FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 0-27068
BAB Holdings, Inc.
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(Name of small business issuer in its charter)
Illinois 36-3857339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (773) 380-6100
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,514,306 shares of Common
Stock, as of July 12, 1999.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements ...................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation ..................
PART II
Item 1. Legal Proceedings.......................................
Item 2. Changes in Securities...................................
Item 3. Defaults Upon Senior Securities.........................
Item 4. Submission of Matters to a Vote of Security Holders.....
Item 5. Other Information.......................................
Item 6. Exhibits and Reports on Form 8-K........................
SIGNATURE ........................................................
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
May 31, 1999
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $149,981 $ 259,234
Accounts receivable, net of allowance for
doubtful accounts of $279,733 1,615,941
Other current assets 1,550,470
------------
Total current assets 3,425,645
Property and equipment, net of
accumulated depreciation of $2,190,541 4,343,316
Notes receivable 1,064,098
Goodwill, net of accumulated amortization of $223,861 3,752,461
Franchise contract rights, net of accumulated
amortization of $215,863 1,868,102
Other assets and intangible assets, net of
accumulated amortization of $370,534 1,327,301
------------
$ 15,780,923
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,240,625
Deferred franchise fee revenue 307,000
Current portion of long-term debt 1,877,422
Other current liabilities 639,644
------------
Total current liabilities 5,064,691
Noncurrent liabilities:
Long-term debt, net of portion included
in current liabilities 1,133,070
Other 261,363
-----------
Total noncurrent liabilities 1,394,433
-----------
Stockholders' equity:
Common stock 11,570,452
Additional paid-in capital 1,452,402
Preferred stock 1,625,827
Treasury stock (43,964)
Accumulated deficit (5,282,918)
------------
Total stockholders' equity 9,321,799
------------
$ 15,780,923
============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MAY 31,
1999 1998
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 2,744,937 $ 2,390,690
Royalty fees from franchised stores 770,299 761,713
Franchise and area development fees 79,000 390,500
Licensing fees and other income 272,001 252,542
-------------------------
3,866,237 3,795,445
OPERATING COSTS AND EXPENSES
Food, beverage and paper costs 800,748 784,088
Store payroll and other operating expenses 1,787,151 1,314,915
Selling, general and administrative expenses 1,417,346 1,481,410
--------------------------
4,005,245 3,580,413
--------------------------
(Loss) income before interest (139,008) 215,032
Interest expense ( 92,510) ( 57,133)
Interest income 66,668 37,743
--------------------------
Net (loss) income (164,850) 195,642
Preferred stock dividends accumulated (31,397) ( 37,003)
--------------------------
Net (loss) income attributable to
common shareholders $ (196,247) $ 158,639
==========================
(Loss) earnings per common share -
basic and diluted $ (0.02) $ 0.02
==========================
Average number of shares outstanding 8,514,306 7,919,466
=========================
Average number of shares outstanding-
diluted 8,514,306 10,425,864
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
SIX MONTHS ENDED
MAY 31,
1999 1998
--------------------------
REVENUES
<S> <C> <C>
Net sales by Company-owned stores $ 4,831,024 $ 4,817,840
Royalty fees from franchised stores 1,585,379 1,549,240
Franchise and area development fees 209,500 602,500
Licensing fees and other income 509,274 555,705
-------------------------
7,135,177 7,525,285
OPERATING COSTS AND EXPENSES
Food, beverage and paper costs 1,505,555 1,604,702
Store payroll and other operating expenses 2,983,504 2,828,467
Selling, general and administrative expenses 2,850,609 2,982,558
--------------------------
7,339,668 7,415,727
--------------------------
(Loss) income before interest (204,491) 109,558
Interest expense (131,532) (103,714)
Interest income 97,767 56,839
--------------------------
Net (loss) income (238,256) 62,683
Preferred stock dividends accumulated (77,096) ( 87,699)
--------------------------
Net loss attributable to
common shareholders $ (315,352) $ ( 25,016)
==========================
Loss per common share -
basic and diluted $ (0.04) $ -
==========================
Average number of shares outstanding-
basic and diluted 8,440,643 7,822,614
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
MAY 31,
1999 1998
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used for)
operating activities $ 146,828 $ (463,743)
INVESTING ACTIVITIES
Purchases of property and equipment (293,260) (103,484)
Note repayments 18,289 116,129
Other (161,416) 22,303
-----------------------
Net cash (used for) provided by
investing activities (436,387) 34,948
FINANCING ACTIVITIES
Borrowings 180,453 337,500
Repayment of long-term debt (323,925) -
Other ( 7,897) (35,107)
-----------------------
Net cash (used for) provided by
financing activities (151,369) 302,393
----------------------
Net decrease in cash and cash equivalents (440,928) (126,402)
Cash and cash equivalents at beginning of period 700,162 389,896
----------------------
Cash and cash equivalents at end of period $ 259,234 $ 263,494
======================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
BAB Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
represent the financial activity of BAB Holdings, Inc. (the "Company" or
"Holdings"), an Illinois corporation incorporated on November 25, 1992, and
its four wholly-owned subsidiaries, BAB Operations, Inc. ("Operations"), BAB
Systems, Inc. ("Systems"), Brewster's Franchise Corporation ("BFC") and My
Favorite Muffin Too, Inc. ("MFM"). Systems was incorporated on December 2,
1992, and was primarily established to franchise "Big Apple Bagels" specialty
bagel retail stores. Operations was formed on August 30, 1995, primarily to
operate Company-owned stores, including one which currently serves as the
franchise training facility. BFC was established on February 15, 1996, to
franchise "Brewster's Coffee" concept retail coffee stores. MFM was acquired
on May 13, 1997. MFM franchises and operates "My Favorite Muffin" specialty
muffin retail stores.
The accompanying condensed consolidated financial statements are unaudited.
These financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of the
Company's management, the condensed consolidated financial statements for the
unaudited interim periods presented include all adjustments necessary to
fairly present the results of such interim periods and the financial position
as of the end of said period. These adjustments were of a normal recurring
nature and did not have a material impact on the financial statements
presented.
2. Stores Open
Stores which have been opened at May 31, 1999 are as follows:
Stores opened:
Company-owned 26
Franchisee-owned 184
Licensed 69
---
Total 279
===
3. Acquisitions and Dispositions
In January 1998, the Company sold one store located in Lincoln, Nebraska to a
franchisee in exchange for $30,000 and a $177,000 note receivable which bears
interest at a rate of 8.5% per annum. Principal and interest payments are
payable monthly until March 1, 2003 when the remaining unpaid principal
balance is due in full.
On February 1, 1999 the Company acquired certain assets of a group of related
entities doing business as Jacobs Bros. Bagels (Jacobs Bros.), which include
eight retail bagel stores and a central commissary facility, in exchange for
$950,000 in cash and warrants for the purchase of an aggregate of 500,000
shares of common stock at an exercise price of $1.25 per share as to 275,000
shares and $1.50 per share as to 225,000 shares. These warrants are first
exercisable on February 1, 2000 and expire on January 31, 2006. On February
26, 1999 the Company issued a total of 160,000 shares of common stock to the
investment bankers who provided services in connection with this acquisition.
Further, the Company obtained noncompetition agreements with two former
principals of Jacobs Bros in consideration of $210,000 to be paid over varying
periods.
4. Preferred Stock - Series A Convertible Preferred Stock
In April 1997, the Company completed the sale of 87,710 shares of $25.00
Series A Convertible Preferred Stock (the "Preferred Stock") in a private
placement to institutional investors. The Preferred Stock carries an 8% annual
dividend payable in cash or, at the option of the Company, in shares of common
stock. However, during a Conversion Suspension Period (defined below),
dividends accrue at a rate of 15% per annum. Dividends are payable only when
shares are converted to shares of common stock. The holders have no voting
rights and have a liquidation preference of $25.00, plus accrued dividends,
out of assets of the Company available for distribution to shareholders.
Commencing August 1, 1997 through July 31, 1999, which date shall be extended
by the number of days in all Conversion Suspension Periods, the shareholders
may elect to convert each share of Preferred Stock into that number of shares
of common stock determined by dividing the $25 purchase price by the lesser of
$5.64 or 85% of the average closing bid price of the common stock for the 30
trading days immediately preceding the conversion date. In addition, if the
Company engages in an underwritten public offering, for any holder who has
given notice of participation in such offering, the conversion rate shall be
85% of the public offering price, if less than the amount calculated in the
immediately preceding sentence.
A Conversion Suspension Period takes effect if the closing bid price of the
common stock is less than $2.325 for 30 consecutive trading days. The
Conversion Suspension Period continues until the first trading day thereafter
that the closing bid price for the common stock has exceeded $2.325 for 30
consecutive trading days; provided, however, that a Conversion Suspension
Period shall not continue for more than sixty (60) days in any period of 365
days. The Company is not required to recognize or accept any conversion of
Preferred Stock during a Conversion Suspension Period. During any Conversion
Suspension Period, the Company, at its option, may redeem any or all of the
Preferred Stock by payment to the holders of $28.75 per share, plus all
accrued and unpaid dividends. The Company entered into a Conversion
Suspension Period during January 1999. Preferred dividends accumulated
during the three months and six months ended May 31, 1999 and 1998 were
$31,397, $77,096, $37,003 and $87,699 respectively.
During fiscal 1998, holders elected to convert 18,710 shares of Preferred
Stock plus dividends accrued thereon into 673,376 shares of common stock. No
shares of Preferred Stock were converted during the six months ended
May 31, 1999 and 60,000 shares of the Preferred Stock remain outstanding.
5. Line of Credit Agreement
In December 1998, the Company repaid $127,465 on a line of credit facility
which expired on December 31, 1998 and replaced it with a $1.75 million line-
of-credit facility which expires December 31, 1999 (the Line). Maximum
borrowing under the Line is limited to 75% of accounts receivable under 90
days and 40% of the original cost of equipment, furniture and fixtures.
Interest is payable monthly at prime plus 1% (9.00% as of May 31, 1999),
with principal due upon maturity on December 31, 1999. At May 31, 1999, the
Company had borrowed $1,750,000 on the Line, all of which is classified as a
current liability. The Company is currently in the process of replacing the
Line with a long-term credit facility. The Line is secured by substantially
all of the assets of the Company and requires, among other things, that the
Company maintain minimum net worth of $8 million and a compensating cash
balance of $250,000.
6. Notes Payable
In January 1999, the Company received a commitment from a finance
company for secured loans totaling $1,350,000 to be used to acquire the Jacobs
Bros. assets and refurbish and convert the units acquired to Big Apple
Bagels concept stores. As of May 31, 1999, the Company has borrowed
$1,297,432 pursuant to this commitment. Principal and interest are payable
monthly over a period of seven years and are secured by the assets acquired
and all improvements made thereon. The loans bear interest at an annual
percentage rate of 11.3 percent.
7. (Loss) Earnings per Share
The following tables set forth the computation of basic and diluted (loss)
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
1999 1998
---------- --------
<S> <C> <C>
Numerator:
Net (loss) income $(164,850) $195,642
Preferred stock dividend accumulated (31,397) (37,003)
---------- ----------
Numerator for basic (loss) earnings per
share- (loss) income attributable to
common shareholders $ (196,247) $ 158,639
Effect of dilutive securities:
Preferred stock dividend accumulated - 37,003
---------- ----------
Numerator for diluted (loss) earnings
per share - (loss) income
attributable to common shareholders $ (196,247) $ 195,642
=========== ==========
Denominator:
Denominator for basic (loss) earnings
per share--weighted average shares 8,514,306 7,919,466
Effect of dilutive securities:
Convertible preferred stock - 2,506,398
--------- ---------
Denominator for diluted (loss)earnings
per share -weighted average shares 8,514,306 10,425,864
========== ==========
Basic and diluted
(loss) earnings per share $ (0.02) $ 0.02
========== ==========
SIX MONTHS ENDED
MAY 31,
1999 1998
---------- --------
<S> <C> <C>
Numerator:
Net (loss) income $(238,256) $ 62,683
Preferred stock dividend accumulated (77,096) (87,699)
---------- -----------
Numerator for basic and diluted loss
per share- loss attributable to common
shareholders $ (315,352) $ (25,016)
========== ==========
Denominator:
Denominator for basic and diluted loss
per share--weighted average shares 8,440,643 7,822,614
========= =========
Basic and diluted loss per share $ (0.04) $ -
=========== ==========
</TABLE>
Options to purchase 535,240 shares of common stock at varying prices are
outstanding at May 31, 1999 under the Company's 1995 Long-Term Incentive
and Stock Option Plan (the Incentive Plan) and the 1995 Outside Directors
Stock Option Plan (the Directors' Plan). Also outstanding during the period
ended May 31, 1999 was a warrant sold in connection with the Company's
initial public offering to the underwriter to purchase 255,000 shares of
common stock at $3.20 per share. Additionally, in connection with various
acquisitions, the Company has issued options to purchase 504,500 shares of
common stock issuable at varying exercise prices ranging from $1.25 per share
to $6.17 per share. Options to purchase 550,000 shares of common stock at an
exercise price of $6.17 expired unexercised on May 21, 1999. Further, warrants
issued to each holder of Preferred Stock and the placement agent of the
Preferred Stock were outstanding to purchase 175,320 and 13,315 shares of
common stock at $2.35 and $3.29 per share, respectively. Finally, shares of
common stock are issuable pursuant to the terms of the Company's convertible
Preferred Stock (see Note 4).
The exercise of outstanding options and warrants and the conversion of
convertible securities outstanding during the three months and six months ended
May 31, 1999 and the six months ended May 31,1998 is not assumed as the result
is antidilutive to the reported loss per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the development of the Company's business, the markets for the Company's
products, anticipated capital expenditures, and the effects of completed and
proposed acquisitions, and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Certain risks and uncertainties are outside the control of the Company and its
management including its ability to attract new franchisees; the continued
success of current franchisees; the effects of competition on franchisee and
Company-owned store results; consumer acceptance of the Company's products in
new and existing markets; fluctuation in development and operating costs;
brand awareness; availability and terms of capital; adverse publicity;
acceptance of new product offerings; availability of locations and terms of
sites for store development; food, labor and employee benefit costs; changes
in government regulation (including increases in the minimum wage law);
regional economic and weather conditions; the hiring, training, and retention
of skilled corporate and restaurant management; and the integration and
assimilation of acquired concepts. Some of these risks and uncertainties are
wholly outside of the control of the Company. Accordingly, readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
General:
From its inception in November of 1992, the Company has grown to 26 Company-
owned stores and 253 franchised and licensed units as of May 31, 1999.
Systemwide revenues for the six months ended May 31, 1999 were $39.5
million, a $648,000 increase from the year-ago period. The Company is focused
on opening new or converting existing units to tri-branded stores featuring
products using the Big Apple Bagels, My Favorite Muffin and Brewster's coffee
trade names.
The Company continues to derive a substantial portion of its revenue from
sales generated at its Company-owned stores. Company-owned store sales
accounted for 71% of total revenues during the current year quarter. The
eight units acquired in February 1999 which were formerly owned by
Jacobs Bros. are anticipated to contribute approximately $3.3 million in
additional revenues in fiscal 1999. Ongoing royalty revenues and franchise
fees recognized upon the opening of a franchised unit also represent a
significant source of revenue to the Company, totaling 22% of total revenues
in the current year quarter. Management anticipates that the current
infrastructure is adequate to support the growth in the number of franchised
units which are anticipated to open during fiscal 1999. Further, additional
revenues generated from the sale of international master franchise agreements
are anticipated in fiscal 1999. During fiscal 1999, four franchised units
opened in Lima, Peru and are now contributing to ongoing franchise fees as a
result of an international master franchise agreement sold in the prior
fiscal year. Finally, licensing fees continue to be a source of increasing
revenues to the Company as it continually seeks to develop additional methods
of distribution for its brands. Management anticipates that the commissary
which was recently acquired in the Jacobs Bros. acquisition will provide
opportunities for increased profitability on product sold via non-traditional
sources of distribution.
Franchising interest remains very strong. With the help of the Internet Web
site as one of the prime sources of franchise leads and other means of
advertising, lead generation remains very high. International franchise
leads are increasing as well with the opening of four stores in Lima, Peru.
The Company anticipates store openings in at least two additional countries
in fiscal 1999.
In November 1998, the Company launched its Web site to take advantage of the
growth in Internet usage and transactional commerce on the World Wide Web.
The site was enhanced during the six months of 1999. Through the Web site,
customers can order My Favorite Muffin gift baskets; select offerings of
Brewster's Coffee and branded merchandise; access investor, franchise and
financial information; search for store locations and send comments directly
to the corporate offices. The Company's full service commissary, acquired
in the February 1999 Jacobs Bros. acquisition assists in support of the
growing business generated by the Web site. Currently the Company is in the
process of promoting the Web site to enhance its E-commerce growth.
During the first quarter of 1999 the Company began test marketing a new line
of artisan breads and a complete line of sandwiches, soups and salads. This
test has been expanded from 3 locations to additional Company-owned units
and will be tested in franchise units during the third quarter.
During the fourth quarter of fiscal 1997, management identified certain under-
performing stores which were operating at a loss and which, based on the
estimated future cash flows, were considered to be impaired. One store was
closed during fiscal 1997 and the remaining units were closed during the first
quarter of 1998. The six stores incurred operating losses of approximately
$90,000 during the three months ended February 28, 1998. As of February 1999
management has terminated its obligations under all the non-cancelable lease
obligations and paid all lease obligations in full.
Results of Operations
Three Months Ended May 31, 1999 versus Three Months Ended May 31, 1998.
Total revenues increased 1.9% to $3,866,000 in the second quarter 1999 from
$3,795,000 in the prior year quarter. The increase is primarily attributed
to the acquisition of the Jacobs Bros. stores offset by revenues generated by
stores operating in the year ago quarter that were subsequently closed. The
number of Company-owned stores remains at 26. In addition, franchise and
area development fee revenue was significantly below the year-ago period,
primarily because of the timing of store openings and the 1998 sale of two
international master franchise agreements that were not present in the
current year period.
Food, beverage and paper costs as a percentage of sales generated by Company-
owned stores, improved to 29.2% from 32.8% in the second quarter 1999 versus
1998. This is primarily the result of the commissary operations acquired as
part of the Jacobs Bros. acquisition. Store payroll and other operating
expenses increased due to greater overall sales volume and because of non-
recurring costs associated with the integration and conversion of the Jacobs
Bros. stores to tri-branded concepts and additional labor associated with the
testing of the Company's line of signature bread.
Selling, general and administrative (S,G&A) expenses totaled $1,417,000
during the current year period, a decrease of $64,000 from the year-ago
quarter. Payroll-related expenses totaled $658,000 compared to $551,000 in
the prior period, an increase of 19.0%. The increase is attributed to
employees hired in connection with the Jacobs Bros. acquisition. Despite the
increase in payroll, total S,G&A expenses are below year-ago levels. As a
percentage of revenue, S,G&A expenses were at 36.7% in the second quarter of
1999 versus 39.0% during the 1998 second quarter.
Loss from operations was $139,000 in the second quarter of fiscal 1999 versus
income from operations of $215,000 generated in the year-ago quarter.
Interest expense increased by $35,000 to $93,000 in the three months ended
May 31, 1999, related to the Company's additional obligations arising through
the Jacobs Bros. acquisition.
Net loss attributable to common shareholders totaled $196,000 in the quarter
ended May 31, 1999 versus net income of $159,000 in the year-ago quarter.
Preferred dividends on the Preferred Stock of $31,000 were accumulated during
the second quarter of 1999. In the quarter ended May 31, 1998, $37,000 of
preferred dividends were accumulated.
Net loss per share for the quarter ended May 31, 1999 was ($0.02) per share
on both a basic and diluted basis. The Company's income per share for the
year-ago quarter was $0.02 per share on both a basic and diluted basis. On
a diluted basis, 2,506,398 shares issuable pursuant to the conversion feature
of the Preferred Stock were included in the average number of shares
outstanding in the prior period calculation. The number of shares was based
on the average conversion price in effect during the quarter.
Six Months Ended May 31, 1999 versus Six Months Ended May 31, 1998
Total revenues decreased 5.2% to $7,135,000 in the 1999 period from
$7,525,000 in the prior year period. This decrease is attributable to the
level of franchising activity during the first six months of 1999 as compared
to 1998. In addition, the positive effect of the Jacobs Bros. acquisition in
1999 was offset by eight stores that were open for varying periods of time
during the six months of 1998. During the six months ended May 31, 1999, the
Company had a net increase in the number of Company-owned stores open of 4
and ended the period with 26 units in operation. During the year-ago
period, the Company had a net decrease in the number of Company-owned stores
of 8 and ended the quarter with 26 units in operation. Royalty revenue
increased modestly over the prior year period. Franchise and area
development fee revenue was significantly below the year-ago period,
primarily because of the timing of store openings and the 1998 sales of two
international master franchise agreements that were not present in the
current year period. The Company anticipates an increased number of store
openings and sales of international development agreements during the
last six months of fiscal 1999. Finally, licensing fees and other income in
total were slightly lower in the six months ended May 31, 1999 versus the
prior year's six months due to timing issues.
Food, beverage and paper costs associated with Company-owned store operations
were 31.2% as a percentage of sales in the six months ended May 31, 1999 as
compared to 33.3% in the prior year period. This is primarily the result of
the commissary operations acquired as part of the Jacobs Bros. acquisition.
Leveraging the costs in the commissary represents a significant opportunity
for improved profitability. Store payroll and other operating expenses
increased because of costs associated with the integration and conversion of
the Jacobs Bros. stores to tri-branded concepts and additional labor
associated with the testing of the Company's line of signature bread.
Selling, general and administrative expenses decreased by $132,000 to
$2,851,000. Corporate head count has risen slightly to 42 from 36 at the end
of May 31, 1998. The increase is attributed to employees hired in connection
with the Jacobs Bros. acquisition. Consequently, there is a slight increase
in payroll expense. Despite the increase in payroll expense, overall S,G&A
expenses were lower in the 1999 period than in the 1998 period.
Loss from operations was $204,000 in the fiscal 1999 period versus income of
$110,000 in the fiscal 1998 period Interest expense increased by $28,000 to
$132,000 in the six months ended May 31, 1999 related to the Company's
additional borrowings for the Jacobs Bros. acquisition offset by a lower
effective interest rate on its credit facility. Net loss attributable to
common shareholders totaled $315,000 in the six months ended May 31, 1999
versus $25,000 in the year-ago period. Preferred dividends on the Preferred
Stock of $77,000 were accumulated during the six months ended May 31, 1999.
In the year-ago period, $88,000 of preferred dividends accumulated. Net
loss per share for the six months ended May 31, 1999 was $0.04 per share on
both a basic and diluted basis. The Company's loss per share for the
year-ago quarter was less than $0.01 per share on both a basic and diluted
basis.
Liquidity and Capital Resources
The net cash provided by operating activities totaled $147,000 during the six
months ended May 31, 1999. Cash provided represents principally the net
loss, adjusted for depreciation and amortization of $631,000 and an increase
in accounts payable and accrued expenses of $160,000, offset by an increase
in accounts receivable of $435,000. The net cash used in operating
activities in the year-ago period totaled $464,000.
Investing activities used $436,000 during the six months ended May 31, 1999,
and consisted primarily of the purchase of property and equipment used to
refurbish and convert units acquired in the Jacobs Bros. acquisition. The
net cash provided in the prior year period totaled $35,000.
Net cash used in financing activities during the current period totaled
$151,000 and represents principally payments made on the credit facility
which expired on December 31, 1998. The Company paid $127,000 to reduce the
amount borrowed to $1,750,000, the maximum borrowing on a new line of credit
facility which is due on December 31, 1999. The outstanding balance of
$1,750,000 at May 31, 1999 is classified as a current liability. Management
is currently in the process of seeking long-term financing to replace this
credit facility.
In January 1999, the Company obtained loan commitments totaling $1,350,000
from a finance company whereby the Company could borrow $950,000 to purchase
certain assets of Jacobs Bros. and up to $400,000 to purchase equipment and
fund remodeling for the units acquired in the purchase. By May 31, 1999, the
Company had borrowed $1,297,000 pursuant to these commitments.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs written to
identify the applicable year with two digits rather than four. As
written, these programs may identify the year "00" as 1900 rather than
2000, which could result in system miscalculations or systems failure
leading to potentially substantial business disruptions.
The Year 2000 problem could affect computers, software and other
equipment used, operated or maintained by the Company. Accordingly, the
Company has adopted a Year 2000 plan which consists of identifying all
of its internal computer programs, systems and hardware and contacting
its vendors to obtain assurance that each product is Year 2000-
compliant. During this process, one exception was identified in the
Company's point of sale hardware and software for certain restaurant
units. The Company expects to incur capital costs totaling
approximately $10,000 to purchase Year 2000-compliant hardware and
software for those units. The Company presently believes that all of
its information technology systems will be Year 2000 compliant in a
timely manner. Costs related to the Year 2000, other than the cost
related to the point of sale system, are not expected to be material.
In addition, the Company is currently in the process of identifying all
significant third party vendors, including the Company's landlords,
equipment vendors, service providers, banks and utility companies and
assessing the impact on the Company if those vendors are not Year 2000-
compliant. To date, the Company is not aware of any third party vendors
whose malfunctions would materially disrupt the Company's business.
However, third party compliance efforts are outside the Company's
control. To the extent that the Company determines that a significant
vendor is not likely to be Year 2000 compliant, the Company intends to
develop contingency plans which include obtaining alternative sources
for any product or service material to the business. There can be no
assurance that all of the Company's material third party vendors will be
Year 2000 compliant or that the Company will successfully develop and
implement satisfactory contingency plans on a timely basis. The
occurrence of any such event could materially impact the financial
condition or results of operations of the Company.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the registrant's annual meeting of
shareholders held on April 27, 1999. All directors were elected and all
other proposals passed.
1. Election of Directors (Management's nominees):
Broker
For Withheld non Vote
--------- --------- --------
Michael W. Evans 6,762,015 1,217,390 -
Michael K. Murtaugh 6,742,015 1,237,390 -
David L. Epstein 6,784,935 1,194,470 -
Robert B. Nagel 6,763,615 1,215,790 -
Cynthia A. Vahlkamp 6,753,515 1,225,890 -
2. Amendment of the 1995 Long-Term Incentive and Stock Option Plan to
increase the number of shares of Common Stock reserved for issuance under the
Incentive Plan from 570,000 to 995,000.
For 2,512,868 Against 2,140,458 Abstain 22,455 Broker Non Vote
3,303,624
Broker non votes were not counted as "present and entitled to vote."
3. Amendment of the 1995 Outside Directors Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance under the Directors
Plan from 30,000 to 105,000.
For 2,465,768 Against 2,174,973 Abstain 26,310 Broker Non Vote
3,312,354
Broker non votes were not counted as "present and entitled to vote."
4. Amendment of the Directors Plan to increase the number of shares
underlying options granted to outside directors upon re-election from 1,000
to 5,000.
For 5,784,122 Against 2,168,538 Abstain 26,745 Broker Non Vote
0
Broker non votes were not counted as "present and entitled to vote."
5. Appointment of Blackman Kallick Bartelstein, LLP as independent auditors
for the fiscal year ended November 30, 1999.
For 7,816,981 Against 79,924 Abstain 82,500 Broker Non Vote 0
Broker non votes were not counted as "present and entitled to vote."
ITEM 5. OTHER INFORMATION
The Company has received notice from NASDAQ that the Company's stock price is
not in compliance with the new minimum bid price requirement. The Company
has until August 10, 1999 in order to regain compliance with this
requirement.
On April 26, 1999, the Company hired Mr. Mark E. Majewski as its Chief
Financial Officer and Treasurer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
EXHIBITS
The following exhibits are filed herewith.
Exhibit No. Description of Exhibit
- ----------- -------------------------------------------------------------
[i] 2.1 Asset Purchase Agreement dated February 2, 1996
between the Company, Brewster's Coffee Company, Inc.
and Peter D. Grumhaus
[ii] 2.2a Asset Purchase Agreement by and among BAB Systems,
Inc., Bagels Unlimited, Inc.("BUI"), and Donald Nelson
and Mary Ann Varichak dated May 1, 1996
[ii] 2.2b Non-Competition Agreement by and among the Company and
Donald Nelson and Mary Ann Varichak dated May 1, 1996
[ii] 2.2c Stock Option Agreement between the Company and BUI
dated May 1, 1996
[ii] 2.2d Registration Rights Agreement between the Company
and BUI dated May 1, 1996
[iii] 2.3a Asset Purchase Agreement by and between the Company
and Strathmore Bagels Franchise
Corp. ("Strathmore") dated May 21, 1996
[iii] 2.3b Stock Option Agreement dated May 21, 1996 between
the Company and Strathmore
[iii] 2.3c Registration Rights Agreement dated May 21, 1996
between the Company and Strathmore
[iii] 2.3d Non-Competition Agreement dated May 21, 1996 among
the Company, Strathmore, Jack Freedman and Glen Steuerman
[iii] 2.3e Memorandum of Understanding Regarding Form of
License Agreement effective November 30, 1995,
between Strathmore and Host International, Inc.
[iii] 2.3f Consent to Assignment between Strathmore and Host
International, Inc., dated March 13, 1996,
as amended May 21, 1996
[iv] 2.4a Acquisition Agreement dated May 1, 1997 by and among
BAB Holdings, Inc., BAB Acquisition Corp., My
Favorite Muffin Too, Inc., Muffin Holdings of
Pennsylvania, a limited partnership, Ruth Stern,
Owen Stern, and Ilona Stern
[iv] 2.4b Registration Rights Agreement dated as of May 1,
1997 between BAB Holdings, Inc., and
Owen Stern, Ruth Stern, Ilona Stern and Pierce W.
Hance.
[v] 3.1a Amended Articles of Incorporation of the Company
[vii] 3.1b Amended and Restated Statement of Designation,
Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock as filed with
the Secretary of State of Illinois on March 26, 1997
[v] 3.2 Bylaws of the Company, as amended
[v] 4.1 Form of Stock Certificate evidencing Common Stock,
no par value
[v] 4.2 Subscription Agreement with the Aladdin
International, Inc. dated August 31, 1995
[v] 4.3 Amended Form of Warrant Issued to Aladdin
International, Inc.
[v] 10.1 Form of Franchise Agreement
[v] 10.2 Form of Franchise Agreement-Satellite
[v] 10.3 Form of Franchise Agreement-Wholesale
[v] 10.4 Form of Area Development Agreement
[v] 10.5 Confidentiality and Non-Competition Agreement with
Franchisees
[v] 10.6 Form of Confidentiality Agreement with Employees
[v] 10.7 Licensing Agreement dated November 20, 1992 between
the Company and Big Apple Bagels, Inc.
[v] 10.8 Assignment of Royalty Mark & Trademark to the
Company by Big Apple Bagels, Inc. dated November 20, 1992
[v] 10.9 Agreement dated September 14, 1995 among the
Company, Big Apple Bagels, Inc. and Paul C. Stolzer
[i] 10.10 Consulting agreement dated February 16, 1996 between
Paul C. Stolzer and BAB Holdings, Inc.
[v] 10.11 Leases dated November 2, 1994 and February 14, 1995
for principal executive office
[v] 10.12 1995 Long-Term Incentive and Stock Option Plan
[v] 10.13 1995 Outside Directors Stock Option Plan
[v] 10.14 Settlement Agreement with Timothy Williams d/b/a Big
Apple Deli and Stipulated Dismissal with Prejudice
[i] 10.15 Program Agreement dated February 10, 1997 between
BAB Systems, Inc. a wholly owned subsidiary of
the Company, and Franchise Mortgage Acceptance
Company LLC
[iv] 10.16 Employment agreement between the Company and Owen
Stern dated May 8, 1997
[viii] 10.17 Loan document-CIB line of credit dated 12/31/98.
[viii] 10.18 Loan document-FMAC dated 02/01/99.
27.1 Financial data schedule
[i] Incorporated by reference to the Company's Report on Form 10-KSB for
the fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-K dated
May 1, 1996
[iii] Incorporated by reference to the Company's Report on Form 8-K
dated May 21, 1996
[iv] Incorporated by reference to the Company's Report on Form 8-K dated
May 13, 1997
[v] Incorporated by reference to the Company's Registration Statement on
Form SB-2, effective November 27, 1995 (Commission File No. 33-98060C)
[vi] Incorporated by reference to the Company's Report on Form 10-KSB for
the fiscal year ended November 30, 1996
[vii] Incorporated by reference to the Company's Report on Form 10-QSB
for the quarter ended February 28, 1997
[viii] Incorporated by reference to the Company's Report on Form 10-QSB
for the quarter ended February 28, 1999
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BAB HOLDINGS, INC.
Dated: July 14, 1999 By: /s/ MARK E. MAJEWSKI
--------------------
Mark E. Majewski
Chief Financial Officer
(Principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE
SIX MONTH PERIOD ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> MAY-31-1999
<CASH> 259,234
<SECURITIES> 0
<RECEIVABLES> 1,895,674
<ALLOWANCES> (279,733)
<INVENTORY> 354,943
<CURRENT-ASSETS> 3,425,645
<PP&E> 6,533,857
<DEPRECIATION> (2,190,541)
<TOTAL-ASSETS> 15,780,923
<CURRENT-LIABILITIES> 5,064,691
<BONDS> 3,010,492
0
1,625,827
<COMMON> 11,570,452
<OTHER-SE> (5,282,918)
<TOTAL-LIABILITY-AND-EQUITY> 15,780,923
<SALES> 4,831,024
<TOTAL-REVENUES> 7,135,177
<CGS> 1,505,555
<TOTAL-COSTS> 7,339,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,532
<INCOME-PRETAX> (315,352)
<INCOME-TAX> 0
<INCOME-CONTINUING> (315,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (315,352)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
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