U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-24388
MANHATTAN BAGEL COMPANY, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2981539
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
246 Industrial Way West, Eatontown, New Jersey 07724
(Address of principal executive offices)
(732) 544-0155
(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the last 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___
Number of shares of Common Stock, no par value, outstanding at November 12,
1997: 7,501,822.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of Manhattan Bagel Company, Inc. (the "Company") to be materially different from
any future results, performance or achievements, expressed or implied by such
forward-looking statements.
The financial viability of the Company is dependent upon, among
other things, the Company's ability to obtain additional financing, to sell or
close non-performing company-owned stores, and otherwise structure a financial
reorganization acceptable to the Company's creditors.
Specifically, the Company is dependent upon the success of existing
and new franchised and Company owned stores and alternative distribution
outlets; the success of the Company, its master franchisees and area developers
in getting new stores or other retail locations opened; the ability of the
Company and its master franchisees to attract new qualified franchisees; and
such other factors as competition, commodity pricing and economic conditions.
The opening and success of Manhattan Bagel Company stores will
depend on various factors, including the availability of suitable store sites
and the negotiation of acceptable lease terms for new locations, the ability of
the Company or its franchisees to obtain construction and other necessary
permits in a timely manner, the ability to meet construction schedules, the
financial and other capabilities of the Company's franchisees and master
franchisees, and general economic and business conditions.
The Company's success is partially dependent on its ability to
attract, retain and contract with suitable franchisees and the ability of these
franchisees to open and operate their stores successfully.
The Company's business may also be subject to changes in consumer
taste, national, regional and local economic conditions, demographic trends and
the type, number and location of competing businesses. Competition in the bagel
industry is increasing significantly with an increasing number of national,
regional and local stores competing for franchisees and store locations as well
as customers.
The Company's future results may also be negatively impacted by
future pricing of the key ingredients for its frozen bagel dough.
The success of Manhattan Bagel Company units in alternative
distribution locations, including convenience stores, supermarkets, military
bases and other non-traditional locations, will depend, in addition to the
factors affecting traditional franchisee and Company owned stores, on the
success of the locations in which they are located.
The openings and remodelings of Manhattan Bagel stores, as well as
openings of units within alternative locations, may be subject to potential
delays caused by, among other things, permitting, weather, the delivery of
equipment and materials, and the availability of labor.
1
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MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1996
and September 30, 1997 3
Consolidated Statements of Operations -
Three and nine months ended September 30, 1996 and 1997 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $1,619,494 $564,610
Marketable securities 6,926,921 1,823,988
Accounts receivable, net of allowance for doubtful
accounts of $292,685 and $642,325, respectively 2,795,478 3,643,216
Construction costs receivable, net of allowance for doubtful
accounts of $60,000 and $1,060,000, respectively 2,254,842 421,587
Franchise fee receivable area developers, net of allowance of $565,000 721,782 575,175
Inventories 1,381,648 1,193,103
Current maturities of notes receivable, net of reserve of $256,000 462,225 303,437
Current maturities of notes receivable - affiliates 250,000 250,000
Income taxes receivable 2,053,663 1,391,390
Prepaid expenses and other current assets 628,634 612,337
------------- ---------------
Total current assets 19,094,687 10,778,843
------------- ---------------
Property and equipment, net of accumulated
depreciation of $1,987,142 and $3,314,961, respectively 12,000,338 15,703,266
------------- ---------------
Other assets:
Accounts receivable long term 480,539 480,539
Franchise fee receivable area developers long term, net of allowance
of $633,019 200,000 200,000
Notes receivable, net of current maturities and a reserve of $1,665,000 7,304,151 8,731,665
Notes receivable affiliates, net of current maturities 1,250,000 1,250,000
Goodwill, net of accumulated amortization of $214,201 4,386,853
Security deposits 909,053 859,338
Investment in stores, net of reserve of $849,000 and $4,142,000,
respectively 3,145,659 1,712,652
Other assets 819,910 687,345
-------------- ----------------
Total assets $49,591,190 $40,403,648
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $2,098,408 $5,603,830
Current maturities of capital lease obligations 164,812 154,732
Accounts payable and accrued expenses 6,354,511 7,785,777
Unearned franchise fee income 303,451 348,334
Franchise deposits 202,500 122,576
-------------- ----------------
Total current liabilities 9,123,682 14,015,249
-------------- ----------------
Other liabilities:
Long-term debt, net of current maturities 3,897,090 3,705,517
Capital lease obligations, net of current maturities 410,904 317,774
Security deposits 414,622 479,429
Other liabilities 79,636 79,636
-------------- ----------------
Total other liabilities 4,802,252 4,582,356
-------------- ----------------
Stockholders' equity:
Preferred stock, 2,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value, 25,000,000 shares
authorized, 7,454,822 and 7,501,822 shares issued and
outstanding, respectively 40,721,233 40,866,233
Foreign currency translation (12,695) (7,489)
Accumulated deficit (5,043,282) (19,052,701)
------------- ----------------
Total stockholders' equity 35,665,256 21,806,043
------------- ----------------
Total liabilities and stockholders' equity $49,591,190 $40,403,648
============= ================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
------------------------------ ---------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Product sales $7,329,800 $8,610,462 $21,141,202 $25,760,889
Franchise & license related revenue 1,474,659 1,238,727 5,560,395 5,537,964
-------------- -------------- -------------- --------------
Total revenue 8,804,459 9,849,189 26,701,597 31,298,853
-------------- -------------- -------------- --------------
Operating expenses
Cost of goods sold 4,795,084 6,550,090 13,336,902 18,827,241
Selling, general & administrative expenses 4,394,048 17,637,760 12,512,771 27,010,792
Write-off of investment 3,010,000 -- 3,010,000
Other income (235,152) (31,208) (400,082) (118,093)
Non recurring charges -- -- 713,000 --
Interest income (272,286) (327,645) (791,860) (989,552)
Interest expense 122,424 177,393 308,675 577,884
-------------- -------------- -------------- --------------
Total operating expenses 11,814,118 24,006,390 28,689,406 45,308,272
-------------- -------------- -------------- --------------
Loss before income taxes (3,009,659) (14,157,201) (1,987,809) (14,009,419)
Benefit for income taxes (641,748) -- (454,954) --
-------------- -------------- -------------- --------------
Net loss ($2,367,911) ($14,157,201) ($1,532,855) ($14,009,419)
============== ============== ============== ==============
Net loss per share ($0.31) ($1.89) ($0.21) ($1.87)
============== ============== ============== ==============
Weighted average number of common &
common equivalent shares outstanding 7,547,522 7,501,822 7,423,614 7,485,242
============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1996 1997
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash used in operating activities ($4,175,595) ($8,710,794)
--------------------- --------------------
Cash flows from investing activities:
Payments for the purchase of property and equipment (7,329,176) (5,030,747)
Proceeds from the sale of marketable securities 11,615,836 5,102,933
Purchase of marketable securities (1,911,150) --
Increase in notes receivable (1,268,726)
Purchase of business, net of cash acquired --
Other net cash (used in) / provided by investing activities (2,622,359) 6,007,346
--------------------- --------------------
Net cash (used in) / provided by investing activities (246,849) 4,810,806
--------------------- --------------------
Cash flows from financing activities:
Issuance of notes receivable (6,040,600) --
Proceeds from debt issuance 2,920,000
Proceeds from the exercise of stock options 145,000
Proceeds from issuance of common stock 3,351,153 --
Other net cash provided by / (used in) financing activities 112,816 (219,896)
--------------------- --------------------
Net cash (used in) / provided by financing activities (2,576,631) 2,845,104
--------------------- --------------------
Net decrease in cash and cash equivalents (6,999,075) (1,054,884)
Cash and cash equivalents-beginning of period 8,014,519 1,619,494
--------------------- --------------------
Cash and cash equivalents-end of period $1,015,444 $564,610
===================== ====================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial information in this report should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-KSB, as amended, for the year ended December 31, 1996.
In the opinion of management, the accompanying financial statements
include all adjustments necessary for a fair presentation. All such adjustments
are of a normal recurring nature with the exception of those 1996 charges
discussed in Note 5. The results of operations for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
The accompanying condensed consolidated financial statements have
been prepared on an ongoing concern basis, which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal course of
business despite the filing, by the Company, for reorganization under Chapter 11
of the Federal Bankruptcy Act (see Note 6).
Certain September 30, 1996, balances have been reclassified to
conform with the September 30, 1997 presentation.
NOTE 2 - INVENTORIES
December 31, 1996 September 30, 1997
------------------ ------------------
Raw materials $788,977 $658,027
Finished Goods 592,671 535,076
------- -------
$1,381,648 $1,193,103
========== ==========
NOTE 3 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The impact of Statement 128 on the calculation of primary and fully
diluted earnings per share has not yet been determined by management.
NOTE 4 - MODIFICATION OF CREDIT LINE
On April 15, 1997 the Company amended its letter of credit
supporting its line of credit agreement with the New Jersey Economic Development
Authority and the line of credit agreement with a bank. Under the terms of the
6
<PAGE>
amendment certain covenants were modified and in return the Company's borrowing
rate was increased to Prime plus 1% and the Company paid a fee of $20,000.
On November 10, 1997, First Union National Bank notified the Company
that it was in default under the revolving line of credit agreement.
Accordingly, the full amount outstanding thereunder has been recorded as
current. The filing by the Company of its petition under Chapter 11 of the
Bankruptcy Act would constitute a default under the line of credit agreement.
NOTE 5 - CONTINGENCIES
On June 20, 1996, the Company announced that following the
installation of new management at its I&J West Coast subsidiary, the Company had
uncovered certain improper bookkeeping and accounting practices at the Los
Angeles subsidiary and that it would be restating its first quarter 1996
Statement of Operations to account for these improper practices. Simultaneously
with the public announcement by the Company of the improprieties uncovered at
the I&J subsidiary, the Company announced it expected the West Coast subsidiary
will operate at a close to break-even level for the remainder of 1996. On the
day following the announcement the stock price of the Company's common stock
declined from a closing price of $21.25 on June 20, 1996 to a closing price of
$13.75 on June 21, 1996. As a result, certain class action law suits have been
filed.
These lawsuits from New Jersey and California have been consolidated
into one class action lawsuit in the Federal District Court in New Jersey. The
plaintiffs seek unspecified money damages. The Company has filed and argued a
motion to dismiss the lawsuit and is currently awaiting a decision by the court.
Although the Company believes it has acted properly and has adequate
defenses to such actions, no assessment of the amount or range of any loss that
might be incurred by, or the effects thereof on the Company, should it be found
to have violated any law, can be made at this time. Accordingly, no provisions
for these contingencies have been made.
The Company is also involved in various other pending legal
proceedings arising out of the Company's business. The adverse outcome of any of
these legal proceeding is not expected to have a material adverse effect on the
financial condition of the Company.
The Company has executed a $25.0 million franchisee financing
agreement with Atlantic Financial Services, Inc. Under the terms of this
agreement, the Company has agreed to guarantee certain portions of loans in
exchange for more favorable terms and rates for the Company's franchisees. The
7
<PAGE>
liability of the Company under this agreement is the greater of (i) $1,500,000
or (ii) 20% of the first $10,000,000 of loans to franchisees and 10% of the
remaining $15,000,000 of loans to franchisees. At December 31, 1996 and
September 30, 1997 the Company's contingent liability was $2,140,000 for
outstanding loans.
The Company has executed a $10.0 million franchisee financing
agreement with Stephens Franchise Finance which was purchased by Sun Trust
Credit Corp. Under the terms of this agreement, the Company has agreed to
guarantee certain portions of loans in exchange for more favorable terms and
rates for the Company's franchisees. The liability of the Company under this
agreement is the greater of (i) $1,000,000 or (ii) 30% of the aggregate
principal amount of loans to franchisees. At December 31, 1996 and September 30,
1997, the Company's contingent liability was $1,695,026 and $1,682,915 for
outstanding loans, respectively. As of June 13, 1996, the Company ceased using
Sun Trust Credit Corp. for any new franchisee financing.
Due to the Company filing a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Act, the Company is in default of
these agreements.
NOTE 6 - SUBSEQUENT EVENT
On November 19, 1997, the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Act. The filing was
made in the U.S. Bankruptcy Court for the District Court of New Jersey in
Trenton.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
On November 19, 1997, the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Act. The filing was
made in the U.S. Bankruptcy Court for the District of New Jersey in Trenton.
The Company sought bankruptcy protection as a result of recent
losses and being placed in default by its primary lender, First Union National
Bank. The Company is in negotiations with First Union National Bank regarding
the use of its cash collateral in the Company's ongoing business, and other
lenders regarding debtor in possession financing.
The Company was experiencing a cash shortage as a result of the
losses which were being funded by the Company's ongoing cash flow, cash reserves
and expenditures for the purchase of capital equipment. The Company also
recorded an adjustment during the quarter of $12,579,000, as discussed in
Selling, General and Administrative Expenses below.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
The Company's rapid expansion of franchisees significantly affects
the comparability of results of operations in several ways. Total royalty income
and frozen raw bagel dough sales rise significantly as new franchised and
licensed stores open. New store revenues are not usually as high in the first
periods following opening as they are in later periods. Total expenses have also
risen significantly as the Company expanded its corporate infrastructure.
REVENUES. Total revenues of the Company for the three months ended
September 30, 1997 were $9,849,189 as compared to total revenues of $8,804,459
for the three months ended September 30, 1996, a $1,044,730 or 11.9% increase
over the three months of the prior year. The increase is primarily attributable
to the increased product sales of $1,280,662 resulting from the increase in the
number of franchised stores opened. In addition ongoing royalties increased
$389,383. These increases were partially offset by decreases in franchise fees
of $158,334 and area developer fees of $466,981. The Company's revenues are
primarily derived from (i) the sale of frozen raw bagel dough and cheese spreads
to franchisees and licensees, (ii) retail and wholesale sale of products by the
Company-owned stores, and (iii) royalties, franchise and license fees, including
master franchise fees, and area development fees. The percentage of revenues
derived from product sales to total sales for the three months ended September
30, 1997 was 87.4% as compared to 83.3% for the comparable 1996 periods.
COSTS OF GOODS SOLD. Cost of goods sold for the three months ended
September 30, 1997 increased 36.6% to $6,550,090 as compared to $4,795,084 for
the three months ended September 30, 1996. This increase is attributable to the
increase in product sales as well as increased raw material and factory overhead
costs. The latter factors also negatively impacted cost of goods sold as a
percentage of product sales which increased to 76.1% of product sales for the
9
<PAGE>
three months ended September 30, 1997 compared to 65.4% of product sales for the
three months ended September 30, 1996. Additional costs were incurred in the
distribution of the Company's product due to expansion of the territory that the
Company covers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded
an adjustment during the quarter totaling $12,579,000. The adjustment consisted
of reserves for the write off of accounts and notes receivable of $4,010,000,
consisting of $1,345,000 of accounts receivable, $1,250,000 in area developer
fees, $915,000 of notes receivable and loans guaranteed by the Company totaling
$500,000. In addition, reserves were taken for the reduction of the value of
Company owned stores and the buyout of leases guaranteed by the Company totaling
$3,849,000 and a write off goodwill totaling $4,227,000 . The Company also
reserved for the close down of two of its plants totaling $400,000 and severance
pay of $93,000 incurred due to a downsizing of personnel. Before the adjustment
selling, general and administrative as a percentage of total revenues, is 51.4%
for the three months ended September 30, 1997 as compared to 49.9% for the three
months ended September 30, 1996. Total expenses increased 15.1% to $5,058,779
for the three months ended September 30, 1997, compared with $4,394,048 for the
three months ended September 30, 1996. The increase in absolute dollars is a
result of the growth of the Company, addition of personnel to manage the growth
and the addition of Company owned stores.
The Company is taking steps to decrease costs. Subsequent to the end
of the third quarter the Company downsized and terminated twenty five people,
closed two production facilities, one in Canada and the other was the Company's
original production facility in Eatontown, New Jersey. The closing of the
facility in Canada was a result of Comac Food Group, Inc. making the decision to
cease operating stores in Canada.
OTHER INCOME. Other income for the three months ended September 30,
1997 was $31,208 compared to $235,152 for the three months ended September 30,
1996. The decrease of $203,944 was primarily due to the closing of the Company's
construction business.
INTEREST INCOME. Interest income for the three months ended
September 30, 1997 was $327,645 compared to $272,286 for the three months ended
September 30, 1996. The increase of $55,359 was primarily due to the increase in
notes receivable.
INTEREST EXPENSE. Interest expense increased from $122,424 for the
three months ended September 30, 1996 to $177,393 for the three months ended
September 30, 1997. The $54,969 increase was primarily due to the increase in
debt associated with the Company's expansion.
LOSS BEFORE INCOME TAXES. Loss before provision for income taxes for
the three months ended September 30, 1997 was $14,157,201, compared with
$3,009,659 for the three months ended September 30, 1996. This increase is
attributable to the factors discussed above.
INCOME TAX. There is no benefit for income taxes for the three
months ended September 30, 1997 as compared to a benefit of $641,748 for the
three months ended September 30, 1996. A benefit for income taxes has not been
recorded for the quarter ended September 30, 1997 as a valuation allowance has
been recorded against the Company's current operating losses.
NET LOSS. The Company generated a net loss of $14,157,201 ($.1,89
per share) for the three months ended September 30, 1997, as compared to a net
loss of $2,367,911 ($.31 per share) for the three months ended September 30,
1996 as a result of the factors discussed above.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES. Total revenues of the Company for the nine months ended
September 30, 1997 were $31,298,853 as compared to total revenues of $26,701,597
for the nine months ended September 30, 1996, a $4,597,256 or 17.2% increase
over the nine months of the prior year. The increase is primarily attributable
to a $4,619,687 increase in product sales, resulting from the increase in the
number of franchised stores opened. The balance of the change a $22,431 decrease
is a result of increases in royalties of $1,307,851 and area developer fees of
$988,019 offset by decreases in master franchise fees and franchise fees of
$1,000,000 and $1,318,301 respectively. The Company's revenues are primarily
derived from (i) the sale of frozen raw bagel dough and cheese spreads to
franchisees and licensees, (ii) retail and wholesale sale of products by the
Company owned stores, and (iii) royalties, franchise and license fees, including
master franchise fees, and area development fees. The percentage of revenues
derived from product sales to total sales for the nine months ended September
30, 1997 was 82.3% as compared to 79.2% for the comparable 1996 period.
COSTS OF GOODS SOLD. Cost of goods sold for the nine months ended
September 30, 1997 increased 41.2% to $18,827,241 as compared to $13,336,902 for
the nine months ended September 30, 1996. This increase is attributable to the
increase in product sales, increased distribution costs associated with
territory expansion as well as costs associated with the temporary transfer of
bagel production to the East Coast, for the West Coast stores, to assure product
quality. The latter factor also negatively impacted cost of goods sold as a
percentage of product sales which increased to 73.1% of product sales for the
nine months ended September 30, 1997 compared to 63.1% of product sales for the
nine months ended September 30, 1996. The Company resumed partial bagel
production on the West Coast which is helping to lower these costs. Additional
costs were incurred in the distribution of the Company's product due to the
expansion of the territory that the Company covers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded
an adjustment during the third quarter totaling $12,579,000. The adjustment
consisted of reserves for the write off of accounts and notes receivable of
$4,010,000, consisting of $1,345,000 of accounts receivable, $1,250,000 in area
developer fees, $915,000 of notes receivable and loans guaranteed by the Company
totaling $500,000. In addition, reserves were taken for the reduction of the
value of Company owned stores and the buyout of leases guaranteed by the Company
totaling $3,849,000 and a write off goodwill totaling $4,227,000 . The Company
also reserved for the close down of two of its plants totaling $400,000 and
severance pay of $93,000 incurred due to a downsizing of personnel.. Before the
adjustment selling, general and administrative as a percentage of total
revenues, is 51.4% for the nine months ended September 30, 1997 as compared to
49.9% for the nine months ended September 30, 1996. Total expenses increased
15.1% to $5,058,779 for the nine months ended September 30, 1997, compared with
$4,394,048 for the nine months ended September 30, 1996. The increase in
absolute dollars is a result of the growth of the Company, addition of personnel
to manage the growth and the addition of Company owned stores.
11
<PAGE>
The Company is taking steps to decrease costs. Subsequent to the end
of the third quarter the Company downsized and terminated twenty five people,
closed two production facilities, one in Canada and the other was the Company's
original production facility in Eatontown, New Jersey. The closing of the
facility in Canada was a result of Comac Food Group, Inc. making the decision to
cease operating stores in Canada.
NON-RECURRING CHARGES. Non-recurring charges of $713,000 for the
nine months ended September 30, 1996 were comprised of professional fees
associated with the investigation relating to the improper bookkeeping and
accounting practices at the Company's Los Angeles subsidiary uncovered in June
1996, the related settlements of certain consulting agreements, and the class
action lawsuits (see Note 5, Notes to Condensed Consolidated Financial
Statements).
OTHER INCOME. Other income for the nine months ended September 30,
1997 was $118,093 compared to $400,082 for the nine months ended September 30,
1996. The decrease of $281,989 was primarily due to the closing of the Company's
construction business.
INTEREST INCOME. Interest income for the nine months ended September
30, 1997 was $989,552 compared to $791,860 for the nine months ended September
30, 1996. The increase of $197,692 was primarily due to the increase in notes
receivable.
INTEREST EXPENSE. Interest expense increased from $308,675 for the
nine months ended September 30, 1996 to $577,884 for the nine months ended
September 30, 1997. The $269,209 increase was primarily due to the increase in
debt associated with the Company's expansion.
LOSS BEFORE INCOME TAXES. Loss before income taxes for the nine
months ended September 30, 1997 was $14,009,419, compared with a loss of
$1,987,809 for the nine months ended September 30, 1996. This decrease is
attributable to factors as discussed above.
INCOME TAX. There is no provision for income taxes for the nine
months ended September 30, 1997 as compared to a tax benefit of $454,954 for the
nine months ended September 30, 1996. A benefit for income taxes has not been
recorded for the nine months ended September 30, 1997 as a valuation allowance
has been recorded against the Company's current operating losses.
NET LOSS. The Company generated a net loss of $14,009,419 ($1.87 per
share) for the nine months ended September 30, 1997, as compared to a net loss
of $1,532,855 ($.21 per share) for the nine months ended September 30, 1996 as a
result of the factors discussed above.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On January 4, 1995, the Company executed a $10 million dollar
franchisee financing agreement with Stephen Diversified Leasing, Inc. d/b/a
Stephens Franchise Finance which was later purchased by Sun Trust Credit Corp.
Upon entering into the agreement with Atlantic Financial Services, the Company
terminated its agreement with Stephens except for the loans then outstanding.
Under the terms of the Agreement, which provided for financing to the Company's
franchisees, the Company agreed to guarantee certain portions of the loans in
exchange for more favorable terms and rates for the Company's franchisees. The
aggregate liability of the Company under this arrangement is the greater of (i)
$1,000,000 or (ii) 30% of the aggregate principal amount of loans to
franchisees. At September 30, 1997, the Company's contingent liability was
approximately $1,682,915 constituting the full amount of loans outstanding to
franchisees under this franchise financing programs.
On May 24, 1996 the Company executed a $25 million dollar franchisee
financing agreement with Atlantic Financial Services. Under the terms of the
Agreement, the Company has agreed to guarantee certain portions of these loans
in exchange for more favorable terms and rates for the Company's franchisees.
The aggregate liability of the company under this arrangement is the greater of
(i) $1,5000,000 or (ii) 20% of the first $10,000,000 aggregate principal amount
of loans to franchisees and 10% of the remaining $15,000,000 principal of loans
to franchisees. At September 30, 1997, the Company's contingent liability was
approximately $2,140,000 constituting the full amount of the loans outstanding
to franchisees under the franchise financing program. The Company recorded a
reserve of $500,000 related to this contingent liability.
On August 8, 1996 the Company obtained a $7.5 million revolving
line of credit from First Union Bank, N.A. Under the terms of the agreement the
Company must maintain certain liquidity ratios and earnings.
On April 15, 1997 the Company amended its letter of credit
supporting its line of credit agreement with the New Jersey Economic Development
Authority and the line of credit agreement with a bank. Under the terms of the
amendment certain covenants were modified and in return the Company's borrowing
rate was increased to Prime plus 1% and the Company paid a fee of $20,000.
On November 10, 1997, First Union National Bank notified the Company
that it was in default under the revolving line of credit agreement.
Accordingly, the full amount outstanding thereunder has been recorded as
current. The filing by the Company of its petition under Chapter 11 of the
Bankruptcy Act would is a default under the line of credit agreement.
The filing of the Chapter 11 petition could also give rise to
defaults under other financing agreements.
The Company's cash flow used by operating activities during the
first nine months of 1997 was $3,977,055 compared to a use of $4,175,595 during
the first nine months of 1996. The decrease in the amount of cash flow used by
operating activities of $198,540 is primarily due to a less than proportionate
13
<PAGE>
increase in accounts receivable as compared to the sales increase, availability
and refund of income tax benefits which were partially offset by decreases in
accounts payable.
The Company had negative working capital of $3,743,164 at September
30, 1997, which represents a decrease of $13,714,169 from December 31, 1996.
This decrease in working capital is primarily a result of the adjustment taken
this quarter of $12,579,000 (see "SELLING, GENERAL AND ADMINISTRATIVE EXPENSES",
above) and the classification of $4,572,000, which represented the Company's
line of credit from it's bank, to current.
The Company said it is pursuing a number of actions to improve its
operating results. Company-owned stores have been identified as a major
component of the operating losses. The Company has undertaken a program to sell
those stores to franchisees or close them. Combined, these locations represent
approximately 9% of the Manhattan Bagel stores now in operation. Other steps
being taken to restore profitability include a downsizing of the corporate
staff. The Company has already completed an initial downsizing and will continue
to review staffing requirements relative to the needs of the continuing
business.
The Company is a defendant in class action law suits that have been
filed. These lawsuits from New Jersey and California have been consolidated into
one class action lawsuit in the Federal District Court in New Jersey. The
plaintiffs seek unspecified money damages. The Company has filed and argued a
motion to dismiss the lawsuit and is currently awaiting a decision by the court.
Although the Company believes it has acted properly and has adequate defenses to
such actions, no assessment of the amount or range of any loss that might be
incurred by, or the effects thereof on the Company, should it be found to have
violated any law, can be made at this time. Accordingly, no provisions for these
contingencies have been made.
The Company is also involved in various other pending legal
proceedings arising out of the Company's business.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components and applies to all
enterprises. SFAS No. 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 will have no impact
on the Company's consolidated results of operations, financial position or cash
flows.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 5- OTHER INFORMATION.
ITEM 6- EXHIBITS & REPORTS ON FORM 8-K.
None
15
<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, thereunto duly authorized.
MANHATTAN BAGEL COMPANY, INC.
Dated: November 21, 1997 By: s/n Jack Grumet
----------------
Jack Grumet,
Chairman of the Board and
Chief Executive Officer
Dated: November 21, 1997 By: s/n James J. O'Connor
----------------------
James J. O'Connor
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000914565
<NAME> MANHATTAN BAGEL COMPANY, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> $564,610
<SECURITIES> 1,823,988
<RECEIVABLES> 5,193,415
<ALLOWANCES> (2,011,325)
<INVENTORY> 1,193,103
<CURRENT-ASSETS> 10,778,843
<PP&E> 19,018,227
<DEPRECIATION> (3,314,961)
<TOTAL-ASSETS> 40,403,648
<CURRENT-LIABILITIES> 14,015,249
<BONDS> 0
0
0
<COMMON> 40,866,233
<OTHER-SE> (19,060,190)
<TOTAL-LIABILITY-AND-EQUITY> 40,403,648
<SALES> 25,760,889
<TOTAL-REVENUES> 31,298,853
<CGS> 18,827,241
<TOTAL-COSTS> 27,010,792
<OTHER-EXPENSES> (1,107,645)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 577,884
<INCOME-PRETAX> (14,009,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,009,419)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,009,419)
<EPS-PRIMARY> (1.87)
<EPS-DILUTED> (1.87)
</TABLE>
