Exhibit 99.2 Historical Combined Financial Statements
My Favorite Muffin Too, Inc. and
My Favorite Muffin, Inc.
Combined Balance Sheet
December 31, 1996
ASSETS (Pledged) (Notes 3 and 4)
Current assets:
Cash $ 122,395
Accounts Receivable (less allowance for
doubtful accounts of $7,768) 306,677
Inventory 57,640
Prepaid expenses 38,451
Deferred income taxes (Note 5) 2,319
Other 7,433
----------
Total current assets 534,915
----------
Property and equipment
Furniture and fixtures 122,066
Equipment 351,471
Leasehold improvements 445,605
Transportation equipment 23,279
----------
942,421
Less accumulated depreciation
and amortization 436,412
----------
Net Property and equipment 506,009
----------
Other Assets
Intangibles, primarily goodwill, net 123,434
Security deposits 23,086
----------
Total other assets 146,520
----------
$1,187,444
==========
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
My Favorite Muffin Too, Inc. and
My Favorite Muffin, Inc.
Combined Balance Sheet (continued)
December 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 250,429
Current maturities of
long-term debt (Note 3) 137,799
Line of Credit (Note 4) 44,000
Deferred revenue 152,873
Incomes taxes payable (Note 5) 11,947
Accrued expenses 27,318
Current maturities of loans
payable, related parties (Note 2) 27,170
----------
Total current liabilities 651,536
Deferred income taxes (Note 5) 5,406
Long-term debt, net of
current maturities (Note 3) 252,666
Loans payable, related parties,
net of current maturities (Note 2) 20,795
----------
Total Liabilities 930,403
----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock (Note 7) 15,000
Additional paid-in capital 24,376
Retained earnings 217,665
----------
Total shareholders' equity 257,041
----------
$1,187,444
==========
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
My Favorite Muffin Too, Inc. and My Favorite Muffin, Inc.
Combined Statement of Income and Retained Earnings
Year Ended December 31, 1996
Revenues
Sales of franchises $ 235,250
Sales 1,310,663
Franchise fees 896,002
Advertising fees 170,040
Other 99,410
----------
Total revenues 2,711,365
Cost of Revenues
Advertising 165,346
Cost of Sales 1,003,334
Franchise 90,254
Other 12,306
----------
Total cost of revenues 1,271,240
----------
Gross Profit 1,440,125
----------
Operating expenses
(including interest expense of $44,349) 1,376,763
----------
Income before minority interest in loss of
subsidiary and taxes on income 63,362
Minority interest(acquired during
October 1996) in loss of
subsidiary(Note 2) 18,422
----------
Income before taxes on income 81,784
Taxes on income (Note 5) 47,993
----------
Net Income 33,791
Retained earnings, beginning of year 183,874
----------
Retained earnings, end of year $ 217,665
==========
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
My Favorite Muffin Too, Inc. and My Favorite Muffin, Inc.
Combined Statement of Cash Flows
Year Ended December 31, 1996
Cash flows from operating activities
Net Income $ 33,791
Adjustments to reconcile net income
to net cash provided by
operating activities
Deferred income recognition (1,948)
Provision for doubtful accounts (7,377)
Deferred income taxes 2,906
Minority interest in subsidiary 18,422
Depreciation and Amortization 99,548
Changes in assets and liabilities
(Increase) in accounts receivable (12,436)
Decrease in prepaid expenses 14,523
Decrease in inventory 17,422
Decrease in other 9,673
Increase in accounts payable 20,387
Increase in income taxes 11,947
(Decrease) in accrued expenses (25,918)
----------
Net cash provided by operating activities 180,940
----------
Cash flow from investing activities
Purchase of property and equipment (19,737)
Purchase of minority interest in subsidiary (26,282)
----------
Net cash (used in) investing activities (46,019)
----------
Cash flows from financing activities
Increase in loans payable, related party 20,928
Borrowings on line of credit 25,000
Repayments of long-term debt (123,051)
----------
Net cash (used in) financing activities (77,123)
----------
Net increase in cash 57,798
Cash, at beginning of year 64,597
----------
Cash, at end of year $ 122,395
==========
Supplemental disclosures of
cash flow information
Cash paid for
Interest $ 55,672
==========
Income Taxes $ 33,140
==========
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS
My Favorite Muffin Too, Inc. and My Favorite Muffin, Inc.
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies
Principles of Combined Financial Statements
The combined financial statements include the accounts of My
Favorite Muffin Too, Inc. and subsidiaries and My Favorite
Muffin, Inc. (the "Company"). Significant intercompany balances
and transactions have been eliminated in combination.
Description of Business and Income Recognition
Sale of franchises: Revenue from the initial sale of a
franchise is recognized at the time the store is opened.
Receivables or collections prior to store opening are recorded
as deferred income. Commissions paid or accrued in connection
with the sale of a franchise are also deferred until the store
is opened.
Franchise fees: Fees charged to franchisees are based on a
percentage of monthly franchisee sales and are recognized when
earned.
Advertising fees: The Company charges its franchisees a
percentage of their sales to be used for advertising. The
Company defers these fees and recognizes them as revenue in an
amount equal to the actual expenditures on behalf of the
franchisees.
Sales of food items: The Company sells food items to its franchisees
as well as through company-owned locations and recognizes income when
a sale is made.
Inventory
Inventory consists primarily of food items available for sale
and is stated at the lower of cost (first-in, first-out method)
or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using accelerated methods over the estimated useful
lives ranging from five to seven years which is not materially
different from those amounts computed on the straight-line
method. Leasehold improvements are amortized over the life of
the related lease.
Goodwill and Other Intangibles
The excess of cost over fair value of net assets acquired is
being amortized on the straight-line method over a fifteen year
period. Amortization of goodwill was $3,710 for the year ended
December 31, 1996. The Company evaluates the recoverability of
the goodwill quarterly, or more frequently whenever events and
circumstances warrant revised estimates by assessing current and
future levels of income and cash flows, as well as other
factors, and considers whether goodwill should be completely or
partially written off or the amortization period accelerated.
Other intangibles are amortized over a period of 5-10 years.
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to
concentrations of credit risk consist principally of trade
receivables.
Concentrations of credit risk, with respect to trade
receivables, are limited due to the large number of customers
compromising the Company's franchisees and their dispersion
across different geographic regions. As of December 31, 1996,
the Company had no significant concentrations of credit risk.
No single customer accounted for a significant amount of the
Company's sales in 1996.
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.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash,
accounts receivable, miscellaneous
receivables, accounts payable, accrued liabilities and short-
term debt approximate fair value because of the immediate or
short-term maturity of these financial instruments. The
carrying amount reported for long-term debt approximates fair
value because the underlying instruments are at variable rates
which are repriced frequently.
Income Taxes
Income taxes are calculated using the liability method specified
by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
2. Related Party Transactions
As of December 31, 1996, the Company had a loan payable to an
officer in the amount of $4,627, payable in monthly installments
of $526. The loan is unsecured and bears interest at 8.855% per
annum.
As of December 31, 1996, the Company had loans payable to a
Partnership controlled by its officers/stockholders in the
amount of $43,338 payable in varying monthly principal
installments plus interest at 10%. The loans mature October
1999.
3. Long-Term Debt
Long-term debt consists of the following at December 31, 1996:
Note payable in monthly installments of $1,667
plus interest at prime plus 1.5% (9.75% at
December 31, 1996) through October 1, 2000. The
debt is collateralized by substantially all of
the assets of the Company. $ 76,667
Unsecured note in connection with
minority interest acquisition payable in
monthly installments of $1,154, including
interest at 10%. The note is due November 1998. 24,055
Note payable in monthly installments of $2,091,
including interest at 14.5%. The note is
secured by property and equipment and is due
February 1998. 23,231
Note payable, bank, is collateralized by a
security interest in substantially all of the
assets of the Company. The stockholders have
guaranteed the note and assigned life insurance
policies on the corporate officers. The note is
payable in monthly principal installments of
$6,083 plus interest at prime plus 1% (10% at
December 31, 1996) through June 2000. 257,995
Other 8,517
--------
390,465
Less current maturities 137,799
--------
Long-term debt $252,666
========
Long-term debt maturities at December 31, 1996 are summarized as
follows:
Year ended December 31,
1997 $137,799
1998 105,671
1999 93,000
2000 53,995
--------
$390,465
========
4. Line of Credit
The Company has a $50,000 line of credit available with a bank.
Interest is at the bank's national commercial rate plus 1.5%
(9.75% at December 31, 1996). Advances under the line are
collateralized by a security interest in the Company's accounts
receivable and property and equipment. The outstanding balance
of $44,000 at December 31, 1996 is payable on demand.
5. Income Taxes
In 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The types of
temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise
to a significant portion of the deferred tax assets and deferred
tax liabilities are provisions for doubtful accounts and
depreciation, respectively.
The provision for Federal and state income taxes is detailed as
follows:
Taxes on income
Federal $ 29,546
State 15,541
Deferred 2,906
---------
$ 47,993
=========
The Company has $103,000 of net operating loss carryforwards
to be used to offset future taxes. Such resultant tax asset
has a 100% valuation reserve. The difference between the statutory
tax rate and the effective tax rate is primarily due to non-deductible
losses.
6. Commitments and Contingencies
The Company leases its corporate office, warehouse and two
stores under various non-cancellable operating leases through
June 30, 2005. The leases contain provisions for escalation and
specific increased occupancy expenses. Rent expenses for the
year ended December 31, 1996 amounted to $113,300.
Future minimum payments remaining under the terms of the non-
cancellable leases are approximately as follows for the year
ended December 31,:
1997 $ 131,153
1998 141,944
1999 152,138
2000 115,898
2001 69,530
Thereafter 272,152
---------
$ 882,815
=========
7. Common Stock
My Favorite Muffin Too, Inc.
Authorized 2,500 shares, no par value
Issued and outstanding 150 shares $ 7,500
My Favorite Muffin, Inc.
Authorized 1,500 shares, no par value
Issued and outstanding 150 shares 7,500
---------
$ 15,000
=========
8. Subsequent Event
In May 1997, BAB Holdings, Inc. ("BAB") acquired the Company
from its stockholders in exchange for 432,608 shares of BAB
common stock (restricted until January 1, 1999) plus $260,000
cash consideration. Immediately preceding the acquisition by
BAB, the net assets of My Favorite Muffin, Inc. were acquired
by My Favorite Muffin Too, Inc.
9. Legal Proceedings
On August 18, 1995, MFM filed a claim in federal court against
a franchisee alleging trademark violations as a result of the
franchisees alleged misuse of the MFM trademark. Subsequently
the franchisee filed a counterclaim to be heard in arbitration,
as required under the franchise agreement, against MFM alleging
unauthorized earnings claims in violation of the Trade Regulation
Rule of the Federal Trade Commission. The federal court claim
was dismissed as a result of the issue being moved to arbitration.
The franchisee originally sought $250,000 in damages and subsequently
amended the claim in April 1997 to $500,000. Management believes
the case against MFM is without merit. To date, six arbitration
hearings have been held on this matter. Two additional hearing dates
have been set for September and October 1997.