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 JUNE 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 AUGUST 9, 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.
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
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
Part I FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1996
and June 30, 1997 3
Consolidated Statements of Income -
Three and six months ended June 30, 1996 and 1997 4
Consolidated Statements of Cash Flows -
Six months ended June 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 4. Submission of Matters to a vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
---- ----
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,619,494 $ 575,537
Marketable securities 6,926,921 2,814,587
Accounts receivable, net of allowance for doubtful
accounts of $292,685 2,795,478 2,920,699
Construction costs receivable, net of allowance for doubtful
accounts of $60,000 2,254,842 3,313,080
Franchise fee receivable area developers, net of allowance of $565,000 721,782 620,174
Inventories 1,381,648 1,234,126
Current maturities of notes receivable, net of reserve of $256,000 462,225 1,668,512
Current maturities of notes receivable - affiliates 250,000 250,000
Income taxes receivable 2,053,663 1,332,484
Prepaid expenses and other current assets 628,634 363,691
------------ ------------
Total current assets 19,094,687 15,092,890
------------ ------------
Property and equipment, net of accumulated
depreciation of $1,987,142 and $2,904,654, respectively 12,000,338 15,111,612
------------ ------------
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 7,304,151 8,752,281
Notes receivable affiliates, net of current maturities 1,250,000 1,250,000
Goodwill, net of accumulated amortization of $214,201
and $286,415 respectively 4,386,853 4,314,639
Security deposits 909,053 899,782
Investment in stores, net of reserve of $849,000 and
$725,000, respectively 3,145,659 4,001,353
Other assets 819,910 813,046
------------ ------------
Total assets $ 49,591,190 $ 50,916,142
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,098,408 $ 1,780,081
Current maturities of capital lease obligations 164,812 154,732
Accounts payable and accrued expenses 6,354,511 4,694,178
Unearned franchise fee income 303,451 348,333
Franchise deposits 202,500 161,667
------------ ------------
Total current liabilities 9,123,682 7,138,991
------------ ------------
Other liabilities:
Long-term debt, net of current maturities 3,897,090 6,967,696
Capital lease obligations, net of current maturities 410,904 297,941
Security deposits 414,622 467,024
Other liabilities 79,636 79,636
------------ ------------
Total other liabilities 4,802,252 7,812,297
------------ ------------
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 40,866,234
Foreign currency translation (12,695) (5,879)
Accumulated deficit (5,043,282) (4,895,501)
------------ ------------
Total stockholders' equity 35,665,256 35,964,854
------------ ------------
Total liabilities and stockholders' equity $ 49,591,190 $ 50,916,142
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1997 1996 1997
---- ---- ---- ----
Revenues
<S> <C> <C> <C> <C>
Product sales $ 7,344,916 $ 9,511,811 $ 13,811,402 $ 17,150,427
Franchise & license related revenue 2,070,609 2,085,773 4,085,736 4,299,237
----------- ------------ ------------ ------------
Total revenue 9,415,525 11,597,584 17,897,138 21,449,664
----------- ------------ ------------ ------------
Operating expenses
Cost of goods sold 4,620,911 7,066,244 8,541,818 12,277,152
Selling, general & administrative expenses 4,229,212 4,613,905 8,118,723 9,373,032
Other income (94,813) (28,868) (164,930) (86,885)
Non recurring charges 713,000 0 713,000 0
Interest income (251,037) (362,982) (519,574) (661,907)
Interest expense 132,948 223,317 186,252 400,491
----------- ------------ ------------ ------------
Total operating expenses 9,350,221 11,511,616 16,875,289 21,301,883
----------- ------------ ------------ ------------
Earnings before provision for income taxes 65,304 85,969 1,021,849 147,781
Provision for income taxes (109,807) 0 186,794 0
----------- ------------ ------------ ------------
Net income $ 175,111 $ 85,969 $ 835,055 $ 147,781
=========== ============ ============ ============
Net income per share $ 0.02 $ 0.01 $ 0.11 $ 0.02
=========== ============ ============ ============
Weighted average number of common &
common equivalent shares outstanding 7,478,037 7,583,704 7,386,285 7,572,364
=========== ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
</TABLE>
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
<TABLE>
<CAPTION>
1996 1997
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash used in operating activities ($ 2,542,550) ($ 381,803)
------------ -----------
Cash flows from investing activities:
Payments for the purchase of property and equipment (2,438,711) (4,884,479)
Proceeds from the sale of marketable securities 10,511,749 4,112,173
Purchase of marketable securities (5,001,440) 0
Increase in notes receivable (6,095,079) (2,654,417)
Purchase of business, net of cash acquired (4,569,866) 0
Other net cash (used in) / provided by investing activities (2,305,232) 161
------------ -----------
Net cash used in investing activities (9,898,579) (3,426,562)
------------ -----------
Cash flows from financing activities:
Proceeds from debt issuance 0 2,920,000
Proceeds from the exercise of stock options 1,422,502 145,000
Proceeds from issuance of common stock 1,911,150 0
Other net cash provided by / (used in) financing activities 1,166,457 (300,592)
------------ -----------
Net cash provided by financing activities 4,500,109 2,764,408
------------ -----------
Net decrease in cash and cash equivalents (7,941,020) (1,043,957)
Cash and cash equivalents-beginning of period 8,014,519 1,619,494
------------ -----------
Cash and cash equivalents-end of period $ 73,499 $ 575,537
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
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 six months
ended June 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
Certain June 30, 1996, balances have been reclassified to conform with
the June 30, 1997 presentation.
NOTE 2 - INVENTORIES
-----------
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
Raw materials $ 788,977 $ 611,307
Finished Goods 592,671 622,819
---------- ---------
$1,381,648 $1,234,126
========== ==========
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 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.
6
<PAGE>
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, 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 a motion to
dismiss the lawsuit and all discovery has been stayed pending the resolution of
this motion. The oral argument is scheduled for September 15, 1997. 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 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 June 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 June 30, 1997, the Company's contingent
liability was $1,695,026 and $2,577,607 for outstanding loans, respectively. As
of June 13, 1996, the Company ceased using Sun Trust Credit Corp. for any new
franchisee financing.
As of June 30, 1997, there have been no events of default under either
the Atlantic Financial Services, Inc. agreement or the Sun Trust Credit Corp.
agreement.
In addition, the Company had commitments for the purchase of equipment
of
7
<PAGE>
approximately $300,000 at June 30, 1997.
NOTE 6 - SUBSEQUENT EVENT
----------------
The Company announced that it has signed a letter of intent with Doctors'
Associates Inc. (DAI), franchisor of the Subway chain (a worldwide fast food
restaurant franchise), providing for a proposed investment in the company by DAI
and the potential for Manhattan Bagel to sell bagels and cheese spreads to
participating franchisees in the 12,800-unit Subway chain if the franchisor
implements a bagel program.
Under the terms of the letter of intent, Fort Lauderdale, Fla.-based DAI would
purchase from Manhattan Bagel a five-year, $14.7 million convertible note
carrying a 6.25% interest rate. The note would be convertible into shares of
Manhattan Bagel common stock at $5.875 per share, or initially 2.5 million
shares, at the option of DAI at any time, or at the option of Manhattan Bagel if
the average closing bid prices of the common stock for 30 days after December
31, 1997 is at least equal to 150% of the conversion price. The letter of intent
additionally includes a provision calling for DAI and its principals to enter
into a five-year standstill agreement.
The transactions proposed in the letter of intent are subject to the execution
of definitive agreements, the completion of due diligence reviews by both
parties, and other customary conditions.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
----------------------------------------------------------------------
FINANCIAL CONDITION.
--------------------
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.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
REVENUES. Total revenues of the Company for the three months ended June
30, 1997 were $11,597,584 as compared to total revenues of $9,415,525 for the
three months ended June 30, 1996, a $2,182,059 or 23.2% increase over the three
months of the prior year. The increase is primarily attributable to the
increased product sales ($2,166,895) resulting from the increase in the number
of franchised stores opened as well as an increase in retail and wholesale sales
by the Company owned stores. The balance of the increase $15,164 is a result of
$595,000 of area developer fees and an increase in royalties of $532,552, offset
in part by a decrease in master franchise fees and franchise fees of $375,000
and $737,388 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 three months ended June 30, 1997 was
82.0% as compared to 78.0% for the comparable 1996 periods.
COSTS OF GOODS SOLD. Cost of goods sold for the three months ended June
30, 1997 increased 52.9% to $7,066,244 as compared to $4,620,911 for the three
months ended June 30, 1996. This increase is attributable to the increase in
product sales as well as costs associated with the temporary transfer of bagel
production for the West Coast stores to the East Coast to assure product
quality. The latter factor also negatively impacted cost of goods sold as a
percentage of product sales which increased to 74.3% of product sales for the
three months ended June 30, 1997 compared to 62.9% of product sales for the
three months ended June 30, 1996. The Company resumed partial bagel production
on the West Coast which is expected to help to lower these costs. 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. Selling, general and
administrative as a percentage of total revenues, decreased to 39.8% for the
three months ended June 30, 1997 from 44.9% for the three months ended June 30,
1996. Total expenses increased 9.1% to $4,613,905 for the three months ended
June 30, 1997, compared with $4,229,212 for the three months ended June 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.
9
<PAGE>
NON-RECURRING CHARGES. Non-recurring charges of $713,000 for the three
months ended June 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 law suits
(see Note 5, Notes to Condensed Consolidated Financial Statements).
INTEREST INCOME. Interest income for the three months ended June 30,
1997 was $362,982 compared to $251,037 for the three months ended June 30, 1996.
The increase of $111,945 was primarily due to the increase in notes receivable.
INTEREST EXPENSE. Interest expense increased from $132,948 for the
three months ended June 30, 1996 to $223,317 for the three months ended June 30,
1997. The $90,369 increase was primarily due to the increase in debt associated
with the Company's expansion.
EARNINGS BEFORE PROVISION FOR INCOME TAXES. Earnings before provision
for income taxes for the three months ended June 30, 1997 was $85,969, compared
with $65,304 for the three months ended June 30, 1996. This increase is
attributable to the factors discussed above.
INCOME TAX. There is no provision for income taxes for the three months
ended June 30, 1997 as compared to a benefit of $109,807 for the three months
ended June 30, 1996. A provision for income taxes has not been recorded for the
quarter ended June 30, 1997 due to the utilization of net operating losses and
deductible temporary differences against which a valuation allowance has
previously been provided.
NET INCOME. The Company generated net income of $85,969 ($.01 per
share) for the three months ended June 30, 1997, as compared to net income of
$175,111 ($.02 per share) for the three months ended June 30, 1996 as a result
of the factors discussed above.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Total revenues of the Company for the six months ended June
30, 1997 were $21,449,664 as compared to total revenues of $17,897,138 for the
six months ended June 30, 1996, a $3,552,526 or 19.8% increase over the six
months of the prior year. The increase is primarily attributable to the
increased product sales ($3,339,025) resulting from the increase in the number
of franchised stores opened as well as an increase in retail and wholesale sales
by the Company owned stores. The additional increase of $213,501 can be
attributed to increases in royalties of $918,468 and area developer fees of
$1,455,000 offset in part by decreases in master franchise fees and franchise
fees of $1,000,000 and $1,159,967 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 six months ended June 30, 1997
was 80.0% as compared to 77.2% for the comparable 1996 periods.
COSTS OF GOODS SOLD. Cost of goods sold for the six months ended June
30, 1997 increased 43.7% to $12,277,152 as compared to $8,541,818 for the six
months ended June 30,
10
<PAGE>
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 for the West Coast
stores to the East Coast to assure product quality. The latter factor also
negatively impacted cost of goods sold as a percentage of product sales which
increased to 71.6% of product sales for the six months ended June 30, 1997
compared to 61.8% of product sales for the six months ended June 30, 1996. The
Company resumed partial bagel production on the west coast which is expected to
help 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. Selling, general and
administrative as a percentage of total revenues, selling, general, and
administrative expenses decreased to 43.7% for the six months ended June 30,
1997 from 45.4% for the six months ended June 30, 1996. Total expenses increased
15.4% to $9,373,032 for the six months ended June 30, 1997, compared with
$8,118,723 for the six months ended June 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.
NON-RECURRING CHARGES. Non-recurring charges of $713,000 for the six
months ended June 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 law suits
(see Note 5, Notes to Condensed Consolidated Financial Statements).
INTEREST INCOME. Interest income for the six months ended June 30, 1997
was $661,907 compared to $519,574 for the six months ended June 30, 1996. The
increase of $142,333 was primarily due to the increase in notes receivable.
INTEREST EXPENSE. Interest expense increased from $186,252 for the six
months ended June 30, 1996 to $400,491 for the six months ended June 30, 1997.
The $214,239 increase was primarily due to the increase in debt associated with
the Company's expansion.
EARNINGS BEFORE PROVISION FOR INCOME TAXES. Earnings before provision
for income taxes for the six months ended June 30, 1997 was $147,781, compared
with income of $1,021,849 for the six months ended June 30, 1996. This decrease
is attributable to factors as discussed above.
INCOME TAX. There is no provision for income taxes for the six months
ended June 30, 1997 as compared to a provision of $186,794 for the six months
ended June 30, 1996. A provision for income taxes has not been recorded for the
six months ended June 30, 1997 due to the utilization of net operating losses
and deductible temporary differences against which a valuation allowance has
previously been provided.
NET INCOME. The Company generated net income of $147,781 ($.02 per
share) for the six months ended June 30, 1997, as compared to net income of
$835,055 ($.11 per share) for the six months ended June 30, 1996 as a result of
the factors discussed above.
11
<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
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 June 30, 1997,
the Company's contingent liability was approximately $2,577,607 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 June 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.
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.
The Company's cash flow used by operating activities during the first
six months of 1997 was $381,803 compared to a use of $2,542,550 during the first
six months of 1996. The decrease in the amount of cash flow used by operating
activities of $2,160,747 is primarily due to a less than proportionate 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 working capital of $7,953,899 at June 30, 1997, which
represents a decrease of $2,017,106 from December 31, 1996. This decrease in
working capital is primarily a result of an increase in current borrowing to
fund the expansion of the East and West Coast manufacturing facilities,
remodeling of the Company's West Coast stores and the building of new stores to
be franchised. The Company expects to sell the majority of these stores and
existing Company owned stores to franchisees during this fiscal year. The
Company believes there are no long-term trends or events that would have a
material negative impact on working capital.
12
<PAGE>
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 a motion to
dismiss the lawsuit and all discovery has been stayed pending the resolution of
this motion to dismiss the lawsuit and all discovery has been stayed pending the
resolution of this motion. The oral argument is scheduled for September 15,
1997. 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.
Management believes that the Company's working capital, credit
facilities and funds anticipated to be generated internally from operations will
be sufficient to meet the Company's liquidity requirements for the foreseeable
future, including the construction of the new West Coast bagel dough and cheese
spread manufacturing facility and the expansion of the manufacturing facility in
New Jersey. The Company may also find it necessary or desirable to obtain
additional funds. Such funds could be obtained from strategic alliances with
other companies, including joint venture, joint development or license
agreements or additional equity or debt offerings. However, there can be no
assurance that the Company will be successful in obtaining additional financing
from any of the foregoing sources, if it seeks to do so.
The Company announced that it has signed a letter of intent with
Doctors' Associates Inc. (DAI), franchisor of the Subway chain, (a worldwide
fast food restaurant franchise) providing for a proposed investment in the
company by DAI. Under the terms of the letter of intent, Fort Lauderdale,
Fla.-based DAI would purchase from Manhattan Bagel a five-year, $14.7 million
convertible note carrying a 6.25% interest rate. The note would be convertible
into shares of Manhattan Bagel common stock at $5.875 per share, or initially
2.5 million shares, at the option of DAI at any time, or at the option of
Manhattan Bagel if the average closing bid prices of the common stock for 30
days after December 31, 1997 is at least equal to 150% of the conversion price
(see Note 6, Notes to Condensed Consolidated Financial Statements).
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
----------------------------------------------------
An annual meeting of Shareholders of the Registrant took place on June 26, 1997.
At the meeting, the following six directors were elected with the votes cast as
follows:
DIRECTOR VOTES FOR VOTES WITHHELD
-------- --------- --------------
Jack Grumet 6,839,742 162,521
David Goldsmith 6,850,512 159,751
Jason Gennusa 6,847,712 162,551
Andrew Gennusa 6,849,932 160,331
Julia S. Heckman 6,856,142 154,121
Jack Levy 6,852,142 158,121
At the meeting an amendment to the Registrant's 1996 Stock Option Plan to
provide that directors be eligible for grants under the plan, was approved by
the following vote: For- 5,994,185, Against - 498,803, and Abstain (including
broker non-votes) - 517,275.
At the meeting, the Company granted options to purchase 30,000 shares of the
Company's stock to a non-employee director. An amendment to ratify a previous
grant to a certain non-employee was approved by the following vote: For -
6,199,428, Against - 456,758, and Abstain (including broker non-votes) -
354,077. .
ITEM 6- EXHIBITS & REPORTS ON FORM 8-K.
-------------------------------
None
<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: August 13, 1997 By: /s/ JACK GRUMET
----------------
Jack Grumet,
Chairman of the Board and
Chief Executive Officer
Dated: August 13, 1997 By: /s/ JAMES J. O'CONNOR
----------------------
James J. O'Connor
Chief Financial Officer
15
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 575,537
<SECURITIES> 2,814,587
<RECEIVABLES> 9,946,150
<ALLOWANCES> (1,173,685)
<INVENTORY> 1,234,126
<CURRENT-ASSETS> 15,092,890
<PP&E> 18,016,266
<DEPRECIATION> (2,904,654)
<TOTAL-ASSETS> 50,916,142
<CURRENT-LIABILITIES> 7,138,991
<BONDS> 0
0
0
<COMMON> 40,866,234
<OTHER-SE> (4,901,380)
<TOTAL-LIABILITY-AND-EQUITY> 50,916,142
<SALES> 17,150,427
<TOTAL-REVENUES> 21,449,664
<CGS> 12,277,152
<TOTAL-COSTS> 9,373,032
<OTHER-EXPENSES> (748,792)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 400,491
<INCOME-PRETAX> 147,781
<INCOME-TAX> 0
<INCOME-CONTINUING> 147,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 147,781
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