FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1996
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 0-27068
BAB Holdings, Inc.
(Name of small business issuer in its charter)
Illinois 36-3857339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (312) 380-6100
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,009,598 shares of Common Stock, as
of June 30, 1996.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements...............................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................8
PART II
Item 1. Legal Proceedings.................................................14
Item 2. Changes in Securities.............................................14
Item 3. Defaults Upon Senior Securities...................................14
Item 4. Submission of Matters to a Vote of Security Holders...............14
Item 5. Other Information.................................................14
Item 6. Exhibits and Reports on Form 8-K..................................14
SIGNATURE 16
INDEX TO EXHIBITS............................................................17
PART I
ITEM 1. FINANCIAL STATEMENTS
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
May 31, 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $222,000 $ 5,655,697
Other current assets 594,707
-----------
Total current assets 6,250,404
Property, plant, and equipment, net of
accumulated depreciation of $ 137,451 1,363,554
Goodwill, net of accumulated
amortization of $3,180 2,933,439
Other assets and other intangible assets,
net of accumulated amortization of $67,319 988,770
-----------
$11,536,167
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Deferred franchise fee revenue $ 611,500
Current portion of long-term debt 7,249
Other current liabilities 606,876
-----------
Total current liabilities 1,225,625
Long-term debt, less current portion 4,424
Shareholders' equity 10,306,118
-----------
$11,536,167
===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MAY 31, MAY 31,
1996 1995
----------- -----------
REVENUES
Net sales by Company-owned stores $ 548,828 $ 113,651
Franchise fees 190,000 196,500
Royalty fees from franchised stores 348,822 175,761
Other 27,219 1,065
----------- -----------
1,114,869 486,977
OPERATING COSTS AND EXPENSES
Company-owned stores:
Food, beverage, and paper costs 178,505 38,263
Payroll-related expenses 176,701 38,215
Occupancy and other operating expenses 110,672 24,132
Depreciation and amortization 29,088 6,303
----------- -----------
494,966 106,913
Selling, general, and administrative expenses:
Payroll-related expenses 289,717 185,995
Professional service fees 110,360 85,269
Depreciation and amortization 28,213 5,514
Other 216,854 140,979
----------- -----------
645,144 417,757
----------- -----------
1,140,110 524,670
----------- -----------
Loss before interest (25,241) (37,693)
Interest expense (183) (7,775)
Interest income 90,256 1,431
----------- -----------
Net income (loss) 64,832 (44,037)
Preferred stock dividends accumulated -- (3,791)
----------- -----------
Net income (loss) attributable
to common shareholders $ 64,832 $ (47,828)
=========== ===========
Net income (loss) attributable
to common and common equivalent share:
Primary $ 0.01 $ (0.01)
=========== ===========
Fully diluted $ 0.01 $ (0.01)
=========== ===========
Average number of common and common equivalent
shares used in calculation:
Primary 7,350,290 3,324,301
=========== ===========
Fully diluted 7,381,545 3,401,741
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
SIX MONTHS ENDED
MAY 31, MAY 31,
1996 1995
----------- -----------
REVENUES
Net sales by Company-owned stores $ 784,999 $ 210,420
Franchise fees 491,500 410,000
Royalty fees from franchised stores 634,073 304,560
Other 29,938 2,024
----------- -----------
1,940,510 927,004
OPERATING COSTS AND EXPENSES
Company-owned stores:
Food, beverage, and paper costs 255,950 70,012
Payroll-related expenses 255,147 72,861
Occupancy and other operating expenses 187,288 49,096
Depreciation and amortization 48,025 12,543
----------- -----------
746,410 204,512
Selling, general, and administrative expenses:
Payroll-related expenses 584,467 386,517
Professional service fees 203,720 170,538
Depreciation and amortization 42,932 10,182
Other 408,526 266,564
----------- -----------
1,239,645 833,801
----------- -----------
1,986,055 1,038,313
----------- -----------
Loss before interest (45,545) (111,309)
Interest expense (4,155) (15,337)
Interest income 193,344 2,460
----------- -----------
Net income (loss) 143,644 (124,186)
Preferred stock dividends accumulated -- (5,944)
----------- -----------
Net income (loss) attributable to common shareholders $ 143,644 $ (130,130)
=========== ===========
Net income (loss) attributable to common
and common equivalent share:
Primary $ 0.02 $ (0.04)
=========== ===========
Fully diluted $ 0.02 $ (0.03)
=========== ===========
Average number of common and common equivalent
shares used in calculation:
Primary 7,178,219 3,055,801
=========== ===========
Fully diluted 7,232,153 3,401,741
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
MAY 31, MAY 31,
1996 1995
----------- ---------
OPERATING ACTIVITIES
Net cash (used for) provided by operating activities $ (371,726) $ 58,280
INVESTING ACTIVITIES
Acquisition of assets (2,075,157) --
Purchases of other property, plant, and equipment (264,100) (78,153)
Other (162,591) 1,900
----------- ---------
Net cash used for investing activities (2,501,848) (76,253)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,020,000 --
Other (169,738) 6,502
----------- ---------
Net cash provided by financing activities 850,262 6,502
----------- ---------
Net decrease in cash and cash equivalents (2,023,312) (11,471)
Cash and cash equivalents at beginning of year 7,679,009 410,377
----------- ---------
Cash and cash equivalents at end of period $ 5,655,697 $ 398,906
=========== =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB Holdings, Inc.
Notes to Unaudited Condensed 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. Brewster's
Franchise Corporation (BFC), an Illinois Corporation, was incorporated on
February 15, 1996. BFC, a wholly owned subsidiary of the Company, was
established to franchise "Brewster's" 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 account-
ing 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 May 31, 1996, are as follows:
Stores opened:
Company-owned 7
Franchisee-owned 79
Licensed 34
-------------------
120
Unopened franchised stores for which
an agreement has been sold:
Franchise agreement 29
Area development agreement 37
-------------------
66
-------------------
Total 186
===================
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 dividends accumulated and interest expense on securities
converted during the period.
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. 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. The allocation 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.
The following unaudited pro forma condensed financial information reflects the
acquisition of BUI by the Company as if it had occurred on December 1, 1994. The
Following interim period and quarter pro forma information is based on the
historical unaudited consolidated statements of operations of the Company for
the interim fiscal periods ended May 31, 1996 and 1995, and the unaudited
statements of operations of BUI for the six months and three months ended May
31, 1996 and 1995. This unaudited condensed pro forma financial information
should be read in conjunction with the historical financial statements and
footnotes thereto of the Company which have been filed as part of Form 10-KSB
for the fiscal year ended November 30, 1995, and in conjunction with the
financial statements and footnotes of BUI for the fiscal year ended February 29,
1996 as filed as exhibit 10.27 to Form 8-K/A dated July 12, 1996.
This unaudited pro forma condensed financial information is not necessarily
indicative of what the actual consolidated results of operations would have been
if the acquisition of assets had been completed as set forth above, nor does it
purport to represent the consolidated results of operations of the Company for
future periods.
<TABLE>
<CAPTION>
Pro Forma
---------------------------------------------------------
Three Months Ended Six Months Ended
-------------------------- ---------------------------
May 31, May 31, May 31, May 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,607,432 $ 1,130,125 $ 3,033,108 $ 2,015,599
Operating costs and expenses 1,658,078 1,201,897 3,190,970 2,186,742
----------- ----------- ----------- -----------
Loss from operations (50,646) (71,772) (157,862) (171,143)
Other income (expense), net 81,259 (17,853) 168,871 (32,357)
----------- ----------- ----------- -----------
Net income (loss) $ 30,613 $ (89,625) $ 11,009 $ (203,500)
Perferred stock dividend accumulated -- 3,791 -- 5,944
----------- ----------- ----------- -----------
Net income (loss) attributable to
common shareholders $ 30,613 $ (93,416) $ 11,009 $ (209,444)
=========== =========== =========== ===========
Net income (loss) attributable to
common share:
Primary $ -- $ (0.03) $ -- $ (0.07)
=========== =========== =========== ===========
Fully diluted $ -- $ (0.03) $ -- $ (0.06)
=========== =========== =========== ===========
Average number of shares used:
Primary 7,364,000 3,336,801 7,204,566 3,080,801
=========== =========== =========== ===========
Fully diluted 7,397,221 3,414,241 7,262,863 3,426,741
=========== =========== =========== ===========
</TABLE>
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 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 International, Inc. (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. These bagel-deli and display units are 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 allocation 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 $2,210,000 has been recorded as goodwill and is
being amortized on a straight-line basis over 40 years.
7. 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.
8. SUBSEQUENT EVENTS
On June 26, 1996, the Company entered into a letter of intent to acquire the
assets of the American Bagel Company and AlMike Enterprises, Inc. (collectively
known as Chesapeake Bagel Bakery (or Chesapeake)), together with all of
Chesapeake's assets relating to the operation of company-owned and franchised
bagel stores. The Company is currently involved in due diligence procedures and
in negotiations in the drafting of the definitive purchase agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The selected financial data contained herein have been derived from the
condensed consolidated financial statements of BAB Holdings, Inc. (the Company)
included in Item 1. above. The data should be read in conjunction with the
condensed consolidated financial statements and notes thereto.
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the development of the Company's business, the markets for the Company's
products, anticipated capital expenditures, and the effects of completed and
proposed acquisitions, and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements.
GENERAL
The Company is primarily engaged in the business of franchising "Big
Apple Bagels" bagel stores. The first Company-owned store was opened in July
1993 and the second Company-owned store opened in September 1995. With the
proceeds of the Company's November 1995 initial public offering, the Company
intends to significantly increase its Company-owned store operations in fiscal
1996 through new development and acquisitions, as well as to continue expansion
of the franchise operations. In February 1996, the Company acquired the assets
of Brewster's Coffee Company, Inc. and began dual branding Big Apple Bagels
bagels and Brewster's coffee products as well as developing Brewster's Coffee
franchised stores.
Since July 1993, the Company has offered single store and area
development Big Apple Bagels franchises throughout the United States and Canada.
The Company is currently permitted to offer and sell its Big Apple Bagels
franchises in 48 states in the United States and in most Canadian provinces and,
as of May 31, 1996, had sold a total of 143 Big Apple Bagels franchise stores
through franchise and area development agreements in 22 U.S. states and Canada.
The 143 Big Apple Bagels franchise stores sold as of May 31, 1996, include 37
units under area development agreements for which franchise agreements are not
yet signed. On May 31, 1996, 77 Big Apple Bagels franchise stores were operating
in 17 U.S. states and Canada.
In its February 1996 acquisition of Brewster's Coffee Company, Inc.,
the Company also acquired the rights to two Brewster's franchised units which
are currently in operation. The Company recently completed the process of
registering to sell Brewster's franchises in the United States and Canada and in
June 1996, included the Brewster's concept in a national franchise sales
advertising campaign.
From inception in November 1992 through May 31, 1996, the Company and
its franchise system have grown to seven Company-owned and 79 franchised stores
in operation, including two Brewster's units. This rapid expansion in franchise
operations significantly affects the comparability of results of operations of
the Company in several ways, particularly in the recognition of initial
franchise fee revenue which is currently $20,000 for an initial Big Apple Bagels
franchise store and $17,500 for an initial Brewster's Coffee franchise store. In
accordance with generally accepted accounting principles, initial franchise fee
revenue and the direct, incremental costs associated with such revenue, are
deferred until an individual franchise store is opened. However, prior to such
revenue recognition, the Company, as a growing franchise system, incurs
significant indirect administrative, promotional and training expenses which are
not deferred.
The Company's revenues are derived primarily from the operations of the
Company-owned stores, initial franchise fees and ongoing royalty fees paid to
the Company by its franchisees, and from interest income on cash balances.
Revenues have fluctuated from quarter-to-quarter depending on, among other
things, store openings and related revenues. As the total number of
Company-owned and franchise stores increases, the relative effects of franchise
store openings on the results of operations for any period should decrease.
Management anticipates that overall revenues will continue to increase
significantly in the second half of fiscal year 1996 if the additional
Company-owned units are opened, as planned, and if the expansion of franchise
units in operation continues. The Brewster's acquisition also enables the
Company to provide Company-owned stores, franchised stores and a number of
wholesale accounts with Brewster's coffee, a high quality, freshly roasted
arabica coffee bean. Throughout the second quarter of fiscal 1996, the Company
offered the Brewster's Coffee program to its existing franchise stores, often
replacing more expensive national brands, and was pleased that over 70% of the
franchise system had completed the implementation of the program. The Company
anticipates that sales of Brewster's Coffee to Big Apple Bagels franchisees and
several other wholesale customers will become more significant by the end of
fiscal 1996 and that these revenues will exceed directly related expenses.
Additionally, the May 1996 acquisition of the assets of Strathmore
Bagels Franchise Corp. marks the Company's entry into the "par-baked" bagel
business -- the sale of a partially baked and then frozen bagel to
non-traditional retail units (e.g., airports, hospitals, schools, malls etc.).
Generally, the production of the fresh "from scratch" Big Apple Bagels bagel is
often not efficient in these types of locations. Customers at these units are
generally buying a single bagel to eat immediately rather than the dozens of
bagels which are often sold at the traditional retail store.
Through the Strathmore acquisition, the Company acquired a licensing
contract with Host International, Inc. (Host Marriott) which added Big Apple
Bagels as the only approved bagel / deli concept in Host Marriott's portfolio of
nationally branded restaurant concepts which are operated in airports, travel
plazas and casinos. The Company is in the process of converting the 34 existing
Strathmore Bagels units which are owned and operated by Host Marriott into Big
Apple Bagels units. These licensed units pay a 3% royalty based on unit retail
sales and purchase the par-baked bagels through the Company. The Company
anticipates that additional revenues will be generated through the sale of
par-baked bagels; an example of which is the June 1996 licensing contract signed
with Mrs. Field's Cookies. Representatives of the Mrs. Field's organization
expect that Big Apple Bagels bagels will be sold in 250 - 300 Mrs. Field's
retail outlets by the end of 1996.
Total food, beverage and paper costs and total labor and other store
overhead costs will increase as additional Company-owned stores are opened.
However, because the Company expects to negotiate additional volume discounts
from vendors, operating costs per store are expected to improve over that
experienced to date in the first two Company-owned stores. Management
anticipates additional savings will be realized as a result of its decision to
purchase all food, beverage and paper products from one national distributor
which began in May 1996. Further, the Company anticipates that both franchised
and Company-owned stores will continue to benefit from purchasing Brewster's
coffee over other, more expensive, premium branded coffee products that had been
purchased in the past.
Management believes that the anticipated growth in franchise operations
during the remainder of fiscal year 1996 can be supported by the hiring of
relatively few additional field support and administrative personnel. While the
growth anticipated in the Company-owned store operations will require additional
personnel, management believes the majority of these individuals are store
personnel and store managers. Management also believes that professional fees
should decrease as a percentage of revenues within the next fiscal year.
Further, franchise-related expenses, or those direct expenses incurred with the
sale and opening of a franchise store which are expensed upon the opening of the
franchise store, are expected to increase, in total, as the number of franchise
store openings increases; but are expected to decrease on a per store basis,
reflecting efficiencies resulting from increases in volume.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1996 VERSUS THE THREE MONTHS ENDED MAY 31, 1995
Total revenues increased 129% to $1,115,000 for the three months ended
May 31, 1996 from the year-ago quarter. A substantial portion of the increase in
revenues is attributable to sales from Company-owned stores which rose over 383%
to $549,000 for the three months ended May 31, 1996 versus $114,000 in the
previous year. On May 1, 1996, the Company completed the acquisition of five
franchised Big Apple Bagels stores in the Milwaukee market bringing the total
number of Company-owned stores in operation to 7 versus 1 at May 31, 1995.
Royalty revenues rose by $173,000, or 98%, primarily as a result of the greater
number of franchised stores operating during the first quarter of fiscal 1996 --
79 on May 31, 1996 versus 43 on May 31, 1995. The unaudited pro forma condensed
financial information presented in the notes to the condensed consolidated
financial statements reflects the effects of the acquisition of BUI as if the
transaction had occurred on December 1, 1994. Pro forma revenues for the three
months ended May 31, 1996 increased $477,000 or 42% from the year-ago quarter
due, in part, to increased sales volumes of the Milwaukee-based stores as well
as the addition of the fifth store open during the 1996 period and a full
quarter's sales activity for the fourth store which had opened in April 1995.
Cost of food, beverage and paper related to the Company-owned stores
decreased to 32.5% from 33.7% in the year-ago period. 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 as well as savings experienced from using one national
distributor of product to both Company-owned and franchised stores.
Total operating costs and expenses relative to Company-owned stores
decreased to 90% of store revenues versus 94% in the year-ago quarter and cash
flow from store operations improved to 15% from 11% in the year-ago quarter.
While management was pleased with the improvement, they anticipate further
improvement, in results of store operations with the implementation of
cost-saving programs in the five Milwaukee-based stores which were purchased on
May 1, 1996. Pro forma operating costs and expenses increased $456,000 or 38%
from the year ago quarter due, in part, to the related increase in store sales
volumes, the amortization of goodwill and other intangibles recorded in
connection with the acquisition, and certain administrative costs incurred
within the BUI organization. A significant portion of the administrative
expenses incurred by the BUI organization are currently available from the
Company and thus, are not anticipated to have a significant impact upon ongoing
operations of the Company.
Total selling, general and administrative expenses rose 54% in the
current fiscal quarter -from $418,000 for the three months ended May 31, 1995 to
$645,000 for the three months ended May 31, 1996. Approximately $104,000 of this
increase is due to the hiring of additional personnel to support the growth in
Company-owned store and franchise operations and salary increases granted to
several management-level employees in November 1995. The remainder of the
increase can be attributed to additional costs incurred at the corporate
headquarters to support the increased number of corporate employees which
totaled 24 at May 31, 1996 versus 17 at May 31, 1995. Additionally,
administrative overhead costs were incurred to support the increased base of
franchise stores open and in development which totaled 145 at May 31, 1996
versus 89 at May 31, 1995. While total selling, general and administrative costs
increased, these expenses declined from 86% of total revenues in the three
months ended May 31, 1995 to 58% of total revenues in the three months ended May
31, 1996. 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 combined with that of Company store operations will exceed
anticipated costs.
Net interest income totaled approximately $90,000 in the first quarter
of fiscal 1996 versus net expense of approximately $6,000 in the 1995 period.
Substantial income was generated from the short-term investment of a portion of
the net proceeds of the Company's November 1995 initial public offering and the
January 1996 exercise of the underwriter's over-allotment exercise which,
together, totaled approximately $7.2 million. At May 31, 1996, the Company's
cash balance totaled approximately $5.7 million.
The Company generated net income attributable to common shareholders of
approximately $65,000 or $.01 per common and common equivalent share for the
three months ended May 31, 1996, as compared to a net loss attributable to
common shareholders of approximately $(48,000) or $(.01) per common and common
equivalent share for the three months ended May 31, 1995. The average number of
shares outstanding increased 121% to 7,350,290 from 3,324,301 during the
respective periods resulting primarily from the August 1995 private placement of
508,475 shares of common stock, the November 1995 initial public offering of
2.55 million shares of common stock, and the January 1996 issuance of 382,500
shares of common stock resulting from the exercise of the underwriter's
over-allotment option. The share information has been adjusted to reflect the
three-for-two stock split effected in the form of a 50% dividend which was
declared by the Company's Board of Directors on March 28, 1996 to shareholders
of record on April 12, 1996 and distributed on April 26, 1996. Had the BUI
acquisition occurred on December 1, 1994, the pro forma net income attributable
to common shareholders for the three months ended May 31, 1996 would have been
$31,000 or nil per common and common requivalent share, as compared to a net
loss of $(93,000) or $(.03) per common and common equivalent share in the
year-ago quarter. The pro forma average number of shares outstanding during the
three months ended May 31, 1996 was 7,364,000 versus 3,336,801 in the 1995
period.
SIX MONTHS ENDED MAY 31, 1996 VERSUS THE SIX MONTHS ENDED MAY 31, 1995
Total revenues increased 109% to $1,941,000 for the six months ended
May 31, 1996 from the year-ago quarter. A substantial portion of the increase in
revenues is attributable to sales from Company-owned stores which rose over 273%
to $785,000 for the six months ended May 31, 1996 versus $210,000 in the
previous year. On May 1, 1996, the Company completed the acquisition of five
franchised Big Apple Bagels stores in the Milwaukee market bringing the total
number of Company-owned stores in operation to 7 versus 1 at May 31, 1995.
Royalty revenues rose by $329,000, or 108%, primarily as a result of the greater
number of franchised stores operating during the fiscal 1996 period of fiscal
1996 -- 79 on May 31, 1996 versus 43 on May 31, 1995. The unaudited pro forma
condensed financial information presented in the notes to the condensed
consolidated financial statements reflects the effects of the acquisition of
BUI as if the transaction had occurred on December 1, 1994. Pro forma revenues
for the six months ended May 31, 1996 increased $1,018,000 or 50% from the
year-ago period due, in part, to increased sales volumes of the Milwaukee-based
stores as well as the addition of the fifth store opened in April 1995.
Cost of food, beverage and paper related to the Company-owned stores
decreased to 32.6% from 33.3% in the year-ago period. 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 as well as savings experienced from using one national
distributor of product to both Company-owned and franchised stores.
Total operating costs and expenses relative to Company-owned stores for
the six months ended May 31, 1995 improved only slightly from those incurred
during the six months ended May 31, 1995. Compared to the more significant
differences noted in comparing the three months ended May 31 in the two fiscal
years, management was pleased by the effects of the addition of six
Company-owned stores since May 31, 1995 and anticipate further improvement in
results of store operations with the implementation of cost-saving programs in
the five Milwaukee-based stores which were purchased on May 1, 1996. Pro forma
operating costs and expenses increased $1,004,000 or 46% from the year ago
period due, in part, to the related increase in store sales volumes, the
amortization of goodwill and other intangibles recorded in connection with the
acquisition, and certain administrative costs incurred with the BUI
organization. A significant portion of the administrative expenses incurred by
the BUI organization are currently available from the Company and thus, are not
anticipated to have a significant impact upon ongoing operations of the Company.
Total selling, general and administrative expenses rose by $406,000
from $834,000 for the six months ended May 31, 1995 to $1,240,000 for the six
months ended May 31, 1996. Approximately $198,000 of this increase is due to the
hiring of additional personnel to support the growth in Company-owned store and
franchise operations and salary increases granted to several management-level
employees in November 1995. The remainder of the increase can be attributed to
additional costs incurred at the corporate headquarters to support the increased
number of corporate employees which totaled 24 at May 31, 1996 versus 17 at May
31, 1995. Additionally, administrative overhead costs were incurred to support
the increased base of franchise stores open and in development which totaled 145
at May 31, 1996 versus 89 at May 31, 1995. While total selling, general and
administrative costs increased, these expenses declined from 90% of total
revenues in the six months ended May 31, 1995 to 64% of total revenues in the
six months ended May 31, 1996. 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 combined with that of Company store operations will
exceed anticipated costs.
Net interest income totaled approximately $189,000 in the first quarter
of fiscal 1996 versus net interest expense of approximately $13,000 in the 1995
period. Substantial income was generated from short-term investment of a portion
of the net proceeds of the Company's November 1995 initial public offering and
the January 1996 exercise of the underwriter's over-allotment exercise which,
together, totaled approximately $7.2 million. At May 31, 1996, the Company's
cash balance totaled approximately $5.7 million.
The Company generated net income attributable to common shareholders of
approximately $144,000 or $.02 per common and common equivalent share for the
six months ended May 31, 1996, as compared to a net loss attributable to common
shareholders of approximately $(130,000) or $(.04) per common and commnon
equivalent share for the six months ended May 31, 1995. The average number of
shares outstanding increased 135% to 7,178,219 from 3,055,801 during the
respective periods resulting primarily from the August 1995 private placement of
508,475 shares of common stock, the November 1995 initial public offering of
2.55 million shares of common stock, and the January 1996 issuance of 382,500
shares of common stock resulting from the exercise of the underwriter's
over-allotment option. The share information has been adjusted to reflect the
three-for-two stock split effected in the form of a 50% dividend which was
declared by the Company's Board of Directors on March 28, 1996 to shareholders
of record on April 12, 1996 and distributed on April 26, 1996. Had the BUI
acquisition occurred on December 1, 1994, the pro forma net income attributable
to common shareholders for the six months ended May 31, 1996 would have been
$11,000 or nil per common and common equivalent share, as compared to a net loss
of $(209,000) or $(.07) per common and common equivalent share in the year-ago
period. The pro forma average number of shares outstanding during the six months
ended May 31, 1996 was 7,204,566 versus 3,080,801 in the 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a negative cash flow from operating activities
for the six months ended May 31, 1996 of approximately $372,000 versus a net
positive cash flow of approximately $58,000 for the 1995 period. The use of
funds by operating activities during the six months ended May 31, 1996 can
primarily be attributed to the decrease in deferred franchise fee revenue of
$191,000 and an increases in notes receivable and accounts receivable of $94,000
and $73,000, respectively.
Cash used for investing activities during the six months ended May 31,
1996 totaled $2,501,000, which consisted primarily of the following
acquisitions: (i) the February 1996 acquisition of the assets of Brewster's
Coffee Company, Inc., including the Brewster's coffee trademark and other
intangible assets of approximately $148,000 and the purchase of two
free-standing, double drive through units totaling $90,000, (ii) the May 1996
acquisition of the assets of Bagels Unlimited, Inc. which included five existing
Big Apple Bagels stores operating in Milwaukee, Wisconsin for $975,000, and
(iii) the May 1996 acquisition of the assets of Strathmore Bagels Franchise
Corp. which included a licensing agreement with Host Marriott and contract
rights related to 34 licensed units which are owned and operated by Host
Marriott for $862,000. During the six months ended May 31, 1995, cash used for
investing activities totaled approximately $76,000 and consisted primarily of
miscellaneous purchases of property, plant and equipment at the corporate
headquarters.
In December 1995, the Company issued one additional $10,000 convertible
bond, which bore interest at 8% per annum, payable on a semi-annual basis;
bringing the total balance of convertible bonds outstanding to $370,000. On
December 29, 1995, the Company notified bondholders of its intent to redeem the
outstanding principal balance. Bondholders elected to convert $200,160 of
principal to 75,060 shares of Common Stock (shares adjusted for the April stock
split). The remaining bonds were redeemed for approximately $31,000 in February
1996.
On January 2, 1996, the Company sold an additional 382,500 shares of
Common Stock for a public offering price of $2.66 per share upon exercise in
full of the underwriter's over-allotment option, for an aggregate of $1,020,000
(price and shares adjusted for the April stock split). 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.
While the Company believes that its capital is sufficient to achieve
its proposed internal expansion of Company-owned and franchise stores through
1996, the development of additional Company-owned stores following the
expenditure of the net proceeds of its recently completed public offering may be
financed from operations, equipment and/or construction financing, and,
potentially, future equity or debt financing. Additionally, the Company is
currently finalizing its plan to finance the potential acquisition of Chesapeake
Bagel Bakery which was announced in June of 1996. Chesapeake is the fourth
largest bagel chain in the nation with over 130 franchised units and 8
company-owned stores currently in operation.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1996, Systems filed an arbitration action against a
franchisee for 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 Systems 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 so indicated by the provisions of the
franchise agreement.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the
fiscal quarter ended May 31, 1996 and from such quarter end to the date of
this report:
Form 8-K filed on May 15, 1996 regarding the acquisition of the assets of Bagels
Unlimited, Inc.
Form 8-K filed on June 5, 1996 regarding the acquisition of the assets of
Strathmore Bagels Franchise Corp.
Form 8-K/A filed on July 12, 1996 amending the May 15, 1996 Form 8-K filing
regarding the acquisition of the assets of Bagels Unlimited, Inc.
EXHIBITS
The following exhibits are filed herewith.
Exhibit
No. Description of Exhibit
*3.1 Amended Articles of Incorporation of the Company
*3.2 Bylaws of the Company, as amended
*4.1 Form of Stock Certificate evidencing Common Stock, no par value
*4.2 Forms of Lock-up Agreement executed by certain shareholders
*4.3 Form of 8% Convertible Bond due July 1, 2002
*4.4 Amended Form of Investor Warrant
*4.5 Subscription Agreement with The Investor dated August 31, 1995
*4.6 Escrow Agreement with the Minnesota Department of Commerce with
respect to the Investor Warrant
*10.1 Form of Franchise Agreement
*10.2 Form of Franchise Agreement - Satellite
*10.3 Form of Franchise Agreement - Wholesale
*10.4 Form of Area Development Agreement
*10.5 Confidentiality and Non-Competition Agreement with Franchisees
*10.6 Form of Confidentiality Agreement with Employees
*10.7 Licensing Agreement dated November 20, 1992 between the Company and
Big Apple Bagels, Inc.
*10.8 Assignment of Royalty Mark & Trademark to the Company by Big Apple
Bagels, Inc. dated November 20, 1992
*10.9 Agreement dated September 14, 1995 among the Company, Big Apple
Bagels, Inc. and Paul C. Stolzer
*10.10 Leases dated November 2, 1994 and February 14, 1995 for principal
executive office
*10.11 1995 Long-Term Incentive and Stock Option Plan
*10.12 1995 Outside Directors Stock Option Plan
*10.13 Settlement Agreement with Timothy Williams d/b/a Big Apple Deli and
Stipulated Dismissal with Prejudice
**10.14 Consulting agreement dated February 16, 1996 between Paul C. Stolzer
and BAB Holdings, Inc.
**10.15 Asset purchase agreement dated February 2, 1996 between BAB Holdings,
Inc., Brewster's Coffee Company, Inc. and Peter D. Grumhaus
**10.16 $550,000 Revolving line of credit loan dated January 31, 1996
(executed February 12, 1996) by BAB Systems, Inc. to Bagels Unlimited
Inc.
^10.17 Asset Purchase Agreement by and among BAB Systems, Inc., Bagels
Unlimited, Inc. and Donald Nelson and Mary Ann Varichak dated May 1,
1996 (without schedules)
^10.18 Non Competition Agreement by and among BAB Holdings, Inc. and Donald
Nelson and Mary Ann Varichak dated May 1, 1996
^10.19 Stock Option Agreement between BAB Holdings, Inc. and Bagels
Unlimited, Inc. dated May 1, 1996
^10.20 Registration Rights Agreement between BAB Holdings, Inc. and Bagels
Unlimited, Inc. dated May 1, 1996
^^10.21 Asset Purchase Agreement by and between BAB Holdings, Inc. and
Strathmore Bagels Franchise Corp. dated May 21, 1996 (without
schedules)
^^10.22 Stock Option Agreement dated May 21, 1996 between BAB Holdings, Inc.
and Strathmore Bagels Franchise Corp. dated May 21, 1996
^^10.23 Registration Rights Agreement dated May 21, 1996 between BAB Holdings,
Inc. and Strathmore Bagels Franchise Corp. dated May 21, 1996
^^10.24 Non-Competition Agreement dated May 21, 1996 between BAB Holdings,
Inc. and Strathmore Bagels Franchise Corp., Jack Freedman and Glen
Stuerman dated May 21, 1996
^^10.25 Memorandum of Understanding Regarding Form of License Agreement
effective November 30, 1995 between Strathmore Bagels Franchise Corp.
and Host International, Inc.
^^10.26 Consent to Assignment between Strathmore Bagels Franchise Corp.
and Host International, Inc. dated March 13, 1996 (as amended May 21,
1996)
^10.27 Historical Financial Statements of Bagels Unlimited, Inc. for the
periods ended February 29, 1996 and February 28, 1995
11.0 Computation of earnings per share
**21.1 Subsidiaries of BAB Holdings, Inc.
27.01 Financial Data Schedule
* Incorporated herein by reference to the exhibits of the same Exh. No.
filed as a part of Registration Statement on Form SB-2, Commission
File No. 33-98060C, effective November 27, 1995.
** Incorporated herein by reference to the exhibits of the same Exh. No.
filed as a part of the Form 10-KSB for the fiscal year ended November
30, 1995 which was filed on or about February 26, 1996.
^ Incorporated herein by reference to the exhibits of the same Exh. No.
filed as a part of the Form 8-K/A which was filed on or about July 12,
1996.
^^ Incorporated herein by reference to the exhibits of the same Exh. No.
filed as a part of the Form 8-K which was filed on or about June 5,
1996.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BAB HOLDINGS, INC.
Dated: July 18, 1996 By: /s/ THEODORE P. NONCEK
--------------------
Theodore P. Noncek, Chief Financial Officer
(Principal accounting and financial
officer)
INDEX
NUMBER DESCRIPTION PAGE #
11.0 Computation of earnings per share
27.01
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
3 MONTHS ENDED MAY 31, 1996 V. 3 MONTHS ENDED MAY 31, 1995
AND 6 MONTHS ENDED MAY 31, 1996 V. 6 MONTHS ENDED MAY 31, 1995
3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS
5/31/96 5/31/95 5/31/96 5/31/95
<S> <C> <C> <C> <C>
PRIMARY EPS
Net income (loss) from operations 64,832.10 (44,037.00) 143,644.81 (124,185.68)
Less pref. stock dividend - (3,790.95) - (5,944.31)
-------------------------------- -------------------------------
Loss applicable to common 64,832.10 (47,827.95) 143,644.81 (130,129.99)
================================ ===============================
Weighted average shares o/s 7,350,290 3,324,301 7,178,219 3,055,801
Net loss per common share $0.01 ($0.01) $0.02 ($0.04)
FULLY DILUTIVE EPS
Net income (loss) from operations 64,832.10 (44,037.00) 143,644.81 (124,185.68)
Less pref. stock dividend - (3,790.95) - (5,944.31)
Add back "as if" stock dividend - 3,790.95 - 5,944.31
Bond interest exp on "as if " conv. - 2,617.85 566.00 5,593.60
-------------------------------- ----------------------------------
Loss applicable to common 64,832.10 (41,419.15) 144,210.81 (118,592.08)
================================ ==================================
Weighted average shares o/s 7,381,545 3,401,741 7,232,153 3,401,741
Net loss per common share,
fully diluted $0.01 ($0.01) $0.02 ($0.03)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE SIX MONTH PERIOD ENDED MAY
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. ENTIRE FINANCIAL DATA SCHEDULE PRESENTATION IS BASED ON CONDENSED
FORMAT PRESENTATION OF FORM 10-QSB FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 5,655,697
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,250,404
<PP&E> 1,501,005
<DEPRECIATION> 137,451
<TOTAL-ASSETS> 11,356,167
<CURRENT-LIABILITIES> 1,225,625
<BONDS> 4,424
0
0
<COMMON> 1,306,118
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,536,167
<SALES> 548,828
<TOTAL-REVENUES> 11,205,125<F1>
<CGS> 494,966
<TOTAL-COSTS> 1,140,110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183
<INCOME-PRETAX> 64,832
<INCOME-TAX> 0
<INCOME-CONTINUING> 64,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,832
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<FN>
<F1>TOTAL REVENUES INCLUDE $90,256 IN INTEREST INCOME.
</FN>
</TABLE>
