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: August 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.
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(Name of small business issuer in its charter)
Illinois 36-3857339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (312) 380-6100
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(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: 7,143,069 shares of Common Stock, as
of September 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............................................... 13
Item 2. Changes in Securities............................................13
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
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
August 31, 1996
(Unaudited)
<S> <C>
ASSETS
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
===========
LIABILITIES AND SHAREHOLDERS' EQUITY 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
===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores $ 1,180,940 $ 130,019
Royalty fees from franchised stores 374,325 218,308
Franchise and area development fees 316,831 144,000
Licensing fees and other 94,827 445
----------- -----------
1,966,923 492,772
OPERATING COSTS AND EXPENSES Company-owned stores:
Food, beverage, and paper costs 430,324 45,121
Payroll-related expenses 414,907 38,376
Occupancy and other operating expenses 239,893 29,953
Depreciation and amortization 60,869 6,846
----------- -----------
1,145,993 120,296
Selling, general, and administrative expenses:
Payroll-related expenses 348,508 225,722
Professional service fees 89,326 85,269
Depreciation and amortization 55,804 5,581
Other 246,892 139,999
----------- -----------
740,530 456,571
----------- -----------
1,886,523 576,867
----------- -----------
Income (loss) before interest 80,400 (84,095)
Interest expense 191 9,525
Interest income 68,234 2,186
----------- -----------
Net income (loss) attributable to common shareholders $ 148,443 $ (91,434)
=========== ===========
Net income (loss) attributable to common and common
equivalent share:
Primary $ 0.02 $ (0.03)
=========== ===========
Fully diluted $ 0.02 $ (0.02)
=========== ===========
Average number of common and common equivalent shares
used in calculation:
Primary 7,245,405 3,509,261
=========== ===========
Fully diluted 7,648,941 3,523,094
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1996 1995
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<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
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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:
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
=======
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 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 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, 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.
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. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
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 an 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 units 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. (Brewster's), Bagels
Unlimited, Inc. (Bagels Unlimited), and Strathmore Bagel Franchise Corp.
(Strathmore). 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.
Total revenue is comprised of net sales by Company-owned stores,
franchise fees, royalty fees from franchised stores and licensing fees 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.
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.
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 Development Corporation (Mrs.Fields). 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 21 employees at
November 30, 1995 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1996 VERSUS THE THREE MONTHS ENDED AUGUST 31, 1995
Total revenues increased 299% to $1,967,000 for the three months ended
August 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 808%
to $1,181,000 for the three months ended August 31, 1996 versus $130,000 in the
previous year. The Company opened two full production Big Apple Bagels stores in
Lincoln, Nebraska and Milwaukee, Wisconsin in late August as well as a
Brewster's Coffee double-drive through unit in June which is also a satellite
location to a Company-owned Big Apple Bagels store in the northern suburbs of
Chicago, Illinois. These three new units bring the total number Company-owned
units in operation to ten compared to one in the year-ago quarter. The Company
also more than doubled the revenue recognized from franchise and area
development fees, with approximately $317,000 of revenue recorded versus
$144,000 in the year-ago quarter. Approximately $161,000 of the franchise fee
revenue recognized in the third quarter 1996 can be attributed to the Company
entering into a master franchise agreement with an Alberta, Canada corporation
for the development of franchised stores in the four western provinces of
Canada. Royalty revenues rose by $156,000, or 71%, primarily as a result of the
greater number of franchised stores operating during the third quarter of fiscal
1996--91 on August 31, 1996 versus 51 on August 31, 1995. Finally, revenue from
other sources increased to almost $95,000 in the current fiscal quarter versus
less than $1,000 in the year-ago quarter as a result of licensing fees related
to the sale of Brewster's coffee and par-baked bagels in the Host Marriott
system and to Mrs. Fields.
Total operating costs and expenses related to Company-owned stores was
97.0% of store revenues during the three months ended August 31, 1996 versus
92.5% in the year-ago quarter. The cost of food, beverage and paper increased to
36.4% from 34.7% in the 1995 period. The Company attributes some of the increase
to the fact that 3 of the 10 units in operation have been open less than three
months and an additional five of the units have only been under the Company's
control since the May 1, 1996 acquisition of franchised stores in the Milwaukee,
Wisconsin market. 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 by using one
national distributor. Similarly, payroll-related expenses increased from 29.5%
of store revenues to 35.1% of store revenues. This increase is attributed to the
number of new stores opened in the last quarter and due the impact of the stores
operating in the Milwaukee, Wisconsin market. Prior to the Company's
acquisition, these Milwaukee-based stores experienced historical labor costs of
approximately 39% of store revenues, principally due to the payment of salaries
at rates exceeding local market conditions and due to prior management's failure
to adhere to the Company's staffing guidelines. Since the May 1, 1996
acquisition, the Company has been gradually modifying labor hours and rates and
making personnel changes to bring this cost factor in line with Company
guidelines. Occupancy and other operating expenses have decreased to 20.3% of
revenues, versus 23.0% in the year-ago quarter, due to the overall sales volume
increases; average annualized sales revenues experienced for stores open the
entire third quarter were approximately $649,000 in fiscal 1996 (based on seven
units) versus approximately $520,000 in fiscal 1995 (based on one unit.)
While total selling, general and administrative expenses rose 62% in
the current fiscal quarter--from $457,000 for the three months ended August 31,
1995 to $741,000 for the three months ended August 31, 1996--these expenses
decreased significantly from 92.7% of total revenues to less than 38% of total
revenues in the current period. While there is no assurance that these cost
percentages will continue to show improvement, management is pleased to report
significant decreases in overhead expenses relative to total revenues for the
third consecutive fiscal quarter and 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 $123,000 of the overall increase in selling, general and
administrative costs is reflected in payroll-related expenses and is due to the
hiring of additional personnel and salary increases granted to several
management-level employees in November 1995. During the third quarter of fiscal
1996, the Company hired additional employees, bringing the total number of
individuals employed at the corporate level to 28 versus 21 full- and part-time
employees in the year-ago quarter. Other administrative overhead expenses
increased approximately $107,000 from the year-ago quarter and can be
principally attributed to office expenses and services to support the increase
in Company-owned stores, licensed units, and the base of franchise stores open
and in development, all of which totaled (including area development agreements)
205 at August 31, 1996 versus 119 at August 31, 1995. Finally, depreciation and
amortization increased $50,000 from the year-ago quarter due principally to the
amortization of intangibles acquired in connection with the May 1996
acquisitions of Bagels Unlimited and Strathmore.
The Company experienced net income from operations of approximately
$80,000 or 4.1% of revenues in the quarter ended August 31, 1996 versus a net
loss from operations of approximately $(84,000) or (17.1%) of revenues in the
year-ago quarter.
Net interest income totaled approximately $68,000 in the third quarter
of fiscal 1996 versus net expense of approximately $7,000 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 option which,
together, totaled approximately $7.2 million. The average cash balance
outstanding during the third quarter 1996 was approximately $5.2 million and a
substantial portion was invested in liquid, money market funds. In the fiscal
1995 quarter, the Company recorded interest on an average outstanding principal
balance of approximately $300,000 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 $148,000 or $0.02 per common and common equivalent share for the
three months ended August 31, 1996, as compared to a net loss attributable to
common shareholders of approximately $(91,000) or $(0.03) per common and common
equivalent share for the three months ended August 31, 1995. The average number
of shares outstanding increased to 7,245,405 from 3,509,261 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.
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. Revenue from various other
sources, including licensing fees earned on the sale of Brewster's Coffee and
Big Apple Bagels par-baked bagels, 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 relative to Company-owned stores was
96.3% of store revenues during the nine months ended August 31, 1996 versus
95.4% 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 Bagels Unlimited, the Company has been gradually modifying labor
hours and rates and making personnel changes to bring this cost 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 $1,973,000 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 and Strathmore.
The Company realized net income from operations of approximately
$35,000 or 1% 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 $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 126% 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced positive net cash flow from operating
activities for the nine months ended August 31, 1996 of approximately $88,000
compared to approximately $78,000 for the 1995 period.
Cash used for investing activities during the nine months ended August
31, 1996 totaled $3,885,000, which consisted primarily of the following
acquisitions: (i) the February 1996 acquisition of the assets of Brewster's,
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 which included five existing Big Apple Bagels stores operating
in Milwaukee, Wisconsin for $975,000, (iii) the May 1996 acquisition of the
assets of Strathmore 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, and (iv) the development of three Company-owned
units which were opened during the third quarter as well as additional units
which are in various stages of development as of August 31, 1996. During the
nine months ended August 31, 1995, net cash used for investing activities
totaled approximately $452,000 and consisted primarily of the $300,000 purchase
of short-term investments, the partial construction of the second Company-owned
stores totaling approximately $90,000 and the miscellaneous purchases of
property, plant and equipment to be used 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.
The development of additional Company-owned stores and further
expansion of franchise operations is anticipated to 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 acquisition of Chesapeake Bagel Bakery.
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. As a result, the arbitration hearing has been scheduled for
December 18, 1996.
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 August 31, 1996 and from such quarter end to the date of
this Report:
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 regarding
the acquisition of the assets of Bagels Unlimited, Inc.
Form 8-K/A filed on August 5, 1996 amending the June 5, 1996 Form 8-K regarding
the acquisition of the assets of Strathmore Bagels Franchise Corp.
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
27.02 Amended 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: October 15, 1996 By:
--------------------------------
Theodore P. Noncek, Chief Financial Officer,
Treasurer and Secretary
(Principal accounting and financial officer)
INDEX
NUMBER DESCRIPTION PAGE #
- ------ ----------- ------
11.0 Computation of earnings per share
27.01 Financial data schedule
27.02 Amended financial data schedule
Exhibit 11.0
BAB HOLDINGS, INC.
3 MONTHS ENDED AUGUST 31, 1996 V. 3 MONTHS ENDED AUGUST 31, 1995
AND 9 MONTHS ENDED AUGUST 31, 1996 V. 9 MONTHS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
8/31/96 8/31/95 8/31/96 8/31/95
----------- ------------ ------------ ------------
PRIMARY EPS
<S> <C> <C> <C> <C>
Net income (loss) 148,443.00 (91,434.00) 292,087.00 (215,620.00)
Less pref. stock dividend - - - (4,000.00)
----------- ------------ ------------ ------------
Income (loss) applicable to common 148,443.00 (91,434.00) 292,087.00 (219,620.00)
=========== ============ ============ ============
Weighted average share o/s 7,245,405 3,509,261 7,250,672 3,206,954
Net income (loss) per common share $ 0.0205 $ (0.0261) $ 0.0403 $ (0.0685)
FULLY DILUTIVE EPS
Net income (loss) 148,443.00 (91,434.00) 292,087.00 (215,620.00)
Less pref. stock dividend - - - (4,000.00)
Add back "as if" stock dividend - - - 4,000.00
Bond interest exp. on "as if" conv. - 6,525.00 - 6,525.00
=========== ============ ============ ============
Income (loss) applicable to common 148,443.00 (84,909.00) 292,087.00 (209,095.00)
=========== ============ ============ ============
Weighted average shares o/s 7,648,941 3,523,094 7,337,226 3,443,407
Net income (loss) per common share,
fully diluted $ 0.0194 $ (0.0241) $ 0.0398 $ (0.0607)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE NINE MONTH PERIOD ENDED
AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. (b)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> 4,730,829
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,674,500
<PP&E> 2,192,086
<DEPRECIATION> 197,662
<TOTAL-ASSETS> 11,170,398
<CURRENT-LIABILITIES> 1,759,643
<BONDS> 2,824
0
0
<COMMON> 10,228,765
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,170,398
<SALES> 1,965,939
<TOTAL-REVENUES> 4,169,011<F1>
<CGS> 1,892,403
<TOTAL-COSTS> 3,872,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,346
<INCOME-PRETAX> 292,087
<INCOME-TAX> 0
<INCOME-CONTINUING> 292,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,087
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1>NOTES TO FINANCIAL DATA SCHEDULE:
(a) Total revenues include $261,578 in interest income.
(b) Entire Financial Data Schedule presentation is based on condensed format
presentation of Form 10-QSB financial statements.
</FN>
</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. (b),(c)
</LEGEND>
<RESTATED>
<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> 11,275,396
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,536,167
<SALES> 784,999
<TOTAL-REVENUES> 2,133,854<F1>
<CGS> 746,410
<TOTAL-COSTS> 1,986,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,155
<INCOME-PRETAX> 143,644
<INCOME-TAX> 0
<INCOME-CONTINUING> 143,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,644
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<FN>
<F1>NOTES TO AMENDED FINANCIAL DATA SCHEDULE:
(a) Total revenues include $193,344 in interest income.
(b) Entire Amended Financial Data Schedule presentation is based on condensed
format presentation of Form 10-QSB financial statements.
(c) Amended Financial Data Schedule corrects typographical errors discovered
in the Financial Data Schedule filed with BAB Holdings, Inc.'s Form 10-QSB
for the six month period ended May 31, 1996.
</FN>
</TABLE>
