FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27068
BAB Holdings, Inc.
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(Name of small business issuer in its charter)
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Illinois 36-3857339
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(State or other jurisdiction (IRS Employer
of incorporation or organiztion) Indentification No.)
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
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year:
$14,549,240
State the aggregate market value of the voting stock held by
nonaffiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days: $6,346,401
based on 5,887,199 shares held by nonaffiliates as of February
19, 1999, and the average of the closing bid ($1.031) and asked
($1.125) prices for said shares in the Nasdaq SmallCap Market as
of such date.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
8,521,706 shares of Common Stock, as of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy materials to be filed on or before
March 30, 1999 are incorporated by reference in Part III of Form
10-KSB. In addition, certain exhibits identified in Part III,
Item 13 are incorporated by reference to said exhibits as
previously filed with the Commission.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No
FORM 10-KSB INDEX
PART I
Item 1. Description of Business
Overview
Risk Factors
Recent Acquisitions
Locations
Store Operations
Franchising
Competition
Trademarks and Service Marks
Government Regulation
Employees
Year 2000 Issue
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promotors and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Reports on Form 8-K
Exhibits
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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BAB Holdings, Inc. (the "Company") was incorporated under the laws of
the State of Illinois on November 25, 1992 and currently operates,
franchises and licenses bagel, muffin and coffee retail units under the
Big Apple Bagels, My Favorite Muffin and Brewster's Coffee tradenames.
At November 30, 1998, the Company had 293 units in operation in 32
states and two Canadian provinces. The Company additionally derives
income from the sale of its trademark bagels, muffins and coffees
through nontraditional channels of distribution including under
licensing agreements with Host Marriott Services Corporation (Host
Marriott), Mrs. Fields Cookies, Choice Picks Food Courts, and through
direct home delivery of specialty muffin gift baskets and coffee.
The Big Apple Bagels brand franchise and Company-owned stores feature
daily baked "from scratch" bagels, flavored cream cheeses, premium
coffees, gourmet bagel sandwiches and other related products. Licensed
Big Apple Bagels units serve the Company's par-baked or frozen dough
bagel products, freshly baked daily, and related products. The My Favorite
Muffin brand consists of units operating as "My Favorite Muffin,"
featuring a large variety of freshly baked muffins, coffees and related
products, and units operating as "My Favorite Muffin and Bagel Cafes,"
featuring these products as well as a variety of specialty bagel
sandwiches and related products. The Company's Brewster's Coffee units
are specialty coffee shops featuring a variety of premium arabica bean
coffees--freshly brewed or in bulk--and related products. Big Apple
Bagels units are concentrated in the Midwest and Western United States,
while My Favorite Muffin units are clustered in the Middle Atlantic
States and Florida. Brewster's Coffee units are currently located in
Ohio. The Brewster's coffee products are featured in all Company-owned
and many of the franchised units.
The Company has grown significantly since its initial public offering in
November 1995 through growth in franchise units, Company-store
development, acquisitions and the development of alternative
distribution channels for its branded products. The Company intends to
continue its expansion through these means in the future. With the
acquisition of My Favorite Muffin Too, Inc. (MFM) on May 13, 1997, the
Company immediately added 60 franchise and five Company-operated units.
Through this acquisition the Company expects to continue to
leverage on the natural synergy of distributing muffin products in existing
Big Apple Bagels units and, alternatively, bagel products and Brewster's
Coffee in existing My Favorite Muffin units. Additionally, in February 1999,
the Company acquired eight bagel store units and a commissary from a related
group of entities doing business as Jacobs Bros. Bagels ("Jacobs Bros.")
in Chicago, Illinois. The assets acquired comprised only a portion of
the assets of the related group of entities. Most of these units will be
converted to Company-owned tri-branded stores and three will continue to
operate under the Jacobs Bros. Bagels tradename. The Company expects to
realize efficiencies in servicing the combined base of Big Apple Bagels,
My Favorite Muffin and Brewster's Coffee franchisees as a result of
these acquisitions.
RISK FACTORS
Limited Operating History
The Company was formed in November 1992. As of November 30, 1998, the
Company had 22 Company-owned stores and 271 franchised and licensed
stores in operation. The company's growth from 2 Company-owned and 59
franchise units at the time of its initial public offering in November
1995 has been achieved primarily through acquisitions. Consequently,
the Company's operating results achieved to date may not be indicative
of the results that may be achieved in the future by the Company.
Operating Losses
The Company reported a loss from operations of $3,406,000 for the year
ended November 30, 1997. However, the Company reported income from
operations of $515,000 for the year ended November 30, 1998 and believes
that its franchising and licensing operations and its Company-owned
stores will generate revenues sufficient to exceed the expenses
necessary to support such operations in the foreseeable future.
Recent Acquisitions
The Company's strategic plan has included growth through business
acquisitions. Since the beginning of fiscal 1997, the Company has
completed the acquisitions of Just Bagels, Inc. ("JBI"), MFM and
Jacobs Bros. No assurance can be given that these or other
acquisitions will be profitable or that the Company will successfully
integrate, convert or operate any acquired businesses.
As a result of acquisitions, the Company has grown significantly in
size, has expanded the geographic area in which it operates and has
added product lines and distribution channels. Any acquisition involves
inherent uncertainties, such as the effect on the acquired businesses of
integration into a larger organization and the availability of
management resources to oversee the operations of the acquired business.
The Company's ability to integrate the operations of acquired businesses
is essential to its future success. There can be no assurance as to the
Company's ability to integrate new businesses nor as to its success in
managing the significantly larger operations resulting therefrom.
Additionally, amortization of intangible assets recorded as a result of
the acquisitions will have a significant impact on future operating
results. During 1998 and 1997, the Company closed the stores acquired
from JBI (see "Management's Discussion and Analysis" and Note 12 to the
audited consolidated financial statements included herein.)
Recoverability of Intangible Assets
The Company has recorded significant intangible assets in connection
with certain acquisitions. Applicable accounting standards require the
Company to review long-lived assets (such as goodwill and other
identifiable intangible assets) to be held and used by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying values of those assets may not be recoverable. In the fourth
quarter of fiscal 1997, the Company recorded a provision for impairment
and store closures totaling $1,837,000. Of this amount, approximately
$323,000 related to goodwill and other intangible assets related to
stores acquired which have been closed (see "Management's Discussion
and Analysis" and Note 12 to the audited consolidated financial
statements included herein). While management believes goodwill and
other identifiable intangible assets recorded as of November 30, 1998 to
be fairly stated, it is possible that charges to write down assets will
be required in the future. Any such charge could have a material
adverse effect on the Company's financial results.
Rapid Growth
The Company has grown significantly during the past year and expects
continued growth in franchising and licensed product distribution to
continue in the future. The opening and success of franchised Big Apple
Bagels, Brewster's Coffee and My Favorite Muffin stores will depend on
various factors, including customer acceptance of these concepts in new
markets, the availability of suitable sites, the negotiation of
acceptable lease or purchase terms for new locations, permit and
regulatory compliance, the ability to meet construction schedules, the
financial and other capabilities of the Company and its franchisees, the
ability of the Company to successfully manage this anticipated expansion
and to hire and train personnel, and general economic and business
conditions. Not all of the foregoing factors are within the control of
the Company.
The Company will continue to require the implementation of enhanced
operational and financial systems and additional management,
operational, and financial resources. Failure to implement these
systems and add these resources could have a material adverse effect on
the Company's results of operations and financial condition. There can
be no assurance that the Company will be able to manage its expanding
operations effectively or that it will be able to maintain or accelerate
its growth.
Terms of Credit Facility and Availability of Capital
In December 1998, the Company entered into a new bank credit facility
for $1.75 million. This new credit facility, which expires December 31,
1999, replaces the previous secured line of credit in the amount of $2
million, which expired on December 31, 1998. This new credit line is
secured by substantially all of the assets of the Company and is subject
to essentially the same loan covenants as the expired line, including
that the Company maintain a minimum net worth of $8 million and maintain
a compensating cash balance of $250,000. At December 31, 1998 the
Company had borrowed the maximum amount available under the new line of
credit.
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 its cash flows from current operations will
provide sufficient working capital to enable the Company to meet
operating requirements and compensating cash balance requirements for
the foreseeable future, however, it is possible that additional
financing will be required. The Company does not represent that it will
be able to obtain any required additional financing or that such
financing, if obtained, will be on terms favorable or acceptable to the
Company. Any future equity financing may result in dilution to holders
of the Common Stock and any future debt financing may reduce earnings.
If the Company is unable to secure additional financing when needed, or
at all, it could be required to significantly reduce the scope of its
existing operations, or even to discontinue operations. (See
"Management's Discussion and Analysis" and Notes 5 and 13 to the audited
consolidated financial statements included herein.)
Dependence on Franchisees
The Company historically has received a significant portion of its
revenues from initial franchise fees and continuing royalty payments
from franchisees. Although the Company uses established criteria to
evaluate franchisees, there can be no assurance that franchisees will
have the business ability or access to financial resources necessary to
successfully develop or operate stores in a manner consistent with the
Company's concepts and standards. Additionally, no assurance can be
given that desirable locations and acceptable leases can be obtained by
franchisees. If the Company's franchisees encounter business or
operational difficulties, the Company's revenues will be adversely
affected. The poor performance of any franchisee may also negatively
impact the Company's ability to sell new franchises. Consequently, at
present, the Company's financial prospects are substantially related to
the success of the franchise stores, over which the Company has limited
control. There can be no assurance that the Company will be able to
successfully attract new franchisees or that the Company's franchisees
will be able to successfully develop and operate stores.
Although the Company monitors franchisees' compliance with ongoing
obligations on the basis of weekly revenue, and the Company's standard
franchise agreement also grants the Company the right to audit the books
and records of franchisees at any time, no assurance can be given that
all franchisees will operate their stores in accordance with the
Company's operating guidelines and in compliance with all material
provisions of the franchise agreement, and the failure of franchisees to
so operate their stores could have a material adverse impact on the
Company's business. The franchise agreement gives the Company the
choice of seeking legal remedies, which could be time-consuming and
expensive, and terminating the franchisee, which would diminish the
Company's revenue until such time, if ever, as a new franchisee replaces
the terminated franchisee.
Competition
The food service industry in general, and the fast food/take-out sector
in particular, are highly competitive, and competition is likely to
increase. The Company believes that specialty bagel, muffin and coffee
retail businesses are likely to become increasingly competitive. The Company
competes against well-established food service companies with greater product
and name recognition and with larger financial, marketing, and distribution
capabilities than those of the Company, as well as innumerable local food
service establishments that offer products competitive with those offered by
the Company. The Company's principal competitors include Bruegger's Bagel
Bakery ("Bruegger's"), Chesapeake Bagel Bakery ("Chesapeake"),
Einstein/Noah Bagel Corp. ("Einstein") and New World Coffee and Bagel
(which recently acquired Manhattan Bagel). In addition, other fast-food
service providers, such as Dunkin' Donuts, have recently added bagels to
their product offerings. Any increase in the number of food service
establishments in areas where the Company's or its franchisees' sites
are located could have a material adverse effect on the Company's sales
and revenues. The Company competes for qualified franchisees with a
wide variety of investment opportunities both in the food service
business and in other industries. Investment opportunities in the bagel
store business include competing franchises offered by Bruegger's,
Chesapeake, Einstein and New World Coffee and Bagel, as well as
operators of individual stores and multi-store chains.
Food Service Industry
Food service businesses are often affected by changes in consumer
tastes; national, regional, and local economic conditions; demographic
trends; traffic patterns; and the type, number, and location of
competing restaurants. Multi-unit food service chains, such as the
Company's, can also be substantially adversely affected by publicity
resulting from problems with food quality, illness, injury, or other
health concerns or operating issues stemming from one store or a limited
number of stores. Such businesses are also subject to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could negatively affect the availability, quality, and cost
of ingredients and other food products. In addition, factors such as
inflation, increased food and labor costs, regional weather conditions,
availability and cost of suitable sites and the availability of
experienced management and hourly employees may also adversely affect
the food service industry in general and the Company's results of
operations and financial condition in particular.
Government Regulation
The Company is subject to the Trade Regulation Rule of the Federal Trade
Commission (the "FTC") entitled ``Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures''
(the "FTC Franchise Rule") and state and local laws and regulations that
govern the offer, sale and termination of franchises and the refusal to
renew franchises. Continued compliance with this broad federal, state
and local regulatory network is essential and costly, and the failure to
comply with such regulations may have a material adverse effect on the
Company and its franchisees. Violations of franchising laws and/or
state laws and regulations regulating substantive aspects of doing
business in a particular state could limit the Company's ability to sell
franchises or subject the Company and its affiliates to rescission
offers, monetary damages, penalties, imprisonment and/or injunctive
proceedings. In addition, under court decisions in certain states,
absolute vicarious liability may be imposed upon franchisors based upon
claims made against franchisees. Even if the Company is able to obtain
insurance coverage for such claims, there can be no assurance that such
insurance will be sufficient to cover potential claims against the
Company.
Dependence on Personnel
The Company's ability to develop and market its products and to achieve
and maintain a competitive market position depends, in large part, on
its ability to attract and retain qualified personnel and
franchisees. Competition for such personnel is intense, and there can be
no assurance that the Company will be able to attract and retain such
personnel.
Trademarks/Service Marks
The trademarks and service marks used by the Company contain common
descriptive English words and thus may be subject to challenge by users
of these words, alone or in combination with other words, to describe
other services or products. Some persons or entities may have prior
rights to those names or marks in their respective localities.
Accordingly, there is no assurance that such marks are available in all
locations. Any challenge, if successful, in whole or in part, could
restrict the Company's use of the marks in areas in which the challenger
is found to have used the name prior to the Company's use. Any such
restriction could limit the expansion of the Company's use of the marks
into that region, and the Company and its franchisees may be materially
and adversely affected.
Potential Effects of Antitakeover Provisions
The Company is authorized to issue up to 4,000,000 shares of Preferred
Stock, 120,000 shares of which have been designated Series A Convertible
Preferred Stock. The remaining authorized preferred stock may be issued
in one or more series, the terms of which may be determined at the time
of issuance by the Board of Directors, without further action by
stockholders. The issuance of any Preferred Stock could adversely
affect the rights of the holders of Common Stock, and specific rights
granted to holders of preferred stock could restrict the Company's
ability to merge with or sell its assets to a third party, thereby
preserving control of the Company by its then owners.
Certain provisions of the Illinois Business Corporation Act (the
"Illinois Act") restrict a publicly-held corporation from engaging in a
"business combination" with an "interested shareholder" or its
affiliates, unless the business combination is approved by the Board of
Directors or by a supermajority vote of the stockholders. These
provisions of the Illinois Act could delay and make more difficult a
business combination even if the business combination could be
beneficial to the interests of the Company's shareholders.
Possible Depressive Effect on Price of Common Stock from Future Sales of
Common Stock
As of February 1999, 1,719,004 shares of Common Stock are issuable from
time to time pursuant to the terms of the Company's outstanding Series A
Convertible Preferred Stock and related warrants issued to the holders
of the Company's Series A Convertible Preferred Stock and to the
placement agent for such Preferred Stock. In addition, the Company
intends to file a registration statement covering the shares of Common
Stock issuable under its Incentive Plan and Directors Plan, pursuant to
which such shares, when issued, will be freely tradeable, except to the
extent held by officers and directors who are limited to resale by Rule
144 under the Securities Act of 1933 ("the Act"). Further, in
connection with the Jacobs Bros. acquisition in February 1999, the
Company issued warrants for the purchase of 500,000 shares of Common
Stock issued in consideration of the assets acquired and 160,000 shares
of Common Stock to the investment bankers for services rendered in
connection with the acquisition. All of these shall have certain
limited rights to registration, to make the issue fully tradeable. In
addition, pursuant to Rule 144 under the Act, these shares will be
publicly tradeable in part beginning 5th year of the issuance. (See also
"RECENT BUSINESS ACQUISITIONS" and "RECENT SALES OF UNREGISTERED
SECURITIES.")
The sale, or availability for sale, of substantial additional amounts of
Common Stock in the public market, in the offerings described above,
could materially adversely affect the market price of the Common Stock
and could impair the Company's ability to raise additional capital
through the sale of its equity securities or debt financing.
Effects of Delisting From Nasdaq SmallCap Market
If the Company fails to maintain the qualification for its Common Stock
to trade on the Nasdaq SmallCap Market, its Common Stock could be
delisted from Nasdaq. In such event, trading, if any, in such
securities would thereafter be conducted in the over-the-counter markets
in the so-called "pink sheets" or the National Association of Securities
Dealer's "Electronic Bulletin Board." Consequently, the liquidity of
the Company's securities would likely be impaired, not only in the
number of shares which could be bought and sold, but also through delays
in the timing of the transactions, reduction in security analysts' and
the news media coverage, if any, of the Company, and the lower prices
for the Company's securities than might otherwise prevail.
Penny Stock Regulation
In the event the Company's securities are delisted from the Nasdaq
SmallCap Market, as described above, the Company's securities could
become subject to the rules and regulations under the Securities
Exchange Act of 1934 relating to "penny stocks" (the "Penny Stock
Rule"), which impose additional sales practice requirements on broker-
dealers who sell such securities to persons other than established
customers and certain institutional investors. Penny stocks generally
are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or
authorized for quotation on the Nasdaq system, provided that current
price and volume information with respect to transactions in that
security is provided by the exchange or system). For transactions
covered by the Penny Stock Rule, a broker-dealer must, among other
things, make a special suitability determination for the purchaser and
have received the purchaser's written consent to the transaction prior
to sale. Consequently, the Penny Stock Rule may reduce the level of
trading activity in the secondary market for the Company's securities,
may adversely affect the ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of purchasers in this
offering to sell any of the securities acquired hereby in the secondary
market.
RECENT BUSINESS ACQUISITIONS
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
owners of JBI and was paid in part through the forgiveness of notes
receivable and other receivables from JBI of approximately $486,000.
The stores acquired were closed in 1997 and 1998 (see "Management's
Discussion and Analysis" and Note 11 to the audited consolidated
financial statements included herein).
On May 13, 1997, the Company acquired My Favorite Muffin Too, Inc., a
New Jersey corporation. MFM franchised and operated muffin and bagel
specialty retail stores concentrated primarily in the eastern United
States and Florida, and had 60 franchise and 5 Company-operated units in
operation. MFM was merged into BAB Acquisition Corporation, a wholly
owned subsidiary of the Company, with MFM being the surviving entity.
The acquisition through merger was completed by exchanging 150 shares of
MFM common stock held equally by Owen Stern, Ruth Stern and Ilona Stern
(the "Sellers"), for 432,608 shares of the Company's common stock,
restricted as to transfer until January 1, 1999, and $259,000 in cash.
In addition to current liabilities, the Company has assumed
approximately $350,000 of MFM's existing bank debt. The Company has
retained two of the three Sellers as employees of the Company pursuant
to employment contracts, through May 8, 2001 for Owen Stern, and through
May 8, 2000 for Ruth Stern. (See "Management's Discussion and Analysis"
and Note 11 to the audited consolidated financial statements included
herein).
On February 1, 1999 the Company acquired certain assets of 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. Further, the Company entered into
noncompetition agreements with two former principals of Jacobs Bros.
totaling $210,000 to be paid over varying periods. (See "Management's
Discussion and Analysis" and Note 13 to the audited consolidated
financial statements included herein).
LOCATIONS
The following table sets forth the states and provinces in which the
Company's units were located as of November 30, 1998.
<TABLE>
<CAPTION>
COMPANY
STATE/PROVINCE OWNED FRANCHISED LICENSED TOTAL
- --------------- ------- ---------- -------- -----
<S> <C> <C> <C> <C>
UNITED STATES:
Alabama 1 1
Arizona 1 1
California 8 2 10
Colorado 6 6
Connecticut 1 2 3
Florida 12 9 21
Georgia 3 6 9
Illinois 2 37 7 46
Indiana 7 7
Iowa 10 10
Kentucky 3 3
Maryland 3 3
Massachusetts 1 1
Michigan 23 3 26
Minnesota 7 1 8
Missouri 7 7
Nebraska 3 3
Nevada 2 5 7
New Jersey 18 8 26
New York 2 11 13
North Carolina 5 5
Ohio 2 10 2 13
Oregon 1 1
Pennsylvania 3 11 1 15
South Carolina 1 1
Tennessee 1 1
Texas 6 6
Utah 2 2
Virginia 1 1
Washington 2 2
West Virginia 1 1
Wisconsin 7 17 3 27
CANADA:
British Columbia 1 2 3
Ontario 3 3
----- ------ ----- -----
Total 22 194 77 293
===== ====== ===== =====
</TABLE>
STORE OPERATIONS
BIG APPLE BAGELS--Big Apple Bagels franchised and Company-owned stores
daily bake "from scratch" over 18 varieties of fresh bagels and prepare
up to 18 varieties of cream cheese spreads. Licensed units under Host
Marriot, and Choice Picks Food Courts serve the Company's par-baked
frozen bagel products, freshly baked daily. Stores also offer a
variety of breakfast and lunch bagel sandwiches, soups, various dessert
items, and gourmet coffees and other beverages. A typical Big Apple
Bagels franchise or Company-owned store is located within a three-mile
radius of at least 25,000 residents in an area with a mix of both
residential and commercial properties. The average Company-owned or
franchised store ranges from 1,500 to 2,000 square feet. The Company's
current store design is approximately 2,000 square feet, with seating
capacity for 30 to 40 persons, and includes 750 square feet devoted to
production and baking. A satellite store is typically smaller than a
production store, averaging 600 to 1,000 square feet. Although franchise
stores may vary in size from Company-owned stores, and from other
franchise stores, store layout is generally consistent. Licensed units
are generally located in airports, travel plazas, hotels, and
universities.
MY FAVORITE MUFFIN--My Favorite Muffin franchised and Company-owned
stores bake 20 to 25 varieties of muffins daily, from over 400 recipes,
plus a variety of bagels. They also serve gourmet coffees, beverages
and, at My Favorite Muffin and Bagel Caf, locations, a variety of bagel
sandwiches and related products. While a number of MFM units are
located in shopping mall locations with minimal square footage of 400
to 800 square feet, the typical strip mall prototype unit is
approximately 2,000 square feet with seating for 30 to 40 persons. A
typical MFM franchise or Company-owned store is located within a three-
mile radius of at least 25,000 residents in an area with a mix of both
residential and commercial properties.
BREWSTER'S COFFEE--Brewster's Coffee licensed units serve a variety of
arabica bean coffees, both freshly brewed and in bulk, and related
products such as bagels, muffins and other beverages. The typical
Brewster's coffee location is approximately 1,500 square feet and offers
seating for 20 to 30 persons and is generally located in high traffic
urban or suburban location.
FRANCHISING
The Company requires payment of an initial franchise fee per store, plus
a 5% royalty on net sales. Additionally, Big Apple Bagels ("BAB")
franchisees are members of a national marketing fund requiring a 2%
contribution based on net sales. MFM franchisees pay a 1% net sales
contribution to a national marketing fund. The Company currently
requires a franchise fee of $25,000 on a franchisee's first BAB or MFM
store. The fee for subsequent production stores is $20,000 and $15,000
for satellite and kiosk stores.
The Company has revised its Uniform Franchise Offering Circular to
provide for, among other things, the opportunity for prospective
franchisees to enter into a preliminary agreement for their first
production store. This agreement enables a prospective franchisee a
period of 60 days in which to locate a site. The fee for this
preliminary agreement is $10,000. If a site is not located and approved
by the franchisor within the 60 days, the prospective franchisee will
receive a refund of $7,000. If a site is approved, the entire $10,000
will be applied toward the initial franchise fee. See also "Government
Regulation."
The Company's franchise agreements provide a franchisee with the right
to develop one store at a specific location. Each franchise agreement is
for a term of ten years with the right to renew. A franchisee is
required to be in operation not later than ten months following the
signing of the franchise agreement.
Area development agreements, which may be granted to new or existing
franchisees, provide that a franchisee may open a predetermined number
of concept stores within a defined geographic area (an "Area of
Exclusivity"). The Area of Exclusivity is negotiated prior to the
signing of the area development agreement and varies by agreement as to
size of the area, the number of stores required, and the schedule for
store development and opening. The Company's current area development
fee is $5,000 per store to be developed. As additional franchise
agreements are executed, additional franchise fees are collected. The
area development fee is not refundable if no franchise agreement is
executed.
The Company currently advertises its franchising opportunities at
franchise trade shows and in directories, newspapers and business
opportunity magazines worldwide. In addition, a substantial number of
prospective franchisees contact the Company as a result of patronizing
an existing store.
In February 1997, the Company entered an agreement with Franchise
Mortgage Acceptance Company, LLC ("FMAC") of Greenwich, Connecticut to
provide financing to qualified existing franchisees for the purpose of
adding second or subsequent units. FMAC has reserved a total of $25
million for the program, which is expected to assist in increasing the
number of units in the Company's franchise system. Pursuant to the
agreement, the Company guarantees up to 10% of the amount funded by FMAC
in each 12-month period commencing from the date the first financing is
funded. As of November 30, 1998, FMAC has advanced funds totaling
$1,040,000 to franchisees.
COMPETITION
The quick service restaurant industry is intensely competitive with
respect to product quality, concept, location, service and price. There
are a number of national, regional and local chains operating both owned
and franchised stores which may compete with the Company on a national
level or solely in a specific market or region. The Company believes
that because the industry is extremely fragmented, there is a
significant opportunity for expansion in the bagel, muffin and coffee
concept chains.
The Company believes that the most direct competitors of its bagel
concept units are New World Coffee and Bagel (which recently acquired
the operations of Manhattan Bagel), Bruegger's, Chesapeake, and
Einstein, all of which are also franchisors. There are several other
regional bagel chains with fewer than fifty stores, all of which may be
expected to compete with the Company. There is currently not a major
national competitor in the muffin business, but there are a number of
local and regional operators. Additionally, the Company competes
directly with a number of national, regional and local coffee concept
stores and brandnames.
The Company competes, and can be anticipated to compete, against
numerous small independently owned bagel bakeries, and national fast
food restaurants, such as Dunkin' Donuts, that offer bagels and muffins
as part of their breakfast food offerings and supermarket bakery
sections. In particular, the Company's bagels compete against Lenders
Bagels and other brands of fresh and frozen bagels offered in
supermarkets. Certain of these competitors may have greater product and
name recognition and larger financial, marketing and distribution
capabilities than the Company. In addition, the Company believes that
the startup costs associated with opening a retail food establishment
offering similar products on a stand-alone basis are competitive with
the startup costs associated with opening its concept stores and,
accordingly, such startup costs are not an impediment to entry into the
retail bagel, muffin or coffee businesses.
The Company believes that its stores compete favorably in terms of
taste, food quality, convenience, customer service, and value, which the
Company believes are important factors to its targeted customers.
Competition in the food service industry is often affected by changes in
consumer taste; national, regional, and local economic and real estate
conditions: demographic trends, traffic patterns; the cost and
availability of labor; consumer purchasing power; availability of
product, and local competitive factors. The Company attempts to manage
or adapt to these factors, but not all such factors are within the
Company's control and such factors could cause the Company and some or
all of its area developers and franchisees to be adversely affected.
The Company competes for qualified franchisees with a wide variety of
investment opportunities in the restaurant business and in other
industries. The Company's continued success is dependent to a
substantial extent on its reputation for providing high quality and
value with respect to its service, products and franchises, and this
reputation may be affected not only by the performance of Company-owned
stores but also by the performance of its franchise stores, over which
the Company has limited control.
TRADEMARKS AND SERVICE MARKS
The trademarks and service marks "Big Apple Bagels," "Brewster's Coffee"
and "My Favorite Muffin" are registered under applicable federal
trademark law. These marks are licensed by the Company to its
franchisees pursuant to franchise agreements, and the Company has
licensed the "Big Apple Bagels" mark to Big Apple Bagels, Inc., a
corporation which is wholly owned by Paul C. Stolzer, a principal
stockholder and a former director and president of the Company. Mr.
Stolzer served as a consultant to the Company through February 1999. In
February 1999 the Company acquired the trademark of "Jacobs Bros.
Bagels" upon purchasing certain assets of Jacobs Bros.
The "Jacobs Bros. Bagels" mark is also registered under applicable
federal trademark law.
The Company is aware of the use by other persons and entities in certain
geographic areas of names and marks which are the same as or similar to
the Company's marks. Some of these persons or entities may have prior
rights to those names or marks in their respective localities.
Therefore, there is no assurance that the marks are available in all
locations. It is the Company's policy to pursue registration of its
marks whenever possible and to vigorously oppose any infringement of its
marks.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply with federal,
state and local government regulations applicable to consumer food
service businesses, including those relating to the preparation and sale
of food, minimum wage requirements, overtime, working and safety
conditions, and citizenship requirements, as well as regulations
relating to zoning, construction, health, and business licensing. Each
store is subject to regulation by federal agencies and to licensing and
regulation by state and local health, sanitation, safety, fire and other
departments. Difficulties or failures in obtaining the required licenses
or approvals could delay or prevent the opening of a new Company-owned
or franchise store, and failure to remain in compliance with applicable
regulations could cause the temporary or permanent closing of an
existing store. The Company believes that it is in material compliance
with these provisions. Continued compliance with these federal, state
and local laws and regulations is costly but essential, and failure to
comply may have an adverse effect on the Company and its franchisees.
The Company's franchising operations are subject to regulation by the
Federal Trade Commission (the "FTC") under the Uniform Franchise Act
which requires, among other things, that the Company prepare and
periodically update a comprehensive disclosure document known as a
Uniform Franchise Offering Circular ("UFOC"), in connection with the
sale and operation of its franchises. In addition, some states require a
franchisor to register its franchise with the state before it may offer
a franchise to a prospective franchisee. The Company believes its UFOCs,
together with any applicable state versions or supplements, complies
with both the FTC guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises.
The Company is also subject to a number of state laws, as well as
foreign laws (to the extent it offers franchises outside of the United
States), that regulate substantive aspects of the franchisor-franchisee
relationship, including, but not limited to, those concerning
termination and non-renewal of a franchise.
EMPLOYEES
As of November 30, 1998, the Company employed 307 persons. Of these
individuals, 266 work in the Company-owned stores and the majority are
part-time employees. The remaining employees are responsible for
oversight of franchising and Company-store operations. None of the
Company's employees are subject to any collective bargaining agreements,
and management considers its relations with its employees to be good.
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.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company's principal executive office, consisting of approximately
7,300 square feet, is located in Chicago, Illinois and is leased
pursuant to two leases, expiring in March 2000 and June 1999. The
Company believes that these facilities will be adequate to meet its
needs for the remainder of the term of the two leases. The Company
expects to renew the leases on the current space under terms favorable
to the Company. As a result, no relocation expense is anticipated in
the foreseeable future. In connection with the MFM acquisition, the
Company assumed a lease on approximately 6,600 square feet of office
space used as the former MFM corporate headquarters, expiring in
September 2000. In October 1997, the Company entered into 2 agreements
to sublease the entire facility. These sublease agreements expire in
March 2000 and September 2000, respectively. Additionally, the Company
leases space for each of its Company-owned stores. Lease terms for these
stores are generally for initial terms of five years and contain options
for renewal for one or more five-year terms. (See Note 6 to the audited
consolidated financial statements included herein.)
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
During the fourth quarter of the fiscal year ended November 30, 1998, no
matter was submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ---------------------------------------------------------------------
The following table sets forth the quarterly high and low sale prices
for the Company's Common Stock, as reported in the Nasdaq SmallCap
Market for the two years ended November 30,1998. The Company's Common
Stock is traded under the symbol "BAGL."
<TABLE>
<CAPTION>
LOW HIGH
----- ----
<S> <C> <C>
YEAR ENDED NOVEMBER 30, 1997
First quarter.................... $3.13 $8.25
Second quarter................... 2.50 4.50
Third quarter.................... 2.50 3.63
Fourth quarter................... 1.06 3.63
YEAR ENDED NOVEMBER 30, 1998
First quarter.................... $ .63 $1.38
Second quarter................... .63 1.44
Third quarter.................... .63 1.33
Fourth quarter................... .50 1.00
</TABLE>
As of February 24, 1999, the Company's Common Stock was held of record
by 208 holders. Registered ownership includes nominees who may hold
securities on behalf of multiple beneficial owners. The Company
estimates that the number of beneficial owners of its common stock at
February 10, 1999 is 2,800, based upon information provided by a proxy
services firm.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the Board of Directors currently intends to retain all
earnings, if any, for use in the Company's business for the foreseeable
future. Any future determination as to declaration and payment of
dividends will be made at the discretion of the Board of Directors,
subject to the existence of any covenants restricting the payment of
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On March 27, 1997, the Company authorized and issued a series of
convertible Preferred Stock which has liquidation and dividend rights
senior to that of Common Stock. Such securities were offered and sold
without registration under the Securities Act of 1933 (the "Act") in
reliance upon Sections 4 (2) and 4(6) of the Act. See Note 8 to the
audited consolidated financial statements included herein and Exhibit
4.4 to the report on Form 10-QSB filed for the quarter ended February
28, 1997 for further information.
On May 13, 1997, the Company issued a total of 432,608 shares of Common
Stock to acquire MFM. Such securities were offered and sold without
registration under the Act in reliance upon Section 4(2) of the Act.
See Note 11 to the audited consolidated financial statements included
herein and Form 8-K filed with the Commission on May 28, 1997 (as
amended on July 23, 1997 and December 15, 1997.)
On February 1, 1999 the Company issued warrants for purchase of an
aggregate of 500,000 shares of the Company's Common Stock in connection
with the acquisition of certain assets of Jacobs Bros. These warrants
are exercisable at an exercise price of $1.25 per share as to 275,000
shares and $1.50 per share as to 225,000 shares commencing February 1,
2000 and ending on January 31, 2006. The warrants were offered and sold
without registration under the Act in reliance upon Section 4(2) of the
Act.
On February 26, 1999 the Company issued a total of 160,000 shares of
Common Stock in connection with services rendered in the Jacobs Bros.
aquisition, including 65,000 shares which may be deemed to be
beneficially owned by David Epstein, a member of the Board of Directors
of the Company. Such securities were offered and sold without
registration under the Act in reliance upon Section 4(2) of the Act.
ITEM 6. 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 elsewhere in
this Report on Form 10-KSB. The data should be read in conjunction with
the consolidated financial statements and notes thereto. Certain
statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements
regarding the development of the Company's business, the markets for the
Company's products, anticipated capital expenditures, and the effects of
completed and proposed acquisitions, and other statements contained
herein regarding matters that are not historical facts, are forward-
looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks
and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. 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.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The Consolidated Financial Statements and Report of Independent Auditors
is included immediately following.
BAB HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
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 Report 1
Consolidated Balance Sheets Exhibit A 2
Consolidated Statements of Operations Exhibit B 3
Consolidated Statements of
Stockholders' Equity Exhibit C 4
Consolidated Statements of
Cash Flows Exhibit D 5-6
Notes to Consolidated Financial
Statements 7-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Stockholders and Board of Directors
BAB Holdings, Inc.
Chicago, Illinois
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
February 6, 1999
<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 2,275,169 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, $25.00 par value,
120,000 shares authorized; 60,000 shares and
78,710 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 Dividend
Accumulated -- -- -- 510,668 -- --
Conversion of
Preferred to
Common Stock 110,342 248,185 (9,000) (207,152) -- --
Net Loss -- -- -- -- -- --
---------- ---------- ------ ---------- ------- ------
Balance as of
November 30, 1997 7,981,630 10,908,062 78,710 1,862,035 (270,000)(17,500)
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, Systems Investments, Inc. 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 Statement 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 1,647,245 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
$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 Director 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 shareholders:
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 non-competition 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.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------
See Part III, Item 13 "REPORTS ON FORM 8-K."
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- ---------------------------------------------------------------------
Incorporated by reference to the Company's definitive proxy materials to
be filed with the Commission on or before March 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
Incorporated by reference to the Company's definitive proxy materials to
be filed with the Commission on or before March 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Incorporated by reference to the Company's definitive proxy materials to
be filed with the Commission on or before March 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Incorporated by reference to the Company's definitive proxy materials to
be filed with the Commission on or before March 30, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended November 30, 1998:
Change in independent auditors. Filed with the Commission on December
4, 1998.
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
21.1 List of Subsidiaries of the Company
23.1 Consent of Blackman Kallick Bartelstein, LLP, independent
auditors
23.2 Consent of Ernst & Young LLP, independent auditors
___________________________________________
[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
INDEX TO EXHIBITS
INDEX
NUMBER DESCRIPTION
21.1 List of Subsidiaries of the Company
23.1 Consent of Blackman Kallick Bartelstein, LLP, independent
auditors
23.2 Consent of Ernst & Young LLP, independent auditors
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant has
duly caused this report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAB HOLDINGS, INC.
Dated: February 26, 1999 By /s/ Michael W. Evans
Michael W. Evans, Chief Executive
Officer and President (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-KSB has been signed below by the following
persons on behalf of the company and in the capacities and on the dates
indicated.
/s/ Michael W. Evans February 26, 1999
Michael W. Evans, Chief Executive Officer, Date
President and Director (Principal Executive
Officer)
/s/ Michael K. Murtaugh February 26, 1999
Michael K. Murtaugh, Director and Vice Date
President/General Counsel and Secretary
/s/ Joseph M. Merkin February 26, 1999
Joseph M. Merkin, Chief Date
Financial Officer and
Treasurer (Principal Financial and Accounting
Officer)
/s/ David L. Epstein February 26, 1999
David L. Epstein, Director Date
/s/ Cynthia A. Vahlkamp February 26, 1999
Cynthia A. Vahlkamp, Director Date
/s/ Robert B. Nagel February 26, 1999
Robert B. Nagel, Director Date
Exhibit 21.1 SUBSIDIARIES OF BAB HOLDINGS, INC.
BAB Systems, Inc., an Illinois corporation
BAB Operations, Inc., an Illinois corporation
Brewster's Franchise Corporation, an Illinois corporation
My Favorite Muffin Too, Inc., a New Jersey corporation
Exhibit 23.1
We consent to the incorporation by reference in the Registration
Statements on Form S-3 (Commission File Nos. 333-42253 and 333-51337)
and in the related Prospectuses of our report dated February 6, 1999,
with respect to the consolidated financial statements of BAB Holdings,
Inc. as of and for the year ended November 30, 1998 included in this
Annual Report (Form 10-KSB) for the year ended November 30, 1998.
/s/ Blackman Kallick Bartelstein, LLP
BLACKMAN KALLICK BARTELSTEIN, LLP
CHICAGO, ILLINOIS
FEBRUARY 26, 1999
Exhibit 23.2
We consent to the incorporation by reference in the Registration
Statements on Form S-3 (Commission File Nos. 333-42253 and 333-51337)
and in the related Prospectuses of our report dated February 27, 1998,
with respect to the consolidated financial statements of BAB Holdings,
Inc. as of and for the year ended November 30, 1997 included in this
Annual Report (Form 10-KSB) for the year ended November 30, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
CHICAGO, ILLINOIS
FEBRUARY 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE YEAR ENDED NOVEMBER 30,
1998 AND IS QUALIFIED IN THE ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 700,162
<SECURITIES> 0
<RECEIVABLES> 2,296,475
<ALLOWANCES> 361,000
<INVENTORY> 298,501
<CURRENT-ASSETS> 3,591,036
<PP&E> 5,945,997
<DEPRECIATION> 1,743,800
<TOTAL-ASSETS> 14,444,991
<CURRENT-LIABILITIES> 2,941,370
<BONDS> 0
0
1,548,731
<COMMON> 11,430,452
<OTHER-SE> (3,751,221)
<TOTAL-LIABILITY-AND-EQUITY> 14,444,991
<SALES> 8,929,664
<TOTAL-REVENUES> 14,549,240
<CGS> 3,309,504
<TOTAL-COSTS> 14,034,085
<OTHER-EXPENSES> (54,022)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206,618
<INCOME-PRETAX> 482,803
<INCOME-TAX> (163,961)
<INCOME-CONTINUING> 646,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 498,900
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
