As filed with the Securities and Exchange Commission on July 17, 1997
Registration No. 333-29465
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
Under The Securities Act of 1933
--------------------------------
BAB Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
------------------------------------------------------
Illinois 5416 36-3857339
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification
Organization) Code Number)
8501 West Higgins Road,
Suite 320
Chicago, IL 60631
Telephone: (773) 380-6100 Telefax: (773) 380-6183
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive
Offices)
Michael W. Evans, Chief Executive Officer
BAB Holdings, Inc.
8501 West Higgins Road,
Suite 320
Chicago, IL 60631
Telephone: (773) 380-6100 Telefax: (773) 380-6183
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
Deanne M. Greco, Esq.
Janna R. Severance, Esq.
Moss & Barnett
A Professional Association
4800 Norwest Center
90 South 7th Street
Minneapolis, MN 55402
Telephone: (612) 347-0287
Telefax: (612) 339-6686
Approximate Date of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form
are to be offered on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act of 1933, check the
following box. [X]
If this Form is filed to register additional securities
for an offering pursuant to Rule 462(b) under the Securities
Act, please check the following box and list the Securities
Act registration statement number of earlier effective
registration statement for the same offering. [_]__________
If this Form is a post-effective amendment filed pursuant
to Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. [_]__________
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box.[_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share Price Fee
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 768,857 $3.40(3) $2,614,114 $ 793
no par value(1) Shares
Common Stock, 1,332,010 2.75(4) 3,663,030 1,110(5)
no par value(2) Shares
-----------------------------------------------------------------
2,100,867 $6,277,144 $1,903
Shares
=================================================================
</TABLE>
(1)The number of shares registered is based upon the
number of shares that would be issued upon
conversion of the Preferred Stock if such conversion
had occurred on May 30, 1997.
(2)Additional shares requested to be registered pursuant to
Registration Rights Agreements, requested subsequent to
initial filing.
(3)Estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) under the
Securities Act of 1933, as amended. Equal to the
average of the high and low sale prices for the
Common Stock, as reported on the Nasdaq Small-Cap
Market, on June 13, 1997.
(4)Estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) under the
Securities Act of 1933, as amended. Equal to the
average of the high and low sale prices for the
Common Stock, as reported on the Nasdaq Small-Cap
Market, on July 14, 1997.
(5)Additional filing fee related to additional shares
being registered pursuant to Registration Rights
Agreements.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY
ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- --------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR +
+ AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE +
+ SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE +
+ COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS +
+ TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION +
+ STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT +
+ CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER +
+ TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN +
+ ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+ UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+ SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 17, 1997
PROSPECTUS
2,100,867 SHARES
BAB HOLDINGS, INC.
COMMON STOCK
This Prospectus relates to the offering of up to 2,100,867
shares of Common Stock of BAB Holdings, Inc. (the "Company")
for the account of certain shareholders of the Company
(collectively the "Selling Shareholders"). See "Selling
Shareholders." The Company will not receive any proceeds
from the sale of such shares by the Selling Shareholders.
The Selling Shareholders have advised the Company that
all or a portion of the shares may be sold from time to time
by the Selling Shareholders, or by pledgees, donees,
tranferees, or other successors in interest. Such sales may
be made in the over-the-counter market or otherwise at
prices and at terms then prevailing or at prices related to
the then-current market price or in negotiated transactions.
The shares may be sold directly by the Selling Shareholders
to or through brokers or dealers by one or more of the
following: (a) ordinary brokerage or marketmaking
transactions in which the broker or dealer solicits
purchasers; (b) a block trade in which the broker or dealer
so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to
facilitate the transaction; and (c) purchase by a broker or
dealer as principal and resale by such broker or dealer for
its account pursuant to this Prospectus. In effecting
sales, the Selling Shareholders or brokers or dealers
engaged by the Selling Shareholders may arrange for other
brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling
Shareholders or the Company in amounts to be negotiated immediately
prior to the sale. The Selling Shareholders and such brokers and
dealers and any other participating brokers and dealers may
be deemed to be "underwriters" within the meaning of the
Securities Act of 1933 (the "Act") in connection with such
sales. In addition, any securities covered by this
Prospectus that qualify for sale pursuant to Rule 144 under
the Act may be sold under Rule 144 rather than pursuant to
this Prospectus. See "Plan of Distribution."
The Company's Common Stock is currently quoted on The
Nasdaq Stock Market's Small-Cap Market ("Nasdaq") under the
symbol "BAGL." On JuLY 14, 1997, the last reported sale
price of the Common Stock, as reported by Nasdaq, was $
2.875 per Share. See "Price Range of Common Stock; Dividend
Policy."
See "Risk Factors" beginning on page 6 for discussion of
certain factors that should be considered by prospective
purchasers of the shares offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
July _____, 1997
PROSPECTUS SUMMARY
The following summary of certain provisions of this
Prospectus is intended only for ease of reference, is not a
complete presentation of all relevant facts and is qualified
in its entirety by reference to the detailed information
appearing elsewhere in this Prospectus. The entire
Prospectus, including the information set forth under the
caption "Risk Factors," should be read and carefully
considered by prospective investors.
The Company
BAB Holdings, Inc. (the "Company") operates, franchises
and licenses bagel, muffin and coffee concept retail units
under the Big Apple Bagels, My Favorite Muffin and
Brewster's Coffee tradenames and currently has 241 units in
operation in 28 states and two Canadian provinces. The
Company additionally derives income from the sale of its
trademark bagels, muffins and coffees through nontraditional
channels of distribution including under licensing
agreements with Host Marriott Services Corporation, Mrs.
Fields Cookies, Choice Picks Food Courts, and through direct
home delivery of specialty muffin gift baskets and coffee.
The Big Apple Bagels brand franchise and Company-owned
stores feature daily baked "from scratch" bagels, flavored
cream cheeses, premium coffees, gourmet bagel sandwiches and
other related products. Licensed Big Apple Bagels units
under Host Marriott, and future units under Choice Picks
Food Courts, serve the Company's par-baked frozen bagel
products, freshly baked daily, and related products. The My
Favorite Muffin brand consists of units operating as "My
Favorite Muffin" featuring a large variety of freshly baked
muffins and bagels, cream cheeses, coffees and related
products, and units operating as "My Favorite Muffin and
Bagel Cafes" featuring these products as well as a variety
of specialty bagel sandwiches and related products. The
Company's Brewster's Coffee units are specialty coffee shops
featuring a variety of premium arabica bean coffees--freshly
brewed or in bulk--and related products. Big Apple Bagels
units are concentrated in the Midwest and Western United
States while My Favorite Muffin units are clustered in the
Middle Atlantic States and Florida. Brewster's Coffee Shops
are currently located in two states--Illinois and Ohio.
The Company has grown significantly since its initial
public offering in November 1995 through growth in franchise
units, Company-store development, acquisitions and the
development of alternative distribution channels for its
branded products. The Company intends on continuing its
expansion through these means in the future. With the
acquisition of My Favorite Muffin Too, Inc. ("MFM" or "My
Favorite Muffin") on May 13, 1997, the Company immediately
added 60 franchise and five Company-operated units and
expects to leverage on the synergy of distributing muffin
products in existing Big Apple Bagels units and,
alternatively, bagel products and Brewster's Coffee in
existing My Favorite Muffin units. Additionally, the
Company expects to realize further efficiencies in servicing
the larger combined base of Big Apple Bagels, My Favorite
Muffin and Brewster's Coffee franchisees as a result of this
acquisition.
Big Apple Bagels (r), Brewster's Coffeer (r) and My Favorite
Muffin (r) and logos are registered marks of the Company.
The Company was incorporated under the laws of the
State of Illinois on November 25, 1992. Its corporate
office is located at 8501 West Higgins Road, Suite 320,
Chicago, Illinois 60631, and its telephone number is (773)
380-6100. Unless otherwise indicated, the term "Company" as
used herein refers to BAB Holdings, Inc., its subsidiaries
and subsidiaries of its subsidiaries.
The Offering
<TABLE>
<S> <C>
Common Stock Offered . . . . . . . . . . .Up to 2,100,867 shares,
of which 764,357
are issuable from time to
time pursuant to the terms of
the Company's outstanding
Series A Convertible
Preferred Stock (the
"Preferred Stock"), 450,000
are issuable under an option
agreement, 4,500 are issuable
upon exercise of an outstanding
warrant and 882,010 are currently
outstanding. See "Selling
Shareholders" and "Description of
Securities."
Common Stock to be Outstanding . . . . . .8,820,145 shares(1)
After this Offering
Use of Proceeds. . . . . . . . . . . . . .The Company will not receive
any of the proceeds from the
sale of the Shares by the
Selling Shareholders.
Nasdaq symbol. . . . . . . . . . . . . . .BAGL
</TABLE>
- --------
(1) Does not include (i) 570,000 shares of Common Stock
reserved for issuance under the Company's 1995
Long-Term Incentive and Stock Option Plan (the
"Incentive Plan"); (ii) 30,000 shares of Common Stock
reserved for issuance under the Company's 1995 Outside
Directors Stock Option Plan (the "Directors Plan");
(iii) 255,000 shares of Common Stock issuable upon
exercise of a warrant issued to the underwriter of the
Company's initial public offering; (iv) 100,000 shares
of Common Stock issuable upon exercise of an option
issued in the BUI Acquisition; (v) 13,315 shares
issuable upon exercise of a warrant issued to the
placement agent for the Preferred Stock; or (vii) up to
175,420 shares of Common Stock issuable upon exercise
of warrants that could be issued to the Selling
Shareholders as holders of the Series A Preferred
Stock. See "Recent Acquisitions," "Management,"
"Certain Transactions," and "Description of
Securities."
Summary Consolidated Financial and Store Data
The following summary financial information and store
data should be read in conjunction with the historical
financial statements and pro forma financial statements and
the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
May 31 November 30
---------------------------- ----------------------------------
1997 1996
------------------ --------------------
Pro Pro
Actual Forma(2) 1996 Actual Forma(3) 1995
---------- ---------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS
DATA:
REVENUES:
Net sales by
Company-owned
stores $4,087,363 $4,746,046 $784,999 $3,484,319 $5,947,504 $ 563,211
Royalty fees
from
franchised
stores 958,744 1,367,185 634,073 1,402,839 2,239,317 767,064
Franchise
and area
development
fees 647,900 704,150 491,500 1,023,331 1,258,581 700,000
Licensing fees
and other
revenues 570,827 701,784 29,938 413,109 960,827 2,728
---------- --------- --------- --------- ---------- --------
Total
revenues 6,264,834 7,519,165 1,940,510 6,323,598 10,406,229 2,033,003
OPERATING
COSTS AND
EXPENSES:
Food,
beverage
and paper
costs 1,350,415 1,626,870 255,950 1,221,826 2,065,372 191,415
Store payroll
and other
operating
expenses 2,262,798 2,622,567 378,685 1,753,397 3,185,679 283,120
Costs of
uncompleted
business
acquisition (1) -- -- -- 650,922 650,922 --
Depreciation and
amortization 562,946 650,637 90,957 379,266 660,887 65,102
Selling,
general and
administrative
expenses 1,949,368 2,548,890 1,260,463 2,938,806 4,665,971 1,913,944
---------- --------- --------- --------- ---------- ----------
Total
operating
costs and
expenses 6,125,527 7,448,964 1,986,055 6,944,217 11,228,831 2,453,581
---------- --------- --------- --------- ---------- ---------
Income (loss)
from
operations 139,307 70,201 (45,545) (620,619) (822,602) (420,578)
Interest
and other
income
(expense),net 34,678 11,839 189,189 299,775 193,075 (15,182)
---------- --------- ---------- --------- ---------- ---------
Net income(loss) 173,985 82,040 143,644 (320,844) (629,527) (435,760)
Preferred stock
dividend
accumulated (222,715) (222,715) -- -- -- (4,000)
---------- --------- ---------- -------- ---------- ---------
Net income(loss)
attributable
to common
shareholders $ (48,730) $(140,675)$ 143,644 $(320,844) $(629,527)$(439,760)
========== ========= ========== ========== ========= ==========
Net income
(loss)
attributable
to common
share,
fully diluted $(0.01) $(0.02) $0.02 $(0.04) $(0.08) $(0.12)
========== ========= ========== ========== ========= =========
STORE DATA:
Number of
stores in
operation
at end of
period:
Company-owned 31 7 15 2
Franchise 173 79 99 59
Licensed 37 34 35 --
--- --- --- ---
241 120 149 61
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital $ 160,144 $ 1,335,053
Total assets 15,908,436 11,147,987
Long-term debt, less
current portion 580,237 1,758
Total liabilities 3,650,112 2,352,978
Shareholders' equity 12,258,324 8,795,009
</TABLE>
- -------------
(1) Represents the costs of the uncompleted Chesapeake
Bagel Bakery acquisition in 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Represents the pro forma results of operations as if the MFM
transaction had occurred on December 1, 1996.
(3) Represents the pro forma results of operations as if
the BUI, Strathmore and MFM transactions had occurred on December
1, 1995.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995: CERTAIN INFORMATION PROVIDED
UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS",
AND "BUSINESS" AND OTHER STATEMENTS WHICH ARE NOT HISTORICAL
FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING,
WITHOUT LIMITATION, THE FOLLOWING: THE EFFECT OF CHANGING
ECONOMIC CONDITIONS AND CONSUMER BUYING PATTERNS, THE
PRESENCE IN THE COMPANY'S MARKET AREA OF COMPETITORS WITH
GREATER FINANCIAL RESOURCES, AND OTHER RISKS DETAILED UNDER
"RISK FACTORS" AND IN OTHER SECTIONS HEREOF AND OTHER
DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
RISK FACTORS
An investment in the Shares offered hereby is
speculative and involves a high degree of risk. Prior to
making an investment decision, prospective investors should
carefully consider each of the following risk factors,
together with the other information set forth elsewhere in
this Prospectus, including the financial statements and
notes thereto.
Limited Operating History
The Company was formed in November 1992. As of May 31,
1997, the Company had 30 Company-owned stores and 211
franchised and licensed stores in operation. The Company
has grown from only 2 Company-owned and 59 franchise units
at the time of its initial public offering in November 1995
primarily through acquisitions. Consequently, the Company's
operating results achieved to date may not be indicative of
the results that may be achieved in the future by the
Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Operating Losses
The Company had operating income of $139,000 for the six
months ended May 31, 1997, but reported operating
losses of $621,000 and $421,000 for the years ended November
30, 1996 and 1995, respectively. While the Company believes
that the level of its franchising and licensing operations
and number of Company-owned stores currently generate
revenues sufficient to exceed the expenses necessary to
support such operations, given its historical losses, there
can be no assurance that the Company will continue to
operate profitably in the future. See "Management's
Discussion and Analysis of Financial Condition and Results
of Operations."
Recent Acquisitions
The Company's strategic plan has included growth through
business acquisitions. Since the beginning of fiscal 1996,
the Company has completed the acquisitions of Brewster's
Coffee ("Brewster's), Strathmore Bagels Franchise Corp.
("Strathmore"), Bagels Unlimited, Inc.("BUI"), Danville
Bagels, Inc. ("Danville"), Just Bagels, Inc. ("JBI") and My
Favorite Muffin. No assurance can be given that these or
other acquisitions will be profitable or that the Company
will successfully integrate, convert, or operate any
acquired businesses.
As a result of acquisitions, the Company has grown
significantly in size, has expanded the geographic area in
which it operates and has added product lines and
distribution channels. Any acquisition involves inherent
uncertainties, such as the effect on the acquired businesses
of integration into a larger organization and the
availability of management resources to oversee the
operations of the acquired business. The Company's ability
to integrate the operations of acquired businesses is
essential to its future success. There can be no assurance
as to the Company's ability to integrate new businesses nor
as to its success in managing the significantly larger
operations resulting therefrom. Additionally, amortization
of intangible assets recorded as a result of the
acquisitions will have a significant impact on future
operating results.
Rapid Growth
The Company has grown significantly during the past year,
both internally and through acquisitions, and expects to
continue to grow in the future. The opening and success of
Big Apple Bagels, Brewster's Coffee and My Favorite Muffin
stores will depend on various factors, including customer
acceptance of these concepts in new markets, the
availability of suitable sites, the negotiation of
acceptable lease or purchase terms for new locations, permit
and regulatory compliance, the ability to meet construction
schedules, the financial and other capabilities of the
Company and its franchisees, the ability of the Company to
develop Company-owned stores or to complete strategic
acquisitions of existing bagel stores, the ability of the
Company to successfully manage this anticipated expansion
and to hire and train personnel, and general economic and
business conditions. Not all of the foregoing factors are
within the control of the Company.
The Company's expansion will continue to require the
implementation of enhanced operational and financial systems
and additional management, operational, and financial
resources. Failure to implement these systems and add these
resources could have a material adverse effect on the
Company's results of operations and financial condition.
There can be no assurance that the Company will be able to
manage its expanding operations effectively or that it will
be able to maintain or accelerate its growth.
Capital Requirements
Although the Company believes that its current cash
position, cash flows from current operations and current
financing arrangements will provide sufficient working
capital to enable the Company to meet operating requirements
for the foreseeable future, the Company may require
additional financing in the future to complete additional
acquisitions. There can be no assurance that the Company
will be able to secure any required additional financing
when needed, or at all, or that such financing, if obtained,
will be on terms favorable or acceptable to the Company.
Any future equity financing may result in dilution to
holders of the Common Stock and any future debt financing
may reduce earnings. If the Company is unable to secure
additional financing when needed, or at all, it could be
required to significantly scale back its expansion plans and
reduce the scope of its existing operations, or even to
discontinue operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources."
Dependence on Franchisees
The Company has historically received a significant
portion of its revenues from initial franchise fees and
continuing royalty payments from franchisees. Although the
Company uses established criteria to evaluate franchisees,
there can be no assurance that franchisees will have the
business ability or access to financial resources necessary
to successfully develop or operate stores in a manner
consistent with the Company's concepts and standards.
Additionally, no assurance can be given that desirable
locations and acceptable leases can be obtained by
franchisees. Should the Company's franchisees encounter
business or operational difficulties, the Company's revenues
will be adversely affected. The poor performance of any
franchisee may also negatively impact the Company's ability
to sell new franchises. Consequently, at present, the
Company's financial prospects are substantially related to
the success of the franchise stores, over which the Company
has limited control. There can be no assurance that the
Company will be able to successfully attract new franchisees
or that the Company's franchisees will be able to
successfully develop and operate stores.
Although the Company monitors franchisees' compliance
with ongoing obligations on the basis of weekly revenue, and
the Company's standard franchise agreement also grants the
Company the right to audit the books and records of
franchisees at any time, no assurance can be given that all
franchisees will operate their stores in accordance with the
Company's operating guidelines and in compliance with all
material provisions of the franchise agreement, and the
failure of franchisees to so operate their stores could have
a material adverse impact on the Company's business. The
franchise agreement gives the Company the choice of seeking
legal remedies, which could be time-consuming and expensive,
and terminating the franchisee, which would diminish the
Company's revenue until such time, if ever, as a new
franchisee replaces the terminated franchisee.
Competition
The food service industry, in general, and the fast
food/take-out sector in particular, are highly competitive,
and competition is likely to increase. The Company believes
that specialty bagel, muffin and coffee retail businesses
are growing rapidly and are likely to become increasingly
competitive. The Company competes against well-established
food service companies with greater product and name
recognition and with larger financial, marketing, and
distribution capabilities than those of the Company, as well
as innumerable local food service establishments that offer
products competitive with those offered by the Company. The
Company's principal competitors include Bruegger's Bagel
Bakery ("Bruegger's"), Chesapeake Bagel Bakery
("Chesapeake"), Einstein/Noah Bagel Corp. ("Einstein") and
Manhattan Bagel Company, Inc. ("Manhattan"). In addition,
other fast-food service providers, such as Dunkin' Donuts,
have recently added bagels to their product offerings. Any
increase in the number of food service establishments in
areas where the Company's or its franchisees' sites are
located could have a material adverse effect on the
Company's sales and revenues. The Company competes for
qualified franchisees with a wide variety of investment
opportunities both in the food service business and in other
industries. Investment opportunities in the bagel store
business include competing franchises offered by Bruegger's,
Chesapeake, Einstein, and Manhattan as well as operators of
individual stores and multi-store chains. See "Business-
Competition."
Food Service Industry
Food service businesses are often affected by changes in
consumer tastes, national, regional, and local economic
conditions, demographic trends, traffic patterns, and the
type, number, and location of competing restaurants. Multi-
unit food service chains, such as the Company's, can also be
substantially adversely affected by publicity resulting from
problems with food quality, illness, injury, or other health
concerns or operating issues stemming from one store or a
limited number of stores. Such businesses are also subject
to the risk that shortages or interruptions in supply caused
by adverse weather or other conditions could negatively
affect the availability, quality, and cost of ingredients
and other food products. In addition, factors such as
inflation, increased food and labor costs, regional weather
conditions, availability and cost of suitable sites and the
availability of experienced management and hourly employees
may also adversely affect the food service industry in
general and the Company's results of operations and
financial condition in particular. See "Business."
Government Regulation
The Company is subject to the Trade Regulation Rule of
the Federal Trade Commission (the "FTC") entitled
"Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures" (the "FTC
Franchise Rule") and state and local laws and regulations
that govern the offer, sale and termination of franchises
and the refusal to renew franchises. See "Business-
Government Regulation." Continued compliance with this broad
federal, state and local regulatory network is essential and
costly, and the failure to comply with such regulations may
have a material adverse effect on the Company and its
franchisees. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing
business in a particular state could limit the Company's
ability to sell franchises or subject the Company and its
affiliates to rescission offers, monetary damages,
penalties, imprisonment and/or injunctive proceedings. In
addition, under court decisions in certain states, absolute
vicarious liability may be imposed upon franchisors based
upon claims made against franchisees. Even if the Company
is able to obtain insurance coverage for such claims, there
can be no assurance that such insurance will be sufficient
to cover potential claims against the Company.
Dependence on Key Personnel
The success of the Company is highly dependent on the
continuing services of Michael W. Evans, its President and
Chief Executive Officer, and Michael K. Murtaugh, its Vice
President and General Counsel. The loss of the services of
Mr. Evans or Mr. Murtaugh could have a material adverse
effect on the Company's business. The Company has no
employment agreement with either of these officers.
However, these officers are subject to certain nondisclosure
agreements and, in the case of Mr. Murtaugh, a
noncompetition agreement which provides, generally, that Mr.
Murtaugh will not, while associated with the Company and for
a period of two years thereafter, directly or indirectly
engage in a business similar to or competitive with the
business of the Company within the state in which his
franchise stores are located. The Company has key-person
life insurance policies on Mr. Evans in the amount of
$1,000,000 and on Mr. Murtaugh in the amount of $500,000.
In addition, the Company's ability to develop and market its
products and to achieve and maintain a competitive market
position depends, in large part, on its ability to attract
and retain qualified food marketing personnel and
franchisees. Competition for such personnel is intense, and
there can be no assurance that the Company will be able to
attract and retain such personnel. See "Business" and
"Management."
Trademarks/Service Marks
The trademarks and service marks used by the Company
contain common descriptive English words and thus may be
subject to challenge by users of these words, alone or in
combination with other words, to describe other services or
products. Some persons or entities may have prior rights to
those names or marks in their respective localities.
Accordingly, there is no assurance that such marks are
available in all locations. Any challenge, if successful,
in whole or in part, could restrict the Company's use of the
marks in areas in which the challenger is found to have used
the name prior to the Company's use. Any such restriction
could limit the expansion of the Company's use of the marks
into that region, and the Company and its franchisees may be
materially and adversely affected.
Conflicts of Interest
Michael K. Murtaugh, Vice President, General Counsel and
director, owns interests in entities that are franchisees of
the Company. In the event of a default under the franchise
agreement, the interests of the Company with respect to the
franchisee could potentially differ from the interests of
the Mr. Murtaugh. The Company intends to protect its
interests in these circumstances by strictly adhering to the
terms of the respective written agreements with the
franchisee and by assigning decision-making responsibilities
in regard to such matters to directors of the Company who
are not financially interested in that matter. Any
preferential treatment could constitute a breach of
fiduciary duty by the Board of Directors and the interested
officer. See "Management" and "Certain Transactions."
Potential Effects of Antitakeover Provisions
The Company is authorized to issue up to 4,000,000 shares
of preferred stock, $.01 par value, 87,710 of which comprise
the Preferred Shares which are convertible into the Shares
offered by this Prospectus. The remaining authorized
preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by
the Board of Directors, without further action by
shareholders. The issuance of any preferred stock could
adversely affect the rights of the holders of Common Stock,
and specific rights granted to holders of preferred stock
could restrict the Company's ability to merge with or sell
its assets to a third party, thereby preserving control of
the Company by its then owners. See "Description of
Securities."
Certain provisions of the Illinois Business Corporation
Act (the "Illinois Act") restrict a publicly-held
corporation from engaging in a "business combination" with
an "interested shareholder" or its affiliates, unless the
business combination is approved by the Board of Directors
or by a supermajority vote of the shareholders. These
provisions of the Illinois Act could delay and make more
difficult a business combination even if the business
combination could be beneficial to the interests of the
Company's shareholders. See "Description of Securities-
Antitakeover Effect of Illinois Law."
RECENT ACQUISITIONS
In January 1997, the Company acquired JBI and an
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 payable to
the Company of approximately $455,000.
On May 13, 1997 the Company acquired by merger My
Favorite Muffin, a New Jersey corporation. MFM franchised
and operated 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. MFM was merged into BAB Acquisition
Corporation, a wholly-owned subsidiary of the Company, with
MFM being the surviving entity. The acquisition through
merger was completed by exchanging 150 shares of MFM stock
held equally by Owen Stern, Ruth Stern and Illona Stern (the
"Sellers"), for 432,608 shares of the Company's common
stock, restricted as to transfer until January 1, 1999, and
$260,000 in cash to the Sellers. In addition to current
liabilities, the Company has assumed approximately $350,000
of MFM's existing bank debt. The Company has retained the
Sellers as employees of the Company pursuant to employment
contracts, through May 8, 2001 for Owen Stern, and through
May 8, 2000 for Ruth Stern and Illona Stern. Total revenue
of MFM was $2.7 million for the year ended December 31,
1996.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the
offering and sale of any of the shares of the Common Stock
offered hereby.
PRICE RANGE OF COMMON STOCK; DIVIDEND POLICY
The following table sets forth the quarterly high and low
sale prices for the Company's Common Stock, as reported in
The Nasdaq Small-Cap Market since November 27, 1995. The
Company's Common Stock is traded under the symbol "BAGL."
<TABLE>
<CAPTION>
LOW HIGH
------- ------
<S> <C> <C>
YEAR ENDED NOVEMBER 30, 1995
Fourth quarter (beginning
November 27, 1995) $3.33 $4.33
YEAR ENDED NOVEMBER 30, 1996
First quarter $3.17 $4.50
Second quarter 4.00 9.13
Third quarter 6.25 11.75
Fourth quarter 6.75 9.00
YEAR ENDED NOVEMBER 30, 1997
First quarter $3.13 $8.25
Second quarter 2.50 4.50
Third quarter (through
July 14, 1997) 2.63 3.63
</TABLE>
As of July 16, 1997, the Company's Common Stock was held
of record by 179 holders. Registered ownership includes
nominees who may hold securities on behalf of multiple
beneficial owners.
The Company has never declared or paid any cash dividends
on its Common Stock, and the Board of Directors currently
intends to retain all earnings, if any, for use in the
Company's business for the foreseeable future. Any future
determination as to declaration and payment of dividends
will be made at the discretion of the Board of Directors,
subject to covenants in any loan documents restricting the
payment of dividends.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data presented below
have been derived from the financial statements of the
Company. The financial statements as of and for the periods
ended November 30, 1995 and 1996 have been audited by Ernst
& Young LLP, independent auditors. Financial data for the
six months ended May 31, 1996 and 1997 have been
derived from unaudited financial statements. The data should
be read in conjunction with the Company's Consolidated
Financial Statements as of November 30, 1995 and 1996 and
for the two years then ended, the related notes, and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations," all of which appear elsewhere in
this Prospectus. The financial data for the six months
ended May 31, 1997 and May 31, 1996 have not been
audited, but, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments and
accruals, which the Company considers necessary for a fair
presentation of the Company's financial position and results
of operations for the periods indicated. Results for the
six months ended May 31, 1997 are not necessarily
indicative of results that may be achieved for a full
twelve-month period.
<TABLE>
<CAPTION>
Six Months Ended Year Ended November 30
-------------------- ----------------------
May 31, May 31,
1997 1996 1996 1995
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS
DATA:
REVENUES:
Net sales by
Company-owned
stores $4,087,363 $784,999 $3,484,319 $ 563,211
Royalty fees
from franchised
stores 958,744 634,073 1,402,839 767,064
Franchise and area
development fees 647,900 491,500 1,023,331 700,000
Licensing fees and
other revenues 570,827 29,938 413,109 2,728
---------- --------- --------- ---------
Total revenues 6,264,834 1,940,510 6,323,598 2,033,003
OPERATING COSTS
AND EXPENSES:
Food, beverage
and paper costs 1,350,415 255,950 1,221,826 191,415
Store payroll and
other operating
expenses 2,262,798 378,685 1,753,397 283,120
Costs of uncompleted
business
acquisition (1) -- -- 650,922 --
Depreciation and
amortization 562,946 90,957 379,266 65,102
Selling, general
and administrative
expenses 1,949,368 1,260,463 2,938,806 1,913,944
---------- --------- --------- ---------
Total operating
costs and
expenses 6,125,527 1,986,055 6,944,217 2,453,581
---------- --------- --------- ---------
Income (loss) from
operations 139,307 (45,545) (620,619) (420,578)
Interest and other
income(expense),
net 34,678 189,189 299,775 (15,182)
---------- --------- ---------- ---------
Net income(loss) 173,985 143,644 (320,844) (435,760)
Preferred stock
dividend
accumulated (222,715) -- -- (4,000)
---------- -------- --------- ---------
Net income(loss)
attributable
to common
shareholders $ (48,730) $143,644 $(320,844) $(439,760)
========== ======== ========= =========
Net income (loss)
attributable to
common share,
fully diluted $ (0.01) $ 0.02 $ (0.04) $ (0.12)
========== ======== ========= =========
STORE DATA:
Number of stores
in operation
at end of period:
Company-owned 31 7 15 2
Franchise 173 79 99 59
Licensed 37 34 35 --
--- --- --- ---
241 120 149 61
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital $ 160,144 $ 1,335,053
Total assets 15,908,436 11,147,987
Long-term debt, less
current portion 580,237 1,758
Total liabilities 3,650,112 2,352,978
Shareholders' equity 12,258,324 8,795,009
</TABLE>
(1) Represents the costs of the uncompleted Chesapeake
Bagel Bakery acquisition in 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
BAB HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
Year ended November 30, 1996
(Unaudited)
The following unaudited pro forma statement of operations reflects
the acquisition by the Company of BUI, Strathmore and MFM as if they
had occurred on December 1, 1995. Such pro forma information is based
upon the historical results of operations of the Company for the year ended
November 30, 1996, the historical results of operations of BUI for the five
months ended April 30, 1996, the historical results of operations of
Strathmore for the six months ended May 21, 1996 and the historical
results of operations of MFM for the year ended December 31, 1996
giving effect to the acquisitions and the pro forma adjustments
set forth in the accompanying notes to pro forma financial
statements. Unaudited pro forma adjustments are based upon
historical information, estimates and certain assumptions
that the Company deems appropriate. The unaudited pro forma
financial statements are not necessarily indicative of either
future results of operations or results that might have been
obtained if the foregoing transactions had been consummated
as of the indicated date. This pro forma statement of
operations should be read in conjunction with the historical
financial statements and notes thereto of the Company, BUI,
Strathmore and MFM, included elsewhere in this Prospectus. On
a pro forma basis, had the offering of 87,710 shares of $25.00
Series A Convertible Preferred Shares (the "Preferred Shares")
taken place as of the beginning of fiscal 1996 and all Preferred
Shares were outstanding for the entire year, the 1996 net loss
attributable to common shareholders would have been increased
by $562,000 due to the accumulation of dividends of $175,420
related to the stated 8% dividend rate, and $387,000 related to
the 15% discount available to holders of the Preferred Shares
upon conversion (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Descriptions
of Securities--Preferred Stock"). Net loss per shares for
1996 would have been $0.15 had the Preferred Stock been outstanding
for the entire year.
<TABLE>
<CAPTION>
Pro Pro
Forma Forma
Strath- Adjust- as
Company BUI more MFM ments Adjusted
---------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Net sales
by Company-
owned stores $3,484,319 $1,152,522 $1,310,663 $5,947,504
Royalty fees
from
franchised
stores 1,402,839 896,002 $(59,524)(1) 2,239,317
Franchise
and area
development
fees 1,023,331 235,250 1,258,581
Licensing
fees and
other
revenues 413,109 $278,268 269,450 960,827
---------- ---------- ---------- ---------- -------- ---------
Total
revenues 6,323,598 1,152,522 278,268 2,711,365 (59,524) 10,406,229
OPERATING
COSTS AND
EXPENSES:
Food,
beverage
and paper
costs 1,221,826 417,213 426,333 2,065,372
Store payroll
and other
operating
expenses 1,753,397 608,981 823,301 3,185,679
Costs of
uncompleted
business
acquisition 650,922 650,922
Depreciation
and
amortization 379,266 28,920 16,835 84,600 151,266(2) 660,887
Selling,
general and
adminis-
trative
expenses 2,938,806 198,060 319,209 1,269,420 (59,524)(1)4,665,971
---------- --------- --------- ---------- --------- ---------
Total
operating
costs and
expenses 6,944,217 1,253,174 336,044 2,603,654 91,742 11,228,831
---------- --------- --------- ---------- --------- ----------
Income (loss)
from
operations (620,619) (100,652) (57,776) 107,711 (151,266) (822,602)
Interest and
other income
(expense), net 299,775 (20,318) (25,927) 253,530
---------- --------- --------- ----------- -------- ----------
Income(loss)
before taxes (320,844) (120,970) (57,776) 81,784 (151,266) (569,072)
Provision for
income taxes -- -- 12,462 47,993 -- 60,455
---------- --------- --------- ----------- -------- ----------
Net income
(loss)
attributable
to common
shareholders $(320,844) $(120,970) $ (70,238) $ 33,791 $(151,266) $(629,527)
========== ========== ========== ========== ========= ==========
Net income
(loss)
attributable
to common
share, fully
diluted $(0.04) $(0.08)
========== =========
Average number
of shares
used fully
diluted(3) 7,420,538 7,873,979
========== =========
</TABLE>
(1) Elimination of franchise royalty revenue of the Company
and related expense recognized by BUI.
(2) Amortization of BUI goodwill over 40 years ($7,576),
amortization of BUI non-competition agreement over six
years ($6,945), amortization of Strathmore goodwill over
40 years ($27,616), Strathmore contract rights over
102 months ($28,818) and amortization of MFM franchise
contract rights over 20 years ($83,167), reduced by
elimination of BUI initial franchise fee amortization ($2,856).
(3) Adjusted for 432,608 shares of common stock issued in
MFM transaction.
BAB HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
Six months ended May 31, 1997
(Unaudited)
The following unaudited pro forma statement
of operations reflects the acquisition by the Company
of MFM as if it had occurred on December 1, 1996. Such
pro forma information is based upon the historical results
of operations of the Company for the six months ended
May 31, 1997 and the historical results of operations of
MFM for the period from December 1, 1996 through May 13,
1997 (date of MFM acquisition) giving effect to the
acquisition and the pro forma adjustments set forth in the
accompanying notes to pro forma financial statements.
Unaudited pro forma adjustments are based upon historical
information, estimates and certain assumptions that the
Company deems appropriate. The unaudited pro forma financial
statements are not necessarily indicative of either future
results of operations or results that might have been
obtained if the foregoing transaction had been consummated
as of the indicated date. This pro forma statement of
operations should be read in conjunction with the historical
financial statements and notes thereto of the Company and
MFM, included elsewhere in this Prospectus. On a pro forma
basis, had the offering of 87,710 shares of $25.00 Series A
Convertible Preferred Shares (the "Preferred Shares") taken
place as of the beginning of fiscal 1997 and if all the
Preferred Shares were outstanding for the six month period,
the net loss attributable to common shareholders during
the period would have been increased by $252,473 due to
the accumulation of additional dividends of $58,473 related
to the stated 8% dividend rate, and $194,000 related to
15% discount available to holders of the Preferred Shares
upon conversion (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Description
of Securities--Preferred Stock"). Net loss per shares for the
first half of fiscal 1997 would have been $0.05 had the Preferred
Stock been outstanding for the entire period.
<TABLE>
<CAPTION>
Pro Pro
Forma Forma
Adjust- as
Company MFM ments Adjusted
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Net sales
by Company-
owned stores $4,087,363 $ 658,683 $4,746,046
Royalty fees
from
franchised
stores 958,744 408,441 1,367,185
Franchise
and area
development
fees 647,900 56,250 704,150
Licensing
fees and
other
revenues 570,827 130,957 701,784
---------- ---------- -------- ---------
Total
revenues 6,264,834 1,254,331 7,519,165
OPERATING
COSTS AND
EXPENSES:
Food,
beverage
and paper
costs 1,350,415 276,455 1,626,870
Store payroll
and other
operating
expenses 2,262,798 359,769 2,622,567
Depreciation
and
amortization 562,946 50,356 37,335(1) 650,637
Selling,
general and
adminis-
trative
expenses 1,949,368 599,522 2,548,890
---------- ---------- --------- ---------
Total
operating
costs and
expenses 6,125,527 1,286,102 37,335 7,448,964
---------- ---------- --------- ---------
Income (loss)
from
operations 139,307 (31,771) (37,335) 70,201
Interest and
other income
(expense), net 34,678 (22,839) 11,839
---------- ---------- ---------- ---------
Net Income
(loss) 173,985 (54,610) (37,335) 82,040
Preferred stock
dividend
accumulated (222,715) -- -- (222,715)
---------- ----------- --------- --------
Net income
(loss)
attributable
to common
shareholders $ (48,730) $ (54,610) $(37,335) $(140,675)
========== ========= ========== =========
Net income
(loss)
attributable
to common
share, fully
diluted $(0.01) $(0.02)
========== ==========
Average number
of shares
used fully
diluted(2) 7,194,725 7,389,398
========= =========
</TABLE>
(1) Amortization of MFM franchise contract rights over 20 years.
(2) Adjusted for 432,608 shares of common stock issued in
MFM transaction.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the information set forth under "Summary
Consolidated Financial and Store Data," "Selected
Consolidated Financial Information" and the Consolidated
Financial Statements of BAB Holdings, Inc. and the
accompanying notes thereto included elsewhere in this
Prospectus.
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, 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 15 Company-owned and 134 franchised and licensed units at the
end of fiscal 1996 and 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.
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.
In September 1996, the Company signed an agreement to
purchase the operations of Chesapeake, an operator and
franchisor of approximately nine company-owned and 134
franchise Chesapeake Bagel Bakery specialty bagel retail
stores. The acquisition agreement was subject, among other
factors, to the Company's successful financing of the cash
portion of $22 million of the purchase price. In November
1996, the Company filed a registration statement on Form S-1
to register shares of the Company's common stock to be sold
through a registered direct offering to qualified
institutional investors. Being unable to complete the sale
of common stock at a share price which made the transaction
economically beneficial to the Company, the Company
withdrew its registration statement in December 1996 and on
December 31, 1996, the expiration date of the agreement with
Chesapeake, announced it would not complete the proposed
acquisition. As a result of the failure to complete this
acquisition, the Company recorded a write-off of approximately
$651,000 in the fourth quarter of fiscal 1996, consisting
primarily of accounting, legal, printing, placement agent
expenses and filing fees associated with the stock
offering and acquisition. Management believes that while
the failed acquisition of Chesapeake diverted management and
operational attention during the second half of 1996, the
Company's existing operations and prospects for further
strategic acquisitions during 1997, including the MFM
acquisition noted above, have the potential to replace the
strategic advantage the Company believed would have
followed the completion of the Chesapeake acquisition.
As a result of adding 13 Company-owned stores during
fiscal 1996 and 17 during first half of fiscal 1997, management
believes the Company did not realize the potential of its
expected margins from Company-owned store operations during
1996 and during first half 1997. New store operations suffer
from low revenues in the early start-up stages of
operations and inefficiencies due to continuing training
activities of store-level personnel. Similarly, as stores
that are opened in the early stages of entering into a
specific geographic market, the efficiencies of advertising,
promotion and area management are not reached and cause an
additional drain on store-level economics until a critical
mass of stores is established in that geographic market.
Start-up costs related to expenditures incurred prior to
opening individual units, which are amortized over the first
year of operation of a store, additionally reduce
operating profitability during the early stages of store
operations. Stores added which were acquired and converted to
Company-owned units, while not generally affected by low
early stage revenues, also exhibit inefficiencies in early
operations due to initial staff and management turnover
and related training issues resulting in higher than normal
costs.
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
beginning in fiscal 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years
1996 and 1995, revenue by type and as a percentage of total
revenue (in thousands):
<TABLE>
<CAPTION>
Year ended November 30,
-------------------------------
1996 1995
--------------- ---------------
<S> <C> <C> <C> <C>
Selected Revenue Data:
Company-owned stores $3,484 55.1% $ 563 27.7%
Franchise and area
development fees 1,024 16.2% 700 34.5%
Royalty fees from franchise
stores 1,403 22.2% 767 37.7%
Licensing fees and other
income 413 6.5% 3 0.1%
------ ------ ------ ------
Total $6,324 100.0% $2,033 100.0%
====== ====== ====== ======
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Total revenues increased 211% to $6,324,000 in 1996
from $2,033,000 the prior year. This increase was driven
primarily by the increase in Company-owned store revenues
which accounted for 55.1% of total revenue in 1996, up from
27.7% in the prior year. The Company added 13 Company-owned
units during the year, bringing the total to 15 in operation
at November 30, 1996. Franchise and area development fees
rose to $1,024,000 or 16.2% of total revenue in 1996 from
$700,000 or 34.5% of total revenue in 1995 as a result of
opening a total of 51 franchise units during the year
compared to 38 during 1995. Additionally, $161,000 of the
1996 increase in these fees is attributable to the Company
entering into a master franchise agreement for the
development of franchised stores in the four western
provinces of Canada. Royalty fees from franchise stores
increased to $1,403,000 or 22.2% of revenue in 1996 from
$767,000 or 37.7% or revenue in 1995, as a result of the
higher number of franchise stores in operation in 1996
compared to the prior year. Licensing fees and other income
increased from approximately $3,000 in 1995 to $413,000 for
1996, or 6.5% of total revenues, as a result of the
Company's entrance into various nontraditional channels of
distribution, such as 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 in their system, 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 $123,000 from the resale
to franchisees of stores acquired during the year.
Food, beverage and paper costs and store payroll and
other operating expenses increased by 538.3% and 519.3%,
respectively, in 1996 as a result of increasing the Company-
owned stores base from two units at the close of 1995 to 15
at the end of 1996. Total food, beverage and paper costs
consumed 35.1% of Company-store revenue for 1996 versus
34.0% in 1995, while store payroll and other operating
expenses remained at 50.3% of revenue in both periods. The
levels of these rates, and the increase from 1995 in food,
beverage and paper costs, are a direct result of the
increase in Company-owned stores during the year and related
start-up inefficiencies. Costs of the uncompleted business
acquisition were the result of acquisition-related costs and
stock offering costs related to the Company's uncompleted
acquisition of Chesapeake (see "General" above) which
accounted for 10.3% of total 1996 revenue.
Selling, general and administrative expenses increased
67.7% to $3,318,000 during 1996 from $1,979,000 in the prior
year as a result of supporting an increasing base of
franchise stores as well as the significant increase in
Company-owned stores during the year. Payroll-related costs
increased 52.9% during the year due to the increase in
corporate level headcount from 21 at the beginning of 1996
to 33 at the close of the year. Advertising and promotion
expense increased 209.6% due to increased advertising costs
related to the Company-owned stores base. Professional
service fees declined 5.7% in 1996, as compared to 1995, as
the prior year included additional legal and accounting
costs preceding the Company's initial public offering in
November 1995. Franchise-related costs, those costs
associated with franchise openings, increased 55.5% as a
result of the increase in franchise openings from 38 in 1995
to 51 in 1996. Depreciation and amortization expense
increased 482.6% due to the significant increase in Company-
owned store depreciation and related to amortization of
intangible assets including goodwill, contract rights,
noncompetition agreements and trademarks resulting from the
Company's various acquisitions during 1996. Other selling,
general and administrative expenses increased 66.4%,
following trends in other components of this category.
Loss from operations was $621,000 in 1996 versus
$421,000 in 1995, representing a 47.6% increase from 1995.
Without the impact of the uncompleted Chesapeake acquisition
write-off of $651,000, Company operations would have
generated income of approximately $30,000 for 1996. Interest
income increased $301,000 as a result of the Company's
investment of unused proceeds of the Company's November 1995
initial public offering during the year. Interest expense
declined to approximately $5,000 in 1996 from $31,000 in the
prior year as a result of the conversion of $229,000 of
convertible bonds outstanding at the beginning of the year
to common stock.
Net loss for the year decreased to $321,000 as compared
to the prior year net loss of $436,000, a 26.4% decrease.
Without the impact of the uncompleted Chesapeake acquisition
costs write-off, the Company would have recognized net
income for 1996 of approximately $330,000. Net loss per
share was $0.04 on both a primary and fully-diluted basis as
compared to net loss per share in 1995 of $ 0.13 and $0.12
on a primary and fully-diluted basis, respectively. The
average number of shares used to compute per share amounts
in fiscal 1996 was significantly increased as a result of
the Company's initial public offering in November 1995.
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).
Without 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 first six months 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 1996.
Interest expense 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 year ended November 30, 1996, cash provided by
operating activities was $69,000 as compared with $406,000 provided by
operating activities during 1995, or an 83.0% decrease. This decrease in
large part is due to the costs related to the uncompleted Chesapeake
acquisition written off in the fourth quarter of $651,000 and other
changes in operating assets and liabilities. Without the impact of the
write-off of these costs, cash flows from operations would have been
$720,000. 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 1996 totaled $6,422,000
of which $2,512,000 was used in the purchase of property, plant and
equipment primarily for new Company-owned store construction during the
year. Business acquisitions during the year required $2,474,000 in cash,
including $991,000 related to BUI, $880,000 related to Strathmore and
$603,000 related to Danville. The purchase of the Brewster's trademark
and other rights required $171,000 in 1996. Cash used for investing
activities during 1995 totaled $458,000, which consisted primarily of
constructing and equipping the second Company-owned store totaling
approximately $157,000, the acquisition of the "Big Apple Deli"
trademark, and miscellaneous purchases of property, plant and equipment
totaling approximately $78,000 used in the corporate headquarters
facilities. Cash used for investing activities during the six months
ended May 31, 1997 totaled $3,030,000 of which $2,140,000 was used to
purchase 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 $837,000 in 1996, due
principally to the exercise in January of the underwriter's over-
allotment option from the Company's initial public offering which
provided the Company $882,000 after expenses. This amount was reduced by
the repayment of long-term obligations during the year of $36,000.
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. See "Description of Securities-
Preferred Stock - Series A Convertible Preferred Stock." Additionally,
in April 1997, the Company entered into 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.
On November 27, 1995, the Company completed a public offering of
2,550,000 shares of the Company's Common Stock for a public offering
price of $2.67 per share or an aggregate of $6,800,000. Costs associated
with this offering totaled approximately $1,056,000. Effective with the
closing of the public offering on November 30, 1995 and pursuant to an
August 31, 1995 subscription agreement, the Company sold an additional
403,536 shares of Common Stock to Aladdin International, Inc. (see
"Certain Transactions") at $1.80 per share. Costs associated with this
transaction totaled $97,500 payable to an investment banking firm for
assistance in obtaining the financing. The Company's cash needs in
fiscal 1996 were met, in part, with proceeds from these transactions.
BUSINESS
The Company was incorporated under the laws of the
State of Illinois on November 25, 1992 and currently
operates, franchises and licenses bagel, muffin and coffee
concept retail units under the Big Apple Bagels, My Favorite
Muffin and Brewster's Coffee tradenames and currently has
241 units in operation in 28 states and two Canadian
provinces. The Company additionally derives income from the
sale of its trademark bagels, muffins and coffees through
nontraditional channels of distribution including under
licensing agreements with Host Marriott Services
Corporation, Mrs. Fields Cookies, Choice Pick Food Courts,
and through direct home delivery of specialty muffin gift
baskets and coffee.
The Big Apple Bagels brand franchise and Company-owned
stores feature daily baked "from scratch" bagels, flavored
cream cheeses, premium coffees, gourmet bagel sandwiches and
other related products. Licensed Big Apple Bagels units
under Host Marriott, and future units under Choice Picks
Food Courts, serve the Company's par-baked frozen bagel
products, freshly baked daily, and related products. The My
Favorite Muffin brand consists of units operating as "My
Favorite Muffin" featuring a large variety of freshly baked
muffins and bagels, cream cheeses, coffees and related
products, and units operating as "My Favorite Muffin and
Bagel Cafes" featuring these products as well as a variety
of specialty bagel sandwiches and related products. The
Company's Brewster's Coffee units are specialty coffee shops
featuring a variety of premium arabica bean coffees--freshly
brewed or in bulk--and related products. Big Apple Bagels
units are concentrated in the Midwest and Western United
States, while My Favorite Muffin units are clustered in the
Middle Atlantic States and Florida. Brewster's Coffee Shops
are currently located in two states--Illinois and Ohio.
The Company has grown significantly since its initial
public offering in November 1995 through growth in franchise
units, Company-store development, acquisitions and the
development of alternative distribution channels for its
branded products. The Company intends on continuing its
expansion through these means in the future. With the
acquisition of My Favorite Muffin on May 13, 1997, the
Company immediately added 60 franchise and five Company-
operated units and expects to leverage on the natural
synergy of distributing muffin products in existing Big
Apple Bagels units and, alternatively, bagel products and
Brewster's Coffee in existing My Favorite Muffin units.
Additionally, the Company expects to realize efficiencies in
servicing the combined base of Big Apple Bagels, My Favorite
Muffin and Brewster's Coffee franchisees as a result of this
acquisition.
LOCATIONS
The following table sets forth the states and provinces in
which the Company's units were located as of May 31, 1997:
<TABLE>
<CAPTION>
COMPANY
STATE/PROVINCE OWNED FRANCHISED LICENSED TOTAL
- --------------- ------- ---------- -------- -----
<S> <C> <C> <C> <C>
UNITED STATES:
Arizona 1 1
California 10 2 12
Colorado. 8 8
Connecticut 3 3
Florida 9 1 10
Georgia 3 3
Illinois 5 43 48
Indiana 5 5
Iowa 6 6
Kansas 1 1
Kentucky 3 3
Massachusetts 1 1
Michigan 13 5 18
Minnesota 3 1 4
Missouri. 1 1
Nebraska 1 1 2
Nevada 3 1 4
New Jersey 2 15 12 29
New York 4 8 12
North Carolina 8 8
Ohio 2 15 17
Pennsylvania 3 8 11
Rhode Island 1 1
South Carolina 1 1
Texas 4 4
Utah 2 2
Washington 2 2
Wisconsin 8 12 20
CANADA:
British Columbia 1 1
Ontario 3 3
----- ----- ----- -----
Total 31 173 37 241
==== ===== ===== =====
</TABLE>
STORE OPERATIONS
BIG APPLE BAGELS--Big Apple Bagels franchisees and Company-
owned stores daily bake "from scratch" over 18 varieties of
fresh bagels and prepare up to 18 varieties of cream cheese
spreads. Licensed units under Host Marriott, and future
units under Choice Picks Food Courts, serve the Company's
par-baked frozen bagel products, freshly baked daily.
Stores also offer a variety of breakfast and lunch bagel
sandwiches, soups, various dessert items, and gourmet
coffees and other beverages. A typical Big Apple Bagels
franchise or Company-owned store is located within a three-
mile radius of at least 25,000 residents in an area with a
mix of both residential and commercial properties. The
average Company-owned or franchised store ranges from 1,500
to 2,000 square feet. The Company's current store prototype
is approximately 2,000 square feet, with seating capacity
for 30 to 40 persons and 750 square feet devoted to
production and baking. A satellite store is typically
smaller than a production store, averaging 600 to 1,000
square feet. Although franchise stores may vary in size from
Company-owned stores, and from other franchise stores, store
layout is generally consistent. Licensed units in the Host
Marriott system are generally located in airports and travel
plazas. Units in the Choice Picks Food Courts system will
be in hotels, universities and similar locations.
MY FAVORITE MUFFIN--My Favorite Muffin franchisees and
Company-owned stores bake 20-25 varieties daily, from over
400 muffin recipes, a variety of bagels, gourmet coffees,
beverages and, at My Favorite Muffin and Bagel Cafe
locations, a variety of bagel sandwiches and related
products. While a number of MFM units are located in
shopping mall locations with minimal square footage of 400-
800 square feet, the typical strip mall prototype unit is
approximately 2,000 square feet with seating for 30 to 40
persons. A typical MFM franchise or Company-owned store is
located within a three-mile radius of at least 25,000
residents in an area with a mix of both residential and
commercial properties.
BREWSTER'S COFFEE--Brewster's Coffee franchise and Company-
owned units serve a variety of arabica bean coffees, both
freshly brewed and in bulk, and related products such as
bagels, muffins and other beverages. In addition to two
double drive-through units in operation, the typical
Brewster's location is approximately 1,500 square feet and
offers seating for 20-30 persons and is generally located in
high traffic urban or suburban locations.
FRANCHISING
The Company requires payment of an initial franchise
fee per store, plus a 5% royalty on net sales.
Additionally, Big Apple Bagels ("BAB") franchisees are
members of a national marketing fund requiring a 2%
contribution based on net sales. MFM franchisees pay a 1%
net sales contribution to a national marketing fund. There
currently is no Brewster's Coffee national marketing fund.
The Company offers multiple store discounts on the initial
franchise fee. The Company currently requires a franchise
fee of $25,000 on a franchisee's first BAB concept store.
The fee for second, third, fourth, and fifth BAB stores is
$20,000, and the fee for the sixth and any additional store
is $12,500. The initial franchise fee for a franchisee's
first MFM store is $25,000 and $20,000 for all subsequent
stores. The initial franchise fee for a franchisee's first
Brewster's store is $17,500, with a fee of $15,000 for the
second and third stores and $13,500 for the fourth store and
any additional stores.
The Company's franchise agreements provide a franchisee
with the right to develop one store at a specific location.
Each franchise agreement is for a term of ten years with the
right to renew at no additional fee. A franchisee is
required to be in operation not later than ten months
following the signing of the franchise agreement.
Area development agreements, which may be granted to
new or existing franchisees, provide that a franchisee may
open a predetermined number of concept stores within a
defined geographic area (an "Area of Exclusivity"). The Area
of Exclusivity is negotiated prior to the signing of the
area development agreement and varies by agreement as to
size of the area, the number of BAB stores required, and the
schedule for store development and opening. The Company's
current area development fee is $5,000 per store to be
developed. As additional franchise agreements are executed,
additional franchise fees are collected. The area
development fee is not refundable if no franchise agreement
is executed.
The Company currently advertises its franchising
opportunities at franchise trade shows and in newspapers and
business opportunity magazines. In addition, a substantial
number of prospective franchisees contact the Company as a
result of patronizing an existing store. In February 1997,
the Company entered an agreement with Franchise Mortgage
Acceptance Company, LLC ("FMAC") of Greenwich, Connecticut
to provide financing to qualifying existing franchisees for
the purpose of adding second or subsequent units. FMAC has
reserved a total of $25 million for the program, which is
expected to assist in increasing the number of units in the
Company's franchise system.
COMPETITION
The quick service restaurant industry is intensely
competitive with respect to product quality, concept,
location, service and price. There are a number of national,
regional and local chains operating both owned and
franchised stores which may compete with the Company on a
national level or solely in a specific market or region. The
Company believes that because the industry is extremely
fragmented, there is a significant opportunity for bagel,
muffin and coffee concept chains, including both the Company
and its competitors, to expand dramatically.
The Company believes that the four most direct
competitors of its bagel concept units are Bruegger's,
Chesapeake, Einstein and Manhattan, all of which are also
franchisors. There are several other regional bagel chains
with fewer than fifty stores, all of which may be expected
to compete with the Company, including Bon Jour Bagel Cafe
and All American Food Group, Inc. There is currently not a
major national competitor in the muffin business, but there
are a number of local and regional operators. Additionally,
the Company competes directly with Starbucks Coffee and a
number of regional and local coffee concept companies in its
Brewster's Coffee concept stores.
The Company competes, and can be anticipated to
compete, against numerous small independently-owned bagel
bakeries and fast food restaurants, such as Dunkin' Donuts,
that offer bagels as part of their breakfast food offerings
and supermarket bakery sections. In particular, the
Company's bagels compete against Lenders Bagels and other
brands of fresh and frozen bagels offered in supermarkets.
Certain of these competitors may have greater product and
name recognition and larger financial, marketing and
distribution capabilities than the Company. In addition, the
Company believes that the startup costs associated with
opening a retail food establishment offering similar
products on a stand-alone basis are competitive with the
startup costs associated with opening its concept stores
and, accordingly, such startup costs are not an impediment
to entry into the retail bagel, muffin or coffee businesses.
The Company believes that its stores compete favorably
in terms of taste, food quality, convenience, customer
service, and value, which the Company believes are important
factors to its targeted customers. Competition in the food
service industry is often affected by changes in consumer
taste, national, regional, and local economic and real
estate conditions, demographic trends, traffic patterns, the
cost and availability of labor, consumer purchasing power,
availability of product, and local competitive factors. The
Company attempts to manage or adapt to these factors, but
not all such factors are within the Company's control and
such factors could cause the Company and some or all of its
area developers and franchisees to be adversely affected.
The Company competes for qualified franchisees with a
wide variety of investment opportunities in the restaurant
business and in other industries. The Company's continued
success is dependent to a substantial extent on its
reputation for providing high quality and value with respect
to its service, products and franchises, and this reputation
may be affected not only by the performance of Company-owned
stores but also by the performance of its franchise stores
over which the Company has limited control.
TRADEMARKS AND SERVICE MARKS
The trademarks and service marks "Big Apple Bagels,"
"Brewster's Coffee" and "My Favorite Muffin" are registered
under applicable federal trademark law. These marks are
licensed by the Company to its franchisees pursuant to
franchise agreements, and the Company has licensed the "Big
Apple Bagels" mark to Big Apple Bagels, Inc., a corporation
which is wholly-owned by Paul C. Stolzer, a principal
shareholder and a former director and president of the
Company. Mr. Stolzer currently serves as a consultant to
the Company.
The Company is aware of the use by other persons and
entities in certain geographic areas of names and marks
which are the same as or similar to the Company's marks.
Some of these persons or entities may have prior rights to
those names or marks in their respective localities.
Therefore, there is no assurance that the marks are
available in all locations. It is the Company's policy to
pursue registration of its marks whenever possible and to
vigorously oppose any infringement of its marks.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply
with federal, state and local government regulations
applicable to consumer food service businesses, including
those relating to the preparation and sale of food, minimum
wage requirements, overtime, working and safety conditions,
and citizenship requirements, as well as regulations
relating to zoning, construction, health, and business
licensing. Each store is subject to regulation by federal
agencies and to licensing and regulation by state and local
health, sanitation, safety, fire and other departments.
Difficulties or failures in obtaining the required licenses
or approvals could delay or prevent the opening of a new
Company-owned or franchise store, and failure to remain in
compliance with applicable regulations could cause the
temporary or permanent closing of an existing store. The
Company believes that it is in material compliance with
these provisions. Continued compliance with these federal,
state and local laws and regulations is costly but
essential, and failure to comply may have an adverse effect
on the Company and its franchisees.
The Company's franchising operations are subject to
regulation by the Federal Trade Commission (the "FTC") under
the Uniform Franchise Act which requires, among other
things, that the Company prepare and periodically update a
comprehensive disclosure document known as a Uniform
Franchise Offering Circular ("UFOC"), in connection with the
sale and operation of its franchises. In addition, some
states require a franchisor to register its franchise with
the state before it may offer a franchise to a prospective
franchisee. The Company believes its UFOCs, together with
any applicable state versions or supplements, complies with
both the FTC guidelines and all applicable state laws
regulating franchising in those states in which it has
offered franchises.
The Company is also subject to a number of state laws,
as well as foreign laws (to the extent it offers franchises
outside of the United States), that regulate substantive
aspects of the franchisor-franchisee relationship,
including, but not limited to, those concerning termination
and non-renewal of a franchise.
EMPLOYEES
As of May 31, 1997, the Company employed 486 persons.
Of these individuals, 438 work in the Company-owned stores
and the majority are part-time employees. The remaining
employees are responsible for oversight of franchising and
Company-store operations. It is expected that additional
store-level employees will be required to staff additional
Company-operated units as they are developed. None of the
Company's employees is subject to any collective bargaining
agreements and management considers its relations with its
employees to be good.
PROPERTY
The Company's principal executive office, consisting of
approximately 7,300 square feet, is located in Chicago,
Illinois and is leased pursuant to two leases, expiring in
March 2000 and June 1999. As a result of the My Favorite
Muffin acquisition, the Company assumed a lease on
approximately 6,600 square feet of office space used as the
former MFM corporate headquarters, expiring in September
2000. The Company is actively marketing this property for
sublease as it has moved all of MFM's operations to its
Chicago headquarters. Additionally, the Company leases
space for each of its Company-owned stores. Lease terms for
these stores are generally for initial terms of five years
and contain options for renewal for one or more five-year
terms. See Note 6 to the Company's Consolidated Financial
Statements contained herein for further information.
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. The franchisee seeks 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 franchisee to have its
claims heard in arbitration as required by the provisions of
the franchise agreement. A hearing on this matter was held
on July 11 and 12, 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 counterclaim 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.
MANAGEMENT
Directors and Executive Officers
The following tables set forth certain information with
respect to each of the directors and executive officers of
the Company.
<TABLE>
<CAPTIONS>
Directors and
Executive Officers Age Position(s) Held with Company
------------------------- --- --------------------------------
<S> <C> <C>
Michael W. Evans 40 President, Chief Executive
Officer and Director
Michael K. Murtaugh 53 Vice President, General
Counsel and Director
Owen A. Stern 39 Vice President, Product
Development
Theodore P. Noncek 38 Chief Financial Officer,
Treasurer and Secretary
Tom J. Fletcher 38 Chief Operating Officer
David L. Epstein 49 Director
Cynthia A. Vahlkamp 42 Director
</TABLE>
Michael W. Evans has served as Chief Executive Officer
and a director of the Company since January 1993 and is
responsible for all aspects of franchise development and
marketing, as well as all corporate and franchise sales
performance and operation programs. In February 1996, he was
appointed President. From December 1986 to December 1993, he
was the chief executive of Windy City Management Services,
an Illinois joint venture that served as the general partner
of three limited partnerships that owned and operated 19
TCBY, Inc. yogurt store franchises. Mr. Evans has over 9
years of experience in the food service industry.
Michael K. Murtaugh joined the Company as a director in
January 1993 and as Vice President and General Counsel in
January 1994. Mr. Murtaugh is responsible for dealing
directly with state franchise regulatory officials and for
the negotiation and enforcement of franchise and area
development agreements, and for negotiations of business
acquisitions and other business contracts. Before joining
the Company in January 1994, Mr. Murtaugh was a partner with
the law firm of Baker & McKenzie, where he practiced law
from 1971 to 1993. He also currently serves as vice
president and secretary of American Sports Enterprises,
Inc., which owns the Kane County Cougars and the Nashville
Sounds, minor league baseball teams. Mr. Murtaugh is a
shareholder, officer, and director of the Northshore Bagels,
Inc., which owns and operates two Big Apple Bagels franchise
stores in suburban Chicago, Illinois.
Owen A. Stern joined the Company as Vice President of
Product Development in May 1997 and is responsible for the
new product development plans of the Company. Prior to
joining the Company, Mr. Stern was President and co-founder
of My Favorite Muffin Too, Inc., which the Company acquired.
Mr. Stern built My Favorite Muffin from the initial company-
operated store in 1986 to 60 franchise and 5 company
operated stores at the time of its sale to the Company and
acquired his baking expertise by growing up in his father's
wholesale bakery business in Rockland County, NY, and when
he assumed control of this business in 1985.
Theodore P. Noncek joined the Company as its Chief
Financial Officer and Treasurer in July 1996 and was
appointed secretary in September 1996. Mr. Noncek is
responsible for all financial reporting and analysis. Mr.
Noncek is a Certified Public Accountant and a member of the
American Institute of Certified Public Accountants and the
Illinois CPA Society. Prior to joining the Company, he spent
approximately three years as the Assistant Controller and
Financial Reporting Manager of Apollo Travel Services, a
subsidiary of UAL Corp. Prior to his time at Apollo, Mr.
Noncek spent seven years in the public accounting firm Ernst
& Young LLP, where, as an audit manager, he specialized in
clients in the retail and wholesale industry.
Tom J. Fletcher joined the Company in April 1997 as its
Chief Operating Officer. Mr. Fletcher is responsible for
all aspects of the Company's operations including Company-
operated stores, franchising, licensing and marketing.
Prior to joining the Company, Mr. Fletcher served as
Director of Retail Brands for Allied Domecq Retailing USA,
Co., where he had been responsible as for the administration
and profitability of over 550 Baskin Robbins and Dunkin
Donuts points of distribution since 1996. Prior to that
position Mr. Fletcher served as Regional Director of Baskin
Robbins USA from 1986 through 1996, and from 1983 through
1984 had various operating positions with Baskin Robbins
Division of Dean Foods Co.
David L. Epstein joined the Company as a director in
September 1995. Mr. Epstein has been a principal of the J.H.
Chapman Group, Ltd., an international investment banking
firm specializing in the food industry since September 1983.
Prior to joining J.H. Chapman Group, Ltd., Mr. Epstein was
vice president and regional executive of Chase Commercial
Corporation, an affiliate of Chase Manhattan Bank, N.A.,
where he headed that company's expansion in the food
industry.
Cynthia A. Vahlkamp was appointed a director in April
1996. Since September 1996, she has been vice president of
category marketing at Sunbeam Corporation. Ms. Vahlkamp
served as senior vice president of marketing for On-Line
Services of CompuServe Incorporated from February 1996 to
September 1996, as general manager of Pritikin Systems, Inc.
from 1993 to 1995, and held various other management
positions at the Quaker Oats Company, both domestically and
internationally, from 1986 to 1993. Ms. Vahlkamp is a member
of the National Association of Corporate Directors, The
American Marketing Association, The American Institute of
Wine and Food, and The Chicago Arts and Business Council,
serving on its Marketing Committee.
Director Compensation
Each non-employee director of the Company is paid a fee
of $100 for each meeting attended, as well as reimbursement
of reasonable expenses. In addition, the non-employee
directors receive stock options pursuant to the 1995 Outside
Directors Stock Option Plan.
1995 Outside Directors Stock Option Plan
The Directors Plan provides for the issuance of up to
30,000 shares of the Company's Common Stock to non-employee
members of the Board of Directors. The Directors Plan will
terminate on September 19, 2005, unless sooner terminated by
action of the Board.
Only non-employee members of the Board of Directors of
the Company (the ``Board'') are eligible to receive grants
under the Directors Plan. The Directors Plan provides for a
grant to each non-employee director of an option to purchase
3,000 shares upon initial election to the Board (an
``Initial Option'') and for an annual grant thereafter, upon
re-election to the Board, of an option to purchase 1,000
shares (an ``Annual Option''). Each Initial Option and each
Annual Option is immediately exercisable for a period of 10
years from the date of grant at an exercise price per share
equal to the fair market value of the Common Stock as of the
date of grant. Each Annual Option terminates three months
after the termination of the optionee as a director of the
Company for any reason except a ``change in control,'' in
which case the Option terminates after six months. An
Initial Option remains exercisable, notwithstanding the
termination of the directorship of the optionee, unless such
termination is a result of death or a ``change in control,''
in which case the Initial Option terminates after six
months. Directors may choose to waive such option grants, in
their discretion. All options granted under the Directors
Plan are "nonqualified" options, which do not meet the
requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
The Directors Plan is administered by the President and
Chief Financial Officer, but the administrators have no
authority to select recipients, select the date of grant of
options, the number of option shares, or the exercise price,
or to otherwise prescribe the particular form or conditions
of any option granted. As of May 31, 1997, options granted
under the Directors Plans include Initial Options granted to
David Epstein and Cynthia Vahlkamp upon election to the
Board, and Annual Options granted to Mr. Epstein and Paul
Stolzer, a former director, upon their re-election to the
Board at the annual meeting of shareholders in April 1996,
and Annual Options to these directors granted upon re-
election at the annual meeting of shareholders in April
1997. The exercise price of Mr. Epstein's Initial Option
is $2.67 per share. The exercise price of all of the other
Initial and the 1996 Annual Options granted was $4.83 per
share and $2.75 per share as to the 1997 Annual Options.
Executive Compensation
The following table sets forth the cash compensation paid
to the Company's Chief Executive Officer for services
rendered during fiscal years 1994,1995 and 1996. No other
executive officer received annual salary and bonus
compensation of more than $100,000 during the fiscal years
1994 through 1996. The Company has no employment agreements
with any of its executive officers except for Owen A. Stern,
for which the Company has an employment contract through May
8, 2001.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION
Long-Term
Annual Compensation Compensation
------------------- --------------
Awards
Securities
Fiscal Underlying
Year Options/
Name and Principal Ended Salary Bonus SARs
Position 11/30 ($) ($) (#)
- ------------------- ------ --------- -------- ------------
<S> <C> <C> <C> <C>
Michael W. Evans 1996 128,077 -- 115,000
President and CEO 1995 87,615 5,000 --
1994 70,250 -- --
</TABLE>
The following table sets forth the stock option
compensation of the Company's President and CEO for 1996.
No options were granted previous to 1996.
<TABLE>
<CAPTIONS>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Number of Percent of
Securities Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price
Expiration
Name (#) Fiscal Year ($/Sh) Date
- ------------------- ------------ ------------- ----------- ---------
- -
<S> <C> <C> <C> <C>
Michael W. Evans 115,000 42.4 $7.01 4/23/01
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
The following table provides information relating to
the number and value of shares of Common Stock subject to
options held by the Company's President and CEO as of
November 30, 1996.
<TABLE>
<CAPTIONS>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares Fiscal Year-End Fiscal
Acquired on Value (#) Year-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---------------- ------------ -------- ---------------- -------------
<S> <C> <C> <C> <C>
Michael W. Evans -- -- 0/115,000 --/85,100
</TABLE>
SELLING SHAREHOLDERS
Set forth below are the names of the Selling
Shareholders, the number of shares of Common Stock of the
Company beneficially owned by each of them at May 31, 1997,
the number of shares offered hereby, and the number of
shares to be owned if all offered shares are sold.
<TABLE>
<CAPTION>
Number of Shares Owned
Number of Shares Following Sale
Shares Offered of Shares
Name Owned Hereby Offered Hereby
- ----------------------------- --------- -------- -----------------
<S> <C> <C> <C>
Aladdin International, Inc. 1,015,481 882,010 133,471
Cranshire Capital(1) -- 17,429 --
E.P. Opportunity Fund,LLC(1) -- 122,004 --
Wolfgang and Barbara
Garbelmann(1) -- 6,536 --
Richard E. Goulding(1) -- 10,458 --
Richard E. Goulding, PSP(1) -- 2,614 --
Dennis Hanish (2) -- 4,500 --
Noel Incavo(1) -- 8,715 --
Marshall Katzman(1) -- 8,715 --
Keyway Investments Limited(1) -- 522,874 --
Sol Klipstein(1) -- 4,357 --
Leonard Loventhal Trust(1) -- 8,715 --
Melvin A. Olshansky(1) -- 8,715 --
Sarah Schwartz(1) -- 8,715 --
Stewart A. Shiman(1) -- 17,429 --
Arie and Corey Simon(1) -- 8,715 --
Strathmore Bagels
Franchising, Inc.(3) -- 450,000 --
Robert Weber, Trustee for
Robert Weber IRA Account(1) -- 8,366 --
</TABLE>
(1) The number of shares indicated is the number of shares
each holder would have received if the Preferred Shares
had been converted as of May 30, 1997 (with a conversion
price of $2.87 per share). Because the conversion price
is subject to change in relation to the market price of
the Company's Common Stock (see "Description of
Securities - Preferred Stock"), the number of shares
actually received upon conversion and, accordingly, the
number of shares to be sold pursuant to this Prospectus
may change.
(2) Represents a Selling Shareholder of shares issuable upon
exercise of warrants to purchase the Company's Common
Stock. See "Description of Securities--Outstanding Options
and Warrants."
(3) Represents a Selling Shareholder of shares issuable upon the
exercise of options to purchase the Company's Common Stock. See
"Description of Securities--Outstanding Options and Warrants."
All of the Selling Shareholders, except Aladdin International,
Inc.("Aladdin"), Strathmore and Mr. Hanish, purchased Preferred Stock
of the Company that is convertible into the shares of Common Stock
being sold pursuant to this Prospectus. Aladdin is a major shareholder
of the Company. See "Certain Transactions." Mr. Hanish is a registered
representative of the investment banking firm that served as the
underwriter of the Company's initial public offering and is selling
shares of Common Stock issuable upon exercise of a portion of the
warrant granted to the underwriter in connection with such offering.
Other than as noted above, none of these Selling Shareholders has had
any position, office or other material relationship with the Company.
Prior to the effectiveness of the Registration
Statement of which this Prospectus is a part, additional
holders of shares of the Company's Common Stock or warrants
or options to purchase shares of the Company's Common Stock
may elect to have such shares included in the Registration
Statement pursuant to certain rights granted to them under
agreements with the Company. Any such additional holders
will be included in the above table in the final form of
Prospectus.
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with
respect to beneficial ownership of the Common Stock as of
May 31, 1997 and as adjusted to reflect the sale of Shares
offered hereby (i) by each person who is known by the
Company to beneficially own more than five percent (5%) of
the Common Stock, (ii) by each director and Named Executive
Officer, (iii) by all executive officers and directors as a
group and (iv) by the Selling Shareholders. Except as
otherwise indicated, the Company believes that the
beneficial owners of the Common stock listed below, based on
information furnished by such owners, have sole investment
and voting power with respect to such shares.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial
Ownership
Before Offering After
Offering(1)
-------------------- -------------------
- -
Name and Address Shares Percent Shares Percent
- ---------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Aladdin International, 1,015,481 13.4 133,471 1.5
Inc., 3806 Abbott Ave.
Minneapolis, MN 55410
Michael W. Evans 711,875(2) 9.3 711,875(2) 8.1
8501 W. Higgins Rd.
Chicago, IL 60631
Paul C. Stolzer 660,425(3) 8.7 660,425(3) 7.5
4112 Emporia Ct.
Naperville, IL 60564
Michael K. Murtaugh 450,208(4) 5.9 450,208(4) 5.1
8501 W. Higgins Rd.
Chicago, IL 60631
David L. Epstein 31,000(5) * 31,000(5) *
Cynthia A. Vahlkamp 3,000(6) * 3,000(6) *
All executive officers
and directors as a
group (4 persons) 1,196,083(7) 15.6 1,196,083(7) 13.5
</TABLE>
* Less than 1%.
(1) Assumes conversion of all the outstanding shares of
Series A Preferred Stock into 764,357 shares of Common
Stock, and the exercise of warrants and options of the Selling
Shareholders representing the additional issuance of
454,500 shares of Common Stock.
(2) Includes 38,333 shares that may be acquired
pursuant to a currently exercisable option.
(3) Includes 1,500 shares that may be acquired pursuant to
a currently exercisable option.
(4) Includes 28,333 shares that may be acquired pursuant to
currently exercisable option.
(5) Includes 4,500 shares that may be acquired pursuant to
currently exercisable option.
(6) Includes 3,000 shares that may be acquired pursuant to
a currently exercisable option.
(7) Includes 74,166 shares that may be acquired pursuant to
currently exercisable options of Evans, Murtaugh, Epstein
and Vahlkamp.
CERTAIN TRANSACTIONS
The following information relates to certain
relationships and transactions between the Company and
related parties, including officers and directors of the
Company. It is the Company's policy that it will not enter
into any transactions with officers, directors or beneficial
owners of more than 5% of the Company's Common Stock on
terms less favorable to the Company than could be obtained
from unaffiliated third parties. Management believes that
the following transactions were effected on terms no less
favorable to the Company than those that could have been
realized in arm's length transactions with unaffiliated
parties.
In November 1992, the Company acquired the trademark
and service mark Big Apple Bagels from Big Apple Bagels
Inc., in consideration of a licensing agreement described
below. Paul C. Stolzer, formerly President and a director,
and currently a holder of more than 5% of the Company's
Common Stock, is the owner and President of Big Apple
Bagels, Inc., which owns and operates two Big Apple Bagels
stores in Naperville, Illinois and one in Lisle, Illinois.
These stores operate under a licensing agreement with the
Company, are not subject to the rules and regulations
stipulated in the Company's standard franchise agreement and
are under no obligation to pay any franchise, royalty or
marketing fees. Other than the licensing agreement and a
non-compete agreement, Big Apple Bagels, Inc. has no other
affiliation or relationship with the Company. On February
16, 1996, in connection with his resignation as President of
the Company, Paul C. Stolzer entered into a three year
consulting agreement with the Company whereby in exchange
for his services, Mr. Stolzer receives a fee of $65,000 per
annum, subject to 5% annual increases, and increases in his
rights under the November 1992 license agreement to include
the operation of two additional Big Apple Bagels stores,
subject to certain geographical restrictions.
Michael K. Murtaugh, the Company's Vice President and
General Counsel, is president of Northshore Bagels, Inc.,
which owns and operates two Big Apple Bagels franchise
stores near Chicago, Illinois. All transactions between the
Company and this franchisee are similar to those with other
franchisees. These stores are operated by full-time store
managers.
In July 1994, the Company entered into a 12-month
agreement with J.H. Chapman Group, Ltd. ("Chapman"), for
assistance in obtaining financing for the Company. David L.
Epstein, who is currently a member of the Board of Directors
of the Company, is a principal of Chapman. The agreement was
negotiated at arm's length prior to Mr. Epstein's election
to the Board in September 1995. Pursuant to the agreement,
the Company paid Chapman $150,000 in connection with the
investment of Aladdin International, Inc., described below.
Chapman also assists the Company in the identification and
negotiation of other potential acquisitions and licensing
agreements and receives compensation as agreed in each
particular instance. Since December 1, 1994, Chapman has
received approximately $44,000 from the Company in
compensation for these services and for expense
reimbursement.
In February 1997, Chapman assisted the Company in
negotiating and obtaining a franchise financing program
administered by Franchise Mortgage Acceptance Company LLC
("FMAC"). Pursuant to the terms of the arrangement between
Chapman and the Company, Chapman will receive a fee for its
services in connection with this assistance in the amount of
1% of loans obtained by franchisees from FMAC, to a total
maximum not to exceed $200,000.
Aladdin International, Inc., a Minnesota corporation
("Aladdin"), loaned $500,000 to the Company on August 15,
1995, pursuant to an 11% secured convertible promissory note
(the "Note"). The Note was converted to 254,238 shares of
Common Stock of the Company on August 31, 1995. On August
31, 1995 Aladdin also purchased an additional 254,237 shares
of Common Stock for $500,000 and was granted an option to
purchase an additional 579,225 shares for an aggregate price
of $822,500, or $1.42 per share, which was exercised to
purchase 403,536 shares simultaneously with the closing of
the Company's initial public offering of securities.
Aladdin also received, upon closing of such offering, a
warrant (the "Warrant") exercisable from the date of
issuance through September 1, 1996, to purchase 145,474
shares of Common Stock at $.66 per share as to 144,040
shares and $.67 per share as to 1,434 shares. The Warrant
was exercised in full on June 25, 1996 by means of a
"cashless" exercise, which resulted in issuance of 133,471
shares of Common Stock. All shares acquired upon exercise of
the Warrant are currently held in escrow pursuant to order
of the Commissioner of Commerce of the State of Minnesota
issued in connection with registration of the Company's
securities in Minnesota in the initial public offering.
DESCRIPTION OF SECURITIES
General
The Company's authorized capital stock consists of
20,000,000 shares of Common Stock, no par value, and
4,000,000 shares of preferred stock, $.01 par value. As of
the date of this Prospectus, there are outstanding 7,601,288
shares of the Company's Common Stock and 87,710 shares of
preferred stock, which comprise the Preferred Shares. Of
the 120,000 preferred shares designated as Series A
Preferred Shares, there remains 32,290 shares which have not
been issued. No other shares of preferred stock are
currently outstanding.
Common Stock
There are no preemptive, subscription, conversion or
redemption rights pertaining to the Common Stock. The
absence of preemptive rights could result in a dilution of
the interest of existing shareholders should additional
shares of Common Stock be issued. Holders of the Common
Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of assets legally
available therefor and to share ratably in the assets of the
Company available upon liquidation, subject to rights of
holders of the preferred stock, including the Preferred
Shares. The shares currently outstanding are, and the Shares
offered hereby will be, fully paid and nonassessable.
Each share of Common Stock is entitled to one vote for
all purposes and cumulative voting is not permitted in the
election of directors. Accordingly, the holders of more than
50% of all of the outstanding shares of Common Stock can
elect all of the directors. Significant corporate
transactions such as amendments to the Articles of
Incorporation, mergers, sales of assets and dissolution or
liquidation require approval by the affirmative vote of the
majority of the outstanding shares of Common Stock. Other
matters to be voted upon by the holders of Common Stock
normally require an affirmative vote of a majority of the
shares present at the particular shareholders meeting. As of
the date of this Prospectus, the Company's directors and
officers own approximately 18.9% of the outstanding shares
of the Company's Common Stock. Accordingly, the Company's
directors and executive officers have and will continue to
have significant voting influence in connection with
election of the directors of the Company and control of the
Company's business and affairs.
Preferred Stock - General
The Board of Directors of the Company may, without
further action by the shareholders, from time to time, issue
the remaining authorized preferred stock, consisting of
3,880,000 shares, in one or more series and determine the
rights, preferences, privileges, and restrictions, including
voting rights, dividend rights, dividend rate, liquidation
preference, conversion or exchange rights, redemption and
sinking fund provisions, and the number of shares
constituting and the designation of any such series. The
holders of such shares of preferred stock, if issued, would
likely have rights, preferences, and privileges in addition
to those afforded the holders of shares of Common Stock. The
Board of Directors currently has no plans to issue any
additional shares of preferred stock.
The issuance of preferred stock in certain
circumstances may have the effect of delaying, deferring, or
preventing a change in control of the Company without
further action by the shareholders, may discourage bids for
the Common Stock at a premium over the market price of the
Common Stock, and may adversely affect the market price of,
and the voting and other rights of the holders of, the
Common Stock.
Preferred Stock - Series A Convertible Preferred Stock
As of the date of this Prospectus, there are
outstanding 87,710 shares of Series A Convertible Preferred
Stock (the "Preferred Shares"), which may be converted from
time to time into shares of Common Stock at the then
applicable Conversion Rate, as defined in the Certificate of
Designation establishing the Preferred Shares. The shares
of Common Stock issuable upon conversion comprise the Shares
which may be offered and sold from time to time pursuant to
this Prospectus and the Registration Statement of which it
is a part. Upon conversion, the Preferred Shares will be
retired and cancelled and cannot be reissued.
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.
Antitakeover Effect of Illinois Law
The Company is subject to certain provisions of the
Illinois Business Corporation Act of 1983, as amended (the
"Illinois Act") that govern business combinations between
corporations and ''interested shareholders'' or their
''affiliates.'' The Illinois Act generally provides that if
a person or entity acquires 15% or more of the voting stock
of an Illinois corporation (an "Interested Shareholder"),
the corporation and the Interested Shareholder, or any
affiliated entity of the Interested Shareholder, may not
engage in certain business combination transactions for
three years following the date the person became an
Interested Shareholder unless (1) prior to the date that the
Interested Shareholder became an Interested Shareholder the
board of directors approved either the business combination
or the transaction which resulted in the shareholder's
becoming an Interested Shareholder, or (2) upon consummation
of the transaction which resulted in the shareholder
becoming an Interested Shareholder, the Interested
Shareholder owned at least 85% of the voting shares of the
corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number
of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in
which employee participants do not have the right to
determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer), or (3)
on or subsequent to the date that the Interested Shareholder
became an Interested Shareholder the business combination is
approved by the board of directors and authorized at an
annual or special meeting of shareholders (not by written
consent) by the affirmative vote of at least 66-2/3% of the
outstanding voting shares that are not owned by the
Interested Shareholder. An ''affiliate'' is a person who
directly or indirectly controls, is controlled by, or is
under common control with a specified person (an
''Affiliate''). Business combination transactions for this
purpose include (a) any merger, consolidation or share
exchange, (b) any sale, lease, transfer or other disposition
of ten percent (10%) or more of the assets of the
corporation, (c) certain transactions that result in the
issuance of any equity securities of the corporation to the
Interested Shareholder, (d) any transaction which has the
effect, directly or indirectly, of increasing the
proportionate amount of any class of equity securities of
the corporation or any subsidiary owned directly or
indirectly by any Interested Shareholder or an Affiliate
thereof, and (e) any receipt by the Interested Shareholder
of the benefit, directly or indirectly of any loans,
advances, guarantees, pledges, or other financial benefits
provided by or through the corporation or any direct or
indirect majority owned subsidiary.
The Company's Board of Directors and shareholders may
amend the Company's Articles of Incorporation and Bylaws to
provide that the provisions of the Illinois Act will not
apply to any business combination after the date of the
amendment.
Limitation of Director Liability and Indemnification
The Company's Articles of Incorporation limit personal
liability for breach of fiduciary duty by its directors to
the fullest extent permitted by the Illinois Act. Such
Articles eliminate the personal liability of directors to
the Company and its shareholders for damages occasioned by
breach of fiduciary duty, except for liability based on
breach of the director's duty of loyalty to the Company,
liability for acts or omissions not made in good faith,
liability for acts or omissions involving intentional
misconduct, liability based on payments of improper
dividends, liability based on violations of state securities
laws, and liability for acts occurring prior to the date
such provision was added. Any amendment to or repeal of such
provisions in the Company's Articles of Incorporation will
not adversely affect any right or protection of a director
of the Company for or with respect to any acts or omissions
of such director occurring prior to such amendment or
repeal.
In addition to the Illinois Act, the Company's Bylaws
provide that officers and directors of the Company have the
right to indemnification from the Company for liability
arising out of certain actions to the fullest extent
permissible by law. This indemnification may be available
for liabilities arising in connection with the registration
of such shares. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers or persons controlling the
Company pursuant to such indemnification provisions, the
Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is
therefore unenforceable.
Transfer Placement Agent and Registrar
LaSalle National Bank, Chicago, Illinois, serves as the
transfer agent and registrar for the Company's Common Stock.
The Company currently serves as its own transfer agent and
registrar with respect to the Preferred Shares.
Outstanding Warrants and Options
The underwriter of the Company's initial public offering
was issued a warrant to purchase 255,000 shares of Common
Stock at $3.20 per share commencing November 27, 1996. In
April 1997, the underwriter transferred ownership of this
warrant to several of the underwriter's employees
individually. These warrants expire on November 27, 2000.
The consideration in the BUI acquisition included an
option to purchase 100,000 shares of Common Stock at $4.00
per share exercisable from May 1, 1996 through April 30,
2001.
The consideration in the Strathmore acquisition included
an option to acquire 625,000 shares of Common Stock at $6.17
per share, which becomes exercisable in two equal cumulative
installments on May 22, 1997 and 1998, and expires on May
21, 1999. Of these options, 75,000 were sold to a third
party in a private transaction and have been subsequently
acquired by the Company as partial consideration on a master
franchise agreement. In addition, Strathmore may earn a
one-year option to purchase 1,500 shares exercisable at
$6.17 per share for each store opened between May 21, 1996
and May 22, 1998. The Company estimates that up to 200,000
shares could be subject to the earned options.
As a portion of compensation in the placement of the
Series A Preferred Shares, the Company has issued to the
placement agent, Merrill Weber & Company, warrants to
purchase 13,315 shares of Common Stock at $3.29. Such are
warrants are exercisable from April 1997 through March 1999.
PLAN OF DISTRIBUTION
The Selling Shareholders may sell the Common Stock being
offered hereby directly to other purchasers or to or through
underwriters, dealers, or agents. To the extent required, a
Prospectus supplement with respect to the Common Stock will
set forth the terms of the offering of the Common Stock,
including the names of any underwriters, dealers or agents,
the names of the Selling Shareholders, the number of shares
of Common Stock to be sold, the price of the offered Common
Stock, any underwriting discounts or other items
constituting underwriters' compensation, and any discounts or
concessions allowed or reallowed or paid to dealers.
The Common Stock offered hereby may be sold from time to
time directly by the Selling Shareholders or, alternatively,
through underwriters, broker-dealers, or agents. Such
Common Stock may be sold in one or more transactions at
fixed prices, at prevailing market prices at the time of
sale, at varying prices determined at the time of sale, or
at negotiated prices. Such sales may be effected in
transactions (which may involve crosses or block
transactions) (i) on any national securities exchange or
quotation service on which the Common Stock may be listed or
quoted at the time of sale, (ii) in the over-the-counter
market, or (iii) in transactions otherwise than on such
exchanges or services or in the over-the-counter market. In
connection with sales of the Common Stock offered hereby or
otherwise, the Selling Shareholders may enter into hedging
transactions with broker-dealers, which may in turn engage
in short sales of such Common Stock on the course of hedging
the positions they assume. The Selling Shareholders may
also sell the Common Stock offered hereby short and deliver
such Common Stock to close out such short positions or loan
or pledge such Common Stock to broker-dealers that in turn
may sell such securities. The Common Stock offered hereby
also may be sold pursuant to Rule 144 of the Securities Act.
None of the Selling Shareholders has advised the Company of
any particular plan or intention as to timing, amount or
manner of distribution of shares.
Any Selling Shareholder and any such underwriters,
brokers, dealers or agents, upon effecting the sale of the
Common Stock, may be deemed "underwriters" as that term is
defined in the Securities Act.
The underwriter or underwriters with respect to a
particular underwritten offering of Common Stock will be
named in the Prospectus supplement relating to such
offering, and if an underwriting syndicate is used, the
managing underwriter or underwriters will be set forth on
the cover of such Prospectus supplement. Unless otherwise
set forth in the Prospectus supplement, the obligations of
the underwriters to purchase the Common Stock will be
subject to certain conditions precedent and the underwriters
will be obligated to purchase all the Common Stock if any is
purchased. Any initial public offering price and any
discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
If a dealer is utilized in the sale of any Common Stock
in respect of which this Prospectus is delivered, the
Selling Shareholders may sell such Common Stock to the
dealer, as principal. The dealer may then resell such
Common Stock to the public at varying prices to be
determined by such dealer at the time of resale. To the
extent required, the name of the dealer and the terms of the
transaction will be set forth in the Prospectus supplement
relating thereto.
In connection with the sale of Common Stock offered
hereby, underwriters or agents may receive compensation from
the Company, the Selling Shareholders, or from purchasers of
such Common Stock for whom they may act as agents in the
form of discounts, concessions, or commissions.
Underwriters, agents, and dealers participating in the
distribution of the Common Stock may be deemed to be
underwriters, and any such compensation received by them and
any profit on the resale of Common Stock by them may be
deemed to be underwriting discounts or commissions under the
Securities Act.
The Common Stock is quoted on the Nasdaq Small-Cap Market.
Any underwriters to whom Common Stock is sold by the Selling
Shareholders for public offering and sale may make a market
in such Common Stock, but such underwriters will not be
obligated to do so and may discontinue any market making at
any time without notice. No assurance can be given as to
the liquidity of the trading market for any Common Stock.
The Selling Shareholders, agents, dealers, and
underwriters may be entitled under agreements entered into
with the Company to indemnification by the Company against
certain civil liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments
that the Selling Shareholders, agents, dealers, or
underwriters may be required to make with respect thereto.
Underwriters, dealers, or agents and their associates may be
customers of, engage in transactions with, and perform
services for the Company in the ordinary course of business.
The Company has agreed to pay certain expenses in
connection with the offering contemplated hereby, including
(i) registration and filing fees, (ii) fees and expenses of
providing certain information to the Selling Shareholders,
(iii) fees and expenses of compliance with securities and
blue sky laws, and (iv) fees and expenses of preparing and
delivering certificates representing the Common Stock. In
addition to such expenses, the Company has agreed to pay
certain other expenses customarily borne by the issuers in
the event of an underwritten offering of Common Stock
including (i) printing expenses, (ii) fees and disbursements
of counsel for the Company and its independent public
accountants, and (iii), to the extent permitted under
applicable law, underwriting discounts and commissions and
transfer taxes for the holders of the Preferred Stock. The
Selling Shareholders will be responsible for fees and
expenses of their own counsel and Selling Shareholders other
than the holders of the Preferred Stock will be responsible
for payment of underwriting discounts and commissions and
transfer taxes. Any Selling Shareholder may agree to
indemnify any agent, dealer, or broker-dealer that
participates in transactions involving sales of the Common
Stock against certain liabilities, including liabilities
arising under the Securities Act. The Company and the
Selling Shareholders have agreed to indemnify each other and
certain other persons against certain liabilities in
connection with the offering of the Common Stock, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby
has been passed upon for the Company by Moss & Barnett, A
Professional Association, Minneapolis, Minnesota.
EXPERTS
The Consolidated Financial Statements of BAB Holdings,
Inc. as of November 30, 1996 and 1995, and for each of the
two years in the period ended November 30, 1996, and the
financial statements of Bagels Unlimited, Inc. as of
February 29, 1996 and for the year then ended, appearing in
this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and
auditing.
The Financial Statements of Bagels Unlimited, Inc. as
of February 28, 1995, and for each of the two years ended
February 28, 1995 appearing in this Prospectus and
Registration Statement have been audited by Muehl, Steffes &
Krueger, S.C., independent auditors as set forth in their
report thereon appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The Financial Statements of Strathmore Bagels Franchise
Corporation as of December 31, 1994 and 1995 and for each of
the two years in the period ended December 31, 1995
appearing in this Prospectus and Registration Statement,
have been audited by Buonanno & Conolly, independent
auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith files reports,
proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company
can be inspected and copied at the public reference
facilities of the Commission at 450 Fifth Street, N.W,
Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and CitiCorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission also
maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other
materials that are filed through the Commission's Electronic
Data Gathering, Analysis, and Retrieval System. Such
reports, proxy statements and other information can also be
inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street N.W, Washington,
D.C. 20006, which supervises The Nasdaq Stock Market's
Small-Cap Market on which the Common Stock is quoted.
The Company has filed a Registration Statement on Form
SB-2 under the Securities Act, including amendments thereto,
relating to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules
thereto, as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to
the contents of any contract or any other document referred
to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document
(if any) filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such
reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits and
schedules thereto. A copy of the Registration Statement,
including exhibits and schedules thereto, may be inspected
by anyone without charge at the Commission's principal
office in Washington, D.C. and copies of all or any part
thereof may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain fees prescribed by the
Commission.
INDEX TO FINANCIAL STATEMENTS
BAB HOLDINGS, INC.
Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
---
<S> <C>
Report of Independent Auditors
Consolidated Balance Sheets as of November 30, 1996 and 1995
Consolidated Statements of Operations for the years ended
November 30, 1996 and 1995
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended November 30, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
November 30, 1996 and 1995
Notes to Consolidated Financial Statements
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of May 31, 1997
Condensed Consolidated Statements of Operations for the six
months ended May 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the six
months ended May 31, 1997 and 1996
Notes to Unaudited Condensed Consolidated Financial Statements
STRATHMORE BAGELS FRANCHISE CORPORATION
Financial Statements
Report of Independent Auditors
Balance Sheet as of December 31, 1995
Statement of Operations and Retained Deficit for the year
ended December 31, 1995
Statement of Cash Flows for the year ended December 31, 1995
Notes to Financial Statements
Report of Independent Auditors
Balance Sheet as of December 31, 1994
Statement of Operations and Retained Deficit for the period
from May 31, 1994 through December 31, 1994
Statement of Cash Flows for the period from May 31, 1994
through December 31, 1994
Notes to Financial Statements
Unaudited Condensed Financial Statements
Condensed Balance Sheet as of May 21, 1996
Condensed Statement of Income for the period from January 31,
1996 through May 21, 1996
Condensed Statement of Cash Flows for the period from January
31, 1996 through May 21, 1996
Notes to Unaudited Condensed Financial Statements
BAGELS UNLIMITED, INC.
Financial Statements
Reports of Independent Auditors
Balance Sheets as of February 29, 1996 and February 28, 1995
Statements of Operations and Retained Earnings (Accumulated
Deficit) for the years ended February 29,1996 and
February 28, 1995 and for the period from inception
(August 11, 1993) to February 28,1994
Statements of Cash Flows for the years ended February 29, 1996
and February 28, 1995 and for the period from inception
(August 11, 1993) to February 28, 1994
Notes to Financial Statements
MY FAVORITE MUFFIN, TOO, INC. AND MY FAVORITE MUFFIN, INC.
Unaudited Combined Financial Statements
Combined Balance Sheet as of December 31, 1996
Combined Statement of Income and Retained Earnings for the year
ended December 31, 1996
Combined Statement of Cash Flows for the year ended December 31, 1996
Notes to Combined Financial Statements
Unaudited Combined Financial Statements
Condensed Combined Balance Sheet as of May 13, 1997
Condensed Combined Statement of Income for the period from
January 1, 1997 through May 13, 1997
Condensed Combined Statement of Cash Flows for the period
from January 1, 1997 through May 13, 1997
Notes to Combined Condensed Financial Statements
</TABLE>
Report of Independent Auditors
The Shareholders and Board of Directors
BAB Holdings, Inc.
We have audited the accompanying consolidated balance sheets of BAB
Holdings, Inc. as of November 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BAB Holdings, Inc. at November 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the years then ended,
in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 7, 1997, except for Note 13 as to which the date is
June 16, 1997
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Balance Sheets
NOVEMBER 30
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents,
including restricted cash of
$149,232 and $346,441, respectively $ 2,163,293 $ 7,679,009
Trade accounts receivable 471,303 81,198
National Marketing Fund contributions
receivable 96,121 26,795
Inventories 103,314 16,542
Notes receivable 556,143 13,144
Amounts due from affiliate 36,347 18,026
Deferred franchise costs 43,576 25,238
Prepaid expenses and other current assets 216,176 35,553
----------- -----------
Total current assets 3,686,273 7,895,505
Property, plant, and equipment:
Leasehold improvements 1,064,648 101,937
Furniture and fixtures 435,277 101,480
Equipment 1,335,719 232,972
Construction in progress 997,383 --
----------- -----------
3,833,027 436,389
Less: Accumulated depreciation
and amortization 299,315 87,957
----------- -----------
3,533,712 348,432
Patents, trademarks, and copyrights,
net of accumulated amortization
of $21,752 and $1,446, respectively 545,177 172,575
Goodwill, net of accumulated amortization
of $27,924 2,511,295 --
Other assets, net of accumulated amortization
of $147,090 and $30,364, respectively 583,346 63,627
Notes receivable 288,184 11,493
----------- -----------
$11,147,987 $ 8,491,632
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,056,548 $ 384,465
Accrued professional and other services 289,567 105,000
Accrued liabilities 228,947 107,536
Unexpended National Marketing Fund
contributions 145,383 57,563
Current portion of long-term debt 6,375 7,927
Deferred franchise fee revenue 624,400 802,500
------------ ------------
Total current liabilities 2,351,220 1,464,991
Long-term debt, less current portion 1,758 236,294
Shareholders' equity:
Common stock, no par value; 20,000,000
shares authorized, 7,413,069 shares
and 6,772,038 shares issued, respectively,
and 7,143,069 and 6,502,038
outstanding, respectively 9,218,522 7,903,183
Preferred stock, $0.01 par value; 4,000,000
shares authorized, and no shares issued
and outstanding -- --
Treasury stock at cost, 270,000 shares (17,500) (17,500)
Additional paid-in capital 1,010,167 --
Accumulated deficit (1,416,180) (1,095,336)
------------ ------------
Total shareholders' equity 8,795,009 6,790,347
------------ ------------
$ 11,147,987 $ 8,491,632
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BAB Holdings, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores $ 3,484,319 $ 563,211
Franchise and area development fees 1,023,331 700,000
Royalty fees from franchised stores 1,402,839 767,064
Licensing fees and other income 413,109 2,728
----------- -----------
6,323,598 2,033,003
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 1,221,826 191,415
Store payroll and other operating expenses 1,753,397 283,120
Costs of uncompleted business acquisition 650,922 --
Selling, general, and administrative expenses:
Payroll-related expenses 1,337,587 874,719
Advertising and promotion 365,387 118,036
Professional service fees 373,614 396,358
Franchise-related expenses 157,990 101,570
Depreciation and amortization 379,266 65,102
Other 704,228 423,261
----------- -----------
3,318,072 1,979,046
----------- -----------
6,944,217 2,453,581
----------- -----------
Loss from operations (620,619) (420,578)
Interest income 316,855 15,625
Interest expense (4,530) (30,807)
Other expense (12,550) --
----------- -----------
Net loss (320,844) (435,760)
Preferred stock dividends accumulated -- (4,000)
----------- -----------
Net loss attributable to common
shareholders $ (320,844) $ (439,760)
=========== ===========
Primary earnings per share $ (0.04) $ (0.13)
=========== ===========
Fully diluted earnings per share $ (0.04) $ (0.12)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
COMMON STOCK PREFERRED STOCK TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
November 30, 1994 2,430,000 $49,570 56.0 $392,000 (270,000) $(17,500)
Preferred stock
conversion 813,000 379,400 (54.2) (379,400) -- --
Preferred stock
redemption -- (6,002) (1.8) (12,600) -- --
Preferred stock
cash dividends -- (5,944) -- -- -- --
Bond payable
conversion 52,440 132,849 -- -- -- --
Issuance of common
stock 3,476,598 7,353,310 -- -- -- --
Net loss -- -- -- -- -- --
----------- ---------- ---- --------- -------- -------
Balance as of
November 30, 1995 6,772,038 7,903,183 -- -- (270,000) (17,500)
Bond payable
conversion 75,060 190,989 -- -- -- --
Issuance of common
stock 382,500 882,350 -- -- -- --
Cashless exercise of
investor warrant 133,471 -- -- -- -- --
Issuance of common
stock in
acquisitions 50,000 242,000 -- -- -- --
Issuance of
stock options
in acquisitions -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ---------- ---- --------- -------- -------
Balance as of
November 30, 1996 7,413,069 $ 9,218,522 -- $ -- (270,000)$(17,500)
=========== =========== ==== ========= ======== ========
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance as of November 30, 1994 -- $ (659,576) $ (235,506)
Preferred stock conversion -- -- --
Preferred stock redemption -- -- (18,602)
Preferred stock cash dividends -- -- (5,944)
Bond payable conversion -- -- 132,849
Issuance of common stock -- -- 7,353,310
Net loss -- (435,760) (435,760)
----------- ----------- -----------
Balance as of November 30, 1995 -- (1,095,336) 6,790,347
Bond payable conversion -- -- 190,989
Issuance of common stock -- -- 882,350
Cashless exercise of investor
warrant -- -- --
Issuance of common stock in
acquisitions -- -- 242,000
Issuance of stock options in
acquisitions 1,010,167 -- 1,010,167
Net loss -- (320,844) (320,844)
----------- ----------- -----------
Balance as of November 30, 1996 $ 1,010,167 $(1,416,180) $ 8,795,009
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED NOVEMBER 30
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(320,844) $(435,760)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 379,266 65,102
Deferred preopening store cost (142,867) --
Other 11,045 16,236
Changes in operating assets and liabilities:
Trade accounts receivable (447,293) (52,274)
National Marketing Fund contributions
receivable (69,326) (18,893)
Inventories (7,926) (10,354)
Deferred franchise costs (18,338) 9,710
Notes receivable (3,682) 17,766
Prepaid expenses and other assets (180,623) (19,340)
Amounts due from affiliate (18,321) (5,930)
Accounts payable 672,083 374,064
Accrued professional and other services 184,567 95,000
Accrued liabilities 121,411 38,966
Unexpended National Marketing Fund
franchisee contributions 87,820 26,400
Deferred franchise fee revenue (178,100) 305,500
--------- ---------
Net cash provided by operating activities 68,872 406,193
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED NOVEMBER 30
1996 1995
----------- -----------
<S> <C> <C>
INVESTING ACTIVITIES
Purchase of Bagels Unlimited $ (990,874) $ --
Purchase of Stratmore (879,566) --
Purchase of Danville (602,988) --
Purchases of property, plant, and equipment (2,512,472) (254,299)
Purchase of trademarks (171,396) (169,291)
Purchases of other assets (143,765) --
Loan disbursements (1,254,196) --
Loan repayments 183,578 --
Other (50,171) (34,480)
----------- -----------
Net cash used for investing activities (6,421,850) (458,070)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,020,000 8,055,591
Payment of common stock issuance costs (137,650) (1,212,006)
Redemption of preferred stock -- (18,602)
Payment of preferred dividends -- (5,944)
Debt proceeds -- 520,000
Debt repayments (35,928) (16,930)
Other (9,160) (1,600)
----------- -----------
Net cash provided by financing activities 837,262 7,320,509
----------- -----------
Net increase (decrease) in cash and cash
equivalents (5,515,716) 7,268,632
Cash and cash equivalents at beginning of year 7,679,009 410,377
----------- -----------
Cash and cash equivalents at end of year $2,163,293 $7,679,009
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BAB Holdings, Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
BAB Holdings, Inc. (the Company) is an Illinois Corporation incorporated on
November 25, 1992. The Company has three wholly owned subsidiaries, BAB
Operations, Inc. (Operations), BAB Systems, Inc. (Systems), and Brewster's
Franchise Corporation (BFC). Systems was incorporated on December 2, 1992, and
was primarily established to franchise "Big Apple Bagels" specialty bagel
retail stores. Systems has a wholly owned subsidiary, Systems Investments, Inc.
(Investments), which was created to operate the first Company-owned Big Apple
Bagels store, which, until December 1995, also operated as the franchise
training facility. Investments owns a 50% interest in a joint venture which
operates a franchise satellite store. 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 coffee stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its direct and indirect wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. The joint venture is
accounted for using the equity method.
CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid investments,
primarily composed of money market mutual funds, certificates of deposit, and
government agency notes, which are convertible to a known amount of cash and
carry an insignificant risk of change in value.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first in, first out
(FIFO) basis, or market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives for the purposes of
depreciation are: leasehold improvements - ten years or term of lease if
less; machinery, equipment and fixtures - five to seven years.
INTANGIBLE ASSETS
The Company's intangible assets consist primarily of patents, trademarks, and
copyrights, organization costs, contract rights, noncompetition agreements, and
goodwill. Organization costs are primarily incorporation fees and legal fees
associated with initial Uniform Franchise Offering Circulars related to
operations and are being amortized over five years. Patents, trademarks, and
copyrights are being amortized over 17 years. Contract rights are related to
costs allocated to license agreements assumed by the Company in the acquisition
of Strathmore Bagels Franchise Corporation and are being amortized over 8.5
years, the remaining life of the contract. Noncompetition agreements are
amortized over the term of the agreements, which is six years. Goodwill
recorded as a result of acquisitions described in Note 11 are being amortized
over 40 years. Amortization expense recorded in the accompanying consolidated
statements of operations for the years ended November 30, 1996 and 1995, was
$164,956 and $17,203, respectively.
STOCK OPTIONS
The Company uses the intrinsic method to account for stock options granted for
employees and directors. No compensation expense is recognized for stock
options because the exercise price of the option is at least equal to the
market price of the underlying stock on the grant date. Stock options granted
as consideration in purchase acquisitions during 1996 have been recorded as an
addition to additional paid-in capital in the accompanying balance sheet based
on the fair value of such options on the date of the acquisition.
DEFERRED FRANCHISE FEE REVENUES AND COSTS
The Company recognizes franchise fee revenue upon the opening of a franchise
store. Direct costs associated with the franchise sales are deferred until the
franchise fee revenue is recognized. These costs include site approval,
construction approval, commissions, blueprints, purchase of cash registers, and
training costs.
Area development agreement revenue is recognized on a pro rata basis as each
store covered by the agreement opens. At the termination of an agreement, any
remaining deferred franchise and area development agreement revenue is
recognized as such amounts are not refundable.
In addition to Company-operated and franchised stores, the Company acts as
licensor of "Big Apple Bagels" units owned and operated by Host Marriott
Services (Host Marriott). Included below as "licensed units" are these units
located primarily in airport and travel plazas served by Host Marriott. The
Company derives a licensing fee from certain sales at these units as well as a
sales commission from the sale of par-baked bagels to these units by a
third-party commercial bakery.
Stores which have been opened and unopened stores for which an agreement has
been executed and franchise or area development fees collected are as follows:
<TABLE>
<CAPTIONS>
NOVEMBER 30
1996 1995
------------ ------------
<S> <C> <C>
Stores opened:
Company-owned 15 2
Franchisee-owned 99 59
Licensed 35 --
------------ ------------
149 61
Unopened stores:
Franchise agreement 26 32
Area development agreement 39 50
------------ ------------
65 82
------------ ------------
214 143
============ ============
</TABLE>
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$179,659 and $55,245 in 1996 and 1995, respectively. Included in advertising
expense was $41,928 and $30,912, in 1996 and 1995, respectively, related to the
Company's franchise operations.
NET LOSS ATTRIBUTABLE TO COMMON SHARE
All share information presented has been adjusted for the three-for-two stock
split effected in the form of a 50% dividend which occurred in April 1996. All
common stock and warrants issued within one year prior to the initial filing of
the public offering (see Note 8), have been treated as outstanding shares for
the periods prior to the initial public offering. Prior to the issuance of such
stock and warrants, the number of such shares included in the calculation of
net loss attributable to common share has been reduced by the number of shares
that could have been purchased at the public offering price using the proceeds
from the issuance. Subsequent to the issuance of such stock, only the actual
number of such shares issued has been included in the calculations. The primary
calculation of net loss attributable to common share is based on the net loss
attributable to common shareholders and the weighted-average number of common
shares outstanding during the period. The primary calculation of net loss
attributable to common share does not include the convertible bonds and the
convertible preferred stock because they are not common stock equivalents. The
fully diluted calculation of net loss attributable to common share assumes
conversion at the beginning of the period of any convertible security converted
during the period. Accordingly, the net loss attributable to common
shareholders was adjusted for preferred dividends accumulated and interest
expense on securities converted during the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (the
Standard), which is effective for fiscal years beginning after December 15,
1995. The Company intends to implement the requirements of this Standard for
the fiscal year ended November 30, 1997, and has determined that, in accordance
with the Standard, it will not alter its current method of accounting for
stock-based compensation in the Consolidated Statement of Operations. The
Company has not yet determined the impact, on a pro forma basis, of
implementing the disclosure requirements of this standard.
3. RESTRICTED CASH
The Company is required by certain states to maintain franchise and area
development fees in escrow accounts until the related franchise stores commence
operations. At November 30, 1996 and November 30, 1995, these accounts totaled
$63,500 and $314,000, respectively.
The Company established the National Marketing Fund (Fund) during 1994.
Franchisees are required to contribute to the Fund based on their net sales and
in turn are reimbursed for a portion of media advertising placed in their local
markets up to a maximum equal to the amount they contributed. At November 30,
1996 and 1995, the Fund's cash balance was $85,732 and $32,441, respectively.
4. INCOME TAXES
There were no provisions for income taxes during the years ended November 30,
1996 and 1995, due to net operating losses incurred during those periods. The
reconciliation of the income tax benefit computed at the federal statutory rate
of 34% and the provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
1996 1995
------------- ------------
<S> <C> <C>
Income tax benefit computed at federal
statutory rate $(109,087) $(148,158)
State income tax benefit, net of federal
tax benefit (15,458) (20,995)
Permanent differences on debt financing
obtained (1,748) (31,701)
Other adjustments 1,046 (181)
Valuation allowance against net deferred
tax asset 125,247 201,035
-------------- ------------
Provision for income taxes $ -- $ --
============= ============
</TABLE>
There was no current income tax expense for the years ended November 30, 1996
and 1995, due to the Company incurring net operating losses for tax purposes
during each of those two years. No deferred taxes have been reflected in the
consolidated statements of operations because the Company has fully reserved
the tax benefit of net deductible temporary differences and operating loss
carryforwards due to the fact that the likelihood of realization of the tax
benefits cannot be established. The Company did not pay any income taxes during
the years ended November 30, 1996 and 1995.
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
------------ ----------
<S> <C> <C>
Franchise fee revenue $249,760 $313,400
Net operating loss carryforwards 350,464 117,211
Franchise costs 74,979 27,476
National Marketing Fund net contributions 19,664 12,976
Promotional expenses - 10,020
Depreciation (94,741) (22,347)
Start-up costs (21,092) -
Other 4,106 (843)
------------- ----------
583,140 457,893
------------- ----------
Valuation allowance (583,140) (457,893)
------------- ----------
$ -- $ --
============= ==========
</TABLE>
At November 30, 1996, the Company has cumulative net operating loss
carryforwards expiring between 2008 and 2011 for U.S. federal income tax
purposes of approximately $876,160. The net operating loss carryforwards are
subject to limitation in any given year as a result of the Company's initial
public offering (see Note 8) and may be further limited if certain other events
occur.
5. LONG-TERM OBLIGATIONS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
----------- ----------
<S> <C> <C>
Unsecured note payable to bank, principal
payments due monthly beginning April 1994,
in accordance with a paydown schedule, at
an interest rate of 9.5% $2,245 $ 5,389
Secured note payable to bank, principal
payments due monthly beginning June 1994,
in accordance with a paydown schedule, at an
interest rate of 8.75% 5,888 9,672
8% unsecured convertible bonds, due July 1, 2002 -- 220,160
8% redeemed unsecured bonds, due July 1, 2000 -- 9,000
------------ -----------
8,133 244,221
Less: Current portion 6,375 7,927
------------ -----------
Long-term debt, net of current portion $1,758 $236,294
============ ===========
</TABLE>
In fiscal 1995, the Company had outstanding $370,000 of 8% unsecured
convertible bonds due July 1, 2002. The bonds were convertible into
shares of common stock at the conversion ratio of one share for every
$2.67 of principal outstanding.
In July 1995, the Company issued 52,440 shares of common stock to bondholders
exercising certain conversion rights. Among other terms of the issue, the
Company had the option of calling outstanding bonds at any time during the
term, subject to certain redemption notice requirements. On December 29,
1995, the Company notified the remaining bondholders of its intent to redeem
the outstanding principal balance of the issue. Bondholders representing
$200,160 of principal elected to convert their interests to common stock
pursuant to the terms of bonds, resulting in the issuance of 75,060 shares of
common stock. The remaining outstanding principal was retired by the payment by
the Company of approximately $31,000 to bondholders in February 1996.
On August 15, 1995, the Company issued a convertible promissory note for
$500,000, due December 1, 1996, bearing interest at 11%, payable monthly. The
note was converted into 254,238 shares of common stock on August 31, 1995, in
connection with a stock subscription agreement (see Note 8).
The secured note payable to bank is collateralized by a delivery van.
As of November 30, 1996, annual maturities on long-term debt are due as
follows: $6,375 in 1997 and $1,758 in 1998. Interest paid for the years ended
November 30, 1996 and 1995, was $4,530 and $28,954, respectively.
6. LEASE COMMITMENTS
The Company rents its office and Company-owned store facilities under leases
which require it to pay real estate taxes, insurance, and general repairs and
maintenance on these leased facilities. Rent expense for the years ended
November 30, 1996 and 1995, was $230,480 and $53,115, respectively. At November
30, 1996, future minimum annual rental commitments under the leases are as
follows:
<TABLE>
<S> <C>
1997 $ 707,210
1998 803,525
1999 755,863
2000 648,207
2001 488,370
Thereafter 809,143
-------------------
$4,212,318
===================
</TABLE>
7. NONCASH TRANSACTIONS
During 1995 the Company converted $379,400 of preferred stock to common stock
(see Note 8).
In connection with the stock subscription agreement entered into on August 31,
1995, the $500,000 August 15, 1995, promissory note was converted to common
stock with put option, and the Company accepted a $200,000 note receivable (see
Notes 5 and 8).
During 1996 and 1995 the Company converted $190,989 and $132,849 of bonds, net
of bond issue costs, to shares of common stock (see Note 5).
On May 1, 1996, the Company issued 50,000 shares of common stock and an option
to purchase 100,000 additional shares of common stock valued, in total, at
approximately $392,000 and canceled notes and other receivables totaling
approximately $145,000 as a portion of consideration of the purchase of several
bagel stores owned and operated by a franchisee (see Notes 8 and 11).
On May 22, 1996, the Company issued an option to purchase 625,000 shares of
common stock valued at $860,000 in connection with the purchase of various
contract rights related to licensed units owned and operated by Host Marriott
(see Notes 8 and 11).
On October 18, 1996, the Company canceled notes and other receivables totaling
approximately $165,000 in connection with the purchase of all contract rights
and other assets of BrewCorp (formerly known as Brewster's Coffee Company,
Inc.) in foreclosure proceedings.
8. SHAREHOLDERS' EQUITY (DEFICIT)
On March 28, 1996, the Board of Directors declared a three-for-two stock split
effected in the form of a 50% dividend payable to shareholders of record on
April 12, 1996 and distributed on April 26, 1996. The terms of all outstanding
options and warrants to purchase shares of common stock were adjusted
accordingly. All share information has been adjusted to reflect the stock
split.
During fiscal year 1995, the Company notified preferred shareholders of its
intention to redeem the outstanding shares of preferred stock. Subject to the
shareholder's conversion right, the Company had the right to redeem shares of
preferred stock for cash at a price equal to the original amount invested by
the shareholder, plus an annualized noncompounded return of 25% and all accrued
but unpaid dividends due. Preferred shareholders had the right to convert their
shares to shares of the Company's common stock at any time. During fiscal 1995,
54.2 preferred shares were converted to 813,000 shares of common stock, and the
remaining 1.8 shares were redeemed for cash. The Company declared and paid a 5%
dividend on the preferred stock for the period from November 2, 1994, through
the date of conversion or redemption of each preferred share, totaling $5,944.
On July 12, 1995, the Articles of Incorporation were amended to authorize
4,000,000 shares of preferred stock, $.01 par value. No shares of preferred
stock were outstanding at November 30, 1996 or 1995.
In July 1995, employees of the Company subscribed for 14,587 shares of common
stock at a price of $2.67 per share. The Company contributed $.67 per share
which was recorded as compensation expense. These shares were paid in full and
issued on September 30, 1995.
On August 31, 1995, the Company entered into a stock subscription agreement
with an "Investor" and sold 508,475 shares of common stock for $1,000,000,
which was paid, in part, by conversion of the $500,000 August 15, 1995
promissory note (see Note 5). The net proceeds to the Company were $941,380.
On September 20, 1995, the Articles of Incorporation of the Company were
amended to increase the authorized common shares from 5,000,000 to 20,000,000
shares.
On November 27, 1995, the Company completed a public offering of 2,500,000
shares of common stock for a public offering price of $2.67 per share or an
aggregate of $6,800,000. Costs associated with this offering totaled
$1,055,886, which included an underwriting discount of 9% of the offering
amount plus a nonaccountable expense allowance of 3% along with other expenses.
The Company also sold to the underwriter, for nominal consideration, warrants
to purchase 255,000 shares of the Company's common stock. The warrants are
exercisable between the first and fifth anniversary of the effective date of
the initial public offering at $3.20 per share.
On November 30, 1995, effective with the closing of the offering and pursuant
to the stock subscription agreement mentioned above, the Company sold an
additional 403,536 shares of common stock to the Investor at $1.80 per share.
Costs associated with this transaction totaled $97,500 payable to an investment
banking firm for assistance in obtaining financing. The net proceeds to the
Company were $628,866. In addition, the Investor was granted a warrant to
purchase up to 144,041 shares of common stock exercisable from the date of
issuance through September 1, 1996, at a price of $.67 per share. On June 25,
1996, 133,471 shares of common stock were issued to the Investor in connection
with a cashless exercise of the warrant. In connection with this exercise, the
Investor forfeited the option to purchase the remaining 10,570 shares covered
by the warrant.
On January 2, 1996, the Company sold an additional 382,500 shares of Common
Stock at the public offering price of approximately $2.67 per share upon
exercise in full of the underwriter's over-allotment option, for an aggregate of
$1,020,000. Costs associated with the exercise of the over-allotment option
totaled approximately $138,000 which included an underwriting discount of 9% of
the offering amount, plus a nonaccountable expense allowance of 3%, and other
expenses. The net proceeds to the Company were approximately $882,000.
On May 1, 1996, in connection with the acquisition of Bagels Unlimited, Inc.,
the Company issued 50,000 shares of common stock and an option to purchase an
additional 100,000 shares of common stock. The option is exercisable for 5
years commencing on May 1, 1996, at a $4.00 per share price. The stock and
option were valued at approximately $242,000 and $150,000, respectively.
On May 22, 1996, in connection with the acquisition of Strathmore Bagels
Franchise Corp., the Company issued an option to purchase 625,000 shares of
Holdings' common stock, no par value, at an exercise price of $6.17 per share.
The option is exercisable for 312,500 shares commencing on May 21, 1997, and
for the remaining 312,500 shares commencing on May 21, 1998. The exercise
period for the option ends on May 21, 1999. The option was valued at
approximately $860,000.
9. STOCK OPTION PLANS
On September 20, 1995, the Company adopted and received shareholder approval of
the 1995 Long-Term Incentive and Stock Option Plan (the Incentive Plan), which
permits the issuance of options, stock appreciation rights, and restricted
stock awards to employees and nonemployee officers, directors, and agents of
the Company. The Incentive Plan reserves 570,000 shares of common stock for
grant and provides that the term of each award be determined by the Board or a
committee of the Board. Under the terms of the Incentive Plan, options granted
may be either nonqualified or incentive stock options. Incentive stock options
must be exercisable at not less than the fair market value of a share on the
date of grant (110% of fair market value if the optionee is a 10% or greater
shareholder) and may be granted only to employees. The Incentive Plan will
terminate on September 19, 2005, unless terminated sooner by action of the
Board.
On September 20, 1995, incentive stock options were granted for an aggregate of
27,000 shares to 18 of the Company's employees, which are exercisable at $2.67
per share. Of the options issued to each employee in 1995, 750 options are
exercisable on December 1, 1996, and the remaining 750 options are exercisable
on December 1, 1997. During 1996, as a result of employees terminating their
employment with the Company, options to purchase 9,000 shares granted to six
employees were canceled. Additionally, on February 27, 1996, stock options to
purchase a total of 6,000 shares were granted to two employees, exercisable one
year from the date of grant, at an exercise price of $4.17. On April 23, 1996,
stock options to purchase a total of 262,500 shares were granted to five
employees, exercisable one year from the date of grant, 147,000 at an exercise
price of $6.37, and 115,000 to a 10% shareholder exercisable at $7.01. Options
are exercisable for a period of ten years from the respective exercise date.
Options issued terminate immediately following an optionee's termination of
employment or, in some circumstances, one to three months after termination or
up to 12 months in the case of the death of the employee.
Additionally, on September 20, 1995, the Company adopted and received
shareholder approval of the 1995 Outside Directors Stock Option Plan (the
Directors Plan), which permits the issuance of nonqualified options to
nonemployee members of the Board. The Directors Plan reserves 30,000 shares of
common stock for grant. The Directors Plan provides for a grant of options to
purchase 3,000 shares upon initial election to the Board and for annual grants
thereafter, upon reelection, of options to purchase 1,500 shares.
Options granted are immediately exercisable for a period of 10 years from the
date of grant at an exercise price per share equal to the fair market value of
a share on the date of grant. Upon termination of the directorship, the options
remain exercisable for periods of varying lengths based on the nature of the
option and the reason for termination. The Directors Plan will terminate on
September 19, 2005, unless terminated sooner by action of the Board.
On September 20, 1995, 3,000 options were granted to one nonemployee director
pursuant to his election to the Board which are exercisable at $2.67 per share.
On April 2, 1996, options to purchase 3,000 shares were issued to a director
upon her election to the Board, and options to purchase 3,000 shares were
issued to continuing nonemployee directors all with an exercise price of $4.83.
10. COSTS OF UNCOMPLETED ACQUISITION
On September 4, 1996 the Company signed an agreement to acquire certain assets
and assume certain liabilities of the two companies which represent the
operations of The Chesapeake Bagel Bakery (Chesapeake), a franchisor and
operator of Chesapeake Bagel Bakery concept specialty bagel stores. The
agreement was subject to certain closing conditions including the Company
obtaining funding for the acquisition by December 31, 1996. At that date, the
Company was unable to complete a public offering of its common stock necessary
to close the transaction on terms agreeable to management. The Company's costs
incurred in acquisition-related and equity offering-related activities have
been expensed in the accompanying consolidated statement of operations under
the caption "costs of uncompleted business acquisition."
11. BUSINESS COMBINATIONS
During the year the Company completed several acquisitions which were all
accounted for using the purchase method of accounting. On May 1, 1996, the
Company acquired certain assets of Bagels Unlimited, Inc. (BUI), 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. Additionally, the Company paid $100,000 to the former owners of BUI
in exchange for noncompetition agreements. The acquired stores are currently
operated as Company-owned Big Apple Bagels units.
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). In this acquisition, the Company acquired
rights to a license agreement with Host Marriott which operated 34 units,
contracts for each facility, and certain machinery and equipment. Additionally,
as part of the acquisition, the Company entered into noncompetition agreements
with the two former principals of Strathmore.
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.
Additionally, as part of the acquisition, the Company entered into
noncompetition agreements with the two former principals of Danville. The
acquired stores are currently operated as Company-owned Big Apple Bagels units.
The financial results of these acquisitions have been included in the
accompanying consolidated statement of operations from the date of acquisition
to the end of fiscal 1996. On a pro forma basis, had the above acquisitions
occurred at December 1, 1994, revenues for the fiscal years ended November 30,
1996 and 1995, would have been $8,543,000 and $5,768,000, respectively. Net
loss for fiscal 1996 and 1995 would have been $548,000 and $676,000,
respectively, or a net loss per share of $0.07 and $0.19, respectively.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company evaluates its various financial instruments based on current market
interest, rates relative to stated interest rates, length to maturity, and the
existence of a readily determinable market price. Based on the Company's
analysis, the fair value of financial instruments recorded on the consolidated
balance sheet at November 30, 1996, approximate their carrying value.
13. SUBSEQUENT EVENT
In January 1997, the Company completed the acquisitions of Just Bagels, Inc.
(JBI), and an 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.
On May 13, 1997, the Company acquired by merger My Favorite Muffin, a New
Jersey corporation. MFM franchised and operated 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.
MFM was merged into BAB Acquisition Corporation, a wholly-owned subsidiary of
the Company, with MFM being the surviving entity. The acquisition through
merger was completed by exchanging 150 shares of MFM stock held equally by
Owen Stern, Ruth Stern and Illona Stern (the "Sellers"), for 432,608 shares
of the Company's common stock, restricted as to transfer until January 1, 1999,
and $260,000 in cash to the Sellers. In addition to current liabilities,
the Company has assumed approximately $350,000 of MFM's existing bank debt.
In April 1997, the Company completed the private placement of 87,710 shares
of $25.00 Series A Convertible Preferred stock (convertible into shares of
common stock), the net proceeds of which was approximately $2 million
after placement agent commissions and costs.
In April 1997, the Company entered a $2 million line of credit agreement
with a bank expiring in October 1998. Interest is payable monthly at prime
plus one percent, with principal due upon the expiration of the note.
<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 10,642,376
Additional paid-in capital 1,272,123
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)
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.
Board of Directors
Strathmore Bagels Franchise Corporation
We have audited the accompanying balance sheet of STRATHMORE BAGELS FRANCHISE
CORPORATION as of December 31, 1995, and the related statement of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of STRATHMORE BAGELS FRANCHISE
CORPORATION, as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BUONANNO & CONOLLY
Commack, New York
May 6, 1996
STRATHMORE BAGELS FRANCHISE CORPORATION
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C> <C> <C>
Current assets
Cash in banks..................................... $ 4,327
Accounts receivable............................... 93,575
Due from officers................................. 7,275
Deferred tax asset (note 4)....................... 7,015
--------
Total current assets............................ $112,192
Property and equipment (notes 1 and 3)
Machinery and equipment........................... $320,674
Accumulated depreciation.......................... 36,585
--------
$284,089
--------
Total property and equipment.................... 284,089
--------
Other assets
Security deposits................................. 829
Organization expenses............................. 2,977
Accumulated amortization.......................... 595
--------
2,382
--------
Total other assets.............................. 3,211
--------
Total assets.................................... $399,492
========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $132,028
Payroll taxes payable..................................... 3,172
Other taxes payable....................................... 421
--------
Total current liabilities............................... $135,621
Long term liabilities
Deferred tax liability (note 4)........................... 5,680
--------
Total long term liabilities............................. 5,680
--------
Total liabilities....................................... $141,301
Stockholders' equity
Common stock.............................................. $180,000
Additional paid-in capital................................ 80,000
Retained deficit--ending.................................. (1,809)
--------
Total stockholders' equity.............................. 258,191
--------
Total liabilities and stockholders' equity.............. $399,492
========
</TABLE>
See accompanying notes.
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Income
Sales.................................................... $440,944
Store set-up commission.................................. 75,000
--------
Total income........................................... $515,944
Cost of sales
Purchases................................................ 232,557
--------
Total cost of sales.................................... 232,557
--------
Gross profit............................................... 283,387
Expenses
Operating expenses....................................... 41,882
Selling expenses......................................... 36,821
General and administrative expenses...................... 152,696
--------
Total expenses......................................... 231,399
--------
Operating income........................................... 51,988
Operating income and expenses loss on lease cancellation
(note 5).................................................. $(30,920)
--------
Total other income and expense............................. (30,920)
--------
Income before taxes........................................ 21,068
Provision for income tax expense/(benefit) (note 4)........ 4,707
--------
Net income................................................. 16,361
Retained deficit--beginning................................ (18,170)
--------
Retained deficit--ending................................... $ (1,809)
========
</TABLE>
See accompanying notes.
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Cash flows from operating activities
Cash received from customers........................... $ 458,244
Cash paid to suppliers................................. (309,308)
Taxes paid............................................. (316)
---------
Cash provided by operating activities.................... $148,620
Cash flows from investing activities
Cash paid for machinery and equipment.................. $(219,353)
Cash paid for Springfield location..................... (30,920)
Equipment deposits..................................... (829)
---------
Cash used by investing activities........................ (251,102)
Cash flows from financing activities
Cash received from issuance of common stock............ $ 30,000
Additional paid in capital............................. 80,000
Loans to shareholder................................... (7,275)
---------
Cash provided by financing activities.................... 102,725
--------
Net increase in cash and cash equivalents................ $ 243
Cash and cash equivalents, beginning of year............. 4,084
--------
Cash and cash equivalents, end of year................... $ 4,327
========
Reconciliation of net income to net cash provided by
operating activities
Net income............................................... $ 16,361
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... $ 33,670
Loss on lease cancellation............................. 30,920
Changes in assets and liabilities
Increase in accounts receivable...................... (57,700)
Increase in deferred tax asset....................... (623)
Increase in accounts payable......................... 117,807
Increase in payroll taxes payable.................... 3,172
Increase in other taxes payable...................... 104
Increase in deferred tax liability................... 4,909
---------
Total adjustments.................................. 132,259
--------
Net cash provided by operating activities.......... $148,620
========
</TABLE>
See accompanying notes.
STRATHMORE BAGELS FRANCHISE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
1) SIGNIFICANT ACCOUNT POLICIES
A) Property
Fixed assets are capitalized at cost. Significant improvements are
capitalized, maintenance and repairs are charged to income. When equipment is
retired or otherwise disposed of, the cost of the assets and the related
accumulated depreciation are eliminated from the accounts and any gain or loss
on disposition is credited or charged to income.
B) Organization History
The Corporation was formed under the Laws of New York State on May 13, 1994
and commenced operations on the same date. The Corporation is in the business
of setting up and selling Strathmore Bagel store franchises.
During 1994 Strathmore entered into a relationship with Host Marriott in
which Marriott opens bagel shops at airports and highway rest stops on sites
leased by them. Marriott will use the name Strathmore Bagel and will purchase
all of its bagel products from Strathmore. The relationship was formalized in a
written agreement completed in 1995. In 1994 three shops were opened at Kennedy
Airport in New York, at which Strathmore invested in equipment and placed it
into service. In 1995 fifteen additional stores were opened.
The agreement with Marriott is a licensing of the use of the name, Strathmore
Bagels, and to date, no franchises have been sold.
2) RELATED PARTY TRANSACTIONS
Steuerman & Sons, Inc. (Steuerman, a wholesale bagel bakery) is owned by
Glenn Steuerman, who is also a 20% stockholder of Strathmore Bagels Franchise
Corp. (Strathmore). Strathmore purchases all of its products for resale from
Steuerman. Steuerman also sets up Strathmore Bagel facilities and stores for
individuals but has no direct agreements with Host Marriott. Finally, Steuerman
provided a commission in the amount of $5,000 for each full store opened which
is reflected in store commission income.
3) EQUIPMENT
Equipment is stated at cost and at December 31, 1995, $319,025 of equipment
had been placed into service. Depreciation is computed on a straight-line
method for financial reporting and amounted to $33,202. For federal income tax
purposes, depreciation is computed under the modified accelerated cash recovery
system.
4) INCOME TAXES
The Company has loss carryforwards totaling $29,231 that may be offset
against future taxable income. If not used, the carryforwards will expire as
follows:
<TABLE>
<S> <C>
2009............................................................ $26,634
2010............................................................ 2,597
</TABLE>
The net deferred tax benefit in the accompanying balance sheet includes the
following amounts of deferred tax assets and liabilities:
<TABLE>
<S> <C>
Deferred tax liability............................................. $5,680
Deferred tax asset................................................. 7,015
------
Net deferred tax benefit....................................... $1,335
</TABLE>
The deferred tax liability results from the use of accelerated methods of
depreciation of property and equipment. The deferred tax asset results from net
operating loss carryforward.
The components income tax expense (benefit) are as follows:
<TABLE>
<S> <C>
Current............................................................ $ 421
Deferred........................................................... 4,286
------
$4,707
</TABLE>
5) LOSS ON LEASE CANCELLATION
Loss on lease cancellation resulted from the corporation's decision to
attempt to open and operate company owned stores. A lease was entered into and
construction begun on a storefront operation in Springfield, Virginia. After
spending $30,920 on lease deposit and construction costs, the corporation
discovered problems in finding proper management to operate the remote
location. A decision not to pursue company owned locations, but rather to
concentrate solely on development of Host Marriott business was made. As a
result the lease was abandoned and all payments forfeited.
Board of Directors
Strathmore Bagels Franchise Corporation
We have audited the accompanying balance sheet of STRATHMORE BAGELS FRANCHISE
CORPORATION as of December 31, 1994, and the related statement of operations,
retained deficit, and cash flows for the period from May 13, 1994 through
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above represent fairly,
in all material respects, the financial position of STRATHMORE BAGELS FRANCHISE
CORPORATION, as of December 31, 1994, and the results of its operations and its
cash flows for the period from May 13, 1994 through December 31, 1994 in
conformity with generally accepted accounting principles.
BUONANNO & CONOLLY
Commack, New York
November 17, 1995
STRATHMORE BAGELS FRANCHISE CORPORATION
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C> <C> <C>
Current assets
Cash in banks...................................... $ 4,084
Accounts receivable................................ 35,875
Deferred tax asset (note 4)........................ 6,392
-------
Total current assets............................. $ 46,351
Property and equipment (notes 1 and 3)...............
Machinery and equipment............................ $101,322
Accumulated depreciation........................... 3,214
--------
$98,108
-------
Total property and equipment..................... 98,108
--------
Other assets
Organization expenses.............................. 2,977
Accumulated amortization........................... 298
--------
2,679
-------
Total other assets............................... 2,679
--------
Total assets..................................... $147,138
========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 14,221
Other taxes payable....................................... 316
--------
Total current liabilities $ 14,537
Long term liabilities.......................................
Deferred tax liability (note 4)........................... 771
--------
Total long term liabilities............................. 771
--------
Total liabilities....................................... $ 15,308
Stockholders' equity
Common stock.............................................. $150,000
Retained deficit--ending.................................. (18,170)
--------
Total stockholders' equity.............................. 131,830
--------
Total liabilities and stockholders' equity ............. $147,138
========
</TABLE>
See accompanying notes.
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE PERIOD FROM MAY 13, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
Income sales.................................................. $88,105
-------
Total income.................................................. $ 88,105
Cost of sales
Purchases................................................... $23,831
Contract labor.............................................. 880
Supplies.................................................... 3,000
-------
Total cost of sales....................................... 27,711
--------
Gross profit.................................................. $ 60,394
Expenses
Operating expenses.......................................... $ 8,500
Selling expenses............................................ 26,171
General and administrative expenses......................... 49,198
-------
Total expenses............................................ 83,869
--------
Loss before taxes............................................. $(23,475)
Income Tax benefit (note 4)................................... (5,305)
--------
Net loss and retained deficit................................. $(18,170)
========
</TABLE>
See accompanying notes.
STRATHMORE BAGELS FRANCHISE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 13, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
Cash flows from operating activities
Cash received from customers.......................... $ 72,230
Cash paid to suppliers................................ (113,847)
---------
Cash used by operating activities....................... $ (41,617)
Cash flows from investing activities
Cash paid for machinery and equipment................. $(101,322)
---------
Cash used by investing activities....................... (101,322)
Cash flows from financing activities
Cash received from the issuance of common stock....... $ 150,000
Cash paid for organization and issuance of common
stock................................................ (2,977)
---------
Cash provided by financing activities................... 147,023
---------
Net increase in cash and cash equivalents............... $ 4,084
Cash and cash equivalents, beginning of period.......... --
---------
Cash and cash equivalents, end of period................ $ 4,084
=========
Reconciliation of net loss to net cash provided by
operating activities:
Net loss................................................ (18,170)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization......................... 3,511
Changes in assets and liabilities:
Increase in accounts receivable..................... (35,875)
Increase in deferred tax asset...................... (6,392)
Increase in accounts payable........................ 14,222
Increase in taxes payable........................... 316
Increase in deferred tax liability.................. 771
---------
Total adjustments....................................... (23,447)
---------
Net cash provided by operating activities............... $ (41,617)
=========
</TABLE>
See accompanying notes.
STRATHMORE BAGELS FRANCHISE CORPORATON
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994
1) SIGNIFICANT ACCOUNT POLICIES
A) Property
Fixed assets are capitalized at cost. Significant improvements are
capitalized, maintenance and repairs are charged to income. When equipment is
retired or otherwise disposed of, the cost of the assets and the related
accumulated depreciation are eliminated from the accounts and any gain or loss
on disposition is credited or charged to income.
B) Organization History
The Corporation was formed under the Laws of New York State on May 13, 1994
and commenced operations on the same date. The Corporation is in the business
of setting up and selling Strathmore Bagel store franchises.
During 1994 Strathmore entered into a relationship with Host Marriott in
which Marriott opens bagel shops at airports and highway rest stops on sites
leased by them. Marriott will use the name Strathmore Bagel and will purchase
all of its bagel products from Strathmore Bagel and will purchase all of its
bagel products from Strathmore. The relationship was formalized in a written
agreement completed in 1995. This agreement is a test period agreement to
determine the feasibility and profitability of the stores. A more expansive
final contract has been drafted and is anticipated to be signed in 1995. In
1994 three shops were opened at Kennedy Airport in New York, at which
Strathmore invested in equipment and placed it into service. In 1995 fifteen
additional stores were opened.
The agreement with Marriott is a licensing of the use of the name, Strathmore
Bagels, and to date, no franchises have been sold.
2) RELATED PARTY TRANSACTIONS
Steuerman & Sons, Inc. (Steuerman, a wholesale bagel bakery) is owned by
Glenn Steuerman, who is also a 25% stockholder of Strathmore Bagels Franchise
Corp. (Strathmore). Strathmore purchases all of its products for resale from
Steuerman. During the year Steuerman was paid $7,700 for construction costs of
several new store locations. Steuerman also sets up Strathmore Bagel facilities
and stores for individuals but has no direct agreements with Host Marriott.
Finally, Steuerman provided purchase rebates of $20,000 to Strathmore, which
are reflected in purchase rebates receivable at December 31, 1994.
3) EQUIPMENT
Equipment is stated at cost and at December 31, 1994, $89,988 of equipment
had been placed into service. Depreciation is computed on a straight-line
method for financial reporting and amounted to $3,214. For federal income tax
purposes, depreciation is computed under the modified accelerated cash recovery
system.
4) INCOME TAXES
The Company has loss carryforwards totaling $26,634 that may be offset
against future taxable income. If not used, the carryforwards will expire in
the year 2009.
The net deferred tax benefit in the accompanying balance sheet includes the
following amounts of deferred tax assets and liabilities:
<TABLE>
<S> <C>
Deferred tax liability............ $ 771
Deferred tax asset................ 6,392
------
Net deferred tax benefit........ $5,621
======
</TABLE>
The deferred tax liability results from the use of accelerated methods of
depreciation of property and equipment. The deferred tax asset results from net
operating loss carryforward.
The components of income tax expense/(benefit) are as follows:
<TABLE>
<S> <C>
Current......................... $ 316
Deferred........................ 5,621
-------
$(5,305)
=======
</TABLE>
STRATHMORE BAGELS FRANCHISE CORPORATION
CONDENSED BALANCE SHEET
MAY 21, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Current assets $ 39,936
Property and equipment, net........................................... 279,923
Other assets
Security deposits................................................... 829
Organization expenses............................................... 2,382
--------
$323,070
========
Current liabilities
Accounts payable and accrued liabilities............................ $ 50,479
Long-term liabilities
Loans payable....................................................... 75,000
Deferred tax liability.............................................. 5,680
Stockholders' equity
Common stock........................................................ 180,000
Additional paid-in capital.......................................... 80,000
Retained deficit.................................................... (68,089)
--------
191,911
--------
$323,070
========
</TABLE>
See notes to unaudited condensed financial statements
STRATHMORE BAGELS FRANCHISE CORPORATION
CONDENSED STATEMENT OF INCOME
PERIOD FROM JANUARY 1, 1996 THROUGH MAY 21, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Sales................................................................ $142,044
Cost of sales........................................................ 83,189
--------
Gross profit......................................................... 58,855
Operating expenses................................................... 4,675
Selling expenses..................................................... 2,272
General and administrative........................................... 110,117
--------
117,064
--------
Operating loss....................................................... (58,209)
Provision for income taxes........................................... 8,071
--------
Net loss............................................................. $(66,280)
========
</TABLE>
See notes to unaudited condensed financial statements
STRATHMORE BAGELS FRANCHISE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996 THROUGH MAY 21, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Operating activities:
Net cash used in operating activities.............................. $(91,894)
Investing activities:
Proceeds on sales of equipment..................................... 4,166
Financing activities:
Proceeds of borrowings............................................. 75,000
--------
Net decrease in cash................................................. (12,728)
Cash at beginning of period.......................................... 4,327
--------
Cash overdraft at end of period...................................... $ (8,401)
========
</TABLE>
See notes to unaudited condensed financial statements
STRATHMORE BAGELS FRANCHISE CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Strathmore Bagels Franchise Corporation (the "Corporation") was formed under
the laws of New York state on May 13, 1994 and commenced operations on the same
date. On May 21, 1996, substantially all of the assets of the Corporation were
sold to BAB Holdings, Inc.
The accompanying unaudited financial statements present the financial
activity of the Corporation from January 1, 1996 through the date of the sale
of the Corporation. These unaudited financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1995 and the related notes.
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Bagels Unlimited, Inc.
We have audited the accompanying balance sheet of Bagels Unlimited, Inc. as
of February 29, 1996 and the related statements of operations and accumulated
deficit, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bagels Unlimited, Inc. at
February 29, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 30, 1996
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Bagels Unlimited, Inc.
We have audited the accompanying balance sheet of Bagels Unlimited, Inc. as
of February 28, 1995 and the related statements of operations and retained
earnings (accumulated deficit) and cash flows for the period then ended. We
have also audited the accompanying statements of operations and retained
earnings (accumulated deficit) and cash flows for the period since inception
(August 11, 1993) to February 28, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Bagels
Unlimited, Inc. as of February 28, 1995 and the results of its operations and
its cash flows for the periods ending February 28, 1995, and February 28, 1994
in conformity with generally accepted accounting principles.
Muehl, Steffes & Krueger, S.C.
Milwaukee, Wisconsin
June 13, 1996
BAGELS UNLIMITED, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
ASSETS 1996 1995
------ ------------ ------------
<S> <C> <C>
Current assets:
Inventories........................................ $ 34,986 $ 15,497
Prepaid income taxes............................... 1,242 --
Prepaid expenses................................... 6,891 1,421
--------- --------
Total current assets............................. 43,119 16,918
--------- --------
Property and Equipment:
Construction in progress........................... 2,530 59,320
Machinery and equipment............................ 314,981 183,854
Leasehold improvements............................. 358,527 239,427
--------- --------
Total property and equipment..................... 676,038 482,601
Less: Accumulated Depreciation and Amortization...... (97,845) (35,417)
--------- --------
Net property and equipment........................... 578,193 447,184
--------- --------
Other assets:
Franchise fees, net of accumulated amortization of
$11,084 and $4,230 as of February 29, 1996 and
February 28, 1995................................. 58,916 65,770
Organization costs, net of accumulated amortization
of $288 and $160 as of February 29, 1996 and
February 28, 1995................................. 1,630 1,758
Prepaid franchise fees............................. 10,000 10,000
Investment......................................... 3,500 3,500
Deposits........................................... 1,350 1,350
--------- --------
Total other assets............................... 75,396 82,378
--------- --------
Total assets..................................... $ 696,708 $546,480
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Checks issued, but not yet presented for payment... $ 2,027 $ 11,815
Line of credit..................................... 10,000 12,500
Notes payable...................................... 167,684 --
Due to franchisor.................................. 10,000 10,000
Due to officers.................................... 216,365 126,511
Accounts payable................................... 291,266 159,069
Accrued liabilities................................ 69,051 27,038
Accrued interest................................... 43,246 --
Accrued income taxes............................... -- 9,248
--------- --------
Total current liabilities........................ 809,639 356,181
--------- --------
Long-Term Liabilities
Deferred rent...................................... 16,348 9,685
Accrued interest................................... -- 7,502
Notes payable...................................... -- 144,000
--------- --------
Total long-term liabilities...................... 16,348 161,187
--------- --------
Total liabilities................................ 825,987 517,368
--------- --------
Stockholders' equity (deficit):
Common stock--no par value; 9,000 shares
authorized, 2,000 shares issued and outstanding... 2,000 2,000
Stock subscription receivable...................... (2,000) (2,000)
Retained earnings (accumulated deficit)............ (129,279) 29,112
--------- --------
Total stockholders' equity (deficit)............. (129,279) 29,112
--------- --------
Total liabilities and stockholder's equity
(deficit)....................................... $ 696,708 $546,480
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
BAGELS UNLIMITED, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Sales......................................... $2,776,415 $1,430,573 $ 92,719
Cost of sales................................. 2,338,541 1,111,214 72,855
---------- ---------- --------
Gross profit.................................. 437,874 319,359 19,864
Selling and administrative expenses........... 517,251 236,932 25,618
---------- ---------- --------
Income (loss) from operations................. (79,377) 82,427 (5,754)
Interest expense.............................. (79,123) (37,602) (1,326)
Other......................................... 109 837 30
---------- ---------- --------
Income (loss) before income taxes............. (158,391) 45,662 (7,050)
Income taxes.................................. -- 9,500 --
---------- ---------- --------
Net income (loss)............................. (158,391) 36,162 (7,050)
---------- ---------- --------
Retained earnings (accumulated deficit):
Balance--beginning of period................ 29,112 (7,050) --
---------- ---------- --------
Balance--end of period...................... $ (129,279) $ 29,112 $ (7,050)
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
BAGELS UNLIMITED, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................ $(158,391) $ 36,162 $ (7,050)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 69,410 36,267 3,540
Deferred rent.............................. 6,663 7,946 1,739
Increase (decrease) in cash due to changes
in:
Inventories................................ (19,489) (8,248) (7,249)
Prepaid expenses........................... (5,470) (1,421) --
Prepaid income taxes....................... (1,242) -- --
Accounts payable........................... 182,321 75,014 22,932
Accrued liabilities........................ 77,757 27,212 7,328
Accrued income taxes....................... (9,248) 9,248 --
--------- --------- ---------
Net cash provided by operating activities.... 142,311 182,180 21,240
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........... (243,561) (295,381) (126,097)
Cash paid for investment..................... -- -- (3,500)
Deposit for leasehold improvements........... -- (26,599) 25,249
Payment of organizational costs.............. -- -- (1,918)
Payment of franchise fees.................... -- (52,500) (17,500)
--------- --------- ---------
Net cash (used in) investing activities...... (243,561) (374,480) (123,766)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of credit.. (2,500) 12,500 --
Net borrowing on amounts due to officers..... 89,854 21,661 104,850
Proceeds from the issuance note payable...... 30,000 150,000 --
Principal payments on long-term debt......... (6,316) (6,000) --
--------- --------- ---------
Net cash provided by financing activities.... 111,038 178,161 104,850
--------- --------- ---------
Net increase (decrease) in cash (checks
issued, but not yet presented for payment).. 9,788 (14,139) 2,324
--------- --------- ---------
Balance--beginning of period................. (11,815) 2,324 --
--------- --------- ---------
Balance--end of period....................... $ (2,027) $ (11,815) $ 2,324
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest................................... $ 43,379 $ 31,426 $ --
Income taxes............................... 10,490 259 --
--------- --------- ---------
Total cash paid for interest and income
taxes....................................... $ 53,869 $ 31,685 $ --
========= ========= =========
SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES
Purchase of property and equipment through
accounts payable............................ $ 10,999 $ 61,123 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 11, 1993) TO FEBRUARY 28, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Bagels Unlimited, Inc. d/b/a Big Apple Bagels (the Company) operates bagel
stores in southeastern Wisconsin in accordance with franchise agreements with
a regional franchisor. The Company began operating the stores on the following
dates:
<TABLE>
<CAPTION>
COMMENCEMENT
DATE OF
STORE LOCATION OPERATIONS
-------------- --------------
<S> <C>
Hales Corners............................................ December 1993
Brookfield............................................... July 1994
Milwaukee--Marquette University.......................... September 1994
Kenosha.................................................. April 1995
</TABLE>
Inventories
Inventories consist principally of perishable food supplies. Inventories are
valued at the lower of cost or market using the first-in, first-out (FIFO)
method.
Credit Policy
Substantially all of the Company's revenues are from retail cash sales.
Accordingly, the Company generally does not provide credit in the normal
course of business.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Depreciation and Amortization
Depreciation and amortization are computed using the straight line method
(half year convention) over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Machinery and equipment............................. 5-7 years
Leasehold improvements.............................. Length of the Lease
</TABLE>
Other assets are being amortized using the straight line method over the
following terms:
<TABLE>
<S> <C>
Franchise fees................................................. 10 Years
Organizational costs........................................... 15 Years
</TABLE>
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related to differences between the bases of certain assets and
liabilities for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
recovered or settled. If full realization of the deferred tax asset is not
expected, a deferred tax valuation allowance will be recorded. Deferred taxes
also are recognized for operating losses that are available to offset future
taxable income and tax credits that are available to offset future federal and
state income taxes.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
NOTE 2. RELATED PARTY TRANSACTIONS
Due to Officers
As February 29, 1996 and February 28, 1995 the following amounts were due to
the two corporate
officers/stockholders of the Company:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Unsecured advances due to officers. Interest is
charged at 8%. The advances are due on demand. $216,365 $126,511
</TABLE>
Office Lease Payments
During the period ended February 29, 1996, approximately $2,500 of rent was
paid to an affiliated company for office rent. The payments were made under a
verbal month to month lease with the affiliated company.
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. LINE OF CREDIT/NOTES PAYABLE
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
LINE OF CREDIT
The Company has a $10,000 ($15,000 as of
February 28, 1995) line-of-credit with a bank
which is due on demand. The line bears
interest at the bank's prime rate plus 2.50%
(effective rate of 10.75% as of February 29,
1996). The line is unsecured.................. $ 10,000 $ 12,500
Notes payable, as of February 29, 1996 and February 28, 1995, consist of the
following:
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Unsecured note payable due to an affiliated
Company. The note is due on demand and bears
interest at 8%................................ $ 30,000 $ --
Note payable, bearing interest at 0.5% above
the prime rate (effective rate of 8.75% at
February 28, 1996), payable monthly. The
entire outstanding principal balance was paid
in May 1996. Under the terms of the note
payable, additional interest is due based upon
2% of the net sales of one of the four
franchise stores operated by the Company. The
additional interest is payable monthly and
continues for an additional six months after
the note is paid in full...................... 91,218 94,000
Note payable, bearing interest at 1.0% above
the prime rate (effective rate of 9.25% at
February 29, 1996), payable monthly. The
entire outstanding principal balance was paid
in May 1996. Under the terms of the note
payable, additional interest is due based upon
1% of the net sales of one of the four
franchise stores operated by the Company. The
additional interest is payable monthly and
continues for an additional six months after
the note is paid in full...................... 46,466 50,000
--------- --------
Total........................................ 167,684 144,000
Less: Current Portion........................ (167,684) --
--------- --------
Long-term portion.......................... $ -- $144,000
========= ========
</TABLE>
Interest charged to operations for related party obligations was
approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense................... $21,000 $9,000 $1,000
</TABLE>
Included in accrued interest on the accompanying balance sheet is the
estimated net present value of the additional interest due for six months after
the related notes have matured.
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. AGREEMENTS WITH FRANCHISOR/SUBSEQUENT EVENT
The Company has entered into various agreements with BAB Holdings, Inc. (the
franchisor to own and operate "Big Apple Bagels" franchises. Under the terms
of the agreements, the Company will purchase the rights for each franchise
location for $17,500. The agreements require the Company to remit weekly
royalty payments to the franchisor based on 5% of sales.
Amounts expensed for royalties are approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Royalty expense.. $136,000 $72,000 $6,000
</TABLE>
The agreements also require the Company to remit advertising payments weekly
to a fund for the benefit of the Company. The Company is reimbursed from the
fund for qualified advertising expenditures. Amounts paid into the fund are
expensed as the qualified expenditure is incurred. Included in prepaid
expenses as of February 29, 1996 and February 28, 1995 were approximately
$4,000 and $1,000, respectively, for amounts due from the fund.
Amounts expensed for advertising were approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Advertising expense... $61,000 $16,000 $4,000
</TABLE>
The franchise agreements contain, among other things, guidelines for
operations and conditions and restrictions on the sale and transfer of the
franchises. Under certain conditions, the Franchisor has the option to
purchase the assets of a location from the Company. Also, the Company may be
required to remodel its franchise locations. The cost of the required
remodeling may not exceed 2% of the cumulative sales of the franchise.
The franchise agreements expire at the end of 10 years or at the end of the
lease for the location of the franchise, which ever is shorter. The agreements
may be extended if the leases are further extended or a new location
acceptable to the Franchisor is secured within 120 days of the expiration of
the lease.
Franchise fee amortization was as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Amortization....... $6,854 $3,792 $438
</TABLE>
The Company and the Franchisor are parties to an Area Development Agreement.
Under the terms of the agreement and for a fee of $25,000, the Company was
granted the exclusive right to develop "Big Apple Bagels" franchises in
southeastern Wisconsin. The agreement further specifies that the first five
franchises can be purchased for a $5,000 discount. As of February 29, 1996,
three franchises have been purchased under this agreement. The full amount of
the agreement was capitalized and applied to the net amount paid for the
franchises as they were purchased and amortized accordingly.
All of the amounts due to the Franchisor have been personally guaranteed by
the stockholders' of the Company.
On May 1, 1996, the Company sold substantially all of its assets to the
Franchisor for approximately $770,000 in cash and publicly traded stock of the
Franchisor. At the time of the sale, the remaining unpaid balance on the Area
Development Agreement was deducted from the sales proceeds and the remaining
balance in the prepaid franchise fees was charged to operations in May 1996.
The Franchisor has also assumed all of the lease commitments of the Company.
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LEASE COMMITMENTS
The Company leases its franchise locations from third parties under operating
leases. The leases call for average monthly payments ranging from approximately
$1,200 to $2,600. In addition to the monthly lease payments, the Company is
responsible for its share (based on square feet leased) of common area expenses
and real estate taxes. The Company is responsible for all other operating
costs. The basic rent expense is being recorded on a straight line basis.
The terms of the leases expire in terms ranging from September 1998 to May
2006. Certain leases contain options to extend the terms of the leases for an
additional 5 years. One lease contains an option to extend the lease for two
five year periods after the original term.
The Company also leases two vehicles under operating leases which call for
monthly payments of approximately $1,300.
Rent, common area charges, and related taxes paid related to the above leases
were approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total............................ $148,000 $81,000 $6,000
</TABLE>
Future minimum lease payments, which have been guaranteed by the Company's
stockholders, excluding adjustments for inflation, for the above leases is as
follows:
<TABLE>
<CAPTION>
YEARS ENDING FEBRUARY
---------------------
<S> <C>
1997..................................... $129,000
1998..................................... 127,000
1999..................................... 124,000
2000..................................... 80,000
2001..................................... 30,000
Thereafter............................... 175,000
</TABLE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAXES EXPENSE (CREDIT)
Income taxes (credit) consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current--
Federal.......................... $ -- $6,000 $ --
State............................ -- 3,500 --
----- ------ -----
Total current...................... $ -- $9,500 $ --
===== ====== =====
</TABLE>
No deferred taxes have been reflected in the statements of operations because
the Company has fully reserved the tax benefit of net deductible temporary
differences and operating loss carryforwards due to the fact that the
likelihood of realization of the tax benefits cannot be established.
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Accelerated depreciation for income tax purposes............... $ (3,900)
Non-deductible deferred rent................................... 3,400
Non-deductible accrued interest................................ 4,100
Federal net operating loss carryforward........................ 18,400
State tax loss and credit carryforwards........................ 8,200
Other temporary differences, net............................... 2,100
Deferred tax valuation allowance............................... (32,300)
--------
Net deferred tax asset....................................... $ --
========
</TABLE>
The deferred tax balances as of February 28, 1995 and 1994 were immaterial.
The provision for income taxes (credit) differs from the amount computed by
applying the U.S. federal statutory income tax rate of approximately 15% to
income (loss) before income taxes as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes (credit) at U.S.
statutory rate................... $(23,800) $6,800 $(1,100)
Increase in taxes resulting from:
State taxes, net of federal
benefit........................ (9,500) 2,700 (400)
Change in deferred tax valuation
allowance and other............ 33,300 -- 1,500
-------- ------ -------
Income taxes...................... $ -- $9,500 $ --
======== ====== =======
</TABLE>
The Company has carryforwards for income tax purposes as of February 29, 1996
approximately as follows:
<TABLE>
<CAPTION>
EXPIRING IN FEDERAL NET WISCONSIN NET
PERIODS ENDING OPERATING LOSS OPERATING LOSS
-------------- -------------- --------------
<S> <C> <C>
2011 $93,000 $87,000
</TABLE>
BAGELS UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 7. CONCENTRATIONS
Substantially all of the Company's revenues are derived from retail sales in
four locations located in southeastern Wisconsin.
<TABLE>
<CAPTION>
My Favorite Muffin, Too, Inc. and
My Favorite Muffin, Inc.
Combined Balance Sheet
December 31, 1996
(unaudited)
<S> <C>
ASSETS (Pledged) (Notes 3 and 4)
Current assets:
Cash and cash equivalents $ 122,395
Accounts Receivable (less allowance for
doubtful accounts of $7,768) 306,677
Inventory 57,640
Prepaid expenses 38,451
Deferred income taxes (Note 5) 2,319
Other 7,433
----------
Total current assets 534,915
Property and equipment
Furniture and fixtures 122,066
Equipment 351,471
Leasehold improvements 445,605
Transportation equipment 23,279
----------
942,421
Less accumulated depreciation
and amortization 436,412
----------
Net Property and equipment 506,009
Other Assets
Intangibles, primarily goodwill, net 123,434
Security deposits 23,086
----------
Total other assets 146,520
----------
$1,187,444
==========
</TABLE>
<TABLE>
<CAPTION>
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
My Favorite Muffin, Too, Inc. and
My Favorite Muffin, Inc.
Combined Balance Sheet (continued)
December 31, 1996
(unaudited)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 250,429
Current maturities of
long-term debt (Note 3) 137,799
Line of Credit (Note 4) 44,000
Deferred revenue 152,873
Incomes taxes payable (Note 5) 11,947
Accrued expenses 27,318
Current maturities of loans
payable, related parties (Note 2) 27,170
----------
Total current liabilities 651,536
Deferred income taxes (Note 5) 5,406
Long-term debt, net of
current maturities (Note 3) 252,666
Loans payable, related parties,
net of current maturities (Note 2) 20,795
----------
Total Liabilities 930,403
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock (Note 7) 15,000
Additional paid-in capital 24,376
Retained earnings 217,665
----------
Total shareholders' equity 257,041
----------
$1,187,444
==========
</TABLE>
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
My Favorite Muffin Too, Inc. and My Favorite Muffin, Inc.
Combined Statement of Income and Retained Earnings
Year Ended December 31, 1996
(Unaudited)
<S> <C>
Revenues
Sales of franchises $ 235,250
Sales 1,310,663
Franchise fees 896,002
Advertising fees 170,040
Other 99,410
----------
Total revenues 2,711,365
Cost of Revenues
Advertising 165,346
Cost of Sales 1,003,334
Franchise 90,254
Other 12,306
----------
Total cost of revenues 1,271,240
----------
Gross Profit 1,440,125
----------
Operating expenses
(including interest expense of $44,349) 1,376,763
----------
Income before minority interest in loss of
subsidiary and taxes on income 63,362
Minority interest in loss of
subsidiary(Note 2) 18,422
----------
Income before taxes on income 81,784
Taxes on income (Note 5) 47,993
----------
Net Income 33,791
Retained earnings, beginning of year 183,874
----------
Retained earnings, end of year $ 217,665
==========
</TABLE>
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
My Favorite Muffin Too, Inc. and My Favorite Muffin, Inc.
Combined Statement of Cash Flows
Year Ended December 31, 1996
(Unaudited)
<S> <C>
Cash flows from operating activities
Net Income $ 33,791
Adjustments to reconcile net income
to net cash provided by
operating activities
Deferred income recognition (1,948)
Provision for doubtful accounts (7,377)
Deferred income taxes 2,906
Minority interest in subsidiary (7,860)
Depreciation and Amortization 99,548
Changes in assets and liabilities
(Increase) in accounts receivable (12,436)
Decrease in prepaid expenses 14,523
Decrease in inventory 17,422
Decrease in other 9,673
Increase in accounts payable 20,387
Increase in income taxes 11,947
(Decrease) in accrued expenses (25,918)
----------
Net cash provided by operating activities 154,658
Cash flow from investing activities
Purchase of property and equipment (19,737)
----------
Net cash (used in) investing activities (19,737)
Cash flows from financing activities
Increase in loans payable, related party 20,928
Borrowings on line of credit 25,000
Repayments of long-term debt (123,051)
----------
Net cash (used in) financing activities (77,123)
Net increase in cash 57,798
Cash, at beginning of year 64,597
----------
Cash, at end of year $ 122,395
==========
Supplemental disclosures of
cash flow information
Cash paid for interest $ 55,672
==========
Income Taxes $ 33,140
==========
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS
</TABLE>
My Favorite Muffin Too, Inc. and My Favorite Muffin, Inc.
Notes to Unaudited Combined Financial Statements
1. Summary of Significant Accounting Policies
Principles of Combined Financial Statements
The combined financial statements include the accounts of My
Favorite Muffin Too, Inc. and subsidiaries and My Favorite
Muffin, Inc. (the "Company"). Significant intercompany balances
and transactions have been eliminated in combination.
Description of Business and Income Recognition
Sale of franchises: Revenue from the initial sale of a
franchise is recognized at the time the store is opened.
Receivables or collections prior to store opening are recorded
as deferred income. Commissions paid or accrued in connection
with the sale of a franchise are also deferred until the store
is opened.
Franchise fees: Fees charged to franchisees are based on a
percentage of monthly franchisee sales and are recognized when
earned.
Advertising fees: The Company charges its franchisees a
percentage of their sales to be used for advertising. The
Company defers these fees and recognizes them as revenue in an
amount equal to the actual expenditures on behalf of the
franchisees.
Sales of food items: The Company sells food items through
company-owned locations and recognizes income when a sale is
made.
Inventory
Inventory consists primarily of food items available for sale
and is stated at the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using accelerated methods over the estimated useful
lives ranging from five to seven years which is not materially
different from those amounts computed on the straight-line
method. Leasehold improvements are amortized over the life of
the related lease.
Goodwill and Other Intangibles
The excess of cost over fair value of net assets acquired is
being amortized on the straight-line method over a fifteen year
period. Amortization of goodwill was $3,710 for the year ended
December 31, 1996. The Company evaluates the recoverability of
the goodwill quarterly, or more frequently whenever events and
circumstances warrant revised estimates by assessing current and
future levels of income and cash flows, as well as other
factors, and considers whether goodwill should be completely or
partially written off or the amortization period accelerated.
Other intangibles are amortized over a period of 5-10 years.
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to
concentrations of credit risk consist principally of trade
receivables.
Concentrations of credit risk, with respect to trade
receivables, are limited due to the large number of customers
compromising the Company's franchisees and their dispersion
across different geographic regions. As of December 31, 1996,
the Company had no significant concentrations of credit risk.
No single customer accounted for a significant amount of the
Company's sales in 1996.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash,
accounts receivable, miscellaneous
receivables, accounts payable, accrued liabilities and short-
term debt approximate fair value because of the immediate or
short-term maturity of these financial instruments. The
carrying amount reported for long-term debt approximate fair
value because the underlying instruments are at variable rates
which are repriced frequently. The remaining long-term debt is
based on quoted market prices or where quoted market prices are
not available on the present value of cash flows discounted at
estimated borrowing rates for similar debt instruments.
Income Taxes
Income taxes are calculated using the liability method specified
by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
2. Related Party Transactions
During October 1996, the Company acquired the remaining 28% of
Muffin Holdings of PA. The purchase price in excess of the
minority interest was treated as additional goodwill.
As of December 31, 1996, the Company had a loan payable to an
officer in the amount of $4,627, payable in monthly installments
of $526. The loan is unsecured and bears interest at 8.855% per
annum.
As of December 31, 1996, the Company had loans payable to a
Partnership controlled by its officers/stockholders in the
amount of $43,338 payable in varying monthly principal
installments plus interest at 10%. The loans mature October
1999.
3. Long-Term Debt
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Note payable in monthly installments of $1,667
plus interest at prime plus 1.5% (9.75% at
December 31, 1996) through October 1, 2000. The
debt is collateralized by substantially all of
the assets of the Company. $ 76,667
Unsecured note payable in connection with
minority interest acquisition (see Note2)
monthly installments of $1,154, including
interest at 10%. The note is due November 1998. 24,055
Note payable in monthly installments of $2,091,
including interest at 14.5%. The note is
secured by property and equipment and is due
February 1998. 23,231
Note payable, bank, is collaterialized by a
security interest in substantially all of the
assets of the Company. The stockholders have
guaranteed the note and assigned life insurance
policies on the corporate officers. The note is
payable in monthly principal installments of
$6,083 plus interest at prime plus 1 _% (10% at
December 31, 1996) through June 2000. At
December 31, 1996, the Company was in violation
of several financial loan covenants. However,
the Bank has agreed to waived these violations
for a period in excess of one year. 257,995
Other 8,517
--------
390,465
Less current maturities 137,799
--------
Long-term debt $252,666
========
</TABLE>
<TABLE>
Long-term debt maturities at December 31, 1996 are summarized as
follows:
<S> <C>
Year ended December 31,
1997 $137,799
1998 105,671
1999 93,000
2000 53,995
--------
$390,465
========
</TABLE>
4. Line of Credit
The Company has a $50,000 line of credit available with a bank.
Interest is at the bank's national commercial rate plus 1.5%
(9.75% at December 31, 1996). Advances under the line are
collateralized by a security interest in the Company's accounts
receivable and property and equipment. The outstanding balance
of $44,000 at December 31, 1996 is payable on demand.
5. Income Taxes
In 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The types of
temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise
to a significant portion of the deferred tax assets and deferred
tax liabilities are provisions for doubtful accounts and
depreciation, respectively.
The provision for Federal and state income taxes is detailed as
follows:
<TABLE>
<CAPTION>
My Favorite My Favorite
Muffin Too, Inc. Muffin, Inc. Total
---------------- ------------ ---------
<S> <C> <C> <C>
Income (loss) before
taxes on income $ 144,739 $ (62,955) $ 81,784
Taxes on income
Federal $ 29,546 $ - $ 29,546
State 15,541 - 15,541
Deferred 2,906 - 2,906
--------- --------- --------
$ 47,993 $ - $ 47,993
========= ========= ========
</TABLE>
My Favorite Muffin, Inc. has $103,000 of net operating loss
carryforwards to be used to offset future taxes. Such resultant
tax asset has a 100% valuation reserve.
6. Commitments and Contingincies
The Company leases its corporate office, warehouse and two
stores under various non-cancellable operating leases through
June 30, 2005. The leases contain provisions for escalation and
specific increased occupancy expenses. Rent expenses for the
year ended December 31, 1996 amounted to $113,300.
Future minimum payments remaining under the terms of the non-
cancellable leases are approximately as follows for the year
ended December 31,:
<TABLE>
<S> <C>
1997 $ 131,153
1998 141,944
1999 152,138
2000 115,898
2001 69,530
Thereafter 272,152
---------
$ 882,815
=========
</TABLE>
7. Common Stock
<TABLE>
<S> <C>
My Favorite Muffin Too, Inc.
Authorized 2,500 shares, no par value
Issued and outstanding 150 shares $ 7,500
My Favorite Muffin, Inc.
Authorized 1,500 shares, no par value
Issued and outstanding 150 shares 7,500
---------
$ 15,000
=========
</TABLE>
8. Subsequent Event
In May 1997, BAB Holdings, Inc. ("BAB") acquired the Company
from its stockholders in exchange for 432,608 shares of BAB
common stock plus $260,000 cash consideration.
<TABLE>
<CAPTION>
My Favorite Muffin, Too, Inc. and
My Favorite Muffin, Inc.
Condensed Combined Balance Sheet
May 13, 1997
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 143,449
Other current assets 360,052
----------
Total current assets 503,501
Property, plant, and equipment,
net of accumulated depreciation of $479,677 464,562
Goodwill, net 144,157
Other assets 25,831
----------
$1,138,051
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 450,038
Deferred franchise fee revenue 120,565
Line of credit 44,000
Current portion of long-term debt 19,209
Other current liabilities 33,088
----------
Total current liabilities 666,900
Long-term debt, less current portion 316,586
Shareholders' equity:
Common stock 39,376
Retained earnings 115,189
----------
Total shareholders' equity 154,565
----------
$1,138,051
==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
My Favorite Muffin, Too, Inc. and
My Favorite Muffin, Inc.
Condensed Combined Statement of Income
Period from January 1, 1997 through May 13, 1997
(Unaudited)
<S> <C>
REVENUES
Net sales by company-owned stores $ 521,595
Royalty fees from franchised stores 308,532
Franchise fees 26,250
Other income 89,121
---------
945,498
OPERATING COSTS AND EXPENSES
Costs of sales 407,993
Selling, general and administrative 620,459
---------
1,028,452
---------
Loss before interest and other, net (82,954)
Interest expense (16,562)
Other expense, net (2,960)
---------
Net loss $(102,476)
=========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
My Favorite Muffin, Too, Inc. and
My Favorite Muffin, Inc.
Condensed Combined Statement of Cash Flows
Period from January 1, 1997 through May 13, 1997
(Unaudited)
<S> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 96,751
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,818)
FINANCING ACTIVITIES
Repayment of borrowings (73,879)
--------
Net increase in cash and cash equivalents 21,054
Cash and cash equivalents at beginning of period 122,395
--------
Cash and cash equivalents at end of period $143,449
========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS.
</TABLE>
My Favorite Muffin, Too, Inc. and
My Favorite Muffin, Inc.
Notes to Condensed Combined Financial Statements
1. Basis of Presentation
The condensed combined financial statements include the accounts of My
Favorite Muffin Too, Inc. and subsidiaries and My Favorite Muffin, Inc.
(the "Company"). Significant intercompany balances and transactions
have been eliminated in combination.
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. Sale of Company
On May 13, 1997, the Company was sold to BAB Holdings, Inc. Immediately
preceding the sale to BAB Holdings, Inc., the assets of My Favorite
Muffin Inc. were sold to My Favorite Muffin, Too, Inc. for assumption of
all liabilities of My Favorite Muffin, Inc. The resulting My Favorite
Muffin, Too, Inc., was sold to BAB Holdings, Inc. by exchanging the
outstanding shares of the Company for 432,608 shares of BAB Holdings,
Inc. common stock, plus cash of $260,000.
- ----------------------------------------------------------------------------
No dealer, salesperson or other person
has been authorized to give any information
or to make any representations in connection
with this offering other than those contained
in this Prospectus, and, if given or made, BAB HOLDINGS, INC.
such information or representations must not
be relied upon as having been authorized by
the Company. This Prospectus does not Common Stock
constitute an offer to sell or a solicitation
of an offer to buy the Shares by anyone in
any jurisdiction in which such offer or
solicitation would be unlawful or to any person Prospectus
to whom it is unlawful. Under no circumstances
shall the delivery of this Prospectus create any
implication that any information contained in this
Prospectus is correct as of any time subsequent
to the date of this Prospectus.
- ----------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary
Risk Factors
Recent Acquisitions
Use of Proceeds
Price Range of Common Stock; Dividend Policy
Selected Consolidated Financial Information
Pro Forma Statement of Operations
Year Ended November 30, 1996
Pro Forma Statement of Operations
Six Months Ended May 31, 1997
Management's Discussion and Analysis of
Financial Condition And Results
of Operations
Business
Management
Selling Shareholders
Principal Shareholders and Ownership of
Management
Certain Transactions
Description of Securities
Plan of Distribution
Legal Matters
Experts
Available Information
Index to Financial Statements
- -----------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Company is governed by Illinois Business Corporation Act
of 1983, as amended, which provides that a corporation may
indemnify any person who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or who
is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including
employee benefit plans), against expenses (including attorneys'
fees), judgments, fines (including excise taxes), and amounts
paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding, if such person acted in
good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In
addition, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the
corporation; provided that no indemnification shall be made with
respect to any claim, issue, or matter as to which such person
has been adjudged to have been liable to the corporation, unless,
and only to the extent that the court in which such action or
suit was brought shall determine that, despite the adjudication
of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity. Any
indemnification shall be made by the corporation only upon a
determination by disinterested directors or independent counsel
that indemnification is proper in the circumstances because the
indemnified person met the applicable standard of conduct. The
Company's amended Articles of Incorporation and Bylaws provide
for indemnification to the full extent permitted under Illinois
law.
The Statement of Designation establishing the Series A
Convertible Preferred Stock contains provisions under which the
Company, on the one hand, and the holders of such securities, on
the other hand, have agreed to indemnify each other (including
officers and directors of the Company or such holders, and any
person who may be deemed to control the Company or such holders)
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the issuance and
distribution of the Common Stock registered hereby, other than
underwriting discounts and fees, are set forth in the following
table:
<TABLE>
<S> <C>
SEC registration fee $ 1,903
Legal fees and expenses 25,000
Accounting fees and expenses 25,000
Blue sky fees and expenses 5,000
Printing and engraving expenses 5,000
Miscellaneous 2,000
--------
Total $ 63,903
========
</TABLE>
All such expenses will be paid by the Company pursuant to the
written agreements with the Selling Shareholders.
Item 26. Recent Sales of Unregistered Securities
(a) In fiscal year 1993, the Company issued $476,000 in $7,000
par value convertible preferred stock, convertible into shares of
its Common Stock at $.70 per share. In fiscal year 1994 and in
December 1994, the Company issued $370,000 in 8% convertible
bonds, due July 1, 2002, convertible into shares of its Common
Stock at $2.67 per share. The preferred stock was converted in
whole (except as to 2.7 shares, which were redeemed) to 993,000
shares of Common Stock during the period from October 1994
through April 1995. The bonds were converted, in part, to 52,440
shares of Common Stock on July 1, 1995 and to 75,060 shares of
Common Stock on December 29, 1995.
(b) On August 31, 1995, the Company issued an aggregate of
508,475 shares of Common Stock to an investor in consideration of
a combination of cash, a promissory note, and conversion of debt.
The investor was also granted an option to purchase 579,225
shares for $822,500. Effective November 30, 1995, the investor
purchased 403,536 shares for $726,366. The remaining shares were
purchased on June 25, 1996 by means of a ''cashless'' exercise,
resulting in the issuance of 133,471 shares.
(c) In September 1995, the Company issued an aggregate of
14,588 shares of Common Stock to 10 employees, in connection with
their employment, at a price of $2.67 per share ($38,900 in
total).
(d) During the period from December 1, 1995 through May 31,
1997, the Company has granted options for an aggregate of 298,500
shares of Common Stock to employees and others, including
consultants and non-employee directors, pursuant to the Company's
1995 Long-Term Incentive and Stock Option Plan and 1995 Directors
Stock Option Plan. Such options are exercisable at various
prices, which in each case is equal to or greater than the fair
market value as of the date of grant. To date, no options have
been exercised.
(e) On May 1, 1996, the Company issued 50,000 shares of Common
Stock and a 5-year option to purchase 100,000 shares of Common
Stock at $4.00 per share to Bagels Unlimited, Inc. (''BUI''), a
Wisconsin corporation which was a franchisee of the Company, in
partial consideration of the purchase by the Company of
substantially all of the assets of BUI.
(f) On May 22, 1996, the Company granted a 3-year option to
purchase 625,000 shares of Common Stock to Strathmore Bagels
Franchise Corp. (''Strathmore'') in partial consideration for the
purchase by the Company of substantially all of the assets of
Strathmore.
(g) On April 1, 1997, the Company issued 25,611 shares of
Common Stock to Heartland Bagels, Inc., in partial consideration
of the purchase of a franchise Big Apple Bagels units.
(h) In April 1997 the Company issued 87,710 shares of $25.00
Series A Convertible Preferred Shares for total consideration of
$2,192,750. Merrill Weber & Company served as an agent for such
sale and received $131,565 in commissions and a warrant to
purchase 13,315 shares of Common Stock at $3.29 per share.
(i) On May 13, 1997, the Company issued 432,608 shares of
Common Stock in partial consideration of the acquisition by
merger of My Favorite Muffin Too, Inc.
(j) On June 30, 1997, the Company issued a 1-year option to
purchase 2,000 shares of Common Stock at $8.00 per share to
Danville Bagel Company pursuant to a store development agreement.
The Company believes that each such issuance and sale of
securities was exempt from registration under the Securities Act
of 1933, pursuant to Section 4(2) of the Act, except that the
transaction described in (c) is exempt under Section 3(b) of the
Act and Rule 701 promulgated thereunder, and the transaction
described in (h) is exempt under Section 4(2) and Regulation D.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- -----------------------------------------------------
<S> <C>
[i] 2.1 Asset Purchase Agreement dated February 2, 1996
between the Company, 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
[ii] 2.2b Non-Competition Agreement by and among the Company
and Donald Nelson and Mary
Ann Varichak dated May 1, 1996
[ii] 2.2c Stock Option Agreement between the Company and BUI
dated May 1, 1996
[ii] 2.2d Registration Rights Agreement between the Company
and BUI 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] 2.3b Stock Option Agreement dated May 21, 1996 between
the Company and Strathmore
[iii] 2.3c Registration Rights Agreement dated May 21, 1996
between the Company and Strathmore
[iii] 2.3d Non-Competition Agreement dated May 21, 1996 among
the Company, Strathmore, Jack
Freedman and Glen Steuerman
[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
[iv] 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
[iv] 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.
[v] 3.1a Amended Articles of Incorporation of the Company
[vi] 3.1b Amended and Restated Statement of Designation,
Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock as filed with
the Secretary of State of Illinois on March 26, 1997
[v] 3.2 Bylaws of the Company, as amended
[v] 4.1 Form of Stock Certificate evidencing Common Stock,
no par value
[v] 4.2 Subscription Agreement with Aladdin International, Inc.
dated August 31, 1995
[v] 4.3 Amended Form of Warrant Issued to Aladdin International, Inc.
* 5 Opinion of Moss & Barnett, A Professional
Association, Counsel to the Company
[v] 10.1 Form of Franchise Agreement
[v] 10.2 Form of Franchise Agreement-Satellite
[v] 10.3 Form of Franchise Agreement-Wholesale
[v] 10.4 Form of Area Development Agreement
[v] 10.5 Confidentiality and Non-Competition Agreement with
Franchisees
[v] 10.6 Form of Confidentiality Agreement with Employees
[v] 10.7 Licensing Agreement dated November 20, 1992 between
the Company and Big Apple
Bagels, Inc.
[v] 10.8 Assignment of Royalty Mark & Trademark to the
Company by Big Apple Bagels, Inc.
dated November 20, 1992
[v] 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.
[v] 10.11 Leases dated November 2, 1994 and February 14, 1995
for principal executive office
[v] 10.12 1995 Long-Term Incentive and Stock Option Plan
[v] 10.13 1995 Outside Directors Stock Option Plan
[v] 10.14 Settlement Agreement with Timothy Williams d/b/a Big
Apple Deli and Stipulated Dismissal with Prejudice
[i] 10.15 $550,000 Revolving line of credit loan dated January
31, 1996 (executed February 12,
1996) by BAB Systems, Inc. to Bagels Unlimited, Inc.
11.1 Calculation of earnings per share
21.1 List of Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Muehl, Steffes & Krueger, S.C.,
independent auditors
23.3 Consent of Buonanno & Conolly, independent auditors
* 23.4 Consent of Counsel to the Company (filed as part of
Exhibit 5.1)
* 23.5 Consent of BDO Seidman, L.L.P., independent auditors
24 Power of Attorney (included on signature page as previously filed)
</TABLE>
- ----------------------------
* To be filed by amendment
[i] Incorporated by reference to the Company's Report on Form
10-KSB for the fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-
K dated May 1, 1996
[iii] Incorporated by reference to the Company's Report on
Form 8-K dated May 21, 1996
[iv] Incorporated by reference to the Company's Report on Form 8-
K dated May 13, 1997
[v] Incorporated by reference to the Company's Registration
Statement on Form SB-2, effective November 27, 1995
(Commission File No. 33-98060C)
[vi] Incorporated by reference to the Company's Report on Form
10-QSB for the quarter ended February 28, 1997
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to
directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions or otherwise, the
small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement and the offering of the
securities at that time as the initial bona fide offering of
those securities.
(3) To file, during any period in which offers
or sales are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii)To reflect in the prospectus any
facts or circumstances which, individually or together, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(iii)To include any additional or changed material
information on the plan of distribution;
(4) For the purpose of
determining any liability under the Securities Act of 1933,
treat each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering thereof.
(5) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
SB-2 and has authorized this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Chicago, State of Illinois, on July
17,1997.
BAB HOLDINGS, INC.
/S/ MICHAEL W. EVANS
-------------------------
By: Michael W. Evans,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
Signature Title Date
/S/MICHAEL W. EVANS President and Chief Executive July 17, 1997
- --------------------- Officer (Principal executive -------------
Michael W. Evans officer) and Director
/S/THEODORE P. NONCEK Chief Financial Officer July 17, 1997
- --------------------- (Principal financial and -------------
Theodore P. Noncek accounting officer)
* Vice President, General Counsel July 17, 1997
- ----------------------- and Director -------------
Michael K. Murtaugh
* Director July 17, 1997
- ----------------------- -------------
David L. Epstein
* Director July 17, 1997
- ------------------------ -------------
Cynthia A. Vahlkamp
By: /s/ Michael W. Evans
----------------------
Michael W. Evans
Attorny-in-fact
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.
- ----------- ----------------------------------------------------- ---------
<S> <C> <C>
[i] 2.1 Asset Purchase Agreement dated February 2, 1996
between the Company, 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
[ii] 2.2b Non-Competition Agreement by and among the Company
and Donald Nelson and Mary
Ann Varichak dated May 1, 1996
[ii] 2.2c Stock Option Agreement between the Company and BUI
dated May 1, 1996
[ii] 2.2d Registration Rights Agreement between the Company
and BUI 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] 2.3b Stock Option Agreement dated May 21, 1996 between
the Company and Strathmore
[iii] 2.3c Registration Rights Agreement dated May 21, 1996
between the Company and Strathmore
[iii] 2.3d Non-Competition Agreement dated May 21, 1996 among
the Company, Strathmore, Jack
Freedman and Glen Steuerman
[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
[iv] 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
[iv] 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.
[v] 3.1a Amended Articles of Incorporation of the Company
[vi] 3.1b Amended and Restated Statement of Designation,
Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock as filed with
the Secretary of State of Illinois on March 26, 1997
[v] 3.2 Bylaws of the Company, as amended
[v] 4.1 Form of Stock Certificate evidencing Common Stock,
no par value
[v] 4.2 Subscription Agreement with the Aladdin International, Inc.
dated August 31, 1995
[v] 4.3 Amended Form of Warrant Issued to Aladdin International, Inc.
* 5 Opinion of Moss & Barnett, A Professional
Association, Counsel to the Company
[v] 10.1 Form of Franchise Agreement
[v] 10.2 Form of Franchise Agreement-Satellite
[v] 10.3 Form of Franchise Agreement-Wholesale
[v] 10.4 Form of Area Development Agreement
[v] 10.5 Confidentiality and Non-Competition Agreement with
Franchisees
[v] 10.6 Form of Confidentiality Agreement with Employees
[v] 10.7 Licensing Agreement dated November 20, 1992 between
the Company and Big Apple
Bagels, Inc.
[v] 10.8 Assignment of Royalty Mark & Trademark to the
Company by Big Apple Bagels, Inc.
dated November 20, 1992
[v] 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.
[v] 10.11 Leases dated November 2, 1994 and February 14, 1995
for principal executive office
[v] 10.12 1995 Long-Term Incentive and Stock Option Plan
[v] 10.13 1995 Outside Directors Stock Option Plan
[v] 10.14 Settlement Agreement with Timothy Williams d/b/a Big
Apple Deli and Stipulated Dismissal with Prejudice
[i] 10.15 $550,000 Revolving line of credit loan dated January
31, 1996 (executed February 12,
1996) by BAB Systems, Inc. to Bagels Unlimited, Inc.
11.1 Calculation of earnings per share
21.1 List of Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Muehl, Steffes & Krueger, S.C.,
independent auditors
23.3 Consent of Buonanno & Conolly, independent auditors
* 23.4 Consent of Counsel to the Company (filed as part of
Exhibit 5.1)
* 23.5 Consent of BDO Seidman, L.L.P., independent auditors
24 Power of Attorney (included on signature page as
previously filed)
</TABLE>
- ----------------------------
* To be filed by amendment
[i] Incorporated by reference to the Company's Report on Form
10-KSB for the fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-
K dated May 1, 1996
[iii] Incorporated by reference to the Company's Report on
Form 8-K dated May 21, 1996
[iv] Incorporated by reference to the Company's Report on Form 8-
K dated May 13, 1997
[v] Incorporated by reference to the Company's Registration
Statement on Form SB-2, effective November 27, 1995
(Commission File No. 33-98060C)
[vi] Incorporated by reference to the Company's Report on Form
10-QSB for the quarter ended February 28, 1997
Exhibit 11.1
BAB HOLDINGS, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal Fiscal
6 Months 6 Months Year Year
5/31/97 5/31/96 11/30/96 11/30/95
---------- --------- --------- --------
<S> <C> <C> <C> <C>
PRIMARY EPS
Net income (loss) $173,985 $143,644 $(320,844)$(435,760)
Less preferred stock dividend (222,715) -- -- (4,000)
--------- --------- ---------- --------
Income(loss)applicable to common $(48,730) $143,644 $(320,844)$(435,760)
========= ========== ========= =========
Weighted average shares outstanding 7,194,725 7,178,219 7,366,645 3,382,916
========= ========== ========= ==========
Net income(loss)per common share $(0.0068) $0.0200 $(0.0436) $(0.1300)
========= ========== ========== =========
FULLY DILUTIVE EPS
Net income (loss) $173,985 $143,644 $(320,844)$(435,760)
Less preferred stock dividend (222,715) -- -- (4,000)
Add back "as if" stock dividend -- -- -- 4,000
Bond interest expense
"as if" Converted -- 566 566 6,525
--------- --------- ---------- --------
Income(loss)applicable to common $ (48,730) $144,210 $(320,278)$(429,235)
========= ========== ========= =========
Weighted average shares outstanding 7,194,725 7,232,153 7,420,538 3,560,257
========= ========== ========= =========
Net income(loss)per common share,
fully diluted $(0.0068) $ 0.0199 $(0.0432) $(0.1206)
========= ========== ========== =========
</TABLE>
Exhibit 21.1
SUBSIDIARIES OF BAB HOLDINGS, INC.
BAB Systems, Inc., an Illinois corporation
BAB Operations, Inc., an Illinois corporation
Brewster's Franchise Corporation, an Illinois corporation
Systems Investments, Inc., an Illinois corporation, (a wholly-
owned subsidiary of BAB Systems, Inc., which is a subsidiary of
BAB Holdings, Inc.)
My Favorite Muffin Too, Inc., a New Jersey corporation
Exhibit 23.1
We consent to the reference to our firm under the caption
"Experts" and in the "Selected Consolidated Financial Information" and
to the use of our report dated February 7, 1997, except for Note
13, as to which the date is June 16, 1997 for BAB Holdings, Inc.,
and our report dated October 30, 1996 for Bagels Unlimited, Inc.,
in Amendment No. 1 to the Registration Statement (Form Sb-2 No. 333-29465)
and the related Prospectus of BAB Holdings, Inc. for the registration
of 2,100,867 shares of its common stock.
ERNST & YOUNG LLP
Chicago, Illinois
July 17, 1997
Exhibit 23.2
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated June 13, 1996 for
Bagels Unlimited, Inc., in Amendment No. 1 to the Registration
Statement (Form SB-2 No. 333-29465) and the related Prospectus
of BAB Holdings, Inc. for the registration of 2,100,867 shares
of its common stock.
MUEHL, STEFFES & KRUEGER, S.C.
July 17, 1997
Exhibit 23.3
We consent to the reference to our firm under the caption
"Experts" and to the use of our reports dated May 6, 1996 and
November 17, 1995 for Strathmore Bagels Franchise Corporation, in
Amendment No. 1 to the Registration Statement (Form SB-2 No. 333-
29465) on Form SB-2 and the related Prospectus of BAB Holdings, Inc.
for the registration of 2,100,867 shares of its common stock.
BUONANNO & CONOLLY, CPA'S
July 17, 1997
