UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 21, 1996
BAB Holdings, Inc.
(Name of small business issuer in its charter)
Illinois 0-27068 36-3857339
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
(Address of principal executive offices) Zip Code)
Issuer's telephone number (312) 380-6100
(Former name, former address and former fiscal year, if changed since last
report.)
TABLE OF CONTENTS
Page
Item 1. Changes in Control of Registrant..................................... 1
Item 2. Acquisition or Disposition of Assets................................. 1
Item 3. Bankruptcy or Receivership........................................... 2
Item 4. Changes in Registrant's Certifying Accountant........................ 2
Item 5. Other Events......................................................... 2
Item 6. Resignations of Registrant's Directors............................... 2
Item 7. Financial Statements and Exhibits.................................... 3
Item 8. Change in Fiscal Year................................................ 4
SIGNATURE 4
INDEX TO EXHIBITS............................................................ 5
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Not applicable.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 21, 1996, BAB Holdings, Inc. (Holdings or the Company), an
Illinois corporation, completed the acquisition of the assets of Strathmore
Bagels Franchise Corp. (Strathmore), a New York corporation. Strathmore is
engaged in the business of distributing bagels and related products, at
wholesale, and the collection of royalties on the related retail sale of those
products pursuant to a 10 year license agreement, dated November 30, 1995 with
Host International, Inc. (Host Marriott). (See Licensing Agreement filed as an
exhibit hereto.) At the time of the acquisition, Strathmore had licensing
contracts with 19 bagel-deli units and 15 bagel cart / display units in several
major airports and travel plazas in the United States. These bagel-deli and
display units are operated by Host Marriott.
The assets acquired by Holdings include the licensing contracts with
Host Marriott and the individual contracts for each facility, supply contracts,
equipment leases and other contractual arrangements with vendors. Additionally,
Holdings acquired the machinery, equipment and improvements owned by Strathmore
and located in the Host Marriott facilities.
The purchase of the assets was completed in exchange for the following
consideration: (a) $850,000 in cash paid at closing; (b) an option to purchase
625,000 shares of Holdings' common stock, no par value, exercisable during a
period commencing on May 21, 1997 and ending on May 21, 1999 (312,500 shares
exercisable from May 21, 1997 and all shares exercisable from May 21, 1998) at
an exercise price of $6.17 per share (see Stock Option Agreement filed as an
exhibit hereto); and (c) additional consideration based on the number of and
gross sales volumes of additional units opening, as follows:
(i) $5,000 for every bagel-deli unit operated under the Host Marriott
agreement opened during the two years following the closing of
this acquisition,
(ii) A percentage of annual gross sales of the units identified in (i)
above, which result in royalty payments to Holdings, at a rate of
5% of sales between $250,000 and $350,000, plus 3% of sales
greater than $350,000 to $450,000, plus 1% of sales greater than
$450,000 to $650,000, measured for a twelve month period,
(iii)3% of annual gross sales, which result in royalty payments to
Holdings, for each cart / display unit opened during the year
following the closing of this acquisition, measured for a
twelve-month period commencing 60 days after the unit is placed in
operation, and
(iv) Options to purchase 1,500 shares of Holdings common stock, no par
value, for each bagel / deli unit opened during the first two
years following the closing of this acquisition, at an exercise
price of $6.17 per share. Options earned during the first year
will be issued within 30 days following the end of that year and
will be exercisable for a period of one year beginning with the
date of issuance. Additionally, options earned during the second
year will be issued within 30 days following the end of that year
and will be exercisable for a period of one year beginning with
the date of issuance.
All shares issued pursuant to the options identified above have been
given certain rights to registration under the Securities Act of 1933 (see
Registration Rights Agreement filed as an exhibit hereto).
The Company financed this transaction using a portion of the net
proceeds from its November 27, 1995 initial public offering of securities.
The Company will be assigning the activities of the sale of bagels and
other products to the Host Marriott operated facilities and the collection of
royalty on the retail sales thereon, to its wholly owned subsidiary, BAB
Operations, Inc. (Operations). Operations will continue to maintain the units
currently in operation and develop additional units in facilities operated by
Host Marriott.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not applicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 5. OTHER EVENTS
None.
ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTORS
Not applicable.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The audited balance sheets of Strathmore as of December 31, 1995 and
1994 and the related consolidated statements of operations, retained earnings
and cash flows for the years then ended have been filed as exhibits hereto. (See
schedule 7A and 7B attached hereto.) Unaudited financial statements for the most
recent interim period are not readily available. The interim financial
statements and pro forma financial information will be filed as soon as
practicable under Form 8-K/A but not later than 60 days after the filing of this
report.
EXHIBITS
The following exhibits are filed herewith.
Exhibit
No. Description of Exhibit
10.21 Asset Purchase Agreement by and between BAB Holdings, Inc. and
Strathmore Bagels Franchise Corp. dated May 21, 1996 (without
schedules)
10.22 Stock Option Agreement dated May 21, 1996 between BAB Holdings, Inc.
and Strathmore Bagels Franchise Corp. dated May 21, 1996
10.23 Registration Rights Agreement dated May 21, 1996 between BAB
Holdings, Inc. and Strathmore Bagels Franchise Corp. dated May 21,
1996
10.24 Non-Competition Agreement dated May 21, 1996 between BAB Holdings,
Inc. and Strathmore Bagels Franchise Corp., Jack Freedman and Glen
Steuerman dated May 21, 1996
10.25 Memorandum of Understanding Regarding Form of License Agreement
effective November 30, 1995 between Strathmore Bagels Franchise Corp.
and Host International, Inc.
10.26 Consent to Assignment between Strathmore Bagels Franchise Corp. and
Host International, Inc. dated March 13, 1996 (as amended May 21,
1996)
ITEM 8. CHANGE IN FISCAL YEAR
Not applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAB HOLDINGS, INC.
Dated: June 5, 1996 By: /s/ SALLY A. SULLIVAN
---------------------
Sally A. Sullivan, Chief Financial Officer,
Treasurer and Secretary (Principal accounting
and financial officer)
Schedule 7A
BUONANNO & CONOLLY
CERTIFIED PUBLIC ACCOUNTANTS
5036 JERICHO TURNPIKE
COMMACK, NEW YORK 11725
---
TELEPHONE (516) 462-6066
May 6, 1996
Board of Directors
STRATHMORE BAGELS FRANCHISE CORP.
1879 LAKELAND AVENUE
RONKONKOMA, NY 11779
Dear Board of Directors:
We have audited the accompanying balance sheet of STRATHMORE BAGELS
FRANCHISE CORP. as of December 31, 1995, and the related statement of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of STRATHMORE BAGELS
FRANCHISE CORP., as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Respectfully submitted,
/s/ Buonanno & Conolly
Buonanno & Conolly
Certified Public Accountants
DB:jb
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
EXHIBIT A
ASSETS
CURRENT ASSETS
CASH IN BANKS $ 4,327
ACCOUNTS RECEIVABLE 93,575
DUE FROM OFFICERS 7,275
DEFERRED TAX ASSET (NOTE 4) 7,015
--------
TOTAL CURRENT ASSETS $112,192
PROPERTY AND EQUIPMENT (NOTES 1 AND 3)
MACHINERY AND EQUIPMENT $320,674
ACCUMULATED DEPRECIATION 36,585
--------
$284,089
--------
TOTAL PROPERTY AND EQUIPMENT 284,089
--------
OTHER ASSETS
SECURITY DEPOSITS 829
ORGANIZATION EXPENSES 2,977
ACCUMULATED AMORTIZATION 595
--------
2,382
--------
TOTAL OTHER ASSETS 3,211
--------
TOTAL ASSETS $399,492
========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
EXHIBIT A
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 132,028
PAYROLL TAXES PAYABLE 3,172
OTHER TAXES PAYABLE 421
---------
TOTAL CURRENT LIABILITIES $ 135,621
LONG TERM LIABILITIES
DEFERRED TAX LIABILITY
(NOTE 4) 5,680
---------
TOTAL LONG TERM LIABILITIES 5,680
---------
TOTAL LIABILITIES $ 141,301
STOCKHOLDERS' EQUITY
COMMON STOCK $ 180,000
ADDITIONAL PAID-IN CAPITAL 80,000
RETAINED DEFICIT - ENDING (1,809)
---------
TOTAL STOCKHOLDERS' EQUITY 258,181
---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 399,492
=========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
EXHIBIT B
INCOME
SALES $ 440,944 85.5
STORE SET-UP COMMISSION 75,000 14.5
--------- -----
TOTAL INCOME $ 515,944 100.0
COST OF SALES
PURCHASES $ 232,557 45.1
--------- -----
TOTAL COST OF SALES 232,557
---------
GROSS PROFIT $ 283,387 54.9
EXPENSES
OPERATING EXPENSES
AS PER SCHEDULE ONE $ 41,882 8.1
SELLING EXPENSES
AS PER SCHEDULE TWO 36,821 7.1
GENERAL AND ADMIN. EXPENSES
AS PER SCHEDULE THREE 152,696 29.6
--------- -----
TOTAL EXPENSES 231,399 44.8
--------- -----
OPERATING INCOME/(LOSS) $ 51,988 10.1
OPERATING INCOME AND EXPENSES
LOSS ON LEASE CANCELLATION(NOTE 5) (30,920) (6.0)
--------- -----
TOTAL OTHER INCOME AND EXPENSE (30,920) (6.0)
--------- -----
INCOME/(LOSS) BEFORE TAXES $ 21,068 4.1
PROVISION FOR INCOME TAX EXPENSE/BENEFIT) (NOTE 4)
4,707 0.9
--------- -----
NET INCOME/(LOSS) $ 16,361 3.2
RETAINED EARNINGS - BEGINNING (18,170) (3.5)
--------- -----
RETAINED DEFICIT - ENDING $ (1,809) (0.4)
========= =====
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
SUPPORTING SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1995
OPERATING EXPENSES
SCHEDULE ONE
SUPPLIES $ 285 0.1
INSURANCE 6,784 1.3
REPAIRS AND MAINTENANCE 1,143 0.2
DEPRECIATION & AMORTIZATION 33,670 6.5
-------- ------
TOTAL OPERATING EXPENSES $ 41,882 8.1
======== ======
SELLING EXPENSES
SCHEDULE TWO
ADVERTISING 30,004 5.8
AUTO EXPENSES 6,817 1.3
-------- ------
TOTAL SELLING EXPENSES $ 36,821 7.1
======== ======
GENERAL AND ADMINISTRATIVE EXPENSES
SCHEDULE THREE
SALARIES - OFFICERS $ 37,000 7.2
BANK CHARGES 337 0.1
OFFICE EXPENSES 3,505 0.7
PAYROLL TAXES 3,131 0.6
PROFESSIONAL EXPENSES 75,068 14.5
TELEPHONE 5,157 1.0
TRAVEL AND ENTERTAINMENT 23,369 4.5
UNIFORM 5,129 1.0
-------- ------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES $152,696 29.6
======== ======
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES
CASH RECEIVED FROM CUSTOMERS $ 458,244
CASH PAID TO SUPPLIERS (309,308)
TAXES PAID (316)
---------
CASH PROVIDED BY OPERATING ACTIVITIES $ 148,620
CASH FLOWS FROM INVESTING ACTIVITIES
CASH PAID FOR MACHINERY AND EQUIPMENT $(219,353)
CASH PAID FOR SPRINGFIELD LOCATION (30,920)
EQUIPMENT DEPOSITS (829)
---------
CASH USED BY INVESTING ACTIVITIES (251,102)
CASH FLOWS FROM FINANCING ACTIVITIES
CASH RECEIVED FROM ISSUANCE OF
COMMON STOCK $ 30,000
ADDITIONAL PAID IN CAPITAL 80,000
LOANS TO SHAREHOLDER (7,275)
---------
CASH PROVIDED BY FINANCING ACTIVITIES 102,725
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 243
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,084
---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,327
=========
ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
NET INCOME $ 16,361
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION $ 33,670
LOSS ON LEASE CANCELLATION 30,920
CHANGES IN ASSETS AND LIABILITIES
INCREASE IN ACCOUNTS RECEIVABLE (57,500)
INCREASE IN DEFERRED TAX ASSET (623)
INCREASE IN ACCOUNTS PAYABLE 117,807
INCREASE IN PAYROLL TAXES PAYABLE 3,172
INCREASE IN OTHER TAXES PAYABLE 104
INCREASE IN DEFERRED TAX LIABILITY 4,909
---------
TOTAL ADJUSTMENTS 132,259
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 148,620
=========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
FOOTNOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
1) Significant Account Policies
A) Property
Fixed assets are capitalized at cost. Significant improvements
are capitalized, maintenance and repairs are charged to
income. When equipment is retired or otherwise disposed of,
the cost of the assets and the related accumulated
depreciation are eliminated from the accounts and any gain or
loss on disposition is credited or charged to income.
B) Organization History
The Corporation was formed under the Laws of New York State on
May 13, 1994 and commenced operations on the same date. The
Corporation is in the business of setting up and selling
Strathmore Bagel store franchises.
During 1994 Strathmore entered into a relationship with Host
Marriott in which Marriott opens bagel shops at airports and
highway rest stops on sites leased by them. Marriott will use
the name Strathmore Bagel and will purchase all of its bagel
products from Strathmore. The relationship was formalized in a
written agreement completed in 1995. In 1994 three shops were
opened at Kennedy Airport in New York, at which Strathmore
invested in equipment and placed it into service. In 1995
fifteen additional stores were opened.
The agreement with Marriott is a licensing of the use of the
name, Strathmore Bagels, and to date, no franchises have been
sold.
2) Related Party Transactions
Steuerman & Sons, Inc. (Steuerman, a wholesale bagel bakery) is owned
by Glenn Steuerman, who is also a 20% stockholder of Strathmore Bagels
Franchise Corp. (Strathmore). Strathmore purchases all of its products
for resale from Steuerman. Steuerman also sets up Strathmore Bagel
facilities and stores for individuals but has no direct agreements with
Host Marriott. Finally, Steuerman provided a commission in the amount
of $5,000 for each full store opened which is reflected in store
commission income.
3) Equipment
Equipment is stated at cost and at December 31, 1995, $319,025 of
equipment had been placed into service. Depreciation is computed on a
straight-line method for financial reporting and amounted to $33,202.
For federal income tax purposes, depreciation is computed under the
modified accelerated cash recovery system.
4) Income Taxes
The Company has loss carryforwards totaling $29,231 that may be offset
against future taxable income. If not used, the carryforwards will
expire as follows:
2009 $26,634
2010 2,597
The net deferred tax benefit in the accompanying balance sheet includes
the following amounts of deferred tax assets and liabilities:
Deferred tax liability $5,680
Deferred tax asset 7,015
------
Net deferred tax benefit $1,335
The deferred tax liability results from the use of accelerated methods of
depreciation of property and equipment. The deferred tax asset results from net
operating loss carryforward.
The components income tax expense (benefit) are as follows:
Current $ 421
Deferred 4,286
------
$4,707
5) Loss on Lease Cancellation
Loss on lease cancellation resulted from the corporation's decision to
attempt to open and operate company owned stores. A lease was entered
into and construction begun on a storefront operation in Springfield,
Virginia. After spending $30,920 on lease deposit and construction
costs, the corporation discovered problems in finding proper management
to operate the remote location. A decision not to pursue company owned
locations, but rather to concentrate solely on development of Host
Marriott business was made. As a result the lease was abandoned and all
payments forfeited.
Schedule 7B
BUONANNO & CONOLLY
CERTIFIED PUBLIC ACCOUNTANTS
5036 JERICHO TURNPIKE
COMMACK, NEW YORK 11725
-------
TELEPHONE (516) 462-6066
November 17, 1995
Board of Directors
STRATHMORE BAGELS FRANCHISE CORP.
1879 LAKELAND AVENUE
RONKONKOMA, NY 11779
Dear Board of Directors:
We have audited the accompanying balance sheet of STRATHMORE BAGELS FRANCHISE
CORP. as of December 31, 1994, and the related statement of income, retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accorance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly, in
all material respects, the financial position of STRATHMORE BAGELS FRANCHISE
CORP., as of December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Respectfully submitted,
Buonanno & Conolly
Certified Public Accounts
DB:jb
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994
EXHIBIT A
ASSETS
CURRENT ASSETS
CASH IN BANKS $ 4,084
ACCOUNTS RECEIVABLE 35,875
DEFERRED TAX ASSET (NOTE 4) 6,392
--------
TOTAL CURRENT ASSETS $ 46,351
PROPERTY AND EQUIPMENT (NOTES 1 AND 3)
MACHINERY AND EQUIPMENT $101,322
ACCUMULATED DEPRECIATION 3,214
--------
$ 98,108
--------
TOTAL PROPERTY AND EQUIPMENT 98,108
--------
OTHER ASSETS
ORGANIZATION EXPENSES 2,977
ACCUMULATED AMORTIZATION 298
--------
2,679
--------
TOTAL OTHER ASSETS 2,679
TOTAL ASSETS $147,138
========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994
EXHIBIT A
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 14,221
OTHER TAXES PAYABLE 316
---------
TOTAL CURRENT LIABILITIES $ 14,537
LONG TERM LIABILITIES
DEFERRED TAX LIABILITY
(NOTE 4) 771
---------
TOTAL LONG TERM LIABILITIES 771
---------
TOTAL LIABILITIES $ 15,308
STOCKHOLDERS' EQUITY
COMMON STOCK $ 150,000
RETAINED DEFICIT - ENDING (18,170)
---------
TOTAL STOCKHOLDERS' EQUITY 131,830
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 147,138
=========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
SUPPORTING SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1994
OPERATING EXPENSES
SCHEDULE ONE
SUPPLIES $ 4,104 4.7
INSURANCE 885 1.0
DEPRECIATION & AMORTIZATION 3,511 4.0
------- ----
TOTAL OPERATING EXPENSES $ 8,500 9.6
======= ====
SELLING EXPENSES
SCHEDULE TWO
ADVERTISING 23,396 26.6
AUTO EXPENSES 2,775 3.1
------- ----
TOTAL SELLING EXPENSES $26,171 29.7
======= ====
GENERAL AND ADMINISTRATIVE EXPENSES
SCHEDULE THREE
BANK CHARGES 136 0.2
LICENSES AND PERMITS 1,182 1.3
OFFICE EXPENSES 2,237 2.5
PROFESSIONAL EXPENSES 44,520 50.5
TRAVEL AND ENTERTAINMENT 238 0.3
UNIFORM 885 1.0
------- ----
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $49,198 55.8
======= ====
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
EXHIBIT B
INCOME SALES $ 88,105 100.0
-------- -----
TOTAL INCOME $ 88,105 100.0
COST OF SALES
PURCHASES $ 23,831 27.0
CONTRACT LABOR 880 1.0
SUPPLIES 3,000 3.4
-------- -----
TOTAL COST OF SALES 27,711 31.5
-------- -----
GROSS PROFIT $ 60,394 68.5
EXPENSES
OPERATING EXPENSES
AS PER SCHEDULE ONE $ 8,500 9.6
SELLING EXPENSES
AS PER SCHEDULE TWO 26,171 29.7
GENERAL AND ADMIN. EXPENSES
AS PER SCHEDULE THREE 49,198 55.8
-------- -----
TOTAL EXPENSES 83,869 95.2
-------- -----
OPERATING INCOME/(LOSS) $(23,475) (26.6)
OTHER INCOME AND EXPENSES
-------- -----
TOTAL OTHER INCOME
-------- -----
INCOME/(LOSS) BEFORE TAXES $(23,475) (26.6)
PROVISION FOR INCOME TAX
EXPENSE/(BENEFIT) (NOTE 4) (5,305) (6.0)
-------- -----
NET INCOME/(LOSS) $(18,170) (20.6)
-------- -----
RETAINED DEFICIT - ENDING $(18,170) (20.6)
======== =====
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
CASH FLOWS FROM OPERATING ACTIVITIES
CASH RECEIVED FROM CUSTOMERS $ 72,230
CASH PAID TO SUPPLIERS (113,848)
---------
CASH USED BY OPERATING ACTIVITIES $ (41,618)
CASH FLOWS FROM INVESTING ACTIVITIES
CASH PAID FOR MACHINERY AND EQUIPMENT $(101,322)
---------
CASH USED BY INVESTING ACTIVITIES (101,322)
CASH FLOWS FROM FINANCING ACTIVITIES
CASH RECEIVED FROM THE ISSUANCE OF
COMMON STOCK $ 150,000
CASH PAID FOR ORGANIZATION AND ISSUANCE OF
COMMON STOCK (2,977)
---------
CASH PROVIDED BY FINANCING ACTIVITIES 147,023
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 4,084
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 0
---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,084
=========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
NET LOSS $(18,170)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION $ 3,511
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (35,875)
INCREASE IN DEFERRED TAX ASSET (6,392)
INCREASE IN ACCOUNTS PAYABLE 41,221
INCREASE IN TAXES PAYABLE 316
INCREASE IN DEFERRED TAX LIABILITY 771
--------
TOTAL ADJUSTMENTS (23,448)
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES $(41,618)
========
THE ACCOMPANYING AUDIT REPORT AND FOOTNOTES TO THESE FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
BUONANNO & CONOLLY, CERTIFIED PUBLIC ACCOUNTANTS
STRATHMORE BAGELS FRANCHISE CORP.
FOOTNOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994
1) Significant Account Policies
A) Property
Fixed assets are capitalized at cost. Significant improvements
are capitalized, maintenance and repairs are charged to
income. When equipment is retired or otherwise disposed of,
the cost of the assets and the related accumulated
depreciation are eliminated from the accounts and any gain or
loss on disposition is credited or charged to income.
B) Organization History
The Corporation was formed under the Laws of New York State on
May 13, 1994 and commenced operations on the same date. The
Corporation is in the business of setting up and selling
Strathmore Bagel store franchises.
During 1994 Strathmore entered into a relationship with Host
Marriott in which Marriott opens bagel shops at airports and
highway rest stops on sites leased by them. Marriott will use
the name Strathmore Bagel and will purchase all of its bagel
products from Strathmore Bagel and will purchase all of its
bagel products from Strathmore. The relationship was
formalized in a written agreement completed in 1995. This
agreementis a test period agreement ot determine the
feasibility and profitability of the stores. A more expansive
final contract has been drafted and is anticipated to be
signed in 1995. In 1994 three shops were opened at Kennedy
Airport in New York, at which Strathmore invested in equipment
and placed it into service. In 1995 fifteen additional stores
were opened.
The agreement with Marriott is a licensing of the use of the
name, Strathmore Bagels, and to date, no franchises have been
sold.
2) Related Party Transactions
Steuerman & Sons, Inc. (Steuerman, a wholesale bagel bakery) is owned
by Glenn Steuerman, who is also a 25% stockholder of Strathmore Bagels
Franchise Corp. (Strathmore). Strathmore purchases all of its products
for resale from Steuerman. During the year Steuerman was paid $7,700
for construction costs of several new store locations. Steuerman also
sets up Strathmore Bagel facilities and stores for individuals but has
no direct agreements with Host Marriott. Finally, Steuerman provided
purchase rebates of $20,000 to Strathmore, which are reflected in
purchase rebates receivable at December 31, 1994.
3) Equipment
Equipment is stated at cost and at December 31, 1994, $89,988 of
equipment had been placed into service. Depreciation is computed on a
straight-line method for financial reporting and amounted to $3,214.
For federal income tax purposes, depreciation is computed under the
modified accelerated cash recovery system.
4) Income Taxes
The Company has loss carryforwards totaling $26,634 that may be offset
against future taxable income. If not used, the carryforwards will
expire in the year 2009.
The net deferred tax benefit in the accompanying balance sheet includes
the following amounts of deferred tax assets and liabilities:
Deferred tax liability $ 771
Deferred tax asset 6,392
------
Net deferred tax benefit $5,621
======
The deferred tax liability results from the use of accelerated methods of
depreciation of property and equipment. The deferred tax asset results from net
operating loss carryforward.
The components income tax expense (benefit) are as follows:
Current $ 316
Deferred 5,621
-------
$(5,305)
=======
INDEX
NUMBER DESCRIPTION PAGE #
10.21 Asset Purchase Agreement by and between BAB Holdings, Inc.
and Strathmore Bagels Franchise Corp. dated May 21, 1996
(without schedules)
10.22 Stock Option Agreement dated May 21, 1996 between BAB
Holdings, Inc. and Strathmore Bagels Franchise Corp. dated
May 21, 1996
10.23 Registration Rights Agreement dated May 21, 1996 between
BAB Holdings, Inc. and Strathmore Bagels Franchise Corp.
dated May 21, 1996
10.24 Non-Competition Agreement dated May 21, 1996 between BAB
Holdings, Inc. and Strathmore Bagels Franchise Corp., Jack
Freedman and Glen Steuerman dated May 21, 1996
10.25 Memorandum of Understanding Regarding Form of License
Agreement effective November 30, 1995 between Strathmore
Bagels Franchise Corp. and Host International, Inc.
10.26 Consent to Assignment between Strathmore Bagels Franchise
Corp. and Host International, Inc. dated March 13, 1996 (as
amended May 21, 1996)