UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________to __________
Commission file number 001-31367
MONTANA MILLS BREAD CO., INC.
(Exact name of small business issuer as specified in its charter)
Delaware 16-1551461
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
2171 Monroe Avenue, Suite 205A,
Rochester, New York 14618
(Address of principal executive offices)
(585) 242-7540
(Issuer's telephone number, including area code)
As of September 16, 2002, 8,107,835 shares of the Issuer's Common Stock, $.001
par value was outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
MONTANA MILLS BREAD CO., INC.
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of July 31, 2002 and January 30, 2002 3
Consolidated Statements of Operations for the thirteen and twenty-six
weeks ended July 31, 2002 and August 1, 2001 4
Consolidated Statement of Stockholder's Equity (Deficit) for the
twenty-six weeks ended July 31, 2002 5
Consolidated Statements of Cash Flows for the twenty-six weeks
ended July 31, 2002 and August 1, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
Item 3. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 24
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
Item 3. DEFAULTS UPON SENIOR SECURITIES 24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
Item 5. OTHER INFORMATION 24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 25
Signatures and Required Certification 26
Page 2 of 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTANA MILLS BREAD CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2002 JANUARY 30, 2002
------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,330,963 $ 248,243
Short-term investments 7,709,892 518,258
Inventory 354,842 401,426
Income tax receivable 269,199 314,655
Prepaid expenses and other current assets 451,643 426,255
Deferred income taxes 53,000 53,000
------------ -------------
Total current assets 10,169,539 1,961,837
Property and equipment, net 6,518,564 6,621,146
Deferred income taxes 802,497 260,000
Deposits and other assets 197,292 181,482
Unamortized bond issue costs -0- 447,405
------------ -------------
Total assets $ 17,687,892 $ 9,471,870
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 970,794 $ 844,986
Payroll and related expenses 101,096 127,345
Deferred revenue 40,544 101,191
Other current liabilities 27,933 64,648
Current portion of long-term debt 31,286 34,418
------------ -------------
Total current liabilities 1,171,653 1,172,588
Subordinated Convertible Debentures 2,000,000 6,538,500
Long-term debt, net of current portion 28,981 44,185
Other long-term liabilities 58,774 43,000
------------ -------------
Total liabilities 3,259,408 7,798,273
------------ -------------
Commitments and contingencies
Series A Convertible Redeemable Preferred Stock, ($.001 par value;
687,500 shares authorized, none issued and outstanding as of July 31,
2002; 1,000,000 shares authorized; 312,500 issued and
outstanding as of January 30, 2002) -0- 2,500,000
------------ -------------
Common stockholders' equity (deficit):
Common Stock, ($.001 par value; 14,417,989 shares authorized;
8,107,835 issued and outstanding as of July 31, 2002; 5,000,000
issued and outstanding as of January 30, 2002) 8,108 5,000
Additional paid-in capital 16,165,240 -0-
Accumulated deficit (1,744,864) (831,403)
------------ -------------
Total common stockholders' equity (deficit) 14,428,484 (826,403)
------------ -------------
Total liabilities and stockholders' equity $ 17,687,892 $ 9,471,870
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3 of 30
MONTANA MILLS BREAD CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
---------------------------- ------------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales $ 2,778,034 $ 2,088,302 $ 5,850,722 $ 4,089,222
Cost of goods sold (exclusive of depreciation and
amortization) 1,507,040 1,039,419 3,137,154 2,030,663
----------- ----------- ----------- -----------
Gross profit 1,270,994 1,048,883 2,713,568 2,058,559
Selling, general and administrative expenses 1,621,844 1,084,552 3,017,066 2,115,657
Pre-opening and grand-opening expenses 153,101 205,872 230,681 372,862
Depreciation and amortization 159,610 107,146 319,220 205,165
----------- ----------- ----------- -----------
Loss from operations (663,561) (348,687) (853,399) (635,125)
Interest income 11,762 46,903 16,736 119,864
Financing costs (134,651) (190,271) (324,645) (380,629)
----------- ----------- ----------- -----------
Loss before income taxes and extraordinary item (786,450) (492,055) (1,161,308) (895,890)
Benefit from income taxes (306,715) (192,500) (454,140) (349,750)
----------- ----------- ----------- -----------
Loss before extraordinary item (479,735) (299,555) (707,168) (546,140)
Extraordinary item-loss on early
extinguishment of debt (net of income tax
benefit of $84,000) 131,293 -0- 131,293 -0-
----------- ----------- ----------- -----------
Net loss $ (611,028) $ (299,555) $ (838,461) $ (546,140)
=========== =========== =========== ===========
Series A Preferred Stock Dividends (50,000) (75,000) (125,000) (150,000)
Net loss before extraordinary item applicable to
common stockholders $ (529,735) $ (374,555) $ (832,168) $ (696,140)
=========== =========== =========== ===========
Basic and diluted loss before extraordinary
item per common share applicable to
common stockholders $ (0.09) $ (0.07) $ (0.15) $ (0.14)
=========== =========== =========== ===========
Net loss applicable to common stockholders $ (661,028) $ (374,555) $ (963,461) $ (696,140)
=========== =========== =========== ===========
Basic and diluted loss per common share
applicable to common stockholders $ (0.11) $ (0.07) $ (0.17) $ (0.14)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
Page 4 of 30
MONTANA MILLS BREAD CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ----------- ------------ ------------
Balance at January 30, 2002 5,000,000 $ 5,000 $ -0- $ (831,403) $ (826,403)
Net loss for the thirteen
weeks ended May 1, 2002 (227,433) (227,433)
Series A Convertible
Preferred Stock dividends (75,000) (75,000)
--------- -------- ----------- ------------ -----------
Balance at May 1, 2002 5,000,000 $ 5,000 -0- $ (1,133,836) $(1,128,836)
Contribution and retirement of
Common Stock to capital by
Eugene and Susan O'Donovan (582,011) (582) 582 -0-
Conversion of Subordinated
Convertible Debentures to
Common Stock 907,700 908 4,264,618 4,265,526
Cephas Capital Partners, L.P.
modification of debt 15,000 15 74,985 75,000
Conversion of Series A
Convertible Preferred
Stock into Common Stock 489,696 489 2,499,511 2,500,000
Net proceeds from issuance
of Common Stock and Warrants 2,269,950 2,270 8,471,731 8,474,001
Issuance of Underwriter
Purchase Option 794,451 794,451
Issuance of Common Stock
to consultant 7,500 8 37,492 37,500
Issuance of Warrants to
Consultant 71,870 71,870
Net loss for the thirteen
weeks ended July 31, 2002 (611,028) (611,028)
Series A Convertible
Preferred Stock
dividends (50,000) (50,000)
--------- -------- ----------- ------------ -----------
Balance at July 31, 2002 8,107,835 $ 8,108 $16,165,240 $ (1,744,864) $14,428,484
========= ======== =========== ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5 of 30
MONTANA MILLS BREAD CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED
------------------------------
JULY 31, AUGUST 1,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (838,461) $ (546,140)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation and amortization 319,220 205,165
Amortization of bond issuance costs 54,138 64,964
Deferred income taxes (542,497) (350,000)
Consulting agreement stock issuance 37,500 -0-
Consulting agreement warrant issuance 71,870 -0-
Extraordinary item 195,296 -0-
(Increase) decrease in operating assets -
Inventory 46,584 (7,238)
Income tax receivable 45,456 (1,019)
Prepaid expenses and other current assets (25,388) (265,400)
Deposits and other assets (15,810) (87,625)
(Decrease) increase in operating liabilities -
Accounts payable 125,808 (29,079)
Payroll and related expenses (26,249) (23,181)
Other liabilities (81,588) (1,032)
------------ ------------
Total adjustments 204,340 (494,445)
------------ ------------
Net cash used in operating activities (634,121) (1,040,585)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (8,012,819) (1,500,100)
Sale of short-term investments 821,185 -0-
Purchase of property and equipment (216,642) (1,681,367)
------------ ------------
Net cash used in investing activities (7,408,276) (3,181,467)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Gross proceeds from issuance of Common Stock and Redeemable 11,463,248 -0-
Common Stock Purchase Warrants
Offering costs (2,194,795) -0-
Series A Convertible Preferred Stock dividends (125,000) (150,000)
Repayment of debt (18,336) (17,601)
------------ ------------
Net cash provided by (used in) financing activities 9,125,117 (167,601)
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,082,720 (4,389,653)
Cash and cash equivalents at beginning of period 248,243 5,805,564
------------ ------------
Cash and cash equivalents at end of period $ 1,330,963 $ 1,415,911
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 270,507 $ 315,662
============ ============
Income taxes 4,357 250
============ ============
Non-cash investing and financing activities
Offering costs included in accounts payable $ 272,539 -0-
============ ============
Issuance of underwriter's purchase option $ 794,451 -0-
============ ============
Conversion of Series A Convertible Redeemable Preferred
Stock into Common Stock $ 2,500,000
============
Conversion of Subordinated Convertible Debentures to
Common Stock $ 4,265,526
============
The accompanying notes are an integral part of these consolidated
financial statements.
Page 6 of 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements of Montana
Mills Bread Co., Inc. and its subsidiaries (the "Company") have been prepared in
accordance with instructions to Form 10-QSB and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States.
They should be read in conjunction with the financial statements of the Company
for the fiscal year ended January 30, 2002, included in the Company's
Registration Statement on Form SB-2 filed under the Securities Act of 1933, as
amended, in connection with the Company's initial public stock offering which
became effective on June 27, 2002.
The accompanying unaudited consolidated financial statements include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations for the interim periods. Interim results are not
necessarily indicative of the results that may be expected for the entire year.
NOTE 2-INCOME TAXES
The Company's effective tax rate for the thirteen and twenty-six weeks
ended July 31, 2002 and the thirteen and twenty-six weeks ended August 1, 2001
was 39%.
NOTE 3-ADOPTION OF SFAS 142
The Company adopted Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which establishes new
accounting and reporting standards that require ratable amortization of goodwill
and other intangibles be replaced with periodic tests of the goodwill's
impairment and that intangible assets with other than indefinite lives be
amortized over their useful lives. The Company's adoption of SFAS 142 did not
have a material impact on the results of its operations. Unamortized intangible
assets consist of trademarks and goodwill totaling $133,560 at July 31, 2002.
NOTE 4-INVENTORIES
Inventories are comprised of the following:
JULY 31, 2002 JANUARY 30, 2002
------------- ----------------
Ingredients 234,840 243,631
Retail products 87,279 132,232
Paper products 32,723 25,563
------- -------
354,842 401,426
======= =======
Page 7 of 30
NOTE 5-EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net earnings
available to common stockholders by the weighted average number of common shares
outstanding. For the thirteen and twenty-six weeks ended August 1, 2001, the
Company's calculation of diluted earnings per share does not include the effect
of unexercised stock options and warrants, or the conversion of Series A
Convertible Preferred Stock or the Company's convertible debt representing
1,281,912 potential shares of common stock, since the effect would be
anti-dilutive. For the thirteen and twenty-six weeks ended July 31, 2002, the
Company's calculation of diluted earnings per share does not include the effect
of unexercised stock options, warrants and the 2,000,000 Common Stock warrants
issued in the Company's initial public offering, representing a combined total
of 3,578,062 potential shares of Common Stock, since certain instruments'
exercise price exceeds the Company's market price the overall effect would be
anti-dilutive given the Company's loss position.
The following table sets forth the computation of basic and diluted earnings per
share:
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
----------------------------------- -----------------------------------
JULY 31, 2002 AUGUST 1, 2001 JULY 31, 2002 AUGUST 1, 2001
------------- -------------- ------------- --------------
(unaudited) (unadited) (unaudited) (unaudited)
Net loss before extraordinary item $ (479,735) $ (299,555) $ (707,168) $ (546,140)
Series A Convertible Preferred Stock (50,000) (75,000) (125,000) (150,000)
dividends
----------- ----------- ----------- ------------
Net loss before extraordinary item
applicable to common stockholders $ (529,735) $ (374,555) $ (832,168) $ (696,140)
=========== =========== =========== ===========
Basic and diluted loss before
extraordinary item per common share
applicable to common stockholders $ (0.09) $ (0.07) $ (0.15) $ (0.14)
=========== =========== =========== ===========
Net loss $ (611,028) $ (299,555) $ (838,461) $ (546,140)
Series A Convertible Preferred Stock (50,000) (75,000) (125,000) (150,000)
dividends
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (661,028) $ (374,555) $ (963,461) $ (696,140)
=========== =========== =========== ===========
Basic and diluted loss per common share
applicable to common stockholders $ (0.11) $ (0.07) $ (0.17) $ (0.14)
=========== =========== =========== ===========
Weighted average outstanding common
shares 6,067,554 5,000,000 5,533,777 5,000,000
=========== =========== =========== ===========
Page 8 of 30
NOTE 6-COMMON STOCK, PREFERRED STOCK AND COMMON STOCK WARRANTS
Contribution of Shares.
On June 27, 2002, the effective date of the Company's initial public
offering, Eugene O'Donovan and Susan O'Donovan, the Company's President and
Chief Executive Officer and Executive Vice President, respectively, contributed
an aggregate of 582,011 shares of Common Stock owned by them to the Company's
capital. Mr. and Mrs. O'Donovan made this capital contribution without receiving
any payment for their shares in response to a request by the Company's
underwriter in its initial public offering to limit the number of shares of the
Company's Common Stock outstanding on a fully diluted basis.
Issue of Common Stock and Redeemable Common Stock Purchase Warrants in
connection with the Company's Initial Public Offering.
The Company's initial public offering was declared effective on June 27,
2002 and closed on July 3, 2002. In connection with the initial public offering,
the Company issued 2,269,950 shares of Common Stock and 2,269,950 redeemable
Common Stock Purchase Warrants. This included the exercise by the Company's
underwriter of 269,950 shares of Common Stock and 269,950 Common Stock Purchase
Warrants to cover over-allotments. The initial public offering price per share
of Common Stock was $5.00 and the Redeemable Common Stock Purchase Warrants were
offered at $.05 per purchase warrant.
Each Common Stock Purchase Warrant entitles the purchaser to purchase one
share of the Company's Common Stock for $7.58 beginning June 27, 2002 and ending
June 27, 2007. The Company may redeem the Common Stock Purchase Warrants, with
the Company's underwriter's prior consent, at any time after they become
exercisable, for $.01 per purchase warrant, on not less than 30 day's prior
written notice if the last sale price of the Company's Common Stock has been at
least $15.16 for the 20 consecutive trading days ending on the third day prior
to the date on which notice was given.
Conversion of Series A Convertible Redeemable Preferred Stock.
Through July 2, 2002, the Company was authorized to issue 1,000,000 shares
of $.001 par value preferred stock. There were 312,500 shares issued and
outstanding for a total consideration of $2,500,000 through July 2, 2002. On
July 3, 2002, the Company converted all 312,500 outstanding shares of its
outstanding Series A Convertible Redeemable Preferred Stock into 489,696 shares
of Common Stock pursuant to the terms of the Series A Convertible Redeemable
Preferred Stock.
Subject to the provisions of the Company's Certificate of Incorporation
and to the limitations prescribed by law, the Company's Board of Directors has
the authority, without further action by stockholders, to issue up to 687,500
shares of authorized but unissued preferred stock in one or more series. The
blank check preferred stock allows the Company's Board of Directors the power
and authority to fix the rights, designations, preferences, privileges,
qualifications and restrictions of the preferred stock, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences and sinking fund terms, any or all which may be greater than the
rights of the Company's common stock. The Company has no present plans to issue
any additional shares of preferred stock and has agreed not to issue any
Page 9 of 30
shares of preferred stock for one year after June 27, 2002 without the prior
written consent of the Company's initial public offering underwriter. The
issuance by the Company of shares of preferred stock may discourage or delay
bids for the Company's Common Stock or may otherwise affect the market price of
the Company's Common Stock.
Conversion of Subordinated Convertible Debentures.
In fiscal 2001, the Company issued $4,538,500 in principal face value of
five-year Subordinated Convertible Debentures bearing interest at an average
rate of 8.5%. Financing costs, including 98,062 warrants for the purchase of
Common Stock at $7.50 per share, were issued to the selling agent that assisted
the Company in privately placing the Subordinated Convertible Debenture.
Commissions and legal fees incurred in connection with such private placement
amounted to $648,662 and were amortized over five years using the effective
interest rate method. On June 27, 2002, the effective date of the Company's
initial public offering, all of the Company's outstanding Subordinated
Convertible Debentures were converted into 907,700 shares of the Company's
Common Stock. Accrued interest totaling $156,277 was paid prior to such
conversion.
NOTE 7-EXTRAORDINARY ITEM
On July 3, 2002 Cephas Capital Partners, L.P. was issued 15,000 shares of
the Company's Common Stock and was paid $20,000 in conjunction with the
modification of a Convertible Promissory Note made by the Company. Such
modification lowered the annual interest rate from 12% to 8%. The effect of this
modification was a one time nonrecurring charge of $215,293. This charge
included the $20,000 payment, $75,000 for the fair market value of 15,000 shares
of common stock at $5.00 per share and the write-off of $120,293 of unamortized
financing costs associated with the initial issuance of the Convertible
Promissory Note.
NOTE 8-CONSULTING AGREEMENTS
In connection with the Company's initial public offering, the Company's
underwriter was engaged as its financial consultant for a period of two years
beginning June 27, 2002. The consulting agreement requires an annual fee of
$50,000, of which payment for the first year was paid at the closing of the
Company's initial public offering. Additionally, if within five years from June
27, 2002, the Company completes a merger, acquisition, joint venture or other
transaction with a party that such underwriter introduces to the Company, such
underwriter will receive a finder's fee equal to 5% of the consideration paid in
connection with such transaction.
In connection with its initial public offering, the Company also hired an
investor relations firm. The terms of the agreement between the Company and
such firm is for 18 months and calls for monthly payments of $4,000 beginning
July 2002. The agreement, unless terminated in writing, automatically renews
for an additional twelve months. The agreement also includes the payment to
such firm of 7,500 shares of restricted stock and an additional 7,500 shares
will be deemed issued but subject to vesting in equal monthly increments over
the 12-month period beginning in month six of the agreement. In addition, the
consultant received 50,000 warrants to purchase shares of the Company's Common
Stock at a price of $10.00 per share and 50,000 warrants to purchase shares of
the Company's Common Stock at a price of $15.00 per share. In the event the
agreement is terminated in the first six months, the consultant
Page 10 of 30
will retain 50% of the warrants (25,000 shares at the $10.00 exercise price and
25,000 shares at the $15.00 exercise price) with the remaining warrants
reverting back to the Company. If the agreement is terminated in months six
through eighteen, the consultant will receive a pro rata warrant portion of
such warrants, based on the number of months the agreement was in effect
commencing in month six of the 18 month period. The agreement may be terminated
at any time upon 30 business days' notice after the first three-month
anniversary of the date of the agreement. In the event that the agreement is
terminated by either party prior to the end of the 18-month term, the
consultant shall be entitled to reimbursement of its reasonable out-pocket
expenses. As a result of the non-forfeitable component of the Common Stock and
warrant in this agreement, the Company incurred a non-cash expense of $109,370
during the 13 weeks ending July 31, 2002.
NOTE 9-RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and the accounting and reporting provisions of APAB No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. SFAS No.
144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. The Company adopted SFAS
No. 144 on January 31, 2002 and the adoption did not have a material impact on
the Company's financial condition or its results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
The Company adopted the provisions of SFAS No. 145 in its quarter-ended July 31,
2002. There was no impact on the Company's financial statements as a result of
the adoption of SFAS No. 145.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" which nullifies Emerging Issues Task Force
Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
The Company will adopt the provisions of SFAS No. 146 on January 1, 2003. The
Company believes the impact of the adoption of the provisions of SFAS No. 146
will not have a material impact on the Company's financial statements.
NOTE 10-COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated under noncancelable operating leases for its
administrative offices, bread stores and mall kiosks. Generally, the Company is
required to pay a proportionate share of real estate taxes, insurance, common
area and other operating costs. Some bread store leases provide for contingent
rental (i.e., percentage rent) payments based on sales in excess of specified
amounts. Generally, the Company's leases have initial terms of ten years and
contain provisions for renewal options of five to twenty-five years.
Page 11 of 30
The Company is subject to legal proceedings and claims which arise in the
normal course of business. In the opinion of management, the ultimate
liabilities with respect to these potential actions will not have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
Page 12 of 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and our results of
operations should be read together with the Company's financial statements and
the accompanying notes. This discussion contains statements about future events
and expectations, including anticipated store and market openings, planned
capital expenditures and trends in or expectations regarding the Company's
operations and financing abilities, that constitute "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are based on management's beliefs,
assumptions, and expectations of our future economic performance, taking into
account the information currently available to management. These statements are
not statements of historical fact. Forward-looking statements involve risks and
uncertainties that may cause our actual results, performance or financial
condition to differ materially from the expectations of future results,
performance of financial condition we express or imply in any forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to: the Company's ability to continue and manage growth; delays in
store openings; the quality of future franchise store operations, if any; the
price and availability of raw materials and ingredients needed to produce
breads and other baked goods; changes in customer preferences and perceptions;
risks associated with competition; risks associated with fluctuations in
operating and quarterly results; compliance with government regulations; and
other factors discussed in Montana Mills periodic reports and other information
statements filed with the Securities and Exchange Commission. The words
"believe", "may", "will", "should", "anticipate", "estimate", "expect",
"intend", "objective", "seek", "strive", or similar words, or the negative of
these words, identify forward-looking statements entirely by these cautionary
factors.
OVERVIEW
Montana Mills was founded in June 1996 and reincorporated as a Delaware
corporation in 1998. Eugene O'Donovan, our president and chief executive
officer, and Susan O'Donovan, our executive vice president, designed our unique
village bread store concept that recreates a community-focused, nostalgic,
special bakery experience for customers. Through our subsidiaries, we offer high
quality, fresh boutique-style bread and other baked goods prepared in small
batches in an open-view baking format using fresh ingredients including freshly
ground wheat and dough made from scratch. All aspects of our baking process are
conducted in full view of customers to emphasize the homemade aspect of our
bread and other baked goods. We also sell our fresh bread and other products at
satellite cafes, which are small stores with up to 45 seats where customers can
enjoy fresh bakery products supplied by one of our nearby village bread stores.
Our locations are decorated with and contain natural colors and hues,
maple counters and tables and educational, in-store displays to further
highlight our image of freshness and quality. Customers generally are greeted by
an employee and offered a free, fresh slice the "size of Montana" of one of any
breads available that day. In addition to bread, we also bake muffins, scones,
cookies, granola and other baked goods. We also offer sandwiches under the
"Breader" name and sell coffee beverages under the Java Joe's brand name. As of
September 16, 2002, we operated 30 permanent locations, including 20 village
bread stores and ten satellite cafes.
Page 13 of 30
The Company's initial public offering was declared effective on June 27,
2002 and closed on July 3, 2002. In connection with the initial public offering,
the company issued 2,269,950 shares of common stock and 2,269,950 purchase
warrants. This included the exercise by our underwriter of an over-allotment
option for 269,950 shares of common stock and 269,950 purchase warrants. The
offering price per share of common stock was $5.00 and the purchase warrants
were priced at $.05 per purchase warrant.
Each purchase warrant entitles the holder to purchase one share of our
common stock for $7.58 during the period beginning 90 days after the date of the
prospectus, June 27, 2002 and ending on the fifth anniversary after the date of
the prospectus, June 27, 2007. We may redeem the purchase warrants, with our
underwriter's prior consent, at any time after they become exercisable, for $.01
per purchase warrant, on not less that 30 day's prior written notice if the last
sale price of our common stock has been at least $15.16 for the 20 consecutive
trading days ending on the third day prior to the date on which notice was
given.
GROWTH STRATEGY
Our business strategy is to build a widely recognized and respected brand
name by further penetrating new and existing markets, continuously improving the
experience of our customers, continuing to develop our off-premises sales to
other retailers, further developing our catalog and internet sales, entering the
franchising market, and examining strategic acquisitions.
FURTHER PENETRATE NEW AND EXISTING MARKETS. Opening additional stores in
existing and new markets is the cornerstone of our effort to build a widely
recognized brand name. Since our inception, we have expanded upon our village
bread store locations to include satellite cafes, kiosks, the Java Joe's coffee
concept and a wide array of products, including baked goods and Breader
sandwiches.
- Build out of existing markets. We believe that clustering new
locations in existing markets will increase recognition of the
Montana Mills brand name and create a strong platform for a broad
regional expansion program. We intend to open new locations in core
markets that are geographically convenient to our Rochester, New
York headquarters. We believe that this strategy will assist us in
strengthening our brand name in our core markets.
- Penetrate new markets. Building on the strength of the Montana Mills
brand name in our core markets, we have identified a number of
cities throughout upstate New York, Pennsylvania, Ohio and
Connecticut to open new stores. We have conducted demographic
surveys of these locations and have determined that their
populations fit our profile for store development. In addition, we
believe that these markets have not captured the attention of
larger, national bakery chains. We believe that we can establish the
Montana Mills brand name and develop a loyal customer base in these
areas, thereby creating significant barriers to entry for
competitors in these markets.
CONTINUOUSLY IMPROVE THE EXPERIENCE OF OUR CUSTOMERS. In each of our
stores, we seek to provide value to our customers by continually expanding our
product offerings and further improving our prompt, courteous service and
pleasant customer-service oriented atmosphere.
Page 14 of 30
- Expansion of product offerings. We continually create new products,
illustrated by our expansion from approximately 15 types of bread in
1996 to more than 80 types of bread and a wide array of baked goods,
coffee beverages and related products. We intend to continue to
maintain and improve our product offerings through customer surveys
and independent research designed to assess consumer demands and
preferences.
- Continuously improve customer service. We believe that superior
customer service is critical to achieving customer satisfaction and
operating success. We utilize comprehensive management training
programs to ensure that our employees provide customers with an
enjoyable experience during every store visit. An integral part of
this experience is our policy to greet each customer with a free
slice of bread the "size of Montana."
OFF-PREMISES SALES TO OTHER RETAILERS AND CAFES. We recently commenced
selling our products off-premises through grocery stores and other retailers
where fresh bread and other baked goods are delivered daily from our bread
stores. These products are displayed on bread racks supplied by us generally
using our branded point of sale signage. The Company currently sells
off-premises from four store locations and expects to sell off-premises from
substantially all of its current bread stores within the next twelve months. It
is also anticipated that off-premises sales will be an important element of
future stores both owned by us and franchised.
FURTHER DEVELOP OUR CATALOG AND INTERNET PROGRAMS. Our mail order catalog
and internet businesses represented approximately $648,000, or 6.0%, of our
total sales in our fiscal year ended January 30, 2002. We believe that
opportunities exist to grow our catalog and internet businesses substantially,
thereby generating additional revenue as well as expanding awareness of the
Montana Mills brand name. We believe that we can also utilize our catalog to
direct customers to our website, which achieved approximately 5,500,000 page
views during our fiscal year ended January 30, 2002. Our website was awarded
honors by The Rochester Business Journal in 2001 for the best home page and
best overall website in the small business category for Rochester-based
companies. On our website, customers may place online orders and view our
product offerings. Additionally, we intend to explore opportunities to further
capitalize on the corporate gift segment of mail order catalogs, which we
believe can generate significant revenues. Currently, corporate gifts do not
represent a significant component of our catalog or internet business.
FRANCHISING. We intend to diversify our customer base and expand our
operations into new geographic areas by franchising our stores. Our franchise
strategy will be to grant franchisees the exclusive right and license to operate
Montana Mills stores within a defined territory.
We intend to provide franchisees with stringent guidelines and
specifications for the operation of stores, initial training, and the use of our
name, service marks and proprietary marks. We will also assist franchisees with
identifying site locations and provide franchisees with advice on advertising
and other promotional techniques. Our franchisees will be required to buy
supplies from us or from alternative suppliers that we have pre-approved.
Additionally, our franchisees will be required to purchase promotional
materials, catalogs and various other products from us.
Page 15 of 30
We intend for our franchisees to bear the complete financial
responsibility for opening and operating franchised stores, including purchasing
insurance, hiring employees, entering into lease agreements and purchasing or
leasing equipment. In exchange for our services and the rights granted by
franchise agreements, franchisees will pay various fees to us.
We also intend for our franchisees to indemnify us and hold us harmless
from any liability, claim or judgment arising from their franchised business. We
will be able to terminate any franchise agreement upon the occurrence of events
of default, which will include a franchisee's failure to pay monies owed to us,
failure to maintain licenses, a franchisee's misuse of our service or
proprietary marks or a franchisee's insolvency. We have not entered into any
franchise agreements as of the date of this Report.
We recently registered our Uniform Franchise Offering Circular with the
New York State Department of Law. The registration allows us to immediately
offer franchises for sale in 22 states which require no specific filing
(including Ohio and Pennsylvania where we have existing stores). We expect to
offer franchises for sale nationwide within approximately 60 days.
EXPLORE ACQUISITIONS. Due to the fragmented nature of the industry in
which we compete, we believe a significant opportunity exists for consolidation.
We intend to continuously examine potential acquisition opportunities as they
arise and will consider the acquisition of existing companies where we believe
the potential exists for achieving economies of scale, increasing the
recognition of the Montana Mills brand name or where completing an acquisition
will otherwise benefit our growth strategy or results of operations.
CRITICAL ACCOUNTING POLICIES
An understanding of our accounting policies is necessary for a complete
analysis of our results, financial position, liquidity and trends. We focus your
attention on the following:
ASSET IMPAIRMENT. All long-lived assets are evaluated for impairment on
the basis of undiscounted cash flows whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impaired asset is written down to its estimated fair market value based on the
best information available. Estimated fair market value is generally measured by
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Assumptions used in these
cash flows are consistent with internal forecasts.
INCOME TAXES. Our effective tax rate and the tax bases of our assets and
liabilities reflect our best estimate of the ultimate outcome of tax audits.
Valuation allowances are established where expected future taxable income does
not support the realization of the deferred tax assets. Considerable management
judgment is also necessary in estimating future taxable income. Assumptions used
in these estimates are consistent with internal forecasts.
Page 16 of 30
RESULTS OF OPERATIONS
The following historical financial data, discussion and analysis should be
read in conjunction with the consolidated financial statements and notes
included herein.
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales $ 2,778,034 $ 2,088,302 $ 5,850,722 $ 4,089,222
Cost of goods sold (exclusive of depreciation and
amortization) 1,507,040 1,039,419 3,137,154 2,030,663
----------- ----------- ----------- -----------
Gross profit 1,270,994 1,048,883 2,713,568 2,058,559
Selling, general and administrative expenses 1,621,844 1,084,552 3,017,066 2,115,657
Pre-opening and grand-opening expenses 153,101 205,872 230,681 372,862
Depreciation and amortization 159,610 107,146 319,220 205,165
----------- ----------- ----------- -----------
Loss from operations (663,561) (348,687) (853,399) (635,125)
Interest income 11,762 46,903 16,736 119,864
Financing costs (134,651) (190,271) (324,645) (380,629)
----------- ----------- ----------- -----------
Loss before income taxes and extraordinary item (786,450) (492,055) (1,161,308) (895,890)
Benefit from income taxes (306,715) (192,500) (454,140) (349,750)
----------- ----------- ----------- -----------
Loss before extraordinary item (479,735) (299,555) (707,168) (546,140)
Extraordinary item-loss on early
extinguishment of debt (net of income tax
benefit of $84,000) 131,293 -0- 131,293 -0-
----------- ----------- ----------- -----------
Net loss $ (611,028) $ (299,555) $ (838,461) $ (546,140)
=========== =========== =========== ===========
Net loss before extraordinary item applicable to
common stockholders $ (529,735) $ (374,555) $ (832,168) $ (696,140)
=========== =========== =========== ===========
Basic and diluted loss before extraordinary
item per common share applicable to
common stockholders $ (0.09) $ (0.07) $ (0.15) $ (0.14)
=========== =========== =========== ===========
Net loss applicable to common stockholders $ (611,028) $ (374,555) $ (963,461) $ (696,140)
=========== =========== =========== ===========
Basic and diluted loss per common share
applicable to common stockholders $ (0.11) $ (0.07) $ (0.17) $ (0.14)
=========== =========== =========== ===========
SALES.
Sales for the thirteen-weeks ended July 31, 2002 increased 33% to
$2,778,034 compared to $2,088,302 for the thirteen-weeks ended August 1, 2001.
For the twenty-six weeks ended July 31, 2002 total sales increased 43% to
$5,850,722 compared to $4,089,222 for the twenty-six weeks ended August 1, 2001.
The increase in sales is primarily due to approximately $600,000 of additional
sales from the six new stores opened during the thirteen weeks ended July
Page 17 of 30
31, 2002 and approximately $2,121,000 of additional sales from eleven new
stores opened during the twenty-six weeks ended July 31, 2002 compared to the
corresponding periods for the previous year. These increases were offset by a 3%
and 4% decline in comparable store sales during the thirteen weeks and
twenty-six weeks, respectively, ended July 31, 2002 as a result of the
cannibalization effect of new store additions in existing markets and general
economic conditions. Comparable store sales from the two stores where the
Company generated off-premises sales during the quarter ended July 31, 2002
increased an average of 24% over the previous year. The Company currently sells
off-premises from four store locations and expects to sell off-premises from
substantially all of its current bread stores within twelve months.
COST OF GOODS SOLD (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION).
Cost of goods sold (exclusive of depreciation and amortization) includes
bakery and paper ingredients supplied by outside vendors, production labor, and
occupancy costs. The cost of goods sold and occupancy costs increased to
$1,507,040 or 54% of sales for the thirteen weeks ended July 31, 2002 as
compared to $1,039,419 or 50% of sales for the thirteen weeks ended August 1,
2001. For the twenty six-weeks ended July 31, 2002, cost of goods sold and
occupancy costs increased to $3,137,154 or 54% of sales from $2,030,663 or 50%
of sales for the twenty six-weeks ended August 1, 2002. The cost of goods sold
and occupancy costs for the thirteen weeks and twenty-six weeks ended July 31,
2002 increased primarily as a result of increased labor costs in existing and
new markets and increased product costs related to new product offerings
including coffee and sandwiches which have a lower margin than our historical
bakery products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses were $1,621,844 or 58% of
sales for the thirteen weeks ended July 31, 2002 compared to $1,084,552 or 52%
of sales for the thirteen weeks ended August 1, 2001. Selling, general and
administrative expenses were $3,017,066 or 52% of sales for the twenty-six weeks
ended July 31, 2002 compared to $2,115,657 or 52% of sales for the thirteen
weeks ended August 1, 2001. Store selling expenses were $367,240 or 13% of sales
for the thirteen weeks ended July 31, 2002 compared to $244,821 or 12% for the
thirteen weeks ended August 1, 2002. Store selling expenses were $727,352 or 12%
of sales for the twenty-six weeks ended July 31, 2002 compared to $503,407 of
sales or 12% for the twenty-six weeks ended August 1, 2001.
Corporate general and administrative expenses for the thirteen weeks ended
July 31, 2002 included approximately $74,000 in one-time expenses related to the
start up of the Company's franchise operations ("Franchise Expenses") and
$113,000 (of which $109,000 is a non-cash item) for a public relations
consultant ("Public Relations Expenses") hired by the Company subsequent to our
Initial Public Offering.
Excluding Franchise Expenses and Public Relations Expenses corporate
general and administrative expenses were $429,554 (15% of sales) and $816,839
(14% of sales) compared to $410,768 (20% of sales) and $785,719 (19% of sales)
for the thirteen and twenty six weeks ended July 31, 2002, respectively,
compared to the corresponding periods in the previous year. The decreases in
corporate expenses resulted primarily from efficiencies in our corporate
infrastructure and an increasing sales base.
Page 18 of 30
PRE-OPENING AND GRAND-OPENING EXPENSES.
Pre-opening and grand-opening expenses were $153,101 or 6% of sales for
the thirteen weeks ended July 31, 2002 compared to $205,872 or 10% of sales for
the thirteen weeks ended August 1, 2001. Pre-opening and grand-opening expenses
were $230,681 or 4% of sales for the twenty-six weeks ended July 31, 2002
compared to $372,862 or 9% of sales for the twenty-six weeks ended August 1,
2001. Pre-opening and grand-opening expenses decreased as a percentage of sales
for the thirteen and twenty-six weeks ended July 31, 2002 compared to the
corresponding periods in the previous year primarily as a result of the
reduction in administrative and training personnel expenditures to support the
addition of new stores.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization was $159,610 or 6% of sales for the thirteen
weeks ended July 31, 2002 compared to $107,146 or 5% of sales for the thirteen
weeks ended August 1, 2001. For the twenty-six weeks ended July 31, 2002,
depreciation and amortization was $319,220 or 5% of sales compared to $205,165
or 5% of sales for the twenty-six weeks ended August 1, 2001. Depreciation and
amortization as a percentage of sales has remained consistent.
FINANCING COSTS, NET OF INTEREST INCOME.
Interest payments were $112,996 for the thirteen weeks ended July 31, 2002
compared to $157,788 for the thirteen weeks ended August 1, 2001. Interest
payments were $270,507 for the twenty-six weeks ended July 31, 2002 compared to
$315,663 for the twenty-six weeks ended August 1, 2001. Interest payments
decreased for the thirteen and twenty six weeks ended July 31, 2002 compared to
the corresponding periods for the previous year. This decrease resulted from the
Company's conversion of $4,538,500 of subordinated convertible debentures into
common stock at the time of the Company's initial public offering which was
declared effective on June 27, 2002. The Company expects that significant
interest expense savings will positively impact future earnings and cash flow.
Amortization of bond issue costs decreased to $21,655 for the thirteen
weeks ended July 31, 2002 compared to $32,483 for the thirteen weeks ended
August 1, 2001. Amortization of bond issue costs decreased to $54,139 for the
twenty-six weeks ended July 31, 2002 compared to $64,966 for the twenty-six
weeks ended August 1, 2001. These decreases resulted from the Company's
conversion of $4,538,500 of subordinated convertible debentures to common stock
at the time of the Company's initial public offering which was declared
effective on June 27.
Interest income decreased to $11,744 for the thirteen weeks ended July 31,
2002 compared to $46,917 for the thirteen weeks ended August 1, 2001. Interest
income decreased to $16,718 for the twenty-six weeks ended July 31, 2002
compared to $119,160 for the twenty-six weeks ended August 1, 2001. These
decreases resulted from a decline in interest rates earned on investments and
reduced average cash and cash equivalent balances. In the short term and until
significant public offering proceeds are utilized, the Company expects some
modest increases in
Page 19 of 30
interest income as a result of the significant cash infusion from its initial
public offering in July 2002.
BENEFIT FROM INCOME TAXES.
The benefit from income taxes increased to $306,715 for the thirteen weeks
ended July 31, 2002 from $192,500 for the thirteen weeks ended August 1, 2001.
For the twenty-six weeks ended July 31, 2002, the benefit from income taxes
increased to $454,140 from $349,750 for the twenty-six weeks ended August 1,
2001. The tax provision for the thirteen weeks ended July 31, 2002 and August 1,
2001, and the twenty-six weeks ended July 31, 2002 and August 1, 2001, reflects
a combined federal, state, and local effective tax rate of 39%.
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENTS OF DEBT.
On July 3, 2002 Cephas Capital Partners, L.P. was issued 15,000 shares of
the Company's Common Stock and was paid $20,000 in conjunction with the
modification of a Convertible Promissory Note made by the Company. Such
modification lowered the annual interest rate from 12% to 8%. The effect of this
modification was a one time nonrecurring charge of $215,293. This charge
included the $20,000 payment, $75,000 for the fair market value of 15,000 shares
of common stock at $5.00 per share and the write-off of $120,293 of unamortized
financing costs associated with the initial issuance of the Convertible
Promissory Note.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the twenty - six weeks ended July 31,
2002, was $634,121 compared to $1,040,585 for the twenty-six weeks ended August
1, 2001. The decrease in cash
Page 20 of 30
outflows was primarily a result of the increase in net loss, changes in
depreciation and amortization, the non-cash portion of public relations expenses
and changes in working capital.
Cash used in investing activities for the twenty-six weeks ended July 31, 2002
increased to $7,408,276 compared to $3,181,467 for the twenty-six weeks ended
August 1, 2001. Primarily as a result of decreased purchases of property and
equipment and increased short term investments of the proceeds of the Company's
initial public offering completed in July 2002.
Cash provided by financing activities was $9,125,117 for the twenty-six weeks
ended July 31, 2002 and consisted primarily of the net proceeds of the Company's
initial public offering less $125,000 in dividend payments to preferred
stockholders prior to the conversion of the preferred shares into common stock
at the date of the Company's initial public offering.
The Company has working capital of approximately $9 million at July 31, 2002
consisting principally of cash and cash equivalents and short term investments
invested in short term money market funds. The Company expects to open up to ten
stores in the next twelve months at a projected cost of $2.6 million.
IMPACT OF INFLATION AND SEASONALITY
We anticipate that our business will be affected by general trends that
affect retailers. We do not believe that we have operated during a period of
high inflation. Based on our experience, we expect to be able to pass on
increased costs resulting from inflation to our customers. Our business could be
affected by increased wheat prices, coffee prices, sugar prices, acquisitions of
existing bakeries, weather, marketing programs, variations in the number of
store openings and general economic conditions and diet trends. In the past, the
Company has been able to recover inflationary costs and commodity price
increases through increased menu prices. There have been and there may be in the
future, delays in implementing such menu price increases, and competitive
pressures may limit the Company's ability to recover such cost increases in
their entirety. Historically, the effects of inflation on the Company's net
income have not been materially adverse.
A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws. Although the Company has and will continue
to attempt to pass along any increased labor costs through food price increases,
there can be no assurance that all such increased labor costs can be reflected
in its prices or that increased prices will be absorbed by consumers without
diminishing to some degree consumer spending at the bread stores. However, the
Company has not experienced to date a significant reduction in gross profit
margins as a result of changes in such laws, and management does not anticipate
any related future significant reductions in gross profit margins.
Page 21 of 30
TRANSACTIONS WITH RELATED PARTIES
Transactions with related parties included the purchase of coffee and the
leasing of three properties from entities owned by Eugene O'Donovan, the
Company's President and Chief Executive Officer and its largest stockholder. The
Company believes that these arrangements are consistent in all respects with
other arrangements that could have been made with unaffiliated third parties. On
July 3, 2002, the closing of the Company's initial public offering, the Company
purchased Java Joe's Public Market Roastery, Inc. from Eugene O'Donovon for
$30,000. The Company is now purchasing and roasting coffee for use in its bread
stores.
CAPITAL RESOURCES, CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
OPERATING LEASES.
The Company is obligated under noncancelable operating leases for its
administrative offices, bread stores and mall kiosks. Generally, the Company is
required to pay a proportionate share of real estate taxes, insurance, common
area and other operating costs. Some bread store leases provide for contingent
rental (i.e., percentage rent) payments based on sales in excess of specified
amounts. Generally, theses leases have initial terms of ten years and contain
provisions for renewal options of five to twenty five years. We anticipate
utilizing operating leases as a financing tool for future locations.
CEPHAS CAPITAL PARTNERS CONVERTIBLE PROMISSORY NOTE.
On July 3, 2002 a $2,000,000 Convertible Promissory Note was issued in
favor of Cephas Capital Partners, L.P. This Convertible Promissory Note
represented a modification of a previous $2,000,000 Convertible Promissory Note
dated June 22, 2000, issued pursuant to a Note Purchase Agreement between the
Company and Cephas Capital Partners, L.P. In connection with this modification,
the Company paid $20,000 and issued 15,000 shares of common stock to Cephas
Capital Partners, L.P. The Convertible Promissory Note is collateralized by all
of the Company's assets. Cephas Capital Partners, L.P. has agreed to subordinate
its security interest to a senior lender if we secure a senior finance facility.
The Company is required to make monthly payments of interest on the note through
June 2005, at which time the Company will be required to make amortized payments
of principal and interest through June 2007. The Convertible Promissory Note is
convertible, at Cephas Capital Partner, L.P.'s option, into shares of the
Company's Common Stock at $5.00 per share. Cephas Capital Partners, L.P. has
signed a lock-up agreement which prohibits it from transferring any of our
securities for a period of thirteen months following June 27, 2002. The Company
may prepay the Note at any time upon the payment by us of up to a 3% prepayment
premium.
OFF BALANCE SHEET ARRANGEMENTS.
The Company does not have any off balance sheet debt nor does it have any
transactions, arrangements, or relationships with any "special purpose"
entities.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or
Page 22 of 30
Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
and the accounting and reporting provisions of APAB No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business. SFAS No. 144 retains
many of the provisions of SFAS No. 121, but addresses certain implementation
issues associated with that Statement. The Company adopted SFAS No. 144 on
January 31, 2002 and the adoption did not have a material impact on the
Company's financial condition or its results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
The Company adopted the provisions of SFAS No. 145 in its quarter ended July 31,
2002. There was no impact on the Company's financial statements as a result of
the adoption of SFAS No. 145.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. The Company will adopt the provisions of SFAS No. 146 on January
1, 2003. The Company believes the impact of the adoption of the provisions of
SFAS No. 146 will not have a material impact on the Company`s financial
statements.
ITEM 3. CONTROLS AND PROCEDURES
(a) EXPLANATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's principal
executive and principal financial officer after evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of
the quarterly report (the "Evaluation Date") has concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to him by others within those
entities, particularly during the period in which this quarterly report was
being prepared.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date, nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions. As a result, no corrective
actions were taken.
Page 23 of 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement on Form SB-2 filed under the
Securities Act of 1933 (Commission File No. 333-86956), relating to the
Company's initial public offering, was declared effective by the Securities and
Exchange Commission on June 27, 2002. The following securities were registered
by the Company pursuant to such Registration Statement: (i) 5,000,000 shares of
Common Stock; and (ii) 2,500,000 Redeemable Common Stock Purchase Warrants
("Warrants"). The Warrants are convertible into shares of the Company's Common
Stock upon payment of additional consideration by the holders of such Warrants.
Such registered shares of Common Stock and Warrants included: (i) 2,300,000
shares of Common Stock and 2,300,000 Warrants registered in connection with the
Company's initial public offering; (ii) 200,000 shares of Common Stock and
200,000 Warrants underlying a Purchase Option granted to Kirlin Securities,
Inc., the Company's underwriter, in connection with such initial public offering
(the "Purchase Option"); and (iii) 2,500,000 shares of Common Stock underlying
the Warrants registered in connection with the Company's initial public offering
and the Warrants underlying the Purchase Option. The Company's initial public
offering was made on a firm-commitment basis.
The Registrant's initial public offering commenced on June 27, 2002 and
has been completed. The Registrant sold 2,269,950 shares of Common Stock and
2,269,950 Warrants at an initial public offering price of $5.00 per share of
Common Stock and $.05 per Warrant (representing 2,000,000 shares of Common Stock
and 2,000,000 Warrants sold to Kirlin Securities, Inc. on July 3, 2002 and an
additional 269,950 shares of Common Stock and 269,950 Warrants sold to Kirlin
Securities, Inc. in connection with the exercise of its over-allotment option on
July 31, 2002). The aggregate underwriting discount and underwriter's expenses
paid by the Company in connection with its initial public offering amounted to
$2,171,040. The Company also incurred other expenses aggregating approximately
$819,000 in connection with such offering.
The net proceeds from the Company's initial public offering, after
deducting the underwriting discount and the offering expenses incurred by the
Registrant, approximated $9,268,000. Uses of proceeds to date have been for
working capital and general corporate purposes, which have amounted to an
aggregate of $227,145. The remainder of the proceeds from the offering will be
used for general corporate purposes, including working capital. Pending these
uses, the remaining net proceeds have been invested in short-term interest
bearing investment grade marketable securities.
None of the net proceeds of the Registrant's initial public offering have
been paid, directly or indirectly to any of the Registrant's directors or
officers or any of their associates, or to any persons owing 10 percent or more
of the Registrant's common stock, or to any of the Registrant's affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
Page 24 of 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Index to Exhibits.
(b) REPORTS ON FORM 8-K. There have been no reports on Form 8-K filed during
the fiscal quarter for which this report is filed.
Page 25 of 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONTANA MILLS BREAD CO., INC.
(REGISTRANT)
Date: September 16, 2002 By: /s/ Eugene O'Donovan
-----------------------------------------
Eugene O'Donovan, Chairman, President,
Chief Executive Officer and Chief
Financial and Administrative Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
I, Eugene O'Donovan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Montana Mills
Bread Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
Page 27 of 30
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: September 16, 2002 /s/ Eugene O'Donovan
----------------------------------------
Eugene O'Donovan,
President, Chief Executive Officer and
Chief Financial and Administrative
Officer
Page 28 of 30
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------
3.1 Certificate of Incorporation of the Registrant, including
Certificate of Designation, incorporated herein by reference
to Exhibit 3.1 of the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-86956).
3.2 Amended and Restated By-Laws of the Registrant, incorporated
herein by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-86956).
4.1 Specimen Common Stock Certificate of the Registrant,
incorporated herein by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-86956).
4.2 Specimen Redeemable Common Stock Purchase Warrant Certificate,
incorporated herein by reference to Exhibit 4.2 of the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-86956).
4.3 Form of Redeemable Common Stock purchase Warrant Agreement
between the Registrant and Continental Stock Transfer & Trust
Company, incorporated herein by reference to Exhibit 4.3 of
the Registrant's Registration Statement on Form SB-2
(Registration No. 333-86956).
4.4 Form of Purchase Option issued to Kirlin Securities, Inc.,
incorporated herein by reference to Exhibit 4.4 of the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-86956).
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Executive Officer and Chief Financial Officer.
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