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, 1997
[ ] 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 (773) 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: 7,601,288 shares of Common
Stock, as of July 8, 1997.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Financial Statements ...................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation ..................
PART II
Item 1. Legal Proceedings.......................................
Item 2. Changes in Securities...................................
Item 3. Defaults Upon Senior Securities.........................
Item 4. Submission of Matters to a Vote of Security Holders.....
Item 5. Other Information.......................................
Item 6. Exhibits and Reports on Form 8-K........................
SIGNATURE ........................................................
INDEX TO EXHIBITS..................................................
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
May 31, 1997
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $249,711 $ 1,030,067
Other current assets 2,199,952
------------
Total current assets 3,230,019
Property, plant, and equipment, net of
accumulated depreciation of $553,120 6,457,754
Goodwill, net of accumulated amortization of $65,712 2,783,072
Franchise contract rights, net of accumulated
amortization of $4,024 1,659,325
Other assets and intangible assets, net of
accumulated amortization of $348,328 1,778,266
------------
$ 15,908,436
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,925,886
Deferred franchise fee revenue 501,645
Current portion of long-term debt 42,063
Other current liabilities 600,281
------------
Total current liabilities 3,069,875
Long-term debt, less current portion 580,237
Shareholders' equity:
Common stock 11,416,288
Additional paid-in capital 498,211
Preferred stock 1,808,734
Accumulated deficit ( 1,464,909)
------------
Total shareholders' equity 12,258,324
------------
$ 15,908,436
============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MAY 31, MAY 31,
1997 1996
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 2,280,086 $ 548,828
Royalty fees from franchised stores 552,523 348,822
Franchise and area development fees 413,000 190,000
Licensing fees and other income 245,105 27,219
--------------------------
3,490,714 1,114,869
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 749,994 178,505
Store payroll and other operating expenses 1,204,177 254,039
Selling, general, and administrative expenses:
Payroll-related expenses 485,969 289,717
Depreciation and amortization 328,362 57,301
Other 588,103 360,548
--------------------------
1,402,434 707,566
--------------------------
3,356,605 1,140,110
--------------------------
Income (loss) before interest 134,109 (25,241)
Interest expense (2,443) (183)
Interest income 16,994 90,256
--------------------------
Net income 148,660 64,832
Preferred stock divided accumulated (222,715) -
--------------------------
Net income (loss) attributable to
common shareholders $ (74,055) $ 64,832
==========================
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 7,246,380 7,350,290
==========================
Fully diluted 7,246,380 7,381,545
==========================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
SIX MONTHS ENDED
MAY 31, MAY 31,
1997 1996
-----------------------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores $ 4,087,363 $ 784,999
Royalty fees from franchised stores 958,744 634,073
Franchise and area development fees 647,900 491,500
Licensing fees and other income 570,827 29,938
-----------------------
6,264,834 1,940,510
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 1,350,415 255,950
Store payroll and other operating expenses 2,262,798 378,685
Selling, general, and administrative expenses:
Payroll-related expenses 928,565 584,468
Depreciation and amortization 562,946 90,957
Other 1,020,803 675,995
-----------------------
2,512,314 1,351,420
-----------------------
6,125,527 1,986,055
-----------------------
Income (loss) before interest 139,307 (45,545)
Interest expense (2,488) (4,155)
Interest income 37,166 193,344
-----------------------
Net income 173,985 143,644
Preferred stock divided accumulated (222,715) -
-----------------------
Net income (loss) attributable to
common shareholders $ (48,730) $ 143,644
=======================
Net income (loss) attributable to common and
common equivalent share:
Primary $ (0.01) $ 0.02
=======================
Fully diluted $ (0.01) $ 0.02
=======================
Average number of common and common
equivalent shares used in calculation:
Primary 7,194,725 7,178,219
=======================
Fully diluted 7,194,725 7,232,153
=======================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
MAY 31, MAY 31,
1997 1996
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used by operating activities $ (277,682) $ (371,726)
INVESTING ACTIVITIES
Business acquisitions (650,531) (2,075,157)
Purchases of property, plant and equipment (2,140,483) (264,100)
Other (238,882) (162,591)
-----------------------
Net cash used for investing activities (3,029,896) (2,501,848)
FINANCING ACTIVITIES
Proceeds from issuance of common stock - 1,020,000
Proceeds from issuance of preferred stock 2,192,750 -
Borrowings under line of credit 211,447 -
Payment of preferred stock issuance costs (219,774) -
Other (10,071) (169,738)
----------------------
Net cash provided by financing activities 2,174,352 850,262
----------------------
Net decrease in cash and cash equivalents (1,133,226) (2,023,312)
Cash and cash equivalents at beginning of period 2,163,293 7,679,009
----------------------
Cash and cash equivalents at end of period $1,030,067 $5,655,697
======================
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"), an Illinois corporation
incorporated on November 25, 1992, and its four wholly-owned
subsidiaries, BAB Operations, Inc. ("Operations"), BAB Systems,
Inc. ("Systems"), Brewster's Franchise Corporation ("BFC") and My
Favorite Muffin Too, Inc. ("MFM"). Systems was incorporated on
December 2, 1992, and was primarily established to franchise "Big
Apple Bagels" specialty bagel retail stores. Operations was
formed on August 30, 1995, primarily to operate Company-owned
stores, including one which currently serves as the franchise
training facility. BFC was established on February 15,1996, to
franchise "Brewster's Coffee" concept retail coffee stores. MFM
operates and franchises "My Favorite Muffin" specialty muffin
retail stores and was acquired through merger on May 13, 1997.
The accompanying condensed consolidated financial statements are
unaudited. These financial statements have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in financial statement prepared in
accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations.
In the opinion of the Company's management, the condensed
consolidated financial statements for the unaudited interim
periods presented include all adjustments necessary to fairly
present the results of such interim periods and the financial
position as of the end of said period. These adjustments were of
a normal recurring nature and did not have a material impact on
the financial statements presented.
2. Stores Open and Under Development
Stores which have been opened and unopened stores for which an
agreement has been executed and franchise or area development
fees collected at May 31, 1997 are as follows:
<TABLE>
<S> <C>
Stores opened:
Company-owned 31
Franchisee-owned 173
Licensed 37
----
241
Unopened franchised stores for
which an agreement has been sold:
Franchise agreement 22
Area development agreement 36
----
58
----
Total 299
====
</TABLE>
3. Acquisitions and Dispositions
In January 1997, the Company completed the acquisitions of Just
Bagels, Inc. ("JBI"), and affiliate, franchisees of the Company,
operating a total of four stores in southern California. The
total purchase price paid was $770,000 including $120,000 related
to a noncompetition agreement with the former owners of JBI and
was paid in part through the forgiveness of notes receivable from
JBI of approximately $455,000.
In February 1997, the Company purchased the 50% interest held by
its joint venture partner in Downtown Bagels, a franchise Big
Apple Bagels satellite unit, for $20,000. The unit, and certain
other assets, were sold by the Company to a franchisee for
$60,000 consisting of a note receivable from the purchasers of
$55,000 and cash of $5,000. The note receivable bears interest at
prime plus one percent, and is payable monthly over a seven-year
period. Also in February 1997, the Company sold its Park Ridge,
Illinois Company-operated unit to a franchisee for $233,000. In
payment, the Company received a note receivable for $183,000 from
the purchasers, bearing interest at 9%, payable monthly over a
seven-year period, and cash of $50,000.
In April and May 1997 the Company completed the acquisitions of
two stores from Heartland Bagels, Inc. ("Heartland"), franchisees
of the Company. In April the Buffalo Grove, Illinois store was
purchased for $170,000, through the issuance of 25,611 shares of
restricted Company common stock, and the payment of approximately
$78,000 in outstanding liabilities of Heartland. In May the
Berwyn, Illinois store was purchased for approximately $140,000,
consisting of $111,000 paid to a bank in satisfaction of an
outstanding bank loan of Heartland, and $29,000 paid to creditors
of Heartland for outstanding liabilities. Both these units are
currently being operated as Big Apple Bagels Company-owned
stores.
On May 13, 1997 the Company acquired MFM. MFM franchises and
operates muffin and bagel specialty retail stores concentrated
primarily in the Eastern United States and Florida, and has 60
franchise and 5 company-operated units in operation. The
acquisition was completed by exchanging 150 shares of MFM stock,
for 432,608 shares of the Company's common stock, restricted as
to transfer until January 1, 1999, and $260,000 in cash. In
addition to current liabilities, the Company has assumed
approximately $350,000 of MFM's existing bank debt. Total revenue
of MFM was $2.7 million for the year ended December 31, 1996.
Additionally, during 1996 the Company completed several
acquisitions. On May 1, 1996, the Company acquired certain
assets of Bagels Unlimited, Inc., a franchisee of the Company
which operated five Big Apple Bagels stores in southeastern
Wisconsin, for a purchase price, including acquisition costs, of
approximately $1,428,000. On May 21, 1996, the Company acquired
certain assets and contract rights of Strathmore Bagels Franchise
Corporation ("Strathmore") for a purchase price including
acquisition costs of approximately $1,740,000, plus additional
consideration based on future openings of units operated by Host
Marriott Services Corporation ("Host Marriott"). On October 7,
1996, the Company acquired certain assets of Danville Bagels,
Inc. ("Danville"), a franchisee of the Company operating two Big
Apple Bagels stores in northern California, for a purchase price
of approximately $603,000. The acquired stores are currently
operated as Company-owned Big Apple Bagels units.
4. Preferred Stock - Series A Convertible Preferred Stock
In April 1997 the Company completed the sale of 87,710 shares of
$25.00 Series A Convertible Preferred Stock (the "Preferred
Stock") in a private placement to institutional investors. The
Preferred Stock carries an 8% annual dividend payable in cash or,
at the option of the Company, in shares of Holdings common stock
("Common Stock") at the conversion rate inherent in the
convertibility feature of the security described below.
The principal terms of the Preferred Shares are as follows:
DIVIDENDS. From and after the date of issuance until the
Expiration Date (defined below), the holders of the
Preferred Shares are entitled to an annual dividend prior to
the payment of any cash dividends on the Common Stock, equal
to eight percent (8%) of $25.00 (the "Original Purchase
Price"), or $2.00 per share; provided that during a
Conversion Suspension Period (defined below), dividends will
accrue at the rate of 15% per annum, or $3.75 per share.
Such dividends are payable only when the Preferred Shares
are converted to shares of Common Stock. Payment may be in
cash or, at the option of the Company, in shares of Common
Stock at the Conversion Rate (as defined below).
LIQUIDATION, DISSOLUTION OR WINDING UP. The holders of the
Preferred Shares are entitled to be paid an amount per share
equal to the Original Purchase Price of $25.00, plus accrued
dividends, out of the assets of the Company available for
distribution to its shareholders before any payment is made
to the holders of Common Stock. After the payment of all
preferential amounts, the holders of the Preferred Shares
are not entitled to share in or receive any remaining assets
or funds available for distribution to shareholders.
VOTING. The holders of the Preferred Shares have no rights
to vote, except as may be required by law.
OPTIONAL CONVERSION. The holders of the Preferred Shares
may convert such Preferred Shares to shares of Common Stock
on or after August 1, 1997 (the "Initial Conversion Date")
until the close of business on July 31, 1999 (the
"Expiration Date"), subject to extension by a number of days
equal to the number of trading days in any Conversion
Suspension Period (defined below) during the period prior to
the Expiration Date. Each Preferred Share is convertible
into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original
Purchase Price by the lesser of $5.64 or 85% of the average
closing bid price of the Common Stock for the 30 trading
days immediately preceding the Conversion Date (as so
determined, the "Conversion Rate"). In addition, if the
Company engages in an underwritten public offering, for any
holder who has given notice of participation in such
offering, the Conversion Rate shall be 85% of the public
offering price, if less than the amount calculated in the
immediately preceding sentence.
CONVERSION SUSPENSION. A Conversion Suspension Period takes
effect if, at any time on or after the later of
(i) September 15, 1997, or (ii) the date which is 30 trading
days following the date that the Registration Statement of
which this Prospectus is a part is declared effective by the
Securities and Exchange Commission, the closing bid price of
the Common Stock is less than $2.325 for 30 consecutive
trading days. The Conversion Suspension Period continues
until the first trading day thereafter that the closing bid
price for the Common Stock has exceeded $2.325 for 30
consecutive trading days; provided, however, that a
Conversion Suspension Period shall not continue for more
than sixty (60) days in any period of 365 days. The Company
is not required to recognize or accept any conversion of
Preferred Shares during a Conversion Suspension Period.
During any Conversion Suspension Period, the Company, at its
option, may redeem any or all of the Preferred Shares by
payment to the holders of $28.75 per share, plus all accrued
and unpaid dividends.
5. Preferred Stock Dividend Accumulated
Preferred dividends in the amount of $223,000 accumulated during
the period, which includes $193,000 attributable to the 15%
discount available to holders of the Preferred Stock in acquiring
Common Stock upon ultimate conversion. Such discounts must be
recognized as dividends under generally accepted accounting
principles. The total discount which is treated as a dividend
(i.e., $387,000), is required to be amortized over the minimum
period from issuance to the first date of convertibility, August
1, 1997. The remaining $194,000 (i.e., $387,000 less $193,000
recognized in the quarter ended May 31, 1997) will be amortized
over the two-month period prior to August 1, 1997 in the third
quarter. Once fully recognized by August 1, 1997, no additional
preferred dividends will accumulate related to this conversion
discount.
The preferred dividend accumulated which is attributable to the
conversion discount is a non-cash entry which has no impact on
operating income or total equity of the Company. Upon issuance
of the Preferred Stock, the total of $387,000 representing the
conversion discount was recorded as additional paid-in capital.
As the dividend is accumulated during the period prior to
convertibility, the dividend is recorded as a reduction in
retained earnings and an increase in the preferred stock carrying
value.
6. Line of Credit Agreement
In April 1997, the Company entered a $2 million line of credit
agreement with a bank expiring in October 1998. Maximum
borrowing under the line is limited to a borrowing base of 80% of
accounts receivable under 90 days and 40% of equipment costs.
Interest is payable monthly at prime plus one percent (currently
9.5%), with principal due upon the maturity of the note in
October 1998. At May 31, 1997, the Company had approximately
$211,000 outstanding under this agreement. Additionally, in July
1997, the Company converted the bank debt assumed in the MFM
acquisition, noted above, to this credit facility.
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. 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. Certain risks and uncertainties are outside the
control of the Company and its management including its ability
to attract new franchisees, the continued success of current
franchisees, the effects of competition on franchisee and
Company-owned store results and consumer acceptance of the
Company's products in new and existing markets. 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
From its inception in November 1992, the Company has grown to 31
Company-owned and 241 franchised and licensed units at May 31,
1997 following the acquisition by merger of MFM. This rapid
expansion in operations significantly affects the comparability
of results of operations of the Company in several ways,
particularly in the recognition of initial franchise fee revenue
and ongoing royalty fees, as well as the significant increase in
Company-owned store revenues.
The Company's revenues are derived primarily from the operation
of Company-owned stores, initial franchise fees and ongoing
royalties paid to the Company by its franchisees. Additionally,
in 1996 the Company significantly increased revenue derived from
the sale of licensed products as a result of purchasing
trademarks (Brewster's), licensing contracts (Strathmore's
licenses with Host Marriott) and by directly entering licensing
agreements (Mrs. Fields Cookies). Additionally, the Company has
generated other revenue through the sale of store units to
franchisees of the Company. In adding 29 Company-operated units
since the start of fiscal 1996, the Company has created a stable
revenue base in Company-owned store revenue and has become less
dependent on initial franchise fee revenue.
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.
On May 13, 1997, the Company completed the acquisition by merger
of MFM. This acquisition adds to the Company's existing product
offering a premium muffin product and additional points of
distribution for its branded bagel and coffee products. It is
expected that the introduction of MFM muffin products will
enhance the revenue potential of existing bagel stores and result
in operating leverage as corporate overhead is spread over an
additional 60 franchise and 5 Company-operated units. The Company
has reduced the number of MFM employees and is in the process of
closing MFM's corporate facility and combining operations in the
Company's Chicago, Illinois headquarters. As the Company already
has significant infrastructure in place to oversee franchisee and
Company stores operations, it is expected that the integration of
MFM with the Company's operations will require minimal additional
resources.
With the increase in both franchise, licensed and Company-owned
operations, the Company has experienced increases in payroll,
occupancy and overhead costs in the corporate offices. At May 31,
1997 the Company had 48 employees at the corporate level who
oversee operations of the franchise, licensed and Company-owned
store operations, up from 21 at the end of 1995, and 33 at the
end of fiscal 1996. While these costs have increased, they have
decreased as a percentage of total revenues, and management
expects that these costs will further decline as a percentage of
revenue as additional franchise and Company-owned units are
added. It is expected that the MFM acquisition and existing
Company growth will require only modest increases in employees at
the corporate office. Additionally, as the Company approximately
doubled the space at the corporate headquarters in late 1996
through subletting an office suite adjacent to the Company's
existing offices, it is anticipated that the Company will not
require additional office facilities in the foreseeable future.
The Company believes it is in a position to leverage selling,
general and administrative expenses across increasing revenue.
RESULTS OF OPERATIONS
Three Months Ended May 31, 1997 versus
Three Months Ended May 31, 1996
- --------------------------------------
Total revenues increased 213% to $3,491,000 in the second quarter
1997 from $1,115,000 in the prior year quarter. This increase was
driven primarily by the increase in Company-owned store revenues
which accounts for 65.4% of total revenue this quarter, up from
49.2% of total revenue in the prior year quarter. The Company
added 9 Company-owned units during the quarter (5 of which were a
result of the MFM acquisition) bringing the total to 31 in
operation at May 31, 1997, as compared to only 7 in operation at
May 31, 1996. Franchise and area development fees increased to
$413,000 or 11.8% of total revenue in second quarter 1997 from
$190,000 or 17.0% of total revenue in the year-ago quarter as a
result of selling a Big Apple Bagels master franchise agreement
for the state of Hawaii ($200,000) and due to the sale of an
option to purchase a Big Apple Bagels master franchise agreement
for the country of South Korea ($50,000). With out the impact of
these master franchise sales, franchise and area development
fees, would have declined by $33,000 from last year's second
quarter as a result of only opening 8 franchise stores this
quarter versus 10 in the year-ago quarter. Royalty fees from
franchise stores increased to $553,000 or 15.8% of revenue in
this quarter from $349,000 or 31.3% of revenue in last year's
quarter, as a result of the higher number of franchise stores in
operation during the quarter compared to the prior year,
including the impact of adding 60 MFM franchise units in May
1997. Licensing fees and other income increased from
approximately $27,000 in second quarter 1996 to $245,000 in this
year's second quarter or 7.0% of total revenues as a result of
the Company's entrance into various nontraditional channels of
distribution, including the sale of Brewster's Coffee to
franchisees and licensees of the Company, licensing fees paid by
Host Marriott on the sales of product in Big Apple Bagels
licensed units, and commissions received on the sale to Host
Marriott and Mrs. Fields by a third party commercial baker of
par-baked Big Apple Bagels.
Food, beverage and paper costs increased by 320%, and store
payroll and other operating expenses increased by 374% in second
quarter 1997 from the year-ago quarter as a result of increasing
the Company-owned stores base from seven units in operation last
year to 31 at May 31, 1997. Total food, beverage and paper costs
consumed 32.9% of Company-store revenue in the second quarter
this year versus 32.5% during last year's second quarter, while
store payroll and other operating expenses increased to 52.8% of
Company-store revenue in second quarter 1997 versus 46.3% in last
year's quarter. The levels of these rates, and the increases from
second quarter 1996 in food, beverage and paper costs, and store
payroll and other operating expenses, are a direct result of the
increase in Company-owned stores during this quarter and last and
related start-up inefficiencies.
Selling, general and administrative expenses increased 98.2% to
$1,402,000 in second quarter 1997 from $708,000 in the prior year
quarter as a result of supporting an increasing base of franchise
stores as well as the significant increase in Company-owned
stores from last year's quarter. Payroll-related costs increased
67.7% from the year-ago quarter due to the increase in corporate-
level headcount from 24 at May 31, 1996 to 48 at May 31, 1997.
Depreciation and amortization expense increased 473% due to the
significant increase in Company-owned store depreciation and
amortization of intangible assets including goodwill, contract
rights, noncompetition agreements, franchise contract rights and
trademarks resulting from the Company's various acquisitions.
Other selling, general and administrative expenses increased
63.1% as a result of the increase in Company-owned and franchise
units, as well as the increase in office space of the corporate
headquarters supporting the increased corporate headcount.
Selling, general and administrative expenses, as a percent of
total revenue, declined to 40% in this quarter versus 63% in last
year's quarter.
Income from operations was $134,000 in second quarter 1997 versus
a loss from operations of $25,000 in second quarter 1996.
Interest income decreased to $17,000 in this year's quarter from
$90,000 in last year's quarter as the Company's cash and cash
equivalents balances was $5.7 million at May 31, 1996 as compared
to $1.0 million at May 31, 1997. Interest expenses was $2,000
this quarter versus minimal amounts in the second quarter last
year. Interest expense is expected to increase in subsequent
quarters due to interest on debt assumed in the MFM acquisition,
and due to borrowings by the Company under the bank line of
credit described below under the caption "Liquidity and Capital
Resources."
Net income for second quarter 1997 increased to approximately
$149,000 as compared to the prior year quarter of $65,000.
Preferred stock dividends accumulated, related to the issuance of
87,710 shares of Preferred Stock during the quarter, resulted in
a net loss attributable to common shareholders of $74,000.
Preferred dividends in the amount of $223,000 accumulated during
the period, which includes $193,000 attributable to the 15%
discount available to holders of the Preferred Stock in acquiring
Common Stock upon ultimate conversion. Such discounts must be
recognized as dividends under generally accepted accounting
principles. The total discount which is treated as a dividend
(i.e., $387,000), is required to be amortized over the minimum
period from issuance to the first date of convertibility, August
1, 1997. The remaining $194,000 (i.e., $387,000 less $193,000
recognized in the quarter ended May 31, 1997) will be amortized
over the two-month period prior to August 1, 1997 in the third
quarter. Once fully recognized by August 1, 1997, no additional
preferred dividends will accumulate related to this conversion
discount.
The preferred dividend accumulated which is attributable to the
conversion discount is a non-cash entry which has no impact on
operating income or total equity of the Company. Upon issuance
of the Preferred Stock, the total of $387,000 representing the
conversion discount was recorded as additional paid-in capital.
As the dividend is accumulated during the period prior to
convertibility, the dividend is recorded as a reduction in
retained earnings and an increase in the preferred stock carrying
value.
Net loss per share for this quarter was $0.01 on both a primary
and fully-diluted basis, as compared to net income per share in
second quarter 1996 of $ 0.01.
Six Months Ended May 31, 1997 versus
Six Months Ended May 31, 1996
- ------------------------------------
Total revenues increased 223% to $6,265,000 for the six month
period ended May 31, 1997 from $1,941,000 in the prior year
period. This increase was driven primarily by the increase in
Company-owned store revenues which accounts for 65.3% of total
revenue this period, up from 40.5% of total revenue in the prior
year period. The Company added 17 Company-owned units during the
period (5 of which were a result of the MFM acquisition), but
sold one bringing the total to 31 in operation at May 31, 1997,
as compared to only 7 in operation at May 31, 1996. Franchise
and area development fees increased to $648,000 or 10.3% of total
revenue in this period from $492,000 or 25.3% of total revenue in
the year-ago period as a result of selling a Big Apple Bagels
master franchise agreement for the state of Hawaii ($200,000) and
due to the sale of an option to purchase a Big Apple Bagels
master franchise agreement for the country of South Korea
($50,000). With out the impact of these master franchise sales,
franchise and area development fees, would have declined by
$94,000 from last year's period as a result of opening only 20
franchise stores this period versus 25 in the year-ago period.
Royalty fees from franchise stores increased to $959,000 or 15.3%
of revenue in this period from $634,000 or 32.7% of revenue in
last year's period, as a result of the higher number of franchise
stores in operation during the period compared to the prior year,
including the impact of adding 60 MFM franchise units in May
1997. Licensing fees and other income increased from
approximately $30,000 in last year's period to $571,000 in this
year's second quarter or 9.1% of total revenues as a result of
the Company's entrance into various nontraditional channels of
distribution, including the sale of Brewster's Coffee to
franchisees and licensees of the Company, licensing fees paid by
Host Marriott on the sales of product in Big Apple Bagels
licensed units, and commissions received on the sale to Host
Marriott and Mrs. Fields by a third party commercial baker of
par-baked Big Apple Bagels. Additionally, the Company generated
$156,000 from the resale to franchisees of Company-operated units
during the first quarter 1997.
Food, beverage and paper costs increased by 428%, and store
payroll and other operating expenses increased by 498%, in the
six month period ended May 31, 1997 from the year-ago period as a
result of increasing the Company-owned stores base from seven
units in operation last year to 31 at May 31, 1997. Total food,
beverage and paper costs consumed 33.0% of Company-store revenue
in this period versus 32.6% during last year's period, while
store payroll and other operating expenses increased to 55.4% of
Company-store revenue in this period versus 48.2% in last year's
period. The levels of these rates, and the increases from last
year's period in food, beverage and paper costs, and store
payroll and other operating expenses, are a direct result of the
increase in Company-owned stores during this period and during
the last quarter of 1996 and and related start-up inefficiencies.
Selling, general and administrative expenses increased 85.9% to
$2,512,000 in this period from $1,351,000 in the prior year
period as a result of supporting an increasing base of franchise
stores as well as the significant increase in Company-owned
stores from last year's period. Payroll-related costs increased
58.9% from the year-ago period due to the increase in corporate-
level headcount from 24 at May 31, 1996 to 48 at May 31, 1997.
Depreciation and amortization expense increased 519% due to the
significant increase in Company-owned store depreciation and
amortization of intangible assets including goodwill, contract
rights, noncompetition agreements, franchise contract rights and
trademarks resulting from the Company's various acquisitions.
Other selling, general and administrative expenses increased
51.0% as a result of the increase in Company-owned and franchise
units, as well as the increase in office space of the corporate
headquarters supporting the increased corporate headcount.
Selling, general and administrative expenses, as a percent of
total revenue, declined to 40.1% in this period versus 69.9% in
last year's period.
Income from operations was $139,000 in the six month period ended
May 31, 1997 versus a loss from operations of $46,000 in last
year's period. Interest income decreased to $37,000 in this
year's period from $193,000 in last year's period. This decrease
is due to having lower cash balances than last year as the
Company had just completed its initial public offering in
November 1995 and had invested the proceeds in interest-bearing
securities during the first half of fiscal 1997. Interest
expenses was only $2,000 this period versus $4,000 in the last
year period.
Net income for the period increased to approximately $174,000 as
compared to the prior year period of $144,000. Preferred stock
dividends accumulated, related to the issuance of 87,710 shares
of Preferred Stock during the period, resulted in a net loss
attributable to common shareholders of $49,000. Preferred
dividends in the amount of $223,000 accumulated during the
period, which includes $193,000 attributable to the 15% discount
available to holders of the Preferred Stock in acquiring Common
Stock upon ultimate conversion. Such discounts must be
recognized as dividends under generally accepted accounting
principles. The total discount which is treated as a dividend
(i.e., $387,000), is required to be amortized over the minimum
period from issuance to the first date of convertibility, August
1, 1997. The remaining $194,000 (i.e., $387,000 less $193,000
recognized in the quarter ended May 31, 1997) will be amortized
over the two-month period prior to August 1, 1997 in the third
quarter. Once fully recognized by August 1, 1997, no additional
preferred dividends will accumulate related to this conversion
discount.
The preferred dividend accumulated which is attributable to the
conversion discount is a non-cash entry which has no impact on
operating income or total equity of the Company. Upon issuance
of the Preferred Stock, the total of $387,000 representing the
conversion discount was recorded as additional paid-in capital.
As the dividend is accumulated during the period prior to
convertibility, the dividend is recorded as a reduction in
retained earnings and an increase in the preferred stock carrying
value.
Net loss per share for this period was $0.01 on both a primary
and fully-diluted basis, as compared to net income per share in
last year's period of $ 0.02.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended May 31, 1997, cash used in operating
activities was $278,000 as compared with $372,000 used by
operating activities during the comparable last year period.
This reduction in operating cash uses is a direct result of the
improved operating results of the Company on a cash basis,
without the impact of $563,000 in depreciation and amortization
expense related to the Company's increased base of operations.
Cash used for investing activities during the six moths ended May
31, 1997 totaled $3,030,000 of which $2,140,000 was used to
purchase of property, plant and equipment primarily for new
Company-owned store construction. Business acquisitions during
the period required $651,000, net of $455,000 in notes receivable
related to the Just Bagels, Inc. and affiliate acquisition in
January 1997 converted to purchase consideration. Collections on
notes receivable provided approximately $132,000 during the
period.
Financing activities provided a total of $2,174,000 during the
six months ended May 31, 1997. In April 1997 the Company
completed the sale of 87,710 shares of $25.00 Preferred Stock in
a private placement to institutional investors, netting
approximately $2 million after placement agent commissions and
fees. Additionally, in April 1997, the Company entered a $2
million line of credit agreement (the "Credit Facility") with a
bank expiring in October 1998. Maximum borrowing under the
Credit Facility is limited to a borrowing base of 80% of accounts
receivable under 90 days and 40% of equipment costs. Interest is
payable monthly at prime plus one percent (currently 9.5%), with
principal due upon the maturity of the note in October 1998. At
May 31, 1997, the Company had approximately $211,000 outstanding
under the Credit Facility. In the MFM acquisition, the Company
assumed approximately $350,000 in long-term debt, of which
$330,000 payable to MFM's existing bank was converted to
borrowings under the Credit Facility in July 1997. The Company
expects to make additional draws on the Credit Facility through
the remainder of 1997 to complete its current Company-store
expansion plan. The Company believes that its current cash
balances, combined with cash flow from operations and additional
borrowings under the Credit Facility, will adequately fund its
Company-store development and acquisition plan for the year and
provide additional working capital to assist in the Company
meeting its current goals.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1996, the Company filed an arbitration action
against a franchisee alleging breach of its franchise agreement
for refusal to submit required sales reports and pay royalty fees
and contributions to the national marketing fund. The franchisee
filed suit in the Circuit Court of Cook County, Illinois against
the Company and its officers and directors on April 19, 1996. The
franchisee alleges that the Company misrepresented the initial
investment required to establish a store and made untrue and
unauthorized earnings claims in violation of the Illinois
Franchise Disclosure Act. Plaintiffs seek rescission of the
franchise agreement, damages of $600,000 and punitive damages in
the amount of $6,000,000. Management believes the case is without
merit and on May 28, 1996, filed a motion to stay litigation in
order to compel the plaintiffs to have their claims heard in
arbitration as required by the provisions of the franchise
agreement. A hearing on this matter was held on July 11th and 12th,
1997 and an additional hearing has been scheduled for September
1997.
On August 18, 1995, MFM filed a claim in federal court against a
franchisee alleging trademark violations as a result of the
franchisee's alleged misuse of the MFM trademark. Subsequently
the franchisee filed a counter claim to be heard in arbitration,
as required under the franchise agreement, against MFM alleging
unauthorized earnings claims in violation of the Trade Regulation
Rule of the Federal Trade Commission. The federal court claim
was dismissed as a result of the issue being moved to
arbitration. The franchisee originally sought $250,000 in
damages against MFM and subsequently amended the claim in April
1997 to $500,000. Management believes the case against MFM is
without merit. To date, six arbitration hearings have been held
on this matter. Two additional hearing dates have been set for
September and October 1997.
ITEM 2. CHANGES IN SECURITIES
On March 27, 1997, the Company authorized and began issuing a
series of convertible preferred stock which has liquidation and
dividend rights senior to that of common stock. See financial
statements above, and exhibit 4.4 to the report on Form 10-QSB
filed for the quarter ended February 28, 1997 for further
details.
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
On May 28, 1997, the Company filed an initial report on Form 8-K
related to the acquisition by merger of MFM completed on May 13,
1997.
EXHIBITS
The following exhibits are filed herewith.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
[i] 2.1 Asset Purchase Agreement dated February 2, 1996 between
the Company, and Brewster's Coffee Company, Inc. and
Peter D. Grumhaus
[ii] 2.2a Asset Purchase Agreement by and among BAB Systems, Inc.,
Bagels Unlimited, Inc. ("BUI"), and Donald Nelson and
Mary Ann Varichak dated May 1, 1996
[iii] 2.3a Asset Purchase Agreement by and between the
Company and Strathmore Bagels Franchise Corp. ("Strathmore")
dated May 21, 1996
[iii] 2.3e Memorandum of Understanding Regarding Form of License
Agreement effective November 30, 1995, between Strathmore
and Host International, Inc.
[iii] 2.3f Consent to Assignment between Strathmore and Host
International, Inc., dated March 13, 1996, as amended May
21, 1996
[vii] 2.4a Acquisition Agreement dated May 1, 1997 by and
among BAB Holdings, Inc., BAB Acquisition Corp., My Favorite
Muffin, Too, Inc., Muffin Holdings of Pennsylvania,
a limited partnership, Ruth Stern, Owen Stern, and Ilona Stern
[vii] 2.4b Registration Rights Agreement dated as of May 1,1997 between
BAB Holdings, Inc., and Owen Stern, Ruth Stern, Ilona Stern
and Pierce W. Hance
[vi] 4.4 Statement of Designation, Number, Voting Powers, Preferences
and Rights of Series of Preferred Stock of BAB Holdings,
Inc. to be Designated Series A Convertible Preferred Stock
dated March 25, 1997
[iv] 10.1 Form of Franchise Agreement
[iv] 10.2 Form of Franchise Agreement--Satellite
[iv] 10.3 Form of Franchise Agreement--Wholesale
[iv] 10.4 Form of Area Development Agreement
[iv] 10.5 Confidentiality and Non-Competition Agreement with Franchisees
[iv] 10.6 Form of Confidentiality Agreement with Employees
[iv] 10.7 Licensing Agreement dated November 20, 1992 between the
Company and Big Apple Bagels, Inc.
[iv] 10.8 Assignment of Royalty Mark & Trademark to the Company by Big
Apple Bagels, Inc. dated November 20, 1992
[iv] 10.9 Agreement dated September 14, 1995 among the Company, Big
Apple Bagels, Inc. and Paul C. Stolzer
[i] 10.10 Consulting agreement dated February 16, 1996 between
Paul C. Stolzer and BAB Holdings, Inc.
[iv]10.11 Leases dated November 2, 1994 and February 14, 1995 for
principal executive office
[iv]10.12 1995 Long-Term Incentive and Stock Option Plan
[iv]10.13 1995 Outside Directors Stock Option Plan
[v] 10.15 Program Agreement dated February 10, 1997 between
BAB Systems, Inc., a wholly-owned subsidiary of the
Company, and Franchise Mortgage Acceptance Company LLC
* 11.0 Calculation of Earning Per Share
[v] 21.1 List of Subsidiaries of the Company
- -----------------------------------
[i] Incorporated by reference to the exhibits filed as a part
of the Company's Report on Form 10-KSB for the fiscal year ended
November 30, 1995
[ii] Incorporated by reference to the exhibits filed as a part of the
Company's Report on Form 8-K dated May 1, 1996
[iii] Incorporated by reference to the exhibits filed as a part of the
Company's Report on Form 8-K dated May 21, 1996
[iv] Incorporated by reference to exhibits filed as a part of the Company's
Registration Statement on Form SB-2, effective November 27, 1995
(Commission File No. 33-98060C)
[v] Incorporated by reference to exhibits filed as a part of the Company's
Report on Form 10-KSB for the fiscal year ended November 30, 1996
[vi] Incorporated by reference to exhibits filed as a part of the Company's
Report on Form 10-QSB for the fiscal quarter ended February 28, 1997.
[vii] Incorporated by reference to exhibits filed as a part of the Company's
Report on Form 8-K dated May 13, 1997
* Filed herewith
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 15, 1997 By: /s/ THEODORE P. NONCEK
---------------- ----------------------
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
Exhibit 11.0
- ------------
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
3 MONTHS ENDED MAY 31, 1997 VERSUS 3 MONTHS ENDED MAY 31, 1996
6 MONTHS ENDED MAY 31, 1997 VERSUS 6 MONTHS ENDED MAY 31, 1996
3 Months 3 Months 6 Months 6 Months
5/31/97 5/31/96 5/31/97 5/31/96
-------- -------- --------- --------
<S> <C> <C> <C> <C>
PRIMARY EPS
Net income $148,660 $64,832 $173,985 $143,644
Less: Preferred dividend
accumulated (222,715) - (222,715) -
-------- ------- -------- --------
Net income (loss) attributable
to common shareholders $(74,055) $64,832 $(48,730) $143,644
======== ======= ======== ========
Weighted average shares
outstanding 7,246,380 7,350,290 7,194,725 7,178,219
========= ========= ========= =========
Net income (loss) per
common share $ (0.0102) $ 0.0088 $ (0.0068) $ 0.0200
========= ========= ========= ========
FULLY DILUTED EPS
Net income $ 148,660 $64,832 $ 173,985 $143,644
Add: Bond interest expense on
"as if converted" method - - - 566
Less: Preferred dividend
accumulated (222,715) - (222,715) -
--------- -------- --------- --------
Net income (loss) attributable
to common shareholders $ (74,055) $64,832 $ (48,730) $144,210
========= ======== ========= ========
Weighted average shares
outstanding 7,246,380 7,381,545 7,194,725 7,232,153
========= ========= ========= =========
Net income (loss) per
common share $(0.0102) $ 0.0088 $(0.0068) $ 0.0199
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE
SIX MONTH PERIOD ENDED MAY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,030,067
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,230,019
<PP&E> 6,457,754
<DEPRECIATION> 553,120
<TOTAL-ASSETS> 15,908,436
<CURRENT-LIABILITIES> 3,069,875
<BONDS> 580,237
0
1,808,734
<COMMON> 11,416,288
<OTHER-SE> (966,698)
<TOTAL-LIABILITY-AND-EQUITY> 15,908,436
<SALES> 6,264,834
<TOTAL-REVENUES> 6,264,834
<CGS> 1,350,415
<TOTAL-COSTS> 6,125,527
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,488
<INCOME-PRETAX> 173,985
<INCOME-TAX> 0
<INCOME-CONTINUING> 173,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,730)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
