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, 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: 7,711,630 shares of Common
Stock, as of October 9, 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
August 31, 1997
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $272,624 $ 860,206
Other current assets 2,501,933
------------
Total current assets 3,362,139
Property, plant, and equipment, net of
accumulated depreciation of $823,378 6,806,613
Goodwill, net of accumulated amortization of $83,751 2,773,191
Franchise contract rights, net of accumulated
amortization of $24,811 1,801,572
Other assets and intangible assets, net of
accumulated amortization of $585,692 1,804,559
------------
$ 16,548,074
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,123,017
Deferred franchise fee revenue 646,900
Current portion of long-term debt 28,502
Other current liabilities 595,124
------------
Total current liabilities 3,393,543
Long-term debt, less current portion 1,452,117
Shareholders' equity:
Common stock 10,642,376
Additional paid-in capital 1,409,652
Preferred stock 2,018,568
Accumulated deficit ( 2,368,182)
------------
Total shareholders' equity 11,702,414
------------
$ 16,548,074
============
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,
1997 1996
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 2,830,808 $ 1,180,940
Royalty fees from franchised stores 705,557 374,325
Franchise and area development fees 124,645 316,831
Licensing fees and other income 220,597 94,827
--------------------------
3,881,607 1,966,923
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 973,371 430,324
Store payroll and other operating expenses 1,708,185 581,323
Selling, general, and administrative expenses:
Payroll-related expenses 541,761 348,508
Depreciation and amortization 425,874 116,673
Other 743,003 409,695
--------------------------
1,710,638 874,876
--------------------------
4,392,194 1,886,523
--------------------------
Income (loss) before interest (510,587) 80,400
Interest expense (29,803) (191)
Interest income 11,979 68,234
--------------------------
Net income(loss) (528,411) 148,443
Preferred stock divided accumulated (374,862) -
--------------------------
Net income (loss) attributable to
common shareholders $ (903,273) $ 148,443
==========================
Net income (loss) attributable to common and
common equivalent share:
Primary $ (0.12) $ 0.02
==========================
Fully diluted $ (0.12) $ 0.02
==========================
Average number of common and common
equivalent shares used in calculation:
Primary 7,601,288 7,245,405
==========================
Fully diluted 7,601,288 7,648,941
==========================
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,
1997 1996
-----------------------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores $ 6,918,171 $1,965,939
Royalty fees from franchised stores 1,664,301 1,008,398
Franchise and area development fees 772,545 808,331
Licensing fees and other income 791,424 124,765
-----------------------
10,146,441 3,907,433
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 2,323,786 686,274
Store payroll and other operating expenses 3,970,983 963,312
Selling, general, and administrative expenses:
Payroll-related expenses 1,470,326 932,975
Depreciation and amortization 988,820 207,631
Other 1,763,806 1,082,386
-----------------------
4,222,952 2,222,992
-----------------------
10,517,721 3,872,578
-----------------------
Income (loss) before interest (371,280) 34,855
Interest expense (32,291) (4,346)
Interest income 49,145 261,578
-----------------------
Net income(loss) (354,426) 292,087
Preferred stock divided accumulated (597,577) -
-----------------------
Net income (loss) attributable to
common shareholders $ (952,003) $ 292,087
=======================
Net income (loss) attributable to common and
common equivalent share:
Primary $ (0.13) $ 0.04
=======================
Fully diluted $ (0.13) $ 0.04
=======================
Average number of common and common
equivalent shares used in calculation:
Primary 7,330,246 7,250,672
=======================
Fully diluted 7,330,246 7,337,226
=======================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1997 1996
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided(used)by operating activities $ (500,684) $ 88,137
INVESTING ACTIVITIES
Business acquisitions (650,531) (2,103,008)
Purchases of property, plant and equipment (2,897,038) (955,181)
Loans to franchisees - (578,902)
Other (279,133) (247,439)
-----------------------
Net cash used for investing activities (3,826,702) (3,884,530)
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 1,420,975 -
Repayment of long-term debt (362,152) -
Payment of preferred stock issuance costs (227,274) -
Other - (171,787)
----------------------
Net cash provided by financing activities 3,024,299 848,213
----------------------
Net decrease in cash and cash equivalents (1,303,087) (2,948,180)
Cash and cash equivalents at beginning of period 2,163,293 7,679,009
----------------------
Cash and cash equivalents at end of period $ 860,206 $4,730,829
======================
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 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 August 31, 1997 are as follows:
Stores opened:
Company-owned 36
Franchisee-owned 180
Licensed 40
____
256
Unopened franchised stores for which an agreement
has been sold:
Franchise agreement 29
Area development agreement 34
____
63
____
Total 319
====
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. The Company recognized
$156,400 in gains from the sale of these units to franchisees.
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.
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 had 60
franchise and 5 company-operated units in operation at to point
of the acquisition. 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 and converted it to borrowings under the Company's credit
facility. Total revenue of MFM was $2.7 million for the year
ended December 31, 1996.
In August 1997 the Company sold the Buffalo Grove, Illinois unit
acquired from Heartland to a franchisee for $231,000 consisting
of two notes receivable from the purchasers, $43,000 due October
1997, and $188,000 due in monthly payments through August 2004,
with interest at 8.5%.
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 qualified 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").
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 a registration statement for the
conversion Common Stock 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 $375,000 accumulated during
the period, which included $194,000 attributable to the 15%
discount available to holders of the Preferred Stock in acquiring
Common Stock upon ultimate conversion. Such discounts are
recognized as dividends under generally accepted accounting
principles. The total discount which was treated as a dividend
was recognized over the minimum period from issuance to the first
date of convertibility which was August 1, 1997. During second
quarter 1997 the Company previously recorded preferred dividends
of $193,000 related to this discount. As fully recognized at
August 31, 1997, no additional preferred dividends will
accumulate related to this conversion discount. The Company was
additionally obligated to issue warrants to purchase two shares
of Common Stock for each share of Preferred Stock on August 1,
1997. The value of these two-year warrants was additionally
recorded as a preferred stock dividend accumulated of $138,000.
The preferred dividend accumulated which is attributable to the
conversion discount is a non-cash entry which had 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 was accumulated during the period prior to
convertibility, the dividend was 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 August 31, 1997, the Company had approximately
$1,421,000 outstanding under this agreement, including $330,000
representing the conversion of remaining 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 possible
future 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 36
Company-owned and 220 franchised and licensed units at August 31,
1997. 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.
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, 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 of MFM.
This acquisition added 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 these additional
units. The Company has reduced the number of MFM employees and
has closed MFM's corporate facility and combined 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
continued integration of MFM with the Company's operations will
require only 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 August
31, 1997 the Company had 40 employees at the corporate level who
oversee operations of the franchise, licensed and Company-owned
store operations, up from 28 at August 31, 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 August 31, 1997 versus
Three Months Ended August 31, 1996
- -----------------------------------------
Total revenues increased 97% to $3.9 million in third quarter
1997 from $2.0 million in the prior year quarter. This increase
was driven primarily by the increase in Company-owned store
revenues which accounts for 72.9% of total revenue this quarter,
up from 60.0% of total revenue in the prior year quarter. The
Company added 6 Company-owned units during the quarter but sold
one bringing the total to 36 in operation at August 31, 1997, as
compared to only 10 in operation at August 31, 1996. Franchise
and area development fees decreased 61% to $125,000 or 3.2% of
total revenue in third quarter 1997, from $317,000 or 16.1% of
total revenue in the year-ago quarter, as a result of fewer
openings of franchise units in this quarter versus last year, and
a $161,000 master franchise fee recognized in August 1996.
Without the impact of the master franchise agreement, franchise
and area development fees for the quarter would have been
approximately 20% below the comparable 1996 figure. This decrease
in franchise openings during the quarter was attributable to
legal and geographic restrictions in selling franchise
territories during the last half of 1996 as the Company attempted
to acquire Chesapeake Bagel Bakery. During the last six months
of 1996, the Company was unable to complete franchise sales in
several key markets while updating franchise offering
circulars and attempting to minimize territorial disputes
with existing Chesapeake area developers. Royalty fees from franchise
stores increased 88% to $706,000 or 18.2% of revenue in this
quarter from $374,000 or 19.0% 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 MFM franchise units in May 1997. Licensing fees
and other income increased from approximately $95,000 in third
quarter 1996 to $221,000 in this year's third quarter or 5.7% 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 included in
licensing fees and other income for the quarter is approximately
$32,000 recognized on the sale of a Company-operated unit to a
franchisee.
Food, beverage and paper costs increased by 126%, and store
payroll and other operating expenses increased by 194% in third
quarter 1997 from the year-ago quarter as a result of increasing
the Company-owned stores base from ten units in operation last
year to 36 at August 31, 1997. Total food, beverage and paper
costs was 34.4% of Company-store revenue in the third quarter
this year down from 36.4% during last year's third quarter, while
store payroll and other operating expenses increased to 60.3% of
Company-store revenue in third quarter 1997 versus 49.2% in last
year's quarter. The levels of these rates, and the increase
from third quarter 1996 in 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. The Company is aggressively working to decrease
these rates as a percent of total sales in operating units as
evidenced by the decrease in food, beverage and paper costs.
Over half of the Company-owned stores have been in operation for
less than one year and have yet to fully reach mature sales
levels and operating efficiencies. It is expected that as these
stores are in operation for longer periods they will better
contribute to the Company's operating results.
Selling, general and administrative expenses increased 96% to
$1.7 million in third quarter 1997 from $875,000 in the prior
year quarter as a result of supporting an increasing base of
franchise stores, including those related to the MFM acquisition,
as well as the significant increase in Company-owned stores from
last year's quarter. Payroll-related costs increased 55% from
the year-ago quarter due to the increase in corporate-level
headcount from 28 at August 31, 1996, to 40 at August 31, 1997.
Depreciation and amortization expense increased 265% 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 81%
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, excluding
depreciation and amortization, as a percent of total revenue,
declined to 33.1% in this quarter versus 38.5% in last year's
quarter as the Company continues to realize operating leverage
from its increasing revenue base.
Loss from operations was $528,000 in third quarter 1997 versus
income from operations of $80,000 in third quarter 1996. The
loss this quarter is primarily attributable to the high
percentage of Company-operated stores which have been in
operation for less than one year, and the decrease in franchise
fees noted above. Interest income decreased to $12,000 in this
year's quarter from $68,000 in last year's quarter due to lower
cash and cash equivalent balances during the quarter as compared
to last year. Interest expenses was $30,000 this quarter versus
minimal amounts in the third quarter last year as a result of
borrowings on the Company's $2 million line of credit.
Net loss for third quarter 1997 was $528,000 as compared to the
prior year quarter net income of $148,000. Preferred stock
dividends accumulated, related to the issuance of 87,710 shares
of Preferred Stock during the second quarter, resulted in a net
loss attributable to common shareholders of $903,000. Preferred
dividends in the amount of $375,000 were accumulated during the
period, which included $194,000 attributable to the 15% discount
available to holders of the Preferred Stock in acquiring Common
Stock upon ultimate conversion. Such discounts are recognized as
dividends under generally accepted accounting principles. The
total discount treated as a dividend was recognized over the
minimum period from issuance, to the first date of convertibility
which was August 1, 1997. During second quarter 1997 the Company
recorded preferred dividends of $193,000 related to this
discount. As fully recognized at August 31, 1997, no additional
preferred dividends will accumulate related to the conversion
discount. The Company was additionally obligated to issue
warrants to purchase two shares of Common Stock for each share of
Preferred Stock on August 1, 1997. The value of these two-year
warrants was additionally recorded as a preferred stock dividend
accumulated of $138,000.
The preferred dividend accumulated 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 was accumulated during the period prior to
convertibility, the dividend was recorded as a reduction in
retained earnings and an increase in the preferred stock carrying
value. Similarly, the preferred dividend related to the issuance
of the warrants noted above represents a non-cash adjustment
reducing retained earnings and increasing the additional paid-in
capital.
Net loss per share for this quarter was $0.12, as compared to net
income per share in third quarter 1996 of $0.02.
Nine Months Ended August 31, 1997 versus
Nine Months Ended August 31, 1996
- ----------------------------------------
Total revenues increased 160% to $10.1 million for the nine month
period ended August 31, 1997, from $3.9 million in the prior year
period. This increase was driven primarily by the increase in
Company-owned store revenues which accounts for 68.2% of total
revenue this period, up from 50.3% of total revenue in the prior
year period. The Company added 23 Company-owned units during the
period, but sold two bringing the total to 36 in operation at
August 31, 1997, as compared to only 10 in operation at August
31, 1996. Franchise and area development fees decreased 4% to
$773,000 or 7.6% of total revenue in this period from $808,000 or
20.7% of total revenue in the year-ago period as a result of
fewer franchise store openings during the first three quarters of
1997 as compared with last year's period. Included in the
comparative amounts were $250,000 related to the sale of master
franchise agreements in second quarter 1997, and $161,000 related
to the sale of a master franchise in last year's third quarter.
Without the impact of these master franchise sales, franchise and
area development fees, would have declined by 19% or $124,000
from last year's period as a result of opening only 30 franchise
stores this period, versus 38 in the year-ago period. This
decrease in franchise openings during the period was attributable
to legal and geographic restrictions in selling franchise
territories during the last half of 1996 as the Company attempted
to acquire Chesapeake Bagel Bakery. During the last six months of
1996, the Company was unable to complete franchise sales in certain
key markets while updating franchise offering circulars and
attempting to minimize territorial disputes with existing
Chesapeake area developers. Royalty fees from franchise
stores increased 65% to $1.7 million or 16.4% of revenue in this
period from $1.0 million or 25.8% 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 MFM franchise units in May 1997. Licensing
fees and other income increased from approximately $125,000 in
last year's period to $791,000 in this year's first three
quarters or 7.8% 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 $188,000 from the resale to
franchisees of Company-operated units during the first three
quarters of 1997.
Food, beverage and paper costs increased by 239%, and store
payroll and other operating expenses increased by 312%, in the
nine month period ended August 31, 1997 from the year-ago period
as a result of increasing the Company-owned stores base from ten
units in operation last year to 36 at August 31, 1997. Total
food, beverage and paper costs was 33.6% of Company-store revenue
in this period versus 34.9% during last year's period, while
store payroll and other operating expenses increased to 57.4% of
Company-store revenue in this period versus 49.0% in last year's
period. The levels of these rates, and the increase from 1996 in
store payroll and other operating expenses, are a direct result
of the increase in Company-owned stores during this period and
related start-up inefficiencies. The Company is aggressively
working to decrease these rates as a percent of total sales in
operating units as evidenced by the decrease in food, beverage
and paper costs. Over half of the Company-owned stores have been
in operation for less than one year and have yet to fully reach
mature sales levels and operating efficiencies. It is expected
that as these stores are in operation for longer periods they
will better contribute to the Company's operating results.
Selling, general and administrative expenses increased 90% to
$4.2 million in this period from $2.2 million 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% from the year-ago period due to the increase in corporate-
level headcount from 28 at August 31, 1996, to 40 at August 31,
1997. Depreciation and amortization expense increased 376% 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% 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 excluding
depreciation and amortization, as a percent of total revenue,
declined to 31.9% in this period versus 51.6% in last year's
period as the Company continues to realize operating leverage
from its increasing revenue base.
Loss from operations was $371,000 in the nine month period ended
August 31, 1997 versus income from operations of $35,000 in last
year's period. Interest income decreased to $49,000 in this
year's period from $262,000 in last year's period. This decrease
resulted from lower cash and equivalent balances than last year
as the Company had just completed its initial public offering in
November 1995, and invested proceeds in interest-bearing
securities during the first three quarters of fiscal 1997.
Interest expenses was $32,000 this period versus $4,000 in the
last year period as a result of borrowings on the Company's
credit facility this year.
Net loss for the period was approximately $354,000 as compared to
net income in the prior year period of $292,000. 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 $952,000. Preferred
dividends in the amount of $598,000 were accumulated during the
period, which included $387,000 attributable to the 15% discount
available to holders of the Preferred Stock in acquiring Common
Stock upon ultimate conversion. Such discounts are recognized as
dividends under generally accepted accounting principles. The
total discount treated as a dividend was recognized over the
minimum period from issuance, to the first date of
convertibility, August 1, 1997. The Company was additionally
obligated to issue warrants to purchase two shares of Common
Stock for each share of Preferred Stock on August 1, 1997. The
value of these two-year warrants was additionally recorded as a
preferred stock dividend accumulated of $138,000. As fully
recognized by August 1, 1997, no additional preferred dividends
will accumulate related to this conversion discount or the
warrants.
The preferred dividend accumulated attributable to the conversion
discount was a non-cash entry having 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 was accumulated during the period prior to
convertibility, the dividend was recorded as a reduction in
retained earnings, and an increase in the preferred stock
carrying value. Similarly, the preferred dividend related to the
issuance of the warrants noted above represents a non-cash
adjustment reducing retained earnings and increasing additional
paid-in capital.
Net loss per share for this period was $0.13, as compared to net
income per share in last year's period of $0.04.
Liquidity and Capital Resources
During the nine months ended August 31, 1997, cash used in
operating activities was $501,000 as compared with $88,000
provided by operating activities during the comparable last year
period. Cash used for investing activities during the nine
months ended May 31, 1997 totaled $3.8 million of which $2.9
million 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 $140,000 during the period.
Financing activities provided a total of $3 million during the
nine months ended August 31, 1997. In April 1997 the Company
completed the sale of 87,710 shares of $25.00 Preferred Stock in
a private placement to qualified 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 maturity of the note in October 1998. At
August 31, 1997, the Company had approximately $1.4 million
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
believes that its current cash position, combined with
availability on its Credit Facility, will provide the Company
with sufficient working capital in future periods.
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 obtained an order staying litigation in order to
compel the plaintiffs to have their claims heard in
arbitration as required by the provisions of the franchise
agreement. Hearings have been held on this matter and the Company
anticipates a ruling on this matter in February 1998.
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. To date, seven arbitration hearings have been
held on this matter. An additional hearing date has been set
for October 1997. In connection with the MFM acquisition, the
Company has placed in escrow 200,000 shares of Common Stock issued
as consideration in the acquisition, to secure indemnification by
the former owners of MFM against the outcome of this litigation.
ITEM 2. CHANGES IN SECURITIES
On March 27, 1997, the Company authorized and issued 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 July 23, 1997, the Company filed an amendment to its initial
report on Form 8-K related to the acquisition 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: October 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 AUG 31, 1997 VERSUS 3 MONTHS ENDED AUG 31, 1996
9 MONTHS ENDED AUG 31, 1997 VERSUS 9 MONTHS ENDED AUG 31, 1996
3 Months 3 Months 9 Months 9 Months
8/31/97 8/31/96 8/31/97 8/31/96
-------- -------- --------- --------
<S> <C> <C> <C> <C>
PRIMARY EPS
Net income(loss) $(528,411) 148,443 $(354,426) $292,087
Less: Preferred dividend
accumulated (374,862) - (597,577) -
-------- ------- -------- --------
Net income (loss) attributable
to common shareholders $(903,273) $148,443 $(952,003) $292,087
======== ======= ======== ========
Weighted average shares
outstanding 7,601,288 7,245,405 7,330,246 7,250,672
========= ========= ========= =========
Net income (loss) per
common share $ (0.1188) $ 0.0205 $ (0.1299) $ 0.0403
========= ========= ========= =========
FULLY DILUTED EPS
Net income(loss) $(528,411) $148,443 $ (354,426) $ 292,087
Less: Preferred dividend
accumulated (374,862) - (597,577) -
--------- -------- --------- ---------
Net income (loss) attributable
to common shareholders $(903,273) $148,443 $(952,003) $ 292,087
========= ======== ========= =========
Weighted average shares
outstanding 7,601,288 7,648,941 7,330,246 7,337,226
========= ========= ========= =========
Net income (loss) per
common share $(0.1188) $ 0.0194 $(0.1299) $ 0.0398
========= ========= ========= =========
</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
NINE MONTH PERIOD ENDED AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 860,206
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,362,139
<PP&E> 6,806,613
<DEPRECIATION> 823,378
<TOTAL-ASSETS> 16,548,074
<CURRENT-LIABILITIES> 3,393,543
<BONDS> 1,452,117
0
2,018,568
<COMMON> 12,052,028
<OTHER-SE> (2,368,182)
<TOTAL-LIABILITY-AND-EQUITY> 16,548,074
<SALES> 6,918,171
<TOTAL-REVENUES> 10,146,441
<CGS> 2,323,786
<TOTAL-COSTS> 10,517,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,291
<INCOME-PRETAX> (354,426)
<INCOME-TAX> 0
<INCOME-CONTINUING> (354,426)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (952,003)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
