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 March 31, 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
T.J. Cinnamons, 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:
As of May 14, 1996 , there were 2,910,833 shares of Common Stock, 1,115,550
Class A Warrants, and 557,750 Class B Warrants.
T.J. CINNAMONS, INC.
Part I FINANCIAL INFORMATION
Item I FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Balance Sheets at December 31, 1995 and 3
March 31, 1996
Statement of Operations for the three months 4
ended March 31, 1995 and March 31, 1996.
Statement of Cash Flows for the three months 5
ended March 31, 1995 and March 31, 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 12
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
T.J. CINNAMONS, INC.
BALANCE SHEET
Dec. 31, Mar. 31,
1995 1996
(Audited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 51,677 $ 31,851
Accounts receivable, less allowance for doubtful accounts 179,066 194,731
Prepaid expenses and other current assets,net 28,065 57,285
----------- -----------
Total current assets 258,808 283,867
Property and Equipment, less accumulated
depreciation and amortization 49,644 46,597
Excess of Cost over Fair Value of Net Assets Acquired 2,348,374 2,312,794
Organization Costs and Trademarks, at cost, less
accumulated amortization 15,973 13,739
Franchise Offering Costs, less accumulated amortization 106,126 93,766
Deferred Income Tax Asset, net of valuation allowance -- --
Other Assets 1,230 1,230
----------- -----------
Total Assets $ 2,780,155 $ 2,751,993
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 590,505 $ 587,146
Current maturities of long-term debt 802,708 809,780
Notes payable from affiliate of stockholder 23,848 74,209
Other current liabilities 67,500 97,538
----------- -----------
Total current liabilities 1,484,561 1,568,673
Long-Term Debt, net of current maturities 14,000 14,000
----------- -----------
Total liabilities 1,498,561 1,582,673
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock -- --
Common Stock 29,109 29,109
Additional paid-in capital 6,704,421 6,704,421
Accumulated deficit (5,451,936) (5,564,210)
----------- -----------
Stockholders' equity 1,281,594 1,169,320
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,780,155 $ 2,751,993
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
3
T.J. CINNAMONS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
1995 1996
Revenue:
Sales from Company-owned stores and wholesale sales $ 138,300 $ 230,003
Royalties and licensing fees 144,120 144,067
Other 0 16,679
----------- -----------
Total revenue 282,420 390,749
Operating expenses:
Cost of goods sold 109,720 192,638
Selling, general and administrative 524,825 294,107
----------- -----------
Total operating expenses 634,545 486,745
----------- -----------
Loss from operations (352,125) (95,996)
----------- -----------
Other income (expense):
Interest expense, net (13,784) (17,125)
Loss from equipment disposal (14,762) 0
Other income 0 668
----------- -----------
Total other income (expense) (28,546) (16,457)
----------- -----------
Net loss ($ 380,671) ($ 112,453)
=========== ===========
Net loss per common share ($0.13) ($0.04)
=========== ===========
Weighted average number of
common shares outstanding 2,918,635 2,910,833
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
4
T.J. CINNAMONS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
1995 1996
Cash flow from operating activities:
Net loss ($380,671) ($112,453)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 47,716 53,400
Licensing revenue (14,575) (7,500)
Provision for doubtful accounts 12,199 10,315
Loss from disposal of equipment 14,762 0
Noncash interest expense 16,024 14,572
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 26,119 (25,980)
(Increase) decrease in prepaid expenses and other current assets 4,010 (29,220)
(Increase) decrease if franchise offering costs (56,492) 0
(Increase) decrease in other assets 740 0
Increase (decrease) in accounts payable and accrued expenses (100,947) (3,359)
Increase (decrease) in other current liabilities 17,500 30,038
--------- ---------
Net cash used in operating activities (407,158) (70,186)
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of equipment 4,560 0
Purchases of equipment (27,644) 0
--------- ---------
Net cash used in investing activities (22,994) 0
--------- ---------
Cash flows from financing activities:
Increase in notes payable 0 50,361
Payment of long term debt (35,233) 0
--------- ---------
Net cash provided by (used in) financing activities (35,233) 50,360
--------- ---------
Net decrease in cash (465,384) (19,826)
Cash at beginning of period 725,046 51,677
--------- ---------
Cash at end of period $ 259,662 $ 31,851
========= =========
SEE NOTES TO FINANCIAL STATEMENTS
5
T.J. Cinnamons, 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 the Company's audited 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 to the 1996 presentation.
Note 2 - Net 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. Common stock equivalents have been excluded from the
computation of weighted average shares outstanding since their effect would
be antidilutive.
Note 3 - Income Taxes
No provision (credit) for income taxes has been made for the three months
ended March 31, 1996 and 1995 as the Company has net operating losses.
These net operating losses have resulted in a deferred tax asset at March
31, 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 March 31, 1996.
Note 4 - Grants of Stock Options
On May 31, 1995, options to purchase an aggregate of 362,500 shares of
common stock were granted to various employees, officers and directors of
the Company under the 1993 Stock Option Plan.
6
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 month period ended March 31, 1996
compared to the three month period ended March 31, 1995).
The following tables set forth the components of the Company's revenue:
Three Months Ended March 31,
1995 1996
Company-owned bakery sales $138,300 $ 60,167
Product sales 0 169,836
Franchise royalties 125,510 121,508
Licensing fees 18,610 22,559
Product rebates 0 16,679
-------- --------
$282,420 $390,749
======== ========
Company-owned bakery sales decreased by 56% to $60,167 for the three months
ended March 31, 1996 from $138,300 for the three months ended March 31,
1995. This sales decrease resulted from the closing of one 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.
Product sales of $169,836 for the quarter ended March 31, 1996 are from
sales of fresh baked products which are delivered daily to approximately
256 Ralphs Supermarkets on the West Coast. The Company is currently
utilizing a West Coast co-packer to manufacture and distribute these
fresh-baked T.J. Cinnamons products.
Franchise royalty revenue decreased by 3% to $121,508 for the three months
ended March 31, 1996 from $125,510 for the three months ended March 31,
1995. This decrease in franchise royalties resulted primarily from a
decline in the number of franchised bakeries in the system which was
partially offset by an improved monitoring of bakeries in the first
quarter. There were 51 bakeries on March 31, 1996 as compared with 62
bakeries on March 31, 1995. The majority of these closings have resulted
from expirations of lease terms and defaults in royalty obligations in
below average volume bakeries. Although the Company has taken a number of
measures to prevent
7
future closings of franchised bakeries, there can be no assurance that
these declines will not continue in the future.
Licensing fees increased by 21% to $22,559 for the three months ended March
31, 1996, from $18,610 for the three months ended March 31, 1995. These
increases in license fees are primarily from an increase in the sales of
"proof and bake" cinnamon rolls utilized in approximately 33 bakery kiosk
units in Texaco Starmart locations under a license agreement with the Brice
Group.
Product rebates of $16,679 for the quarter ended March 31, 1996 are from
various supplier rebates and commitment fees.
Cost of goods sold increased by 76% to $192,638 for the three months ended
March 31, 1996 from $109,720 for the three months ended March 31, 1995.
This increase is primarily the result of the cost of the product sales to
Ralphs Supermarkets as discussed above.
The cost of goods sold of Company-owned bakery sales expressed as a
percentage of bakery sales were 61% during the three months ended March 31,
1996 as compared to 80% for the same period last year. This decrease
resulted primarily from managements focused efforts to manage costs at the
Company-owned bakery level.
Selling, general and administrative expenses decreased by 44% to $294,107
for the three months ended March 31, 1996 from $524,825 for the three
months ended March 31, 1995. This decrease is 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.
Net interest expense increased to $17,125 for the three months ended March
31, 1996 from $13,784 for the three months ended March 31, 1995. This
increase in net interest expense results from a increase in borrowing
levels.
8
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had a working capital deficiency of
approximately $1,300,000. Included in this working capital deficiency is a
note payment due to Heinz Bakery Products on July 31, 1996 in an amount
equal to approximately $789,000. In order to finance cash flow deficits, an
affiliate of one of the principal stockholders of the Company has provided
the Company with a loan which balance was $70,000 at March 31, 1996. As of
March 31, 1996, the Company had no other line of credit available to it.
Accordingly, the Company is in need of immediate financing to continue its
operations and pursue its business plan. Without such financing, the
Company may not be able to continue its existing business operations.
The Company owed approximately $473,800 to various trade and other
creditors at March 31, 1996, of which approximately $391,600 was more than
90 days past due. The Company also expects to continue to experience
operating cash flow deficits primarily because its current expenses exceed
its current revenues. These deficits are currently being funded by loans
from an affiliate of one of the principal stockholders and through an
increase of short-term liabilities. Although the Company has successfully
been able to extend terms with its primary creditors, there can be no
assurance that the Company will be able to continue to obtain such
favorable terms from its creditors. At March 31, 1996, the Company had
accounts receivable net of allowance for doubtful accounts in the amount of
$194,700. As a result of the financial difficulties of the Company, it is
reasonably possible that the estimate of collectibility of the accounts
receivable will decrease materially in the near term.
The Company used net cash in operating activities in the amount of $70,185
for the quarter ended March 31, 1996 as compared to $407,158 for quarter
ended March 31, 1995. The Company used no cash in investing activities for
the quarter ended March 31, 1996 as compared to $22,994 for quarter ended
March 31, 1995. The Company generated net cash in financing activities in
the amount of $50,360 for the quarter ended March 31, 1996 resulting from a
loan from an affiliate of one of the principal stockholders of the Company
as discussed above, as compared net cash used in financing activities in
the amount of $35,233 for quarter ended March 31, 1995.
Since June 1992, Heinz Bakery Products has provided an aggregate of
$1,425,000 in advanced royalties to be offset by actual royalties earned,
which was used to finance the acquisition of the Company and for working
capital. On August 1, 1994, the Company entered into an agreement with
Heinz Bakery Products to extend the terms of the advanced royalties
repayment schedule. This agreement provides for a repayment of $400,000 of
advanced royalties, which has been paid, and extended the repayment of the
remaining advanced
9
royalties over 30 months, with interest at the prime rate and minimum
payments, including earned royalties, of $130,000 due by April 28, 1995,
which amount has not been paid to date, and an additional $395,000 due by
July 31, 1996 with the remaining balance due on January 31, 1997. In
consideration for this extended payment schedule, royalties payable to the
Company from Heinz Bakery Products for sales in excess of $5 million were
reduced from 4% to 3%. The balance owed to Heinz Bakery Products as of
March 31, 1996 including accrued interest is approximately $789,000.
Repayment of $750,000 of the advanced royalties is guaranteed by Charles N.
Loccisano, Chairman of the Company and his wife.
In order to meet its short term cash requirements, the Company has
negotiating commitment fees and marketing rebates from a number of its
suppliers. In the forth quarter of 1995, the Company sought a private
placement financing transaction to meet its short term capital needs, but
was unable to successfully consummate such transaction. In an effort to
obtain the long term resources necessary to fully develop the Company's
business strategies, the Company retained the Corporate Finance Group at
Arthur Andersen LLP in June, 1995 to act as its financial advisor in
connection with the exploration of strategic alternatives available to the
Company including a possible merger or sale of all or part of the Company.
As a result of this engagement, in January 1996, the Company reached a
non-binding agreement in principle with Arby's, Inc. through which Arby's
will purchase the trademarks, service marks, recipes and secret formulas of
the Company and simultaneously license back to the Company the ability to
operate existing locations and distribute T.J. Cinnamons products through
retail grocery outlets. The transaction further provides that the Company
will enter into a management agreement with Arby's for the management of
the existing franchise system. The proposed transaction as currently
contemplated provides for a payment of $1,750,000 at closing, a promissory
note in the amount of $1,500,000 which will be paid in fifteen (15) equal
installments with a final payment of $250,000 on or before August 31, 1997,
and the potential for a contingent payment of up to a maximum of an
additional $5,500,000 over time dependant upon the amount of T.J. Cinnamons
product sales by Arby's exceeding a minimum base system wide sales of $26.3
million. The closing of this transaction is subject to the completion of
due diligence and the negotiation and execution of definitive
documentation.
Consummation of the Arby's transaction is dependant upon the termination of
the Heinz License Agreement as well as receipt of shareholder approval
under Delaware law. The Company has entered into a preliminary letter
agreement with Heinz Bakery Products which provides for the termination of
the License Agreement based on a full repayment of the outstanding
promissory note (current balance of approximately $789,000) over a period
two years. The source of funds necessary to repay the outstanding
promissory note
10
will be derived from the Arby's transaction.There can be no assurances that
the Company will be able to reach a definitive agreement with Arby's or
Heinz, or even if such agreements are reached, that the Company's
stockholders will approve the Arby's transaction.
In the event that the Arby's transaction is not consummated, the Company
will reevaluate available alternatives including continuing the financial
advisory agreement with the Corporate Finance Group at Arthur Andersen LLP
relating to the exploration of strategic alternatives available to the
Company including 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 Arby's transaction is not
consummated, it is reasonably possible that the estimate of the carrying
value of the excess of cost over fair value of net assets, trademark and
franchise offering costs will decrease materially in the near term.
If the Company is able to consummate the Arby's transaction, the Company's
operations will be concentrated exclusively on its wholesale development
activities. Accordingly, the Company will be entirely dependent on its
wholesale operations as its sole source of revenues in addition to the
additional revenues generated from the Arby's transaction. The Company
intends to apply the proceeds from the Arby's transaction towards a
reduction of its existing indebtedness and to provide working capital for
its operations. Management believes that funds generated from the Arby's
transaction will provide sufficient working capital for its planned grocery
product distribution expansion plans for the foreseeable future.
11
PART II OTHER INFORMATION
Item 3 DEFAULTS UPON SENIOR SECURITIES
See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1996.
12
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.
T.J. Cinnamons, Inc.
Dated: May 13, 1996 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)
13