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, 1997 .
[ ] 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 - 3,070,083 shares as of October 20, 1997.
1
<PAGE>
Paramark Enterprises Inc.
Part I FINANCIAL INFORMATION
Item I FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Balance Sheets at December 31, 1996 and 3
September 30, 1997.
Statements of Operations for the three and nine 4
months ended September 30, 1996 and
September 30, 1997.
Statements of Cash Flows for the nine months 5
ended September 30, 1996 and September 30, 1997.
Notes to Financial Statements 6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
SIGNATURES 12
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<PAGE>
PARAMARK ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
(Audited) (Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash $49,667 $163,253
Accounts receivable, less allowance for doubtful accounts 335,322 577,460
Notes receivable - current maturities 1,383,836 421,527
Inventory 82,201 237,464
Prepaid expenses and other current assets, net 40,380 45,358
----------- -----------
Total current assets 1,891,406 1,445,062
Property and equipment 188,547 341,340
Excess of cost over fair value of net assets acquired 531,666 490,417
Notes receivable, net of current maturities 39,675 0
----------- -----------
Total Assets $2,651,294 $2,276,819
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $833,319 $790,335
Current maturities of long-term debt 168,809 527,241
Other current liabilities 53,383 15,000
----------- -----------
Total current liabilities 1,055,511 1,332,576
Long-term debt, net of current maturities 39,675 0
----------- -----------
Total liabilities 1,095,186 1,332,576
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 0 0
Common Stock 30,689 30,702
Additional paid-in capital 6,757,491 6,759,353
Accumulated deficit (5,232,072) (5,845,812)
----------- -----------
Total stockholders' equity 1,556,108 944,243
----------- -----------
Total Liabilities and Stockholders' Equity $2,651,294 $2,276,819
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
PARAMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1997 1996 1997
Revenue:
<S> <C> <C> <C> <C>
Wholesale sales $150,193 $1,589,638 $483,465 $2,572,352
Sales from Company-owned stores 59,081 48,422 174,757 143,000
Royalties and licensing fees 62,108 18,311 372,206 101,866
----------- ----------- ----------- -----------
Total revenue 271,382 1,656,391 1,030,428 2,817,218
Operating expenses:
Cost of goods sold 143,540 1,276,030 535,471 2,073,153
Selling, general and administrative 251,382 455,741 932,664 1,427,501
----------- ----------- ----------- -----------
Total operating expenses 394,922 1,731,770 1,468,135 3,500,654
----------- ----------- ----------- -----------
Loss from operations (123,540) (75,379) (437,707) (683,436)
----------- ----------- ----------- -----------
Other income (expense):
Interest income (expense), net (96,974) (13,277) (130,730) 18,341
Income tax expense 0 (12,597) 0 (12,597)
Gain from sale of assets 1,270,277 0 1,270,277 0
Other income 138,020 15 138,020 63,952
----------- ----------- ----------- -----------
Total other income (expense) 1,311,323 (25,859) 1,277,567 69,696
----------- ----------- ----------- -----------
Net income (loss) $1,187,783 $(101,238) $839,860 ($613,740)
=========== =========== =========== ===========
Net income (loss) per common share $0.40 ($0.03) $0.28 ($0.20)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,996,615 3,070,083 2,979,323 3,070,083
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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<PAGE>
PARAMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1996 1997
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $839,860 ($613,740)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 132,462 79,164
Licensing revenue (12,500) 0
Provision for doubtful accounts 87,018 0
Gain from the sale of assets (1,270,227) 0
Gain on debt discharge (93,409) 0
Noncash interest expense 70,672 0
Noncash consulting fee 0 1,875
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (97,322) (242,138)
(Increase) decrease in inventories 0 (155,263)
(Increase) decrease in prepaid expenses and other assets 22,845 (4,977)
Increase (decrease) in accounts payable and accrued expenses (161,550) (81,366)
Increase (decrease) in other current liabilities (3,321) 0
----------- -----------
Net cash used in operating activities (485,522) (1,016,445)
----------- -----------
Cash flows from investing activities:
Net proceeds from the sale of assets 1,408,123 0
Proceeds from notes receivable 0 1,001,984
Purchases of property and equipment (2,700) (190,710)
----------- -----------
Net cash provided by (used in) investing activities 1,405,423 811,274
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 150 0
Proceeds from financing 101,500 522,987
Payment of notes payable (721,721) (204,229)
Net repayments of notes payable to affiliates (13,705) 0
----------- -----------
Net cash provided by (used in) financing activities (633,776) 318,757
----------- -----------
Net increase (decrease) in cash 286,125 113,586
Cash at beginning of period 51,677 49,667
----------- -----------
Cash at end of period $337,802 $163,253
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
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, 1996, 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, 1996. There have
been no significant changes of accounting policies since December 31,
1996. For comparability, certain 1996 amounts have been reclassified,
where appropriate, to conform with the 1997 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 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 nine months ended
September 30, 1997 and 1996 as the Company has net operating losses.
These net operating losses have resulted in a deferred tax asset at
September 30, 1997. 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, 1997.
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 through retail
grocery outlets, and (c) the Company entered into a management
agreement with Triarc to manage the franchise system.
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<PAGE>
Note 4 - Sale of Assets (Continued)
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 December 1996 the Company consummated a short term loan with Gelt
Financial Corporation ("Gelt") in the amount of $100,000, and in
March, 1997 the Company increased the loan with Gelt by an additional
$175,000. The terms of these Gelt loans provided for interest at a
rate of prime plus three and one half percent, and a placement fee of
5.5%. These loans have been secured by a security interest in the 15
month note receivable from Triarc in the original principal amount of
$1,650,000, and will be fully amortized and paid in full by December
1, 1997. The balance of these loans September 30, 1997 was $80,400.
The proceeds of these loans were used to pay outstanding indebtedness,
fund startup costs of the California bakery facility, and fund working
capital.
In addition, in July 1997 the Company entered into a loan agreement
with Gelt Financial Corporation for a credit line in the amount of
$200,000 which was subsequently increased to $300,000 secured by
Wal-Mart accounts receivable. The terms of this loan agreement 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 addition, the
Company granted Gelt 3,000 shares of the Company's common stock as a
loan origination fee.
In September 1997, the Company borrowed $100,000 from Charles
Loccisano, the Chairman, Chief Executive Officer and Director of the
Company. The terms of the demand promissory note provide for interest
to be paid quarterly at the rate of 10% per annum.
-7-
<PAGE>
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, 1997 compared to the three and nine month periods ended
September 30, 1996).
The following tables set forth the components of the Company's
revenue:
Three Months Ended September 30,
1996 1997
Wholesale sales $150,193 $1,589,638
Company-owned bakery sales 59,081 48,422
Royalties and licensing fees 62,108 18,311
---------- ----------
Total Revenue $271,382 $1,656,391
Nine Months Ended September 30,
1996 1997
Wholesale sales $483,465 $2,572,352
Company-owned bakery sales 174,757 143,000
Royalties and licensing fees 372,206 101,866
---------- ----------
Total Revenue $1,030,428 $2,817,218
Wholesale sales increased to $1,589,638 for the three months ended September
30, 1997 from $150,193 for the three months ended September 30, 1996, and
increased to $2,572,352 for the nine months ended September 30, 1997 from
$483,465 for the nine months ended September 30, 1996. 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 also developed its
own signature line of gourmet rugalach made in four
-8-
<PAGE>
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, Price/Costco Wholesale Clubs and Sams Wholesale Clubs.
Company-owned bakery sales decreased by 18% to $48,422 for the three months
ended September 30, 1997 from $59,081 for the three months ended September 30,
1996, and decreased by 18% to $143,000 for the nine months ended September 30,
1997 from $174,757 for the nine months ended September 30, 1996. 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 decreased to $18,311 for the three months
ended September 30,1997 from $62,108 for the three months ended September 30,
1996, and decreased to $101,866 for the nine months ended September 30, 1997
from $372,206 for the nine months ended September 30, 1996. This decrease in
royalties and licensing fees resulted primarily from the terms of the Triarc
Transaction requiring the Company to provide 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. The decreases in license fees are primarily from a decrease
in the sales of "proof and bake" cinnamon rolls utilized in various locations
under licensing agreements. In 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 Transaction.
Cost of goods sold increased to $1,276,030 for the three months ended
September 30, 1997 from $143,540 for the three months ended September 30, 1996,
and increased to $2,073,153 for the nine months ended September 30, 1997 from
$535,471 for the nine months ended September 30, 1996. These increases are
primarily the result of the cost of the wholesale sales to supermarkets chains
and membership club chains.
Selling, general and administrative expenses increased to $455,741 for the
three months ended September 30, 1997 from $251,382 for the three months ended
September 31, 1996, and increased to $1,427,501 for the nine months ended
September 30, 1997 from $932,664 for the nine months ended September 30, 1996.
These increases are 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.
-9-
<PAGE>
Net interest expense for the three months ended September 30, 1997 was
($13,277) as compared to net interest expense for the three months ended
September 30, 1996 of ($96,974), and net interest income for the nine months
ended September 30, 1997 was $18,341 as compared to net interest expense for the
nine months ended September 30, 1996 of ($130,730). This change in net interest
expense resulted primarily from the interest earned on the notes receivable from
Triarc Restaurant Group offset by interest expenses associated with the Gelt
short-term loans and accounts receivable financing.
Other income decreased to $15 for the three months ended September 30, 1997
from $138,020 for the three months ended September 30, 1996, and decreased to
$63,952 for the nine months ended September 30, 1997 from $138,020 for the nine
months ended September 30, 1996. This other income in both periods is from
reductions in accounts payable and 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 September 30, 1997, the Company had a working capital surplus of
approximately $112,500. During the three and nine months ended September 30,
1997, the Company experienced cash flow deficits from its operating activities
primarily because its operating expenses exceeded its operating revenues. These
operating deficits have been funded by the Triarc notes receivable payments.
The Company used net cash in operating activities in the amount of
$1,016,445 for the nine months ended September 30, 1997, as compared to $485,522
for the nine months ended September 30, 1996. The Company received net cash from
investing activities in the amount of $811,274 for the nine months ended
September 30, 1997, as compared to net cash received from investing activities
in the amount of $1,405,423 for the nine months ended September 30, 1996. The
Company received net cash provided by financing activities in the amount of
$318,757 for the nine months ended September 30, 1997 as compared to net cash
used in financing activities in the amount of $633,776 for the nine months ended
September 30, 1996.
In August 1996, the Company closed a purchase agreement with Triarc
Restaurant Group d/b/a/ Arby's, Inc. ("Triarc") pursuant to 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 $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 which began on October 1, 1996, and a promissory note in
the amount of $100,000 which is being paid in twenty four (24) equal monthly
installments which began on October 1, 1996 with a $50,000 balloon payment on
September 1, 1998. In addition, the purchase agreement provides for 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
-10-
<PAGE>
exceeding a minimum base system wide sales of $26.3 million. Management believes
that funds generated from the Triarc transaction will provide sufficient working
capital for its planned product manufacturing and distribution expansion plans
at least through December, 1997.
Simultaneous with the closing of the Triarc 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 twenty four (24) month period with a $50,000 balloon
payment.
In December, 1996 the Company consummated a short term loan with Gelt
Financial Corporation in the amount of $100,000, and in March, 1997 the Company
increased the loan with Gelt by an additional $175,000. The terms of these Gelt
loans provided for interest at a rate of prime plus three and one half percent,
and a placement fee of 5.5%. These loans have been secured by a security
interest in the 15 month note receivable from Triarc in the original principal
amount of $1,650,000, and will be fully amortized and paid in full by December
1, 1997. The proceeds of these loans were used to pay outstanding indebtedness,
fund startup costs of the California bakery production facility, and fund
working capital.
In June, 1997, the Company received a purchase commitment from Wal-Mart to
supply its CinnaChip products to 445 Sams Wholesale Club stores nationally. In
order to finance the working capital for these sales aggregating $945,000 , the
Company entered into a loan agreement with Gelt Financial Corporation for a
credit line in the amount of $200,000 which was subsequently increased to
$300,000 secured by 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. In addition, the
Company granted Gelt 3,000 shares of the Company's common stock as a loan
origination fee.
In September 1997, the Company borrowed $100,000 from Charles Loccisano, the
Chairman, Chief Executive Officer and Director of the Company. The terms of the
demand promissory note provide for interest to be paid quarterly at the rate of
10% per annum.
In October 1997, the Company finalized its investment advisory letter of
intent with Commonwealth Associates whereby Commonwealth Associates will act as
the Company's investment advisor in areas including long-term financial
planning, expansion financing and capital structure, mergers, acquisitions and
other corporate financial matters. Pursuant to this relationship, Commonwealth
Associates contemplates acting as the Company's placement agent in connection
with a planned convertible preferred stock private placement. The Company
anticipates utilizing the proceeds derived from this private placement toward
automating the Santa Ana, California production facility, establishing a North
East production facility, and establishing a working capital reserve.
-11-
<PAGE>
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: 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)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915661
<NAME> PARAMARK ENTERPRISES, INC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 163,253
<SECURITIES> 0
<RECEIVABLES> 1,062,987
<ALLOWANCES> 64,000
<INVENTORY> 237,464
<CURRENT-ASSETS> 1,445,062
<PP&E> 406,526
<DEPRECIATION> 65,186
<TOTAL-ASSETS> 2,276,819
<CURRENT-LIABILITIES> 1,332,577
<BONDS> 0
0
0
<COMMON> 30,702
<OTHER-SE> 913,541
<TOTAL-LIABILITY-AND-EQUITY> 944,243
<SALES> 2,715,352
<TOTAL-REVENUES> 2,817,218
<CGS> 2,073,153
<TOTAL-COSTS> 3,500,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (601,143)
<INCOME-TAX> 12,597
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (163,740)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
