
BALANCE SHEET
December 31, September 30,
1995 1996
(Audited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $51,677 $337,802
Accounts receivable, less allowance for doubtful accounts 179,066 104,923
Notes Receivable - short term 0 1,370,000
Prepaid expenses and other current assets 28,065 5,220
----------- -----------
Total current assets 258,808 1,817,946
Property and Equipment, less accumulated
depreciation and amortization 49,644 43,205
Excess of Cost over Fair Value of Net Assets Acquired 2,348,374 543,750
Notes Receivable - long term 0 380,000
Organization Costs and Trademarks, at cost, less
accumulated amortization 15,973 0
Deferred Income Tax Asset, net of valuation allowance 0 0
Franchise Offering Costs 106,126 0
Other Assets 1,230 1,230
----------- -----------
Total Assets $2,780,155 $2,786,131
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $590,505 $428,955
Current maturities of long-term debt 802,708 115,000
Notes payable from affiliate of stockholders 23,848 10,143
Other current liabilities 67,500 64,179
----------- -----------
Total current liabilities 1,484,561 618,277
Long-Term Debt, net of current maturities 14,000 20,000
----------- -----------
Total liabilities 1,498,561 638,277
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 0 0
Common Stock 29,109 29,259
Additional paid-in capital 6,704,421 6,730,671
Accumulated deficit (5,451,936) (4,612,075)
----------- -----------
Stockholders' equity 1,281,594 1,947,854
----------- -----------
Total Liabilities and Stockholders' Equity $2,780,155 $2,786,131
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
3
PARAMARK ENTERPRISES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1995 1996 1995 1996
Revenue:
Sales $74,959 $209,276 $294,696 $658,223
Royalties and fees 157,886 45,428 444,514 322,168
Product Rebate 0 16,679 0 50,038
----------- ----------- ----------- -----------
Total revenue 232,845 271,382 739,210 1,030,428
Operating expenses:
Cost of goods sold 40,837 143,540 204,547 535,471
Selling, general and administrative 321,585 242,682 1,275,233 923,964
Management Fees 0 8,700 0 8,700
----------- ----------- ----------- -----------
Total operating expenses 362,422 394,922 1,479,780 1,468,135
----------- ----------- ----------- -----------
Loss from operations (129,577) (123,540) (740,570) (437,707)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense, net (16,673) (96,974) (48,385) (130,730)
Gain from the sale of assets 0 1,270,277 0 1,270,277
Other income 0 138,020 0 138,020
Loss from equipment disposal 0 0 (28,281) 0
Overaccrual/Loss from bakery closing 20,000 0 (10,000) 0
----------- ----------- ----------- -----------
Total other income (expense) 3,327 1,311,323 (86,666) 1,277,567
----------- ----------- ----------- -----------
Net income (loss) ($126,250) $1,187,783 ($827,236) $839,860
=========== =========== =========== ===========
Net income (loss) per common share ($0.04) $0.40 ($0.28) $0.28
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,918,635 2,996,615 2,918,635 2,979,323
=========== =========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
4
PARAMARK ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
1995 1996
Cash flow from operating activities:
Net income (loss) ($827,236) $839,860
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 154,679 132,462
Licensing revenue (44,575) (12,500)
Provision for doubtful accounts (23,074) 87,018
Gain from the sale of assets 0 (1,270,277)
Gain on debt discharge 0 (93,409)
Loss from disposal of equipment 28,280 0
Noncash interest expense 47,070 70,672
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 50,075 (97,322)
(Increase) decrease in prepaid expenses and other current assets (22,060) 22,845
(Increase) decrease if franchise offering costs (65,670) 0
(Increase) decrease in other assets 54,185 0
Increase (decrease) in accounts payable and accrued expenses (35,997) (161,550)
Increase (decrease) in other current liabilities 45,000 (3,321)
----------- -----------
Net cash used in operating activities (639,323) (485,522)
----------- -----------
Cash flows from investing activities:
Proceeds from the sale of equipment 7,850 0
Purchases of equipment (32,573) (2,700)
Net proceeds from the sale of assets 0 1,408,123
----------- -----------
Net cash provided by (used) in investing activities (24,723) 1,405,423
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 0 150
Proceeds from notes payable 0 101,500
Payment of notes payable (52,875) (721,721)
Net repayments of notes payable to affiliates 0 (13,705)
----------- -----------
Net cash used in financing activities (52,875) (633,776)
----------- -----------
Net increase (decrease) in cash (716,921) 286,125
Cash at beginning of period 725,046 51,677
----------- -----------
Cash at end of period $8,125 $337,802
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
5
Paramark Enterprises, Inc.
Notes to Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared by the Company, in
accordance with generally accepted accounting principles and except for the
Balance Sheet at December 31, 1995, all statements are unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Additionally, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principals have been omitted. It is suggested that these
financial statements be read in connection with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995. There have been no significant changes
of accounting policies since December 31, 1995. For comparability, certain
1995 amounts have been reclassified, where appropriate, to conform with the
1996 presentation.
Note 2 - Net Income (Loss) Per Common Share
Net loss per common share is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding for each period
presented. For purposes of the 1995 computation, shares issuable upon the
exercise of all common stock purchase options outstanding with exercise
prices below the Initial Public Offering (IPO) price, have been included in
weighted average number of shares outstanding, since inception, utilizing
the treasury stock method. For purposes of the 1996 computation, shares
issuable upon the exercise of all common stock purchase options outstanding
with exercise prices below the market price, have been included in weighted
average number of shares outstanding utilizing the treasury stock method.
Note 3 - Income Taxes
No provision (credit) for income taxes has been made for the nine months
ended September 30, 1996 and 1995 as the Company has net operating losses.
These net operating losses have resulted in a deferred tax asset at
September 30, 1996. Due to the uncertainty regarding the ultimate amount of
income tax benefits to be derived from the Company's net operating losses,
the Company has recorded a valuation allowance for the entire amount of the
deferred tax asset at September 30, 1996.
6
Note 4 - Sale of Assets
In August 1996, the Company closed a purchase agreement 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
products through retail grocery outlets, and (c) the Company entered into a
management agreement with Triarc to manage the franchise system.
The Company received payments of $25,000 at the execution of the agreement,
$1,765,000 at the closing, a promissory note in the amount of $1,650,000
which is being paid in fifteen (15) equal monthly installments beginning
October 1, 1996, a promissory note in the amount of $100,000 which is being
paid in twenty four (24) equal monthly installments beginning October 1,
1996. In addition, the purchase agreement the potential for contingent
payments of up to a maximum of an additional $5,500,000 over time dependant
upon the amount of T.J. Cinnamons product sales by Triarc exceeding a
minimum base system wide sales of $26.3 million. Pursuant to the terms of
the purchase agreement, T.J. Cinnamons, Inc. changed its name to Paramark
Enterprises, Inc.
Simultaneous with the closing of the Triarc transaction, the Company entered
into an agreement with Heinz Bakery Products to terminate the 1992
manufacturing and license agreement. Under the terms of the agreement, the
Company paid Heinz Bakery Products $600,000 at closing, and assigned to
Heinz the Triarc promissory note in the amount of $100,000 payable with
interest in equal installments over a two year period.
Note 5 - Short Term Bridge Financing
In July 1996, the Company consummated a short term bridge loan with Gelt
Financial Corporation ("Gelt") in the amount of $125,000. The terms of the
Gelt loan provided interest at a rate of prime plus five percent, and a
placement fee of $15,625 together with 15,000 shares of the Company's common
stock. This issuance of common stock resulted in a $26,100 finance charge
representing the market value of the Company's common stock at date of
issue. This Gelt loan was fully repaid from the proceeds of the Triarc
transaction.
7
Part I Item 2
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 three and nine month periods ended September
30, 1996 compared to the three and nine month periods ended September 30,
1995).
The following tables set forth the components of the Company's revenue:
Three Months Ended September 30,
1995 1996
Company-owned bakery sales $74,959 $59,081
Product sales 0 150,193
Franchise royalties 140,431 52,178
Licensing fees 17,455 0
Product Rebates 0 9,930
-------- --------
Total Revenue $232,845 $271,382
======== ========
Nine Months Ended September 30,
1995 1996
Company-owned bakery sales $294,696 $174,757
Product sales 0 483,465
Franchise royalties 385,815 287,268
Licensing fees 58,699 34,900
Product Rebates 0 50,038
---------- ----------
Total Revenue $739,210 $1,030,428
========== ==========
Company-owned bakery sales decreased by 21% to $59,081 for the three months
ended September 30, 1996 from $74,959 for the three months ended September
30, 1995, and decreased by 41% to $174,757 for the nine months ended
September 30, 1996 from $294,696 for the nine months ended September 30,
1995. The sales decrease for the three months ended September 30, 1996
resulted from a decline in mall traffic due to a number of vacancies in the
mall, and the sales decrease for the nine months ended September 30, 1996
resulted from the closing of a Company-owned bakery in May 1995. The bakery
was closed because it was not profitable as a result of a severe decline in
sales due to mall renovations, and management was unable to negotiate
favorable lease restructuring terms.
8
Product sales of $150,193 for the three months ended September 30, 1996 and
$483,465 for the nine months ended September 30, 1996 are from sales of
fresh baked products which are delivered daily to approximately 250 Ralphs
Supermarkets on the West Coast. During these periods, the Company utilized a
West Coast co-packer to manufacture and distribute these fresh-baked T.J.
Cinnamons products. In October, 1996, the Company entered into a lease for a
production facility located in Santa Ana, California. The facility is 22,000
square feet, and has been a health approved bakery for the past eight years.
The facility has freezer and refrigeration equipment, and the Company
anticipates start-up costs for equipment and leasehold improvements of
approximately $85,000. The Company expects to begin production and direct
selling to the Ralphs Supermarket account in November, 1996.
The Company has aligned itself with two primary food brokers to assist in
the development of its sales and marketing plans. The one group of food
brokers are located in Southern California, and has specific grocery store
regional focus on the West Coast. The other group of food brokers specialize
in Wholesale Club stores nationwide. The Company is targeting three primary
products for its initial selling effort: 4-Pack Petite Cinnamon Rolls,
24-Pack Mini Cinni Rolls and Cinnachips. The 24-Pack Mini Cinni Rolls will
be targeted to the Wholesale Club stores, while the 4-Pack Petite Cinnamon
Rolls will be targeted to retail supermarket chains. The Cinnachips are
shelf stable and ideal for dry distribution, and will be sold in 20 ounce
containers in Wholesale Club stores, and 8 ounce containers in supermarket
stores.
Franchise royalty revenue decreased by 63% to $52,178 for the three months
ended September 30, 1996 from $140,431 for the three months ended September
30, 1995, and decreased by 26% to $287,268 for the nine months ended
September 30, 1996 from $385,815 for the nine months ended September 30,
1995. These decreases in franchise royalties result primarily from the terms
of the Triarc purchase agreement requiring the Company to provide
franchisees an offer to forgive all royalties for the period August, 1996
through January, 1997 in exchange for a general release against the Company.
Franchisees representing approximately 75% of the franchised bakery units
entered into these general release agreements.
Licensing fees decreased from $17,455 for the three months ended September
30, 1995 to $0 for the three months ended September 30, 1996, and decreased
from $58,699 for the nine months ended September 30, 1995 to $34,900 for the
nine months ended September 30, 1996. These decreases in license fees are
primarily from a decreases in the sales of "proof and bake" cinnamon rolls
utilized in various locations under licensing agreements. In
9
August, 1996, the Company terminated its trademark and technology license
agreement with Heinz Bakery Products which was a condition for the closing
of the Triarc Restaurant Group transaction.
Product rebates of $9,930 for the three months ended September 30, 1996 and
$50,038 for the nine months ended September 30, 1996 are from various
supplier rebates and commitment fees.
Cost of goods sold increased by 251% to $143,540 for the three months ended
September 30, 1996 from $40,837 for the three months ended September 30,
1995, and increased by 162% to $535,471 for the nine months ended September
30, 1996 from $204,547 for the nine months ended September 30, 1995. These
increases are primarily the result of the cost of the product sales to
Ralphs Supermarkets as discussed above.
The cost of goods sold of the Company-owned bakery sales expressed as a
percentage of bakery sales were 51% during the three months ended September
30, 1996 as compared to 54% for the same period last year, and 58% during
the nine months ended September 30, 1996 as compared to 69% for the same
period last year. These decreases resulted primarily from managements
focused efforts to manage costs at the Company-owned bakery level.
Selling, general and administrative expenses decreased by 4% to $309,629 for
the three months ended September 30, 1996 from $321,585 for the three months
ended September 30, 1995, and decreased by 22% to $990,911 for the nine
months ended September 30, 1996 from $1,275,233 for the nine months ended
September 30, 1995. These decreases are primarily the result of managements
implementation of a cost reduction plan which has resulted in significant
decreases in corporate payroll and related costs, legal and consulting
costs, and corporate office costs.
Management fees of $8,700 for the three months and nine months ended
September 30, 1996 represent fees paid to Triarc Restaurant Group pursuant
to the terms of the management agreement whereby Triarc receives a
management fee equal to all royalty fees collected under the existing
franchise agreements.
Net interest expense increased to $96,974 for the three months ended
September 30, 1996 from $16,673 for the three months ended September 30,
1995, and increased to $130,730 for the nine months ended September 30, 1996
from $48,385 for the nine months ended September 30, 1995. These increases
in net interest expense for the three and nine months ended September 30,
1996 resulted from an initial loan fees and interest incurred on the Gelt
Financial loan, and loans from affiliates of two of the principal
stockholders of the Company.
Gain from the sale of assets of $1,270,277 for the three and nine
10
months ended September 30, 1996 results from the sale of certain assets to
Triarc pursuant to the terms of a purchase agreement.
Other income of $138,020 for the three and nine months ended September 30,
1996 is primarily the result of a forgiveness of indebtedness due to Heinz
Bakery Products in the amount of approximately $93,500 pursuant to the terms
of the termination agreement, and reductions in accounts payable and accrued
liabilities resulting from discounted settlements and write offs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had a working capital surplus of
approximately $1,200,000.
The Company owed approximately $388,200 to various trade and other creditors
at September 30, 1996, of which approximately $280,000 was more than 90 days
past due. The Company expects to negotiate discounts and payment plans with
a majority of the past due accounts. The Company expects to continue to
experience cash flow deficits from its operating activities primarily
because its current expenses exceed its current revenues. These deficits
will be funded by the Triarc notes receivable payments.
The Company used net cash in operating activities in the amount of $485,522
for the nine months ended September 30, 1996 as compared to $639,323 for the
nine months ended September 30, 1995. The Company generated net cash from
investing activities in the amount of $1,405,423 for the nine months ended
September 30, 1996 resulting from net proceeds from the sale of assets, as
compared to net cash used in investing activities in the amount of $24,723
for the nine months ended September 30, 1995. The Company used net cash in
financing activities in the amount of $633,776 for the nine months ended
September 30, 1996 resulting from repayments of notes payable, as compared
net cash used in financing activities in the amount of $52,875 for the nine
months ended September 30, 1995.
In July 1996, the Company consummated a short term bridge loan with Gelt in
the amount of $125,000. The terms of the Gelt loan provided for interest at
a rate of prime plus five percent, and a placement fee of $15,625 together
with 15,000 shares of the Company's common stock. This issuance of common
stock resulted in a $26,100 finance charge representing the market value of
the Company's common stock at date of issue. As additional security for the
loan, an aggregate of 250,000 shares of the Company's common stock held by
affiliates of Charles Loccisano, the Chairman and Chief Executive Officer of
the Company and Alan Gottlich, the Vice Chairman and Chief Financial Officer
of the Company were pledged to Gelt. The Gelt loan was fully repaid from the
proceeds of the Triarc Restaurant Group transaction.
11
In August 1996, the Company closed a purchase agreement 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
products through retail grocery outlets, and (c) the Company entered into a
management agreement with Triarc to manage the franchise system.
The Company received payments of $25,000 at the execution of the agreement,
$1,765,000 at the closing, a promissory note in the amount of $1,650,000
which is being paid in fifteen (15) equal monthly installments beginning
October 1, 1996, a promissory note in the amount of $100,000 which is being
paid in twenty four (24) equal monthly installments beginning October 1,
1996. In addition, the purchase agreement the potential for contingent
payments of up to a maximum of an additional $5,500,000 over time dependant
upon the amount of T.J. Cinnamons product sales by Triarc exceeding a
minimum base system wide sales of $26.3 million. Pursuant to the terms of
the purchase agreement, T.J. Cinnamons, Inc. changed its name to Paramark
Enterprises, Inc.
Simultaneous with the closing of the Triarc transaction, the Company entered
into an agreement with Heinz Bakery Products to terminate the 1992
manufacturing and license agreement. Under the terms of the agreement, the
Company paid Heinz Bakery Products $600,000 at closing, and assigned to
Heinz the Triarc promissory note in the amount of $100,000 payable with
interest in equal installments over a two year period.
Following the closing of the Triarc transaction, the Company's operations
have been concentrated exclusively on its wholesale development activities.
Accordingly, the Company is entirely dependent on its wholesale operations
as its sole source of revenues in addition to the additional revenues
generated from the Triarc transaction. The Company has applied the proceeds
from the Triarc transaction towards a reduction of its existing indebtedness
and to provide working capital for its operations. Management believes that
funds generated from the Triarc transaction will provide sufficient working
capital for its planned grocery product manufacturing and distribution
expansion plans at least through December, 1997.
12
PART II OTHER INFORMATION
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits
(b) On September 6, 1996 the registrant filed a Current Report
on Form 8-K/A covering Item 2, Acquisition or Disposition of
assets, disclosing the closing of the purchase agreement
with Triarc Restaurant Group, and Item 7, Financial
Statements and Exhibits, filing pro-forma financial
information required pursuant to Article XI of Regulation
S-X.
13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Paramark Enterprises, Inc.
Dated: 11/13/96 By: /s/ Charles N.Loccisano
--------------------------------------------
Charles N.Loccisano,
Chairman and Chief Executive Officer
By: /s/ Alan S. Gottlich
--------------------------------------------
Alan S. Gottlich, Vice Chairman
and Chief Financial Officer
(Principal Accounting Officer)
14