Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998 .
[ ] 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 X 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 - 3,373,883 shares as of May 14, 1998.
Transitional Small Business disclosure Format (check one):
Yes X No ___
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Paramark Enterprises Inc.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Balance Sheets at December 31, 1997 and 3
March 31, 1998.
Statements of Operations for the three 4
months ended March 31, 1998.
Statements of Cash Flows for the three months 5
ended March 31, 1997 and March 31, 1998.
Notes to Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults upon Senior Securities 12
Item 4 Submission of Matters to a Vote
of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
PARAMARK ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1997 1998
(Audited) (Unaudited)
ASSETS
Current Assets:
Cash $122,561 $7,050
Accounts receivable, less allowance for doubtful accounts 259,271 687,103
Notes receivable - current maturities 69,837 126,957
Inventory 234,822 195,265
Prepaid expenses and other current assets, net 35,291 71,204
----------- -----------
Total current assets 721,782 1,087,580
Property and equipment 453,296 458,515
Excess of cost over fair value of net assets acquired 476,667 462,917
----------- -----------
Total Assets $1,651,745 $2,009,011
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $1,142,415 $1,276,934
Current maturities of long-term debt 258,545 802,397
----------- -----------
Total current liabilities 1,400,960 2,079,331
Long-term debt, net of current maturities 69,460 0
----------- -----------
Total liabilities 1,470,420 2,079,331
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 0 0
Common Stock 30,702 33,740
Additional paid-in capital 6,759,352 6,813,705
Accumulated deficit (6,608,729) (6,917,765)
----------- -----------
Total stockholders' equity 181,325 (70,320)
----------- -----------
Total Liabilities and Stockholders' Equity $1,651,745 $2,009,011
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
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PARAMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
1997 1998
Revenue:
Wholesale sales $422,539 $1,223,996
Sales from Company-owned stores 51,383 35,530
Royalties, licensing fees and other 21,796 30,000
----------- -----------
Total revenue 495,718 1,289,526
Operating expenses:
Cost of goods sold 355,210 985,298
Selling, general and administrative 385,678 606,936
----------- -----------
Total operating expenses 740,888 1,592,234
----------- -----------
Loss from operations (245,170) (302,707)
----------- -----------
Other income (expense):
Interest income (expense), net 22,761 (6,329)
Other income 55,716 0
----------- -----------
Total other income (expense) 78,477 (6,329)
----------- -----------
Net loss ($166,693) ($309,036)
=========== ===========
Net loss per common share ($0.05) ($0.10)
=========== ===========
Weighted average number of
common shares outstanding 3,068,833 3,145,907
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
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PARAMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
1997 1998
Cash flow from operating activities:
Net loss ($166,693) ($309,036)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 22,492 35,864
Noncash interest expense 0 56,250
Noncash consulting fee 0 1,140
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 109,908 (427,832)
(Increase) decrease in notes receivable 0 (57,120)
(Increase) decrease in inventories (22,150) 39,557
(Increase) decrease in prepaid expenses and other assets (18,807) (35,912)
Increase (decrease) in accounts payable and accrued expenses (359,482) 139,519
--------- ---------
Net cash used in operating activities (434,733) (557,570)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (28,021) (27,332)
--------- ---------
Net cash used in investing activities (28,021) (27,332)
--------- ---------
Cash flows from financing activities:
Proceeds from financing 158,257 469,391
Proceeds from notes receivable 322,448 0
Net repayments of notes payable (32,049) 0
--------- ---------
Net cash provided by financing activities 448,656 469,391
--------- ---------
Net decrease in cash (14,098) (115,511)
Cash at beginning of period 49,677 122,561
--------- ---------
Cash at end of period $35,569 $7,050
========= =========
SEE NOTES TO FINANCIAL STATEMENTS
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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 pursuant to the
Rules and Regulations of the Securities and Exchange Commission, and except
for the Balance Sheet at December 31, 1997, 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.
Operating results for the interim period are not necessarily indicative of
financial results for the full year.
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
unaudited 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, 1997. There have been no
significant changes of accounting policies since December 31, 1997.
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 these computations, shares issuable upon the
exercise of all common stock purchase options and warrants outstanding have
been excluded from the computation of weighted average shares outstanding
since their effect is antidilutive.
Note 3 - Income Taxes
No provision for income taxes has been made for the three months ended March
31, 1998 as the Company has net operating losses. These net operating losses
have resulted in a deferred tax asset at March 31, 1998. 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 March
31, 1998.
Note 4 - 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 products
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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 $1,790,000 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
provides for the contingent payments of 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.
Pursuant to the terms of the Transaction, T.J. Cinnamons, Inc. changed its
name to Paramark Enterprises, Inc.
Simultaneous with the closing of the Transaction in August 1996, 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 Financing
In June 1997 the Company entered into a loan agreement with Gelt Financial
Corporation for a credit line in the amount of $200,000 which was
subsequently increased to $400,000 secured by Wal-Mart accounts receivable.
The terms of this loan agreement provide for a service fee of 1.5% of each
advance together with interest at a rate of 675 basis points above the prime
rate.
In March 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 a credit line in the amount of $500,000.
The credit line is required to be repaid within one year, with interest
payable quarterly at the rate of 5.39% per annum. In consideration for the
loan, Messrs. Loccisano and Gottlich were granted an aggregate of 300,000
shares of the Company's common stock.
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PART I ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
When used in this Quarterly 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 that
could cause the compan 's actual results to differ materially from historical
earnings and those presently anticipated or projected. 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.
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 month period ended March 31, 1998
compared to the three month period ended March 31, 1997).
The following tables set forth the components of the Company's revenue:
Three Months Ended March 31,
1997 1998
Wholesale sales $422,539 $1,223,996
Company-owned bakery sales 51,383 35,530
Royalties and licensing fees 21,796 30,000
---------- ----------
Total Revenue $ 495,718 $1,289,526
Wholesale sales increased 190% to $1,223,996 for the three months ended March
31, 1998 from $422,539 for the three months ended March 31, 1998 due to a
continued expansion of the Company's distribution of its products to grocery
stores, wholesale club stores and mass merchandisers. To further develop its
wholesale sales, the Company is focusing its selling efforts in specific
geographic areas through alliances with the following key food brokerage groups:
(a) Le Grand Marketing, representing retail grocery stores California; (b) Food
Scene, representing retail grocery stores in the New York tri-state area, (c) J
& J Brokers, representing retail grocery stores in New England, (d) Priority
Food Brokers, representing retail grocery stores in Maryland and Virginia, and
(e) American Sales and Marketing, representing membership club stores nationwide
and retail grocery stores in the mid-west. The Company is targeting its product
line to in-store bakeries and in-store deli areas of supermarket chains,
focusing on large multi-unit accounts. The Company is focusing its initial
marketing efforts on the following core products: (a) T.J. Cinnamons Gourmet
Cinnamon Rolls and Gourmet Sticky Rolls; (b) T.J. Cinnamons CinnaChips; (c)
Gourmet Rugalach and (d) Gourmet Brownies. The Company has
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also developed its own signature line of gourmet rugalach made in four flavor
varieties. In addition, the Company is manufacturing gourmet brownies sold under
the Hershey's label, gourmet bundt cakes in five flavor varieties, layer cakes,
and mini cakes. All of these products are sold in various packaging and sizes,
and are shipped through both fresh and frozen distribution
The Company is currently selling products to the following accounts: Ralphs
Supermarkets, Food-4-Less Supermarkets, Luckys Supermarkets, ShopRite
Supermarkets, H.E. Butt Supermarkets, Hughs Supermarkets, Kings Supermarkets,
D'Agostinos Supermarkets, Walmart Super Centers, Costco Wholesale Clubs and Sams
Wholesale Clubs.
Company-owned bakery sales decreased by 31% to $35,530 for the three months
ended March 31, 1998 from $51,383 for the three months ended March 31, 1997.
This sales decrease resulted from a decline in mall traffic due to a number of
vacancies in the Poughkeepsie Galleria mall. In April 1997, the Company entered
into a management agreement whereby the Poughkeepsie Galleria mall bakery will
be operated with all cash deficits funded by the manager and all positive cash
flow retained by the manager as a management fee.
Royalty and licensing fee revenues increased to $30,000 for the three months
ended March 31 ,1998 from $21,796 for the three months ended March 31, 1997.
This increase in royalties and licensing fees resulted primarily from increased
franchise royalty collections. In August 1996, based on the terms of the Triarc
Transaction, the Company provided franchisees an offer to forgive all franchise
royalties for the period August, 1996 through February, 1997 in exchange for a
general release against the Company. Franchisees representing approximately 80%
of the franchised bakery units entered into these general release agreements,
resulting in reduced franchise royalty collections for the quarter ended March
31, 1997.
Cost of goods sold increased to $985,298 for the three months ended March 31,
1998 from $355,210 for the three months ended March 31, 1997. These increases
were primarily the result of the increased sales of products to supermarkets
chains and membership club chains.
Selling, general and administrative expenses increased to $606,936 for the
three months ended March 31, 1998 from $385,678 for the three months ended March
31, 1997. These increases were primarily the result of increases in selling,
general and administrative costs associated with the Company's manufacturing
plant in Santa Ana, California and the selling and marketing expenses associated
with the launch of the Company's product line to wholesale channels of
distribution.
Net interest expense for the three months ended March 31, 1998 was ($6,329) as
compared to net interest expense for the three months ended March 31, 1997 of
$22,761. This change in net interest expense resulted primarily from the
interest earned during the three months ended March 31, 1997 on the notes
receivable from Triarc Restaurant Group which were paid in full in December
1997.
Other income decreased to $0 for the three months ended March 31, 1998 from
$55,716 for the three months ended March 31, 1997. This other income is
comprised of reductions in accounts payable and
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accrued liabilities resulting from discounted settlements and write-offs of
accounts payable based on their being no recent contact with the Company by the
creditors being owed such amounts.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a working capital deficit of
approximately $991,750. During the three months ended March 31, 1998, the
Company experienced cash flow deficits from its operating activities primarily
because its operating expenses exceeded its operating revenues. These operating
deficits experienced during the three months ended March 31, 1998 have been
funded by a credit line provided to the Company by officers of the Company.
The Company used net cash in operating activities in the amount of $557,570
for the three months ended March 31, 1998, as compared to $434,733 for the three
months ended March 31, 1997. The Company used net cash in investing activities
in the amount of $27,332 for the three months ended March 31, 1998, as compared
to net cash received from investing activities in the amount of $28,021 for the
three months ended March 31, 1997. The Company used net cash in financing
activities in the amount of $469,391 for the three months ended March 31, 1998
as compared to net cash used in financing activities in the amount of $448,656
for the three months ended March 31, 1997.
In June 1997, the Company entered into a loan agreement with Gelt Financial
Corporation for a credit line in the amount of $200,000 which was subsequently
increased to $400,000 secured by the Wal-Mart accounts receivable. The terms of
this loan agreement provide for a service fee of 1.5% of each advance together
with interest at a rate of 675 basis points above the prime rate. The credit
line balance was approximately $279,000 on March 31, 1998.
In October 1997, the Company offered for sale units in a convertible
preferred private placement with Commonwealth Associates acting as placement
agent. This offering was to be held open to investors through January 1998, and
was not consummated as orders for the minimum number of shares were not
obtained. Without alternative sources of financing to fund the Company's
operating deficit, in January 1998, Charles Loccisano, the Company's Chairman
and Chief Executive Officer, and Alan Gottlich, the Company's President and
Chief Financial Officer, provided the Company with loans aggregating $282,500.
In March 1998, based on the need for additional funding resulting from the
receipt of large purchase orders from Walmart Super Centers, the previous
Loccisano and Gottlich loans were repaid in full, and Messrs. Loccisano and
Gottlich agreed to provide the Company with a credit line for up to $500,000
with interest payable quarterly at the applicable federal rate of 5.39% per
annum. Th credit line is required to be repaid within one year or such shorter
period if the Company closes the Triarc Transaction. In consideration for
providing this credit line facility, the Company granted Messrs. Loccisano and
Gottlich an aggregate of 300,000 unregistered shares of Common Stock.
In November 1997, in order to bring the Company into compliance with
requirements necessary for continued listing on the Nasdaq SmallCap Market,
Messrs. Loccisano and Gottlich purchased an aggregate of 20,000 shares of
redeemable Series B preferred stock at a price of $5.00 per share. In January
1998, following a delisting of the Company's securities from the Nasdaq SmallCap
Market and
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as a result of additional funds loaned to the Company by Messrs. Loccisano and
Gottlich, these shares of Serie B preferred stock were redeemed by the Company
at a price of $5.00 per share.
The Company is currently negotiating with an unaffiliated third party
purchaser (the "Third Party") regarding the sale of (a) all of the Company's
rights under the Triarc Purchase Agreement and License Agreement and (b) the
Company's rights and obligations as franchisor under the T.J. Cinnamons
franchise system (collectively the "TJC Transaction"). Consummation of the
proposed TJC Transaction is subject to negotiation of the final terms of the
transaction, executio of a definitive agreement, completion by Third Party of
its due diligence of the Company, and the receipt of shareholder approval for
the TJC Transaction. No assurance can be given that the Company and the Third
Party will be successful in negotiating a definitive agreement following
completion of the due diligence, or even if such agreement is reached, that the
Company's shareholders would approve the TJC Transaction.
The Company anticipates that the net proceeds from the proposed TJC
Transaction, together with its anticipated lines of credit, and the Company's
anticipated cash from operations, should be sufficient to satisfy the Company's
cash needs through June 30, 1999. Should demand for the Company's products 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 or on terms
acceptable to the Company.
The Company's independent auditors report of its financial statements for
the fiscal year ending December 31, 1997 raises substantial doubts about the
Company's ability to continue as a going concern. The failure to consummate the
TJC Transaction could have a material adverse effect on the Company's ability to
continue as a going concern. In the event that the TJC Transaction is not
consummated, the Company will reevaluate available alternatives including debt
or equity financing, or a possible merger or sale of all or part of the Company.
If alternative sources of financing are not available in the near term, the
Company will be unable to pursue its business plan and may be unable to continue
its existing business operations.
If the Company is able to consummate the TJC Transaction, the Company will
continue to manufacture and distribute gourmet bakery products to the retail
grocery and food service trade. However, the Company would no longer manufacture
and sell T.J. Cinnamons branded products, which represent 75% of wholesale sales
for the fiscal year ended December 31, 1997 and 70% of wholesale sales for the
three months ended December 31, 1998. In addition, the Company will no longer be
entitled to any further payment under the Triarc Purchase Agreement and the
Triarc License Agreement.
Even if the TJC Transaction is consummated, in order to implement its plan
of operations, the Company will be required, among other things, to raise
additional capital beyond June 30, 1999. While the Company has existing lines of
credit, there can be no assurance that such debt financing will be available to
the Company in the future or that such debt financing will be available in the
amounts required by the Company or on terms acceptable to the Company. There can
be no assurance that such financin will be available or available on attractive
terms, or that such financing would not result in a substantial dilution of
shareholders' interest.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
On March 9, 1998, the Company entered into a loan agreement with
Charles Loccisano, the Company's Chairman and Chief Executive Officer
and Alan Gottlich, the Company's President and Chief Financial Officer,
providing for a credit line in the aggregate amount of up to $500,000.
The loan bears interest at the applicable federal rate of 5.39% payable
quarterly, and is required to be repaid within one year or such shorter
period if the Company obtains alternative sources of funds to fund its
operations. As additional consideration for providing this credit line,
the Company granted Messrs. Loccisano and Gottlich an aggregate of
300,000 unregistered shares of the Company's common stock. Exemption
for registration of the issuance described above were claimed pursuant
to Section 4(2) of the Securities Act of 1933, as amended, in reliance
on the fact that such sales did not involve a public offering.
Therefore, such securities are subject to certain transfer
restrictions.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed herewith.
Exhibit Number Description
10.17 Loan and Security Agreement with Charles Loccisano
10.18 Loan and Security Agreement with Alan Gottlich
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any current reports on Form
8-K for the quarter ended March 31, 1998.
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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: May 14, 1998 By: /s/ Charles N. Loccisano
Charles N. Loccisano,
Chairman and Chief Executive Officer
By: /s/ Alan S. Gottlich
Alan S. Gottlich,
President and Chief Financial Officer
(Principal Accounting Officer)
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