U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB / A NO. 1
(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, 1996
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 SMALL BUSINESS ISSUER 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)
(908) 544-0155
(ISSUER'S TELEPHONE NUMBER)
CHECK WHETHER THE ISSUER (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 SEPTEMBER 30,
1996: 7,453,822.
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - 1
September 30, 1996
Condensed Consolidated Statements of Operations - 3
Three and nine months ended September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - 4
Nine months ended September 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of 8
Results of Operations and Financial Condition
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Part 1 - Financial Information
Item 1 Financial Statements
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,1996
-----------------
(RESTATED UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 1,015,444
Marketable securities 12,920,314
Accounts receivable, net of allowance for
doubtful accounts of $9,924 10,616,193
Inventories 1,369,164
Current maturities of notes receivable 103,335
Income taxes receivable 1,559,646
Prepaid expenses and other current assets 802,762
-----------
Total current assets 28,386,858
-----------
Property and equipment, net of accumulated
depreciation of $2,833,535 11,472,459
-----------
Other assets
Notes receivable, net of current maturities 6,373,905
Goodwill, net of accumulated amortization of $133,331 4,537,067
Security deposits 810,725
Other assets 3,202,461
-----------
Total Assets $54,783,475
===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-1-
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,1996
-----------------
(RESTATED UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,596,445
Current maturities of capital lease obligations 129,315
Accounts payable and accrued expenses 6,349,494
Unearned franchise fee income 276,379
Franchise deposits 269,167
Deferred income taxes 6,700
Other current liabilities 49,336
-----------
Total current liabilities 8,676,836
-----------
Other liabilities
Long-term debt, net of current maturities 4,071,048
Capital lease obligations, net of current maturities 453,259
Security deposits 366,007
Deferred income taxes and other liabilities 241,000
-----------
Total other liabilities 5,131,314
-----------
Stockholders' equity
Preferred stock, 2,000,000 shares authorized,
no shares issued or outstanding -
Common stock, no par value, 25,000,000 shares
authorized, 7,453,822 issued
and outstanding 40,071,988
Retained earnings 903,337
-----------
Total stockholders' equity 40,975,325
-----------
Total liabilities and stockholders' equity $54,783,475
===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-2-
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
(RESTATED (RESTATED (RESTATED (RESTATED
UNAUDITED) UNAUDITED) UNAUDITED) UNAUDITED)
Revenues
Product sales $ 7,329,800 $ 4,623,232 $ 21,141,202 $ 11,793,530
Franchise & license related revenue 1,849,466 1,680,967 6,571,226 3,834,088
Other income 235,152 60,957 400,082 132,228
------------ ------------ ------------ ------------
Total revenue 9,414,418 6,365,156 28,112,510 15,759,846
------------ ------------ ------------ ------------
Operating expenses
Cost of goods sold 3,909,148 2,170,986 11,045,410 6,089,547
Selling, general & administrative expenses 5,654,791 2,989,275 15,815,094 7,794,903
Write-off of investment 3,010,000 -- 3,010,000 --
Non recurring charges -- -- 713,000 --
Interest income (272,286) (3,013) (791,860) (24,117)
Interest expense 122,424 42,694 308,675 105,650
------------ ------------ ------------ ------------
Total operating expenses 12,424,077 5,199,942 30,100,319 13,965,983
------------ ------------ ------------ ------------
(Loss) earnings before provision for income taxes (3,099,659) 1,165,214 (1,987,809) 1,793,863
(Benefit) provision for income taxes (641,748) 511,166 (454,954) 883,473
------------ ------------ ------------ ------------
Net (loss) income ($ 2,367,911) $ 654,048 ($ 1,532,855) $ 910,390
============ ============ ============ ============
Net (loss) income per share ($0.31) $ 0.12 ($0.21) $ 0.17
============ ============ ============ ============
Weighted average number of common &
common equivalent shares outstanding 7,547,522 5,361,166 7,423,614 5,355,598
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-3-
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
------------ ------------
(RESTATED (RESTATED
UNAUDITED) UNAUDITED)
Net cash provided (used) by operating activities ($ 4,175,595) $ 804,962
------------ ------------
Cash flows from investing activities
Purchases of marketable securities (1,911,150) --
Sales of marketable securities 11,615,836 --
Acquisitions and construction of property and equipment (7,329,176) (4,473,355)
Other net cash (used) provided by
investing activities (2,622,359) 26,002
------------ ------------
Net cash used by investing activities (246,849) (4,447,353)
------------ ------------
Cash flows from financing activities
Issuance of notes receivable (6,040,600) --
Proceeds from issuance of common stock 3,351,153 83,835
Other financing activities 112,816 2,630,762
------------ ------------
Net cash (used) provided by financing activities (2,576,631) 2,714,597
------------ ------------
Net decrease in cash and cash equivalents (6,999,075) (927,794)
Cash and cash equivalents - beginning 8,014,519 2,071,766
------------ ------------
Cash and cash equivalents - ending $ 1,015,444 $ 1,143,972
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-4-
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 for the year ended December 31, 1995 and current report on Form 8-K and
Form 8-KA reporting the acquisition of Specialty Bakeries, Inc. on May 22, 1996
as amended. The balances for 1995 have been restated to reflect the acquisition
of Specialty Bakeries, Inc. on May 22, 1996 accounted for as a pooling of
interest. See Note 3.
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 charges discussed
in Note 4 and Note 6. The results of operations for the three and nine months
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2 - INVENTORIES
-----------
September 30, 1996
------------------
Raw materials $ 299,308
Finished Goods 1,069,856
----------
$1,369,164
==========
NOTE 3 - ACQUISITIONS
------------
On January 9, 1996, the Company completed the acquisition of Bay Area
Bagels, Inc., a private company which owned eight bagel bakery stores in the San
Francisco Area. The purchase price was 65,500 shares of Common stock of the
Company and $85,000. The transaction was treated as a purchase for accounting
purposes.
On January 17, 1996, the Company completed the acquisition of three
stores in the Los Angeles market, which were licensed locations of I&J Bagels,
Inc. Such stores are being operated as company owned locations. The purchase
price was $1,500,000 and was treated as a purchase for accounting purchases.
-5-
On May 22, 1996, the Company completed the acquisition of Specialty
Bakeries, Inc. ("SBI") a private company which owned and franchised a total of
23 bagel bakery stores in the Southern New Jersey and Philadelphia areas
operating under the name Bagel Builders. The Company completed the acquisition
through the merging of a newly created, wholly owned subsidiary of the Company
with and into SBI and 132,500 shares of common stock of the Company were issued
to the shareholders of SBI. This transaction was structured to be a tax-free
reorganization and is being accounted for as a pooling of interests. Net
revenues and net income included in the Company's Consolidated Statements of
Operations are as follows ($ thousands):
Three Months Nine Months
Ended September 30 Ended September 30
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Net Revenues
Manhattan Bagel Company, Inc. $ 8,782 $ 5,476 $ 25,608 $ 13,283
Specialty Bakeries, Inc. 632 889 2,505 2,477
-------- -------- -------- --------
$ 9,414 $ 6,365 $ 28,113 $ 15,760
======== ======== ======== ========
Net Income
Manhattan Bagel Company, Inc. $ (2,504) $ 728 $ (1,567) $ 1,323
Specialty Bakeries, Inc. 136 (74) 34 (413)
-------- -------- -------- --------
$ (2,368) $ 654 $ (1,533) $ 910
======== ======== ======== ========
On June 28, 1996, the Company completed a transaction under which it
added 23 Bagel Brothers stores (including two under development) to its
franchise network. Under terms of the agreement, the Company purchased the Bagel
Brothers bagel dough factories in Cleveland and Buffalo for $2,000,000 and
50,000 shares of the Company's common stock. This transaction was treated as a
purchase for accounting purposes. Additionally, the Company provided Bagel
Brothers with $6,000,000 in financing, which, among other things, provided funds
to retire existing loans, to pay franchise fees, and to remodel the 21 operating
stores to the Manhattan Bagel format. The Company has the right to convert the
loan to equity should certain profit targets be met.
NOTE 4 - NON-RECURRING CHARGE
--------------------
Following the installation of new management at its I&J West Coast
subsidiary and subsequent to the Company's filing of its first quarter 10-QSB,
the Company uncovered certain improper bookkeeping and accounting practices at
the Los Angeles subsidiary. As a result, the Board of Directors authorized a
full investigation into the accounting practices at the subsidiary and retained
special counsel to assist in the investigation. Based on the conclusion of that
investigation, the Company restated its first quarter 1996 Statement of
Operations. Professional fees associated with the special investigation and the
class action lawsuits (see Note 5), and settlements of certain consulting
agreements totaling approximately $713,000, recorded in the second quarter, are
included in the Statement of Operations for the nine month period ended
September 30, 1996.
-6-
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 has 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 and that 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. The Company believes it has acted properly and has
adequate defenses to such actions. Accordingly, no provisions for these
contingencies have been made. Certain cost of the defense of these actions have
been included in the non-recurring charge (see Note 4).
NOTE 6 - WRITE OFF OF INVESTMENTS
------------------------
Based upon the results of a review of its West Coast operations, the
company has decided to close its bagel production facility in Los Angeles and to
temporarily supply its West Coast operations from Eatontown to assure product
quality. The Company has also decided to sell, franchise or close the San
Francisco locations acquired in January, 1996 operating under the name Holey
Bagel. As a result of these decisions, the company is writing off $3,010,000
comprised of the goodwill ($1,711,000) fixed assets ($874,000) and other assets
and accruals ($425,000) acquired in the Bay Area Bagel acquisition (see Note 3)
and the Los Angeles commissary and the sale or closure of the locations. The
amount of goodwill was reflective of the price of the Company's common stock at
the time of the acquisition. This write-off is reflected in the results of
operations for the three months and nine months ended September 30, 1996.
-7-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company's financial statements for the three and nine month 1996
periods reflect the recordation of two non-recurring charges as well as several
acquisitions made by the Company during 1996.
The Company's recently completed review of its West Coast operations
led to Management's determination to record in the third quarter a write-down of
its investments of $3.0 million relating to such operations. As a result of this
review, Management concluded that in the wake of escalating product demand from
the growing store base, the quality of the bagel dough being produced in the Los
Angeles manufacturing plant was not up to the Company's current standards.
Rather than compromise on quality, the Company elected to shut down the plant
and to reopen its plant on Meridian Road in Eatontown, New Jersey, and to supply
bagels to the West Coast from this facility. Approximately $700,000 of the
write-down reflects the write-down of machinery, equipment and the leasehold
improvements at the Los Angeles plant.
Such review also led to the determination that the eight Holy Bagel
stores in San Francisco acquired in January 1996 will be either franchised, sold
or closed by the end of the first half of 1997. Accordingly, the Company has
written off the goodwill and written down the assets associated with the stores
to their net realizable value, which write-off's are the balance of $2.3 million
included in the write-down of investments. The write-off of investments
substantially impacts the comparability of the three and nine month 1996 periods
with the corresponding periods of 1995.
Following the installation of new management at its I&J West Coast
subsidiary and subsequent to the company's filing of its first quarter 10-QSB,
the Company uncovered certain improper bookkeeping and accounting practices at
the Los Angeles subsidiary. As a result, the Board of Directors authorized a
full investigation into the accounting practices at the subsidiary and retained
special counsel to assist in the investigation. Based on the conclusion of that
investigation, the company has restated its first quarter 1996 Statement of
Operations to reduce revenues $90,000 and record additional expenses of
$290,000. Such adjustments are reflected in the financial statements for the
nine month period ending September 30, 1996. 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 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. The Company
believes it has acted properly and has adequate defenses to such actions.
Accordingly, no provisions for these contingencies have been made. Certain cost
of the defense of these actions have been included in the non-recurring charge.
See Note 4, Notes to the Condensed Consolidated Financial Statements. This
non-recurring charge substantially effects the comparability of the results of
operations.
On June 29, 1995, the Company acquired I&J Bagels Inc. ("I&J"). I&J was
a private company which owned and licensed a total of 17 bagel bakery stores in
the Los Angeles area operating under the name of I & Joy Bagels. The Company
completed the acquisition through the merging of a newly created, wholly-owned
-8-
subsidiary of the Company with DAB Industries Inc., ("DAB") whose sole asset is
all of the stock of I&J, in exchange for 1.5 million shares of Common Stock of
the Company. Accordingly, the consolidated financial statements for periods
prior to June 29, 1995 have been restated to include the accounts and results of
operations of I&J for all the periods presented.
On January 9, 1996, the Company completed the acquisition of Bay Area
Bagels, Inc., a private company which owned eight bagel bakery stores in the San
Francisco Area. The purchase price was 65,500 shares of Common stock of the
Company and $85,000. The transaction was treated as a purchase for accounting
purposes.
On January 17, 1996, the Company completed the acquisition of three
stores in the Los Angeles market, which were licensed locations of I&J Bagels,
Inc. Such stores are being operated as company owned locations. The purchase
price was $1,500,000 and was treated as a purchase for accounting purchases.
On May 22, 1996, the Company completed the acquisition of Specialty
Bakeries, Inc. ("SBI") a private company which owned and franchised a total of
23 bagel bakery stores in the Southern New Jersey and Philadelphia areas
operating under the name Bagel Builders. The Company completed the acquisition
through the merging of a newly created, wholly owned subsidiary of the Company
with and into SBI and 132,500 shares of common stock of the Company were issued
to the shareholders of SBI. This transaction was structured to be a tax-free
reorganization and is being accounted for as a pooling of interests. See Note 3,
Notes to Condensed Consolidated Financial Statements.
On June 28, 1996, the Company completed a transaction under which it
added 23 Bagel Brothers stores (including two under development) to its
franchise network. Under terms of the agreement, the company purchased the Bagel
Brothers bagel dough factories in Cleveland and Buffalo for $2,000,000 and
50,000 shares of the Company's common stock. This transaction was treated as a
purchase for accounting purposes. Additionally, the Company provided Bagel
Brothers with $6,000,000 in financing, which, among other things, provided funds
to retire existing loans, to pay franchise fees, and to remodel the 21 operating
stores to the Manhattan Bagel format. The Company has the right to convert the
loan to equity should certain profit targets be met.
RESULTS OF OPERATIONS
The total number of operating Manhattan Bagel Company stores has
increased from four at December 31, 1990 to 271 at September 30, 1996.
The following total number of stores were open and operating on the
following dates:
December 31, 1990.................................... 4
December 31, 1991.................................... 11
December 31, 1992.................................... 27
December 31, 1993.................................... 41
December 31, 1994.................................... 73
December 31, 1995.................................... 152
September 30, 1996................................... 271
-9-
In addition, on September 30, 1996, the Company had over 100 additional
stores in various stages of development.
The rapid expansion 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 as evidenced by the same store sales increases discussed
below. Total expenses have also risen significantly as the Company expanded its
corporate infrastructure. The number of employees as of September 30, 1996 was
562, while the number of employees as of September 30, 1995 was 342.
The Company has also granted several master franchises. Under the terms
of the master franchise agreement, a master franchisee is required to pay the
Company an initial fee based on the population of the territory covered by such
master franchise. The granting of new master franchises and the payment of the
initial fees also affects the comparability of results to prior periods.
The Company also grants area development rights. Under the terms of the
area development agreements, the area developer is required to pay the Company
an initial fee based on the number of stores to be developed within a specified
time period. The granting of new area development rights and the payment of
initial fees also affects the comparability of results to prior periods.
The Company's revenues are primarily derived from (i) the sale of
frozen raw bagel dough and cream 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 first nine months of 1996 was 75.2% compared to 74.8% in
1995.
For the comparative nine month periods ending September 30 1996 and
September 30, 1995, same store retail sales as reported by the Company's bagel
franchisees (which are unaudited), increased 1.9%, and total sales rose from
$26.2 million to $59.6 million, an increase of $33.4 million or 127.4%. The
amounts so reported are exclusive of three original stores that are on a fixed
royalty basis and are not required to report sales to the Company. The amounts
so reported also exclude the I & Joy stores which were previously operated by
I&J and acquired on June 29, 1995. New stores generally show greater increases
in their sales from period to period during their first years of operation. As
stores mature, the relative increase in their sales from period to period can be
expected to decline. Although the number of new stores in the Company's chain
continues to grow, new stores will increasingly constitute a smaller percentage
of total sales. Accordingly, on average the increase in same store sales is
expected to be at the more moderate levels than reported in prior periods.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
REVENUES. Total revenues of the Company for the three months ended
September 30, 1996 were $9,414,418 as compared to total revenues of $6,365,156
for the three months ended September 30, 1995, a $3,049,262 or 47.9% increase
over the three months of the prior year. The increase is primarily attributable
to the increased product sales 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 company recorded $466,981 of area development fees
for the three months ended September 30, 1996 as compared to $489,360 of master
franchise fees in the prior year quarter. Ongoing royalties and continuing
license fees increased from $462,327 in the quarter to $770,177 in the current
quarter, a $307,850 or 66.6% increase.
-10-
COSTS OF GOODS SOLD. Cost of goods sold for the three months ended
September 30, 1996 increased 80.1% to $3,909,148 as compared to $2,170,986 for
the three months ended September 30, 1995. This increase is directly
attributable to the increase in product sales. Costs of goods sold increased to
53.3% of product sales for the three months ended September 30, 1996 compared to
47.0% of product sales for the three months ended September 30, 1995. This
increase is due to a combination of the temporary transfer of bagel production
for the West Coast stores to the East Coast to assure product quality, including
cost associated with opening the Meridian Road plant in Eatontown and increases
in raw material costs not absorbed by price increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 89.2% to $5,654,791 for the three months ended
September 30, 1996, compared with $2,989,275 for the three months ended
September 30, 1995. As a percentage of total revenues, selling, general, and
administrative expenses increased to 60.1% for the three months ended September
30, 1996 from 47% for the three months ended September 30, 1995. The increase in
both absolute dollars and percentage of revenues is attributable, in addition,
to the growth of the Company to the consolidation of acquired businesses,
addition of senior and middle level personnel to manage the growth, and the
addition of Company owned stores which have a negative impact on S.G.&A.
margins.
WRITE-OFF OF INVESTMENTS. Write-off of Investments of $3,010,000 for
the three months ended September 30, 1996 were comprised of the goodwill and
fixed assets acquired in the Bay Area Bagel acquisition (see Note 3, Notes to
the Condensed Consolidated Financial Statements) and the Los Angeles (I&J)
commissary (see Note 6, Notes to the Condensed Consolidated Financial
Statements).
INTEREST INCOME. Interest income for the three months ended September
30, 1996 was $272,286 compared to $3,013 for the three months ended September
30, 1995. The increase of $269,273 was due to the proceeds of the November 23,
1995 public offering and proceeds received on April 9, 1996 from the exercise of
the over allotment option in connection with an underwritten March 22, 1996
public offering by selling shareholders invested in marketable securities. The
majority of these securities are short-term tax-free investments.
INTEREST EXPENSE. Interest expense increased from $42,694 for the three
months ended September 30, 1995 to $122,424 for the three months ended September
30, 1996. The $79,730 increase was primarily due to interest associated with the
EDA loan for the new Eatontown manufacturing facility which became operational
in April, 1996.
LOSS BEFORE PROVISION FOR INCOME TAXES. Loss before provision for
income taxes for the three months ended September 30, 1996 was $3,009,659,
compared with income of $1,165,214 for the three months ended September 30,
1995. This decrease is attributable to the $3,010,000 write-off of investments
(see Note 6, Notes to the Condensed Consolidated Financial Statements) and
increases in cost of sales and SG&A expenses as a percentage of sales discussed
above.
-11-
INCOME TAX. Provision for income taxes for the three months ended
September 30, 1996 was a benefit of $641,748 compared to expense of $511,166 for
the three months ended September 30, 1995. The benefit is a result of the loss
for the quarter and the tax-free status of the majority of interest income.
NET LOSS. The Company generated a net loss of $2,367,911 ($.31 per
share) for the three months ended September 30, 1996, as compared to net income
of $654,048 ($.12 per share) for the three months ended September 30, 1995 as a
result of the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995.
REVENUES. Total revenues of the Company for the nine months ended
September 30, 1996 were $28,112,510 as compared to total revenues of $15,759,846
for the nine months ended September 30, 1995, a $12,352,664 or 78.4% increase
over the nine months of the prior year. The increase is primarily attributable
to the increased product sales resulting from the increase in the number of
franchised stores opened as well as an increase in retail and wholesale sales by
the company stores. For the nine months ended September 30, 1996, master
franchise and area development fees were $1,000,000 and $591,360 respectively.
For the nine months ended September 30, 1995 master franchise fees were $591,360
and no area development fees were recorded. Ongoing royalty and continuing
license fees increased from $1,147,506 to $1,998,733 or 74.2% increase.
COST OF GOODS SOLD. Cost of goods sold for the nine months ended
September 30, 1996 increased 81.4% to $11,045,410 as compared to $6,089,547 for
the nine months ended September 30, 1995. This increase is directly attributable
to the increase in product sales. Costs of goods sold increased to 52.2% of
products sales for the nine months ended September 30, 1996 compared to 51.6% of
product sales for the nine months ended September 30, 1995. This increase is due
to a combination of increased purchasing and distribution costs partially offset
by manufacturing efficiencies from the automation of the existing Eatontown
factory and the operation of the new Eatontown factory, and the addition of
company owned stores which have a positive impact on gross profit margins.
During the quarter, the Company ceased operation of its California commissary to
supply the Los Angeles market, and transferred production to Eatontown, which
increased its production costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 102.9% to $15,815,094 for the nine months
ended September 30, 1996, compared with $7,794,903 for the nine months ended
September 30, 1995. As a percentage of total revenues, selling, general, and
administrative expenses increased to 56.3% for the nine months ended September
30, 1996 from 49.5% for the six months ended June 30, 1995. The increase in both
absolute dollars and percentage of revenues is attributable to the growth of the
company, addition of senior and middle level personnel to manage the growth and
the addition of company owned stores which have a negative impact on S.G.&A.
margins.
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 (see Note 4, Notes to Condensed Consolidated Financial
Statements) and the class action lawsuits (See Note 5, Notes to Condensed
Consolidated Financial Statements) and related settlements of certain consulting
agreements.
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WRITE-OFF OF INVESTMENTS. Write-off of Investments of $3,010,000 for
the three months ended September 30, 1996 were comprised of the goodwill and
fixed assets acquired in the Bay Area Bagel acquisition (see Note 3, Notes to
the Condensed Consolidated Financial Statements) and the Los Angeles (I&J)
commissary (see Note 6, Notes to the Condensed Consolidated Financial
Statements).
INTEREST INCOME. Interest income for the nine months ended September
30, 1996 was $791,860 compared to $24,117 for the nine months ended September
30, 1995. The increase of $767,743 was due to the proceeds of the November 23,
1995 public offering and proceeds received on April 9, 1996 from the exercise of
the over allotment option in connection with an underwritten March 22, 1996
public offering by selling shareholders invested in marketable securities. The
majority of these securities are short-term tax-free investments.
INTEREST EXPENSE. Interest expense increased from $105,650 for the nine
months ended September 30, 1995 to $308,675 for the nine months ended September
30, 1996. The $203,025 increase was primarily due to interest associated with
the EDA loan for the new Eatontown manufacturing facility which became
operational in April, 1996.
LOSS BEFORE PROVISION FOR INCOME TAXES. Loss before provision for
income taxes for the nine months ended September 30, 1996 was $1,987,809
compared with earnings of $1,793,863 for the nine months ended September 30,
1995. This decrease was attributed to a non recurring charge of $713,000 (See
Note 4, Notes to Condensed Consolidated Financial Statements), the $3,010,000
write off of investments (See Note 6, Notes to Condensed Consolidated Financial
Statements) and the increase in cost of sales and SG&A expenses as a percentage
of sales discussed above.
INCOME TAX. Income tax benefit for the nine months ended September 30,
1996 was $454,954 compared to an expense of $883,473 for the nine months ended
September 30, 1995. The effective tax rate for the nine months ended September
30, 1996 of 22.9% is due to the tax free status of the majority of interest
income offset by the non-deductible portion of the write-off of investments.
NET LOSS. The Company generated a net loss of $1,532,855 ($.21 per
share) for the nine months ended September 30, 1996, as compared to net income
of $910,390 ($.17 per share) for the nine month period ended September 30, 1995
as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On November 20, 1995, completed a public offering of 1,500,000 shares
of Common Stock at a public offering price of $19.625 per share. The proceeds of
such offering, net of discounts and offering expenses were $27,084,440. The
Company also received additional proceeds of $2,176,509 on December 14, 1995
from the sale of 118,000 shares of Common Stock to the public pursuant to the
underwriters' over-allotment option. The proceeds of the offering are being used
to finance the expansion of the Company's business through remodeling stores,
constructing and equipping manufacturing facilities and acquiring existing bagel
businesses as well as providing financing for future franchisees, and for
general corporate and working capital purposes.
On April 9, 1996 the Company received net proceeds of $1,911,150 from
the sale of 90,000 shares of common stock pursuant to the exercise of an
over-allotment option in connection with an underwritten public offering of
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shares owned by shareholders of the Company. In addition the Company received
$1,440,003 from the sale of stock to employees and consultants through the
Company's stock option plan. These proceeds will be utilized for general
corporate and working capital purposes.
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) $1,500,000 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, 1996 the Company's potential liability was
$676,131 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. The agreement provides for a number of
negative financial covenants, including minimum requirements with respect to a
fixed charge coverage ratio, a current ratio, leverage (as defined), tangible
net worth requirements and that the Company will not incur losses for two
consecutive quarters. The Company believes that it is in compliance with all
ratios and requirements as of September 30,1996.
The Company's cash flow used by operating activities during the first
nine months of 1996 was $4,175,595 compared to a cash flow of $804,962 provided
by operating activities during the nine months of 1995. During the nine months
ended September 30, 1996, cash flow used from net loss and depreciation was
$732,964. The decrease in cash and cash equivalents of $6,999,075 was primarily
due to the acquisition of Bagel Brothers factories for $2,000,000 and 50,000
shares of the Company's common stock (non-cash item). The Company also provided
Bagel Brothers with $6,000,000 in financing (see note 3 - Acquisition). .
The Company had working capital of $19,710,022 at September 30, 1996,
which represents a decrease of $11,125,501 from December 31, 1995. This decrease
in working capital is primarily a result of the Bagel Brothers transaction. At
September 30,1996, the accounts receivable balance was greater than the total
revenue for the three months ended September 30,1996 primarily due to an
increase in the construction receivable which in turn increased as a result of
increased starts on new stores. The Company believes there are no long-term
trends or events that would have a material negative impact on working capital.
The Company intends to construct a new bagel dough and cheese spread
manufacturing facility to supply its West Coast stores. The costs to complete
this facility are estimated to be $1.3 million.
Management believes that the Company's working capital, credit
facilities and anticipated funds generated internally from operations will be
sufficient to finance the Company's anticipated growth and 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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
None
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.
(Small Business Issuer)
Dated: January 30, 1997 By: S/N Jack Grumet
----------------
Jack Grumet,
Chairman of the Board and
Chief Executive Officer
Chief Financial Officer
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