Securities and Exchange Commission
450 5th Street N. W.
Judiciary Plaza
Washington, D.C. 20549
Dear Sirs:
Pursuant to regulations of the Securities and Exchange Commission, we
submit herewith for filing on behalf of BAB Holdings, Inc. (the
Company)the Company's Definitive Proxy Materials under cover of
Schedule 14A. Pursuant to Instruction 3 to Item 10 of Schedule 14A, we also
Submit (as supplemental information for the Commission) a copy of the Company's
1995 Long Term Incentive and Stock Option Plan.
Very truly yours,
/s/ Mark E. Majewski
Mark E. Majewski, Chief
Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
BAB HOLDINGS,INC.
- -----------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- -----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies
(2) Aggregate number of securities to which transaction applies:
(2) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11. (Set forth
(3) The amount on which the filing fee is calculated and state how it was
determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
BAB HOLDINGS, INC.
8501 W. Higgins Road, Suite 320
Chicago, Illinois 60631
(773) 380-6100
April 11, 2000
Dear Shareholder:
You are cordially invited to attend the Company's Annual Meeting
of Shareholders to be held at 10:00 a.m. on Thursday, May 11, 2000 at
the Hawthorn Hotel & Suites, 10233 West Higgins Road, Rosemont, Illinois.
In addition to electing four members to the Board of Directors, you are
being asked to approve an increase of 109,167 shares in the number of shares
authorized for issuance under the 1995 Long Term Incentive and Stock Option
Plan and to ratify appointment of the independent auditors for the year
ending November 26, 2000. We hope that these proposals will be adopted at
the Annual Meeting.
We look forward to greeting personally those of you who are able
to be present at the meeting. However, whether or not you plan to
attend, it is important that your shares be represented. Accordingly,
you are requested to sign and date the enclosed proxy and mail it in
the envelope provided at your earliest convenience.
Very truly yours,
/s/ MICHAEL W. EVANS
Michael W. Evans
President and Chief Executive Officer
BAB HOLDINGS, INC.
8501 W. Higgins Road, Suite 320
Chicago, Illinois 60631
(773) 380-6100
_________________________________________
NOTICE OF MEETING OF SHAREHOLDERS
TO BE HELD MAY 11, 2000
_________________________________________
To the Shareholders of BAB Holdings, Inc.:
The Annual Meeting of Shareholders of BAB Holdings, Inc. (the "Company) will be
held at 10:00 a.m. on Thursday, May 11, 2000 at the Hawthorn Hotel & Suites,
10233 West Higgins Road, Rosemont, Illinois, for the following purposes:
1. To set the number of directors at four and to elect four directors to
serve for a one-year term expiring when their successors are elected and
qualified at the annual meeting in 2001.
2. To act upon a proposal to approve an increase in the number of shares
authorized under the 1995 Long-Term Incentive and Stock Option Plan from
165,833 shares to 275,000 shares.
3. To act upon a proposal to ratify the appointment of Blackman
Kallick Bartelstein, LLP as independent auditors of the Company for the fiscal
year ending November 30, 1999.
4. To transact such other business as may properly come before the meeting or
any adjournments thereof.
The Board of Directors has fixed the close of business on March 31, 2000 as
the record date for the determination of shareholders entitled to vote at the
Annual Meeting and to receive notice thereof. The transfer books of the
Company will not be closed.
A PROXY STATEMENT AND FORM OF PROXY ARE ENCLOSED. SHAREHOLDERS ARE REQUESTED
TO DATE, SIGN AND RETURN THE ENCLOSED PROXY TO WHICH NO POSTAGE NEED BE
AFFIXED IF MAILED IN THE UNITED STATES. IT IS IMPORTANT THAT PROXIES BE
RETURNED PROMPTLY WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON.
SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN
PERSON IF THEY DESIRE.
By Order of the Board of Directors
April 11, 2000 /s/ MICHAEL K. MURTAUGH
Michael K. Murtaugh
Vice President and General Counsel
TABLE OF CONTENTS
General Information 1
Record Date and Voting 2
Principal Shareholders and Ownership of Management 3
Proposal 1 - Election of Directors 4
Management 5
Section 16 (a) Beneficial Ownership Reporting Compliance 8
Certain Transactions 8
Proposal 2 - Amendment of 1995 Long-Term Incentive and
Stock Option Plan 9
Proposal 3 - Ratification of Appointment of Independent
Auditors 11
Proposals for Fiscal 2000 Annual Meeting 11
Available Information 12
BAB HOLDINGS, INC.
8501 W. Higgins Road, Suite 320
Chicago, Illinois
(773) 380-6100
___________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 11, 2000
__________________________________
GENERAL INFORMATION
This proxy statement is furnished to shareholders by the Board of Directors of
BAB Holdings, Inc. (the "Company") for solicitation of proxies for use at the
Annual Meeting of Shareholders at 10:00 a.m. on Thursday, May 11, 2000 at
the Hawthorn Hotel & Suites, 10233 West Higgins Road, Rosemont, Illinois, and
at all adjournments thereof for the purposes set forth in the attached Notice
of Annual Meeting of Shareholders. The Board of Directors is not currently
aware of any other matters that may or could properly come before the meeting.
Shareholders may revoke proxies before exercise by submitting a
subsequently dated proxy or by voting in person at the Annual Meeting. Unless
a shareholder gives contrary instructions on the proxy card, proxies will be
voted at the meeting (a) for the election of the nominees named herein and on
the proxy card to the Board of Directors; (b) for ratification of the
amendments to the 1995 Long-Term Incentive and Stock Option Plan (the
"Incentive Plan"); (c) for the appointment of Blackman Kallick Bartelstein,
LLP as independent auditors of the Company; and (d) in the discretion of the
proxy holder as to other matters which may properly come before the meeting.
This proxy statement and the enclosed proxy are being mailed to the
shareholders of the Company on or about April 11, 2000.
Summary information about the Company's directors and executive officers,
historical information concerning the common equity of the Company, and the
most recent 10-KSB together with the audited consolidated financial statements
of the Company are included in this mailing, but are not considered a part of
the proxy solicitation material.
The Company will make arrangements with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy material to
the beneficial owners of the shares and will reimburse them for their
expenses in so doing. To ensure adequate representation of shares at the
meeting, officers, agents and employees of the Company may communicate with
shareholders, banks, brokerage houses and others by telephone, facsimile, or
in person to request that proxies be furnished. All expenses incurred in
connection with this solicitation will be borne by the Company.
RECORD DATE AND VOTING
The Board of Directors has fixed March 31, 2000, as the record date for the
determination of shareholders entitled to vote at the Annual Meeting. As of
the close of business on the record date, there were outstanding 2,237,542
shares of Common Stock, no par value, which is the only outstanding class of
stock of the Company. Each share is entitled to one vote on each proposal to
be presented to the meeting. All matters being voted upon by the
shareholders require a majority vote of the shares represented at the Annual
Meeting either in person or by proxy, except for election of directors, which
is by plurality vote in the event of more nominees than positions (i.e., the
four nominees receiving the highest number of votes would be elected).
The presence at the Annual Meeting in person or by proxy of the holders of a
majority of the outstanding shares of the Company's Common Stock entitled to
vote constitutes a quorum for the transaction of business. Shares voted as
abstentions and broker non-votes on any matter will be counted as present and
entitled to vote for purposes of determining a quorum. "Broker non-votes"
are shares held by brokers or nominees which are present in person or
represented by proxy, but which are not voted on a particular matter because
instructions have not been received from the beneficial owner and the broker
indicates that it does not have discretionary authority to vote certain shares
on that matter.
BOARD RECOMMENDATIONS
The Board of Directors recommends a vote FOR election of each nominee for
director named herein, FOR ratification of the amendments to the Incentive
Plan and FOR ratification of the appointment of Blackman Kallick Bartelstein,
LLP as independent auditors. It is intended that proxies solicited by the
Board of Directors will be voted FOR each nominee and FOR each such other
proposals unless otherwise directed by the shareholder submitting the proxy.
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 31, 2000 the record and beneficial
ownership of Common Stock held by (i) each person who is known to the Company to
be the beneficial owner of more than 5% of the Common Stock of the Company; (ii)
each current director; (iii) each "named executive officer" (as defined in
Regulation S-B, Item 402 under the Securities Act of 1933); and (iv) all
executive officers and directors of the Company as a group. Securities
reported as "beneficially owned" include those for which the named persons may
exercise voting power or investment power, alone or with others. Voting power
and investment power are not shared with others unless so stated. The number
and percent of shares of Common Stock of the Company beneficially owned by
each such person as of March 31, 2000 includes the number of shares which
such person has the right to acquire within sixty (60) days after such date.
<TABLE>
<CAPTION>
Name Shares Percent
- ---------------------------- ---------- -------
<S> <C> <C>
Michael W. Evans 954,914 (1)(3) 42.2
8501 West Higgins Road
Chicago, Illinois 60631
Michael K. Murtaugh 912,387 (2)(3) 40.5
8501 West Higgins Road
Chicago, Illinois 60631
Holdings Investments, LLC. 818,491 (3) 36.6
220 DeWindt Road
Winnetka, Illinois 60093
Aladdin International Inc. 169,246 7.6
3806 Abbott Avenue South
Minneapolis, MN 55410
David L. Epstein 18,248 (4) *
9700 Higgins Road, Suite 630
Rosemont, IL 60018
Tom J. Fletcher 16,222 (5) *
8501 West Higgins Road
Chicago, IL 60631
Robert B. Nagel 2,165 (6) *
516 Elder Drive
Winnetka, IL 60093
Mark E. Majewski 1,666 (7) *
8501 West Higgins Road
Chicago, IL 60631
Cynthia A. Vahlkamp 1,665 (8) *
1615 South Congress Avenue, Suite 200
Delray Beach, FL 33445
All executive officers and
directors as a group (7 persons) 1,088,776 (1)(2)(3)(4)(5)(6)(7)(8)
</TABLE>
- -------------------------------
* Less than 1%.
(1) Includes 24,166 shares that may be acquired pursuant to
currently exercisable options.
(2) Includes 17,499 shares that may be acquired pursuant to
currently exercisable options and 635 shares held by 401 (k)
trust.
(3) Includes all shares held of record by Holdings Investments,
LLC. Messrs. Evans and Murtaugh are members and managers of
the LLC and together control all voting power of the stock
owned by the LLC.
(4) Includes 1,915 shares that may be acquired pursuant to currently
exercisable options, 15,500 shares held indirectly by entities
under Mr. Epstein's control, and 833 shares representing his
proportionate ownership in an entity which he does not control.
(5) Includes 15,831 shares that may be acquired pursuant to
currently exercisable options.
(6) Includes 1,332 shares that may be acquired pursuant to currently
exercisable options.
(7) Includes 1,666 shares that may be acquired pursuant to currently
exercisable options.
(8) Includes 1,665 shares that may be acquired pursuant to currently
exercisable options. Ms. Vahlkamp is a current director who is not
standing for reelection.
PROPOSAL 1
________________
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall be
as fixed from time to time by resolution of the shareholders subject to
increase by the Board of Directors. The directors elected at this Annual
Meeting, and at annual meetings thereafter unless otherwise determined by the
Board or the shareholders, will serve a one-year term expiring upon the
election of their successors at the next annual meeting. The four persons
designated by the Board of Directors as nominees for election as directors at
the Annual Meeting are Michael W. Evans, Michael K. Murtaugh, David L.
Epstein and Robert B. Nagel. Each nominee is currently a member of the Board
of Directors.
In the event any nominee should be unavailable to stand for election at
the time of the Annual Meeting, the proxies may be voted for a substitute
nominee selected by the Board of Directors.
See "MANAGEMENT" for biographical information concerning Messrs. Evans
and Murtaugh, who are employees of the Company. The following biographical
information is furnished with respect to each of the other nominees.
David L. Epstein joined the Company as a director in September 1995.
Mr. Epstein is a principal of the J. H. Chapman Group, L.L.C., an
international investment banking firm specializing in the food industry since
September 1983. Prior to joining J. H. Chapman Group, L.L.C., Mr. Epstein was
vice president and regional executive of Chase Commercial Corporation, an
affiliate of Chase Manhattan Bank, N. A., and assistant vice president of the
First National Bank of Chicago. He is a frequent speaker at business and
professional meetings and conferences and has published extensive articles on
financial topics for many food service publications.
Robert B. Nagel was first elected as a director in August 1997. Since
October 1996, he has been the President and Chief Executive Officer of Newport
Associates, Inc., a private consulting firm specializing in strategic
consulting services to the food and food service industries, primarily in the
areas of integration and management of acquired companies, business strategy,
and shareholder value improvement. He is also a partner in the firm of CEO
Partners, Inc., which provides similar consulting services to food service
companies. From 1995 until September 1996, he was the President of Peapod
Delivery Services, a computer-based on-line grocery shopping and delivery
company, From 1991 through 1995, he was a principal at A. T. Kearney, Inc.,
a major international management consulting firm, providing services in the
food service and consumer products industries. Prior to 1991, he served as
Vice President, Management and Organization Development for Kraft General
Foods, Inc. and earlier was General Manager of Kraft's (now Alliant
Foodservice) eastern food service businesses.
MANAGEMENT
Directors and Executive Officers
The following tables set forth certain information with respect to each
of the directors and executive officers of the Company and certain other key
management personnel.
<TABLE>
<CAPTION>
Directors and Executive Officers Age Position(s) Held with Company
- -------------------------------- --- -----------------------------
<S> <C> <C>
Michael W. Evans 43 President, Chief Executive
Officer and Director
Michael K. Murtaugh 55 Vice President, General
Counsel and Director
Tom J. Fletcher 41 Chief Operating Officer
Mark E. Majewski 38 Chief Financial Officer and
Treasurer
David L. Epstein 52 Director
Cynthia A. Vahlkamp 45 Director (1)
Robert B. Nagel 62 Director
</TABLE>
(1) Ms. Vahlkamp is a current director who is not standing for reelection.
Michael W. Evans has served as Chief Executive Officer and director of
the Company since January 1993 and is responsible for all aspects of franchise
development and marketing, as well as all corporate and franchise sales
performance and operation programs. In February 1996, he was appointed
President. Mr. Evans has over 13 years of experience in the food service
industry.
Michael K. Murtaugh joined the Company as a director in January 1993 and
as Vice President and General Counsel in January 1994. Mr. Murtaugh is
responsible for dealing directly with state franchise regulatory officials and
for the negotiation and enforcement of franchise and area development
agreements, and for negotiations of acquisition and other business
arrangements. Before joining the Company in January 1994, Mr. Murtaugh was a
partner with the law firm of Baker & McKenzie, where he practiced law from
1971 to 1993. He also currently serves as vice president and secretary of
American Sports Enterprises, Inc., which owns controlling interest in the Kane
County Cougars a minor league baseball team. Mr. Murtaugh is sole
shareholder of Bagel One, Inc., which owns and operates a Big Apple Bagels
franchise store in suburban Chicago, Illinois.
Tom J. Fletcher has been Chief Operating Officer since April 1997. He
is responsible for all operations of the Company and reports to Mr. Evans. A
twenty-five year veteran of the franchise industry, Mr. Fletcher joined the
Company following his most recent position as Director of Retail Brands for
Allied Domecq Retailing USA, Co., the parent company of Baskin-Robbins and
Dunkin Donuts, where he was instrumental in the integration of the two
organizations into a cohesive team. He brought to the organization a proven
track record in the areas of operations, development, training, personnel
management, budgeting and financial planning; all of which he employs at the
Company.
Mark E. Majewski joined the Company as its Chief Financial Officer and
Treasurer in April 1999 and is responsible for all financial reporting and
analysis. Mr. Majewski received his MBA from New York University. He is a
licensed Certified Public Accountant and a member of the American Institute
of Certified Public Accountants. From 1983 to 1985, he was with Arthur
Andersen & Co. From 1985 to 1999 he was with Bestfoods, most recently as
Chief Financial Officer of Freihofer Baking Co. in Albany, New York.
The Board of Directors had three standing committees during the last
fiscal year: the Compensation Committee, the Audit Committee and the Options
Committee. The Compensation Committee has three members: David L. Epstein,
Robert B. Nagel, and Cynthia A. Vahlkamp, all of whom are non-employee
directors. The function of the Compensation Committee is to set the
compensation for the Executive Officers and to recommend the compensation to
the Board of Directors for approval. The Audit Committee has four members:
Michael K. Murtaugh, David L. Epstein, Robert B. Nagel, and Cynthia A.
Vahlkamp, three of whom are non-employee directors. The function of the Audit
Committee is to interact with the independent auditors of the Company and to
recommend the appointment of the independent auditors to the Board of
Directors. The Options Committee has three members: Michael W. Evans, David
L. Epstein, and Cynthia A. Vahlkamp, two of whom are non-employee directors.
The function of the Options Committee is to consider, determine and recommend
to the Board of Directors the granting of options. Each of the standing
committees met once during the fiscal year and all members were in attendance
at the meetings.
The Board of Directors met 6 times during the 1999 fiscal year. None of
the directors attended fewer than 75% of the meeting of the Board of
Directors.
Director Compensation
Each non-employee director of the Company is paid a fee of $100 for each
meeting attended, as well as reimbursement of reasonable expenses. In
addition, the non-employee directors receive stock options pursuant to the
1995 outside Directors Stock Option Plan (the "Directors Plan"). During the
fiscal year ended November 30, 1999, 833 Annual Options each were granted to
David Epstein, Robert Nagel and Cynthia Vahlkamp upon re-election to the
Board at the annual meeting of shareholders in April 1998 at an exercise
price of $6.00 per share. The Company terminated the Directors Plan and
intends to include the non-employee directors under the Company's 1995 Long
Term Incentive and Stock Option Plan.
Executive Compensation
The following table sets forth the cash compensation earned by executive
officers who received annual salary and bonus compensation of more than
$100,000 during fiscal years 1999, 1998 and 1997 (the "Named Executive
Officers"). The Company has no employment agreements with any of its
executive officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Fiscal
Year Other Annual
Name and Principal Ended Salary Bonus Compensation
Position 11/30 ($) ($) ($)
=========================================================
<S> <C> <C> <C> <C>
Michael W. Evans, 1999 175,000 -- --
President and CEO 1998 165,000 15,000 --
1997 165,000 -- --
Michael K. Murtaugh 1999 130,000 -- --
Vice President and 1998 125,000 12,500 --
General Counsel 1997 125,000 -- --
Tom J. Fletcher 1999 125,000 -- --
Chief Operating 1998 115,000 10,000 --
Officer 1997 85,827 -- --
</TABLE>
<TABLE>
<CAPTION>
(wide table continued from above)
Long-Term Compensation
--------------------------------
Awards Payouts
--------------------- -------
Fiscal Restricted Securities
Year Stock Underlying LTIP All Other
Name and Principal Ended Awards Options/ Payouts Compensation
Position 11/30 ($) SARS (#) ($) ($)
===========================================================================
<S> <C> <C> <C> <C> <C>
Michael W. Evans, 1999 -- 5,000 -- --
President and CEO 1998 -- -- -- --
1997 -- -- -- --
Michael K. Murtaugh, 1999 -- 3,333 -- --
Vice President and 1998 -- -- -- --
General Counsel 1997 -- -- -- --
Tom J. Fletcher 1999 -- 3,333 -- --
Chief Operating 1998 -- 12,498 -- --
Officer 1997 -- -- -- --
</TABLE>
The following table sets forth information about stock options granted to the
Named Executive Officers in fiscal 1999:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Name and Pricincipal Options/SARs Employees in Base Price Expiration
Position Granted (#) Fiscal Year ($/Sh) Date
=============================================================================
Michael W. Evans 5,000 27.9% $6.00 April 12, 2004
President and CEO
Michael K. Murtaugh 3,333 18.6% $6.00 April 12, 2004
Executive Vice President
And General Counsel
Tom J. Fletcher, 3,333 18.6% $6.00 April 12, 2004
Chief Operating
Officer
<TABLE>
<CAPTION>
The following table sets forth information about the exercise of options by the
Named Executive Officers in fiscal 1999 and the value of options held by them
at the end of the fiscal year:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FY-END OPTION/SAR VALUES
Number of Value of
unexercised unexercised in-
options/SAR the-money options
Shares Value at FY-end /SAR at FY-end
Name and Principal Acquired on Received (#)exercisable ($)exercisable
Position Exercise(#) ($) /unexercisable /unexercisable
============================================================================
<S> <C> <C> <C> <C>
Michael W. Evans, -- -- 24,166 / 0 --
President and CEO
Michael K. Murtaugh, -- -- 17,499 / 0 --
Vice President and
General Counsel
Tom J. Fletcher, -- -- 11,665 / 4,166 --
Chief Operating
Officer
</TABLE>
Indemnification of Directors and Officers
The Company's Articles of Incorporation limit personal liability for
breach of fiduciary duty by its directors to the fullest extent permitted by
the Illinois Business Corporation Act (the "Illinois Act"). Such Articles
eliminate the personal liability of directors to the Company and its
shareholders for damages occasioned by breach of fiduciary duty, except for
liability based on breach of the director's duty of loyalty to the Company,
liability for acts omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments or
improper dividends, liability based on violation of state securities laws, and
liability for acts occurring prior to the date such provision was added. Any
amendment to or repeal of such provisions in the Company's Articles of
Incorporation shall not adversely affect any right or protection of a director
of the Company for with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
In addition to the Illinois Act, the Company's Bylaws provide that
officers and directors of the Company have the right to indemnification from
the Company for liability arising out of certain actions to the fullest extent
permissible by law. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors,
officers or persons controlling the Company pursuant to such indemnification
provisions, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's Common Stock, to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission (the "SEC"). Executive officers, directors and greater
than ten percent beneficial owners are required by the SEC to furnish the
Company with copies of all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to the
Company, the Company believes that all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than ten percent
beneficial owners were met during the fiscal year ended November 30, 1998,
except that Robert B. Nagel, a Director, failed to timely file one report
concerning one purchase transaction.
CERTAIN TRANSACTIONS
The following information relates to certain relationships and
transactions between the Company and related parties, including officers and
directors of the Company. It is the Company's policy that it will not enter
into any transactions with officers, directors or beneficial owners of more
than 5% of the Company's Common Stock, or any entity controlled by or under
common control with any such person, on terms less favorable to the Company
than could be obtained from unaffiliated third parties and all such
transactions require the consent of the majority of disinterested members of
the Board of Directors.
Management believes that the following transactions were effected on
terms no less favorable to the Company than could have been realized in arm's
length transactions with unaffiliated parties.
Executive Officers and Directors
Michael K. Murtaugh, the Company's Vice President and General Counsel,
is sole shareholder of Bagel One, Inc., which owns and operates a Big Apple
Bagels franchise store near Chicago, Illinois. All transactions between the
Company and this franchisee are similar to those with other franchisees. This
store is operated by a full-time store manager.
David L. Epstein, who is currently a member of the Board of Directors of the
Company, is a principal of J.H. Chapman Group, LLC. ("Chapman"), who assists
the Company from time to time in the identification and negotiation of
potential acquisitions. In February 1997, Chapman assisted the Company in
negotiating and obtaining a franchisee financing program administered by
Franchise Mortgage Acceptance Company LLC ("FMAC"). Pursuant to the terms of
the arrangement between Chapman and the Company, Chapman received a fee for its
services in the amount of 1% of loans obtained by franchisees from FMAC, to a
total maximum not to exceed $200,000. During fiscal year 1998, approximately
$438,000, was advanced to franchisees from FMAC and 1% of this amount, or
approximately $4,380, was paid to Chapman. FMAC made no franchisee loans in
fiscal 1999 and this program was not renewed. In February 1999, Chapman
assisted the Company in negotiating the acquisition of certain assets of a
related group of entities doing business as Jacobs Bros. Bagels. On February
26, 1999, the Company issued 26,666 shares of Common Stock to Chapman and
affiliated persons in connection with services provided with the acquisition,
including 10,833 shares of Common Stock which may be deemed to be beneficially
owned by David Epstein.
PROPOSAL 2
________________
AMENDMENT OF THE
1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
Proposed Amendment
The Board of Directors and the shareholders of the Company authorized
and adopted the 1995 Long-Term Incentive and Stock Option Plan (the
"Incentive Plan") in 1995. The Incentive Plan will terminate on September
19, 2005, unless sooner terminated by action of the Board. The Plan, as
adopted and subequently amended in 1999, authorizes the Company to grant
options and other stock-based awards for an aggregate of 165,833 shares of
Common Stock (as adjusted for a 1.5:1 stock split in 1996 and a 1:6 reverse
split in 1999).
The Board of Directors believes that the Company's policy of encouraging
stock ownership by its employees through the granting of restricted stock
awards, stock options and other sorts of stock-based compensation has been and
will be a significant factor in its growth and success by enhancing the
Company's ability to retain, attract and motivate qualified employees. The
Incentive Plan is the primary vehicle for implementation of this policy. The
Board believes that employees with a proprietary interest in the Company have
a strong incentive to put forth their best efforts to insure the Company's
success and, additionally, that stock options are a means of rewarding
individuals without depleting the cash resources of the Company.
As of March 14, 2000, the Company had granted options to purchase 75,904
shares of Common Stock under the Incentive Plan. Therefore, under the terms
of the Incentive Plan, the Company would be able in the future to grant
options to purchase no more than 89,929 additional shares of Common Stock.
As a result, on March 14, 2000, the Board of Directors authorized an increase
in the number of shares of Common Stock that may be granted under the Plan
from 165,833 to 275,000, subject to shareholder approval of such amendment at
the Annual Meeting. In conjunction with this, the Board of Directors voted
to terminate the Outside Directors Stock Option Plan which provided for a
maximum of 17,500 shares to be granted. As of March 14, 2000, 4,912 options
to purchase shares of Common Stock had been granted under the Directors Plan
thus leaving 12,588 shares which, in effect, will be available for the
increase in the Incentive Plan without requiring additional reserves. The Board
of Directors will now be eligible for grants under the Incentive Plan. Based
on the closing sale price of the Common Stock on March 14, 2000 in the Nasdaq
SmallCap Market ($1.25), the aggregate market value of the additional shares
that may be issued under the Incentive Plan pursuant to the proposed amendment
was $136,459.
Adoption of Proposal 2 approves the action of the Board of Directors in
amending the Incentive Plan to increase the number of shares of Common Stock
for which options and stock-based awards may be granted under the Incentive
Plan. If not approved, the aggregate number of shares of Common Stock
available under the Incentive Plan will remain at 165,833.
Description of Incentive Plan
The following is a summary of the Incentive Plan that is qualified in
its entirety by reference to the actual text of the Incentive Plan, which will
be provided to any shareholder upon request.
All employees (including officers and directors) of the Company (and any
subsidiaries) and non-employee directors, consultants and independent
contractors providing services to the Company (or any subsidiaries) are
eligible to receive options and awards under the Incentive Plan. The
Incentive Plan is not subject to the Employee Retirement Income Security Act
of 1974.
The Incentive Plan permits the granting of awards to employees and non-
employee officers, directors and agents of the Company in the form of stock
appreciation rights, restricted stock awards and stock options. The Incentive
Plan is currently administered by the Board of Directors and may be
administered by a Committee of the Board of Directors appointed by the Board.
The Incentive Plan gives broad powers to the Board or Committee to administer
and interpret the Incentive Plan, including the authority to select the
individuals to be granted options and rights, and to prescribe the particular
form and conditions of each option or right granted. Incentive stock options,
in order to receive favorable tax treatment under the Code, must be
exercisable at not less than the fair market value of the Common Stock as of
the date of the grant (110% of fair market value if the optionee is a 10% or
greater shareholder) and may be granted only to employees. As of March 14,
2000 the Company has granted 5-year and 10-year stock options (73,821
incentive stock options and 2,083 nonqualified options) to 23 employees, in
share amounts ranging from 200 to 19,166, at exercise prices ranging from
$4.20 to $42.06. In general, options become exercisable in two or more
installments commencing one year after the date of grant.
Certain Tax Matters
Stock options granted under the Incentive Plan may be "incentive stock
options," meeting the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or non-qualified options which do not
meet the requirements of Section 422. The grant of an option is not expected
to result in any taxable income for the recipient. The holder of an incentive
stock option generally will have no taxable income upon exercising the
incentive stock option (except that a liability may arise pursuant to the
alternative minimum tax), and the Company will not be entitled to a tax
deduction. Upon exercising a nonqualified stock option, the optionee must
recognize ordinary income equal to the excess of the fair market value of the
shares of Common Stock acquired on the date of exercise over the exercise
price, and the Company will be entitled at that time to a tax deduction for
the same amount. The tax consequence to an optionee upon a disposition of
shares acquired through the exercise of an option will depend upon how long
the shares have been held and upon whether such shares were acquired by
exercising an incentive stock option or by exercising a nonqualified stock
option. Generally, there will be no tax consequence to the Company in
connection with disposition of shares acquired under an option, except that
the Company may be entitled to a tax deduction in the case of a disposition of
shares acquired under an incentive stock option before the applicable
incentive stock option holding periods set forth in the Code have been
satisfied. In general, the tax consequences to the Company and to recipients
of awards other than an incentive stock option or a nonqualified stock option
(such as an award of restricted stock) will be governed by principles relating
to transfer of property in consideration of services, including Section 83 of
the Code.
Options Granted under the Incentive Plan
The following table sets forth as of November 28, 1999 the number of
stock options granted to the individuals or groups indicated:
<TABLE>
<CAPTION>
<S> <C>
Michael W. Evans 24,166
Michael K. Murtaugh 17,499
Tom J. Fletcher 15,831
Mark E. Majewski 2,499
All executive officers as a group (4 persons) 59,995
Non-executive Director Group 4,079
Non-executive Officer Employee Group 15,909
</TABLE>
PROPOSAL 3
__________________
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Board of Directors has appointed Blackman Kallick Bartelstein, LLP,
independent auditors, to audit the financial statements of the Company for the
fiscal year ending November 26, 2000. If the shareholders fail to ratify such
appointment, the Board of Directors will select another firm to perform the
required audit function. A representative of Blackman Kallick Bartelstein,
LLP is expected to be present at the shareholders meeting with the opportunity
to make a statement if such representative desires to do so and is expected to
be available to respond to appropriate questions.
PROPOSALS FOR FISCAL 2000 ANNUAL MEETING
It is currently anticipated that the next meeting, for the fiscal year ending
November 26, 2000 (the "2000 Annual Meeting") will be held mid-April 2001.
Shareholders who intend to submit proposals for inclusion in the 2000 Proxy
Statement and Proxy for shareholder action at the 2000 Annual Meeting must
do so by sending the proposal and supporting statements, if any, to the
Company at its corporate offices no later than December 15, 2000.
Additionally, if the Company receives notice of a shareholder proposal after
February 15, 2001, the proposal will be considered untimely pursuant to SEC
Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited by the
Board of Directors of the Company may exercise discretionary voting power
with respect to the proposal.
AVAILABLE INFORMATION
Copies of the Company's Annual Report on Form 10-KSB and the Incentive Plan
will be sent without charge to any shareholder requesting the same in writing
from: BAB Holdings, Inc., Attention: Investor Relations, 8501 West Higgins
Road, Suite 320, Chicago, IL 60631.
By Order of the Board of Directors
/s/ MICHAEL K. MURTAUGH
Michael K. Murtaugh
Vice President and General Counsel
Dated: April 11, 2000
Chicago, Illinois
- --------------------------------------------------------------------
PROXY PROXY
BAB HOLDINGS, INC.
This Proxy is Solicited on Behalf of the
Board of Directors
The undersigned, having received the Notice of Annual Meeting and
Proxy Statement dated April 11, 2000, hereby appoints each of
Michael W. Evans and Michael K. Murtaugh as proxy, with full power
of substitution, to vote all the shares of Common Stock which the
undersigned would be entitled to vote if personally present at the
Annual Meeting of Shareholders of BAB Holdings, Inc. (the "Company")
to be held on Thursday, May 11, 2000 at 10:00 a.m. at HAWTHORN HOTEL & SUITES,
10233 WEST HIGGINS ROAD, ROSEMONT, ILLINOIS, or at any adjournment thereof,
upon any and all matters which may properly be brought before the meeting or
adjournment thereof, hereby revoking all former proxies.
The Board of Directors has fixed the close of business on March 31,
2000 as the record date for the determination of shareholders entitled to
vote at the Annual Meeting and to receive notice thereof. The transfer
books of the Company will not be closed.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE
(Continued and to be completed and signed on reverse side.)
-----------------
BAB HOLDINGS, INC.
1. Election of Directors duly nominated.
Nominees: Michael W. Evans, Michael For Withhold For All
K. Murtaugh, David L. Epstein, and Robert All All Except
RobertB. Nagel [ ] [ ] [ ]
2. To act upon a proposal to ratify an
amendment to the 1995 Long-Term Incentive
and Stock Option Plan (the "Incentive
Plan) which increases the number of
shares of Common Stock reserved for
issuance under the Incentive Plan For Against Abstain
from 165,833 to 275,000. [ ] [ ] [ ]
3. To act upon a proposal to ratify the
appointment of Blackman Kallick
Bartelstein, LLP as independent
auditors for the fiscal year ended For Against Abstain
November 26, 2000. [ ] [ ] [ ]
4. The authority to vote, in his
discretion, on all other business Authority Authority
that may properly come before the Granted Withheld
meeting. [ ] [ ]
This proxy when properly executed will be voted the manner directed
herein by the undersigned shareholder. If no direction is made, this
proxy will be voted for the adoption of Proposal 1, and in the
discretion of the proxy holder on such other business as may
properly come before the meeting.
Dated: ___________________, 2000
Signature(s)____________________
________________________________
APPENDIX A
Officers and Directors
Michael W. Evans, Chairman and Chief Executive Officer, President and Director
Michael K. Murtaugh, Vice President and General Counsel, Secretary and Director
Tom J. Fletcher, Chief Operating Officer
Mark E. Majewski, Chief Financial Officer and Treasurer
David L. Epstein, Principal, J.H. Chapman, LLC, Director
Robert B. Nagel, President and Chief Executive Officer, Newport Associates,
Inc., Director
Cynthia A. Vahlkamp, Marketing Consultant, Director
Market for the Common Equity
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 28,1999. The Company's Common
Stock is traded under the symbol "BAGL."
<TABLE>
<CAPTION>
LOW HIGH
----- ----
<S> <C> <C>
YEAR ENDED NOVEMBER 30, 1998
First quarter.................... $3.75 $8.25
Second quarter................... 3.75 8.63
Third quarter.................... 3.75 8.06
Fourth quarter................... 6.75 9.00
YEAR ENDED NOVEMBER 28, 1999
First quarter.................... $3.56 $9.75
Second quarter................... 3.94 7.13
Third quarter.................... 3.00 6.75
Fourth quarter................... 1.31 3.75
</TABLE>
All share prices reflect the 1:6 reverse split of the Common Stock effected on
December 10, 1999.
CORPORATE HEADQUARTERS
BAB Holdings, Inc.
8501 West Higgins Road
Suite 320
Chicago, Illinois 60631
(773) 380-6100
LEGAL COUNSEL
Moss and Barnett
4800 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4129
(612) 347-0300
INDEPENDENT AUDITORS
Blackman Kallick Bartelstein, LLP
300 South Riverside Plaza
Chicago, Illinois 60606-6613
(312) 207-1040
ANNUAL MEETING
The Company will hold its annual meeting at the Hawthorn Hotel & Suites in
Rosemont, Illinois on Thursday, May 11, 2000 at 10:00 a.m.
STOCK EXCHANGE LISTING
Nasdaq SmallCap Market
Ticker symbol: BAGL
TRANSFER AGENT
LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
(312) 443-2300
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 28, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27068
BAB Holdings, Inc.
- ----------------------------------------------------------------
(Name of small business issuer in its charter)
- ----------------------------------------------------------------
Illinois 36-3857339
- ----------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
- ----------------------------------------------------------------
(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:
$14,940,901
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: $1,438,964
based on 1,151,171 shares held by nonaffiliates as of March 10, 2000
and the average of the closing bid ($1.1875) and asked ($1.3125) 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:
2,237,557 shares of Common Stock, as of March 10, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy materials to be filed on or before
March 31, 2000 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, Promoters 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
- --------------------------------
OVERVIEW
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 trade names.
At November 28, 1999, the Company had 260 units in operation in 28
states, two Canadian provinces and Peru. The Company additionally
derives income from the sale of its trademark bagels, muffins and
coffee through nontraditional channels of distribution including
under licensing agreements with Host Marriott Services Corporation
(Host Marriott), Mrs. Fields Cookies, Alonti Deli 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 frozen 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 Cafe,"
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 is leveraging 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 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 the units have been 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 and My Favorite Muffin
franchisees as a result of these acquisitions.
RISK FACTORS
Limited Operating History
The Company was formed in November 1992. As of November 28, 1999, the
Company had 23 Company-owned stores and 237 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 losses from operations of $3,465,000 for the year
ended November 28, 1999 and $3,402,000 for the year ended November 30, 1997
and net income of $647,000 for the year ended November 30, 1998.
However, the Company believes that with a renewed focus on its franchising
and licensing operations and selected investment in its Company-owned stores,
it will generate revenues sufficient to exceed the expenses necessary to
support its operations in the foreseeable future.
Recent Acquisitions
The Company's strategic plan has included growth through business
acquisitions. Since the beginning of fiscal 1998, the Company has
completed the acquisition of Jacobs Bros.
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.
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 1999, the Company recorded a restructuring charge of
$1,600,000. Of this amount,$113,000 related to intangible assets. (See
"Management's Discussion and Analysis" and Note 4 of the audited
consolidated financial statements included herein.) While management
believes goodwill and other identifiable intangible assets recorded as of
November 28, 1999 to be fairly stated, it is possible that additional
charges to write down assets will be required in the future. Any such
charges could have a material adverse effect on the Company's financial
results.
Rapid Growth
The Company has grown significantly since inception 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 1999, the Company entered into a new bank credit facility
for $1.5 million. This new credit facility, which expires April 30,
2000, replaces the previous secured line of credit in the amount of
$1.75 million, which expired on December 31, 1999. This new credit
line is secured by substantially all of the assets of the Company
excluding those acquired through the Jacobs Bros. acquisition and
is subject to essentially the same loan covenants as the expired
line, including covenants to maintain a minimum net worth of $6
million and maintain a compensating cash balance of $250,000. At
December 31, 1999 the Company had borrowed the maximum amount
available under the new line of credit. The Company is negotiating
to replace the current line of credit. However, there is no assurance
that this can be done on terms favorable to the Company.
In June 1999 the Company obtained an amortizing loan in the amount
of $170,000 from a finance company. Proceeds were used to purchase
two stores from a franchisee in Wisconsin.
In February 1999 the Company obtained a series of amortizing loans
in the amount of $1,350,000 from a finance company. Loan proceeds
of $950,000 were used to purchase certain assets of Jacobs Bros.
Bagels. An additional $280,000 was used to purchase equipment and
fund remodeling required on the units acquired in the purchase. The
remaining $120,000 was used to purchase assets from a former
franchisee in Colorado.
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. Current liabilities
exceed current assets. (See "Management's Discussion and Analysis" and
Note 6 to the audited 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 growing rapidly and 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"), 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 and McDonalds, 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, 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 food marketing 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 3,880,000 shares of preferred
stock. The Board of Directors, without shareholder approval, may issue such
shares in one or more series and set the terms of each such series. 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 make a change in control of the Company more difficult to accomplish
and could hamper attempts by outside parties.
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 shareholders. 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
In October 1999, the Company issued 818,491 shares of Common Stock in
exchange for 60,000 shares of its Series A Convertible Preferred Stock
plus accrued dividends. 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 tradable, 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 83,333 shares of Common
Stock issued in consideration of the assets acquired and warrants for 26,666
shares of Common Stock to the investment bankers for services rendered in
connection with the acquisition. The shares issuable upon exercise of all
of these warrants have certain limited rights to registration, to make the
shares fully tradable. In addition, pursuant to Rule 144 under the Act,
these shares will be publicly tradable in part beginning one year after
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. During the fourth quarter of 1999, the Company was
notified that its stock would be removed from the Nasdaq SmallCap Market due
to failure to maintain a minimum $1.00 bid price. In December 1999, the
Company held a special meeting of shareholders to approve a one-for-six
consolidation of its Common Stock, thereby preserving its Nasdaq listing. It
is possible that the Company will be unable to maintain the required minimum
bid price or otherwise meet all Nasdaq listing standards. In such event,
trading would cease in the Nasdaq SmallCap Market and 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 12 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 72,101 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 12 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 83,333 shares of Common Stock at an exercise price
of $7.50 per share as to 45,833 shares and $9.00 per share as to
37,500 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 12 to the audited consolidated
financial statements included herein).
LOCATIONS
The following table sets forth the states, provinces and countries in which the
Company's units were located as of November 28, 1999.
<TABLE>
<CAPTION>
COMPANY
STATE/PROVINCE OWNED FRANCHISED LICENSED TOTAL
- --------------- ------- ---------- -------- -----
<S> <C> <C> <C> <C>
UNITED STATES:
Alabama 1 1
California (i) 5 1 3 9
Colorado 3 3
Connecticut 1 2 3
Florida 7 2 9
Georgia 3 4 7
Illinois (ii) 9 29 12 50
Indiana 10 10
Iowa 9 9
Kentucky (ii) 2 2
Maryland 1 1
Michigan 25 3 28
Minnesota 7 1 8
Missouri 9 9
Nebraska (ii) 3 3
Nevada 2 5 7
New Jersey 17 3 20
New York 2 3 5
North Carolina 5 5
Ohio 2 10 2 14
Oregon 1 1
Pennsylvania 10 10
Rhode Island 2 2
Texas 5 5
Utah 2 2
Virginia 1 1
Washington 2 2
Wisconsin 7 15 3 25
CANADA:
British Columbia 1 1 2
Ontario 2 1 3
Peru 4 4
----- ------ ----- -----
Total 23 177 60 260
===== ====== ===== =====
</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
Marriott, 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 Cafe, 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 28, 1999, FMAC has advanced funds totaling
$420,000 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 was wholly owned by Paul C. Stolzer, a principal
stockholder and a former director and president of the Company, who sold
the license to a third party in 1999. 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, comply
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 28, 1999, the Company employed 366 persons. Of these
individuals, 333 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 Company
had no material problems with the Year 2000 issue subsequent to year end.
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 a lease, expiring in June 2004. The Company believes
that these facilities will be adequate to meet its needs for the
remainder of the term of the lease. 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 7 to the audited consolidated financial statements included
herein.)
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the registrant's special meeting
Of shareholders held on December 8, 1999. Each of the proposals passed.
1. Amendment of the Articles of Incorporation to effect a Common Stock
Combination of both the authorized and outstanding Common Stock in a
ratio not to exceed 6:1 (each six shares will become one share.)
For 11,520,349 Against 1,403,182 Abstain 14,995 Non-vote 0
2. Amendment of the Articles of Incorporation to increase the authorized
Capital stock to its pre-combination level.
For 11,310,685 Against 1,588,246 Abstain 18,251 Non-vote 21,344
Broker non votes were not counted as "present and entitled to vote."
The Common Stock combination of 6:1 was effected on December 10, 1999.
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 28,1999. The Company's Common
Stock is traded under the symbol "BAGL."
<TABLE>
<CAPTION>
LOW HIGH
----- ----
<S> <C> <C>
YEAR ENDED NOVEMBER 30, 1998
First quarter.................... $3.75 $8.25
Second quarter................... 3.75 8.63
Third quarter.................... 3.75 8.06
Fourth quarter................... 6.75 9.00
YEAR ENDED NOVEMBER 28, 1999
First quarter.................... $3.56 $9.75
Second quarter................... 3.94 7.13
Third quarter.................... 3.00 6.75
Fourth quarter................... 1.31 3.75
</TABLE>
All share prices reflect the 1:6 reverse split of the Common Stock effected on
December 10, 1999.
As of March 1, 2000, 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
March 1, 2000 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 9 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. As of October 1999, all of the
Preferred Stock issued plus accumulated dividends was converted into
Common Stock.
On February 1, 1999 the Company issued warrants for purchase of an
aggregate of 83,333 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 $7.50 per share as to 45,833
shares and $9.00 per share as to 37,500 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 26,666 shares of
Common Stock in connection with services rendered in the Jacobs Bros.
acquisition, including 10,833 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.
On October 21, 1999 the remaining 60,000 shares of the Company's Series
A convertible preferred stock plus accumulated dividends were converted
in accordance with the terms of the preferred stock to an aggregate of
818,491 shares of common stock by the holder of the preferred stock,
Holdings Investments, LLC an Illinois limited liability company
(the "LLC"). (See Schedule 13D filed on behalf of the LLC on October
29, 1999.) No cash or other consideration was required or paid in
connection with the conversion. The Common Stock was issued to one
investor (the LLC) in a non-public offering in reliance on Section 4(2)
of the Securities Act of 1933.
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 23
Company-owned stores and 237 franchised and licensed units at the end of
fiscal 1999. Units in operation at the end of fiscal 1998 included 22
Company owned stores and 271 franchised and licensed units. System-wide
revenues in fiscal 1999 reached $78 million compared to $79 million in
the year ago period.
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 derives revenue
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.
During the fourth quarter of fiscal 1999, management identified thirteen
under-performing stores which were operating at a loss and which, based
on the estimated future cash flows, were considered to be impaired.
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 $1,600,000. Approximately $1,236,000 represents a
noncash write-down of property and equipment, $113,000 is related to the
write down of intangible assets and the remainder represents a reserve for
severance and other costs. One store was closed and one store was sold during
fiscal 1999 with the remaining eleven stores expected to be sold during fiscal
year 2000. In addition the Company wrote down and reserved $1,044,000 of
franchise-related receivables pertaining to closed stores.
Despite the increase in both franchise and licensed operations and the
acquisition of Jacobs Bros., the Company has controlled expenses in payroll,
occupancy and overhead costs in the corporate offices. At November 30,
1999, the Company had 33 employees at the corporate level who oversee
operations of the franchise, licensed and Company-owned store
operations, down from 41 at the end of 1998. Selling, general and
administrative expenses, net of the provision for doubtful accounts, are
essentially flat compared to fiscal 1998 both as a percentage of revenue and
also in absolute dollars. Efficiencies have resulted in selling, general and
administrative expenses, net of the provision for doubtful accounts, decreasing
to 39.3% in 1999 compared to 40.2% in 1998 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 non-traditional
sources of revenue 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 2000.
The Company believes it is in a position to continue to leverage selling,
general and administrative expenses against increased revenues anticipated in
fiscal 2000.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Total revenues increased 3% to $14,941,000 in 1999 from $14,549,000 in
the prior year. Net sales by company-owned stores increased by 15.5% to
$10,311,000 in large part due to the acquisition of Jacobs Bros. which
provided incremental revenue of $3,883,000 offset by the sale of 5
units with approximately $2,000,000 in sales.
Royalty fees from franchise stores decreased slightly to $3,086,000 in
fiscal 1999 from $3,178,000 in fiscal 1998 principally due to a reduction
in the total number of franchised units open. Franchise and area
development fee revenue was $494,000 versus a year ago performance of
$1,104,000 attributable to the timing of domestic store openings and the
number of international deals signed in 1998 versus 1999. Finally,
licensing fees and other income was $1,050,000 versus $1,337,000 in 1998
primarily because of the acceleration of licensing deals into 1998.
Food, beverage and paper costs incurred at the Company-owned stores
decreased as a percentage of revenue from 33.6% in 1998 to 30.5% in 1999 an
improvement of just over 3 percentage points. Store payroll and other costs
increased to 64.0% of sales from 58.4% because of the integration of the Jacobs
Bros. acquisition.
Selling, general & administrative costs fell as a percentage of revenue to 39.3%
from 40.2% prior to the $1,044,000 charge for writing off royalties for closed
stores. The 1999 results of operations include the decision to re-franchise a
number of company stores to focus on building equity in the 3 brands and to
concentrate on franchising and marketing. The total non-cash charge taken in
the fourth quarter was $1,600,000 plus the aforementioned $1,044,000 of accounts
receivable write-offs. The $1,600,000 charge includes a reserve to write down
property and equipment and associated goodwill to fair market value, a reserve
to accrue for future lease obligations, plus the costs associated with closing
the stores. (See Note 4 to the audited consolidated financial statements
included herein.) Depreciation and amortization increased by 6% because of
the Jacobs Bros. acquisition.
Loss from operations was ($3,388,000) in fiscal 1999 versus income from
operations of $515,000 in fiscal 1998. Interest income increased to
$154,000 in fiscal 1998 from $119,000 in the prior year due to the
increase in notes receivable during fiscal 1999. Interest expense was
$292,000 during 1999 versus $206,000 in 1998 as a result of the increased
borrowing associated with the Jacobs Bros. acquisition.
Net loss totaled ($3,588,000) during the current fiscal year as
compared to income of $499,000 in the prior year. Preferred dividends
accumulated during 1999 totaled $124,000 compared to $148,000 in the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
The net cash used in operating activities totaled ($440,000) during
fiscal 1999. Cash used principally represents net loss, adjusted
for the depreciation and amortization of $1,248,000, the special charge
of $1,600,000 plus the provision for uncollectible accounts of $1,044,000
offset by increases in trade accounts receivable ($569,000) and contributions
receivable by the National Marketing Fund ($125,000). In 1998, the
net cash provided by operating activities included net income of $645,000
plus depreciation and amortization of $1,180,000, deferred revenue of
$350,000, prepaid expenses and other assets of $386,000, and provision for
uncollectible accounts of $125,000 offset by an increase in trade accounts
receivable of ($332,000), notes receivable of ($491,000) and an income tax
benefit of ($180,000). In addition, accounts payable decreased by ($589,000)
and the reserve for closed store expenses was reduced by ($468,000). Finally,
accrued liabilities were reduced by ($140,000) and deferred franchise fee was
reduced by ($282,000).
Cash used for investing activities during 1999 totaled $218,000, and was
used primarily for the purchase of property, equipment and trademarks
offset by loan repayments and sales of property and equipment. In the prior
year, cash used for investing activities totaled ($146,000) which consisted
primarily of the purchase of property, equipment and trademarks offset by
loan repayments and sales of property and equipment.
Financing activities used ($448,000) during fiscal 1999. The Company
Paid down its line of credit with its bank by $345,000 and also repaid $111,000
on its amortizing loan. The Company had also borrowed $125,000 on its line of
credit in 1999.
Financing activities provided a total of $153,000 during fiscal 1998. This
was substantially the net amount of borrowings and repayments on the Line.
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 REPORTS
YEARS ENDED NOVEMBER 30, 1999 AND 1998
<PAGE>
BAB HOLDINGS, INC.
Years Ended November 30, 1999 and 1998
C O N T E N T S
---------------
Reference
Independent Auditor's Report
Consolidated Balance Sheets Exhibit A
Consolidated Statements of Operations Exhibit B
Consolidated Statements of
Stockholders' Equity Exhibit C
Consolidated Statements of
Cash Flows Exhibit D
Notes to Consolidated Financial
Statements
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Stockholders and Board of Directors
BAB Holdings, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of BAB HOLDINGS,
INC. as of November 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
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 audits.
We conducted our audits 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 audits provide 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, 1999 and 1998, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
February 3, 2000
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Balance Sheets
Years Ended November 30, 1999 and 1998
ASSETS
------
1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents, including
restricted cash of $21,946 in 1999
and $218,646 in 1998 $ 30,818 $ 700,162
Receivables
Trade accounts receivable, net of
allowance for doubtful accounts of
$770,764 in 1999 and $341,521 in 1998 1,106,010 1,181,282
National Marketing Fund contributions
receivable 415,317 309,633
Notes receivable, net of allowance for
doubtful accounts of $482,744 in 1999
and $20,000 in 1998 394,836 444,560
Inventories 293,838 298,501
Deferred franchise costs - 18,227
Assets held for sale 1,323,736 -
Prepaid expenses and other current assets 276,717 206,952
Deferred income taxes 530,005 431,719
---------- ----------
Total Current Assets 4,371,277 3,591,036
Property and Equipment
Leasehold improvements 1,143,835 2,618,906
Furniture and fixtures 574,020 744,833
Equipment 1,837,710 2,513,715
Construction in progress - 68,543
---------- ----------
3,555,565 5,945,997
Less accumulated depreciation (1,382,406) (1,743,800)
---------- ----------
Total Property and Equipment, Net 2,173,159 4,202,197
Notes Receivable 517,186 1,086,100
---------- ----------
Intangibles
Patents, trademarks and copyrights (Net of
accumulated amortization of $155,143 in 1999
and $90,374 in 1998) 977,788 568,683
Goodwill (Net of accumulated amortization
of $232,885 in 1999 and $164,806 in 1998) 2,510,379 2,591,515
Franchise contract rights (Net of accumulated
amortization of $267,670 in 1999 and
$152,375 in 1998) 1,816,295 1,919,909
Other assets (Net of accumulated amortization
of $303,117 in 1999 and $235,056 in 1998) 488,494 485,551
---------- ----------
Total Intangibles, Net 5,792,956 5,565,658
---------- ----------
$12,854,578 $14,444,991
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 939,787 $ 1,014,734
Accrued liabilities 875,563 714,789
Reserve for closed store expenses 168,719 36,388
Accrued professional and other services 229,154 214,972
Unexpended National Marketing Fund
contributions 544,625 465,173
Long-term debt due within one year 1,818,087 134,814
Deferred franchise fee revenue 267,500 360,500
------------ ------------
Total Current Liabilities 4,843,435 2,941,370
------------ ------------
Noncurrent Liabilities
Deferred revenue 309,789 263,996
Deferred income taxes 350,005 251,719
Long-term debt (Net of portion included
in current liabilities) 1,255,862 1,759,954
------------ ------------
Total Noncurrent Liabilities 1,915,656 2,275,669
------------ ------------
Total Liabilities 6,759,091 5,217,039
------------ ------------
Stockholders' Equity:
Common stock - No par value; 3,333,333
shares authorized; 2,287,656 shares and
1,442,499 shares issued, respectively;
and 2,237,540 shares and 1,393,616 shares
outstanding, respectively 13,507,669 11,430,452
Preferred stock - $0.01 par value; 3,880,000
shares authorized; no shares issued
and outstanding - -
Series A Preferred stock - $25 par value;
120,000 shares authorized; 0 shares and
60,000 shares issued and outstanding,
respectively - 1,548,731
Treasury stock at cost, 50,116 shares and
48,883 shares, respectively (43,963) (36,067)
Additional paid-in capital 1,187,696 1,252,402
Accumulated deficit (8,555,915) (4,967,566)
------------ ------------
Total Stockholders' Equity 6,095,487 9,227,952
------------ ------------
$ 12,854,578 $ 14,444,991
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BAB HOLDINGS, INC.
Consolidated Statements of Operations
Years Ended November 30, 1999 and 1998
1999 1998
----------- -----------
<S> <C> <C>
Revenues
Net sales by Company-owned stores $10,310,869 $ 8,929,664
Royalty fees from franchised stores 3,085,949 3,178,262
Franchise and area development fees 493,869 1,104,000
Licensing fees and other income 1,050,214 1,337,314
----------- -----------
Total Revenues 14,940,901 14,549,240
Operating Costs and Expenses
Food, beverage, and paper costs 3,148,698 2,998,079
Store payroll and other operating expenses 6,601,415 5,213,359
Special charge 1,600,406 (107,699)
Selling, general and administrative expenses:
Payroll-related expenses 2,484,045 2,262,616
Occupancy 337,063 259,253
Advertising and promotion 435,719 532,678
Professional service fees 361,655 362,360
Franchise-related expenses 152,736 261,287
Provision for doubtful accounts 1,043,993 124,521
Depreciation and amortization 1,247,868 1,180,259
Other 915,035 947,372
----------- -----------
Total Selling, General and
Administrative Expenses 6,978,114 5,930,346
----------- -----------
Total Operating Costs
and Expenses 18,328,633 14,034,085
----------- -----------
Income (Loss) from Operations (3,387,732) 515,155
Interest Income 153,758 119,244
Interest Expense (292,457) (205,618)
Other Income 61,862 54,022
----------- -----------
Income (Loss) Before Taxes (3,464,569) 482,803
Provision (Benefit) for Income Taxes
Current - 16,039
Deferred - (180,000)
----------- -----------
- (163,961)
----------- -----------
Net Income (Loss) (3,464,569) 646,764
Preferred Stock Dividends Accumulated (123,780) (147,864)
----------- -----------
Net Income (Loss) Attributable to
Common Stockholders $(3,588,349) $ 498,900
=========== ===========
Income (Loss) per Share - Basic and Diluted $ (2.32) $ 0.37
=========== ===========
</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, 1999 and 1998
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, 1997 1,330,272 $10,908,062 78,710 1,862,035(45,000) (17,500)
Conversion of
Preferred to
Common Stock 112,229 522,390 (18,710) (441,173) -- --
Preferred Dividends
Accumulated -- -- -- 147,864 -- --
Preferred Dividends
Paid -- -- -- (19,995) -- --
Purchase of
Treasury Stock -- -- -- -- (3,883) (18,567)
---------- ---------- ------ --------- ------- -------
Balance as of
November 30, 1998 1,442,499 11,430,452 60,000 1,548,731(48,883) (36,067)
Conversion of
Preferred to
Common Stock 818,491 1,937,217 (60,000) (1,672,511) -- --
Preferred Dividends
Accumulated -- -- -- 123,780 -- --
Purchase of
Treasury Stock -- -- -- -- (1,233) (7,896)
Issuance of Stock 26,666 140,000
---------- ----------- ------ ----------- ------- -------
- -
Balance as of
November 30, 1999 2,287,656 $13,507,669 -- --(50,116) (43,963)
========== =========== ====== ========== ======== =======
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance as of November 30, 1997 $1,368,619 (5,466,466) 8,654,750
Termination of Options Issued
in Connection with Acquisitions (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
Issuance of Common Stock
in Acquisitions -- -- 140,000
Purchase of Treasury Stock -- -- (7,896)
Issuance of Warrants 200,000 -- 200,000
Preferred Dividends Accumulated -- (123,780) --
Conversion of Preferred to
Common Stock (264,706) -- --
Net Loss -- (3,464,569) (3,464,569)
----------- ----------- -----------
Balance as of November 30, 1999 1,187,696 (8,555,915) 6,095,487
=========== ========== ===========
</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, 1999 and 1998
1999 1998
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(3,464,569) $ 646,764
----------- ---------
- -
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 1,247,868 1,180,259
Provision for store conversions 1,600,406 -
Provision for uncollectible accounts 1,043,993 124,521
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 (569,380) (331,811)
National Marketing Fund contributions
receivable (124,558) 72,799
Inventories 4,663 45,923
Deferred franchise costs 18,227 58,578
Notes receivable 23,044 (491,003)
Prepaid expenses and other assets (93,465) 386,461
Increase (decrease) in
Accounts payable (94,499) (588,927)
Accrued professional and other services (18,238) ( 12,923)
Reserve for closed store expenses (36,344) (467,815)
Accrued liabilities 36,476 (140,192)
Unexpended National Marketing Fund
franchisee contributions 85,758 (57,549)
Jacobs Bros. non-compete agreement (90,000) -
Deferred franchise fee revenue (99,207) (281,500)
---------- ---------
Total Adjustments 2,934,744 (343,572)
---------- ---------
Net Cash Provided by (Used in)
Operating Activities (529,825) 303,192
--------- ---------
</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, 1999 and 1998
1999 1998
------------ ----------
<S> <C> <C>
Cash Flows from Investing Activities
Purchases of property and equipment $ (148,498) $ (198,295)
Sale of property and equipment 101,140 33,484
Purchase of trademarks (21,892) (75,892)
Loan disbursements) - (13,263)
Loan repayments 247,059 138,900
Other 40,445 (31,029)
----------- ----------
Net Cash Used in Investing Activities 218,254 (146,095)
----------- -----------
Cash Flows from Financing Activities
(Repayments)Borrowing on line of credit (219,972) 337,500
Debt repayments (110,777) (145,769)
Other (27,024) (38,562)
----------- ----------
Net Cash Provided by Financing Activities (357,773) 153,169
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (669,344) 310,266
Cash and Cash Equivalents, Beginning of Year 700,162 389,896
----------- ---------
Cash and Cash Equivalents, End of Year $ 30,818 $ 700,162
=========== ==========
</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, 1999 and 1998
- ------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
BAB Holdings, Inc. (the Company) is an Illinois corporation incorporated on
November 25, 1992. The Company has four wholly owned subsidiaries: BAB
Operations, Inc. (Operations); BAB Systems, Inc. (Systems); Brewster's
Franchise Corporation (BFC); and My Favorite Muffin Too, Inc. (MFM). Systems
was incorporated on December 2, 1992, and was primarily established to
franchise "Big Apple Bagels" specialty bagel retail stores. Systems has a
wholly owned subsidiary, Systems Investments, Inc. (Investments), which was
created to operate the first Company-owned "Big Apple Bagels" store which,
until December 1995, also operated as the franchise training facility.
Investments also owned a 50% interest in a joint venture which operated a
franchise satellite store. During fiscal 1997, the stores operated by
Investments and by the joint venture were sold and are currently operating as
franchised stores. As of November 1998, Investments was dissolved and
merged into the parent company, Systems. Operations was formed on August 30,
1995, primarily to operate Company-owned stores, currently "Big Apple Bagels"
and "Brewster's Coffee" concept stores including one which currently serves as
the franchise training facility. BFC was established on February 15, 1996,
to franchise "Brewster's Coffee" concept coffee stores. MFM, a New Jersey
corporation, was acquired on May 13, 1997. MFM franchises and operates
Company-owned "My Favorite Muffin" concept muffin stores. The assets of
Jacobs Bros. Bagels (Jacobs Bros.) were acquired on February 1, 1999. See
Note 12. The company continues to operate four stores with the Jacob Bros.
name.
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.
Change in Fiscal Year End
- -------------------------
Effective with the 1999 fiscal year-end, the Company adopted a 52-53 week
period ending on the Sunday closest to November 30. The 52-week fiscal year
ended on November 28 for 1999. The impact of the change from fiscal year-end
to a 52-53 week period upon 1998 financial statements is not material and
therefore no adjustment has been made. For convenience throughout the
consolidated financial statements, the Company's fiscal year-end is referred
to as November 30.
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 are
amortized over varying periods from 8.5 to 20 years. Goodwill recorded as a
result of acquisitions is being amortized over 40 years. Other intangibles
including noncompete agreements are being amortized over the terms of the
agreements which is 5-6 years. Amortization expense recorded in the
accompanying consolidated statements of operations for the years ended
November 30, 1999 and 1998 was $344,306 and $326,089, 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.
Stock Warrants
- --------------
Stock warrants 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 stock warrants 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 1999
and 1998, 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, 1999 or 1998, or area development fees
collected are as:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Stores opened:
Company-owned 23 22
Franchisee-owned 177 194
Licensed 60 77
---- ----
260 293
Unopened stores:
Franchise agreement 10 15
Area development agreement 8 19
---- ----
18 34
---- ----
278 327
==== ====
</TABLE>
Advertising Costs
- -----------------
The Company expenses advertising costs as incurred. Advertising expense was
$193,364 and $331,004 in 1999 and 1998, respectively. Included in
advertising expense was $55,019 and $53,593 in 1999 and 1998, respectively,
related to the Company's franchise operations.
Comprehensive Income (Loss)
- ---------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which established standards for the
reporting and display of comprehensive income (loss) and its components in
the financial statements. Components of comprehensive income (loss) include
amounts that, under SFAS No. 130, are included in the comprehensive income
(loss) but are excluded from net income (loss). There were no differences
between the Company's net (loss) income and comprehensive (loss) income.
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, 1999 and 1998, approximates
their carrying value.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instrument and Hedging Activities." SFAS No. 133
is effective for the fiscal years beginning after June 15, 2000. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet
at their fair market value. Changes in the fair value of derivatives are
recorded each period in the current earnings or other comprehensive income
(loss) depending on whether a derivative is designed as part of a hedge
transaction and, if so, the type of hedge transaction involved. The Company
does not expect that adoption of SFAS No. 133 will have a material impact on
its consolidated financial position or results of operations, as the Company
does not currently hold any derivative financial instruments.
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 1998 amounts have been reclassified to reflect the 1999 presentation.
NOTE 3 - RESTRICTED CASH
Systems and MFM have established the National Marketing Fund (Fund). Certain
franchisees and Company-owned stores 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, 1999 and 1998, the Fund's cash balance
was $21,946 and $218,646, respectively.
NOTE 4 - SPECIAL CHARGE
During the fourth quarter of 1999, the Company made the decision to refranchise
certain Company-owned stores, in order to concentrate on franchising and
marketing and building equity in the branding of its trademarked names and
products. The Company-owned stores, which were to be converted to franchised
units were written down to fair value based upon actual selling prices or, if
not sold prior to year-end, upon management's judgment based upon the
previous sale 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 the
remaining assets to be sold totaled $1,323,736 was recorded as a current
asset as of November 30, 1999.
The actual and planned conversions resulted in a pre-tax loss of $1,600,406
during the fourth quarter of 1999. As of November 30, 1999, $168,719 of the
charge, primarily for severance and lease termination costs, remains as a
liability for store conversions. A summary of the special charge is
presented below:
<TABLE>
<CAPTION>
<S> <C>
Loss associated with actual and
expected conversion
of stores to franchisee $1,236,568
Severance, lease termination and other costs 250,713
Write-off of Canadian franchise rights 113,125
---------
$1,600,406
=========
</TABLE>
In addition, the Company reserved or wrote off approximately $1,044,000 of
accounts and notes receivable during 1999. This additional reserve primarily
resulted from store closings of franchisees.
The negative special charge in 1998 of $107,699 resulted from the overaccrual
in 1997 for store closing costs.
NOTE 5 - INCOME TAXES
The reconciliation of the income tax (benefit) provision computed at the
federal statutory rate of 34% and the benefit for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Income tax provision (benefit)
computed at federal statutory rate $ (918,743) $ 164,153
State income taxes (benefit), net
of federal tax benefit (127,753) 23,261
Other adjustments 3,100 16,781
Change in valuation allowance 1,043,396 (368,156)
--------- ---------
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>
1999 1998
---------- --------
<S> <C> <C>
Franchise fee revenue $ 100,926 $ 20,638
Franchise costs 61,620 52,745
National Marketing Fund net contributions 7,960 71,737
Allowance for uncollectible accounts 460,485 129,125
Notes receivable (72,325) -
Net operating loss carryforwards 2,529,506 1,672,245
Valuation allowance (2,558,167) (1,514,771)
--------- ---------
Total Deferred Tax Assets 530,005 431,719
--------- ---------
Depreciation (350,005) (249,263)
Other - (2,456)
--------- ---------
Total Deferred Tax Liabilities (350,005) (251,719)
--------- ---------
$ 180,000 $ 180,000
========= =========
</TABLE>
As of November 30, 1999, the Company has cumulative net operating loss
carryforwards expiring between 2008 and 2014 for U.S. federal income tax
purposes of $6,516,323. 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 $2,558,167 of the deferred tax
benefit related to those loss carryforwards and other deferred tax assets for
which it is considered more likely than not that the benefit will not be
realized.
NOTE 6 - LONG-TERM OBLIGATIONS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Secured line of credit payable to
bank, due December 31, 1999,
at an interest rate of prime
plus 1% $1,657,493 $1,877,465
Capital lease obligations,
various rates 7,232 17,303
Secured note payable, principal
payments due monthly at an
interest rate of 11.3% 1,239,224 -
Other 170,000 -
--------- ---------
3,073,949 1,894,768
Less current portion (1,818,087) ( 134,814)
--------- ---------
Long-Term Debt, Net of Current Portion $1,255,862 $1,759,954
========= ==========
</TABLE>
The Company had a secured $1.75 million line-of-credit facility (Line) with a
bank which expired December 31, 1999. Maximum borrowing under the Line was
limited to 80% of accounts receivable under 90 days and 40% or original cost
of equipment, furniture and fixtures. Interest was payable monthly at prime
plus 1% (9.25% as of November 30, 1999), with principal due upon maturity on
December 31, 1999. As of November 30, 1999, the Company had borrowed
$1,657,493 on the Line.
In December 1999, the Company entered into a new bank credit facility for $1.5
million. This new credit line is secured by substantially all of the assets of
the Company excluding those acquired through the Jacobs Bros. acquisition and
requires, among other things, that the Company maintain minimum net worth of
$6 million and maintain a compensating cash balance of $250,000. Maximum
borrowing terms under the Line are identical to the previously expired
agreement. The interest rate on this new line of credit is prime plus 4%.
The new line expires on April 30, 2000, however, it is management's expectation
that this agreement will be renewed by the bank or that a similar arrangement
with another lender will be concluded.
As of November 30, 1999, annual maturities on long-term obligations are due as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending November 30:
FY 2000 1,818,087
FY 2001 180,363
FY 2002 199,427
FY 2003 222,763
FY 2004 247,052
Thereafter 406,257
---------
3,073,949
=========
</TABLE>
In June 1999, the Company obtained an amortizing loan in the amount of
$170,000 from a finance company. Proceeds were used to purchase two stores
from a franchisee in Wisconsin.
In February 1999, the Company obtained a series of amortizing loans in the
amount of $1,350,000 from a finance company. Loan proceeds of $950,000 were
used to purchase certain assets of Jacobs Bros. Bagels. Approximately
$280,000 was used to purchase equipment and fund remodeling required on the
units acquired in the purchase. The remaining $120,000 was used to purchase
assets from a former franchisee.
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, 1999, $420,000 has been advanced to franchises under this program.
Interest paid for the years ended November 30, 1999 and 1998 was $292,457 and
$202,312, respectively.
NOTE 7 - 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, 1999 and 1998 was $1,277,463 and $936,895, including contingent
rental expense of $0 and $41,646, less sublease income of $259,577 and
$106,606, respectively. As of November 30, 1999, future minimum annual
rental commitments under leases, net of sublease income of $170,073 in 2000,
$80,790 in 2001, $83,542 in 2002, $86,384 in 2003, and $148,584 in 2004 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending November 30:
FY 2000 $ 1,011,776
FY 2001 978,325
FY 2002 808,090
FY 2003 814,345
FY 2004 559,559
Thereafter 402,642
---------
$ 4,574,737
=========
</TABLE>
NOTE 8 - NONCASH TRANSACTIONS
In February 1999, the Company acquired certain assets of Jacobs Bros. Bagels
(Jacob Bros.) See Note 12. The company financed this acquisition with a
lender in the amount of $950,000. Also the company issued common stock in
the amount of $140,000 and warrants valued at $200,000 in connection with
this acquisition. The company also accrued $210,000 for the noncompete
agreement.
The company acquired two stores from a franchisee for forgiveness of
outstanding royalty fees and national marketing fund receivables in the
amount of $171,371. The company also assumed liabilities in the amount of
$170,000.
The company acquired assets and assumed liabilities from a franchisee in the
amount of $119,500.
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 16,667 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 9 - STOCKHOLDERS' EQUITY
During fiscal 1999, holders elected to convert 60,000 shares of Preferred
Stock plus dividends accrued thereon into 818,491 shares of common stock.
During fiscal 1998, holders elected to convert 18,710 shares of Preferred
Stock plus dividends accrued thereon into 112,229 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.
Preferred dividends of $123,780 and $147,864 accumulated during fiscal years
1999 and 1998, respectively.
On December 10, 1999, subsequent to a favorable vote by stockholders, the
Company effected a 1:6 reverse split of the outstanding shares of common
stock. Accordingly, all data shown in the accompanying consolidated
financial statements and notes has been retroactively adjusted to reflect the
reverse split.
NOTE 10 - EARNINGS PER SHARE
The computation of basic and diluted earnings (loss) per share is as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss) $(3,464,569) 646,764
Preferred stock dividend accumulated (123,780) (147,864)
----------- -----------
Numerator for basic earnings (loss)
per share - income (loss)
attributable to common stockholders (3,588,349) (498,900)
Effect of dilutive securities:
Preferred stock dividend accumulated 123,780 147,864
----------- -----------
Numerator for diluted earnings (loss)
per share - income (loss)
attributable to common stockholders $(3,464,569) $ 646,764
=========== ===========
Denominator:
Denominator for basic earnings (loss)
per share - weighted average shares 1,496,323 1,350,180
Effect of dilutive securities:
Convertible preferred stock - 401,193
---------- ----------
Denominator for diluted earnings (loss)
per share - weighted average shares 1,496,323 1,751,373
========== ==========
Basic and diluted earnings (loss)
per share $ (2.32) $ 0.37
========== ==========
</TABLE>
The exercise of options and warrants outstanding during the years ended
November 30, 1999 and 1998 and the conversion of convertible securities
outstanding during the year ended November 30, 1998 is not assumed as
the result is antidilutive to the reported loss per share.
NOTE 11 - STOCK OPTIONS PLANS
On April 27, 1999, the Company adopted and received stockholder approval to
amend 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 165,833 shares of common
stock (as adjusted for a 1:6 reverse split in 1999) 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 April 27, 1999, the Company adopted and received stockholder
approval to amend 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 17,500 shares of common stock for grant. The
Directors Plan provides for a grant of options to purchase 333 shares upon
initial election to the Board and for annual grants thereafter, upon
reelection, of options to purchase 833 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, 1999, is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average Option
Shares Price Per Share
---------- ---------------
<S> <C> <C>
Outstanding as of November 30, 1998 70,576 $ 28.46
Granted 18,914 $ 5.80
Exercised - -
Canceled ( 8,424) $ 24.26
-------
Outstanding as of November 30, 1999 81,066 $ 23.61
=======
</TABLE>
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123, "Accounting and Disclosure of
Stock-Based Compensation" (SFAS No.123). Accordingly, no employee
compensation expense has been recognized for the Incentive Plan or for the
Directors Plan. Had employee compensation expense for the Company's plan
been determined based on the fair value at the grant date for awards in
fiscal years 1999 and 1998 consistent with provisions of SFAS No. 123, the
Company's net (loss) income and net (loss) income per share would have been
as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net income (loss) attributable to
common stockholders:
As reported $(3,588,349) $ 498,900
Pro forma $(3,811,986) $ 89,973
Basic income (loss) per share:
As reported $ (2.32) $ 0.37
Pro forma $ (2.54) $ 0.06
Diluted income (loss) per share:
As reported $ (2.32) $ 0.37
Pro forma $ (2.54) $ 0.06
</TABLE>
Information on options outstanding under the Incentive Plan and the
Directors Plan as of November 30, 1999, 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>
$ 4.02 - $ 6.00 30,910 4.43 $ 5.03
$12.00 - $16.50 8,325 4.67 $13.09
$25.00 - $29.00 2,250 6.28 $26.33
$38.00 - $42.50 39,581 3.98 $40.08
</TABLE>
NOTE 12 - BUSINESS COMBINATIONS
During 1999, 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.
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 in 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 83,333 shares of the
Company's common stock. The warrants provide for the purchase of 45,833
shares and 37,500 shares of common stock at an exercise price of $7.50 and
$9.00 per share, respectively. The warrants are first exercisable on
February 1, 2000 and expire on January 31, 2006. None of the warrants were
exercised as of February 3, 2000. Further, the Company entered into
noncompetition agreements with two principals of Jacobs Bros. totaling
$210,000 to be paid over varying periods. Finally, the Company issued 26,666
shares of the Company's common stock to the investment banker for services in
connection with the acquisition, valued at $140,000.
NOTE 13 - SEGMENT INFORMATION
In the fourth quarter of 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement supercedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that
is used by management for making operating decisions and assessing performance
as the source of the Company's reportable segments. This statement requires
disclosure of certain information by reportable segment, geographic area and
major customer. As a result, the Company will separately report information
on the following two operating segments: company store operations and
franchise operations. In determining the operating income of each segment,
certain general and corporate expenses are not allocated to operating segments.
<PAGE>
<TABLE>
<CAPTION>
Year Ended November 30
NET REVENUES (LOSS) INCOME
1999 1998 1999 1998
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Company store operations $11,361,084 $10,266,978 $(1,395,447) $( 712,708)
Franchise operations 3,579,817 4,282,262 244,522 1,834,652
----------- ---------- --------- ---------
Total ongoing business 14,940,901 14,549,240 (1,150,925) 1,121,944
Less: Special charges 1,600,406
Corporate expenses 574,538 522,767
Interest expense, net of
Income (138,700) (86,374)
--------- ---------
(Loss) Income before taxes (3,464,569) 482,803
Benefit for Income taxes - (163,961)
--------- ---------
Net (Loss) Income (3,464,569) 646,764
=========== =========
</TABLE>
OPERATING SEGMENT DATA
<TABLE>
<CAPTION>
IDENTIFIABLE CAPITAL DEPRECIATION
ASSETS EXPENDITURES AND AMORTIZATION
----------- ------------ ----------------
<S> <C> <C> <C>
Year ended November 30, 1999
Company store operations $ 8,564,951 122,148 982,742
Franchise operations 3,452,087 26,350 265,126
---------- -------- ---------
12,017,038 148,498 1,247,868
========== ======== =========
Year ended November 30,1998
Company store operations $ 8,886,927 135,315 906,087
Franchise operations 4,219,231 62,980 274,172
---------- -------- ---------
13,106,158 198,295 1,180,259
========== ======== =========
Reconciliation to Total Assets
As Reported
November 30, November 30,
1999 1998
----------- ------------
Assets
Total reportable segments
Identifiable assets $ 12,017,038 $13,106,158
Unallocated amounts
Cash 30,818 700,162
Prepaid expenses and other current 276,717 206,952
Other 530,005 431,719
------------ -----------
Total Consolidated Assets 12,854,578 14,444,991
============ ===========
</TABLE>
Prior period amounts have been restated in accordance with SFAS No. 131.
There were no sales to any individual customer during any of the years in the
two year period ended November 30, 1999 that represented 10% or more of net
sales.
1995 LONG-TERM INCENTIVE
AND
STOCK OPTION PLAN
Table of Contents
1. Purpose of Plan
2. Stock Subject to Plan
3. Administration of Plan
4. Eligibility
5. Price
6. Term
7. Exercise of Option or Award
8. Additional Restrictions
9. Alternative Stock Appreciation Rights
10. Ten Percent Shareholder Rule
11. Non-Transferability
12. Restricted Stock Awards
13. Performance Awards
14. Dilution or Other Adjustments
15. Amendment or Discontinuance of Plan
16. Time of Granting
17. Income Tax Withholding and Tax Bonuses
18. Effective Date and Termination of Plan
1995 LONG-TERM INCENTIVE AND
STOCK OPTION PLAN
1. Purpose of Plan
This Plan shall be known as the "BAB HOLDINGS, INC. 1995 LONG-TERM
INCENTIVE AND STOCK OPTION PLAN" and is hereinafter referred to as the "Plan".
The purpose of the Plan is to aid in maintaining and developing personnel
capable of assuring the future success of BAB Holdings, Inc., an Illinois
corporation (the "Company"), to offer such personnel additional incentives to
put forth maximum efforts for the success of the business, and to afford them
an opportunity to acquire a proprietary interest in the Company through stock
options and other long-term incentive awards as provided herein. Options
granted under this Plan may be either incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986 (the "Code"), or options which do not qualify as Incentive Stock Options.
Awards granted under this Plan shall be stock appreciation rights ("SARs"),
restricted stock or performance awards as hereinafter described.
2. Stock Subject to Plan
Subject to the provisions of Section 14 hereof, the stock to be subject to
options or other awards under the Plan shall be the Company's authorized Common
Stock, no par value (the "Common Shares"). Such shares may be either
authorized but unissued shares, or issued shares which have been reacquired by
the Company. Subject to adjustment as provided in Section 14 hereof, the
maximum number of shares on which options may be exercised or other award
issued under this Plan shall be 380,000 Common Shares. If an option or award
under the Plan expires, or for any reason is terminated or unexercised with
respect to any shares, such shares shall again be available for options or
awards thereafter granted during the term of the Plan.
3. Administration of Plan
(a) Except as provided in Section 3(b) hereof, the Plan shall be
administered by the Board of Directors of the Company or a committee thereof.
The members of any such committee shall be appointed by and serve at the
pleasure of the Board of Directors. If no committee is appointed by the Board,
the committee shall be comprised of all of the members of the Board of
Directors. (The group administering the Plan shall hereinafter be referred to
as the "Committee".)
(b) Notwithstanding Section 3(a) hereof, all option grants and awards
under this Plan to officers, directors and others who are subject to Section 16
under the Securities Exchange Act of 1934, as amended (the 1934 Act), and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder (the "Section 16 Regulations"), shall be made exclusively by a
committee (the "Disinterested Committee") comprised of at least two members of
the Board of Directors who qualify as "disinterested" plan administrators under
the Section 16 Regulations, or whose administration otherwise qualifies
transactions under the Plan as exempt from Section 16(b) of the 1934 Act. All
references hereinafter to the "Committee" shall mean the "Disinterested
Committee" if the action to be taken in administration of the Plan must be
taken by the Disinterested Committee.
(c) The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan: (i) to determine the purchase
price of the Common Stock covered by each option or award, (ii) to determine
the persons to whom and the time or times at which such options and awards
shall be granted and the number of shares to be subject to each, (iii) to
determine the form of payment to be made upon the exercise of an SAR or in
connection with performance awards, either cash, Common Shares of the Company
or a combination thereof, (iv) to determine the terms of exercise of each
option and award, (v) to accelerate the time at which all or any part of an
option or award may be exercised, (vi) to amend or modify the terms of any
option or award with the consent of the optionee, (vii) to interpret the Plan,
(viii) to prescribed, amend and rescind rules and regulations relating to the
Plan, (ix) to determine the terms and provisions of each option and award
agreement under the Plan (which agreements need not be identical), including
the designation of those options intended to be Incentive Stock Options, and
(x) to make all other determinations necessary or advisable for the
administration of the Plan, subject to the exclusive authority of the Board of
Directors under Section 15 herein to amend or terminate the Plan. The
Committee's determinations on the foregoing matters, unless otherwise
disapproved by the Board of Directors of the Company, shall be final and
conclusive.
(d) The Committee may select one of its members as its Chairman and
shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of
the Committee shall be made by not less than a majority of its members. Any
decision or determination reduced to writing and signed by all of the members
of the Committee shall be fully effective as if it had been made by a majority
vote at a meeting duly called and held. The grant of an option or award
shall be effective only if a written agreement shall have been duly executed
and delivered by and on behalf of the Company following such grant. The
Committee may appoint a Secretary and may make such rules and regulations for
the conduct of its business as it shall deem advisable.
4. Eligibility
Incentive Stock Options may only be granted under this Plan to any full or
part-time employee (which term as used herein includes, but is not limited to,
officers and directors who are also employees) of the Company and of its
present and future subsidiary corporations (herein called "subsidiaries").
Full or part-time employees, non-employee members of the Board of Directors,
and non-employee consultants, agents or independent contractors to the Company
or one of its subsidiaries shall be eligible to receive options which do not
qualify as Incentive Stock Options and awards; provided, however, that members
of the Disinterested Committee shall not be eligible for any option grant or
award under the Plan while serving on said Disinterested Committee. In
determining the persons to whom options and awards shall be granted and the
number of shares subject to each, the Committee may take into account the
nature of services rendered by the respective employees or consultants, their
present and potential contributions to the success of the Company and such
other factors as the Committee in its discretion shall deem relevant. A
person who has been granted an option or award under this Plan may be granted
additional options or awards under the Plan if the Committee shall so
determine; provided, however, that for Incentive Stock Options, to the extent
the aggregate fair market value (determined at the time the Incentive Stock
Option is granted) of the Common Shares with respect to which all Incentive
Stock Options are exercisable for the first time by an employee during any
calendar year (under all plans described in subsection (d) of Section 422 of
the Code of his employer corporation and its parent and subsidiary
corporations) exceeds $100,000, such options shall be treated as options
which do not qualify as Incentive Stock Options. Nothing in the Plan or in
any agreement thereunder shall confer on any employee any right
to continue in the employ of the Company or any of its subsidiaries or affect,
in any way, the right of the Company or any of its subsidiaries to terminate
his or her employment at the time.
5. Price
The option price for all Incentive Stock Options granted under the Plan
shall be determined by the Committee but shall not be less than 100% of the
fair market value of the Common Shares at the date of grant of such option.
The option price for options granted under the Plan which do not qualify as
Incentive Stock Options and, if applicable, the price for all awards shall also
be determined by the Committee and may be other than 100% of the fair market
value of the Common Shares. For purposes of the preceding sentence and for all
other valuation purposes under the Plan, the fair market value of the Common
Shares shall be as reasonably determined by the Committee. If on the date of
grant of any option or award hereunder the Common Shares are not traded on an
established securities market, the Committee shall make a good faith attempt to
satisfy the requirements of this Section 5 and in connection therewith shall
take such action as it deems necessary or advisable.
6. Term
Each option and award and all rights and obligations thereunder shall
expire on the date determined by the Committee and specified in the option or
award agreement. The Committee shall be under no duty to provide terms of like
duration for options or awards granted under the Plan, but the term of an
Incentive Stock Option may not extend more than ten (10) years from the date of
grant of such option and the term of options granted under the Plan which do
not qualify as Incentive Stock Options may not extend more than fifteen (15)
years from the date of granting of such option.
7. Exercise of Option or Award
(a) The Committee shall have full and complete authority to determine
whether an option or award will be exercisable in full at any time or from time
to time during the term thereof, or to provide for the exercise thereof in such
installments, upon the occurrence of such events (such as termination of
employment for any reason) and at such times during the term of the option as
the Committee may determine and specify in the option or award agreement.
(b) The exercise of any option or award granted hereunder shall only be
effective at such time that the sale of Common Shares pursuant to such exercise
will not violate any state or federal securities or other laws.
(c) An optionee or grantee electing to exercise an option or award shall
give written notice to the Company of such election and of the number of shares
subject to such exercise. The full purchase price of such shares shall be
tendered with such notice of exercise. Payment shall be made to the Company in
cash (including bank check, certified check, personal check, or money order),
or, at the discretion of the Committee and as specified by the Committee, (i)
by delivering certificates for the Company's Common Shares already owned by the
optionee or grantee having a fair market value as of the date of grant equal to
the full purchase price of the shares or (ii) a combination of cash and such
shares. The fair market value of such tendered shares shall be determined as
provided in Section 5 herein. Until such person has been issued the shares
subject to such exercise, he or she shall possess no rights as a shareholder
with respect to such shares.
8. Additional Restrictions
The Committee shall have full and complete authority to determine whether
all or any part of the Common Shares of the Company acquired upon exercise of
any of the options or awards granted under the Plan shall be subject to
restrictions on the transferability thereof or any other restrictions affecting
in any manner the optionee's or grantee's rights with respect thereto, but any
such restriction shall be contained in the agreement relating to such options
or awards.
9. Alternative Stock Appreciation Rights
(a) Grant. At the time of grant of an option or award under the Plan
(or at any other time), the Committee, in its discretion, may grant a Stock
Appreciation Right ("SAR") evidenced by an agreement in such form as the
Committee shall from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the agreement
representing such SAR which agreement shall comply with and be subject to the
following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan.
(b) Exercise. An SAR shall be exercised by the delivery to the Company
of a written notice which shall state that the holder thereof elects to
exercise his or her SAR as to the number of shares specified in the notice and
which shall further state what portion, if any, of the SAR exercise amount
(hereinafter defined) the holder thereof requests be paid to in cash and what
portion, if any, is to be paid in Common Shares of the Company. The Committee
promptly shall cause to be paid to such holder the SAR exercise amount either
in cash, in Common Shares of the Company, or any combination of cash and shares
as the Committee may determine. Such determination may be either in accordance
with the request made by the holder of the SAR or in the sole and absolute
discretion of the Committee. The SAR exercise amount is the excess of the fair
market value of one share of the Company's Common Shares on the date of exercise
over the per share exercise price in respect of which the SAR was granted,
multiplied by the number of shares as to which the SAR is exercised. For the
purposes hereof, the fair market value of the Company's shares shall be
determined as provided in Section 5 herein.
10. Ten Percent Shareholder Rule
Notwithstanding any other provision in the Plan, if at the time an option
is granted pursuant to the Plan the optionee owns directly or indirectly
(within the meaning of Section 425(d) of the Code) Common Shares of the Company
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or its parent or subsidiary corporations,
if any (within the meaning of Section 422(b)(6) of the Code), then any
Incentive Stock Option to be granted to such optionee pursuant to the Plan
shall satisfy the requirements of Section 422(c)(6) of the Code, and the
option price shall be not less than 110% of the fair market value of the
Common Shares of the Company determined as described herein, and such option
by its terms shall not be exercisable after the expiration of five (5) years
from the date such option is granted.
11. Non-Transferability
Except as otherwise provided in an option or award agreement, no option or
award granted under the Plan shall be transferable by an optionee or grantee,
otherwise than by will or the laws of descent or distribution, and during the
lifetime of an optionee or grantee, the option shall be exercisable only by
such optionee or grantee.
12. Restricted Stock Awards
Awards of Common Shares subject to forfeiture and transfer restrictions
may be granted by the Committee. Any restricted stock award shall be evidenced
by an agreement in such form as the Committee shall from time to time approve,
which agreement shall comply with and be subject to the following terms and
conditions and any additional terms and conditions established by the Committee
that are consistent with the terms of the Plan:
(a) Grant of Restricted Stock Awards. Each restricted stock award made
under the Plan shall be for such number of Common Share as shall be determined
by the Committee and set forth in the agreement containing the terms of such
restricted stock award. Such agreement shall set forth a period of time during
which the grantee must remain in the continuous employment of the Company in
order for the forfeiture and transfer restrictions to lapse. If the Committee
so determines, the restrictions may lapse during such restricted period in
installments with respect to specified portions of the shares covered by the
restricted stock award. The agreement may also, in the discretion of the
Committee, set forth performance or other conditions that will subject the
Common Shares to forfeiture and transfer restrictions. The Committee may, at
its discretion, waive all or any part of the restrictions applicable to any or
all outstanding restricted stock awards.
(b) Delivery of Common Shares and Restrictions. At the time of a
restricted stock award, a certificate representing the number of Common Shares
awarded thereunder shall be registered in the name of the grantee. Such
certificate shall be held by the Company or any custodian appointed by the
Company for the account of the grantee subject to the terms and conditions of
the Plan, and shall bear such a legend setting forth the restrictions imposed
thereon as the Committee, in its discretion, may determine. The grantee shall
have all rights of a shareholder with respect to the Common Shares, including
the right to receive dividends and the right to vote such shares, subject to
the following restrictions: (i) the grantee shall not be entitled to delivery
of the stock certificate until the expiration of the restricted period and the
fulfillment of any other restrictive conditions set forth in the restricted
stock agreement with respect to such Common Shares; (ii) none of the Common
Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered or disposed of during such restricted period or until after the
fulfillment of any such other restrictive conditions; and (iii) except as
otherwise determined by the Committee, all of the Common Shares shall be
forfeited and all rights of the grantee to such Common Shares shall terminate,
without further obligation on the part of the Company, unless the grantee
remains in the continuous employment of the Company for the entire restricted
period in relation to which such Common Shares were granted and unless any
other restrictive conditions relating to the restricted stock award are met.
Any Common Shares, any other securities of the Company and any other property
(except for cash dividends) distributed with respect to the Common Shares
subject to restricted stock awards shall be subject to the same restrictions,
terms and conditions as such restricted Common Shares.
(c) Termination of Restrictions. At the end of the restricted period
and provided that any other restrictive conditions of the restricted stock
award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the restricted Common
Shares subject thereto, and a stock certificate for the appropriate number of
Common Shares, free of the restrictions and the restricted stock legend,
shall be delivered to the grantee or his beneficiary or estate, as the case
may be.
13. Performance Awards
The Committee is further authorized to grant Performance awards. Subject
to the terms of this Plan and any applicable award agreement, a Performance
award granted under the Plan (i) may be denominated or payable in cash, Common
Shares (including, without limitation. restricted stock), other securities,
other awards, or other property and (ii) shall confer on the holder thereof
rights valued as determined by the Committee, in its discretion, and payable
to, or exercisable by, the holder of the Performance awards, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee, in its discretion, shall establish. Subject to the
terms of this Plan and any applicable award agreement, the performance goals to
be achieved during any performance period, the length of any performance
period, the amount of any Performance award granted, and the amount of any
payment or transfer to be made by the granter and by the Company under any
Performance award shall be determined by the Committee.
14. Dilution or Other Adjustments
If there shall be any change in the Common Shares through merger,
consolidation, reorganization, recapitalization, dividend in the form of stock
(of whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options and awards shall be
made by the Committee. In the event of any such changes, adjustments shall
include, where appropriate, changes in the aggregate number of shares subject
to the Plan, the number of shares and the price per share subject to
outstanding options and awards and the amount payable upon exercise of
outstanding awards, in order to prevent dilution or enlargement of option or
award rights.
15. Amendment or Discontinuance of Plan
The Board of Directors may amend or discontinue at any time. Subject to
the provisions of Section 14 no amendment of the Plan, however, shall without
shareholder approval: (i) increase the maximum number of shares under the Plan
as provided in Section 2 herein, (ii) decrease the minimum price provided in
Section 5 herein, (iii) extend the maximum term under Section 6, or (iv) modify
the eligibility requirements for participation in the Plan. The Board of
Directors shall not alter or impair any option or award theretofore granted
under the Plan without the consent of the holder of the option or award.
16. Time of Granting
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Company, and no
action taken by the Committee or the Board of Directors (other than the
execution and delivery of an option or award agreement), shall constitute the
granting of an option or award hereunder.
17. Income Tax Withholding and Tax Bonuses
(a) In order to comply with all applicable federal or state income tax
laws or regulations, the Company may take such action as it deems appropriate
to ensure that all applicable federal or state payroll, withholding, income or
other taxes, which are the sole and absolute responsibility of an optionee or
grantee under the Plan, are withheld or collected from such optionee or
grantee. In order to assist an optionee or grantee in paying all federal and
state taxes to be withheld or collected upon exercise of an option or award
which does not qualify as an Incentive Stock Option hereunder, the Committee,
in its absolute discretion and subject to such additional terms and conditions
as it may adopt, shall permit the optionee or grantee to satisfy such tax
obligation by (i) electing to have the Company withhold a portion of the shares
otherwise to be delivered upon exercise of such option or award with a fair
market value, determined in accordance with Section 5 herein, equal to such
taxes or (ii) delivering to the Company Common Shares other than the shares
issuable upon exercise of such option or award with a fair market value,
determined in accordance with Section 5, equal to such taxes.
(b) The Committee shall have the authority, at the time of grant of an
option under the Plan or at any time thereafter, to approve tax bonuses to
designated optionee or grantees to be paid upon their exercise of options or
awards granted hereunder. The amount of any such payment shall be determined
by the Committee. The Committee shal have full authority in its absolute
discretion to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereafter.
18. Effective Date and Termination of Plan
(a) The Plan was approved by the Board of Directors by unanimous action
in writing, effective September 19, 1995 and by the shareholders of the Company
by unanimous action in writing, effective, September 20, 1995.
(b) Unless the Plan shall have been discontinued as provided in Section
14 hereof, the Plan shall terminate September 19, 2005. No option or award may
be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee or grantee, alter or impair any rights or
obligations under any option or award theretofore granted.
