<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BAB HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
ILLINOIS 5416 36-3857339
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8501 WEST HIGGINS ROAD,
SUITE 320
CHICAGO, IL 60631
TELEPHONE: (773) 380-6100 TELEFAX: (773) 380-6183
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MICHAEL W. EVANS, CHIEF EXECUTIVE OFFICER
BAB HOLDINGS, INC.
8501 WEST HIGGINS ROAD,
SUITE 320
CHICAGO, IL 60631
TELEPHONE: (773) 380-6100 TELEFAX: (773) 380-6183
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF PLACEMENT AGENT FOR SERVICE)
COPIES TO:
DEANNE M. GRECO, ESQ. MITCHELL L. HOLLINS, ESQ.
JANNA R. SEVERANCE, ESQ. SONNENSCHEIN NATH & ROSENTHAL
MOSS & BARNETT 8000 SEARS TOWER
A PROFESSIONAL ASSOCIATION CHICAGO, IL 60606
4800 NORWEST CENTER TELEPHONE: (312) 876-8144
90 SOUTH 7TH STREET TELEFAX: (312) 876-7934
MINNEAPOLIS, MN 55402
TELEPHONE: (612) 347-0287
TELEFAX: (612) 339-6686----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par 3,800,000
value................. Shares $8.50 $32,300,000 $9,788
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
Equal to the average of the high and low sale prices for the Common Stock,
as reported on the Nasdaq Small-Cap Market, on October 28, 1996.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 1, 1996
PROSPECTUS
3,800,000 SHARES
BAB HOLDINGS, INC.
COMMON STOCK
All of the shares of Common Stock, no par value (the "Shares"), being offered
hereby are being sold by BAB Holdings, Inc. (the "Company").
The Company intends to use a portion of the net proceeds of this offering
(the "Offering") to pay the cash portion of the cost of the acquisition by the
Company of the assets of Almike Enterprises, Inc. and The American Bagel
Company related to the operation and franchising of Chesapeake Bagel Bakery
stores (the "Chesapeake Acquisition"), which will occur contemporaneously with
the closing of this Offering. See "Use of Proceeds."
The Company's Common Stock is currently quoted on The Nasdaq Stock Market's
Small-Cap Market ("Nasdaq") under the symbol "BAGL." On October 31, 1996, the
last reported sale price of the Common Stock, as reported by Nasdaq, was $8.50
per Share. See "Price Range of Common Stock; Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PROCEEDS
OFFERING CASH TO THE
PRICE(1) COMMISSION(2) COMPANY(3)
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<S> <C> <C> <C>
Per Share $ $ $
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Total $ $ $
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</TABLE>
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(1) The Shares are being offered by the Company to selected institutional
investors. The Chicago Corporation (the "Placement Agent") has been
retained to act as the agent of the Company in connection with the
arrangement of this transaction. The Company has agreed to indemnify the
Placement Agent against certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(2) For information regarding compensation payable to the Placement Agent, see
"Plan of Distribution."
(3) Before deducting expenses payable by the Company estimated at $332,500.
--------
The Company reserves the right to reject orders in whole or in part and to
withdraw, cancel or modify the Offering made hereby without notice. It is
expected that delivery of certificates representing the Shares will be made
against payment therefor in Chicago, Illinois on or about December , 1996.
THE CHICAGO CORPORATION
AS PLACEMENT AGENT
DECEMBER , 1996
<PAGE>
[INTENTIONALLY LEFT BLANK]
2
<PAGE>
PROSPECTUS SUMMARY
The following summary of certain provisions of this Prospectus is intended
only for ease of reference, is not a complete presentation of all relevant
facts and is qualified in its entirety by reference to the detailed information
appearing elsewhere in this Prospectus. The entire Prospectus, including the
information set forth under the caption "Risk Factors," should be read and
carefully considered by prospective investors. All share and per share amounts
in this Prospectus reflect a three-for-two stock dividend paid on April 26,
1996 to holders of record as of April 12, 1996. Solely for the purpose of
providing certain information herein which reflects the completion of this
Offering and application of the net proceeds thereof to the Chesapeake
Acquisition and other corporate purposes, it is assumed that the Offering is
completed at a price of $7.50 per share (the "Assumed Share Price"). The actual
price per Share in the Offering may be higher or lower than the Assumed Share
Price and will be based on the Nasdaq prices for the Common Stock at the time
of the Offering.
THE COMPANY
The Company operates and franchises specialty bagel stores under the Big
Apple Bagels brand name featuring daily baked "from scratch" bagels, cream
cheeses, coffee and other related products. As of August 31, 1996, the Company
operated 9 Company-owned and 123 franchised and licensed Big Apple Bagels
stores and one Company-owned and two franchised Brewster's coffee stores
located in 22 states and Canada. Concurrently with the closing of this
offering, the Company will acquire the assets of Almike Enterprises, Inc. and
The American Bagel Company related to the operation and franchising of
Chesapeake Bagel Bakery stores ("Chesapeake"), which as of August 31, 1996
operated 9 company-owned and 139 franchised bagel stores located in 31 states
and the District of Columbia. See "Recent Acquisitions." Upon completion of the
Chesapeake Acquisition, based upon the number of stores in operation at August
31, 1996, the Company believes that it will be the second largest operator and
franchisor of bagel stores in the United States and Canada, with 19 Company-
operated and 264 franchised and licensed units located in 32 states, the
District of Columbia and Canada.
Company operations are characterized by the rapid sale and development of
franchised bagel stores. The Company opened 32 new franchised Big Apple Bagels
stores during the nine months ended August 31, 1996 and 38 new franchised
stores during the fiscal year ended November 1995. Chesapeake has experienced
similar growth in its franchise operations, opening 45 new franchised
Chesapeake Bagel Bakery stores during the eight months ended August 31, 1996
and 65 new franchised bagel stores during calendar year 1995. Both operations
have attracted a diverse group of franchisees, capable of effectively entering
a variety of markets.
The Company also operates as a brand manager, licensing branded food products
produced by third-party suppliers to its franchisees and other food service
companies. Since May 1996, the Company has distributed par-baked bagel products
under the Big Apple Bagels name to hospitality centers and concessions at
airports, travel plazas, and similar locations served by Host Marriott Services
Corporation ("Host Marriott"). A similar agreement was entered into with Mrs.
Fields Development Corporation ("Mrs. Fields Cookies"), which has been offering
Big Apple Bagels product to its company-owned and franchise network since July
1996. The Company also distributes Brewster's Coffee, a brand acquired by the
Company in February 1996. About 90% of Big Apple Bagels stores serve Brewster's
Coffee, and upon completion of the Chesapeake Acquisition, Brewster's Coffee
will also be offered to the Chesapeake franchisees.
The specialty bagel market is one of the fastest growing food product
segments in America. According to NPD National Eating Trends, annual bagel
consumption increased 169% between 1984 and 1993 as consumer awareness of the
product has increased and consumer perception of bagels has evolved from an
ethnic food to a product with a broad appeal. The bagel market is currently
geographically highly concentrated, with an estimated 70% of bagel retailers
located in New York, New Jersey, Florida and California. Despite the market's
geographic concentration, the bagel retailing industry remains highly
fragmented and has historically been dominated by single-unit operators. Over
the past few years, several companies have developed national expansion plans
to meet the increase in consumer demand.
3
<PAGE>
The Company intends to become the leading branded operator and franchisor of
specialty bagel stores through the continued expansion of the number of
franchised and Company-owned stores and development of alternative distribution
channels for branded product. The Company plans to achieve this goal through
the implementation of its strategic plan which includes: (1) commitment to the
growth and financial success of its franchisees; (2) continued focus on
maintaining its position as a low cost producer; (3) increasing store operating
margins by emphasizing its profitable bulk bagel business; (4) further
developing consumer awareness of its multiple brands, including Big Apple
Bagels, Chesapeake Bagel Bakery and Brewster's; (5) enhancing revenue through
the sale of licensed product; and (6) growth through acquisitions and
development of Company-owned stores.
The Company believes that implementation of its strategic plan will result in
continued rapid growth in fiscal 1997. During fiscal 1997, the Company has
estimated that franchise and area developers will open 60 to 70 Big Apple
Bagels franchise stores and 60 to 70 Chesapeake Bagel Bakery franchise stores.
The Company expects to add eight Big Apple Bagels Company-owned stores during
the fourth quarter of fiscal 1996 and an estimated 12 to 14 additional stores
in fiscal 1997. In fiscal 1997, total Company revenue is projected to be
between $26 and $29 million, and net income per share is projected to be
between $0.28 and $0.32.
Big Apple Bagels(R) and logo and Brewster's(R) are registered marks of the
Company. Chesapeake Bagel Bakery(R) is a registered mark of The American Bagel
Company.
The Company was incorporated under the laws of the State of Illinois on
November 25, 1992. Its corporate office is located at 8501 West Higgins Road,
Suite 320, Chicago, Illinois 60631, and its telephone number is (773) 380-6100.
Unless otherwise indicated, the term "Company" as used herein refers to BAB
Holdings, Inc., its subsidiaries and subsidiaries of its subsidiaries.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................. 3,800,000 shares
Common Stock to be Outstanding After 11,843,069 shares(1)(2)
this Offering.......................
Use of Proceeds...................... To finance the Chesapeake Acquisition and
to provide working capital. See "Use of
Proceeds."
Nasdaq symbol........................ BAGL
</TABLE>
- --------
(1) Includes 900,000 shares to be issued in connection with the Chesapeake
Acquisition.
(2) Does not include (i) 570,000 shares of Common Stock reserved for issuance
under the Company's 1995 Long-Term Incentive and Stock Option Plan (the
"Incentive Plan"); (ii) 30,000 shares of Common Stock reserved for issuance
under the Company's 1995 Outside Directors Stock Option Plan (the
"Directors Plan"); (iii) 255,000 shares of Common Stock issuable upon
exercise of a warrant issued to the
underwriter of the Company's initial public offering; (iv) 100,000 shares
of Common Stock issuable upon exercise of an option issued in the BUI
Acquisition; (v) 625,000 shares of Common Stock issuable upon exercise of
an option issued in the Strathmore Acquisition; (vi) up to 200,000 shares
(subject to upward and downward adjustment) reserved for issuance with
exercise of additional options that may be earned in connection with the
Strathmore Acquisition; or (vii) shares that may be issued as additional
consideration in the Chesapeake Acquisition. Of such shares, 373,000 are
subject to options or warrants currently exercisable or becoming
exercisable within 60 days of the date of this Prospectus. See "Recent
Acquisitions," "Management," "Certain Transactions," and "Description of
Securities."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND STORE DATA
The following summary financial information and store data should be read in
conjunction with the historical financial statements and pro forma financial
statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, NINE MONTHS ENDED AUGUST 31,
----------------------------------------------- -----------------------------------------
1993(1) 1994 1995 1995 1996
--------- ---------- ------------------------ ----------- -----------------------
PRO PRO
ACTUAL FORMA(3) ACTUAL FORMA(3)(4)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
REVENUES:
Net sales by Company-
owned stores........... $ 146,843 $ 459,345 $ 563,211 $ 8,669,675 $ 340,439 $ 1,965,939 $ 7,150,457
Royalty fees from
franchised stores...... 466 181,769 767,064 1,962,078 522,868 1,008,398 2,406,843
Franchise and area
development fees....... 35,000 333,000 700,000 1,932,923 554,000 808,331 1,988,198
Licensing fees and other
revenues............... 4,254 4,938 2,728 540,501 2,469 124,765 479,460
--------- ---------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 186,563 979,052 2,033,003 13,105,177 1,419,776 3,907,433 12,024,958
OPERATING COSTS AND
EXPENSES:
Food, beverage and paper
costs.................. 45,101 149,360 191,415 2,663,093 115,133 686,274 2,413,336
Other store operating
expenses............... 86,835 282,972 374,216 4,547,805 190,286 1,097,235 4,176,368
Depreciation and
amortization........... 16,374 44,349 77,627 1,611,379 35,152 207,630 1,290,295
Selling, general and
administrative
expenses............... 351,317 846,589 1,810,323 4,850,805 1,274,609 1,881,439 4,491,194
--------- ---------- ----------- ----------- ----------- ----------- -----------
Total operating costs
and expenses........ 499,627 1,323,270 2,453,581 13,673,082 1,615,180 3,872,578 12,371,193
--------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. (313,064) (344,218) (420,578) (567,905) (195,404) 34,855 (346,235)
Interest and other
income (expense), net.. 1,698 (3,992) (15,182) (100,498) (20,216) 257,232 265,239
--------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss)....... (311,366) (348,210) (435,760) (668,403) (215,620) 292,087 (80,996)
Preferred stock
dividends accumulated.. (13,400) (23,800) (4,000) (4,000) (4,000) -- --
--------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to common
shareholders........... $(324,766) $ (372,010) $ (439,760) $ (672,403) $ (219,620) $ 292,087 $ (80,996)
========= ========== =========== =========== =========== =========== ===========
Net income (loss)
attributable to common
share, fully diluted... $ (0.13) $ (0.15) $ (0.12) $ (0.08) $ (0.06) $ 0.04 $ (0.01)
========= ========== =========== =========== =========== =========== ===========
Average fully diluted
number of common
shares................. 2,536,260 2,536,260 3,560,256 8,310,256 3,445,797 7,337,226 11,735,395
========= ========== =========== =========== =========== =========== ===========
STORE DATA:
System-wide revenues.... $ 156,163 $4,094,725 $15,904,491 $56,267,000 $10,747,059 $22,133,899 $64,552,000
Number of stores in
operation at end of
period:
Company-owned (2)...... 1 1 2 14 1 10 19
Franchise (2).......... 2 21 59 161 51 91 230
Licensed units......... -- -- -- 18 -- 34 34
--------- ---------- ----------- ----------- ----------- ----------- -----------
Total................ 3 22 61 193 52 135 283
========= ========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------------------
1993 1994 1995 AUG. 31, 1996
-------- --------- ---------- -----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)(4)
----------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $(34,354) $ (69,474) $6,430,514 $ 3,914,857 $ 8,463,918
Total assets............ 464,475 753,619 8,491,632 11,170,398 46,619,387
Long-term debt, less
current portion........ -- 374,443 236,294 2,824 2,824
Total liabilities....... 316,341 989,125 1,701,285 1,762,467 4,311,456
Shareholders' equity
(deficit).............. 148,134 (235,506) 6,790,347 9,407,931 42,307,931
</TABLE>
See Notes on following page.
5
<PAGE>
- --------
(1) The Company was incorporated on November 25, 1992.
(2) Includes one Company-owned and two franchise Brewster's Coffee stores in
1996 and four stores currently operated as "Just Bagels" stores which are
scheduled for conversion to Big Apple Bagels stores during the first
quarter of fiscal year 1997.
(3) The unaudited pro forma statements of operations for the year ended
November 30, 1995 and for the nine months ended August 31, 1996 are
presented as if Chesapeake, Strathmore, and BUI were acquired on December
1, 1994 and on December 1, 1995, respectively. Average fully diluted common
shares outstanding is adjusted to reflect the shares issued in this
Offering and in connection with the Chesapeake Acquisition. The unaudited
pro forma balance sheet is presented as if the Chesapeake Acquisition
occurred on August 31, 1996. See the pro forma condensed combined financial
information appearing elsewhere in this Prospectus.
(4) Adjusted to give effect to the sale of the Shares offered hereby at the
Assumed Share Price and the application of the estimated net proceeds
thereof.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: CERTAIN INFORMATION PROVIDED UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AND
"BUSINESS" AND OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN
THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: THE EFFECT OF
CHANGING ECONOMIC CONDITIONS AND CONSUMER BUYING PATTERNS, ACTUAL RESULTS OF
OPERATIONS FOLLOWING THE CHESAPEAKE ACQUISITION, THE PRESENCE IN THE COMPANY'S
MARKET AREA OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND OTHER RISKS
DETAILED UNDER "RISK FACTORS" AND IN OTHER SECTIONS HEREOF AND OTHER DOCUMENTS
FILED BY THE COMPANY WITH THE COMMISSION.
6
<PAGE>
RISK FACTORS
An investment in the Shares offered hereby is speculative and involves a
high degree of risk. Prior to making an investment decision, prospective
investors should carefully consider each of the following risk factors,
together with the other information set forth elsewhere in this Prospectus,
including the financial statements and notes thereto.
LIMITED OPERATING HISTORY
The Company was formed in November 1992. As of August 31, 1996, the Company
had ten Company-owned stores and 125 franchised and licensed stores in
operation, including two Brewster's franchises. Chesapeake had nine company-
owned and 139 franchise stores in operation. Of these stores, 42% of the
Company-owned stores and 50% of the franchise stores have been in operation
for less than one year. Consequently, the Company's operating results achieved
to date may not be indicative of the results that may be achieved in the
future by the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATING LOSSES
The Company recorded operating income of $34,855 for the nine months ended
August 31, 1996, but recorded operating losses of $420,578 and $344,218 for
the years ended November 30, 1995 and 1994, respectively. While the Company
believes that the level of its franchising and licensing operations and number
of Company-owned stores currently generate revenues sufficient to exceed the
expenses necessary to support such operations, given its historical losses,
there can be no assurance that the Company will continue to operate profitably
in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PROJECTED FINANCIAL RESULTS AND FORWARD LOOKING STATEMENTS
Certain projected financial results which are stated in this Prospectus (the
"Projections") are based upon a number of assumptions and estimates, including
future franchise store growth, that, while considered reasonable by the
Company when taken as a whole, are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Company, and are based upon specific present
assumptions with respect to future business decisions, some of which will
change. Projections are necessarily speculative in nature, and it can be
expected that some or all of the assumptions underlying the Projections will
not materialize or will change based upon actual results. Accordingly, the
Projections are only an estimate. Actual results will likely vary from the
Projections, and the variations are likely to be material and are likely to
increase over time. Consequently, the inclusion of the Projections herein
should not be regarded as a representation by the Company or any other person
of results that will actually be achieved. Moreover, the Company does not
intend to update or otherwise revise the Projections to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Prospective purchasers of the Shares are cautioned not
to place undue reliance on the Projections.
The Projections were internally formulated by management of the Company and
no independent accountants or other independent expert has expressed an
opinion or any other form of assurance with respect thereto. The Company's
independent accountants assume no responsibility for, and disclaim any
association with, the Projections.
In arriving at the Projections, the Company had a limited operating history
on which to base its revenue and expense assumptions. As a result, the
Projections are in large part based on assumptions derived from management's
experience rather than on actual performance data of the Company. In addition,
the Projections as well as certain other portions of the discussion in this
Prospectus which constitute forward-looking statements regarding future events
and the future financial performance of the Company, involve significant risks
and uncertainties. Investors are cautioned that such statements are merely
predictions and beliefs of the Company and the Company's actual results will
likely differ materially from those discussed herein.
7
<PAGE>
Moreover, the Projections are based in part upon the operating history and
financial results of Chesapeake, of which management of the Company has no
first hand knowledge, and assume the effective and timely integration of
Chesapeake with the Company's operations. Management's assumptions and
projections as to the future performance of the combined companies is
inherently more speculative than Projections involving only the Company.
RECENT AND PROPOSED ACQUISITIONS
The Company's strategic plan includes continuing acquisition of existing
bagel stores and/or other retail enterprises that complement the bagel
business. During fiscal 1996, the Company has completed three acquisitions
and, upon the closing of this Offering, will complete the Chesapeake
Acquisition. See "Recent Acquisitions." No assurance can be given that these
or other acquisitions will be profitable or that the Company will successfully
integrate, convert, or operate any acquired businesses.
The Company recently acquired certain assets of Brewster's Coffee Company,
Inc., Bagels Unlimited, Inc. and Strathmore Bagels Franchise Corp. and
intends, upon consummation of this Offering, to acquire the assets of
Chesapeake. As a result, the Company has grown and will grow significantly in
size, has expanded the geographic area in which it operates and has added
product lines and distribution channels. Any acquisition involves inherent
uncertainties, such as the effect on the acquired businesses of integration
into a larger organization and the availability of management resources to
oversee the operations of the acquired business. The Company's ability to
integrate the operations of acquired businesses is essential to its future
success. There can be no assurance as to the Company's ability to integrate
new businesses nor as to its success in managing the significantly larger
operations resulting therefrom. Additionally, amortization of intangible
assets recorded and expected to be recorded as a result of the acquisitions
will have a significant impact on future operating results.
RAPID GROWTH
The Company has grown significantly during the past year, both internally
and through acquisitions. The Company intends to continue to pursue an
aggressive growth strategy. By the end of fiscal 1996, the Company expects to
have approximately 150 Big Apple Bagels franchise, licensed and Company-owned
stores in operation and approximately 170 Chesapeake Bagel Bakery franchise
and Company-owned stores in operation. During fiscal 1997, the Company plans
to open 60 to 70 franchise and 12 to 14 Company-owned Big Apple Bagels stores,
as well as 60 to 70 franchise Chesapeake Bagel Bakery stores. The opening and
success of Big Apple Bagels and Chesapeake Bagel Bakery stores will depend on
various factors, including customer acceptance of the Big Apple Bagels and
Chesapeake Bagel Bakery concepts in new markets, the availability of suitable
sites, the negotiation of acceptable lease or purchase terms for new
locations, permit and regulatory compliance, the ability to meet construction
schedules, the financial and other capabilities of the Company and its
franchisees, the ability of the Company to develop Company-owned stores or to
complete strategic acquisitions of existing bagel stores, the ability of the
Company to successfully manage this anticipated expansion and to hire and
train personnel, and general economic and business conditions. Not all of the
foregoing factors are within the control of the Company.
The Company's expansion will continue to require the implementation of
enhanced operational and financial systems and additional management,
operational, and financial resources. Failure to implement these systems and
add these resources could have a material adverse effect on the Company's
results of operations and financial condition. There can be no assurance that
the Company will be able to manage its expanding operations effectively or
that it will be able to maintain or accelerate its growth. See "Business--
Strategy."
CAPITAL REQUIREMENTS
The Company believes that its current cash position, the net proceeds of
this Offering and cash flows from current operations will provide sufficient
working capital to enable the Company to complete the Chesapeake
8
<PAGE>
Acquisition and meet operating requirements for at least the foreseeable
future. The Company may require additional financing in the future to complete
additional acquisitions, and there can be no assurance that the Company will
be able to secure any required additional financing when needed, or at all, or
that such financing, if obtained, will be on terms favorable or acceptable to
the Company. Any future equity financing may result in dilution to holders of
the Common Stock and any future debt financing may reduce earnings. If the
Company is unable to secure additional financing when needed, or at all, it
could be required to significantly scale back its expansion plans and reduce
the scope of its existing operations, or even to discontinue operations. See
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," and
"Business--Strategy."
DEPENDENCE ON FRANCHISEES
The Company has historically received a significant portion of its revenues
from initial franchise fees and continuing royalty payments from franchisees.
Although the Company uses established criteria to evaluate franchisees, there
can be no assurance that franchisees will have the business ability or access
to financial resources necessary to successfully develop or operate a Big
Apple Bagels or Chesapeake Bagel Bakery store in a manner consistent with the
Company's concepts and standards. Additionally, no assurance can be given that
desirable locations and acceptable leases can be obtained by franchisees.
Should the Company's franchisees encounter business or operational
difficulties, the Company's revenues will be adversely affected. The poor
performance of any franchisee may also negatively impact the Company's ability
to sell new franchises. Consequently, at present, the Company's financial
prospects are substantially related to the success of the Big Apple Bagels and
Chesapeake Bagel Bakery franchise stores, over which the Company has limited
control. There can be no assurance that the Company will be able to
successfully attract new franchisees or that the Company's franchisees will be
able to successfully develop and operate Big Apple Bagels or Chesapeake Bagel
Bakery stores.
Although the Company monitors franchisees' compliance with ongoing
obligations on the basis of weekly revenue, and the Company's standard
franchise agreement generally also grants the Company the right to audit the
books and records of franchisees at any time, no assurance can be given that
all franchisees will operate their stores in accordance with the Company's
operating guidelines and in compliance with all material provisions of the
franchise agreement, and the failure of franchisees to so operate their stores
could have a material adverse impact on the Company's business. The franchise
agreement gives the Company the choice of seeking legal remedies, which could
be time-consuming and expensive, and terminating the franchisee, which would
diminish the Company's revenue until such time, if ever, as a new franchisee
replaces the terminated franchisee.
COMPETITION
The food service industry, in general, and the fast food/take-out sector in
particular, are highly competitive, and competition is likely to increase. The
Company believes that the specialty bagel retail business is growing rapidly
and is likely to become increasingly competitive. The Company competes against
well-established food service companies with greater product and name
recognition and with larger financial, marketing, and distribution
capabilities than those of the Company, as well as innumerable local food
service establishments that offer products competitive with those offered by
the Company. The Company's principal competitors include Bruegger's Bagel
Bakery ("Bruegger's"), Einstein/Noah Bagel Corp. ("Einstein"), and Manhattan
Bagel Company, Inc. ("Manhattan"). In addition, other fast-food service
providers, such as Dunkin' Donuts, have recently added bagels to their product
offerings. Any increase in the number of food service establishments in areas
where the Company's or its franchisees' sites are located could have a
material adverse effect on the Company's sales and revenues. The Company
competes for qualified franchisees with a wide variety of investment
opportunities both in the food service business and in other industries.
Investment opportunities in the bagel store business include competing
franchises offered by Bruegger's and Manhattan as well as operators of
individual stores and multi-store chains. See "Business--Competition."
9
<PAGE>
FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional, and local economic conditions, demographic trends, traffic
patterns, and the type, number, and location of competing restaurants. Multi-
unit food service chains, such as the Company's, can also be substantially
adversely affected by publicity resulting from problems with food quality,
illness, injury, or other health concerns or operating issues stemming from
one store or a limited number of stores. Such businesses are also subject to
the risk that shortages or interruptions in supply caused by adverse weather
or other conditions could negatively affect the availability, quality, and
cost of ingredients and other food products. In addition, factors such as
inflation, increased food and labor costs, regional weather conditions,
availability and cost of suitable sites and the availability of experienced
management and hourly employees may also adversely affect the food service
industry in general and the Company's results of operations and financial
condition in particular. See "Business."
GOVERNMENT REGULATION
The Company is subject to the Trade Regulation Rule of the Federal Trade
Commission (the "FTC") entitled "Disclosure Requirements and Prohibitions
Concerning Franchising and Business Opportunity Ventures" (the "FTC Franchise
Rule") and state and local laws and regulations that govern the offer, sale
and termination of franchises and the refusal to renew franchises. See
"Business--Government Regulation." Continued compliance with this broad
federal, state and local regulatory network is essential and costly, and the
failure to comply with such regulations may have a material adverse effect on
the Company and its franchisees. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could limit the Company's ability to sell franchises or
subject the Company and its affiliates to rescission offers, monetary damages,
penalties, imprisonment and/or injunctive proceedings. In addition, under
court decisions in certain states, absolute vicarious liability may be imposed
upon franchisors based upon claims made against franchisees. Even if the
Company is able to obtain insurance coverage for such claims, there can be no
assurance that such insurance will be sufficient to cover potential claims
against the Company.
Pursuant to the Asset Purchase Agreement related to the Chesapeake
Acquisition, The American Bagel Company (the franchisor entity of Chesapeake)
will assign all of its rights and obligations under its franchise agreements
with Chesapeake Bagel Bakery franchisees to the Company. All of the franchise
and area development agreements were sold subject to certain federal and/or
state franchise sale laws, the requirements of which include delivery of
certain disclosures by Chesapeake to its prospective franchisees, including
financial statements of the franchisor (The American Bagel Company), audited
and certified by The American Bagel Company's independent public accountants,
and prepared in accordance with generally accepted accounting principles.
Compliance with the FTC Franchise Rule and state franchise disclosure laws was
the responsibility of Chesapeake and the Company has not contractually assumed
any liability in this regard. However, if applicable franchise disclosure laws
were found to have been violated, franchisees who entered into franchise
agreements with Chesapeake may, in some instances, be permitted to rescind
their agreements, which could adversely affect the Company.
Pursuant to the Asset Purchase Agreement, independent public accountants
were retained by Chesapeake to audit the combined financial statements of The
American Bagel Company and Almike Enterprises, Inc. These combined financial
statements include financial statements of The American Bagel Company which
have been adjusted from financial statements previously reported on by other
independent auditors, primarily with respect to the timing of the recognition
of revenue related to franchise and area development fees. As adjusted, the
results of operations of Chesapeake are less favorable than that earlier
reported by The American Bagel Company. Whether such adjustment would have any
significance in light of the FTC Franchise Rule and state franchise disclosure
laws is unknown.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is highly dependent on the continuing services of
Michael W. Evans, its President and Chief Executive Officer, and Michael K.
Murtaugh, its Vice President and General Counsel. The
10
<PAGE>
loss of the services of Mr. Evans or Mr. Murtaugh could have a material
adverse effect on the Company's business. The Company has no employment
agreement with either of these officers. However, these officers are subject
to certain nondisclosure agreements and, in the case of Mr. Murtaugh, a
noncompetition agreement which provides, generally, that Mr. Murtaugh will
not, while associated with the Company and for a period of two years
thereafter, directly or indirectly engage in a business similar to or
competitive with the business of the Company within the state in which his
franchise stores are located. The Company has key-person life insurance
policies on Mr. Evans in the amount of $1,000,000 and on Mr. Murtaugh in the
amount of $500,000. In addition, the Company's ability to develop and market
its products and to achieve and maintain a competitive market position
depends, in large part, on its ability to attract and retain qualified food
marketing personnel and franchisees. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
attract and retain such personnel. See "Business" and "Management."
TRADEMARKS/SERVICE MARKS
The trademarks and service marks used by the Company and Chesapeake contain
common descriptive English words and thus may be subject to challenge by users
of these words, alone or in combination with other words, to describe other
services or products. Some persons or entities may have prior rights to those
names or marks in their respective localities. Accordingly, there is no
assurance that such marks are available in all locations. Any challenge, if
successful, in whole or in part, could restrict the Company's use of the marks
in areas in which the challenger is found to have used the name prior to the
Company's use. Any such restriction could limit the expansion of the Company's
use of the marks into that region, and the Company and its franchisees may be
materially and adversely affected.
CONFLICTS OF INTEREST
Paul C. Stolzer, a director of the Company, is the sole shareholder and
president of Big Apple Bagels, Inc., a licensee of the Company that operates
three stores in the western suburbs of Chicago, Illinois, and Michael K.
Murtaugh, Vice President, General Counsel and director, owns interests in
entities that are franchisees of the Company. If any such licensee or
franchisee defaults on its respective license or franchise agreement, the
interests of the Company with respect to the franchisee or licensee could
potentially differ from the interests of the individuals named above. The
Company intends to protect its interests in these circumstances by strictly
adhering to the terms of the respective written agreements with the licensee
and franchisees and by assigning decision-making responsibilities in regard to
such matters to directors of the Company who are not financially interested in
that matter. Any preferential treatment could constitute a breach of fiduciary
duty by the Board of Directors and the interested officer. See "Management"
and "Certain Transactions."
POSSIBLE DEPRESSIVE EFFECT ON PRICE OF COMMON STOCK FROM FUTURE SALES OF
COMMON STOCK
Following the sale of the Shares offered hereby and the closing of the
Chesapeake Acquisition, the Company will have outstanding 11,843,069 shares of
Common Stock, of which 9,051,723 shares will be freely tradable and 85,000
shares will be eligible for sale under Rule 144, or will become eligible for
such sale by the end of 1996. In addition, the Company intends to file a
registration statement covering the shares of Common Stock issuable under its
Incentive Plan and Directors Plan, pursuant to which such shares, when issued,
will be freely tradeable, except to the extent held by officers or directors
who are limited as to resale by Rule 144 or by agreement with the Placement
Agent, as described below. The sale, or availability for sale, of substantial
amounts of Common Stock in the public market subsequent to this offering could
materially adversely affect the market price of the Common Stock and could
impair the Company's ability to raise additional capital through the sale of
its equity securities or debt financing. The Company and its directors and
officers have agreed not to offer, sell, contract to sell, grant any option to
purchase or otherwise sell or dispose of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 90 days after the effective date of the
Registration Statement of which this Prospectus is a part without the written
consent of the Placement Agent, other than pursuant to (i) the exercise of
outstanding stock options and warrants, (ii) the Company's stock option plans
and (iii) sales of up to an aggregate of 160,350 shares of Common Stock by
certain officers and directors of the Company.
11
<PAGE>
POTENTIAL EFFECTS OF ANTITAKEOVER PROVISIONS
The Company is authorized to issue up to 4,000,000 shares of preferred
stock, $.01 par value (the "Preferred Stock"), none of which are currently
outstanding or will be outstanding following this Offering. The Preferred
Stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors, without further
action by shareholders. The issuance of any Preferred Stock could adversely
affect the rights of the holders of Common Stock, and specific rights granted
to holders of Preferred Stock could restrict the Company's ability to merge
with or sell its assets to a third party, thereby preserving control of the
Company by its then owners. See "Description of Securities."
Certain provisions of the Illinois Business Corporation Act (the "Illinois
Act") restrict a publicly-held corporation from engaging in a "business
combination" with an "interested shareholder" or its affiliates, unless the
business combination is approved by the Board of Directors or by a
supermajority vote of the shareholders. These provisions of the Illinois Act
could delay and make more difficult a business combination even if the
business combination could be beneficial to the interests of the Company's
shareholders. See "Description of Securities--Antitakeover Effect of Illinois
Law."
RECENT ACQUISITIONS
In February 1996, the Company acquired the trademark and franchise rights,
wholesale accounts and certain other assets, including two franchise units, of
Brewster's Coffee Company, Inc. ("Brewster's") for a total purchase price of
approximately $227,000. Brewster's Coffee is now sold through approximately 90
Big Apple Bagels stores. See Note 10 of Notes to Consolidated Financial
Statements of BAB Holdings, Inc. In addition, in October 1996, the Company
acquired two Brewster's stores previously operated as licensed units by the
former owner of Brewster's.
In May 1996, the Company acquired certain assets of Bagels Unlimited, Inc.
("BUI"), a Milwaukee-based Big Apple Bagels franchisee, including five stores
and certain contract rights, for a total purchase price of approximately
$1,224,000. The Company also entered into non-competition agreements with the
two principals of BUI in consideration of $100,000. Such agreements prohibit
these principals from being involved in the retail or wholesale sale of bagels
within a four-mile radius of any existing Big Apple Bagels store for six years
after the close of the transaction. The stores acquired in the BUI acquisition
are now owned and operated by the Company.
In May 1996, the Company acquired certain assets of Strathmore Bagel
Franchise Corp. ("Strathmore") for a total purchase price of approximately
$1,710,000 plus additional compensation based on future openings of licensed
units in the Host Marriott system. Strathmore distributed bagels and related
products at wholesale and collected royalties on retail sales pursuant to a
license agreement with Host Marriott. As of the date of closing, Strathmore
had contracts with 19 bagel-deli units and 15 bagel cart/display units
operated by Host Marriott in airports and travel plazas. The Company acquired
the rights to the license agreement with Host Marriott, contracts for each
facility, supply contracts, equipment leases, and vendor arrangements, as well
as machinery, equipment, and improvements owned by Strathmore and located in
the Host Marriott facilities. The Company also entered into non-competition
agreements with the two principals of Strathmore prohibiting such individuals
from engaging in any business that receives 30% of its revenues from the
production or sale of bagels or the franchising of such business in any place
in the world where Host Marriott has a presence in an airport or travel plaza
for a period of two years following closing.
On September 4, 1996, the Company entered into an asset purchase agreement
(the "Asset Purchase Agreement") pursuant to which it agreed to acquire the
assets of The American Bagel Company and Almike Enterprises, Inc. related to
the operation and franchising of Chesapeake Bagel Bakery stores (the
"Chesapeake Acquisition"). Management of the Company believes that the
Chesapeake Acquisition will allow the Company to rapidly expand its market
presence into new geographic areas. The Company expects to realize certain
operating and administrative efficiencies as a result of the acquisition and
that it will be able to utilize current Company systems and personnel and
other resources for both Big Apple Bagels and Chesapeake franchising and
operations.
12
<PAGE>
The terms of the Chesapeake Acquisition, as set forth in the Asset Purchase
Agreement, provide that the Company will purchase the Chesapeake-related assets
for $22 million in cash, plus assumption of initial franchise obligations and
certain current liabilities, and 900,000 shares of the Company's Common Stock.
The holders of such shares will have certain rights to require registration of
the shares under the Securities Act. The Asset Purchase Agreement also calls
for additional future consideration to be paid by the Company upon the opening
of Chesapeake Bagel Bakery franchise stores in excess of 181 stores, if there
was a signed franchise or area development agreement for such store as of the
date of closing. For the 182nd and each additional such store, the Company is
obligated to pay $20,000 per store to the current owners of Chesapeake. Such
payment will be made in shares of the Company's Common Stock, valued at the
then current market price, in the case of stores for which the franchise fee
was collected by Chesapeake prior to closing and in cash for those for which
the franchise fee is collected by the Company following the Chesapeake
Acquisition. The Company estimates that its total obligation pursuant to this
term of the Asset Purchase Agreement will be approximately $3 million.
Each Chesapeake Bagel Bakery store has a bagel bakery on the premises. The
stores offer a variety of bagels prepared from scratch on the premises as well
as bagel sandwiches, other foods, and beverages. The first Chesapeake Bagel
Bakery was opened in 1981 by Alan Manstof and Michael Robinson in Washington,
D.C. Messrs. Manstof and Robinson, through their corporation Almike
Enterprises, Inc., currently own and operate nine Chesapeake Bagel Bakery
stores, all in the District of Columbia, Maryland, and Virginia. The American
Bagel Company, also owned by Messrs. Manstof and Robinson, began offering
franchises for Chesapeake Bagel Bakery stores in 1984. As of August 31, 1996,
there were 139 franchise Chesapeake Bagel Bakery stores operating in 31 states
and the District of Columbia. The Company currently intends to keep operating
and franchising Chesapeake stores under the Chesapeake name in markets in which
Chesapeake has been successful--primarily in the eastern and middle Atlantic
states.
The Company expects to make offers of employment to certain Chesapeake
employees. Because Chesapeake outsourced its franchise sales operation, it is
anticipated that the Company will need to hire additional sales personnel to
market the Chesapeake franchise concept.
It is a condition to the closing of this Offering that the Chesapeake
Acquisition be consummated contemporaneously with or immediately after the
closing of this Offering.
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Shares offered hereby at the Assumed
Share Price, after deducting the Placement Agent's commission and estimated
offering expenses of approximately $1,900,000, are estimated to be
$26,600,000. See "Prospectus Summary."
The Company intends to use approximately $22.0 million of the net proceeds
to complete the Chesapeake Acquisition and the balance for working capital.
The net proceeds may be used for other purposes consistent with the
Company's plan to expand the number of Company-owned stores as well as
franchise operations. Pending application of the net proceeds, such proceeds
will be invested in certificates of deposit, government debt instruments
and/or other short-term investments.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1996: (i) on an actual basis and (ii) on a pro forma basis to give
effect to the sale by the Company of the Shares offered hereby at the Assumed
Share Price, less the Placement Agent's commissions and estimated Offering
expenses, and application of the net proceeds therefrom and issuance of
900,000 shares of restricted Company Common Stock preliminarily valued at
$7.00 per share as partial consideration for the Chesapeake Acquisition. The
final per share value of the shares issued in the Chesapeake Acquisition will
be determined on the closing of such transaction, and may be greater or less
than such amount. See "Prospectus Summary."
<TABLE>
<CAPTION>
AUGUST 31, 1996
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Current portion of long-term debt............... $ 7,099 $ 7,099
========== ===========
Long-term debt, less current portion............ $ 2,824 $ 2,824
Shareholders' equity:
Preferred Stock, $.01 par value:
4,000,000 shares authorized; no shares
issued and outstanding, no shares issued and
outstanding
Common Stock, no par value:
20,000,000 shares authorized; 7,143,069
shares issued and outstanding, 11,843,069
shares issued and outstanding, as adjusted
(1)......................................... 9,201,024 42,101,024
Additional paid-in capital.................... 1,010,156 1,010,156
Accumulated deficit........................... (803,249) (803,249)
---------- -----------
Total shareholders' equity.................. 9,407,931 42,307,931
---------- -----------
Total capitalization........................ $9,410,755 $42,310,755
========== ===========
</TABLE>
- --------
(1) Does not include (i) 570,000 shares of Common Stock reserved for issuance
under the 1995 Long-Term Incentive and Stock Option Plan; (ii) 30,000
shares of Common Stock reserved for issuance under the Outside Directors
Stock Option Plan; (iii) 255,000 shares of Common Stock issuable upon
exercise of a warrant issued to the underwriter of the Company's initial
public offering; (iv) 100,000 shares of Common Stock issuable upon
exercise of an option issued in the BUI Acquisition; (v) 625,000 shares of
Common Stock issuable upon exercise of an option issued in the Strathmore
Acquisition; (vi) up to 200,000 shares (subject to upward and downward
adjustment) reserved for issuance with exercise of additional options that
may be earned in connection with the Strathmore Acquisition; or (vii)
shares that may be issued as additional consideration in the Chesapeake
Acquisition. Of such shares, 373,000 are subject to options or warrants
currently exercisable or exercisable within sixty days of the date of this
Prospectus. See "Recent Acquisitions," "Management," and "Description of
Securities."
14
<PAGE>
PRICE RANGE OF COMMON STOCK; DIVIDEND POLICY
The following table sets forth the quarterly high and low sale prices for
the Company's Common Stock, as reported in The Nasdaq Stock Market's Small-Cap
Market since beginning of trading on November 27, 1995. The Company's Common
Stock is traded under the symbol "BAGL." Prices reflect a three-for-two stock
dividend paid on April 26, 1996 to holders of record as of April 12, 1996.
<TABLE>
<CAPTION>
LOW HIGH
----- ------
<S> <C> <C>
YEAR ENDED NOVEMBER 30, 1995
Fourth quarter (beginning November 27, 1995).............. $3.33 $ 4.33
YEAR ENDING NOVEMBER 30, 1996
First quarter............................................. $3.17 $ 4.50
Second quarter............................................ 4.00 9.13
Third quarter............................................. 6.25 11.75
Fourth quarter (through October 28, 1996)................. 6.75 9.00
</TABLE>
As of August 31, 1996, the Company's Common Stock was held of record by 193
holders. Registered ownership includes nominees who may hold securities on
behalf of multiple beneficial owners.
Following issuance of the Shares offered hereby, the Company intends to
apply to list the Common Stock on The Nasdaq Stock Market's National Market.
The Company has never declared or paid any cash dividends on its Common
Stock, and the Board of Directors currently intends to retain all earnings, if
any, for use in the Company's business for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors, subject to covenants in any loan
documents restricting the payment of dividends.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
The selected consolidated financial data presented below have been derived
from the financial statements of the Company. The financial statements as of
and for the periods ended November 30, 1993, 1994 and 1995 and August 31, 1995
have been audited by Ernst & Young LLP, independent auditors. Financial data
for the nine months ended August 31, 1996 have been derived from unaudited
financial statements. The data should be read in conjunction with the
Company's Consolidated Financial Statements as of November 30, 1993, 1994 and
1995 and for the three years then ended, the related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
of which appear elsewhere in this Prospectus. The financial data for the nine
months ended August 31, 1996 have not been audited, but, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments and accruals, which the Company considers necessary for a fair
presentation of the Company's financial position and results of operations for
the periods indicated. Results for the nine months ended August 31, 1996 are
not necessarily indicative of results that may be achieved for a full twelve-
month period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
---------------------------------- ------------------------
1993(1) 1994 1995 1995 1996
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS:
REVENUES:
Net sales by Company-
owned stores......... $ 146,843 $ 459,345 $ 563,211 $ 340,439 $ 1,965,939
Royalty fees from
franchised stores.... 466 181,769 767,064 522,868 1,008,398
Franchise and area
development fees..... 35,000 333,000 700,000 554,000 808,331
Licensing fees and
other revenues....... 4,254 4,938 2,728 2,469 124,765
--------- ---------- ----------- ----------- -----------
Total revenues...... 186,563 979,052 2,033,003 1,419,776 3,907,433
EXPENSES:
Food, beverage and
paper costs.......... 45,101 149,360 191,415 115,133 686,274
Other store operating
expenses............. 86,835 282,972 374,216 190,286 1,097,235
Depreciation and
amortization......... 16,374 44,349 77,627 35,152 207,631
Selling, general and
administrative
expenses............. 351,317 846,589 1,810,323 1,274,609 1,881,438
--------- ---------- ----------- ----------- -----------
Total operating
costs and expenses. 499,627 1,323,270 2,453,581 1,615,180 3,872,578
--------- ---------- ----------- ----------- -----------
Income (loss) from
operations............. (313,064) (344,218) (420,578) (195,404) 34,855
Interest and other
income (expenses)...... 1,698 (3,992) (15,182) (20,216) 257,232
--------- ---------- ----------- ----------- -----------
Net income (loss)....... (311,366) (348,210) (435,760) (215,620) 292,087
Preferred stock
dividends accumulated.. (13,400) (23,800) (4,000) (4,000) --
--------- ---------- ----------- ----------- -----------
Net income (loss)
attributable to common
shareholders........... $(324,766) $ (372,010) $ (439,760) $ (219,620) $ 292,087
========= ========== =========== =========== ===========
Net income (loss) per
common share, fully
diluted................ $(0.13) $(0.15) $(0.12) $(0.06) $0.04
========= ========== =========== =========== ===========
Average fully diluted
number of common
shares................. 2,536,260 2,536,260 3,560,256 3,445,797 7,337,226
========= ========== =========== =========== ===========
STORE DATA:
System-wide revenues.... $ 156,163 $4,094,725 $15,904,491 $10,747,059 $22,133,899
========= ========== =========== =========== ===========
Number of stores in
operation at end of
period:
Company-owned (2)..... 1 1 2 1 10
Franchise (2)......... 2 21 59 51 91
Licensed units........ -- -- -- -- 34
--------- ---------- ----------- ----------- -----------
Total............... 3 22 61 52 135
========= ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
------------------------------ -----------------------
1993 1994 1995 1995 1996
BALANCE SHEET DATA: -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Working capital
(deficit).............. $(34,354) $(69,474) $6,430,514 $ 62,170 $ 3,914,857
Total assets............ 464,475 753,619 8,491,632 1,822,485 11,170,398
Long-term debt, less
current portion........ -- 374,443 236,294 238,084 2,824
Total liabilities....... 316,341 989,125 1,701,285 1,126,408 1,762,467
Shareholders' equity
(deficit).............. 148,134 (235,506) 6,790,347 (303,923) 9,407,931
</TABLE>
- -------
(1) The Company was incorporated on November 25, 1992.
(2) Includes one Company-owned and two franchise Brewster's Coffee stores in
1996 and four stores currently operated as "Just Bagels" stores which are
scheduled for conversion to Big Apple Bagels stores during the first
quarter of fiscal year 1997.
16
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION OF CHESAPEAKE BAGEL BAKERY
The selected combined financial data presented below have been derived from
the combined financial statements of Chesapeake Bagel Bakery. The combined
financial statements include the financial statements of Almike Enterprises,
Inc. and The American Bagel Company. The combined financial statements as of
December 31, 1993, 1994 and 1995 have been audited by Ernst & Young LLP,
independent auditors. The data should be read in conjunction with Chesapeake's
Financial Statements as of December 31, 1993, 1994 and 1995 and for the three
years then ended, the related notes, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," all of which appear
elsewhere in this Prospectus. The financial data for the eight months ended
August 31, 1995 and 1996 have not been audited, but, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments
and accruals, which management considers necessary for a fair presentation of
the financial position and results of operations for the periods indicated.
Results for the eight months ended August 31, 1996 are not necessarily
indicative of results that may be achieved for a full twelve-month period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED AUGUST 31,
------------------------------------- ------------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENTS OF
INCOME:
REVENUES:
Net sales by company-
owned stores......... $ 4,861,186 $ 5,848,907 $ 5,330,049 $ 3,668,149 $ 3,645,080
Royalty fees from
franchised stores.... 453,722 730,365 1,331,014 772,801 1,323,659
Franchise and area
development fees..... 62,500 350,000 1,232,923 755,500 1,029,867
Other revenue......... 84,802 117,089 21,829 13,402 76,427
----------- ----------- ----------- -------------- --------------
Total revenues...... 5,462,210 7,046,361 7,915,815 5,209,852 6,075,033
EXPENSES:
Food, beverage and
paper costs.......... 1,298,955 1,564,006 1,477,476 1,046,560 1,193,212
Other store operating
expenses............. 2,170,742 2,866,352 2,829,250 1,891,955 2,227,162
Depreciation and
amortization......... 152,855 171,452 182,267 132,682 121,520
Selling, general and
administrative
expenses............. 1,092,596 1,528,163 2,976,355 1,691,037 2,382,732
----------- ----------- ----------- -------------- --------------
Total operating
costs and expenses. 4,715,148 6,129,973 7,465,348 4,762,234 5,924,626
----------- ----------- ----------- -------------- --------------
Income from operations.. 747,062 916,388 450,467 447,618 150,407
Interest and other
income (expense)....... (15,290) (2,329) (87,786) 28,015 10,107
----------- ----------- ----------- -------------- --------------
Income before taxes..... 731,142 914,059 362,681 475,633 160,514
Income tax provision(1). 22,635 21,414 3,500 -- 3,192
----------- ----------- ----------- -------------- --------------
Net income.............. $ 708,507 $ 892,645 $ 359,181 $ 475,633 $ 157,322
=========== =========== =========== ============== ==============
STORE DATA:
System-wide revenues.... $16,204,000 $24,108,000 $40,363,000 $ 25,240,000 $ 38,673,000
=========== =========== =========== ============== ==============
Number of stores in
operation at end of
period:
Company-owned......... 7 8 8 8 9
Franchise............. 21 39 102 76 139
----------- ----------- ----------- -------------- --------------
Total............... 28 47 110 84 148
=========== =========== =========== ============== ==============
<CAPTION>
DECEMBER 31, AUGUST 31,
------------------------------------- ------------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 72,069 $ (163,623) $(2,166,668) $ (1,681,088) $ (2,500,068)
Total assets............ 1,590,256 3,331,574 3,165,719 3,425,489 3,167,112
Long-term debt, less
current portion........ 572,725 546,003 100,837 270,765 159,870
Total liabilities....... 1,355,641 3,192,314 4,608,326 4,504,238 5,077,797
Stockholders' equity
(deficit).............. 234,615 139,260 (1,442,607) (1,060,749) (1,910,685)
</TABLE>
- -------
(1) Almike Enterprises, Inc. and The American Bagel Company are both S
corporations under the Internal Revenue Code and, as such, not subject to
federal income tax.
17
<PAGE>
BAB HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1995
(UNAUDITED)
The following unaudited pro forma statement of operations reflects the
acquisition by the Company of BUI, Strathmore, and Chesapeake as if they had
occurred on December 1, 1994. Such pro forma information is based upon the
historical results of operations of the Company for the year ended November 30,
1995, the historical results of operations of BUI for the fiscal year ended
February 29, 1996, and the historical results of operations of Strathmore and
Chesapeake for the fiscal year ended December 31, 1995, giving effect to the
acquisitions and the pro forma adjustments set forth in the accompanying notes
to pro forma financial statements. Unaudited pro forma adjustments are based
upon historical information, preliminary estimates and certain assumptions that
the Company deems appropriate. The unaudited pro forma financial statements are
not necessarily indicative of either future results of operations or results
that might have been obtained if the foregoing transaction had been consummated
as of the indicated dates. This pro forma statement of operations should be
read in conjunction with the historical financial statements and notes thereto
of the Company, BUI, Strathmore, and Chesapeake included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
BUI AND
STRATHMORE STRATHMORE CHESAPEAKE
BAGELS BAGELS FRANCHISE PRO FORMA CHESAPEAKE PRO FORMA PRO FORMA
COMPANY UNLIMITED INC. CORPORATION ADJUSTMENTS ACQUISITION ADJUSTMENTS AS ADJUSTED
---------- -------------- ---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net sales by Company-
owned stores.......... $ 563,211 $2,776,415 $ -- $ -- $5,330,049 $ -- $ 8,669,675
Royalty fees from
franchised stores...... 767,064 -- -- (136,000)(1) 1,331,014 -- 1,962,078
Franchise and area
development fees....... 700,000 -- -- -- 1,232,923 -- 1,932,923
Licensing fees and
other revenues......... 2,728 -- 515,944 -- 21,829 -- 540,501
---------- ---------- -------- --------- ---------- ---------- -----------
Total revenues...... 2,033,003 2,776,415 515,944 (136,000) 7,915,815 13,105,177
OPERATING COSTS AND
EXPENSES:
Food, beverage, and
paper costs............ 191,415 994,202 -- -- 1,477,476 -- 2,663,093
Other store operating
expenses............... 374,216 1,344,339 -- -- 2,829,250 -- 4,547,805
Depreciation and
amortization........... 77,627 69,410 33,670 140,863 (2) 182,267 1,107,542 (4) 1,611,379
Selling, general and
administrative
expenses.............. 1,810,323 447,841 430,286 (136,000)(1) 2,976,355 (678,000)(5) 4,850,805
---------- ---------- -------- --------- ---------- ---------- -----------
Total operating
costs and
expenses........... 2,453,581 2,855,792 463,956 4,863 7,465,348 429,542 13,673,082
---------- ---------- -------- --------- ---------- ---------- -----------
Income (loss) from
operations............. (420,578) (79,377) 51,988 (140,863) 450,467 (429,542) (567,905)
Interest and other
income (expense), net.. (15,182) (79,014) (30,920) 79,123 (3) (87,786) 41,488 (3) (92,291)
---------- ---------- -------- --------- ---------- ---------- -----------
Income (loss) before
taxes.................. (435,760) (158,391) 21,068 (61,740) 362,681 (388,054) (660,196)
Provision for income
taxes.................. -- -- 4,707 -- 3,500 -- (6) 8,207
---------- ---------- -------- --------- ---------- ---------- -----------
Net income (loss)...... (435,760) (158,391) 16,361 (61,740) 359,181 (388,054) (668,403)
Preferred stock
dividends accumulated.. 4,000 -- -- -- -- -- 4,000
---------- ---------- -------- --------- ---------- ---------- -----------
Net income (loss)
attributable to common
shareholders.......... $ (439,760) $ (158,391) $ 16,361 $ (61,740) $ 359,181 $ (388,054) $ (672,403)
========== ========== ======== ========= ========== ========== ===========
Net (loss) attributable
to common share, fully
diluted............... $ (0.12) $ (0.08)
========== ===========
Average number of
common shares used,
fully diluted (7)..... 3,560,256 8,310,256
========== ===========
</TABLE>
- -------
(1) Elimination of franchise royalty revenue of the Company and related expense
recognized by BUI.
(2) Amortization of preliminary estimate of BUI goodwill over 40 years
($18,183), amortization of BUI non-competition agreement over six years
($16,667), amortization of preliminary estimate of Strathmore goodwill over
40 years ($55,232) and Strathmore contract rights over 102 months
($57,635), reduced by elimination of BUI initial franchise fee ($6,854)
amortization.
18
<PAGE>
(3) Elimination of interest expense of BUI and Chesapeake, as related debt is
not assumed by the Company.
(4) Amortization of preliminary allocation of Chesapeake purchase price to
franchise contract rights (20-year life), other intangibles including
goodwill (40-year life) and additional depreciation on equipment and
leasehold improvements (average life of 6 years).
(5) Pro forma adjustments related to the following:
i) Net savings due to elimination of payroll-related costs of Chesapeake
owners and duplicative financial personnel ($394,000).
ii) Elimination of 35% sales commission on franchise sales due to the
Company's plan to discontinue the use of an outside franchise sales
force and bring such efforts in-house, ($431,000), net of additional
payroll-related costs of additional in-house franchise sales force
($147,000).
(6) The American Bagel Company and Almike Enterprises Inc., the two entities
which make up Chesapeake are S-corporations for U.S. federal income tax
purposes. Accordingly, no accrual for federal income taxes has been made.
Additional pro forma federal tax accrual is not necessary due to loss
position of pro forma entity.
(7) Represents the issuance of 3,800,000 Shares in the Offering, and 900,000
shares of Common Stock as partial consideration pursuant to the Asset
Purchase Agreement, and issuance 50,000 shares of Common Stock as partial
consideration in the BUI acquisition for Pro Forma as Adjusted.
19
<PAGE>
BAB HOLDINGS, INC.
PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 1996
(UNAUDITED)
The following unaudited pro forma statement of operations reflects the
acquisition by the Company of BUI, Strathmore, and Chesapeake as if they had
occurred on December 1, 1995. Such pro forma information is based upon the
historical results of operations of the Company for the nine months ended
August 31, 1996, the historical results of operations of BUI for the five
months ended April 30, 1996, the historical results of operations of Strathmore
for the six months ended May 21, 1996 and Chesapeake for the nine month period
ended August 31, 1996, giving effect to the acquisitions and the pro forma
adjustments set forth in the accompanying notes to pro forma financial
statements. Unaudited pro forma adjustments are based upon historical
information, preliminary estimates and certain assumptions that the Company
deems appropriate. The unaudited pro forma financial statements are not
necessarily indicative of either future results of operations or results that
might have been obtained if the foregoing transaction had been consummated as
of the indicated dates. This pro forma statement of operations should be read
in conjunction with the pro forma balance sheet of the Company and the
historical financial statements and notes thereto of the Company, BUI,
Strathmore, and Chesapeake included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
STRATHMORE BUI AND
BAGELS BAGELS STRATHMORE CHESAPEAKE
UNLIMITED FRANCHISE PRO FORMA CHESAPEAKE PRO FORMA PRO FORMA
COMPANY INC. CORPORATION ADJUSTMENTS ACQUISITION ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net sales by Company-
owned stores........... $1,965,939 $1,152,522 $ -- $ -- $4,031,996 $ -- $ 7,150,457
Royalty fees from
franchised stores...... 1,008,398 -- -- (59,524)(1) 1,457,969 -- 2,406,843
Franchise and area
development fees....... 808,331 -- -- -- 1,179,867 -- 1,988,198
Licensing fees and other
revenues............... 124,765 -- $278,268 -- 76,427 -- 479,460
---------- ---------- -------- -------- ---------- --------- -----------
Total revenues....... 3,907,433 1,152,522 278,268 (59,524) 6,746,259 -- 12,024,958
OPERATING COSTS AND
EXPENSES:
Food, beverage and
paper.................. 686,274 417,213 -- -- 1,309,849 -- 2,413,336
Other store operating
expenses............... 1,097,235 608,981 -- -- 2,470,152 -- 4,176,368
Depreciation and
amortization........... 207,631 28,920 16,835 68,099 (2) 138,153 $ 830,657 (4) 1,290,295
Selling, general and
administrative
expenses............... 1,881,438 198,060 319,209 (59,524)(1) 2,750,011 (598,000)(5) 4,491,194
---------- ---------- -------- -------- ---------- --------- -----------
Total operating costs
and expenses........ 3,872,578 1,253,174 336,044 8,575 6,668,165 232,657 12,371,193
---------- ---------- -------- -------- ---------- --------- -----------
Income (loss) from
operations............. 34,855 (100,652) (57,776) (68,099) 78,094 (232,657) (346,235)
Interest and other
income (expense), net.. 257,232 (20,318) -- -- 10,043 33,936 (3) 280,893
---------- ---------- -------- -------- ---------- --------- -----------
Income (loss) before
taxes.................. 292,087 (120,970) (57,776) (68,099) 88,137 (198,721) (65,342)
Provision for income
taxes.................. -- -- 12,462 -- 3,192 -- (6) 15,654
---------- ---------- -------- -------- ---------- --------- -----------
Net income (loss)
attributable to common
shareholders........... $ 292,087 $ (120,970) $(70,238) $(68,099) $ 84,945 $(198,721) $ (80,996)
========== ========== ======== ======== ========== ========= ===========
Net income (loss)
attributable to
common share, fully
diluted............... $ 0.04 $ (0.01)
========== ===========
Average number of
common shares used
fully diluted(7)...... 7,337,226 11,735,395
========== ===========
</TABLE>
- --------
(1) Elimination of franchise royalty revenue of the Company and related expense
recognized by BUI.
(2) Amortization of preliminary estimate of BUI goodwill over 40 years
($7,576), amortization of BUI non-competition agreement over six years
($6,945), amortization of preliminary estimate of Strathmore goodwill over
40 years ($27,616) and Strathmore contract rights over 102 months
($28,818), reduced by elimination of BUI initial franchise fee ($2,856)
amortization.
(3) Elimination of interest expense of Chesapeake as related debt is not
assumed by the Company.
20
<PAGE>
(4) Amortization of preliminary allocation of Chesapeake purchase price to
franchise contract rights (20-year life), other intangibles including
goodwill (40-year life) and additional depreciation on equipment and
leasehold improvements (average life of 6 years).
(5) Pro forma adjustments related to the following:
i) Net savings due to elimination of payroll-related costs of Chesapeake
owners and duplicative financial personnel ($295,000).
ii) Elimination of 35% sales commission on franchise sales due to the
Company's plan to discontinue the use of an outside franchise sales
force and bring such efforts in-house ($413,000), net of additional
payroll-related costs of additional in-house franchise sales force
($110,000).
(6) The American Bagel Company and Almike Enterprises Inc., the two entities
which make up Chesapeake, are S-corporations for U.S. federal income tax
purposes. Accordingly, no accrual for federal income taxes has been made
in the historical financial statements. Additional pro forma federal tax
accrual is not necessary due to loss position of pro forma entity.
(7) Represents the issuance of 3,800,000 Shares of the Offering, and 900,000
shares of Common Stock as partial consideration pursuant to the Asset
Purchase Agreement, and reduction in Common Stock equivalents due to loss
position of pro forma combined entity for Pro Forma as Adjusted.
21
<PAGE>
BAB HOLDINGS, INC.
PRO FORMA BALANCE SHEET
AUGUST 31, 1996
(UNAUDITED)
The following unaudited pro forma balance sheet reflects the completion of
the Offering at the Assumed Share Price and the acquisition by the Company of
Chesapeake as if such acquisition had occurred on August 31, 1996. Such pro
forma information is based upon the unaudited historical consolidated balance
sheet of the Company as of August 31, 1996, and the unaudited historical
balance sheet of Chesapeake as of August 31, 1996, giving effect to the
acquisitions and the pro forma adjustments set forth in the accompanying notes
to these pro forma financial statements. Unaudited pro forma adjustments are
based upon historical information, preliminary estimates and certain
assumptions that the Company deems appropriate. The unaudited pro forma
financial statements are not necessarily indicative of the financial position
or financial position that might have been obtained if the foregoing
transaction had been consummated as of the indicated date. This pro forma
balance sheet should be read in conjunction with the pro forma statement of
operations of the Company and the historical financial statements and notes
thereto of the Company and Chesapeake included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
CHESAPEAKE PRO FORMA AS
COMPANY ACQUISITION ADJUSTMENTS ADJUSTED(7)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets............. $ 5,674,500 $2,417,859 $ 4,680,191 (1) $12,772,550
Equipment and leasehold
improvements, net......... 1,994,424 647,480 300,000 (2) 2,941,904
Other noncurrent assets,
net....................... 3,501,474 101,773 27,301,686 (3) 30,904,933
----------- ---------- ----------- -----------
Total assets............. $11,170,398 $3,167,112 $32,281,877 $46,619,387
=========== ========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities........ $ 1,759,643 $4,917,927 $(2,368,938)(4) $ 4,308,632
Long-term debt............. 2,824 159,870 (159,870)(5) 2,824
Shareholders' equity
(deficit)................. 9,407,931 (1,910,685) 34,810,685 (6) 42,307,931
----------- ---------- ----------- -----------
Total liabilities and
shareholders' equity.... $11,170,398 $3,167,112 $32,281,877 $46,619,387
=========== ========== =========== ===========
</TABLE>
- --------
(1) Application of excess proceeds of the Offering over cash consideration
required to be paid pursuant to the Asset Purchase Agreement, net of
elimination of deferred franchise costs of $1,356,731 in Chesapeake
balance sheet.
(2) Increase in carrying value of equipment and leasehold improvements to
preliminary estimate at fair value.
(3) Preliminary allocation of purchase price to franchise contract rights,
goodwill and other intangible assets.
(4) Adjustment to eliminate deferred franchise fee revenue of Chesapeake,
accrual for costs of completing Chesapeake franchise contracts and
elimination of current portion of debt not assumed.
(5) Elimination of long-term debt of Chesapeake not assumed in Asset Purchase
Agreement.
(6) Reflects issuance of 3,800,000 Shares in this Offering at the Assumed
Share Price, and the issuance of 900,000 shares of Common Stock to owners
of Chesapeake, preliminarily valued at $7.00 per share, pursuant to the
Asset Purchase Agreement and the elimination of the shareholders' deficit
of Chesapeake. The final per share value of the shares issued in the
Chesapeake Acquisition will be determined on the closing of such
transaction and may be greater or less than such amount.
(7) The unaudited pro forma balance sheet is presented as if the Chesapeake
Acquisition occurred on August 31, 1996. See the pro forma condensed
combined financial information appearing elsewhere in this Prospectus.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
information set forth under "Summary Consolidated Financial and Store Data,"
"Selected Consolidated Financial Information" and the Consolidated Financial
Statements of BAB Holdings, Inc. and the accompanying notes thereto included
elsewhere in this Prospectus.
GENERAL
As of August 31, 1996, the Company operated 9 Company-owned and 123
franchised and licensed Big Apple Bagels stores as well as one Company-owned
and two franchised Brewster's Coffee stores. In September 1996, the Company
entered into the Asset Purchase Agreement to acquire substantially all of the
assets of Chesapeake Bagel Bakery, primarily 9 company-owned stores and 139
franchise stores as of August 31, 1996. Upon completion of the Chesapeake
Acquisition, based upon the number of stores in operation at August 31, 1996,
the Company will be the second largest operator and franchisor of bagel stores
in the United States and Canada based on total number of units, with 19
Company-operated, 264 franchised and licensed stores located in 32 states, the
District of Columbia and Canada.
During the nine months ended August 31, 1996, the Company acquired certain
assets of Brewster's Coffee Company, Inc., Bagels Unlimited, Inc., and
Strathmore Bagel Franchise Corp. Given the Company's significant expansion
through these acquisitions and the rapid growth of its franchise operations
over the past three years, the Company's results of operations for both
current periods and prior years may not be indicative of future performance.
The Company plans to increase its revenues and profits through the continued
growth of its franchise business and Company-owned Big Apple Bagels and
Chesapeake Bagel Bakery stores. The Company also envisions revenue and profit
increases through the expansion of distribution channels and product
offerings. Management anticipates this growth will allow the Company to
achieve efficiencies through increased purchasing power, shared product
development, marketing efficiencies, and other economies of scale. The full
expected impact of these efficiencies is not reflected in the pro forma
statements of operations. The Company anticipates substantial increases in
depreciation and amortization related to its acquisition of Chesapeake.
Total revenue is comprised of net sales by Company-owned stores, franchise
fees, royalty fees from franchised stores and licensed units and other
revenues. Revenues have fluctuated from quarter to quarter depending on, among
other things, store openings and related revenues. As the Company continues to
grow, overall revenues are anticipated to increase and the impact of franchise
store openings on the results of operations for any period should decrease.
Excluding any impact of Chesapeake operations, the Company anticipates
consolidated fourth quarter 1996 revenues of between $2.2 million and $2.5
million. Including the Chesapeake Acquisition for a full year in fiscal 1997,
the Company believes consolidated annual revenues will be between $26 million
and $29 million. Such anticipated revenue levels are highly dependent on
adding between 20 and 22 Company-owned stores to those in operation at August
31, 1996, and continued growth in both Big Apple Bagels and Chesapeake Bagel
Bakery franchise units through the end of fiscal 1996 and during fiscal 1997.
The Company anticipates growth in franchise stores of 120 to 140 stores in
fiscal 1997, including 60 to 70 additional Big Apple Bagels stores and 60 to
70 Chesapeake Bagel Bakery stores.
Cost of revenue includes expenses occurring at the Company-owned stores,
such as food, beverage and paper costs, payroll related expenses, occupancy
and other operating expenses, depreciation and amortization, and other store
expenses, and selling, general and administrative costs occurring Company-
wide, such as payroll related expenses, advertising and promotion expenses,
professional service fees, franchise-related expenses, depreciation and
amortization, and other expenses. As additional Company-owned stores are
opened, the store-related expenses will increase. However, because new
Company-owned stores will not participate in franchise training activity, and
because the Company expects to negotiate volume discounts from vendors,
operating costs per store are expected to be lower than those incurred to date
in the original Company-owned stores. While the growth anticipated in Company-
owned store operations will require additional personnel, management believes
that most key personnel are already in place.
23
<PAGE>
Without including any financial results from the Chesapeake Acquisition in
the remainder of fiscal 1996, management anticipates that net income per share
for the 1996 fourth quarter will be between $0.01 and $0.02 on a fully diluted
basis, excluding shares issuable in this offering or in the Chesapeake
Acquisition. Including Chesapeake operations for the full year in fiscal 1997,
and anticipating aggressive growth in franchise and Company-owned Big Apple
Bagels and Chesapeake Bagel Bakery stores in 1997, management expects net
income to be between $0.28 and $0.32 per share, on a fully diluted basis,
including shares issued in this Offering and in the Chesapeake Acquisition.
BAB HOLDINGS, INC.'S RESULTS OF OPERATIONS
As of August 31, 1996, the Company operated 10 Company-owned stores and 125
franchise and licensed stores in 22 states and Canada. The Company added seven
Company-owned stores during the first nine months of fiscal 1996, primarily
through the acquisition of BUI, and anticipates adding approximately eight
additional Company-owned stores and continuing the rapid expansion of
franchise stores in operation during the remainder of fiscal 1996. This rapid
expansion significantly affects the comparability of results of operations of
the Company, particularly in the recognition of franchise fee revenue and
royalty fees and in related expenses.
In addition to rapid new store development, the Company has created other
new revenue sources during the first nine months of fiscal 1996 through its
acquisition of Brewster's and Strathmore and its reciprocal licensing
agreements with Mrs. Fields Cookies. Although these initiatives produced
little revenue during fiscal 1996, the Company expects substantial revenue
growth during fiscal 1997.
The Company has incurred increases in payroll-related expenses with
increases in personnel at the corporate headquarters from four employees in
November 1993 to 28 employees in August 1996. Further, the increase in
personnel has resulted in increases in insurance, occupancy costs, office
expenses and other overhead expenses. Management believes that the anticipated
growth in franchise operations during fiscal year 1996 and beyond can be
supported by the hiring of relatively few additional field support and
administrative personnel as most key personnel are already in place.
Management also believes that professional fees should decrease as a
percentage of revenues within the next fiscal year. Direct franchise related
costs, which are deferred and expensed upon franchise store opening, are
expected to increase, in total, but decrease on a per store basis as more
units are added and greater efficiencies are realized.
The following tables set forth, for the fiscal years 1993, 1994 and 1995,
and for the nine months ended August 31, 1995 and 1996, the percentage of
total revenue of the listed items included in BAB Holdings, Inc.'s
consolidated statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER NINE MONTHS ENDED
30, AUGUST 31,
------------------------ --------------------
1993 1994 1995 1995 1996
------ ------ ------ --------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
REVENUES:
Net sales by Company-owned
stores....................... 78.7% 46.9% 27.7% 24.0% 50.3%
Royalty fees from franchised
stores....................... 0.2 18.6 37.8 36.8 25.8
Franchise and area development
fees......................... 18.8 34.0 34.4 39.0 20.7
Licensing fees and other
revenues..................... 2.3 0.5 0.1 0.2 3.2
------ ------ ------ --------- --------
Total revenues............. 100.0 100.0 100.0 100.0 100.0
EXPENSES:
Food, beverage and paper
costs........................ 24.2 15.3 9.4 8.1 17.6
Other store operating
expenses..................... 46.5 28.9 18.4 13.4 28.1
Depreciation and amortization. 8.8 4.5 3.8 2.5 5.2
Selling, general and
administrative expenses...... 188.3 86.5 89.1 89.8 48.2
------ ------ ------ --------- --------
Total operating costs and
expenses.................. 267.8 135.2 120.7 113.8 99.1
------ ------ ------ --------- --------
Income (loss) from operations. (167.8) (35.2) (20.7) (13.8) 0.9
Interest income............... 0.9 0.2 0.8 0.3 6.7
Interest expense.............. -- (0.6) (1.5) (1.7) (0.1)
------ ------ ------ --------- --------
Net income (loss)............. (166.9)% (35.6)% (21.4)% (15.2)% 7.5%
====== ====== ====== ========= ========
</TABLE>
- --------
Note: Numbers are expressed as percentages of total revenues.
24
<PAGE>
Nine Months ended August 31, 1996 Compared to Nine Months ended August 31,
1995
Total revenues increased 175% to $3,907,000 for the nine months ended August
31, 1996 from $1,420,000 realized in the year-ago period. A substantial
portion of the increase in revenues is attributable to sales from Company-
owned stores, which rose over 478% to $1,966,000 for the nine months ended
August 31, 1996 versus $340,000 in the previous year. On May 1, 1996, the
Company acquired five franchised Big Apple Bagels stores in the Milwaukee
market. Three additional units were opened in the third quarter, bringing the
total number of Company-owned stores in operation to ten as compared to one at
August 31, 1995. Royalty revenues rose by $486,000, or 93%, primarily as a
result of the greater number of franchised stores operating during the fiscal
1996--91 on August 31, 1996 versus 51 on August 31, 1995. Franchise fee
revenue increased to approximately $808,000 from $554,000 in the year-ago
period. Of this increase, $161,000 can be attributed to the Company's entering
into a master franchise agreement with an Alberta, Canada corporation for the
development of franchised stores in the four western provinces of Canada.
Licensing fees and other revenue increased by $122,000 to approximately
$125,000. Substantially all of this increase was experienced during the third
quarter of fiscal 1996.
Total operating costs and expenses (excluding depreciation) relative to
Company-owned stores was 90.7% of store revenues during the nine months ended
August 31, 1996 versus 89.7% in the year-ago period. The cost of food,
beverage and paper increased to 34.9% from 33.8% in the 1995 period. Three of
the ten units in operation have been open less than three months and an
additional five of the units have only been under the Company's management
since May 1, 1996. The Company anticipates that as the number of Company-owned
stores continues to increase, it will be able to further benefit from volume
discounts for the purchase of food, beverage and paper products using one
national distributor. Since the May 1, 1996 acquisition of BUI, the Company
has been gradually modifying labor hours and rates and making personnel
changes to bring store level labor costs in line with Company guidelines. It
is management's belief that with the increasing maturity of Company-owned
stores and continued focus on reduction of food and labor costs, the
contribution percentage from Company-owned stores should improve over that
experienced in the nine months ended August 31, 1996.
Total selling, general and administrative expenses rose 53% in the current
fiscal period from $1,290,000 for the nine months ended August 31, 1995 to
$1,980,000 for the nine months ended August 31, 1996. These expenses decreased
significantly from 90.8% of total revenues in 1995 to less than 51% of total
revenues in the current period as a direct result of an increasing revenue
base supporting these costs. While there is no assurance that these cost
percentages will continue to show improvement, management believes that
continued growth in franchise operations can be supported with relatively
limited increases in corporate overhead and that the revenues generated from
these expanded operations combined with that of Company store operations will
exceed anticipated costs.
Approximately $327,000 of the overall increase in selling, general and
administrative costs is reflected in payroll-related expenses and results from
hiring additional personnel and salary increases. Employee headcount at the
corporate headquarters has increased from 21 full and part-time employees at
August 31, 1995 to 28 at August 31, 1996. Other administrative overhead
expenses increased approximately $241,000 from the year-ago period and can be
principally attributed to office expenses and services to support the increase
in the corporate workforce and the base of franchise stores open and in
development, which totaled 205 at August 31, 1996 versus 119 at August 31,
1995. Depreciation and amortization increased $79,000 from the year-ago period
due principally to the amortization of intangibles acquired in connection with
the May 1996 acquisitions of Bagels Unlimited, Inc. and Strathmore Bagels
Franchise Corp.
The Company realized income from operations of approximately $35,000 or 0.9%
of revenues in the nine months ended August 31, 1996 versus a net loss from
operations of approximately $195,000 or 13.7% of revenues in the year-ago
period.
Net interest income totaled approximately $257,000 during the nine months
ended August 31, 1996 as compared to net interest expense of approximately
$21,000 in the 1995 period. This change is attributable to the short-term
investment of the net proceeds of the Company's initial public offering, which
totaled approximately
25
<PAGE>
$7.2 million. The average cash balance outstanding during 1996 was
approximately $6.2 million and a substantial portion was invested in liquid,
money market funds. In the fiscal 1995 period, the Company accrued interest on
approximately $320,000 of convertible bonds which were substantially converted
to Common Stock during the first quarter of fiscal 1996.
The Company generated net income attributable to common shareholders of
approximately $292,000 or $.04 per share for the nine months ended August 31,
1996, as compared to a net loss attributable to common shareholders of
approximately $220,000 or $.07 per share for the nine months ended August 31,
1995. The average number of shares outstanding increased 125% to 7,250,672
from 3,209,345 during the respective periods, resulting primarily from the
August 1995 private placement of 508,475 shares of Common Stock and the
initial public offering of 2,932,500 million shares of Common Stock.
Fiscal 1995 Compared to Fiscal 1994
Total revenues increased 107.7% for the year ended November 30, 1995 from
$979,000 to $2.03 million. Increased revenues resulted, in part, from an
increased number of franchise store openings; 38 franchise stores opened in
fiscal 1995 compared to 18 during fiscal 1994. Royalty revenues rose by
$585,000, or 322.0%, primarily as a result of the greater number of stores
operating during 1995. Sales from Company-owned stores rose by approximately
$104,000 in fiscal 1995.
Cost of food, beverage and paper related to the Company-owned stores
increased from 32.5% of net store sales for fiscal 1994 to 34.0% of net store
sales for fiscal 1995. Other store operating expenses increased from 61.6% of
net store sales in fiscal 1994 to 66.4% of net store sales in fiscal 1995.
These increases in Company-owned store costs reflect the greater number of
franchisees trained during 1995 in the original store which served as the
franchisee training facility. Also reflected in this increase are start-up
inefficiencies, which are experienced during the first few months in which any
store is opened, attributable to the second Company-owned store, which opened
in September 1995. The Company anticipates that as the number of Company-owned
stores increases, it will be able to benefit from volume discounts for the
purchase of supplies.
Total selling, general and administrative expenses rose 92.7% from $1.2
million for fiscal 1994, to $2.3 for fiscal 1995. Approximately $430,000 of
this increase is attributable to payroll related expenditures incurred at the
corporate level. Eight full-time employees were hired in 1995 to assist in the
franchise operations, accounting, marketing, and legal departments. Further,
fiscal 1995 included a full twelve months of employment for 70% of the
employees who were hired during fiscal 1994. As a result of the overall
increase in number of personnel, the Company relocated its corporate offices
to a larger facility, resulting in increased occupancy costs of approximately
$44,000. Professional fees increased approximately $247,000, or 166%, for 1995
compared to 1994, primarily related to the filing of Uniform Franchise
Offering Circulars ("UFOCs") to comply with revised Federal Trade Commission
("FTC") guidelines, completion of an interim audit in connection with the
Company's initial public offering of securities, annual reporting
requirements, trademark defense, and legal fees. Further, upon the opening of
each franchise store, the Company recognizes certain expenses associated with
the sale of the franchise. These costs include travel costs, cash register and
blueprints provided to the franchisee (drafting of blueprints was brought in-
house in July 1995), and commission paid on the sale, if any. These franchise-
sale costs, which can range between $2,000 and $4,000 for each franchise,
depending on the location of the franchise store, account for approximately
$42,000 of the increase in corporate selling, general and administrative
expenses in 1995. Finally, the expansion in personnel and in franchising
operations increased costs for insurance, telephone, printing, postage and
other miscellaneous expenses by over $62,000 during fiscal 1995. While total
selling, general and administrative costs rose significantly, these expenses
declined from 119.9% of total revenues in 1994 to 111.3% of total revenues in
1995. Although there can be no assurance that the cost percentages will
continue to show improvement, management believes that the anticipated growth
in franchise operations can be supported with relatively limited increases in
corporate overhead and that the revenues generated from these expanded
operations will exceed the related corporate overhead expenses.
The Company generated a net loss attributable to common shareholders of
$439,760, or $.13 per share, for the year ended November 30, 1995, as compared
to a net loss attributable to common shareholders of $372,010, or $.16 per
share, for the year ended November 30, 1994.
26
<PAGE>
Fiscal 1994 Compared to Fiscal 1993
Total revenues increased to 424.8% from $186,563 in fiscal 1993 to $979,052
in fiscal 1994. The increase was due to the opening of 19 franchise stores and
an increase in Company-owned store revenue from $146,843 in fiscal 1993 to
$459,345 in fiscal 1994.
Food, beverage and paper costs for the Company-owned store increased from
30.7% of net store sales during fiscal 1993 to 32.5% of net store sales during
fiscal 1994. Other store operating expenses increased from 59.1% of net store
sales in fiscal 1993 to 61.6% of net store sales in fiscal 1994. These
increases are attributed to the fact that franchisee training activity at the
Company-owned store increased substantially in fiscal 1994 as a result of the
increased number of franchise stores opened during that period.
Total selling, general and administrative increased $719,384 or 158.3% in
fiscal 1994 as compared to fiscal 1993. This increase is due to the rapid
expansion of the corporate infrastructure to support the growing franchise
operations which did not begin until the end of fiscal 1993 and continued
throughout fiscal 1994. The most significant expense category, payroll-related
expenses, more than doubled during this period due to growth in corporate
headquarters personnel from four employees to 13 employees.
Consolidated losses from operations totaled $344,218 in fiscal 1994 compared
to $313,064 in fiscal 1993. Despite absorbing the costs of training
franchisees throughout fiscal 1994, the Company-owned store produced nominal
profits during fiscal 1994. During fiscal 1993, the Company-owned store
incurred a loss due primarily to start-up expenses.
The Company had a net loss attributable to common shareholders of $372,010,
or $.16 per share, during the year ended November 30, 1994, as compared to a
net loss attributable to common shareholders of $324,766, or $.13 per share,
during the year ended November 30, 1993.
CHESAPEAKE BAGEL BAKERY'S RESULTS OF OPERATIONS
The first Chesapeake Bagel Bakery opened in 1981 in Washington, D.C., and in
1984, The American Bagel Company began offering franchises for Chesapeake
Bagel Bakery stores. As of August 31, 1996, Almike Enterprises, Inc. owned and
operated nine Chesapeake Bagel Bakery stores, all in the District of Columbia,
Maryland and Virginia, and 139 franchise Chesapeake Bagel Bakery stores were
operating in 31 states and the District of Columbia, with geographic
concentrations in Washington, D.C., Virginia, Maryland, North Carolina,
Georgia and Minnesota, making Chesapeake Bagel Bakery the third largest bagel
restaurant chain in the U.S. and the largest "made from scratch" bagel bakery
chain in the nation.
27
<PAGE>
The following table sets forth, for the fiscal years ended December 31,
1993, 1994 and 1995, and the eight month periods ended August 31, 1995 and
1996, the percentage of certain revenue and expense items to total revenue.
Certain items have been reclassified from Chesapeake's audited financial
statements format to conform to BAB Holdings, Inc.'s financial presentation.
<TABLE>
<CAPTION>
EIGHT
MONTHS,
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENTS OF OPERATIONS DATA
Revenues:
Net sales by company-owned stores......... 89.0% 83.0 67.3% 70.4% 60.0%
Royalties fees from franchised stores..... 8.3 10.4 16.8 14.8 21.7
Franchise and area development fees....... 1.1 4.9 15.6 14.5 17.0
Licensing fees and other revenues......... 1.6 1.7 0.3 0.3 1.3
----- ----- ----- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
Expenses:
Food, beverage and paper costs............ 23.8 22.2 18.7 20.2 19.6
Other store operating expenses............ 39.7 40.7 35.7 36.3 36.7
Selling, general and administrative
expenses................................. 20.0 21.7 37.6 32.4 39.2
Depreciation and amortization............. 2.8 2.4 2.3 2.5 2.0
----- ----- ----- ----- -----
Total operating costs and expenses...... 86.3 87.0 94.3 91.4 97.5
Income from operations...................... 13.7 13.0 5.7 8.6 2.5
Interest income............................. 0.3 0.4 0.3 0.4 0.2
Miscellaneous income (expense).............. 0.2 0.6 (0.6) 1.2 0.4
Interest expense............................ (0.8) (1.0) (0.9) (1.0) (0.5)
----- ----- ----- ----- -----
Income before taxes......................... 13.4 13.0 4.5 9.2 2.6
Income tax provision........................ 0.4 0.3 -- -- 0.1
----- ----- ----- ----- -----
Net income.................................. 13.0% 12.7% 4.5% 9.2% 2.5%
===== ===== ===== ===== =====
</TABLE>
- --------
Note: Numbers are expressed as percentages of total revenue.
Eight Months Ended August 31, 1996 Compared to Eight Months Ended August 31,
1995
Chesapeake's total revenues increased 16.6% to $6,075,033 for the eight
months ended August 31, 1996 over the comparable period in 1995. This increase
is attributable to increases in both initial and continuing franchise fees.
Initial franchise fees rose by 36.3% to $1,029,867 for the eight months ended
August 31, 1996 versus $755,500 for the comparable period in 1995. Royalty
fees increased by 71.3% to $1,323,659 for the eight months ended August 31,
1996 from $722,801 for the comparable period in 1995. The number of franchised
stores increased by 37 from 102 stores at the end of 1995 to 139 stores as of
the eight months ended August 31, 1996. Company-owned store revenues remained
relatively flat at $3,668,149 in 1995 and $3,645,080 in 1996.
Total operating expenses increased by 24.4% to $5,924,626 for the eight
months ended August 31, 1996 over the comparable period in 1995 and increased
from 91.4% to 97.5% of total revenues, respectively. Food, beverage and paper
costs of company-owned stores increased as a percentage of company-owned store
revenues from 28.5% in 1995 to 32.7% in 1996, attributable primarily to
increases in paper and plastic costs. The remaining store operating expenses
increased by 17.7% to $2,227,162 for the eight months ended August 31, 1996
from the prior comparable period's level; as a percentage of company-owned
store revenues, they increased to 61.1% for the eight months ended August 31,
1996 from 51.6% for the comparable period in 1995. In total, store operating
expenses increased by 16.4% to $3,420,374 for the eight months ended August
31, 1996 from $2,938,515 for the comparable period in 1995. Total store
operating expenses increased to 93.8% of company-owned store sales for 1996
from 80.1%. Selling, general and administrative expenses increased by 41.0% to
$2,382,732 in 1996 from $1,691,037 in 1995. Management attributes most of the
increase in these expenses to
28
<PAGE>
general and administrative expenses related to building the company's
infrastructure to support growth. As a percentage of total revenues, selling,
general and administrative expenses increased to 39.2% in 1996 from 32.5% in
1995.
Chesapeake realized income from operations of $150,407 (2.5% of revenues)
for the eight months ended 1996 versus $447,618 (8.6% of revenues) for the
comparable period in 1995.
Net interest and other income totaled $10,017 for the eight months ended
August 31, 1996 versus $28,015 for the comparable period in 1995. Interest
income is derived from interest received on cash balances and interest
received on notes issued by certain franchisees as royalty payments.
Chesapeake generated net income of $157,322 for the eight months ended
August 31, 1996, compared to $475,633 for the comparable period in 1995. As a
percentage of total revenues, net income decreased from 9.2% to 2.6% in 1996.
Fiscal 1995 Compared to Fiscal 1994
Chesapeake's total revenues increased 12.3% to $7,915,815 for fiscal year
1995 from the prior year. This increase is attributable to increases in both
initial franchise fees and royalty fees. Initial franchise fees rose by 252.3%
to $1,233,000 for 1995 versus $350,000 for 1994. Royalty fees increased by
82.2% to $1,331,000 for 1995 versus $730,000 for 1994. The number of
franchised stores increased by 161.5% from 39 stores at the end of 1994 to 102
stores by the end of 1995. Offsetting franchise-related revenue increases was
a decline of 8.9% in sales revenue generated by company-owned stores, from
$5,849,000 in 1994 to $5,330,000 in 1995.
Total operating expenses increased by 21.8% to $7,465,000 for 1995 from the
1994 level and increased from 87.0% to 94.3% of total revenues. Food, beverage
and paper costs of company-owned stores increased as a percentage of company-
owned store revenues from 26.7% in 1994 to 27.7% in 1995, attributable
primarily to increases in paper and plastic costs. The remaining store
operating expenses decreased by 1.3% from the prior year's level, but as a
percentage of company-owned store revenues increased to 53.1% in 1995 from
49.0% in 1994. Total store operating expenses increased to 80.8% of company-
owned store sales in 1995 from 75.7% in 1994. Selling, general and
administrative expenses increased by 94.8% to $2,976,000 in 1995 from
$1,528,000 in 1994. Management attributes most of the increase in these
expenses to general and administrative expenses related to franchise store
openings, fees paid to consultants (primarily franchise developers), and to
building the company's infrastructure to support growth. As a percentage of
total revenues, these expenses increased to 37.6% in 1995 from 21.7% in 1994.
Chesapeake realized income from operations of $450,000 (5.7% of revenues) in
1995 versus $916,000 (13.0% of revenues) in 1994.
Net interest expense totaled $44,000 in 1995 versus $46,000 in 1994.
Interest income is derived from interest received on cash balances and
interest received on notes issued by certain franchisees as royalty payments.
Miscellaneous income (expense) was a $44,000 expense in 1995, but $43,000 of
income in 1994.
Chesapeake generated net income of $359,000 in 1995, compared to $893,000 in
1994. As a percentage of total revenues, net income decreased to 4.5% in 1995
from 12.7% in 1994.
Fiscal 1994 Compared to Fiscal 1993
Chesapeake's total revenues increased 29.0% to $7,046,000 for fiscal year
1994 over 1993. This increase is attributable to the opening of an additional
company-owned store and to significant increases in both initial franchise
fees and royalty fees resulting from the company's growing franchise base.
Initial franchise fees rose by 460.0% to $350,000 for 1994, versus $63,000 for
1993. Royalty fees increased by 61.0% to $730,000 for
29
<PAGE>
1994, versus $454,000 for 1993. The number of franchised stores increased by
85.7%, from 21 stores at the end of 1993 to 39 stores by the end of 1994. In
addition to franchise-related revenue increases was an increase of 20.3% in
sales revenue generated by company-owned stores, from $4,861,000 in 1993 to
$5,849,000 in 1994. This increase in sales revenue was primarily the result of
an additional company-owned store opened during February 1994 and of the full-
year impact of a company-owned store opened in December 1993.
Total operating expenses increased by 30.0% to $6,130,000 for 1994 from the
1993 level and increased as a percentage of total revenues to 87.0% from
86.3%. Food, beverage and paper costs of company-owned stores remained
constant as a percentage of company-owned store revenues at 26.7% in both 1993
and 1994. The remaining store operating expenses increased by 32.0% to
$2,866,000 for 1994 from the prior year's level; as a percentage of company-
owned store revenues, they increased to 49.0% in 1994 from 44.7% in 1993 due
to operating expenses associated with the opening of the Aspen Hill and
Georgetown Square stores, which opened in December 1993 and February 1994,
respectively. Management attributes most of the increase in these other
restaurant operating expenses to general and administrative expenses related
to franchise store openings and to building the company's infrastructure to
support growth. In total, store operating expenses increased by 27.7% to
$4,430,000 in 1994 from $3,470,000 in 1993. Total store operating expenses
increased to 75.7% of company-owned store sales in 1994 from 71.4% in 1993.
Selling, general and administrative expenses increased by 39.9% to $1,528,000
in 1994 from $1,093,000 in 1993. The increase in selling, general and
administrative expenses was primarily due to additional corporate personnel
and overhead added to support the Company's growth and to higher payments to
franchise-enlistment consultants.
Chesapeake generated income from operations of $916,000 (13.0% of revenues)
in 1994 versus $747,000 (13.7% of revenues) in 1993.
Net interest expense totaled $46,000 in 1994 versus $27,000 in 1993.
Interest income increased $11,000 from 1993 to 1994, while interest expense
increased $29,000. Interest income is derived from interest received on cash
balances and on notes issued by certain franchisees as royalty payments.
Miscellaneous income was $43,000 in 1994, compared to $11,000 in 1993.
Chesapeake generated net income of approximately $893,000 in 1994, compared
to $709,000 in 1993. As a percentage of total revenues, net income decreased
to 12.7% in 1994 from 13.0% in 1993.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
During the year ended November 30, 1995, cash provided by operating
activities totaled $406,000, which consisted primarily of increases in
deferred franchise fee revenue, accounts payable and accrued expenses offset
by the net loss. During the years ended November 30, 1994 and 1993, cash used
for operating activities totaled $95,000 and $30,000, respectively, which
consisted primarily of net losses offset by the increases in deferred
franchise fees and depreciation and amortization. The Company experienced
positive cash flow from operating activities for the nine months ended August
31, 1996 of approximately $88,000 as compared to positive cash flow of
approximately $78,000 for the 1995 period.
Cash used for investing activities during 1995 totaled $458,000, including
approximately $157,000 for constructing and equipping the second Company-owned
store, acquisition of the "Big Apple Deli" trademark, and miscellaneous
purchases of property, plant and equipment totaling approximately $78,000 used
in the new corporate headquarters facilities. During 1994, cash used for
investing activities totaled approximately $43,000, and consisted primarily of
an investment of approximately $23,000 in a 50% owned joint venture to operate
a franchise satellite store and miscellaneous purchases of property, plant and
equipment. During 1993, cash used for investing activities totaled
approximately $199,000 and consisted primarily of the cost of property, plant
and equipment for the first Company-owned store and the corporate headquarters
totaling approximately $124,000 and $39,000, respectively, and organization
costs. Cash used for investing activities during the nine months
30
<PAGE>
ended August 31, 1996 totaled approximately $3,885,000, primarily for the
acquisition of the assets of Brewster's Coffee Company, Inc., Bagels
Unlimited, Inc., and Strathmore Bagels Franchise Corp. During the nine months
ended August 31, 1995, cash used for investing activities totaled
approximately $452,000 and consisted primarily of miscellaneous purchases of
property, plant and equipment for corporate headquarters.
Cash used for investing activities has been principally provided by
operations, the private placement of debt and the sale of Common Stock.
Although the recognition of initial franchise fee revenue is deferred until
the date the store is opened under Financial Accounting Standards Board
Statement 45, "Accounting for Franchise Fee Revenue," the Company, when
permitted by applicable state franchise regulations, may use initial franchise
fees for general operating purposes. The Company receives a weekly royalty fee
of 5% of each franchise store's gross sales. Royalty revenue is recognized
immediately.
Cash provided by financing activities totaled approximately $7,321,000,
$301,000 and $477,000 during 1995, 1994 and 1993, respectively. For the nine
months ended August 31, 1996 and 1995, cash provided by financing activities
totaled approximately $848,000 and $739,000, respectively.
During fiscal 1995, the Company received net proceeds of $1,629,000 from a
series of purchases of Common Stock by a private investor. See "Certain
Transactions."
The Company believes that its current capital, together with the proceeds of
this Offering, and cash from operations, will be sufficient to complete the
proposed acquisition of Chesapeake and meet operating requirements for the
foreseeable future. Future acquisitions and development of additional Company-
owned stores may also be financed from operations, equipment and/or
construction financing, and, potentially, future equity or other debt
financing.
31
<PAGE>
BUSINESS
GENERAL OVERVIEW
The Company operates and franchises specialty bagel stores under the Big
Apple Bagels brand name featuring daily baked "from scratch" bagels, cream
cheeses, coffee and other related products. As of August 31, 1996, there were
9 Company-owned and 123 franchise and licensed Big Apple Bagels stores and one
Company-owned and two franchise Brewster's Coffee stores located in 22 states
and Canada. Concurrently with, and as a condition to, the consummation of this
offering, the Company will acquire the assets of Chesapeake. As of August 31,
1996 there were 9 company-owned and 139 franchised Chesapeake Bagel Bakery
stores located in 31 states and the District of Columbia. See "Recent
Acquisitions." Upon completion of the Chesapeake Acquisition, based upon the
number of stores in operation at August 31 1996, the Company believes that it
will be the second largest operator and franchisor of bagel stores in the
United States and Canada, with 19 Company-operated and 264 franchised and
licensed units located in 32 states, Canada and the District of Columbia.
STRATEGY
The Company intends to become the leading branded operator and franchisor of
specialty bagel stores through the continued expansion of the number of
franchised and Company-owned stores and development of alternative
distribution channels for branded product. The Company plans to achieve this
goal through the implementation of its strategic plan which includes: (1)
commitment to the growth and financial success of its franchisees; (2)
continued focus on maintaining its position as a low cost producer; (3)
increasing store operating margins by emphasizing its profitable bulk bagel
business; (4) further developing consumer awareness of its multiple brands,
including Big Apple Bagels, Chesapeake Bagel Bakery and Brewster's; (5)
enhancing revenue through the sale of licensed product; and (6) growth through
acquisition and development of Company-owned stores.
Commitment to Franchising--The Company is committed to the growth and
financial success of its franchisees and expects that continued development of
franchised stores will comprise the most significant component of near term
growth. The bagel restaurant concept is conducive to franchising given its
relatively simple operation, low initial investment and strong cash returns.
The Company's diverse group of franchisees can effectively expand in a variety
of markets without placing undue strain on the Company's financial or
personnel resources. The Company plans to open 120 to 140 franchise stores
during fiscal 1997.
Low Cost Producer--The Company believes that the "fresh from scratch" baking
processes used in both the Big Apple Bagels and Chesapeake Bagel Bakery stores
allow operators to produce bagel products at a cost 10% to 20% lower than that
of its major competitors, all of which ship product to stores from a central
location. All cream cheeses are also mixed in-store, rather than delivered
pre-packaged, which creates additional in-store margin. Further, the Company
believes that it develops and builds its stores at an initial cost which is
substantially lower than the construction costs incurred by many other
competitors.
Focus on Bulk Sales--Approximately 65% of all bagel sales by Big Apple
Bagels stores are carry-out orders of six or more bagels. These bulk purchases
are one of the Company's highest margin products. The Company's site selection
criteria, elements of store design and promotional pricing policies all
contribute to a focus on bulk sales of packaged bagels. Stores are sited for
convenience and visibility, with ample parking. Store interiors are designed
to feature the abundance of bagel offerings. In-store pricing includes daily
"specials" intended to promote larger purchases.
Multiple Brands--The Company will continue to operate bagel stores under
both the Big Apple Bagels and Chesapeake Bagel Bakery brands. Both brands have
developed consumer awareness and loyalty and the bagel product is different
for each concept. Big Apple bagels are steamed, creating a softer, less tough
bagel. Chesapeake bagels are boiled in the traditional manner, creating a
harder exterior and chewier product. The availability of two well-known brands
affords the Company flexibility in responding to market changes. The Company
will also use its Brewster's coffee brand to create value, both through sales
to franchised stores as well as other licensing arrangements, both together
with and separate from the bagel brands.
32
<PAGE>
Sale of Licensed Product--The Company will continue to license branded food
products to franchisees and other food service companies. Since May 1995, the
Company has offered Brewster's Coffee to its Big Apple Bagels franchisees and
will extend this program to Chesapeake franchisees following completion of the
Chesapeake Acquisition. The Company will also expand the number of non-
traditional locations offering Big Apple Bagels on a licensed basis, adding
new units related to existing relationships with Host Marriott and Mrs. Fields
Cookies and developing new relationships with other companies for licensed
sales.
Growth through Acquisition and Development of Company-owned Stores--The
Company has a history of growth through acquisitions. During the first nine
months of fiscal 1996, the Company has completed three acquisitions, and has
signed a definitive agreement to acquire Chesapeake concurrent with the
closing of this offering. The Company intends to continue to selectively
pursue acquisitions in the future in order to complement new store
development. The Company also intends to build new stores to increase its
store base. In fiscal 1997, the Company plans to open an additional 12 to 14
Company-owned Big Apple Bagels stores.
NEW STORE DEVELOPMENT
The Company intends to build additional Company-owned stores in several
geographic regions and to expand its current franchise and licensed
operations. Management believes that Big Apple Bagels and Chesapeake Bagel
Bakery stores each have excellent unit economics and that excellent growth
opportunities exist in their respective markets. At August 31, 1996, both the
Company and Chesapeake had numerous individual franchise and area development
agreements with qualified franchisees and area developers to ensure the
continued growth in franchise units. At August 31, 1996, the Company had
collected initial franchise and area development fees for the development of
72 future Big Apple Bagels franchise stores and had sold a master franchise
agreement for the development of 42 future franchise stores in western Canada.
As of the same date, Chesapeake had collected initial franchise and area
development fees for the development of 183 future stores. Initial franchise
fees for a Big Apple Bagels franchise unit are $20,000, and initial franchise
fees for a Chesapeake Bagel Bakery franchise unit is $22,500. Big Apple Bagels
franchise stores each require an approximate investment by franchisees of
between $169,000 and $283,000. Chesapeake Bagel Bakery franchise stores
require an investment by the franchisees of between $329,000 and $431,000.
Company-owned Big Apple Bagels stores require an approximate investment by
the Company of between $175,000 and $225,000. Chesapeake Bagel Bakery company-
owned stores require an approximate investment of between $350,000 and
$400,000. Average revenue of Company-owned Big Apple Bagels stores open during
all of fiscal 1995 (including 1995 revenue of five franchise stores converted
to Company-owned Big Apple Bagels units in May 1996) was $639,000. Average
annual revenue of company-owned Chesapeake Bagel Bakery units open during all
of fiscal 1995 was $674,000.
In selecting new store locations, the Company considers target population
density, household income levels and trade area demographics, as well as
specific location characteristics, such as visibility, accessibility, parking
capacity, and traffic volume. An important factor in site selection is the
convenience of the potential location to both morning commuter traffic and
lunch guests and the occupancy cost of the proposed site. The Company also
takes into account potential local competition and the success of chain
restaurants operating in the area. To date, most of the Big Apple Bagels
stores have been, and are, located in strip shopping malls and neighborhood
shopping centers, and management currently expects that most of the stores
opened in the future will be in similar type facilities. Chesapeake stores, on
the other hand, are typically located in more traditional neighborhood
settings.
33
<PAGE>
THE BIG APPLE BAGELS BRAND
The following table sets forth the jurisdiction in which Big Apple Bagels
stores were located as of August 31, 1996.
<TABLE>
<CAPTION>
STATE/PROVINCE COMPANY FRANCHISED LICENSED(1) TOTAL
-------------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C>
UNITED STATES:
Alabama..................................
Arizona..................................
Arkansas.................................
California(2)............................ 7 7
Colorado................................. 5 5
Delaware.................................
District of Columbia.....................
Florida.................................. 1 1
Georgia.................................. 1 1
Illinois................................. 3* 38* 41
Indiana.................................. 2 2
Iowa..................................... 6 6
Kansas................................... 1 1
Kentucky.................................
Louisiana................................
Maryland.................................
Massachusetts............................
Michigan................................. 7 5 12
Minnesota................................ 1 1
Missouri.................................
Nebraska................................. 1 1
Nevada................................... 1 1
New Jersey............................... 12 12
New Mexico...............................
New York................................. 8 8
North Carolina........................... 8 8
North Dakota.............................
Ohio..................................... 4* 4
Oklahoma.................................
Oregon...................................
Pennsylvania............................. 2 2
South Carolina........................... 1 1
South Dakota.............................
Tennessee................................ 1 1
Texas....................................
Utah..................................... 1 1
Virginia.................................
Washington............................... 1 1
West Virginia............................
Wisconsin................................ 6 10 16
Wyoming..................................
CANADA:
Ontario.................................. 2 2
--- --- --- ---
TOTAL.................................... 10 91 34 135
=== === === ===
</TABLE>
- --------
(1) Host Marriott units.
(2) Includes four stores currently operated as "Just Bagels" stores which are
scheduled for conversion to Big Apple Bagels stores during the first
quarter of fiscal year 1997.
*Includes one Company-owned Brewster's Coffee unit in Illinois and two
franchised Brewster's Coffee units (one in Illinois and one in Ohio).
34
<PAGE>
Products. Big Apple Bagels stores daily bake "from scratch" over 18
varieties of fresh bagels and prepare up to 18 varieties of cream cheese
spreads. While bulk bagel and cream cheese sales account for a significant
portion of retail sales, most stores also offer a variety of breakfast and
lunch bagel sandwiches, soups, various dessert items, and gourmet coffees and
other beverages.
The key component of the Big Apple Bagels product strategy is the
proprietary "fresh from scratch" production process, which utilizes high
quality ingredients and a steam-baking process. As compared to the traditional
boiling process, the steam-baking process produces a larger bagel with a
moister interior and a firm crust. In addition, the Company believes that the
"from scratch" steam-baking process, when compared to other production
methods, is more cost efficient and produces a bagel with extended freshness.
Store Locations and Layout. A typical Big Apple Bagels store is located
within a three-mile radius of at least 25,000 residents in an area with a mix
of both residential and commercial properties. The average Company-owned and
franchised store ranges from 1,500 and 2,000 square feet. The Company's
current store prototype approximates 2,000 square feet, with seating capacity
of 30 to 40 persons and 750 square feet devoted to production and baking. A
satellite store is typically smaller than a production store, averaging 600 to
1,000 square feet. Although franchise stores may vary in size from Company-
owned stores, and from other franchise stores, store layout is generally
consistent. Typically, both franchised and Company-owned stores are open daily
from 6:00 a.m. to 6:00 p.m.; however, stores may extend their evening hours to
accommodate customer demand.
Store Economics. The Company believes that its full production stores can be
opened for an initial investment, including leasehold improvements, furniture,
fixtures, equipment, initial working capital and pre-opening expenses, of
approximately $200,000, with satellite stores utilizing the production
facilities of a full production store requiring approximately $100,000.
During 1995, average revenue of Company-owned Big Apple Bagels stores open
during the entire periods (including 1995 revenue of five franchise stores
converted to Company-owned Big Apple Bagels stores in May 1996) was $639,000.
The level cash flow margin (defined as sales from Company-owned stores, less
cost of sales and stores operating expenses, before depreciation) as a
percentage of sales from Company-owned stores for the one Company-owned store
open for all of fiscal 1995 was 6.5%. The Company believes this statistic is
not indicative of model Company-stores profitability given that the unit was
used as the franchise training facility and is only 1,300 square feet with
minimal seating capacity. Based on the Company's current model store in the
2,000 square foot range, it is expected that mature stores with revenue levels
similar to the average 1995 store level will produce store level cash flow
margins of 20% or more. The store level cash-flow margin for Company-owned
stores for the nine months ended August 31, 1996 (excluding the impact of
those opened during the third quarter) was 10.2%. The historical performance
of such stores in 1996 was negatively impacted by the Company's conversion of
five of such stores from franchise-operated stores on May 1, 1996, which
exhibited higher labor cost factors than the Company's standard factors at the
time of acquisition.
35
<PAGE>
THE CHESAPEAKE BAGEL BAKERY BRAND
The following table sets forth the states in which Chesapeake Bagel Bakery
stores were located as of August 31, 1996.
<TABLE>
<CAPTION>
STATE COMPANY FRANCHISED TOTAL
----- ------- ---------- -----
<S> <C> <C> <C>
Alabama..........................................
Arizona.......................................... 5 5
Arkansas.........................................
California....................................... 6 6
Colorado......................................... 4 4
Delaware......................................... 1 1
District of Columbia............................. 3 3 6
Florida.......................................... 7 7
Georgia.......................................... 5 5
Illinois......................................... 2 2
Indiana.......................................... 3 3
Iowa............................................. 1 1
Kansas........................................... 2 2
Kentucky......................................... 1 1
Louisiana........................................
Maryland......................................... 3 20 23
Massachusetts....................................
Michigan......................................... 3 3
Minnesota........................................ 9 9
Missouri......................................... 3 3
Nebraska.........................................
Nevada........................................... 2 2
New Jersey....................................... 3 3
New Mexico.......................................
New York......................................... 1 1
North Carolina................................... 6 6
North Dakota..................................... 2 2
Ohio............................................. 1 1
Oklahoma.........................................
Oregon...........................................
Pennsylvania..................................... 3 3
South Carolina................................... 2 2
South Dakota.....................................
Tennessee........................................ 2 2
Texas............................................ 3 3
Utah............................................. 1 1
Virginia......................................... 3 33 36
Washington....................................... 1 1
West Virginia.................................... 1 1
Wisconsin........................................ 2 2
Wyoming.......................................... 1 1
--- --- ---
TOTAL............................................ 9 139 148
=== === ===
</TABLE>
Products. The Chesapeake Bagel Bakery menu offers 12 to 15 varieties of
bagels, including specialty bagels, a variety of cream cheeses, as well as
homemade soups, croissant sandwiches, fresh salads, muffins, desserts and
gourmet coffees. Chesapeake Bagel Bakery provides value to its customer by
offering bagels made from scratch from high quality ingredients and baked
fresh on the premises all day, utilizing the traditional boiling method. As
with Big Apple Bagel stores, Chesapeake stores utilize the proprietary "fresh
from scratch" production process.
Store Locations and Layout. Chesapeake Bagel Bakery targets sites that have
access to both residential and business communities and anticipates that the
majority of a store's customers will come from a two- to three-mile radius.
Chesapeake Bagel Bakery stores range in size from 1,800 to 2,400 square feet
and seat 30 to 60 customers. The majority of stores are open from 6:30 a.m. to
8:00 p.m., seven days per week.
36
<PAGE>
Store Economics. The Company believes that Chesapeake restaurants can be
opened for an initial investment, including leasehold improvements, furniture,
fixtures, equipment, initial working capital and pre-opening expenses, of
approximately $400,000, although the Company does not believe it will add
further units at this cost level.
During 1995 and the eight-month period ended August 31, 1996, average sales
per Chesapeake company-owned store were $667,000 and $405,000, respectively.
During 1995 and the eight-month period ended August 31, 1996, Chesapeake's
level cash flow margin was 17.5% and 6.2%, respectively. Unit profitability of
Chesapeake company-operated units has declined during this year and 1995. The
Company expects to evaluate profitability of individual units and enact a plan
of action to improve profitability, including the potential closing of
unprofitable units and other changes to bring these units and any additional
stores in line with the Company's expectation of level cash-flow margins of
approximately 20%.
FRANCHISING
The Company currently requires payment of a $20,000 initial franchise fee
per Big Apple Bagels store, a 5% royalty on net sales, and a 2% national
advertising fund contribution. The Company offers multiple store discounts on
the initial franchise fee. The Company currently requires a franchise fee of
$20,000 on the first store. The fee for second, third, fourth, and fifth
stores is $18,500 and the fee for the sixth store and any additional store is
$12,500. The initial franchise fee for Brewster's store is $17,500, with a fee
of $15,000 for the second and third stores and $13,500 for the fourth store
and any additional stores. Chesapeake currently requires an initial franchise
fee of $22,500. The fee for a second store is $20,000 and for a third store is
$17,500. Ongoing fees include a 4% royalty on sales and a 1% contribution to a
national advertising fund. Chesapeake franchisees are also required to spend
2% of sales on local advertising.
Franchise agreements provide a franchisee with the right to develop one
store at a specific location. Each franchise agreement is for a term of ten
years with the right to renew at no additional fee. A franchisee is required
to be in operation not later than 10 months following signing the franchise
agreement. A franchise is considered "sold" when a franchise agreement has
been executed by both the franchisee and the Company or Chesapeake and when
the initial franchise fee has been received or placed into an escrow account
pursuant to the franchise regulations of individual states.
Area development agreements, which may be granted to an existing franchisee
or concurrent with the execution of a franchise agreement, provide that a
franchisee may open a predetermined number of Big Apple Bagels or Chesapeake
Bagel Bakery stores within a defined geographic area (an "Area of
Exclusivity"). The Area of Exclusivity is negotiated prior to the signing of
the area development agreement and varies by agreement as to size of the area,
the number of Big Apple Bagels or Chesapeake Bagel Bakery stores required, and
the schedule for store development and opening. A typical area development
agreement requires that a signed lease be obtained for the franchisee's second
store within 210 days of execution of the initial franchise agreement.
Executed leases for subsequent stores are generally required in six-month
intervals thereafter. Both franchise and area development agreements contain
cross-default provisions. Failure to develop the stores on schedule may result
in a loss of exclusivity within the Area of Exclusivity. The Company's current
area development fee is $5,000 per store to be developed. As additional
franchise agreements are executed additional franchise fees are collected. The
area development fee is not refundable if no franchise agreement is executed.
The process of opening a franchise store includes selection of a site,
negotiation of a lease, design of the store, application for all necessary
permits, construction of the store, and training of the franchisee. The
Company estimates that a franchisee's cost to open a Big Apple Bagels store,
including the initial franchise fee, cost of construction, leasing of space
and other start-up costs, is generally between $169,000 and $283,000, while
the cost to open a Chesapeake Bagel Bakery store is generally between $329,000
and $431,000.
The Company assists in site selection by obtaining market demographics,
visiting potential sites, and giving final approval. During the design phase,
all blueprints are reviewed and approved by the Company and discussed with the
franchisee. All equipment necessary to operate a Big Apple Bagels store must
be purchased from pre-
37
<PAGE>
approved vendors, and one cash register is supplied by the Company to each
franchisee. The Company provides support to its franchisees throughout the
store development process, including a mandatory ten-day training program
(five days of classroom instruction on administration, record keeping, and
inventory control, and five days of in-store instruction on baking and food
preparation). For a few days before and after store opening, the Company
provides assistance at the franchisee's store to ensure that the store is
operating properly and in accordance with Company standards.
The Company monitors each franchisee's operations and product quality
through review of weekly reports and quarterly financial statements, quarterly
field visits, weekly management meetings and nightly cash register polling via
computer modem connection with the store's cash register. Cash register
polling allows the Company to monitor each store's daily performance,
including review of such data as net retail sales, customer count, coupons,
promotional activity, and average sales. These overview mechanisms allow the
Company to quickly identify potential problems and lend operational,
marketing, or accounting assistance.
The Company regularly communicates with its franchisees and encourages
active communication among its franchisees through franchisee newsletters,
special bulletins, and periodic meetings. In addition, Company personnel
provide telephone support with respect to operational issues, as well as
ongoing assistance with advertising and promotion. Retail sales are promoted
by advertising in newspapers, through direct mail, and on radio in several
markets. Franchisees are required to contribute to the Company's national
marketing fund based on net sales and are reimbursed for a portion of the
media advertising they place in their local market, up to the amount
contributed. During 1995, the Company was instrumental in organizing an
advertising cooperative association among its franchisees in the Chicago,
Illinois area. The cooperative enables individual franchisees to gain access
to and effectively advertise by means that would otherwise be cost-prohibitive
for individual franchisees. The Company anticipates that other groups of
franchisees will replicate this concept within their respective market areas.
The Company currently advertises its franchising opportunities at franchise
trade shows and in newspapers and business opportunity magazines. In addition,
a substantial number of prospective franchisees contact the Company as a
result of patronizing an existing store.
To facilitate growth in franchising operations, the Company may assist
qualified franchisees with equipment lease and/or construction financing. The
Company is negotiating for discounts on the purchase of major equipment in
exchange for commitments to purchase large volumes directly from the
manufacturer. A franchisee may then be able to purchase or lease the equipment
from the Company.
LICENSING AND LICENSED PRODUCT
The Company currently sells two licensed food products: Big Apple Bagels and
Brewster's Coffee. Big Apple Bagels are sold on a licensed basis through 34
locations served by Host Marriott, including airports and travel plazas, and
through Mrs. Fields Cookies stores. Brewster's Coffee is sold through
approximately 100 Big Apple Bagel stores. Upon completion of the Chesapeake
Acquisition, Brewster's Coffee will also be offered to the Chesapeake
franchisees.
Following the Strathmore Acquisition, the Company developed a par-baked
frozen bagel for distribution to the Host Marriott system by a third-party
commercial bakery. Given the tendency of units located in airports and travel
plazas to sales of single bagels and deli sandwiches, rather than the bulk
bagel sales which generally predominate at traditional retail sites, the
Company believes that the deviation from its normal "fresh from scratch"
approach is appropriate. Where the product is immediately consumed by the
customer, extended freshness is not a significant factor. Due to the limited
space considerations in such locations, the use of convection ovens rather
than the full steam oven used in the Company's traditional retail sites offers
further efficiencies. The Company collects a licensing fee of 3% of bagel-
related sales in the 34 units that existed at the Strathmore Acquisition date
and will collect a 3% licensing fee on all nonbeverage sales in future units
developed by Host Marriott as well as a commission on the sale of par-baked
bagels by the third party commercial bakery
38
<PAGE>
to the Host Marriott units. The Company believes that Host Marriott will add
as many as four additional units by the end of fiscal 1996 and expects Host
Marriott to add between 20 and 25 units in fiscal 1997.
Since August 1996, par-baked frozen bagels have also been sold to some of
the nearly 1,000 stores in the Mrs. Fields Cookies network. In the limited
time period since introducing this program, the Company believes that
approximately 250 stores in the Mrs. Fields system have begun to stock Big
Apple Bagels product. As part of the arrangement, Mrs. Fields Cookies are also
offered to Big Apple Bagel franchisees who may choose to stock the item.
Brewster's Coffee is a premium grade arabica coffee which is roasted and
shipped by a third party coffee roaster. The coffee is purchased and roasted
to the Company's specifications. The Company collects a commission on the sale
of Brewster's Coffee to its franchisees by the third party commercial coffee
roaster.
The Company is actively exploring potential distribution channels for both
Big Apple Bagels and Brewster's Coffee. Potential new customers include
convenience stores, economy motels, institutional food service and other
restaurants.
COMPETITION
The quick service restaurant industry is intensely competitive with respect
to product quality, concept, location, service and price.
The Company believes that following the Chesapeake Acquisition it will be
the second largest chain of fresh baked bagel stores in the United States and
Canada based upon total number of stores operating as of August 31, 1996.
There are a number of national, regional and local chains operating both owned
and franchised stores which may compete with the Company on a national level
or solely in a specific market or region. The Company believes that because
the bagel industry is extremely fragmented, there is a significant opportunity
for bagel chains, including both the Company and its competitors, to expand
dramatically.
The Company believes that its three most direct competitors are Bruegger's,
Einstein and Manhattan, all of which are also franchisors. As of August 31,
1996, Bruegger's, Einstein and Manhattan had 373, 218 and 265 stores open,
respectively. There are several other regional bagel chains with under fifty
stores, all of which may be expected to compete with the Company, including
Bon Jour Bagel Cafe and All American Food Group, Inc.
The Company competes, and can be anticipated to compete, against numerous
small independently-owned bagel bakeries, fast food restaurants such as
Dunkin' Donuts that offer bagels as part of their breakfast food offerings and
supermarket bakery sections. In particular, the Company's bagels compete
against Lenders Bagels and other brands of fresh and frozen bagels offered in
supermarkets. Certain of these competitors may have greater product and name
recognition and larger financial, marketing and distribution capabilities than
the Company. In addition, the Company believes that the startup costs
associated with opening a retail food establishment offering similar products
on a stand-alone basis are competitive with the startup costs associated with
opening a Big Apple Bagels or Chesapeake Bagel Bakery store and, accordingly,
such startup costs are not an impediment to entry into the retail bagel
business.
The Company believes that Big Apple Bagels and Chesapeake Bagel Bakery
stores compete favorably in terms of taste, food quality, convenience,
customer service, and value, which the Company believes are important factors
to its targeted customers. Competition in the food service industry is often
affected by changes in consumer taste, national, regional, and local economic
and real estate conditions, demographic trends, traffic patterns, the cost and
availability of labor, consumer purchasing power, availability of product, and
local competitive factors. The Company attempts to manage or adapt to these
factors, but not all such factors are within the Company's control and such
factors could cause the Company and some or all of its area developers and
franchisees to be adversely affected.
39
<PAGE>
The Company competes for qualified franchisees with a wide variety of
investment opportunities in the restaurant business and in other industries.
The Company's continued success is dependent to a substantial extent on its
reputation for providing high quality and value with respect to its service,
products and franchises, and this reputation may be affected not only by the
performance of Company-owned stores but also by the performance of its
franchise stores over which the Company has limited control.
TRADEMARKS AND SERVICE MARKS
The trademarks and service marks "Big Apple Bagels," "Brewster's" and
"Chesapeake Bagel Bakery" are registered under applicable federal trademark
law. These marks are licensed by the Company and Chesapeake to their
respective franchisees pursuant to franchise agreements and the Company has
licensed the "Big Apple Bagels" mark to Big Apple Bagels, Inc., pursuant to a
license agreement. Big Apple Bagels, Inc. is wholly-owned by Paul C. Stolzer,
a director and principal shareholder and the former President of the Company.
Mr. Stolzer currently serves as a consultant to the Company.
The Company is aware of the use by other persons and entities in certain
geographic areas of names and marks which are the same as or similar to the
Company's marks. Some of these persons or entities may have prior rights to
those names or marks in their respective localities. Therefore, there is no
assurance that the marks are available in all locations. It is the Company's
policy to pursue registration of its marks whenever possible and to vigorously
oppose any infringement of its marks.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply with federal, state
and local government regulations applicable to consumer food service
businesses, including those relating to the preparation and sale of food,
minimum wage requirements, overtime, working and safety conditions, and
citizenship requirements, as well as regulations relating to zoning,
construction, health, and business licensing. Each store is subject to
regulation by federal agencies and to licensing and regulation by state and
local health, sanitation, safety, fire and other departments. Difficulties or
failures in obtaining the required licenses or approvals could delay or
prevent the opening of a new Company-owned or franchise store, and failure to
remain in compliance with applicable regulations could cause the temporary or
permanent closing of an existing store. The Company believes that it is in
material compliance with these provisions. Continued compliance with these
federal, state and local laws and regulations is costly but essential, and
failure to comply may have an adverse effect on the Company and its
franchisees.
The Company's franchising operations are subject to regulation by the
Federal Trade Commission (the "FTC") under the Uniform Franchise Act which
requires, among other things, that the Company prepare and periodically update
a comprehensive disclosure document known as a Uniform Franchise Offering
Circular ("UFOC"), in connection with the sale and operation of its
franchises. In addition, some states require a franchisor to register its
franchise with the state before it may offer a franchise. The Company believes
its UFOC, together with any applicable state versions or supplements, complies
with both the FTC guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises. The Company is
currently in the process of filing a UFOC for use in connection with the sale
of Brewster's Coffee franchises.
The Company is also subject to a number of state laws, as well as foreign
laws (to the extent it offers franchises outside of the United States), that
regulate substantive aspects of the franchisor-franchisee relationship,
including, but not limited to, those concerning termination and non-renewal of
a franchise.
PROPERTIES
The Company's principal executive office, consisting of approximately 4,600
square feet, is located in Chicago, Illinois and is leased pursuant to two
five-year leases, expiring in March 2000. The Company additionally rented
approximately 3,300 square feet in the same building on October 1, 1996, with
basic monthly
40
<PAGE>
base rent of $1,792 expiring in June 1999. For information regarding the terms
of these and other leases, see Note 6 of Notes to Consolidated Financial
Statements of BAB Holdings, Inc.
LEGAL PROCEEDINGS
On April 16, 1996, the Company filed an arbitration action against a
franchisee alleging breach of its franchise agreement for refusal to submit
required sales reports and pay royalty fees and contributions to the national
marketing fund. The franchisee filed suit in the Circuit Court of Cook County,
Illinois against the Company and its officers and directors on April 19, 1996.
The franchisee alleges that the Company misrepresented the initial investment
required to establish a store and made untrue and unauthorized earnings claims
in violation of the Illinois Franchise Disclosure Act. Plaintiffs seek
rescission of the franchise agreement, damages of $600,000 and punitive
damages in the amount of $6,000,000. Management believes the case is without
merit and on May 28, 1996, filed a motion to stay litigation in order to
compel the plaintiffs to have their claims heard in arbitration as required by
the provisions of the franchise agreement. An arbitration hearing is scheduled
to begin December 18, 1996.
EMPLOYEES
As of August 31, 1996, the Company employed 235 persons. Of these
individuals, 207 work in the Company-owned stores and the majority are part-
time employees. The remaining employees are responsible for oversight of
franchising and Company-store operations. The Company anticipates hiring
additional employees to develop and support new Company-owned stores, to
assist in sales and marketing for Chesapeake Bagel Bakery franchises, and to
support the growing number of franchise stores.
None of the Company's employees is subject to any collective bargaining
agreements and management considers its relations with its employees to be
good.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND KEY MANAGEMENT
The following tables set forth certain information with respect to each of
the directors and executive officers of the Company and certain other key
management personnel.
<TABLE>
<CAPTION>
DIRECTORS AND
EXECUTIVE OFFICERS AGE POSITION(S) HELD WITH COMPANY
-------------------- --- -----------------------------
<S> <C> <C>
Michael W. Evans 40 President, Chief Executive Officer and Director
Michael K. Murtaugh 52 Vice President, General Counsel and Director
Theodore P. Noncek 37 Chief Financial Officer
Paul C. Stolzer 41 Director
David L. Epstein 49 Director
Cynthia A. Vahlkamp 41 Director
<CAPTION>
OTHER KEY MANAGEMENT AGE POSITION(S) HELD WITH COMPANY
-------------------- --- -----------------------------
<S> <C> <C>
Thomas K. Ryan 37 Director of Franchise Development
Jack P. Bracken 48 Licensing and Brand Manager
Anthony S. Cervini 43 Director of Franchise Operations
William G. Wilkinson 42 Director of Company-store Operations
Paul H. Lutton 50 Director of Facilities
</TABLE>
41
<PAGE>
Michael W. Evans has served as Chief Executive Officer and a director of the
Company since January 1993 and is responsible for all aspects of franchise
development and marketing, as well as all corporate and franchise sales
performance and operation programs. In February 1996, he was appointed
President. From December 1986 to December 1993, he was the chief executive of
Windy City Management Services, an Illinois joint venture that served as the
general partner of three limited partnerships that owned and operated 19 TCBY,
Inc. yogurt store franchises. Mr. Evans has over 9 years of experience in the
food service industry.
Michael K. Murtaugh joined the Company as a director in January 1993 and as
Vice President and General Counsel in January 1994. Mr. Murtaugh is
responsible for dealing directly with state franchise regulatory officials and
for the negotiation and enforcement of franchise and area development
agreements. Before joining the Company in January 1994, Mr. Murtaugh was a
partner with the law firm of Baker & McKenzie, where he practiced law from
1971 to 1993. He also currently serves as vice president and secretary of
American Sports Enterprises, Inc. and as managing partner of the Kane County
Cougars minor league baseball team. Mr. Murtaugh is a shareholder, officer,
and director of the Northshore Bagels, Inc., which owns and operates two Big
Apple Bagels franchise stores in suburban Chicago, Illinois.
Theodore P. Noncek joined the Company as its Chief Financial Officer in July
1996 and is responsible for all financial reporting and analysis. Mr. Noncek
is a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants and the Illinois CPA Society. Prior to joining
the Company, he spent approximately three years as the Assistant Controller
and Financial Reporting Manager of Apollo Travel Services, a subsidiary of UAL
Corp. Prior to his time at Apollo, Mr. Noncek spent seven years in the public
accounting firm Ernst & Young LLP, where, as an audit manager, he specialized
in clients in the retail and wholesale industry.
Paul C. Stolzer has served as a director of the Company since January 1993
and served as President from January 1993 to February 1996. Mr. Stolzer opened
the first Big Apple Bagels store in Naperville, Illinois in 1986. Since 1986,
he has been the president of Big Apple Bagels, Inc., which currently operates
three stores in the western suburbs of Chicago, pursuant to a license
agreement with the Company. Prior to his affiliation with the Company, Mr.
Stolzer served as a consultant in the development of nine unrelated bagel
shops in several states. Mr. Stolzer resigned as President of the Company to
pursue other business interests. He is currently under contract as a
consultant to the Company.
David L. Epstein joined the Company as a director in September 1995. Mr.
Epstein has been a principal of the J.H. Chapman Group, Ltd., an international
investment banking firm specializing in the food industry since September
1983. Prior to joining J.H. Chapman Group, Ltd., Mr. Epstein was vice
president and regional executive of Chase Commercial Corporation, an affiliate
of Chase Manhattan Bank, N.A., where he headed that company's expansion in the
food industry.
Cynthia A. Vahlkamp was appointed a director in April 1996. Since September,
1996, she has been vice president of category marketing at Sunbeam
Corporation. Ms. Vahlkamp served as senior vice president of marketing for On-
Line Services of CompuServe Incorporated from February, 1996 to September,
1996, as general manager of Pritikin Systems, Inc. from 1993 to 1995, and held
various other management positions at the Quaker Oats Company, both
domestically and internationally, from 1986 to 1993. Ms. Vahlkamp is a member
of the National Association of Corporate Directors, The American Marketing
Association, The American Institute of Wine and Food, and The Chicago Arts and
Business Council, serving on its Marketing Committee.
Thomas K. Ryan joined the Company in July 1994. Mr. Ryan is responsible for
franchise marketing and for recruitment of franchisees. Mr. Ryan has extensive
experience in franchising, both as a consultant to emerging franchisors and as
a franchisee. From 1991 to 1994, he provided franchise consulting services to
Unocal Corp., National Auto/Truckstops Holdings Corp., Coupon Cash Saver
Franchise Corp., and several other franchisors. From 1985 to 1991, Mr. Ryan
was employed by Francorp, Inc., a management consulting firm specializing in
franchising.
42
<PAGE>
Jack P. Bracken joined the Company in August 1996 and is responsible for
licensed products, including the Company's relationship with Host Marriott.
Mr. Bracken has twenty-four years of experience in the operations of large,
multi-unit food and beverage organizations, including over twenty years with
Host Marriott Corp. He served as general manager of Marriott International
Corp. and Host Marriott Corp. branches in various parts of the United States,
overseeing operations in excess of $20 million in annual sales between 1978
and 1996, and was Host Marriott's director of branded concepts during 1989 and
1990.
Anthony S. Cervini joined the Company in August 1993 and is responsible for
overseeing franchise operations and development and has substantial experience
in the restaurant industry. From 1988 to 1992, Mr. Cervini was president of
Illinois Franchise Association, a franchisee of the TCBY Inc. yogurt company.
From 1986 to 1988, he served as senior vice president of Banditree, Inc., a
restaurant company with locations in Florida, Texas, Georgia, and Louisiana.
From 1978 to 1986, he served in various roles at Chart House, Inc., where he
rose to the position of vice president of operations, overseeing 100 company-
owned and 100 franchised Burger King restaurants in Illinois and northwest
Indiana.
William G. Wilkinson joined the Company in April 1996 as the director of
Company-store operations after eight years as regional director of operations
of the largest licensee of A&W Restaurants, overseeing more than 100
restaurants in the eastern United States. Prior to his tenure at A&W
Restaurants, Mr. Wilkinson served for over two years as the director of
operations of Wizard's Ice Cream ("Wizard's"), a franchisor of ice cream
specialty stores. Prior to his association with Wizard's, he served in several
positions with Brown & Portillo, Inc.
Paul H. Lutton joined the Company in November 1995 and is responsible for
new store development, including real estate acquisition, design, drafting and
construction management of Company-owned and licensed stores. Prior to joining
the Company, Mr. Lutton, a licensed architect, operated a computer design and
programming service. He has served as an independent consultant to the
Company, providing similar services, since the Company's inception.
DIRECTOR COMPENSATION
Each non-employee director of the Company is paid a fee of $100 for each
meeting attended, as well as reimbursement of reasonable expenses. In
addition, the non-employee directors receive stock options pursuant to the
Directors Plan.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Directors Plan provides for the issuance of up to 30,000 shares of the
Company's Common Stock to non-employee members of the Board of Directors. The
Directors Plan will terminate on September 19, 2005, unless sooner terminated
by action of the Board.
Only non-employee members of the Board of Directors of the Company (the
"Board") are eligible to receive grants under the Directors Plan. The
Directors Plan provides for a grant to each non-employee director of an option
to purchase 3,000 shares upon initial election to the Board (an "Initial
Option") and for an annual grant thereafter, upon re-election to the Board, of
an option to purchase 1,500 shares (an "Annual Option"). Each Initial Option
and each Annual Option is immediately exercisable for a period of 10 years
from the date of grant at an exercise price per share equal to the fair market
value of the Common Stock as of the date of grant. Each Annual Option
terminates three months after the termination of the optionee as a director of
the Company for any reason except a "change in control," in which case the
Option terminates after six months. An Initial Option remains exercisable,
notwithstanding the termination of the directorship of the optionee, unless
such termination is a result of death or a "change in control," in which case
the Initial Option terminates after six months. Directors may choose to waive
such option grants, in their discretion. All options granted under the
Directors Plan are "nonqualified" options, which do not meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
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<PAGE>
The Directors Plan is administered by the President and Chief Financial
Officer, but the administrators have no authority to select recipients, select
the date of grant of options, the number of option shares, or the exercise
price, or to otherwise prescribe the particular form or conditions of any
option granted. As of August 31, 1996, options granted under the Directors
Plans include Initial Options granted to David Epstein and Cynthia Vahlkamp
upon election to the Board, and Annual Options granted to Mr. Epstein and Paul
Stolzer upon their re-election to the Board at the annual meeting of
shareholders in April 1996. The exercise price of Mr. Epstein's Initial Option
is $2.67 per share. The exercise price of all of the other Initial and Annual
Options granted is $4.83 per share.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to the Company's
Chief Executive Officer for services rendered during fiscal years 1994 and
1995. No executive officer received annual salary and bonus compensation of
more than $100,000 during fiscal 1994 or 1995. The Company has no employment
agreements with any of its executive officers.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
FISCAL YEAR ENDED --------------------
NAME AND PRINCIPAL POSITIONS NOVEMBER 30 SALARY BONUS
---------------------------- ----------------- ------- ------
<S> <C> <C> <C>
Michael W. Evans, 1995 $87,615 $5,000
Chief Executive Officer 1994 70,250 --
</TABLE>
1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
The 1995 Long-Term Incentive and Stock Option Plan (the "Incentive Plan")
provides for the issuance of up to 570,000 shares of the Company's Common
Stock. The Incentive Plan will terminate on September 19, 2005, unless sooner
terminated by action of the Board.
The Incentive Plan permits the granting of awards to employees and non-
employee officers, directors and agents of the Company in the form of stock
appreciation rights, restricted stock awards and stock options. Stock options
granted under the Incentive Plan may be "incentive stock options," meeting the
requirements of Section 422 of the Code or nonqualified options which do not
meet the requirements of Section 422. The Incentive Plan is currently
administered by the Board of Directors and may be administered by a Committee
of the Board of Directors appointed by the Board. The Incentive Plan gives
broad powers to the Board or Committee to administer and interpret the Plan,
including the authority to select the individuals to be granted options and
rights, and to prescribe the particular form and conditions of each option or
right granted. Incentive stock options, in order to receive favorable tax
treatment under the Code, must be exercisable at not less than the fair market
value of the Common Stock as of the date of the grant (110% of fair market
value if the optionee is a 10% or greater shareholder) and may be granted only
to employees.
As of August 31, 1996, the Company has granted incentive stock options to 14
employees (including options granted to Michael W. Evans and Michael K.
Murtaugh, executive officers of the Company) each for a term of 10 years,
except in the case of Mr. Evans, whose option has a term of 5 years. Each
incentive option is exercisable at 100% of the fair market value as of the
date of grant (110% in the case of Mr. Evans). These options are exercisable
in varying annual installments commencing on the one-year anniversary of
grant. Messrs. Evans and Murtaugh's options are exercisable in three equal
annual installments commencing on the one-year anniversary of grant.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of August 31, 1996, and as
adjusted to reflect the sale of Shares offered hereby and the completion of
the Chesapeake Acquisition, (i) by each person who is known by the Company to
beneficially own more than five percent (5%) of the Common Stock, (ii) by each
director and Named Executive Officer, and (iii) by all officers and directors
as a group.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP AFTER
BEFORE OFFERING OFFERING(4)
-------------------------- --------------------
NAME SHARES PERCENT SHARES PERCENT
---- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Aladdin International, Inc..... 1,015,481 14.2 1,015,481 8.6
3806 Abbott Ave. South
Minneapolis, MN 55410
Michael W. Evans............... 706,875 9.9 706,875 6.0
8501 West Higgins Road
Chicago, IL 60631
Paul C. Stolzer................ 678,625(1) 9.5 678,625 5.7
2100 Cherrywood Circle
Naperville, IL 60565
Michael K. Murtaugh............ 421,875 5.9 421,875 3.6
8501 West Higgins Road
Chicago, IL 60631
Almike Enterprises, Inc. and
The American Bagel Company.... -- -- 900,000 7.6
1451 Dolly Madison Blvd.
McLean, VA 22101
David L. Epstein............... 21,000(2) * 21,000(2) *
Cynthia A. Vahlkamp............ 3,000(3) * 3,000(3) *
All officers and directors as a
group (6 persons)............. 1,831,375(1)(2)(3) 25.6 1,831,375 15.5
</TABLE>
- --------
*Less than 1%.
(1) Includes 1,500 shares that may be acquired pursuant to a currently
exercisable option.
(2) Includes 4,500 shares that may be acquired pursuant to currently
exercisable options.
(3) Includes 3,000 shares that may be acquired pursuant to a currently
exercisable option.
(4) Does not include persons who may become principal shareholders as a result
of Shares issued in this Offering.
CERTAIN TRANSACTIONS
The following information relates to certain relationships and transactions
between the Company and related parties, including officers and directors of
the Company. It is the Company's policy that it will not enter into any
transactions with officers, directors or beneficial owners of more than 5% of
the Company's Common Stock on terms less favorable to the Company than could
be obtained from unaffiliated third parties. Management believes that the
following transactions were effected on terms no less favorable to the Company
than those that could have been realized in arm's length transactions with
unaffiliated parties.
OFFICERS AND DIRECTORS
In November 1992, the Company acquired the trademark and service mark Big
Apple Bagels from Big Apple Bagels Inc., in consideration of the licensing
agreement described below. Paul C. Stolzer is the owner and President of Big
Apple Bagels, Inc., which owns and operates two Big Apple Bagels stores in
Naperville, Illinois
45
<PAGE>
and one in Lisle, Illinois. These stores operate under a licensing agreement
with the Company, are not subject to the rules and regulations stipulated in
the Company's standard franchise agreement and are under no obligation to pay
any franchise, royalty or marketing fees. Other than the licensing agreement
and a non-compete agreement, Big Apple Bagels, Inc. has no other affiliation
or relationship with the Company.
On February 16, 1996, in connection with his resignation as president of the
Company, Paul C. Stolzer entered into a three year consulting agreement with
the Company whereby in exchange for his services, Mr. Stolzer will receive a
fee of $65,000 per annum, subject to 5% annual increases, and increases in his
rights under the November 1992 license agreement to include the operation of
two additional Big Apple Bagels stores, subject to certain geographical
restrictions.
In March 1994, the Company purchased a wholesale account from Paul C.
Stolzer at the time the President, a director and a principal shareholder of
the Company, for total consideration of $18,200. In May 1994, the Company
discontinued sales to this account, and Mr. Stolzer forgave the balance of
$7,583 due on the purchase price.
In February 1994, the Company acquired, for $22,705, a 50% interest in a
joint venture formed to operate a franchise satellite store. The remaining 50%
interest is owned by PNEF Inc., a company whose president is related by
marriage to Michael W. Evans. This store purchases its bagels and cream cheese
from a Company-owned store at price discounts comparable to those granted to
wholesale customers.
Michael K. Murtaugh, the Company's Vice President and General Counsel, is
president of Northshore Bagels, Inc., which owns and operates two Big Apple
Bagels franchise stores near Chicago, Illinois, and has an area development
agreement to develop four additional stores in a north suburban area of
Chicago. All transactions between the Company and this franchisee are similar
to those with other franchisees. These stores are operated by full-time store
managers.
In July 1994, the Company entered into a 12-month agreement with J.H.
Chapman Group, Ltd. ("Chapman"), for assistance in obtaining financing for the
Company. David L. Epstein, who is currently a member of the Board of Directors
of the Company, is a principal of Chapman. The agreement was negotiated at
arm's length prior to Mr. Epstein's election to the Board in September 1995.
Pursuant to the agreement, the Company paid Chapman $150,000 in connection
with the investment of Aladdin International, Inc., described below. Chapman
has also acted as finder and agent on behalf of the Company in the Chesapeake
Acquisition and will receive upon closing a fee estimated to be $437,500, plus
1% of any additional consideration payable under the Asset Purchase Agreement
in connection with the opening of additional Chesapeake franchise stores post-
closing. Chapman also assists the Company in the identification and
negotiation of other potential acquisitions and licensing agreements and
receives compensation as agreed in each particular instance. Since December 1,
1994, Chapman has received approximately $44,000 from the Company in
compensation for these services and for expense reimbursement.
ALADDIN INTERNATIONAL, INC.
Aladdin International, Inc., a Minnesota corporation ("Aladdin"), loaned
$500,000 to the Company on August 15, 1995, pursuant to an 11% secured
convertible promissory note (the "Note"). The Note was converted to 254,238
shares of Common Stock of the Company on August 31, 1995. On August 31, 1995
Aladdin also purchased an additional 254,237 shares of Common Stock for
$500,000 and was granted an option to purchase an additional 579,225 shares
for an aggregate price of $822,500, or $1.42 per share, which was exercised to
purchase 403,536 shares (the "Additional Shares") simultaneously with the
closing of the Company's initial public offering of securities. Aladdin also
received, upon closing of such offering, a warrant (the "Warrant") exercisable
from the date of issuance through September 1, 1996, to purchase 145,474
shares of Common Stock at $.66 per share as to 144,040 shares and $.67 per
share as to 1,434 shares. The Warrant was exercised in full on June 25, 1996
by means of a "cashless" exercise, which resulted in issuance of 133,471
shares of Common Stock. All shares acquired upon exercise of the Warrant are
currently held in escrow pursuant to order of the Commissioner of Commerce of
the State of Minnesota issued in connection with registration of the Company's
securities in Minnesota in the initial public offering.
46
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, no par value, and 4,000,000 shares of Preferred Stock, $.01 par
value. As of the date of this Prospectus, there are 7,143,069 shares of the
Company's Common Stock outstanding. No shares of the Preferred Stock are
currently outstanding.
COMMON STOCK
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result
in a dilution of the interest of existing shareholders should additional
shares of Common Stock be issued. Holders of the Common Stock are entitled to
receive such dividends as may be declared by the Board of Directors out of
assets legally available therefor and to share ratably in the assets of the
Company available upon liquidation, subject to rights of holders of the
Preferred Stock, if any. The shares currently outstanding are, and the shares
offered hereby, upon payment and issuance as described in this Prospectus,
will be, fully paid and nonassessable.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. Accordingly,
the holders of more than 50% of all of the outstanding shares of Common Stock
can elect all of the directors. Significant corporate transactions such as
amendments to the Articles of Incorporation, mergers, sales of assets and
dissolution or liquidation require approval by the affirmative vote of the
majority of the outstanding shares of Common Stock. Other matters to be voted
upon by the holders of Common Stock normally require an affirmative vote of a
majority of the shares present at the particular shareholders meeting. As of
the date of this Prospectus, the Company's directors and officers own
approximately 26% of the outstanding shares of the Company's Common Stock and
following the Offering will own approximately 16% of the outstanding shares.
Accordingly, the Company's directors and executive officers have and will
continue to have significant voting influence in connection with election of
the directors of the Company and control of the Company's business and
affairs.
PREFERRED STOCK
The Board of Directors of the Company may, without further action by the
shareholders, from time to time, issue Preferred Stock in one or more series
and determine the rights, preferences, privileges, and restrictions, including
voting rights, dividend rights, dividend rate, liquidation preference,
conversion or exchange rights, redemption and sinking fund provisions, and the
number of shares constituting and the designation of any such series. The
holders of such shares of Preferred Stock, if issued, would likely have
rights, preferences, and privileges in addition to those afforded the holders
of shares of Common Stock. The Board of Directors currently has no plans to
issue any shares of Preferred Stock.
The issuance of Preferred Stock in certain circumstances may have the effect
of delaying, deferring, or preventing a change in control of the Company
without further action by the shareholders, may discourage bids for the Common
Stock at a premium over the market price of the Common Stock, and may
adversely affect the market price of, and the voting and other rights of the
holders of, the Common Stock. See "Risk Factors--Issuance of Additional
Shares."
ANTITAKEOVER EFFECT OF ILLINOIS LAW
The Company is subject to certain provisions of the Illinois Business
Corporation Act of 1983, as amended (the "Illinois Act") that govern business
combinations between corporations and "interested shareholders" or their
"affiliates." The Illinois Act generally provides that if a person or entity
acquires 15% or more of the voting stock of an Illinois corporation (an
"Interested Shareholder"), the corporation and the Interested Shareholder, or
any affiliated entity of the Interested Shareholder, may not engage in certain
business combination transactions for three years following the date the
person became an Interested Shareholder unless (1) prior to the date that
47
<PAGE>
the Interested Shareholder became an Interested Shareholder the board of
directors approved either the business combination or the transaction which
resulted in the shareholder's becoming an Interested Shareholder, or (2) upon
consummation of the transaction which resulted in the shareholder becoming an
Interested Shareholder, the Interested Shareholder owned at least 85% of the
voting shares of the corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also officers
and by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer), or (3) on or subsequent to the
date that the Interested Shareholder became an Interested Shareholder the
business combination is approved by the board of directors and authorized at
an annual or special meeting of shareholders (not by written consent) by the
affirmative vote of at least 66 2/3% of the outstanding voting shares that are
not owned by the Interested Shareholder. An "affiliate" is a person who
directly or indirectly controls, is controlled by, or is under common control
with a specified person (an "Affiliate"). Business combination transactions
for this purpose include (a) any merger, consolidation or share exchange, (b)
any sale, lease, transfer or other disposition of ten percent (10%) or more of
the assets of the corporation, (c) certain transactions that result in the
issuance of any equity securities of the corporation to the Interested
Shareholder, (d) any transaction which has the effect, directly or indirectly,
of increasing the proportionate amount of any class of equity securities of
the corporation or any subsidiary owned directly or indirectly by any
Interested Shareholder or an Affiliate thereof, and (e) any receipt by the
Interested Shareholder of the benefit, directly or indirectly of any loans,
advances, guarantees, pledges, or other financial benefits provided by or
through the corporation or any direct or indirect majority owned subsidiary.
The Company's Board of Directors and shareholders may amend the Company's
Articles of Incorporation and Bylaws to provide that the provisions of the
Illinois Act will not apply to any business combination after the date of the
amendment.
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit personal liability for breach
of fiduciary duty by its directors to the fullest extent permitted by the
Illinois Act. Such Articles eliminate the personal liability of directors to
the Company and its shareholders for damages occasioned by breach of fiduciary
duty, except for liability based on breach of the director's duty of loyalty
to the Company, liability for acts or omissions not made in good faith,
liability for acts or omissions involving intentional misconduct, liability
based on payments of improper dividends, liability based on violations of
state securities laws, and liability for acts occurring prior to the date such
provision was added. Any amendment to or repeal of such provisions in the
Company's Articles of Incorporation will not adversely affect any right or
protection of a director of the Company for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
In addition to the Illinois Act, the Company's Bylaws provide that officers
and directors of the Company have the right to indemnification from the
Company for liability arising out of certain actions to the fullest extent
permissible by law. This indemnification may be available for liabilities
arising in connection with this Offering. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers or persons controlling the Company pursuant
to such indemnification provisions, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
TRANSFER PLACEMENT AGENT AND REGISTRAR
LaSalle National Trust, N.A., Chicago, Illinois, serves as the transfer
agent and registrar for the Company's Common Stock and Preferred Stock.
48
<PAGE>
OUTSTANDING WARRANTS AND OPTIONS
The underwriter of the Company's initial public offering holds a warrant to
purchase 255,000 shares of Common Stock at $3.20 per share commencing November
27, 1996. This warrant expires on November 27, 2000.
The consideration in the BUI Acquisition included an option to purchase
100,000 shares of Common Stock at $4.00 per share exercisable from May 1, 1996
through April 30, 2001.
The consideration in the Strathmore Acquisition included an option to
acquire 625,000 shares of Common Stock at $6.17 per share, which becomes
exercisable in two equal cumulative installments on May 22, 1997 and 1998, and
expires on May 21, 1999. In addition, Strathmore may earn a one-year option to
purchase 1,500 shares exercisable at $6.17 per share for each store opened
between May 21, 1996 and May 22, 1998. The Company estimates that up to
200,000 of shares could be subject to the earned options.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and the Chesapeake Acquisition, the Company
will have 11,843,069 shares of Common Stock outstanding. All of the shares
sold in this Offering will be freely transferable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for such shares, if any, that are purchased by an
Affiliate of the Company (as defined under the Securities Act). In addition,
an aggregate of 5,251,723 shares currently outstanding are restricted and,
under certain circumstances, may be freely tradable without restriction or
limitation under the Securities Act. The remaining 2,791,346 shares are
"restricted" shares within the meaning of Rule 144 under the Securities Act
("Rule 144").
Holders of restricted securities must comply with the requirements of Rule
144 in order to sell their shares in the open market. In general, under Rule
144 as currently in effect, any person (or persons whose shares are
aggregated) who has beneficially owned his or her restricted shares for at
least two but less than three years, is entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
then outstanding shares of the Company's Common Stock or the average weekly
trading volume of the Common Stock reported for the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
limitations on manner of sale, notice requirements, and availability of
current public information about the Company. Non-affiliates who have held
their restricted shares for three years are entitled to sell such shares under
Rule 144 without regard to any of the above limitations, provided they have
not been Affiliates of the Company for the three months preceding such sale.
Certain outstanding shares and shares issuable upon the exercise of
outstanding options and warrants are subject to rights of registration under
the Securities Act. In addition, the Company intends to file a registration
statement covering the shares of Common Stock issuable under its Incentive
Plan and Directors Plan, pursuant to which such shares, when issued, will be
freely tradeable, except to the extent held by officers or directors who are
limited as to resale by Rule 144 or by agreement with the Placement Agent, as
described below.
Certain officers and directors of the Company have agreed to restrictions on
the sale of their shares. See "Plan of Distribution."
The Company cannot predict the effect, if any, that the potential for sales
of restricted securities under Rule 144 or pursuant to a registration
statement could have on the market price of the Common Stock, if any,
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Company's Common Stock could adversely affect prevailing market prices of
the Company's Common Stock and the Company's ability to raise additional
capital by occurring at a time when it would be beneficial for the Company to
sell securities.
PLAN OF DISTRIBUTION
The Shares of Common Stock are being offered to a limited number of
"qualified institutional buyers" ("QIBs") as that term is defined in Rule 144A
promulgated under the Securities Act and a limited number of other "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act ("Accredited Investors").
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<PAGE>
It is anticipated that effectiveness of the Registration Statement will not
be requested and no investor funds will be accepted until the Placement Agent
has received indications of interest from prospective investors sufficient to
purchase all of the Shares at a price per share agreed upon by the Company and
the Placement Agent. Confirmations and final prospectuses will be distributed
to all investors promptly following the time the Registration Statement is
declared effective, informing investors of the closing date, which will be
three business days after the effective date of the Registration Statement or
such other date within five business days after the effective date of the
Registration Statement as the Company and the Placement Agent agree. No
investor funds will be accepted prior to effectiveness of the Registration
Statement. Prior to the closing date, all investor funds will be placed in
escrow with The First National Bank of Chicago or such other institution as
may be selected by the Placement Agent, as escrow agent (the "Escrow Agent"),
in an escrow account established for the benefit of the investors. Prior to
the closing, the Escrow Agent will notify the Company that payment for the
purchase of the Shares of Common Stock has been deposited by the investors in
the escrow account. Upon receipt of such notice and satisfaction or waiver of
certain closing conditions, the Company will deliver shares to each investor
or its nominee against payment of the purchase price therefor. Investor funds
will be released by the Escrow Agent and paid to the Company only in
connection with the closing of the Offering. The Offering will not continue
after the closing date. Unless the investors otherwise agree, if the closing
is not completed within five business days after pricing, all investor funds
deposited in the escrow account will be promptly returned, without interest.
Pursuant to an agreement with the Placement Agent, the Company has agreed to
(i) pay the Placement Agent a fee equal to 5.5% of the proceeds from the
Offering and (ii) sell to the Placement Agent, for a nominal consideration, a
five-year warrant to purchase up to 100,000 shares of Common Stock at a price
per share equal to 150% of the Offering Price (the "Warrant"). Such number of
shares and exercise price are subject to customary anti-dilution provisions.
The Warrant includes the right to cause the Company to register the shares of
Common Stock issuable upon exercise of the Warrant under the Securities Act
and also include certain other rights to participate in registrations of
Common Stock by the Company under the Securities Act. The Company will also
reimburse the Placement Agent for up to $75,000 in accountable expenses
incurred in connection with the Offering.
The Company has agreed to indemnify the Placement Agent and its controlling
persons against certain liabilities, including liabilities under the
Securities Act, or to contribute to payment the Placement Agent may be
required to make in respect thereof.
The Company and its directors and officers have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise sell or dispose of
any shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 90 days after the
effective date of the Registration Statement of which this Prospectus is a
part without the written consent of the Placement Agent, other than pursuant
to (i) the exercise of outstanding stock options and warrants, (ii) the
Company's stock option plans and (iii) sales of up to an aggregate of 160,350
shares of Common Stock by certain officers and directors of the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Moss & Barnett, A Professional Association,
Minneapolis, Minnesota. Certain legal matters relating to the Offering will be
passed upon for the Placement Agent by Sonnenschein Nath & Rosenthal, Chicago,
Illinois.
EXPERTS
The Consolidated Financial Statements of BAB Holdings, Inc. as of November
30, 1994 and 1995, and for each of the three years in the period ended
November 30, 1995, the Combined Financial Statements of Chesapeake Bagel
Bakery as of December 31, 1994 and 1995, and for each of the three years in
the period ended December 31, 1995, and the financial statements of Bagels
Unlimited, Inc. as of February 29, 1996 and for the year then ended, appearing
in this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
50
<PAGE>
The Financial Statements of Bagels Unlimited, Inc. as of February 28, 1995,
and for each of the two years ended February 28, 1995 appearing in this
Prospectus and Registration Statement have been audited by Muehl, Steffes &
Krueger, S.C., independent auditors as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The Financial Statements of Strathmore Bagels Franchise Corporation as of
December 31, 1994 and 1995 and for each of the two years in the period ended
December 31, 1995 appearing in this Prospectus and Registration Statement,
have been audited by Buonanno & Conolly, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W, Washington, D.C. 20549, and at the Commission's regional offices
at 7 World Trade Center, Suite 1300, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other materials that
are filed through the Commission's Electronic Data Gathering, Analysis, and
Retrieval System. Such reports, proxy statements and other information can
also be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street N.W, Washington, D.C. 20006, which supervises The
Nasdaq Stock Market's Small-Cap Market on which the Common Stock is quoted.
The Company has filed a Registration Statement on Form S-1, under the
Securities Act, including amendments thereto, relating to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto, as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, reference is
made to the copy of such contract or document (if any) filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, including exhibits and schedules thereto, may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C. and copies of all or any part thereof may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
BAB HOLDINGS, INC.
Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of November 30, 1994 and 1995.............. F-3
Consolidated Statements of Operations for the years ended November 30,
1993, 1994 and 1995...................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended November 30, 1993, 1994 and 1995................................... F-5
Consolidated Statements of Cash Flows for the years ended November 30,
1993, 1994 and 1995...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of August 31, 1996................ F-15
Condensed Consolidated Statements of Operations for the nine months ended
August 31, 1996 and 1995................................................. F-16
Condensed Consolidated Statements of Cash Flows for the nine months ended
August 31, 1996 and 1995................................................. F-17
Notes to Unaudited Condensed Consolidated Financial Statements............ F-18
Unaudited Pro Forma Financial Statements
Pro Forma Balance Sheet as of August 31, 1996............................. F-21
Pro Forma Statement of Operations for the nine months ended August 31,
1996 and the year ended November 30, 1995................................ F-22
CHESAPEAKE BAGEL BAKERY
Combined Financial Statements
Report of Independent Auditors............................................ F-26
Combined Balance Sheet as of December 31, 1994............................ F-27
Combined Statements of Income for the years ended December 31, 1993, 1994
and 1995................................................................. F-28
Combined Statements of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1993, 1994 and 1995............................. F-29
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995............................................................ F-30
Notes to Combined Financial Statements.................................... F-31
Unaudited Condensed Combined Financial Statements
Condensed Combined Balance Sheets as of August 31, 1996................... F-35
Condensed Combined Statements of Operations for the eight months ended
August 31, 1996 and 1995................................................. F-36
Condensed Combined Statements of Cash Flows for the eight months ended
August 31, 1996 and 1995................................................. F-37
Notes to Unaudited Condensed Combined Financial Statements................ F-38
</TABLE>
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-39
Balance Sheet as of December 31, 1995..................................... F-40
Statement of Operations and Retained Deficit for the year ended December
31, 1995................................................................. F-41
Statement of Cash Flows for the year ended December 31, 1995.............. F-42
Notes to Financial Statements............................................. F-43
Report of Independent Auditors............................................ F-45
Balance Sheet as of December 31, 1994..................................... F-46
Statement of Operations and Retained Deficit for the period from May 31,
1994 through December 31, 1994........................................... F-47
Statement of Cash Flows for the period from May 31, 1994 through December
31, 1994................................................................. F-48
Notes to Financial Statements............................................. F-49
Unaudited Condensed Financial Statements
Condensed Balance Sheet as of May 21, 1996................................ F-51
Condensed Statement of Income for the period from January 31, 1996 through
May 21, 1996............................................................. F-52
Condensed Statement of Cash Flows for the period from January 31, 1996
through May 21, 1996..................................................... F-53
Notes to Unaudited Condensed Financial Statements......................... F-54
BAGELS UNLIMITED, INC.
Financial Statements
Reports of Independent Auditors........................................... F-55
Balance Sheets as of February 29, 1996 and February 28, 1995.............. F-57
Statements of Operations and Retained Earnings (Accumulated Deficit) for
the years ended February 29, 1996 and February 28, 1995 and for the
period from inception (August 11, 1993) to February 28, 1994............. F-58
Statements of Cash Flows for the years ended February 29, 1996 and
February 28, 1995 and for the period from inception (August 11, 1993) to
February 28, 1994........................................................ F-59
Notes to Financial Statements............................................. F-60
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
BAB Holdings, Inc.
We have audited the accompanying consolidated balance sheets of BAB
Holdings, Inc. as of November 30, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended November 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BAB Holdings,
Inc. at November 30, 1994 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
November 30, 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
------------------
Chicago, Illinois
December 22, 1995
except for Note 10, as to which the date is
February 12, 1996
F-2
<PAGE>
BAB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30
---------------------
ASSETS 1994 1995
------ --------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash
of $121,323 and $346,441, respectively................ $ 410,377 $7,679,009
Trade accounts receivable, less allowance for doubtful
accounts of $1,500 in 1995............................ 28,924 81,198
National Marketing Fund contributions receivable....... 7,902 26,795
Inventories............................................ 6,188 16,542
Notes receivable....................................... 28,560 13,144
Amounts due from affiliate............................. 12,096 18,026
Deferred franchise costs............................... 34,948 25,238
Prepaid expenses and other current assets.............. 16,213 35,553
--------- ----------
Total current assets................................. 545,208 7,895,505
Property, plant, and equipment:
Leasehold improvements................................. 33,482 101,937
Furniture and fixtures................................. 26,166 101,480
Equipment.............................................. 125,442 232,972
--------- ----------
185,090 436,389
Less: Accumulated depreciation and amortization........ 43,114 87,957
--------- ----------
141,976 348,432
Patents, trademarks, and copyrights, net of accumulated
amortization of $339 and $1,446, respectively.......... 4,391 172,575
Other assets, net of accumulated amortization of $12,070
and $30,364, respectively.............................. 41,927 54,621
Notes receivable........................................ 4,843 11,493
Investment in joint venture............................. 15,274 9,006
--------- ----------
$ 753,619 $8,491,632
========= ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses.................. $ 88,971 $ 597,001
Unexpended National Marketing Fund franchisee
contributions......................................... 31,163 57,563
Current portion of long-term debt...................... 6,548 7,927
Deferred franchise fee revenue......................... 488,000 802,500
--------- ----------
Total current liabilities............................ 614,682 1,464,991
Long-term debt, less current portion.................... 374,443 236,294
Shareholders' equity (deficit):
Common stock, no par value; 5,000,000 and 20,000,000
shares authorized, respectively; 1,620,000 and
4,514,692 shares issued, respectively; 1,440,000 and
4,334,692 shares outstanding, respectively............ 49,570 7,903,183
Preferred stock, $7,000 par value; 5% cumulative
dividend; 100 shares authorized and 56 shares issued
and outstanding in 1994............................... 392,000 --
Preferred stock, $0.01 par value; 4,000,000 shares
authorized, and no shares issued and outstanding...... -- --
Treasury stock at cost, 180,000 shares................. (17,500) (17,500)
Accumulated deficit.................................... (659,576) (1,095,336)
--------- ----------
Total shareholders' equity (deficit)................. (235,506) 6,790,347
--------- ----------
$ 753,619 $8,491,632
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BAB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Net sales by Company-owned stores......... $ 146,843 $ 459,345 $ 563,211
Franchise fees............................ 35,000 333,000 700,000
Royalty fees from franchised stores....... 466 181,769 767,064
Other..................................... 4,254 4,938 2,728
---------- ---------- ----------
186,563 979,052 2,033,003
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs........... 45,101 149,360 191,415
Selling, general, and administrative
expenses:
Payroll-related expenses................ 272,041 586,544 1,061,525
Advertising and promotion expense....... 57,492 92,313 118,036
Professional service fees............... 20,172 149,007 396,358
Franchise-related expenses.............. -- 60,042 101,570
Other................................... 104,821 286,004 584,677
---------- ---------- ----------
454,526 1,173,910 2,262,166
---------- ---------- ----------
499,627 1,323,270 2,453,581
---------- ---------- ----------
Loss before interest...................... (313,064) (344,218) (420,578)
Interest expense.......................... -- (5,832) (30,807)
Interest income........................... 1,698 1,840 15,625
---------- ---------- ----------
Net loss.................................. (311,366) (348,210) (435,760)
Preferred stock dividends accumulated..... (13,400) (23,800) (4,000)
---------- ---------- ----------
Net loss attributable to common
shareholders............................. $ (324,766) $ (372,010) $ (439,760)
========== ========== ==========
Net loss attributable to common share:
Primary................................. $ (0.19) $ (0.24) $ (0.19)
========== ========== ==========
Fully diluted........................... $ (0.19) $ (0.22) $ (0.18)
========== ========== ==========
Average number of common shares used in
calculation:
Primary................................. 1,690,840 1,580,840 2,255,278
========== ========== ==========
Fully diluted........................... 1,690,840 1,690,840 2,373,504
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BAB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
-------------------- ---------------- ------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ---------- ------ -------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of November
30, 1992............... 750,000 $ 1,000 -- $ -- -- $ -- $ -- $ 1,000
Issuance of preferred
stock.................. -- -- 68.0 476,000 -- -- -- 476,000
Treasury stock purchase. -- -- -- -- (90,000) (17,500) -- (17,500)
Net loss................ -- -- -- -- -- -- (311,366) (311,366)
--------- ---------- ----- -------- -------- -------- ----------- ----------
Balance as of November
30, 1993............... 750,000 1,000 68.0 476,000 (90,000) (17,500) (311,366) 148,134
Two-for-one common stock
split.................. 750,000 -- -- -- (90,000) -- -- --
Preferred stock
conversion............. 120,000 84,000 (12.0) (84,000) -- -- -- --
Preferred stock cash
dividends.............. -- (35,430) -- -- -- -- -- (35,430)
Net loss................ -- -- -- -- -- -- (348,210) (348,210)
--------- ---------- ----- -------- -------- -------- ----------- ----------
Balance as of November
30, 1994............... 1,620,000 49,570 56.0 392,000 (180,000) (17,500) (659,576) (235,506)
Preferred stock
conversion............. 542,000 379,400 (54.2) (379,400) -- -- -- --
Preferred stock
redemption............. -- (6,002) (1.8) (12,600) -- -- -- (18,602)
Preferred stock cash
dividends.............. -- (5,944) -- -- -- -- -- (5,944)
Bond payable conversion. 34,960 132,849 -- -- -- -- -- 132,849
Issuance of common
stock.................. 2,317,732 7,353,310 -- -- -- -- -- 7,353,310
Net loss................ -- -- -- -- -- -- (435,760) (435,760)
--------- ---------- ----- -------- -------- -------- ----------- ----------
Balance as of November
30, 1995............... 4,514,692 $7,903,183 -- $ -- (180,000) $(17,500) $(1,095,336) $6,790,347
========= ========== ===== ======== ======== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BAB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
---------------------------------
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $(311,366) $(348,210) $ (435,760)
Adjustments to reconcile net loss to net
cash provided by (used for) operating
activities:
Depreciation and amortization............ 16,374 44,349 65,102
Equity in loss of investment in joint
venture................................. -- 7,431 6,268
Compensation expense for common stock
issued.................................. -- -- 9,725
Loss on write-off of wholesale business.. -- 6,572 --
Loss on sale of fixed asset.............. -- 1,582 243
Provision for doubtful accounts.......... -- -- 1,500
Changes in operating assets and
liabilities:
Trade accounts receivable.............. (2,140) (26,784) (53,774)
National Marketing Fund contributions
receivable............................ -- (7,902) (18,893)
Inventories............................ (3,928) (2,260) (10,354)
Deferred franchise costs............... -- (34,948) 9,710
Notes receivable....................... (25,000) 412 17,766
Prepaid expenses and other assets...... (2,638) (13,575) (19,340)
Amounts due from affiliate............. -- (13,596) (5,930)
Accounts payable and accrued expenses.. 18,841 70,130 508,030
Unexpended National Marketing Fund
franchisee contributions.............. -- 31,163 26,400
Deferred franchise fee revenue......... 280,000 190,500 305,500
--------- --------- -----------
Net cash provided by (used for) operating
activities................................ (29,857) (95,136) 406,193
INVESTING ACTIVITIES
Purchases of property, plant, and
equipment................................. (159,123) (11,569) (254,299)
Proceeds from sale of property, plant, and
equipment................................. -- -- 1,900
Purchases of trademark..................... -- -- (169,291)
Purchase of wholesale business............. -- (9,100) --
Investment in joint venture................ -- (22,705) --
Other...................................... (39,739) -- (36,380)
--------- --------- -----------
Net cash used for investing activities..... (198,862) (43,374) (458,070)
FINANCING ACTIVITIES
Proceeds from issuance of common stock..... 1,000 -- 8,055,591
Payment of common stock issuance costs..... -- -- (1,212,006)
Redemption of preferred stock.............. -- -- (18,602)
Payment of preferred dividends............. -- (35,430) (5,944)
Proceeds from short-term borrowings........ -- -- 10,000
Repayment of short-term borrowings......... -- (1,517) (10,000)
Proceeds from issuance of notes payable.... -- -- 500,000
Repayments on long-term obligations........ -- (3,459) (6,930)
Proceeds from issuance of bonds............ -- 360,000 10,000
Payment of bond issuance costs............. -- (18,988) (1,600)
Proceeds from issuance of preferred stock.. 476,000 -- --
--------- --------- -----------
Net cash provided by financing activities.. 477,000 300,606 7,320,509
--------- --------- -----------
Net increase in cash and cash equivalents.. 248,281 162,096 7,268,632
--------- --------- -----------
Cash and cash equivalents at beginning of
year...................................... -- 248,281 410,377
--------- --------- -----------
Cash and cash equivalents at end of year... $ 248,281 $ 410,377 $ 7,679,009
========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
BAB Holdings, Inc. (the Company) is an Illinois Corporation incorporated on
November 25, 1992. The Company has a wholly owned subsidiary, BAB Systems,
Inc. (Systems), an Illinois Corporation incorporated on December 2, 1992,
which was established to franchise "Big Apple Bagels" stores. Systems
Investments, Inc. (Investments) is a wholly owned subsidiary of Systems and
was established to operate a Company-owned store that serves as the franchisee
training facility. Investments owns a 50% interest in a joint venture which
operates a franchise satellite store.
BAB Operations, Inc. (Operations), an Illinois Corporation, was incorporated
on August 30, 1995. Operations, a wholly owned subsidiary of the Company, was
established to own and operate Company-owned Big Apple Bagels stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation. The joint
venture is accounted for using the equity method.
Cash Equivalents
The Company classifies as cash equivalents all highly-liquid investments,
primarily composed of money market mutual funds, certificates of deposit, and
government agency notes, which are convertible to a known amount of cash and
carry an insignificant risk of change in value.
Inventories
Inventories are valued at the lower of cost, determined on a first in, first
out (FIFO) basis, or market.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives for the purposes
of depreciation are: leasehold improvements 10 years or term of lease if less;
machinery, equipment and fixtures five to seven years.
Organization Costs
Organization costs are primarily incorporation fees and legal fees
associated with the initial Uniform Franchise Offering Circular. These costs
will be amortized over a five-year period.
Patents, Trademarks, and Copyrights
Patents, trademarks, and copyrights will be amortized over 17 years.
Stock Options
The Company uses the intrinsic method to account for stock options granted
for employees and directors. No compensation expense is recognized for stock
options because the exercise price of the option is at least equal to the
market price of the underlying stock on the grant date.
F-7
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Franchise Fee Revenues and Costs
The Company recognizes franchise fee revenue upon the opening of a franchise
store. Direct costs associated with the franchise sales are deferred until the
franchise fee revenue is recognized. These costs include site approval,
construction approval, commissions, purchase of cash registers, and costs
incurred during training.
Area development agreement revenue is recognized on a pro rata basis as each
store covered by the agreement opens. At the termination of an agreement, any
remaining deferred area development agreement revenue will be recognized as
such amounts are not refundable.
Stores which have been opened and unopened stores for which an agreement has
been sold are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
------------
1994 1995
----- -----
<S> <C> <C>
Stores opened:
Company-owned............................................ 1 2
Franchisee-owned......................................... 21 59
----- -----
22 61
Unopened stores for which an agreement has been sold:
Franchise agreement...................................... 22 32
Area development agreement............................... 19 50
----- -----
41 82
----- -----
63 143
===== =====
</TABLE>
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for
the years ended November 30, 1993, 1994, and 1995, was $13,010, $40,672 and
$55,245, respectively.
Net Loss Attributable to Common Share
All share information presented has been adjusted for the two-for-one common
stock split which occurred on April 1, 1994. All common stock and warrants
issued on or before October 11, 1994 (i.e., within one year prior to the
initial filing of the public offering (Note 8)), have been treated as
outstanding shares for all periods presented. Prior to the issuance of such
stock and warrants, the number of such shares included in each calculation of
net loss attributable to common share has been reduced by the number of shares
that could have been purchased at the public offering price using the proceeds
from the issuance. Subsequent to the issuance of such stock, only the actual
number of such shares issued has been included in the calculations. The
primary calculation of net loss attributable to common share is based on the
net loss attributable to common shareholders and the weighted-average number
of common shares outstanding during the period. The primary calculation of net
loss attributable to common share does not include the convertible bonds and
the convertible preferred stock because they are not common stock equivalents.
The fully diluted calculation of net loss attributable to common share assumes
conversion at the beginning of the period of any convertible security
converted during the period. Accordingly, the net loss attributable to common
shareholders was adjusted for preferred dividends accumulated and interest
expense on securities converted during the period. Primary net loss
attributable to common share for the year ended November 30, 1995, assuming
conversion of all convertible securities which have been converted as if
converted on the first day of the fiscal year or the date of issuance of the
convertible security, if later, would have been $0.17.
F-8
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.
3. RESTRICTED CASH
The Company is required by certain states to maintain franchise fees in
escrow accounts until the related franchise stores commence operations. At
November 30, 1994 and November 30, 1995, these accounts totaled $36,000 and
$314,000, respectively.
The Company established the National Marketing Fund (Fund) during 1994.
Franchisees are required to contribute to the Fund based on their net sales
and in turn are reimbursed for a portion of media advertising placed in their
local markets up to a maximum equal to the amount they contributed. At
November 30, 1994 and November 30, 1995, the Fund's cash balance was $23,261
and $32,441 respectively.
At November 30, 1994, the Company restricted $62,062 for the total
redemption price of preferred stock for which there were outstanding notices
of redemption. In 1995, $12,600 was paid to preferred shareholders upon
redemption of 1.8 shares. Upon conversion or redemption of all preferred
shares, restrictions on the use of these funds were removed.
4. INCOME TAXES
There were no provisions for income taxes during the three years in the
period ended November 30, 1995, due to net operating losses being incurred
during those periods. The reconciliation of the income tax benefit computed at
the federal statutory rate of 34% and the provision for income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax benefit computed at federal
statutory rate........................ $(105,864) $(118,391) $(148,158)
State income tax benefit, net of
federal tax benefit................... (16,029) (17,926) (20,995)
Permanent differences on debt financing
obtained.............................. -- -- (31,701)
Other adjustments...................... 1,146 206 (181)
Valuation allowance against net
deferred tax asset..................... 120,747 136,111 201,035
--------- --------- ---------
Provision for income taxes............. $ -- $ -- $ --
========= ========= =========
</TABLE>
There was no current income tax expense for the three years in the period
ended November 30, 1995 due to the Company incurring net operating losses for
tax purposes during those years. No deferred taxes have been reflected in the
consolidated statements of operations because the Company has fully reserved
the tax benefit of net deductible temporary differences and operating loss
carryforwards due to the fact that the likelihood of realization of the tax
benefits cannot be established. The Company did not pay any income taxes
during the three years in the period ended November 30, 1995.
F-9
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Franchise fee revenue............................... $ 185,170 $ 313,400
Net operating loss carryforwards.................... 51,770 117,211
Franchise costs..................................... 11,250 27,476
National Marketing Fund net contributions........... 9,106 12,976
Promotional expenses................................ -- 10,020
Other............................................... 15,829 (843)
Depreciation........................................ (16,267) (22,347)
--------- ---------
256,858 457,893
Valuation allowance................................. (256,858) (457,893)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At November 30, 1995, the Company has cumulative net operating loss
carryforwards expiring in 2008, 2009, and 2010 for U.S. federal income tax
purposes of approximately $293,000 and for U.S. federal alternative minimum
tax purposes of approximately $236,400. The net operating loss carryforwards
are subject to limitation in any given year as a result of the Company's
initial public offering (Note 8) and may be further limited if certain other
events occur.
5. LONG-TERM OBLIGATIONS
Long-term debt at November 30, 1994 and 1995, consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
-----------------
1994 1995
-------- --------
<S> <C> <C>
Unsecured note payable to bank, principal payments due
monthly beginning April 1994, in accordance with a paydown
schedule, at an interest rate of 9.5%....................... $ 7,750 $ 5,389
Secured note payable to bank, principal payments due monthly
beginning June 1994, in accordance with a paydown schedule,
at an interest rate of 8.75%................................ 13,241 9,672
8% unsecured convertible bonds, due July 1, 2002............. 360,000 220,160
8% redeemed unsecured bonds, due July 1, 2000................ -- 9,000
-------- --------
380,991 244,221
Less: Current portion........................................ 6,548 7,927
-------- --------
Long-term debt, net of current portion....................... $374,443 $236,294
======== ========
</TABLE>
In fiscal 1994 and 1995, the Company issued $10,000 and $360,000,
respectively, of unsecured convertible bonds (face value $10,000 per bond),
which bear interest at 8% per annum, payable on a semiannual basis. The bonds
mature on July 1, 2002. The bondholder may, at any time, elect to convert the
bond, or a portion thereof, to shares of common stock at the ratio of one
share for every $4 of bond principal. The Company has the option of calling
all of the bonds for redemption at any time, subject to the conversion rights
of the bondholders during the first 30 days subsequent to the redemption
notice. The Company has the obligation, subject to the conversion rights of
the bondholders and the optional redemption provisions of the Company, to
redeem one-third of each bond at par on July 1, 1995, 1996, and 1997. At the
option of the Company, however, the redemption price for the redeemed portion
of each bond, not converted by the bondholder, is payable in 10 consecutive
semiannual installments of $333.34 each beginning six months subsequent to the
redemption date. The unpaid portion of each redeemed bond shall bear interest
at a rate of 8% per annum.
F-10
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1995, the Company issued 24,960 shares of common stock to
bondholders electing to convert one-third of each bond and 10,000 shares of
common stock to bondholders electing 100% conversion. Two bondholders elected
to redeem one-third of their bonds, which totaled $10,000 (Note 10).
On August 15, 1995, the Company issued a convertible promissory note for
$500,000, due December 1, 1996, that bears an interest rate of 11% per annum,
payable monthly. The note was converted into 169,492 shares of common stock on
August 31, 1995, in connection with a subscription agreement (Note 8).
The secured note payable to bank is collateralized by a delivery van.
As of November 30, 1995, annual maturities on long-term debt are due as
follows: $7,927 in 1996; $30,391 in 1997; $47,791 in 1998; $46,032 in 1999;
$46,032 in 2000; and $66,048 thereafter. These maturities reflect the
Company's option to pay the bond redemption amounts in 10 consecutive
semiannual installments.
Interest paid for the years ended November 30, 1994 and 1995, was $754 and
$28,954, respectively. No interest was paid during the year ended November 30,
1993.
6. LEASE COMMITMENTS
The Company rents its office and Company-owned store facilities under leases
which require it to pay real estate taxes, insurance, and general repairs and
maintenance on these leased facilities. Rent expense for the years ended
November 30, 1993, 1994, and 1995, was $18,452, $38,986, and $53,115,
respectively. At November 30, 1995, future minimum annual rental commitments
under the leases are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 91,518
1997............................................................. 91,518
1998............................................................. 91,518
1999............................................................. 91,518
2000............................................................. 64,822
Thereafter....................................................... 221,493
--------
$652,387
========
</TABLE>
7. NONCASH TRANSACTIONS
In 1993, the Company sold a franchise to a shareholder in return for 90,000
shares of the Company's common stock. This transaction resulted in $17,500 of
Franchise fees.
In March 1994, the Company purchased from a shareholder a wholesale business
for $9,100 in cash and a note payable for $9,100. In May 1994, management
discontinued and wrote off the wholesale business, and the shareholder forgave
the remaining balance on the note of $7,583. These transactions resulted in a
loss of $6,572.
In connection with the purchase of the wholesale business, the Company also
purchased a delivery van from the shareholder for $1,500 in cash and the
assumption of a note payable of $10,052. In August 1994, the Company sold the
delivery van to a third party in exchange for a note receivable for $8,815.
These transactions resulted in a loss of $1,582.
In August 1994, the Company purchased a delivery van from its joint venture
by assuming a note payable of $14,398 to a bank and reducing the receivable
from the joint venture by $1,500.
During 1994 and 1995, the Company converted $84,000 and $379,400,
respectively, of preferred stock to common stock (Note 8).
F-11
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1995, the Company converted $132,849 of bonds, net of bond issue
costs, to shares of common stock (Note 5).
In connection with the subscription agreement entered into on August 31,
1995, the $500,000 August 15, 1995 promissory note was converted to common
stock with put option and the Company accepted a $200,000 note receivable
(Notes 5 and 8).
In September 1995, the Company sold a franchise agreement for $9,000 in cash
and a note receivable for $9,000, which is due June 23, 1997.
8. SHAREHOLDERS' EQUITY (DEFICIT)
On March 23, 1994, the Articles of Incorporation of the Company were amended
to increase the authorized common shares from 1,500,000 shares to 5,000,000
shares. On April 1, 1994, the Board of Directors (the Board) approved a two-
for-one stock split; thereby increasing the number of shares outstanding from
660,000 to 1,320,000. Further, the conversion rate for the Company's 5%
cumulative convertible nonvoting preferred stock was increased from 5,000
common shares for each preferred share to 10,000 common shares for each
preferred share.
In October 1994, the Company declared and paid a 5% dividend on the
preferred stock for the period of issuance through November 1, 1994, totaling
$35,430. During fiscal 1995, the Company declared and paid a 5% dividend on
the preferred stock for the period from November 2, 1994, through the date of
conversion or redemption of each preferred share, totaling $5,944.
During fiscal years 1994 and 1995, the Company notified preferred
shareholders of its intention to redeem the outstanding shares of preferred
stock. Subject to the shareholder's conversion right, the Company had the
right to redeem shares of preferred stock for cash at a price equal to the
original amount invested by the shareholder, plus an annualized noncompounded
return of 25% and all accrued but unpaid dividends due. Preferred shareholders
had the right to convert their shares to shares of the Company's common stock
at any time. As of November 30, 1994, 12 preferred shares had been converted
to 120,000 shares of common stock. As of November 30, 1995, 54.2 preferred
shares had been converted to 542,000 shares of common stock, and the remaining
1.8 shares had been redeemed for cash.
On July 12, 1995, the Articles of Incorporation were amended to authorize
4,000,000 shares of preferred stock, $.01 par value. In addition, the
authorized but unissued $7,000 par value, 5% cumulative dividend, series of
preferred stock was eliminated. No shares of preferred stock are outstanding
at November 30, 1995.
In July 1995, employees of the Company subscribed for 9,725 shares of common
stock at a price of $4.00 per share. The Company contributed $1.00 per share
which was recorded as compensation expense. These shares were paid in full and
issued on September 30, 1995.
On August 31, 1995, the Company entered into a stock subscription agreement
with an "Investor" and sold 338,983 shares of common stock for $1,000,000,
which was paid, in part, by conversion of the $500,000 August 15, 1995
promissory note (Note 5). The net proceeds to the Company were $941,380.
On September 20, 1995, the Articles of Incorporation of the Company were
amended to increase the authorized common shares from 5,000,000 to 20,000,000
shares.
On November 27, 1995, the Company completed a public offering of 1,700,000
shares of common stock for a public offering price of $4.00 per share or an
aggregate of $6,800,000. Costs associated with this offering
F-12
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
totaled $1,055,886, which included an underwriting discount of 9% of the
offering amount plus an unaccountable expense allowance of 3% along with other
expenses. The Company also sold to the underwriter, for nominal consideration,
warrants to purchase 170,000 shares of the Company's common stock. The
warrants are exercisable between the first and fifth anniversary of the
effective date of the initial public offering at $4.80 per share.
On November 30, 1995, effective with the closing of the offering and
pursuant to the stock subscription agreement mentioned above, the Company sold
an additional 269,024 shares of common stock to the Investor at $2.70 per
share. Costs associated with this transaction totaled $97,500 payable to an
investment banking firm for assistance in obtaining financing. The net
proceeds to the Company were $628,866. In addition, the investor was granted a
warrant to purchase up to 96,027 shares of common stock exercisable from the
date of issuance through September 1, 1996, at a price of $1.00 per share.
9. STOCK OPTION PLANS
On September 20, 1995, the Company adopted and received shareholder approval
of the 1995 Long-Term Incentive, and Stock Option Plan (the Incentive Plan)
which permits the issuance of options, stock appreciation rights, and
restricted stock awards to employees and nonemployee officers, directors, and
agents of the Company. The Incentive Plan reserves 380,000 shares of common
stock for grant and provides that the term of each award be determined by the
Board or a committee of the Board. Under the terms of the Incentive Plan,
options granted may be either nonqualified or incentive stock options.
Incentive stock options must be exercisable at not less than the fair market
value of a share on the date of grant (110% of fair market value if the
optionee is a 10% or greater shareholder) and may be granted only to
employees. The Incentive Plan will terminate on September 19, 2005, unless
terminated sooner by action of the Board.
On September 20, 1995, incentive stock options were granted for an aggregate
of 18,000 shares to 18 of the Company's employees, which are exercisable at
$4.00 per share. Of the options issued to each employee, 500 options are
exercisable on December 1, 1996, and the remaining 500 options are exercisable
on December 1, 1997. Options are exercisable for a period of 10 years from the
respective exercise date. Options issued terminate immediately following an
optionee's termination of employment or, in some circumstances, one to three
months after termination or up to 12 months in the case of the death of the
employee.
Additionally, on September 20, 1995, the Company adopted and received
shareholder approval of the 1995 Outside Directors Stock Option Plan (the
Directors Plan), which permits the issuance of nonqualified options to
nonemployee members of the Board. The Directors Plan reserves 20,000 shares of
common stock for grant. The Directors Plan provides for a grant of options to
purchase 2,000 shares upon initial election to the Board and for annual grants
thereafter, upon reelection, of options to purchase 1,000 shares. Options
granted are immediately exercisable for a period of 10 years from the date of
grant at an exercise price per share equal to the fair market value of a share
on the date of grant. Upon termination of the directorship, the options remain
exercisable for periods of varying lengths based on the nature of the option
and the reason for termination. The Directors Plan will terminate on September
19, 2005, unless terminated sooner by action of the Board.
On September 20, 1995, 2,000 options were granted to one nonemployee
director pursuant to his election to the Board which are exercisable at $4.00
per share.
10. SUBSEQUENT EVENTS
Convertible Bonds
On December 29, 1995, the Company notified bondholders of its intent to
redeem the outstanding principal balance of the 8% convertible bonds. For 30
days from the date of the notice, bondholders could elect to convert
F-13
<PAGE>
BAB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
all or a portion of the principal balance outstanding to common stock at an
effective price of $4.00 per common share. The Company will redeem bonds not
converted and pay the principal balance and accrued interest thereon paid
within 60 days of the date of the notice. As of January 28, 1996, the Company
had determined that 50,040 shares of common stock would be issued to
bondholders electing to covert and that approximately $20,000 representing
principal and accrued interest would be paid to three bondholders.
Common Stock
On January 2, 1996, the Company sold on the same term as the public offering
(Note 8) an additional 255,000 shares on the same terms upon exercise of the
underwriter's overallotment option, for an aggregate of $1,020,000. The net
proceeds to the Company was approximately $898,000.
Acquisition
On February 2, 1996, the Company acquired certain assets, including
trademark and franchise rights of Brewster's Coffee Company, Inc. (Brewster's)
and formed the Brewster's Coffee division of the Company. In return, the
Company: (1) canceled a $162,000 note receivable from Brewster's; (2) paid
cash of approximately $63,000; and (3) granted the shareholders of Brewster's
the right to receive shares of the Company's common stock based on a formula
dependent in part on the operating profit of the Brewster's Coffee division
during fiscal 1999. In addition, upon closing of the purchase agreement, the
Company loaned the shareholders of Brewster's $100,000 at a rate of 10%.
Payments are due monthly through March 1997 or earlier upon a specified event.
Franchise Line of Credit
On February 12, 1996, the Company agreed to provide a $550,000 revolving
line-of-credit loan for a franchisee of Systems to be used solely for the
leasehold improvements and opening expenses of two Big Apple Bagels stores and
to satisfy certain indebtedness of the franchisee. The loan is secured by
substantially all of the assets of the franchisee, including four existing Big
Apple Bagels stores. Amounts borrowed will bear interest at a rate equal to
the prime rate plus 1% adjusted monthly. Interest is payable monthly
commencing on March 1, 1996, and principal is payable monthly commencing on
August 1, 1996. The outstanding principal balance and accrued interest thereon
is payable in full on January 31, 1997.
F-14
<PAGE>
BAB HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents, including restricted cash of $174,000. $ 4,730,829
Other current assets............................................. 943,671
-----------
Total current assets........................................... 5,674,500
Property, plant, and equipment, net of accumulated depreciation of
$197,662.......................................................... 1,994,424
Goodwill, net of accumulated amortization of $14,214............... 1,889,361
Other assets and intangible assets, net of accumulated amortization
of $112,747....................................................... 1,612,113
-----------
$11,170,398
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Deferred franchise fee revenue................................... $ 703,400
Current portion of long-term debt................................ 7,099
Other current liabilities........................................ 1,049,144
-----------
Total current liabilities...................................... 1,759,643
Long-term debt, less current portion............................... 2,824
Shareholders' equity............................................... 9,407,931
-----------
$11,170,398
===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-15
<PAGE>
BAB HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores...................... $1,965,939 $ 340,439
Royalty fees from franchised stores.................... 1,008,398 522,868
Franchise and area development fees.................... 808,331 554,000
Licensing fees and other............................... 124,765 2,469
---------- ----------
3,907,433 1,419,776
OPERATING COSTS AND EXPENSES
Company-owned stores:
Food, beverage, and paper costs...................... 686,274 115,133
Payroll-related expenses............................. 670,054 111,237
Occupancy and other operating expenses............... 427,181 79,049
Depreciation and amortization........................ 108,894 19,389
---------- ----------
1,892,403 324,808
Selling, general, and administrative expenses:
Payroll-related expenses............................. 932,975 612,239
Professional service fees............................ 293,046 255,807
Depreciation and amortization........................ 98,737 15,763
Other................................................ 655,417 406,563
---------- ----------
1,980,175 1,290,372
---------- ----------
3,872,578 1,615,180
---------- ----------
Income (loss) before interest.......................... 34,855 (195,404)
Interest expense....................................... 4,346 24,862
Interest income........................................ 261,578 4,646
---------- ----------
Net income (loss)...................................... 292,087 (215,620)
Preferred stock dividends accumulated.................. -- (4,000)
---------- ----------
Net income (loss) attributable to common shareholders.. $ 292,087 $ (219,620)
========== ==========
Net income (loss) attributable to common and common
equivalent share:
Primary.............................................. $ 0.04 $ (0.07)
========== ==========
Fully diluted........................................ $ 0.04 $ (0.06)
========== ==========
Average number of common and common equivalent shares
used in calculation:
Primary.............................................. 7,250,672 3,209,345
========== ==========
Fully diluted........................................ 7,337,226 3,445,797
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-16
<PAGE>
BAB HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
AUGUST
AUGUST 31, 31,
1996 1995
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by
operating activities... $ 88,137 $ 78,369
INVESTING ACTIVITIES
Acquisition of assets... (2,103,008) --
Purchases of property,
plant and equipment..... (955,181) (154,377)
Loans to franchisees.... (578,902) --
Purchases of short-term
investments............. -- (300,000)
Other................... (247,439) 1,900
----------- ---------
Net cash used for
investing activities.... (3,884,530) (452,477)
FINANCING ACTIVITIES
Proceeds from issuance
of common stock........ 1,020,000 19,287
Proceeds from issuance
of common stock with
put option............. -- 300,000
Proceeds from issuance
of notes payable....... -- 500,000
Other................... (171,787) (80,062)
----------- ---------
Net cash provided by
financing activities.... 848,213 739,225
----------- ---------
Net increase (decrease)
in cash and cash
equivalents............. (2,948,180) 365,117
Cash and cash
equivalents at beginning
of period............... 7,679,009 410,377
----------- ---------
Cash and cash
equivalents at end of
period.................. $ 4,730,829 $ 775,494
=========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
F-17
<PAGE>
BAB HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
represent the financial activity of BAB Holdings, Inc. (the Company or
Holdings) and its wholly-owned subsidiaries BAB Systems, Inc. (Systems), BAB
Operations, Inc. (Operations) and Brewster's Franchise Corporation (BFC); and
the wholly-owned subsidiary of Systems, Systems Investments, Inc.
(Investments). Systems franchises the "Big Apple Bagels" concept specialty
bagel store and, through Investments, its wholly-owned subsidiary, operates a
Big Apple Bagels store which was originally utilized as a franchise training
facility. Operations was formed to operate Company-owned Big Apple Bagels
stores including one currently utilized by Systems as the franchise training
facility. BFC was established on February 15, 1996 to franchise "Brewster's
Coffee" concept coffee stores.
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of the results
for the interim periods. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures included herein are adequate to make the
information presented not misleading.
2. STORES OPEN AND UNDER DEVELOPMENT
Stores which have been opened and unopened stores for which an agreement has
been sold at August 31, 1996, are as follows:
<TABLE>
<S> <C>
Stores opened:
Company-owned....................................................... 10
Franchisee-owned.................................................... 91
Licensed............................................................ 34
---
135
Unopened franchised stores for which an agreement has been sold:
Franchise agreement................................................. 33
Area development agreement.......................................... 39
---
72
---
Total............................................................. 207
===
</TABLE>
3. NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHARE
All common stock and warrants issued on or before October 11, 1994 (i.e.,
within one year prior to the initial filing of the public offering), have been
treated as outstanding shares for all periods presented. Prior to the issuance
of such stock and warrants, the number of such shares included in each
calculation of net income (loss) attributable to common share has been reduced
by the number of shares that could have been purchased at the public offering
price using the proceeds from the issuance. Subsequent to the issuance of such
stock, only the actual number of such shares issued has been included in the
calculations. The primary calculation of net income (loss) attributable to
common and common equivalent share is based on the net income (loss)
attributable to common shareholders and the weighted-average number of common
and common equivalent shares outstanding during the period. The primary
calculation of net income (loss) attributable to common and common equivalent
share does not include the convertible bonds and the convertible preferred
stock because they are not common stock equivalents. The fully diluted
calculation of net income (loss) attributable to common and common equivalent
share assumes conversion at the beginning of the period of any convertible
security converted during the period. Accordingly, the net income (loss)
attributable to common shareholders was adjusted for preferred
F-18
<PAGE>
BAB HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividends accumulated and interest expense on securities converted during the
period. No income taxes were provided in 1996 as the Company anticipates that
any income taxes payable will be offered by utilization of net operating less
carryforwards.
4. EXERCISE OF UNDERWRITER'S OVER-ALLOTMENT
On January 2, 1996, the Company sold an additional 255,000 shares of common
stock for a public offering price of $4.00 per share upon exercise in full of
the underwriter's over-allotment option, for an aggregate of $1,020,000. Costs
associated with the exercise of the over-allotment option totaled
approximately $131,000, which included an underwriting discount of 9% of the
offering amount, plus a non-accountable expense allowance of 3%, and other
expenses. The net proceeds to the Company were approximately $889,000.
5. ACQUISITIONS
Brewster's Coffee Company, Inc.
On February 2, 1996, the Company acquired certain assets, including
trademark and franchise rights of Brewster's Coffee Company, Inc. (Brewster's)
and formed the Brewster's Coffee division of the Company and BFC. In return,
the Company: (1) canceled a $162,000 note receivable from Brewster's, (2) paid
cash of approximately $63,000, and (3) granted the shareholders of Brewster's
the right to receive shares of the Company's common stock based on a formula
dependent in part on the operating profit of the Brewster's Coffee division
during fiscal 1999. In addition, upon closing of the purchase agreement, the
Company loaned the shareholders of Brewster's $100,000 at a rate of 10%.
Payments are due monthly through March 1997 or earlier upon a specified event.
Bagels Unlimited, Inc.
On May 1, 1996, Systems exercised its option to purchase substantially all
of the assets of Bagels Unlimited, Inc. (BUI), a Wisconsin corporation. This
option was acquired in January 1996 in connection with a revolving line of
credit extended to BUI by Systems. BUI, a franchisee of Systems, was engaged
in the business of owning and operating five Big Apple Bagels stores and had
the development rights for one additional store in the Milwaukee, Wisconsin
area.
The assets acquired by Systems included all inventory, furniture, equipment,
signage and improvements of the five Big Apple Bagels stores in operation.
Additionally, Systems acquired all franchise and area development rights and
other contractual rights owned by BUI, including BUI's interest in the leases
for the five existing stores and the lease for the sixth store which is
currently under construction.
The purchase of assets was completed in exchange for the following
consideration: (a) the purchase price of $772,000, reduced by the outstanding
principal and interest owed on the January 31, 1996 revolving line of credit
issued by Systems to BUI, and increased by BUI's inventory on hand at cost,
(b) 50,000 shares of Holdings' common stock, no par value, and (c) an option
to purchase 100,000 shares of Holdings' common stock exercisable for 5 years
commencing on May 1, 1996 at a $4.00 per share price. The purchase price was
preliminarily allocated to assets of the Company based on the estimated fair
value as of the date of the acquisition and was based on preliminary estimates
which may be revised at a later date. The excess of consideration paid over
the estimated fair value of net assets acquired in the amount of approximately
$727,000 has been recorded as goodwill and is being amortized on a straight-
line basis over 40 years. Additionally, the two principals of BUI entered into
a 6 year non-competition agreement with Holdings in exchange for total
consideration of $100,000.
Strathmore Bagels Franchise Corp.
On May 21, 1996, the Company completed the acquisition of the assets of
Strathmore Bagels Franchise Corp. (Strathmore), a New York corporation.
Strathmore is engaged in the business of distributing bagels and
F-19
<PAGE>
BAB HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
related products, at wholesale, and the collection of royalties on the related
retail sale of those products pursuant to a 10 year license agreement, dated
November 30, 1995 with Host Marriott Services Corporation (Host Marriott). At
the time of the acquisition, Strathmore had licensing contracts with 19 bagel-
deli units and 15 bagel cart / display units in several major airports and
travel plazas in the United States, owned and operated by Host Marriott.
The assets acquired by Holdings include the licensing contracts with Host
Marriott and the individual contracts for each facility, supply contracts,
equipment leases and other contractual arrangements with vendors.
Additionally, Holdings acquired the machinery, equipment and improvements
owned by Strathmore and located in the Host Marriott facilities.
The purchase of the assets was completed in exchange for the following
consideration: (a) $850,000 in cash paid at closing; (b) an option to purchase
625,000 shares of Holdings' common stock, no par value, exercisable during a
period commencing on May 21, 1997 and ending on May 21, 1999 (312,500 shares
exercisable from May 21, 1997 and all shares exercisable from May 21, 1998) at
an exercise price of $6.17 per share; and (c) additional consideration based
on the number of and gross sales volumes of additional units opening.
The purchase price was preliminarily allocated to assets of the Company
based on the estimated fair value as of the date of the acquisition. The
preliminary estimate has been adjusted during the three months ended August
31, 1996 due to a revision of the valuation of the options granted to
Strathmore. The excess of consideration paid over the estimated fair value of
net assets acquired in the amount of approximately $1,173,000 has been
recorded as goodwill and is being amortized on a straight-line basis over 40
years.
6. STOCK SPLIT
On March 28, 1996, the Board of Directors declared a 50% stock split
effected in the form of a dividend payable to shareholders of record on April
12, 1996 and distributed on April 26, 1996. Fractional shares were settled in
cash based on the average of the closing bid and asked prices as reported
during the two business days immediately preceding the record date. All share
information has been adjusted to reflect the April 1996 stock split.
7. SUBSEQUENT EVENTS
In September 1996, the Company signed a definitive purchase agreement to
acquire the certain assets of The American Bagel Company and Almike
Enterprises, Inc. (collectively known as "Chesapeake Bagel Bakery" or
"Chesapeake"). The purchase of these assets is anticipated to be completed for
a total value of approximately $29,000,000, including $22,000,000 in cash,
900,000 shares of newly issued common stock preliminarily valued at $7.00 per
share, and additional consideration based on future earnings of new Chesapeake
units already in development. At August 31, 1996, Chesapeake operated 9
company-owned and 139 franchisee-owned Chesapeake Bagel Bakery concept
specialty bagel stores.
In October 1996, the Company acquired the assets and assumed all contract
rights of Danville Bagel Company, Inc., a franchisee of Systems, which owned
and operated two Big Apple Bagels stores in Northern California for
approximately $599,000 in cash. Additionally, Operations assumed the lease
rights for additional stores currently in development.
F-20
<PAGE>
BAB HOLDINGS, INC.
PRO FORMA BALANCE SHEET
AUGUST 31, 1996
(UNAUDITED)
The following unaudited pro forma balance sheet reflects the completion of
the Offering at the Assumed Share Price and the acquisition by the Company of
Chesapeake as if such acquisition had occurred on August 31, 1996. Such pro
forma information is based upon the unaudited historical consolidated balance
sheet of the Company as of August 31, 1996, and the unaudited historical
balance sheet of Chesapeake as of August 31, 1996, giving effect to the
acquisitions and the pro forma adjustments set forth in the accompanying notes
to these pro forma financial statements. Unaudited pro forma adjustments are
based upon historical information, preliminary estimates and certain
assumptions that the Company deems appropriate. The unaudited pro forma
financial statements are not necessarily indicative of the financial position
or financial position that might have been obtained if the foregoing
transaction had been consummated as of the indicated date. This pro forma
balance sheet should be read in conjunction with the pro forma statement of
operations of the Company and the historical financial statements and notes
thereto of the Company and Chesapeake included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
CHESAPEAKE PRO FORMA AS
COMPANY ACQUISITION ADJUSTMENTS ADJUSTED(7)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets............. $ 5,674,500 $2,417,859 $ 4,680,191 (1) $12,772,550
Equipment and leasehold
improvements, net......... 1,994,424 647,480 300,000 (2) 2,941,904
Other noncurrent assets,
net....................... 3,501,474 101,773 27,301,686 (3) 30,904,933
----------- ---------- ----------- -----------
Total assets............. $11,170,398 $3,167,112 $32,281,877 $46,619,387
=========== ========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities........ $ 1,759,643 $4,917,927 $(2,368,938)(4) $ 4,308,632
Long-term debt............. 2,824 159,870 (159,870)(5) 2,824
Shareholders' equity
(deficit)................. 9,407,931 (1,910,685) 34,810,685 (6) 42,307,931
----------- ---------- ----------- -----------
Total liabilities and
shareholders' equity.... $11,170,398 $3,167,112 $32,281,877 $46,619,387
=========== ========== =========== ===========
</TABLE>
- --------
(1) Application of excess proceeds of the Offering over cash consideration
required to be paid pursuant to the Asset Purchase Agreement, net of
elimination of deferred franchise costs of $1,356,731 in Chesapeake
balance sheet.
(2) Increase in carrying value of equipment and leasehold improvements to
preliminary estimate at fair value.
(3) Preliminary allocation of purchase price to franchise contract rights,
goodwill and other intangible assets.
(4) Adjustment to eliminate deferred franchise fee revenue of Chesapeake,
accrual for costs of completing Chesapeake franchise contracts and
elimination of current portion of debt not assumed.
(5) Elimination of long-term debt of Chesapeake not assumed in Asset Purchase
Agreement.
(6) Reflects issuance of 3,800,000 Shares in this Offering at the Assumed
Share Price, and the issuance of 900,000 shares of Common Stock to owners
of Chesapeake, preliminarily valued at $7.00 per share, pursuant to the
Asset Purchase Agreement and the elimination of the shareholders' deficit
of Chesapeake. The final per share value of the shares issued in the
Chesapeake Acquisition will be determined on the closing of such
transaction and may be greater or less than such amount.
(7) The unaudited pro forma balance sheet is presented as if the Chesapeake
Acquisition occurred on August 31, 1996. See the pro forma condensed
combined financial information appearing elsewhere in this Prospectus.
F-21
<PAGE>
BAB HOLDINGS, INC.
PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 1996
(UNAUDITED)
The following unaudited pro forma statement of operations reflects the
acquisition by the Company of BUI, Strathmore, and Chesapeake as if they had
occurred on December 1, 1995. Such pro forma information is based upon the
historical results of operations of the Company for the nine months ended
August 31, 1996, the historical results of operations of BUI for the five
months ended April 30, 1996, the historical results of operations of
Strathmore for the six months ended May 21, 1996 and Chesapeake for the nine
month period ended August 31, 1996, giving effect to the acquisitions and the
pro forma adjustments set forth in the accompanying notes to pro forma
financial statements. Unaudited pro forma adjustments are based upon
historical information, preliminary estimates and certain assumptions that the
Company deems appropriate. The unaudited pro forma financial statements are
not necessarily indicative of either future results of operations or results
that might have been obtained if the foregoing transaction had been
consummated as of the indicated date. This pro forma statement of operations
should be read in conjunction with the pro forma balance sheet of the Company
and the historical financial statements and notes thereto of the Company, BUI,
Strathmore, and Chesapeake included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
STRATHMORE BUI AND
BAGELS BAGELS STRATHMORE CHESAPEAKE
UNLIMITED FRANCHISE PRO FORMA CHESAPEAKE PRO FORMA PRO FORMA
COMPANY INC. CORPORATION ADJUSTMENTS ACQUISITION ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net sales by Company-
owned stores........... $1,965,939 $1,152,522 $4,031,996 $ 7,150,457
Royalty fees from
franchised stores...... 1,008,398 $(59,524)(1) 1,457,969 2,406,843
Franchise and area
development fees....... 808,331 1,179,867 1,988,198
Licensing fees and other
revenues............... 124,765 $278,268 76,427 479,460
---------- ---------- -------- -------- ---------- -----------
Total revenues....... 3,907,433 1,152,522 278,268 (59,524) 6,746,259 12,024,958
OPERATING COSTS AND
EXPENSES:
Food, beverage and
paper.................. 686,274 417,213 1,309,849 2,413,336
Other store operating
expenses............... 1,097,235 608,981 2,470,152 4,176,368
Depreciation and
amortization........... 207,631 28,920 16,835 68,099 (2) 138,153 $ 830,657 (4) 1,290,295
Selling, general and
administrative......... 1,881,438 198,060 319,209 (59,524)(1) 2,750,011 (598,000)(5) 4,491,194
---------- ---------- -------- -------- ---------- --------- -----------
Total operating costs
and expenses........ 3,872,578 1,253,174 336,044 8,575 6,668,165 232,657 12,371,193
Income (loss) from
operations............. 34,855 (100,652) (57,776) (68,099) 78,094 (232,657) (346,235)
Interest and other
income (expense), net.. 257,232 (20,318) 10,043 33,936 (3) 280,893
---------- ---------- -------- -------- ---------- --------- -----------
Income (loss) before
taxes.................. 292,087 (120,970) (57,776) (68,099) 88,137 (198,721) (65,342)
Provision for income
taxes.................. 12,462 3,192 -- (6) 15,654
---------- ---------- -------- -------- ---------- --------- -----------
Net income (loss)
attributable to common
shareholders........... $ 292,087 $ (120,970) $(70,238) $(68,099) $ 84,945 $(198,721) $ (80,996)
========== ========== ======== ======== ========== ========= ===========
Net (loss)
attributable to
common share, fully
diluted............... $ 0.04 $ (0.01)
========== ===========
Average number of
shares used fully
diluted(7)............ 7,337,226 11,735,395
========== ===========
</TABLE>
- -------
(1) Elimination of franchise royalty revenue of the Company and related
expense recognized by BUI.
(2) Amortization of preliminary estimate of BUI goodwill over 40 years
($7,576), amortization of BUI non-competition agreement over six years
($6,945), amortization of preliminary estimate of Strathmore goodwill over
40 years ($27,616) and Strathmore contract rights over 102 months
($28,818), reduced by elimination of BUI initial franchise fee ($2,856)
amortization.
(3) Elimination of interest expense of Chesapeake as related debt is not
assumed by the Company.
(4) Amortization of preliminary allocation of Chesapeake purchase price to
franchise contract rights (20-year life), other intangibles including
goodwill (40-year life) and additional depreciation on equipment and
leasehold improvements (average life of 6 years).
F-22
<PAGE>
(5) Pro forma adjustments related to the following:
i) Net savings due to elimination of payroll-related costs of Chesapeake
owners and duplicative financial personnel ($295,000).
ii) Elimination of 35% sales commission on franchise sales due to the
Company's plan to discontinue the use of an outside franchise sales
force and bring such efforts in-house ($413,000), net of additional
payroll-related costs of additional in-house franchise sales force
($110,000).
(6) The American Bagel Company and Almike Enterprises Inc., the two entities
which make up Chesapeake, are S-corporations for U.S. federal income tax
purposes. Accordingly, no accrual for federal income taxes has been made in
the historical financial statements. Additional pro forma federal tax
accrual is not necessary due to loss position of pro forma entity.
(7) Represents the issuance of 3,800,000 Shares of the Offering, and 900,000
shares of Common Stock as partial consideration pursuant to the Asset
Purchase Agreement, and reduction in Common Stock equivalents due to loss
position of pro forma combined entity.
F-23
<PAGE>
BAB HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1995
(UNAUDITED)
The following unaudited pro forma statement of operations reflects the
acquisition by the Company of BUI, Strathmore, and Chesapeake as if they had
occurred on December 1, 1994. Such pro forma information is based upon the
historical results of operations of the Company for the year ended November
30, 1995, the historical results of operations of BUI for the fiscal year
ended February 29, 1996, and the historical results of operations of
Strathmore and Chesapeake for the fiscal year ended December 31, 1995, giving
effect to the acquisitions and the pro forma adjustments set forth in the
accompanying notes to pro forma financial statements. The unaudited pro forma
financial statements are not necessarily indicative of either future results
of operations or results that might have been obtained if the foregoing
transaction had been consummated as of the indicated dates. This pro forma
statement of operations should be read in conjunction with the historical
financial statements and notes thereto of the Company, BUI, Strathmore, and
Chesapeake included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
BUI AND
STRATHMORE STRATHMORE CHESAPEAKE
BAGELS BAGELS FRANCHISE PRO FORMA CHESAPEAKE PRO FORMA PRO FORMA
COMPANY UNLIMITED INC. CORPORATION ADJUSTMENTS ACQUISITION ADJUSTMENTS AS ADJUSTED
---------- -------------- ---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net sales by Company-
owned stores........... $ 563,211 $2,776,415 $ -- $ -- $5,330,049 $ -- $ 8,669,675
Royalty fees from
franchised stores....... 767,064 -- -- (136,000)(1) 1,331,014 -- 1,962,078
Franchise and area
development fees........ 700,000 -- -- -- 1,232,923 -- 1,932,923
Licensing fees and other
revenues................ 2,728 -- 515,944 -- 21,829 -- 540,501
---------- ---------- -------- -------- ---------- ---------- -----------
Total revenues....... 2,033,003 2,776,415 515,944 (136,000) 7,915,815 13,105,177
OPERATING COSTS AND
EXPENSES:
Food, beverage, and
paper costs............. 191,415 994,202 -- -- 1,477,476 -- 2,663,093
Other store operating
expenses................ 374,216 1,344,339 -- -- 2,829,250 -- 4,547,805
Depreciation and
amortization............ 77,627 69,410 33,670 140,863(2) 182,267 $1,107,542 (4) 1,611,379
Selling, general and
administrative
expenses............... 1,810,323 447,841 430,286 (136,000)(1) 2,976,355 (678,000)(5) 4,850,805
---------- ---------- -------- -------- ---------- ---------- -----------
Total operating costs
and
expenses............ 2,453,581 2,855,792 463,956 4,863 7,465,348 429,542 13,673,082
---------- ---------- -------- -------- ---------- ---------- -----------
Income (loss) from
operations.............. (420,578) (79,377) 51,988 (140,863) 450,467 (429,542) (567,905)
Interest and other
income (expense), net... (15,182) (79,014) (30,920) 79,123(3) (87,786) 41,488(3) (92,291)
---------- ---------- -------- -------- ---------- ---------- -----------
Income (loss) before
taxes................... (435,760) (158,391) 21,068 (61,740) 362,681 (388,054) (660,196)
Provision for income
taxes................... -- -- 4,707 -- 3,500 -- (6) 8,207
---------- ---------- -------- -------- ---------- ---------- -----------
Net income (loss)....... (435,760) (158,391) 16,361 (61,740) 359,181 (388,054) (668,403)
Preferred stock
dividends accumulated... 4,000 4,000
---------- ---------- -------- -------- ---------- ---------- -----------
Net income (loss)
attributable to common
shareholders........... $ (439,760) $ (158,391) $ 16,361 $(61,740) $ 359,181 $ (388,054) $ (672,403)
========== ========== ======== ======== ========== ========== ===========
Net (loss) attributable
to common share, fully
diluted................ $ (0.12) $ (0.08)
========== ===========
Average number of common
shares used, fully
diluted (7)............ 3,560,256 8,310,256
========== ===========
</TABLE>
- -------
(1) Elimination of franchise royalty revenue of the Company and related
expense recognized by BUI.
(2) Amortization of preliminary estimate of BUI goodwill over 40 years
($18,183), amortization of BUI non-competition agreement over six years
($16,667), amortization of preliminary estimate of Strathmore goodwill
over 40 years ($55,232) and Strathmore contract rights over 102 months
($57,635), reduced by elimination of BUI initial franchise fee ($6,854)
amortization.
F-24
<PAGE>
(3) Elimination of interest expense of BUI and Chesapeake, as related debt is
not assumed by the Company.
(4) Amortization of preliminary allocation of Chesapeake purchase price to
franchise contract rights (20-year life), other intangibles including
goodwill (40-year life) and additional depreciation on equipment and
leasehold improvements (average life of 6 years).
(5) Pro forma adjustments related to the following:
i) Net savings due to elimination of payroll-related costs of Chesapeake
owners and duplicative financial personnel ($394,000).
ii) Elimination of 35% sales commission on franchise sales due to the
Company's plan to discontinue the use of an outside franchise sales
force and bring such efforts in-house, ($431,000), net of additional
payroll-related costs of additional in-house franchise sales force
($147,000).
(6) The American Bagel Company and Almike Enterprises Inc., the two entities
which make up the combined Chesapeake are S-corporations for U.S. federal
income tax purposes. Accordingly, no accrual for federal income taxes has
been made. Additional pro forma federal tax accrual is not necessary due
to loss position of pro forma entity.
(7) Represents the issuance of 3,800,000 Shares in the Offering, and 900,000
shares of Common Stock as partial consideration pursuant to the Asset
Purchase Agreement, and issuance 50,000 shares of Common Stock as partial
consideration in the BUI acquisition for pro forma as adjusted.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
The American Bagel Company
and Almike Enterprises, Inc.
We have audited the accompanying combined balance sheets of The American
Bagel Company and Almike Enterprises, Inc. (Chesapeake Bagel Bakery or
Company) as of December 31, 1995 and 1994, and the related combined statements
of income, changes in stockholders' equity (deficit), and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position at December 31, 1995
and 1994, of Chesapeake Bagel Bakery, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
------------------
Chicago, Illinois
October 7, 1996
F-26
<PAGE>
CHESAPEAKE BAGEL BAKERY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
ASSETS 1994 1995
------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $1,387,908 $ 796,792
Accounts receivable.................................. 115,119 206,185
Inventories.......................................... 74,171 64,177
Notes receivable--Franchise fees..................... 180,209 19,500
Deferred franchise costs............................. 594,125 1,156,356
Prepaid expenses and other current assets............ 131,156 97,811
---------- ----------
Total current assets............................... 2,482,688 2,340,821
Property and equipment:
Furniture and equipment.............................. 800,088 813,797
Autos................................................ 15,743 15,743
Leasehold improvements............................... 969,596 1,015,783
---------- ----------
1,785,427 1,845,323
Accumulated depreciation............................. (1,011,218) (1,098,237)
---------- ----------
Net property and equipment............................. 774,209 747,086
Deposits............................................... 19,261 27,428
Goodwill and organization costs, less accumulated
amortization of $49,012 and $54,044................... 55,416 50,384
---------- ----------
$3,331,574 $3,165,719
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current maturities of long-term debt................. $ 229,324 $ 430,479
Accounts payable..................................... 472,607 450,103
Accrued expenses and other current liabilities....... 244,380 194,032
Deferred franchise fee revenue....................... 1,700,000 3,432,875
---------- ----------
Total current liabilities.......................... 2,646,311 4,507,489
Long-term debt, less current maturities................ 546,003 100,837
Stockholders' equity (deficit):
Common stock:
$1 par value, 2,000 shares authorized, 1,000 shares
issued and outstanding 1,000 1,000
Class A--$.10 par value; 50,000 shares authorized,
20,000 shares issued and outstanding.............. 2,000 2,000
Paid-in capital...................................... 4,000 59,000
Retained earnings (accumulated deficit).............. 157,760 (1,479,107)
Common stock in treasury:
Class A--$.10 par value, 52 shares at cost......... (25,500) (25,500)
---------- ----------
Total shareholders' equity (deficit)............. 139,260 (1,442,607)
---------- ----------
$3,331,574 $3,165,719
========== ==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
CHESAPEAKE BAGEL BAKERY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Sales....................................... $4,861,186 $5,848,907 $5,330,049
Continuing franchise fees................... 453,722 730,365 1,331,014
Initial franchise fees...................... 62,500 350,000 1,232,923
Other revenue............................... 84,802 117,089 21,829
---------- ---------- ----------
5,462,210 7,046,361 7,915,815
OPERATING COSTS AND EXPENSES
Cost of sales............................... 1,298,955 1,564,006 1,477,476
Operating expenses.......................... 3,263,338 4,394,515 5,805,605
Amortization and depreciation............... 152,855 171,452 182,267
---------- ---------- ----------
4,715,148 6,129,973 7,465,348
---------- ---------- ----------
Operating income............................ 747,062 916,388 450,467
Other income (expense)...................... 11,478 43,496 (43,864)
Interest income............................. 14,090 24,700 26,329
Interest expense............................ (41,488) (70,525) (70,251)
---------- ---------- ----------
Income before income taxes.................. 731,142 914,059 362,681
Provision for income taxes.................. 22,635 21,414 3,500
---------- ---------- ----------
Net income.................................. $ 708,507 $ 892,645 $ 359,181
========== ========== ==========
</TABLE>
See accompanying notes.
F-28
<PAGE>
CHESAPEAKE BAGEL BAKERY
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ALMIKE
THE AMERICAN ENTERPRISES,
BAGEL COMPANY INC.
------------- -------------
COMMON STOCK COMMON STOCK RETAINED TOTAL
PAR VALUE $1 PAR VALUE $1 EARNINGS COMMON STOCKHOLDERS'
------------- ------------- PAID-IN (ACCUMULATED STOCK IN EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TREASURY (DEFICIT)
------ ------ ------ ------ ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 1,000 $1,000 20,000 $2,000 $ 4,000 $ 223,136 $(25,500) $ 204,636
Net income.............. -- -- -- -- -- 708,507 -- 708,507
Distributions to
stockholders........... -- -- -- -- -- (678,528) -- (678,528)
----- ------ ------ ------ ------- ----------- -------- -----------
Balance, December 31,
1993................... 1,000 1,000 20,000 2,000 4,000 253,115 (25,500) 234,615
Net income.............. -- -- -- -- -- 892,645 -- 892,645
Distributions to
stockholders........... -- -- -- -- -- (988,000) -- (988,000)
----- ------ ------ ------ ------- ----------- -------- -----------
Balance, December 31,
1994................... 1,000 1,000 20,000 2,000 4,000 157,760 (25,500) 139,260
Net income.............. -- -- -- -- -- 359,181 -- 359,181
Capital contributions... -- -- -- -- 55,000 -- -- 55,000
Distributions to
stockholders........... -- -- -- -- -- (1,996,048) -- (1,996,048)
----- ------ ------ ------ ------- ----------- -------- -----------
Balance, December 31,
1995................... 1,000 $1,000 20,000 $2,000 $59,000 $(1,479,107) $(25,500) $(1,442,607)
===== ====== ====== ====== ======= =========== ======== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
CHESAPEAKE BAGEL BAKERY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 708,507 $ 892,645 $ 359,181
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Amortization and depreciation......... 152,855 171,452 182,267
(Gain) loss on disposition of fixed
assets............................... (2,000) (4,559) 45,535
Increase in accounts receivable....... (28,309) (43,256) (91,066)
(Increase) decrease in inventories.... (15,234) (1,856) 9,994
(Increase) decrease in prepaid
expenses and other current assets.... 8,447 (98,595) 33,345
Increase in deposits.................. (6,797) (5,539) (8,167)
(Increase) decrease in notes
receivable--Franchise fee............ 6,708 (158,709) 160,709
Increase in organization costs........ (2,008) -- --
Increase in deferred franchise costs.. (69,002) (525,122) (562,231)
Increase (decrease) in accounts
payable.............................. 83,408 266,245 (22,504)
Increase in deferred franchise fee
revenue.............................. 120,000 1,562,500 1,732,875
Increase (decrease) in accrued
expenses and other current
liabilities.......................... 56,287 (11,894) (50,348)
---------- ---------- -----------
Net cash provided by operating
activities........................... 1,012,862 2,043,312 1,789,590
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets................ (314,747) (297,671) (195,647)
Proceeds from sale of fixed assets...... 2,000 22,700 --
---------- ---------- -----------
Net cash used in investing activities... (312,747) (274,971) (195,647)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution.................... -- -- 55,000
Principal payments on long-term debt.... (135,415) (213,510) (244,011)
Proceeds from issuance of notes payable. 250,000 233,333 --
Distributions to stockholders........... (678,528) (988,000) (1,996,048)
---------- ---------- -----------
Net cash used in financing activities... (563,943) (968,177) (2,185,059)
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 136,172 800,164 (591,116)
Cash and cash equivalents, beginning of
year................................... 451,572 587,744 1,387,908
---------- ---------- -----------
Cash and cash equivalents, end of year.. $ 587,744 $1,387,908 $ 796,792
========== ========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for income
taxes.............................. $ 8,420 $ 36,635 $ 6,900
========== ========== ===========
Cash paid during the year for
interest........................... $ 22,635 $ 70,525 $ 70,251
========== ========== ===========
</TABLE>
See accompanying notes.
F-30
<PAGE>
CHESAPEAKE BAGEL BAKERY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The combined financial statements include the financial statements of The
American Bagel Company (American Bagel) and Almike Enterprises, Inc. (Almike)
(combined, Chesapeake Bagel Bakery or the Company) which are under common
control. Significant intercompany accounts and transactions have been
eliminated.
American Bagel was incorporated under the laws of the state of Maryland on
April 27, 1984, for the purpose of marketing and franchising retail bagel
outlets.
Almike was incorporated under the laws of the state of Maryland on December
31, 1983, for the primary purpose of acquiring, owning, and operating retail
bagel bakeries in the Washington, D.C. metropolitan area.
These combined financial statements include financial statements of American
Bagel which have been adjusted from financial statements previously issued and
reported on by other independent auditors primarily to reflect recognition of
revenue for initial franchise fees when all material services relating to the
sale of a franchise license have been substantially performed and deferral of
the related direct costs of services until the franchise fee revenue is
recognized. The financial statements of American Bagel combined herein have
been retroactively restated. Prior to this restatement, American Bagel
recognized revenue for initial franchise fees when the franchise agreement was
signed and expensed all costs of services as incurred. The effect of this
restatement on net income as previously reported for 1993, 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ----------- ---------
<S> <C> <C> <C>
Decrease in net income................. $(54,375) $(1,031,500) $(991,144)
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories consisting of food and beverages for company-owned stores are
stated at the lower of cost or market. Cost is determined by the first in,
first out method.
Revenue Recognition
The Company receives an initial franchise fee upon the sale of a franchise
license in return for providing certain services to the franchisee. These
services include, but are not limited to, assistance in site selection,
training, systems implementation, and quality control program development. The
direct cost of these services are deferred until franchise fee revenue is
recognized. Initial franchise fees are recognized as revenue when all material
services relating to the sale have been substantially performed which is
usually at the commencement of operations by the franchisee.
The Company also earns royalty fees, based on a percentage of sales of the
franchisee, and payable by the franchisee monthly. Royalty fees are recognized
as revenue by the Company in the period earned.
F-31
<PAGE>
CHESAPEAKE BAGEL BAKERY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Stores which have been opened and unopened stores for which an agreement has
been funded at December 31, 1995, are as follows:
<TABLE>
<S> <C>
Stores opened:
Company-owned....................................................... 8
Franchise owned..................................................... 102
---
110
Unopened stores....................................................... 147
---
Total............................................................. 257
===
</TABLE>
Amortization
Organization costs are being amortized over 30 years using the straight-line
method.
Goodwill represents the cost in excess of net assets of acquired entities and
is being amortized over 25 years.
Total amortization expense for the years ended December 31, 1993, 1994 and
1995 was $6,693, $5,032, and $5,032, and respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on the
double declining balance or straight-line method over the estimated useful
lives of the assets. Estimated useful lives for purposes of depreciation are:
furniture and equipment--five to seven years, auto--five years, and leasehold
improvements--term of lease.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" (Statement 121), which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. Statement
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company will adopt Statement 121 in 1996 and, based on current
circumstances, management does not believe the effect of adoption will be
material.
Income Taxes
The stockholders have elected to have American Bagel and Almike treated for
income tax purposes as "S corporations," whereby the taxable income or loss of
the companies flows through to, and is reportable by, the stockholders on their
individual income tax returns. Accordingly, no provision for federal income
taxes has been included in the Company's accompanying financial statements,
except as necessary for those states that do not recognize S Corporation
status.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 1993, 1994, and 1995, was $97,473, $197,695, and
$285,026, respectively.
F-32
<PAGE>
CHESAPEAKE BAGEL BAKERY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents
The Company invests a portion of its cash balances into tax-free money market
reserves. Management considers highly liquid investments with original maturity
dates less than 90 days to be cash equivalents. The carrying amount of cash
equivalents approximates fair value due to the short maturity and liquidity of
these investments.
2. NOTES RECEIVABLE--FRANCHISE FEES
American Bagel has entered into unsecured promissory note agreements with
eight and four new franchises during 1994 and 1995, respectively, for certain
initial franchise fees. During 1995, all of the notes are non-interest-bearing.
During 1994, four of the notes bear interest at either 6.5% or 8% and the
remaining notes are non-interest-bearing. Loans are made at below market
interest rates to franchisees in order to facilitate the sale of franchises as
described above. Fair value of the notes receivable does not differ materially
from carrying value.
3. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Note payable to Franklin National Bank of Washington, D.C.,
payable in monthly principal installments of $7,550 plus
interest at prime plus 1% maturing July 1997................ $200,300 $102,149
Note payable to Franklin National Bank of Washington, D.C.,
payable in monthly principal installments of $2,976 plus
interest at prime plus 1% maturing July 1999................ 163,690 125,000
Note payable to Franklin National Bank of Washington, D.C.,
payable in aggregate monthly principal installments of
$8,334 plus interest at prime plus 1%: maturing September
and November 1996........................................... 408,333 304,167
Note payable to Citizens Bank, payable in total monthly
installments of $320 which include principal and interest at
8.25%, maturing October 1995................................ 3,004 --
-------- --------
775,327 531,316
Less: Current maturities..................................... 229,324 430,479
-------- --------
Long-term debt, less current maturities...................... $546,003 $100,837
======== ========
</TABLE>
Aggregate maturities of long-term debt over each of the next four years are
as follows:
<TABLE>
<S> <C>
December 31:
1996........................................................... $430,479
1997........................................................... 47,261
1998........................................................... 35,712
1999........................................................... 17,864
--------
$531,316
========
</TABLE>
In July 1996, the Company signed an agreement to extend the maturity of the
note payable of $125,000 to July 1999.
The notes payable are secured by furniture, equipment, inventory and an
assignment of leaseholds with a book value of $1,042,438 and stockholders'
guarantees. The carrying amount of the Company's long-term debt at December 31,
1994 and 1995 approximates fair value. Prime plus 1% was 7% and 8.5% at
December 31, 1994 and 1995, respectively.
F-33
<PAGE>
CHESAPEAKE BAGEL BAKERY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
4. PROFIT-SHARING PLAN
American Bagel maintains a profit-sharing plan for all eligible employees.
Full-time employees become participants in the plan at the midpoint or end of
the plan year during which they reach the age of 21 and complete 2 years of
service. Contributions to the profit-sharing plan are determined annually at
the discretion of the Board of Directors. American Bagel's charge to expense
related to the profit-sharing plan was $0, $1,960, and $8,346 for 1993, 1994,
and 1995, respectively.
Almike maintains a profit-sharing plan for all eligible employees. Full-time
employees become participants in the plan at the midpoint or end of the plan
year during which they reach the age of 21 and complete 3 years of service.
Contributions to the profit-sharing plan are determined annually at the
discretion of the Board of Directors. Almike's charge to expense related to the
profit-sharing plan was $74,168, $81,329 and $73,764, for 1993, 1994, and 1995,
respectively.
5. COMMITMENTS
The Company leases retail space and administrative facilities pursuant to
long-term noncancelable operating lease agreements which expire at varying
dates through 2003. Certain of the Company's leases provided for pro rata
payment of real estate taxes and common area maintenance charges. Rent expense
for 1993, 1994, and 1995 were $471,556, $631,840 and, $635,403, respectively.
Minimum future lease payments as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
Year ending December 31
1996......................................................... $ 773,259
1997......................................................... 788,886
1998......................................................... 751,417
1999......................................................... 570,469
2000......................................................... 422,834
Thereafter................................................... 487,346
----------
$3,794,211
==========
</TABLE>
6. CONCENTRATION OF CREDIT RISK
American Bagel maintains its cash balances in one bank. The balance is
insured by the Federal Deposit Insurance Corporation up to $100,000. As of
December 31, 1995, the uninsured portion of the cash balances is $294,267.
7. SUBSEQUENT EVENTS
Sale of Assets
On September 4, 1996, the Company signed a definitive agreement to sell
substantially all of the Company's assets to BAB Holdings, Inc. (BAB) in
exchange for $22 million in cash, 900,000 shares of newly issued BAB common
stock, and additional consideration based on future openings of new Chesapeake
franchises already in the development. The Company expects to complete the
transaction by December 31, 1996.
F-34
<PAGE>
CHESAPEAKE BAGEL BAKERY
CONDENSED COMBINED BALANCE SHEET
AUGUST 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
Current assets:
Cash and cash equivalents....................................... $ 401,420
Other current assets............................................ 2,016,439
-----------
Total current assets.......................................... 2,417,859
Property, plant, and equipment of accumulated depreciation of
$1,213,792....................................................... 647,480
Goodwill, net of accumulated amortization of $49,701.............. 35,793
Other assets and intangible assets, net of accumulated
amortization of $9,908........................................... 65,980
-----------
$ 3,167,112
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C>
Current liabilities:
Deferred franchise fee revenue.................................. $ 3,976,375
Current portion of long-term debt............................... 226,314
Other current liabilities....................................... 715,238
-----------
Total current liabilities..................................... 4,917,927
Long-term debt, less current portion.............................. 159,870
Stockholders' equity.............................................. (1,910,685)
-----------
$ 3,167,112
===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-35
<PAGE>
CHESAPEAKE BAGEL BAKERY
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
---------------------
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores........................ $3,645,080 $3,668,149
Royalty fees from franchised stores...................... 1,323,659 772,801
Franchise and area development fees...................... 1,029,867 755,500
Other.................................................... 76,427 13,402
---------- ----------
6,075,033 5,209,852
OPERATING COSTS AND EXPENSES
Company-owned stores:
Food, beverage, and paper costs........................ 1,193,212 1,046,560
Payroll-related expenses............................... 1,189,928 1,049,365
Occupancy and other operating expenses................. 1,037,234 842,590
Depreciation and amortization.......................... 111,042 126,520
---------- ----------
3,531,416 3,065,035
Selling, general, and administrative expenses:
Payroll-related expenses............................... 1,122,166 809,841
Professional service fees.............................. 241,427 158,681
Depreciation and amortization.......................... 10,478 6,162
Other.................................................. 1,019,139 722,515
---------- ----------
2,393,210 1,697,199
---------- ----------
5,924,626 4,762,234
---------- ----------
Income before interest................................... 150,407 447,618
Interest expense......................................... 29,350 50,710
Interest income.......................................... 12,398 18,325
Miscellaneous income..................................... 27,059 60,400
---------- ----------
Income before income taxes............................... 160,514 475,633
Income tax provision..................................... 3,192 --
---------- ----------
Net income............................................... $ 157,322 $ 475,633
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-36
<PAGE>
CHESAPEAKE BAGEL BAKERY
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
------------------------
AUGUST 31, AUGUST 31,
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities............. $ 286,731 $ 1,749,658
INVESTING ACTIVITIES
Purchases of fixed assets............................. (15,950) (150,307)
----------- -----------
Net cash used for investing activities................ (15,950) (150,307)
FINANCING ACTIVITIES
Capital contribution.................................. 470,000 2,000
Principal payments on long-term debt.................. (150,872) (275,238)
Proceeds from issuance of notes payable............... 110,119 --
Distributions to shareholders......................... (1,095,400) (1,677,642)
----------- -----------
Net cash provided by financing activities............. (666,153) (1,950,880)
----------- -----------
Net decrease in cash and cash equivalents............. (395,372) (351,529)
Cash and cash equivalents at beginning of period...... 796,792 1,387,908
----------- -----------
Cash and cash equivalents at end of period............ $ 401,420 $ 1,036,379
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
F-37
<PAGE>
CHESAPEAKE BAGEL BAKERY
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements represent the
financial activity of The American Bagel Company (American Bagel) and Almike
Enterprises, Inc. (Almike) (combined Chesapeake Bagel Bakery of the Company)
which are under common control.
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of the results
for the interim periods. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
included herein are adequate to make the information presented not misleading.
2. STORES OPEN AND UNDER DEVELOPMENT
Stores which have been opened and unopened stores for which an agreement has
been sold at August 31, 1996, are as follows:
<TABLE>
<S> <C>
Stores opened:
Company-owned....................................................... 9
Franchisee-owned.................................................... 139
---
148
Unopened franchised stores for which an agreement has been sold: 183
---
Total............................................................. 331
===
</TABLE>
3. NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHARE
In September 1996, the Company signed a definitive purchase agreement to sell
certain assets to BAB Holdings, Inc. (Holdings). The sale of these assets is
anticipated to be completed for a total value of approximately $22,000,000 in
cash, 900,000 shares on newly issued common stock, and additional consideration
based on future openings of new franchise units already in development. At
August 31, 1996, Holdings operated 10 company-owned, 91 franchisee-owned and 34
licensed Big Apple Bagels concept specialty bagel stores.
Income Taxes
The stockholders have elected to have American Bagel and Almike treated for
income tax purposes as "S corporations," whereby the taxable income or loss of
the companies flows through to, and is reportable by, the stockholders on their
individual income tax returns. Accordingly, no provision for federal income
taxes has been included in the Company's accompanying financial statements,
except as necessary for those states that do not recognize S corporation
status.
F-38
<PAGE>
Board of Directors
Strathmore Bagels Franchise Corporation
We have audited the accompanying balance sheet of STRATHMORE BAGELS FRANCHISE
CORPORATION as of December 31, 1995, and the related statement of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of STRATHMORE BAGELS FRANCHISE
CORPORATION, as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BUONANNO & CONOLLY
Commack, New York
May 6, 1996
F-39
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C> <C> <C>
Current assets
Cash in banks..................................... $ 4,327
Accounts receivable............................... 93,575
Due from officers................................. 7,275
Deferred tax asset (note 4)....................... 7,015
--------
Total current assets............................ $112,192
Property and equipment (notes 1 and 3)
Machinery and equipment........................... $320,674
Accumulated depreciation.......................... 36,585
--------
$284,089
--------
Total property and equipment.................... 284,089
--------
Other assets
Security deposits................................. 829
Organization expenses............................. 2,977
Accumulated amortization.......................... 595
--------
2,382
--------
Total other assets.............................. 3,211
--------
Total assets.................................... $399,492
========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $132,028
Payroll taxes payable..................................... 3,172
Other taxes payable....................................... 421
--------
Total current liabilities............................... $135,621
Long term liabilities
Deferred tax liability (note 4)........................... 5,680
--------
Total long term liabilities............................. 5,680
--------
Total liabilities....................................... $141,301
Stockholders' equity
Common stock.............................................. $180,000
Additional paid-in capital................................ 80,000
Retained deficit--ending.................................. (1,809)
--------
Total stockholders' equity.............................. 258,181
--------
Total liabilities and stockholders' equity.............. $399,492
========
</TABLE>
See accompanying notes.
F-40
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Income
Sales.................................................... $440,944
Store set-up commission.................................. 75,000
--------
Total income........................................... $515,944
Cost of sales
Purchases................................................ 232,557
--------
Total cost of sales.................................... 232,557
--------
Gross profit............................................... 283,387
Expenses
Operating expenses....................................... 41,882
Selling expenses......................................... 36,821
General and administrative expenses...................... 152,696
--------
Total expenses......................................... 231,399
--------
Operating income........................................... 51,988
Operating income and expenses loss on lease cancellation
(note 5).................................................. $(30,920)
--------
Total other income and expense............................. (30,920)
--------
Income before taxes........................................ 21,068
Provision for income tax expense/(benefit) (note 4)........ 4,707
--------
Net income................................................. 16,361
Retained deficit--beginning................................ (18,170)
--------
Retained deficit--ending................................... $ (1,809)
========
</TABLE>
See accompanying notes.
F-41
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Cash flows from operating activities
Cash received from customers........................... $ 458,244
Cash paid to suppliers................................. (309,308)
Taxes paid............................................. (316)
---------
Cash provided by operating activities.................... $148,620
Cash flows from investing activities
Cash paid for machinery and equipment.................. $(219,353)
Cash paid for Springfield location..................... (30,920)
Equipment deposits..................................... (829)
---------
Cash used by investing activities........................ (251,102)
Cash flows from financing activities
Cash received from issuance of common stock............ $ 30,000
Additional paid in capital............................. 80,000
Loans to shareholder................................... (7,275)
---------
Cash provided by financing activities.................... 102,725
--------
Net increase in cash and cash equivalents................ $ 243
Cash and cash equivalents, beginning of year............. 4,084
--------
Cash and cash equivalents, end of year................... $ 4,327
========
Reconciliation of net income to net cash provided by
operating activities
Net income............................................... $ 16,361
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... $ 33,670
Loss on lease cancellation............................. 30,920
Changes in assets and liabilities
Increase in accounts receivable...................... (57,700)
Increase in deferred tax asset....................... (623)
Increase in accounts payable......................... 117,807
Increase in payroll taxes payable.................... 3,172
Increase in other taxes payable...................... 104
Increase in deferred tax liability................... 4,909
---------
Total adjustments.................................. 132,259
--------
Net cash provided by operating activities.......... $148,620
========
</TABLE>
See accompanying notes.
F-42
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
1) SIGNIFICANT ACCOUNT POLICIES
A) Property
Fixed assets are capitalized at cost. Significant improvements are
capitalized, maintenance and repairs are charged to income. When equipment is
retired or otherwise disposed of, the cost of the assets and the related
accumulated depreciation are eliminated from the accounts and any gain or loss
on disposition is credited or charged to income.
B) Organization History
The Corporation was formed under the Laws of New York State on May 13, 1994
and commenced operations on the same date. The Corporation is in the business
of setting up and selling Strathmore Bagel store franchises.
During 1994 Strathmore entered into a relationship with Host Marriott in
which Marriott opens bagel shops at airports and highway rest stops on sites
leased by them. Marriott will use the name Strathmore Bagel and will purchase
all of its bagel products from Strathmore. The relationship was formalized in a
written agreement completed in 1995. In 1994 three shops were opened at Kennedy
Airport in New York, at which Strathmore invested in equipment and placed it
into service. In 1995 fifteen additional stores were opened.
The agreement with Marriott is a licensing of the use of the name, Strathmore
Bagels, and to date, no franchises have been sold.
2) RELATED PARTY TRANSACTIONS
Steuerman & Sons, Inc. (Steuerman, a wholesale bagel bakery) is owned by
Glenn Steuerman, who is also a 20% stockholder of Strathmore Bagels Franchise
Corp. (Strathmore). Strathmore purchases all of its products for resale from
Steuerman. Steuerman also sets up Strathmore Bagel facilities and stores for
individuals but has no direct agreements with Host Marriott. Finally, Steuerman
provided a commission in the amount of $5,000 for each full store opened which
is reflected in store commission income.
3) EQUIPMENT
Equipment is stated at cost and at December 31, 1995, $319,025 of equipment
had been placed into service. Depreciation is computed on a straight-line
method for financial reporting and amounted to $33,202. For federal income tax
purposes, depreciation is computed under the modified accelerated cash recovery
system.
4) INCOME TAXES
The Company has loss carryforwards totaling $29,231 that may be offset
against future taxable income. If not used, the carryforwards will expire as
follows:
<TABLE>
<S> <C>
2009............................................................ $26,634
2010............................................................ 2,597
</TABLE>
The net deferred tax benefit in the accompanying balance sheet includes the
following amounts of deferred tax assets and liabilities:
<TABLE>
<S> <C>
Deferred tax liability............................................. $5,680
Deferred tax asset................................................. 7,015
------
Net deferred tax benefit....................................... $1,335
</TABLE>
F-43
<PAGE>
The deferred tax liability results from the use of accelerated methods of
depreciation of property and equipment. The deferred tax asset results from net
operating loss carryforward.
The components income tax expense (benefit) are as follows:
<TABLE>
<S> <C>
Current............................................................ $ 421
Deferred........................................................... 4,286
------
$4,707
</TABLE>
5) LOSS ON LEASE CANCELLATION
Loss on lease cancellation resulted from the corporation's decision to
attempt to open and operate company owned stores. A lease was entered into and
construction begun on a storefront operation in Springfield, Virginia. After
spending $30,920 on lease deposit and construction costs, the corporation
discovered problems in finding proper management to operate the remote
location. A decision not to pursue company owned locations, but rather to
concentrate solely on development of Host Marriott business was made. As a
result the lease was abandoned and all payments forfeited.
F-44
<PAGE>
Board of Directors
Strathmore Bagels Franchise Corporation
We have audited the accompanying balance sheet of STRATHMORE BAGELS FRANCHISE
CORPORATION as of December 31, 1994, and the related statement of operations,
retained deficit, and cash flows for the period from May 13, 1994 through
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above represent fairly,
in all material respects, the financial position of STRATHMORE BAGELS FRANCHISE
CORPORATION, as of December 31, 1994, and the results of its operations and its
cash flows for the period from May 13, 1994 through December 31, 1994 in
conformity with generally accepted accounting principles.
BUONANNO & CONOLLY
Commack, New York
November 17, 1995
F-45
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C> <C> <C>
Current assets
Cash in banks...................................... $ 4,084
Accounts receivable................................ 35,875
Deferred tax asset (note 4)........................ 6,392
-------
Total current assets............................. $ 46,351
Property and equipment (notes 1 and 3)...............
Machinery and equipment............................ $101,322
Accumulated depreciation........................... 3,214
--------
$98,108
-------
Total property and equipment..................... 98,108
--------
Other assets
Organization expenses.............................. 2,977
Accumulated amortization........................... 298
--------
2,679
-------
Total other assets............................... 2,679
--------
Total assets..................................... $147,138
========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 14,221
Other taxes payable....................................... 316
--------
Total current liabilities $ 14,537
Long term liabilities.......................................
Deferred tax liability (note 4)........................... 771
--------
Total long term liabilities............................. 771
--------
Total liabilities....................................... $ 15,308
Stockholders' equity
Common stock.............................................. $150,000
Retained deficit--ending.................................. (18,170)
--------
Total stockholders' equity.............................. 131,830
--------
Total liabilities and stockholders' equity ............. $147,138
========
</TABLE>
See accompanying notes.
F-46
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE PERIOD FROM MAY 13, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
Income sales.................................................. $88,105
-------
Total income.................................................. $ 88,105
Cost of sales
Purchases................................................... $23,831
Contract labor.............................................. 880
Supplies.................................................... 3,000
-------
Total cost of sales....................................... 27,711
--------
Gross profit.................................................. $ 60,394
Expenses
Operating expenses.......................................... $ 8,500
Selling expenses............................................ 26,171
General and administrative expenses......................... 49,198
-------
Total expenses............................................ 83,869
--------
Loss before taxes............................................. $(23,475)
Income Tax benefit (note 4)................................... (5,305)
--------
Net loss and retained deficit................................. $(18,170)
========
</TABLE>
See accompanying notes.
F-47
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 13, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
Cash flows from operating activities
Cash received from customers.......................... $ 72,230
Cash paid to suppliers................................ (113,847)
---------
Cash used by operating activities....................... $ (41,617)
Cash flows from investing activities
Cash paid for machinery and equipment................. $(101,322)
---------
Cash used by investing activities....................... (101,322)
Cash flows from financing activities
Cash received from the issuance of common stock....... $ 150,000
Cash paid for organization and issuance of common
stock................................................ (2,977)
---------
Cash provided by financing activities................... 147,023
---------
Net increase in cash and cash equivalents............... $ 4,084
Cash and cash equivalents, beginning of period.......... --
---------
Cash and cash equivalents, end of period................ $ 4,084
=========
Reconciliation of net loss to net cash provided by
operating activities:
Net loss................................................ (18,170)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization......................... 3,511
Changes in assets and liabilities:
Increase in accounts receivable..................... (35,875)
Increase in deferred tax asset...................... (6,392)
Increase in accounts payable........................ 14,222
Increase in taxes payable........................... 316
Increase in deferred tax liability.................. 771
---------
Total adjustments....................................... (23,447)
---------
Net cash provided by operating activities............... $ (41,617)
=========
</TABLE>
See accompanying notes.
F-48
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATON
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994
1) SIGNIFICANT ACCOUNT POLICIES
A) Property
Fixed assets are capitalized at cost. Significant improvements are
capitalized, maintenance and repairs are charged to income. When equipment is
retired or otherwise disposed of, the cost of the assets and the related
accumulated depreciation are eliminated from the accounts and any gain or loss
on disposition is credited or charged to income.
B) Organization History
The Corporation was formed under the Laws of New York State on May 13, 1994
and commenced operations on the same date. The Corporation is in the business
of setting up and selling Strathmore Bagel store franchises.
During 1994 Strathmore entered into a relationship with Host Marriott in
which Marriott opens bagel shops at airports and highway rest stops on sites
leased by them. Marriott will use the name Strathmore Bagel and will purchase
all of its bagel products from Strathmore Bagel and will purchase all of its
bagel products from Strathmore. The relationship was formalized in a written
agreement completed in 1995. This agreement is a test period agreement to
determine the feasibility and profitability of the stores. A more expansive
final contract has been drafted and is anticipated to be signed in 1995. In
1994 three shops were opened at Kennedy Airport in New York, at which
Strathmore invested in equipment and placed it into service. In 1995 fifteen
additional stores were opened.
The agreement with Marriott is a licensing of the use of the name, Strathmore
Bagels, and to date, no franchises have been sold.
2) RELATED PARTY TRANSACTIONS
Steuerman & Sons, Inc. (Steuerman, a wholesale bagel bakery) is owned by
Glenn Steuerman, who is also a 25% stockholder of Strathmore Bagels Franchise
Corp. (Strathmore). Strathmore purchases all of its products for resale from
Steuerman. During the year Steuerman was paid $7,700 for construction costs of
several new store locations. Steuerman also sets up Strathmore Bagel facilities
and stores for individuals but has no direct agreements with Host Marriott.
Finally, Steuerman provided purchase rebates of $20,000 to Strathmore, which
are reflected in purchase rebates receivable at December 31, 1994.
3) EQUIPMENT
Equipment is stated at cost and at December 31, 1994, $89,988 of equipment
had been placed into service. Depreciation is computed on a straight-line
method for financial reporting and amounted to $3,214. For federal income tax
purposes, depreciation is computed under the modified accelerated cash recovery
system.
4) INCOME TAXES
The Company has loss carryforwards totaling $26,634 that may be offset
against future taxable income. If not used, the carryforwards will expire in
the year 2009.
F-49
<PAGE>
The net deferred tax benefit in the accompanying balance sheet includes the
following amounts of deferred tax assets and liabilities:
<TABLE>
<S> <C>
Deferred tax liability............ $ 771
Deferred tax asset................ 6,392
------
Net deferred tax benefit........ $5,621
======
</TABLE>
The deferred tax liability results from the use of accelerated methods of
depreciation of property and equipment. The deferred tax asset results from net
operating loss carryforward.
The components of income tax expense/(benefit) are as follows:
<TABLE>
<S> <C>
Current......................... $ 316
Deferred........................ 5,621
-------
$(5,305)
=======
</TABLE>
F-50
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
CONDENSED BALANCE SHEET
MAY 21, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Current assets $ 39,936
Property and equipment, net........................................... 279,923
Other assets
Security deposits................................................... 829
Organization expenses............................................... 2,382
--------
$323,070
========
Current liabilities
Accounts payable and accrued liabilities............................ $ 50,479
Long-term liabilities
Loans payable....................................................... 75,000
Deferred tax liability.............................................. 5,680
Stockholders' equity
Common stock........................................................ 180,000
Additional paid-in capital.......................................... 80,000
Retained deficit.................................................... (68,089)
--------
191,911
--------
$323,070
========
</TABLE>
See notes to unaudited condensed financial statements
F-51
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
CONDENSED STATEMENT OF INCOME
PERIOD FROM JANUARY 1, 1996 THROUGH MAY 21, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Sales................................................................ $142,044
Cost of sales........................................................ 83,189
--------
Gross profit......................................................... 58,855
Operating expenses................................................... 4,675
Selling expenses..................................................... 2,272
General and administrative........................................... 110,117
--------
117,064
--------
Operating loss....................................................... (58,209)
Provision for income taxes........................................... 8,071
--------
Net loss............................................................. $(66,280)
========
</TABLE>
See notes to unaudited condensed financial statements
F-52
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996 THROUGH MAY 21, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Operating activities:
Net cash used in operating activities.............................. $(91,894)
Investing activities:
Proceeds on sales of equipment..................................... 4,166
Financing activities:
Proceeds of borrowings............................................. 75,000
--------
Net decrease in cash................................................. (12,728)
Cash at beginning of period.......................................... 4,327
--------
Cash overdraft at end of period...................................... $ (8,401)
========
</TABLE>
See notes to unaudited condensed financial statements
F-53
<PAGE>
STRATHMORE BAGELS FRANCHISE CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Strathmore Bagels Franchise Corporation (the "Corporation") was formed under
the laws of New York state on May 13, 1994 and commenced operations on the same
date. On May 21, 1996, substantially all of the assets of the Corporation were
sold to BAB Holdings, Inc.
The accompanying unaudited financial statements present the financial
activity of the Corporation from January 1, 1996 through the date of the sale
of the Corporation. These unaudited financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1995 and the related notes.
F-54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Bagels Unlimited, Inc.
We have audited the accompanying balance sheet of Bagels Unlimited, Inc. as
of February 29, 1996 and the related statements of operations and accumulated
deficit, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bagels Unlimited, Inc. at
February 29, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 30, 1996
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Bagels Unlimited, Inc.
We have audited the accompanying balance sheet of Bagels Unlimited, Inc. as
of February 28, 1995 and the related statements of operations and retained
earnings (accumulated deficit) and cash flows for the period then ended. We
have also audited the accompanying statements of operations and retained
earnings (accumulated deficit) and cash flows for the period since inception
(August 11, 1993) to February 28, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Bagels
Unlimited, Inc. as of February 28, 1995 and the results of its operations and
its cash flows for the periods ending February 28, 1995, and February 28, 1994
in conformity with generally accepted accounting principles.
Muehl, Steffes & Krueger, S.C.
Milwaukee, Wisconsin
June 13, 1996
F-56
<PAGE>
BAGELS UNLIMITED, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
ASSETS 1996 1995
------ ------------ ------------
<S> <C> <C>
Current assets:
Inventories........................................ $ 34,986 $ 15,497
Prepaid income taxes............................... 1,242 --
Prepaid expenses................................... 6,891 1,421
--------- --------
Total current assets............................. 43,119 16,918
--------- --------
Property and Equipment:
Construction in progress........................... 2,530 59,320
Machinery and equipment............................ 314,981 183,854
Leasehold improvements............................. 358,527 239,427
--------- --------
Total property and equipment..................... 676,038 482,601
Less: Accumulated Depreciation and Amortization...... (97,845) (35,417)
--------- --------
Net property and equipment........................... 578,193 447,184
--------- --------
Other assets:
Franchise fees, net of accumulated amortization of
$11,084 and $4,230 as of February 29, 1996 and
February 28, 1995................................. 58,916 65,770
Organization costs, net of accumulated amortization
of $288 and $160 as of February 29, 1996 and
February 28, 1995................................. 1,630 1,758
Prepaid franchise fees............................. 10,000 10,000
Investment......................................... 3,500 3,500
Deposits........................................... 1,350 1,350
--------- --------
Total other assets............................... 75,396 82,378
--------- --------
Total assets..................................... $ 696,708 $546,480
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Checks issued, but not yet presented for payment... $ 2,027 $ 11,815
Line of credit..................................... 10,000 12,500
Notes payable...................................... 167,684 --
Due to franchisor.................................. 10,000 10,000
Due to officers.................................... 216,365 126,511
Accounts payable................................... 291,266 159,069
Accrued liabilities................................ 69,051 27,038
Accrued interest................................... 43,246 --
Accrued income taxes............................... -- 9,248
--------- --------
Total current liabilities........................ 809,639 356,181
--------- --------
Long-Term Liabilities
Deferred rent...................................... 16,348 9,685
Accrued interest................................... -- 7,502
Notes payable...................................... -- 144,000
--------- --------
Total long-term liabilities...................... 16,348 161,187
--------- --------
Total liabilities................................ 825,987 517,368
--------- --------
Stockholders' equity (deficit):
Common stock--no par value; 9,000 shares
authorized, 2,000 shares issued and outstanding... 2,000 2,000
Stock subscription receivable...................... (2,000) (2,000)
Retained earnings (accumulated deficit)............ (129,279) 29,112
--------- --------
Total stockholders' equity (deficit)............. (129,279) 29,112
--------- --------
Total liabilities and stockholder's equity
(deficit)....................................... $ 696,708 $546,480
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
BAGELS UNLIMITED, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Sales......................................... $2,776,415 $1,430,573 $ 92,719
Cost of sales................................. 2,338,541 1,111,214 72,855
---------- ---------- --------
Gross profit.................................. 437,874 319,359 19,864
Selling and administrative expenses........... 517,251 236,932 25,618
---------- ---------- --------
Income (loss) from operations................. (79,377) 82,427 (5,754)
Interest expense.............................. (79,123) (37,602) (1,326)
Other......................................... 109 837 30
---------- ---------- --------
Income (loss) before income taxes............. (158,391) 45,662 (7,050)
Income taxes.................................. -- 9,500 --
---------- ---------- --------
Net income (loss)............................. (158,391) 36,162 (7,050)
---------- ---------- --------
Retained earnings (accumulated deficit):
Balance--beginning of period................ 29,112 (7,050) --
---------- ---------- --------
Balance--end of period...................... $ (129,279) $ 29,112 $ (7,050)
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
BAGELS UNLIMITED, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................ $(158,391) $ 36,162 $ (7,050)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 69,410 36,267 3,540
Deferred rent.............................. 6,663 7,946 1,739
Increase (decrease) in cash due to changes
in:
Inventories................................ (19,489) (8,248) (7,249)
Prepaid expenses........................... (5,470) (1,421) --
Prepaid income taxes....................... (1,242) -- --
Accounts payable........................... 182,321 75,014 22,932
Accrued liabilities........................ 77,757 27,212 7,328
Accrued income taxes....................... (9,248) 9,248 --
--------- --------- ---------
Net cash provided by operating activities.... 142,311 182,180 21,240
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........... (243,561) (295,381) (126,097)
Cash paid for investment..................... -- -- (3,500)
Deposit for leasehold improvements........... -- (26,599) 25,249
Payment of organizational costs.............. -- -- (1,918)
Payment of franchise fees.................... -- (52,500) (17,500)
--------- --------- ---------
Net cash (used in) investing activities...... (243,561) (374,480) (123,766)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of credit.. (2,500) 12,500 --
Net borrowing on amounts due to officers..... 89,854 21,661 104,850
Proceeds from the issuance note payable...... 30,000 150,000 --
Principal payments on long-term debt......... (6,316) (6,000) --
--------- --------- ---------
Net cash provided by financing activities.... 111,038 178,161 104,850
--------- --------- ---------
Net increase (decrease) in cash (checks
issued, but not yet presented for payment).. 9,788 (14,139) 2,324
--------- --------- ---------
Balance--beginning of period................. (11,815) 2,324 --
--------- --------- ---------
Balance--end of period....................... $ (2,027) $ (11,815) $ 2,324
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest................................... $ 43,379 $ 31,426 $ --
Income taxes............................... 10,490 259 --
--------- --------- ---------
Total cash paid for interest and income
taxes....................................... $ 53,869 $ 31,685 $ --
========= ========= =========
SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES
Purchase of property and equipment through
accounts payable............................ $ 10,999 $ 61,123 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Bagels Unlimited, Inc. d/b/a Big Apple Bagels (the Company) operates bagel
stores in southeastern Wisconsin in accordance with franchise agreements with
a regional franchisor. The Company began operating the stores on the following
dates:
<TABLE>
<CAPTION>
COMMENCEMENT
DATE OF
STORE LOCATION OPERATIONS
-------------- --------------
<S> <C>
Hales Corners............................................ December 1993
Brookfield............................................... July 1994
Milwaukee--Marquette University.......................... September 1994
Kenosha.................................................. April 1995
</TABLE>
Inventories
Inventories consist principally of perishable food supplies. Inventories are
valued at the lower of cost or market using the first-in, first-out (FIFO)
method.
Credit Policy
Substantially all of the Company's revenues are from retail cash sales.
Accordingly, the Company generally does not provide credit in the normal
course of business.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Depreciation and Amortization
Depreciation and amortization are computed using the straight line method
(half year convention) over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Machinery and equipment............................. 5-7 years
Leasehold improvements.............................. Length of the Lease
</TABLE>
Other assets are being amortized using the straight line method over the
following terms:
<TABLE>
<S> <C>
Franchise fees................................................. 10 Years
Organizational costs........................................... 15 Years
</TABLE>
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related to differences between the bases of certain assets and
liabilities for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are
F-60
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
recovered or settled. If full realization of the deferred tax asset is not
expected, a deferred tax valuation allowance will be recorded. Deferred taxes
also are recognized for operating losses that are available to offset future
taxable income and tax credits that are available to offset future federal and
state income taxes.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
NOTE 2. RELATED PARTY TRANSACTIONS
Due to Officers
As February 29, 1996 and February 28, 1995 the following amounts were due to
the two corporate
officers/stockholders of the Company:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Unsecured advances due to officers. Interest is
charged at 8%. The advances are due on demand. $216,365 $126,511
</TABLE>
Office Lease Payments
During the period ended February 29, 1996, approximately $2,500 of rent was
paid to an affiliated company for office rent. The payments were made under a
verbal month to month lease with the affiliated company.
F-61
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. LINE OF CREDIT/NOTES PAYABLE
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
LINE OF CREDIT
The Company has a $10,000 ($15,000 as of
February 28, 1995) line-of-credit with a bank
which is due on demand. The line bears
interest at the bank's prime rate plus 2.50%
(effective rate of 10.75% as of February 29,
1996). The line is unsecured.................. $ 10,000 $ 12,500
Notes payable, as of February 29, 1996 and February 28, 1995, consist of the
following:
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Unsecured note payable due to an affiliated
Company. The note is due on demand and bears
interest at 8%................................ $ 30,000 $ --
Note payable, bearing interest at 0.5% above
the prime rate (effective rate of 8.75% at
February 28, 1996), payable monthly. The
entire outstanding principal balance was paid
in May 1996. Under the terms of the note
payable, additional interest is due based upon
2% of the net sales of one of the four
franchise stores operated by the Company. The
additional interest is payable monthly and
continues for an additional six months after
the note is paid in full...................... 91,218 94,000
Note payable, bearing interest at 1.0% above
the prime rate (effective rate of 9.25% at
February 29, 1996), payable monthly. The
entire outstanding principal balance was paid
in May 1996. Under the terms of the note
payable, additional interest is due based upon
1% of the net sales of one of the four
franchise stores operated by the Company. The
additional interest is payable monthly and
continues for an additional six months after
the note is paid in full...................... 46,466 50,000
--------- --------
Total........................................ 167,684 144,000
Less: Current Portion........................ (167,684) --
--------- --------
Long-term portion.......................... $ -- $144,000
========= ========
</TABLE>
Interest charged to operations for related party obligations was
approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense................... $21,000 $9,000 $1,000
</TABLE>
Included in accrued interest on the accompanying balance sheet is the
estimated net present value of the additional interest due for six months after
the related notes have matured.
F-62
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. AGREEMENTS WITH FRANCHISOR/SUBSEQUENT EVENT
The Company has entered into various agreements with BAB Holdings, Inc. (the
franchisor to own and operate "Big Apple Bagels" franchises. Under the terms
of the agreements, the Company will purchase the rights for each franchise
location for $17,500. The agreements require the Company to remit weekly
royalty payments to the franchisor based on 5% of sales.
Amounts expensed for royalties are approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Royalty expense.. $136,000 $72,000 $6,000
</TABLE>
The agreements also require the Company to remit advertising payments weekly
to a fund for the benefit of the Company. The Company is reimbursed from the
fund for qualified advertising expenditures. Amounts paid into the fund are
expensed as the qualified expenditure is incurred. Included in prepaid
expenses as of February 29, 1996 and February 28, 1995 were approximately
$4,000 and $1,000, respectively, for amounts due from the fund.
Amounts expensed for advertising were approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Advertising expense... $61,000 $16,000 $4,000
</TABLE>
The franchise agreements contain, among other things, guidelines for
operations and conditions and restrictions on the sale and transfer of the
franchises. Under certain conditions, the Franchisor has the option to
purchase the assets of a location from the Company. Also, the Company may be
required to remodel its franchise locations. The cost of the required
remodeling may not exceed 2% of the cumulative sales of the franchise.
The franchise agreements expire at the end of 10 years or at the end of the
lease for the location of the franchise, which ever is shorter. The agreements
may be extended if the leases are further extended or a new location
acceptable to the Franchisor is secured within 120 days of the expiration of
the lease.
Franchise fee amortization was as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Amortization....... $6,854 $3,792 $438
</TABLE>
The Company and the Franchisor are parties to an Area Development Agreement.
Under the terms of the agreement and for a fee of $25,000, the Company was
granted the exclusive right to develop "Big Apple Bagels" franchises in
southeastern Wisconsin. The agreement further specifies that the first five
franchises can be purchased for a $5,000 discount. As of February 29, 1996,
three franchises have been purchased under this agreement. The full amount of
the agreement was capitalized and applied to the net amount paid for the
franchises as they were purchased and amortized accordingly.
All of the amounts due to the Franchisor have been personally guaranteed by
the stockholders' of the Company.
On May 1, 1996, the Company sold substantially all of its assets to the
Franchisor for approximately $770,000 in cash and publicly traded stock of the
Franchisor. At the time of the sale, the remaining unpaid balance on the Area
Development Agreement was deducted from the sales proceeds and the remaining
balance in the prepaid franchise fees was charged to operations in May 1996.
The Franchisor has also assumed all of the lease commitments of the Company.
F-63
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LEASE COMMITMENTS
The Company leases its franchise locations from third parties under operating
leases. The leases call for average monthly payments ranging from approximately
$1,200 to $2,600. In addition to the monthly lease payments, the Company is
responsible for its share (based on square feet leased) of common area expenses
and real estate taxes. The Company is responsible for all other operating
costs. The basic rent expense is being recorded on a straight line basis.
The terms of the leases expire in terms ranging from September 1998 to May
2006. Certain leases contain options to extend the terms of the leases for an
additional 5 years. One lease contains an option to extend the lease for two
five year periods after the original term.
The Company also leases two vehicles under operating leases which call for
monthly payments of approximately $1,300.
Rent, common area charges, and related taxes paid related to the above leases
were approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total............................ $148,000 $81,000 $6,000
</TABLE>
Future minimum lease payments, which have been guaranteed by the Company's
stockholders, excluding adjustments for inflation, for the above leases is as
follows:
<TABLE>
<CAPTION>
YEARS ENDING FEBRUARY
---------------------
<S> <C>
1997..................................... $129,000
1998..................................... 127,000
1999..................................... 124,000
2000..................................... 80,000
2001..................................... 30,000
Thereafter............................... 175,000
</TABLE>
F-64
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAXES EXPENSE (CREDIT)
Income taxes (credit) consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current--
Federal.......................... $ -- $6,000 $ --
State............................ -- 3,500 --
----- ------ -----
Total current...................... $ -- $9,500 $ --
===== ====== =====
</TABLE>
No deferred taxes have been reflected in the statements of operations because
the Company has fully reserved the tax benefit of net deductible temporary
differences and operating loss carryforwards due to the fact that the
likelihood of realization of the tax benefits cannot be established.
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Accelerated depreciation for income tax purposes............... $ (3,900)
Non-deductible deferred rent................................... 3,400
Non-deductible accrued interest................................ 4,100
Federal net operating loss carryforward........................ 18,400
State tax loss and credit carryforwards........................ 8,200
Other temporary differences, net............................... 2,100
Deferred tax valuation allowance............................... (32,300)
--------
Net deferred tax asset....................................... $ --
========
</TABLE>
The deferred tax balances as of February 28, 1995 and 1994 were immaterial.
The provision for income taxes (credit) differs from the amount computed by
applying the U.S. federal statutory income tax rate of approximately 15% to
income (loss) before income taxes as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes (credit) at U.S.
statutory rate................... $(23,800) $6,800 $(1,100)
Increase in taxes resulting from:
State taxes, net of federal
benefit........................ (9,500) 2,700 (400)
Change in deferred tax valuation
allowance and other............ 33,300 -- 1,500
-------- ------ -------
Income taxes...................... $ -- $9,500 $ --
======== ====== =======
</TABLE>
The Company has carryforwards for income tax purposes as of February 29, 1996
approximately as follows:
<TABLE>
<CAPTION>
EXPIRING IN FEDERAL NET WISCONSIN NET
PERIODS ENDING OPERATING LOSS OPERATING LOSS
-------------- -------------- --------------
<S> <C> <C>
2011 $93,000 $87,000
</TABLE>
F-65
<PAGE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 7. CONCENTRATIONS
Substantially all of the Company's revenues are derived from retail sales in
four locations located in southeastern Wisconsin.
F-66
<PAGE>
[INTENTIONALLY LEFT BLANK]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE PLACEMENT AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF
THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO THIS PROSPECTUS CREATE ANY IMPLI-
CATION THAT ANY INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Acquisitions....................................................... 12
Use of Proceeds........................................................... 14
Capitalization............................................................ 14
Price Range of Common Stock; Dividend Policy.............................. 15
Selected Consolidated Financial Information of the Company................ 16
Selected Combined Financial Information of Chesapeake Bagel Bakery........ 17
Pro Forma Statement of Operations
Year Ended November 30, 1995............................................. 18
Pro Forma Statement of Operations
Nine Months Ended August 31, 1996........................................ 20
Pro Forma Balance Sheet as of August 31, 1996............................. 22
Management's Discussion and Analysis of Financial Condition And Results of
Operations............................................................... 23
Business.................................................................. 32
Management................................................................ 41
Principal Shareholders.................................................... 45
Certain Transactions...................................................... 45
Description of Securities................................................. 47
Shares Eligible for Future Sale........................................... 49
Plan of Distribution...................................................... 49
Legal Matters............................................................. 50
Experts................................................................... 50
Available Information..................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,800,000 SHARES
BAB HOLDINGS, INC.
COMMON STOCK
PROSPECTUS
THE CHICAGO CORPORATION
AS PLACEMENT AGENT
DECEMBER , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the Common Stock registered hereby, other than underwriting discounts and
fees, are set forth in the following table:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 9,788
Legal fees and expenses......................................... 80,000
Accounting fees and expenses.................................... 60,000
Blue Sky fees and expenses...................................... 5,000
Printing and engraving expenses................................. 60,000
Placement Agent's accountable expense allowance................. 75,000
Miscellaneous................................................... 42,712
--------
Total....................................................... $332,500
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Illinois Business Corporation Act of 1983, as
amended, which provides that a corporation may indemnify any person who was or
is a party, or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he or she is or was a director, officer, employee
or agent of the corporation, or who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including employee
benefit plans), against expenses (including attorneys' fees), judgments, fines
(including excise taxes), and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding, if
such person acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. In addition, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation; provided that no indemnification shall be made with respect
to any claim, issue, or matter as to which such person has been adjudged to
have been liable to the corporation, unless, and only to the extent that the
court in which such action or suit was brought shall determine that, despite
the adjudication of liability, but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity. Any
indemnification shall be made by the corporation only upon a determination by
disinterested directors or independent counsel that indemnification is proper
in the circumstances because the indemnified person met the applicable
standard of conduct. The Company's amended Articles of Incorporation and
Bylaws provide for indemnification to the full extent permitted under Illinois
law.
The Placement Agent Agreement contains provisions under which the Company,
on the one hand, and the Placement Agent, on the other hand, have agreed to
indemnify each other (including officers and directors of the Company and the
Placement Agent, and any person who may be deemed to control the Company or
the Placement Agent) against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) In fiscal year 1993, the Company issued $476,000 in $7,000 par value
convertible preferred stock, convertible into shares of its Common Stock at
$.70 per share. In fiscal year 1994 and in December 1994, the Company issued
$370,000 in 8% convertible bonds, due July 1, 2002, convertible into shares of
its Common Stock at $2.67 per share. The preferred stock was converted in
whole (except as to 2.7 shares, which were redeemed) to 993,000 shares of
Common Stock during the period from October 1994 through April 1995. The bonds
were converted, in part, to 52,440 shares of Common Stock on July 1, 1995 and
to 75,060 shares of Common Stock on December 29, 1995.
II-1
<PAGE>
(b) On August 31, 1995, the Company issued an aggregate of 508,475 shares of
Common Stock to an investor in consideration of a combination of cash, a
promissory note, and conversion of debt. The investor was also granted an
option to purchase 579,225 shares for $822,500. Effective November 30, 1995,
the investor purchased 403,536 shares for $726,366. The remaining shares were
purchased on June 25, 1996 by means of a "cashless" exercise, resulting in the
issuance of 133,471 shares.
(c) In September 1995, the Company issued an aggregate of 14,588 shares of
Common Stock to 10 employees, in connection with their employment, at a price
of $2.67 per share ($38,900 in total).
(d) During the period from December 1, 1995 through May 31, 1996, the
Company has granted options for an aggregate of 298,500 shares of Common Stock
to employees and others, including consultants and non-employee directors,
pursuant to the Company's 1995 Long-Term Incentive and Stock Option Plan and
1995 Directors Stock Option Plan. Such options are exercisable at various
prices, which in each case other than options granted to Mr. Evans, equals the
fair market value as of the date of grant. Mr. Evans options are exercisable
at 110% of market value as of the date of grant. To date, no options have been
exercised.
(e) On May 1, 1996, the Company issued 50,000 shares of Common Stock and a
5-year option to purchase 100,000 shares of Common Stock at $4.00 per share to
Bagels Unlimited, Inc. ("BUI"), a Wisconsin corporation which was a franchisee
of the Company, in partial consideration of the purchase by the Company of
substantially all of the assets of BUI.
(f) On May 22, 1996, the Company granted a 3-year option to purchase 625,000
shares of Common Stock to Strathmore Bagels Franchise Corp. ("Strathmore") in
partial consideration for the purchase by the Company of substantially all of
the assets of Strathmore.
The Company believes that each such issuance and sale of securities was
exempt from registration under the Securities Act of 1933, pursuant to Section
4(2) of the Act, except that the transaction described in (c) is exempt under
Section 3(b) of the Act and Rule 701 promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
1.1 Form of Placement Agent Agreement
1.2 Form of Placement Agent Warrant
[i] 2.1 Asset Purchase Agreement dated February 2, 1996 between
the Company, Brewster's Coffee Company, Inc. and Peter D.
Grumhaus
[ii] Asset Purchase Agreement by and among BAB Systems, Inc.,
2.2a Bagels Unlimited, Inc. ("BUI"), and Donald Nelson and Mary
Ann Varichak dated May 1, 1996
[ii] Non-Competition Agreement by and among the Company and
2.2b Donald Nelson and Mary Ann Varichak dated May 1, 1996
[ii] Stock Option Agreement between the Company and BUI dated
2.2c May 1, 1996
[ii] Registration Rights Agreement between the Company and BUI
2.2d dated May 1, 1996
[iii] Asset Purchase Agreement by and between the Company and
2.3a Strathmore Bagels Franchise Corp. ("Strathmore") dated May
21, 1996
[iii] Stock Option Agreement dated May 21, 1996 between the Com-
2.3b pany and Strathmore
[iii] Registration Rights Agreement dated May 21, 1996 between
2.3c the Company and Strathmore
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
[iii] Non-Competition Agreement dated May 21, 1996 among the
2.3d Company, Strathmore, Jack Freedman and Glen Steuerman
[iii] Memorandum of Understanding Regarding Form of License
2.3e Agreement effective November 30, 1995, between Strathmore
and Host International, Inc.
[iii] Consent to Assignment between Strathmore and Host Interna-
2.3f tional, Inc., dated March 13, 1996, as amended May 21,
1996
2.4 Asset Purchase Agreement dated September 4, 1996 between
BAB Holdings, Inc., The American Bagel Company, Almike En-
terprises, Michael D. Robinson and Alan R. Manstof
[iv] Amended Articles of Incorporation of the Company
3.1
[iv] Bylaws of the Company, as amended
3.2
[iv] Form of Stock Certificate evidencing Common Stock, no par
4.1 value
[iv] Forms of Lock-up Agreement executed by certain sharehold-
4.2 ers
[iv] Form of 8% Convertible Bond due July 1, 2002
4.3
[iv] Subscription Agreement with the Investor dated August 31,
4.4 1995
[iv] Amended Form of Investor Warrant
4.5
5.1 Opinion of Moss & Barnett, A Professional Association,
Counsel to the Company
[iv] Form of Franchise Agreement
10.1
[iv] Form of Franchise Agreement--Satellite
10.2
[iv] Form of Franchise Agreement--Wholesale
10.3
[iv] Form of Area Development Agreement
10.4
[iv] Confidentiality and Non-Competition Agreement with Fran-
10.5 chisees
[iv] Form of Confidentiality Agreement with Employees
10.6
[iv] Licensing Agreement dated November 20, 1992 between the
10.7 Company and Big Apple Bagels, Inc.
[iv] Assignment of Royalty Mark & Trademark to the Company by
10.8 Big Apple Bagels, Inc. dated November 20, 1992
[iv] Agreement dated September 14, 1995 among the Company, Big
10.9 Apple Bagels, Inc. and Paul C. Stolzer
[i] Consulting agreement dated February 16, 1996 between Paul
10.10 C. Stolzer and BAB Holdings, Inc.
[iv] Leases dated November 2, 1994 and February 14, 1995 for
10.11 principal executive office
[iv] 1995 Long-Term Incentive and Stock Option Plan
10.12
[iv] 1995 Outside Directors Stock Option Plan
10.13
[iv] Settlement Agreement with Timothy Williams d/b/a Big Apple
10.14 Deli and Stipulated Dismissal with Prejudice
[i] $550,000 Revolving line of credit loan dated January 31,
10.15 1996 (executed February 12, 1996) by BAB Systems, Inc. to
Bagels Unlimited, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
11.1 Calculation of earnings per share
21.1 List of Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Muehl, Steffes & Krueger, S.C., independent audi-
tors
23.3 Consent of Buonanno & Conolly, independent auditors
23.4 Consent of Counsel to the Company (filed as part of Exhibit
5.1)
24 Power of Attorney (included on signature page)
</TABLE>
- --------
[i] Incorporated by reference to the Company's Report on Form 10-KSB for the
fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-K dated May
1, 1996
[iii] Incorporated by reference to the Company's Report on Form 8-K dated May
21, 1996
[iv] Incorporated by reference to the Company's Registration Statement on Form
SB-2, effective November 27, 1995 (Commission File No. 33-98060C)
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement and the offering of the securities at that time as the initial
bona fide offering of those securities.
(3) Provide at the closing specified in the Placement Agent Agreement
certificates in such denominations and registered in such names as required
by the Placement Agent to permit prompt delivery to each purchaser of
shares.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Chicago, State of Illinois, on October 31, 1996.
BAB Holdings, Inc.
/s/ Michael W. Evans
By: _________________________________
Michael W. Evans,
President and Chief Executive
Officer
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Michael W. Evans, Michael K. Murtaugh, and
Theodore P. Noncek, and each of them, his or her true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution for him or
her and in his or her name, place, and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-1, including any amendment increasing or
decreasing the amount of securities for which registration is being sought or
any registration for the same offering filed in accordance with Rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael W. Evans President and Chief October 31, 1996
____________________________________ Executive Officer
Michael W. Evans (Principal executive
officer) and Director
/s/ Theodore P. Noncek Chief Financial Officer October 31, 1996
____________________________________ (Principal financial and
Theodore P. Noncek accounting officer)
/s/ Michael K. Murtaugh Vice President, General October 31, 1996
____________________________________ Counsel and Director
Michael K. Murtaugh
/s/ Paul C. Stolzer Director October 31, 1996
____________________________________
Paul C. Stolzer
/s/ David L. Epstein Director October 31, 1996
____________________________________
David L. Epstein
/s/ Cynthia A. Vahlkamp Director October 31, 1996
____________________________________
Cynthia A. Vahlkamp
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S> <C>
1.1 Form of Placement Agent Agreement
1.2 Form of Placement Agent Warrant
[i] 2.1 Asset Purchase Agreement dated February 2, 1996 between the
Company, Brewster's Coffee Company, Inc. and Peter D.
Grumhaus
[ii] 2.2a Asset Purchase Agreement by and among BAB Systems, Inc., Ba-
gels Unlimited, Inc. ("BUI"), and Donald Nelson and Mary Ann
Varichak dated May 1, 1996
[ii] 2.2b Non-Competition Agreement by and among the Company and Don-
ald Nelson and Mary Ann Varichak dated May 1, 1996
[ii] 2.2c Stock Option Agreement between the Company and BUI dated May
1, 1996
[ii] 2.2d Registration Rights Agreement between the Company and BUI
dated May 1, 1996
[iii] 2.3a Asset Purchase Agreement by and between the Company and
Strathmore Bagels Franchise Corp. ("Strathmore") dated May
21, 1996
[iii] 2.3b Stock Option Agreement dated May 21, 1996 between the Com-
pany and Strathmore
[iii] 2.3c Registration Rights Agreement dated May 21, 1996 between the
Company and Strathmore
[iii] 2.3d Non-Competition Agreement dated May 21, 1996 among the Com-
pany, Strathmore, Jack Freedman and Glen Steuerman
[iii] 2.3e Memorandum of Understanding Regarding Form of License Agree-
ment effective November 30, 1995, between Strathmore and
Host International, Inc.
[iii] 2.3f Consent to Assignment between Strathmore and Host Interna-
tional, Inc., dated March 13, 1996, as amended May 21, 1996
2.4 Asset Purchase Agreement dated September 4, 1996 between BAB
Holdings, Inc.,
The American Bagel Company, Almike Enterprises, Michael D.
Robinson and
Alan R. Manstof
[iv] 3.1 Amended Articles of Incorporation of the Company
[iv] 3.2 Bylaws of the Company, as amended
[iv] 4.1 Form of Stock Certificate evidencing Common Stock, no par
value
[iv] 4.2 Forms of Lock-up Agreement executed by certain shareholders
[iv] 4.3 Form of 8% Convertible Bond due July 1, 2002
[iv] 4.4 Subscription Agreement with the Investor dated August 31,
1995
[iv] 4.5 Amended Form of Investor Warrant
5.1 Opinion of Moss & Barnett, A Professional Association, Coun-
sel to the Company
[iv] 10.1 Form of Franchise Agreement
[iv] 10.2 Form of Franchise Agreement--Satellite
[iv] 10.3 Form of Franchise Agreement--Wholesale
[iv] 10.4 Form of Area Development Agreement
[iv] 10.5 Confidentiality and Non-Competition Agreement with Franchi-
sees
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S> <C>
[iv] 10.6 Form of Confidentiality Agreement with Employees
[iv] 10.7 Licensing Agreement dated November 20, 1992 between the Com-
pany and Big Apple Bagels, Inc.
[iv] 10.8 Assignment of Royalty Mark & Trademark to the Company by Big
Apple Bagels, Inc. dated November 20, 1992
[iv] 10.9 Agreement dated September 14, 1995 among the Company, Big
Apple Bagels, Inc. and Paul C. Stolzer
[i] 10.10 Consulting agreement dated February 16, 1996 between Paul C.
Stolzer and BAB Holdings, Inc.
[iv] 10.11 Leases dated November 2, 1994 and February 14, 1995 for
principal executive office
[iv] 10.12 1995 Long-Term Incentive and Stock Option Plan
[iv] 10.13 1995 Outside Directors Stock Option Plan
[iv] 10.14 Settlement Agreement with Timothy Williams d/b/a Big Apple
Deli and Stipulated Dismissal with Prejudice
[i] 10.15 $550,000 Revolving line of credit loan dated January 31,
1996 (executed February 12, 1996) by BAB Systems, Inc. to
Bagels Unlimited, Inc.
11.1 Calculation of earnings per share
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Muehl, Steffes & Krueger, S.C., independent audi-
tors
23.3 Consent of Buonanno & Conolly, independent auditors
23.4 Consent of Counsel to the Company (filed as part of Exhibit
5)
24 Power of Attorney (included on signature page)
</TABLE>
- --------
[i] Incorporated by reference to the Company's Report on Form 10-KSB for the
fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-K dated May 1,
1996
[iii] Incorporated by reference to the Company's Report on Form 8-K dated May
21, 1996
[iv] Incorporated by reference to the Company's Registration Statement on Form
SB-2, effective November 27, 1995 (Commission File No. 33-98060C)
<PAGE>
EXHIBIT 1.1
3,800,000 Shares
BAB HOLDINGS, INC.
Common Stock
PLACEMENT AGENT AGREEMENT
____________, 1996
The Chicago Corporation
208 South LaSalle Street
Chicago, Illinois 60604
Ladies and Gentlemen:
BAB Holdings, Inc., an Illinois corporation (the "Company"), proposes to
offer and sell an aggregate of 3,800,000 shares (the "Shares") of its common
stock, no par value per share ("Common Stock") to Qualified Institutional Buyers
and Institutional Accredited Investors. The Company desires that you act as the
placement agent ("Placement Agent") for the offering (the "Offering") of the
Shares. Certain of the capitalized terms used herein or defined in Section 8 of
this Agreement.
In connection therewith, the Company confirms its agreement with you as
follows:
1. Placement Agent.
(a) The Company agrees to retain The Chicago Corporation as its
exclusive placement agent ("Placement Agent") to introduce the Company to
Qualified Institutional Buyers and Institutional Accredited Investors as
prospective purchasers of Shares in the Offering. The Company acknowledges that
R.J. Steichen & Company ("Steichen") may provide a list of Qualified
Institutional Buyers and Institutional Accredited Investors to the Placement
Agent in connection with the performance of such services, it being understood
that any compensation of Steichen for such information shall be the obligation
of the Placement Agent and not the Company.
(b) The Chicago Corporation agrees to act as Placement Agent in
connection with the Offering of the Shares and to use reasonable efforts,
subject to the Securities Act of 1933, as amended (the "Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act")
<PAGE>
and applicable state and other securities laws, to solicit Qualified
Institutional Buyers and Institutional Accredited Investors as prospective
purchasers of Shares in the Offering.
(c) As consideration for agreeing to act as Placement Agent in
connection with the Offering of the Shares, the Placement Agent shall receive
the consideration set forth that certain letter agreement dated September 25,
1996 between the Company and the Placement Agent, a copy of which is attached
hereto as Exhibit A.
2. Escrow; Closing. (a) The aggregate purchase price ("Funds") for Shares
subscribed to be purchased by Qualified Institutional Buyers and Institutional
Accredited Investors ("Investors") in the Offering shall be held by the
Placement Agent in a segregated account at The First National Bank of Chicago
(or such other bank selected by the Placement Agent) (the "Escrow Agent"). The
Funds will not be released until all of the conditions listed in Section 5 below
have occurred or are otherwise waived in writing by the Placement Agent.
(b) At such time as the Placement Agent has received indications of
interest from prospective investors sufficient to purchase all of the Shares at
a price per share agreed upon by the Company and the Placement Agent, the
Company and the Placement Agent shall request that the Securities and Exchange
Commission ("Commission") declare the Registration Statement (as hereinafter
defined) effective. Confirmation and final prospectuses will be distributed to
all investors promptly following the time the Registration Statement is declared
effective, informing investors of the date of the closing ("Closing"), which
will be at 10:00 a.m., Chicago time, on the third business day after the
effective date of the Registration Statement at the offices of Sonnenschein Nath
& Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, or at such other time
and place within five business days after the effective date of the Registration
Statement as shall be agreed upon by the parties hereto (such date is
hereinafter referred to as the "Closing Date"). Certificates evidencing the
Shares shall be in definitive form and shall be registered in the respective
names of the Investors or their designees and in such denominations as the
Investors shall request by written notice to the Company. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company agrees to make such certificates available for inspection at least 24
hours prior to the Closing Date. On the Closing Date, provided that the
conditions set forth in Section 5 below have occurred or are otherwise waived in
writing by the Placement Agent, delivery of the Shares shall be made to the
Placement Agent for the accounts of the respective Investors (or, at the
election of the Placement Agent, through the facilities of The Depository Trust
Company for the accounts of the respective Investors) against payment of the
purchase price therefor by wire transfer or certified or official bank check
payable to the order of the Company (the "Closing").
3. Representations and Warranties of the Company. Subject to Section 9(a)
of this Agreement, the Company represents and warrants to the Placement Agent as
of the date hereof (except as to matters that are to occur subsequent to the
date hereof and prior to the Closing Date) and as of the Closing Date as
follows:
(a) A registration statement (Registration No. 333-_____) on Form S-l
relating to the Shares, including a preliminary prospectus and such amendments
to such registration
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statement as may have been required to the date of this Agreement, has been
prepared by the Company under the provisions of the Act and the rules and
regulations (collectively referred to as the "Rules and Regulations") of the
Commission thereunder, and has been filed with the Commission. The term
"preliminary prospectus" as used herein means a preliminary prospectus as
contemplated by Rule 430 or Rule 430A of the Rules and Regulations included at
any time as part of the registration statement. Copies of such registration
statement and amendments and of each related preliminary prospectus have been
delivered to the Placement Agent. If such registration statement has not become
effective, a further amendment to such registration statement, including a form
of final prospectus, necessary to permit such registration statement to become
effective will be filed promptly by the Company with the Commission. If such
registration statement has become effective, a final prospectus containing
information permitted to be omitted at the time of effectiveness by Rule 430A of
the Rules and Regulations will be filed promptly by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations. The term
"Registration Statement" means the registration statement as amended at the time
it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A. The term "Prospectus" means the prospectus as first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such
filing is required, the form of final prospectus included in the Registration
Statement at the Effective Date.
(b) Neither the Commission nor any state securities division has
issued any order preventing or suspending the use of any preliminary prospectus,
and each preliminary prospectus, at the time of filing thereof with the
Commission, has conformed in all material respects with all applicable
provisions of the Act and the Rules and Regulations and, as of its date, has not
included any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein not misleading. On the Effective
Date, the date the Prospectus is first filed with the Commission pursuant to
Rule 424(b) (if required), the Closing Date, and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement and the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment or supplement thereto) did or will
comply in all material respects with all applicable provisions of the Act and
the Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement, the
Prospectus or any such amendment or supplement did or will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date, the Prospectus did not or will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The foregoing representations and warranties in this Section 3(b) do
not apply to any statements or omissions made in reliance on and in conformity
with information relating to the Placement Agent furnished in writing to the
Company by the Placement Agent specifically for inclusion in the any preliminary
prospectus,
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<PAGE>
the Registration Statement, the Prospectus or any amendment or supplement
thereto. The Company acknowledges that the statements set forth under the
heading "Plan of Distribution" in the Prospectus constitute the only information
relating to the Placement Agent furnished in writing to the Company by the
Placement Agent specifically for inclusion in the Registration Statement.
(c) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Illinois and has all requisite
corporate power and authority to own its Property and to carry on its business
as presently conducted and as presently proposed to be conducted, to enter into,
deliver and perform its obligations under this Agreement and to carry out the
transactions contemplated by this Agreement. The Company is qualified to do
business in each jurisdiction in which the character of its Property or the
nature of its activities makes such qualification in such jurisdiction
necessary, except where the failure to so qualify would not, individually or in
the aggregate, have a Material Adverse Effect.
(d) Chesapeake and each of the Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has all requisite corporate power and
authority to own its Property and to carry on its business as presently
conducted and as presently proposed to be conducted. Chesapeake and each of the
Subsidiaries is qualified to do business in each jurisdiction in which the
character of its Property or the nature of its activities makes such
qualification in such jurisdiction necessary, except where the failure to so
qualify would not, individually or in the aggregate, have a Material Adverse
Effect. On the Closing Date, the Company will have good and marketable title to
all of the outstanding shares of Stock of such Subsidiaries, free and clear in
each case of any lien, claim or encumbrance of any nature.
(e) As of the date of this Agreement, the Company has an authorized
and outstanding number of shares as set forth under the caption "Shareholders'
Equity" in the table beneath the caption "Capitalization" in the Prospectus and
an outstanding capitalization (in dollars) as set forth under the heading
"Actual" in the Capitalization Table, and immediately following the purchase of
the Shares by the Investors, the application of the net offering proceeds as
described in the Prospectus and the closing of the Chesapeake Acquisition (as
defined in the Prospectus), the Company will have an authorized and outstanding
number of shares as set forth under the caption "Shareholders' Equity" in the
Capitalization Table and an outstanding capitalization (in dollars) as set forth
under the heading "Pro Forma As Adjusted" in the Capitalization Table. The
issued and outstanding shares of capital stock of the Company have been, and the
Shares to be issued and sold by the Company upon such issuance and delivered
against payment therefor will be, duly authorized, validly issued, fully paid
and nonassessable and will not be subject to any preemptive or similar right;
the description of the Common Stock in the Registration Statement and the
Prospectus is, and at the Closing Date will be, complete and accurate in all
material respects. Except as set forth in the Prospectus, none of Chesapeake,
the Company or any Subsidiary has outstanding, and at the Closing Date will not
have outstanding, any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any
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<PAGE>
shares of common stock, any shares of capital stock of any subsidiary or any
such warrants, convertible securities or obligations.
(f) As of the Closing Date, no security holder of Chesapeake, the
Company or any Subsidiary will hold a right to require the Company to register
under the Act any securities of any nature owned or held by such person in
connection with the transactions contemplated by this Agreement except for
rights which are described in the Prospectus and which have been waived in
connection with the transactions contemplated by this Agreement. Upon payment
for and delivery of the Shares to be sold by the Company pursuant to this
Agreement, the Investors will acquire ownership to such Shares, free and clear
of all adverse claims, legal or equitable. The certificates evidencing the
Shares will comply as to form with all applicable provisions of the laws of the
State of Illinois.
(g) The financial statements (together with the related notes thereto)
and schedules included in the Registration Statement or the Prospectus present
fairly the financial position of the Company, Bagels Unlimited, Inc. ("BUI") and
Strathmore Bagels Franchise Corp. ("Strathmore") and, to the best of the
Company's knowledge after diligent investigation, Chesapeake as of the
respective dates thereof and the results of operations and cash flows of the
Company, BUI and Strathmore and, to the best of the Company's knowledge after
diligent investigation, Chesapeake for the respective periods covered thereby,
all in conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. The accountants who have expressed
their opinions with respect to the financial statements and schedules included
in the Registration Statement are independent accountants with respect to the
entities which such opinion relates to as required by the Act and the Rules and
Regulations.
(h) The financial information set forth in the Prospectus under
"Summary Consolidated Financial and Store Data" and "Selected Consolidation
Information of the Company" presents fairly, on the basis stated in the
Prospectus, the information set forth therein and, to the best of the Company's
knowledge after diligent investigation, the financial information set forth in
the Prospectus under "Selected Combined Financial Data of Chesapeake" presents
fairly, on the basis stated in the Prospectus, the information set forth
therein; and the pro forma information included in the Prospectus presents
fairly the information shown therein, has been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma information, has
been properly compiled on the pro forma basis described therein, and, in the
opinion of the Company, the assumptions used in the preparation of such
information are reasonable and the adjustments used therein are appropriate
under the circumstances.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date, except as set forth in or contemplated by the Registration Statement and
the Prospectus, (i) there has not been and will not have been any change in the
capitalization of Chesapeake, the Company or any Subsidiary, or in the business,
properties, business prospects, condition (financial or otherwise) or results
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<PAGE>
of operations of Chesapeake, the Company or any Subsidiary, arising for any
reason whatsoever, (ii) none of Chesapeake, the Company or any Subsidiary has
incurred nor will it incur any material liabilities or obligations, direct or
contingent, nor has it entered into nor will it enter into any material
transactions other than pursuant to this Agreement and the transactions referred
to herein and (iii) Chesapeake, the Company and its Subsidiaries have not and
will not have paid or declared any dividends or other distributions of any kind
on any class of its capital stock.
(j) None of Chesapeake, the Company or any Subsidiary is an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(k) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting Chesapeake, the
Company or its Subsidiaries or any of their respective directors or officers in
their capacity as such, before or by any federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding might have a
Material Adverse Effect.
(l) Chesapeake, the Company and its Subsidiaries have, and at the
Closing Date will have, (i) all material governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as contemplated in the Prospectus, (ii) complied with all laws,
regulations and orders applicable to it or its business where the failure to
comply could, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect and (iii) performed its material obligations required to
be performed by it and is not, and at the Closing Date will not be, in default
under any contract or other instrument to which it is a party or by which its
property is bound or affected, which defaults, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect. There does not
exist any state of facts, including without limitation the sale of the Shares
hereunder, which constitutes, or which with notice or lapse of time or both
would constitute, an event of default as defined in such contracts or other
instruments or which would result in any party thereto other than the Company
having the right to terminate any such contract or other instrument, and to the
best knowledge of the Company, no other party under any such contract or other
instrument is in material default in any respect thereunder. None of Chesapeake,
the Company or any Subsidiary is, and at the Closing Date will not be, in
violation of any provision of its articles of incorporation or bylaws.
(m) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part herein contemplated,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or blue sky laws or the bylaws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase by the Investors of the Shares.
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<PAGE>
(n) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company and
is enforceable against the Company in accordance with the terms hereof except to
the extent enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws of general applicability affecting or relating to
creditors' rights or by general principles of equity and except insofar as the
enforceability of the Placement Agent's right to indemnity and contribution
hereunder may be limited by public policy. The performance of this Agreement and
the consummation of the transactions contemplated hereby will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the assets
of Chesapeake, the Company or its Subsidiaries pursuant to the terms or
provisions of, or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or result in the acceleration of
any obligation under, the articles of incorporation or bylaws of Chesapeake, the
Company or any Subsidiary, any material indenture, mortgage, deed of trust,
voting trust agreement, loan agreement, bond, debenture, note agreement or other
evidence of indebtedness, lease, contract or other agreement or instrument to
which Chesapeake, the Company or any Subsidiary is a party or by which
Chesapeake, the Company or any Subsidiary or any of their respective properties
is bound or affected, except where the other contract party or parties have
granted such waivers or consents as are necessary to prevent such default or
acceleration, or violate or conflict with any judgment, ruling, decree, order,
statute, rule or regulation of any court or other governmental agency or body
applicable to the business or properties of Chesapeake, the Company or any
Subsidiary.
(o) Chesapeake, the Company and its Subsidiaries have good and
marketable title to all properties and assets described in the Prospectus as
owned by it, free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Prospectus or would not, individually or in
the aggregate, have a Material Adverse Effect. Chesapeake, the Company and its
Subsidiaries have valid, subsisting and enforceable leases for the properties
described in the Prospectus as leased by it, with such exceptions as are not
material, individually or in the aggregate, to Chesapeake, the Company or its
Subsidiaries and do not materially interfere with the use made and proposed to
be made of such properties by Chesapeake, the Company and its Subsidiaries.
(p) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which Chesapeake, the Company or any Subsidiary
is a party have been duly authorized, executed and delivered by Chesapeake, the
Company or such Subsidiary, constitute valid and binding agreements of
Chesapeake, the Company or such Subsidiary and are enforceable against
Chesapeake, the Company or such Subsidiary in accordance with the terms thereof
except to the extent enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws of general applicability affecting or relating to
creditors' rights or by general principles of equity.
(q) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Placement Agent was or will be, when made,
inaccurate, untrue or incorrect in
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any material respect.
(r) Neither the Company, any Subsidiary nor any of their respective
directors, officers or controlling persons has taken, directly or indirectly,
any action designed, or which might reasonably be expected, to cause or result,
under the Act or otherwise, in, or which has constituted, stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(s) Chesapeake, the Company and each Subsidiary owns or possess
adequate rights to use all trademarks, patents, copyrights and other proprietary
rights ("Trade Rights") material to the conduct of the business of Chesapeake,
the Company or such Subsidiary and none of Chesapeake, the Company or any
Subsidiary has granted any lien or encumbrance on, or granted any right of
license (other than in the ordinary course of its business) with respect to, any
such Trade Rights. Chesapeake, the Company and its Subsidiaries have not
received any notice of infringement, misappropriation or conflict from any third
party as to such Trade Rights that has not been resolved or disposed of and, to
the best of the Company's knowledge, none of Chesapeake, the Company or any
Subsidiary has infringed, misappropriated or otherwise conflicted with Trade
Rights of any third parties which might, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(t) All offers and sales of the Company's and each Subsidiary's
capital stock prior to the date hereof were at all relevant times duly
registered under or exempt from the registration requirements of the Act and
were duly registered in accordance with or the subject of an available exemption
from registration under the applicable state securities or blue sky laws.
(u) Chesapeake, the Company and its Subsidiaries have filed all
necessary federal and state income, sales, use and franchise tax returns which
have been required to be filed, except such income, sales, use and franchise tax
returns for states in which such entity reasonably believes it had no income,
sale, use or franchise tax liability, and has paid all taxes shown as due
thereon to the extent that such taxes have become due. Except as disclosed in
the Registration Statement, there is no tax deficiency that has been asserted,
or to the knowledge of the Company, threatened against Chesapeake, the Company,
any Subsidiary or any of their respective properties or assets which might,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(v) No relationship, direct or indirect, exists between or among the
Company, on the one hand, and the directors, officers, shareholders, customers,
or suppliers of the Company, on the other hand, which is required to be
described in the Prospectus which is not so described.
(w) Except for The Chicago Corporation, no person is entitled,
directly or indirectly, to compensation from the Company for services as a
finder or placement agent in connection with the transactions contemplated
hereby.
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<PAGE>
(x) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts which the Company believes is adequate
for the business of the Company and its Subsidiaries.
(y) The consummation of the Chesapeake Acquisition and the execution,
delivery and performance of all documents and instruments executed and delivered
in connection therewith were authorized by all necessary corporate action on the
part of Company; all consents, approvals, authorizations, orders, licenses,
certificates, permits, registrations or qualifications required to be obtained
in connection with the Chesapeake Acquisition have been obtained, other than
such consents, approvals, authorizations, orders, licenses, certificates,
permits, registrations or qualifications which, individually or in the
aggregate, would not have a Material Adverse Effect; the consummation of the
Chesapeake Acquisition will not (i) conflict with or result in a breach or
violation of any of terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its Subsidiaries was or is bound or to
which any of the Property or assets of the Company or any of its subsidiaries
was or is subject, (ii) result in any violation of the provisions of the
articles of incorporation or by-laws of the Company or any of its Subsidiaries
or (iii) result in any violation of the provisions of any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its Subsidiaries or any of their
Properties, other than, in the case of clauses (i) and (iii) above, such
conflicts, breaches, violations or defaults that, individually or in the
aggregate, would not have a Material Adverse Effect.
(z) The Company and the Subsidiaries have complied with all applicable
laws and regulations, including franchise and business opportunity laws, of
every governmental authority, including the Federal Trade Commission, in
offering and selling "Big Apple Bagel" franchises and area franchises, except
for noncompliance which neither individually or in the aggregate might
reasonably be expected to have a Material Adverse Effect. To the best of the
Company's knowledge after diligent investigation, Chesapeake has complied with
all applicable laws and regulations, including franchise and business
opportunity laws, of every governmental authority, including the Federal Trade
Commission, in offering and selling "Chesapeake Bagel Bakery" franchises and
area franchises, except for noncompliance which neither individually or in the
aggregate might reasonably be expected to have a Material Adverse Effect. Except
as disclosed by the Company to the Placement Agent in writing prior to the date
hereof, (i) all of the terms and conditions of all franchises and all area
franchises to which Chesapeake, the Company or any Subsidiary is a party are
contained in a written document and, except as so disclosed in writing, no
material term or condition has been waived by Chesapeake, the Company or any
Subsidiary, (ii) the Franchise Offering Circulars of Chesapeake, the Company and
its Subsidiaries in use in each jurisdiction have been maintained current in all
material respects and fairly disclose all matters required to be disclosed by
applicable laws and regulations and (iii) all franchise agreements and area
franchise development agreements entered into by Chesapeake, the Company or any
Subsidiary with their franchisees were entered into accordance with the
requirements of all applicable laws and regulations; provided, however, that the
representation and warranty made by this sentence with respect to Chesapeake are
made to the Company's knowledge after diligent investigation rather than
unconditionally.
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(aa) The Company and each of its Subsidiaries are in compliance with
all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating
to Disclosure of Doing Business with Cuba, and the Company further agrees that
if it or any of its Subsidiaries commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
Effective Date, or if the information reported in the Prospectus, if any,
concerning the Company's business with Cuba or with any person or affiliate
located in Cuba changes in any material way, the Company will provide the
Florida Department of Banking and Finance Department notice of such business or
change, as appropriate, in a form acceptable to such Department.
4. Agreements of the Company. The Company agrees with the Placement Agent
as follows:
(a) The Company will not file any amendment or supplement to the
Registration Statement or the Prospectus, unless a copy thereof shall first have
been submitted to the Placement Agent within a reasonable period of time prior
to the filing thereof, and the Placement Agent shall not have objected thereto
in good faith.
(b) If the Registration Statement has not become effective, the
Company will use its best efforts to cause the Registration Statement to become
effective as soon as practicable. The Company will notify the Placement Agent
promptly, and will confirm such advice in writing, (1) when the Registration
Statement has become effective (if applicable) and when any post-effective
amendment thereto becomes effective, (2) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (4) of the happening of
any event during the period mentioned in the third sentence of Section 4(e)
that, in the judgment of the Company, makes any statement of material fact made
in the Registration Statement or the Prospectus untrue or that requires the
making of any changes in the Registration Statement or the Prospectus in order
to make the statements of material fact therein, in light of the circumstances
in which they are made, not misleading and (5) of receipt by the Company or any
representative or attorney of the Company of any other communication from the
Commission relating to the Company, the Registration Statement, any preliminary
prospectus or the Prospectus. If at any time the Commission shall issue any
order suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal of such order at the
earliest possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will comply with the provisions of and make all requisite filings with
the Commission pursuant to said Rule 430A and will notify the Placement Agent
promptly of all such filings.
(c) The Company will furnish to the Placement Agent, without charge,
two signed copies of the Registration Statement and of any post-effective
amendment thereto.
(d) The Company will comply with all the provisions of any
undertakings
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contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to the Placement Agent, without charge, as many copies of
the Prospectus or any amendment or supplement thereto as the Placement Agent may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the Placement Agent and its designees. If
during such period of time any event shall occur which, in the judgment of the
Company or counsel to the Placement Agent, should be set forth in the Prospectus
in order to make any statement of material fact therein, in the light of the
circumstances under which it was made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement or
amendment thereto, and will deliver to the Placement Agent, without charge, such
number of copies thereof as the Placement Agent may reasonably request.
(f) During the period of five years commencing on the Effective Date,
the Company will furnish to the Placement Agent copies of such financial
statements and other periodic and special reports as the Company may from time
to time distribute generally to the holders of any class of its capital stock,
and will furnish to the Placement Agent a copy of each annual or other report it
shall be required to file with the Commission.
(g) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay (i) all
costs, fees and expenses incurred in connection with the performance of the
Company's obligations hereunder, including without limiting the generality of
the foregoing, all costs, fees and expenses relating to (1) the preparation,
printing and filing of the Registration Statement and exhibits to it, each
preliminary prospectus, the Prospectus and any amendment or supplement to the
Registration Statement or the Prospectus, (2) the preparation and delivery of
certificates representing the Shares, (3) the production and reproduction of
this Agreement, the Escrow Agreement and other documents used in connection with
the transactions contemplated hereby, (4) furnishing (including costs of
shipping and mailing) such copies of the Registration Statement, the Prospectus
and any preliminary prospectus, and all amendments and supplements thereto, as
may be requested for use in connection with the offering and sale of the Shares,
(5) the quotation of the Shares on the Nasdaq Small-Cap Market, (6) legal
counsel for the Company and (7) the Company's independent accountants and the
independent accountants of entities acquired by the Company, (ii) all costs,
fees and expenses (including legal fees and disbursements of counsel for the
Placement Agent) incurred by the Placement Agent in connection with (1)
qualifying or registering all or any part of the Shares for offer and sale under
applicable state securities laws, including the preparation of a blue sky
memorandum relating to the Shares and (2) clearance of such offering with the
NASD; (iii) all costs, fees and expenses of the Company's transfer agent,
printing of the certificates for the Shares and all transfer taxes, if any, with
respect to the sale and delivery of the Shares to the Investors; and (iv) all
costs, fees and expenses incurred in connection with the escrow contemplated by
Section 2 hereof, including the costs, fees and expenses of the Escrow Agent. In
addition, the Company shall reimburse other expenses incurred by the Placement
Agent to the extent set forth in the letter agreement dated
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<PAGE>
September 25, 1996 between the Company and the Placement Agent, a copy of which
is attached hereto as Exhibit A.
(h) The Company will make generally available to holders of its
securities as soon as may be practicable, but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months ended, commencing after
the Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) The Company will not at any time, directly or indirectly, take
any action designed, or which might reasonably be expected, to cause or result
in, or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale of any of the Shares.
(j) The Company will apply the net proceeds from the offering and
sale of the Shares in the manner set forth in the Prospectus under the caption
"Use of Proceeds."
(k) During the period commencing on the date hereof and ending 90
days after the Closing Date, the Company will not, without the prior written
consent of the Placement Agent, offer, sell, offer to sell, contract to sell,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
other than pursuant to (i) outstanding stock options and warrants disclosed in
the Prospectus, (ii) the Company stock option plans disclosed in the Prospectus,
under which all options granted subsequent to the date hereof have an exercise
price not less than the fair market value on the date of grant or (iii) the
negotiation and consummation of potential acquisitions by the Company, provided
that any shares of Common Stock issued in connection therewith will not be
freely transferable during such 90 day period.
(l) As soon as practicable after the date hereof and in no event
later than the Closing Date, the Company will cause each of its officers and
directors, each beneficial owner of any outstanding shares of Common Stock to
enter into agreements with the Placement Agent to the effect that for a period
beginning on the date of such agreement and ending 90 days after the Closing
Date they will not, without the prior written consent of the Placement Agent,
offer, sell, offer to sell, contract to sell, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock except as otherwise agreed by the
Company and the Placement Agent prior to the effective date of the Registration
Statement.
(m) The Company will cooperate with the Placement Agent in qualifying
or registering the Shares for sale under the state securities laws of such
jurisdictions as you designate, and will continue such qualifications in effect
so long as reasonably required for the
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<PAGE>
distribution of the Shares. In connection with such qualification or
registration of the Shares, the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
such jurisdiction where it is not currently qualified or where it would be
subject to taxation as a foreign corporation.
(n) As soon as practicable after the date hereof, the Company will
use its best efforts to cause the Common Stock (including the Shares) to be
listed on the Nasdaq Stock Market's National Market.
(o) The Company will use its best efforts to cause the closing of the
Chesapeake Acquisition to be completed on the Closing Date concurrently with or
immediately after the Closing of the sale of the Shares pursuant to this
Agreement.
5. Conditions. The obligation of The Chicago Corporation to act as
Placement Agent pursuant to Section 1 hereunder and the Closing shall be subject
to the accuracy of the representations and warranties on the part of the Company
herein set forth as of the date hereof and as of the Closing Date, to the
accuracy of the statements of officers of the Company made pursuant to the
provisions hereof, to the performance by the Company and of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have been declared effective by
the Commission; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge
of the Company or you, shall be contemplated by the Commission.
(b) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the Shares, the execution and delivery of
this Agreement, and all corporate proceedings and other legal matters
incident thereto, and the form of the Registration Statement and the
Prospectus (except financial statements) shall have been approved by your
special counsel.
(c) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the opinion of your special
counsel, is material or omits to state a fact which, in the opinion of such
counsel, is material and is required to be stated therein or necessary to
make the statements therein not misleading.
(d) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any change, or any development involving a
prospective change, in or affecting particularly the business or properties
of the Company or its subsidiaries, whether or not arising in the ordinary
course of business, which, in the judgment of the Placement Agent, makes it
impractical or inadvisable to proceed with the offering of the Shares as
contemplated hereby.
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<PAGE>
(e) You shall have received from Moss & Barnett, counsel to the
Company, an opinion of counsel substantially in the form attached hereto as
Exhibit B.
(f) A certificate of the chief executive officer and the chief
financial officer of the Company, dated the Closing Date, to the effect
that (i) each signer of such certificate has examined the Registration
Statement and the Prospectus and (A) as of the date of such certificate,
such documents are true and correct in all material respects and do not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not untrue or misleading and (B) since
the date of this Agreement no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material respect; (ii)
each of the representations and warranties of the Company contained in this
Agreement were, when originally made, and are, at the time such certificate
is dated true and correct; (iii) each of the covenants required herein to
be performed by the Company on or prior to the date of such certificate has
been duly, timely and fully performed, and each condition herein required
to be complied with by the Company on or prior to the date of such
certificate has been duly, timely and fully complied with; and (iv) the
Commission has not issued an order preventing or suspending the use of the
Prospectus or any preliminary prospectus filed as a part of the
Registration Statement or any amendment thereto; no stop order suspending
the effectiveness of the Registration Statement has been issued; and to the
best knowledge of the respective signers, no proceedings for that purpose
have been instituted or are pending or contemplated under the Act. The
delivery of the certificate provided for in this subparagraph shall be and
constitute a representation and warranty of the Company as to the facts
required in the immediately foregoing clauses (i) through (iv) of this
subparagraph to be set forth in such certificate.
(g) At the time the Registration Statement is declared effective and
also on the Closing Date, there shall be delivered to you a letter
addressed to you, as Placement Agent, from Ernst & Young LLP, independent
accountants, the first one to be dated the effective date of the
Registration Statement and the second one to be dated the Closing Date, to
the effect set forth in Exhibit C. There shall not have been any change or
decrease specified in the letters referred to in this subparagraph which
makes it impractical or inadvisable in the judgment of the Placement Agent
to proceed with the offering of the Shares as contemplated hereby.
(h) At the time the Registration Statement is declared effective and
also on the Closing Date, there shall be delivered to you a letter
addressed to you, as Placement Agent, from Muehl, Steffes & Krueger, S.C.,
independent accountants, the first one to be dated the effective date of
the Registration Statement and the second one to be dated the Closing Date,
to the effect set forth in Exhibit D.
(i) At the time the Registration Statement is declared effective and
also on the Closing Date, there shall be delivered to you a letter
addressed to you, as Placement Agent, from Buonanno & Conolly, independent
accountants, the first one to be dated the
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<PAGE>
effective date of the Registration Statement and the second one to be dated
the Closing Date, to the effect set forth in Exhibit E.
(j) The fees and out-of-pocket expenses payable by the Company
pursuant to Section 4(g) of this Agreement, shall have been paid in full,
to the extent that the Company shall have received an invoice therefor at
any time prior to the Closing Date.
(k) All conditions to the closing of the Chesapeake Acquisition have
been satisfied or waived, and the Company and Chesapeake shall have
notified you that they intend to complete the closing of the Chesapeake
Acquisition on the Closing Date concurrently with or immediately after the
Closing of the sale of the Shares pursuant to this Agreement.
(l) Such further certificates and documents as you may reasonably
request.
(m) The Escrow Agent shall have received Funds from prospective
investors for the purchase of all of the Shares.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Sonnenschein Nath & Rosenthal, special counsel to the Placement Agent, which
approval shall not be unreasonably withheld. The Company shall furnish you with
such manually signed or conformed copies of such opinions, certificates, letters
and documents as you request. If any of the conditions specified in this Section
shall not have been fulfilled when and as required by this Agreement, the
Placement Agent shall have no obligation to transfer any funds representing the
purchase price for the Shares to the Company and may, in its sole discretion,
return any such funds to prospective Investors in the Offering. Any such return
of funds to prospective Investors shall be without liability of the Placement
Agent to the Company or to any shareholder, officer, director, employee or
creditor of the Company. Notice of such return of funds to prospective Investors
shall be given to the Company in writing, or by telegraph or telephone and
confirmed in writing.
6. Termination. This Agreement may be terminated with respect to the
Shares in the sole discretion of the Placement Agent by notice to the Company
given prior to the Closing, in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at or
prior to the Closing, the Placement Agent determines in its sole discretion
(which determination shall be conclusive absent manifest error) that there has
been an adverse change in the financial or securities markets or in the
Company's business, financial condition, results of operations or prospects that
makes it impracticable or inadvisable to proceed with the Offering contemplated
hereby or the delivery of the Shares as contemplated hereby. Any termination of
this Agreement pursuant to this Section 6 shall not be deemed a termination of
that certain letter agreement dated September 25, 1996 between the Company and
the Placement Agent, a copy of which is attached hereto as Exhibit A.
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<PAGE>
7. Indemnification.
(a) The Company will indemnify and hold harmless the Placement Agent
and each of the directors, officers, employees and agents of the Placement Agent
and each person, if any, who controls the Placement Agent within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, liabilities, expenses and damages (including any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, liabilities, expenses
or damages arise out of or are based on the engagement of or services rendered
by the Placement Agent in its capacity as Placement Agent of the Offering or any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, or the
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading,
provided that the Company will not be liable to the extent that such loss,
claim, liability, expense or damage arises from the sale of the Shares in the
Offering to any person and is based on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to the Placement Agent furnished in writing to the Company
by the Placement Agent expressly for inclusion in the Registration Statement,
any preliminary prospectus or the Prospectus. The Company acknowledges that the
statements set forth under the heading "Plan of Distribution" in any preliminary
prospectus and the Prospectus constitute the only information relating to the
Placement Agent furnished in writing to the Company by the Placement Agent
expressly for inclusion in the Registration Statement, any preliminary
prospectus or the Prospectus. This indemnity agreement will be in addition to
any liability that the Company might otherwise have.
(b) The Placement Agent will indemnify and hold harmless the Company
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, each director of the Company
and each officer of the Company who signs the Registration Statement, to the
same extent as the foregoing indemnity from the Company to the Placement Agent,
but only insofar as losses, claims, liabilities, expenses or damages arise out
of or are based on any untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information relating to
the Placement Agent furnished in writing to the Company by the Placement Agent
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus. The Company acknowledges that the statements set forth under the
heading "Plan of Distribution" in any preliminary prospectus and the Prospectus
constitute the only information relating to the Placement Agent furnished in
writing to the Company by the Placement Agent expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus. This
indemnity will be in addition to any liability that the Placement Agent might
otherwise have.
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<PAGE>
(c) Any party that proposes to assert the right to be indemnified
under this Section 7 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
this Section unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. If any
such action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering written notice
to the indemnified party promptly after receiving notice of the commencement of
the action from the indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and, after notice from the indemnifying
party to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in connection with
the defense. The indemnified party will have the right to employ its own counsel
in any such action, but the fees, expenses and other charges of such counsel
will be at the expense of such indemnified party unless (1) the employment of
counsel by the indemnified party has been authorized in writing by the
indemnifying party, (2) the indemnified party has reasonably concluded (based on
advice of counsel) that there may be legal defenses available to it or other
indemnified parties that are different from or in addition to those available to
the indemnifying party, (3) a conflict or potential conflict exists (based on
advice of counsel to the indemnified party) between the indemnified party and
the indemnifying party (in which case the indemnifying party will not have the
right to direct the defense of such action on behalf of the indemnified party)
or (4) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. All such fees, disbursements and other charges
will be reimbursed by the indemnifying party promptly as they are incurred. An
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent (which consent will not be unreasonably
withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Placement Agent,
the Company and the Placement Agent will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Placement Agent, such as persons who control the Company within the meaning of
the Act, officers of the Company who signed the Registration Statement and
directors of the Company, who also may be liable for contribution) to which the
Company and the Placement Agent may be subject in such proportion so that the
Placement
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Agent is responsible for that portion represented by the percentage that the
cash commission appearing on the cover of the Prospectus bears to the public
offering price appearing thereon, and the Company is responsible in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company. If, but only if, the allocation provided by the foregoing sentence
is not permitted by applicable law, the allocation of contribution shall be made
in such proportion as is appropriate to reflect not only the relative benefits
referred to in the foregoing sentence but also the relative fault of the
Company, on the one hand, and the Placement Agent, on the other, with respect to
the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Placement Agent, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Placement Agent agree that it would not be just and equitable if
contributions pursuant to this Section 7(d) were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 7(d)
shall be deemed to include, for purposes of this Section 7(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7(d), the Placement Agent shall not be required to
contribute any amount in excess of the cash commissions received by it, and no
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) will be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7(d), any person who controls a party to this Agreement within the
meaning of the Act will have the same rights to contribution as that party, and
each officer of the Company who signed the Registration Statement will have the
same rights to contribution as the Company, subject in each case to the
provisions hereof. Any party entitled to contribution, promptly after receipt of
notice of commencement of any action against such party in respect of which a
claim for contribution may be made under this Section 7(d), will notify any such
party or parties from whom contribution may be sought, but the omission so to
notify will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 7(d). No
party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
(e) The indemnity and contribution agreements contained in this
Section 7, the representations and warranties of the Company contained in this
Agreement and the Company's obligations in Section 4(g) shall remain operative
and in full force and effect regardless of (i) any investigation made by or on
behalf of the Placement Agent or (ii) any termination of this Agreement.
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<PAGE>
8. Certain Definitions.
"Chesapeake" shall mean The American Bagel Company, a Maryland corporation,
and Almike Enterprises, Inc., a Maryland corporation.
"Chesapeake Asset Purchase Agreement" shall mean that certain Asset
Purchase Agreement dated as of September 4, 1996 among the Company, Chesapeake,
Michael D. Robinson and Alan R. Manstof.
"Chesapeake Acquisition" shall have the meaning assigned to such term in
the Registration Statement.
"Institutional Accredited Investor" shall mean an institutional investor
which is an "accredited investor," as defined in Rule 501(a)(1),(2),(3) or (7)
of Regulation D promulgated under the Act.
"Material Adverse Effect" shall mean a material adverse effect upon the
condition (financial or otherwise), business, assets, results of operations or
prospects of Chesapeake, the Company and its Subsidiaries taken as a whole, upon
the Company's ability to perform its obligations under this Agreement or upon
the validity or consummation of the Chesapeake Acquisition or the transactions
contemplated by this Agreement.
"Property" shall mean any interest of any kind of property assets, whether
real, personal or mixed, or tangible or intangible.
"Qualified Institutional Buyer" shall have the meaning ascribed to that
term in Section (a)(i) of Rule 144A promulgated under the Act.
"Subsidiary" shall mean any corporation at least 50% of whose outstanding
voting stock shall at the time be owned by the Company or by one or more
Subsidiaries of the Company or by the Company and one or more Subsidiaries of
the Company.
9. Miscellaneous.
(a) To the extent that any representation and warranty in Section 3 of
this Agreement pertains specifically to Chesapeake, such representation and
warranty of the Company shall be deemed given by the Company to the Placement
Agent pursuant to Section 3 hereof only to the extent represented and warranted
by Chesapeake to the Company in Section 4 of the Chesapeake Asset Purchase
Agreement and to the extent of the Company's knowledge after diligent
investigation. Nothing in this Section 9(a) shall be deemed to limit in any
respect the representation and warranty of the Company contained in Section 3(b)
of this Agreement.
(b) All communications provided for hereunder shall be in writing and
delivered by hand or by certified mail, return receipt requested, postage
prepaid, and, if to The Chicago Corporation, at its offices at 208 South LaSalle
Street, Chicago, Illinois 60604, Attention:
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Patrick DeLacey, or such other place or places as shall be designated by The
Chicago Corporation in writing, with a copy to Mitchell L. Hollins, Sonnenschein
Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, and if to the
Company, at its offices at 8501 W. Higgins Road, Suite 320, Chicago, Illinois
60631, Attention: Chief Executive Officer, or such other place or places as
shall be designated by the Company in writing, with a copy to Deanne M. Greco,
Moss & Barnett, 4800 Norwest Center, 90 South Seventh Street, Minneapolis,
Minnesota 55402-4129. Any such notice shall be effective only upon receipt. Any
notice under Section 6 or 7 may be made by facsimile, telex or telephone, but if
so made shall be subsequently confirmed in writing.
(c) This Agreement has been and is made solely for the benefit of the
Placement Agent and the Company and of the controlling persons, directors and
officers referred to in Section 7, and their respective successors and assigns,
and no other person shall acquire or have any right under or by virtue of this
Agreement.
(d) This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois applicable to contracts made and to be
performed entirely within such State without giving effect to the principles of
conflicts of law of such State.
(e) This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
(f) In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
* * * *
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<PAGE>
If you agree with the foregoing, please sign the form of acceptance below
and return this Agreement to the Company, whereupon this Agreement will become
and evidence a binding agreement between the Company and you as of the date
first written above.
Sincerely,
BAB HOLDINGS, INC.
By:
------------------------------
Name:
Its:
Confirmed as of the date
first above mentioned:
THE CHICAGO CORPORATION
By:
------------------------------
Name:
Its:
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EXHIBIT A
THE CHICAGO CORPORATION
September 20, 1996
PERSONAL AND CONFIDENTIAL
- -------------------------
BAB Holdings, Inc.
8501 W. Higgins Road
Suite 320
Chicago, IL 60631
Attn: Mr. Michael K. Murtaugh
Vice President and General Counsel
Dear Mr. Murtaugh:
The Chicago Corporation ("TCC") is pleased to set forth the terms of this
engagement letter agreement (the "Agreement") relating to our retention for
financial advisory and investment banking services by BAB Holdings, Inc. ("BAB"
or the "Company").
1. DESCRIPTION OF ENGAGEMENT. TCC agrees to act as the exclusive
financial advisor and agent for BAB to provide investment banking services in
connection with a private placement of securities of the Company, to be
convertible into or exercisable to purchase common stock, (the "Offering") and
TCC agrees to act as agent in soliciting potential institution investors (the
"Investors") to purchase such securities to finance the Company's pending merger
with Chesapeake Bagel Bakery. The Investors may be either new or existing
investors of the Company.
The terms of this Agreement shall extend from the date of this letter to the
earlier of a period of twelve months thereafter or the consummation of the
financing transaction contemplated herein, and may be extended on a month-to-
month basis by mutual written consent of the parties hereto, hereinafter as it
may be extended referred to as the "Term".
2. PRIVATE PLACEMENT STRUCTURE. The Offering will comprise securities
which will be convertible into or exchangeable for approximately 3,000,000
shares of common stock. The Offering will be structured to allow for trading of
such securities under Rule 144A. The common stock into which such securities are
convertible or for which such securities are exercisable will be registered
under the Securities Act of 1933 pursuant to a Registration Statement filed by
the Company on or about November 30, 1996. Except for the 160,350 shares
excluded from a similar "no sale" provision agreed to as part of the Company's
initial public
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<PAGE>
offering, the Company and its officers and directors will not offer to sell or
sell any shares of the common stock from the date of the closing of the Offering
through the 30th day following the effective date of such Registration Statement
under the Securities Act of 1993.
3. SERVICES TO BE PROVIDED. In connection with the Offering described in
paragraph 1 above, TCC will, or will stand ready to:
. Review the business operations of the Company;
. Analyze and evaluate the historical and projected financial
performance of the Company;
. Assist in preparation of a Financing Memorandum describing the
Offering and the business and prospects of the Company;
. Compile a list of potential Investors and contact those sources
approved by the Company;
. Formulate a strategy for discussions and negotiations with potential
Investors;
. Distribute the Memorandum and determine the interest of Investors in
providing financing;
. Coordinate and assist in informational due diligence meetings with
potential Investors;
. Assist in negotiations and execution of a term sheet and subscription
agreements pursuant to the Offering; and
. Provide, as deemed appropriate by TCC, additional financial advisory
services related to the Offering.
4. COMPENSATION. In consideration of TCC providing, or standing ready to
provide, the investment banking services described in paragraph 3 above, BAB
agrees to pay to TCC: (i) a fee ("Placement Fee") payable at Closing equal to
5.5% of any financing commitments secured by BAB (whether or not such monies are
actually funded at Closing); and (ii) Warrants to purchase 100,000 shares of the
Company's Common Stock at a price equal to 150% of the Offering price per share
for a period of five years.
The Placement Fee shall be payable in immediately available funds on the closing
date of an Offering regardless of whether such closing occurs during the Term or
such Offering is initiated during the Term and is closed after the Term. Except
as expressly provided in the last sentence of paragraph 10 hereof, BAB's
obligation to pay the Placement Fee shall be contingent solely upon closing of
an Offering. The Placement Fee shall not include any fees earned by TCC or
others for furnishing services other than as provided herein, such as fees
payable in connection
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<PAGE>
with the placement or arrangement of any other debt or equity financing, or
advisory work unrelated to the Offering including, without limitation, advisory
fees associated with the pending acquisition of Chesapeake by BAB.
5. EXPENSES. In addition to the Placement Fee described in paragraph 4
above, BAB agrees to promptly reimburse TCC, upon request, for all reasonable
out-of-pocket expenses incurred in the performance of its services hereunder
regardless of whether an Offering is consummated, not to exceed $75,000 in
aggregate without BAB's prior approval.
6. INDEMNIFICATION. BAB agrees to: (1) indemnify and hold harmless TCC,
their directors, officers, agents, employees, and any individual(s) who may be
deemed to control TCC (collectively, "Indemnified Persons") against all losses,
claims, damages, penalties, judgments, liabilities and expenses of every kind
whatsoever (including, without limitation, all expenses of litigation or
preparation therefor, including reasonable attorneys' fees; whether or not an
Indemnified Person is a party thereto) (collectively, "Liabilities") which any
of the Indemnified Persons may pay or incur arising out of or relating to this
Agreement or the Offering; and (2) expressly and irrevocably waives any and all
rights and objections which it may have against any Indemnified Persons in
respect of any Liabilities arising out of or relating to this Agreement or the
Offering, except to the extent that such Liabilities arise primarily from TCC's
gross negligence or wilful misconduct.
BAB further agrees not to settle any claim, litigation or proceeding (whether or
not any Indemnified Person is a party thereto) relating to this Agreement or
Offering unless: (1) such settlement releases all the Indemnified Persons from
any and all Liabilities related to this Agreement or the Offering; and (2) the
entire settlement amount and all costs of settlement are borne by BAB.
For the purposes of this Indemnification provision, BAB irrevocably submits to
the non-exclusive jurisdiction of any court in which a claim relating to this
Agreement or the Offering is properly brought against an Indemnified Person and
irrevocably waives any objection as to venue or forum.
An Indemnified Person shall have the right to employ their own counsel in any
suit, action or proceeding arising from this Agreement or the Offering if the
Indemnified Person reasonably concludes, based on advice of counsel, that a
conflict of interest exists between BAB and the Indemnified Person which would
materially impact the effective representation of the Indemnified Person. In
the event that the Indemnified Person concludes that a conflict of interest
exists, the Indemnified Person shall have the right to: (1) assume and direct
the defense of such suit, action, or proceeding on their own behalf; and (2) to
select counsel which will represent them in any such action, suit or proceeding,
and BAB shall indemnify the Indemnified Person for the reasonable legal fees and
expenses of such counsel and other expenses reasonably incurred by the
Indemnified Person.
7. PERSONS ENTITLED TO RELIANCE. BAB recognizes that TCC has been
retained only by the undersigned, and that its engagement of TCC is not deemed
to be on behalf of and is not
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intended to confer rights upon any shareholder, owner or partner of BAB or any
other person not a party hereto as against TCC or any of TCC's affiliates, the
respective directors, officers, agents and employees of TCC's affiliates or each
other person, if any, controlling TCC or any of TCC's affiliates.
8. COOPERATION. In connection with TCC's activities pursuant to this
Agreement, BAB will cooperate with TCC will, to the extent possible, furnish TCC
with all information and data concerning the Offering which TCC deems
appropriate and will, to the extent possible, provide TCC with access to the
Company's respective officers, directors, employees, financial advisors,
independent accountants and legal counsel. BAB represents and warrants that all
information made available to TCC by BAB or contained in any filing by BAB with
any court or governmental regulatory agency, commission or instrumentality with
respect to any Offering will, at all times during the period of the engagement
of TCC hereunder, be complete and correct in all material respects and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances under which such statements are made. BAB further represents
and warrants that any projections provided by it to TCC will have been prepared
in good faith and will be based upon assumptions which, in light of the
circumstances under which they are made, are reasonable. BAB acknowledges and
agrees that, in rendering its services hereunder, TCC will be using and relying
on information provided by BAB or information available from public sources and
other sources deemed reliable by TCC without independent verification thereof by
TCC or independent appraisal by TCC. TCC does not assume responsibility for the
accuracy or completeness of any of this information regarding the Company.
9. CONFIDENTIALITY.
(a) TCC agrees to keep confidential non-public information which it
receives from BAB concerning BAB and the Offering and to disclose that
information only with the consent of BAB, to the extent necessary to
complete the Offering, or as required by law or legal process.
(b) BAB agrees to keep confidential non-public information which it
receives from TCC (including, without limitation, opinions and advice)
and to disclose that information only with the consent of TCC;
provided that BAB may disclose the fact that it has retained TCC as an
advisor, and as required by regulation, law or legal process.
10. TERMINATION. This Agreement shall become effective upon BAB's
acceptance of this letter. This Agreement may be terminated during the Term by
either TCC or BAB giving written notice of termination to the other. Neither
termination of this Agreement nor consummation of the Offering contemplated
herein shall effect i) any compensation earned by TCC up to and including the
date of termination or consummation; ii) the reimbursement of expenses incurred
by TCC up to the date of termination or consummation; and iii) paragraphs 3-11,
inclusive, of this Agreement. If this Agreement is terminated by BAB or this
Agreement is terminated by TCC after a breach of the Agreement by BAB or the
Agreement's Term expires
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<PAGE>
without renewal and consummation of the financing contemplated herein, and if an
Offering is consummated with any institution contacted by TCC on behalf of the
Company in connection with the Offering during the period of two years following
a termination for any of the three foregoing reasons, then the Placement Fee in
respect of such Offering shall become due and payable.
11. MISCELLANEOUS.
(a) BAB may not assign this Agreement.
(b) BAB agrees that, upon consummation of an Offering, TCC has the right
to publish a tombstone advertisement in financial publications at its
own expense describing its services hereunder.
(c) The Agreement represented by this letter shall be governed by the laws
of the State of Illinois.
Please confirm that the foregoing is in accordance with your understanding of
this Agreement by signing and returning to us a copy of this letter.
Very truly yours,
THE CHICAGO CORPORATION
By: /s/ Patrick T. DeLacey
-------------------------
Patrick T. DeLacey
Managing Director
ACCEPTED AND AGREED
BAB HOLDINGS, INC.
By: /s/ Michael W. Evans
------------------------------
Title: Chief Executive Officer
----------------------------
Date: September 25, 1996
-----------------------------
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<PAGE>
EXHIBIT B
The opinion letter, dated the Closing Date, of Moss & Barnett, counsel to
the Company, shall include opinions to the effect that:
1. BAB Holdings, Inc. (the "Company") is a corporation duly organized,
validly existing and in good standing under the laws of the State of Illinois
and has all requisite corporate power and authority to own its Property and to
carry on its business as presently conducted, and to enter into, deliver and
perform its obligations under the Placement Agent Agreement (the "Agreement"),
and to issue and sell the Shares to be issued and sold pursuant thereto. The
Company is qualified to do business in each jurisdiction in which the character
of the Company's Property or the nature of its activities makes such
qualification in such jurisdictions necessary, except where the failure to so
qualify would not, individually or in the aggregate, have a Material Adverse
Effect.
2. Chesapeake and each of the Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization and has all requisite corporate
power and authority to own its Property and to carry on its business as
presently conducted. Chesapeake and each of the Subsidiaries is qualified to do
business in each jurisdiction in which the character of the its Property or the
nature of its activities makes such qualification in such jurisdictions
necessary, except where the failure to so qualify would not, individually or in
the aggregate, have a Material Adverse Effect. The Company has good and
marketable title to all of the outstanding shares of capital stock of such
Subsidiaries, free and clear in each case of any lien, claim or encumbrance of
any nature.
3. The number of authorized, issued and outstanding shares of capital
stock of the Company are as set forth in the Prospectus under the historical
column of the "Capitalization" section, and all issued and outstanding capital
stock of the Company has been duly authorized and is validly issued, fully paid
and nonassessable. No preemptive rights or similar rights of any security
holders of the Company exist with respect to the issuance and sale of the Shares
by the Company. To the knowledge of such counsel, no security holder of
Chesapeake, the Company or any Subsidiary holds a right to require the Company
to register under the Act any securities of any nature owned or held by such
person in connection with the transactions contemplated by this Agreement except
for rights which are described in the Prospectus and which have been waived in
connection with the transactions contemplated by this Agreement. The Shares
conform as to matters of law in all material respects to the description of the
Shares under the caption "Description of Capital Stock -- Common Stock" in the
Prospectus, and such description accurately sets forth the material legal
provisions thereof required to be set forth in the Prospectus.
4. The outstanding shares of Common Stock have been, and the Shares will
be, when they are duly countersigned by the Company's Transfer Agent, issued and
delivered in accordance with the provisions of the Registration Statement and
paid for by the Investors in accordance with the terms of the Agreement, duly
authorized, validly issued, fully paid and
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<PAGE>
nonassessable. The Shares have been approved for listing on the Nasdaq Small-
Cap Market, subject to official notice of issuance.
5. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of the Agreement by the Company or in connection with the taking by
the Company of any action contemplated thereby, except such as have been
obtained under the Act and the Rules and Regulations and such as may be required
under state securities or blue sky laws or by the bylaws and rules of the NASD
in connection with the purchase and of the Shares by the Investors.
6. The Registration Statement has become effective under the Act, and no
order suspending the effectiveness of the Registration Statement has been issued
and no proceeding for that purpose has been instituted or to our knowledge is
threatened or pending.
7. We have reviewed all contracts or other documents referred to in the
Registration Statement and the Prospectus, and such contracts or other documents
are fairly summarized or disclosed therein, and filed as exhibits thereto as
required, and we do not know of any contracts or documents required to be so
summarized or disclosed or filed which have not been so summarized or disclosed
or filed.
8. The Registration Statement and the Prospectus comply in all material
respects as to form with the requirements of the Act and the Rules and
Regulations (except that we express no opinion as to financial statements,
schedules and other financial and statistical data contained in the Registration
Statement or the Prospectus).
9. All descriptions in the Prospectus of statutes, regulations or legal or
governmental proceedings fairly present the information required to be shown.
10. The Company has full corporate power and authority to enter into the
Agreement, and the Agreement has been duly authorized, executed and delivered by
the Company, is a valid and binding agreement of the Company and, except for the
indemnification and contribution provisions thereof, as to which we express no
opinion, is enforceable against the Company in accordance with the terms
thereof.
11. Except as described in the Registration Statement and Prospectus, the
execution and delivery of the Agreement by the Company, the consummation by the
Company of the transactions therein contemplated and the compliance by the
Company with the terms of the Agreement do not and will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the assets
of Chesapeake, the Company or any Subsidiary pursuant to the terms or provisions
of, or result in a breach or violation of any of the terms or provisions of, or
constitute a default or result in the acceleration of any obligation under, the
articles of incorporation or bylaws of Chesapeake, the Company or any Subsidiary
or any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of
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<PAGE>
indebtedness, lease, contract or other material agreement or instrument to which
Chesapeake, the Company or any Subsidiary is a party or by which it or any of
its properties is bound or affected, or any judgment, ruling, decree, order,
statute, rule or regulation of any court or other governmental agency or body
applicable to the business or properties of Chesapeake, the Company or any
Subsidiary (except that we express no opinion as to the securities or blue sky
laws of any jurisdiction other than the United States) or result in any party
thereto other than the Company having the right to terminate any such indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, lease, contract or other material agreement or
instrument to which the Company is a party or by which it or any of its
properties is bound or affected.
12. To our knowledge, except as described in the Registration Statement
and Prospectus, none of Chesapeake, the Company or any Subsidiary is in
violation of its articles of incorporation or bylaws or in default (nor has an
event occurred which, with notice or lapse of time or both, would constitute a
default or acceleration) in the performance of any obligation, agreement or
condition contained in any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument to which such
entity is a party or by which it or its properties is bound or affected, and
none of Chesapeake, the Company or any Subsidiary is in violation of any
judgment, ruling, decree, order, franchise, license or permit or any statute,
rule or regulation of any court or other governmental agency or body applicable
to the business or properties of Chesapeake, the Company or such Subsidiary.
13. To our knowledge, there are no actions, suits or proceedings pending
or threatened against or affecting Chesapeake, the Company or any Subsidiary or
the business, properties, business prospects, condition (financial or otherwise)
or results of operations of Chesapeake, the Company or any Subsidiary or any of
their respective directors or officers in their capacities as such, before or by
any federal or state court, commission, regulatory body, administrative agency
or other governmental body, wherein an unfavorable ruling, decision or finding
would reasonably be expected to have a Material Adverse Effect, except as set
forth in or contemplated by the Registration Statement and the Prospectus.
14. All offers and sales of the Company's and each Subsidiary's capital
stock prior to the date hereof were at all relevant times duly registered under
or exempt from the registration requirements of the Act and were duly registered
in accordance with or exempt from the registration requirements of all
applicable state securities or blue sky laws.
15. None of Chesapeake, the Company or any Subsidiary is an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended.
16. The consummation of the Chesapeake Acquisition and the execution,
delivery and performance of all documents and instruments executed and delivered
in connection therewith were authorized by all necessary corporate action on the
part of Company; all consents, approvals, authorizations, orders, licenses,
certificates, permits, registrations or qualifications
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<PAGE>
required to be obtained in connection with the consummation of the Chesapeake
Acquisition have been obtained, other than such consents, approvals,
authorizations, orders, licenses, certificates, permits, registrations or
qualifications which, individually or in the aggregate, would not have a
Material Adverse Effect; the consummation of the Chesapeake Acquisition will not
(i) conflict with or result in a breach or violation of any of terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such counsel to
which Chesapeake, the Company or any of its Subsidiaries was or is bound or to
which any of the Property or assets of Chesapeake, the Company or any of its
Subsidiaries was or is subject, (ii) result in any violation of the provisions
of the articles of incorporation or by-laws of Chesapeake, the Company or any of
its Subsidiaries or (iii) result in any violation of the provisions of any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over Chesapeake, the Company or any of its Subsidiaries
or any of their Properties, other than, in the case of clauses (i) and (iii)
above, such conflicts, breaches, violations or defaults that, individually or in
the aggregate, would not have a Material Adverse Effect.
17. We have participated in the preparation of the Registration Statement
and the Prospectus and nothing has come to our attention which has caused us to
believe that, as of the Effective Date, the date of the Agreement, and the
Closing Date, either the Registration Statement or the Prospectus, or any
amendment or supplement thereto contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances in which they were made (except that we express no opinion as
to financial statements, schedules and other financial or statistical data
contained in the Registration Statement or the Prospectus). The opinion
expressed in this paragraph is made without independent check or verification of
such facts, and we do not assume any responsibility for the accuracy,
completeness or fairness of the statements in the Registration Statement or
Prospectus .
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<PAGE>
EXHIBIT C
Matters to be Covered in Comfort Letter
to be Delivered by Ernst & Young LLP
(1) They are independent public accountants with respect to the Company
and its subsidiaries (the "Company"), Chesapeake and its subsidiaries
("Chesapeake") and Bagels Unlimited, Inc. ("BUI") within the meaning of the Act.
(2) In their opinion the financial statements and schedules of the
Company, Chesapeake and BUI included in the Registration Statement and the
financial statements from which the information presented under the captions
"Summary Consolidated Financial and Store Data," "Selected Consolidated
Financial Information of the Company" and "Selected Combined Financial
Information of Chesapeake" has been derived, which are stated therein to have
been examined by them comply as to form in all material respects with the
applicable accounting requirements of the Act.
(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and Chesapeake responsible for financial and
accounting matters as to transactions and events subsequent to November 30, 1995
(in the case of the Company) and December 31, 1995 (in the case of Chesapeake),
a reading of minutes of meetings of the shareholders and directors of the
Company since November 30, 1995 (in the case of the Company) and December 31,
1995 (in the case of Chesapeake), a reading of the latest available interim
unaudited financial statements of the Company and Chesapeake (with an indication
of the dates thereof) and other procedures as specified in such letter, nothing
came to their attention which caused them to believe that:
(i) the unaudited financial statements of the Company and Chesapeake
included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of
the Act or that such unaudited financial statements are not fairly
presented in accordance with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration
Statement,
(ii) the amounts in "Summary Consolidated Financial and Store Data,"
"Selected Consolidated Financial Information of the Company" and
"Selected Combined Financial Information of Chesapeake" included in
the Prospectus do not agree with or are not derivable from the
corresponding amounts in the audited consolidated financial
statements or unaudited consolidated financial statements (as
applicable) from which such amounts were derived, and
(iii) at a specified date not more than five days prior to the date of
such letter, there was any change in the capital stock or long-term
debt or short-term debt (other than normal payments) of the Company
or Chesapeake or any decrease in net current assets or shareholders'
equity as compared with amounts shown on the
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latest unaudited balance sheet of the Company and Chesapeake included
in the Registration Statement or for the period from the date of such
balance sheet to a date not more than five days prior to the date
thereof, there were any decreases, as compared with the corresponding
period of the prior year, in net sales, income before income taxes or
in the total or per share amounts of net income except, in all
instances, for changes or decreases which the Prospectus discloses
have occurred or may occur or which are set forth in such letter.
(4) On the basis of reading the pro forma information included in the
Prospectus, carrying out specified procedures, inquiries of certain officials of
the Company and Chesapeake who have responsibility for financial and accounting
matters, and proving the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts, nothing came to their attention which
caused them to believe that the pro forma financial information does not comply
in all material respects with the applicable accounting requirements of Rule 11-
02 of Regulation S-X and the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of such information.
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EXHIBIT D
Matters to be Covered in Comfort Letter
to be Delivered by Muehl, Steffes & Krueger, S.C.
(1) They are independent public accountants with respect to Bagels
Unlimited, Inc. within the meaning of the Securities Act of 1933, as amended.
(2) In their opinion the financial statements and schedules of Bagels
Unlimited, Inc. included in the Registration Statement which are stated therein
to have been examined by them comply as to form in all material respects with
the applicable accounting requirements of the Securities Act of 1933, as
amended.
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<PAGE>
EXHIBIT E
Matters to be Covered in Comfort Letter
to be Delivered by Buonanno & Conolly
(1) They are independent public accountants with respect to Strathmore
Bagels Franchise Corp. within the meaning of the Securities Act of 1933, as
amended.
(2) In their opinion the financial statements and schedules of Strathmore
Bagels Franchise Corp. included in the Registration Statement which are stated
therein to have been examined by them comply as to form in all material respects
with the applicable accounting requirements of the Securities Act of 1933, as
amended.
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<PAGE>
EXHIBIT 1.2
NO. FOR THE PURCHASE
OF 100,000 SHARES
VOID AFTER 4:00 P.M. CHICAGO TIME ON NOVEMBER ___, 2001
BAB HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
THIS CERTIFIES that, for value received, BAB Holdings, Inc., a Illinois
corporation (hereinafter called the "Company"), upon the surrender of this
Warrant Certificate (which Warrant Certificate evidences a number of Common
Stock Purchase Warrants ("Warrants") equal to the number of Shares set forth
above) to the Company at its principal executive office (provided, and only if,
this Warrant Certificate shall be so surrendered subsequent to 4:00 P.M. Chicago
Time on November ___, 1997, but before 4:00 P.M. Chicago Time on November ___,
2001), will sell and deliver, or cause to be sold and delivered to The Chicago
Corporation ("TCC") or registered assigns, fully paid and nonassessable shares
of the Common Stock, no par value per share, of the Company ("Shares"),
evidenced by a certificate therefor, upon payment of the warrant price for the
number of Shares in respect of which this Warrant Certificate is exercised;
provided, however, that under certain conditions set forth hereinafter the
number of Shares purchasable upon the exercise of the Warrants evidenced hereby
may be increased or reduced, or other securities, property and/or cash may
become purchasable in lieu thereof upon the exercise of the Warrants evidenced
hereby. In such event the term "Shares" shall mean, unless the context
otherwise requires, the shares, other securities, property and cash at the time
receivable upon the exercise of the Warrants evidenced hereby. The warrant
price at which the Shares shall be purchasable (the "Purchase Price") upon the
exercise of the Warrants evidenced hereby shall be $_______ per Share, or, in
the event of any subdivision of Warrants pursuant to Section 4 hereof, such
other purchase price as may then be in effect. The warrant price is payable,
upon the exercise of the Warrants evidenced hereby, in cash, or by certified or
official bank check, wire transfer, or postal or express money order, payable in
United States Dollars, to the order of the Company. The right of purchase
represented by this Warrant Certificate is exercisable, at the election of the
registered holder thereof, either as an entirety or from time to time for part
only of the Shares specified herein and, in the event this Warrant Certificate
is exercised in respect of less than all of such Shares, a new Warrant
Certificate for the remaining number of such Shares will be issued on such
surrender.
Upon any exercise of the Warrants evidenced by this Warrant Certificate,
the form of election to purchase attached hereto must be duly executed and the
accompanying instructions for the registration and delivery of Shares must be
filled in.
This Warrant Certificate and the Warrants evidenced hereby are subject to
the terms and conditions hereinafter set forth.
1. Delivery of Share Certificates on Exercise. As soon as practicable
after the exercise
<PAGE>
of Warrants and payment of the Purchase Price, the Company at its expense
(including the payment by it of any applicable issue or other tax) will cause to
be issued in the name of and delivered to the holder hereof, or as such holder
may direct, a certificate or certificates for the number of full Shares to which
such holder shall be entitled upon such exercise, and cash as provided in
Section 2 hereof, in respect of any fraction of a Share otherwise issuable upon
such exercise.
All Shares issued upon the exercise of Warrants shall be duly issued and
outstanding and fully paid and nonassessable.
Irrespective of the date of issue and delivery of certificates for any
Shares issuable upon the exercise of Warrants, each person in whose name any
such certificate is issued shall for all purposes be deemed to have become the
holder of record of the Shares represented thereby on the date on which this
Warrant Certificate was surrendered and payment of the Purchase Price was
tendered. Each person holding any Shares received upon exercise of Warrants
shall be entitled to receive only dividends or distributions which are payable
to holders of record on or after the date on which such person became the holder
of record of such Shares.
2. Payment of Cash in lieu of Fractional Shares. The Company shall not be
required to issue fractional Shares upon exercise of Warrants. If a fractional
interest in a Share would be otherwise deliverable upon the exercise of
Warrants, the Company shall make payment therefor in cash at the Market Price
thereof on the last business day before the exercise date. The term "Market
Price" shall mean the closing price of the Shares on the date in question on the
principal securities exchange on which the Shares may then be listed or, if the
Shares are not then listed on a national securities exchange, the closing bid
price on such date in the over-the-counter securities market.
3. Adjustments in Shares Receivable upon Exercise of Warrants. If the
Company shall (1) make a distribution in its Shares, (2) subdivide its
outstanding Shares, (3) combine its outstanding Shares into a smaller number of
Shares, (4) issue by reclassification of its Shares any shares of the Company,
or (5) merge, consolidate, sell, lease, or exchange all or substantially all of
the assets of the Company, the number of Shares issuable upon the exercise of
each Warrant evidenced by this Warrant Certificate shall be the same number and
kind of Shares and the same amount of securities, property, or cash as the
holder hereof would have been entitled to receive upon the happening of the
above events if immediately prior to any such event such holder had exercised
such Warrant and had purchased Shares. For this purpose, any event described in
(1) through (5) in the preceding sentence shall be deemed to have occurred
immediately after the opening of business on the day following the date fixed
for the determination of the shareholders entitled to participate in such event.
If the Company issues or grants, other than issuances or grants pursuant to
a stock option plan of the Company existing on the date hereof, stock options,
warrants or other rights to acquire Common Stock of the Company at a price lower
than 100% of the Market Price on the
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last business day before the date of issuance or grant or if the Company offers
the right to subscribe for additional Shares to its shareholders at a price
below 100% of the Market Price on the last business day before the date the
offer is made, such issuance or grant of stock options, warrants or other rights
or offering of rights shall be deemed to constitute a distribution in Shares of
that number of Shares which is determined by dividing the Market Price on the
last business day before the date of issuance or grant of stock options,
warrants or other rights or offering of rights into the difference between (A)
the total Market Price as of such time of the number of Shares purchasable upon
exercise of such options or rights and (B) the total offering price of such
Shares.
The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company, to make any computation
required under this Section, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section.
No adjustment of the Shares issuable upon exercise of Warrants shall be
required unless such adjustment would require an increase or decrease of at
least 1% in the number of Shares issuable upon exercise of Warrants or a change
in the kind or class of Shares or other securities or property so issuable upon
any such exercise; provided, that any adjustments of less than 1% shall
accumulate and be taken into account in determining whether any subsequent
adjustment shall be made and the amount thereof.
Whenever the Company shall take any action requiring an adjustment in the
Shares receivable upon the exercise of a Warrant, the Company shall promptly
cause to be mailed to the registered holder thereof, at such holder's address
appearing on the Warrant register, a notice stating the date of the action, the
type of action and the adjustment required. Failure to give such notice, or any
defect therein, shall not affect the legality or validity of the action taken or
of any distribution in connection therewith.
4. Subdivision of Warrants. If as a result of an adjustment under Section
3 hereof (the "Adjustment"), the Shares receivable upon the exercise of a
Warrant immediately after the Adjustment shall constitute a multiple (the
"Multiple," which Multiple shall be a whole number) of the Shares which would
have been receivable upon the exercise of a Warrant immediately prior to the
Adjustment, then the Company may at its discretion subdivide the number of
Warrants evidenced by this Warrant Certificate into a number of Warrants equal
to the Multiple.
Upon such subdivision of Warrants (the "Subdivision") this Warrant
Certificate shall evidence a number of Warrants equal to the number of Warrants
evidenced by this Warrant Certificate immediately prior to the Subdivision,
multiplied by the Multiple; and each Warrant evidenced thereby shall entitle the
registered holder hereof to purchase the Shares which would have been receivable
upon exercise of such Warrant immediately prior to the Adjustment at a Purchase
Price equal to the Purchase Price in effect immediately prior to the
Subdivision,
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<PAGE>
divided by the Multiple. Promptly following the Subdivision the Company shall
cause to be mailed to the registered holder hereof, at such holder's address
appearing on the Warrant register, a notice stating the date and nature of the
subdivision and the new Purchase Price effective with the Subdivision. Failure
to give such notice, or any defect therein, shall not affect the legality or
validity of the Subdivision. In connection with the Subdivision, the Company may
at its election make provision for exchange of this Warrant Certificate for a
new form of Warrant Certificate.
5. Registration. The Company shall maintain books for the transfer and
registration of Warrants. Such registers shall show the names and addresses of
the respective holders of the Warrant Certificates and the number of Shares for
which each such Warrant Certificate has been issued.
6. Transfer of Securities. This Warrant Certificate, the Warrants
evidenced hereby and the Shares (the "Warrant Shares") issuable upon the
exercise of the Warrants evidenced hereby (collectively, the "Warrant
Securities") shall not be transferable except upon the conditions specified in
this Section 6.
6.1 The Chicago Corporation ("TCC") may transfer Warrant Securities at any
time to any officer, director, employee or affiliate (as defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended) of TCC or to
R.J. Steichen & Company or any officer, director, employee or affiliate of R.J.
Steichen & Company (the "Permitted Transferees"), and any such Permitted
Transferee may transfer Warrant Securities at any time to TCC or another
Permitted Transferee. Other than for such transfers, this Warrant Certificate
and the Warrants evidenced hereby may not be transferred. Subject to Section
6.2, the Warrant Shares may be transferred, but only in compliance with this
Section 6.
6.2 Except as permitted by the first sentence of Section 6.1, the holder
thereof may not transfer any Warrant Securities prior to November __, 1997.
6.3 Notice of Proposed Transfer. Prior to any transfer or sale or proposed
transfer or sale of any Warrant Shares, the holder thereof shall deliver a
written notice to the Company describing briefly the manner of such transfer or
sale and a written opinion of counsel for such holder to the effect that such
transfer or sale may be effected without the registration of such Warrant Shares
under the Securities Act of 1933, as amended (the "Securities Act"). The Company
shall thereupon permit or cause its transfer agent (if any) to permit such
transfer or sale to be effected unless the Company, within seven business days
after receipt of such notice and opinion, shall furnish to such holder and such
holder's counsel an opinion of the Company's outside counsel which (i) states
that such sale or transfer may not be effected without the registration of such
Warrant Shares under the Securities Act and (ii) specifies the reasons, factual,
legal or both, why such counsel's opinion differs from that of such holder's
counsel.
6.4 Termination of Restrictions. Notwithstanding the foregoing provisions
of this
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<PAGE>
Section 6, on or after November __, 1997 (i) the restrictions imposed by this
Section 6 upon the transferability of any particular Warrant Shares shall
terminate when (1) such securities shall have been effectively registered under
the Securities Act and sold by the holder thereof in accordance with such
registration or (2) written opinions to the effect that such restrictions are no
longer required or necessary under any federal or state securities law or
regulation have been received from counsel for the holder thereof and, if the
Company shall so require, from counsel for the Company or (3) a letter shall
have been issued by the staff of the Securities and Exchange Commission (the
"Commission") or a ruling shall have been issued by the Commission stating that
no action will be recommended by such staff or taken by the Commission, as the
case may be, if such Warrant Shares are transferred without registration under
the Securities Act, and such Warrant Shares are transferred in accordance with
the conditions set forth in such letter or ruling, and (ii) the restrictions
imposed by this Section 6 upon the transferability of this Warrant Certificate
and the Warrants evidenced hereby shall terminate when written opinions to the
effect that such restrictions are no longer required or necessary under any
federal or state securities law or regulation have been received from counsel
for the holder thereof and, if the Company shall so require, from counsel for
the Company. In the event that the restrictions imposed by this Section 6 upon
the transferability of this Warrant Certificate and the Warrants evidenced
hereby shall terminate pursuant to clause (ii) of this Section 6.4, all
references in the balance of this Section 6 to "Warrant Shares" shall
thenceforth be deemed to be references to "Warrant Securities" unless the
context shall otherwise require.
6.5 Compliance with Rule 144. At the request of any holder thereof who
proposes to sell Warrant Shares in compliance with Rule 144 promulgated by the
Commission under the Securities Act, the Company shall forthwith furnish to such
holder a written statement concerning the Company's compliance with the filing
requirements of the Commission as set forth in such Rule, as such Rule may be
amended from time to time. Warrant Shares which may then be transferred pursuant
to Rule 144 shall be deemed "Freely Transferable" for purposes of Sections 6.6,
6.7 and 6.8 hereof.
6.6 Required Registration. Upon the written request to register Warrant
Shares under the Securities Act made at any time subsequent to November __, 1997
(if at the time the Company is not maintaining the effectiveness under the
Securities Act of any registration statement on a form which permits inclusion
of the Warrant Shares for disposition in the manner desired by any holder of
Warrant Shares), by the holders of at least 51% of the Equivalent Warrant Shares
(which term shall mean the total of all Shares issued pursuant to the exercise
of Warrants plus all Shares issuable upon the full exercise of all outstanding
Warrants) existing on the date of such request which are not then Freely
Transferable unless registered under the Securities Act, the Company shall use
its best efforts to effect the registration of Warrant Shares under the
Securities Act, but only to the extent provided for in the following provisions
of this Section 6. A request pursuant to this Section 6.6 shall state the
intended method of disposition of the Warrant Shares sought to be registered.
Whenever the Company shall, pursuant to this Section 6.6, be requested to effect
the registration of any Warrant Shares under the Securities Act, the Company
shall promptly give written notice of such proposed registration to all holders
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<PAGE>
of outstanding Warrant Securities, and thereupon the Company shall, as
expeditiously as possible, use its best efforts to effect the registration under
the Securities Act (which registration may be pursuant to Form S-3 at such times
as the Company is eligible to use Form S-3) of such Warrant Shares which the
Company has been requested to register for disposition by holders of Warrant
Securities in accordance with the intended methods of disposition described in
the requests by such holders, all to the extent requisite to permit such sale or
other disposition by such holders of Warrant Shares so registered, provided,
however, that, the Company shall not be required to effect a registration
pursuant to a request made under this Section 6.6 more than once or pursuant to
a request made under this Section 6.6 after November ___, 2001.
6.7 Incidental Registrations. A. If the Company at any time subsequent to
November ___, 1997 is maintaining the effectiveness under the Securities Act of
any registration statement on a form which permits inclusion of the Warrant
Shares, upon each written request of any holder or holders of Warrant Securities
which are not then Freely Transferable made on or before November ___, 2003
(which request shall state the intended method of disposition of Warrant
Shares), the Company shall use its best efforts to cause all Warrant Shares
which each such holder shall have requested be registered to be registered under
the Securities Act in accordance with and to the extent permitted by Rule 462(b)
thereunder or any successor or similar provision, all to the extent requisite to
permit the sale or other disposition by such holder of the Warrant Shares so
registered in the manner intended by such holder as set forth in such request.
B. If the Company at any time subsequent to November ___, 1997, but on or
before November ___, 2003, proposes to register any of its securities under the
Securities Act on a form which permits inclusion of the Warrant Shares, it shall
each such time give written notice to all holders of outstanding Warrant
Securities which are not then Freely Transferable of its intention so to do.
Upon the written request (stating the intended method of disposition of Warrant
Shares) of any such holder given within 20 days after receipt of any such
notice, but on or before November ___, 2003, the Company shall use its best
efforts to cause all Warrant Shares which such holders shall have requested be
registered, to be registered under the Securities Act, all to the extent
requisite to permit the sale or other disposition by such holder of the Warrant
Shares so registered in the manner intended by such holder as set forth in such
request.
6.8 Registration Procedures. If and whenever the Company is required by
the provisions of this Section 6 to use its best efforts to effect the
registration of any of the Warrant Shares under the Securities Act, the Company
shall, as expeditiously as possible:
A. prepare and file with the Commission a Registration Statement (or
a post-effective amendment to an appropriate existing Registration
Statement of the Company which is then effective under the Securities Act,
as the case may be) with respect to such Warrant Shares and use its best
efforts to cause such Registration Statement (or such Registration
Statement as so post-effectively amended, as the case may be) to become
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and remain effective under the Securities Act for the period provided in
this Section 6;
B. prepare and file with the Commission such amendments and
supplements to such Registration Statement (or such Registration Statement
as post-effectively amended, as the case may be) and the Prospectus used in
connection therewith as may be necessary to keep such Registration
Statement (or such Registration Statement as post-effectively amended, as
the case may be) effective and to comply with the provisions of the
Securities Act with respect to the sale or other disposition of all Warrant
Shares covered by such Registration Statement (or such Registration
Statement as post-effectively amended, as the case may be) whenever the
seller or sellers of such Warrant Shares shall desire to sell or otherwise
dispose of the same, but only to the extent provided in this Section 6;
C. furnish to each seller of Warrant Shares covered by such
Registration Statement (or such Registration Statement as post-effectively
amended, as the case may be), such numbers of copies of a Prospectus,
including a preliminary Prospectus, in conformity with the requirements of
the Securities Act, and such other documents, as such seller may reasonably
request in order to facilitate the public sale or other disposition of such
Warrant Shares;
D. use every reasonable effort to register or qualify the Warrant
Shares covered by such Registration Statement (or such Registration
Statement as post-effectively amended, as the case may be) under such other
securities or Blue Sky laws of such jurisdictions as each seller thereof
shall reasonably request, and do any and all other acts and things which
may be necessary under such securities or Blue Sky laws to enable such
seller to consummate the public sale or other disposition in such
jurisdiction of the Warrant Shares owned by such seller covered by such
Registration Statement (or such Registration Statement as post-effectively
amended, as the case may be), except that the Company shall not for any
such purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified or subject itself to
taxation in any such jurisdiction; and
E. before filing the Registration Statement or any Prospectus or any
amendment or supplement to the Registration Statement or any Prospectus
with the Commission, furnish each counsel to each seller of Warrant Shares
covered or to be covered by such Registration Statement with copies of all
such documents proposed to be filed which shall be subject to the
reasonable approval of such counsel;
provided, however, that notwithstanding any other provision of this Section 6,
the Company shall not in any event be required to use its best efforts to
maintain the effectiveness of any such Registration Statement (or any such
Registration Statement as post-effectively amended, as the case may be) for a
period in excess of 180 days.
6.9 Expenses. All expenses incurred in effecting the registrations
provided for in this
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Section 6, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, expenses
of any audits incident to or required by any such registration and expenses of
complying with the securities or Blue Sky laws of any jurisdictions pursuant to
Section 6.8D hereof, but excluding fees and disbursements of counsel for the
sellers and underwriting commissions and discounts attributable to the Warrant
Shares being sold by the sellers, shall be paid by the Company.
6.10 Indemnification. A. In the event of any registration of any of
Warrant Shares under the Securities Act pursuant to this Section 6, the Company
shall indemnify and hold harmless each seller of such Warrant Shares, each
underwriter (as defined in the Securities Act), the directors, officers,
employees and agents of such underwriter, each other person who participates in
the offering of such securities and each person, if any, who controls such
seller, underwriter or participating person within the meaning of Section 15 of
the Act or Section 20 of the Securities Exchange Act of 1934, as amended
("Exchange Act"), from and against any and all losses, claims, liabilities,
expenses and damages (including any and all investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Act, the Exchange Act or
other federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of or
are based on (1) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or a post-effective amendment to
such Registration Statement, as the case may be) under which such Warrant Shares
were registered under the Securities Act, any preliminary Prospectus or final
Prospectus contained therein, or any summary Prospectus issued in connection
with such Warrant Shares, or any amendment or supplement thereto, or (2) an
omission or alleged omission to state in any such document a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided that the Company will not be liable to the extent that such
loss, claim, liability, expense or damage arises from and is based on an untrue
statement or omission or alleged untrue statement or omission made in such
Registration Statement (or such Registration Statement as post-effectively
amended, as the case may be), preliminary Prospectus, final Prospectus, summary
Prospectus, or amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such seller,
underwriter, director, officer, agent, employee, participating person, or
controlling person specifically for use therein. This indemnity agreement will
be in addition to any liability that the Company might otherwise have.
B. Each holder of any Warrant Shares shall, by acceptance thereof,
severally and not jointly, indemnify and hold harmless each other holder of any
Warrant Shares, the Company, its directors, officers, agents and employees, each
underwriter (as defined in the Securities Act), the directors, officers agents
and employees of such underwriter, and each other person, if any, who controls
the Company or any underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
liabilities, expenses and damages (including any and all investigative, legal
and other expenses reasonably incurred
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<PAGE>
in connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Act, the Exchange Act or other federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on (1) any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement (or a post-effective amendment to such Registration
Statement, as the case may be) under which such Warrant Shares were registered
under the Securities Act, any preliminary Prospectus or final Prospectus
contained therein, or any summary Prospectus issued in connection with such
Warrant Shares, or any amendment or supplement thereto, or (2) an omission or
alleged omission to state in any such document a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided that such holder shall be liable, in the case of (1) or (2) to the
extent, but only to the extent, that such untrue statement or omission or
alleged untrue statement or alleged omission was made in such Registration
Statement (or such Registration Statement as post-effectively amended, as the
case may be), preliminary Prospectus, final Prospectus, summary Prospectus, or
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by such holder specifically for use
therein. This indemnity will be in addition to any liability that such holder
might otherwise have.
C. Indemnification similar to that specified in subsections A and B of
this Section 6.10 shall be given by the Company and each holder of any Warrant
Shares (with such modifications as shall be appropriate) covered by any
registration or other qualification of securities under any federal or state
securities law or regulation other than the Securities Act with respect to any
such registration or other qualification effected pursuant to this Section 6.
D. Any party that proposes to assert the right to be indemnified under
this Section 6.10 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 6.10, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
this Section unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. If any
such action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering written notice
to the indemnified party promptly after receiving notice of the commencement of
the action from the indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and, after notice from the indemnifying
party to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in connection with
the defense. The indemnified party will have the right to employ its own counsel
in any such action, but the fees, expenses and other
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charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. All such fees, disbursements
and other charges will be reimbursed by the indemnifying party promptly as they
are incurred. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
E. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6.10 is applicable in accordance with its terms but
for any reason is held to be unavailable from the Company or holders of Warrant
Shares, the Company and the holders of Warrant Shares will contribute to the
total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Company
from persons other than the holders of Warrant Shares, such as persons who
control the Company within the meaning of the Act, officers of the Company who
signed the Registration Statement and directors of the Company, who also may be
liable for contribution) to which the Company and the holders of Warrant Shares
may be subject in such proportion so as is appropriate to reflect the relative
fault of the Company and each holder of Warrant Shares with respect to the
statements or omissions which resulted in such loss, claim, liability, expense
or damage, or action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the holder of Warrant Shares, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the holders of Warrant Shares agree that it would not be just and equitable if
contributions pursuant to this Section 6.10(E) were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6.10(E)
shall be deemed to include, for purposes of this Section 6.10(E), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. For purposes of this
Section 6.10(E), any person who controls a party to this
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<PAGE>
Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed any such
Registration Statement will have the same rights to contribution as the Company,
subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6.10(E), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6.10(E). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
F. Notwithstanding the provisions of Sections 6.10, (i) no holder of
Warrant Shares shall be required to pay under such provisions an amount in
excess of the proceeds (net of brokerage or underwriting commissions, discounts
or the like) received by such holder in payment for the Warrant Shares sold by
such holder pursuant to any such Registration Statement and (ii) no person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The indemnity and contribution
agreements contained in this Section 6.10 shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
holder of Warrant Shares.
6.11 Restrictive Legend. So long as any particular Warrant Securities are
not freely transferable, the certificates evidencing such Warrant Securities may
be stamped or otherwise inscribed with an appropriate legend to such effect.
6.12 Transfers and Exchanges of Warrant Certificates. Assuming compliance
with the provisions of this Section 6, the Company shall transfer, from time to
time, any outstanding Warrant Certificates upon the books to be maintained by
the Company for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer. Upon any such
transfer, a new Warrant Certificate shall be issued to the transferee and the
surrendered Warrant Certificate shall be cancelled. Warrant Certificates may be
exchanged at the option of the holder thereof, when surrendered at the principal
office of the Company for another Warrant Certificate, or other Warrant
Certificates of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Shares.
7. Mutilated or Missing Warrants. In case this Warrant Certificate shall
be mutilated, lost, stolen or destroyed, the Company may in its discretion issue
and deliver in exchange and substitution for and upon cancellation hereof, or in
lieu of and substitution therefor, a new Warrant Certificate of like tenor and
representing an equivalent right or interest; but only upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction hereof and
indemnity, if requested, also satisfactory to it. Applicants for such substitute
Warrant Certificates shall also comply with such other reasonable regulations
and pay for such other reasonable charges as the Company may prescribe.
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<PAGE>
8. Reservation of Shares, etc. The Company shall at all times keep
reserved, out of its authorized and unissued Shares and/or Shares held in its
treasury, a number of Shares sufficient to provide for the exercise of all
outstanding Warrants, including without limitation, the Warrants evidenced by
this Warrant Certificate, and any Transfer Agent for the Shares is hereby
irrevocably authorized and directed to reserve such number of Shares as shall be
requisite for such purpose. The Company shall supply such Transfer Agent with
duly executed Share certificates for such purpose and will itself provide or
otherwise make available any cash which may be payable as provided in Section 2
hereof.
9. Warrant Holder not Deemed a Shareholder. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
holder hereof the right to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders for any purpose, or any
other rights whatsoever, as a shareholder of the Company.
10. Agreement of Holders Hereof. The holder of this Warrant Certificate by
accepting the same consents and agrees with the Company that:
A. this Warrant Certificate is transferable only on the registry
books of the Company by the registered holder hereof in person or by such
holder's attorney duly authorized in writing, and only if surrendered at
the principal executive office of the Company, duly endorsed, or
accompanied by a proper instrument of transfer satisfactory to the Company
in its sole discretion; and
B. the Company may deem and treat the person in whose name this
Warrant Certificate is registered as the absolute owner for all purposes
whatever and the Company shall not be affected by any notice to the
contrary.
11. Merger or Consolidation of the Company. The Company will not merge or
consolidate with or into any other entity or sell, lease or exchange all or
substantially all of its assets to any other entity unless the entity resulting
from such merger or consolidation (if not the Company) or acquiring such assets
shall expressly assume, by supplemental agreement, the due and punctual
performance and observance of each and every covenant and condition of all
outstanding Warrants, including without limitation, the Warrants evidenced by
this Warrant Certificate , to be performed and observed by the Company. The
Company shall give to the registered holder hereof notice of the execution of
any such agreement. Such agreements shall provide for adjustments, which shall
be as nearly equivalent as may be practicable to the adjustments provided for in
Section 3 hereof. The provisions of this section shall similarly apply to
successive consolidations, mergers, sales, leases, and exchanges.
12. Survival of Indemnities and Agreements. All indemnities and agreements
set forth in Section 6 hereof shall survive the exercise of the Warrants
evidenced hereby, the issuance of Warrant Shares upon such exercise and the
transfer of any Warrant Securities.
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13. Successors and Assigns. This Warrant Certificate and the indemnities
and agreements made herein shall inure to the benefit of and be binding upon the
Company, the holder hereof and their respective successors, assigns, heirs,
executors, and administrators.
14. Applicable Law. This Warrant Certificate shall be deemed to be a
contract made under the laws of the State of Illinois and for all purposes shall
be construed in accordance with the laws of said State.
BAB HOLDINGS, INC.
By
---------------------------------------
President
(Corporate Seal)
ATTEST:
--------------------------------------
Secretary
1246598
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ELECTION TO PURCHASE
To BAB Holdings, Inc.
The undersigned hereby irrevocably elects to exercise the Warrants
evidenced by the attached Warrant Certificate, and to purchase thereunder
...................... Shares of the stock provided for therein, and requests
that certificates for such Shares shall be issued in the name of
.............................and be delivered to...............................
at.....................................and, if said number of Shares shall not
be all the Shares purchasable thereunder, that a new Warrant Certificate for the
balance remaining of the Shares purchasable under the attached Warrant
Certificate be registered in the name of, and delivered to, the undersigned at
the address stated below.
Dated: ...........................,.......
Name of warrantholder.............................
(Please print)
Address:..........................................
Signature:........................................
Note: The above signature must
correspond with the name as
written upon the first page of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change
whatever.
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ASSIGNMENT
For Value Received, ...................................hereby sells,
assigns and transfers unto ................................. the attached
Warrant Certificate, together with all right, title and interest therein, and do
hereby irrevocably constitute and appoint.............................attorney,
to transfer said Warrant Certificate on the books of BAB Holdings, Inc. with
full power of substitution in the premises.
Dated: ......................,......
.............................................
Note: The above signature must correspond
with the name as written upon the
first page of this Warrant Certificate
in every particular, without
alteration or enlargement or any
change whatever.
Signature Guaranteed:
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Exhibit 2.4
ASSET PURCHASE AGREEMENT
dated ____________, 1996
by and among
BAB Holdings, Inc., The American Bagel Company,
Almike Enterprises, Inc., Michael D. Robinson
and
Alan R. Manstof
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TABLE OF CONTENTS
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ARTICLE 1: PURCHASE OF ASSETS............................................... 1
1.1 Agreement to Purchase and Sell Assets................................... 1
1.2 Excluded Assets......................................................... 4
ARTICLE 2: PURCHASE PRICE, ALLOCATION AND PAYMENT........................... 4
2.1 Purchase Price.......................................................... 4
2.2 Allocation of Purchase Price............................................ 6
2.3 Payment of Purchase Price............................................... 6
2.4 Additional Consideration................................................ 7
ARTICLE 3: ASSUMPTION OF LIABILITIES........................................ 8
3.1 Limitation on Assumption of Liabilities................................. 8
3.2 Assumption of Certain Liabilities....................................... 8
ARTICLE 4: REPRESENTATIONS AND WARRANTIES OF SELLERS AND SHAREHOLDERS....... 9
4.1 Due Incorporation....................................................... 9
4.2 Due Authorization....................................................... 9
4.3 No Breach............................................................... 10
4.4 Clear Title............................................................. 10
4.5 Condition of Assets..................................................... 11
4.6 Litigation.............................................................. 11
4.7 Labor Matters........................................................... 12
4.8 Taxes................................................................... 12
4.9 Employee Benefits....................................................... 13
4.10 Full Disclosure........................................................ 13
4.11 Financial Statements................................................... 14
4.12 Absence of Certain Developments........................................ 14
</TABLE>
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TABLE OF CONTENTS, continued
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<CAPTION>
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4.13 Proprietary Rights..................................................... 15
4.14 Compliance with Laws................................................... 16
4.15 Operating Contracts.................................................... 16
4.16 Real Estate............................................................ 17
4.17 Receivables............................................................ 18
4.18 Books and Records...................................................... 18
4.19 Employees.............................................................. 18
4.20 Licenses and Permits................................................... 19
4.21 Sufficiency of Assets.................................................. 19
4.22 Other Material Contracts and Obligations............................... 19
4.23 Shareholders........................................................... 20
4.24 Subsidiaries........................................................... 20
4.25 Products Liability Claims.............................................. 20
4.26 Insurance.............................................................. 20
4.27 Brokers................................................................ 21
4.28 Certain Payments....................................................... 21
4.29 Relationship with Related Persons...................................... 21
4.30 Inventory.............................................................. 22
4.31 Private Placement Memorandum........................................... 22
4.32 Environmental Matters.................................................. 22
4.33 Franchise Operations................................................... 23
ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF PURCHASER...................... 24
5.1 Due Incorporation....................................................... 24
5.2 Due Authorization....................................................... 24
5.3 No Breach............................................................... 25
5.4 Full Disclosure......................................................... 25
5.5 Brokers................................................................. 25
5.6 BAB Shares.............................................................. 26
</TABLE>
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TABLE OF CONTENTS, continued
5.7 Securities Laws Filings................................................. 26
5.8 Compliance with Laws.................................................... 26
5.9 Licenses and Permits.................................................... 26
ARTICLE 6: PERFORMANCE BY SELLERS AND SHAREHOLDERS PENDING CLOSING.......... 26
6.1 Access to Information................................................... 26
6.2 Business As Usual....................................................... 27
6.3 Encumbrances............................................................ 27
6.4 Pay Increases........................................................... 27
6.5 Restrictions on New Contracts........................................... 27
6.6 Preservation of Business................................................ 28
6.7 Payment and Performance of Obligations.................................. 28
6.8 Restrictions on Sale of Assets.......................................... 28
6.9 Prompt Notice........................................................... 28
6.10 Consents............................................................... 28
6.11 Copies of Documents.................................................... 28
6.12 No Solicitation of Other Offers........................................ 29
6.13 Inventory.............................................................. 29
6.14 Insurance.............................................................. 29
6.15 Filing Reports and Making Payments..................................... 29
6.16 Capital Expenditures................................................... 29
6.17 Monthly Financials..................................................... 29
6.18 COBRA.................................................................. 30
6.19 Cash on Hand........................................................... 30
6.20 Limitation on Transactions in Purchasers' Securities................... 30
6.21 Dividends.............................................................. 30
ARTICLE 7: PERFORMANCE BY PURCHASER PENDING CLOSING......................... 30
7.1 Access to Information................................................... 31
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TABLE OF CONTENTS, continued
7.2 Business As Usual....................................................... 31
7.3 Preservation of Business................................................ 31
7.4 Prompt Notice........................................................... 31
7.5 Insurance............................................................... 31
7.6 Filing Reports and Making Payments...................................... 31
ARTICLE 8: SECURITIES DISCLOSURES REGARDING BAB SHARES...................... 32
8.1 Unregistered Shares; Restrictions on Transfer........................... 32
ARTICLE 9: CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS.................. 33
9.1 Accuracy of Representations and Warranties.............................. 33
9.2 Compliance with Covenants and Agreements................................ 33
9.3 No Adverse Change....................................................... 33
9.4 Proceedings............................................................. 33
9.5 Consents and Approvals.................................................. 33
9.6 The Offering............................................................ 33
9.7 Financial Statements.................................................... 34
9.8 Employment Contracts.................................................... 34
9.9 Due Authorization....................................................... 34
ARTICLE 10: CONDITIONS PRECEDENT TO SELLERS' AND SHAREHOLDERS' OBLIGATIONS.. 34
10.1 Accuracy of Representations and Warranties............................. 34
10.2 Compliance with Covenants and Agreements............................... 34
10.3 Registration Rights.................................................... 35
10.4 No Adverse Change...................................................... 35
10.5 Proceedings............................................................ 35
10.6 Consents and Approvals................................................. 35
10.7 The Offering........................................................... 35
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TABLE OF CONTENTS, continued
ARTICLE 11: INDEMNIFICATION................................................. 35
11.1 Indemnification by Sellers and Shareholders............................ 35
11.2 Indemnification by Purchaser........................................... 37
11.3 Procedure for Indemnification.......................................... 37
11.4 Survival of Representations, Warranties and Covenants.................. 39
11.5 Limitation on Indemnification Obligations.............................. 39
ARTICLE 12: CLOSING......................................................... 40
12.1 Date of Closing........................................................ 40
12.2 Documents to be Delivered by Sellers and Shareholders.................. 40
12.3 Documents to be Delivered by Purchaser................................. 42
ARTICLE 13: PERFORMANCE FOLLOWING THE DATE OF CLOSING....................... 42
13.1 Collection of Receivables.............................................. 43
13.2 Further Acts and Assurances............................................ 43
ARTICLE 14: TERMINATION..................................................... 43
14.1 Termination............................................................ 43
14.2 Return of Documents and Nondisclosure.................................. 44
ARTICLE 15: TITLE AND RISK OF LOSS.......................................... 44
15.1 Title and Risk of Loss................................................. 44
ARTICLE 16: DEFINITIONS..................................................... 45
ARTICLE 17 MISCELLANEOUS.................................................... 48
17.1 Preservation of and Access to Records.................................. 48
17.2 Cooperation Prior To Closing........................................... 49
17.3 Cooperation Following Closing.......................................... 50
17.4 Employees.............................................................. 50
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TABLE OF CONTENTS, continued
17.5 Public Announcements................................................... 50
17.6 Waiver of Bulk Transfers Act........................................... 50
17.7 Sales, Use and Deed Taxes.............................................. 51
17.8 Notices................................................................ 51
17.9 Entire Agreement....................................................... 51
17.10 Remedies Cumulative................................................... 52
17.11 Specific Performance.................................................. 52
17.12 Amendments............................................................ 52
17.13 Successors and Assigns................................................ 52
17.14 Costs................................................................. 52
17.15 Governing Law......................................................... 52
17.16 Counterparts.......................................................... 52
17.17 Headings.............................................................. 53
17.18 Scope of Agreement.................................................... 53
17.19 Number and Gender..................................................... 53
17.20 Severability.......................................................... 53
17.21 Parties in Interest................................................... 53
17.22 Waiver................................................................ 53
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made and entered into as of
the _____ day of ____________, 1996, by and among BAB Holdings, Inc., an
Illinois corporation (the "Purchaser"), The American Bagel Company, a Maryland
corporation ("ABC"), Almike Enterprises, Inc., a Maryland corporation
("Almike"), and Michael D. Robinson and Alan R. Manstof (collectively the
"Shareholders").
WHEREAS, Shareholders are the owners of all of the issued and outstanding
shares of each class and series of capital stock of ABC and Almike (individually
a "Seller" and collectively the "Sellers");
WHEREAS, Sellers are engaged in the business of franchising Chesapeake
Bagel Bakery stores and owning and operating company-owned Chesapeake Bagel
Bakery stores (collectively the "Business"); and
WHEREAS, Sellers desire to sell and assign and Purchaser desires to
purchase and assume, or cause one or more Affiliates (as hereinafter defined) of
the Purchaser to purchase and assume substantially all of the assets and rights
used by Sellers or useful in the operations of the Business on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1: PURCHASE OF ASSETS
1.1 AGREEMENT TO PURCHASE AND SELL ASSETS. On the Date of Closing (as
hereinafter defined), Purchaser agrees to purchase, or cause one or more
Affiliate(s) of Purchaser to which this Agreement has been assigned pursuant to
Section 17.13 hereof to purchase, from Sellers and Sellers agree to sell,
assign, transfer, convey and deliver to Purchaser or to such Affiliate(s) of
Purchaser, on the terms and subject to the conditions set forth in this
Agreement, all of the assets, properties, Contracts (as hereinafter defined),
operations and business of Sellers of every kind, nature and description
whatsoever which are related to arise from, are used or useful in connection
with the operation of the Business or which are reflected to, arise from, are
used or useful in connection with the operation of the Business or which are
reflected on their respective financial statements, wherever the same may be
located, excluding only the assets specifically identified as "Excluded Assets"
in Section 1.2 hereof. The assets, properties, Contracts, operations and
business to be purchased and sold pursuant to this Agreement (collectively the
"Assets") include, without limitation:
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a. All of Sellers' right, title and interest in and to the real
property leased by either Seller in connection with the operation of the
Business, together with the improvements, fixtures, hereditaments and
appurtenances thereto, including the real property leased by Sellers on
Shady Grove Road in Gaithersburg, Maryland (the "New Store") in connection
with Sellers' proposed opening of a new company-owned Chesapeake Bagel
Bakery store during the fourth quarter of 1996 at that location
(collectively the "Leased Premises");
b. All of Sellers' right, title and interest in and to any and all
federal, state, foreign and common law trademarks, trademark registrations
and applications therefor, service marks, service mark registrations and
applications therefor, copyrights, copyright registrations and applications
therefor, trade names, assumed names, logos, patents, patent applications,
technology, know-how, trade secrets, processes, formulas, recipes,
drawings, designs and similar intellectual property and proprietary rights
of any kind, as well as Sellers' transferable interests in any and all
federal, state and foreign common law rights protecting the same,
including, but not limited to, those proprietary rights described on
Schedule 1.1(b) hereto (the "Proprietary Rights");
c. All of Sellers' equipment, machinery, furniture, fixtures,
furnishings, tooling, personal property, shelving, patterns, molds, office
equipment, computer hardware, trade fixtures, leasehold improvements, tools
and other tangible personal property owned or leased by either Seller and
used or useful in the operation of the Business, together with any
manufacturer, vendor or installer warranties thereon;
d. All of Sellers' vehicles used or useful in the operation of the
Business, including, but not limited to, those vehicles described on
Schedule 1.1(d) hereto (the "Vehicles");
e. All of the telephone numbers and telephone directory
advertisements used by Sellers in the operation of the Business;
f. All of Sellers' business records relating to the Business,
including, but not limited to, franchisee files and records, customer
lists, lists of prospective franchisees, lists of suppliers, operations and
other manuals, accounting records (including work papers related thereto),
correspondence, files, research data, advertising data, Contracts and other
records and information necessary or desirable for Purchaser to carry on
the Business in the ordinary course on and after the Date of Closing;
g. All of Sellers' contract rights and benefits in and to the
Contracts, Contracts in progress, commitments, leases, franchise
agreements, area franchise development agreements, licenses and other
agreements which relate to or arise from or are used or are necessary for
the Business and any amendments thereto; all such
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Contracts, Contracts in progress, commitments, leases, franchise
agreements, area franchise development agreements, licenses and other
agreements which are not listed on Schedule 1.2 hereof are described in
Schedule 1.1(g) hereto (the "Operating Contracts");
h. All of Sellers' governmental licenses, certificates, franchises,
permits, registrations, concessions, consents and approvals related to the
Business, including, but not limited to, those described in Schedule 1.1(h)
hereto (the "Licenses") but excluding those listed on Schedule 1.2 hereto
which by their terms are not transferable;
i. All of Sellers' prepaid expenses, credit memos and deposits which
relate to the Business, the categories of which are described in Schedule
1.1(i) hereto;
j. All of Sellers' office, shop and other supplies used in the
operation of the Business and which are on hand as of the Date of Closing;
k. All of Sellers' accounts receivable, notes receivable and other
rights to the payment of money arising out of the operation of the Business
and which remain uncollected on the Date of Closing, whether or not
evidenced by a writing or reflected on the Balance Sheets (as hereinafter
defined) (the "Receivables");
l. All of Sellers' inventory which is on hand as of the Date of
Closing, including raw materials, work in process and finished goods (the
"Inventory");
m. All of the plans, specifications, blueprints, surveys, repair and
operating manuals, warranties, guaranties, maintenance records, information
regarding real estate taxes, assessments and/or insurance and other written
information in the possession of Sellers relating to any of the Assets or
to the improvements on any Leased Premises as well as copies of the
certificates of occupancy for such improvements;
n. All of Sellers' rights, if any and to the extent transferable, in
any computer software and software program documentation in computer
readable and hard-copy forms reasonably acceptable to Purchaser, including,
but not limited to, the software described in Schedule 1.1(n) hereto (the
"Software");
o. All of Sellers' rights and claims against third parties relating
to the Assets ;
p. All of Sellers' supply of brochures, displays, models and other
marketing materials on hand as of the Date of Closing, as well as the
camera ready art, negatives, proofs and other reproduction materials for
the same;
q. All saleable goodwill as a going concern and other intangible
personal property of Sellers which comprise a part of the Business;
r. All cash and cash equivalents on hand and/or on deposit in bank
and/or brokerage accounts as of the Date of Closing;
s. All other assets of Sellers of every type, nature and
description; and
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t. All accretions and additions to the Assets that occur prior to the
Date of Closing.
1.2 EXCLUDED ASSETS. Notwithstanding anything contained in this Agreement
to the contrary, Purchaser will not purchase, and Sellers will not sell, any of
the following assets (the "Excluded Assets"):
a. The corporate minute books, stock books and other corporate
records of Sellers having exclusively to do with the corporate organization
and capitalization of Sellers as well as Sellers' tax records; and
b. All assets listed on Schedule 1.2 hereof.
ARTICLE 2: PURCHASE PRICE, ALLOCATION AND PAYMENT
2.1 PURCHASE PRICE. Subject to the adjustments hereinafter set forth, the
purchase price for the Assets and the Agreement Not To Compete provided for in
Section 12.2(g) hereof (the "Agreement Not to Compete") shall be the sum of
Twenty-Two Million and 00/100 Dollars ($22,000,000.00) plus Nine Hundred
Thousand (900,000) shares of the Common Stock, no par value per share, of BAB
Holdings, Inc. (collectively the "Purchase Price"). Notwithstanding any
provision of this Agreement to the contrary, in the event the aggregate amount
of cash and cash equivalents which the Sellers have on hand and on deposit in
banks and brokerage accounts as of the Date of Closing is less than Five Hundred
Thousand and No/100 Dollars ($500,000.00), the Purchase Price shall be reduced
dollar-for-dollar by the amount of the deficit; provided, however, that on the
Settlement Date (as hereinafter defined), the Sellers and Shareholders may pay
to the Purchaser by certified or bank cashier's check (or by wire transfer of
immediately available funds to Purchaser's designated account) the amount of
such deficit and upon receipt of such payment by the Purchaser, the combined
tangible net worth of the Sellers reflected on the Closing Balance Sheet (as
hereinafter defined) shall be deemed to be increased by the amount of such
payment.
As soon as practicable following the execution of this Agreement, the
parties shall, at Seller's expense, cause Ernst & Young L.L.P. (the "Auditor")
to prepare, audit and issue an unqualified opinion on the combined balance sheet
of Sellers as of the close of business of the Business on December 31, 1995 (the
"Opening Balance Sheet"). The Opening Balance Sheet shall be prepared in
accordance with GAAP (as hereinafter defined) consistently applied, with
appropriate adjustments to eliminate intercompany transactions of the Sellers.
As soon as practicable after the Date of Closing (but in any event within thirty
(30) days after the Date of Closing), the Purchaser, at its expense, shall cause
the Auditor to prepare, audit and issue an unqualified opinion on the combined
balance sheet of the Sellers as of the close of business of the Business on the
Date of Closing and without giving effect to the consummation of the transaction
contemplated herein ("Closing Balance Sheet"). The Closing Balance Sheet shall
be
4
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prepared in accordance with GAAP consistently applied and in a manner consistent
with the preparation of the Opening Balance Sheet, with appropriate adjustments
to eliminate intercompany transactions of the Sellers; provided, however, the
Closing Balance Sheet shall include accruals for (i) all amounts due or to
become due and payable under the Operating Contracts with respect to any period
of time ending on or before the Date of Closing, (ii) all amounts accrued for
wages and salaries payable to Sellers' employees, including vacation and sick
leave, with respect to any period of time ending on or before the Date of
Closing (but specifically excluding any benefits under any employee benefit
plans of any nature, none of which shall be assumed by Purchaser), and (iii) all
utility charges, including sewer, water, gas, electricity, telephone and garbage
disposal, as well as other current operating expenses of the Business with
respect to any period of time ending on or before the Date of Closing. The
Closing Balance Sheet shall not include accruals for, and Purchaser expressly
does not assume any liability for, fees and expenses incurred by the Sellers
with respect to the transaction contemplated hereby (including, but not limited
to, counsel fees, investment banking fees, brokers fees, auditing fees, and
related expenses). Both the Operating Balance Sheet and the Closing Balance
Sheet (individually a "Balance Sheet" and collectively the "Balance Sheets")
shall contain a calculation of the combined tangible net worth of the Sellers as
of their respective dates (i.e., total combined tangible assets less total
combined tangible liabilities, in each case as reflected on the applicable
Balance Sheet). The Auditor shall promptly deliver each Balance Sheet to the
Purchaser and the Sellers following the preparation thereof. Representatives of
the Purchaser and Sellers shall have the right to review the Balance Sheets and
perform other audit and review procedures, including a review of the working
papers of the Auditor relative to the preparation of such Balance Sheets. Each
party shall bear its own expenses incurred in connection with the review of the
Balance Sheets. The parties shall be deemed to have accepted the Balance Sheets
and the combined tangible net worth of the Sellers reflected thereon unless
within fifteen (15) days after the last date of the Auditor's transmittal of the
applicable Balance Sheet to the parties (the "Delivery Date"), they give written
notice to the other parties and to the Auditor of their good faith objection to
any item therin setting forth a detailed description of such objection and the
amount they have determined in good faith as the consolidated tangible net worth
of the Sellers as of the date of such Balance Sheet. Any disagreement or
controversy between Sellers and Purchaser which is not resolved by Sellers and
Purchaser within thirty (30) days following the Delivery Date shall be
determined by arbitration as follows. Each party shall designate a firm (other
than the Auditor or the current or former auditor of the Sellers) of independent
certified accountants of recognized national standing to resolve such dispute.
If the two firms cannot agree on a resolution within three weeks from the date
it is submitted to them, they shall jointly agree on a third firm of independent
certified accountants of recognized
5
<PAGE>
national standing, whose decision shall be binding on both Sellers and
Purchaser. Each party shall be responsible for the costs of the accountant
selected by it and agree to share the cost of the third accountant.
In the event the consolidated tangible net worth of the Sellers as
reflected on the Closing Balance Sheet is greater than the consolidated tangible
net worth of the Sellers reflected on the Opening Balance Sheet, the Purchase
Price shall be increased by the amount of the excess. However, in the event the
consolidated tangible net worth of the Sellers reflected on the Closing Balance
Sheet is less than the consolidated tangible net worth of the Sellers reflected
on the Opening Balance Sheet, the Purchase Price shall be reduced by the amount
of the difference.
2.2 Allocation of Purchase Price. Purchaser and Sellers shall, in a
reasonable manner, determine the fair market value of the Assets and Purchaser
shall allocate the Purchase Price among the Assets and the Agreement Not to
Compete in accordance with said determination and Section 1060 of the Code (as
hereinafter defined). On the Settlement Date, the Purchaser and Sellers shall
execute a schedule setting forth the allocation of the Purchase Price mutually
agreed upon by the parties. The Purchaser and Sellers shall each file, in
accordance with Section 1060 of the Code, an Asset Allocation Statement on Form
8594 (which conforms with such allocation) with its federal income tax return
for the tax year in which the Date of Closing occurs and shall contemporaneously
provide the other party with a copy of the Form 8594 being filed. Each party
agrees not to assert, in connection with any tax return, audit or other similar
proceeding, any allocation of the Purchase Price which differs from the
allocation determined hereunder.
2.3 Payment of Purchase Price. The Purchase Price shall be paid by the
Purchaser to the Sellers as follows:
a. On the Date of Closing, the Purchaser shall deposit the sum of
Two Million and 00/100 Dollars ($2,000,000.00) (the "Deposit") in
immediately available funds with a mutually acceptable national bank (the
"Escrow Agent"), to be held by the Escrow Agent pursuant to an Escrow
Agreement in substantially the form of Exhibit A hereto (the "Escrow
Agreement") to be entered into by and among the Purchaser, Sellers and the
Escrow Agent on the Date of Closing (the "Escrow Agreement").
b. On the Date of Closing, the Purchaser shall pay to the Sellers by
certified or bank cashier's check (or by wire transfer of immediately
available funds to Sellers' designated account) the sum of Twenty Million
and 00/100 Dollars ($20,000,000.00).
c. In the event the combined tangible net worth of the Sellers
reflected on the Closing Balance Sheet exceeds the combined tangible net
worth of the Sellers reflected on the Opening Balance Sheet, on the
Settlement Date (as hereinafter defined), the Purchaser shall pay to the
Sellers by certified or bank cashier's check (or by wire transfer
6
<PAGE>
of immediately available funds to Sellers' designated account) the amount
of the excess and the parties shall instruct the Escrow Agent to disburse
the Deposit and any interest or earnings thereon to the Sellers. For
purposes of this Agreement, the "Settlement Date" shall be such date as is
mutually agreed upon by the parties not later than five (5) days after the
acceptance by all of the parties of both Balance Sheets, or if any party
timely objects to the combined tangible net worth of the Sellers pursuant
to Section 2.1 hereof and such objection is not resolved by mutual
agreement, within five (5) days after completion of the arbitration as
provided in Section 2.1 hereof.
d. In the event the combined tangible net worth of the Sellers
reflected on the Closing Balance Sheet is less than the combined tangible
net worth of the Sellers reflected on the Opening Balance Sheet, on the
Settlement Date the parties shall instruct the Escrow Agent to disburse to
the Purchaser the portion of the Deposit equal to the difference together
with the interest or income thereon and shall instruct the Escrow Agent to
disburse the balance of the Deposit, if any, together with the interest or
income thereon to the Sellers. In the event such difference exceeds the
amount of the Deposit, on the Settlement Date the parties shall instruct
the Escrow Agent to disburse the entire Deposit together with the interest
or income thereon to the Purchaser, and the Sellers and the Shareholders
shall, jointly and severally, on demand, pay to the Purchaser the amount by
which such difference exceeds the Deposit.
e. On the Date of Closing the Purchaser shall deliver to the Sellers
certificates representing Nine Hundred Thousand (900,000) shares of the
Common Stock, no par value of BAB Holdings, Inc. If, prior to the Closing,
there shall be a merger, reorganization, consolidation, recapitalization,
stock dividend, stock split or other change in the corporate structure
affecting the capitalization of the Purchaser, such adjustment shall be
made in the number and type of shares of stock to be delivered hereunder as
is appropriate and equitable in light of such change in the Purchaser's
capitalization.
2.4 ADDITIONAL CONSIDERATION. Purchaser shall pay to Sellers, on the last
business day of each calendar quarter, commencing on the last business day of
the first full calendar quarter following the Date of Closing in which there
shall have been opened and there is then operating at least One Hundred Eighty-
One (181) franchised Chesapeake Bagel Bakery stores, Twenty Thousand Dollars
($20,000) for each such franchised Chesapeake Bagel Bakery store opened during
said quarter pursuant to the terms of a franchise or area development agreement
in place as of the Date of Closing and listed on Schedule 1.1(g) hereto;
provided, however, that for the calendar quarter in which the One Hundred
Eighty-First (181st) franchised Chesapeake Bagel Bakery store is opened, such
payments shall be due and payable only with respect to such franchised stores
opened in excess of One
7
<PAGE>
Hundred Eighty-One (181). Such amounts shall be paid in cash if the full initial
franchise fee with respect to such store is payable by the franchisee to the
Purchaser after the Date of Closing. However, if all or part of the initial
franchise fee for such store has been paid to either Seller or any of their
franchise brokers on or before the Date of Closing such amounts shall be paid in
shares of the Common Stock of BAB Holdings, Inc., in an amount equivalent to
Twenty Thousand Dollars ($20,000) based upon the average of the closing bid and
asked prices of the Common Stock as quoted on the Nasdaq stock market for the
twenty (20) consecutive trading days immediately preceding the last day of each
such calendar quarter. Interest shall accrue at twelve percent (12%) per
annum on any payments not made within fifteen (15) days of the due date
hereunder. Purchaser shall cause to be kept complete and accurate records with
respect to all store openings. All such records shall be available for
inspection and copying be Sellers or their authorized representative(s) during
normal working hours at the principal office of Purchaser upon reasonable
advance notice.
ARTICLE 3: ASSUMPTION OF LIABILITIES
3.1 Limitation on Assumption of Liabilities. Except as specifically set
forth in Section 3.2 hereof, Sellers shall transfer the Assets to Purchaser on
the Date of Closing free and clear of any Encumbrance (as hereinafter defined)
and Purchaser shall not, by virtue of its purchase of Assets, assume or become
responsible for any debts, liabilities or obligations of either of the Sellers
or either of the Shareholders, whether fixed, contingent, known, unknown or
otherwise.
3.2 Assumption of Certain Liabilities. Notwithstanding the provisions of
Section 3.1 hereof to the contrary, Purchaser covenants and agrees that on the
Date of Closing, it shall execute and deliver to Sellers an Assumption Agreement
in substantially the form of Exhibit B hereto (the "Assumption Agreement")
pursuant to which it will assume and agree to perform and discharge the
following debts, liabilities and obligations of Sellers:
a. All debts, liabilities and obligations of Sellers arising under
the Operating Contracts which become performable after the Date of Closing,
except that Purchaser expressly does not assume any liabilities for (i)
products sold or services rendered by the Business under such Operating
Contracts on or prior to the Date of Closing, (ii) for any debts,
liabilities or obligations arising as a result of a breach or default by
either Seller under any of such Operating Contracts occurring on or before
the Date of Closing or as a result of the consummation of the transactions
contemplated hereby, (iii) any long-term indebtedness (including the
current portion thereof), except as set forth on Schedule 3.2 hereto; or
(iv) any fees or commissions payable by Sellers or any other person to
brokers, consultants, finders or others with respect to the offer or sale
of Sellers' franchises or area development agreements, except as reflected
in the deferred revenues from the sale of franchises on the Closing Balance
Sheet;
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b. All of Sellers' trade accounts payable, deferred revenues from the
sale of franchises, and other current liabilities, in each case arising out
of the operation of the Business in the Ordinary Course of Business (as
hereinafter defined) which remain unpaid on the Date of Closing, but only
to the extent reflected on the Closing Balance Sheet; provided that
Purchaser expressly does not assume (i) any accrued taxes of any nature,
(ii) any liabilities to any Related Person (as hereinafter defined), or
(iii) any long-term debt (including the current portions thereof), except
as set forth on Schedule 3.2 hereto; and
c. All debts, liabilities and obligations of Sellers identified on
Schedule 3.2 hereto (including leases for the Leased Premises).
ARTICLE 4: REPRESENTATIONS AND WARRANTIES OF SELLERS AND SHAREHOLDERS
As an inducement for Purchaser to enter into this Agreement and consummate
the transactions contemplated hereby, intending that Purchaser rely thereon in
entering into and performing this Agreement, Sellers and Shareholders jointly
and severally warrant and represent to Purchaser that each and all of the
following are true and correct in all material respects as of the date of this
Agreement and will be true and correct in all material respects at and as of the
Closing:
4.1 Due Incorporation. Each Seller is a corporation duly formed, validly
existing and in good standing under the laws of the State of Maryland, and has
all requisite power and authority, corporate and otherwise, to own, operate and
lease its properties and assets and to conduct its respective portion of the
Business as it is now being conducted. Each Seller is duly qualified to transact
business as a foreign corporation and is in good standing under the laws of
those jurisdictions set forth on Schedule 4.1 hereto; and there are no other
jurisdictions in which either Seller is required to be so qualified and the
failure to be so qualified could reasonably be expected to have a Material
Adverse Effect (as hereinafter defined) on either Seller. Neither Seller is
subject to any Contract which restricts or may restrict the conduct of the
Business in any jurisdiction or location except for territorial protections
contained in Sellers' franchise agreements and area development agreements
listed on Schedule 1.1(g) hereto.
4.2 Due Authorization. The execution, delivery and performance of this
Agreement, including the documents, instruments and agreements to be executed
and/or delivered by Sellers pursuant to this Agreement, and the consummation of
the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Sellers, including
authorization by the Boards of Directors of the Sellers and the Shareholders.
This Agreement and the documents, instruments and agreements to be executed
and/or delivered
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by Sellers and/or Shareholders pursuant to this Agreement have been or will be
on or before the Date of Closing duly and validly authorized, executed and
delivered by Sellers and/or Shareholders and the obligations of Sellers and/or
Shareholders hereunder and thereunder are or will be upon such execution or
delivery valid and legally binding, and this Agreement and the documents,
instruments and agreements to be executed and/or delivered by Sellers and/or
Shareholders pursuant to this Agreement are or will be upon such execution and
delivery enforceable against Sellers and Shareholders in accordance with their
respective terms, except as such enforcement may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
presently or hereafter in effect affecting the enforcement of creditors' rights
generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity), including,
among others, limitations on the availability of equitable remedies.
4.3 No Breach. Each Seller has full corporate power and authority to
sell, assign, transfer, convey and deliver to Purchaser the Assets to be sold
hereunder and to otherwise perform its obligations under this Agreement and the
documents, instruments and agreements to be executed and/or delivered by such
Sellers pursuant hereto. The execution and delivery of this Agreement, including
the documents, instruments and agreements to be executed and/or delivered by
each Seller pursuant to this Agreement, and the consummation of the transactions
contemplated hereby and thereby will not: (i) violate any provision of the
Articles of Incorporation or Bylaws (or comparable governing documents or
instruments) of such Seller; (ii) to Sellers' Knowledge, violate any Applicable
Laws (as hereinafter defined), issued, enacted, entered or deemed applicable by
any Governmental Body (as hereinafter defined) having jurisdiction over such
Seller or any of its properties or assets; (iii) to Sellers' Knowledge, except
as provided in Schedule 4.3 hereto, require any filing with, permit from,
consent or approval of, or the giving of any notice to, any Person (as
hereinafter defined); (iv) to Sellers' Knowledge, result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give another party any rights of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, franchise, permit, lease, or other Contract
to which such Seller is a party, or by which it or any of its properties or
assets may be bound, including the Operating Contracts; or (v) to Sellers'
Knowledge, result in the creation or imposition of any Encumbrance on any of the
Assets.
4.4 Clear Title. On the Date of Closing, Sellers will convey to Purchaser
good, valid and marketable title to all of the Assets (whether real, personal or
mixed, and whether tangible or intangible), including, without limitation, all
of the properties and assets reflected on the Balance Sheets (except for
personal property sold since the date of the Opening Balance Sheet in the
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Ordinary Course of Business), free and clear of any and all Encumbrances, of any
kind, nature or description whatsoever.
4.5 Condition of Assets. All of the Assets to be purchased and sold
hereunder (i) have been maintained in accordance with prudent business practice,
(ii) are in reasonably good operating condition and repair, subject only to
ordinary wear and tear, and (iii) are usable and fit for their intended purpose.
Sellers shall use their respective best efforts and shall cooperate with
Purchaser with respect to the transfer to Purchaser of all existing
manufacturers', vendors', installers' or other warranties for the Assets which
are in effect as of the Date of Closing.
4.6 Litigation. Except as described in Schedule 4.6 hereto or otherwise
disclosed by Sellers to Purchaser in writing prior to the Closing, neither the
Sellers nor the Shareholders have notice of any pending Proceeding (as
hereinafter defined):
a. that has been commenced by or against either Seller or that
otherwise relates to or may affect business of, or any of the assets owned
or used by, either Seller (other than any Proceeding which generally
affects the business of all Persons conducting business similar to the
Sellers' and in which neither Seller is a named defendant); or
b. that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
transactions contemplated hereby.
To Sellers' Knowledge, (1) no such Proceeding has been Threatened (as
hereinafter defined), and (2) no event has occurred or circumstance exists that
Sellers or the Shareholders, in exercise of reasonable judgment, believe may
five rise to, or serve as a basis for, the commencement of any such Proceeding.
The Sellers have delivered to Purchaser copies of all pleadings, correspondence,
and other documents relating to each Proceeding listed in Schedule 4.6 hereto.
Except as otherwise disclosed by Sellers to Purchaser in writing prior to the
Closing, the Proceedings listed in Schedule 4.6 hereto will not have a Material
Adverse Effect on either Seller or the Business. Sellers have provided to
Purchaser a statement of all material Proceedings commenced or Threatened by or
against either Seller within the last three (3) years and a description of the
outcome thereof. Except as provided in Schedule 4.6 hereto, neither Seller has
notice that it is a party to or subject to the provisions of any writ, ruling,
award, executive order, directive, requirement, injunction (whether temporary,
preliminary or permanent), judgment, decree or other issued, enacted, entered or
deemed applicable by any Governmental Body which could, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on either
Seller or the Purchaser or impair the ability of either Seller and/or the
Shareholders to consummate the transactions contemplated hereby.
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4.7 Labor Matters. Except as described in Schedule 4.7 hereto, neither
Seller has ever been a party to any collective bargaining agreement or other
labor Contract. Except as described in Schedule 4.7 hereto, there has never
been, and there is not presently pending or existing and to the best of Sellers'
Knowledge there is not Threatened, any strike, slowdown, picketing, work
stoppage, labor arbitration or other Proceeding with respect to any grievance of
any employee, application or complaint filed by an employee or union with the
National Labor Relations Board, or any comparable Governmental Body,
organizational activity, or other labor dispute against or affecting either
Seller or the Business, and no application for certification of a collective
bargaining agreement is pending or, to the best of Sellers' Knowledge, is
Threatened. Except as described in Schedule 4.7 hereto, to the best of Sellers'
Knowledge, no event has occurred or circumstance exists could provide the basis
for any work stoppage or other labor dispute. Except as described in Schedule
4.7 hereto, there is no lockout of any employees by either Seller and no such
action is contemplated by either Seller. Except as described in Schedule 4.7
hereto, the Sellers have complied in all material respects with all Applicable
Laws relating to employment, equal employment opportunity, discrimination,
harassment, immigration, wages, hours, benefits, collective bargaining, the
payment of social security and similar taxes, occupational safety and health,
and plant closing, and Sellers have no notice of any allegations, charge,
complaint or Proceeding pending or to the best of Sellers' Knowledge Threatened
against either Seller or any of their respective officers, directors, or
employees relating to any such laws, and the Sellers have no written notice of
any basis for any such allegation, charge, complaint, or Proceeding.
4.8 Taxes.
a. Except as described in Schedule 4.8 hereto, all returns and
reports, including, without limitation, information and withholding returns
and reports ("Tax Returns") of or relating to any foreign, federal, state,
county, local or other Tax (as hereinafter defined) that are required to be
filed on or before the Date of Closing by or with respect to either Seller,
or any other corporation that is or was a member of an affiliated group
(within the meaning of Section 1504(a) of the Code) of corporations of
which either Seller was a member for any period ending on or prior to the
Date of Closing, have been or will be duly and timely filed, and all Taxes
(as hereinafter defined), including interest and penalties, due and payable
pursuant to such Tax Returns, have been paid or adequately provided for in
reserves established by the Sellers, except where the failure to file, pay,
or provide for do not, and insofar as reasonably can be foreseen will not
have, a Material Adverse Effect on either Seller or the Purchaser.
b. Except as described in Schedule 4.8 hereto, Sellers have no
notice of any material claim against either Seller with respect to any
Taxes, and no material
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assessment, deficiency, or adjustment has been asserted or proposed with
respect to any Tax Return of or with respect to either Seller that has not
been adequately provided for in reserves established by the Sellers.
c. Except as described in Schedule 4.8 hereto, the total amounts set
up as liabilities for current and deferred Taxes on the books of the
Sellers have been prepared in accordance with GAAP and are sufficient to
cover the payment of all material Taxes, including any penalties or
interest hereon and whether or not assessed or disputed, that are, or are
hereafter found to be, or to have been, due with respect to the operations
of the Sellers through the periods covered thereby.
4.9 Employee Benefits.
a. Neither of the Sellers, or any current or former affiliate of
either Seller, has at any time maintained, contributed to, or
obligated itself, or otherwise had any debt, liability or obligation
with respect to any Benefit Plans (as hereinafter defined), with
respect to which the Purchaser will incur any debts, liabilities or
obligations as a result of the consummation of the transactions
contemplated hereby which are not expressly assumed by the Purchaser
pursuant to Section 3.2 hereof; and
b. the requirements related to the continuation of medical
benefit coverage for former employees of Sellers, their spouses, and
other dependents as required to be provided under Section 4980B of the
Code and Part 6 of Subtitle B of Title I of ERISA and the accompanying
proposed regulations and state continuation coverage laws ("COBRA")
have been satisfied and will be satisfied by Sellers following the
Date of Closing.
4.10 Full Disclosure. No representation or warranty made by Sellers or
Shareholders in this Agreement, including the documents, instruments and
agreements to be executed and/or delivered by either or both Sellers and/or
Shareholders pursuant to this Agreement, and no statement, certificate or other
document or instrument furnished or to be furnished by or on behalf of either or
both Sellers and/or Shareholders pursuant to this Agreement or in connection
with the consummation of the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact or omits, to state a material
fact necessary to make the statements contained herein and therein not
misleading or any fact necessary to provide Purchaser with proper and adequate
information concerning the properties, Assets, revenues, Business, operations,
financial condition and prospects of Sellers. Neither Sellers nor Shareholders
has knowingly failed to fully disclose to Purchaser any and all facts and
information known to it/him/them that reasonably could be expected to have a
Material Adverse Effect on either Seller or the Business.
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4.11 FINANCIAL STATEMENTS. Sellers have furnished true and correct copies
of the financial statements identified in Schedule 4.11 hereto to Purchaser.
Except as provided in Schedule 4.11 hereto, all of said financial statements,
including any notes thereto, are true and correct in all material respects and
fairly present the financial position and condition of Sellers, on a combined
basis, with elimination of all intercompany transactions, as of their respective
dates and the results of their respective operations for the periods covered in
accordance with GAAP, applied on a basis consistent with that of prior years
and periods, provided, however, that as to the unaudited quarterly financial
statement set forth on such Schedule, such financial statements do not have
the footnotes required by GAAP and such financial statements are subject to
ordinary year-end adjustments. To Sellers' Knowledge, subsequent to December
31, 1995, there have been no material adverse changes in the properties, Assets,
liabilities, revenues, expenses, operations, financial condition or prospects
of the Sellers and/or Business from that reflected in said financial statements.
Except for debts, liabilities and obligations (i) to be reflected or reserved
against in the Balance Sheets or in the notes thereto, (ii) current liabilities
incurred in the Ordinary Course of Business since the date of the Opening
Balance Sheet, and/or (iii) described on Schedule 4.11 hereto, neither Seller
has any debts, liabilities or obligations of any nature, whether secured,
unsecured, known, unknown, accrued, absolute, fixed, contingent or otherwise,
whether due or to become due, which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on either Seller or
the Business. Except as otherwise described herein, all debts, liabilities and
obligations incurred after the date of the Opening Balance Sheet have been
incurred in the Ordinary Course of Business, and are usual and ordinary in
amount both individually and in the aggregate.
4.12 ABSENCE OF CERTAIN DEVELOPMENTS. Except for the transactions
contemplated by this Agreement or as otherwise set forth on Schedule 4.12
hereto, since December 31, 1995, Sellers have conducted the Business only
in the Ordinary Course of Business and have not:
a. Sold, assigned or otherwise transferred any properties or assets
other than in the Ordinary Course of Business;
b. Suffered any material loss or waived or released any material
right or claim, whether or not in the Ordinary Course of Business;
c. Suffered, sustained or incurred any material damage, destruction
or casualty loss to any properties or assets, whether or not covered
by insurance;
d. Engaged in any transaction not in the Ordinary Course of
Business;
e. Made any capital expenditure exceeding $25,000;
f. Incurred any debts, liabilities or obligations, absolute or
contingent, known or unknown, except current liabilities incurred in the
Ordinary Course of Business and those incurred with respect to the
New Store, as described in Schedule 4.12;
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g. Loaned money to any Person, or guaranteed any loan to any Person,
whether or not in the Ordinary Course of Business;
h. Except as described in Schedule 1.1(g) hereto, amended or
terminated any of the Operating Contracts or Licenses, except in the
Ordinary Course of Business;
i. Changed accounting methods or practices (including, without
limitation, any change in depreciation, amortization or cost accounting
policies or rates), except as disclosed to Purchaser by Sellers in writing
prior to the Closing;
j. Suffered, sustained or incurred any material adverse change in
the properties, Assets, revenues, Business, operations, financial condition
or prospects of the Sellers;
k. Received notice from any customer, franchisee, lessor, vendor
or any other Person which could reasonably be expected to have, give
rise to or result in a Material Adverse Effect on either Seller or the
Business; or
l. Entered into any Contract to do any of the foregoing.
4.13 PROPRIETARY RIGHTS. Schedule 1.1(b) hereto contains a list of all
of the federal, state, foreign and common law trademarks, trademark
registrations and applications therefor, service marks, service mark
registrations and applications therefor, copyrights, copyright registrations and
applications therefor, trade names, assumed names, logos, patents, patent
applications, technology, know-how, trade secrets, processes, formulas,
drawings, designs and other similar intellectual property and/or proprietary
rights of any kind used by either Seller in the operation of the Business.
Schedule 1.1(n) hereto contains a list of all of the computer software and
software program documentation of any kind used by either Seller in the conduct
of the Business. Neither Seller has any knowledge of any asserted claim or any
reason to believe that the operations of the Business or the possession or use
in the Business of any of the Assets, including the Proprietary Rights and/or
Software, infringes any trademark, service mark, copyright, trade name, assumed
name, logo, patent, technology, know-how, trade secret, process, formula,
drawing, design or other intellectual property or proprietary rights of any
other Person; except as provided in the franchise agreements and area franchise
development agreements included in the Operating Contracts, Sellers have the
right to use all of the Proprietary Rights and the sole and exclusive right to
use Sellers' trade names, trademarks, service marks and other intellectual
properties which have been registered with the U.S. Patent and Trademark Office;
neither Seller has entered into any Contract or license that would impair its
right to transfer its rights in and to the Proprietary Rights and/or Software to
Purchaser; Sellers have no reason to believe that any of the Proprietary Rights
are, or are claimed to be, invalid; and, except as provided in Schedule 1.1(n)
hereto, neither Seller is obligated under any license, Contract or otherwise to
pay royalties, fees or other payments with respect to any of the Proprietary
Rights
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and/or Software. Except as provided in Schedule 4.3 hereto, the sale and
assignment of the Proprietary Rights and Software and the right to use the
same to Purchaser on the Date of Closing does not require any filing with,
permit from, consent or approval of, or the giving of any notice to, any
Person.
4.14 COMPLIANCE WITH LAWS. To Sellers' Knowledge, the Business has
been operated, and the assets and Sellers are in substantial compliance
with, all requirements of the Licenses, all Applicable Laws, and all
requirements of insurance carriers, and there exists no condition which
could give rise to a cancellation or nonrenewal of any insurance coverage or
License. Neither of the Sellers or Shareholders has notice of any presently
existing circumstances which are likely to result in any violation of a
material nature of any Applicable Laws respecting either Seller, the Assets
or the Business, except as disclosed in writing to Purchaser by Sellers prior
to the Closing.
4.15 OPERATING CONTRACTS. Except for the Contracts set forth in
Schedule 1.2 hereto, the Operating Contracts set forth on Schedule 1.1 (g)
hereto include all Contracts, commitments, leases, licenses and other
agreements, including franchise agreements and area franchise development
agreements which relate to, arise from or are used or are necessary for the
operation of the Business. All of the Operating Contracts are valid,
binding in all material respects and currently in full force and effect, and the
performance by the parties thereto will not, individually or in the aggregate,
have a Material Adverse Effect upon either Seller or the Business. Neither
Seller has been notified of or knows of any default in any material respect
under any of the Operating Contracts, and to Sellers' Knowledge, no event has
occurred which, through the passage of time or the giving of notice, or both,
would constitute a default or give rise to a right of termination or
cancellation under any of the Operating Contracts, or cause the acceleration
of an obligation of any Sellers, or result in the creation of any Encumbrance
whatsoever upon any of the Assets, except as disclosed in writing to Purchaser
by Sellers prior to the Closing. To the best of Sellers' Knowledge, no other
party is in default under any of the Operating Contracts, nor has any event
occurred which, through the passage of time or the giving of notice, or both,
would constitute a default or give rise to a right of termination or
cancellation under any of the Operating Contracts, or cause the acceleration
of any obligation owed to or by either Seller. Except as described on
Schedule 1.1(g) hereto, none of the Operating Contracts have been canceled,
terminated, amended or modified and, to the best of Sellers' Knowledge, all
parties to such Operating Contracts are in all material respects in compliance
therewith. Except as provided in Schedule 4.3 hereto, all of the Operating
Contracts are assignable by Sellers and assumable by Purchaser without giving
advance notice to or receiving the consent or approval of any Person and any
such required notices, consents and approvals, if any, as are required shall be
given or obtained by Sellers prior to the Date of Closing.
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4.16 REAL ESTATE. With respect to the Leased Premises:
a. Schedule 1.1(g) contains a complete and accurate description
of all leases and any modifications, extensions and amendments thereto with
respect to the Leased Premises;
b. Sellers have not been notified of any special assessments levied or
assessed on or against any Leased Premises (or any such special assessments
shall be paid by Sellers on or before the Date of Closing);
c. To Sellers' Knowledge, there are no public improvements affecting
any Leased Premises, including, but not limited to, water, sewer, sidewalk,
street, alley, curbing, landscaping or related improvements, which have
been commenced and/or completed and for which an assessment has not been
levied or, to the best of Sellers' Knowledge, which may be levied after the
date of this Agreement. To Sellers' Knowledge, there are no planned public
improvement which may result in an assessment against or otherwise
materially affect any Leased Premises;
d. There are no condemnation Proceedings pending or, to the best of
Sellers' Knowledge, Threatened with respect to all or any part of any
Leased Premises which are likely to adversely affect the Purchaser's
occupancy of such Leased Premises or the operation of the Business therein
by the Purchaser after the Closing;
e. Except as set forth in the leases for the Leased Premises, to
Sellers' Knowledge, there are no private restrictions, covenants,
reservations or agreements which affect the use or occupancy of any Leased
Premises;
f. To Sellers' Knowledge, there are no Applicable Laws issued,
enacted, entered or deemed applicable by any Governmental Body requiring
repair, alteration or correction of any existing condition on any Leased
Premises and there are no conditions that could give rise to the same;
g. To Sellers' Knowledge, there are no structural, mechanical or
other defects of material significance in any of the buildings,
improvements, fixtures and equipment, including the roof, heating,
ventilating, air conditioning, electrical, plumbing and sanitary disposal
systems, located on any Leased Premises which are likely to adversely
affect the Purchaser's occupancy of such Leased Premises or the operation
of the Business therein by the Purchaser after the Closing. To Sellers'
knowledge, all such Leased Premises, including the leasehold improvements,
fixtures, equipment, roof, and heating, ventilating, air conditioning,
electrical, plumbing and sanitary disposal systems, have been and will be
until the Date of Closing maintained in good repair, working order and
condition;
h. To Sellers' Knowledge, each of the Leased Premises has direct
legal access to, abuts, and is served by a publicly dedicated and
maintained road, which road
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provides a valid means of ingress and egress to and from each Leased
Premises, without additional cost or expense to Purchaser, and to the best
of Sellers' Knowledge, there are no applications, ordinances, petitions,
resolutions or other matters pending before any Governmental Body in regard
to access routes, curb cuts, median strips, or other contemplated actions
which might tend to diminish or curtail the full flow of traffic by any
Leased Premises or access thereto; and
i. To Sellers' Knowledge, all utilities, including water, gas,
telephone, sanitary and storm sewers are currently available to each Leased
Premises at normal and customary rates.
4.17 RECEIVABLES. All accounts receivable of the Sellers that are
reflected on the Balance Sheets (collectively, the "Accounts Receivable")
represent, or will represent, valid obligations arising from sales actually made
or services actually performed in the Ordinary Course of Business. Unless paid
prior to the Date of Closing, to Sellers' Knowledge, the Accounts Receivable are
or will be as of the Date of Closing current and collectible net of the
respective reserves shown on the Closing Balance Sheet (which reserves are
reasonably adequate and calculated consistent with past practice and will not
represent a materially greater percentage of the Accounts Receivable as of the
Date of Closing than the reserve reflected in the Opening Balance Sheet with
respect to the Accounts Receivable reflected therein), the Accounts Receivable
reflected on the Closing Balance Sheet will not represent a material adverse
change in the composition of such Accounts Receivable in terms of aging from
those reflected in the Opening Balance Sheet. To the best of Sellers' Knowledge,
there is no contest, claim, or right of set-off in any Contract with any maker
of an Accounts Receivable, relating to the amount or validity of such Accounts
Receivable, except as disclosed on Schedule 4.6.
4.18 BOOKS AND RECORDS. All of Sellers' books of account and other
financial and corporate records relating to the Business have been made
available to Purchaser and its representatives (or will be so made available
prior to the Date of Closing). Such books of account and records are current,
complete, true and correct in all material respects and reflect in all material
respects all items of income and expense with respect to the Business and all
assets, liabilities and accruals with respect to the Business in accordance
with GAAP, consistently applied. To Sellers' Knowledge, Sellers have filed
all reports relating to the Business required by any and all Applicable Laws
to be filed, except for any failures or delinquencies in reporting which will
not have a Material Adverse Effect on the Business or the Sellers.
4.19 EMPLOYEES. Schedule 4.19 hereto contains a complete and accurate
list of the following information for each employee of the Sellers, including
each employee on leave of absence or layoff status: employer, name, job title,
current compensation paid or payable and any change in compensation since
January 1, 1995, vacation and sick leave accrued, and hire
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date for purposes of determining vesting and eligibility to participate
under each Scheduled Plan. No current or former officer or director of
either Seller and, to the best of Sellers' Knowledge, no other current or
former employee of either Seller is a party to, or is otherwise bound by,
any agreement or arrangement, including any confidentiality, non-competition,
proprietary rights or other agreement, between such employee or officer of
director and any other Person ("Proprietary Rights Agreement") that in any way
materially adversely affected, affects, or will affect (i) the performance of
his or her duties as an employee or officer or director of either Seller, or
(ii) the ability of either Seller to conduct its business, including any
Proprietary Rights Agreement with either Seller by any such employee or
director.
4.20 LICENSES AND PERMITS. Sellers have obtained all licenses,
certificates, franchises, permits, consents and approvals of each and every
Governmental Body having jurisdiction over either Seller or any of its
respective properties assets or business necessary or appropriate to own
the Assets and to operate and carry on the Business as it is now being
conducted, except where the failure to do so would not have a Material Adverse
Effect on the Business or the Sellers. All such licenses, certificates,
franchises, permits, consents and approvals are described on Schedule 1.1(h)
hereto and are valid and in full force and effect.
4.21 SUFFICIENCY OF ASSETS. The Assets to be transferred by Sellers
to Purchaser on the Date of Closing will include all assets, whether owned or
leased, including intangible assets, properties, franchises, licenses, permits,
Contracts, operations and business that relate to, arise from, are used or held
by Sellers for the operation of the Business as presently operated by the
Sellers, except for the Excluded Assets. The instruments and documents to be
executed and/or delivered by Sellers to Purchaser pursuant to Section 11.2
hereof at or following the Closing shall be adequate and sufficient to vest in
Purchaser all of Sellers' rights, titles and interests in or to the Assets.
4.22 OTHER MATERIAL CONTRACTS AND OBLIGATIONS. Except for the
Operating Contracts, non-assignable insurance policies and the Contracts
disclosed on Schedule 4.22 hereto or in the financial statement or notes
thereto listed on Schedule 4.11 hereto, neither Seller is a party to or bound
by any Contract relating to the Business, including any:
a. Dealer, distributorship, franchise brokerage, or sales
agency agreements, excluding purchase orders with respect to the purchase
or sale of products or services in the Ordinary Course of Business;
b. Advertising Contracts;
c. Contract, commitment or arrangement for capital expenditures
having a remaining balance in excess of $25,000;
d. Leases with respect to any property, real or personal,
whether as lessor or lessee;
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e. Contract containing covenants by any Seller not to compete
in any lines of business or with any Person, except for territorial
protections contained in Sellers' franchise agreements and area development
agreements listed on Schedule 1.1(g) hereto;
f. Franchise, license or area development agreements;
g. Guarantees;
h. Contract or purchase order for the purchase of any
services, raw materials, supplies or equipment involving payments of more
than $10,000 per annum or an aggregate of more than $25,000, excluding
purchase orders for the purchase of products or services entered into in
the Ordinary Course of Business; or
i. Contract for the sale of any properties, assets or services
involving a value estimated at more than $25,000, excluding purchase orders
for the sale of products or services in the Ordinary Course of Business.
4.23 SHAREHOLDERS. The Shareholders are the holders of all of the
issued and outstanding shares of each and every class and series of capital
stock of Sellers. There are no outstanding subscriptions, warrants, options,
agreements, convertible securities or other commitments pursuant to which
either Seller is or may be obligated to issue any shares of any class or series
of its capital stock or other securities to any other Person.
4.24 SUBSIDIARIES. Neither Seller has any subsidiaries or owns any
shares of stock or other securities or interests, directly or indirectly, in
any other Person. Neither Seller is subject to any obligation or requirement
to provide funds to, or invest in, any such Person.
4.25 PRODUCTS LIABILITY CLAIMS. All products which either Seller has
sold through the Business have been merchantable, free from defects and, where
applicable, fit for human consumption. Except as set forth on Schedule 4.25
hereto, during the last three (3) years neither Seller has received a claim
based upon an alleged breach of product warranty or defective product, arising
from such Seller's manufacture or sale of its products (hereafter collectively
referred to as "Product Liability Claims"). Sellers have no reasonable grounds
to believe that future Product Liability Claims with respect to products of any
Seller sold through the Business on or before the Date of Closing will be
different from such Sellers' past experience with respect thereto as set forth
herein.
4.26 INSURANCE. Schedule 4.26 hereto contains a complete and accurate
list of all insurance policies (including "self-insurance" programs) now
maintained by either Seller (the "Insurance Policies"). The Insurance Policies
are in full force and effect, neither Seller has notice that it is in default
under any Insurance Policy, and no claim for coverage under any Insurance
Policy has been denied. All of the Insurance Policies will be maintained in
full force and effect until the Date of Closing except for cancellations or
possible cancellations which do not, and insofar as reasonably can be foreseen
in the future, will not have a Material Adverse
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Effect on either Seller or the Purchaser. To Sellers' Knowledge, the Insurance
Policies are reasonably prudent and adequate for the business of the Sellers.
Sellers have promptly and adequately notified Sellers' insurance carriers of any
and all claims known to Sellers with respect to the operations or products of
Sellers for which Sellers are insured. Sellers have not been refused any
insurance coverage by any insurance carrier to which it has applied for
insurance during the past three (3) years with respect to the Assets or the
Business.
4.27 BROKERS. Except as set forth in Schedule 4.27 hereto, neither Sellers
nor Shareholders have employed or engaged any broker, finder, agent, banker or
third party, or otherwise dealt with anyone purporting to act in the capacity of
a finder or broker in connection with the transactions contemplated hereby.
Except as set forth in Schedule 4.27 hereto, no commissions, finder's fees or
like charges have been or will be incurred in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
4.28 CERTAIN PAYMENTS. Neither of the Sellers nor any of their respective
directors or officers, and, to the best of Sellers' Knowledge, no other member
of management, no other agents, employees or any other Person associated with or
acting for or on behalf of either of the Sellers, has directly or indirectly (a)
made any contribution, gift, bribe, rebate, payoff, influence payment, kickback,
or other payment to any Person, private or public, regardless of form, whether
in money, property, or services (i) to obtain favorable treatment in securing
business, (ii) to pay for favorable treatment for business secured, (iii) to
obtain special concessions or for special concessions already obtained, for or
in respect of either Seller or any affiliate of the Sellers, or (iv) in
violation of any Applicable Laws, or (b) established or maintained any fund or
asset that has not been recorded in the books and records of the Sellers.
4.29 RELATIONSHIP WITH RELATED PERSONS. The shareholders, directors,
officers, and employees of the Sellers and their Related Persons (as hereinafter
defined) do not have any interest in any of the assets of the Sellers and, to
the best of Sellers' Knowledge, do not own, of record or as a beneficial owner,
an equity interest or any other financial or profit interest in any Person that
has had business dealings or a material financial interest in any transaction
with either Seller. Neither the Shareholders nor any of the executive officers
of Sellers have engaged or are engaged in competition with either Seller with
respect to any line of products or services of either Seller (a "Competing
Business") in any market presently served by either Seller or the Purchaser. No
shareholder or director of either Seller and none of their Related Persons is a
party to any Contract with, or has any claim or right against, the Sellers. All
money owed by the Sellers to the Shareholders or directors or their Related
Persons (other than for salary) are for bona fide debts, are set forth in
Schedule 4.29 hereto and will be reflected on the Closing Balance Sheet.
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4.30 Inventory. All inventory of the Sellers, as set forth on the Balance
Sheets, consists of a quality and quantity usable and salable at customary
prices in the Ordinary Course of Business, except for obsolete items and items
of below-standard quality, all of which have been written off or written down to
net realizable value in the Balance Sheets. All inventories not written off have
been priced at the lower of cost or market, in accordance with GAAP. The
quantities of each item of inventory (whether raw materials, work-in-process, or
finished goods) are not excessive but are reasonable in the present
circumstances of the Sellers. To Sellers' Knowledge, all work-in-process and
finished goods inventory is free of any materials defect or other material
deficiency.
4.31 Private Placement Memorandum. The information supplied by the Sellers
and Shareholders in writing for inclusion in the offering memorandum (the
"Private Placement Memorandum") for an offering (the "Offering") of securities
of BAB Holdings, Inc. for the purpose of financing the Purchase Price, among
other corporate purposes, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. If, at any
time prior to the closing of the Offering being made pursuant to the Private
Placement Memorandum, any event relating to either Seller, or any of their
respective affiliates, officers, or directors should be discovered by the
Sellers and Shareholders which should be set forth in an amendment to the
Private Placement Memorandum, the Sellers shall immediately inform Purchaser in
writing.
4.32 Environmental Matters. To the best of Sellers' Knowledge:
a. Neither Seller has ever generated, transported, treated, stored,
disposed, or otherwise handled any Hazardous Material at any site,
location, or facility in connection with the Assets, including the
Business, or its Leased Premises and neither Seller has notice in writing
that such Hazardous Materials are present on, in, under or near any Leased
Premises used in connection with the Business.
b. Each Seller is (i) in compliance with all applicable
Environmental and Safety Requirements (as hereinafter defined), and (ii)
possess all required permits, licenses, certifications, and approvals and
has filed all notices or applications required thereby or pertaining
thereto.
c. Neither Seller has ever received any notice (written or oral) of
any private, administrative, or judicial inquiry, investigation, order, or
action, or any notice (written or oral) or any intended or Threatened
private, administrative, or judicial inquiry, investigation, order, or
action relating to the presence, or alleged presence, of Hazardous
Materials on, in, under, or near any Leased Premises, and to Sellers'
Knowledge, there is no reasonable basis for any such inquiry,
investigation, order, action, or notice; and Sellers have no notice of any
pending or Threatened investigations, actions, orders, or
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Proceedings (or notices of potential investigations, actions, orders, or
Proceedings) from any Governmental Body, or any other Person, regarding any
matter relating to Environmental and Safety Requirements.
d. No facts, events, or conditions with respect to the past or
present operations or facilities of either Seller exist which could
reasonably be expected to interfere with, or prevent continued compliance
with, or could give rise to, any common law or statutory liability or
otherwise form the basis of any claim, action, suit, Proceeding, hearing,
or investigation against or involving the Assets, either Seller, the Leased
Premises under any Environmental and Safety Requirement, or related common
law theories based on any such fact, event, or circumstance, including,
without limitation, liability for investigation costs, cleanup costs,
personal injury, or property damage.
4.33 Franchise Operations. Except as disclosed by Sellers to Purchaser in
writing prior to Closing, to Sellers' Knowledge, Sellers have complied with all
Applicable Laws, including franchise and business opportunity laws, of every
Governmental Body, including the Federal Trade Commission (the "FTC"), in
offering and selling their "Chesapeake Bagel Bakery" franchises and area
franchises. Schedule 1.1(g) contains a complete list of all franchise
agreements, area franchise development agreements and other similar agreements
together with all amendments, modifications, renewals, extensions and addended
thereto to which either Seller is a party. The Sellers have not obtained a
federal copyright with respect to the "American Bagel's Operator Manual" and all
supplemental business manuals. Except as set forth in Schedule 4.33 hereto, no
franchisee or area franchisee of either Seller has commenced or, to the best of
Sellers' Knowledge Threatened to commence a Proceeding against either the Seller
or with respect any matter, cause or thing whatsoever. Except as set forth in
Schedule 4.33 hereto or as previously disclosed by Sellers to Purchaser in
writing prior to the execution hereof, all of the terms and conditions of all
franchises and all area franchises to which either Seller is a party are
contained in a written document identified on Schedule 1.1(g) hereto, and,
except as set forth in such Schedule, no such term or condition has been waived
by either Seller. Each jurisdiction in which Sellers have registered its
franchises and/or area franchises for offer and sale is listed on Schedule 4.33
hereto together with any conditions to registration imposed by any such
jurisdiction. Schedule 4.33 sets forth a description of all outstanding offers
by the Sellers to enter into franchise agreements and/or area franchise
development agreements which prospective franchisees and area franchisees. Such
Schedule also sets forth a description of all of franchise agreements and area
franchise development agreements terminated, canceled or revoked by the Sellers
at any time during the past three (3) years, including the respective dates of
termination or cancellation and the reasons therefor. Except as previously
disclosed by Sellers to Purchaser in writing prior to the execution hereof, the
Sellers' Franchise Offering Circulars in use in each
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jurisdiction have been maintained current in all material respects and fairly
disclose all matters required to be disclosed by Applicable Laws. Except as
otherwise disclosed by Sellers to Purchaser in writing prior to Closing, to
Sellers' Knowledge, all franchise agreements and area franchise development
agreements entered into by Sellers with their franchisees were entered into
accordance with the requirements of Applicable Laws.
ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement for Sellers and Shareholders to enter into this
Agreement and consummate the transactions contemplated hereby, intending that
Sellers and Shareholders rely thereon in entering into and performing this
Agreement, Purchaser warrants and represents to Sellers and Shareholders that
each and all of the following are true and correct in all material respects as
of the date of this Agreement and will be true and correct in all material
respects at and as of the Closing:
5.1 Due Incorporation. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Illinois, and has
all requisite power and authority, corporate and otherwise, to own, operate and
lease its properties and assets and to conduct its business as it is now being
conducted. Purchaser is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of every state or
jurisdiction in which the nature of its activities or of its properties owned,
leased or operated makes such qualification necessary and the failure to be so
qualified could reasonably be expected to have a Material Adverse Effect on the
Purchaser. Purchaser is not subject to any Contract which restricts or may
restrict the conduct of the Business in any jurisdiction or location except for
territorial restrictions in Purchaser's franchise and area development
agreements.
5.2 Due Authorization. The execution, delivery and performance of this
Agreement, including the documents, instruments and agreements to be executed
and/or delivered by Purchaser pursuant to this Agreement, and the consummation
of the transactions contemplated hereby and thereby have been, or will be on or
before the Date of Closing, duly and validly authorized by all necessary
corporate action on the part of Purchaser. This Agreement and the documents,
instruments and agreements to be executed by Purchaser pursuant to this
Agreement have been, or will be on or before the Date of Closing, duly and
validly authorized, executed and delivered by Purchaser and the obligations of
Purchaser hereunder and thereunder are or will be valid and legally binding, and
this Agreement and the documents, instruments and agreements to be executed and
delivered by Purchaser pursuant to this Agreement are or will be upon such
execution and delivery enforceable against Purchaser in accordance with their
respective terms, except as such enforcement may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
presently or hereafter in effect affecting the enforcement of
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creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in equity),
including, among others, limitations on the availability of equitable remedies.
5.3 No Breach. Purchaser has full corporate power and authority to
purchase the Assets being purchased hereunder and to otherwise perform its
obligations under this Agreement and the documents, instruments and agreements
to be executed by the Purchaser pursuant hereto. The execution and delivery of
this Agreement, including the documents, instruments and agreements to be
executed by he Purchaser pursuant to this Agreement, and the consummation of the
transactions contemplated hereby and thereby will not: (i) violate any provision
of the Articles of Incorporation or Bylaws (or comparable governing documents or
instruments) of Purchaser; (ii) violate any Applicable Laws issued, enacted,
entered or deemed applicable by any Governmental Body having jurisdiction over
Purchaser or any of its properties or assets; (iii) require any filing with, or
permit, consent or approval of, or the giving of any notice to any Person; (iv)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give another party any rights or
termination, cancellation or acceleration) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, license, franchise,
permit, lease, or Contract to which Purchaser is a party, or by which it or any
of its assets or properties may be bound; or (v) result in the creation or
imposition of any Encumbrance on any of the Purchaser's assets or properties.
5.4 Full Disclosure. No representation or warranty made by Purchaser
in this Agreement, including the documents, instruments and agreements to be
executed and/or delivered by Purchaser pursuant to this Agreement, and no
statement, certificate or other document or instrument furnished or to be
furnished to Sellers pursuant to this Agreement or in connection with the
consummation of the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein and therein not
misleading. Purchaser has not knowingly failed to fully disclose to Sellers and
Shareholders facts or information known to it that reasonably could be expected
to have a Material Adverse Effect on the business of BAB Holdings, Inc.
5.5 Brokers. Except as disclosed on Schedule 5.5 hereto, Purchaser
has not employed or engaged any broker, finder, agent, investment banker or
third party nor has it otherwise dealt with anyone purporting to act in the
capacity of a finder or broker, in connection with the transactions contemplated
hereby. Except as disclosed in Schedule 5.5 hereto, no commissions, finder's
fees or like charges have been or will be incurred in connection with the
execution and delivery of this Agreement of the consummation of the transactions
contemplated hereby.
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5.6 BAB Shares. The BAB Shares to be issued and delivered to the Sellers
at the Closing, at the time said BAB Shares are issued and delivered, will be
duly authorized, valid issued, fully paid and nonassessable and Sellers shall
receive good title thereto free and clear of any Encumbrances of any nature
whatsoever.
5.7 Securities Laws Filings. Purchaser has made all filings required under
applicable securities laws. As of their respective dates, all such filings
complied in all material respects with applicable securities law requirements
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading.
5.8 Compliance with Laws. To Purchaser's Knowledge, the business of
Purchaser has been operated in substantial compliance with all requirements of
insurance carriers, the terms of applicable licenses and all Applicable Laws,
and Purchaser has not received any notice of, or has no reason to anticipate
that any presently existing circumstances are likely to result in, any violation
of a material nature of any applicable laws respecting the existing business of
Purchaser as of the date of this Agreement.
5.9 Licenses and Permits. Purchaser has obtained all licenses,
certificates, franchises, permits, consents and approvals of each and every
Governmental Body having jurisdiction over Purchaser or any of its respective
properties, assets or business necessary or appropriate to own its assets and to
operate and carry on its business as it is now being conducted, except where
failure to do so would not have a Material Adverse Effect upon the business of
Purchaser.
ARTICLE 6: PERFORMANCE BY SELLERS AND SHAREHOLDERS PENDING CLOSING
Sellers and Shareholders, jointly and severally, covenant and agree that
from and after the date of this Agreement and until the earlier of Date of
Closing or the termination of this Agreement in accordance with Article 14
hereof:
6.1 Access to Information. At the request of Purchaser, Sellers shall,
from time to time, give or cause to be given to Purchaser, its officers,
employees, counsel, accountants, investment bankers and other representatives,
upon reasonable notice to Sellers, full and prompt access during normal business
hours to the Business, the Assets and all of the books, minute book, title
papers, records, files, Contracts, insurance policies, Licenses and documents of
every character of Sellers relating to the Business and Sellers shall promptly
furnish or cause to be furnished to Purchaser, its officers, employees, counsel,
accountants, investment bankers and other representatives all of the information
with respect to the Sellers, the Business and/or Assets as any of them may
reasonably request. Purchaser, its officers, employees, counsel, accountants,
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investment bankers and other representatives shall have the authority to
interview all employees, customers, vendors, suppliers, franchisees and other
Persons having relationships with either Seller and/or the Business, and Sellers
shall make such introductions as may be reasonably requested. In addition,
Purchaser may, at its sole cost and expense, at any time prior to the Date of
Closing, through its officers, employees, counsel, accountants, investment
bankers and other representatives, conduct such investigations and examinations
of the Assets and/or Business as it deems necessary or advisable, and Sellers
will cooperate fully and reasonably in such investigations.
6.2 Business As Usual. Sellers shall carry on the Business diligently,
only in the usual and ordinary course and substantially in the same manner as
heretofore conducted and will keep and maintain the Assets in good and safe
repair and condition consistent with past practices.
6.3 Encumbrances. Sellers shall not, directly or indirectly, perform or
fail to perform any act which might reasonably be expected to result in the
creation or imposition of any Encumbrance whatsoever on any of the Assets, other
than in the Ordinary Course of Business, or otherwise adversely effect the
marketability of the Sellers' title to any of the Assets.
6.4 Pay Increases. Sellers shall not, without the prior written consent of
Purchaser, grant any general or uniform increase in the salaries or rate of pay
to their respective employees, grant any increase any benefits or establish,
adopt, enter into, make any new grants or awards under, or amend any collective
bargaining, employment, bonus, stock option, restricted stock, stock purchase,
profit-sharing, deferred compensation, severance, pension, retirement,
disability, medical, dental, health or life insurance, death benefit, incentive
or other compensation or retirement plan, arrangement, agreement, trust, fund,
policy or arrangement for the benefit of their respective employees, other than
in the Ordinary Course of Business; provided that no pay increases or increases
in benefits, as described above, shall be granted to the Shareholders, except as
permitted under Section 6.21 hereof.
6.5 Restrictions on New Contracts. Except with respect to the New Store,
as previously disclosed in writing by Sellers to Purchaser, Sellers shall not
enter into any Contract, incur any liability, absolute or contingent, assume,
guarantee or otherwise become liable or responsible for the obligations of any
other Person, make any loans, advances or capital contributions to any other
Person (except for extensions of credit to its customers in the Ordinary Course
of Business), or waive any right or enter into any other transaction, in each
case other than in the usual and Ordinary Course of Business and consistent with
Sellers, normal business practices.
6.6 Preservation of Business. Sellers shall use their respective best
efforts to preserve their respective business organizations intact, to keep
available to Purchaser the present employees of Sellers and to preserve for
Purchaser the Business and the present goodwill and
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relationship of Sellers with their respective vendors, suppliers, customers,
franchisees and others having business relationships with the Business.
6.7 PAYMENT AND PERFORMANCE OF OBLIGATIONS. Sellers will timely pay and
discharge all invoices, bills and other monetary obligations and shall not
perform or fail to perform any act which will cause a material breach of any of
the Operating Contracts.
6.8 RESTRICTIONS ON SALE OF ASSETS. Sellers shall not sell, assign,
transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the
properties or assets of the Business, except for the sale of inventory in the
Ordinary Course of Business and at regular prices. Without limiting the
generality of the foregoing, Sellers shall not permit any of the Proprietary
Rights to lapse or dispose of or otherwise lose the right to use any of the
Proprietary Rights. Notwithstanding the foregoing provisions of this Section to
the contrary, Almike may, with the prior written consent of the Purchaser, sell
up to five (5) of its company-owned Chesapeake Bagel Bakery stores, which
consent shall not be unreasonably withheld, provided that the proceeds of such
sales are included in the Assets purchased by Purchaser.
6.9 PROMPT NOTICE. Sellers shall promptly notify Purchaser in writing
upon becoming aware of any of the following: (i) any investigation, claim,
demand, action, suit or other Proceeding that may be brought, threatened,
asserted or commenced against either Seller, its officers or directors involving
in any way the Sellers, the Business or the Assets, (ii) any changes in accuracy
of the representations and warranties made by Sellers and/or Shareholders in
this Agreement, (iii) any order or decree or any complaint praying for an order
or decree restraining or enjoining the consummation of the transactions
contemplated hereby, or (iv) any notice from any Governmental Body of its
intention to institute an investigation into, or institute a Proceeding to
restrain or enjoin the consummation of the transactions contemplated hereby or
to nullify or render in effective this Agreement or such transactions if
consummated.
6.10 CONSENTS. As soon as reasonably practicable and in any event on or
before the Date of Closing, Sellers will obtain or cause to be obtained all of
the consents and approvals of all Persons necessary to assign and transfer to
the Purchaser of all of the Assets, including the Operating Contracts, Licenses
and Software, herein provided to be sold, assigned and transferred to Purchaser,
including the consents and approvals listed on Schedule 4.3 hereto.
6.11 COPIES OF DOCUMENTS. Sellers agree that as soon as reasonably
possible following the execution hereof, they shall furnish Purchaser with a
true, complete and accurate copy of each Operating Contract and any additional
Contract listed on Schedule 4.22 hereto; provided, however, the Sellers shall
not be required to furnish Purchaser with copies of all of their franchise
agreements but, rather, such agreements shall be made available for review and
inspection by Purchaser and its attorneys and other representatives.
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6.12 NO SOLICITATION OF OTHER OFFERS. The Sellers and Shareholders will
not, and will not permit their respective directors, officers, employees,
representatives, investment bankers, agents and affiliates to, directly or
indirectly, (i) solicit or encourage submission or any inquiries, proposals or
offers by, (ii) participate in any negotiations with, (iii) afford any access to
the properties, books or records of either Seller to, (iv) accept or approve, or
(v) otherwise assist, facilitate or encourage, or enter into any agreement or
understanding with, any Person or group (other than Purchaser and its
Affiliates, agents and representatives), in connection with any Acquisition
Proposal (as hereinafter defined). In addition, from and after the date of this
Agreement until the Date of Closing or the earlier termination of this Agreement
in accordance with its terms, the Sellers and Shareholders will not, and will
not permit their respective directors, officers, employees, representatives,
investment bankers, agents and affiliates to, directly or indirectly, make or
authorize any statement, recommendation or solicitation in support of any
Acquisition Proposal made by any Person or group (other than Purchaser). The
Sellers and Shareholders will immediately cease all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing.
6.13 INVENTORY. Sellers shall maintain the levels of inventory, materials
and supplies used in the Business consistent with past practice.
6.14 INSURANCE. Sellers will maintain in full force and effect all
insurance coverages for the Assets substantially comparable to coverages
existing on the date hereof.
6.15 FILING REPORTS AND MAKING PAYMENTS. Sellers shall timely file all
required reports and notices with each and every applicable Governmental Body
and timely make all payments due and owing to each such Governmental Body,
including, but not by way of limitation, any filings, notices and/or payments
required by reason of the transactions contemplated by this Agreement.
6.16 CAPITAL EXPENDITURES. Sellers shall not make any capital
expenditures in excess of $10,000 individually or $25,000 in the aggregate
without the Purchaser's prior written consent which will not be unreasonably
withheld or delayed. Notwithstanding the foregoing provisions of this Section
to the contrary, Almike may, with the prior written consent of the Purchaser,
open up to three (3) new company-owned Chesapeake Bagel Bakery stores, which
consent shall not be unreasonably withheld, provided that Purchaser shall be
fully apprised of the terms of financing of such stores.
6.17 MONTHLY FINANCIALS. Within fifteen (15) days of the close of each
month, Sellers shall deliver to Purchaser a balance sheet and income statement
for each Seller disclosing the financial position and results of operations of
each Seller for the preceding month and year-to-date which shall be prepared on
a basis consistent with the Sellers' internally generated financial statements
for the prior months. In addition, within fifteen (15) days of the close of
each
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calendar quarter, Seller shall deliver to Purchaser a combined balance sheet and
income statement for Sellers disclosing the financial position and results of
operations of Sellers for the preceding quarter and year to date which shall be
prepared in accordance with GAAP and on a basis consistent with the quarterly
financial statements identified on Schedule 4.11 hereof; provided, however, that
such quarterly financial statements do not need to contain the footnotes
required by GAAP and such financial statements may be subject to ordinary
year-end adjustments.
6.18 COBRA. Sellers shall at their sole cost and expense supply their
respective employees employed in the operation of the Business with any and all
notices and other information with respect to such employees' rights to continue
their health and other insurance upon the termination of their employment upon
consummation of the transactions contemplated hereby, all in accordance with all
Applicable Laws.
6.19 CASH ON HAND. Sellers shall cause their aggregate cash on hand and
on deposit as of the Date of Closing to equal or exceed the sum of Five Hundred
Thousand and no/100 Dollars ($500,000.00) or the Purchase Price shall be reduced
as provided in Section 2.1 hereof.
6.20 LIMITATION ON TRANSACTIONS IN PURCHASERS' SECURITIES. Neither
Sellers nor any of their respective officers, directors, Shareholders or
employees shall acquire or dispose of, nor shall they permit any of their
respective affiliates to acquire or dispose of, directly or indirectly, any
interest in or right to acquire any securities of Purchaser, except for
distribution of the BAB Shares upon liquidation of Sellers.
6.21 DIVIDENDS. Neither Seller shall pay any dividend or make any
distribution with respect to any class or series of its capital stock; provided,
however, that notwithstanding the foregoing, the Sellers may make pro rata
distributions of money with respect to the Sellers' issued and outstanding
shares of capital stock to the Shareholders sufficient to enable the
Shareholders to pay the federal and state income taxes on the income that passes
through from the Sellers under Section 1366 of the Code net of any tax benefit
produced by losses, deductions and credits that pass through under Section 1366
of the Code and compensation in amounts not in excess of amounts distributed as
compensation in the past fiscal year.
ARTICLE 7: PERFORMANCE BY PURCHASER PENDING CLOSING
Purchaser covenants and agrees that from and after the date of this
Agreement and until the earlier of Date of Closing or the termination of this
Agreement in accordance with Article 14 hereof:
7.1 ACCESS TO INFORMATION. At the request of Sellers, Purchaser shall,
from time to time, give or cause to be given to Sellers, its officers,
employees, counsel, accountants, investment bankers and other representatives,
upon reasonable notice to Purchaser, full and
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prompt access during normal business hours to minute books, title papers,
records, files, contracts, insurance policies, licenses and documents of every
character of Purchaser relating to its business to the extent such documents and
information would be available for inspection by shareholders of Purchaser under
applicable state corporation law, and Purchaser shall promptly furnish or cause
to be furnished to Sellers, their officers, counsel, accountants, and other
representatives such information with respect to the Purchaser and its business
as they may reasonably request; provided however, that nothing contained herein
shall require Purchaser to disclose information not publicly available to
shareholders, generally.
7.2 Business As Usual. Purchaser shall carry on its business diligently,
only in the usual and ordinary course and substantially in the same manner as
heretofore conducted and will keep and maintain its assets in good and safe
repair and condition consistent with past practices.
7.3 Preservation of Business. Purchaser shall use its best efforts to
preserve its present goodwill and relationship of Purchaser with its vendors,
suppliers, customers, franchisees and others having business relationships with
its business.
7.4 Prompt Notice. Purchaser shall promptly notify Sellers in writing
upon becoming aware of any of the following: (i) any investigation, claim,
demand, action, suit or other Proceeding that may be brought, threatened,
asserted or commenced against Purchaser, its officers or directors involving in
any way the Purchaser, provided that notice shall not be required prior to
public dissemination of such information, (ii) any changes in accuracy of the
representations and warranties made by Purchaser in this Agreement, (iii) any
order or decree or any complaint praying for an order or decree restraining or
enjoining the consummation of the transactions contemplated hereby, or (iv) any
notice from any Governmental Body of its intention to institute an investigation
into, or institute a Proceeding to restrain or enjoin the consummation of the
transactions contemplated hereby or to nullify or render ineffective this
Agreement or such transactions if consummated.
7.5 Insurance. Purchaser will maintain in full force and effect all
insurance coverages for its assets substantially comparable to coverages
existing on the date hereof. Purchaser shall cause Sellers to be added as
additional insured parties in any insurance policies covering product liability
for the Assets, for a period of two (2) years following the Date of Closing,
provided that Sellers shall pay any premium and any deductible associated with
such coverage.
7.6 Filing Reports and Making Payments. Purchaser shall timely file all
required reports and notices with each and every applicable Governmental Body
and timely make all payments due and owing to each such Governmental Body,
including, but not by way of limitation, any filings, notices and/or payments
required by reason of the transactions contemplated by this Agreement.
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ARTICLE 8: SECURITIES DISCLOSURES REGARDING BAB SHARES
8.1 UNREGISTERED SHARES; RESTRICTIONS ON TRANSFER. The Sellers and
Shareholders understand, acknowledge, represent and agree with the following
respect the BAB Shares:
(a) The BAB Shares have not been registered under the Securities Act
(as hereinafter defined) or any state securities law and Buyer is relying
upon exemptions from such registration in connection with the issuance of
the BAB Shares to the Sellers and/or the Shareholders.
(b) The Sellers and/or the Shareholders are acquiring the BAB Shares
for their own account for investment, with no present intention of
distributing, reselling, pledging or otherwise disposing of its interest in
the BAB Shares.
(c) The Sellers and/or the Shareholders have been provided with
access to all information with respect to the Purchaser and its business
(including the opportunity to meet with the Purchaser's officers, to
request additional information regarding Buyer's financial condition,
properties, management and material contracts, and ask questions of them),
and have utilized such access to make an informed decision to acquire the
BAB Shares.
(d) The Sellers and/or the Shareholders may not sell the BAB Shares
unless they are registered under the Securities Act and applicable state
securities laws or pursuant to an applicable exemption from such
registration requirements. Even if such shares are so registered or if
exemption from registration is available, there can be no assurance that
there will be a market for these shares.
(e) Any certificate representing the BAB Shares will bear a legend in
substantially the following form:
The securities evidenced by this certificate have not been registered
either under applicable federal law and rules or applicable state law
and rules. No sale, offer to sell, or transfer of these securities
may be made unless a registration statement under the Securities Act
of 1933, as amended, and any applicable state law with respect to such
securities is then in effect or an exemption from the registration
requirements of such laws is then, in fact, applicable to such
securities.
ARTICLE 9: CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
Unless waived by Purchaser in writing, each and every obligation of
Purchaser to be performed at the Closing shall be subject to the satisfaction at
or prior thereto of each and all of the following conditions precedent:
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9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Sellers and/or Shareholders in this Agreement, including the
documents, instruments and agreements to be executed and/or delivered by any of
the Sellers and/or Shareholders pursuant to this Agreement, shall be true and
correct in all material respects at and as of the Closing with the same force
and effect as though such representations and warranties had been made or given
at and as of the Closing.
9.2 COMPLIANCE WITH COVENANTS AND AGREEMENTS. Sellers and/or Shareholders
shall have performed and complied in all material respects with all of
its/his/their covenants, agreements and obligations under this Agreement which
are to be performed or complied with by it/him/them at or prior to the Closing,
including the execution and/or delivery of the documents, instruments and
agreement specified in Section 12.2 hereof or in such documents, instruments and
agreements, all of which shall be reasonably satisfactory in form and substance
to counsel for Purchaser.
9.3 NO ADVERSE CHANGE. As of the Date of Closing, nothing shall have
occurred which could, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect upon either Seller or the ability of either
Seller to conduct the Business on the same basis with the same earning power as
in the past.
9.4 PROCEEDINGS. Except for the proceedings of which Sellers have advised
Purchaser in writing prior to the execution of this Agreement, the obligations
of Purchaser under this Agreement are subject to there being no (i) proceedings
which have been brought, asserted, commenced or Threatened against the Purchaser
or either Seller by any Person involving or affecting in any way the Sellers,
the Business, the Assets, this Agreement or the consummation of the transactions
contemplated hereby, or (ii) Applicable Laws restraining or enjoining or which
may reasonably be expected to nullify or render ineffective this Agreement or
the consummation of the transactions contemplated hereby or which otherwise
could reasonably be expected to have a Material Adverse Effect on either Seller
or the Purchaser.
9.5 CONSENTS AND APPROVALS. All consents, waivers, releases,
authorizations, approvals, licenses, certificates, permits and franchises of
each Person as may be necessary to consummate the transactions contemplated by
this Agreement and for the Purchaser to carry on and continue the Business as it
is now conducted by Sellers shall have been obtained.
9.6 THE OFFERING. The Offering made pursuant to the Private Placement
Memorandum and/or other financing arranged by Purchaser, shall have closed with
the Purchaser receiving aggregate net proceeds of not less than Twenty-Five
Million and no/100 Dollars ($25,000,000).
9.7 FINANCIAL STATEMENTS. Sellers shall, at their expense, cause the
Auditor to promptly prepare, audit where necessary, issue an unqualified opinion
on, and deliver to
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Purchaser all financial statements and related financial information with
respect to the Sellers which the Purchaser may require for inclusion in the
Private Placement Memorandum. All such financial statements shall be prepared
in accordance with GAAP, consistently applied, and shall satisfy applicable
requirements under the Securities Act and the Exchange Act (as hereinafter
defined) in connection with the on-going periodic reporting requirements imposed
on Purchaser by Applicable Laws.
9.8 EMPLOYMENT CONTRACTS. Purchaser shall have reached Contracts of
continued employment or other arrangements reasonably satisfactory to Purchaser
with those current key employees of Sellers as Purchaser deems in its reasonable
discretion to be helpful or necessary in the continued operation of the Business
after the Closing.
9.9 DUE AUTHORIZATION. The execution and delivery of this Agreement,
including the documents, instruments and agreement to be executed and/or
delivered by Purchaser pursuant hereto and thereto, and the consummation of the
transactions contemplated hereby and thereby shall have been duly and validly
authorized by resolution of the Board of Directors of Purchaser and any other
necessary corporate action on the part of Purchaser; provided, however, unless
the Purchaser notifies the Sellers within thirty (30) days of the date of this
Agreement that the execution and delivery of this Agreement has not been
approved, this condition precedent shall be deemed to have been waived.
ARTICLE 10: CONDITIONS PRECEDENT TO SELLERS' AND SHAREHOLDERS' OBLIGATIONS
Unless waived by Sellers and Shareholders in writing, each and every
obligation of Sellers and Shareholders to be performed at the Closing shall be
subject to the satisfaction at or prior thereto of each and all of the following
conditions precedent:
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Purchaser in this Agreement, including the documents,
instruments and agreements to be executed and/or delivered by Purchaser pursuant
to this Agreement, shall be true and correct in all material respects at and as
of the Closing with the same force and effect as though such representations and
warranties had been made or given at and as of the Closing.
10.2 COMPLIANCE WITH COVENANTS AND AGREEMENTS. Purchaser shall have
performed and complied in all material respects with all of its covenants,
agreements and obligations under this Agreement which are to be performed or
complied with by it at or prior to the Closing, including the execution and/or
delivery of the documents, instruments and agreements specified in Section 12.3
hereof or in such documents, instruments and agreements, all of which shall be
reasonably satisfactory in form and substance to counsel for Sellers.
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10.3 REGISTRATION RIGHTS. The Purchaser shall have granted the
Shareholders registration rights with respect to the BAB Shares by entering into
a Registration Rights Agreement with the Sellers at the Closing in substantially
the form of Exhibit C hereto (the "Registration Rights Agreement").
10.4 NO ADVERSE CHANGE. As of the Date of Closing, nothing shall have
occurred which could, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect upon the ability of Purchaser to conduct the
Business.
10.5 PROCEEDINGS. The obligations of Sellers and the Shareholders under
this Agreement are subject to there being no (i) proceedings which have been
brought, asserted, commenced or threatened against the Purchaser by any Person
involving or affecting this Agreement or the consummation of the transactions
contemplated hereby, or (ii) Applicable Laws restraining or enjoining or which
may reasonably be expected to nullify or render ineffective this Agreement or
the consummation of the transactions contemplated hereby or which otherwise
could reasonably be expected to have a Material Adverse Effect on the Purchaser.
10.6 CONSENTS AND APPROVALS. All consents, waivers, releases,
authorizations, approvals, licenses, certificates, permits and franchises of
each Person as may be necessary for Purchaser to consummate the transactions
contemplated by this Agreement and for the Purchaser to carry on and continue
the Business shall have been obtained.
10.7 THE OFFERING. The Offering, pursuant to the Private Placement
Memorandum, and/or other financing arranged by Purchaser shall have closed with
the Purchaser receiving aggregate net proceeds of not less than Twenty Five
Million and no/100 Dollars ($25,000,000.00).
ARTICLE 11: INDEMNIFICATION
11.1 INDEMNIFICATION BY SELLERS AND SHAREHOLDERS. Sellers and
Shareholders (including their respective heirs, personal representatives,
successors and assigns) jointly and severally covenant and agree to pay and
perform and indemnify and hold Purchaser, its officers, directors, employees,
affiliates, shareholders and agents, and each of their respective heirs,
personal representatives, successors and assigns, harmless from, against and in
respect of any and all losses, costs, expenses (including without limitation,
reasonable attorneys' fees and disbursements of counsel), liabilities, damages,
fines, penalties, charges, assessments, judgments, settlements, claims, causes
of action and other obligations of any nature whatsoever (collectively "Losses")
that any of them may at any time, directly or indirectly, suffer, sustain, incur
or become subject to, arising out of, based upon or resulting from or on account
of each and all of the following:
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a. The breach or falsity of any representation, warranty, covenant or
agreement made by any Seller and/or the Shareholders in this Agreement,
including the documents, instruments and agreements to be executed and/or
delivered by any Seller and/or Shareholders pursuant hereto and thereto.
b. Any claims by or liabilities to Sellers' present or former
employees on account of all sums due to such employees or otherwise arising
from acts allegedly occurring on or before the Date of Closing, including,
but not limited to, salaries, pension or profit sharing benefits, wages,
vacation and sick pay and other employee benefits accrued as of the close
of business on the Date of Closing as well as all severance pay payable by
Sellers to its present and former employees, except to the extent that
Purchaser has assumed such claims, demands, liabilities, debts and/or
encumbrances under the provisions of Section 3.2 of this Agreement.
c. All claims, demands, liabilities, debts and/or Encumbrances which
may be asserted by creditors of Sellers, except to the extent that
Purchaser has assumed such liabilities under the provisions of Section 3.2
of this Agreement.
d. All claims, demands, liabilities, debts and/or Encumbrances that
may be asserted against Purchaser or any of the Assets at any time or from
time to time (excluding only any liability assumed by Purchaser under the
provisions of Section 3.2 of this Agreement) resulting from or arising out
of the ownership, use, maintenance or operation of the Assets or Business
with respect to any period of time prior to the Closing.
e. All other liabilities of or claims against either Seller of any
kind, to the extent not specifically assumed by the Purchaser under the
provisions of Section 3.2 of this Agreement.
f. The existence, use, handling, storage, transportation,
manufacture, release, discharge, spillage, leakage, pumping, pouring,
emitting, dumping or disposal of any Hazardous Materials in, about, under
or near any Leased Premises on or before the Date of Closing. The foregoing
indemnification includes, without limitation, indemnification against all
costs in law or in equity of removal, remediation of any kind, and disposal
of such Hazardous Materials, all costs of determining whether the Leased
Premises is in compliance with, and of causing the Leased Premises to be in
compliance with, all Environmental and Safety Requirements, all costs
associated with claims for damages to persons, property, or natural
resources, and the Purchaser's reasonable attorneys' and consultants' fees,
court costs and expenses incurred in connection with any thereof. This
indemnification shall remain in full force and effect, including, without
limitation, with respect to Hazardous Materials which are discovered or
released on, about, under or near
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the Leased Premises after the Date of Closing, but which were introduced or
released on, about, under or near the Leased Premises on or prior to the
Date of Closing, and with respect to the continuing migration or release of
any Hazardous Materials previously introduced on, about, under or near the
Leased Premises.
g. All fees, commissions and other sums which may be due and payable
to the brokers, finders, agents, bankers or third parties identified on
Schedule 4.27 hereof.
h. Any Losses incurred by the Purchaser with respect to any Benefit
Plans not expressly assumed by the Purchaser pursuant to Section 3.2
hereof.
11.2 INDEMNIFICATION BY PURCHASER. Purchaser (including its successors
and assigns) covenants and agrees to pay and perform and indemnify and hold
Sellers, their officers, directors, employees, affiliates, Shareholders and
agents, and each of their respective heirs, personal representatives, successors
and assigns, harmless from, against and in respect of any and all Losses that
any of them may at any time, directly or indirectly, suffer, sustain, incur or
become subject to, arising out of, based upon or resulting from or on account of
each and all of the following:
a. The breach or falsity of any representation, warranty, covenant
or agreement made by Purchaser in this Agreement, including the documents,
instruments and agreements to be executed and/or delivered by Purchaser
pursuant hereto and thereto.
b. The failure of Purchaser to pay and perform the debts,
liabilities and obligations it agreed to assume pursuant to Section 3.2
hereof.
c. All fees, commissions and other sums which may be due and
payable to the brokers, finders, agents, bankers or third parties
identified on Schedule 5.5 hereof.
d. Any liability, obligation or commitment of Purchaser arising
after the Date of Closing relating to Purchaser's ownership of the Assets,
the operation of the Business relating thereto, or franchises sold after
the Date of Closing, but expressly excluding any liabilities, obligations
or commitments arising from facts or circumstances existing prior to the
Date of Closing.
11.3 PROCEDURE FOR INDEMNIFICATION. In the event a party intends to seek
indemnification pursuant to the provisions of Sections 11.1 or 11.2 hereof (the
"Indemnified Party"), the Indemnified Party shall promptly give notice hereunder
to the other party (the "Indemnifying Party") after obtaining written notice of
any claim or the service of a summons or other initial legal process in any
action instituted against the Indemnified Party as to which recovery may be
sought against the Indemnifying Party because of the indemnification provided
for in Section 11.1 or 11.2 hereof, and, if such indemnity shall arise from the
claim of a third party, the Indemnified Party shall permit the Indemnifying
Party to assume the defense of any such claim and any litigation resulting from
such claim; provided, however, that the Indemnified
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Party shall not be required to permit such an assumption of the defense of any
claim or litigation which, if not first paid, discharged or otherwise complied
with, would result in an interruption or disruption of the business of the
Indemnified Party or any material part thereof. Notwithstanding the foregoing,
the right to indemnification hereunder shall not be affected by any failure of
the Indemnified Party to give such notice (or by delay by the Indemnified Party
in giving such notice) unless, and then only to the extent that, the rights and
remedies of the Indemnifying Party shall have been prejudiced as a result of the
failure to give, or delay in giving, such notice. Failure by the Indemnifying
Party to notify the Indemnified Party of its election to defend any such claim
or action by a third party within twenty (20) days after notice thereof shall
have been given to the Indemnifying Party shall be deemed a waiver by the
Indemnifying Party of its right to defend such claim or action.
If the Indemnifying Party assumes the defense of such claim or litigation
resulting therefrom, the obligations of the Indemnifying Party hereunder as to
such claim or litigation shall include taking all steps necessary in the defense
or settlement of such claim or litigation and holding the Indemnified Party
harmless from and against any and all damages caused by or arising out of any
settlement approved by the Indemnifying Party or any judgment entered in
connection with such claim or litigation. The Indemnifying Party shall not, in
the defense of such claim or any litigation resulting therefrom, consent to
entry of any judgment (other than a judgment of dismissal on the merits without
costs) except with the written consent of the Indemnified Party or enter into
any settlement (except with the written consent of the Indemnified Party, which
shall not be unreasonably withheld) which does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to the Indemnified
Party a release from all liability in respect to such claim or litigation.
If the Indemnifying Party assumes the defense of such claim or litigation
resulting therefrom, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it to conduct its defense.
If the Indemnifying Party does not assume the defense of any such claim by
a third party or litigation resulting therefrom after receipt of notice from the
Indemnified Party, the Indemnified Party may defend against such claim or
litigation in such manner as it deems appropriate, and unless the Indemnifying
Party shall deposit with the Indemnified Party a sum equivalent to the total
amount demanded in such claim or litigation plus the Indemnified Party's
estimate of the cost (including attorneys' fees) of defending the same, the
Indemnified Party may settle such claim or litigation on such terms as it may
deem appropriate and the Indemnifying Party shall promptly reimburse the
Indemnified Party for the amount of such settlement and for all costs (including
attorneys' fees), expenses and damages incurred by the Indemnified Party in
connection with the defense against or settlement of such claim or litigation,
or if any such claim
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or litigation is not so settled, the Indemnifying Party shall promptly reimburse
the Indemnified Party for the amount of any judgment rendered with respect to
any claim by a third party in such litigation and for all costs (including
attorneys' fees), expenses and damage incurred by the Indemnified Party in
connection with the defense against such claim or litigation, whether or not
resulting from, arising out of, or incurred with respect to, the act of a third
party.
11.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties contained in this Agreement and in any Exhibit,
Schedule, certificate, instrument or document delivered by or on behalf of any
of the parties hereto pursuant to this Agreement and the transactions
contemplated hereby and the indemnities with respect thereto contained in
Sections 11.1(a) and 11.2(a) hereof shall survive the Closing and shall expire
on the second annual anniversary of the Date of Closing, except that (i) the
representations and warranties of the Sellers and Shareholders and their related
indemnities concerning Taxes shall expire upon the expiration of the applicable
statute of limitations for each and any of the Taxes, (ii) the representations
and warranties and related indemnities under Sections 4.2, 4.27, 5.2 and 5.5
shall expire on the sixth-annual anniversary of the Date of Closing, and (iii)
the representations and warranties and related indemnities under Section 4.31
and 5.7 shall expire on the fourth annual anniversary of the Date of Closing.
After the expiration of such periods, no claim for the breach or falsity of any
such representation or warranty may be brought, and no litigation with respect
thereto may be commenced, and no party shall have any liability or obligation
with respect thereto, unless the indemnified party in good faith and having a
reasonable basis, gave written notice to the indemnifying party specifying with
particularity the breach or falsity of such representation or warranty claimed
on or before the expiration of such period, in which case a claim may be brought
under this Agreement with respect to that matter during a period corresponding
to the applicable statute of limitations.
11.5 LIMITATION ON INDEMNIFICATION OBLIGATIONS. Notwithstanding the
provisions of Section 11.1 or 11.2 hereof to the contrary:
a. No claim may be brought by Purchaser, Sellers or the Shareholders
pursuant to the provisions of Article 11 for any Losses or for any action
arising under or in connection with their respective representations,
warranties and covenants contained in this Agreement, unless and until the
aggregate amount of such claims exceeds $50,000, and then only to the
extent of such excess over $50,000.
b. No claim may be brought by Purchaser, Sellers, or the
Shareholders pursuant to the provisions of Article 11 for any Losses or for
any action arising under or in connection with their respective
representations, warranties and covenants contained in this Agreement to
the extent such claim is paid by insurance.
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c. For purposes of evaluating the Loss related to claims under
Article 11, the amount of the Losses shall be determined on a net after-tax
basis, taking into account the value of any offsetting tax benefit (net of
any tax detriment) which may reasonably be expected to inure to the party
suffering the Losses as a result of such Losses as reasonably determined by
such party's independent public accountant.
d. The aggregate liability of the Sellers and the Shareholders, on
the one hand, and the Purchaser on the other hand, for all claims brought
pursuant to the provisions of this Article 11 for any Losses or for any
action arising under or in connection with the parties' respective
representations, warranties and covenants contained in this Agreement shall
be limited to an amount not to exceed the Purchase Price.
e. No claim may be brought by Purchaser, Sellers or Shareholders
pursuant to the provisions of Article 11 for any Losses or for any action
arising under or in connection with the breach of any of the
representations or warranties contained in this Agreement if such party had
actual knowledge of the breach of such representation and warranty prior to
the execution of this Agreement. The burden of proving such actual
knowledge shall rest on the party who asserts the provisions of this
Section 11.5(e) as a defense to a claim for indemnification or any other
action.
ARTICLE 12: CLOSING
12.1 DATE OF CLOSING. Subject to the satisfaction or waiver of the
conditions precedent contained in Articles 9 and 10 hereof, the closing of the
transactions contemplated by this Agreement (the "Closing") shall be held at the
Purchaser's offices in Chicago, Illinois, at 10:00 o'clock AM (local time) on
such date as may be mutually agreed upon in writing by Purchaser and Sellers but
not later than December 31, 1996 and shall be as of the close of business on
such day. Such date is referred to in this Agreement as the "Date of Closing."
12.2 DOCUMENTS TO BE DELIVERED BY SELLERS AND SHAREHOLDERS. At the
Closing, Sellers and Shareholders shall execute, where necessary or appropriate,
and deliver to Purchaser each and all of the following:
a. A certificate in the form of Exhibit D hereto signed by
Shareholders and a duly authorized officer of each Seller, and dated as of
the Date of Closing, to the effect that the representations and warranties
made by Sellers and Shareholders in this Agreement are true and correct in
all material respects at and as of the Closing with the same force and
effect as though such representations and warranties had been made on or
given at and as of the Closing and Sellers and Shareholders have performed
and complied with all of its/his/their covenants, agreements and
obligations under this Agreement
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which are to be performed and complied with by Sellers and/or Shareholders
at or prior to the Closing;
b. A copy certified by the Secretary of each Seller of the duly
adopted resolutions of such Sellers' Board of Directors and Shareholders
approving this Agreement and authorizing the execution and delivery of this
Agreement, including the documents, instruments and agreements to be
executed and/or delivered by such Seller and/or Shareholders pursuant to
this Agreement, and the consummation of the transactions contemplated
hereby and thereby;
c. A Bill of Sale to all of the Assets in the form of Exhibit E
hereto duly executed by Sellers;
d. Duly executed assignments by Sellers to Purchaser with respect
to the Proprietary Rights and Software in a form reasonably satisfactory to
counsel for Purchaser;
e. Releases, satisfactions, or terminations of all mortgages,
financing statements or other evidences of liens filed with a secretary of
state, any county recorder and/or any other similar office evidencing an
Encumbrance on any of the Assets;
f. All consents, releases, assignments and permissions of any kind
or nature, whether from a Governmental Body or otherwise, which reasonably
may be required to effectively sell, assign and transfer the Assets to
Purchaser, all in a form reasonably satisfactory to counsel for Purchaser;
g. The five-year Agreement Not To Compete duly executed by Sellers
and the Shareholders in the form attached hereto as Exhibit F;
h. Certificates of title and assignments thereof for all Vehicles;
i. The Assumption Agreement duly executed by Sellers and the
Shareholders;
j. The Registration Rights Agreement duly executed by Sellers and
the Shareholders;
k. The Escrow Agreement duly executed by Sellers and the Escrow
Agent;
l. Such other documents and items as are reasonably necessary or
appropriate to effect the consummation of the transactions contemplated
hereby or which may be customary under local law; and
m. A duly executed written opinion letter by Shulman, Rogers,
Gandal, Pordy, & Ecker, PA, counsel for Sellers and Shareholders, dated as
of the Date of Closing, addressed to Purchaser, reasonably satisfactory in
form and substance to counsel for Purchaser, addressing the matters and
substantially in the form set forth on Exhibit G hereto and such other
matters as counsel for the Purchaser may reasonably request.
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12.3 DOCUMENTS TO BE DELIVERED BY PURCHASER. At the Closing, Purchaser
shall execute, where necessary or appropriate, and deliver to Sellers each and
all of the following:
a. A certified or bank cashier's check (or wire transfer of
immediately available funds to Sellers' designated account) in the amount
provided for in Section 2.1 (b) hereof;
b. A certificate in the form of Exhibit H hereto signed by a duly
authorized officer of Purchaser, and dated as of the Date of Closing, to
the effect that the representations and warranties made by Purchaser in
this Agreement are true and correct in all material respects at and as of
the Closing with the same force and effect as though such representations
and warranties had been made on or given at and as of the Closing and the
Purchaser has performed and complied with all of its covenants, agreements
and obligations under this Agreement which are to be performed and complied
with by Purchaser at or prior to on the Closing;
c. A copy certified by the Secretary of Purchaser of the duly
adopted resolutions of the Board of Directors of Purchaser approving this
Agreement and authorizing the execution and delivery of this Agreement,
including the documents, instruments and agreements to be executed and/or
delivered by the Purchaser pursuant hereto, and the consummation of the
transactions contemplated hereby and thereby;
d. The Assumption Agreement hereto duly executed by Purchaser;
e. The Registration Rights Agreement duly executed by the
Purchaser;
f. The Escrow Agreement duly executed by the Purchaser and the
Escrow Agent;
g. A duly executed written opinion letter by Moss & Barnett, A
Professional Association, counsel for Purchaser, dated as of the Date of
Closing, addressed to the Sellers and Shareholders, reasonably satisfactory
in form and substance to counsel for Sellers addressing the matters and
substantially in the form set forth in Exhibit I hereto and such other
matters as counsel for the Sellers may reasonably request; and
h. Certificates representing 900,000 BAB Shares.
ARTICLE 13: PERFORMANCE FOLLOWING THE DATE OF CLOSING
The following covenants and agreements are to be performed after the
Closing by the parties and shall continue in effect for the periods respectively
indicated or, where no indication is made, until performed:
13.1 COLLECTION OF RECEIVABLES. After the Closing, Purchaser shall be
empowered to collect all Receivables and other items transferred to Purchaser
hereunder and to endorse with the names of Sellers any checks or other
instrument received on account of any such Receivables or
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other items. Sellers agree to promptly transfer to Purchaser any cash, checks
or other property that Sellers may receive in respect of the Receivables or
other items. At the written request of Purchaser, Sellers and Shareholders
will cooperate, and will use their best efforts to have the officers, directors,
and other employees of Sellers cooperate, with Purchaser on and after the Date
of Closing in endeavoring to effect the collection of all Receivables and with
respect to other actions, proceedings, arrangements or disputes involving
Sellers or Purchaser based upon Contracts, arrangements or acts of Sellers which
were in effect or occurred on or prior to the Date of Closing.
13.2 FURTHER ACTS AND ASSURANCES. Sellers agree that their respective
officers, directors and Shareholders will, at any time and from time to time, on
and after the Date of Closing, upon the reasonable request of Purchaser, do all
such further acts and things and execute, acknowledge and deliver, or cause to
be executed, acknowledged and delivered to Purchaser any and all papers,
documents, instruments, agreements, deeds, assignments, transfers, assurances
and conveyances as may be reasonably necessary or desirable to vest, perfect and
confirm of record in Purchaser, its successors and assigns, the title to any of
the Assets or otherwise to carry out and give effect to the provisions and
intent of this Agreement. In addition, from and after the Date of Closing,
Sellers will afford to Purchaser and its attorneys, accountants, investment
bankers and other representatives access, during normal business hours, to such
personnel, books and records relating to the Assets and the Business as may
reasonably be required in connection with the preparation of financial
information or the filing of tax returns and will cooperate in all reasonable
respects with Purchaser in connection with claims and litigation asserted by or
against third parties, relating to the transactions contemplated hereby.
ARTICLE 14: TERMINATION
14.1 TERMINATION. This Agreement may be terminated and the transactions
contemplated herein may be abandoned after the date of this Agreement, but not
later than the Closing:
a. By mutual written consent of all parties hereto;
b. By Purchaser if any of the conditions provided for in Article 9
of this Agreement have not been met and have not been waived in writing by
Purchaser on or before the Closing Date;
c. By Sellers or Shareholders if any of the conditions provided
for in Article 10 of this Agreement have not been met and have not been
waived in writing by Sellers and Shareholders on or before the Closing
Date; and
e. By Purchaser pursuant to Section 15.1(b) hereof.
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In the event of termination or abandonment by any party as provided in this
Section 14.1, written notice shall forthwith be given to the other party and
each party shall pay its own expenses incident to preparation for consummation
of this Agreement and the transactions contemplated hereunder and neither party
shall have any obligation or liability to the other hereunder except such
liability as may arise as a result of a breach hereof.
14.2 RETURN OF DOCUMENTS AND NONDISCLOSURE. If this Agreement is
terminated for any reason pursuant to Section 14.1 hereto, each party shall
return all documents and materials which shall have been furnished by or on
behalf of the other party, and each party hereby covenants and agrees that
except insofar as may be necessary to assert their respective rights hereunder,
the agreements concerning confidentiality and non-solicitation of employees
contained in those certain confidentiality agreements between the parties (dated
May 13, 1996 with respect to the agreement of the Purchaser in favor of the
Sellers and June 4, 1996 with respect to the agreement of the Sellers in favor
of the Purchaser) shall continue in full force and effect in accordance with
their terms.
ARTICLE 15: TITLE AND RISK OF LOSS
15.1 TITLE AND RISK OF LOSS
a. Sellers shall bear all costs and expenses and assume and bear
all risk of loss, damage or destruction of or to the Assets due to theft,
expropriation, seizure, destruction, damage, fire, earthquake, flood or
other cause or casualty until title thereto is passed to Purchaser at the
Closing.
b. If prior to the Date of Closing, any material Assets shall have
suffered, sustained or incurred any material loss, damage or destruction,
including, without limitation, any environmental contamination or
pollution, and Sellers shall not have elected at their sole option and
expense to wholly repair or replace the Assets which suffered, sustained or
incurred the material loss, damage or destruction with assets which are as
nearly identical as practicable in value, form and function, Purchaser
shall have the right, at its sole discretion and election, to either (i)
terminate this Agreement, or (ii) complete the purchase contemplated by
this Agreement, in which event:
1) Sellers shall assign and transfer to Purchaser and
Purchaser shall be entitled to receive all insurance proceeds and
other compensation collected by reason of such loss, damage or
destruction, together with any rights to receive any uncollected
insurance proceeds or other compensation relating to such loss, damage
or destruction and an amount equal to the sum of the aggregate amount
of any applicable deductibles under any insurance policies covering
the lost, damaged or destroyed Assets plus any self-insured
retentions; or
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2) Purchaser shall be entitled to reduce the Purchase Price of
the Assets by an amount equal to the cost of repair, or if destroyed
or damaged beyond repair, or if expropriated, seized, lost or stolen,
by an amount equal to the replacement cost; or
3) Purchaser shall be entitled to utilize alternatives 1 and 2
concurrently, but not both with respect to any single Asset.
If Purchaser elects to complete the purchase contemplated hereby
notwithstanding any such loss, damage or destruction, and if Sellers assign such
insurance proceeds and other compensation and any other rights thereto to
Purchaser, then Sellers shall be released from any and all liability or
responsibility with respect to such loss, damage or destruction, but shall
cooperate with Purchaser, at no cost or expense to Purchaser, in collecting all
insurance proceeds and other compensation with respect thereto. The Purchase
Price hereunder in such event shall be reduced by the amount of any deductible
amounts under such insurance policies and self-insured retentions which are not
paid by Sellers to Purchaser.
ARTICLE 16: DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified:
"Acquisition Proposal" - any proposal relating to the possible acquisition
of either or both Sellers whether by way of merger, purchase of capital stock of
either or both Sellers representing fifty percent (50%) or more of the voting
power or equity of such Seller(s), purchase of all or substantially all of the
assets of such Seller(s), or otherwise.
"Applicable Laws" - any and all federal, state, local, municipal, county,
foreign, or other laws, ordinances, constitutions, regulations, statutes,
treaties, rules, codes, licenses, certificates, franchises, permits, writs,
rulings, awards, executive orders, directive, requirements, injunctions
(whether temporary, preliminary, or permanent), judgment, decree, or other order
adopted, enacted, implemented, promulgated, issued, entered or deemed applicable
by or under the authority of any Governmental Body or by the eligible voters of
any jurisdiction.
"Benefit Plans" - any and all bonus, stock option, restricted stock, stock
purchase, profit-sharing, deferred compensation, severance, pension, retirement,
disability, medical, dental, health or life insurance, death benefit, incentive,
welfare and/or other benefit, compensation and/or retirement plan, policy,
arrangement and/or an agreement now or at any time heretofore maintained,
sponsored or participated in by either Seller or any of their respective
affiliates.
"Code" - the Internal Revenue Code of 1986, as amended, or any successor
law and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
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"Contract" -any agreement, contract, obligation, promise, commitment,
understanding or undertaking (whether written or oral and whether express
or implied) of any type, nature or description that is legally binding.
"BAB Shares" -the shares of Common Stock of BAB Holdings, Inc.
issuable to Sellers pursuant to Section 2.3(e) and Section 2.4 hereof.
"Encumbrance" -any claim, lien, pledge, charge, security interest,
encumbrance, mortgage, lease, license, equitable interest, option, right of
first refusal or preemptive right, condition, or other restriction of any
kind, including any restriction on use, voting (in the case of any
security), transfer, receipt of income, or exercise of any other attribute
of ownership, except to the extent that any such claim or other restriction
does not, and insofar as can reasonably be foreseen in the future will not,
have a Material Adverse Effect on either Seller or the Purchaser.
"Environmental and Safety Requirements" -all federal, state, and local
statutes, laws, rules, regulations, codes, ordinances, orders, standards,
permits, licenses, actions, policies and requirements (including consent
decrees, judicial decisions and administrative orders) relating to
protection, preservation or conservation of the environment and public or
worker health and safety, all as amended, hereafter amended, or
reauthorized.
"ERISA" -the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" -The Securities Exchange Act of 1934, as amended, or
any successor law.
"GAAP" -generally accepted accounting principles in the United
States.
"Governmental Body" -any:
(i) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign, or other government;
(iii) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, commission, department,
official, or other entity, and any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, or entitled or purporting to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or
taxing authority or power of any nature.
"Hazardous Materials" -All (i) hazardous substances, as defined by the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. (S) 9601 et seq.; (ii) hazardous wastes as defined by the Resource
Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq.; (iii) petroleum,
including without limitation, crude oil or any fraction thereof which is
liquid at standard conditions of temperature and pressure (60) degrees
Fahrenheit and 14.7 pounds per square inch absolute); (iv) any radioactive
materials, including, without
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limitation, any source, special nuclear, or by-product material as defined
in 42 U.S.C. (S) 2011 et seq.; (v) asbestos in any form or condition; (vi)
polychlorinated biphenyls ("PCB's"), and (vii) any other material,
substance, or waste to which liability or standards of conduct may be
imposed under any Environmental and Safety Requirements.
"IRS" - the United States Internal Revenue Service.
"Knowledge" - shall mean knowledge after such inquiry as is reasonable
under the circumstance.
"Material Adverse Effect" - in connection with any party, any event,
change, or effect that is materially adverse, individually or in the
aggregate, to the condition (financial or otherwise), properties, assets,
liabilities, businesses, operations, results of operations or prospects of
such party, taken as a whole.
"Ordinary Course of Business" - an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(i) such action is consistent with the past practices of such person
and is taken in the ordinary course of the normal day-to-day operations of
such Person; and
(ii) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) and does not require any other separate or special
authorization of any nature.
"Person" - any individual, corporation (including any non-profit
corporation), general, limited or limited liability partnership, limited
liability company, joint venture, estate, trust, association, organization,
or other entity or Governmental Body.
"Proceeding" - any suit, litigation, arbitration, hearing, audit,
investigation, or other action (whether civil, criminal, administrative or
investigative) commencing, brought, conducted, or heard by or before, or
otherwise involving, any Governmental Body or arbitrator.
"Related Person" - with respect to a particular individual:
(i) each other member of such individual's Family (as hereafter
defined); and
(ii) any Person that is, directly or indirectly, controlled by any one
or more members of such individual's Family.
With respect to a specify Person other than an individual:
(i) any Person that, directly or indirectly, controls, is controlled
by, or is under common control with such Person; and
(ii) each Person that serves as a director, executive officer, general
partner, executor, or trustee of such specified Person (or in a similar
capacity);
For purposes of this definition, the "Family" of an individual includes (i)
such individual, (ii) the individual's spouse, (iii) any lineal ancestor or
lineal descendant of the individual, or (iv) a trust for the benefit of the
foregoing. A Person will be deemed to control another Person, for purposes
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of this definition, if the first Person possesses, directly or indirectly,
the power to direct, or cause the direction of, the management policies of
the second Person, (A) through the ownership of voting securities, (B)
through common directors, trustee, or officers, or (C) by contract or
otherwise.
"SEC" -the Securities and Exchange Commission.
"Securities Act" -the Securities Act of 1933, as amended, or any
successor law.
"Sellers' Knowledge" -means the actual Knowledge of Michael Robinson
and Alan Manstof, after such inquiry as is reasonable under the
circumstances of (i) the executive officers and key employees of Sellers,
(ii) the current attorneys, accountants and other professional advisors of
either Seller or Shareholder, and (iii) the executive officers and key
employees of any franchise broker of either Seller.
"Tax or Taxes" -(i) any and all new income, gross income, gross
receipts, sales and use, ad valorem, franchise, profits, transfer, sales,
use, social security, unemployment, licenses, withholding, payroll,
excise, severance, stamp, occupation, property, customers duties and/or
other taxes, fees or charges of any kind whatsoever imposed by a foreign,
federal, state, country local and/or other taxing authority together with
any interest or penalty thereon, and/or (ii) the liability for the payment
of any consolidated tax, including penalty or interest thereon, of the type
described in the immediately preceding subsection (i), including any
federal, state, local and/or other consolidated income tax liability
including any penalty or interest thereon, as a result of being a member
of, and which may be imposed upon, as affiliated group (as defined in
Section 1504(a) of the Code, or other Applicable Law).
"Threatened" -a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has
been made in writing, or any notice has been given in writing, or if any
other event has occurred, or any other circumstances exist that would lead
a reasonably prudent Person to conclude that such a claim, proceeding,
dispute, action, or other matter is substantially likely to be asserted,
commenced, taken, or otherwise pursued in the future.
ARTICLE 17: MISCELLANEOUS
17.1 Preservation of and Access to Records. All books and records of
Sellers conveyed to Purchaser hereunder shall be preserved by Purchaser for
a period of six (6) years after the Date of Closing; provided, however,
Purchaser may destroy any part or parts of such records upon obtaining
written consent of Sellers for such destruction, which consent shall not be
unreasonably withheld or delayed. Such records shall be made available to
Sellers and Shareholders and their representatives at all reasonable times
during normal business hours of Purchaser during said six-year period with
the right at their expense to make abstracts from and
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copies thereof. Purchaser may return such records to Sellers at any time and
Purchaser's obligation to preserve or make available such records shall
thereupon terminate.
17.2 COOPERATION PRIOR TO CLOSING. The parties hereto shall cooperate
with each other in all respects, including using their reasonable efforts to
assist each other in satisfying the conditions precedent to their respective
obligations under this Agreement, to the end that the transactions contemplated
hereby will be consummated. Without limiting the generality of the foregoing,
(a) the Shareholders will vote all of their stock in Sellers in favor of the
consummation of the transactions contemplated hereby, (b) the Purchaser and
Sellers shall consult with each other before they enter into any franchise
agreements and/or area franchise development agreements from and after the date
hereof to prevent, to the extent practicable, the Purchaser and the Sellers each
having franchisee and/or company-owned stores in close geographic proximity to
each other, (c) the Sellers and Shareholders shall, at their expense (except for
travel expenses incurred in connection with marketing the Offering), fully
cooperate with the Purchaser, and its counsel, auditors, investment bankers,
investment bankers' counsel and other representatives in preparing all
documentation necessary or appropriate for the Offering and shall participate in
all meetings, "road shows," and conferences (in person and otherwise) as may be
reasonably be requested from time to time by or on behalf of the Purchaser, (d)
the Sellers and the Shareholders shall assist the Purchaser's subsidiaries in
amending their franchise offering circulars in accordance with Applicable Laws
to reflect that following the Closing, the Purchaser and/or its subsidiaries or
other affiliates will be offering and selling Chesapeake Bagel Bakery franchises
and area franchises, (e) the Sellers and Shareholders shall assist and cooperate
with the Purchaser and its affiliates in preparing a franchise offering circular
for Chesapeake Bagel Bakery franchisees and in registering such franchises for
offer and sale in accordance with Applicable Laws so that the Purchaser and/or
its subsidiaries may offer and sell such franchises immediately following the
consummation of the transactions contemplated hereby; (f) Purchaser shall
cooperate with Sellers in promptly and adequately responding to all concerns
expressed by Sellers' franchisees relating to the transactions contemplated by
this Agreement; (g) from and after the execution of this Agreement, the parties
hereto acknowledge and agree that the parties and their respective affiliates
will discontinue offering and selling their respective franchises unless and
until they have amended their franchise offering circulars and applicable
franchise registrations to disclose the execution of this Agreement and the
proposed consummation of the transactions contemplated hereby; (h) each party
shall promptly supply the other with all information required by such party and
its affiliates to amend and/or prepare their franchise offering circulars and
franchise registrations as contemplated hereby; (i) Purchaser shall give
Sellers and their representatives a reasonable opportunity to review and comment
upon the Private Placement Memorandum before it is
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finalized and circulated among prospective investors; and (j) the parties shall
negotiate in good faith the terms of Consulting Agreements to be entered into on
the Date of Closing between the Shareholders and the Purchaser providing for the
provision of consulting services by the Shareholders to the Purchaser after the
Closing for a reasonable period of time on commercially reasonable terms and
conditions.
17.3 COOPERATION FOLLOWING CLOSING. Purchaser shall consult with Sellers
with respect to the preparation of Purchaser's uniform franchise offering
circulars relating to the Chesapeake Bagel Bakery franchise system after the
Date of Closing and, subject to requirements of law, shall give consideration to
Sellers' reasonable recommendations in regard to the preparation of such uniform
franchise offering circulars. Further, purchase shall respond to inquiries of
Sellers' franchisees relating to the transactions contemplated by this Agreement
with reasonable promptness. In addition, following the Closing, the Purchaser
and Sellers shall use reasonable efforts to cause the former franchisees of
Sellers to enter into new franchise agreements with Purchaser to which neither
Seller is a party.
17.4 EMPLOYEES. Nothing contained in this Agreement shall constitute or
be construed as a contract of employment between Purchaser and such employees of
Sellers, and any such employee(s) hired by Purchaser shall remain subject to
discharge and lay-off by Purchaser at any time.
17.5 PUBLIC ANNOUNCEMENTS. The timing and content of all public
announcements relating to the execution of this Agreement and the consummation
of the transactions contemplated hereby shall be approved by both Purchaser and
Sellers prior to the release of such public announcements. Notwithstanding the
foregoing, the Purchaser may make such public disclosures as may be required by
Applicable Laws; provided, however, that the Purchaser agrees to provide the
Sellers with prior notice of press releases concerning (a) the execution of this
Agreement, (b) the closing of the Offering and the consummation of the
transaction contemplated hereby. Subsequent to the Date of Closing, Purchaser
may make such announcements and/or advertisements as Purchaser, in its sole
discretion, deems necessary to all customers, franchisees, and supplies and/or
potential customers, franchisees and suppliers of the Business.
17.6 WAIVER OF BULK TRANSFERS ACT. In view of the substantial doubt as
to its applicability, the provisions of this Agreement whereby Purchaser is
assuming certain liabilities of Sellers and Sellers' and Shareholders' ability,
intention and agreement to satisfy as they become due all liabilities not
expressly assumed by Purchaser hereunder, the parties hereby waive compliance
with the Bulk Transfers Act in effect in each state which is applicable to the
consummation of the transactions contemplated hereby.
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17.7 SALES, USE AND DEED TAXES. Purchaser agrees to pay in full any and
all federal, state, local and foreign sales taxes, use taxes, deed taxes,
mortgage registrations, real estate transfer taxes or other similar taxes
(including any interest or penalty thereon), but specifically excluding any
income tax, as and when the same may be due, which may be imposed upon or arise
out of the sale of the Assets by the Sellers to the Purchaser or the
consummation of the transactions contemplated hereby.
17.8 NOTICES. All notices, demands and other communications provided for
hereunder shall be in writing and shall be given by personal delivery, via
facsimile transmission (receipt telephonically confirmed), by nationally
recognized overnight courier (prepaid), or by certified or registered first
class mail, postage prepaid, return receipt requested, sent to each party, at
its/his address as set forth below or at such other address or in such other
manner as may be designated by such party in written notice to each of the other
parties. All such notices, demands and communications shall be effective when
personally delivered, one (1) business day after delivery to the overnight
courier, upon telephone confirmation of facsimile transmission or upon receipt
after dispatch by mail to the party to whom the same is so given or made:
If to Sellers or Shareholders: Chesapeake Bagel Bakery
1451 Dolley Madison Blvd., Suite 300
McLean, VA 22101
Attn: Michael Robinson and Alan Manstof
With a copy to: Daniel S. Krakower
Shulman, Rogers, Gandal, Pordy & Ecker, PA
11921 Rockville Pike, 3rd Floor
Rockville, MD 20852-2743
If to Purchaser: BAB Holdings, Inc.
8501 W. Higgins Road, Suite 320
Chicago, IL 60631
Attn: Michael K. Murtaugh, General Counsel
With a copy to: Janna R. Severance
Moss & Barnett P.A.
4800 Norwest Center, 90 South Seventh Street
Minneapolis, MN 55402-4129
17.9 ENTIRE AGREEMENT. This Agreement, including the documents,
instruments, and agreements to be executed by the parties pursuant hereto,
contains the entire agreement of the parties hereto and supersedes all prior or
contemporaneous agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof.
17.10 REMEDIES CUMULATIVE. Remedies herein provided are cumulative and
not exclusive of any other remedies provided by Applicable Law.
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17.11 Specific Performance. The parties acknowledge and agree that the
Assets are unique and that an aggrieved party will have no adequate remedy at
law if a defaulting party shall fail to perform any of its/his/their obligations
hereunder. In such event, the aggrieved party shall have the right, in addition
to any other rights it may have, to specific performance of this Agreement.
17.12 Amendments. No purported amendment, modification or waiver of any
provision of this Agreement or any of the documents, instruments or agreements
to be executed by the parties pursuant hereto shall be effective unless in a
writing specifically referring to this Agreement and signed by all of the
parties.
17.13 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns, but except as hereinafter
provided in this Section, nothing in this Agreement is to be construed as an
authorization or right of any party to assign its rights or delegate its duties
under this Agreement without the prior written consent of the other parties
hereto. In its sole discretion, Purchaser may assign its rights in and/or
delegate its duties under this Agreement to one or more Persons that directly or
indirectly through one or more intermediaries, control, or are controlled by, or
are under common control with, the Purchaser (individually an "Affiliate" and
collectively "Affiliates"). In the event of such an assignment of rights and/or
delegation of duties, all references to the Purchaser in this Agreement shall
also be deemed to be references to the Affiliate(s) to which this Agreement is
assigned; provided that no such assignment and/or delegation shall relieve
Purchaser of any of its duties or obligations hereunder.
17.14 Costs. Except as otherwise provided for herein, each party hereto
shall pay its/his own costs and expenses incurred in connection with negotiating
and preparing this Agreement and consummating the transactions contemplated
hereby, including but not limited to fees and disbursements of their attorneys
and accountants.
17.15 Governing Law. This Agreement, including the documents, instruments
and agreements to be executed and/or delivered by the parties pursuant hereto,
shall be construed, governed by and enforced in accordance with the laws of the
State of Illinois, without giving effect to the principles of conflicts of laws
thereof.
17.16 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same Agreement .
17.17 Headings. The headings of the articles, sections and subsections of
this Agreement are intended for the convenience of the parties only and shall in
no way be held to explain, modify, construe, limit, amplify or aid in the
interpretation of the provisions hereof. The terms "this Agreement," "hereof,"
"hereunder," "hereto" and similar expressions refer
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to this Agreement as a whole and not to any particular article, section,
subsection or other portion hereof and include the Schedules and Exhibits hereto
and any document, instrument or agreement executed and/or delivered by the
parties pursuant hereto.
17.18 Scope of Agreement. Unless the context otherwise requires, all
references in this Agreement or in any Schedule or Exhibit hereto, to the
assets, properties, operations, business, financial statements, employees, books
and records, accounts receivable, accounts payable, Contracts, agreements or
other attributes of the business of Sellers shall mean such items or attributes
as they are used in,apply to, or relate to Sellers' Business.
17.19 Number and Gender. Unless the context otherwise requires, words
importing the singular number shall include the plural and vice versa and words
importing the sue of any gender shall include all genders.
17.20 Severability. In the event that any provision of this Agreement is
declared or held by any court of competent jurisdiction to be invalid or
unenforceable, such provision shall be severable from, and such invalidity or
unenforceability shall not be construed to have any effect on, the remaining
provisions of this Agreement, unless such invalid or unenforceable provision
goes to the essence of this Agreement, in which case the entire Agreement may be
declared invalid and not binding upon any of the parties.
17.21 Parties in Interest. Nothing expressed or implied in this Agreement
is intended or shall be construed to confer any rights or remedies under or by
reason of this Agreement upon any Person or entity other than Purchaser, Sellers
or Shareholders or their respective heirs, personal representatives, successors
and permitted assigns. Nothing in this Agreement is intended to relieve or
discharge the obligations or liabilities of any third Person or entity to
Purchaser, Sellers or Shareholders.
17.22 Waiver. The terms, conditions, warranties, representations and
indemnities contained in this Agreement, including the documents, instruments
and agreements executed and/or delivered by the parties pursuant hereto, may be
waived only by a written instrument executed by the party waiving compliance.
Any such waiver shall only be effective in the specific instance and for the
specific purpose for which it was given and shall not be deemed a waiver of any
other provision hereof or of the same breach or default upon any recurrence
thereof. No failure on the part of a party hereto to exercise and no delay in
exercising any right hereunder shall operate as a waiver thereof nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by duly authorized representations as of the day, month and year first
above written.
PURCHASER:
BAB HOLDINGS, INC.
By
---------------------------------------
Its
------------------------------------
SELLERS:
THE AMERICAN BAGEL COMPANY
By
---------------------------------------
Its
------------------------------------
ALMIKE ENTERPRISES, INC.
By
---------------------------------------
Its
------------------------------------
SHAREHOLDERS:
-----------------------------------------
Michael D. Robinson
-----------------------------------------
Alan R. Manstof
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LIST OF SCHEDULES AND EXHIBITS
Schedule 1.1(b) List of Proprietary Rights
Schedule 1.1(c) List of Tangible Personal Property
Schedule 1.1(d) List of Vehicles
Schedule 1.1(g) List of Operating Contracts
Schedule 1.1(h) List of Licenses, Certificates, Franchises, Permits,
Consents and Approvals
Schedule 1.1(i) Categories of Pre-Paid Expenses
Schedule 1.1(n) List of Computer Software
Schedule 1.2 List of Excluded Assets
Schedule 3.2 List of Liabilities to be Assumed
Schedule 4.1 List of Foreign Qualifications
Schedule 4.3 List of Required Filings, Permits, Consents, Approvals
and Notices
Schedule 4.6 List of Pending and Threatened Litigation
Schedule 4.7 Description of Certain Labor Matters
Schedule 4.8 List of Tax Matters
Schedule 4.11 List of Financial Statements and Certain Liabilities
Schedule 4.12 List of Certain Developments
Schedule 4.19 List Employment Terms
Schedule 4.22 List of Other Material Contracts
Schedule 4.25 Product Liability Claims
Schedule 4.26 List of Insurance
Schedule 4.27 Brokers - Sellers
Schedule 4.29 Relationship with Related Persons
Schedule 4.33 Franchise Matters
Schedule 5.5 Brokers - Purchaser
Exhibit A Form of Escrow Agreement
Exhibit B Form of Assumption Agreement
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Sellers' and Shareholders' Closing Certificate
Exhibit E Form of Bill of Sale
Exhibit F Form of Agreement Not To Compete
Exhibit G Form of Opinion of Sellers' Counsel
Exhibit H Form of Purchaser's Closing Certificate
Exhibit I Form of Opinion of Purchaser's Counsel
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Schedule 5.5
BROKERS - PURCHASERS
J.H. Chapman Group
<PAGE>
EXHIBIT A
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is made and entered into as of the ___ day of
____________, 19___, by and among BAB Holdings, Inc., an Illinois corporation
("Purchaser"), The American Bagel Company, a Maryland corporation, and Almike
Enterprises, Inc., a Maryland corporation (collectively the "Sellers"), and
LaSalle National Trust, N.A. ("Escrow Agent").
WHEREAS, Purchaser, Sellers, Michael D. Robinson and Alan R. Manstof have
entered into an Asset Purchase Agreement dated August 30, 1996, pursuant to
which Sellers have sold and Purchaser has purchased substantially all of
Sellers' assets used in connection with the operation of Sellers' business of
franchising Chesapeake Bagel Bakery stores and owning and operating company-
owned Chesapeake Bagel Bakers stores ("Purchase Agreement");
WHEREAS, Section 2.3 of the Purchase Agreement provides for the escrow of
certain funds pending the preparation by Ernst & Young L.L.P. and the acceptance
by the Purchaser and the Sellers of the Balance Sheets (as that term is defined
in the Purchase Agreement); and
WHEREAS, Purchaser, Sellers and the Escrow Agent desire to enter into this
Agreement to set forth the terms and conditions of such escrow.
1. Deposit of Funds. The Purchaser warrants that it has deposited with
the Escrow Agent on the date hereof, the sum of Two Million and No/100 Dollars
($2,000,000.00 (the "Principal") pursuant to Section 2.3(a) of the Purchase
Agreement.
2. Purpose of Escrow. The Principal and any accrued interest thereon
(collectively the "Deposit") shall be held by the Escrow Agent to protect the
Purchaser against the possibility that the combined tangible net worth of the
Sellers as reflected on the Closing Balance Sheet (as that term is defined in
the Purchase Agreement) is less than the combined tangible net worth of the
Sellers reflected on the Opening Balance Sheet (as that term is defined in the
Purchase Agreement).
3. Investment of Funds. It is the intention of the parties that the
Principal deposited with the Escrow Agent pursuant to this Agreement be invested
for the benefit of the Purchaser and the Sellers during the time period that the
Principal is being held by the Escrow Agent. Subject to the provisions of any
law then in effect to the contrary, the Escrow Agent shall in its sole
discretion invest all funds that it receives pursuant to this Agreement,
provided that such investment is made in the name of the Escrow Agent, the
nominee of the Escrow Agent or in bearer form, either directly by the Escrow
Agent or at the Escrow Agent's discretion through a cash management fund, in any
of the following:
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(a) A certificate of deposit issued by a National Banking Association with
offices in the state of Illinois;
(b) United States Treasury obligations; or
(c) Money market issues, commercial paper or some other comparable
investment which protects the principal invested;
provided that the maturity of any such investment is not more than thirty (30)
days. Upon request, the Escrow Agent shall give the Purchaser and Sellers an
accounting of all investments. At any time during the Escrow Agent's regular
business hours, the Purchaser and the Sellers may inspect the Escrow Agent's
records insofar as they relate to this Agreement, to determine whether the
Escrow Agent is complying with the provisions of this Agreement.
4. Disbursement of Escrowed Funds. The parties hereto acknowledge and
agree that the Deposit should be held by the Escrow Agent pursuant to this
Agreement unless and until directed by an original written notice signed by
officers of the Purchaser and the Sellers specifying whether all or part of the
Deposit shall be paid to the Sellers and/or returned to the Purchaser. If the
Purchaser and the Sellers do not agree as to the disbursement of the Deposit,
Sellers or Purchaser may submit the dispute to the American Arbitration
Association in Chicago, Illinois for resolution of any dispute in accordance
with its rules governing commercial disputes. Any decision of the American
Arbitration Association shall be binding and final on all parties. Use of the
arbitration procedure under this paragraph 4 shall be the exclusive method of
resolving disputes under this Agreement. The parties agree that courts of the
States of Illinois and Maryland may enter judgment upon any award made pursuant
to a decision of the American Arbitration Association.
5. Notices. All notices, instructions and other communications provided
for herein shall be deemed validly given, made or served, on the date of
delivery in the case of personal delivery, or forty-eight (48) hours after
deposit with the U.S. Postal Service if sent by certified mail, return receipt
requested, addressed as follows:
if to Purchaser: BAB Holdings, Inc.
8501 W. Higgins Road, Suite 320
Chicago, IL 60631
Attn: Michael K. Murtaugh
if to Sellers: Chesapeake Bagel Bakery
1451 Dolley Madison Blvd., Suite 300
McLean, VA 22101
Attn: Michael Robinson and Alan Manstof
if to Escrow Agent: Mark Rimkus
LaSalle National Trust,N.A.
135 South LaSalle Street
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<PAGE>
Chicago, IL 60603
or to such other address as the parties may designate.
6. Fees. The fees payable to the Escrow Agent for holding the Deposit in
escrow, investing the Principal, disbursing the Deposit and acting as escrow
agent hereunder shall be $2,000 and shall be paid upon execution of this
Agreement by Sellers and Purchaser in the amount of $1,000 each. The parties
acknowledge that if the term of the escrow exceeds one year, then an additional
fee of $2,000 shall be due and payable.
7. Duties of Escrow Agent. The Escrow Agent's duties and responsibilities
shall be limited to those expressly set forth in this Agreement and the Escrow
Agent shall not be subject to, nor obliged to recognize, any other agreement
between, or direction or instruction of, any of the parties hereto (other than
joint instructions made by Purchasers and Sellers) even though reference thereto
may be made herein; provided, however, with the Escrow Agent's written consent,
this Agreement may be amended at any time or times by an instrument in writing
signed by all of the then parties in interest. The duties and obligations of the
Escrow Agent hereunder shall be determined solely by the express provisions of
this Agreement and no implied duties or obligations shall be read into this
Agreement against the Escrow Agent. The Escrow Agent shall be under no
obligation to refer to the Purchase Agreement or any other documents between or
among the parties related in any way to this Agreement.
8. Limitation on Liability. The Escrow Agent shall not be liable to
anyone by reason of any error of judgment, or for any act done or step taken or
omitted by it in good faith, or for any mistake of fact of law, or for anything
which it may do or refrain from doing in connection herewith, unless caused by
or arising out of its own gross negligence or bad faith.
9. Reliance. The Escrow Agent shall be entitled to rely and shall be
protected in acting in reliance upon any writing furnished to it by any party
hereto in accordance with the terms hereof, and shall be entitled to treat as
genuine, and as the document it purports to be, any letter, paper or other
document, furnished to it by any party and believed by the Escrow Agent in good
faith to be genuine and to have been signed by the proper party. The Escrow
Agent may consult with counsel with respect to any question relating to its
duties or responsibilities hereunder and shall not be liable for any action
taken or omitted in good faith on advice of such counsel.
10. Conflicting Claims. In the event of any disagreement between the
parties hereto resulting in conflicting claims and demands being made in
connection with or against the Deposit, the Escrow Agent shall be entitled, at
its option, to refuse to comply with the claims or demands of any party until
such disagreement is finally resolved in the manner provided in paragraph 4
hereof, and in do doing the Escrow Agent shall not be or become liable to any
party.
11. Attachment, Garnishment, Etc. If all or any part of the Deposit is at
any time attached, garnished or levied upon, under any court order, or in case
the payment, assignment, transfer conveyance or delivery of all or any part of
the Deposit shall be stayed or enjoined by
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<PAGE>
any court order, or in case any order, judgment or decree shall be made or
entered by any court affecting all or any part of the Deposit, then in any of
such events, the Escrow Agent is authorized, in its sole discretion, to rely
upon and comply with any such order, writ, judgment or decree, which it believes
is binding upon it, and if it complies with any such order, writ, judgment or
decree, it shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, even though such
order, writ, judgment or decree may be subsequently reversed, modified,
annulled, set aside or vacated.
12. Governing Law. this Agreement shall be construed, governed, enforced
and administered in accordance with the laws of the State of Illinois.
13. Termination. The Escrow Agent's duties pursuant to this Agreement
shall be terminated upon the disbursement of the Deposit in accordance with the
provisions of this Agreement.
14. Resignation. The Escrow Agent may resign upon thirty (30) days advance
written notice to the parties hereto. If a successor escrow agent is not
appointed within the thirty-day period following such notice, Escrow Agent may
petition any court of competent jurisdiction to name a successor escrow agent.
Until a successor escrow agent is appointed and accepts such appointment, the
Escrow Agent's only duty shall be to hold and invest the Deposit in accordance
with the original instructions contained in this Agreement.
15. Successors and Assigns. Except as otherwise provided in this
Agreement, no party hereto shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other parties
hereto and such attempt at assignment without such prior written consent shall
be void and of no force or effect. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
as of the day, month and year first above written.
PURCHASER:
BAB HOLDINGS, INC.
By
---------------------------
Its
-------------------------
SELLERS:
THE AMERICAN BAGEL COMPANY
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<PAGE>
By
---------------------------
Its
-------------------------
ALMIKE ENTERPRISES, INC.
By
---------------------------
Its
-------------------------
ESCROW AGENT:
LASALLE NATIONAL TRUST, N.A.
-----------------------------
By
---------------------------
Its
-------------------------
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<PAGE>
EXHIBIT B
ASSUMPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the _____ day of
____________, 19___, by and among The American Bagel Company, a Maryland
corporation, and Almike Enterprises, Inc., a Maryland corporation (collectively
the "Sellers"), and BAB Holdings, Inc., an Illinois corporation (the
"Purchaser").
WHEREAS, the Purchaser has purchased substantially all of the assets of the
Sellers used in connection with the operation of Sellers' business of
franchising Chesapeake Bagel Bakery stores and owning and operating company-
owned Chesapeake Bagel Bakery stores (the "Business"), pursuant to an Asset
Purchase Agreement made and entered into as of the _____ day of ___________,
19___, by and among the Sellers, Michael D. Robinson and Alan R. Manstof
(collectively the "Shareholders") and the Purchaser (the "Purchase Agreement");
WHEREAS, the Purchaser has taken over the operation of the Business as of
the close of business on the date hereof; and
WHEREAS, Purchaser and Sellers desire to enter into this Agreement to set
forth the terms and conditions on which Purchaser will assume certain of the
debts, liabilities and obligations of Sellers related to the Business.
NOW, THEREFORE, in consideration of the purchaser and sale of the Assets
(as that term is defined in the Purchase Agreement), and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Assignment and Assumption of Operating Contracts. Sellers do hereby
sell, assign, transfer and convey to Purchaser all of their respective rights,
title and interest in and to those certain contracts, contracts in progress,
commitments, leases, franchise agreements, area franchise development agreements
and other agreements described on Schedule 1.1(g)(i) attached hereto and made a
part hereof (the "Operating Contracts"). Purchaser does hereby agree to be bound
by and to assume and discharge in accordance with their terms all of the
obligations and commitments of the Sellers arising with respect to periods of
time commencing after the date hereof under, with respect to and concerning the
Operating Contracts; provided, however, that Purchaser does not assume any
liabilities for (i) products sold or services rendered by the Business under
such Operating Contracts on or before the date hereof, or (ii) any debts,
liabilities or obligations arising as a result of a breach or default by either
Seller under any of such Operating Contracts occurring on or before the date
hereof or as a result of the consummation of the transactions contemplated by
the Purchase Agreement. Notwithstanding any provision of this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any of the
Operating Contracts, or any benefit arising thereunder or resulting therefrom,
if such an agreement to assign without a consent required or necessary for such
assignment would constitute a breach thereof or in any way adversely affect the
rights of the Sellers or the
<PAGE>
Purchaser thereunder. If such consent is not obtained, or if an attempted
assignment would be ineffective and would adversely affect the rights of the
Sellers thereunder so that the Purchaser would not in fact receive all such
rights, the Sellers shall use their respective best efforts, and shall cooperate
in any arrangement which the Purchaser may reasonably request in writing, to
provide to the Purchaser the benefits under any such Operating Contract,
including (a) entering into subcontracts, subleases, sale and leasebacks, use
and occupancy agreements or other contractual arrangements which will provide
such benefits to the Purchaser; (b) agreeing with the person whose consent is
required to be obtained that the Sellers will remain liable under any such
Operating Contract to the same extent as if such assignment had not occurred;
and (c) enforcing, at the cost of the Sellers and for the benefit of the
Purchaser, any and all rights of the Sellers against any other party thereto
arising out of the breach thereof by such party. Any transfer or assignment to
the Purchaser of any of the Operating Contracts which shall require the consent
or approval of any other party shall be made subject to such consent or approval
being obtained; provided, however, that nothing contained in this paragraph 1
shall affect the rights of the Purchaser, pursuant to the Purchase Agreement or
otherwise, arising out of the Sellers' failure to have disclosed the need for
such consent or approval or for failing to have it obtained.
2. Assignment and Assumption of Licenses, Certificates, Franchises and
Permits. Sellers do hereby sell, assign, transfer and convey to Purchaser all of
their respective rights, title and interest in and to all of Sellers'
governmental licenses, certificates, franchises, permits, registrations,
concessions, consents and approvals related to the Business, including, but not
limited to, those described on Schedule 1(h) attached hereto and made a part
hereof (the "Licenses and Permits"), but excluding those described in Schedule
1.2 to the Purchase Agreement which by their terms are not transferable.
Purchaser does hereby agree to be bound by and to assume and discharge in
accordance with their terms all of the obligations and commitments of Sellers
arising with respect to periods of time commencing after the date hereof, with
respect to and concerning the Licenses and Permits.
3. Assumption of Other Liabilities. Purchaser does hereby assume and agree
to pay, perform and discharge in accordance with their terms, the following
debts, liabilities and obligations of Sellers:
(a) All of Sellers' trade accounts payable, deferred revenues from the
sale of franchises, and other current liabilities, in each case
arising out of the operation of the Business in the Ordinary Course of
Business (as that term is defined in the Purchase Agreement) which
remain unpaid on the date hereof, but only to the extent reflected on
the Closing Balance Sheet (as that term is defined in the Purchase
Agreement); provided that Purchaser expressly does not assume (i) any
accrued taxes of any nature, (ii) any liabilities to any Related
Person (as that term is defined in the Purchase Agreement), or (iii)
any long-term debt (including the current portions thereof), except as
set forth on Schedule 3.2 hereto; and
(b) All debts, liabilities and obligations of Sellers identified on
Schedule 3.2 hereto (including leases for the Leased Premises (as that
term is defined in the Purchase Agreement)).
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<PAGE>
4. Liabilities Not Assumed. Except as specifically set forth in herein,
Purchaser shall not, by virtue of its purchase of Assets, assume or become
responsible for any debts, liabilities or obligations of either of the Sellers
or either of the Shareholders, whether fixed, contingent, known, unknown or
otherwise. In furtherance, and not in limitation of the foregoing, Purchaser
expressly does not assume any liabilities for (i) products sold or services
rendered by the Business under any of the Operating Contracts on or prior to the
date hereof, (ii) for any debts, liabilities or obligations arising as a result
of a breach or default by either Seller under any of the Operating Contracts
occurring on or before the date hereof or as a result of the consummation of the
transactions contemplated by the Purchase Agreement, (iii) any long-term
indebtedness (including the current portion thereof), except as set forth on
Schedule 3.2 hereto; or (iv) any fees or commissions payable by Sellers or any
other person to brokers, consultants, finders or others with respect to the
offer or sale of Sellers' franchises or area development agreements, except as
reflected in the deferred revenues from the sale of franchises on the Closing
Balance Sheet.
This Agreement is intended to confirm, and not alter, the provisions of the
Purchase Agreement, including the provisions thereof governing indemnification.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day, month and year first above written.
SELLERS:
THE AMERICAN BAGEL COMPANY
By________________________
Its_____________________
ALMIKE ENTERPRISES, INC.
By________________________
Its_____________________
PURCHASER:
BAB HOLDINGS, INC.
By________________________
Its_____________________
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<PAGE>
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
DATED AS OF ____________, 1996
BETWEEN
BAB HOLDINGS, INC. (THE "COMPANY")
AND
MICHAEL D. ROBINSON AND ALAN R. MANSTOF (THE "HOLDERS")
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made as of
______________, 1996 between BAB Holdings, Inc., an Illinois corporation (the
"Company"), and Michael D. Robinson and Alan R. Manstof (individually, a
"Holder" and, collectively, the "Holders").
RECITALS
--------
WHEREAS, pursuant to the terms of an Asset Purchase Agreement dated as of
________________, 1996 (the "Asset Purchase Agreement"), by and among the
Holders, The American Bagel Company, Almike Enterprises, Inc., and the Company,
Messrs. Robinson and Manstof, through their controlled corporations The American
Bagel Company and Almike Enterprises, Inc., have acquired an aggregate of
900,000 shares of Common Stock, no par value per share (the "Common Stock"), of
the Company, and may acquire additional shares of the Common Stock pursuant to
the Asset Purchase Agreement in connection with the opening of additional
franchised Chesapeake bagel stores under existing franchise and area development
agreements (collectively, the "Shares"); and
WHEREAS, the Company has agreed to register the Shares on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein set forth, it is hereby agreed among the
Company and the Holders as follows:
ARTICLE I
REGISTRATION RIGHTS
Section 1.1. Participation in Registration. (a) If, at any time or from
time to time after January 1, 1997, the Company shall determine to register any
of its securities, either for its own account or the account of a security
holder or holders exercising their respective demand registration rights, other
than (i) a registration relating solely to employee benefit plans on Form S-1 or
S-8 or similar forms which may be promulgated in the future, or (ii) a
registration on Form S-4 or similar form which may be promulgated in the future
relating to an SEC Rule 145 transaction, the Company will:
(i) promptly give to the Holders written notice thereof (which shall
include a list of the jurisdictions in which the Company intends to attempt to
qualify such securities under the applicable blue sky or other state securities
laws); and
(ii) include in such registration (and any related qualification under blue
sky laws or other compliance), and in any underwriting involved therein, all
Registrable Securities specified
<PAGE>
in a written request or requests, made within 30 days after receipt of such
written notice from the Company, by the Holders.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
1.1(a)(i). In such event, the right of the Holders to registration pursuant to
Section 1.1 shall be conditioned upon the Holders' agreeing to participate in
such underwriting and in the inclusion of such Holders' Registrable Securities
in the underwriting to the extent provided herein. The Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Company or by
other holders exercising their demand registration rights. Notwithstanding any
other provision of this Section 1.1, if the underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the underwriter may limit the number of Registrable Securities to
be included in the registration and underwritten public offering on a pro rata
basis based on the respective amounts of Registrable Securities owned by the
Holders and securities of the Company owned by each other holder seeking to
distribute his securities through the public offering; provided, however, that
the Company shall not exclude more than that number of shares which, in the
reasonable opinion of such underwriter, must reasonably be excluded in light of
such marketing factors. The Company shall so advise the Holders and the other
holders distributing their securities through such underwriting, and the number
of Registrable Securities and other securities that may be included in the
registration shall be allocated among all holders thereof (other than holders
who are exercising demand registration rights) in proportion, as nearly as
practicable, to the respective amounts of securities entitled to inclusion in
such registration held by such holders at the time of filing the registration
statement. If the Holders disapprove of the terms of any such underwriting, they
may elect to withdraw therefrom by written notice to the Company and the
underwriter, which notice, to be effective, must be received by the Company at
least two business days before the anticipated effective date of the
registration statement. The Company may at any time withdraw or abandon any
registration statement which triggers the provisions of this Section 1.1 without
any liability to the Holders. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
Section 1.2. Form S-3 Registration Rights. On and after the Eligibility
Date and for a period of two (2) years thereafter, the Holders, by written
notice signed by the Holders (or by permitted assignees who hold not less than
25% of the Registrable Securities) may demand that the Company file a
registration statement on Form S-3 to permit resale of the Registrable
Securities of the Holders during the period of effectiveness of such Form S-3
registration statement. Any such registration on Form S-3 shall be subject to
the following limitations:
(a) The Company shall not be required to maintain and keep any such
registration on Form S-3 effective for a period exceeding ninety (90) days from
the effective date thereof;
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(b) The Company shall not be required to effect more than two (2)
registrations on Form S-3 pursuant to this Section 1.2;
(c) The Company shall not be required to prepare or effect any registration
pursuant to this Section 1.2 unless the Registrable Securities to be sold by the
Holders represent not less than 25% of the total Registrable Securities;
(d) If the Company shall furnish to the Holders a certificate, signed by
the Company's president or chief executive officer, stating that (i) the Company
is conducting or is about to conduct an offering of its securities and is
advised by its managing underwriter that such offering might be affected
adversely by the registration on behalf of the Holders or (ii) in the good faith
judgment of the Board of Directors of the Company the Form S-3 offering would
interfere with a pending or contemplated financing, merger, sale of assets,
recapitalization or other similar corporate action of the Company if such
registration statement would be filed on or before the date filing would be
required and it is therefore essential to defer the filing of such registration
statement, the Company shall have the right, exercisable only once during any
period of twelve consecutive months, to defer filing the registration statement
for a period of not more than 120 days; provided, however, that the time period
set forth in Section 1.2 with respect to the exercise by the Holders of their
Form S-3 Registration Rights shall be extended by the number of days by which
any registration is deferred under the terms of this paragraph (d);
(e) The Company may include in such Form S-3 registration statement
securities of other selling security holders, without limitation, and securities
offered for its own account, if the Company is eligible for use of Form S-3 for
its own account; and
(f) The Company hereby undertakes to use its best effort to meet the
criteria for use of Form S-3 at the earliest possible date and to continue to
qualify for such use for a period of two (2) years following the Eligibility
Date.
Section 1.3. Expense of Registration. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
Article I shall be borne by the Company. All Selling Expenses relating to
securities registered by the Holders or other holders shall be borne by the
holders of such securities pro rata on the basis of the number of shares so
registered and to be sold by each.
Section 1.4. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Article I,
the Company will keep the Holders advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense, the Company will:
(a) Keep such registration, qualification or compliance effective for a
period of ninety (90) days or until the Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs.
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(b) Furnish such number of prospectuses and other documents incident
thereto as Holders from time to time may reasonably request, but only during the
period that the Company would be required to keep the registration effective.
(c) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(d) Use its best efforts to register and qualify the securities covered by
such registration statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holders, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. The Holders participating
in such underwriting shall also enter into and perform their obligations under
such agreement.
(f) Notify the Holders of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
Section 1.5. Indemnification. (a) The Company will indemnify the Holders
with respect to which registration, qualification or compliance has been
effected pursuant to this Article I, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages and liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration, qualification or compliance, and will pay to such
Holders, each such underwriter and each person who controls any such
underwriter, as incurred, any legal and any other expenses reasonably incurred
in connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue
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<PAGE>
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holders or underwriter and stated to be
specifically for use therein.
(b) The Holders will, if Registrable Securities held by such Holders are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such holder, each of its officers, directors or partners and each person
controlling such holder within the meaning of Section 15 of the Securities Act,
against all expenses, claims, losses, damages and liabilities (or actions in
respect thereof) including any of the foregoing incurred in settlement of any
litigation commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances in which they were
made, not misleading, or any violation by the Holders of any rule or regulation
promulgated under the Securities Act applicable solely to the Holders (which is
not otherwise applicable to or violated by the Company) and relating to action
or inaction required solely of the Holders (and not relating to or required of
the Company) in connection with such registration, qualification or compliance,
and will pay to the Company, such holders, such directors, officers, partners,
persons, underwriters or control persons, as incurred, any legal or any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document or any amendment or
supplement thereto in reliance upon and in conformity with written information
relating to such Holders which shall have been furnished to the Company by an
instrument duly executed by such Holders and stated to be specifically for use
therein; provided, however, that the obligations of such Holders hereunder shall
be limited to an amount equal to the net proceeds to such Holders of Registrable
Securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 1.5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at its own
expense, and provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Article I unless such failure resulted in actual
detriment to the Indemnifying Party. Notwithstanding the above, however, if
representation of one or more
5
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Indemnified Parties by the counsel retained by the Indemnifying Party would be
inappropriate due to actual conflicting interests between such Indemnified
Parties (the "Conflicting Indemnified Parties") and any other party represented
by such counsel in such proceeding, then such Conflicting Indemnified Parties
shall have the right to retain one separate counsel, chosen by the holders of a
majority of the Registrable Securities included in the registration, at the
expense of the Indemnifying Party. No Indemnifying Party, (i) in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation, or (ii) shall be liable for amounts paid in any
settlement if such settlement is effected without the consent of the
Indemnifying Party.
Section 1.6. Information by Holders. The Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holders and the distribution proposed by such Holders
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Article I.
Section 1.7. Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, the Company agrees to:
(a) Use its best efforts to make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act at
all times after the date hereof.
(b) Use its best efforts to file with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Securities Exchange Act of 1934, as amended (at any time it is subject to
such reporting requirements).
(c) So long as the Holders own any Restricted Securities, to furnish to the
Holders forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company for an offering of its securities to the general public) and of the
Securities Act and the Securities Exchange Act of 1934 (at any time after it has
become subject to such reporting requirements) and a copy of the most recent
annual or quarterly report of the Company.
Section 1.8. Transfer of Registration Rights. The rights to cause the
Company to register securities granted under Article I may not be assigned
without the prior written consent of the Company in each instance, except
pursuant to will or the laws of descent and distribution. No transferee,
assignee or other person purporting to exercise rights under this Article I who
is not a signatory to this Agreement shall be entitled to do so unless and until
such person agrees to be bound by the terms of this Article I. The Company
shall not unreasonably withhold its consent to a request to transfer the
registration rights granted hereunder.
6
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Section 1.9. "Market Stand Off" Agreement. The Holders hereby agree that
they shall not, to the extent required by the Company and an underwriter of
Common Stock (or other securities) of the Company, sell or otherwise transfer or
dispose (other than to donees who agree to be similarly bound) of any
Registrable Securities during the ninety (90) day period following the effective
date of a registration statement of the Company filed under the Securities Act;
provided, however, that such agreement shall not apply to Registrable Securities
being registered and sold pursuant to such registration statement.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of the Holders
until the end of such ninety (90) day period.
Section 1.10. Plan of Distribution. To preserve an orderly market in any
publicly owned securities of the Company, in the event that the aggregate number
of shares of Registrable Securities to be registered pursuant to a Registration
Statement under Section 1.2 exceeds 5% of the Company's outstanding securities,
the Holders will provide advance notice to the Company of their intended
marketing and distribution arrangements in connection with the Form S-3
registration, including information with respect to any investment banking firm
or broker-dealer retained by the Holders to manage the distribution.
ARTICLE II
MISCELLANEOUS
-------------
Section 2.1. Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Illinois.
Section 2.2. Successors and Assigns. Except as otherwise provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors and permitted assigns of the parties hereto. Except as otherwise
provided herein, no assignment of this Agreement may be made by either party at
any time, without the other party's prior written consent.
Section 2.3. Entire Agreement; Amendment. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof. Except as expressly provided herein, neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
Section 2.4. Notices, Etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger
addressed (a) if to the Company, at 8501 West Higgins Road, Suite 320, Chicago,
IL 60631, Attention: General Counsel, or at such other address as the Company
shall have furnished to the Holders in writing and (b) if to the Holders,
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<PAGE>
at such address as is set forth on the signature page hereto, or at such other
address as the Holders shall have furnished to the Company in writing. Each such
notice or other communication shall for all purposes of this Agreement be
treated as effective or having been given when delivered if delivered
personally, or, if sent by mail, at the earlier of its receipt or 72 hours after
the same has been deposited in a regularly maintained receptacle for the deposit
of the United States mail, addressed and postage prepaid as aforesaid.
Section 2.5. Delays or Omissions. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to the Company
or the Holders upon any breach or default of any party under this Agreement,
shall impair any such right, power or remedy of the Company or such Holders nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of the
Company or any Holders of any breach or default under this Agreement, or any
waiver on the part of any such party of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to the Company or the Holders, shall
be cumulative and not alternative.
Section 2.6. Counterparts. This Agreement may be executed in any number
of counterparts, each of which may be executed by only one of the parties
hereto, each of which shall be enforceable against the party actually executing
such counterpart, and all of which together shall constitute one instrument.
Section 2.7. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provisions; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
Section 2.8. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 2.9. Definitions. As used in this Agreement, the following terms
have the meanings specified or referred to in this Section 2.9:
"Agreement" has the meaning specified in the first paragraph of this
Agreement.
"Commission" or "SEC" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"Company" has the meaning specified in the first paragraph of this
Agreement.
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<PAGE>
"Eligibility Date" shall mean the later of the first annual anniversary of
the date of this Agreement or the date on which the Company first meets the
criteria for use of Form S-3.
"Form S-1," "Form S-3," "Form S-4" and "Form S-8" shall mean such forms, as
currently identified, for registration of securities under the Securities Act,
or any substantially similar, equivalent or successor forms under the Securities
Act.
"Holders" shall mean the persons named on the signature page hereof and any
permitted transferee of registration rights.
"Registrable Securities" means Shares which are issued and outstanding and
which have not been sold to the public, plus shares of the Company's Common
Stock issued with respect to the Shares upon any stock split, stock dividend,
recapitalization, or similar event, which have not been sold to the public,
which, in each case, are not eligible for resale in reliance upon Rule 144 under
the Securities Act.
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with Article I hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company).
"Restricted Securities" shall mean any share certificate representing
Registrable Securities bearing a legend restricting further public distribution
thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale and all fees and disbursements of counsel for
any holder.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused the foregoing Agreement to be
executed by one of its duly authorized officers, and the Holders have each
executed the foregoing Agreement, each as of the date first above written.
BAB HOLDINGS, INC.
By
-----------------------------------
Its
--------------------------------
--------------------------------------
Michael D. Robinson
Address:
------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Alan R. Manstof
Address:
------------------------------
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EXHIBIT D
SELLERS' AND SHAREHOLDERS' CLOSING CERTIFICATE
The undersigned, Michael D. Robinson and Alan R. Manstof (collectively
the "Shareholders"), being duly acting, appointed and authorized officers of The
American Bagel Company, a Maryland corporation, and Almike Enterprises, Inc., a
Maryland corporation (collectively the "Sellers"), hereby certify to BAB
Holdings, Inc., an Illinois corporation (the "Purchaser"), pursuant to Section
12.2(a) of the Asset Purchase Agreement made and entered into as of the _____
day of __________, 199__, by and among the Purchaser, the Sellers and the
Shareholders (the "Purchase Agreement"), as follows:
1. All of the representations and warranties made by Sellers and/or
Shareholders in the Purchase Agreement, including the documents,
instruments and agreements to be executed and/or delivered by any
of the Sellers and/or Shareholders pursuant to the Purchase Agreement,
are true and correct in all material respects on and as of the date
hereof with the same force and effect as though such representations
and warranties had been made on or given on and as of the date hereof;
and
2. The Sellers and Shareholders have performed and complied in all
material respects with all of its/his/their covenants and obligations
under the Purchase Agreement which were to be performed and complied
with by it/him/them prior to or on the date hereof.
IN WITNESS WHEREOF, we have executed this Sellers' and Shareholders'
Closing Certificate as of the _____ day of __________, 199__.
THE AMERICAN BAGEL COMPANY
By____________________________
Its:________________________
ALMIKE ENTERPRISES, INC.
By_____________________________
Its:_________________________
_______________________________
Michael D. Robinson
_______________________________
Alan R. Manstof
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NON-COMPETITION AGREEMENT
-------------------------
THIS AGREEMENT, is made and entered into as of the ____ day of __________,
199__, by and between BAB HOLDINGS, INC., an Illinois corporation (the
"Company"), and _________________________________________ (the "Selling
Shareholder").
WHEREAS, the Selling Shareholder has been a principal shareholder, officer,
director and employee of The American Bagel Company, a Maryland corporation, and
Amike Enterprises, Inc., a _______________ corporation (collectively the
"Sellers"), for many years and has developed and received special, unique and
extraordinary knowledge, information and goodwill in connection therewith;
WHEREAS, contemporaneously with the execution of this Agreement, the
Sellers have sold all of their respective property and assets to the Company
pursuant to an Asset Purchase Agreement dated ____________, 1996 by and among
the Sellers, the Company, _______________ and the Selling Shareholder (the
"Asset Purchase Agreement");
WHEREAS, in connection with the Asset Purchase Agreement, the Selling
Shareholder has agreed to provide certain consulting services to the Company
pursuant to a Consulting Agreement of even date herewith (the "Consulting
Agreement");
WHEREAS, the Selling Shareholder will receive, in the course of providing
consulting services to the Company, information concerning the operations,
products, services and customers of the Company not generally known to the
public or the industry, which information is confidential and of vital interest
to the Company; and
WHEREAS, the Company would not have entered into the Asset Purchase
Agreement and/or Consulting Agreement with the Selling Shareholder but for the
confidentiality and non-competition agreements contained herein.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
1. Non-Competition Agreement. During the period of five (5) years from
and after the date hereof, the Selling Shareholder covenants and agrees that he
will not, without the Company's prior written consent, directly or indirectly,
at any location within the United States of America, lend his credit, advice or
assistance, or engage in any activity or act in any manner, including but not
limited to, as an individual, owner, sole proprietor, founder, associate,
promoter, partner, joint venturer, shareholder [other than as a less than five
percent (5%) shareholder of a publicly traded corporation], officer, director,
trustee, manager, employer, employee, licensor, licensee, principal, agent,
salesman, broker, representative, consultant, advisor, investor or otherwise,
for the purpose of establishing, operating or managing any business or entity
that is engaged in activities competitive with (i) the business of the Company
and its subsidiaries and affiliates as carried on as of the date of this
Agreement, or (ii) the business of the Sellers and its subsidiaries and
affiliates as carried on immediately prior to the date hereof; provided,
however, that notwithstanding the foregoing provisions of this paragraph 1, the
Selling Shareholder may act as a consultant to the Company pursuant to the
Consulting Agreement.
2. Non-Solicitation Agreement. As used in this Agreement, the term
"Person" means any individual, corporation, limited liability company, joint
venture, general, limited or limited liability partnership, association or other
entity. During the period of five (5) years from and after the date hereof, the
Selling Shareholder covenants and agrees that he will not, whether for his own
account or for the account of any other Person, directly or indirectly interfere
with the relationship of the Company and/or its subsidiaries and affiliates with
or endeavor to divert or entice away from the Company or its subsidiaries or
affiliates any Person who or which at any time while the Selling Shareholder was
a shareholder of either of the Sellers or during the time that the Selling
Shareholder provides consulting services to the Company pursuant to the
Consulting Agreement is or was an employee or customer of or in the habit of
dealing with either of the Sellers, the Company or any of their respective
subsidiaries or affiliates.
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<PAGE>
3. Confidential Information. The Selling Shareholder understands and
agrees that the respective businesses of the Sellers and the Company is based
upon specialized work and that as an officer, director, employee and shareholder
of the Sellers he received, had access to and/or contributed to Confidential
Information (as hereinafter defined) and that as a consultant to the Company
pursuant to the Consulting Agreement he will receive, have access to and/or
contribute to Confidential Information. The Selling Shareholder agrees that at
all times during the term of this Agreement and thereafter without limitation,
he shall keep secret all such Confidential Information and that he will not
directly or indirectly "Use" (as hereinafter defined) or "Disclose" (as
hereinafter defined) the same to any Person without first obtaining the written
consent of the Company. Upon the voluntary or involuntary termination of the
Consulting Agreement with or without cause, or at any time the Company may so
request, the Selling Shareholder shall turn over to the Company all books,
notes, memoranda, manuals, notebooks, tables, drawings, calculations, records
and other documents made, compiled by or delivered to the Selling Shareholder
containing or concerning any Confidential Information, including copies thereof,
in his possession, it being agreed that the same and all information contained
therein are at all times the exclusive property of the Company.
As used in this Agreement, the term "Confidential Information" means any
information or compilation of information not generally known to the public or
the industry, which was proprietary to the Sellers and/or is now proprietary to
the Company, relating to the Sellers' and/or the Company's procedures,
techniques, methods, concepts, ideas, affairs, products, processes and services,
including, but not limited to, information relating to marketing, merchandising,
selling, research, development, manufacturing, purchasing, accounting,
engineering, financing, costs, customers, plans, pricing, billing, needs of
customers and services used by customers. Confidential Information for purposes
of this Agreement shall also include all lists of customers, franchisees,
addresses, prospects, sales calls, suppliers, vendors, products, services,
prices and the like as well as any specifications, formulas, recipes, plans,
drawings,
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<PAGE>
accounts or sales records, sales brochures, books, code books, records, manuals,
trade secrets, knowledge, know-how, pricing strategies, operating costs, sales
margins, methods of operations, invoices or statements and the like. All
information disclosed to the Selling Shareholder during the term of his prior
employment by the Sellers or in the course of providing Consulting Services to
the Company pursuant to the Consulting Agreement which the Selling Shareholder
has a reasonable basis to believe to be Confidential Information or which is
treated by the Sellers and/or the Company as being Confidential Information,
shall be presumed to be Confidential Information.
As used in this Agreement, the term "Disclose" means to reveal, deliver,
divulge, disclose, publish, copy, communicate, show or otherwise make known or
available to any other Person, or in any way to copy, any of the Confidential
Information.
As used in this Agreement, the term "Use" means to appropriate any of the
Confidential Information for the benefit of oneself or any other Person other
than the Company.
4. Reasonableness of Covenants. The Selling Shareholder acknowledges and
agrees that the geographic scope and period of duration of the restrictive
covenants contained in this Agreement are both fair and reasonable and that the
interests sought to be protected by the Company are legitimate business
interests entitled to be protected. The Selling Shareholder further
acknowledges and agrees that the Company would not have agreed to purchase all
of the Sellers' property and assets pursuant to the Asset Purchase Agreement and
that the Company would not have agreed to engage the Selling Shareholder as a
consultant pursuant to the Consulting Agreement unless the Selling shareholder
entered into this Agreement.
5. Injunctive Relief. The parties agree that the remedy of damages at
law for the breach by the Selling Shareholder of any of the covenants contained
in this Agreement is an inadequate remedy. In recognition of the irreparable
harm that a violation by the Selling Shareholder of any of the covenants,
agreements or obligations arising under this Agreement would cause the Company,
the Selling Shareholder agrees that in addition to any other remedies
-4-
<PAGE>
or relief afforded by law, an injunction against an actual or threatened
violation or violations may be issued against him and every other Person
concerned thereby, it being the understanding of the parties that both damages
and an injunction shall be proper modes of relief and are not to be considered
alternative remedies. In the event of any such actual or threatened violation,
the Selling Shareholder agrees to pay the costs, expenses and reasonable
attorneys' fees incurred by the Company in pursuing any of its rights or
remedies with respect to such actual or threatened violation, in addition to the
actual damages sustained by the Company as a result thereof.
6. Blue Pencil Doctrine. In the event that any of the restrictive
covenants contained in this Agreement shall be found by a court of competent
jurisdiction to be unreasonable by reason of its extending for too great a
period of time or over too great a geographic area or by reason of its being too
extensive in any other respect, then such restrictive covenant shall be deemed
modified to the minimum extent necessary to make it reasonable and enforceable
under the circumstances.
7. Compensation. The Selling Shareholder shall receive no separate
monetary consideration for the restrictive covenants contained in this
Agreement, but the Selling Shareholder acknowledges receipt of consideration in
the form of the purchase of the property and assets of the Sellers pursuant to
the Asset Purchase Agreement.
8. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and supersedes all prior or contemporaneous agreements and
understandings, oral or written, between the parties hereto with respect to the
subject matter hereof.
9. Amendment. No amendment or waiver of any provision of this Agreement
shall be effective unless the same shall be in writing and signed by all of the
parties and then such waiver shall only be effective in the specific instance
and for the specific purpose for which it was given.
10. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representative(s), successors and
-5-
<PAGE>
permitted assigns, but nothing in this Agreement is to be construed as an
authorization or right of any party to assign its/his rights or delegate its/his
duties under this Agreement without the prior written consent of the other party
hereto.
11. Governing Law. This Agreement shall be construed, governed by and
enforced in accordance with the laws of the State of _______________.
12. Headings. The headings to the paragraphs of this Agreement are
intended for the convenience of the parties only and shall in no way be held to
explain, modify, amplify or aid in the interpretation of the provisions hereof.
13. Severability. The provisions of this Agreement shall be deemed
severable and if any portion hereof shall be held invalid, illegal or
unenforceable for any reason, the remainder shall not thereby be invalidated but
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day, month and year first above written.
COMPANY:
BAB HOLDINGS, INC.
By:
---------------------------------
Its:
--------------------------------
SELLING SHAREHOLDER:
-------------------------------------
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<PAGE>
EXHIBIT G
OPINION OF SELLER'S COUNSEL
1) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of ____________, and has all requisite
power and authority, corporate and otherwise, to own, operate and lease the
Assets and to conduct the Business as it is now being conducted;
2) Seller is duly qualified to transact business as a foreign
corporation and is in good standing in every state or jurisdiction in which the
nature of its activities or of its properties owned, leased or operated makes
such qualification necessary and the failure to be so qualified could reasonably
be expected to have a Material Adverse Effect;
3) The execution, delivery and performance of this Agreement,
including the documents, instruments and agreements to be executed and/or
delivered by Seller and/or Shareholders pursuant hereto, and the consummation of
the transaction contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Seller and
Shareholders. This Agreement and the documents, instruments and agreements to
be executed and/or delivered by Seller and/or Shareholders pursuant to this
Agreement have been duly and validly authorized, executed and delivered by
Seller and/or Shareholders and the obligations of Seller and Shareholders
hereunder and thereunder are valid and legally binding and enforceable in
accordance with their respective terms, except as such enforcement may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws presently or hereafter in effect affecting the enforcement of
creditors' rights generally and by general principals of equity (regardless of
whether such enforceability is considered under proceeding at law or in equity),
including, among others, limitations on the availability of equitable remedies,
and shall, to the best of such counsel's Knowledge, effectively vest in
Purchaser good and marketable title to the Assets and Business as contemplated
by this Agreement;
4) Seller has full corporate power and authority to sell, assign,
transfer, convey and deliver to Purchaser the Assets to be sold hereunder and to
otherwise perform its obligations under this Agreement and the documents,
instruments and agreements to be executed and/or delivered by the Seller
pursuant hereto. The execution and delivery of this Agreement, including the
documents, instruments and agreements to be executed and/or delivered by the
Seller pursuant to this Agreement, and the consummation of the transactions
contemplated hereby and thereby will not: (i) violate any provision of the
Articles of Incorporation or Bylaws (or comparable government documents or
instruments) of Seller; (ii) violate any Applicable Laws
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<PAGE>
issued, enacted, entered or deemed applicable by Governmental Body having
jurisdiction over Seller or any of its properties or assets; (iii) except as
provided in Schedule 5.3 hereto, require any filing with, permit from, consent
or approval of, or the giving of any notice to, any Governmental Body or any
third party; (iv) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give another party
any rights of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, lease, contract, agreement or other instrument or obligation
to which Seller is a party, or by which it or any of its properties or assets
may be bound, including the Operating Contracts, and of which counsel has actual
Knowledge; or (v) result in the creation or imposition of any encumbrance on any
of the Assets;
5) There are no mortgages, pledges, liens, charges, restrictions,
claims, encumbrances or security interests of record or known by such counsel
that would prevent Purchaser from receiving by the execution and delivery of the
documents hereunder good and marketable title to all of the Assets other than
the Real Estate, free and clear from all mortgages, pledges, liens, charges,
restrictions, claims, encumbrances and security interests;
6) Except as described in Schedule 5.6 hereto, there are no
investigations, claims, demands, actions, suits or other proceedings at law or
in equity which are pending or, to the best of counsel's Knowledge, threatened
against or affecting the Seller, the Assets or the Business before or by any
court, Governmental Body or other Person or entity wherein an unfavorable
decision, ruling or finding could, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect or impair the ability of Seller
and/or Shareholders to consummate the transactions contemplated hereby. Except
as provided in Schedule 5.6 hereto, Seller is not a party to or subject to the
provisions of any writ, ruling, award, executive order, directive, requirement,
injunction, judgment, decree or other order (whether temporary, preliminary or
permanent) issued, enacted, entered or deemed applicable by Governmental Body
which could, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect or impair the ability of Seller and/or Shareholders to
consummate the transactions contemplated hereby;
7) Seller and Shareholders have the unrestricted corporate and other
power and authority to sell, convey, transfer, assign, and deliver to Purchaser
all of the Assets and Business to be sold hereunder and to otherwise perform
its/his/their obligations under this Agreement and the documents, instruments
and agreements to be executed and/or delivered by Seller and/or Shareholders
pursuant hereto;
8) To the best of counsel's Knowledge, Seller and the Business are
in compliance in all material respects with all Applicable Laws issued, enacted,
entered or deemed applicable by Governmental Body and, to the best of such
counsel's Knowledge, no authorization, consent or
2
<PAGE>
approval of any Governmental Body, which has not been obtained, is necessary for
the lawful sale of the Assets to the Purchaser or necessary for the lawful
consummation by the Seller and Shareholders of the transactions contemplated
hereby;
9) To the best of counsel's Knowledge, the representations and
warranties of Seller and Shareholders contained herein are true and correct in
all material respects;
10) The Bulk Transfers Act, as adopted in ______. Stat. (S) ______ et
seq., is not applicable to the transactions contemplated hereby; and
11) Seller has obtained all licenses, certificates, franchises,
permits, consents and approvals of each and every Governmental Body having
jurisdiction over Seller necessary to own the Assets and to operate and carry on
the Business, and all such licenses, certificates, franchises, permits, consents
and approvals are valid and in full force and effect.
3
<PAGE>
EXHIBIT H
PURCHASER'S CLOSING CERTIFICATE
The undersigned, being a duly acting, appointed and authorized officer of
BAB Holdings, Inc., an Illinois corporation (the "Purchaser"), hereby certifies
to The American Bagel Corporation, a Maryland corporation, and Almike
Enterprises, Inc., a Maryland corporation (collectively, the "Sellers"), and
Michael D. Robinson and Alan R. Manstof (collectively, the "Shareholders"),
pursuant to Section 12.3(b) of the Asset Purchase Agreement made and entered
into as of the ____ day of ____________________, 199__, by and among the
Purchaser, the Sellers and the Shareholders (the "Purchase Agreement"), as
follows:
1. All of the representations and warranties made by Purchaser in the
Purchase Agreement, including the documents, instruments and
agreements to be executed and/or delivered by Purchaser pursuant to
the Purchase Agreement, are true and correct in all material respects
on and as of the date hereof with the same force and effect as though
such representations and warranties had been made on or given on and
as of the date hereof; and
2. The Purchaser has performed and complied in all material respects with
all of its covenants and obligations under the Purchase Agreement
which were to be performed and complied with by it prior to or on the
date hereof.
IN WITNESS WHEREOF, I have executed this Purchaser's Closing Certificate as
of the ____ day of ______________, 199___.
BAB HOLDINGS, INC.
By:____________________________
Its: _______________________
1
<PAGE>
EXHIBIT 5
347-0367
November 1, 1996
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: BAB Holdings, Inc.
Registration Statement on Form S-1
Our File No. 54388.004
Dear Sir or Madam:
We are counsel for BAB Holdings, Inc. (the "Company") in connection with
the filing with the Commission of a Registration Statement on Form S-1 (the
"Registration Statement") for registration of 3,800,000 shares of common stock
of the Company, no par value (the "Common Stock") (the "Shares").
We have examined and are familiar with such documents and corporate records
of the Company as we have deemed necessary and appropriate for the purpose of
rendering the following opinion. Based on the foregoing, we are of the opinion
that:
When the Shares of Common Stock are issued by the Company pursuant to the
Registration Statement, such Shares will, when sold pursuant to the
Registration Statement, be validly issued, fully paid and nonassessable.
<PAGE>
Securities and Exchange Commission
November 1, 1996
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement and the Prospectus.
Very truly yours,
MOSS & BARNETT,
A PROFESSIONAL ASSOCIATION
By /s/ Janna R. Severance
------------------------
Janna R. Severance
JRS/mra
<PAGE>
EXHIBIT 11.1
BAB HOLDINGS, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
9 MONTHS 9 MONTHS FISCAL FISCAL FISCAL
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
8/31/96 8/31/95 11/30/95 11/30/94 11/30/93
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Primary EPS
Net income (loss)....... $ 292,087 $ (215,620) $ (435,670) $ (348,210) $ (311,366)
Less preferred stock
dividend............... -- (4,000) (4,000) (23,800) (13,400)
---------- ---------- ---------- ---------- ----------
Loss applicable to
common............. 292,087 (219,620) (439,670) (372,010) (324,766)
Weighted average shares
outstanding............ 7,250,672 3,209,345 3,382,917 2,371,260 2,536,260
Net income (loss) per
common share........... $ 0.0403 $ (0.0684) $ (0.1300) $ (0.1569) $ (0.1280)
Fully dilutive EPS
Net income (loss) from
operations............. $ 292,087 $ (215,620) $ (435,670) $ (348,210) $ (311,366)
Less preferred stock
dividend............... -- (4,000) (4,000) (23,800) (13,400)
Add back "as if" stock
dividend............... -- 4,000 4,000 4,200 --
Bond interest expense
"as if" Converted...... -- 6,525 6,525 -- --
---------- ---------- ---------- ---------- ----------
Loss applicable to
common............. 292,087 (209,095) (429,145) (367,810) (324,766)
Weighted average shares
outstanding............ 7,337,226 3,445,797 3,560,256 2,536,260 2,536,260
Net income (loss) per
common share,
fully diluted.......... $ 0.0398 $ (0.0607) $ (0.1205) $ (0.1450) $ (0.1280)
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF BAB HOLDINGS, INC.
NAME STATE OF INCORPORATION
- ------------------------------------ ------------------------
BAB Systems, Inc. Illinois
BAB Operations, Inc. Illinois
Systems Investments, Inc./(1)/ Illinois
Brewster's Franchise Corporation Illinois
/(1)/ A wholly-owned subsidiary of BAB Systems, Inc.
<PAGE>
EXHIBIT 23.1
We consent to the reference of our firm under the caption "Experts," in the
"Selected Consolidated Financial Information of the Company (BAB Holdings,
Inc.)" and the "Selected Combined Financial Information of Chesapeake Bagel
Bakery" and to the use of our report dated December 22, 1995, except for Note
10, as to which the date is February 12, 1996 for BAB Holdings, Inc., our
report dated October 7, 1996 for Chesapeake Bagel Bakery and our report dated
October 30, 1996 for Bagels Unlimited, Inc., in the Registration Statement and
the related Prospectus of BAB Holdings, Inc. for the registration of 3,800,000
shares of its common stock.
Ernst & Young LLP
Chicago, Illinois
October 31, 1996
<PAGE>
EXHIBIT 23.2
We consent to the reference of our firm under the caption "Experts" and to
the use of our report dated June 13, 1996 for Bagels Unlimited, Inc., in the
Registration statement (Form S-1 No. 33-0000000) and the related Prospectus of
BAB Holdings, Inc. for the registration of 3,800,000 shares of its common
stock.
Muehl, Steffes & Krueger, S.C.
October 31, 1996
<PAGE>
EXHIBIT 23.3
We consent to the reference of our firm under the caption "Experts" and to
the use of our reports dated May 6, 1996 and November 17, 1995 for Strathmore
Bagels Franchise Corporation, in the Registration Statement on Form S-1 and
the related Prospectus of BAB Holdings, Inc. for the registration of 3,800,000
shares of its common stock.
Buonanno & Conolly, CPA's
October 31, 1996
