FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 0-27068
BAB Holdings, Inc.
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(Name of small business issuer in its charter)
Illinois 36-3857339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (773) 380-6100
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,385,006 shares of Common
Stock, as of October 12, 1998.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements ...................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation ..................
PART II
Item 1. Legal Proceedings.......................................
Item 2. Changes in Securities...................................
Item 3. Defaults Upon Senior Securities.........................
Item 4. Submission of Matters to a Vote of Security Holders.....
Item 5. Other Information.......................................
Item 6. Exhibits and Reports on Form 8-K........................
SIGNATURE ........................................................
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
August 31, 1998
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $169,778 $ 319,202
Accounts receivable, net of allowance
for doubtful accounts of $230,500 1,371,059
Other current assets 1,423,368
------------
Total current assets 3,113,629
Property, plant, and equipment, net of
accumulated depreciation of $1,521,379 4,386,830
Goodwill, net of accumulated amortization of $147,579 2,608,742
Franchise contract rights, net of accumulated
amortization of $138,153 1,934,131
Other assets and intangible assets, net of
accumulated amortization of $296,505 1,999,921
------------
$ 14,043,253
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,208,196
Deferred franchise fee revenue 448,500
Current portion of long-term debt 1,990,475
Other current liabilities 587,833
------------
Total current liabilities 5,235,004
Long-term debt, less current portion 20,335
Shareholders' equity:
Common stock 11,430,453
Additional paid-in capital 1,269,902
Preferred stock 1,518,811
Accumulated deficit ( 5,431,252)
------------
Total shareholders' equity 8,787,914
------------
$ 14,043,253
============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
AUGUST 31,
1998 1997
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 2,157,833 $ 2,830,808
Royalty fees from franchised stores 829,507 705,557
Franchise and area development fees 245,000 124,645
Licensing fees and other income 238,789 220,597
--------------------------
3,471,129 3,881,607
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 703,876 973,371
Store payroll and other operating expenses 1,203,534 1,708,185
Selling, general, and administrative expenses 1,453,173 1,710,638
--------------------------
3,360,583 4,392,194
--------------------------
Income (loss) before interest 110,546 (510,587)
Interest expense ( 46,221) ( 29,803)
Interest income 26,152 11,979
--------------------------
Net income (loss) 90,477 (528,411)
Preferred stock divided accumulated ( 30,247) (374,862)
--------------------------
Income (loss) attributable to
common shareholders $ 60,230 $ (903,273)
==========================
Basic and diluted earnings (loss)
per common share $ 0.01 $ (0.12)
==========================
Average number of shares outstanding 8,380,476 7,601,288
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
NINE MONTHS ENDED
AUGUST 31,
1998 1997
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 6,975,673 $ 6,918,171
Royalty fees from franchised stores 2,378,747 1,664,301
Franchise and area development fees 847,500 772,545
Licensing fees and other income 794,494 791,424
--------------------------
10,996,414 10,146,441
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 2,308,578 2,323,786
Store payroll and other operating expenses 4,032,001 3,970,983
Selling, general, and administrative expenses 4,435,731 4,222,952
--------------------------
10,776,310 10,517,721
--------------------------
Income (loss) before interest 220,104 (371,280)
Interest expense (149,935) ( 32,291)
Interest income 82,991 49,145
--------------------------
Net income (loss) 153,160 (354,426)
Preferred stock dividend accumulated (117,946) (597,577)
--------------------------
Income (loss) attributable to
common shareholders $ 35,214 $ (952,003)
==========================
Basic and diluted (loss) per common share $ - $ (0.13)
==========================
Average number of shares outstanding 8,009,925 7,321,657
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
AUGUST 31,
1998 1997
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used for operating activities $ (287,328) $ (500,684)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (163,153) (2,897,038)
Loan repayments from franchisees 129,457 -
Business acquisitions - (650,531)
Other ( 37,447) (279,133)
-----------------------
Net cash used for
investing activities (71,143) (3,826,702)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock - 2,192,750
Borrowings under line of credit 337,500 1,420,975
Repayment of long term debt ( 29,728) (362,152)
Payment of preferred stock issuance costs - (227,274
Other (19,995) -
----------------------
Net cash provided by financing activities 287,777 3,024,299
----------------------
Net decrease in cash and cash equivalents (70,694) (1,303,087)
Cash and cash equivalents at beginning of period 389,896 2,163,293
----------------------
Cash and cash equivalents at end of period $ 319,202 $ 860,206
======================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
BAB Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
represent the financial activity of BAB Holdings, Inc. (the "Company" or
"Holdings"), an Illinois corporation incorporated on November 25, 1992, and
its four wholly-owned subsidiaries, BAB Operations, Inc. ("Operations"), BAB
Systems, Inc. ("Systems"), Brewster's Franchise Corporation ("BFC") and My
Favorite Muffin Too, Inc. ("MFM"). Systems was incorporated on December 2,
1992, and was primarily established to franchise "Big Apple Bagels" specialty
bagel retail stores. Operations was formed on August 30, 1995, primarily to
operate Company-owned stores, including one which currently serves as the
franchise training facility. BFC was established on February 15,1996, to
franchise "Brewster's Coffee" concept retail coffee stores. MFM was acquired
on May 13, 1997. MFM franchises and operates "My Favorite Muffin" specialty
muffin retail stores.
The accompanying condensed consolidated financial statements are unaudited.
These financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statement prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of the
Company's management, the condensed consolidated financial statements for the
unaudited interim periods presented include all adjustments necessary to
fairly present the results of such interim periods and the financial position
as of the end of said period. These adjustments were of a normal recurring
nature and did not have a material impact on the financial statements
presented.
2. Stores Open and Under Development
Stores which have been opened and unopened stores for which an agreement has
been executed and franchise or area development fees collected at August 31,
1998 are as follows:
Stores opened:
Company-owned 24
Franchisee-owned 192
Licensed 70
---
286
Unopened franchised stores for which an agreement
has been sold:
Franchise agreement 18
Area development agreement 22
---
40
---
Total 326
===
3. Acquisitions and Dispositions
In January 1998, the Company sold one store located in Lincoln, Nebraska to a
franchisee in exchange for $30,000 and a $177,000 note receivable which bears
interest at a rate of 8.5% per annum. Principal and interest payments are
payable monthly until March 1, 2003 when the remaining unpaid principal
balance is due in full.
During 1997, the Company acquired and sold several stores. Stores purchased
were operated as Company-owned units for a period of time prior to resale as a
franchised unit.
In January 1997, the Company completed the acquisition of JBI, Inc. and
affiliate, franchisees of the Company, operating a total of four stores in
southern California. The total purchase price paid was $770,000, including
$120,000 related to a noncompetition agreement with the former owners of JBI.
In October 1997, management closed one of the stores and it closed the
remaining three stores in January 1998. All of the long-lived assets
associated with this purchase including the noncompetition agreement were
considered impaired as of November 30, 1997. See Note 4.
In May 1997, the Company acquired MFM. At the time of acquisition, MFM had 5
company-owned and 60 franchised units in operation and its 1996 revenues
exceeded $2.7 million. The Company acquired MFM by exchanging 432,608 shares
of the Company's Common Stock, restricted as to transfer until January 1,
1999, and $259,000 in cash in exchange for 150 shares of MFM stock. The
Company assumed all assets, including approximately $143,000 in cash, and
liabilities of MFM. The Company borrowed approximately $356,000 on its credit
facility to repay MFM bank debt and other borrowings assumed in the
acquisition.
4. Impairment of Long-Lived Assets and Store Closures
As a result of operating losses incurred during the fiscal year ended November
30, 1997, management identified seven Company-owned stores as impaired and
recorded a provision for impairment of long-lived assets and store closures of
approximately $1,837,000, including a reserve for closed store operating
leases and other store closing costs of approximately $504,000. One store was
closed by November 30, 1997 and the remaining six stores were closed by
February 28, 1998. Operating losses incurred by these six stores during the
nine months ended August 31, 1998 totaled approximately $90,000 and are
included in results of Company-owned store operations. At August 31, 1998,
the reserve for closed store operating leases and other store closing costs is
approximately $241,000.
5. Preferred Stock - Series A Convertible Preferred Stock
In April 1997, the Company completed the sale of 87,710 shares of $25.00
Series A Convertible Preferred Stock (the "Preferred Stock") in a private
placement to institutional investors. The Preferred Stock carries an 8% annual
dividend payable in cash or, at the option of the Company, in shares of common
stock; provided that during a Conversion Suspension Period (defined below),
dividends will accrue at a rate of 15% per annum. Dividends are payable only
when shares are converted to shares of common stock. The holders have no
voting rights and have a liquidation preference of $25.00, plus accrued
dividends, out of assets of the Company available for distribution to
shareholders.
Commencing August 1, 1997 through July 31, 1999, subject to certain
extensions, the shareholders may elect to convert each preferred stock share
into that number of common shares determined by dividing the $25 purchase
price by the lesser of $5.64 or 85% of the average closing bid price of the
common stock for the 30 trading days immediately preceding the conversion
date. In addition, if the Company engages in an underwritten public offering,
for any holder who has given notice of participation in such offering, the
conversion rate shall be 85% of the public offering price, if less than the
amount calculated in the immediately preceding sentence.
A Conversion Suspension Period takes effect if the closing bid price of the
common stock is less than $2.325 for 30 consecutive trading days. The
Conversion Suspension Period continues until the first trading day thereafter
that the closing bid price for the common stock has exceeded $2.325 for 30
consecutive trading days; provided, however, that a Conversion Suspension
Period shall not continue for more than sixty (60) days in any period of 365
days. The Company is not required to recognize or accept any conversion of
Preferred Stock during a Conversion Suspension Period. During any Conversion
Suspension Period, the Company, at its option, may redeem any or all of the
Preferred Stock by payment to the holders of $28.75 per share, plus all
accrued and unpaid dividends. The Company entered into a sixty day Conversion
Suspension Period during November 1997. Preferred dividends accumulated
during the three months and nine months ended August 31, 1998 were $30,247 and
$117,946, respectively.
During fiscal 1997, 9,000 shares of Preferred Stock, plus dividends accrued
thereon, were converted into 110,342 shares of common stock. During the nine
months ended August 31, 1998, 18,710 shares of Preferred Stock were converted
into 673,376 shares of common stock. The common stock issued upon conversion
includes shares issued in payment of Preferred Dividends on 10,306 shares of
Preferred Stock. The Company elected to pay accrued dividends in cash
totaling $20,000 upon conversion of the remaining 8,404 shares of Preferred
Stock.
6. Line of Credit Agreement
In April 1997, the Company entered a $2 million line of credit agreement with
a bank expiring on December 31, 1998. Maximum borrowing under the line is
limited to a borrowing base of 80% of accounts receivable under 90 days and
40% of equipment costs. Interest is payable monthly at prime plus one percent
(9.5% at August 31, 1998) with principal due upon the maturity of the note.
At August 31, 1998, the Company had borrowed $1,990,475 on the line of credit
and this outstanding balance is classified as a current liability. The
Company is currently in the process of renewing the line of credit with the
bank.
In February 1998, the Company fell below the compensating cash balance
requirement of $250,000 and obtained a waiver from the bank to lower the
requirement to $150,000 for 60 days expiring April 25, 1998. Management
implemented a plan to increase the cash balance with improved cash flow
resulting from store closures, proceeds from the sale of stores and other
assets, reduction in general and administrative expenses and increased
collection efforts. In June 1998, the Company again fell below the minimum
cash requirements; however, the Company is currently within compliance with
the minimum cash requirements.
7. Earnings (Loss) per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following tables sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
1998 1997
---------- --------
<S> <C> <C>
Numerator:
Net income (loss) $ 90,477 $(528,411)
Preferred stock dividend accumulated (30,247) (374,862)
---------- --------
Numerator for basic and diluted earnings
(loss) per share--income (loss)
attributable to common shareholders $ 60,230 $(903,273)
========== ========
Denominator:
Denominator for basic and diluted
earnings (loss) per share--weighted
average shares 8,380,476 7,601,288
========== =========
Basic and diluted earnings
(loss) per share $ .01 $ (0.12)
========== =========
</TABLE>
<TABLE>
NINE MONTHS ENDED
AUGUST 31,
1998 1997
---------- --------
<S> <C> <C>
Numerator:
Net income (loss) $153,160 $(354,426)
Preferred stock dividend accumulated (117,699) (597,577)
---------- --------
Numerator for basic and diluted earnings
(loss) per share--earnings (loss)
attributable to common shareholders $ 35,214 $(952,003)
========== =========
Denominator:
Denominator for basic and diluted
earnings (loss) per share--weighted
average shares 8,009,925 7,321,657
========== =========
Basic and diluted earnings (loss)
per share $ - $ (0.13)
========== =========
</TABLE>
Options to purchase 370,000 shares of common stock at varying prices are
outstanding at August 31, 1998 under the Company's 1995 Long-Term Incentive
and Stock Option Plan (the Incentive Plan) and the 1995 Outside Directors
Stock Option Plan (the Directors' Plan). Also outstanding during the period
ended August 31, 1998 was a warrant sold in connection with the Company's
initial public offering to the underwriter to purchase 255,000 shares of
common stock at $3.20 per share. Additionally, in connection with various
acquisitions during 1996 and 1997, the Company issued options to purchase
650,000 shares of common stock issuable at varying exercise prices ranging
from $4.00 per share to $6.17 per share. Further, warrants issued to each
preferred shareholder and the placement agent of the Preferred Stock were
outstanding to purchase 175,420 and 13,315 shares of common stock at $2.35 and
$3.29 per share, respectively. Finally, common shares are issuable pursuant
to the terms of the Company's convertible Preferred Stock (see Note 5).
The conversion of convertible securities outstanding during the three months
ended August 31, 1998 and 1997 and the nine months ended August 31, 1998 and
1997 is not assumed as the result is antidilutive to the reported earnings
(loss) per share. Further, as the average price of the Company's common stock
does not exceed the exercise price of the outstanding options and warrants,
the exercise is not assumed during the periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the development of the Company's business, the markets for the Company's
products, anticipated capital expenditures, and the effects of completed and
proposed acquisitions, and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Certain risks and uncertainties are outside the control of the Company and its
management including its ability to attract new franchisees; the continued
success of current franchisees; the effects of competition on franchisee and
Company-owned store results; consumer acceptance of the Company's products in
new and existing markets; fluctuation in development and operating costs; brand
awareness; availability and terms of capital; adverse publicity; acceptance
of new product offerings; availability of locations and terms of sites for
store development; food, labor and employee benefit costs; changes in government
regulation (including increases in the minimum wage law); regional economic
and weather conditions; the hiring, training, and retention of skilled corporate
and restaurant management; and the integration and assimilation of acquired
concepts. Some of these risks and uncertainties are wholly outside of the
control of the Company. Accordingly, readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
General
From its inception in November of 1992, the Company has grown to 24 Company-
owned stores and 262 franchised and licensed units at August 31, 1998.
Systemwide revenues for the nine months ended August 31, 1998 were $58
million, a $14 million increase from the year-ago period.
For the nine months ended August 31, 1998, the Company significantly improved
its financial performance over the nine months ended August 31, 1997. As a
result of streamlined operations and field support during the last nine
months, the Company has experienced improved profitability of existing
stores. In addition, steady growth in the areas of franchise sales -
including area development opportunities in the United States and international
Master Franchise Agreement opportunities worldwide - has resulted in a steady
growth in the number of franchise operations and new store openings. The
opening of 14 of the Company's signature tri-branded restaurants during the
nine months ended August 31, 1998, in addition to 16 other new store openings
during the year, is in sharp contrast to direct competitors in the bagel
segment, who have either slowed or stopped opening bagel stores. The Company
expects to open 40 stores in fiscal 1998, including its first 3
international tri-branded restaurant in Lima, Peru.
The Company's aggressive non-traditional licensing strategy has expanded to
include an additional 12 locations in airports and travel plazas; a total of
51 Host Marriott locations; the addition of additional products to both Host
Marriott and Choice Picks Food Courts; a direct mail campaign with Oberweis
Dairy; the entry into the supermarket arena; and the Company's first co-
branding opportunity with Miami Subs Corporation.
Currently, the Company's revenues continue to be substantially 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 generated other revenue through the sale of Company-owned
units to franchisees of the Company.
During the fourth quarter of fiscal 1997, management identified certain under-
performing stores which were operating at a loss and which, based on the
estimated future cash flows, were considered to be impaired. Four of the
seven stores which were considered to be impaired were located in the Southern
California market. In accordance with the Financial Accounting Standards
Board Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and the Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition of Costs to Exit an Activity",
management recorded a provision for impairment of assets and store closures
which totaled approximately $1,837,000. One store was closed during fiscal
1997 and the remaining units were closed during the first quarter of 1998.
The six stores incurred operating losses of approximately $90,000 during the
three months ended February 28, 1998. Management has successfully completed
negotiations to terminate its obligations under six of the seven non-
cancelable lease obligations and its obligation under the remaining lease
terminates in 1999. Management believes that the reserves established
for closed store operating leases and other store closing costs at November
30, 1997 are sufficient.
Results of Operations
Three Months Ended August 31, 1998 versus Three Months Ended August 31, 1997
Total revenues decreased 11% to $3,471,000 in the third quarter 1998 from
$3,882,000 in the prior year quarter. Lower revenues were primarily the
result of the decrease in Company-owned units in operation as a result of the
November 1997 decision to close 7 under-performing units which was completed
in February 1998. Total Company-owned units in operation at August 31, 1998
was 24 versus 36 at August 31, 1997. There was an 18% increase in royalty
revenues which were $124,000 greater than that generated in the year-ago
quarter. This increase is attributed to the overall increase in the number
of franchised units open during the current year period. Franchise and area
development fee revenue increased 97% to $245,000 from the year-ago period.
Finally, licensing fees and other income in total increased 8% to $ 239,000
from the year-ago period.
Costs associated with Company-owned store operations relative to sales
decreased 6% in the third quarter 1998 versus 1997. This improvement in
Company-owned store operations contributed $101,000 to profitability in the
1998 quarter despite the 24% decrease in associated revenues. Management
attributes the improved profitability to the closure of under-performing units
and improvements in training and management techniques to improve food and
labor costs by over 4%.
Selling, general and administrative expenses as a percentage of total revenues
continue to decrease - less than 42% during the three months ended August 31,
1998 versus 44% in the year-ago quarter. The 25% increase in revenues
associated with franchise, licensed and other non-traditional operations has not
required any significant increases in headcount or corporate headquarter
facility-related expenses. Management anticipates that the current
infrastructure will continue to be able to support increased growth in
franchised and licensed operations with moderate additions in field personnel
and other support services. Additionally during the 1998 period, all
pre-opening costs incurred in connection with the development of Company-
owned stores became fully amortized. Amortization of pre-opening store
development costs represented $75,000 of the decrease in selling, general, and
administrative expenses during the current year period versus the prior year
period.
Income from operations was $111,000 in the third quarter of fiscal 1998 versus
a loss of $511,000 generated in third quarter of fiscal 1997. Interest
expense increased by 55% to $46,000 in the three months ended August 31, 1998.
Average borrowings under the line of credit during the 1998 quarter was
$1,994,000 versus $817,000 in the prior year period. Interest income
increased 118% to $26,000 from $12,000 in the 1997 quarter.
Net income totaled $90,000 in the quarter ended August 31, 1998 versus a loss
of $528,000 in the year-ago quarter. Dividends on the Preferred Stock of
$30,000 were accumulated during the quarter ended August 31, 1998. In the
year-ago quarter, $375,000 of preferred dividends were accumulated, including
$193,000 attributable to the 15% discount available to holders to the
Preferred Stock in acquiring Common Stock upon ultimate conversion. Such
discounts were accounted for as dividends under generally accepted accounting
principles. By August of 1997, the Company had recognized the entire
preferred dividend related to the conversion discount. The Company was
additionally obligated to issue warrants to purchase two shares of Common
Stock for each share of Preferred Stock on August 1, 1997. The value of these
two-year warrants was additionally also recorded as a preferred stock dividend
accumulated of $138,000 in the year-ago quarter.
Net income per share for the quarter ended August 31, 1998 was $0.01 per share
versus a loss per share for the year-ago quarter of $0.12 per share on both a
basic and diluted basis. Average shares outstanding increased by
approximately 780,000 shares due to the conversion of 27,710 shares of
Preferred Stock to 780,000 shares of Common Stock since August 31, 1997. The
conversion of convertible securities outstanding during the three months ended
August 31, 1998 and 1997 and the nine months ended August 31, 1998 and 1997 is
not assumed as the result is antidilutive to the reported earnings (loss) per
share. Further, as the average price of the of the Company's common stock
does not exceed the exercise price of the outstanding options and warrants,
the exercise is not assumed during the periods presented.
Nine Months Ended August 31, 1998 versus Nine Months Ended August 31, 1997
Total revenues increased 8% to $10,996,000 in the 1998 period from $10,146,000
in the prior year period. This increase is attributable to a 43% increase in
royalty revenues generated by franchise unit retail sales over those
recognized in the prior year period and a 10% increase in franchise and area
development fees. Royalty revenues generated represented 22% of total
revenues in the 1998 period compared to 16% of total revenues in the 1997
period. The overall increase in royalty revenues is attributed to the growth
in the number of franchise units in operation in connection with the May 1997
MFM acquisition which added 60 franchise units. These units contributed to
revenues throughout the entire nine months ended August 31, 1998 versus only
four months in the year ago period. Franchise and area development fee revenue
increased 10% for nine months ended August 31, 1998 versus the nine months
ended August 31, 1997, a reflection of the steady growth in the Company's
franchise operations. Many of these new units incorporate the Big Apple
Bagels, My Favorite Muffin, and Brewster's Coffee product lines. Net sales
generated by Company owned stores approached $7 million during the current
period despite the overall decrease in the number of units in operation from
34 at November 30, 1997 to 24 at August 31, 1998. During the year-ago period,
overall, the Company added 21 units and produced revenues relatively
consistent with the current year period. Finally, licensing fees and other
income totaled $795,000 during the 1998 period compared to $791,000 in the
prior year period. However, the 1997 period included $188,000 in revenue
generated from the resale to franchisees of Company-operated units. Excluding
this source of other income, licensing fees and other revenue increased
approximately 32% over the prior year period.
Costs associated with Company-owned store operations remained flat relative
to sales in the nine months ended August 31, 1998 versus the nine months
ended August 31, 1997. Company-owned stores which were closed during the first
quarter of 1998 generated operating losses of over $90,000 and required
significant attention of management, a cost which is not factored into this
amount. Improved profitability in Company-owned store operations, as
evidenced in the three months ended August 31, 1998, has been experienced
since the closure of under-performing stores.
Selling, general and administrative expenses increased by $213,000 to
$4,436,000. Payroll-related expenses increased by $223,000. This is
attributable to the overall increase in corporate headcount associated with
the acquisition of MFM. Employees hired in connection with the acquisition
were employed for the entire nine months during the fiscal 1998 period versus
only four months during the fiscal 1997 period. While payroll costs have
increased over the year-ago period, the Company has decreased its headcount
at the corporate headquarters from 54 at its fiscal year-end November 30,
1997 to 38 at August 31, 1998.
Income from operations was $220,000 in the fiscal 1998 period versus a loss of
$371,000 generated in the fiscal 1997 period. Interest expense increased by
$118,000 to $150,000 in the nine months ended August 31, 1998 related to the
Companies borrowings under its line of credit facility which was outstanding
throughout the entire fiscal 1998 period. The Company first borrowed under
the line of credit on May 29, 1997; therefore, interest expense was only
incurred in the third quarter of the year-ago period.
Net income totaled $153,000 in the nine months ended August 31, 1998 versus a
loss of $354,000 in the year-ago period. Dividends on the Preferred Stock of
$118,000 were accumulated during the nine months ended August 31, 1998. In
the year-ago period, $598,000 of preferred dividends accumulated, including
$387,000 attributable to the 15% discount available to holders of the
Preferred Stock in acquiring Common Stock upon ultimate conversion. Such
discounts were accounted for as dividends under generally accepted accounting
principles. By August of 1997, the Company had recognized the entire
preferred dividend related to the conversion discount. The Company was
additionally obligated to issue warrants to purchase two shares of Common
Stock for each share of Preferred Stock on August 1, 1997. The value of these
two-year warrants was recorded as a preferred stock dividend accumulated of
$138,000 in the year-ago period.
Earnings per share for the nine months ended August 31, 1998 was less than
$0.01 per share versus a loss of $0.13 per share in the 1997 period on both a
basic and diluted basis. Average shares outstanding increased by
approximately 688,000 shares due to the conversion of 27,710 shares of
Preferred Stock to 783,718 shares of common stock since August 31, 1997. The
conversion of convertible securities outstanding during the three months ended
August 31, 1998 and 1997 and the nine months ended August 31, 1998 and 1997 is
not assumed as the result is antidilutive to the reported earnings (loss) per
share. Further, as the average price of the Company's common stock does not
exceed the exercise price of the outstanding options and warrants, the
exercise is not assumed during the periods presented.
Liquidity and Capital Resources
During the nine months ended August 31, 1998, cash used in operating
activities was $287,000 as compared with $501,000 used by operating activities
during the comparable last year period. The change in cash used in operating
activities was attributable to an increase in accounts receivable and a
decrease in accounts payable.
Investing activities used $71,000 during the nine months ended August 31,
1998, and consisted primarily of the purchase of property plant, and
equipment. Cash used for investing activities during the nine months ended
August 31, 1997 totaled $3.8 million, $2.9 million was used to purchase
property, plant and equipment primarily for new Company-owned store
construction. Business acquisitions during the period required $651,000, net
of $455,000 in notes receivable, related to the Just Bagels, Inc. and
affiliate acquisition in January 1997 converted to purchase consideration.
Cash provided by financing activities was $288,000 during the nine months
ended August 31, 1998 and was provided by borrowings under the line of credit
offset by the repayment of long-term debt and other borrowings. For the nine
months ended August 31, 1997 cash provided by financing activities was
$3,024,000. This consisted of $2,200,000 in proceeds from the issuance of
preferred stock (87,710 shares of $25.00 Preferred Stock) in a private
placement to institutional investors and $1,421,000 from borrowings under the
line of credit.
At August 31, 1998, the Company had borrowed $1,990,000 on the credit facility
which is due on December 31, 1998. This outstanding balance is classified as a
current liability. As of October 12, 1998 the Company has made additional
principal payments reducing borrowings on the line of credit to $1,877,000.
The Company is currently in the process of renewing the line of credit with
the bank.
In February 1998, the Company fell below the compensating cash balance
requirement of $250,000 and obtained a waiver from the bank to lower the
requirement to $150,000 for 60 days expiring April 25, 1998. In June 1998,
the Company fell below the minimum cash requirements: however, the Company is
currently in compliance with its covenants and based on the improvements in
cash flow discussed below, management believes the Company will continue to
remain within compliance with its borrowing covenants. Management is actively
negotiating with the bank and believes the Company will negotiate or obtain a
renewal or restructuring of the credit facility on terms favorable to the
Company.
In September 1998, the Company received $500,000 consisting primarily of a
prepayment of a licensing fee. These funds are available for general
working capital requirements.
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 has
improved profitability and cash flow from the remaining Company-owned units.
The Company believes that improved cash flow from existing operations, the
remaining availability on its bank credit facility, the expected continuation of
the bank credit facility, increased collection efforts and the sale of
certain assets, combined with the receipt of prepayment for the aforementioned
licensing fee will be sufficient to meet its working capital
requirements for the foreseeable future.
Year 2000 Issues
The year 2000 issue relates to the fact that computer software was often
written using two rather than four digits to represent an applicable year,
accordingly, software might recognize a date using "00" as the year 1900
rather than as year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
The Company utilizes hardware and software systems which are commercially
available products and are represented by the vendors to year 2000 compliant.
The Company anticipates incurring certain costs related to the upgrade and
replacement of existing systems in the normal course of business. These costs
are not anticipated to be significant.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1996, the Company filed an arbitration action against a
franchisee alleging breach of its franchise agreement for refusal to submit
required sales reports and pay royalty fees and contributions to the national
marketing fund. The franchisee filed suit in the Circuit Court of Cook County,
Illinois against the Company and its officers and directors on April 19, 1996.
The franchisee alleged that the Company misrepresented the initial investment
required to establish a store and made untrue and unauthorized earnings claims
in violation of the Illinois Franchise Disclosure Act. Plaintiffs sought
rescission of the franchise agreement, damages of $600,000 and punitive
damages in the amount of $6,000,000. On May 28, 1996, management filed a
motion to stay litigation in order to compel the plaintiffs to have their
claims heard in arbitration as required by the provisions of the franchise
agreement. The hearing was held over seven days and resulted in an award in
favor of the Company. In January 1998, the Company was awarded all past due
royalty fees and amounts owed to the national marketing fund plus accrued
interest thereon and the franchisees counterclaim was rejected. In June 1998,
the Company collected approximately $58,000 from the franchisee for 100% of
unpaid royalties owed plus accrued interest thereon and for a portion of the
Company's legal expenses.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In August 1998, the Company had received notice from Nasdaq that the Company's
stock price was not in compliance with the new minimum bid price requirement.
On July 1, 1998, the Company hired Mr. Joseph M. Merkin as its Chief Financial
Officer and Treasurer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
EXHIBITS
The following exhibits are filed herewith.
Exhibit No. Description of Exhibit
- ----------- -------------------------------------------------------------
[i] 2.1 Asset Purchase Agreement dated February 2, 1996
between the Company, Brewster's Coffee Company, Inc.
and Peter D. Grumhaus
[ii] 2.2a Asset Purchase Agreement by and among BAB Systems,
Inc., Bagels Unlimited, Inc.("BUI"), and Donald Nelson
and Mary Ann Varichak dated May 1, 1996
[ii] 2.2b Non-Competition Agreement by and among the Company and
Donald Nelson and Mary Ann Varichak dated May 1, 1996
[ii] 2.2c Stock Option Agreement between the Company and BUI
dated May 1, 1996
[ii] 2.2d Registration Rights Agreement between the Company
and BUI dated May 1, 1996
[iii] 2.3a Asset Purchase Agreement by and between the Company
and Strathmore Bagels Franchise
Corp. ("Strathmore") dated May 21, 1996
[iii] 2.3b Stock Option Agreement dated May 21, 1996 between
the Company and Strathmore
[iii] 2.3c Registration Rights Agreement dated May 21, 1996
between the Company and Strathmore
[iii] 2.3d Non-Competition Agreement dated May 21, 1996 among
the Company, Strathmore, Jack Freedman and Glen Steuerman
[iii] 2.3e Memorandum of Understanding Regarding Form of
License Agreement effective November 30, 1995,
between Strathmore and Host International, Inc.
[iii] 2.3f Consent to Assignment between Strathmore and Host
International, Inc., dated March 13, 1996,
as amended May 21, 1996
[iv] 2.4a Acquisition Agreement dated May 1, 1997 by and among
BAB Holdings, Inc., BAB Acquisition Corp., My
Favorite Muffin Too, Inc., Muffin Holdings of
Pennsylvania, a limited partnership, Ruth Stern,
Owen Stern, and Ilona Stern
[iv] 2.4b Registration Rights Agreement dated as of May 1,
1997 between BAB Holdings, Inc., and
Owen Stern, Ruth Stern, Ilona Stern and Pierce W.
Hance.
[v] 3.1a Amended Articles of Incorporation of the Company
[vii] 3.1b Amended and Restated Statement of Designation,
Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock as filed with
the Secretary of State of Illinois on March 26, 1997
[v] 3.2 Bylaws of the Company, as amended
[v] 4.1 Form of Stock Certificate evidencing Common Stock,
no par value
[v] 4.2 Subscription Agreement with the Aladdin
International, Inc. dated August 31, 1995
[v] 4.3 Amended Form of Warrant Issued to Aladdin
International, Inc.
[v] 10.1 Form of Franchise Agreement
[v] 10.2 Form of Franchise Agreement-Satellite
[v] 10.3 Form of Franchise Agreement-Wholesale
[v] 10.4 Form of Area Development Agreement
[v] 10.5 Confidentiality and Non-Competition Agreement with
Franchisees
[v] 10.6 Form of Confidentiality Agreement with Employees
[v] 10.7 Licensing Agreement dated November 20, 1992 between
the Company and Big Apple Bagels, Inc.
[v] 10.8 Assignment of Royalty Mark & Trademark to the
Company by Big Apple Bagels, Inc. dated November 20, 1992
[v] 10.9 Agreement dated September 14, 1995 among the
Company, Big Apple Bagels, Inc. and Paul C. Stolzer
[i] 10.10 Consulting agreement dated February 16, 1996 between
Paul C. Stolzer and BAB Holdings, Inc.
[v] 10.11 Leases dated November 2, 1994 and February 14, 1995
for principal executive office
[v] 10.12 1995 Long-Term Incentive and Stock Option Plan
[v] 10.13 1995 Outside Directors Stock Option Plan
[v] 10.14 Settlement Agreement with Timothy Williams d/b/a Big
Apple Deli and Stipulated Dismissal with Prejudice
[i] 10.15 Program Agreement dated February 10, 1997 between
BAB Systems, Inc. a wholly owned subsidiary of
the Company, and Franchise Mortgage Acceptance
Company LLC
[iv] 10.16 Employment agreement between the Company and Owen
Stern dated May 8, 1997
___________________________________________
[i] Incorporated by reference to the Company's Report on Form 10-KSB for
the fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-K dated
May 1, 1996
[iii] Incorporated by reference to the Company's Report on Form 8-K
dated May 21, 1996
[iv] Incorporated by reference to the Company's Report on Form 8-K dated
May 13, 1997
[v] Incorporated by reference to the Company's Registration Statement on
Form SB-2, effective November 27, 1995 (Commission File No. 33-98060C)
[vi] Incorporated by reference to the Company's Report on Form 10-KSB for
the fiscal year ended November 30, 1996
[vii] Incorporated by reference to the Company's Report on Form 10-QSB
for the quarter ended February 28, 1997
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BAB HOLDINGS, INC.
Dated:October 13, 1998 By: /s/ JOSEPH M. MERKIN
--------------------
Joseph M. Merkin
Chief Financial Officer
(Principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE
NINE MONTH PERIOD ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 319,202
<SECURITIES> 0
<RECEIVABLES> 1,601,559
<ALLOWANCES> (230,500)
<INVENTORY> 0
<CURRENT-ASSETS> 1,999,921
<PP&E> 5,908,209
<DEPRECIATION> (1,521,379)
<TOTAL-ASSETS> 14,043,253
<CURRENT-LIABILITIES> 5,235,833
<BONDS> 20,335
0
1,518,811
<COMMON> 11,430,453
<OTHER-SE> (5,431,252)
<TOTAL-LIABILITY-AND-EQUITY> 14,043,253
<SALES> 6,975,673
<TOTAL-REVENUES> 10,996,414
<CGS> 2,308,578
<TOTAL-COSTS> 10,776,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,991
<INCOME-PRETAX> 153,160
<INCOME-TAX> 0
<INCOME-CONTINUING> 153,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,160
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
