UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO APPLICATION ON REPORT
FILED PURSUANT TO SECTION 12, 13 AND 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
BAB HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K (Date
of Report: May 15, 1996), as amended by Form 8-K/A (Date of Report: July 12,
1996), as set forth herein.
Item 2: Acquisition or Disposition of Assets
Item 7: Financial Statement, Pro Forma Financial
Information and Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAB HOLDINGS, INC.
Dated: November 19, 1996 By: /s/ THEODORE P. NONCEK
--------------------------------------------
Theodore P. Noncek, Chief Financial Officer
(Principal accounting and financial officer)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
This Form 8-K/A is a second amendment to Form 8-K filed on May 15, 1996
concerning the acquisition on May 1, 1996 by BAB Operations, Inc., a
wholly-owned subsidiary of BAB Holdings, Inc. (the "Registrant" or "Holdings")
of substantially all of the assets of Bagels Unlimited, Inc. ("BUI"), a
Wisconsin corporation. This amendment consists solely of the substitution of the
audit report of Ernst & Young, LLP and the financial statements thereby reported
upon for the fiscal year ended February 29, 1996 for the audit report of Muehl,
Steffes & Krueger, S.C. (the "MSK Report") and the financial statements covered
by such report for that period, and resulting changes to the pro forma financial
statements of the combined entities. This amendment also includes a new report
of Muehl, Steffes & Krueger covering solely the financial statements for the
period ended February 28, 1995. The MSK Report was qualified as to an
uncertainty in unreported revenue of BUI in the 1996 period but was,
nonetheless, determined by the Registrant to be acceptable for filing on Form
8-K/A on July 12, 1996 based on the Registrant's erroneous determination
(discovered to be erroneous in late October 1996) that BUI was not a
"significant subsidiary" and therefore did not require audited financial
statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following unaudited pro forma condensed financial information
reflects the acquisition of BUI by Holdings as if it had occurred on December 1,
1994. The fiscal year pro forma information is based on the historical audited
consolidated statement of operations of Holdings for the fiscal year ended
November 30, 1995, and the statement of operations of BUI for its fiscal year
ended February 29, 1996. The unaudited quarterly pro forma condensed financial
information is based on the consolidated statement of operations of Holdings for
the fiscal quarter ended February 29, 1996 and the statement of operations of
BUI for the fiscal quarter ended February 29, 1996. This unaudited condensed pro
forma financial information should be read in conjunction with the historical
financial statements and footnotes thereto of Holdings which have been filed as
part of Form 10-KSB for the fiscal year ended November 30, 1995, and Form 10-QSB
for the fiscal quarter ended February 29, 1996, and in conjunction with the
financial statements and footnotes of BUI for the fiscal year ended February 29,
1996 as filed in exhibit 10.27 below.
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 Holdings for future periods.
<TABLE>
<CAPTION>
Historical Historical Pro Forma
---------- ---------- ------------------------------
Holdings BUI
---------- ----------
Year Ended Year Ended
November 30, February 29,
1995 1996 Adjustments Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ............................. $ 2,033,003 $ 2,776,415 $ (136,000)(1) $ 4,673,418
Operating costs and expenses ......... 2,453,581 2,855,792 18,183 (2) 5,201,369
(136,000)(1)
(6,854)(3)
16,667 (4)
----------- ----------- ----------- -----------
Loss from operations ................. (420,578) (79,377) (27,996) (527,951)
Other expenses, net .................. 15,182 79,014 (79,123)(5) 15,073
----------- ----------- ----------- -----------
Net loss ............................. (435,760) (158,391) 51,127 (543,024)
Preferred stock dividend accumulated . 4,000 -- -- 4,000
----------- ----------- ----------- -----------
Net loss attributable to
common shareholders ............. $ (439,760) $ (158,391) $ 51,127 $ (547,024)
=========== =========== =========== ===========
Net loss attributable to common share:
Primary ......................... $ (0.13) $ (0.16)
=========== ===========
Fully diluted ................... $ (0.12) $ (0.15)
=========== ===========
Average number of shares used:
Primary ......................... 3,382,917(6) 50,000 (7) 3,432,917
=========== =========== ===========
Fully diluted ................... 3,560,256(6) 50,000 (7) 3,610,256
=========== =========== ===========
See accompanying notes to pro forma condensed consolidated financial
information.
</TABLE>
<TABLE>
<CAPTION>
Historical Historical Pro Forma
---------- ---------- ----------------------------
Holdings BUI
---------- ----------
Quarter Ended Quarter Ended
February 29, February 29,
1996 1996 Adjustments Consolidated
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues ............................... $ 825,641 $ 634,035 $ (34,000)(1) $ 1,425,676
Operating costs and expenses ........... 845,945 713,948 4,546 (2) 1,532,892
(34,000)(1)
(1,714)(3)
4,167 (4)
----------- ----------- ----------- -----------
Loss from operations ................... (20,304) (79,913) (6,999) (107,216)
Other income (expenses), net ........... 99,116 (11,504) -- 87,612
----------- ----------- ----------- -----------
Net income (loss) attributable to
common shareholders ............... $ 78,812 $ (91,417) $ (6,999) $ (19,604)
=========== =========== =========== ===========
Net income attributable to common share:
Primary ........................... $ 0.01 $ --
=========== ===========
Fully diluted ..................... $ 0.01 $ --
=========== ===========
Average number of shares used:
Primary ........................... 6,962,199(6) 13,318 (7) 6,975,517
=========== =========== ===========
Fully diluted ..................... 6,995,825(6) (16,866)(7) 6,978,959
=========== =========== ===========
See accompanying notes to pro forma condensed consolidated financial
information.
</TABLE>
Notes to pro forma condensed consolidated financial information:
(1) Elimination of franchise royalty fee revenue of Holdings and expense of BUI.
(2) Amortization of goodwill over a 40-year period associated with the purchase
of BUI by Holdings.
(3) Elimination of franchise fee amortization by BUI associated with initial
franchise fees paid Holdings.
(4) Amortization of non-competition agreement over 6-year period.
(5) Elimination of interest expense of BUI as related debt is not assumed by the
Company.
(6) Average number of shares reported have been adjusted to retroactively give
effect of 50% stock split effected in the form of a dividend payable to
shareholders of record of Holdings on April 12, 1996.
(7) Reflects the issuance of 50,000 shares of Holdings common stock as partial
consideration for purchase. Quarterly amount further adjusted to recognize
antidilutive impact of common stock equivalents under loss position in pro
forma consoldiated financial information.
EXHIBITS
The following exhibit is filed herewith.
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.27 Historical Financial Statements of Bagels Unlimited, Inc. for
the periods ended February 29, 1996 and February 28, 1995,
including Statements of Operations, Retained Earnings/
Accumulated Deficit and Cash Flows for the period August 11,
1993 (inception) through February 28, 1994.
INDEX
NUMBER DESCRIPTION PAGE #
- ------ ----------- ------
10.27 Historical Financial Statements of Bagels Unlimited, Inc.
for the periods ended February 29, 1996 and February 28,
1995, including Statements of Operations, Retained
Earnings/Accumulated Deficit and Cash Flows for the period
August 11, 1993 (inception) through February 28, 1994.
Exhibit 10.27
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Bagels Unlimited, Inc.
We have audited the accompanying balance sheet of Bagels Unlimited, Inc. as of
February 29, 1996 and the related statements of operations and accumulated
deficit, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bagels Unlimited, Inc. at
February 29, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 30, 1996
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Bagels Unlimited, Inc.
We have audited the accompanying balance sheet of Bagels Unlimited, Inc. as of
February 28, 1995 and the related statements of operations and retained earnings
(accumulated deficit) and cash flows for the period then ended. We have also
audited the accompanying statements of operations and retained earnings
(accumulated deficit) and cash flows for the period since inception (August 11,
1993) to February 28, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Bagels
Unlimited, Inc. as of February 28, 1995 and the results of its operations and
its cash flows for the periods ending February 28, 1995, and February 28, 1994
in conformity with generally accepted accounting principles.
Muehl, Steffes & Krueger, S.C.
Milwaukee, Wisconsin
June 13, 1996
BAGELS UNLIMITED, INC.
BALANCE SHEETS
FEBRUARY 29, FEBRUARY 28,
ASSETS 1996 1995
------ ------------ ------------
Current assets:
Inventories........................................ $ 34,986 $ 15,497
Prepaid income taxes............................... 1,242 --
Prepaid expenses................................... 6,891 1,421
--------- --------
Total current assets............................. 43,119 16,918
--------- --------
Property and Equipment:
Construction in progress........................... 2,530 59,320
Machinery and equipment............................ 314,981 183,854
Leasehold improvements............................. 358,527 239,427
--------- --------
Total property and equipment..................... 676,038 482,601
Less: Accumulated Depreciation and Amortization...... (97,845) (35,417)
--------- --------
Net property and equipment........................... 578,193 447,184
--------- --------
Other assets:
Franchise fees, net of accumulated amortization of
$11,084 and $4,230 as of February 29, 1996 and
February 28, 1995................................. 58,916 65,770
Organization costs, net of accumulated amortization
of $288 and $160 as of February 29, 1996 and
February 28, 1995................................. 1,630 1,758
Prepaid franchise fees............................. 10,000 10,000
Investment......................................... 3,500 3,500
Deposits........................................... 1,350 1,350
--------- --------
Total other assets............................... 75,396 82,378
--------- --------
Total assets..................................... $ 696,708 $546,480
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Checks issued, but not yet presented for payment... $ 2,027 $ 11,815
Line of credit..................................... 10,000 12,500
Notes payable...................................... 167,684 --
Due to franchisor.................................. 10,000 10,000
Due to officers.................................... 216,365 126,511
Accounts payable................................... 291,266 159,069
Accrued liabilities................................ 69,051 27,038
Accrued interest................................... 43,246 --
Accrued income taxes............................... -- 9,248
--------- --------
Total current liabilities........................ 809,639 356,181
--------- --------
Long-Term Liabilities
Deferred rent...................................... 16,348 9,685
Accrued interest................................... -- 7,502
Notes payable...................................... -- 144,000
--------- --------
Total long-term liabilities...................... 16,348 161,187
--------- --------
Total liabilities................................ 825,987 517,368
--------- --------
Stockholders' equity (deficit):
Common stock--no par value; 9,000 shares
authorized, 2,000 shares issued and outstanding... 2,000 2,000
Stock subscription receivable...................... (2,000) (2,000)
Retained earnings (accumulated deficit)............ (129,279) 29,112
--------- --------
Total stockholders' equity (deficit)............. (129,279) 29,112
--------- --------
Total liabilities and stockholder's equity
(deficit)....................................... $ 696,708 $546,480
========= ========
The accompanying notes are an integral part of these statements.
BAGELS UNLIMITED, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
1996 1995 1994
---------- ---------- --------
Sales......................................... $2,776,415 $1,430,573 $ 92,719
Cost of sales................................. 2,338,541 1,111,214 72,855
---------- ---------- --------
Gross profit.................................. 437,874 319,359 19,864
Selling and administrative expenses........... 517,251 236,932 25,618
---------- ---------- --------
Income (loss) from operations................. (79,377) 82,427 (5,754)
Interest expense.............................. (79,123) (37,602) (1,326)
Other......................................... 109 837 30
---------- ---------- --------
Income (loss) before income taxes............. (158,391) 45,662 (7,050)
Income taxes.................................. -- 9,500 --
---------- ---------- --------
Net income (loss)............................. (158,391) 36,162 (7,050)
---------- ---------- --------
Retained earnings (accumulated deficit):
Balance--beginning of period................ 29,112 (7,050) --
---------- ---------- --------
Balance--end of period...................... $ (129,279) $ 29,112 $ (7,050)
========== ========== ========
The accompanying notes are an integral part of these statements.
BAGELS UNLIMITED, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................ $(158,391) $ 36,162 $ (7,050)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 69,410 36,267 3,540
Deferred rent.............................. 6,663 7,946 1,739
Increase (decrease) in cash due to changes in:
Inventories................................ (19,489) (8,248) (7,249)
Prepaid expenses........................... (5,470) (1,421) --
Prepaid income taxes....................... (1,242) -- --
Accounts payable........................... 182,321 75,014 22,932
Accrued liabilities........................ 77,757 27,212 7,328
Accrued income taxes....................... (9,248) 9,248 --
--------- --------- ---------
Net cash provided by operating activities.... 142,311 182,180 21,240
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........... (243,561) (295,381) (126,097)
Cash paid for investment..................... -- -- (3,500)
Deposit for leasehold improvements........... -- (26,599) 25,249
Payment of organizational costs.............. -- -- (1,918)
Payment of franchise fees.................... -- (52,500) (17,500)
--------- --------- ---------
Net cash (used in) investing activities...... (243,561) (374,480) (123,766)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of credit.. (2,500) 12,500 --
Net borrowing on amounts due to officers..... 89,854 21,661 104,850
Proceeds from the issuance note payable...... 30,000 150,000 --
Principal payments on long-term debt......... (6,316) (6,000) --
--------- --------- ---------
Net cash provided by financing activities.... 111,038 178,161 104,850
--------- --------- ---------
Net increase (decrease) in cash (checks
issued, but not yet presented for payment).. 9,788 (14,139) 2,324
--------- --------- ---------
Balance--beginning of period................. (11,815) 2,324 --
--------- --------- ---------
Balance--end of period....................... $ (2,027) $ (11,815) $ 2,324
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest................................... $ 43,379 $ 31,426 $ --
Income taxes............................... 10,490 259 --
--------- --------- ---------
Total cash paid for interest and income
taxes....................................... $ 53,869 $ 31,685 $ --
========= ========= =========
SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES
Purchase of property and equipment through
accounts payable............................ $ 10,999 $ 61,123 $ --
========= ========= =========
The accompanying notes are an integral part of these statements.
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Bagels Unlimited, Inc. d/b/a Big Apple Bagels (the Company) operates bagel
stores in southeastern Wisconsin in accordance with franchise agreements with a
regional franchisor. The Company began operating the stores on the following
dates:
COMMENCEMENT
DATE OF
STORE LOCATION OPERATIONS
-------------- --------------
Hales Corners........................................... December 1993
Brookfield.............................................. July 1994
Milwaukee--Marquette University......................... September 1994
Kenosha................................................. April 1995
Inventories
Inventories consist principally of perishable food supplies. Inventories are
valued at the lower of cost or market using the first-in, first-out (FIFO)
method.
Credit Policy
Substantially all of the Company's revenues are from retail cash sales.
Accordingly, the Company generally does not provide credit in the normal course
of business.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Depreciation and Amortization
Depreciation and amortization are computed using the straight line method
(half year convention) over the estimated useful lives of the assets as follows:
Machinery and equipment............................. 5-7 years
Leasehold improvements.............................. Length of the Lease
Other assets are being amortized using the straight line method over the
following terms:
Franchise fees................................................. 10 Years
Organizational costs........................................... 15 Years
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to differences between the bases of certain assets and liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. If full realization of the deferred tax asset is not expected, a
deferred tax valuation allowance will be recorded. Deferred taxes also are
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future federal and state
income taxes.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
NOTE 2. RELATED PARTY TRANSACTIONS
Due to Officers
As February 29, 1996 and February 28, 1995 the following amounts were due to
the two corporate officers/stockholders of the Company:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
Unsecured advances due to officers. Interest is
charged at 8%. The advances are due on demand. $216,365 $126,511
Office Lease Payments
During the period ended February 29, 1996, approximately $2,500 of rent was
paid to an affiliated company for office rent. The payments were made under a
verbal month to month lease with the affiliated company.
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. LINE OF CREDIT/NOTES PAYABLE
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
LINE OF CREDIT
The Company has a $10,000 ($15,000 as of
February 28, 1995) line-of-credit with a bank
which is due on demand. The line bears
interest at the bank's prime rate plus 2.50%
(effective rate of 10.75% as of February 29,
1996). The line is unsecured.................. $ 10,000 $ 12,500
Notes payable, as of February 29, 1996 and February 28, 1995, consist of the
following:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
Unsecured note payable due to an affiliated
Company. The note is due on demand and bears
interest at 8%................................ $ 30,000 $ --
Note payable, bearing interest at 0.5% above
the prime rate (effective rate of 8.75% at
February 28, 1996), payable monthly. The
entire outstanding principal balance was paid
in May 1996. Under the terms of the note
payable, additional interest is due based upon
2% of the net sales of one of the four
franchise stores operated by the Company. The
additional interest is payable monthly and
continues for an additional six months after
the note is paid in full...................... 91,218 94,000
Note payable, bearing interest at 1.0% above
the prime rate (effective rate of 9.25% at
February 29, 1996), payable monthly. The
entire outstanding principal balance was paid
in May 1996. Under the terms of the note
payable, additional interest is due based upon
1% of the net sales of one of the four
franchise stores operated by the Company. The
additional interest is payable monthly and
continues for an additional six months after
the note is paid in full...................... 46,466 50,000
--------- --------
Total........................................ 167,684 144,000
Less: Current Portion........................ (167,684) --
--------- --------
Long-term portion.......................... $ -- $144,000
========= ========
Interest charged to operations for related party obligations was approximately
as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense................... $21,000 $9,000 $1,000
</TABLE>
Included in accrued interest on the accompanying balance sheet is the
estimated net present value of the additional interest due for six months after
the related notes have matured.
NOTE 4. AGREEMENTS WITH FRANCHISOR/SUBSEQUENT EVENT
The Company has entered into various agreements with BAB Holdings, Inc. (the
Franchisor) to own and operate "Big Apple Bagels" franchises. Under the terms of
the agreements, the Company will purchase the rights for each franchise location
for $17,500. The agreements require the Company to remit weekly royalty payments
to the Franchisor based on 5% of sales.
Amounts expensed for royalties are approximately as follows:
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
Royalty expense.. $136,000 $72,000 $6,000
The agreements also require the Company to remit advertising payments weekly
to a fund for the benefit of the Company. The Company is reimbursed from the
fund for qualified advertising expenditures. Amounts paid into the fund are
expensed as the qualified expenditure is incurred. Included in prepaid expenses
as of February 29, 1996 and February 28, 1995 were approximately $4,000 and
$1,000, respectively, for amounts due from the fund.
Amounts expensed for advertising were approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Advertising expense... $61,000 $16,000 $4,000
</TABLE>
The franchise agreements contain, among other things, guidelines for
operations and conditions and restrictions on the sale and transfer of the
franchises. Under certain conditions, the Franchisor has the option to purchase
the assets of a location from the Company. Also, the Company may be required to
remodel its franchise locations. The cost of the required remodeling may not
exceed 2% of the cumulative sales of the franchise.
The franchise agreements expire at the end of 10 years or at the end of the
lease for the location of the franchise, which ever is shorter. The agreements
may be extended if the leases are further extended or a new location acceptable
to the Franchisor is secured within 120 days of the expiration of the lease.
Franchise fee amortization was as follows:
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
Amortization....... $6,854 $3,792 $438
The Company and the Franchisor are parties to an Area Development Agreement.
Under the terms of the agreement and for a fee of $25,000, the Company was
granted the exclusive right to develop "Big Apple Bagels" franchises in
southeastern Wisconsin. The agreement further specifies that the first five
franchises can be purchased for a $5,000 discount. As of February 29, 1996,
three franchises have been purchased under this agreement. The full amount of
the agreement was capitalized and applied to the net amount paid for the
franchises as they were purchased and amortized accordingly.
All of the amounts due to the Franchisor have been personally guaranteed by
the stockholders' of the Company.
On May 1, 1996, the Company sold substantially all of its assets to the
Franchisor for approximately $770,000 in cash and publicly traded stock of the
Franchisor. At the time of the sale, the remaining unpaid balance on the Area
Development Agreement was deducted from the sales proceeds and the remaining
balance in the prepaid franchise fees was charged to operations in May 1996. The
Franchisor has also assumed all of the lease commitments of the Company.
NOTE 5. LEASE COMMITMENTS
The Company leases its franchise locations from third parties under operating
leases. The leases call for average monthly payments ranging from approximately
$1,200 to $2,600. In addition to the monthly lease payments, the Company is
responsible for its share (based on square feet leased) of common area expenses
and real estate taxes. The Company is responsible for all other operating costs.
The basic rent expense is being recorded on a straight line basis.
The terms of the leases expire in terms ranging from September 1998 to May
2006. Certain leases contain options to extend the terms of the leases for an
additional 5 years. One lease contains an option to extend the lease for two
five year periods after the original term.
The Company also leases two vehicles under operating leases which call for
monthly payments of approximately $1,300.
Rent, common area charges, and related taxes paid related to the above leases
were approximately as follows:
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
Total............................ $148,000 $81,000 $6,000
Future minimum lease payments, which have been guaranteed by the Company's
stockholders, excluding adjustments for inflation, for the above leases is as
follows:
YEARS ENDING FEBRUARY
---------------------
1997..................................... $129,000
1998..................................... 127,000
1999..................................... 124,000
2000..................................... 80,000
2001..................................... 30,000
Thereafter............................... 175,000
NOTE 6. INCOME TAXES EXPENSE (CREDIT)
Income taxes (credit) consists of the following:
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
Current--
Federal.......................... $ -- $6,000 $ --
State............................ -- 3,500 --
----- ------ -----
Total current...................... $ -- $9,500 $ --
===== ====== =====
No deferred taxes have been reflected in the statements of operations because
the Company has fully reserved the tax benefit of net deductible temporary
differences and operating loss carryforwards due to the fact that the likelihood
of realization of the tax benefits cannot be established.
Deferred tax assets (liabilities) are as follows:
1996
--------
Accelerated depreciation for income tax purposes............... $ (3,900)
Non-deductible deferred rent................................... 3,400
Non-deductible accrued interest................................ 4,100
Federal net operating loss carryforward........................ 18,400
State tax loss and credit carryforwards........................ 8,200
Other temporary differences, net............................... 2,100
Deferred tax valuation allowance............................... (32,300)
--------
Net deferred tax asset....................................... $ --
========
The deferred tax balances as of February 28, 1995 and 1994 were immaterial.
The provision for income taxes (credit) differs from the amount computed by
applying the U.S. federal statutory income tax rate of approximately 15% to
income (loss) before income taxes as follows:
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
Income taxes (credit) at U.S.
statutory rate................... $(23,800) $6,800 $(1,100)
Increase in taxes resulting from:
State taxes, net of federal
benefit........................ (9,500) 2,700 (400)
Change in deferred tax valuation
allowance and other............ 33,300 -- 1,500
-------- ------ -------
Income taxes...................... $ -- $9,500 $ --
======== ====== =======
The Company has carryforwards for income tax purposes as of February 29, 1996
approximately as follows:
EXPIRING IN FEDERAL NET WISCONSIN NET
PERIODS ENDING OPERATING LOSS OPERATING LOSS
-------------- -------------- --------------
2011 $93,000 $87,000
NOTE 7. CONCENTRATIONS
Substantially all of the Company's revenues are derived from retail sales in
four locations located in southeastern Wisconsin.
