FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 0-27068
BAB Holdings, Inc.
- ----------------------------------------------------------------------------
(Name of small business issuer in its charter)
Illinois 36-3857339
- ----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (773) 380-6100
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,383,203 shares of Common
Stock, as of July 10, 1998.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements ...................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation ..................
PART II
Item 1. Legal Proceedings.......................................
Item 2. Changes in Securities...................................
Item 3. Defaults Upon Senior Securities.........................
Item 4. Submission of Matters to a Vote of Security Holders.....
Item 5. Other Information.......................................
Item 6. Exhibits and Reports on Form 8-K........................
SIGNATURE ........................................................
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
May 31, 1998
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $142,171 $ 263,494
Accounts receivable, net of allowance
for doubtful accounts of $220,000 1,476,743
Other current assets 1,660,517
------------
Total current assets 3,400,754
Property, plant, and equipment, net of
accumulated depreciation of $1,308,194 4,582,691
Goodwill, net of accumulated amortization of $135,330 2,565,692
Franchise contract rights, net of accumulated
amortization of $112,250 1,960,034
Other assets and intangible assets, net of
accumulated amortization of $582,071 1,969,828
------------
$ 14,478,999
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,582,466
Deferred franchise fee revenue 450,500
Current portion of long-term debt 2,002,347
Other current liabilities 723,169
------------
Total current liabilities 5,758,482
Long-term debt, less current portion 23,079
Shareholders' equity:
Common stock 11,368,667
Additional paid-in capital 1,171,331
Preferred stock 1,648,922
Accumulated deficit ( 5,491,482)
------------
Total shareholders' equity 8,697,438
------------
$ 14,478,999
============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MAY 31,
1998 1997
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 2,390,690 $ 2,280,086
Royalty fees from franchised stores 761,713 552,523
Franchise and area development fees 390,500 413,000
Licensing fees and other income 252,542 245,105
--------------------------
3,795,445 3,490,714
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 784,088 749,994
Store payroll and other operating expenses 1,314,915 1,204,177
Selling, general, and administrative expenses 1,481,410 1,402,434
--------------------------
3,580,413 3,356,605
--------------------------
Income before interest 215,032 134,109
Interest expense ( 57,133) (2,443)
Interest income 37,743 16,994
--------------------------
Net income 195,642 148,660
Preferred stock divided accumulated ( 37,003) (222,715)
--------------------------
Net income (loss) attributable to
common shareholders $ 158,639 $ (74,055)
==========================
Basic and diluted earnings (loss)
per common share $ 0.02 $ (0.01)
==========================
Average number of shares outstanding 7,919,466 7,220,615
==========================
Average number of shares outstanding - diluted 10,425,864 7,220,615
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
SIX MONTHS ENDED
MAY 31,
1998 1997
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 4,817,840 $ 4,087,363
Royalty fees from franchised stores 1,549,240 958,744
Franchise and area development fees 602,500 647,900
Licensing fees and other income 555,705 570,827
--------------------------
7,525,285 6,264,834
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 1,604,702 1,350,415
Store payroll and other operating expenses 2,828,467 2,262,798
Selling, general, and administrative expenses 2,982,558 2,512,314
--------------------------
7,415,727 6,125,527
--------------------------
Income before interest 109,558 139,307
Interest expense (103,714) (2,488)
Interest income 56,839 37,166
--------------------------
Net income 62,683 173,985
Preferred stock divided accumulated (87,699) (222,715)
--------------------------
Net loss attributable to
common shareholders $ (25,016) $ (48,730)
==========================
Basic and diluted loss per common share $ - $ (0.01)
==========================
Average number of shares outstanding 7,822,614 7,181,842
==========================
Average number of shares outstanding - diluted 7,822,614 7,181,842
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
MAY 31,
1998 1997
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used for operating activities $ (463,743) $ (277,682)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (103,484) (2,140,483)
Loan repayments 116,129 -
Business acquisitions - (650,531)
Other 22,303 (238,882)
-----------------------
Net cash provided by (used for)
investing activities 34,948 (3,029,896)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock - 2,192,750
Borrowings under line of credit 337,500 211,447
Payment of preferred stock issuance costs - (219,774)
Other (35,107) (10,071)
----------------------
Net cash provided by financing activities 302,393 2,174,352
----------------------
Net decrease in cash and cash equivalents (126,402) (1,133,226)
Cash and cash equivalents at beginning of period 389,896 2,163,293
----------------------
Cash and cash equivalents at end of period $ 263,494 $ 1,030,067
======================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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 was acquired
on May 13, 1997. MFM franchises and operates "My Favorite Muffin" specialty
muffin retail stores.
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, 1998
are as follows:
<TABLE>
<S> <C>
Stores opened:
Company-owned 26
Franchisee-owned 192
Licensed 55
---
273
Unopened franchised stores for
which an agreement has been sold:
Franchise agreement 19
Area development agreement 20
---
39
---
Total 312
===
</TABLE>
3. Acquisitions and Dispositions
In January 1998, the Company sold one store located in Lincoln, Nebraska to a
franchisee in exchange for $30,000 and a $177,000 note receivable which bears
interest at a rate of 8.5% per annum. Principal and interest payments are
payable monthly until March 1, 2003 when the remaining unpaid principal
balance is due in full.
During 1997, the Company acquired and sold several stores. Stores purchased
are operated as Company-owned units for a period of time prior to resale as a
franchised unit.
In January 1997, the Company completed the acquisition of 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. In
October 1997, management closed one of the stores and it closed the remaining
three stores in January 1998. All of the long-lived assets associated with
this purchase were considered impaired as of November 30, 1997. See Note 4.
In May 1997, the Company acquired MFM. At the time of acquisition, MFM had 5
company-owned and 60 franchised units in operation and its 1996 revenues
exceeded $2.7 million. The Company acquired MFM by exchanging 432,608 shares
of the Company's Common Stock, restricted as to transfer until January 1,
1999, and $259,000 in cash in exchange for 150 shares of MFM stock. The
Company assumed all assets, including approximately $143,000 in cash, and
liabilities of MFM. The Company borrowed approximately $356,000 on its credit
facility to repay MFM bank debt and other borrowings assumed in the
acquisition.
4. Impairment of Long-Lived Assets and Store Closures
As a result of operating losses incurred during the fiscal year ended November
30, 1997, management identified seven Company-owned stores as impaired and
recorded a provision for impairment of long-lived assets and store closures of
approximately $1,837,000, including a reserve for closed store operating
leases and other store closing costs of approximately $504,000. One store was
closed by November 30, 1997 and the remaining six stores were closed by
February 28, 1998. Operating losses incurred by these six stores during the
six months ended May 31, 1998 totaled approximately $90,000 and are included
in results of Company-owned store operations. At May 31, 1998, the reserve
for closed store operating leases and other store closing costs is
approximately $341,000.
5. 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 common
stock; provided that during a Conversion Suspension Period (defined below),
dividends will accrue at a rate of 15% per annum. Dividends are payable only
when shares are converted to shares of common stock. The holders have no
voting rights and have a liquidation preference of $25.00, plus accrued
dividends, out of assets of the Company available for distribution to
shareholders.
Commencing August 1, 1997 through July 31, 1999, subject to certain
extensions, the shareholders may elect to convert each preferred stock share
into that number of common shares determined by dividing the $25 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. 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.
A Conversion Suspension Period takes effect if 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 Stock during a Conversion Suspension Period. During any Conversion
Suspension Period, the Company, at its option, may redeem any or all of the
Preferred Stock by payment to the holders of $28.75 per share, plus all
accrued and unpaid dividends. The Company entered into a sixty day Conversion
Suspension Period during November 1997. Preferred dividends accumulated
during the three months and six months ended May 31, 1998 were $37,000 and
$88,000, respectively.
During fiscal 1997, 9,000 shares of Preferred Stock, plus dividends accrued
thereon, were converted into 110,342 shares of common stock. During the six
months ended May 31, 1998, 14,204 shares of Preferred Stock, plus dividends
accrued upon 5,800 shares of Preferred Stock, were converted into 504,659
shares of common stock. The Company elected to pay accrued dividends in cash
totaling $20,000 upon conversion of the remaining 8,404 shares of Preferred
Stock.
6. Line of Credit Agreement
In April 1997, the Company entered a $2 million line of credit agreement with
a bank expiring on December 31, 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. At May
31, 1998, the Company had borrowed $1,995,000 on the line of credit and the
balance is classified as a current liability. The Company is currently in the
process of renewing the line of credit with the bank and transferring a
portion of the borrowings to a secured note payable.
In February 1998, the Company fell below the compensating cash balance
requirement of $250,000 and obtained a waiver from the bank to lower the
requirement to $150,000 for 60 days expiring April 25, 1998. Management has
implemented a plan to increase the cash balance with improved cash flow
resulting from store closures, proceeds from the sale of stores and other
assets, reduction in general and administrative expenses and increased
collection efforts. In June 1998, the Company fell below the minimum cash
requirements; however, the Company is currently within compliance with the
minimum cash requirement.
7. Earnings (Loss) per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following tables sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
1998 1997
---------- --------
<S> <C> <C>
Numerator:
Net income $195,642 $148,660
Preferred stock dividend accumulated (37,003) (222,715)
---------- --------
Numerator for basic earnings (loss)
per share--income (loss) attributable
to common shareholders 158,639 (74,055)
Effect of dilutive securities:
Preferred stock dividend accumulated 37,003 -
---------- -------
Numerator for diluted earnings (loss)
per share--income (loss)attributable
to common shareholders $195,642 $(74,055)
========== ========
Denominator:
Denominator for basic earnings (loss)
per share--weighted average shares 7,919,466 7,220,615
Effect of dilutive securiites:
Convertible preferred stock 2,506,398 -
---------- ---------
Denominator for diluted earnings (loss)
per share--weighted average shares 10,425,864 7,220,615
========== =========
Basic and diluted earnings
(loss) per share $ 0.02 $ (0.01)
========== =========
</TABLE>
<TABLE>
SIX MONTHS ENDED
MAY 31,
1998 1997
---------- --------
<S> <C> <C>
Numerator:
Net income $ 62,683 $173,985
Preferred stock dividend accumulated (87,699) (222,715)
---------- --------
Numerator for basic and diluted loss
per share--loss attributable
to common shareholders $(25,016) $(48,730)
========== ========
Denominator:
Denominator for basic and diluted loss
per share--weighted average shares 7,822,614 7,181,842
========== =========
Basic and diluted loss per share $ - $ (0.01)
========== =========
</TABLE>
Options to purchase 301,000 shares of common stock at varying prices are
outstanding at May 31, 1998 under the Company's 1995 Long-Term Incentive and
Stock Option Plan (the Incentive Plan) and the 1995 Outside Directors Stock
Option Plan (the Directors Plan). Also outstanding during the period ended
May 31, 1998 was a warrant sold in connection with the Company's initial
public offering to the underwriter to purchase 255,000 shares of common stock
at $3.20 per share. Additionally, in connection with various acquisitions
during 1996 and 1997, the Company issued options to purchase 658,000 shares of
common stock issuable at varying exercise prices ranging from $4.00 per share
to $8.00 per share. Further, warrants issued to each preferred shareholder of
the Preferred Stock were outstanding to purchase 175,420 shares of common
stock at $2.35 per share. Finally, common shares are issuable pursuant to the
terms of the Company's convertible Preferred Stock (see Note 5.)
The exercise of options and warrants outstanding or conversion of convertible
securities outstanding during the three months ended May 31, 1997 and the six
months ended May 31, 1998 and 1997 is not assumed as the result is
antidilutive to the reported loss per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the development of the Company's business, the markets for the Company's
products, anticipated capital expenditures, and the effects of completed and
proposed acquisitions, and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Certain risks and uncertainties are outside the control of the Company and its
management including its ability to attract new franchisees, the continued
success of current franchisees, the effects of competition on franchisee and
Company-owned store results and consumer acceptance of the Company's products
in new and existing markets. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
General
From its inception in November 1992, the Company has grown to 26 Company-owned
and 247 franchised and licensed units at May 31, 1998. System-wide revenues
in the six months ended May 31, 1998 approached $39 million, a 54% increase
from the year-ago quarter. This rapid expansion, which includes significant
increases in Company-owned store revenues and related expenses and the May
1997 acquisition of MFM, significantly affects the comparability of results of
operations of the Company in several ways.
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, the Company has significantly increased
revenue derived from the sale of licensed products as a result of purchasing
trademarks (Brewster's), licensing contracts (Host Marriott) and by directly
entering licensing agreements (Choice Picks Food Courts, Oberweis Dairy and
Mrs. Fields Cookies). Additionally, the Company has generated other revenue
through the sale of Company-owned units to franchisees of the Company.
During the fourth quarter of fiscal 1997, management identified certain under-
performing stores which were operating at a loss and which, based on the
estimated future cash flows, were considered to be impaired. Four of the
seven stores which were considered to be impaired were located in the Southern
California market. In accordance with the Financial Accounting Standards
Board Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and the Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition of Costs to Exit an Activity",
management recorded a provision for impairment of assets and store closures
which totaled approximately $1,837,000. One store was closed during fiscal
1997 and the remaining units were closed during the first quarter of 1998.
The six stores incurred operating losses of approximately $90,000 during the
three months ended February 28, 1998. Management has successfully completed
negotiations to terminate its obligations under five of the seven non-
cancelable lease obligations and anticipates that its obligations under the
remaining leases will be terminated during fiscal 1998. Management believes
that the reserves established for closed store operating leases and other
store closing costs at November 30, 1997 are sufficient.
Results of Operations
Three Months Ended May 31, 1998 versus Three Months Ended May 31, 1997
Total revenues increased 9% to $3,795,000 in the second quarter 1998 from
$3,491,000 in the prior year quarter. This increase was driven primarily by
the 38% increase in royalty revenues which were $209,000 greater than that
generated in the year-ago quarter. This increase is attributed to addition
of 60 MFM franchised units in May 1997; these units were open and in operation
during the entire three months ended May 31, 1998. The Company ended the
quarter with 26 Company-owned units as compared to 31 at May 31, 1997. The
overall decrease in Company-owned units is a result of the November 1997
decision to close 7 under-performing units which was completed in February
1998. Despite the decrease in overall units, the Company experienced an
increase in sales generated by Company-owned stores of $111,000 during the
current year period. Franchise and area development fee revenue remained
relatively flat from the year-ago period. Finally, while licensing fees and
other income in total did not change significantly during the three months
ended May 31, 1998 from the year-ago quarter, licensing fees received from
commissions on the sale of Brewster's Coffee to its franchisees and licensees,
fees paid by Host Marriott licensed units based on retail sales, and
commissions received from a third party commercial baker on sales of par-baked
Big Apple Bagels to all licensed units increased 29% from the second quarter
of fiscal 1997 as the Company continued to develop various nontraditional
channels of distribution.
Costs associated with Company-owned store operations increased relative to
sales in the second quarter 1998 versus 1997 -- 88% of store sales in 1998
and 86% in 1997. However, the contribution towards profitability of Company-
owned stores has improved greatly since fiscal year 1997 where the costs as a
percentage of retail sales generated by Company-owned stores was over 93%.
Management attributes the improved profitability to its decision to close
certain under-performing units which has resulted in overall reduction in food
and labor costs relative to retail sales.
Selling, general and administrative expenses increased by $79,000 to
$1,481,000. Payroll-related expenses increased by $65,000. This is
attributable to the overall increase in corporate headcount associated with
the acquisition of MFM. Employees hired in connection with the acquisition
were employed during the entire quarter of fiscal 1998 versus only one month
of the three months ended May 31, 1997. While payroll costs have increased
over the year-ago quarter, the Company has decreased its headcount at the
corporate headquarters from its fiscal year-end of November 30, 1997 from 54
to 36 at May 31, 1998. Other selling, general and administrative expenses did
not fluctuate significantly over the year - ago quarter.
Income from operations was $215,000 in the second quarter of fiscal 1998
versus $134,000 generated in the second quarter of fiscal 1997 - an increase
of over 60% from the year-ago quarter. Interest expense increased by $55,000
to $57,000 in the three months ended May 31, 1998 related to the Company's
borrowings under its line of credit facility which was outstanding throughout
the fiscal 1998 period. The Company first borrowed under the line of credit
on May 29, 1997; therefore, only nominal interest expense was incurred during
the three months ended May 31, 1997.
Net income totaled $196,000 in the quarter ended May 31, 1998 versus $149,000
in the year-ago quarter. Preferred dividends on the Preferred Stock of
$37,000 were accumulated during the first quarter of 1998. In the quarter
ended May 31, 1997, $223,000 of preferred dividends were accumulated,
including $193,000 attributable to the 15% discount available to holders to
the Preferred Stock in acquiring Common Stock upon ultimate conversion. Such
discounts were accounted for as dividends under generally accepted accounting
principles. By August of 1997, the Company had recognized the entire
preferred dividend to accumulate related to the conversion discount.
Net income per share for the quarter ended May 31, 1998 was $0.02 per share on
both a basic and diluted basis. On a diluted basis, 2,506,398 shares issuable
pursuant to the conversion feature of the Preferred Stock were included in the
average number of shares outstanding. The number of shares was based on the
average conversion price in effect during the quarter. However, due to the
overall increase in the Company's common stock price throughout the quarter,
assuming the conversion price in effect as of May 31, 1998 was used in
determining the average number of shares issuable, 410,390 less shares would
have been included in the denominator. The Company's loss per share for the
year-ago quarter was $0.01 per share on both a basic and diluted basis.
Six Months Ended May 31, 1998 versus Six Months Ended May 31, 1997
Total revenues increased 20% to $7,525,000 in the 1998 period from $6,265,000
in the prior year period. This increase is attributable to the 18% increase in
retail sales of Company-owned units and the 62% increase in royalty revenues
generated by franchise unit retail sales over those recognized in the prior
year period. During the six months ended May 31, 1998, the Company had a net
decrease in the number of Company-owned stores open of 8 and ended the quarter
with 26 units in operation. During the year ago period, the Company added 16
units during the period (including 5 MFM units acquired) and ended the quarter
with 31 units in operation. Royalty revenues generated represented 21% of
total revenues in the 1998 period compared to 15% of total revenues in the
1997 period. The overall increase in the revenues is attributed to the growth
in the number of franchise units in operation - 60 units were added in
connection with the May 1997 MFM acquisition. These units contributed to
revenues throughout the six months ended May 31, 1998 versus one month in the
year ago period. Franchise and area development fee revenue remained
relatively flat from the year-ago period. Finally, while licensing fees and
other income in total did not change significantly during the three months
ended May 31, 1998 from the year-ago quarter, licensing fees received from
commissions on the sale of Brewster's Coffee to its franchisees and licensees,
fees paid by Host Marriott licensed units based on retail sales, and
commissions received from a third party commercial baker on sales of par-baked
Big Apple Bagels to all licensed units increased 31% from the second quarter
of fiscal 1997 as the Company continued to develop various nontraditional
channels of distribution. Additionally, the Company recognized $156,000 from
the resale to franchisees of Company-owned units during the first quarter of
fiscal 1997.
Costs associated with Company-owned store operations increased relative to
sales in the six months ended May 31, 1998 versus the six months ended May
31, 1997 -- 92% of store sales in 1998 and 88% in 1997. However, the
contribution towards profitability of Company-owned stores continues to
improve since fiscal year 1997 where the costs as a percentage of retail sales
generated by Company-owned stores was over 93%. Management attributes this
increase to the results of operations of stores which were closed during the
first quarter. Company-owned stores which were closed during the first
quarter of 1998 generated operating losses of over $90,000 and required
significant attention of management, a cost which is not factored into this
amount.
Selling, general and administrative expenses increased by $470,000 to
$2,983,000. Payroll-related expenses increased by $207,000. This is
attributable to the overall increase in corporate headcount associated with
the acquisition of MFM. Employees hired in connection with the acquisition
were employed for the entire six months during the fiscal 1998 period versus
only one month during the fiscal 1997 period. While payroll costs have
increased over the year-ago quarter, the Company has decreased its headcount
at the corporate headquarters from its fiscal year-end of November 30, 1997
from 54 to 36 at May 31, 1998.
Income from operations was $110,000 in the fiscal 1998 period versus $140,000
generated in the fiscal 1997 period. Interest expense increased by $101,000
to $104,000 in the six months ended May 31, 1998 related to the Companies
borrowings under its line of credit facility which was outstanding throughout
the fiscal 1998 period. The Company first borrowed under the line of credit
on May 29, 1997; therefore, only nominal interest expense was incurred during
the year-ago period.
Net income totaled $63,000 in the six months ended May 31, 1998 versus
$174,000 in the year-ago period. Preferred dividends on the Preferred Stock
of $88,000 were accumulated during the six months ended May 31, 1998. In the
year-ago period, $223,000 of preferred dividends accumulated, including
$193,000 attributable to the 15% discount available to holders to the
Preferred Stock in acquiring Common Stock upon ultimate conversion. Such
discounts were accounted for as dividends under generally accepted accounting
principles. By August of 1997, the Company had recognized the entire
preferred dividend to accumulate related to the conversion discount.
Net loss per share for the six months ended May 31, 1998 was less than $0.01
per share on both a basic and diluted basis. The Company's loss per share
for the year-ago quarter was $0.01 per share on both a basic and diluted
basis.
Liquidity and Capital Resources
During the six months ended May 31, 1998, cash used in operating activities
was $464,000 as compared with $278,000 provided by operating activities during
the comparable last year period. Cash used in operating activities was
attributable an to increase in accounts receivable and a decrease in accounts
payable.
Investing activities provided $35,000 during the six months ended May 31, 1998
and is primarily attributable to the collection of a note receivable from a
franchisee offset by improvements in certain Company-owned units and the
purchase of equipment required to introduce My Favorite Muffin products in
existing Big Apple Bagels Company-owned units. 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 during the six months ended May 31, 1998 provided
$302,000 and primarily represented additional borrowings made during the first
quarter of 1998 on the Company's Credit Facility to fund cash used in
operating activities. At May 31, 1998, the Company had borrowed $1,995,000
on the Credit Facility which is due on December 31, 1998 and the balance is
classified as a current liability. The Company is currently in the process of
renewing the line of credit with the bank and transferring a portion of the
borrowings to a secured note payable.
Financing activities provided a total of $2,174,000 during the six months
ended May 31, 1997. In April 1997 the Company completed the sale of 87,710
shares of $25.00 Preferred Stock in a private placement to institutional
investors, netting approximately $2 million after placement agent commissions
and fees. Additionally, in May 1997, the Company borrowed $211,000 under the
Credit Facility.
In February 1998, the Company fell below the compensating cash balance
requirement of $250,000 and obtained a waiver from the bank to lower the
requirement to $150,000 for 60 days expiring April 25, 1998. In June 1998, the
Company fell below the minimum cash requirements; however,the Company is
currently within compliance with its covenants and management believes that the
Company will successfully negotiate a renewal or restructuring of the
Credit Facility on terms favorable to the Company.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1996, the Company filed an arbitration action against a
franchisee alleging breach of its franchise agreement for refusal to submit
required sales reports and pay royalty fees and contributions to the national
marketing fund. The franchisee filed suit in the Circuit Court of Cook County,
Illinois against the Company and its officers and directors on April 19, 1996.
The franchisee alleged that the Company misrepresented the initial investment
required to establish a store and made untrue and unauthorized earnings claims
in violation of the Illinois Franchise Disclosure Act. Plaintiffs sought
rescission of the franchise agreement, damages of $600,000 and punitive
damages in the amount of $6,000,000. On May 28, 1996, management filed a
motion to stay litigation in order to compel the plaintiffs to have their
claims heard in arbitration as required by the provisions of the franchise
agreement. The hearing was held over seven days and resulted in an award in
favor of the Company. In January 1998, the Company was awarded all past due
royalty fees and amounts owed to the national marketing fund plus accrued
interest thereon and the franchisees counterclaim was rejected. In June 1998,
the Company collected approximately $58,000 from the franchisee for 100% of
unpaid royalties owed plus accrued interest thereon and for a portion of the
Company's legal expenses.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In March 1998, the Company had received notice from Nasdaq that the Company's
stock price was not in compliance with the new minimum bid price requirement.
In May 1998, the Company regained compliance with the minimum bid price
requirement.
On July 1, 1998, the Company hired Mr. Joseph M. Merkin as its Chief Financial
Officer and Treasurer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
EXHIBITS
The following exhibits are filed herewith.
Exhibit No. Exhibit Description
- ----------- -------------------------------------------------------------
[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
[vii] 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.
[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 Program Agreement dated February 10, 1997 between
BAB Systems, Inc. a wholly owned subsidiary of
the Company, and Franchise Mortgage Acceptance
Company LLC
[iv] 10.16 Employment agreement between the Company and Owen
Stern dated May 8, 1997
___________________________________________
[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-KSB for
the fiscal year ended November 30, 1996
[vii] Incorporated by reference to the Company's Report on Form 10-QSB
for the quarter ended February 28, 1997
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BAB HOLDINGS, INC.
Dated: July 10, 1998 By: /s/ TOM J. FLETCHER
-------------------
Tom J. Fletcher
Chief Operating Officer
(Principal operating officer and
accounting and financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE
THREE MONTH PERIOD ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<CASH> 263,494
<SECURITIES> 0
<RECEIVABLES> 2,476,743
<ALLOWANCES> (220,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,400,754
<PP&E> 4,582,691
<DEPRECIATION> 1,308,194
<TOTAL-ASSETS> 14,478,999
<CURRENT-LIABILITIES> 5,758,482
<BONDS> 23,079
0
1,648,922
<COMMON> 12,539,998
<OTHER-SE> (5,491,482)
<TOTAL-LIABILITY-AND-EQUITY> 14,478,999
<SALES> 4,817,840
<TOTAL-REVENUES> 7,525,285
<CGS> 1,604,702
<TOTAL-COSTS> 7,415,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,714
<INCOME-PRETAX> 62,683
<INCOME-TAX> 0
<INCOME-CONTINUING> 62,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,683
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
