Securities and Exchange Commission
450 5th Street N. W.
Judiciary Plaza
Washington, D.C. 20549
Dear Sirs:
Pursuant to regulations of the Securities and Exchange Commission, we
submit herewith for filing on behalf of BAB Holdings, Inc. (the Company)
the Company's Definitive Proxy Materials under cover of schedule 14A.
The Company's proxy statement includes proposals for amendment of its
1995 Long-Term Incentive and Stock Option Plan and its Outside Directors
Stock Option Plan. Both plans are filed as appendices to Schedule 14A
pursuant to the instructions to item 10 of Rule 14a-101. Also, pursuant
to those Instructions, the Company supplementally advises the Commission
that the Securities which may be issued pursuant to the Incentive Plan
and the Director's Plan will be registered on Form S-8 in calendar 1999.
To date, no shares have been issued under either plan.
Very truly yours,
/s/ Joseph M. Merkin
Joseph M. Merkin, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
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, 1999
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 27, 1999, at the Rosemont
Suites, 5500 N. River Road, Rosemont, Illinois.
In addition to electing five members of the Board of Directors and
ratifying the independent auditors for the year ending November 30, 1999, you
are being asked to approve an increase of 425,000 shares in the number of
shares authorized for issuance under the 1995 Long Term Incentive and Stock
Option Plan, an increase of 75,000 shares in the number of shares authorized
for issuance under the 1995 Outside Directors Stock Option Plan, and an
increase of the number of shares under options issued to outside directors
upon re-election to the Board. These increases are being proposed based upon
an evaluation of the Company's compensation strategies by the Board with
independent expert assistance. Stock option grants constitute an important
incentive for all key employees and management at the Company and are a
significant factor in the Company's ability to attract, retain and motivate
people whose skills and performance are critical to the Company's success.
Accordingly, we hope that these proposals will be adopted at the Annual
Meeting.
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 27, 1999
___________________________
To the Shareholders of BAB Holdings, Inc.:
The Annual Meeting of Shareholders of BAB Holdings, Inc. (the
"Company") will be held on Tuesday, April 27, 1999 at 10:00 a.m., at the
Rosemont Suites, 5500 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 2000.
(2) To act upon a proposal to ratify an amendment to the 1995 Long-
Term Incentive and Stock Option Plan (the "Incentive Plan") which increases
the number of shares of Common Stock reserved for issuance under the Incentive
Plan from 570,000 to 995,000.
(3) To act upon a proposal to ratify an amendment to the 1995 Outside
Directors Stock Option Plan (the "Directors Plan") which increases the
number of shares of Common Stock reserved for issuance under the Plan from
30,000 to 105,000.
(4) To act upon a proposal to ratify an amendment to the Directors
Plan which increases the number of shares underlying options granted to
outside directors upon re-election from 1,000 to 5,000.
(5) To act upon a proposal to ratify the appointment of Blackman
Kallick Bartelstein, LLP as independent auditors of the Company for the fiscal
year ending November 30, 1999.
(6) To transact such other business as may properly come before the
meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on March 19, 1999
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 Order of the Board of Directors
/s/ MICHAEL K. MURTAUGH
March 25, 1999 Michael K. Murtaugh
Vice President and General Counsel
TABLE OF CONTENTS
GENERAL INFORMATION...............................................1
RECORD DATE AND VOTING............................................2
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT................3
PROPOSAL 1 - ELECTION OF DIRECTORS................................4
MANAGEMENT........................................................5
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE...........8
CERTAIN TRANSACTIONS..............................................8
PROPOSAL 2- AMENDMENT OF 1995 LONG-TERM INCENTIVE AND STOCK
OPTION PLAN..................................................9
PROPOSALS 3 & 4- AMENDMENT OF 1995 OUTSIDE DIRECTORS STOCK
OPTION PLAN.................................................10
PROPOSAL 5 - RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS........................................12
PROPOSALS FOR FISCAL 1999 ANNUAL MEETING.........................12
AVAILABLE INFORMATION............................................12
APPENDIX A.......................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................13
CONSOLIDATED FINANCIAL STATEMENTS...........................F-1
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 27, 1999
_________________________
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 27, 1999, to
be held at the Rosemont Suites, 5500 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 ratification of the
amendments to the 1995 Long-Term Incentive and Stock Option Plan (the
"Incentive Plan") and the 1995 Outside Directors Stock Option Plan (the
"Directors Plan"); (c) for the appointment of Blackman Kallick Bartelstein,
LLP as independent auditors of the Company; and (d) 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, 1999.
A copy of the Company's Summary Annual Report for the fiscal year ended
November 30, 1998, 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, 1998 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, 1999 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 8,521,706
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
is 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 not 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, FOR ratification of the amendments to the Incentive
Plan and the Directors Plan, and FOR ratification of the appointment of
Blackman Kallick Bartelstein, LLP as independent auditors. It is intended
that proxies solicited by the Board of Directors will be voted FOR each
nominee and FOR each such other proposals unless otherwise directed by the
shareholder submitting the proxy.
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 19, 1999 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 (see "MANAGEMENT - Executive
Compensation") 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,
1999 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 1,628,759 (1) 16.1
Europlan House, 19 Havelock
Douglas, Isle of Man
Aladdin International, Inc. 1,015,481 11.9
3806 Abbott Ave. South
Minneapolis, MN 55410
Michael W. Evans 788,542 (2) 9.1
8501 West Higgins Road
Chicago, Illinois 60631
Paul C. Stolzer 541,525 6.4
4112 Emporia Court
Naperville, IL 60564
Michael K. Murtaugh 543,389 (3) 6.3
8501 West Higgins Road
Chicago, IL 60631
Perkins Capital Management, Inc. 423,450 5.0
730 East Lake Street
Wayzata, MN 55391
David L. Epstein 104,500 (4) 1.2
9700 Higgins Road, Suite 630
Rosemont, IL 60018
Tom J. Fletcher 52,350 (5) *
8501 West Higgins Road
Chicago, IL 60631
Robert B. Nagel 8,000 (6) *
516 Elder Drive
Winnetka, IL 60093
Cynthia A. Vahlkamp 5,000 (7) *
1615 South Congress Avenue, Suite 200
Delray Beach, FL 33445
All executive officers and
directors as a group (7 persons) 1,501,781 (2)(3)(4)(5)(6)(7) 17.1
</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 115,000 shares that may be acquired pursuant to a currently
exercisable option.
(3) Includes 85,000 shares that my be acquired pursuant to a currently
exercisable option and 3,814 shares held by 401(k) trust.
(4) Includes 6,500 shares that may be acquired pursuant to currently
exercisable options, 93,000 shares held indirectly by entities under Mr.
Epstein's control, and 5,000 shares representing his proportionate
ownership in an entity which he does not control.
(5) Includes 50,000 shares that may be acquired pursuant to a currently
exercisable option.
(6) Includes 3,000 shares that may be acquired pursuant to currently
exercisable options.
(7) Includes 5,000 shares that may be acquired pursuant to currently
exercisable options.
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 is a principal of the J. H. Chapman Group, L.L.C., an
international investment banking firm specializing in the food industry since
September 1983. Prior to joining J. H. Chapman Group, L.L.C., Mr. Epstein was
vice president and regional executive of Chase Commercial Corporation, an
affiliate of Chase Manhattan Bank, N. A., and assistant vice president of the
First National Bank of Chicago. He is a frequent speaker at business and
professional meetings and conferences and has published extensive articles on
financial topics for many food service publications.
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, business strategy,
and shareholder value improvement. He is also a partner in the firm of CEO
Partners, Inc., which provides similar consulting services to food service
companies. 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. Prior to 1991, he served as
Vice President, Management and Organization Development for Kraft General
Foods, Inc. and earlier was General Manager of Kraft's eastern food service
businesses.
Cynthia A. Vahlkamp was first elected as a director in April 1996, is a
marketing executive with over seventeen years' experience in consumer markets
including packaged goods, consumer durables and consumer services. Her
experience includes thirteen years of food industry experience, both domestic
and international, with the Quaker Oats Company (1986-1995) and with General
Foods Corporation (1982-1986). Most recently, Ms Vahlkamp served as Vice
President and General Manager with Sunbeam Corporation. (1996-1998). Prior to
that position, she was Senior Vice President of Marketing for CompuServe
Incorporated (1996) and General Manager of Pritkin Systems, Inc., a subsidiary
of the the Quaker Oats Company (1993-1995). Ms Vahlkamp is an award-winning
executive with significant experience in business revitalization, brand
building, and product development. She is currently a consultant to major
consumer product and service companies.
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 42 President, Chief Executive
Officer and Director
Michael K. Murtaugh 54 Vice President, General
Counsel and Director
Tom J. Fletcher 40 Chief Operating Officer
Joseph M. Merkin 47 Chief Financial Officer and
Treasurer
David L. Epstein 51 Director
Cynthia A. Vahlkamp 44 Director
Robert B. Nagel 61 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. Mr. Evans has over 12 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. He
is responsible for all operations of the Company and reports to Mr. Evans. A
twenty-five year veteran of the franchise industry, Mr. Fletcher joined the
Company following his most recent position as Director of Retail Brands for
Allied Domecq Retailing USA, Co., the parent company of Baskin-Robbins and
Dunkin Donuts, where he was instrumental in the integration of the two
organizations into a cohesive team. He brought to the organization a proven
track record in the areas of operations, development, training, personnel
management, budgeting and financial planning; all of which he employs at the
Company.
Joseph M. Merkin joined the Company as its Chief Financial Officer and
Treasurer in July 1998 and is responsible for all financial reporting and
analysis. Mr. Merkin received his MBA from Xavier University in Cincinnati,
Ohio. He is a licensed Certified Public Accountant and a member of the
American Institute of Certified Public Accountants and the Illinois, Ohio,
Indiana and Kentucky Societies of CPAs. From 1976 to 1986, he was with
various local public accounting firms. From 1986 to 1996, he was the
Controller of Commonwealth Hotels, Inc. located in Covington, Kentucky. From
1996, until joining the Company, he was the Chief Financial Officer of the
Union League Club of Chicago 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: David L. Epstein,
Robert B. Nagel, and Cynthia A. Vahlkamp, all 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 6 times during the 1998 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"). During the
fiscal year ended November 30, 1998, Annual Options were granted to David
Epstein, Robert Nagel and Cynthia Vahlkamp upon re-election to the Board at
the annual meeting of shareholders in April 1998 at an exercise price of $1.00
per share. See "PROPOSALS 3 AND 4 - AMENDMENT OF THE 1995 OUTSIDE DIRECTORS
STOCK OPTION PLAN" for a description of the Directors Plan, the proposed
increase in the number of shares authorized under the Directors Plan, and the
proposed increase in the number of shares associated with each Annual Option.
Executive Compensation
The following table sets forth the cash compensation earned by executive
officers who received annual salary and bonus compensation of more than
$100,000 during fiscal years 1998, 1997 and 1996 (the "Named Executive
Officers"). The Company has no employment agreements with any of its
executive officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Fiscal
Year Other Annual
Name and Principal Ended Salary Bonus Compensation
Position 11/30 ($) ($) ($)
=========================================================
<S> <C> <C> <C> <C>
Michael W. Evans, 1998 165,000 15,000 --
President and CEO 1997 165,000 -- --
1996 128,077 -- --
Michael K. Murtaugh 1998 125,000 12,500 --
Vice President and 1997 125,000 -- --
General Counsel 1996 92,917 -- --
Tom J. Fletcher 1998 115,000 10,000 --
Chief Operating 1997 85,827 -- --
Officer 1996 -- -- --
</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 ($) SARS (#) ($) ($)
===========================================================================
<S> <C> <C> <C> <C> <C>
Michael W. Evans, 1998 -- -- -- --
President and CEO 1997 -- -- -- --
1996 -- 115,000 -- --
Michael K. Murtaugh, 1998 -- -- -- --
Vice President and 1997 -- -- -- --
General Counsel 1996 -- 85,000 -- --
Tom J. Fletcher 1998 -- 75,000 -- --
Chief Operating 1997 -- -- -- --
Officer 1996 -- -- -- --
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Name and Pricincipal Options/SARs Employees in Base Price Expiration
Position Granted (#) Fiscal Year ($/Sh) Date
=============================================================================
Tom J. Fletcher, 75,000 50.5% $0.70 April 6,2003
Chief Operating
Officer
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FY-END OPTION/SAR VALUES
Number of Value of
unexercised unexercised in-
options/SAR the-money options
Shares Value at FY-end /SAR at FY-end
Name and Principal Acquired on Received (#)exercisable ($)exercisable
Position Exercise(#) ($) /unexercisable /unexercisable
============================================================================
<S> <C> <C> <C> <C>
Michael W. Evans, -- -- 76,666 / 38,334 --
President and CEO
Michael K. Murtaugh, -- -- 56,666 / 28,334 --
Vice President and
General Counsel
Tom J. Fletcher, -- -- 25,000 / 50,000 $1,250 / $2,500
Chief Operating
Officer
</TABLE>
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.
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, 1998,
except that Robert B. Nagel, a Director, failed to timely file one report
concerning one purchase transaction.
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.
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 years 1998 and 1997, approximately $602,000 and
$438,000, respectively, was advanced to franchisees from FMAC; 1% of this
amount, or approximately $6,020 and $4,380, respectively, was paid to Chapman.
In February 1999, Chapman assisted the Company in negotiating the acquisition
of certain assets of a related group of entities doing business as Jacobs
Bros. Bagels. On February 26, 1999, the Company issued 160,000 shares of
Common Stock to Chapman and affiliated persons in connection with services
provided with the acquisition, including 65,000 shares of Common Stock which
may be deemed to be beneficially owned by David Epstein.
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.
This agreement expired in February, 1999.
PROPOSAL 2
________________
AMENDMENT OF THE
1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
(THE "INCENTIVE PLAN")
Proposed Amendment
The Board of Directors and the shareholders of the Company authorized
and adopted the 1995 Long-Term Incentive and Stock Option Plan (the
"Incentive Plan") in 1995. The Incentive Plan will terminate on September
19, 2005, unless sooner terminated by action of the Board. The Plan, as
adopted, authorized the Company to grant options and other stock-based awards
for an aggregate of 570,000 shares of Common Stock (as adjusted for a 1.5:1
stock split in 1996). The number of shares available under the Incentive Plan
has not been increased since the Incentive Plan was adopted.
The Board of Directors believes that the Company's policy of encouraging
stock ownership by its employees through the granting of restricted stock
awards, stock options and other sorts of stock-based compensation has been and
will be a significant factor in its growth and success by enhancing the
Company's ability to retain, attract and motivate qualified employees. The
Incentive Plan is the primary vehicle for implementation of this policy. The
Board believes that employees with a proprietary interest in the Company have
a strong incentive to put forth their best efforts to insure the Company's
success and, additionally, that stock options are a means of rewarding
individuals without depleting the cash resources of the Company.
As of March 8, 1999, the Company had granted options to purchase 420,740
shares of Common Stock under the Incentive Plan. Therefore, under the terms
of the Incentive Plan, the Company would be able in the future to grant
options to purchase no more than 149,260 additional shares of Common Stock.
As a result, on March 8, 1999, the Board of Directors authorized an increase
in the number of shares of Common Stock that may be granted under the Plan
from 570,000 to 995,000, subject to shareholder approval of such amendment at
the Annual Meeting. The closing price of a share of Common Stock as reported
by the Nasdaq SmallCap Market on March 8, 1999 was $1.00. Based on such price
the aggregate market value of the additional shares which may be issued under
the Incentive Plan pursuant to the proposed amendment was $425,000.
Adoption of Proposal 2 approves the action of the Board of Directors in
amending the Incentive Plan to increase the number of shares of Common Stock
for which options and stock-based awards may be granted under the Incentive
Plan. If not approved, the aggregate number of shares of Common Stock
available under the Incentive Plan will remain 570,000.
Description of Incentive Plan
The following is a summary of the Incentive Plan that is qualified in
its entirety by reference to the actual text of the Incentive Plan, which will
be provided to any shareholder upon request. See "AVAILABLE INFORMATION."
All employees (including officers and directors) of the Company (and any
subsidiaries) and non-employee directors, consultants and independent
contractors providing services to the Company (or any subsidiaries) are
eligible to receive options and awards under the Incentive Plan. The
Incentive Plan is not subject to the Employee Retirement Income Security Act
of 1974.
The Incentive Plan permits the granting of awards to employees and non-
employee officers, directors and agents of the Company in the form of stock
appreciation rights, restricted stock awards and stock options. The Incentive
Plan is currently administered by the Board of Directors and may be
administered by a Committee of the Board of Directors appointed by the Board.
The Incentive Plan gives broad powers to the Board or Committee to administer
and interpret the Incentive Plan, including the authority to select the
individuals to be granted options and rights, and to prescribe the particular
form and conditions of each option or right granted. Incentive stock options,
in order to receive favorable tax treatment under the Code, must be
exercisable at not less than the fair market value of the Common Stock as of
the date of the grant (110% of fair market value if the optionee is a 10% or
greater shareholder) and may be granted only to employees. As of March 8,
1999 the Company has granted 5-year and 10-year stock options (408,240
incentive stock options and 12,500 nonqualified options) to 30 employees, in
share amounts ranging from 500 to 115,000, at exercise prices ranging from
$0.70 to $7.01. In general, options become exercisable in two or more
installments commencing one year after the date of grant.
Certain Tax Matters
Stock options granted under the Incentive Plan may be "incentive stock
options," meeting the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or non-qualified options which do not
meet the requirements of Section 422. The grant of an option is not expected
to result in any taxable income for the recipient. The holder of an incentive
stock option generally will have no taxable income upon exercising the
incentive stock option (except that a liability may arise pursuant to the
alternative minimum tax), and the Company will not be entitled to a tax
deduction. Upon exercising a nonqualified stock option, the optionee must
recognize ordinary income equal to the excess of the fair market value of the
shares of Common Stock acquired on the date of exercise over the exercise
price, and the Company will be entitled at that time to a tax deduction for
the same amount. The tax consequence to an optionee upon a disposition of
shares acquired through the exercise of an option will depend upon how long
the shares have been held and upon whether such shares were acquired by
exercising an incentive stock option or by exercising a nonqualified stock
option. Generally, there will be no tax consequence to the Company in
connection with disposition of shares acquired under an option, except that
the Company may be entitled to a tax deduction in the case of a disposition of
shares acquired under an incentive stock option before the applicable
incentive stock option holding periods set forth in the Code have been
satisfied. In general, the tax consequences to the Company and to recipients
of awards other than an incentive stock option or a nonqualified stock option
(such as an award of restricted stock) will be governed by principles relating
to transfer of property in consideration of services, including Section 83 of
the Code.
PROPOSALS 3 AND 4
_________________
AMENDMENT OF THE 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
(THE "DIRECTORS PLAN")
Proposed Amendments
The Board of Directors and the shareholders of the Company authorized
and adopted the 1995 Outside Directors Stock Option Plan (the "Directors
Plan") in 1995. The Directors Plan will terminate on September 19, 2005,
unless sooner terminated by action of the Board. The Directors Plan, as
adopted, authorizes the automatic grant options to purchase up to an aggregate
of 30,000 shares (as adjusted for a 1.5:1 stock split in 1996) of Common
Stock. The number of shares available under the Directors Plan has not been
increased since it was adopted.
The purpose of the Directors Plan is to aid the Company in attracting
and retaining outside (i.e., non-employee) directors to serve on the Board and
to offer incentives to them to put forth maximum efforts for the success of
the business by affording them an opportunity to acquire a proprietary
interest in the Company.
As of March 8, 1999, options for purchase of an aggregate of 14,500
shares of Common Stock had been issued under the Directors Plan. Therefore,
under the terms of the Directors Plan, options to purchase no more than 15,500
additional shares of Common Stock are available for future issuance. The
Company's management believes that it is desirable to encourage stock
ownership by its outside directors and that the potential profit afforded by
options and stock ownership is a means of attracting qualified individuals
without paying substantial cash directors fees. For the same reasons, and to
encourage qualified outside directors to remain on the Board, the Board feel
that it is desirable to increase the number of shares under options issued to
outside directors upon re-election from 1,000 to 5,000 shares.
On March 8, 1999, the Board of Directors authorized an increase in the
number of shares of Common Stock that may be issued under the Plan from 30,000
to 105,000 and an increase in the number of shares for each Annual Option
(defined below) from 1,000 to 5,000, subject to shareholder approval of such
amendments at the Annual Meeting. The closing price of a share of Common
Stock as reported by the Nasdaq SmallCap Market on March 8, 1999 was $1.00.
Based on such price the aggregate market value of the additional shares which
may be issued under the Directors Plan pursuant to the proposed amendment was
$75,000 (or $4,000 with respect to the additional 4,000 shares for each re-
elected director).
Description of the Directors Plan
The following is a summary of the Directors Plan which is qualified in
its entirety by reference to the actual text of the Directors Plan, which will
be provided to any shareholder upon request. See "AVAILABLE INFORMATION."
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 is not subject to the Employee Retirement Income
Security Act of 1974. 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 annual grants thereafter, upon
re-election to the Board, of options 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 of 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 of control," in which case the Initial Option terminates after six
months. A "change of control" shall be deemed to have occurred if (a) a
person is or becomes the beneficial owner, directly or indirectly, of 50% or
more of the voting capital stock of the Company, or (b) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a majority of
the Board unless the election or the nomination for election by the Company
shareholders of each new director was approved by a vote of at least three-
quarters of the directors then still in office who were directors at the
beginning of the period. A merger, consolidation, or corporate reorganization
in which the owners of the Company's voting stock own 50% or more of the
resulting entity's voting stock shall not be considered a "change in
control." Notwithstanding the foregoing, a "change in control" shall not
have been deemed to have occurred if the Board directs otherwise by resolution
adopted prior to the event which would otherwise constitute a "change in
control." Directors may choose to waive such option grants, in their
discretion. All options granted under the Directors Plan are "non-
qualified" options, which do not meet the requirements of Section 422 of the
Code. See "Certain Tax Matters" under Proposal 2 for a discussion of
certain tax consequences associated with non-qualified options.
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.
PROPOSAL 5
__________________
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Board of Directors has appointed Blackman Kallick Bartelstein, LLP,
independent auditors, to audit the financial statements of the Company for the
fiscal year ending November 30, 1999. 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 Blackman Kallick Bartelstein,
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 1999 ANNUAL MEETING
It is currently anticipated that the next meeting, for the fiscal year
ending November 30, 1999 (the "1999 Annual Meeting"), will be held mid-April
2000. Shareholders who intend to submit proposals for inclusion in the 1999
Proxy Statement and Proxy for shareholder action at the 1999 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, 1999. Additionally,
if the Company receives notice of a shareholder proposal after February 10,
2000, the proposal will be considered untimely pursuant to SEC Rules 14a-4 and
14a-5(e) and the persons named in proxies solicited by the Board of Directors
of the Company may exercise discretionary voting power with respect to the
proposal.
AVAILABLE INFORMATION
Copies of the Company's Annual Report on Form 10-KSB, the Incentive Plan, and
the Directors Plan will be sent without charge to any shareholder requesting
the same in writing from: BAB Holdings, Inc., Attention: Investor Relations,
8501 West Higgins Road, Suite 320, Chicago, IL 60631.
By the Order of the Board of Directors
/s/ MICHAEL K. MURTAUGH
Michael K. Murtaugh
Vice President and General Counsel
Dated: March 25, 1999
Chicago, Illinois
APPENDIX A
__________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The selected financial data contained herein have been derived from the
consolidated financial statements of the Company included in the Company's
Annual Report on Form 10-KSB and within this proxy statement. 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. Certain risks
and uncertainties are wholly or partially 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; regional
economic and weather conditions; the hiring, training, and retention of
skilled corporate and restaurant management; and the integration and
assimilation of acquired concepts. 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
Since its inception in November 1992, the Company has grown to 22
Company-owned stores and 271 franchised and licensed units at the end of
fiscal 1998. Units in operation at the end of fiscal 1997 included 28
Company owned stores and 229 franchised and licensed units. System-wide
revenues in fiscal 1998 reached $79 million compared to $62 million in
the year ago period. The increase is due, in part, to the 1997
acquisition of MFM which contributed approximately $20.6 million to
system-wide sales in fiscal 1998, an increase of $8.5 million over its
contribution in the prior fiscal year. This rapid expansion in
operations significantly affects the comparability of results of
operations of the Company in several ways.
The Company's revenues are derived primarily from the operation of
Company-owned stores, initial franchise fees and ongoing royalties paid
to the Company by its franchisees. Additionally, the Company has
significantly increased revenue derived from the sale of licensed
products as a result of purchasing trademarks (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). The increase in
overall revenues has reduced the dependence on the initial franchise
fees as a source of income.
On May 13, 1997, the Company completed the acquisition of MFM. This
acquisition augmented the Company's existing product offerings with a
premium muffin product and provided additional points of distribution
for the Company's branded bagel and coffee products. It is expected
that the introduction of MFM muffin products will enhance the revenue
potential of the Company's bagel stores and result in operating leverage
as corporate overhead is spread over the additional acquired units (58
franchise and 3 Company-operated units at November 30, 1998.) 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 significant
infrastructure in place to oversee franchisee and Company stores
operations), the Company experienced improved profitability during
fiscal 1998 due to increased retail sales and royalty revenues
attributable to these products.
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
noncash write-down of property and equipment and goodwill associated
with these units, and the remainder represents a reserve for store
closing costs. One store was closed during fiscal 1997 and the
remaining units were closed during the first quarter of 1998. These
store closings improved cash flow from remaining Company-store
operations and the profitability of operations overall.
With the increase in both franchise and licensed operations and the
acquisition of MFM, the Company has experienced increases in payroll,
occupancy and overhead costs in the corporate offices. At November 30,
1998, the Company had 41 employees at the corporate level who oversee
operations of the franchise, licensed and Company-owned store
operations, down from 54 at the end of 1997. Selling, general and
administrative expenses are down in fiscal 1998 from fiscal 1997 both as
a percentage of revenue and also in absolute dollars. Efficiencies
have resulted in selling, general and administrative expenses decreasing
9.7% in 1998 over 1997, which translates into a reduction of $636,000
which was achieved with a modest increase in revenue. Management
expects that these costs, as a percentage of revenue, will continue to
decline 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 1999.
The Company is currently negotiating a new lease combining the two
leases and anticipates that such negotiations will be successful in
producing an acceptable new lease for the existing space. The Company
believes it is in a position to continue to leverage selling, general
and administrative expenses against increased revenues anticipated in
fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years 1998 and 1997,
revenue by type and as a percentage of total revenue during the year (in
thousands):
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------------------------
1998 1997 Inc.(Dec.)
-------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Selected Revenue Data:
Company-owned stores..... $8,930 61.4 $9,846 69.5% $ (916)
Royalty fees from
franchised stores...... $3,178 21.8 2,367 16.7% 811
Franchise and area
development fees....... $1,104 7.6 1,005 7.1% 99
Licensing fees and
other income........... $1,337 9.2 948 6.7% 389
------- ------ ------ ------ ------
Total $14,549 100.0% $14,166 100.0% $ 383
======= ====== ====== ====== ======
</TABLE>
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total revenues increased 3% to $14,549,000 in 1998 from $14,166,000 in
the prior year. The reduction in the rate of revenue growth as compared
to that achieved in prior years was anticipated due to the closing of
seven Company-owned stores identified as impaired in the fourth quarter
of 1997 and the six additional units which were closed or sold as
franchised units in the current fiscal year. The reduction in the
number of units operating during fiscal 1998 versus fiscal 1997 resulted
in the 9% decrease in revenues generated by Company-owned stores.
Royalty fees from franchise stores increased by 34% to $3,178,000 in
fiscal 1998 from $2,367,000 in fiscal 1997 principally due to the
addition of the 60 MFM franchised units in May 1997. Franchise and area
development fee revenue increased 10 % from the year-ago period and is
attributed to an expanded presence in the international market. Finally,
licensing fees and other income increased by 41% in fiscal 1998 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
decreased 9% from the prior year, which is consistent with decrease in
the related revenues. Store payroll and other costs decreased by
$646,000, or 11%, from $5,859,000 recorded in fiscal 1997. The
reduction in store payroll and other costs have resulted in an improved
contribution to profitability by Company-owned stores of over 1% from
that experienced in the prior year.
The 1997 results of operations include the decision to close under-
performing stores, which resulted in the recognition of a fourth quarter
1997 charge of approximately $1,837,000, or $0. 25 per share.
Approximately 73% of this charge to net income, or $1,333,000,
represents a noncash write-down of property 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 12 to the audited consolidated
financial statements included herein.)
Selling, general and administrative expenses decreased by $636,000 in
1998 to $5,930,000. The increasing base of Company-owned and franchised
stores has resulted in a favorable trend with respect to overhead costs
- --- fiscal year 1998 costs represented 40.8% of revenues and fiscal year
1997 costs represented 46.4% of revenues. Payroll-related expenses
increased in 1998 by $204,000. Depreciation and amortization decreased
in 1998 by 21% due to the disposition of equipment, furniture and
fixtures from the closed stores. Other selling, general and
administrative expenses decreased from 11.8% of revenue to 9.1% of revenue
in fiscal 1998. Excluding depreciation and amortization, fiscal 1998
selling, general and administrative expenses were less than 33% of total
revenues compared to 36% in the year ago period as the Company continues
to experience operating leverage from its increasing revenue base.
Income from operations was $515,000 in fiscal 1998 versus a loss from
operations of $3,406,000 in fiscal 1997. Interest income increased to
$119,000 in fiscal 1998 from $75,000 in the prior year due to the
increase in notes receivable during fiscal 1998. Interest expense was
$206,000 during 1998 versus $75,000 in 1997 as a result of the increased
borrowing on the Company's credit facility.
Income before taxes totaled $483,000 during the current fiscal year as
compared to a loss of $3,402,000 in the prior year. A benefit for
income taxes of $164,000 was recorded during fiscal 1998 due principally
to a reduction in the valuation allowance established for the tax
benefit of net deductible temporary differences and operating loss
carryforwards. In the prior year, the Company had fully reserved the
deferred tax asset.
The net income in fiscal 1998 was $647,000 versus a net loss of
$3,402,000 for fiscal 1997. Preferred dividends accumulated during 1998
of $148,000 compared to $648,000 in the prior year. Approximately
$387,000 of the dividend accumulated in the prior year was attributable
to the 15% discount available to holders of the Preferred Stock in
acquiring Common Stock upon ultimate conversion. Such discounts must be
recognized as dividends under generally accepted accounting principles.
In addition, the Company was 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 of $138,000. The preferred dividends
attributable to the conversion discount and the warrants was fully
recognized in fiscal 1997. (See Note 8 of the audited consolidated
financial statements included herein.)
Net income attributable to holders of common stock was $499,000,
or $.06 per share (basic and diluted), for fiscal 1998 versus a net loss
attributable to common shareholders of $4,050,000, or $0.55 per share
(basic and diluted), in the prior fiscal year. (See Note 9 of the
audited consolidated financial statements included herein.)
On a pro forma basis, had the acquisitions of MFM and JBI occurred at
the beginning of fiscal 1997, revenues for fiscal 1997 would have been
$15,421,000. The net loss on a pro forma basis for 1997 would have been
$3,500,000. Pro forma net loss per share would have been approximately $0.54
for the fiscal year ended November 1997.
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided by operating activities totaled $303,000 during
fiscal 1998. Cash provided principally represents net income, adjusted
for the deferred tax benefit and depreciation and amortization, of
$1,647,000 plus $350,000 in prepaid license fee which will be earned in
fiscal 1999 and 2000, a reduction of prepaids and other current assets
of $386,000. Cash provided in fiscal 1998 is offset by principally due
to the overall increase in accounts and notes receivables totaling
$625,000 and the reduction in payables, accrued liabilities and reserves
of $1,210,000. The net cash used in operating activities totaled
$1,220,000 in fiscal 1997.
Cash used for investing activities during 1998 totaled $146,000, and
was used primarily for the purchase of property, equipment and trademarks
offset by loan repayments. In the prior year, cash used for investing
activities totaled $3,814,000 which consisted primarily of $3,795,000
used for the purchase of property and equipment associated with the
acquisition and development of 20 Company-owned units. The net cash
used in investing activities totaled $1,220,000 in fiscal 1997.
Financing activities provided $3,261,000 during fiscal 1997. In April
1997, the Company completed the sale of 87,710 shares of 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 Line") with a bank expiring in December 1998. Maximum
borrowing under the Line was limited to a borrowing base of 80% of
accounts receivable under 90 days and 40% of the cost of equipment,
furniture and fixtures. Interest was payable monthly at prime plus 1%
with principal due upon maturity at December 31, 1998.
Financing activities provided a total of $153,000 during fiscal 1998.
This was substantially the net amount of borrowings and repayments on
the Line. At November 30, 1998, the Company had $1,877,000 outstanding
against the Line.
The Line was secured by substantially all of the assets of the Company
and required, among other things, that the Company maintain minimum net
worth of $8 million and a compensating cash balance of $250,000. From
time to time during fiscal 1998, the Company fell below the compensating
cash balance requirement and obtained waivers from the bank to lower the
requirement for specified periods of time. In December 1998, the
Company repaid $127,000 and replaced the Line with a $1.75 million line
of credit facility which matures at December 31, 1999 on terms
essentially the same as the Line. However, in the event the Company's
cash balances fall below the compensating cash balance requirements, the
Company can cure the default by paying additional interest in the
amount of prime plus 4% on the difference between $250,000 and the cash
balance.
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 required for the units
acquired in the purchase. In February 1999, the Company borrowed
$1,100,000 pursuant to these commitments.
The Company believes that improved cash flow from existing operations
will be sufficient to fulfill its working capital requirements for the
foreseeable future.
BAB HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORTS
YEARS ENDED NOVEMBER 30, 1998 AND 1997
<PAGE>
BAB HOLDINGS, INC.
Years Ended November 30, 1998 and 1997
C O N T E N T S
---------------
Reference Page
Independent Auditor's Reports F-4
Consolidated Balance Sheets Exhibit A F-6
Consolidated Statements of Operations Exhibit B F-9
Consolidated Statements of
Stockholders' Equity Exhibit C F-10
Consolidated Statements of
Cash Flows Exhibit D F-12
Notes to Consolidated Financial
Statements F-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Stockholders and Board of Directors
BAB Holdings, Inc.
We have audited the accompanying consolidated balance sheet of BAB HOLDINGS,
INC. as of November 30, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit. The consolidated financial statements of BAB HOLDINGS,
INC. as of and for the year ended November 30, 1997, were audited by other
auditors whose report dated February 27, 1998, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BAB HOLDINGS,
INC. as of November 30, 1998, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
February 6, 1999
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
BAB Holdings, Inc.
We have audited the accompanying consolidated balance sheet of BAB Holdings,
Inc. as of November 30, 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BAB Holdings,
Inc. at November 30, 1997 and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 27, 1998
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Balance Sheets
November 30, 1998 and 1997
ASSETS
------
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents, including
restricted cash of $218,646 in 1998
and $285,442 in 1997 $ 700,162 $ 389,896
Receivables
Trade accounts receivable, net of
allowance for doubtful accounts of
$341,000 in 1998 and $217,000 in 1997 1,181,282 988,992
National Marketing Fund contributions
receivable 309,633 382,432
Notes receivable, net of allowance for
doubtful accounts of $20,000 in 1998
and 1997 444,560 203,230
Inventories 298,501 344,424
Deferred franchise costs 18,227 76,805
Assets held for sale - 170,500
Prepaid expenses and other current assets 206,952 422,913
Deferred income taxes 431,719 -
---------- ----------
Total Current Assets 3,591,036 2,979,192
Property and Equipment
Leasehold improvements 2,618,906 2,690,940
Furniture and fixtures 744,833 686,542
Equipment 2,513,715 2,513,289
Construction in progress 68,543 80,830
---------- ----------
5,945,997 5,971,601
Less accumulated depreciation (1,743,800) (882,693)
---------- ----------
Total Property and Equipment, Net 4,202,197 5,088,908
Notes Receivable 1,086,100 785,065
---------- ----------
Intangibles
Patents, trademarks and copyrights (Net of
accumulated amortization of $90,374 in 1998
and $56,025 in 1997) 568,683 527,140
Goodwill (Net of accumulated amortization
of $164,806 in 1998 and $101,629 in 1997) 2,591,515 2,599,393
Franchise contract rights (Net of accumulated
amortization of $152,375 in 1998 and
$60,442 in 1997) 1,919,909 2,011,842
Other assets (Net of accumulated amortization
of $235,056 in 1998 and $424,855 in 1997) 485,551 635,706
---------- ----------
Total Intangibles, Net 5,565,658 5,774,081
---------- ----------
$14,444,991 $14,627,246
========== ==========
</TABLE>
The accompanying notes are an intergral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 1,014,734 $ 1,603,661
Accrued liabilities 714,789 768,977
Reserve for closed store expenses 36,388 504,203
Accrued professional and other services 214,972 227,895
Unexpended National Marketing Fund
contributions 465,173 522,722
Long-term debt due within one year 134,814 26,143
Deferred franchise fee revenue 360,500 642,000
------------ ------------
Total Current Liabilites 2,941,370 4,295,601
------------ ------------
Noncurrent Liabilities
Deferred revenue 263,996 -
Deferred income taxes 251,719 -
Long-term debt (Net of portion included
in current liabilities) 1,759,954 1,676,895
------------ ------------
Total Noncurrent Liabilities 2,275,669 1,676,895
------------ ------------
Total Liabilities 5,217,039 5,972,496
------------ ------------
Stockholders' Equity:
Common stock - No par value; 20,000,000
shares authorized; 8,655,006 shares and
7,981,630 shares issued, respectively;
and 8,361,706 shares and 7,711,630 shares
outstanding, respectively 11,430,452 10,908,062
Preferred stock - $0.01 par value; 3,880,000
shares authorized; no shares issued
and outstanding - -
Series A Preferred stock - $25 par value;
120,000 shares authorized; 60,000 shares and
78,710 shares issued and outstanding,
respectively 1,548,731 1,862,035
Treasury stock at cost, 293,300 shares and
270,000 shares, respectively (36,067) (17,500)
Additional paid-in capital 1,252,402 1,368,619
Accumulated deficit (4,967,566) (5,466,466)
------------ ------------
Total Stockholders' Equity 9,227,952 8,654,750
------------ ------------
$ 14,444,991 $ 14,627,246
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Statements of Operations
Years Ended November 30, 1998 and 1997
1998 1997
----------- -----------
<S> <C> <C>
Revenues
Net sales by Company-owned stores $ 8,929,664 $ 9,846,020
Royalty fees from franchised stores 3,178,262 2,367,220
Franchise and area development fees 1,104,000 1,005,545
Licensing fees and other income 1,337,314 947,658
----------- -----------
Total Revenues 14,549,240 14,166,443
Operating Costs and Expenses
Food, beverage, and paper costs 2,998,079 3,309,504
Store payroll and other operating expenses 5,213,359 5,859,322
Provision for impairments and store closures (107,699) 1,836,981
Selling, general and administrative expenses:
Payroll-related expenses 2,262,616 2,058,644
Advertising and promotion 532,678 603,373
Professional service fees 362,360 514,319
Franchise-related expenses 261,287 232,964
Depreciation and amortization 1,180,259 1,490,329
Other 1,331,146 1,666,659
----------- -----------
Total Selling, General and
Administrative Expenses 5,930,346 6,566,288
----------- -----------
Total Operating Costs
and Expenses 14,034,085 17,572,095
----------- -----------
Income (Loss) from Operations 515,155 (3,405,652)
Interest Income 119,244 74,513
Interest Expense (205,618) (74,651)
Other Income 54,022 3,701
----------- -----------
Income (Loss) Before Taxes 482,803 (3,402,089)
Provision (Benefit) for Income Taxes
Current 16,039 -
Deferred (180,000) -
----------- -----------
(163,961) -
----------- -----------
Net Income (Loss) 646,764 (3,402,089)
Preferred Stock Dividends Accumulated (147,864) (648,197)
----------- -----------
Net Income (Loss) Attributable to
Common Stockholders $ 498,900 $(4,050,286)
=========== ===========
Income (Loss) per Share - Basic and Diluted $ 0.06 $ (0.55)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Statements of Shareholders' Equity
Years Ended November 30, 1998 and 1997
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, 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 Dividends
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)
Termination of
Options Issued in
Connection with
Acquisition -- -- -- -- -- --
Purchase Of Treasury
Stock -- -- -- -- (23,300)(18,567)
Preferred Dividends
Accumulated -- -- -- 147,864 -- --
Preferred Dividends
Paid -- -- -- (19,995) -- --
Conversion of Preferred
to Common Stock 673,376 522,390 (18,710) (441,173) -- --
Net Income -- -- -- -- -- --
---------- ----------- ------ ---------- -------- ------
Balance as of
November 30, 1998 8,655,006 $11,430,452 60,000 $1,548,731 (293,300)$(36,067)
========== =========== ====== ========== ======== =======
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
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
Termination of Options Issued
in Connection with Acquistions (35,000) -- (35,000)
Purchase of Treasury Stock -- -- (18,567)
Preferred Dividends Accumulated -- (147,864) --
Preferred Dividends Paid -- -- (19,995)
Conversion of Preferred to
Common Stock (81,217) -- --
Net Income 646,764 646,764
----------- ---------- -----------
Balance as of November 30, 1998 $ 1,252,402 $(4,967,566) $ 9,227,952
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years Ended November 30, 1998 and 1997
1998 1997
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 646,764 $(3,402,089)
----------- ----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 1,180,259 1,490,329
Provision for impairment and closure - 1,836,981
Deferred preopening store cost - (240,927)
Deferred revenue 350,000 -
Benefit for deferred income taxes (180,000) -
Gain on sale of property and equipment (10,393) -
(Increase) decrease in
Trade accounts receivable (207,290) (432,604)
National Marketing Fund contributions
receivable 72,799 (245,779)
Inventories 45,923 (211,614)
Deferred franchise costs 58,578 (21,319)
Notes receivable (491,003) (138,632)
Prepaid expenses and other assets 386,461 (215,653)
Amounts due from affiliate - (88,653)
Increase (decrease) in
Accounts payable (588,927) 176,318
Accrued professional and other services (12,923) (178,331)
Reserve for closed store expenses (467,815) -
Accrued liabilities (140,192) 75,157
Unexpended National Marketing Fund
franchisee contributions (57,549) 358,840
Deferred franchise fee revenue (281,500) 17,600
---------- ---------
Total Adjustments (343,572) 2,181,713
---------- ---------
Net Cash Provided by (Used in)
Operating Activities 303,192 (1,220,376)
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Statements of Cash Flows (continued)
Years Ended November 30, 1998 and 1997
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Investing Activities
Purchases of property and equipment $ (198,295) $(3,679,705)
Sale of property and equipment 33,484 57,400
Purchase of MFM - (115,551)
Purchase of trademarks (75,892) (16,236)
Purchases of other assets - (120,000)
Loan disbursements (13,263) (74,201)
Loan repayments 138,900 77,748
Other (31,029) 56,440
----------- -----------
Net Cash Used in Investing Activities (146,095) (3,814,105)
----------- -----------
Cash Flows from Financing Activities
Borrowing on line of credit 337,500 1,675,975
Debt repayments (145,769) (364,037)
Proceeds from issuance of preferred stock - 2,192,750
Payment of preferred stock issuance costs - (247,275)
Other (38,562) 3,671
----------- -----------
Net Cash Provided by Financing Activities 153,169 3,261,084
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 310,266 (1,773,397)
Cash and Cash Equivalents, Beginning of Year 389,896 2,163,293
----------- ----------
Cash and Cash Equivalents, End of Year $ 700,162 $ 389,896
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1998 and 1997
- ------------------------------------------------------------------------
NOTE 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. As of
November 1998, Investments was dissolved and merged into the parent company,
Systems. Operations was formed on August 30, 1995, primarily to operate
Company-owned stores, currently "Big Apple Bagels" 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.
NOTE 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.
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.
Depreciation and Amortization
- -----------------------------
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.
The Company's intangible assets consist primarily of patents,
trademarks, 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 is
being amortized over 40 years. Amortization expense recorded in the
accompanying consolidated statements of operations for the years ended
November 30, 1998 and 1997 was $326,089 and $549,640, 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
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.
Revenue Recognition
- -------------------
Royalty fees from franchised stores represent a fee of 5% of net retail
sales of franchised units. Royalty revenues are recognized on the
accrual basis.
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 those units located primarily in airport and travel plazas.
In fiscal 1998 and 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 at November 30, 1998 or 1997, or area
development fees collected are as follows (excluding six Company-owned
stores which were closed subsequent to year end [see Note 12]):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Stores opened:
Company-owned 22 28
Franchisee-owned 194 182
Licensed 77 47
---- ----
293 257
Unopened stores:
Franchise agreement 15 25
Area development agreement 19 28
---- ----
34 53
---- ----
327 310
==== ====
</TABLE>
Advertising Costs
- -----------------
The Company expenses advertising costs as incurred. Advertising expense
was $331,004 and $339,496 in 1998 and 1997, respectively. Included in
advertising expense was $53,593 and $55,733 in 1998 and 1997,
respectively, related to the Company's franchise operations.
Income (Loss) Per Share
- -----------------------
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" during the first quarter of 1998. This
standard prescribes the methods of calculating basic and diluted
earnings per share and requires dual presentation of these amounts on
the face of the income statement. 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 of $.53 in 1997. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the SFAS No. 128
requirements.
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 as of November 30, 1998,
approximates their carrying value.
New Accounting Standards
- ------------------------
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" were issued. SFAS No. 130 establishes standards for the
reporting of comprehensive income and its components in a financial
statement presentation. SFAS No. 130 separates comprehensive income into
net income and other comprehensive income, but does not change the
measurement and presentation of net income. Other comprehensive income
includes certain changes in the equity of the Company which are
currently recognized and presented separately in the Consolidated
Statements of Stockholders' Equity, such as the change in the Cumulative
Translation Adjustment account. SFAS No. 130 is effective for the
Company beginning in fiscal 1999.
SFAS No. 131 establishes new standards for the way companies report
information about operating segments and requires that those enterprises
report selected information about operating segments in the financial
reports issued to stockholders. SFAS No. 131 is effective for the
Company beginning in fiscal 1999.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
- -----------------
Certain 1997 amounts have been reclassified to reflect the 1998
presentation.
NOTE 3 - RESTRICTED CASH
Systems established the National Marketing Fund (Fund) during 1994.
Franchisees are required to contribute to the Fund based on their net
sales and in turn are reimbursed for a portion of media advertising
placed in their local markets up to a maximum equal to the amount they
contributed. As of November 30, 1998 and 1997, the Fund's cash balance
was $184,804 and $256,678, 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. As of November 30, 1998 and 1997, the
MFM Fund's cash balance was $33,842 and $8,764, respectively.
Systems was required by certain states to maintain franchise and area
development fees in escrow accounts until the related franchise stores
commence operations. As of November 30, 1998 and 1997, these accounts
totaled $ 0 and $20,000, respectively.
NOTE 4 - INCOME TAXES
The reconciliation of the income tax provision (benefit) computed at the
federal statutory rate of 34% and the benefit for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Income tax provision (benefit)
computed at federal statutory rate $ 164,153 $(1,156,710)
State income taxes (benefit), net
of federal tax benefit 23,261 (163,913)
Permanent differences on debt
financing obtained (1,748) (1,748)
Other adjustments 18,529 22,584
Valuation allowance without income
tax benefit (368,156) 1,299,787
---------- ---------
Benefit for Income Taxes $ (163,961) $ -
========== =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Franchise fee revenue $ 20,638 $ 216,615
Franchise costs 52,745 32,102
National Marketing Fund net contributions 71,737 99,638
Allowance for uncollectible accounts 129,125 108,392
Net operating loss carryforwards 1,672,245 1,617,089
Valuation allowance (1,514,771) (1,882,927)
--------- ---------
Total Deferred Tax Assets 431,719 190,909
--------- ---------
Depreciation (249,263) (171,017)
Start-up costs - (17,807)
Other (2,456) (2,085)
--------- ---------
Total Deferred Tax Liabilities (251,719) (190,909)
--------- ---------
$ 180,000 $ -
========= =========
</TABLE>
As of November 30, 1998, the Company has cumulative net operating loss
carryforwards expiring between 2008 and 2013 for U.S. federal income tax
purposes of approximately $4,308,000. The net operating loss
carryforwards are subject to limitation in any given year as a result of
the Company's initial public offering and may be further limited if
certain other events occur. A valuation allowance has been established
for $1,514,771 of the deferred tax benefit related to those loss
carryforwards for which it is considered more likely than not that the
benefit will not be realized.
NOTE 5 - LONG-TERM OBLIGATIONS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Secured line of credit payable to
bank, due December 31, 1998,
at an interest rate of prime
plus 1% $1,877,465 $1,657,975
Capital lease obligations,
various rates 17,303 31,220
Unsecured note payable, principal
payments due monthly at an
interest rate of 10% - 13,843
--------- ---------
1,894,768 1,703,038
Less: current portion 134,814 26,143
--------- ---------
Long-Term Debt, Net of Current Portion $1,759,954 $1,676,895
========= ==========
</TABLE>
The Company had a secured $2 million line-of-credit facility (Line) with
a bank which expired December 31, 1998. Maximum borrowing under the
Line was limited to 80% of accounts receivable under 90 days and 40% of
original cost of equipment, furniture and fixtures. Interest was
payable monthly at prime plus 1% (8.75% as of November 30, 1998), with
principal due upon maturity on December 31, 1998. As of November 30,
1998, the Company had borrowed $1,877,465 on the Line.
In December 1998, the Company repaid $127,465 and replaced the Line with a
$1.75 million line-of-credit facility with a bank which expires December
31, 1999. 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% (8.75% as of January 1, 1999), with principal due upon maturity
on December 31, 1999. 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.
As of November 30, 1998, annual maturities on long-term obligations are
due as follows: $134,814 in 1999 and $1,759,954 in 2000. Interest
paid for the years ended November 30, 1998 and 1997 was $202,312 and
$55,188, 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, 1998, $1,040,458
has been advanced to franchises under this program.
NOTE 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, 1998 and 1997 was $936,895 and $955,693,
including contingent rental expense of $41,646 and $26,600, less
sublease income of $106,606 and $46,109, respectively. As of November
30, 1998, future minimum annual rental commitments under leases, net of
sublease income of $253,965 in 1999, $226,968 in 2000, $97,338 in 2001,
$36,000 in 2002 and $3,000 in 2003, are as follows:
Year Ending November 30:
1999 $ 665,773
2000 505,887
2001 477,122
2002 246,401
2003 241,801
Thereafter 535,089
------------
$ 2,672,073
============
NOTE 7 - NONCASH TRANSACTIONS
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-owned units
(see Note 11).
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 11).
In May 1997, the Company terminated an option to purchase 75,000 shares
of common stock which had been originally issued in a previous
acquisition and subsequently, in a separate transaction, assigned 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 five annual installments of principal and
interest beginning May 1999 and 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 11).
In January 1998, the Company sold the assets of one Company-owned store
to a franchisee in exchange for approximately $30,000 in cash and a note
receivable for $177,000. The note bears interest at a rate of 8.5% and
interest payments were made through August 1998. Thereafter, monthly
payments of principal and interest are due until March 1, 2003 when the
entire unpaid balance of principal and interest is due in full.
In November 1998, the Company acquired from a franchisee its option to
purchase the Company's 100,000 shares of common stock which had been
issued in a previous acquisition. In exchange, the Company canceled a
total of $35,000 of royalties and other receivables owed to its
subsidiaries by the franchisee.
NOTE 8 - STOCKHOLDERS' EQUITY
In April 1997, the Company completed the sale of 87,710 shares of $25
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, plus accrued dividends, out of assets of
the Company available for distribution to stockholders.
Commencing August 1, 1997 through July 31, 1999, subject to certain
extensions, the stockholders 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 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 in 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
through January 1998. During January 1999, the Company entered into a
Conversion Suspension Period.
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 stockholder to purchase two shares of
common stock for each share of Preferred Stock. Preferred dividends of
$147,864 accumulated during fiscal 1998.
During fiscal 1997, holders elected to convert 9,000 shares of Preferred
Stock plus dividends accrued thereon into 110,342 shares of common
stock. During fiscal 1998, holders elected to convert 18,710 shares of
Preferred Stock plus dividends accrued thereon into 673,376 shares of
common stock. The common shares issued upon conversion include shares
issued in payment of preferred dividends on 10,306 shares of Preferred
Stock. The Company elected to pay accrued dividends in cash of
approximately $20,000 upon conversion of the remaining 8,404 shares of
Preferred Stock.
NOTE 9 - EARNINGS PER SHARE
The computation of basic and diluted earnings (loss) per share is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss) $ 646,764 $(3,402,089)
Preferred stock dividend accumulated (147,864) (648,197)
----------- -----------
Numerator for basic earnings (loss)
per share - income (loss)
attributable to common stockholders 498,900 (4,050,286)
Effect of dilutive securities:
Preferred stock dividend accumulated 147,864 -
----------- -----------
Numerator for diluted earnings (loss)
per share - income (loss)
attributable to common stockholders $ 646,764 $(4,050,286)
=========== ===========
Denominator:
Denominator for basic earnings (loss)
per share - weighted average shares 8,101,080 7,420,811
Effect of dilutive securities:
Convertible preferred stock 2,407,159 -
---------- ----------
Denominator for diluted earnings (loss)
per share - weighted average shares 10,508,239 7,420,811
========== ==========
Basic and diluted earnings (loss)
per share $ 0.06 $ (0.55)
========== ==========
</TABLE>
The exercise of options and warrants outstanding during the years ended
November 30, 1998 and 1997 and the conversion of convertible securities
outstanding during the year ended November 30, 1997 is not assumed as
the result is antidilutive to the reported loss per share.
NOTE 10 - STOCK OPTIONS PLANS
On September 20, 1995, the Company adopted and received stockholder
approval of the 1995 Long-Term Incentive and Stock Option Plan (the
Incentive Plan), which permits the issuance of options, stock
appreciation rights, and restricted stock awards to employees and
nonemployee officers, directors, and agents of the Company. The
Incentive Plan reserves 570,000 shares of Common Stock for grant and
provides that the term of each award be determined by the Board or a
committee of the Board. Under the terms of the Incentive Plan, options
granted may be either nonqualified or incentive stock options.
Incentive stock options must be exercisable at not less than the fair
market value of a share on the date of grant (110% of fair market value
if the options are owned by a 10% or greater stockholder) 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 up to 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
stockholder approval of the 1995 Outside Directors Stock Option Plan
(the Directors Plan), which permits the issuance of nonqualified options
to nonemployee members of the Board.
The Directors Plan reserves 30,000 shares of common stock for grant.
The Directors Plan provides for a grant of options to purchase 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 ten 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, 1998, is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average Option
Shares Price Per Share
---------- ---------------
<S> <C> <C>
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
Granted 151,545 $1.32
Exercised - -
Canceled (25,980) $2.12
-------
Outstanding as of November 30, 1998 432,565 $4.74
=======
</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 1998 and 1997 consistent with provisions of SFAS
No. 123, the Company's net income (loss) and net income (loss) per share
would have been as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Net income (loss) attributable to
common stockholders:
As reported $ 498,900 $(4,050,286)
Pro forma $ 89,973 $(4,388,032)
Basic income (loss) per share:
As reported $ 0.06 $ (0.55)
Pro forma $ 0.01 $ (0.59)
Diluted income (loss) per share:
As reported $ 0.06 $ (0.55)
Pro forma $ 0.01 $ (0.58)
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes
Option-Pricing Model with the following weighted-average assumptions for
1998 and 1997, respectively: risk-free interest rates of 5.0% and 6.17%;
dividend yield of 0.0%; expected volatility of .89 and .69; and a
weighted-average expected life of the option of 5.20 years and 8.07
years.
Information on options outstanding under the Incentive Plan and the
Directors Plan as of November 30, 1998, 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>
$0.70 - $1.00 79,000 4.54 $0.72
$2.00 - $2.75 68,565 5.53 $2.15
$4.17 - $4.83 13,500 7.28 $4.39
$6.37 - $7.01 262,500 5.21 $6.65
</TABLE>
NOTE 11 - BUSINESS COMBINATIONS
During 1997, the Company completed several acquisitions which were
accounted for using the purchase method of accounting.
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 it
closed the remaining three stores in January 1998. All of the long-
lived assets associated with this purchase were considered impaired as
of November 30, 1997 (see Notes 7 and 12).
In May 1997, the Company acquired MFM. At the time of acquisition,
MFM had five 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,
1996, revenue for the fiscal year ended November 30, 1997, would have
been $15,421,000. Net loss for fiscal 1997 would have been $3,500,000
or a net loss per share of $0.54.
NOTE 12 - IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSURES
The provision recorded as of November 30, 1997 consisted 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's 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 totaled approximately $171,000 was
recorded as other current assets as of November 30, 1997. During fiscal
1998, the assets were sold to third parties and no significant gains or
losses were incurred.
The seven stores identified as impaired incurred operating losses during
the fiscal year ended November 30, 1997, of approximately $555,000.
One store was closed by November 30, 1997, and the remaining six stores
were closed during the first quarter of fiscal 1998. The six stores
closed during fiscal 1998 incurred operating losses of approximately
$90,000 which are included in the results of Company-owned store
operations.
The reserve for closed-store expense, established on November 30, 1997,
includes an amount for the noncancelable operating lease payments after
the expected closure date, net of estimated sublease income. At
November 30, 1998, the Company has entered into agreements terminating
the contractual lease obligations associated with the stores closed.
The final payments to be made pursuant to these agreements will be
completed in February 1999. At November 30, 1998, the reserve for
closed store leases is approximately $36,000.
NOTE 13-SUBSEQUENT EVENTS
On February 1, 1999, the Company purchased certain assets of a related
group of entities doing business as Jacobs Bros. Bagels (Jacobs Bros.),
a chain operating retail bagel stores the Chicago, Illinois area. The
assets acquired include eight retail locations and a central commissary
facility in exchange for $950,000 in cash and warrants to acquire
500,000 shares of the Company's common stock. The warrants provide for
the purchase of 275,000 shares and 225,000 shares of common stock at an
exercise price of $1.25 and $1.50 per share, respectively. The warrants
are first exerciseable on February 1, 2000 and expire on January 31,
2006. Further, the Company entered into noncompetition agreements
with two principals of Jacobs Bros. totaling $210,000 to be paid over
varying periods. Finally, the Company issued 160,000 shares of the
Company's common stock to the investment bankers.
In January 1999, the Company received a commitment from a finance
company for various secured loans totaling $1,350,000 to be used for the
purpose of acquiring the assets identified above and for the
refurbishment and conversion of the units acquired to Big Apple Bagels
concept stores. Principal and interest are payable monthly over a
period of seven years and are secured by the assets acquired from
Jacobs Bros. and all improvements made thereon. In February 1999, the
Company borrowed $1,100,000 pursuant to this commitment.
-----------------
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, 1999, 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 27, 1999 at 10:00 a.m. at the Rosemont
Suites, 5500 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.
The Board of Directors has fixed the close of business on March 19, 1999
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.
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, Robert All All Except
B. Nagel, and Cynthia A. Vahlkamp [ ] [ ] [ ]
_________________
Nominee exception
2. To act upon a proposal to ratify an
amendment to the 1995 Long-Term Incentive
and Stock Option Plan (the "Incentive
Plan) which increases the number of
shares of Common Stock reserved for
issuance under the Incentive Plan For Against Abstain
from 570,000 to 995,000. [ ] [ ] [ ]
3. To act upon a proposal to ratify an
amendment to the 1995 Outside Directors
Stock Option Plan (the "Directors
Plan) which increases the number of
shares of Common Stock reserved for
issuance under the Directors Plan For Against Abstain
from 30,000 to 105,000. [ ] [ ] [ ]
4. To act upon a proposal to ratify an
amendment to the Directors Plan which
increases the number of shares
underlying options granted to outside
directors upon re-election from 1,000 For Against Abstain
to 5,000. [ ] [ ] [ ]
5. To act upon a proposal to ratify the
appointment of Blackman Kallick
Bartelstein, LLP as independent
auditors for the fiscal year ended For Against Abstain
November 30, 1999. [ ] [ ] [ ]
6. 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 Proposals 2,
3,4,5,and in the discretion of the proxy holder on such other business
as may properly come before the meeting.
Dated: ___________________, 1999
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.
1995 LONG-TERM INCENTIVE
AND
STOCK OPTION PLAN
Table of Contents
1. Purpose of Plan
2. Stock Subject to Plan
3. Administration of Plan
4. Eligibility
5. Price
6. Term
7. Exercise of Option or Award
8. Additional Restrictions
9. Alternative Stock Appreciation Rights
10. Ten Percent Shareholder Rule
11. Non-Transferability
12. Restricted Stock Awards
13. Performance Awards
14. Dilution or Other Adjustments
15. Amendment or Discontinuance of Plan
16. Time of Granting
17. Income Tax Withholding and Tax Bonuses
18. Effective Date and Termination of Plan
1995 LONG-TERM INCENTIVE AND
STOCK OPTION PLAN
1. Purpose of Plan
This Plan shall be known as the "BAB HOLDINGS, INC. 1995 LONG-TERM
INCENTIVE AND STOCK OPTION PLAN" and is hereinafter referred to as the "Plan".
The purpose of the Plan is to aid in maintaining and developing personnel
capable of assuring the future success of BAB Holdings, Inc., an Illinois
corporation (the "Company"), to offer such personnel additional incentives to
put forth maximum efforts for the success of the business, and to afford them
an opportunity to acquire a proprietary interest in the Company through stock
options and other long-term incentive awards as provided herein. Options
granted under this Plan may be either incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986 (the "Code"), or options which do not qualify as Incentive Stock Options.
Awards granted under this Plan shall be stock appreciation rights ("SARs"),
restricted stock or performance awards as hereinafter described.
2. Stock Subject to Plan
Subject to the provisions of Section 14 hereof, the stock to be subject to
options or other awards under the Plan shall be the Company's authorized Common
Stock, no par value (the "Common Shares"). Such shares may be either
authorized but unissued shares, or issued shares which have been reacquired by
the Company. Subject to adjustment as provided in Section 14 hereof, the
maximum number of shares on which options may be exercised or other award
issued under this Plan shall be 380,000 Common Shares. If an option or award
under the Plan expires, or for any reason is terminated or unexercised with
respect to any shares, such shares shall again be available for options or
awards thereafter granted during the term of the Plan.
3. Administration of Plan
(a) Except as provided in Section 3(b) hereof, the Plan shall be
administered by the Board of Directors of the Company or a committee thereof.
The members of any such committee shall be appointed by and serve at the
pleasure of the Board of Directors. If no committee is appointed by the Board,
the committee shall be comprised of all of the members of the Board of
Directors. (The group administering the Plan shall hereinafter be referred to
as the "Committee".)
(b) Notwithstanding Section 3(a) hereof, all option grants and awards
under this Plan to officers, directors and others who are subject to Section 16
under the Securities Exchange Act of 1934, as amended (the 1934 Act), and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder (the "Section 16 Regulations"), shall be made exclusively by a
committee (the "Disinterested Committee") comprised of at least two members of
the Board of Directors who qualify as "disinterested" plan administrators under
the Section 16 Regulations, or whose administration otherwise qualifies
transactions under the Plan as exempt from Section 16(b) of the 1934 Act. All
references hereinafter to the "Committee" shall mean the "Disinterested
Committee" if the action to be taken in administration of the Plan must be
taken by the Disinterested Committee.
(c) The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan: (i) to determine the purchase
price of the Common Stock covered by each option or award, (ii) to determine
the persons to whom and the time or times at which such options and awards
shall be granted and the number of shares to be subject to each, (iii) to
determine the form of payment to be made upon the exercise of an SAR or in
connection with performance awards, either cash, Common Shares of the Company
or a combination thereof, (iv) to determine the terms of exercise of each
option and award, (v) to accelerate the time at which all or any part of an
option or award may be exercised, (vi) to amend or modify the terms of any
option or award with the consent of the optionee, (vii) to interpret the Plan,
(viii) to prescribed, amend and rescind rules and regulations relating to the
Plan, (ix) to determine the terms and provisions of each option and award
agreement under the Plan (which agreements need not be identical), including
the designation of those options intended to be Incentive Stock Options, and
(x) to make all other determinations necessary or advisable for the
administration of the Plan, subject to the exclusive authority of the Board of
Directors under Section 15 herein to amend or terminate the Plan. The
Committee's determinations on the foregoing matters, unless otherwise
disapproved by the Board of Directors of the Company, shall be final and
conclusive.
(d) The Committee may select one of its members as its Chairman and
shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of
the Committee shall be made by not less than a majority of its members. Any
decision or determination reduced to writing and signed by all of the members
of the Committee shall be fully effective as if it had been made by a majority
vote at a meeting duly called and held. The grant of an option or award
shall be effective only if a written agreement shall have been duly executed
and delivered by and on behalf of the Company following such grant. The
Committee may appoint a Secretary and may make such rules and regulations for
the conduct of its business as it shall deem advisable.
4. Eligibility
Incentive Stock Options may only be granted under this Plan to any full or
part-time employee (which term as used herein includes, but is not limited to,
officers and directors who are also employees) of the Company and of its
present and future subsidiary corporations (herein called "subsidiaries").
Full or part-time employees, non-employee members of the Board of Directors,
and non-employee consultants, agents or independent contractors to the Company
or one of its subsidiaries shall be eligible to receive options which do not
qualify as Incentive Stock Options and awards; provided, however, that members
of the Disinterested Committee shall not be eligible for any option grant or
award under the Plan while serving on said Disinterested Committee. In
determining the persons to whom options and awards shall be granted and the
number of shares subject to each, the Committee may take into account the
nature of services rendered by the respective employees or consultants, their
present and potential contributions to the success of the Company and such
other factors as the Committee in its discretion shall deem relevant. A
person who has been granted an option or award under this Plan may be granted
additional options or awards under the Plan if the Committee shall so
determine; provided, however, that for Incentive Stock Options, to the extent
the aggregate fair market value (determined at the time the Incentive Stock
Option is granted) of the Common Shares with respect to which all Incentive
Stock Options are exercisable for the first time by an employee during any
calendar year (under all plans described in subsection (d) of Section 422 of
the Code of his employer corporation and its parent and subsidiary
corporations) exceeds $100,000, such options shall be treated as options
which do not qualify as Incentive Stock Options. Nothing in the Plan or in
any agreement thereunder shall confer on any employee any right
to continue in the employ of the Company or any of its subsidiaries or affect,
in any way, the right of the Company or any of its subsidiaries to terminate
his or her employment at the time.
5. Price
The option price for all Incentive Stock Options granted under the Plan
shall be determined by the Committee but shall not be less than 100% of the
fair market value of the Common Shares at the date of grant of such option.
The option price for options granted under the Plan which do not qualify as
Incentive Stock Options and, if applicable, the price for all awards shall also
be determined by the Committee and may be other than 100% of the fair market
value of the Common Shares. For purposes of the preceding sentence and for all
other valuation purposes under the Plan, the fair market value of the Common
Shares shall be as reasonably determined by the Committee. If on the date of
grant of any option or award hereunder the Common Shares are not traded on an
established securities market, the Committee shall make a good faith attempt to
satisfy the requirements of this Section 5 and in connection therewith shall
take such action as it deems necessary or advisable.
6. Term
Each option and award and all rights and obligations thereunder shall
expire on the date determined by the Committee and specified in the option or
award agreement. The Committee shall be under no duty to provide terms of like
duration for options or awards granted under the Plan, but the term of an
Incentive Stock Option may not extend more than ten (10) years from the date of
grant of such option and the term of options granted under the Plan which do
not qualify as Incentive Stock Options may not extend more than fifteen (15)
years from the date of granting of such option.
7. Exercise of Option or Award
(a) The Committee shall have full and complete authority to determine
whether an option or award will be exercisable in full at any time or from time
to time during the term thereof, or to provide for the exercise thereof in such
installments, upon the occurrence of such events (such as termination of
employment for any reason) and at such times during the term of the option as
the Committee may determine and specify in the option or award agreement.
(b) The exercise of any option or award granted hereunder shall only be
effective at such time that the sale of Common Shares pursuant to such exercise
will not violate any state or federal securities or other laws.
(c) An optionee or grantee electing to exercise an option or award shall
give written notice to the Company of such election and of the number of shares
subject to such exercise. The full purchase price of such shares shall be
tendered with such notice of exercise. Payment shall be made to the Company in
cash (including bank check, certified check, personal check, or money order),
or, at the discretion of the Committee and as specified by the Committee, (i)
by delivering certificates for the Company's Common Shares already owned by the
optionee or grantee having a fair market value as of the date of grant equal to
the full purchase price of the shares or (ii) a combination of cash and such
shares. The fair market value of such tendered shares shall be determined as
provided in Section 5 herein. Until such person has been issued the shares
subject to such exercise, he or she shall possess no rights as a shareholder
with respect to such shares.
8. Additional Restrictions
The Committee shall have full and complete authority to determine whether
all or any part of the Common Shares of the Company acquired upon exercise of
any of the options or awards granted under the Plan shall be subject to
restrictions on the transferability thereof or any other restrictions affecting
in any manner the optionee's or grantee's rights with respect thereto, but any
such restriction shall be contained in the agreement relating to such options
or awards.
9. Alternative Stock Appreciation Rights
(a) Grant. At the time of grant of an option or award under the Plan
(or at any other time), the Committee, in its discretion, may grant a Stock
Appreciation Right ("SAR") evidenced by an agreement in such form as the
Committee shall from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the agreement
representing such SAR which agreement shall comply with and be subject to the
following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan.
(b) Exercise. An SAR shall be exercised by the delivery to the Company
of a written notice which shall state that the holder thereof elects to
exercise his or her SAR as to the number of shares specified in the notice and
which shall further state what portion, if any, of the SAR exercise amount
(hereinafter defined) the holder thereof requests be paid to in cash and what
portion, if any, is to be paid in Common Shares of the Company. The Committee
promptly shall cause to be paid to such holder the SAR exercise amount either
in cash, in Common Shares of the Company, or any combination of cash and shares
as the Committee may determine. Such determination may be either in accordance
with the request made by the holder of the SAR or in the sole and absolute
discretion of the Committee. The SAR exercise amount is the excess of the fair
market value of one share of the Company's Common Shares on the date of exercise
over the per share exercise price in respect of which the SAR was granted,
multiplied by the number of shares as to which the SAR is exercised. For the
purposes hereof, the fair market value of the Company's shares shall be
determined as provided in Section 5 herein.
10. Ten Percent Shareholder Rule
Notwithstanding any other provision in the Plan, if at the time an option
is granted pursuant to the Plan the optionee owns directly or indirectly
(within the meaning of Section 425(d) of the Code) Common Shares of the Company
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or its parent or subsidiary corporations,
if any (within the meaning of Section 422(b)(6) of the Code), then any
Incentive Stock Option to be granted to such optionee pursuant to the Plan
shall satisfy the requirements of Section 422(c)(6) of the Code, and the
option price shall be not less than 110% of the fair market value of the
Common Shares of the Company determined as described herein, and such option
by its terms shall not be exercisable after the expiration of five (5) years
from the date such option is granted.
11. Non-Transferability
Except as otherwise provided in an option or award agreement, no option or
award granted under the Plan shall be transferable by an optionee or grantee,
otherwise than by will or the laws of descent or distribution, and during the
lifetime of an optionee or grantee, the option shall be exercisable only by
such optionee or grantee.
12. Restricted Stock Awards
Awards of Common Shares subject to forfeiture and transfer restrictions
may be granted by the Committee. Any restricted stock award shall be evidenced
by an agreement in such form as the Committee shall from time to time approve,
which agreement shall comply with and be subject to the following terms and
conditions and any additional terms and conditions established by the Committee
that are consistent with the terms of the Plan:
(a) Grant of Restricted Stock Awards. Each restricted stock award made
under the Plan shall be for such number of Common Share as shall be determined
by the Committee and set forth in the agreement containing the terms of such
restricted stock award. Such agreement shall set forth a period of time during
which the grantee must remain in the continuous employment of the Company in
order for the forfeiture and transfer restrictions to lapse. If the Committee
so determines, the restrictions may lapse during such restricted period in
installments with respect to specified portions of the shares covered by the
restricted stock award. The agreement may also, in the discretion of the
Committee, set forth performance or other conditions that will subject the
Common Shares to forfeiture and transfer restrictions. The Committee may, at
its discretion, waive all or any part of the restrictions applicable to any or
all outstanding restricted stock awards.
(b) Delivery of Common Shares and Restrictions. At the time of a
restricted stock award, a certificate representing the number of Common Shares
awarded thereunder shall be registered in the name of the grantee. Such
certificate shall be held by the Company or any custodian appointed by the
Company for the account of the grantee subject to the terms and conditions of
the Plan, and shall bear such a legend setting forth the restrictions imposed
thereon as the Committee, in its discretion, may determine. The grantee shall
have all rights of a shareholder with respect to the Common Shares, including
the right to receive dividends and the right to vote such shares, subject to
the following restrictions: (i) the grantee shall not be entitled to delivery
of the stock certificate until the expiration of the restricted period and the
fulfillment of any other restrictive conditions set forth in the restricted
stock agreement with respect to such Common Shares; (ii) none of the Common
Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered or disposed of during such restricted period or until after the
fulfillment of any such other restrictive conditions; and (iii) except as
otherwise determined by the Committee, all of the Common Shares shall be
forfeited and all rights of the grantee to such Common Shares shall terminate,
without further obligation on the part of the Company, unless the grantee
remains in the continuous employment of the Company for the entire restricted
period in relation to which such Common Shares were granted and unless any
other restrictive conditions relating to the restricted stock award are met.
Any Common Shares, any other securities of the Company and any other property
(except for cash dividends) distributed with respect to the Common Shares
subject to restricted stock awards shall be subject to the same restrictions,
terms and conditions as such restricted Common Shares.
(c) Termination of Restrictions. At the end of the restricted period
and provided that any other restrictive conditions of the restricted stock
award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the restricted Common
Shares subject thereto, and a stock certificate for the appropriate number of
Common Shares, free of the restrictions and the restricted stock legend,
shall be delivered to the grantee or his beneficiary or estate, as the case
may be.
13. Performance Awards
The Committee is further authorized to grant Performance awards. Subject
to the terms of this Plan and any applicable award agreement, a Performance
award granted under the Plan (i) may be denominated or payable in cash, Common
Shares (including, without limitation. restricted stock), other securities,
other awards, or other property and (ii) shall confer on the holder thereof
rights valued as determined by the Committee, in its discretion, and payable
to, or exercisable by, the holder of the Performance awards, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee, in its discretion, shall establish. Subject to the
terms of this Plan and any applicable award agreement, the performance goals to
be achieved during any performance period, the length of any performance
period, the amount of any Performance award granted, and the amount of any
payment or transfer to be made by the granter and by the Company under any
Performance award shall be determined by the Committee.
14. Dilution or Other Adjustments
If there shall be any change in the Common Shares through merger,
consolidation, reorganization, recapitalization, dividend in the form of stock
(of whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options and awards shall be
made by the Committee. In the event of any such changes, adjustments shall
include, where appropriate, changes in the aggregate number of shares subject
to the Plan, the number of shares and the price per share subject to
outstanding options and awards and the amount payable upon exercise of
outstanding awards, in order to prevent dilution or enlargement of option or
award rights.
15. Amendment or Discontinuance of Plan
The Board of Directors may amend or discontinue at any time. Subject to
the provisions of Section 14 no amendment of the Plan, however, shall without
shareholder approval: (i) increase the maximum number of shares under the Plan
as provided in Section 2 herein, (ii) decrease the minimum price provided in
Section 5 herein, (iii) extend the maximum term under Section 6, or (iv) modify
the eligibility requirements for participation in the Plan. The Board of
Directors shall not alter or impair any option or award theretofore granted
under the Plan without the consent of the holder of the option or award.
16. Time of Granting
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Company, and no
action taken by the Committee or the Board of Directors (other than the
execution and delivery of an option or award agreement), shall constitute the
granting of an option or award hereunder.
17. Income Tax Withholding and Tax Bonuses
(a) In order to comply with all applicable federal or state income tax
laws or regulations, the Company may take such action as it deems appropriate
to ensure that all applicable federal or state payroll, withholding, income or
other taxes, which are the sole and absolute responsibility of an optionee or
grantee under the Plan, are withheld or collected from such optionee or
grantee. In order to assist an optionee or grantee in paying all federal and
state taxes to be withheld or collected upon exercise of an option or award
which does not qualify as an Incentive Stock Option hereunder, the Committee,
in its absolute discretion and subject to such additional terms and conditions
as it may adopt, shall permit the optionee or grantee to satisfy such tax
obligation by (i) electing to have the Company withhold a portion of the shares
otherwise to be delivered upon exercise of such option or award with a fair
market value, determined in accordance with Section 5 herein, equal to such
taxes or (ii) delivering to the Company Common Shares other than the shares
issuable upon exercise of such option or award with a fair market value,
determined in accordance with Section 5, equal to such taxes.
(b) The Committee shall have the authority, at the time of grant of an
option under the Plan or at any time thereafter, to approve tax bonuses to
designated optionee or grantees to be paid upon their exercise of options or
awards granted hereunder. The amount of any such payment shall be determined
by the Committee. The Committee shall have full authority in its absolute
discretion to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereafter.
18. Effective Date and Termination of Plan
(a) The Plan was approved by the Board of Directors by unanimous action
in writing, effective September 19, 1995 and by the shareholders of the Company
by unanimous action in writing, effective, September 20, 1995.
(b) Unless the Plan shall have been discontinued as provided in Section
14 hereof, the Plan shall terminate September 19, 2005. No option or award may
be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee or grantee, alter or impair any rights or
obligations under any option or award theretofore granted.
BAB HOLDINGS, INC.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
I. PURPOSE OF PLAN
1.1 The purpose of the BAB Holdings, Inc. 1995 Outside Directors Stock
Option Plan (the "Plan") is to provide a means whereby BAB Holdings, Inc. (the
"Company") may grant options to purchase common stock of the Company to members
of the Company's Board of Directors who are not employees of the Company or any
of its subsidiaries ("Eligible Directors"). Options granted under the Plan are
not intended to and do not qualify as incentive stock options as described in
Section 422 of the Internal Revenue Code (the "Code").
II. NUMBER OF SHARES AVAILABLE UNDER THE PLAN
2.1 Options will be granted by the Company at the times described below,
to Eligible Directors to purchase an aggregate of up to 20,000 shares of common
stock and 20,000 shares are reserved for options granted under the Plan
(subject to adjustment as provided in Section 4.8 below and increase or decrease
by the Board of Directors with the consent of the shareholders). Option grants
as set forth in Section 4.1 shall be irrevocably waived if at the scheduled
date for such grant the reserve of shares has been exhausted. The shares
issued upon exercise of options granted under the Plan may be authorized and
unissued shares or reacquired shares held by the Company. If any option granted
under the Plan shall terminate, expire or with the consent of the optionee, be
canceled as to any shares, new options may thereafter be granted covering such
shares without affecting the amount of the option reserve noted above.
III. ADMINISTRATION
3.1 The Plan shall be administered by a Committee consisting of the
Chief Executive Officer and Chief Financial Officer of the Company, who are not
eligible to participate in the Plan (the "Committee"). Committee members shall
have no discretion concerning the grant of options, the price at which options
are to be granted or times at which options may be exercised.
The Committee may interpret the Plan, amend and rescind any rules and
regulations necessary or appropriate for the administration of the Plan and
make other determinations and take such other action as it deems necessary or
advisable. No such action will affect the rights of Eligible Directors who
have been granted options prior to such action. Any interpretation or other
action made or taken by the Committee shall be final, binding and conclusive.
IV. TERMS AND CONDITIONS
4.1 Time of Grants and Form. Each Eligible Director who is appointed,
elected or re-elected to the Board of Directors on or after September 20, 1995
shall receive a grant of options evidenced by an option agreement, as follows:
(a) effective on the date of initial election or appointment, an Initial
Option for purchase of the number of shares of common stock at the price set
forth on Appendix A hereto;
(b) effective on each date of re-election to the Board, an option (an
"Annual Option") to purchase the number of shares of common stock at the price
set forth on Appendix B hereto.
An optionee may, in his or her discretion, decline to accept an Initial or
an Annual Option, in whole or in part, by notice to the Company prior to the
Date of Grant, provided that the optionee shall not be entitled to receive, and
shall not receive any consideration from the Company in connection therewith.
Each of the foregoing respective dates of grant are referred to herein as
a "Grant Date" and the Initial Options and Annual Options are referred to
herein collectively as "Options." Notwithstanding the foregoing, if on the
scheduled Grant Date, the Chief Executive Officer determines, in his discretion,
that the Company is in possession of material, undisclosed information, then
the grant of options to Eligible Directors pursuant to this Section 4.1 will be
suspended until the third day after public dissemination of such information.
The Chief Executive Officer may only suspend the grant; the amount and other
terms of the grant will remain as set forth in the Plan, with the exercise
price of the option to be determined in accordance with the Plan on the date
the Option is finally granted.
4.2 Exercisabilitv. Subject to Sections 4.6 and 4.7 below, each Option
will immediately become exercisable following the Grant Date as to all of the
Option shares.
4.3 Option Period. Subject to Sections 4.6 and 4.7 below, each Option
shall expire at the end of ten (10) years from the Grant Date or upon
dissolution of the Company, if earlier.
4.4 Option Price. The exercise price per share for each Initial Option
and for each Annual Option shall be the "Fair Market Value" (as defined herein)
as of the common stock on the Grant Date. As used herein, "Fair Market Value"
shall mean: (a) the average between the high and low reported sale prices for
the common stock on the date of determination (or, if there were no such sales
on that date, on the next most recent date on. which there were such sales) as
reported on the Composite Tape if the common stock is listed on the New York
Stock Exchange ("NYSE") or on the National Association of Securities Dealers
National Market System ("NMS"), (b) if the common stock is not then listed on
the NYSE or the NMS, the average between the closing bid and asked price
quotations for the common stock on that date (or if none on that date, on the
next most recent date on which there were such quotations) as reported by the
National Association of Securities Dealers Automatic Quotation System or any
successor thereto or (c) if the common stock is not then listed as described
above, such value as is reasonably determined by the Committee based on the
then current fair market value of the common stock.
4.5 Payment of Option Price. The purchase price of the shares as to
which an Option is exercised shall be paid in cash, check, bank draft or money
order made payable to the Company, or by a "cashless exercise" procedure
established between the Company and a stock brokerage firm, subject to
compliance with applicable securities laws.
4.6 Exercise in the Event of Death or Ceasing to be a Board Member.
(a) If an optionee ceases to be an Eligible Director (other than by a
"Change in Control," as defined herein), all Annual Options which are then
exercisable by the optionee may be exercised until three (3) months from the
date that the optionee ceases to be a director (the "Termination Date"), and
shall thereafter lapse. An Initial Option shall not be affected by the
termination of such status of the optionee, except as set forth in (b), below.
(b) If an optionee ceases to be an Eligible Director because of a
"Change in Control," all of his or her outstanding Annual Options and Initial
Option (if any) shall immediately become exercisable and may be exercised until
six (6) months from the Termination Date and shall thereafter lapse.
4.7 Change in Control. A "Change in Control" shall, unless the Board
otherwise directs by resolution adopted prior thereto, be deemed to occur if
(i) any "person" (as that term is used in Sections 13 and 14(d)(2) of the
Securities Exchange Act of 1934 as amended ("Exchange Act")} becomes the
beneficial owner (as that term is used in Section 13(d) of the Exchange Act),
directly or indirectly, of 50% or more of the voting capital stock of the
Company ("Voting Stock") or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election or
the nomination for election by the Company's shareholders of each new director
was approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period. Any merger,
consolidation or corporate reorganization in which the owners of the Company's
capital stock entitled to vote in the election of directors prior to said
combination, own 50% or more of the resulting entity's voting stock shall not,
by itself, be considered a change in control for the purposes of this Plan.
4.8 Adjustment of Number of Shares. If, and to the extent that, the
number of issued shares of the common stock of the Company shall be increased
or reduced by change in par value, recapitalization, reorganization, merger,
consolidation, split up, distribution of a dividend payable in stock or the
like, the number of shares subject to the Option and the exercise price
therefor shall be equitably adjusted by the Committee consistent with such
change to prevent substantial dilution or enlargement of the rights granted
to or available to Optionees.
Subject to the foregoing, the grant of an Option pursuant to the Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations, or changes of its capital or
business structure or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or assets.
4.9 No Rights as Shareholder. An optionee shall not, by reason of any
Option granted hereunder, have any right of a shareholder of the Company with
respect to the shares covered by his or her Option until such shares shall have
been issued to the optionee.
4.10 No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option and shall not
confer upon the Optionee any rights respecting continued directorship.
4.11 Withholding Taxes. Prior to the delivery of any certificates or
certificates for shares issuable upon exercise of an Option, the Company shall
have the right to require the optionee to remit to the Company an amount
sufficient to satisfy any federal and state withholding or other taxes, if any,
resulting from such Option exercise. Payment of such amount may be made in the
same manner as payment of the exercise price or by tendering previously owned
shares of the Company's common stock with a Fair Market Value (as defined
herein) on the date of exercise equal to such amount, subject to compliance
with applicable securities laws.
4.12 Common Stock Acquired for Investment. Common stock acquired by an
optionee under the Plan by exercise of any Option shall be acquired by the
Optionee for investment and without intention of resale, unless, in the opinion
of counsel to the Company, such common stock may be purchased without any
investment representation. Where an investment representation is deemed
necessary, the Committee may require a written representation to that effect by
the optionee as a condition of the optionee exercising the Option, and the
Committee may place an appropriate legend on the common stock issued to the
optionee indicating that such common stock has not been registered under
federal or state securities laws. Each Option shall be subject to the
requirement that if, at any time, the Committee shall determine in its
discretion that the listing, registration or qualification of the shares subject
to such Option upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of such Option
or the issuance or purchase of shares thereunder, then such Option shall not be
granted or exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The Company shall use its best
efforts to register the reserved Plan shares under the Securities Act of 1933,
as amended, but only if the Company is then eligible to register by means of
Form S-8, and provided that nothing contained herein shall require the Company
to register the reserved shares, the Options, or the shares purchased upon the
exercise of said Options.
4.13 Liquidation. Upon the complete liquidation of the Company, any
unexercised Options shall be deemed canceled, except as otherwise provided in
the Plan in connection with a merger, consolidation or reorganization of the
Company.
4.14 Transfer of Option. An Option granted hereunder shall be
transferable by the optionee subject to compliance with applicable federal and
state securities laws, but shall be subject to termination in the hands of the
transferee as provided in Section 4.6 hereof in the event of the termination of
the transferor's status as an Eligible Director; provided however, that no
option shall be transferable or assignable if such transferability or
assignability would disqualify the Plan under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended.
4.15 Governing law. The Plan shall be governed by and construed in
accordance with the internal laws of the State of Illinois without reference to
the principles of conflicts of law thereof.
4.16 Expiration Date. The Plan shall terminate September 19, 2005, or on
such earlier date determined by the Board. Termination shall not affect any
Options then outstanding under the Plan. No Options may be granted after
termination.
V. AMENDMENT AND TERMINATION
5.1 The Board may from time to time amend, suspend or discontinue the
Plan provided that, subject to the provisions of Section 4.8 above, no action
of the Board may permit the granting of any Option at the Option price less
than that determined in accordance with Section 4.4 above; adjust or change the
Grant Date determined under Section 4.1 above; or shorten the period provided
for in Section 4.3 above. However, the Plan may not be amended more than once
every six months other than to comport with changes in the Internal Revenue
Code, the Employee Retirement Income Security Act, or the rules thereunder.
Without the written consent of an Optionee, no amendment or suspension of the
Plan shall alter or impair any Option previously granted to him or her under
the Plan. The Board may, subject to limitations in the Plan, modify, extend or
renew outstanding Options granted under the Plan, or accept the surrender of
outstanding Options to the extent unexercised.
VI. EFFECTIVE DATE
6.1 The Plan was adopted by the Board of Directors of the Company and
ratified and approved by the shareholders of the Company effective September
20, 1995.
APPENDIX A
INITIAL OPTIONS
No. Shares Exercise Price
---------- -----------------------
Eligible Directors 2,000 each FMV as of Date of Grant
FMV = Fair Market Value
APPENDIX B
ANNUAL OPTIONS
No. Shares Exercise Price
---------- -----------------------
Eligible Directors 1,000 each FMV as of Date of Grant
FMV = Fair Market Value
