SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
BAB HOLDINGS,INC.
- ---------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- ----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on
which the filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by regista-
tion statement number, or the Form or Schedule and the date of its
filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
BAB Holdings, Inc.
8501 W. Higgins Road, Suite 320
Chicago, Illinois 60631
(773) 380-6100
March 25, 1998
Dear Shareholder:
You are cordially invited to attend the Company's Annual Meeting of
Shareholders to be held 10:00 a.m. on Tuesday, April 28, 1998, at the Rosemont
Convention Center, 5555 N. River Road, Rosemont, Illinois.
We look forward to greeting personally those of you who are able to be
present at the meeting. However, whether or not you plan to attend, it is
important that your shares be represented. Accordingly, you are requested to
sign and date the enclosed proxy and mail it in the envelope provided at your
earliest convenience.
Very truly yours,
/s/ MICHAEL W. EVANS
Michael W. Evans
President and Chief Executive Officer
BAB HOLDINGS, INC.
8501 W. Higgins Road, Suite 320
Chicago, Illinois 60631
(773) 380-6100
___________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 28, 1998
___________________________
To the Shareholders of BAB Holdings, Inc.:
The Annual Meeting of Shareholders of BAB Holdings, Inc. (the
"Company") will be held on Tuesday, April 28, 1998 at 10:00 a.m., at the
Rosemont Convention Center, 5555 N. River Road, Rosemont, Illinois, for the
following purposes:
(1) To elect five directors to serve for a one-year term expiring
when their successors are elected and qualified at the annual
meeting in 1999.
(2) To act upon a proposal to ratify the appointment of Ernst & Young
LLP as independent auditors of the Company for the fiscal year
ending November 30, 1998.
(3) To transact such other business as may properly come before the
meeting or any adjournments hereof.
The Board of Directors has fixed the close of business on March 19, 1998
as the record date for the determination of shareholders entitled to vote at
the Annual Meeting and to receive notice thereof. The transfer books of the
Company will not be closed.
A PROXY STATEMENT AND FORM OF PROXY ARE ENCLOSED, SHAREHOLDERS ARE
REQUESTED TO DATE, SIGN AND RETURN THE ENCLOSED PROXY TO WHICH NO POSTAGE
NEEDS TO BE AFFIXED IF MAILED IN THE UNITED STATES. IT IS IMPORTANT THAT
PROXIES BE RETURNED PROMPTLY WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING
IN PERSON. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND
VOTE IN PERSON IF THEY DESIRE.
By the Order of the Board of Directors
/s/ MICHAEL W. EVANS
March 25, 1998 Michael W. Evans
President and Chief Executive Officer
TABLE OF CONTENTS
GENERAL INFORMATION.........................................................
RECORD DATE AND VOTING......................................................
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT..........................
PROPOSAL 1 - ELECTION OF DIRECTORS..........................................
MANAGEMENT..................................................................
CERTAIN TRANSACTIONS........................................................
PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS............
PROPOSALS FOR FISCAL 1998 ANNUAL MEETING....................................
APPENDIX A..................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................
CONSOLIDATED FINANCIAL STATEMENTS........................................
BAB HOLDINGS, INC.
8501 W. Higgins Road, Suite 320
Chicago, Illinois 6063l
(773) 380-6100
________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 28, 1998
_________________________
GENERAL INFORMATION
This proxy statement is furnished to shareholders by the Board of
Directors of BAB Holdings, Inc. (the "Company") for solicitation of proxies
for use at the Annual Meeting of Shareholders on Tuesday, April 28, 1998, to
be held at the Rosemont Convention Center, 5555 N. River Road, Rosemont,
Illinois at 10:00 a.m., and at all adjournments thereof for the purposes set
forth in the attached Notice of Annual Meeting of Shareholders. The purposes
of the meeting and the matters to be acted upon are set forth in the
accompanying Notice of Annual Meeting of Shareholders. The Board of Directors
is not currently aware of any other matters which will come before the
meeting.
Shareholders may revoke proxies before exercise by submitting a
subsequently dated proxy or by voting in person at the Annual Meeting. Unless
a shareholder gives contrary instructions on the proxy card, proxies will be
voted at the meeting (a) for the election of the nominees named herein and on
the proxy card to the Board of Directors; (b) for the appointment of Ernst &
Young LLP as independent auditors of the Company; and (c) in the discretion of
the proxy holder as to other matters which may properly come before the
meeting. This proxy statement and the enclosed proxy are being mailed to the
shareholders of the Company on or about March 25, 1998.
A copy of the Company's Summary Annual Report for the fiscal year ended
November 30, 1997, is enclosed herewith but is not considered a part of the
proxy solicitation material. Management's discussion of the financial
condition of the Company as of November 30, 1997 and the audited consolidated
financial statements of the Company appear in Appendix A to this Proxy
Statement.
The Company will make arrangements with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy material to the
beneficial owners of the shares and will reimburse them for their expenses in
so doing. To ensure adequate representation of shares at the meeting,
officers, agents and employees of the Company may communicate with
shareholders, banks, brokerage houses and others by telephone, facsimile, or
in person to request that proxies be furnished. All expenses incurred in
connection with this solicitation will be borne by the Company.
RECORD DATE AND VOTING
The Board of Directors has fixed March 19, 1998 as the record date for
the determination of shareholders entitled to vote at the Annual Meeting. As
of the close of business on the record date, there were outstanding 7,744,302
shares of Common Stock, no par value, which is the only outstanding class of
voting stock in the Company. Each share is entitled to one vote on each
proposal to be presented at the meeting. All matters being voted upon by the
shareholders require a majority vote of the shares represented at the Annual
Meeting either in person or by proxy, except for election of directors, which
would be by plurality vote in the event of more nominees than positions (i.e.,
the five nominees receiving the highest number of votes would be elected).
The presence at the Annual Meeting in person or by proxy of the holders
of a majority of the outstanding shares of the Company's Common Stock entitled
to vote constitutes a quorum for the transaction of business. Shares voted as
abstentions and broker non-votes on any matter (or a "withheld authority" vote
as to directors) will be counted as present and entitled to vote for purposes
of determining a quorum and for purposes of calculating the vote with respect
to such matter, but will not be deemed to have been voted in favor of such
matter. "Broker non-votes" are shares held by brokers or nominees which are
present in person or represented by proxy, but which are voted on a particular
matter because instructions have not been received from the beneficial owner
and the broker indicates that it does not have discretionary authority to vote
the shares on that matter.
The Board of Directors recommends a vote FOR election of each nominee
for director named herein and FOR ratification of the appointment of Ernst &
Young LLP as independent auditors. It is intended that proxies solicited by
the Board of Directors will be voted FOR each nominee and FOR such other
proposal unless otherwise directed by the shareholder submitting the proxy.
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 19, 1998 the record and
beneficial ownership of Common Stock held by (i) each person who is known to
the Company to be the beneficial owner of more than 5% of the Common Stock of
the Company; (ii) each current director; (iii) each nominee for election as
director; (iv) each Named Executive Officer (as defined herein) and (v) all
executive officers and current directors of the Company as a group.
Securities reported as "beneficially owned" include those for which the named
persons may exercise voting power or investment power, alone or with others.
Voting power and investment power are not shared with others unless so stated.
The number and percent of shares of Common Stock of the Company beneficially
owned by each such person as of March 19, 1998 includes the number of shares
which such person has the right to acquire within sixty (60) days after such
date.
<TABLE>
<CAPTION>
Name Shares Percent
- ---------------------------- ---------- -------
<S> <C> <C>
Keyway Investments Limited 2,312,789 (1) 23.0
Europlan House, 19 Havelock
Douglas, Isle of Man
Aladdin International, Inc. 1,015,481 13.1
3806 Abbott Ave. South
Minneapolis, MN 55410
Michael W. Evans 750,208 (2) 9.6
8501 West Higgins Road
Chicago, Illinois 60631
Paul C. Stolzer 671,625 8.7
4112 Emporia Court
Naperville, IL 60564
E.P. Opportunity Fund, L.L.C. 539,651 (1) 6.5
33 West Monroe Street, 21st Floor
Chicago, IL 60603
Perkins Capital Management, Inc. 532,050 6.9
730 East Lake Street
Wayzata, MN 55391
Michael K. Murtaugh 514,967 (3) 6.6
8501 W. Higgins Road
Chicago, IL 60631
David L. Epstein 22,000 (4) *
9700 Higgins Road, Suite 630
Rosemont, IL 60018
Cynthia A. Vahlkamp 4,000 (5) *
1615 South Congress Avenue, Suite 200
Delray Beach, FL 33445
Robert B. Nagel 2,000 (6) *
516 Elder Drive
Winnetka, IL 60093
Tom J. Fletcher -- --
8501 West Higgins Road
Chicago, IL 60631
All executive officers and
directors as a group (6 persons) 1,293,175 (2)(3)(4)(5)(6) 16.4
</TABLE>
___________________
* Less than 1%.
(1) Represent shares that may be acquired pursuant to conversion of Series A
Convertible Preferred Stock. See Appendix A- Management's Discussion and
Analysis of Financial Condition.
(2) Includes 76,666 shares that may be acquired pursuant to a currently
exercisable option.
(3) Includes 56,666 shares that my be acquired pursuant to a currently
exercisable option and 3,026 shares held by 401(k) trust.
(4) Includes 5,500 share that may be acquired pursuant to currently
exercisable options.
(5) Includes 4,000 share that may be acquired pursuant to a currently
exercisable option.
(6) Includes 2,000 share that may be acquired pursuant to a currently
exercisable option.
PROPOSAL 1
________________
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall be
as fixed from time to time by resolution of the shareholders subject to
increase by the Board of Directors. The current number of members of the
Board of Directors is five (5). The directors elected at this Annual Meeting,
and at annual meetings thereafter unless otherwise determined by the Board or
the shareholders, will serve a one-year term expiring upon the election of
their successors at the next annual meeting. The five persons designated by
the Board of Directors as nominees for election as directors at the Annual
Meeting are Michael W. Evans, Michael K. Murtaugh, David L. Epstein, Robert B.
Nagel and Cynthia A. Vahlkamp. Each nominee is currently a member of the
Board of Directors.
In the event any nominee should be unavailable to stand for election at
the time of the Annual Meeting, the proxies may be voted for a substitute
nominee selected by the Board of Directors.
See "MANAGEMENT" for biographical information concerning Messrs. Evans
and Murtaugh, who are employees of the Company. The following biographical
information is furnished with respect to each of the other nominees.
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 first elected as 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.
Robert B. Nagel was first elected as a director in August 1997. Since
October 1996, he has been the President and Chief Executive Officer of Newport
Associates, Inc., a private consulting firm specializing in strategic
consulting services to the food and food service industries, primarily in the
areas of integration and management of acquired companies, marketing strategy,
and shareholder value improvement. From 1995 until September 1996, he was
the President of Peapod Delivery Services, a computer-based on-line grocery
shopping and delivery company, From 1991 through 1995, he was a principal at
A. T. Kearney, Inc., a major international management consulting firm,
providing services in the food service and consumer products industries.
MANAGEMENT
Directors, Executive Officers, and Key Management
The following tables set forth certain information with respect to each
of the directors and executive officers of the Company and certain other key
management personnel.
<TABLE>
<CAPTION>
Directors and Executive Officers Age Position(s) Held with Company
- -------------------------------- --- -----------------------------
<S> <C> <C>
Michael W. Evans 41 President, Chief Executive
Officer and Director
Michael K. Murtaugh 53 Vice President, General
Counsel and Director
Tom J. Fletcher 39 Chief Operating Officer
David L. Epstein 50 Director
Cynthia A. Vahlkamp 43 Director
Robert B. Nagel 60 Director
</TABLE>
Michael W. Evans has served as Chief Executive Officer and 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 Service, 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 11 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 acquisition and other business
arrangements. 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 controlling interest in the Kane
County Cougars and the Nashville Sounds, minor league baseball teams. Mr.
Murtaugh is sole shareholder of Bagel One, Inc., which owns and operates a Big
Apple Bagels franchise store in suburban Chicago, Illinois.
Tom J. Fletcher has been Chief Operating Officer since April 1997 and is
responsible for both franchise and Company-owned operations as well as the
development of new business via product development and sales through non-
traditional methods of distribution. Prior to joining the Company, Mr.
Fletcher spent 23 years with Baskin-Robbins Ice Cream in various positions.
His most recent position was as Director of Retail Brands for Allied Domecq's
Baskin-Robbins and Dunkin Donuts in Chicago, Illinois..
The Board of Directors had three standing committees during the last
fiscal year: the Compensation Committee, the Audit Committee and the Options
Committee. The Compensation Committee has three members: Michael W. Evans,
David L. Epstein and Robert B. Nagel, two of whom are non-employee directors.
The function of the Compensation Committee is to set the compensation for the
Executive Officers and to recommend the compensation to the Board of Directors
for approval. The Audit Committee has four members: Michael K. Murtaugh,
David L. Epstein, Robert B. Nagel, and Cynthia A. Vahlkamp, three of whom are
non-employee directors. The function of the Audit Committee is to interact
with the independent auditors of the Company and to recommend the appointment
of the independent auditors to the Board of Directors. The Options Committee
has three members: Michael W. Evans, David L. Epstein, and Cynthia A.
Vahlkamp, two of whom are non-employee directors. The function of the Options
Committee is to consider, determine and recommend to the Board of Directors
the granting of options. Each of the standing committees met once during the
fiscal year and all members were in attendance at the meetings.
The Board of Directors met 8 times during the 1997 fiscal year. None of
the directors attended fewer than 75% of the meeting of the Board of Directors.
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 (the "Directors 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 2,000 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. During the fiscal year ended November 30, 1997, Initial
Options were granted to Robert B. Nagel upon election to the Board in August
1997, and Annual Options were granted to David Epstein and Cynthia Vahlkamp
upon re-election to the Board at the annual meeting of shareholders in April
1997. The exercise price of Mr. Nagel's Initial Option is $2.31 per share.
The exercise price of all of the Annual Options granted is $2.75 per share.
Executive Compensation
The following table sets forth the cash compensation paid to executive
officers who received annual salary and bonus compensation of more than
$100,000 during fiscal years 1997, 1996 and 1995. The Company has no
employment agreements with any of its executive officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Fiscal
Year Other Annual
Name and Principal Ended Salary Bonus Compensation
Position 11/30 ($) ($) ($)
=========================================================
<S> <C> <C> <C> <C>
Michael W. Evans, 1997 165,000 -- --
President and CEO 1996 128,000 5,000 --
1995 87,615 -- --
Michael K. Murtaugh 1997 125,000 -- --
Vice President and 1996 92,917 -- --
General Counsel 1995 67,083 5,000 --
</TABLE>
<TABLE>
<CAPTION>
(wide table continued from above)
Long-Term Compensation
--------------------------------
Awards Payouts
--------------------- -------
Fiscal Restricted Securities
Year Stock Underlying LTIP All Other
Name and Principal Ended Awards Options/ Payouts Compensation
Position 11/30 ($) SARS (#) ($) ($)
===========================================================================
<S> <C> <C> <C> <C> <C>
Michael W. Evans, 1997 -- -- -- --
President and CEO 1996 -- 115,000 -- --
1995 -- -- -- --
Michael K. Murtaugh, 1997 -- -- -- --
Vice President and 1996 -- 85,000 -- --
General Counsel 1995 -- -- -- --
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Company did not grant any options or stock appreciation rights to
executive officers during fiscal 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FY-END OPTION/SAR VALUES
Number of Value of
unexercised unexercised in-
options/SAR the-money options
Shares Value at FY-end /SAR at FY-end
Name and Principal Acquired on Received (#)exercisable ($)exercisable
Position Exercise(#) ($) /unexercisable /unexercisable
============================================================================
<S> <C> <C> <C> <C>
Michael W. Evans, -- -- 76,666 / 115,000 --
President and CEO
Michael K. Murtaugh, -- -- 56,666 / 85,000 --
Vice President and
General Counsel
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's Common Stock, to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission (the "SEC"). Executive officers, directors and greater
than ten percent beneficial owners are required by the SEC to furnish the
Company with copies of all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to the
Company, the Company believes that all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than ten percent
beneficial owners were met during the fiscal year ended November 30, 1997.
Indemnification of Directors and Officers
The Company's Article of Incorporation limit personal liability for
breach of fiduciary duty by its directors to the fullest extent permitted by
the Illinois Business Corporation Act (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 omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments or
improper dividends, liability based on violation 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 shall not adversely affect any right or protection of a director
of the Company for 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. 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.
CERTAIN TRANSACTIONS
The following information relates to certain relationships and
transactions between 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, or any entity controlled by or under
common control with any such person, on terms less favorable to the Company
than could be obtained from unaffiliated third parties and all such
transactions require the consent of the majority of disinterested members of
the Board of Directors.
In addition, the Company has agreed with certain state regulatory
authorities that so long as the Company's securities are registered in such
states, the Company will not make loans to its officers, directors, employees,
or principal shareholders, except for loans made in the ordinary course of
business, such as travel advances, expense account advances, relocation
advances, or reasonable salary advances.
Management believes that the following transactions were effected on
terms no less favorable to the Company that those that could have been
realized in arm's length transactions with unaffiliated parties.
Executive Officers and Directors
Michael K. Murtaugh, the Company's Vice President and General Counsel,
is sole shareholder of Bagel One, Inc., which owns and operates a Big Apple
Bagels franchise store near Chicago, Illinois. All transactions between the
Company and this franchisee are similar to those with other franchisees. This
store is operated by a full-time store manager.
David L. Epstein, who is currently a member of the Board of Directors of
the Company, is a principal of J.H. Chapman Group, Ltd. ("Chapman"), who
assists the Company from time to time in the identification and negotiation of
potential acquisitions. In February 1997, Chapman assisted the Company in
negotiating and obtaining a franchisee 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. During fiscal 1997, approximately $438,000 was advanced to
franchisees from FMAC; 1% of this amount, or approximately $4,380 will be paid
to Chapman during fiscal 1998.
Principal Shareholders
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 payable monthly, subject to 5% annual increases.
PROPOSAL 2
__________________
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending November 30, 1998. If the shareholders fail to ratify such
appointment, the Board of Directors will select another firm to perform the
required audit function. A representative of Ernst & Young LLP is expected to
be present at the shareholders meeting with the opportunity to make a
statement if such representative desires to do so and is expected to be
available to respond to appropriate questions.
PROPOSALS FOR FISCAL 1998 ANNUAL MEETING
It is currently anticipated that the next meeting, for the fiscal year
ending November 30, 1998 (the "1998 Annual Meeting"), will be held mid-April
1999. Shareholders who intend to submit proposals for inclusion in the 1998
Proxy Statement and Proxy for shareholder action at the 1998 Annual Meeting
must do so by sending the proposal and supporting statements, if any, to the
Company at its corporate offices no later than December 1, 1998.
By the Order of the Board of Directors
/s/ MICHAEL K. MURTAUGH
Michael K. Murtaugh
Vice President and General Counsel
Dated: March 25, 1998
Chicago, Illinois
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB WILL BE SENT WITHOUT
CHARGE TO ANY SHAREHOLDER REQUESTING THE ANNUAL REPORT IN WRITING FROM: BAB
HOLDINGS, INC., ATTENTION: INVESTOR RELATIONS, 8501 WEST HIGGINS ROAD, SUITE
320, CHICAGO, IL 60631.
APPENDIX A
__________________
MANAGEMENT'S DISCUSSION OF AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The selected financial data contained herein have been derived
from the financial statements of the Company included elsewhere
in this Report on Form 10-KSB. The data should be read in
conjunction with the consolidated financial statements and notes
thereto.
Certain statements contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations,
including statements regarding the development of the Company's
business, the markets for the Company's products, anticipated
capital expenditures, and the effects of completed and proposed
acquisitions, and other statements contained herein regarding
matters that are not historical facts, are forward-looking
statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include
risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking
statements, which reflect management's analysis only as of the
date hereof. Such statements should be read in light of the Risk
Factors enumerated herein as well as the other information
contained in this Report and other documents filed by the Company
with the Commission pursuant to the Securities Act of 1933 and
the Securities Exchange Act of 1934. 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
Since its inception in November 1992, the Company has grown to 28
Company-owned (excluding 6 units identified by management for
closing during the first quarter of 1998) and 229 franchised and
licensed units at the end of fiscal 1997 from 15 Company-owned
and 134 franchised and licensed units at the end of fiscal 1996.
System-wide revenues in fiscal 1997 exceeded $62.3 million compared
to $33.3 million in the year ago period. Further, the units
added in the acquisition of MFM, contributed approximately $12
million to system-wide sales in the last six months of fiscal
1997. This rapid expansion in operations significantly affects
the comparability of results of operations of the Company in
several ways, particularly in the significant increase in
Company-owned store revenues and related expenses.
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
(My Favorite Muffin and Brewster's) and licensing contracts
(licenses with Host Marriott), and by directly entering into
licensing agreements (Choice Picks Food Courts, Oberweis Dairy
and Mrs. Fields Cookies). Additionally, the Company has generated
other revenue through the sale of store units to franchisees of
the Company. The significant increase in overall revenues (up
124% in fiscal 1997 over fiscal 1996 and up 597% over fiscal
1995) has reduced the dependence on the initial franchise fee as
a source of income.
On May 13, 1997, the Company completed the acquisition of MFM.
This acquisition added to the Company's existing product offering
a premium muffin product and additional points of distribution
for its branded bagel and coffee products. It is expected that
the introduction of MFM muffin products will enhance the revenue
potential of existing bagel stores and result in operating
leverage as corporate overhead is spread over additional units
(62 franchise and 7 Company-operated units at November 30, 1997.)
The Company has reduced the number of MFM employees, subleased
the office space which was formerly the MFM headquarters in New
Jersey, and has completed the integration of MFM operations into
its Chicago, Illinois headquarters. Since the process of
integration of MFM products into the Company's existing units
does not entail any significant increase in administrative
overhead (the Company already has sufficient infrastructure in
place to oversee franchisee and Company stores operations) it is
expected that the Company will experience improved profitability
in fiscal 1998 due to increased retail sales and royalty revenues
attributable to these products.
Rapid growth in Company-owned units occurred throughout fiscal
1996 and 1997 --- 13 units were added in fiscal 1996 and over 15
units were added in fiscal 1997 by both development and
acquisition. Management believes the Company did not realize the
full potential of expected margins from Company-owned store
operations during this period. 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, also 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.
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. Approximately $1,333,000 represents a
non-cash write-down of property, plant and equipment and goodwill
associated with these units and the remainder represents a
reserve for store closure costs. One store was closed during
fiscal 1997 and the remaining units were closed during the first
quarter of 1998. Management anticipates that the store closings
will not only improve cash flow from remaining Company-store
operations but will also improve the profitability of operations
overall. The 6 stores identified as impaired as of November 30,
1997, but which were not closed until fiscal 1998, are not included
as units in operation as the fair value of the assets has been
reclassified as "Assets Held for Sale" in the November 30, 1997
audited financial statements included herein.
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. This acquisition was
not completed due to the Company's inability to secure financing
on acceptable terms. 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 acquisition and a
placement of common stock which, if completed, would have
provided the required financing. Management believes that while
the uncompleted acquisition of Chesapeake diverted management and
operational attention during the second half of 1996, the
Company's existing operations and strategic acquisitions made in
1997, including the MFM acquisition noted above, have the
potential to replace the strategic advantage the Company believed
would have been obtained with Chesapeake acquisition.
With the increase in both franchise, licensed and Company-owned
operations and with the acquisition of MFM, the Company has
experienced increases in payroll, occupancy and overhead costs in
the corporate offices. At November 30, 1997, the Company had 54
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. 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
fiscal 1998. The Company believes it is in a position to leverage
selling, general and administrative expenses against increased
revenues anticipated in fiscal 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years 1997 and
1996, revenue by type and as a percentage of total revenue during
the year, along with the change from 1996 (in thousands):
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------------------------
1997 1996 Inc.(Dec.)
-------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Selected Revenue Data:
Company-owned stores..... $9,846 69.5% $3,484 55.1% $6,362
Royalty fees from
franchise stores....... 2,367 16.7% 1,403 22.2% 964
Franchise and area
development fees....... 1,005 7.1% 1,024 16.2% (19)
Licensing fees and
other income........... 948 6.7% 413 6.5% 535
------- ------ ------ ------ ------
Total $14,166 100.0% $6,324 100.0% $7,842
======= ====== ====== ====== ======
</TABLE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total revenues increased 124% to $14,166,000 in 1997 from
$6,324,000 the prior year. This increase was driven primarily by
the increase in Company-owned store revenues which accounts for
69.5% of total revenue in 1997 up from 55.1% in the prior year.
The Company added 13 Company-owned units during the year bringing
the total to 28 in operation at November 30, 1997, exclusive of
those units identified as impaired. Royalty fees from franchise
stores increased to $2,367,000 in 1997 from $1,403,000
principally due to the addition of the 60 MFM franchised units in
May 1997. Franchise and area development fee revenue remained
relatively flat from the year-ago period and is attributed to
legal and geographical restrictions in selling franchise
agreements during the last half of fiscal 1996 while the Company
was involved in the acquisition of Chesapeake. For over six
months the Company was unable to complete franchise sales in
certain key markets while updating franchise offering circulars
and attempting to minimize territorial disputes with existing
Chesapeake area developers. Finally, licensing fees and other
income more than doubled in fiscal 1997 from the previous year as
the Company continued to develop various nontraditional channels
of distribution, including commissions received 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.
Food, beverage and paper costs incurred at the Company-owned
stores rose by 170.9% from the prior year compared to a 182.6%
increase in sales principally due to the greater number of units in
operation during the current fiscal year (34 units, including
those identified as impaired, at November 30, 1997 versus 15 at
November 30, 1996.) However, store payroll and other operating
expenses increased by over 234.2%. The Company is aggressively
working to improve store level profitability and accordingly, in
the fourth quarter, determined that it was necessary to close
stores that were generating negative cash flow and which, in
management's opinion, would not reach acceptable levels of
profitability within the foreseeable future. One such store was
closed in the fourth quarter of 1997 and the remaining six stores
were closed in fiscal 1998. Management is currently in the
process of selling equipment to franchisees and attempting to
sublease or otherwise eliminate its commitment under these
facility leases. Additionally, on November 30, 1997, the Company
sold two Company-owned units to an existing franchisee in the
Milwaukee, Wisconsin market. Subsequent to year end, the Company
sold one unit to a franchisee in the Lincoln, Nebraska market and
the other Company-owned store in that geographic market was
closed in 1998. Strategic decisions to close or sell certain
units have substantially been completed during the first quarter
of 1998; accordingly, management anticipates that Company-owned
store revenues should contribute more significantly to
profitability throughout fiscal 1998. Finally, as of February
28, 1998, over 75% of the remaining Company-owned units have now
been opened for greater than one year which is expected to lessen
certain expenses related to employee training and related start-
up inefficiencies.
As identified above, the decision to close under-performing
stores resulted in the recognition of a fourth quarter 1997
charge of approximately $1,837,000, or $0.24 per share for the
fourth quarter ($0.25 per share for the fiscal year).
Approximately 73% of this charge to net income, or $1,333,000,
represents a non-cash write-down of property, plant and equipment
and associated goodwill to fair market value. The remainder
represents a reserve established to accrue for future
noncancelable lease obligations plus the costs to close the
stores. See Note 11 to the audited financial statements included
herein.
Selling, general and administrative expenses increased by
$3,248,000 to $6,566,000 but continue to decrease as a percentage
of overall revenues. The increasing base of Company-owned and
franchised stores has resulted in a favorable trend with respect
to overhead costs --- fiscal year 1997 costs represented 46.4% of
revenues, fiscal year 1996 costs represented 52.5% of revenues
and fiscal year 1995 costs represented 97.4% of revenues.
Payroll-related expenses increased by $721,000. Depreciation and
amortization increased by 293% due to the significant increase in
Company-owned store depreciation and amortization and the
amortization of intangible assets acquired including goodwill,
franchise contract and other contract rights, non-competition
agreements, and trademarks acquired in the Company's various
acquisitions. Other selling, general and administrative expenses
increased 136.7% due to the increase in office space at the
corporate headquarters as well as insurance and other expenses
associated with the support of the increased corporate headcount.
Excluding depreciation and amortization, fiscal 1997 selling,
general and administrative expenses were less than 35.8% of total
revenues compared to 46.4% in the year ago period as the Company
continues to experience operating leverage from its increasing
revenue base.
Loss from operations was $3,406,000 in fiscal 1997 versus
$621,000 in fiscal 1996. Interest income decreased to $75,000 in
fiscal 1997 from $317,000 in the prior year due to the lower
average cash and cash equivalent balances on hand throughout the
current year. In 1996, the Company had just received the
proceeds from its initial public offering and invested the
proceeds in interest bearing securities generating significant
interest income. Interest expense was $75,000 during 1997 versus
$4,000 in 1996 as a result of the Company's borrowing on the
Company's credit facility.
The net loss totaled $3,402,000 in fiscal 1997 versus a net loss
of $321,000 for fiscal 1996. During fiscal 1997, the Company
issued 87,710 shares of convertible preferred stock (the
Preferred Stock) and recorded preferred dividends associated with
this security of over $648,000 resulting in a net loss
attributable to common shareholders of $4,050,000 for the fiscal
year. Approximately $387,000 of the preferred dividend is
attributable to the 15% discount available to holders of the
Preferred Stock in acquiring Common Stock upon ultimate
conversion. Such discounts result in dividends under
generally accepted accounting principles and no additional
preferred dividends will accumulate related to this conversion
discount. The Company was additionally obligated to issue
warrants to purchase two shares of Common Stock for each share of
Preferred Stock on August 1, 1997. The value of these two-year
warrants was additionally recorded as a preferred stock dividend
accumulated of $138,000. As fully recognized in August 1997, no
additional preferred dividends will accumulate related to either
the conversion discount or the warrants. See Note 9 of the
audited financial statements included herein.
Net loss per share for fiscal 1997 was $0.55 per share ($0.53
diluted loss per share) versus net loss per share for fiscal 1996
of $0.04 per share ($0.04 diluted loss per share.)
On a pro forma basis, had the acquisitions of MFM, JBI,
Strathmore, BUI and Danville occurred at the beginning of fiscal
1996, revenues for fiscal 1997 would have been $15,421,000
representing a 29% increase from $11,985,000 in fiscal 1996,
attributable primarily to the increase in franchised and Company-
owned units acquired in MFM. Net loss on a pro forma basis for
1997 and 1996 would have been $3,500,000 and $616,000,
respectively. This increase is related to the write-off of long-
lived assets recorded in fiscal 1997 and other factors noted
above, as well as inefficiencies in selling, general and
administrative expenses implicit in comparing on a pro forma
basis costs incurred by entities acquired prior to the
acquisitions by the Company. Pro forma net loss per share would
have been approximately $0.54 and $0.08 for the fiscal years
ended November 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended November 30, 1997, cash used for operating
activities was $1,220,000 compared to $69,000 provided from operating
activities in the prior fiscal year. Cash used in operating
activities in fiscal 1997 is attributable to an overall increase in
accounts receivables, inventories, and prepaids due to the increased
number of Company-owned and franchised stores in operation.
Additionally, notes receivable obtained in the sale of Company-owned
stores and in exchange for a master franchise agreement contributed
to the overall use of cash in operating activities.
Cash used for investing activities during 1997 totaled $3,814,000
which consisted primarily of $3,795,000 used for the purchase of
property, plant and equipment associated with the acquisition and
development of 20 Company-owned units. During fiscal 1996, cash
used for investing activities of $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 fiscal
1996.
Financing activities provided a total of $3,261,000 during fiscal
1997. In April 1997, the Company completed the sale of 87,710
shares of $25.00 Preferred Stock in a private placement to
qualified investors, netting approximately $2 million after
placement agent commissions and fees. Additionally, in April
1997, the company entered into a $2 million secured line of
credit agreement (the "Credit Facility") with a bank expiring in
December 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 1% (9.5% at November 30, 1997) with principal due
upon maturity at December 31, 1998. In July 1997, the Company
borrowed $356,000 on its Credit Facility to retire debt and other
borrowings assumed in connection with the MFM acquisition. At
November 30, 1997, the Company had $1,676,000 outstanding against
the Credit Facility.
The Credit Facility is secured by substantially all of the assets
of the Company and requires, among other things, that the Company
maintain minimum net worth of $8 million and a compensating cash
balance of $250,000. In February 1998, the Company fell below
the compensating cash balance requirement 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 balances and to remain within compliance of the
compensating cash provision of the Credit Facility. This plan
includes improvements in cash flow associated with store
closures, proceeds from the sale of stores or other assets,
reduction of general and administrative expenses, increased
collection efforts and potential debt or equity investments by
significant shareholders. Management believes these efforts will be
sufficient to ensure compliance with the compensating cash balance
covenants by April 25, 1998 and for the remainder of the fiscal year.
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.
The Company has implemented a strategy which includes closing
under-performing Company-owned units, the sale of equipment and
fixtures located at these units to its franchisees or to third
parties, and the sale of other Company-owned units located in
certain geographic markets to franchisees. This action is
anticipated to improve profitability and cash flow from the
remaining Company-owned units and to generate working capital.
The Company believes that improved cash flow from existing
operations, the remaining availability on its credit facility,
increased collection efforts and the sale of certain assets will
be sufficient to fulfill its working capital requirements for the
foreseeable future.
Consolidated Financial Statements
BAB Holdings, Inc.
Years ended November 30, 1997 and 1996
with Report of Independent Auditors
<PAGE>
BAB Holdings, Inc.
Consolidated Financial Statements
Years ended November 30, 1997 and 1996
Contents
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders'
equity, 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, 1997 and
1996, 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 27, 1998
<PAGE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Balance Sheets
NOVEMBER 30
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents,
including restricted cash of
$276,678 and $149,232, respectively $ 389,896 $ 2,163,293
Trade accounts receivable, net of allowance
for doubtful accounts of $217,000
and $30,000, respectively 988,992 471,303
National Marketing Fund contributions
receivable 382,432 96,121
Inventories 344,424 103,314
Notes receivable 203,230 556,143
Amounts due from affiliate - 36,347
Deferred franchise costs 76,805 43,576
Assets held for sale 170,500 -
Prepaid expenses and other current assets 422,913 216,176
----------- -----------
Total current assets 2,979,192 3,686,273
Property, plant, and equipment:
Leasehold improvements 2,690,940 1,064,648
Furniture and fixtures 686,542 435,277
Equipment 2,513,289 1,335,719
Construction in progress 80,830 997,383
----------- -----------
5,971,601 3,833,027
Less: Accumulated depreciation 882,693 299,315
----------- -----------
5,088,908 3,533,712
Notes receivable 785,065 288,184
Patents, trademarks, and copyrights,
net of accumulated amortization
of $56,025 and $21,752, respectively 527,140 545,177
Goodwill, net of accumulated amortization
of $101,629 and $27,924, respectively 2,599,393 2,511,295
Franchise contract rights, net of
accumulated amortization of $60,442 2,011,842 -
Other assets, net of accumulated amortization
of $424,855 and $147,090, respectively 635,706 583,346
----------- -----------
$14,627,246 $11,147,987
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 30
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,603,661 $ 1,056,548
Accrued liabilities 768,977 228,947
Reserve for closed store expenses 504,203 -
Accrued professional and other services 227,895 289,567
Unexpended National Marketing Fund
contributions 522,722 145,383
Current portion of long-term debt 26,143 6,375
Deferred franchise fee revenue 642,000 624,400
------------ ------------
Total current liabilities 4,295,601 2,351,220
Long-term debt, less current portion 1,676,895 1,758
Shareholders' equity:
Common stock, no par value; 20,000,000
shares authorized,7,981,630 shares and
7,413,069 shares issued, respectively,
and 7,711,630 and 7,143,069
outstanding, respectively 10,908,062 9,218,522
Preferred stock, $0.01 par value; 3,880,000
shares and 4,000,000 shares authorized,
respectively, and no shares issued
and outstanding - -
Series A Preferred stock, $25.00 par value,
120,000 shares authorized, 78,710 shares
issued and outstanding 1,862,035 -
Treasury stock at cost, 270,000 shares (17,500) (17,500)
Additional paid-in capital 1,368,619 1,010,167
Accumulated deficit (5,466,466) (1,416,180)
------------ ------------
Total shareholders' equity 8,654,750 8,795,009
------------ ------------
$ 14,627,246 $ 11,147,987
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BAB Holdings, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Net sales by Company-owned stores $ 9,846,020 $ 3,484,319
Royalty fees from franchised stores 2,367,220 1,402,839
Franchise and area development fees 1,005,545 1,023,331
Licensing fees and other income 947,658 413,109
----------- -----------
14,166,443 6,323,598
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 3,309,504 1,221,826
Store payroll and other operating expenses 5,859,322 1,753,397
Provision for impairments and store closures 1,836,981 -
Costs of uncompleted business acquisition - 650,922
Selling, general, and administrative expenses:
Payroll-related expenses 2,058,644 1,337,587
Advertising and promotion 603,373 365,387
Professional service fees 514,319 373,614
Franchise-related expenses 232,964 157,990
Depreciation and amortization 1,490,329 379,266
Other 1,666,659 704,228
----------- -----------
6,566,288 3,318,072
----------- -----------
17,572,095 6,944,217
----------- -----------
Loss from operations (3,405,652) (620,619)
Interest income 74,513 316,855
Interest expense (74,651) (4,530)
Other income (expense) 3,701 (12,550)
----------- -----------
Net loss (3,402,089) (320,844)
Preferred stock dividends accumulated (648,197) -
----------- -----------
Net loss attributable to common
shareholders $(4,050,286) $ (320,844)
=========== ===========
Loss per share $ (0.55) $ (0.04)
=========== ===========
Fully diluted loss per share $ (0.53) $ (0.04)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Shareholders' Equity
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
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)
Issuance of common
stock in
acquisitions 458,219 1,441,355 -- -- -- --
Termination of options
issued in connection
with acquisition -- -- -- -- -- --
Issuance of
preferred stock -- -- 87,710 1,558,519 -- --
Issuance of warrants -- -- -- -- -- --
Preferred dividend
accumulated -- -- -- 510,668 -- --
Conversion of
preferred to
common stock 110,342 248,185 (9,000) (207,152) -- --
Net loss -- -- -- -- -- --
---------- ---------- ------ ---------- ------ ------
Balance as of
November 30, 1997 7,981,630 $10,908,062 78,710 $1,862,035 (270,000)$(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, 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
Issuance of common stock
in acquisitions -- -- 1,441,355
Termination of options issued
in connection with
acquisition (125,000) -- (125,000)
Issuance of preferred stock 386,956 -- 1,945,475
Issuance of warrants 137,529 (137,529) --
Preferred dividends accumulated -- (510,668) --
Conversion of preferred to
common stock (41,033) -- --
Net loss -- (3,402,089) (3,402,089)
----------- ----------- -----------
Balance as of November 30, 1997 $1,368,619 $(5,466,466) $ 8,654,750
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED NOVEMBER 30
1997 1996
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,402,089) $(320,844)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization 1,490,329 379,266
Provision for impairment and closure 1,836,981 -
Deferred preopening store cost (240,927) (142,867)
Other - 11,045
Changes in operating assets and liabilities:
Trade accounts receivable (432,604) (447,293)
National Marketing Fund contributions
receivable (245,779) (69,326)
Inventories (211,614) (7,926)
Deferred franchise costs (21,319) (18,338)
Notes receivable (138,632) (3,682)
Prepaid expenses and other assets (215,653) (180,623)
Amounts due from affiliate (88,653) (18,321)
Accounts payable 176,318 672,083
Accrued professional and other services (178,331) 184,567
Accrued liabilities 75,157 121,411
Unexpended National Marketing Fund
franchisee contributions 358,840 87,820
Deferred franchise fee revenue 17,600 (178,100)
---------- ---------
Net cash (used for) provided by
operating activities (1,220,376) 68,872
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED NOVEMBER 30
1997 1996
------------ ------------
<S> <C> <C>
INVESTING ACTIVITIES
Purchases of property, plant and equipment $(3,679,705) $(2,512,472)
Sale of property, plant and equipment 57,400 -
Purchase of Bagels Unlimited - (990,874)
Purchase of Strathmore - (879,566)
Purchase of Danville - (602,988)
Purchase of MFM (115,551) -
Purchase of trademarks (16,236) (171,396)
Purchases of other assets (120,000) (143,765)
Loan disbursements (74,201) (1,254,196)
Loan repayments 77,748 183,578
Other 56,440 (50,171)
----------- -----------
Net cash used for investing activities (3,814,105) (6,421,850)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 2,192,750 -
Payment of preferred stock issuance costs (247,275) -
Proceeds from issuance of common stock - 1,020,000
Payment of common stock issuance costs - (137,650)
Borrowing on line of credit 1,675,975 -
Debt repayments (364,037) (35,928)
Other 3,671 (9,160)
----------- -----------
Net cash provided by financing activities 3,261,084 837,262
----------- -----------
Net decrease in cash and cash equivalents (1,773,397) (5,515,716)
Cash and cash equivalents at beginning of year 2,163,293 7,679,009
----------- -----------
Cash and cash equivalents at end of year $ 389,896 $ 2,163,293
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
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 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. 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 also owned a 50%
interest in a joint venture which operated a franchise satellite
store. During fiscal 1997, the stores operated by Investments
and by the joint venture were sold and are currently operating as
franchised stores. Operations was formed on August 30, 1995,
primarily to operate Company-owned stores, currently, "Big Apple
Bagel" and "Brewster's Coffee" concept 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. MFM, a New Jersey Corporation,
was acquired on May 13, 1997. MFM franchises and operates
Company-owned "My Favorite Muffin" concept muffin 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 was 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.
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.
Franchise contract rights acquired in the MFM acquisition are
amortized over 20 years. Contract rights allocated to license
agreements assumed by the Company in the acquisition of
Strathmore Bagels Franchise Corporation 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 10 is being amortized over 40 years.
Amortization expense recorded in the accompanying consolidated
statements of operations for the years ended November 30, 1997
and 1996 was $549,640 and $164,956, 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 primarily by Host Marriott Services (Host Marriott).
Included below in "licensed units" are these units located
primarily in airport and travel plazas. In fiscal 1997, the
Company opened additional units pursuant to other licensing
arrangements. 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 at November 30, 1997 or
area development fees collected are as follows (excludes 6
Company-owned stores at November 30, 1997 which were closed
subsequent to year end (see Note 11)):
<TABLE>
<CAPTION>
November 30
1997 1996
---- ----
<S> <C> <C>
Stores opened:
Company-owned 28 15
Franchisee-owned 182 99
Licensed 47 35
---- ----
257 149
Unopened stores:
Franchise agreement 25 26
Area development agreement 28 39
---- ----
53 65
---- ----
310 214
==== ====
</TABLE>
Advertising Costs
The Company expenses advertising costs as incurred. Advertising
expense was $339,496 and $179,659 in 1997 and 1996, respectively.
Included in advertising expense was $55,733 and $41,928 in 1997
and 1996, 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. 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 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 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.
Reclassification
Certain 1996 amounts have been reclassified to reflect 1997
presentation.
New Accounting Pronouncement
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (the
Standard), which is required to be adopted in both interim and
annual financial statements for periods ending December 15, 1997.
At that time, the Company will be required to change the method
presently used to compute earnings per share and to restate all
prior period amounts. The Standard replaced primary and fully
diluted earnings per share with basic and diluted earnings per
share. The impact of the Standard is not expected to be
material.
3. Restricted Cash
Systems 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, 1997 and
November 30, 1996, these accounts totaled $20,000 and $63,500,
respectively.
Systems established the National Marketing Fund (Fund) during
1994. Both franchised and Company-owned Big Apple Bagels stores
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, 1997 and 1996, the Fund's cash
balance was $256,678 and $85,732, respectively.
Both franchised and Company-owned MFM stores are required to
contribute to the MFM National Marketing Fund (MFM Fund) based on
their net sales. These monies are then used in the production
and creation of advertising materials and Media placement. At
November 30, 1997, the MFM Fund's cash balance was $8,764.
4. Income Taxes
There were no provisions for income taxes during the years ended
November 30, 1997 and 1996, 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
1997 1996
----------- ---------
<S> <C> <C>
Income tax benefit computed at
federal statutory rate $(1,156,710) $ (109,087)
State income tax benefit, net
of federal tax benefit (163,913) (15,458)
Permanent differences on debt
financing obtained (1,748) (1,748)
Other permanent differences 22,584 1,046
Valuation allowance against
net deferred tax asset 1,299,787 125,247
---------- ---------
Provision for income taxes $ - $ -
========== =========
</TABLE>
There was no current income tax expense for the years ended
November 30, 1997 and 1996, 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, 1997 and 1996.
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
November 30
1997 1996
---------- --------
<S> <C> <C>
Franchise fee revenue $ 216,615 $ 249,760
Net operating loss carryforwards 1,617,089 350,464
Franchise costs 32,102 74,979
National Marketing Fund net contributions 99,638 19,664
Allowance for uncollectible accounts 108,392 4,000
Depreciation (171,017) (94,741)
Start-up costs (17,807) (21,092)
Other (2,085) 106
--------- --------
1,882,927 583,140
Valuation allowance (1,882,927) (583,140)
--------- -------
$ - $ -
========= =======
</TABLE>
At November 30, 1997, the Company has cumulative net operating
loss carryforwards expiring between 2008 and 2012 for U.S.
federal income tax purposes of approximately $4,166,000. 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
1997 1996
-------- --------
<S> <C> <C>
Secured line of credit payable to
bank, due December 31, 1998,
at an interest rate of prime
plus 1% $1,657,975 $ -
Capital lease obligations,
various rates 31,220 -
Unsecured note payable, principal
payments due monthly at an
interest rate of 10% 13,843 -
Other - 8,133
--------- ---------
1,703,038 8,133
Less: Current portion 26,143 6,375
--------- ---------
Long-term debt, net of current portion $1,676,895 $ 1,758
========= =========
</TABLE>
The Company has a secured $2 million line of credit facility with
a bank which expires December 31, 1998. Maximum borrowing under the line
is limited to 80% of accounts receivable under 90 days and 40% of
equipment and furniture and fixtures. Interest is payable monthly at
prime plus 1% (9.5% at November 30, 1997), with principal due upon
maturity at December 31, 1998. In July 1997, the Company borrowed
approximately $330,000 on the line of credit to repay debt plus accrued
interest acquired in the MFM acquisition (see Note 10). At November 30,
1997, the Company had borrowed $1,657,975 on the line of credit.
The line of credit is secured by substantially all of the assets of
the Company and requires, among other things, that the Company maintain
minimum net worth of $8 million and a compensating cash balance of
$250,000. In February 1998, the Company fell below the compensating cash
balance requirement 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 balances and to remain within
compliance of the compensating cash provision of the line of credit.
This plan includes improvements in cash flow associated with the store
closures (see Note 11), proceeds from the sale of stores or other assets,
reduce general and administrative expenses, increase collection efforts
and potential debt or equity investments by significant shareholders.
Management believes that these efforts will be sufficient to ensure
compliance with the compensating cash balance covenant by April 25, 1998
and for the remainder of the fiscal year.
In fiscal 1996, the Company had outstanding 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. 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.
As of November 30, 1997, annual maturities on long-term
obligations are due as follows: $26,143 in 1998, $1,666,941 in
1999 and $9,954 in 2000. Interest paid for the years ended
November 30, 1997 and 1996, was $55,188 and $4,530, respectively.
In February 1997, Systems entered into an agreement with a finance
company to provide financing to qualifying franchisees for the purpose
of adding second or subsequent units. The program is administered by
the finance company; however, Systems has the final right of approval
over individual applicants. Systems has provided a guarantee of
borrowings up to a maximum of 10% of the total amount financed in each
12-month period under the program. As of November 30, 1997, $438,000
has been advanced to franchisees under this program.
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, 1997
and 1996, was $955,693 including contingent rental expense of
$26,600 less sublease income of $46,109 and $230,480,
respectively. At November 30, 1997, future minimum annual rental
commitments under leases, net of sublease income of $126,554 in
1998, $138,059 in 1999, $119,817 in 2000 and $61,338 in 2001 are
as follows:
<TABLE>
<S> <C>
1998 $ 962,254
1999 977,248
2000 825,526
2001 676,609
2002 405,431
Thereafter 907,833
---------
$4,754,901
=========
7. Noncash Transactions
During 1996, the Company converted $190,989 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 10).
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 10).
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.
In January 1997, the Company forgave notes and other receivables
totaling approximately $486,000 from a franchisee, Just Bagels,
Inc. ("JBI") and acquired three stores for conversion to Company-
owed units (see Note 10).
In April 1997, the Company issued 25,611 shares of Common Stock
valued at approximately $94,000, forgave royalties owed totaling
approximately $42,000, and assumed liabilities of approximately
$36,000 in connection with the purchase of one franchised store.
In August 1997, this store was sold to a franchisee for
approximately $235,000, consisting of two notes receivable from
the purchaser, approximately $46,000 which was paid in October
1997 and approximately $189,000, due in monthly payments through
August 2004, with interest at 8.5% (see Note 10).
In May 1997, the Company terminated an option to purchase 75,000
shares of Common Stock which had been originally issued in
connection with the Strathmore acquisition (Note 10). The former
owners of Strathmore had, in a separate transaction, assigned the
rights to acquire 75,000 shares of the 625,000 total shares of
Common Stock to Hawaiian Bagel Factory, Inc. ("HBF"). HBF
entered into an option to purchase the master franchise rights of
the State of Hawaii from Systems in exchange for the assignment
of the option to purchase the Company's Common Stock, valued at
$125,000, and a note receivable for $75,000 which is due and
payable in 5 annual installments of principal and interest
beginning May 1998 and which bears interest at 9% per annum.
In May 1997, Systems repurchased the franchise rights for the
western provinces of Canada from the master franchisor in
exchange for the discharge of a note receivable, plus interest
accrued thereon, totaling approximately $165,000.
In May 1997, the Company acquired MFM by exchanging 432,608
shares of Common Stock plus cash for 150 shares of MFM common
stock (see Note 10).
8. Shareholders' Equity
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.
On January 2, 1996, in connection with the Company's initial
public offering of 2,500,000 shares of common stock which was
completed on November 30, 1995, 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.
Pursuant to the underwriting, 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
exerciseable between the first and fifth anniversary of the
effective date of the initial public offering at $3.20 per share.
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. In fiscal 1997, the Company issued an option
to purchase 6,000 shares of Common Stock as additional consideration
at terms similar to the previously issued option.
On June 25, 1996, 133,471 shares of common stock were issued
pursuant to a cashless exercise of a warrant. The warrant was
originally issued on November 30, 1995 to an investor to purchase
up to 144,041 shares of common stock exerciseable through
September 1, 1996, at a price of $.67 per share. In connection
with this exercise, the investor forfeited the option to purchase
the remaining 10,570 shares covered by the warrant.
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 common shares as 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 a Conversion Suspension Period
during November 1997.
Preferred dividends in the amount of $648,197 accumulated during
fiscal 1997, which includes $386,956 attributable to the 15%
discount available to holders of the Preferred Stock in acquiring
common stock upon ultimate conversion and $137,529 attributable
to the value of two-year warrants issued to each preferred
shareholder to purchase one share of common stock for each share
of Preferred Stock.
During fiscal 1997, holders elected to convert 9,000 shares of
Preferred Stock plus dividends accrued thereon were converted
into 110,342 shares of common stock. In January 1998, 1,000
shares of Preferred Stock plus dividends accrued thereon were
converted into 32,672 shares of common stock.
9. Stock Options 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
non-qualified 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 options 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.
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
non-qualified options to non-employee 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
2,000 shares upon initial election to the Board and for annual
grants thereafter, upon reelection, of options to purchase 1,000
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.
Activity under the Incentive Plan and Directors Plan during the
two years ended November 30, 1997 is as follows:
</TABLE>
<TABLE>
<CAPTION>
Weighted
Number of Average Option
Shares Price Per Share
---------- ---------------
<S> <C> <C>
Outstanding as of December 1, 1995 30,000 $2.67
Granted 276,000 $6.54
Exercised - -
Canceled (9,000) $2.67
Outstanding as of November 30, 1996 297,000 $6.27
Granted 4,000 $2.53
Exercised - -
Canceled (3,000) $2.67
Outstanding as of November 30, 1997 298,000 $6.25
</TABLE>
The Company has adopted the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123
"Accounting and Disclosure of Stock-Based Compensation" ("SFAS
No. 123".) Accordingly, no employee compensation expense
has been recognized for the Incentive Plan or for the Directors
Plan. Had employee compensation expense for the Company's plan
been determined based on the fair value at the grant date for
awards in fiscal years 1996 and 1997 consist with provisions of
SFAS No. 123, the Company's net loss and net loss per share would
have been as follows:
<TABLE>
<CAPTION>
Years ended November 30
1997 1996
----------- ----------
<S> <C> <C>
Net loss attributable to
common shareholders:
As reported $(4,050,286) $(320,844)
Pro forma $(4,388,032) $(596,836)
Loss per share:
As reported $(0.55) $(0.04)
Pro forma $(0.59) $(0.08)
Diluted loss per share:
As reported $(0.53) $(0.04)
Pro forma $(0.58) $(0.08)
</TABLE>
The fair value of each option grant is estimated using the Black-
Scholes option-pricing model with the following weighted average
assumptions for 1997 and 1996: risk-free interest rates of 6.17%,
dividend yield of 0.0%, expected volatility of .69 and a weighted
average expected life of the option of 8.07 years.
Information on options outstanding under the Incentive Plan and
the Directors Plan at November 30, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Average
Range of Number of Remaining Exercise
Exercise Price Options Contractual Life Price
-------------- ------- ----------------- --------
<C> <C> <C> <C>
$2.31 - $2.75 22,000 8.13 $2.64
$4.17 - $4.83 13,500 8.28 $4.39
$6.37 - $7.01 262,500 6.21 $6.65
</TABLE>
10. Business Combinations
During 1997 and 1996, 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.
During 1997, the Company acquired and sold several stores.
Stores purchased are operated as Company-owned units for a period
of time prior to the ultimate resale as a franchised unit.
In January 1997, the Company completed the acquisition of JBI and
its 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 JBI owner. In October 1997, management
closed one of the stores and 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 Notes 7 and 11.
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.
On a pro forma basis, had the above acquisitions occurred at
December 1, 1995, revenues for the fiscal years ended November
30, 1997 and 1996 would have been $15,421,000 and $11,985,000,
respectively. Net loss for fiscal 1997 and 1996 would have been
$3,500,000 and $616,000, respectively, or a net loss per share of
$0.54 and $0.08, respectively.
11. Impairment of Long-Lived Assets and Store Closures
The provision recorded of $1,836,981 consists of the following:
Impairment of long-lived assets $1,009,867
Closed store operating leases and
other store closing costs 504,203
Impairment of goodwill and other
intangible assets associated
with impaired long-lived assets 322,911
---------
$1,836,981
=========
For purposes of determining impairment, management, in certain
circumstances, groups long-lived assets on a geographic market or
store level as appropriate. Such review included, among other
criteria, management's estimate of future cash flows for the
geographic market or store. If the estimated future cash flow
(undiscounted and without interest charges) were not sufficient
to recover the carrying value of the long-lived assets, including
associated goodwill, of the market or store, such assets were
determined to be impaired and were written down to fair value.
Fair value was determined based on current market selling prices
of such assets. Management judgment is inherent in the estimated
fair value determinations and, accordingly, actual results could
vary significantly from such estimates. The estimated fair value
of impaired long-lived assets which total approximately $171,000
have been recorded as other current assets as of November 30,
1997.
The seven stores identified as impaired incurred operating losses
of approximately $555,000 during the fiscal year ended November
30, 1997. One store was closed by year end and the
remaining six stores were closed subsequent to year end.
The reserve for closed store expense includes an amount for the
noncancelable operating lease payments after the expected closure
date, net of estimated sublease income.
12. 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 during fiscal 1996 in the accompanying consolidated
statement of operations under the caption "costs of uncompleted
business acquisition."
13. 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, 1997, approximate their carrying value.
-----------------
PROXY PROXY
BAB HOLDINGS, INC.
This Proxy is Solicited on Behalf of the
Board of Directors
The undersigned, having received the Notice of Annual Meeting and
Proxy Statement dated March 25, 1998, hereby appoints each of
Michael W. Evans and Michael K. Murtaugh as proxy, with full power
of substitution, to vote all the shares of Common Stock which the
undersigned would be entitled to vote if personally present at the
Annual Meeting of Shareholders of BAB Holdings, Inc. (the "Company")
to be held on Tuesday, April 28, 1998 at 10:00 a.m. at the Rosemont
Convention Center, 5555 N. River Road, Rosemont, IL 60018, or at any
adjournment thereof, upon any and all matters which may properly
be brought before the meeting or adjournment thereof, hereby revoking
all former proxies.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE
(Continued and to be completed and signed on reverse side.)
-----------------
BAB HOLDINGS, INC.
1. Election of Directors duly nominated.
Nominees: Michael W. Evans, Michael For Withhold For All
K. Murtaugh, David L. Epstein and All All Except
Cynthia A. Vahlkamp [ ] [ ] [ ]
_________________
Nominee exception
2. Ratification of Ernst & Young LLP as
the independent auditors of the
Company for the year ended November For Against Abstain
30, 1998. [ ] [ ] [ ]
3. The authority to vote, in his
discretion, on all other business Authority Authority
that may properly come before the Granted Withheld
meeting. [ ] [ ]
This proxy when properly executed will be voted the manner directed
herein by the undersigned shareholder. If no direction is made, this
proxy will be voted for each nominee, for the adoption of proposal 2,
and in the discretion of the proxy holder on such other business as may
properly come before the meeting.
Dated: ___________________, 1998
Signature(s)____________________
________________________________
Please sign exactly as your name appears on this card. When shares are
held by joint tenants, both should sign. If a corporation, please sign
in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by an authorized person.
