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 June 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
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:
Common Stock, $.01 par value - 2,925,833 shares as of August 12, 1996
T.J. Cinnamons, Inc.
Part I FINANCIAL INFORMATION
Item I FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE PAGE
Balance Sheets at December 31, 1995 and 3 June 30,
1996. 3
Statement of Operations for the three months 4 ended
June 30, 1995 and June 30, 1996 and for the six months
ended June 30, 1995 and June 30, 1996. 4
Statement of Cash Flows for the six months 5 ended June
30, 1995 and June 30, 1996. 5
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
T.J. CINNAMONS, INC.
BALANCE SHEET
Dec. 31, June 30,
1995 1996
(Audited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 51,677 $ 23,123
Accounts receivable, less allowance for doubtful accounts 179,066 220,316
Prepaid expenses and other current assets,net 28,065 16,251
----------- -----------
Total current assets 258,808 259,690
Property and Equipment, less accumulated
depreciation and amortization 49,644 43,552
Excess of Cost over Fair Value of Net Assets Acquired 2,348,374 2,277,213
Organization Costs and Trademarks, at cost, less
accumulated amortization 15,973 11,504
Franchise Offering Costs, less accumulated amortization 106,126 81,407
Deferred Transaction Costs -- 64,389
Deferred Income Tax Asset, net of valuation allowance -- --
Other Assets 1,230 1,230
----------- -----------
Total Assets $ 2,780,155 $ 2,738,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 590,505 $ 732,877
Current maturities of long-term debt 802,708 828,409
Notes payable from affiliate of stockholders 23,848 138,170
Other current liabilities 67,500 105,858
----------- -----------
Total current liabilities 1,484,561 1,805,314
Long-Term Debt, net of current maturities 14,000 0
----------- -----------
Total liabilities 1,498,561 1,805,314
----------- -----------
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) (5,799,859)
----------- -----------
Stockholders' equity 1,281,594 933,671
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,780,155 $ 2,738,985
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
3
T.J. CINNAMONS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1995 1996 1995 1996
Revenue:
Sales from Company-owned stores
and wholesale sales $ 81,437 $ 218,944 $ 219,737 $ 448,947
Royalties and licensing fees 142,508 132,673 286,628 276,740
Other 0 16,680 0 33,359
Total revenue 223,945 368,297 506,365 759,046
----------- ----------- ----------- -----------
Operating expenses:
Cost of goods sold 53,990 199,293 163,710 391,931
Selling, general and administrative 428,823 387,843 953,648 681,282
----------- ----------- ----------- -----------
Total operating expenses 482,813 587,136 1,117,358 1,073,213
----------- ----------- ----------- -----------
Loss from operations (258,868) (218,839) (610,993) (314,167)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense, net (17,928) (16,631) (31,712) (33,756)
Loss from equipment disposal (13,519) 0 (28,281) 0
Loss from Company-owned
bakery closing (30,000) 0 (30,000) 0
----------- ----------- ----------- -----------
Total other income (expense) (61,447) (17,299) (89,993) (33,756)
----------- ----------- ----------- -----------
Net loss ($ 320,315) ($ 235,649) ($ 700,986) ($ 347,923)
=========== =========== =========== ===========
Net loss per common share ($ 0.11) ($ 0.08) ($ 0.24) ($ 0.12)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,918,635 2,910,833 2,918,635 2,910,833
=========== =========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
4
T.J. CINNAMONS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
1995 1996
Cash flow from operating activities:
Net loss ($700,986) ($347,923)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 101,459 106,441
Licensing revenue (29,575) (12,500)
Provision for doubtful accounts 23,650 86,706
Loss from disposal of equipment 28,281 0
Noncash interest expense 32,049 29,059
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 12,668 (127,956)
(Increase) decrease in prepaid expenses and other current assets (37,687) 11,814
(Increase) decrease if franchise offering costs (65,672) 0
(Increase) decrease in deferred transaction costs 0 (64,389)
(Increase) decrease in other assets 27,809 0
Increase (decrease) in accounts payable and accrued expenses (60,648) 142,372
Increase (decrease) in other current liabilities 32,500 38,358
--------- ---------
Net cash used in operating activities (636,152) (138,018)
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of equipment 7,850 0
Purchases of equipment (32,573) 0
--------- ---------
Net cash used in investing activities (24,723) 0
--------- ---------
Cash flows from financing activities:
Increase in notes payable 0 109,464
Payment of long term debt (44,445) 0
--------- ---------
Net cash provided by (used in) financing activities (44,445) 109,464
--------- ---------
Net decrease in cash (705,320) (28,554)
Cash at beginning of period 725,046 51,677
--------- ---------
Cash at end of period $ 19,726 $ 23,123
========= =========
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 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 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, common stock
equivalents have been excluded from the 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 six months ended
June 30, 1996 and 1995 as the Company has net operating losses. These net
operating losses have resulted in a deferred tax asset at June 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 June
30, 1996.
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 and six month periods ended June 30,
1996 compared to the three and six month periods ended June 30, 1995).
The following tables set forth the components of the Company's revenue:
Three Months Ended June 30,
1995 1996
Company-owned bakery sales $81,437 $55,509
Product sales 0 163,436
Franchise royalties 120,324 113,582
Licensing fees 22,634 12,341
Product rebates 0 23,429
-------- --------
$223,945 $368,297
======== ========
Six Months Ended June 30,
1995 1996
Company-owned bakery sales $219,737 $115,676
Product sales 0 333,272
Franchise royalties 245,384 235,090
Licensing fees 41,244 34,900
Product Rebates 0 40,108
-------- --------
$506,365 $759,046
======== ========
Company-owned bakery sales decreased by 32% to $55,509 for the three months
ended June 30, 1996 from $81,437 for the three months ended June 30, 1995,
and decreased by 47% to $115,676 for the six months ended June 30, 1996
from $219,737 for the six months ended June 30, 1995. The sales decrease
for the three and six months ended June 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.
Product sales of $163,436 for the three months ended June 30,
7
1996 and $333,272 for the six months ended June 30, 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 6% to $113,582 for the three months
ended June 30, 1996 from $120,324 for the three months ended June 30, 1995,
and decreased by 4% to $235,090 for the six months ended June 30, 1996 from
$245,384 for the six months ended June 30, 1995. These decreases in
franchise royalties resulted primarily from the closing of franchise
bakeries. There were 47 franchised bakeries on June 30, 1996 as compared
with 60 franchised bakeries on June 30, 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 future closings of franchised
bakeries, there can be no assurance that these declines will not continue
in the future.
Licensing fees decreased by 45% to $12,341 for the three months ended June
30, 1996 from $22,634 for the three months ended June 30, 1995, and
decreased by 15% to $34,900 for the six months ended June 30, 1996 from
$41,244 for the six months ended June 30, 1995. These 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.
Product rebates of $23,429 for the three months ended March 31, 1996 and
$40,108 for the six months ended June 30, 1996 are from various supplier
rebates and commitment fees.
Cost of goods sold increased by 269% to $199,293 for the three months ended
June 30, 1996 from $53,990 for the three months ended June 30, 1995, and
increased by 139% to $391,931 for the six months ended June 30, 1996 from
$163,710 for the six months ended June 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 Company-owned bakery sales expressed as a
percentage of bakery sales were 61% during the three months ended June 30,
1996 as compared to 80% for the same period last year, and 61% during the
six months ended June 30, 1996 as compared to 80% 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 10% to $387,354
for the three months ended June 30, 1996 from $428,823
8
for the three months ended June 30, 1995, and decreased by 29% to $681,461
for the six months ended June 30, 1996 from $953,648 for the six months
ended June 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.
Net interest expense decreased to $16,631 for the three months ended June
30, 1996 from $17,928 for the three months ended June 30, 1995, and
increased to $33,756 for the six months ended June 30, 1996 from $31,712
for the six months ended June 30, 1995. This increase in net interest
expense for the six months ended June 30, 1996 resulted from an increase in
borrowing levels.
9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had a working capital deficiency of
approximately $1,545,000. Included in this working capital deficiency is a
promissory note to Heinz Bakery Products in an amount equal to
approximately $793,500. In order to finance operating cash flow deficits,
the Company has negotiated commitment fees and marketing rebates from a
number of its suppliers, and affiliates of two of the principal
stockholders of the Company have provided the Company with loans which
balances were approximately $138,000 at June 30, 1996. In addition, the
Company obtained a short term bridge loan in the amount of $125,000 from
Gelt Financial Corporation more fully described below.
The Company owed approximately $697,800 to various trade and other
creditors at June 30, 1996, of which approximately $392,700 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 will be funded by the proceeds from
the Gelt Financial Corporation bridge loan 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 June 30, 1996, the Company had accounts receivable net of
allowance for doubtful accounts in the amount of $220,316. 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 $138,018
for the six months ended June 30, 1996 as compared to $636,152 for the six
months ended June 30, 1995. The Company used no cash in investing
activities for the six months ended June 30, 1996 as compared to $24,723
for the six months ended June 30, 1995. The Company generated net cash in
financing activities in the amount of $109,464 for the six months ended
June 30, 1996 resulting from loans from affiliates of two of the principal
stockholders of the Company, as compared net cash used in financing
activities in the amount of $44,445 for the six months ended June 30, 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 providing for a repayment of $400,000 of advanced
royalties, and an extension of the repayment of the remaining advanced
royalties
10
over 30 months, with interest at the prime rate, with 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,
which amount has also not been paid to date, with the remaining balance due
on January 31, 1997. The balance owed to Heinz Bakery Products as of June
30, 1996 including accrued interest is approximately $793,500. Repayment of
$750,000 of these advanced royalties is guaranteed by Charles Loccisano,
the Chairman of the Company.
In order to meet its short term cash requirements, in July 1996, the
Company consummated a short term bridge loan with Gelt Financial
Corporation ("Gelt") in the amount of $125,000. The Gelt loan bears
interest at a rate of prime plus five percent, and is secured by a security
interest in the Company's franchise and licensing agreements and royalty
income. The Company paid Gelt a placement fee of $15,625 and issued Gelt
15,000 shares of the Company's common stock, resulting 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 will be repaid from the proceeds of the
Triarc Restaurant Group transaction as more fully described below.
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 June 1996, the Company
reached a definitive agreement Triarc Restaurant Group d/b/a/ Arby's, Inc.
("Triarc") through which Triarc 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 Triarc for the management of the existing franchise system.
The Triarc transaction provides for a payment of $1,790,000 at closing, of
which $25,000 was paid upon the execution of the agreement, a promissory
note in the amount of $1,650,000 which will be paid in fifteen (15) equal
installments, a promissory note in the amount of $100,000 which will be
paid in twenty four (24) equal installments, and 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
11
Triarc exceeding a minimum base system wide sales of $26.3 million.
Consummation of the Triarc transaction is dependant upon the termination of
the Heinz Bakery Products license agreement as well as receipt of
shareholder approval under Delaware law. The Company has entered into an
agreement with Heinz Bakery Products which provides for the termination of
the License Agreement based on a $600,000 payment upon the closing of the
Triarc transaction, and the delivery of a promissory note in the amount of
$100,000 payable with interest in equal installments over a two year period
with a balloon payment of $50,000. The source of funds necessary to repay
the outstanding promissory note will be derived from the Triarc
transaction. The Company has filed a Definitive Proxy Statement with the
Securities and Exchange Commission seeking a vote from its shareholders to
approve the transaction. The Definitive Proxy Statements were mailed to all
shareholders of record on July 31, 1996, and the vote will take place at
the Company's annual meeting of its shareholders scheduled on August 27,
1996. There can be no assurances that the Company's shareholders will
approve the Triarc transaction.
Following the closing of the Triarc 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 Triarc transaction. The Company intends to
apply 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 Arby's transaction will
provide sufficient working capital for its planned grocery product
distribution expansion plans for the foreseeable future.
In the event that the Company does not receive shareholder approval under
Delaware law and the Triarc 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 Triarc 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.
12
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) On June 18, 1996 the registrant filed a Current Report on Form
8-K covering Item 5, Other Information, disclosing the
registrants execution of a definitive purchase agreement with
Triarc Restaurant Group.
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.
T.J. Cinnamons, Inc.
Dated: August 12, 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)
14