Bagel Chain Finds Holes at I&J; Unit

Manhattan Bagel Co., the nation’s second-largest bagel chain, said it will restate its first-quarter earnings because of improper accounting practices it uncovered at its California subsidiary, I&J;, based in the San Fernando Valley.

As a result of the announcement, the stock of the 220-store bagel company based in Eatontown, N.J., plunged $7.50 to $13.75 a share on the Nasdaq at Friday’s close.

The company said the improprieties included “improperly recorded franchise fees, payments made for purported public relations work, real estate finder’s fees, bonus and vacation pay, and inflated receivables and inventory,” totaling $350,000 on a pretax basis.

Manhattan Bagel’s auditors and special counsel will investigate the irregularities, which it said were confined to the 17-store I&J; unit, formerly known as I & Joy Bagels, which it acquired a year ago.

The company said it expects to reduce its reported revenue for the first quarter from $8.19 million to about $8.1 million, and to record additional expenses of about $260,000. As a result, its earnings per share for the quarter will be 9 cents, rather than the 12 cents previously reported, it said.

Manhattan Bagel said it uncovered the accounting and bookkeeping problems after new management took over at I&J;, which is based in North Hills. The unit’s two former top executives, Allen Boren, who was chairman, and Eric Cano, president, resigned in December. Their departures came about six months after they were each charged with 24 felony counts of illegal dumping of hazardous waste at another company they ran, Chatsworth Plating.

Manhattan Bagel did not specify whether Boren and Cano were being targeted by its investigation.

In a statement, the company said it doesn’t expect I&J; to contribute to its profit at the level it has in the past.

“The I&J; subsidiary has, in recent months, been impacted by increased competition,” said Manhattan Bagel Chairman and Chief Executive Jack Grumet.

He said he expects the unit to operate near break-even for the rest of the year but that I&J;’s new management is trying to improve operations by refurbishing most of the stores and by increasing advertising and promotions.

Ed Lee, editor of Modern Baking magazine, said the bagel business has been growing rapidly as companies have successfully promoted the versatility of the food item. The number of retail bagel stores has climbed from more than 1,500 in 1994 to more than 4,500 in 1996, and total bagel sales are now estimated to be $2.6 billion a year, the magazine estimates.

But the growth has also fostered a competitive race for market share, particularly among chains entering newer markets in the West, Lee said.

“They’re growing extremely quickly, and there’s a scramble for the best, prime real estate,” he said.

Other companies that have invaded the West Coast market include the nation’s biggest bagel chain company, Vermont-based Bruegger’s Bagel Bakery.

In an interview with The Times a year ago, Cano referred to the expanding bagel market as “a tidal wave.” He said: “Everywhere you go, you see bagels.”

Boren and Cano, friends since high school, ran Chatsworth Plating until Boren acquired I & Joy Bagels from founder Irving Marks in 1992. Following an investigation into the metal-plating company by the Los Angeles Police Department and the Los Angeles County Fire Department, the pair were charged with dumping cyanide, cadmium, chromium and zinc into storm drains and onto the ground.

Each count carries a maximum penalty of 16 months to three years in prison, plus a $100,000 fine.

Boren, who owns a home in Chatsworth and other properties in Southern California, according to authorities, remains free on $20,000 bail. Cano, who is free on his own recognizance, has moved out of state, said Supervising Atty. Vince Sato of the city attorney’s environmental protection section.

The accounting improprieties at I&J; “don’t have an impact on our prosecution,” Sato said. He added, “I’m not surprised they had problems maintaining their financial records, if that allegation is true, because it’s symptomatic of other problems.”

Neither Boren nor Cato could be reached for comment.