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, 1999
[ ] 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: 8,514,306 shares of Common
Stock, as of October 12, 1999.
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, 1999
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $ 89,028 $ 259,229
Accounts receivable, net of allowance for
doubtful accounts of $294,884 1,468,262
Other current assets 1,794,644
------------
Total current assets 3,522,135
Property and equipment, net of
accumulated depreciation of $2,280,506 4,404,376
Notes receivable 958,594
Goodwill, net of accumulated amortization of $259,589 3,459,510
Franchise contract rights, net of accumulated
amortization of $241,767 1,842,198
Other assets and intangible assets, net of
accumulated amortization of $411,112 1,360,124
------------
$ 15,546,937
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,766,469
Deferred franchise fee revenue 325,000
Current portion of long-term debt 2,120,639
Other current liabilities 717,940
------------
Total current liabilities 4,930,048
Noncurrent liabilities:
Long-term debt, net of portion included
in current liabilities 1,212,947
Other 260,897
-----------
Total noncurrent liabilities 1,473,844
-----------
Stockholders' equity:
Common stock 11,570,452
Additional paid-in capital 1,452,402
Preferred stock 1,655,745
Treasury stock (43,964)
Accumulated deficit (5,491,590)
------------
Total stockholders' equity 9,143,045
------------
$ 15,546,937
============
</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,
1999 1998
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 2,856,754 $ 2,157,833
Royalty fees from franchised stores 743,319 829,507
Franchise and area development fees 202,500 245,000
Licensing fees and other income 324,667 238,789
-------------------------
4,127,240 3,471,129
OPERATING COSTS AND EXPENSES
Food, beverage and paper costs 847,185 703,876
Store payroll and other operating expenses 1,857,329 1,203,534
Selling, general and administrative expenses 1,560,031 1,453,173
--------------------------
4,264,545 3,360,583
--------------------------
(Loss) income before interest (137,305) 110,546
Interest expense ( 78,622) ( 46,221)
Interest income 37,174 26,152
--------------------------
Net (loss) income (178,753) 90,477
Preferred stock dividends accumulated (29,918) ( 30,247)
--------------------------
Net (loss) income attributable to
common shareholders $ (208,671) $ 60,230
==========================
(Loss) earnings per common share -
basic and diluted $ (0.02) $ 0.01
==========================
Average number of shares outstanding 8,514,306 8,380,476
=========================
Average number of shares outstanding-
diluted 8,514,306 8,385,006
==========================
</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,
1999 1998
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 7,687,778 $ 6,975,673
Royalty fees from franchised stores 2,328,698 2,378,747
Franchise and area development fees 412,000 847,500
Licensing fees and other income 833,941 794,494
--------------------------
11,262,417 10,996,414
OPERATING COSTS AND EXPENSES
Food, beverage and paper costs 2,352,740 2,308,578
Store payroll and other operating expenses 4,840,833 4,032,001
Selling, general and administrative expenses 4,410,640 4,435,731
--------------------------
11,604,213 10,776,310
--------------------------
(Loss) income before interest (341,796) 220,104
Interest expense (210,154) (149,935)
Interest income 134,941 82,991
--------------------------
Net (loss) income (417,009) 153,160
Preferred stock dividends accumulated (107,014) (117,946)
--------------------------
Net (loss) income attributable to
common shareholders $ (524,023) $ 35,214
==========================
Loss per common share -
basic and diluted $ (0.06) $ -
==========================
Average number of shares outstanding-
basic and diluted 8,465,377 8,009,925
==========================
</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,
1999 1998
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used for operating activities $ ( 77,956) $ (287,328)
INVESTING ACTIVITIES
Purchases of property and equipment (116,748) (163,153)
Note repayments 28,350 129,457
Other ( 12,946) ( 37,447)
------------------------
Net cash used for investing activities (101,344) ( 71,143)
FINANCING ACTIVITIES
Borrowings 125,000 337,500
Repayment of long-term debt (378,736) ( 29,728)
Other ( 7,897) (19,995)
-----------------------
Net cash (used for) provided by
financing activities (261,633) 287,777
----------------------
Net decrease in cash and cash equivalents (440,933) ( 70,694)
Cash and cash equivalents at beginning of period 700,162 389,896
-----------------------
Cash and cash equivalents at end of period $ 259,229 $ 319,202
=======================
</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 statements 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
Stores which have been opened at August 31, 1999 are as follows:
Stores opened:
Company-owned 25
Franchisee-owned 181
Licensed 68
---
Total 274
===
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.
On February 1, 1999 the Company acquired certain assets of a group of related
entities doing business as Jacobs Bros. Bagels (Jacobs Bros.), which include
eight retail bagel stores and a central commissary facility, in exchange for
$950,000 in cash and warrants for the purchase of an aggregate of 500,000
shares of common stock at an exercise price of $1.25 per share as to 275,000
shares and $1.50 per share as to 225,000 shares. These warrants are first
exercisable on February 1, 2000 and expire on January 31, 2006. On February
26, 1999 the Company issued a total of 160,000 shares of common stock to the
investment bankers who provided services in connection with this acquisition.
Further, the Company obtained noncompetition agreements with two former
principals of Jacobs Bros in consideration of $210,000 to be paid over varying
periods.
In June 1999, the Company acquired two stores located in the Milwaukee,
Wisconsin market from a franchisee in exchange for forgiveness of a $251,000
note receivable and assumption of a $170,000 note payable.
In July 1999 the company sold two stores in the Milwaukee, Wisconsin market
to a franchisee for a $217,000 note receivable bearing interest payable
monthly at a rate of 9.5% per annum. This note was paid in full on
September 30, 1999.
4. Preferred Stock - Series A Convertible Preferred Stock
In April 1997, the Company completed the sale of 87,710 shares of $25.00
Series A Convertible Preferred Stock (the "Preferred Stock") in a private
placement to institutional investors. The Preferred Stock carries an 8% annual
dividend payable in cash or, at the option of the Company, in shares of common
stock. However, during a Conversion Suspension Period (defined below),
dividends 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.
From August 1, 1997 through July 31, 1999, plus the number of days in all
Conversion Suspension Periods, the shareholders may elect to convert each
share of Preferred Stock into that number of shares of common stock
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 Conversion
Suspension Period during January 1999. Preferred dividends accumulated
during the three months and nine months ended August 31, 1999 and 1998 were
$29,918, $107,014, $30,247 and $117,946 respectively.
During fiscal 1998, holders elected to convert 18,710 shares of Preferred
Stock plus dividends accrued thereon into 673,376 shares of common stock. No
shares of Preferred Stock were converted during the nine months ended
August 31, 1999 and 60,000 shares of the Preferred Stock remain outstanding.
5. Line of Credit Agreement
In December 1998, the Company repaid $127,465 on a line of credit facility
which expired on December 31, 1998 and replaced it with a $1.75 million line-
of-credit facility which expires December 31, 1999 (the Line). Maximum
borrowing under the Line is limited to 75% of accounts receivable
under 90 days and 40% of the original cost of equipment, furniture and
fixtures. Interest is payable monthly at prime plus 1% (9.25% as of August
31, 1999), with principal due upon maturity on December 31, 1999. At August
31, 1999, the Company had borrowed $1,750,000 on the Line, all of
which is classified as a current liability. The Company is currently
negotiating with its lender to renew the line of credit facility.
The Line 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.
6. Notes Payable
In January 1999, the Company received a commitment from a finance
company for secured loans totaling $1,350,000 to acquire the Jacobs
Bros. assets and refurbish and convert the units acquired to Big Apple
Bagels concept stores. As of August 31, 1999, the Company has borrowed
$1,335,680 pursuant to this commitment. Principal and interest are payable
monthly over a period of seven years and are secured by the assets acquired
and all improvements made thereon. The loans bear interest at an annual
percentage rate of 11.3 percent.
In June 1999, the Company assumed a $170,000 note in connection with
acquiring two stores from a franchisee in Wisconsin. Principal and interest
are payable monthly until October 2006 when the remaining unpaid balance is
due in full. The loans bear interest at an annual percentage rate of 10%.
7. (Loss) Earnings per Share
The following tables set forth the computation of basic and diluted (loss)
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
1999 1998
---------- --------
<S> <C> <C>
Numerator:
Net (loss) income $(178,753) $ 90,477
Preferred stock dividend accumulated (29,918) (30,247)
---------- ----------
Numerator for basic (loss) earnings per
share- (loss) income attributable to
common shareholders $ (208,671) $ 60,230
Effect of dilutive securities:
Preferred stock dividend accumulated - 60
---------- ----------
Numerator for diluted (loss) earnings
per share - (loss) income
attributable to common shareholders $ (208,671) $ 60,290
=========== ==========
Denominator:
Denominator for basic (loss) earnings
per share--weighted average shares 8,514,306 8,380,476
Effect of dilutive securities:
Convertible preferred stock - 4,530
--------- ---------
Denominator for diluted (loss)earnings
per share -weighted average shares 8,514,306 8,385,006
========== ==========
Basic and diluted
(loss) earnings per share $ (0.02) $ 0.01
========== ==========
NINE MONTHS ENDED
AUGUST 31,
1999 1998
---------- ---------
<S> <C> <C>
Numerator:
Net (loss) income $(417,009) $ 153,160
Preferred stock dividend accumulated (107,014) (117,946)
---------- -----------
Numerator for basic and diluted (loss)
Earnings per share- (loss) earnings
attributable to common shareholders $ (524,023) $ 35,214
========== ==========
Denominator:
Denominator for basic and diluted loss
per share--weighted average shares 8,465,377 8,009,925
========= =========
Basic and diluted loss per share $ (0.06) $ -
=========== =========
</TABLE>
Options to purchase 530,740 shares of common stock at varying prices are
outstanding at August 31, 1999 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, 1999 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, the Company has issued options to purchase 500,000 shares of
common stock issuable at varying exercise prices ranging from $1.25 per share
to $1.50 per share. Options to purchase 554,500 shares of common stock at an
exercise price of $6.17 expired unexercised during the nine months ended
August 31, 1999. Further, a warrant issued to the placement agent of the
Preferred Stock to purchase 13,315 shares of common stock at $3.29 per share
was outstanding. Warrants issued to each holder of Preferred Stock to
purchase 175,320 shares of common stock at $2.35 per share expired
unexercised on July 31, 1999. Finally, shares of common stock are issuable
pursuant to the terms of the Company's convertible Preferred Stock (see
Note 4).
The exercise of outstanding options and warrants and the conversion of
convertible securities outstanding during the three months and nine months
ended August 31, 1999 and the nine months ended August 31,1998 is not
assumed as the result is antidilutive to the reported loss per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the development of the Company's business, the markets for the Company's
products, anticipated capital expenditures, and the effects of completed and
proposed acquisitions, and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Certain risks and uncertainties are outside the control of the Company and its
Management, including: its ability to attract new franchisees; the continued
success of current franchisees; the effects of competition on franchisee and
Company-owned store results; 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 of this report. 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 25 Company-
owned stores and 249 franchised and licensed units as of August 31, 1999.
Systemwide revenues for the nine months ended August 31, 1999 were $59.6
million, a $2.0 million increase from the year-ago period. The Company is
focused on opening new or converting existing units to tri-branded stores
featuring products using the Big Apple Bagels, My Favorite Muffin and
Brewster's coffee trade names.
The Company continues to derive a substantial portion of its revenue from
sales generated at its Company-owned stores. Company-owned store sales
accounted for 69% of total revenues during the current year quarter. The
eight units acquired in February 1999 which were formerly owned by
Jacobs Bros. are anticipated to contribute approximately $3.5 million in
additional revenues in fiscal 1999. Ongoing royalty revenues and franchise
fees recognized upon the opening of a franchised unit also represent a
significant source of revenue to the Company, totaling 18% of total revenues
in the current year quarter. Management anticipates that the current
infrastructure is adequate to support the growth in the number of franchised
units which are anticipated to open during fiscal 1999. During fiscal 1999,
four franchised units opened in Lima, Peru under an international master
franchise agreement and are now contributing to ongoing franchise fees.
Finally, licensing fees continue to be a source of increasing revenues to
the Company as it continually seeks to develop additional methods of
distribution for its brands. Management anticipates that the commissary
which was recently acquired in the 1999 Jacobs Bros. acquisition will
provide opportunities for increased profitability on product sold via
non-traditional sources of distribution.
Through the Internet Web site and other means of advertising, domestic and
international franchise lead generation remains very high. International
franchise leads are increasing as well with the opening of four stores in
Lima, Peru. The Company anticipates store openings in at least one additional
country in fiscal 1999.
In November 1998, the Company launched its Web site to take advantage of the
growth in Internet usage and transactional commerce on the World Wide Web.
The site was enhanced during the nine months of 1999. Through the Web site,
customers can order My Favorite Muffin gift baskets; select offerings of
Brewster's Coffee and branded merchandise; access investor, franchise and
financial information; search for store locations and send comments directly
to the corporate offices.
The Company's full service commissary, acquired in the February 1999 Jacobs
Bros. acquisition assists in support of the growing business generated by the
Web site. Currently the Company is in the process of promoting the Web
site to enhance its E-commerce growth.
During the first quarter of 1999 the Company began test marketing a new line
of artisan breads and a complete line of sandwiches, soups and salads. This
test has been expanded from 3 locations to 6 additional Company-owned units
and is being tested in 10 franchise units.
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. 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
terminated its obligations under all the non-cancelable lease obligations in
February 1999 and has paid all lease obligations in full.
Results of Operations
Three Months Ended August 31, 1999 versus Three Months Ended August 31, 1998.
Total revenues increased 18.9% to $4,127,000 in the third quarter 1999 from
$3,471,000 in the prior year quarter. The increase is primarily attributed
to the acquisition of the Jacobs Bros. stores and includes revenue associated
with two stores that were sold and one store that was closed in the third
quarter of 1999. The number of Company-owned stores was 25 at the end of the
third quarter of 1999 compared to 24 at the end of the third quarter of 1998.
Franchise and area development fee revenue was 17.3% below the year-ago
period, primarily because of the timing of store openings. One international
master franchise agreement was signed in both the current period and year ago
period.
Food, beverage and paper costs as a percentage of sales generated by Company-
owned stores improved by 2.9 percentage points to 29.7% from 32.6% in the
third quarter 1999 versus 1998. This is primarily the result of the
commissary operations acquired as part of the Jacobs Bros. acquisition.
Store payroll and other operating expenses increased due to greater overall
sales volume. The Company is greatly concerned with costs associated with
store payroll and has implemented a number of initiatives to control payroll
and related expenses.
Selling, general and administrative (S,G&A) expenses totaled $1,560,000
during the current year period, an increase of $107,000 from the year-ago
quarter. Payroll-related expenses totaled $701,000 compared to $557,000 in
the prior period, an increase of 25.8%. The increase is primarily attributed
to employees hired in connection with the Jacobs Bros. acquisition. As a
percentage of revenue, S,G&A expenses were at 37.7% in the third quarter of
1999 versus 41.9% during the 1998 third quarter, an improvement of 4.2
percentage points.
Loss from operations was $137,000 in the third quarter of fiscal 1999 versus
income from operations of $110,000 generated in the year-ago quarter.
Interest expense increased by $33,000 to $79,000 in the three months ended
August 31, 1999 related to the Company's additional obligations arising
through the Jacobs Bros. acquisition.
Net loss attributable to common shareholders was $209,000 in the quarter ended
August 31, 1999 versus net income of $60,000 in the year-ago quarter.
Preferred dividends on the Preferred Stock of $30,000 were accumulated during
the third quarter of 1999 and 1998.
Net loss per share for the quarter ended August 31, 1999 was ($0.02) per share
on both a basic and diluted basis. The Company's income per share for the
year-ago quarter was $0.01 per share on both a basic and diluted basis.
Nine Months Ended August 31, 1999 versus Nine Months Ended August 31, 1998
Total revenues increased 2.4% to $11,262,000 in the 1999 period from
$10,996,000 in the prior year period. Although the level of franchising
activity during the first nine months of 1999 as compared to 1998 was off
$436,000, the Jacobs Bros. acquisition provided revenue of $2.5 million,
offsetting the revenue of the 10 stores that were open for varying periods
of time during the nine months of 1998. During the nine months ended August
31, 1999, the Company had a net increase of one in the number of Company-owned
stores open and ended the period with 25 units in operation. During the year-
ago period, the Company had a net decrease of 10 in the number of Company-
owned stores and ended the quarter with 24 units in operation. Royalty
revenue and licensing fees and other income were approximately equal between
the current and year ago period. Franchise and area development fee revenue
was significantly below the year-ago period, primarily because of the timing
of store openings and the 1998 sales of three international master franchise
agreements compared to one in the current year period. The Company
anticipates additional store openings and sales of international development
agreements during the last three months of fiscal 1999.
Food, beverage and paper costs associated with Company-owned store operations
were 30.6% as a percentage of sales in the nine months ended August 31, 1999,
compared to 33.1% in the prior year period. This is primarily the result of
the commissary operations acquired as part of the Jacobs Bros. acquisition.
Leveraging the costs in the commissary represents a significant opportunity
for improved profitability. Store payroll and other operating expenses
increased because of costs associated with the integration and conversion of
the Jacobs Bros. stores to tri-branded concepts and additional labor
associated with the testing of the Company's line of signature bread. As
noted above, the Company is greatly concerned with costs associated with
store payroll and has implemented a number of initiatives to control store
payroll and related expenses.
Selling, general and administrative expenses decreased by $25,000 to
$4,411,000. Corporate head count has risen slightly to 41 from 36 at the end
of August 31, 1998. The increase is attributed to employees hired in
connection with the Jacobs Bros. acquisition. Consequently, there is a slight
increase in payroll expense. Despite the increase in payroll expense, overall
S,G&A expenses were lower in the 1999 period than in the 1998 period. As a
percentage of revenue, S,G&A expenses fell to 39,2% in the 1999 period
compared to 40.3% in the 1998 period.
Loss from operations was $342,000 in the fiscal 1999 period versus income of
$220,000 in the fiscal 1998 period. Interest expense increased by $60,000 to
$210,000 in the nine months ended August 31, 1999 related to the Company's
additional borrowings for the Jacobs Bros. acquisition. Net loss attributable
to common shareholders totaled $524,000 in the nine months ended August 31,
1999 versus net income of $35,000 in the year-ago period. Preferred dividends
on the Preferred Stock of $107,000 were accumulated during the nine months
ended August 31, 1999. In the year ago period, $118,000 of preferred
dividends accumulated. Net loss per share for the nine months ended August
31, 1999 was $0.06 per share on both a basic and diluted basis. The
Company's income per share for the year-ago period was less than $0.01 per
share on both a basic and diluted basis.
Liquidity and Capital Resources
The net cash used for operating activities totaled $78,000 during the nine
months ended August 31, 1999. Cash used represents principally the net
loss, adjusted for depreciation and amortization of $953,000, offset by an
increase in accounts receivable of $343,000 and a decrease in accounts
payable and accrued expenses of $214,000. The net cash used in operating
activities in the year-ago period totaled $287,000.
Investing activities used $101,000 during the nine months ended August 31,
1999, and consisted primarily of the purchase of property and equipment used
to refurbish and convert units acquired in the Jacobs Bros. acquisition. The
net cash provided in the prior year period totaled $71,000.
Net cash used in financing activities during the current period totaled
$262,000 and represents, in part, payments made on the credit facility
which expired on December 31, 1998. The Company paid $127,000 to reduce the
amount borrowed to $1,750,000, the maximum borrowing on a new line of credit
facility which is due on December 31, 1999. The outstanding balance of
$1,750,000 at August 31, 1999 is classified as a current liability. Management
is currently in the process of seeking long-term financing to replace this
credit facility.
In January 1999, the Company obtained loan commitments totaling $1,350,000
from a finance company whereby the Company could borrow $950,000 to purchase
certain assets of Jacobs Bros. and up to $400,000 to purchase equipment and
fund remodeling for the units acquired in the purchase. By August 31, 1999,
the Company had borrowed $1,336,000 pursuant to these commitments and had
repaid $111,000 in principal.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs written to
identify the applicable year with two digits rather than four. As
written, these programs may identify the year "00" as 1900 rather than
2000, which could result in system miscalculations or systems failure
leading to potentially substantial business disruptions.
The Year 2000 problem could affect computers, software and other equipment
used, operated or maintained by the Company. Accordingly, the Company has
implemented a Year 2000 plan which consists of identifying all of its
internal computer programs, systems and hardware and contacting its vendors
to obtain assurance that each product is Year 2000-compliant. During this
process, one exception was identified in the Company's point of sale hardware
and software for certain restaurant units. The Company expects to incur
capital costs totaling approximately $10,000 to purchase Year 2000-compliant
hardware and software for those units. The Company presently believes that
all of its information technology systems will be Year 2000 compliant in a
timely manner. Costs related to the Year 2000, other than the cost related
to the point of sale system, are not expected to be material.
In addition, the Company is currently in the process of identifying all
significant third party vendors, including the Company's landlords,
equipment vendors, service providers, banks and utility companies and
assessing the impact on the Company if those vendors are not Year 2000-
compliant. To date, the Company is not aware of any third party vendors
whose malfunctions would materially disrupt the Company's business.
However, third party compliance efforts are outside the Company's
control. If the Company determines that a significant vendor is not likely
to be Year 2000 compliant, the Company intends to develop contingency plans
which include obtaining alternative sources for any product or service
material to the business. There can be no assurance that all of the
Company's material third party vendors will be Year 2000 compliant or that
the Company will successfully develop and implement satisfactory contingency
plans on a timely basis. The occurrence of any such event could materially
impact the financial condition or results of operations of the Company.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
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
A delisting hearing was held before the NASDAQ hearing panel on September
30, 1999. On October 12, 1999, the hearing panel determined to continue
the listing of the Company's securities on the NASDAQ SmallCap Market
pursuant to the following exception. On or before December 10, 1999, the
Company must evidence a closing bid price of at least $1.00 per share;
immediately thereafter, the Company must evidence a closing bid price of
at least $1.00 for a minimum of ten consecutive trading days. In order to
fully comply with the terms of this exception, the Company must be able to
demonstrate compliance with all requirements for continued listing on the
NASDAQ SmallCap Market, including the minimum roundlot shareholder
requirement. In the event the Company fails to comply with the terms of
this exception, the Company's securities will be delisted from the NASDAQ
Stock Market.
All companies operating under exceptions are required to issue a press
release announcing the conditional listing on the NASDAQ SmallCap Market
and are identified by a fifth character "C" appended to the Company's
trading symbol. Accordingly, effective October 14, 1999, the trading
symbol of the Company's securities will be changed from BAGL to BAGLC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1999.
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
[viii] 10.17 Loan document-CIB line of credit dated 12/31/98.
[viii] 10.18 Loan document-FMAC dated 02/01/99.
27.1 Financial data schedule
[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
[viii] Incorporated by reference to the Company's Report on Form 10-QSB
for the quarter ended February 28, 1999
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 14, 1999 By: /s/ MARK E. MAJEWSKI
--------------------
Mark E. Majewski
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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 259,229
<SECURITIES> 0
<RECEIVABLES> 1,763,146
<ALLOWANCES> (294,884)
<INVENTORY> 354,943
<CURRENT-ASSETS> 3,522,135
<PP&E> 6,684,882
<DEPRECIATION> (2,280,506)
<TOTAL-ASSETS> 15,546,937
<CURRENT-LIABILITIES> 4,930,048
<BONDS> 3,010,492
0
1,655,745
<COMMON> 11,570,452
<OTHER-SE> (4,083,152)
<TOTAL-LIABILITY-AND-EQUITY> 15,546,937
<SALES> 7,687,778
<TOTAL-REVENUES> 11,262,417
<CGS> 2,352,740
<TOTAL-COSTS> 11,604,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210,154
<INCOME-PRETAX> (524,023)
<INCOME-TAX> 0
<INCOME-CONTINUING> (524,023)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (524,023)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
