U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER 11,
1998: 7,535,572.
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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Special Note Regarding Forward-Looking Statements 2 - 3
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1997
and September 30, 1998 4
Consolidated Statements of Operations -
Three and nine months ended September 30, 1997
and 1998 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1998 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 18
Part II OTHER INFORMATION 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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.
On July 28, 1998, the Company signed an agreement to be acquired by New
World Coffee & Bagels, Inc. (NWCB), subject to a number of conditions. The
agreement is an integral part of a Plan of Reorganization, as amended, which was
filed with the United States Bankruptcy Court for the District of New Jersey, on
October 13, 1998, 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 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 re-organization (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 obtained
by NWCB 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, and it receives approval from the
Bankruptcy Court, when it becomes effective, 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.
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
2
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 has increased significantly with a 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.
3
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
Debtor-in-Possession
CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
1997 1998
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,802,396 $ 3,745,212
Accounts receivable, net 1,602,346 1,743,519
Franchise fee receivable area developers, net 129,555 239,914
Inventories 995,007 1,011,898
Current maturities of notes receivable, net 642,941 656,326
Current maturities of notes receivable - affiliates 1,275,000 --
Income taxes receivable 151,357 44,416
Prepaid expenses and other current assets 286,306 556,443
------------ ------------
Total current assets 7,884,908 7,997,728
------------ ------------
Property and equipment, net 12,892,070 11,763,179
------------ ------------
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 6,287,546
Security deposits 911,134 965,431
Investment in stores, net 1,193,142 1,071,626
Other assets 409,082 409,080
------------ ------------
Total assets $ 30,090,588 $ 29,164,964
============ ============
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 5,306,319
Unearned franchise fee income 57,500 208,334
Franchise deposits 122,576 170,833
------------ ------------
Total current liabilities 3,581,655 5,700,104
------------ ------------
Other liabilities:
Capital lease obligations, net of current maturities 19,180 19,180
Security deposits 490,853 483,208
Other liabilities 79,636 79,636
------------ ------------
Total other liabilities 589,669 582,024
------------ ------------
Commitments and contingencies
Liabilities subject to settlement:
Long-term debt 6,753,218 5,134,519
Capital lease obligations 408,884 273,243
Accounts payable and accrued expenses 8,465,724 8,590,622
------------ ------------
Total liabilities subject to settlement 15,627,826 13,998,384
------------ ------------
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) (32,220,376)
------------ ------------
Total stockholders' equity 10,291,438 8,884,452
------------ ------------
Total liabilities and stockholders' equity $ 30,090,588 $ 29,164,964
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues
Product sales $ 8,610,462 $ 6,984,326 $ 25,760,889 $ 21,335,707
Franchise & license related revenue 1,238,727 715,758 5,537,964 2,028,404
------------ ------------ ------------ ------------
Total revenue 9,849,189 7,700,084 31,298,853 23,364,111
------------ ------------ ------------ ------------
Expenses
Cost of goods sold 6,550,090 5,525,321 18,827,241 16,697,426
Selling, general & administrative expenses 17,637,760 1,873,981 27,012,974 5,965,255
Other income (31,208) (58,043) (120,275) (194,158)
Interest income (327,645) (54,816) (989,552) (218,817)
Interest expense 177,393 74,740 577,884 283,500
------------ ------------ ------------ ------------
Total expenses 24,006,390 7,361,183 45,308,272 22,533,206
------------ ------------ ------------ ------------
Income (loss) before reorganization expenses and income taxes (14,157,201) 338,901 (14,009,419) 830,905
Reorganization expenses
Administrative expenses -- 143,124 -- 319,468
Professional fees -- 705,445 -- 1,918,423
------------ ------------ ------------ ------------
Total reorganization expenses -- 848,569 -- 2,237,891
Loss before income taxes (14,157,201) (509,668) (14,009,419) (1,406,986)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss ($14,157,201) ($ 509,668) ($14,009,419) ($ 1,406,986)
============ ============ ============ ============
Basic and diluted net loss per share ($1.87) ($0.07) ($1.85) ($0.19)
============ ============ ============ ============
Weighted average common shares outstanding - basic and diluted 7,583,704 7,535,572 7,572,364 7,535,572
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1998
---- ----
(UNAUDITED) (UNAUDITED)
Cash (used in) provided by operating activities ($8,710,794) $ 1,705,312
----------- -----------
Cash flows from investing activities:
Payments for the purchase of property and equipment, net (5,030,747) (112,103)
Proceeds from the sale of marketable securities, net 5,102,933 --
Increase in notes receivable (1,268,726) --
Decrease in notes receivable - related parties -- 1,275,000
Other net cash provided by / (used in) investing activities 6,007,346 (171,053)
----------- -----------
Net cash provided by investing activities 4,810,806 991,844
----------- -----------
Cash flows from financing activities:
Proceeds from debt issuance 2,920,000 --
Principal payments on long term debt and capital leases -- (1,754,340)
Proceeds from the exercise of stock options 145,000 --
Other net cash used in financing activities (219,896) --
----------- -----------
Net cash provided by (used in) financing activities 2,845,104 (1,754,340)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,054,884) 942,816
Cash and cash equivalents-beginning of period 1,619,494 2,802,396
----------- -----------
Cash and cash equivalents-end of period $ 564,610 $ 3,745,212
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO 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
nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
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 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 Annual Report on Form
10-K Report.
Certain September 30, 1997 balances have been reclassified to conform
with the September 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 - ACQUISITION AGREEMENT
On July 28, 1998, the Company signed an agreement to be acquired by New
World Coffee & Bagels, Inc. (NWCB), subject to a number of conditions. The
agreement is an integral part of a Plan of Reorganization, as amended, which was
filed with the United States Bankruptcy Court for the District of New Jersey, on
October 13, 1998, 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 Common Stock, no par
7
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 re-organization (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 NWCB 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, and it receives approval from the
Bankruptcy Court, when it becomes effective, 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.
NOTE 3 - INVENTORIES
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
Raw materials $389,207 $ 407,448
Finished Goods 605,800 604,450
------- ----------
$995,007 $1,011,898
======== ==========
NOTE 4 - NET 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 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 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 both been
terminated. The Company's contingent liability at September 30, 1998 amounted to
$2,125,669 and $1,442,954 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.
8
In September 1998 the Company filed an Adversary Proceeding No.
98-3474(WHG) ("the Complaint") together with I & J Bagel Inc. and the Official
Committee of Unsecured Creditors against First Union National Bank ("FUNB"). The
Complaint asserts claims against FUNB for breach of the restructured loan
agreement of April 1997, breach of implied covenant of good faith and fair
dealing, fraudulent inducement and equitable subordination. A settlement of the
complaint has been reached with the parties which will resolve all the issues.
It provides for a payment to First Union National Bank ("FUNB") of $ 3,000,000
if paid by June 30, 1999 and a payment of $ 3,050,000 if paid between July 1,
1999 and December 31, 1999; If paid after January 1, 2000 the amount is $
3,350,000 plus interest at the non-default rate provided in the loan agreement
plus legal fees and expenses of collection incurred after January 1, 2000. The
proposed settlement will be submitted to the United States Bankruptcy Court for
approval on short notice.
Under the Chapter 11 proceeding, 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 the 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, are part of the 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 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
9
impact on the Company's financial reporting.
NOTE 7 - SUBSEQUENT EVENTS
On October 13, 1998 the United States Bankruptcy Court for the District
of New Jersey approved the Disclosure Statement and the First Amendment Joint
Plan of Reorganization of the Debtor. The Court has scheduled a hearing to
consider confirmation of the Plan on November 20, 1998.
10
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 28, 1998, the Company signed an agreement to be acquired by New
World Coffee & Bagels, Inc. (NWCB), subject to a number of conditions. The
agreement is an integral part of a Plan of Reorganization, as amended, which was
filed with the United States Bankruptcy Court for the District of New Jersey, on
October 13, 1998, 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 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 re-organization (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
NWCB 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, and it receives approval from the
Bankruptcy Court, when it becomes effective, 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.
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
11
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 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 Annual Report on 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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
In the third quarter of 1998, the Company generated income before
reorganization expenses of $338,901 as compared to a loss of $14,157,201 in the
same period of the prior year. The net loss for the period was $509,668 as
compared to a net loss of $14,157,201 in the same period of the prior year. The
loss in 1998 was attributable to reorganization expenses and other factors,
while the loss in 1997 reflected a third quarter adjustment totaling $12,579,000
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
September 30, 1998 were $7,700,084 as compared to total revenues of $9,849,189
for the three months ended September 30, 1997, a $2,149,105 or 21.8% decrease
over the comparable three months of the prior year. Product sales decreased
$1,626,136 resulting from the decrease in the number of franchisees and
Company-owned stores. The decrease in franchise and license related revenue is
attributable to the decreases in franchise fees of $79,166 and royalties of
$443,803. 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 September 30, 1998 was 90.7% as compared to
87.4% for the comparable 1997 period.
COSTS OF GOODS SOLD. Cost of goods sold for the three months ended
September 30, 1998 decreased 15.6% to $5,525,321 as compared to $6,550,090 for
the three months ended September 30, 1997. This decrease is attributable to
decreases in raw material and factory overhead costs related to factory sales
and decreases in food costs due to a decrease in Company-owned store sales. The
decrease in Company-owned store retail revenue also negatively impacted cost of
goods sold as a percentage of sales which increased to 79.1% of product sales
for the three months ended September 30, 1998 compared to 76.1% of product sales
for the three months ended September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Before an adjustment of
$12,579,000 recorded during the third quarter of 1997, selling, general and
administrative expenses as a percentage of total revenues was 51.4% compared to
24.3% for the three months ended September 30, 1998. Total expenses decreased
63.0% to $1,873,981 for the three months ended September 30, 1998, compared with
$5,058,760 (not including the adjustment of $12,579,000
12
discussed below) for the three months ended September 30, 1997. The decrease in
percent and absolute dollars is a result of the closing of most Company-owned
stores, the cost reduction programs implemented by the Company in the fourth
quarter of 1997 and the decrease in legal expenses resulting from the stay of
legal proceedings against the Company under the Chapter 11 filing.
The Company recorded an adjustment during the third quarter of 1997
totaling $12,579,000. The adjustment consisted of reserves for the write-off of
accounts and notes receivable of $4,010,000, consisting of $1,345,000 of
accounts receivable, $1,250,000 in area developer fees, $915,000 of notes
receivable and, reserves for loans guaranteed by the Company totaling $500,000.
In addition, reserves were taken for the reduction of the value of Company-
owned stores and the buyout of leases guaranteed by the Company totaling
$3,849,000 and a write-off of goodwill totaling $4,227,000 . The Company also
provided reserves for the closing of two of its plants totaling $400,000 and for
severance pay of $93,000 incurred due to a downsizing of personnel.
Selling, general and administrative expenses do not include expenses
associated with the reorganization of the Company under Chapter 11 proceedings.
Such expenses are reported in a separate category on the income statement.
INTEREST INCOME. Interest income for the three months ended September
30, 1998 was $54,816 compared to $327,645 for the three months ended September
30, 1997. The decrease of $272,829 was primarily due to the decrease in the
Company's investment in marketable securities.
INTEREST EXPENSE. Interest expense decreased from $177,393 for the
three months ended September 30, 1997 to $74,740 for the three months ended
September 30, 1998. The $102,653 decrease was primarily due to a decrease in the
level of debt.
INCOME (LOSS) BEFORE REORGANIZATION EXPENSES AND INCOME TAXES. Income
before reorganization expenses and provision for income taxes for the three
months ended September 30, 1998 was $338,901, compared with a loss of
$14,157,201 for the three months ended September 30, 1997. This increase is
attributable to the factors discussed above.
REORGANIZATION EXPENSES. Reorganization expenses for the three months
ended September 30, 1998 were expenses incurred as a result of the Company
filing a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Act. Such expenses included fees for the attorneys, accountants and
consultants for both the Company and it's creditors.
INCOME TAX. There was no benefit for income taxes for the three months
ended September 30, 1998 and 1997. A benefit for income taxes has not been
recorded for either quarter because a valuation allowance has been recorded
against the Company's operating losses.
NET LOSS. The Company generated a net loss of $509,688 ($.07 per share)
for the three months ended September 30, 1998, as compared to a net loss of
$14,157,201 ($1.87 per share) for the three months ended September 30, 1997 as a
result of the factors discussed above.
13
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
For the nine months ended September 30, 1998, the Company generated
income before reorganization expenses of $830,905 as compared to a loss of
$14,009,419 in the same period of the prior year. The net loss for the period
was $1,406,986 as compared to a net loss of $14,009,419 in the same period of
the prior year. The loss in 1998 was attributable to reorganization expenses and
other factors, while the loss in 1997 included a third quarter adjustment
totaling $12,579,000 which the Company believes impacts the comparability of
results. These items are discussed below.
REVENUES. Total revenues of the Company for the nine months ended
September 30, 1998 were $23,364,111 as compared to total revenues of $31,298,853
for the nine months ended September 30, 1997, a $7,934,742 or 25.4% decrease
over the comparable nine months of the prior year. Product sales decreased
$4,425,182 resulting from the decrease in the number of franchisees and
Company-owned stores. The decrease in franchise and license related revenue is
attributable to the decreases in area developer fees of $1,595,000, franchise
fees of $636,379 and royalties of $1,278,181. The Company's revenues are
primarily derived from (i) the sale of frozen raw bagel dough and cheese spreads
to franchisees and licensees, (ii) retail and wholesale sale of products by the
Company-owned stores, and (iii) royalties, franchise and license fees, including
master franchise fees, and area development fees. The percentage of revenues
derived from product sales to total sales for the nine months ended September
30, 1998 was 91.3% as compared to 82.3% for the comparable 1997 period.
COSTS OF GOODS SOLD. Cost of goods sold for the nine months ended
September 30, 1998 decreased 11.3% to $16,697,426 as compared to $18,827,241 for
the nine months ended September 30, 1997. This decrease is attributable to
decreases in raw material and factory overhead costs related to factory sales
and decreases in food costs due to a decrease in Company-owned store sales. The
decrease in Company-owned store retail revenue also negatively impacted cost of
goods sold as a percentage of sales which increased to 78.3% of product sales
for the nine months ended September 30, 1998 compared to 73.1% of product sales
for the nine months ended September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Before an adjustment of
$12,579,000 recorded during the third quarter of 1997, selling, general and
administrative expenses as a percentage of total revenues was 46.1% compared to
25.5% for the nine months ended September 30, 1998. Total expenses decreased
58.7% to $5,965,255 for the nine months ended September 30, 1998, compared with
$14,433,974 (not including the adjustment of $12,579,000 discussed below) for
the nine months ended September 30, 1997. The decrease in percent and absolute
dollars is a result of the closing of Company-owned stores, the cost reduction
programs implemented by the Company in the fourth quarter of 1997 and the
decrease in legal expenses resulting from 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.
The Company recorded an adjustment during the third quarter of 1997
totaling $12,579,000. The adjustment consisted of reserves for the write-off of
accounts and notes receivable of $4,010,000, consisting of $1,345,000 of
accounts receivable, $1,250,000 in area developer fees, $915,000 of notes
receivable and, reserves for loans guaranteed by the Company
14
totaling $500,000. In addition, reserves were taken for the reduction of the
value of Company-owned stores and the buyout of leases guaranteed by the Company
totaling $3,849,000 and a write-off of goodwill totaling $4,227,000 . The
company also provided reserves for the closing of two of its plants totaling
$400,000 and for severance pay of $93,000 incurred due to a downsizing of
personnel.
Selling, general and administrative expenses do not include expenses
associated with the reorganization of the Company under Chapter 11 proceedings.
Such expenses are reported in a separate category on the income statement.
INTEREST INCOME. Interest income for the nine months ended September
30, 1998 was $218,817 compared to $989,552 for the nine months ended September
30, 1997. The decrease of $770,735 was primarily due to the decrease in the
Company's investment in marketable securities.
INTEREST EXPENSE. Interest expense decreased from $577,884 for the nine
months ended September 30, 1997 to $283,500 for the nine months ended September
30, 1998. The $294,384 decrease was primarily due to a decrease in the level of
debt.
INCOME (LOSS) BEFORE REORGANIZATION EXPENSES AND INCOME TAXES. Income
before reorganization expenses and provision for income taxes for the nine
months ended September 30, 1998 was $830,905, compared with a loss of
$14,009,419 for the nine months ended September 30, 1997. This increase is
attributable to the factors discussed above.
REORGANIZATION EXPENSES. Reorganization expenses for the nine months
ended September 30, 1998 were expenses incurred as a result of the Company
filing a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Act. Such expenses included fees for the attorneys, accountants and
consultants for both the Company and the creditors.
INCOME TAX. There was no benefit for income taxes for the nine months
ended September 30, 1998 and 1997. A benefit for income taxes has not been
recorded for either quarter because a valuation allowance has been recorded
against the Company's operating losses.
NET LOSS. The Company generated a net loss of $1,406,986 ($.19 per
share) for the nine months ended September 30, 1998, as compared to a net loss
of $14,009,419 ($1.85 per share) for the nine months ended September 30, 1997 as
a result of the factors discussed above.
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.
15
The franchisee financing facilities that the Company had in place with
Atlantic Financial Services and Sun Trust Credit Corp. have both been
terminated. The Company's contingent liability at September 30, 1998 amounted to
$2,125,669 and $1,442,954 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 proceeding, 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, are part of a plan of reorganization.
Subject to the confirmation of the Plan, the Company and NWCB entered
into an Acquisition Agreement, dated as of July 28, 1998, as amended, pursuant
to which, on the effective date of the Plan, NWCB will pay $7,500,000 in cash, a
promissory note of $5,500,000, NWCB Common Stock which is to be registered
within sixty (60) days with a value of not less than $2,250,000, and the
guaranty to the franchisee lenders, in exchange for 100% of the New Common Stock
of Reorganized MBC, which will in turn pay $1,000 for the New Common Stock of
Reorganized I & J. $3,500,000 will be used to pay secured creditors allowed
claims. $4,000,000 in cash, the note and NWCB Stock will be deposited in the
Unsecured Creditor Trust for the benefit of MBC and I & J unsecured creditors.
All claims against and interests in the debtors will be canceled and discharged
by confirmation of the Plan.
$4,000,000 in cash, the note and the NWCB Stock will constitute the
initial corpus of the Unsecured Creditor Trust. In addition, the trustee will be
vested with all Avoiding Power Causes of Action, the proceeds of which shall be
deposited in the Unsecured Creditor Trust. In addition, 50% of the savings below
the $ 3,500,000 derived from prosecution of the First Union Causes of Action
shall be deposited into the Unsecured Creditor Trust.
The note will be secured by a secondary priority blanket lien on all
the assets of NWCB, MBC and I & J and will bear interest at 9% per annum payable
quarterly in arrears (provided that should the Note be secured by a first lien
on the assets of Bagel Brothers, then the interest rate shall be 6% per annum).
Principal will be due and payable quarterly in installments of $687,500
commencing 15 months after the effective date.
Total filed general unsecured claims as of the Bar Date were
$196,560,555. Of that amount, the debtors intend to challenge claims totaling
approximately $185,000,000, or more than 90% in amount (but not in number).
There can be no assurance that the Debtor will be successful in these
challenges. The debtors believe that general unsecured claims will be allowed in
a range of approximately $14,000,000 to $20,000,000. Assuming full payment of
the note at its original face amount and liquidation of the NWCB Stock for an
16
amount not less than $2,250,000, recoveries to general unsecured creditors under
the Plan should range from approximately 85% to 55%, depending upon the total
amount of unsecured claims which are allowed.
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 substantially altered and, as to some
classes, eliminated. At this time, if the Plan is not confirmed or does not
become effective, 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 nine
months ended September 30, 1998 amounted to $942,816.
Net cash provided by operating activities amounted to $1,705,312 for
the nine months ended September 30, 1998. It is primarily comprised of the net
loss for the period $1,406,986 offset by non-cash charges for depreciation and
amortization, $1,240,994, the provision for reorganization expenses in excess of
payments, $251,805, and the net change in other operating assets and
liabilities, $1,619,499.
Net cash provided by investing activities amounted to $991,844 and
consisted primarily of repayment of a note receivable from a related party.
Net cash used in financing activities amounted to $1,754,340 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.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs having been
written using two digits rather than four to define the applicable year
resulting in time-sensitive software recognizing a date using "00"as the year
1900 rather than the year 2000. Such a programming problem would result in
miscalculations and the disruption of normal business transactions and
activities. The Company has contacted its licensors of software and has received
assurances that the software being used has been modified to avoid the year 2000
issues. The Company has determined it has no material exposure to the year 2000.
17
In addition the Company has queried its significant suppliers and
subcontractors that do not share information systems with the Company (external
agents). To date, the Compnay is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
18
PART II - OTHER INFORMATION
ITEM 5- OTHER INFORMATION.
None
ITEM 6- EXHIBITS & REPORTS ON FORM 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MANHATTAN BAGEL COMPANY, INC.
Dated: November 14, 1998 By: s/n Jack Grumet
--------------------------
Jack Grumet
Chairman of the Board and
Chief Executive Officer
Dated: November 14, 1998 By: s/n James J. O'Connor
--------------------------
James J. O'Connor
Chief Financial Officer
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