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, 1998
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)
Indicate by check mark 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___
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No X
Number of shares of Common Stock, no par value, outstanding at August 7, 1998:
7,535,572.
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
Special Note Regarding Forward-Looking Statements 2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1997
and June 30, 1998 3
Consolidated Statements of Operations -
Three and six months ended June 30, 1997 and 1998 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Part II OTHER INFORMATION 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, particularly
under Items 1-2, constitute "forward-looking statements" within the meaning of
Section 21 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 Company filed for protection under Chapter 11 of the Federal
Bankruptcy Code in November 1997 and is operating as a debtor-in-possession. The
Company's success is highly dependent on its ability to structure and implement
a plan of reorganization and to emerge from the Chapter 11 proceedings.
The Company is dependent upon the success of existing and newly
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 the
future cost of the key ingredients for its frozen bagel dough, cheese spreads,
toppings and additional items.
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.
2
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MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
---- ----
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,802,396 $ 3,742,366
Accounts receivable, net 1,602,346 1,504,532
Construction costs receivable, net -- --
Franchise fee receivable area developers, net 129,555 239,914
Inventories 995,007 1,198,280
Current maturities of notes receivable, net 642,941 661,750
Current maturities of notes receivable - affiliates 1,275,000 0
Income taxes receivable 151,357 37,760
Prepaid expenses and other current assets 286,306 345,728
------------ ------------
Total current assets 7,884,908 7,730,330
------------ ------------
Property and equipment, net 12,892,070 12,115,486
------------ ------------
Other assets:
Accounts receivable, long term 470,374 470,374
Franchise fee receivable area developers, long term, net 200,000 200,000
Notes receivable, long term, net 6,129,878 6,318,192
Security deposits 911,134 982,964
Investment in stores, net 1,193,142 1,088,959
Other assets 409,082 409,082
------------ ------------
Total assets $ 30,090,588 $ 29,315,387
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to settlement:
Current liabilities:
Current maturities of capital lease obligations $ 14,618 $ 14,618
Accounts payable and accrued expenses 3,386,961 4,979,771
Unearned franchise fee income 57,500 207,501
Franchise deposits 122,576 170,833
------------ ------------
Total current liabilities 3,581,655 5,372,723
------------ ------------
Other liabilities:
Capital lease obligations, net of current maturities 19,180 19,180
Security deposits 490,853 488,928
Other liabilities 79,636 79,636
------------ ------------
Total other liabilities 589,669 587,744
------------ ------------
Commitments and contingencies
Liabilities subject to settlement:
Long-term debt 6,753,218 5,154,770
Capital lease obligations 408,884 320,732
Accounts payable and accrued expenses 8,465,724 8,485,297
------------ ------------
Total liabilities subject to settlement 15,627,826 13,960,799
------------ ------------
Stockholders' equity:
Preferred stock, 2,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value, 25,000,000 shares
authorized, 7,535,572 shares issued and outstanding 41,104,828 41,104,828
Accumulated deficit (30,813,390) (31,710,707)
------------ ------------
Total stockholders' equity 10,291,438 9,394,121
------------ ------------
Total liabilities and stockholders' equity $ 30,090,588 $ 29,315,387
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues
<S> <C> <C> <C> <C>
Product sales $9,511,811 $7,364,840 $17,150,427 $14,351,381
Franchise & license related revenue 2,085,773 613,493 4,299,237 1,312,646
------------ ----------- ------------ ------------
Total revenue 11,597,584 7,978,333 21,449,664 15,664,027
------------ ----------- ------------ ------------
Expenses
Cost of goods sold 7,066,244 5,693,513 12,277,152 11,172,105
Selling, general & administrative expenses 4,613,905 1,981,795 9,375,214 4,091,274
Other income (28,868) (1,983) (89,067) (136,115)
Interest income (362,982) (57,610) (661,907) (164,001)
Interest expense 223,317 81,182 400,491 208,760
------------ ----------- ------------ ------------
Total expenses 11,511,616 7,696,897 21,301,883 15,172,023
------------ ----------- ------------ ------------
Income before reorganization expenses and income taxes 85,968 281,436 147,781 492,004
Reorganization expenses
Adminitrative expense 0 60,019 0 176,344
Professional fees 0 720,397 0 1,212,978
------------ ----------- ------------ ------------
Total reorganization expense 0 780,416 0 1,389,322
Income (loss) before income taxes 85,968 (498,980) 147,781 (897,318)
Income taxes 0 0 0 0
------------ ----------- ------------ ------------
Net income (loss) $85,968 ($498,980) $147,781 ($897,318)
============ =========== ============ ============
Basic net income (loss) per share $0.01 ($0.07) $0.02 ($0.12)
============ =========== ============ ============
Diluted net income (loss) per share $0.01 ($0.07) $0.02 ($0.12)
============ =========== ============ ============
Weighted average common shares outstanding - basic 7,583,704 7,535,572 7,572,364 7,535,572
============ =========== ============ ============
Weighted average common shares outstanding - diluted 7,651,548 7,535,572 7,667,926 7,535,572
============ =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash (used in) provided by operating activities ($381,803) $1,613,814
----------- -----------
Cash flows from investing activities:
Payments for the purchase of property and equipment, net (4,884,479) (55,121)
Proceeds from the sale of marketable securities, net 4,112,173 0
Increase in notes receivable (2,654,417) 0
Decrease in notes receivable - related parties 0 1,275,000
Other net cash provided by / (used in) investing activities 161 (207,123)
----------- -----------
Net cash (used in) provided by investing activities (3,426,562) 1,012,756
----------- -----------
Cash flows from financing activities:
Proceeds from debt issuance 2,920,000 0
Principal payments on long term debt and capital leases 0 (1,686,600)
Proceeds from the exercise of stock options 145,000 0
Other net cash used in financing activities (300,592) 0
----------- -----------
Net cash provided by (used in) financing activities 2,764,408 (1,686,600)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,043,957) 939,970
Cash and cash equivalents-beginning of period 1,619,494 2,802,396
----------- -----------
Cash and cash equivalents-end of period $575,537 $3,742,366
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
Debtor-in-Possession
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-K, for the year ended December 31, 1997.
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. The results of operations for the three and
six months ended June 30, 1998 are not necessarily indicative of the results to
be expected for the full year.
The accompanying condensed consolidated financial statements have been
prepared on a going 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.
Certain June 30, 1997 balances have been reclassified to conform with
the June 30, 1998 presentation. Additionally, the Company has reclassified
certain accounts payable and accrued expenses included in current liabilities at
December 31, 1997 to liabilities subject to settlement.
NOTE 2 - CASH AND CASH EQUIVALENTS
At June 30, 1998 approximately $602,000 related to the advertising fund
which the Company maintains and administers to advertise and promote the stores
and the system is included in cash and cash equivalents as compared with
approximately $317,000 at December 31, 1997.
NOTE 3 - INVENTORIES
December 31, 1997 June 30, 1998
----------------- -------------
Raw materials $389,207 $462,615
Finished Goods 605,800 735,665
-------- ----------
$995,007 $1,198,280
======== ==========
NOTE 4 - NET INCOME/LOSS PER COMMON SHARE
During the fourth quarter of 1997, The Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128), which
specifies the method of computation, presentation and disclosure for earnings
per share ("EPS"). SFAS 128 requires the presentation of two EPS amounts, basic
and diluted. Basic earnings per share excludes any
6
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dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Basic net loss per share is based upon the weighted average
Common Shares outstanding during each period.
NOTE 5 - CONTINGENCIES
The Company is involved in various pending legal proceedings. The
adverse outcome of any of these legal proceedings is not expected to have a
material adverse effect on the financial condition of the Company. It is the
Company's expectation that each of these claims will be disposed of as part of
the plan of reorganization to be filed in the Company's Chapter 11 Case.
The franchisee financing facilities that the Company had in place with
Atlantic Financial Services and Sun Trust Credit Corp. have all been terminated.
The Company's contingent liability at June 30, 1998 amounted to $2,127,825 and
$1,525,363 under the terms of the Atlantic Financial Services and Sun Trust
Credit Corp. agreements, respectively. The ultimate amount of such liability, if
any, and settlement thereof is subject to adjustment based on the finalization
of a Plan of Reorganization under the Chapter 11 proceedings.
Under the Chapter 11 proceedings, actions to enforce certain claims
against the Company are stayed if the claims arose, or are based on, events that
occurred on or before the petition date. The ultimate terms of settlement of
these claims will be determined in accordance with a plan of reorganization
which requires the approval of the impaired prepetition creditors and
shareholders and confirmation by the Bankruptcy Court. Other liabilities may
arise or be subject to compromise, as a result of rejection of executory
contracts and unexpired leases, or the Bankruptcy Court's resolution of claims
for contingencies and other disputed amounts. The ultimate resolution of such
liabilities, all of which are subject to compromise, will be part of a plan of
reorganization.
The Company has received notification from the Securities and Exchange
Commission that the SEC Staff is considering recommending that the SEC institute
a civil enforcement action against the Company (but not including any present
officer or director of the Company) relating to the filing by the Company of
what the Staff believes are inaccurate financial statements for certain prior
periods. The Staff and the Company have had discussions regarding the Company's
differing views on these matters. No action has been commenced by the SEC and
the Company is unable to predict if or when such an action might be commenced.
NOTE 6 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS No. 130) "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components and is applied to all enterprises. The
adoption of SFAS No. 130 had no impact on the Company's financial statement
presentation.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS No. 131) "Disclosures about Segments of an Enterprise
and Related Information". 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
stockholders. It also establishes standards for related disclosures about
products and services, geographic
7
<PAGE>
areas, and major customers. SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. The Company will adopt the
new requirements in conjunction with its 1998 Form 10-K. The adoption of SFAS
No. 131 will have no significant impact on the Company's financial reporting.
NOTE 7 - SUBSEQUENT EVENT
On July 29, 1998, the Company signed an agreement to be acquired by New
World Coffee & Bagels, Inc. (NWCB), subject to a number of conditions. The
agreement will be an integral part of a Plan of Reorganization which will be
filed with the United States Bankruptcy Court for the District of New Jersey,
together with a required Disclosure Statement in order to obtain consent to the
Plan of Reorganization by the voting holders of claims or interests, and to
obtain confirmation of the Plan of Reorganization by the Bankruptcy Court. The
acquisition documents provide in part for the issuance of warrants which entitle
NWCB to purchase from the Company a total of 4,000,000 shares of the Common
Stock, no par value, (the Warrant Shares) at the purchase price of $.01 per
Warrant Share. The exercise period for the Warrant Shares is from July 28, 1998
through December 31, 2000. The Warrant is exercisable if the Company either
accepts or files a plan of reorganization (or liquidation) involving a party
other than NWCB or the Company through its action or inaction defaults under the
acquisition agreement and the financing commitments made by New World Coffee &
Bagels, Inc. remain in full force.
The acquisition agreement provides that New World Coffee & Bagels, Inc.
will provide up to $3.5 million for the Company's secured creditors, provide
$11.5 million for unsecured creditors and assume up to $5.0 million in
additional liabilities. No payment or other recovery will be provided to
Manhattan Bagel Company, Inc. shareholders.
If the agreement is not terminated, it shall become effective following
requisite approval by the Bankruptcy Court at which time Manhattan Bagel
Company, Inc. shall deliver to New World Coffee & Bagels, Inc. a stock
certificate registered in the name of NWCB, which shall represent all of the
authorized, issued, and outstanding common stock of the reorganized MBC.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
On November 19, 1997, Manhattan Bagel Company, Inc. and on December 31,
1997, I & J Bagel, Inc. filed voluntary petitions in the United States
Bankruptcy Court for the district of New Jersey (the "Bankruptcy Court") seeking
to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11,
certain claims against the Company in existence prior to the filing of the
petition for relief under federal bankruptcy law are stayed while the Company
continues business operations as debtor-in-possession. These claims are
reflected in the accompanying consolidated balance sheet as "liabilities subject
to settlement." In addition, the filing of a voluntary petition under Chapter 11
was an event of default under certain of the Company's loan agreements.
On July 29, 1998, the Company signed an agreement to be acquired by New
World Coffee & Bagels, Inc. (NWCB), subject to a number of conditions. The
agreement will be an integral part of a Plan of Reorganization which will be
filed with the United States Bankruptcy Court for the District of New Jersey,
together with a required Disclosure Statement in order to obtain consent to the
Plan of Reorganization by the voting holders of claims or interests, and to
obtain confirmation of the Plan of Reorganization by the Bankruptcy Court. The
acquisition documents provide in part for the issuance of warrants which entitle
NWCB to purchase from the Company a total of 4,000,000 shares of the Common
Stock, no par value, (the Warrant Shares) at the purchase price of $.01 per
Warrant Share. The exercise period for the Warrant Shares is from July 28, 1998
through December 31, 2000. The Warrant is exercisable if the Company either
accepts or files a plan of reorganization (or liquidation) involving a party
other than NWCB or the Company through its action or inaction defaults under the
acquisition agreement and the financing commitments made by New World Coffee &
Bagels, Inc. remain in full force.
The accompanying Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles applicable to a
company on a "going concern" basis, which, except as otherwise noted,
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business; however, as a result of the Chapter 11 proceedings,
and circumstances relating to this event, including the Company's debt
structure, its operating losses, and current economic conditions, such
realization of assets and liquidation of liabilities are subject to significant
uncertainties. The Company experienced a substantial net loss in 1997. During
the Chapter 11 proceedings, the Company has incurred and will continue to incur
substantial reorganization costs. The Company's ability to continue as a going
concern is dependent upon the confirmation of a plan of reorganization by the
Bankruptcy Court, the ability to secure adequate exit financing, combined with
the achievement of profitable operations. These conditions raise substantial
doubt about the Company's ability to continue as a going
9
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concern. See the qualification regarding the Company's ability to continue as a
going concern in the report of Independent Auditors included in the 1997 Form
10-K Report.
A plan of reorganization, as finally approved by the Bankruptcy Court,
could materially change the currently recorded amounts of assets and
liabilities. These financial statements do not reflect further adjustments to
the carrying value of assets and the amounts and classifications of liabilities
or stockholders' equity that might be necessary as a consequence of the
bankruptcy proceedings.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
In the second quarter of 1998 the Company generated income before
reorganization expenses of $281,436 as compared to net income of $85,968 in the
same period of the prior year. The net loss for the period was $498,980 as
compared to net income of $85,968 in the same period of the prior year. The loss
in 1998 was attributable to reorganization expenses and other factors which the
Company believes impacts the comparability of results. These items are discussed
below.
REVENUES. Total revenues of the Company for the three months ended June
30, 1998 were $7,978,333 as compared to total revenues of $11,597,584 for the
three months ended June 30, 1997, a $3,619,251 or 31.2% decrease over the three
months of the prior year. Product sales decreased $2,146,971 resulting from the
decrease in the number of Company stores. The decrease in franchise and business
related revenue is primarily attributable to the decreases in area developer
fees of $595,000, franchise fees of $266,667 and royalties of $610,613. 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 revenues for the
three months ended June 30, 1998 was 92.3% as compared to 82.0% for the
comparable 1997 period.
COSTS OF GOODS SOLD. Cost of goods sold for the three months ended June
30, 1998 decreased 19.4% to $5,693,513 as compared to $7,066,244 for the three
months ended June 30, 1997. This decrease is attributable to decreases in raw
material and factory overhead costs related to factory sales and decreases in
material due to a decrease in Company store sales. The decrease in Company store
retail revenue also negatively impacted cost of goods sold as a percentage of
sales which increased to 77.3% of product sales for the three months ended June
30, 1998 compared to 74.3% of product sales for the three months ended June 30,
1997. Increased costs were incurred in 1998 in the distribution of the Company's
products due to the geographic expansion of the territory that the Company is
servicing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative as a percentage of total revenues, was 24.8% for the three months
ended June 30, 1998 as compared to 39.8% for the three months ended June 30,
1997. Total expenses decreased 57.0% to $1,981,795 for the three months ended
June 30, 1998, compared with $4,613,905 for the three months ended June 30,
1997. The decrease in percent and absolute dollars is a result of the closing of
Company-owned stores, the cost reduction steps taken by the Company in the
fourth quarter of 1997 and the decrease in legal expenses as a result of the
stay of legal proceedings against the Company under the Chapter 11 filing. The
decrease was partially offset by an increase in the reserve for bad debts of
$225,000.
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OTHER INCOME. Other income for the three months ended June 30, 1998 was
$1,983 compared to $28,868 for the three months ended June 30, 1997, a decrease
of $26,885. The decrease in 1998 is net of $125,000 related to severance and a
write-down of assets related to the suspension of operations at the Company's
Greenville, S.C. facility.
INTEREST INCOME. Interest income for the three months ended June 30,
1998 was $57,610 compared to $362,982 for the three months ended June 30, 1997.
The decrease of $305,372 was primarily due to the sale of the Company's
marketable securities.
INTEREST EXPENSE. Interest expense decreased from $223,317 for the
three months ended June 30, 1997 to $81,182 for the three months ended June 30,
1998. The $142,135 decrease was primarily due to a decrease in debt.
INCOME BEFORE REORGANIZATION EXPENSES AND INCOME TAXES. Income before
reorganization expenses and provision for income taxes for the three months
ended June 30, 1998 was $281,436, compared with $85,968 for the three months
ended June 30, 1997. This increase is attributable to the factors discussed
above.
REORGANIZATION EXPENSES. Reorganization expenses for the three months
ended June 30, 1998 are expenses incurred as a result of the Company filing a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Act. Such expenses include fees for the attorneys, accountants and consultants
for both the Company and it's creditors.
INCOME TAX. There is no provision for income taxes for the three months
ended June 30, 1998 and 1997. A provision for income taxes has not been recorded
for the quarter because a valuation allowance has been recorded against the
Company's operating losses.
NET INCOME/LOSS. The Company generated a net loss of $498,980 ($.07 per
share) for the three months ended June 30, 1998, as compared to net income of
$85,968 ($.01 per share) for the three months ended June 30, 1997 as a result of
the factors discussed above.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998 the Company generated income
before reorganization expenses of $492,004 as compared to net income of $147,781
in the same period of the prior year. The net loss for the period was $897,318
as compared to net income of $147,781 in the same period of the prior year. The
loss in 1998 was attributable to reorganization expenses and other factors which
the Company believes impacts the comparability of results. These items are
discussed below.
REVENUES. Total revenues of the Company for the six months ended June
30, 1998 were $15,664,027 as compared to total revenues of $21,449,664 for the
six months ended June 30, 1997, a $5,785,637 or 27.0% decrease over the six
months of the prior year. Product sales decreased $2,799,046 resulting from the
decrease in the number of Company stores. The decrease in franchise and business
related revenue is primarily attributable to the decreases in area developer
fees of $1,595,000, franchise fees of $557,213 and royalties of $834,378. 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 revenues for the six
months ended June 30, 1998 was 91.6% as compared to 80.0% for the comparable
1997
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period.
COSTS OF GOODS SOLD. Cost of goods sold for the six months ended June
30, 1998 decreased 9.0% to $11,172,105 as compared to $12,277,152 for the six
months ended June 30, 1997. This decrease is attributable to decreases in raw
material and factory overhead costs related to factory sales and decreases in
material due to a decrease in Company store sales. The decrease in Company store
retail revenue also negatively impacted cost of goods sold as a percentage of
product sales which increased to 77.8% of product sales for the six months ended
June 30, 1998 compared to 71.6% of product sales for the six months ended June
30, 1997. Increased costs were incurred in 1998 in the distribution of the
Company's products due to the geographic expansion of the territory that the
Company is servicing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative as a percentage of total revenues, was 26.1% for the six months
ended June 30, 1998 as compared to 43.7% for the six months ended June 30, 1997.
Total expenses decreased 56.4% to $4,091,274 for the six months ended June 30,
1998, compared with $9,375,214 for the six months ended June 30, 1997. The
decrease in percent and absolute dollars is a result of the closing of
Company-owned stores, the cost reduction steps taken by the Company in the
fourth quarter of 1997 and the decrease in legal expenses as a result of the
stay of legal proceedings against the Company under the Chapter 11 filing. The
decrease was partially offset by an increase in the reserve for bad debts of
$225,000.
OTHER INCOME. Other income for the six months ended June 30, 1998 was
$136,115 compared to $89,067 for the six months ended June 30, 1997, an increase
of $47,048. The decrease in 1998 is net of $125,000 related to severance and a
write-down of assets related to the suspension of operations at the Company's
Greenville, S.C. facility.
INTEREST INCOME. Interest income for the six months ended June 30, 1998
was $164,001 compared to $661,907 for the six months ended June 30, 1997. The
decrease of $497,906 was primarily due to the sale of the Company's marketable
securities.
INTEREST EXPENSE. Interest expense decreased from $400,491 for the six
months ended June 30, 1997 to $208,760 for the six months ended June 30, 1998.
The $191,731 decrease was primarily due to a decrease in debt.
INCOME BEFORE REORGANIZATION EXPENSES AND INCOME TAXES. Income before
reorganization expenses and provision for income taxes for the six months ended
June 30, 1998 was $492,004, compared with $147,781 for the six months ended June
30, 1997. This increase is attributable to the factors discussed above.
REORGANIZATION EXPENSES. Reorganization expenses for the six months
ended June 30, 1998 are expenses incurred as a result of the Company filing a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Act. Such expenses include fees for the attorneys, accountants and consultants
for both the Company and the creditors.
INCOME TAX. There is no provision for income taxes for the six months
ended June 30, 1998 and 1997. A provision for income taxes has not been recorded
for either quarter because a valuation allowance has been recorded against the
Company's operating losses.
NET INCOME/LOSS. The Company generated a net loss of $897,318 ($.12 per
share) for the six months ended June 30, 1998, as compared to net income of
$147,781 ($.02 per share) for the six months ended June 30, 1997 as a result of
the factors discussed above.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has no liquidity and capital resources except for the cash
collateral being provided by its primary lender which has a security interest in
all assets of the Company. The Company is using cash collateral in accordance
with projections approved by the Bankruptcy Court. The Company has no liquidity
through any other source and no other debtor-in-possession financing.
The franchisee financing facilities that the Company had in place with
Atlantic Financial Services and Sun Trust Credit Corp. have all been terminated.
The Company's contingent liability at June 30, 1998 amounted to $2,127,825 and
$1,525,363 under the terms of the Atlantic Financial Services and Sun Trust
Credit Corp. agreements, respectively. The ultimate amount of such liability, if
any, and settlement thereof is subject to adjustment based on the finalization
of a Plan of Reorganization under the Chapter 11 proceedings.
Under the Chapter 11 proceedings, actions to enforce certain claims
against the Company are stayed if the claims arose, or are based on, events that
occurred on or before the petition date. The ultimate terms of settlement of
these claims will be determined in accordance with a plan of reorganization
which requires the approval of the impaired prepetition creditors and
confirmation by the Bankruptcy Court. Other liabilities may arise or be subject
to compromise, as a result of rejection of executory contracts and unexpired
leases, or the Bankruptcy Court's resolution of claims for contingencies and
other disputed amounts. The ultimate resolution of such liabilities, all of
which are subject to compromise, will be part of a plan of reorganization. See
"Item 2- Management's Discussion and Analysis of Results of Operations and
Financial Condition" for a description of an agreement signed by the Company on
July 29, 1998.
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to prepetition creditors may be sub
stantially altered and, as to some
classes, eliminated. At this time, the Company cannot predict the outcome of the
Chapter 11 filing, in general, or its affect on the future business of the
Company or on the ultimate interests of creditors or shareholders.
The Company's net increase in cash and cash equivalents for the six
months ended June 30, 1998 amounted to $939,970.
Net cash provided by operating activities amounted to $1,613,814. It is
primarily composed of the net loss for the period $897,318 offset by non-cash
charges for depreciation and amortization, $831,705, the provision for
reorganization expenses in excess of payments, $104,075, and the net change in
other operating assets and liabilities, $1,575,352.
Net cash provided by investing activities amounted to $1,012,756 and
consisted primarily of repayment of a note receivable from a related party.
13
<PAGE>
Net cash used in financing activities amounted to $1,686,600 and
consisted primarily of repayments under the Company's various loan agreements
and the repayment of obligations incurred under capital leases.
Until a plan of reorganization is confirmed by the Bankruptcy Court,
only such payments on prepetition obligations that are approved or required by
the Bankruptcy Court will be made. Except for payments for certain property and
equipment under lease, principal and interest payments on prepetition debt have
not been made since the filing date and will not be made without the Bankruptcy
Court's approval or until a plan of reorganization, defining the repayment
terms, has been confirmed by the Bankruptcy Court. There is no assurance at this
time that a plan of reorganization if proposed by the Company will be approved
and confirmed by the Bankruptcy Court.
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: August 14, 1998 By: s/n Jason Gennusa
----------------------------------------------
Jason Gennusa
President and Chief Operating Officer
Dated: August 14, 1998 By: s/n James J. O'Connor
----------------------------------------------
James J. O'Connor
Chief Financial Officer
16
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> $3,742,366
<SECURITIES> 0
<RECEIVABLES> 7,696,151
<ALLOWANCES> (5,289,955)
<INVENTORY> 1,198,280
<CURRENT-ASSETS> 7,730,330
<PP&E> 16,439,099
<DEPRECIATION> (4,323,613)
<TOTAL-ASSETS> 29,315,387
<CURRENT-LIABILITIES> 5,372,723
<BONDS> 0
0
0
<COMMON> 41,104,828
<OTHER-SE> (31,710,707)
<TOTAL-LIABILITY-AND-EQUITY> 29,315,387
<SALES> 14,351,381
<TOTAL-REVENUES> 15,664,027
<CGS> 11,172,105
<TOTAL-COSTS> 4,091,274
<OTHER-EXPENSES> (136,115)
<LOSS-PROVISION> 225,000
<INTEREST-EXPENSE> 44,759
<INCOME-PRETAX> (897,318)
<INCOME-TAX> 0
<INCOME-CONTINUING> (897,318)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (897,318)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
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