SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
BAB HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No Fee Required
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies:
Common Stock, no par value
--------------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
21,989,295
--------------------------------------------------------------------
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$2.8125: Average of high and low price of BAB common stock on July
24, 2000
--------------------------------------------------------------------
4. Proposed maximum aggregate value transaction:
$61,844,892
--------------------------------------------------------------------
5. Total fee paid: $12,369
--------------------------------------------------------------------
|_| 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 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
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ , 2000]
To the Shareholders of BAB Holdings, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
the stockholders of BAB Holdings, Inc. ("BAB"), will be held on [day], [ , 2000]
at [ ] local time at ________________________________________. This Proxy
Statement is furnished in connection with the solicitation of proxies by the
Board of Directors of BAB for use at the Special Meeting of the holders of BAB's
common stock, no par value (the "BAB Common Stock"). At the Special Meeting, the
BAB shareholders will be asked to consider and vote upon the following
Proposals:
1. Approve the proposal to merge BAB with and into BAB (Delaware), Inc. ("BAB
Delaware"), a newly formed wholly-owned Delaware subsidiary corporation,
for the purpose of becoming a Delaware corporation and approve and adopt
the related Certificate of Merger (see page ___);
2. Approve the proposal to merge (the "Merger") Planet Zanett Corporate
Incubator, Inc. (formerly known as Willow Bay Associates, LLC), a Nevada
corporation ("Planet Zanett"), with and into PZ Acquisition, Inc., a newly
formed wholly-owned Delaware subsidiary of BAB, pursuant to the Agreement
and Plan of Merger dated May 4, 2000 (the "Merger Agreement") and the
issuance of 21,989,295 shares of BAB Common Stock to Planet Zanett's
shareholders in connection with the Merger (see page ___); and
3. Approve the declaration of a dividend (the "Spin-off"), consisting of all
of the common stock of BAB, Inc., to the holders of BAB Common Stock as of
the close of business on a date prior to the Effective Time selected by
BAB's Board of Directors (the "Spin-off Record Date") (see page ___);
4. Transact such other business as may properly be presented at the Special
Meeting or any adjournment(s) or postponement(s) thereof.
The Board of Directors has fixed the close of business on [ , 2000]
(the "Voting Record Date") as the record date for the determination of
stockholders entitled to notice of and to vote at the Special Meeting and at any
adjournments or postponements thereof. Only stockholders of BAB Common Stock at
the close of business on the Voting Record Date will be
entitled to vote at the Special Meeting. A list of the stockholders entitled to
vote at the Special Meeting will be available for inspection at the offices of
BAB. You have dissenters' rights with respect to the transactions contemplated
by the Merger Agreement. Please see "Summary - Dissenters' Rights"
You are requested to fill in and sign the enclosed Proxy Card, which is
being solicited by the Board of Directors of BAB, and to mail it promptly in the
enclosed postage-paid envelope. Any Proxy may be revoked by delivery of a later
dated Proxy. Stockholders of record who attend the Special Meeting may vote in
person, even if they have previously delivered a signed Proxy.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
By Order of the Board of Directors
Michael K. Murtaugh,
Vice President and General Counsel
Chicago, Illinois
____________, 2000
BAB HOLDINGS, INC.
8501 W. HIGGINS ROAD
SUITE 320
CHICAGO, ILLINOIS 60631
(773) 380-6100
PROXY STATEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON [ , 2000]
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of BAB Holdings, Inc., an Illinois
corporation, for use at the Special Meeting at [ ] local time on __________,
2000.
VOTING RECORD DATE
Only the holders of BAB Common Stock of record on the Voting Record Date
will be entitled to vote at the Special Meeting. At the close of business on the
Voting Record Date there were [ ] shares of BAB Common Stock outstanding and
entitled to vote, held by [ ] stockholders of record. The presence, either in
person or by proxy, of the holders of a majority of the outstanding BAB shares
is necessary to constitute a quorum at the BAB Special Meeting. Assuming the
existence of a quorum, the affirmative vote of two-thirds of all shares of BAB
Common Stock outstanding and entitled to vote is required for approval of
Proposals 1 and 2, and the affirmative vote of the majority of the votes cast at
the Special Meeting is required for the approval of Proposal 3. Each stockholder
is entitled to one vote for each share of BAB Common Stock held as of the Voting
Record Date.
If a stockholder attends the BAB Special Meeting, that stockholder may
vote by ballot. However, since many stockholders may be unable to attend the BAB
Special Meeting, the BAB board of directors is soliciting proxies so that each
holder of BAB Common Stock on the BAB Voting Record Date has the opportunity to
vote on the proposals to be considered at the BAB Special Meeting. The BAB
Common Stock represented by a properly signed, dated and returned proxy card
will be voted in accordance with the instructions on the proxy card. If a
stockholder returns a signed proxy card, but does not indicate how their shares
of BAB Common Stock are to be voted, the BAB Common Stock represented by the
proxy card will be voted "FOR" each proposal in which no vote was specified. If
a stockholder does not return a signed proxy card, that stockholder's BAB Common
Stock will not be voted and thus will have the effect of a vote "AGAINST"
Proposals 1 and 2. Submission of proxies indicating broker non-vote (i.e., the
submission of a proxy by a broker or nominee indicating the lack of discretion
or authority to vote on the matter) or abstaining from voting are included in
the determination of the presence or absence of a quorum for the transaction of
business. However, a broker non-vote or an abstention will have the effect of a
vote "AGAINST" each proposal. Stockholders are urged to sign, date and mark the
box on the proxy card to indicate how their shares of BAB Common Stock are to be
voted and return the proxy card to the address provided.
1
PLEASE MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ACCOMPANYING POSTAGE-PAID, RETURN ENVELOPE NO LATER THAN [ , 2000] SO THAT, IF
YOU ARE UNABLE TO ATTEND THE SPECIAL MEETING, YOUR SHARES MAY BE VOTED.
STOCKHOLDERS ARE URGED TO SIGN, DATE, AND PROMPTLY MAIL THE PROXY CARD IN
THE ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING.
ADDITIONAL INFORMATION
BAB'S 1999 ANNUAL REPORT ON FORM 10-KSB ("ANNUAL REPORT"), INCLUDING
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED NOVEMBER 28, 1999, WAS MAILED TO
STOCKHOLDERS ON OR ABOUT APRIL 11, 2000. BAB'S QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 28, 2000 (THE "QUARTERLY REPORT"), INCLUDING
FINANCIAL STATEMENTS FOR SUCH PERIOD, WAS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") ON OR ABOUT JULY 11, 2000. THE ENTIRE ANNUAL REPORT AND
THE QUARTERLY REPORT, HOWEVER, ARE NOT PART OF THE PROXY SOLICITATION MATERIAL.
ADDITIONAL COPIES OF THE ANNUAL REPORT AND THE QUARTERLY REPORT, TOGETHER WITH
EXHIBITS, AND OTHER DOCUMENTS FILED PURSUANT TO SECTION 13(a), 13(c), 14 AND
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ARE AVAILABLE WITHOUT CHARGE UPON
REQUEST IN WRITING TO BAB HOLDINGS, INC., 8501 W. HIGGINS ROAD, SUITE 320,
CHICAGO, ILLINOIS, ATTENTION: INVESTOR RELATIONS.
FORWARD LOOKING STATEMENTS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED IN THIS PROXY STATEMENT, THE WORDS 'ANTICIPATE,' 'BELIEVE,'
'ESTIMATE,' 'MAY,' 'INTEND,' 'EXPECT' AND SIMILAR EXPRESSIONS IDENTIFY CERTAIN
OF SUCH FORWARD-LOOKING STATEMENTS. ACTUAL PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THOSE CONTEMPLATED, EXPRESSED OR IMPLIED HEREIN FOR A
VARIETY OF REASONS, INCLUDING THOSE SET FORTH IN 'RISK FACTORS' BEGINNING ON
PAGE ____.
2
SOLICITATION OF PROXIES
PROXIES WILL BE SOLICITED BY USE OF THE MAIL AND MAY ALSO BE SOLICITED
PERSONALLY OR BY TELEPHONE, TELEGRAPH, TELEGRAM, CABLEGRAM, FACSIMILE OR OTHER
ELECTRONIC TRANSMISSION. SOLICITATIONS MAY ALSO BE MADE BY CERTAIN MEMBERS OF
SENIOR MANAGEMENT OF BAB WITHOUT ADDITIONAL COMPENSATION BEING PAID TO SUCH
INDIVIDUALS. BANKERS, BROKERS AND OTHERS HOLDING COMMON STOCK IN THEIR NAMES OR
IN THE NAMES OF NOMINEES WILL BE REIMBURSED FOR OUT-OF-POCKET EXPENSES INCURRED
IN FORWARDING PROXIES AND PROXY MATERIALS TO THE BENEFICIAL OWNERS OF SUCH
COMMON STOCK. THE EXPENSE OF THE SOLICITATION OF PROXIES WILL BE BORNE BY PLANET
ZANETT.
3
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS .............................. 1
SUMMARY ................................................................... 4
The Companies ......................................................... 4
The Merger ............................................................ 7
Action to be Taken; Votes Required .................................... 8
Reasons for the Merger ................................................ 9
Voting Record Date .................................................... 9
Summary of the Merger Agreement ....................................... 10
Dissenters' Rights .................................................... 12
Accounting Treatment of the Merger .................................... 15
Regulatory Approvals .................................................. 15
Material Federal Income Tax Consequences .............................. 15
Selected Pro Forma Financial Information .............................. 16
RISK FACTORS .............................................................. 17
Risks Particular to the Merger ........................................ 17
Risks Particular to the Spin-off ...................................... 29
PRO FORMA FINANCIAL INFORMATION ........................................... 34
BAB Holdings, Inc. .................................................... 35
BAB, Inc. ............................................................. 37
INFORMATION CONCERNING BAB ................................................ 39
Description of Business ............................................... 39
Management's Discussion and Analysis
of Financial Condition and Results of Operations .................. 44
Selected Historical Financial Data .................................... 47
Market Price Information .............................................. 47
Securities Ownership of Certain Beneficial Owner and Management ....... 48
INFORMATION CONCERNING PLANET ZANETT ...................................... 50
Description of Business ............................................... 50
Management's Discussion and Analysis
of Financial Condition and Results of Operations .................. 60
Selected Historical Financial Data .................................... 60
PROPOSAL 1 ................................................................ 61
Principal Reasons for the Domestication Merger ........................ 61
Domestication Merger .................................................. 61
Certificate of Incorporation and By-laws .............................. 61
Directors and Officers ................................................ 61
Comparison of Rights of Illinois Stockholders and Rights of
Delaware Stockholders ......................................... 61
Vote Required for Approval ............................................ 68
PROPOSAL 2 ................................................................ 69
Background of the Merger .............................................. 69
Potential Negative Factors Associated with the Merger ................. 70
Formation of PZ Acquisition, Inc. ..................................... 70
Merger of Planet Zanett into PZ Acquisition, Inc. ..................... 70
The Effective Time .................................................... 71
Certificate of Incorporation .......................................... 71
By-laws of PZ Acquisition, Inc. ....................................... 71
Effect on Securities .................................................. 71
Stock Transfer Restrictions ........................................... 71
Indemnification of BAB and PZ Acquisition, Inc.
by BAB, Inc. ...................................................... 72
Management of BAB Following the Merger ................................ 72
The Merger Agreement .................................................. 73
U.S. Federal Income Tax Consequences .................................. 81
Equity Ownership of BAB ............................................... 82
Description of BAB Capital Stock ...................................... 82
Accounting Treatment of the Merger .................................... 83
Regulatory Approvals .................................................. 83
Vote Required for Approval ............................................ 83
PROPOSAL 3 ................................................................ 83
General Description of the Spin-off Proposal .......................... 84
Principal Reasons for the Spin-off Proposal ........................... 84
Potential Negative Factors Associated with the Spin-off ............... 84
Formation of BAB, Inc. ................................................ 84
Certificate of Incorporation of BAB, Inc. ............................. 84
By-laws of BAB, Inc. .................................................. 85
Management of BAB, Inc. After the Spin-off ............................ 85
Tax Consequences of the Spin-off ...................................... 85
Vote Required for Approval ............................................ 86
CERTAIN TRANSACTIONS ...................................................... 87
OTHER MATTERS ............................................................. 88
Revocability of Proxies ............................................... 88
Solicitation Costs .................................................... 88
Legal Matters ......................................................... 88
Experts ............................................................... 88
Other Matters ......................................................... 89
Where You Can Find More Information ................................... 89
(ii)
Special Note Regarding Forward-Looking Statements ..................... 90
INDEX TO FINANCIAL STATEMENTS ............................................. F-1
EXHIBIT A - AGREEMENT AND PLAN OF MERGER
EXHIBIT B - CHAPTER 805. ACT 5. SECTION 11.70 OF THE ILLINOIS BUSINESS
CORPORATION ACT
(iii)
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Q: What is a merger?
A: A merger is an amalgamation of two corporate entities pursuant to
statutory provisions in which one of the corporations survives and the
other disappears. In a merger, one company absorbs the other, the latter
ceasing to exist as a separate legal entity, and the former retaining its
own name, identity and acquiring assets, liabilities, and powers of the
latter.
Q: Why is BAB executing the Merger Agreement and recommending the Merger?
A: BAB believes that the industry conditions have depressed the value of
restaurant stocks and that the Merger and the Spin-off offer an
opportunity for BAB stockholders to diversify their investment in BAB
while substantially retaining their current investment.
Q: What happens to my shares in BAB after the Merger?
A: Nothing will happen to the shares you currently own of BAB. At the
Effective Time, the issued and outstanding common stock of Planet Zanett
will be automatically converted into and exchanged for shares of BAB
Common Stock in the ratio of 219,892.95 shares of BAB Common Stock for
each share of Planet Zanett common stock, or an aggregate of 21,989,295
shares of BAB Common Stock.
Q: What is the purpose of the Domestication Merger?
A: The Domestication Merger will make BAB a Delaware corporation, subject to
the laws in Delaware rather than Illinois. Planet Zanett is requiring the
Domestication Merger as a condition to the Merger as it believes that
Delaware corporation law is preferable to Illinois law for its ongoing
business operations because it offers greater management flexibility and
is more fully developed and supported by extensive judicial decisions.
Q: What is the purpose of the Spin-off?
A: The purpose of the Spin-off is to separate the existing restaurant
operations of BAB from the operations of Planet Zanett and to return
ownership of the existing operations of BAB to current BAB stockholders.
Q: Is the Merger taxable?
A: Each party expects the Merger to be tax free. We describe the material
U.S. federal income tax consequences of the transactions in more detail on
page ___. The tax consequences to you will depend on the facts of your own
situation. Please consult your tax advisors for a full understanding of
the tax consequences to you of the Merger.
Q: Is the Spin-off taxable?
A: BAB expects the Spin-off to be tax-free to BAB's U.S. shareholders and to
have no immediate income tax effect in BAB. The tax consequences are more
fully described in "Tax Consequences of the Spin-off."
Q: What is a Certificate of Merger?
A: A certificate of merger is the document filed with the Secretary of State
of the applicable State which sets forth certain facts about the
transactions between the two merging entities. A merger becomes effective
upon the proper filing of a certificate of merger with the Secretary of
State.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
Proxy Statement, please complete, sign and date your Proxy and return it
in the enclosed return envelope as soon as possible, so that your shares
may be represented at the Special Meeting. If you sign and send in your
Proxy and do not indicate how you want to vote, we will count your Proxy
as a vote in favor of adoption of the Merger agreement. If you abstain
from voting or do not vote, it will have the same effect as a vote against
the Merger.
The Special Meeting will take place on _____________, at _________, local
time, at _____________. You may attend the special meeting and vote your
shares in person, rather than completing, signing, dating and returning
your Proxy.
Q: How do I Vote?
A: Just mail your signed proxy card in the enclosed return envelope as soon
as possible so that your shares may be represented at the Special Meeting.
Q: Can I change my vote after I have sent my Proxy card?
A: Yes. You can change your vote at any time before your Proxy is voted at
the Special Meeting. You can do this in one of three ways. First, you can
send a written notice stating that you would like to revoke your Proxy.
Second, you can complete and submit a new Proxy. If you choose either of
these two methods, you must submit your notice of revocation or your new
Proxy to BAB Holdings, Inc., 8501 W. Higgins Road, Suite 320, Chicago,
Illinois 60631, Attention: Michael K. Murtaugh. Third, you can attend the
Special Meeting and vote in person. Simply attending the Special Meeting,
however, will not revoke your Proxy.
- 2 -
Q: If my BAB shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: No. Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Without
instructions, your shares will not be voted, which will have the same
effect as a vote against the Merger.
Q: Do I have dissenter's rights with respect to the transactions?
A: Yes. Please see PROPOSAL 2 - Dissenters' Rights commencing on page ____.
Q: When do you expect the Merger to be completed?
A: We are working to complete the Merger as quickly as possible. We expect to
complete the Merger shortly after the Special Meeting, if we obtain the
required shareholder approval.
Q: When will the Spin-off occur?
A: We expect the Spin-off to occur within 60 days following the Merger.
Q: Has a fairness opinion been sought or obtained with respect to the
transactions contemplated by the Merger Agreement?
A: No. No fairness opinion has been sought or obtained by BAB or Planet
Zanett.
Q: What information will I receive in the future?
A: After completion of the Merger, each of BAB and BAB, Inc. will provide you
with information concerning their respective operations and other
information as required pursuant to applicable law.
Q: What do I do with my stock certificates?
A: You should hold your stock certificates at this time. If the Merger is
completed, you will receive written instructions regarding what needs to
be done with your stock certificates.
Q: Who can help answer my questions?
A: If you have any questions about the Merger or if you need additional
copies of this Proxy Statement or the enclosed Proxy card, you should
contact:
- 3 -
BAB Holdings, Inc.
8501 W. Higgins Road, Suite 320
Chicago, Illinois 60631
Attention: Michael K. Murtaugh
SUMMARY
This summary highlights selected information from this Proxy Statement and
may not contain all of the information that is important to stockholders. To
understand fully the transactions discussed in this Proxy Statement and for a
more complete description of the legal terms of those transactions, stockholders
should carefully read this entire Proxy Statement and the related documents
referred to within this Proxy Statement and the Merger Agreement that is
attached. Certain capitalized terms used and not defined in this Proxy Statement
are defined in the Merger Agreement.
The Companies
BAB Holdings, Inc. - the Business
Overview. BAB 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. As of May 28, 2000, BAB had 247 units in
operation in 28 states, two Canadian provinces and Peru. BAB additionally
derives income from the sale of its trademark bagels, muffins and coffee through
non-traditional 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 BAB-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 BAB'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. BAB'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 BAB-owned and many of the franchise units.
BAB has grown significantly since its initial public offering in November
1995 through growth in franchise units, BAB-store development, acquisitions and
the development of alternative distribution channels for its branded products.
With the acquisition of My Favorite
- 4 -
Muffin Too, Inc. (MFM) on May 13, 1997, BAB immediately added 60 franchise and
five BAB-operated units. Through this acquisition BAB 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, BAB acquired eight bagel
store units and commissaries doing business as Jacobs Bros. Bagels ("Jacobs
Bros.") in Chicago, Illinois. Most of the units have been converted to BAB-owned
tri-branded stores.
Description of Property. BAB'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. BAB 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, BAB 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, BAB entered into 2 agreements to
sublease the entire facility. These sublease agreements expire in March 2000 and
September 2000, respectively. Additionally, BAB leases space for each of its
BAB-owned stores. Lease terms of these stores are generally for initial terms of
five years and contain options for renewal for one or more five-year terms.
Planet Zanett Corporate Incubator, Inc. - the Business
Overview. Planet Zanett was organized under the laws of the State of
Nevada on March 21, 1996 under the name Willow Bay Associates, LLC ("Willow
Bay"). On July 25, 2000, Willow Bay merged with Planet Zanett, a newly formed
Nevada corporation in order to change to corporate form. Since inception, Planet
Zanett has provided financial, managerial and business plan consulting services
to concept-stage and development-stage e-commerce companies in which it or its
affiliates, including Planet Zanett Angel Fund, L.P. (the "Partnership"), hold
an equity interest. Generally, Planet Zanett works with two types of businesses:
early stage businesses that have been started by others and have sought its
financial and management assistance, and established companies which require
Internet solutions to existing or potential business issues. If Planet Zanett
wishes to enter a market in which it cannot locate an attractive affiliate
company candidate, a new company may be created or assistance may be rendered to
one of an affiliate companies to enable penetration into the new markets. Planet
Zanett provides office space, equipment, network administration,
telecommunications, business plan development and personnel and services to
these businesses in addition to financing.
Each business is managed as part of an integrated support network of
"affiliate companies" that build on Planet Zanett's initial support and develop
interrelationships among themselves, thereby accelerating their growth and
development. Planet Zanett has established and will continue to establish
relationships with companies outside of its network that will enable them to
deliver additional services to affiliate companies that they might not otherwise
be able to obtain.
Planet Zanett divides its Internet Incubator operations into three
distinct categories: (i) businesses which develop Web-based applications for
corporate transactions, (ii) Asset Based Internet(TM) businesses which Planet
Zanett forms in conjunction with a non-Web business to develop internet
applications for that non-Web business that can be marketed to other industry
participants, and
- 5 -
(iii) existing businesses that need to transfer a portion or all of their
business operations to the Internet. While Planet Zanett may not provide all
incubation services to this last category of affiliate company, significant
investments are being made in such companies in order to provide them with
services necessary for their growth.
Management. The management team currently consists of Mr. Claudio Guazzoni
and Mr. David McCarthy. Additional key personnel will join the firm in the
future. In addition, Planet Zanett will have an Advisory Board consisting of
knowledgeable and successful executives from a variety of backgrounds.
Affiliate Companies. If Planet Zanett intends to maintain a controlling
interest in the affiliate company for the foreseeable future, an investment in
that company will be made directly. If Planet Zanett anticipates its investment
will be diluted and it will not have a controlling interest, those investments
will be made through the Partnership, the general partner of which is a
wholly-owned subsidiary of Planet Zanett, Planet Zanett Asset Management, Inc.
("PZAM"). PZAM holds a 20% interest in the Partnership. The remainder of the
Partnership's capital will come from private investors.
Currently, Planet Zanett owns an interest in iZanett, Inc. and the
Partnership owns interests in the following entities:
o Transpartner.com, Inc.
o Failsafe.com
o GlobeDrive.Com, Inc.
o IJE, Inc.
o Skoodles, Inc.
o iSwag, Inc.
o e.Salon, Inc.
Planet Zanett is currently discussing investments in the following
conceptual stage businesses:
o Codewriter.com
o LawyerForm.com
o WirelessPlanet
o RadioActiveFile.com (HotFile.com)
Description of Property. Planet Zanett's principal office, consisting of
approximately 9,800 square feet, is located at 135 East 57th Street, 15th Floor,
New York, NY. The Zanett Securities Corporation, an affiliate of Planet Zanett
provides this space and various support and administrative services to Planet
Zanett under an agreement pursuant to which Planet Zanett reimburses Zanett
Securities for the direct and indirect costs associated with the facilities and
services.
- 6 -
The Merger
General Description
BAB is seeking your approval to certain transactions contemplated by the
Merger Agreement between BAB and Planet Zanett. The Merger Agreement
contemplates a series of transactions which will result in (i) issuing
21,989,295 shares of BAB Common Stock to Planet Zanett's shareholders, after
which BAB's current Shareholders would own 10% of BAB on a fully diluted basis,
and (ii) distribution to BAB's current shareholders of 100% ownership of BAB,
Inc., which will hold all of the assets and liabilities of BAB's current
business. Planet Zanett will engage in the Internet incubator business which is
more fully described under the heading "Planet Zanett Corporate Incubator, Inc.
- - Description of Business", beginning on page ___. The following discussion
briefly summarizes the transactions contemplated by the Merger Agreement, which
is attached hereto. This discussion is a summary only and is qualified in its
entirety by the Merger Agreement which is attached to this Proxy Statement.
Step One - Domestication Merger. BAB has formed a wholly-owned Delaware
corporation, BAB (Delaware), Inc. BAB will merge with and into BAB Delaware,
file a Certificate of Merger with the Secretary of State in both the States of
Delaware and Illinois and the separate and independent existence of BAB shall
cease and BAB Delaware shall be the surviving corporation and shall be governed
by the Delaware General Corporation Law ("DGCL"). In addition, at the Effective
Time, BAB will change its name to Planet Zanett, Inc.
Unless noted otherwise, all references in this Proxy Statement to BAB shall be
deemed to mean BAB prior to the consummation of the Domestication Merger and BAB
Delaware thereafter. The objective of this transaction is to change BAB's state
of domicile from Illinois to Delaware.
Step Two - The Merger. BAB has formed a wholly-owned Delaware corporation,
PZ Acquisition, Inc. In the Merger, Planet Zanett will merge with and into PZ
Acquisition, Inc., with PZ Acquisition, Inc. continuing as the surviving
corporation and a wholly-owned subsidiary of BAB. PZ Acquisition, Inc. will
change its name to Planet Zanett Corporate Incubator, Limited. Unless noted
otherwise, all references in this Proxy Statement to Planet Zanett shall be
deemed to mean Planet Zanett prior to the Merger and PZ Acquisition, Inc.
thereafter. The Merger shall become effective upon the proper filing of a
certificate of merger with each of the Secretaries of State of the States of
Delaware and Nevada.
Effect on Securities. At the Effective Time, the issued and outstanding
shares of Planet Zanett common stock shall automatically by virtue of the Merger
be converted into and exchanged for shares of BAB Common Stock, in the ratio of
219,892.95 shares of BAB Common Stock for each share of Planet Zanett common
stock, or an aggregate of 21,989,295 shares of BAB Common Stock (the "Merger
Consideration").
The result of this conversion and exchange will be that the shareholders
in Planet Zanett will own an aggregate of 90% of the BAB Common Stock after the
Merger on a fully diluted basis.
- 7 -
and BAB's current Shareholders will own an aggregate of 10% of the BAB Common
Stock after the Merger on a fully diluted basis.
Step Three - The Spin-off. Prior to the Merger becoming effective (the
"Effective Time"), all of the assets of BAB related to BAB's current business
operations will be transferred to BAB, Inc., which will assume all liabilities
of BAB related to its current business operations. All subsidiaries of BAB
engaged in BAB's current business operations will either become wholly-owned
subsidiaries of BAB, Inc. or will be merged with and into BAB, Inc.
Among other things, BAB, Inc. will agree to repay to BAB all amounts paid
to retire BAB's indebtedness to CIB Bank which is expected to be approximately
$1,400,000. BAB, Inc. will agree to pay off the loan in full, two years after
the Effective Time, with quarterly interest payments being made at a floating
rate of 1% over prime. This obligation will be secured by certain BAB, Inc.
assets.
BAB will declare a dividend consisting of all of the common stock of BAB,
Inc. to holders of BAB Common Stock as of the Spin-off Record Date, payable as
soon as practicable following the Effective Time. The Spin-off Record Date shall
be a date which is not earlier than the date of the Special Meeting and not
later than the date immediately preceding the Effective Time. The distribution
of the BAB, Inc. common stock will be conditioned on the registration of BAB,
Inc.'s common stock on Form 10-SB under the Securities Exchange Act of 1934. BAB
will distribute an Information Statement with the dividend shares.
For a further discussion of the Merger, see PROPOSAL 2, commencing on page
____.
Action to be Taken; Votes Required
The presence, in person or by Proxy, of holders of a majority of shares of
BAB Common Stock entitled to vote is necessary to constitute a quorum for the
transaction of business at the Special Meeting. The affirmative vote of
two-thirds of holders of outstanding shares of BAB Common Stock entitled to vote
is required for approval of each of PROPOSALS 1 and 2.
All of the members of BAB's Board of Directors have indicated their
intention to vote the BAB Common Stock owned by them or over which they have
voting control in favor of each of the proposals at the Special Meeting. As of
the Voting Record Date, members of the Board of Directors collectively owned or
controlled 1,069,224 shares of BAB Common Stock, representing approximately
47.8% of the shares of BAB Common Stock issued and outstanding on the Voting
Record Date and entitled to vote at the Special Meeting. Michael Evans and
Michael Murtaugh (the "Principal BAB Stockholders"), have entered into a voting
agreement (the "Voting Agreement") pursuant to which they have agreed to vote
all shares of BAB Common Stock owned or controlled by them in favor of each of
the proposals at the Special Meeting. As of the Voting Record Date, the
Principal BAB Stockholders collectively owned or controlled 1,048,810 shares of
BAB Common Stock, representing approximately 46.9% of the shares of BAB Common
Stock issued and outstanding on the Voting Record Date and entitled to vote at
the Special Meeting. The shares held by the Principal BAB Stockholders are
included in the
- 8 -
1,069,224 shares of BAB Common Stock owned by members of the Board of Directors.
See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
A stockholder of record may revoke a Proxy at any time before it has been
exercised by filing a written revocation with BAB at the address of BAB set
forth above, by filing a duly executed Proxy bearing a later date, or by
appearing in person and voting by ballot at the Special Meeting. Any stockholder
of record as of the Voting Record Date attending the Special Meeting may vote in
person whether or not a Proxy has been previously given, but the presence
(without further action) of a stockholder at the Special Meeting will not
constitute revocation of a previously given Proxy. If the Special Meeting is
adjourned for any reason, at any subsequent reconvening of the Special Meeting,
all proxies will be voted in the same manner as such proxies would have been
voted at the original convening of the Special Meeting (except for any proxies
that have theretofore effectively been revoked or withdrawn).
Proxies may be solicited by officers, directors or associates of BAB, in
person, by telephone or through other forms of communication. Such persons will
not receive additional compensation for their solicitation services, although
they will be reimbursed by BAB for their reasonable out-of-pocket expenses
incurred in connection with such solicitation. The costs of preparing,
assembling and mailing the Notice of Special Meeting, this Proxy Statement and
the Proxy Card will be borne by Planet Zanett.
Each of the Proposals is contemplated solely in connection with, and
approval of each is necessary for, consummation of the Merger. If any of
Proposals 1, 2 and 3 fail to receive approval from the BAB stockholders, none of
the Proposals will be implemented.
Reasons for the Merger
Management and the Board of Directors of BAB carefully reviewed the past
performance and future prospects for publicly traded restaurant stocks and, in
particular, publicly traded bagel companies, and concluded that the proposed
Merger presents an excellent opportunity to enhance shareholder value. For these
reasons, the management and the Board of Directors concluded that it was in the
best interest of the stockholders to enter into the Merger Agreement and to
spin-off BAB, Inc. to the BAB stockholders resulting in BAB stockholders having
a share of stock in both BAB and BAB, Inc. for every share of BAB Holdings
currently held.
Voting Record Date
The Board of Directors has fixed the close of business on [ , 2000] as
the record date for the determination of stockholders entitled to notice of and
to vote at the Special Meeting and at any adjournments or postponements thereof.
Only stockholders of BAB Common Stock at the close of business on the Voting
Record Date will be entitled to vote at the Special
- 9 -
Meeting. As of the Voting Record Date, there were [ ] shares of BAB Common
Stock outstanding and entitled to vote at the Special Meeting. Holders of BAB
Common Stock outstanding as of the close of business on the Voting Record Date
will be entitled to one vote for each share held by them.
Summary of the Merger Agreement
The following is only a summary of the Merger Agreement and is qualified in its
entirety by the provisions of the Merger Agreement attached hereto as Exhibit A.
Please refer to the more detailed summary of the Merger Agreement in PROPOSAL 2,
commencing on page __.
Consideration for the Merger. The issued and outstanding common stock of
Planet Zanett immediately prior to the Effective Time will automatically be
converted into and exchanged for shares of BAB Common Stock, in the ratio of
219,892.95 shares of BAB Common Stock for each share of Planet Zanett common
stock.
Representations and Warranties. Each of BAB and Planet Zanett has made
certain customary representations and warranties in the Merger Agreement
relating to such matters as:
o corporate organization;
o capital structure;
o financial statements;
o compliance with laws; and
o title to and condition of assets.
None of these representations and warranties of Planet Zanett or the BAB
Entities contained in the Merger Agreement will survive the Effective Time. For
a further description of these representations and warranties, see "PROPOSAL
2--THE MERGER AGREEMENT--Representations and Warranties" at page ____.
Covenants. Planet Zanett and BAB have made certain covenants in the Merger
Agreement relating to the conduct of their respective businesses prior to the
Merger. Each of Planet Zanett and BAB has agreed to:
o maintain its corporate existence in good standing;
o maintain the general character of its business;
o maintain in effect all of its presently existing insurance coverage
(or substantially equivalent insurance coverage);
o preserve its business organization intact, preserve its good will,
keep available the services of its current officers and employees
and preserve its present business relationships with its customers,
clients and other Persons with which it has business relations; and
o in all respects conduct its business only in the usual and ordinary
manner consistent with past practice and perform in all material
respects all material
- 10 -
contracts or other obligations with banks, customers, clients,
employees and others.
In addition, BAB and Planet Zanett have agreed to the following additional
covenants:
o Until the Effective Time, BAB has agreed not to engage in certain
activities without the prior written consent of Planet Zanett.
o BAB will, upon the request of Planet Zanett, take all reasonable
steps to assist in any challenge to the validity or applicability of
the transactions contemplated by the Merger Agreement, of any state
takeover law.
o Planet Zanett will enter into a binding agreement (the "Affiliates
Agreement") with Zanett Securities Corporation, Claudio Guazzoni and
David McCarthy ("Zanett Affiliates"), providing that all Zanett
Affiliate Internet incubator investments which would result in the
investor having "primary control," as defined in the Investment
Company Act of 1940, will be made only through Planet Zanett or the
Partnership.
In addition to the covenants detailed above, each of the parties have made
certain additional covenants, relating to, among other matters:
o restrictions on the making of press releases;
o confidentiality;
o access to one another's facilities and records; and
o the tax treatment of the Merger.
For a further description of these covenants, see "PROPOSAL 2--THE MERGER
AGREEMENT-Covenants" at page ____.
Termination. The Merger Agreement may be terminated under certain
conditions prior to the Effective Time including by mutual written consent of
BAB and Planet Zanett and either party may terminate the Merger Agreement if the
other party has breached the Merger Agreement. Please see "PROPOSAL 2--THE
MERGER AGREEMENT-Termination" at page ____, for a summary of the termination
provisions.
Conditions. We will complete the Merger only if specific conditions are
satisfied or, in some cases, waived, including:
o BAB's stockholders and Planet Zanett's shareholders have approved
the Merger and Related Transactions;
o no law or court order prohibits the Merger;
o all required consents, approvals, waivers and authorizations have
been obtained;
o the parties' businesses have continued in the normal course and
consistent with past practices; and
- 11 -
o each party has been afforded reasonable access to all of its books,
records and personnel to the other party and to its representatives,
accountants, counsel and other agents.
In addition to the conditions set forth above, the obligations of Planet
Zanett and BAB to effect the Merger are subject to the satisfaction of certain
additional conditions which are set forth in the Merger Agreement. See "PROPOSAL
2 - THE MERGER AGREEMENT - Conditions" at page ____.
Dissenters' Rights
Under Illinois law, a BAB stockholder may assert dissenters' rights and
obtain payment for his, her or its shares only if the stockholder delivers to
BAB before the vote is taken a written demand for payment for his, her or its
shares if the proposed transaction is consummated, and the stockholder does not
vote in favor of the proposed transaction. BAB stockholders considering seeking
dissenters' rights should recognize that the fair value of shares could be
determined to be more than, the same as or less than the value of the BAB merger
consideration. Stockholders who elect to exercise dissenters' rights must comply
strictly with all of the procedures set forth in Chapter 805, Act 5, Section
11.70 ("Section 11.70") of the Illinois Business Corporation Act to preserve
those rights. We have attached a copy of Section 11.70 of the Illinois Business
Corporation Act, which sets forth these dissenters' rights, as Exhibit B to this
Proxy Statement.
A record owner of shares may assert dissenters' rights as to fewer than
all the shares recorded in such person's name only if such person dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the record owner asserts dissenters' rights. The rights of a partial dissenter
are determined as if the shares as to which dissent is made and the other shares
were recorded in the names of different stockholders. A beneficial owner of
shares who is not the record owner may assert dissenters' rights as to shares
held on such person's behalf only if the beneficial owner submits to the
corporation the record owner's written consent to the dissent before or at the
same time the beneficial owner asserts dissenters' rights.
Section 11.70 of the Illinois Business Corporation Act sets forth the
required procedure a stockholder seeking to dissent must follow. Making sure
that you actually perfect your dissenters' rights can be complicated. The
procedural rules are specific and must be followed completely. Failure to comply
with the procedure may cause you to lose your dissenters' rights. The following
is only a summary of your rights and the procedure relating to dissenters'
rights and is qualified in its entirety by the provisions of Section 11.70 of
the Illinois Business Corporation Act. Please review Section 11.70 for the
complete procedure. BAB will not give you any notice other than as described in
this Proxy statement and as required by Illinois law.
Dissenters' Rights Procedures. If you are a BAB stockholder and you wish
to exercise your dissenters' rights, you must satisfy the following provisions
of Section 11.70 of the Illinois Business Corporation Act. Only a record holder
may demand payment for shares, and therefor, if
- 12 -
you are the beneficial owner of shares held of record by a broker, bank or other
nominee, you must direct such record owner to comply with the requirements of
the statute.
If you are a BAB stockholder who elects to exercise dissenters' rights,
you should mail or deliver by hand a written demand to:
BAB Holdings, Inc.
8501 W. Higgins
Suite 320
Chicago, IL 60631
Attention: Secretary
It is important that BAB receives all written demands before the
stockholder meeting on ______________, 2000. As explained above, this written
demand should be signed by, or on behalf of, the stockholder of record. The
written demand to dissent should specify the stockholder's name and mailing
address, the number of shares of common stock owned, and that the stockholder is
thereby exercising dissenters' rights of his, her or its shares.
Within 10 days after the date on which the corporate action giving rise to
the right to dissent is effective or 30 days after the stockholder delivers to
the corporation the written demand for payment, whichever is later, the
corporation shall send each stockholder who has delivered a written demand for
payment a statement setting forth the opinion of the corporation as to the
estimated fair value of the shares, the corporation's latest balance sheet as of
the end of a fiscal year ending not earlier than 16 months before the delivery
of the statement, together with the statement of income for that year and the
latest available interim financial statements, and either a commitment to pay
for the shares of the dissenting stockholder at the estimated fair value thereof
upon transmittal to the corporation of the certificate or certificates, or other
evidence of ownership, with respect to the shares, or instructions to the
dissenting stockholder to sell his, her or its shares within 10 days after
delivery of the corporation's statement to the stockholder. The corporation may
instruct the stockholder to sell only if there is a public market for the shares
at which the shares may be readily sold. If the stockholder does not sell within
that 10 day period after being so instructed by the corporation, for the
purposes of Section 11.70, the stockholder shall be deemed to have sold his, her
or its shares at the average closing price of the shares, if listed on a
national exchange, or the average of the bid and asked price with respect to the
shares quoted by a principal market maker, if not listed on a national exchange,
during that 10 day period.
A stockholder who makes written demand for payment under Section 11.70
retains all other rights of a stockholder until those rights are cancelled or
modified by the consummation of the proposed corporate action. Upon consummation
of that action, the corporation shall pay to each dissenter who transmits to the
corporation the certificate or other evidence of ownership of the shares the
amount the corporation estimates to be the fair value of the shares, plus
accrued interest, accompanied by a written explanation of how the interest was
calculated.
- 13 -
If the stockholder does not agree with the opinion of the corporation as
to the estimated fair value of the shares or the amount of interest due, the
stockholder, within 30 days from the delivery of the corporation's statement of
value, shall notify the corporation in writing of the stockholder's estimated
fair value and amount of interest due and demand payment for the difference
between the stockholder's estimate of fair value and interest due and the amount
of the payment by the corporation or the proceeds of sale by the stockholder,
whichever is applicable.
If, within 60 days from delivery to the corporation of the stockholder
notification of estimate of fair value of the shares and interest due, the
corporation and the dissenting stockholder have not agreed in writing upon the
fair value of the shares and interest due, the corporation shall either pay the
difference in value demanded by the stockholder, with interest, or file a
petition in the circuit court of the county in which either the registered
office or the principal office of the corporation is located, requesting the
court to determine the fair value of the shares and interest due. The
corporation shall make all dissenters, whether or not residents of this State,
whose demands remain unsettled, parties to the proceeding as an action against
their shares and all parties shall be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication as
provided by law. Failure of the corporation to commence an action pursuant
Section 11.70 shall not limit or affect the right of the dissenting stockholders
to otherwise commence an action as permitted by law.
The jurisdiction of the court in which the proceeding is commenced under
Section 11.70 by a corporation is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the power described in the order
appointing them, or in any amendment to it. Each dissenter made a party to the
proceeding is entitled to judgment for the amount, if any, by which the court
finds that the fair value of his, her or its shares, plus interest, exceeds the
amount paid by the corporation or the proceeds of sale by the stockholder,
whichever amount is applicable.
The court, in a proceeding commenced Section 11.70, shall determine all
costs of the proceeding, including the reasonable compensation and expenses of
the appraisers, if any, appointed by the court, but shall exclude the fees and
expenses of counsel and experts for the respective parties. If the fair value of
the shares as determined by the court materially exceeds the amount which the
corporation estimated to be the fair value of the shares or if no estimate was
made, then all or any part of the costs may be assessed against the corporation.
If the amount which any dissenter estimated to be the fair value of the shares
materially exceeds the fair value of the shares as determined by the court, then
all or any part of the costs may be assessed against that dissenter. The court
may also assess fees and expenses of counsel and experts for the respective
parties, in amounts the court finds equitable, (1) against the corporation and
in favor of any or all dissenters if the court finds that the corporation did
not substantially comply with the requirements of subsections (a), (b), (c),
(d), or (f) of Section 11.70, and (2) against either the corporation or a
dissenter and in favor of any other party if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights provided by Section 11.70.
- 14 -
If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award to that counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who are benefitted.
If you fail to comply strictly with the procedures described above you may
lose your dissenters' rights. Consequently, if you wish to exercise your
dissenters' rights, we strongly urge you to consult a legal advisor.
Accounting Treatment of the Merger
For accounting purposes, the Merger will be treated as a recapitalization
of Planet Zanett with Planet Zanett as the acquiror (reverse acquisition).
Regulatory Approvals
No regulatory approvals are required to complete the transactions
contemplated by the Merger Agreement.
Material Federal Income Tax Consequences
The following discussion is a summary of the material U.S. federal income
tax consequences of the Merger. This summary does not discuss all aspects of
U.S. federal income taxation that may be relevant to you in light of your
particular tax circumstances, nor does it discuss any state, local, foreign or
non-income tax consequences. This discussion does not address the federal income
tax consequences that may be applicable to taxpayers subject to special
treatment under the Internal Revenue Code of 1986, as amended, which will be
referred to as the "Code" in the following discussion. For example:
o tax-exempt entities;
o partnerships, S corporations and other pass-through entities;
o mutual funds;
o insurance companies and other financial institutions;
o dealers in securities;
o stockholders who hold their shares as part of a hedge, appreciated
financial position, straddle or conversion transaction;
o stockholders who acquired their shares through the exercise of
options or otherwise as compensation or through a tax-qualified
retirement plan; and
o individuals who are not citizens or residents of the United States,
foreign corporations and other foreign entities.
This discussion is based on the Code, Treasury Department regulations,
published positions of the Internal Revenue Service, which is referred to in
this document as the "IRS," and court decisions now in effect, all of which are
subject to change. In particular, the U.S. Congress
- 15 -
could enact legislation or the Treasury Department could issue regulations or
other guidance, including, without limitation, regulations issued pursuant to
its broad authority under Section 337(d) of the Code, affecting the treatment of
stock with characteristics similar to the Planet Zanett Common Stock. Any such
change, which may or may not be retroactive, could alter the tax consequences
discussed in this document.
Because your BAB Common Stock remains unchanged, the Merger will not cause
you to recognize any gain or loss for U.S. federal income tax purposes. We
expect that, for U.S. federal income tax purposes, the exchange of Planet Zanett
common stock for BAB Common Stock generally will not cause shareholders of
Planet Zanett to recognize any gain or loss.
Selected Unaudited Pro Forma Financial Data
BAB Holdings, Inc.
Three Months Ended
February 27, 2000
------------------
Statement of Operations Data: (1)
Total Revenues .................................. $ 0
Income from continuing operations ............... 0
Income from continuing operations
per share - basic and diluted ............. 0
As of
February 27, 2000
-----------------
Balance Sheet Data: (1)
Total Assets .................................... $ 4,000,198
Long-term debt, excluding current portion ....... 0
Stockholders' equity ............................ 3,994,427
BAB, Inc.
Three Months Ended
February 27, 2000
------------------
Statement of Operations Data: (1)
Total Revenues .................................. $ 3,502,625
Income from continuing operations ............... 87,330
Income from continuing operations
per share-basic and diluted ............... 0.01
As of
February 27, 2000
-----------------
Balance Sheet Data: (1)
Total Assets .................................... $12,598,703
Long-term debt, excluding current portion ....... 1,204,338
Stockholders' equity ............................ 6,116,142
(1) See notes to unaudited pro forma financial information on page ___ of this
proxy statement.
- 16 -
RISK FACTORS
Risks Particular to the Merger
Planet Zanett has a very limited operating history.
Planet Zanett recently began to implement its current business plan and
therefore has a very limited operating history upon which you may evaluate
Planet Zanett. In addition, all of Planet Zanett's current affiliate companies
are early stage companies that have limited operating histories and have
generated very limited, if any, revenues or earnings from operations since
inception.
Planet Zanett's proposed operations are speculative in nature and may not ever
result in any operating revenues or profits.
Planet Zanett is not certain its business model, even if successful, will
result in significant operating revenues or profits. Planet Zanett's success
depends upon its ability to develop or select affiliate companies that are
ultimately successful. Although Planet Zanett expects to derive the cash flow
necessary to fund its day-to-day operations from income generated from services
provided to affiliate companies, this will not provide significant income or
funds for additional affiliate companies. As of the date of this Proxy
Statement, none of Planet Zanett's affiliate companies have generated operating
revenues sufficient to pay dividends. Furthermore, Planet Zanett has not
generated any significant revenues from the sale of its equity interests in its
affiliate companies or from services provided to the affiliate companies.
Accordingly, Planet Zanett does not have an established history of selecting and
developing successful affiliate companies. Economic, governmental, regulatory
and industry factors outside Planet Zanett's control affect each of its
affiliate companies. If the affiliate companies do not successfully implement
their business plans with the assistance of Planet Zanett's experiences and
methodologies, then we will not be able to achieve our business plan.
Accordingly, if these events occur, then Planet Zanett will not generate any
revenues and the value of its assets and the market price of its common stock
will decline. There are also material risks relating to the businesses of Planet
Zanett's affiliate companies. Accordingly, the success of Planet Zanett's
operations will be dependent upon the management and operations of its affiliate
companies, the timing of the marketing of the affiliate companies' products and
numerous other factors beyond Planet Zanett's control.
Planet Zanett's success could be impaired by valuations placed on
Internet-related companies by the investment community and by limitations on our
and our affiliate companies' access to the capital markets.
Planet Zanett's strategy involves creating value for its stockholders by
developing its affiliate companies and helping them to gain access to the
capital markets so that they can raise additional funds to satisfy their
business plans. Since Planet Zanett's and the Partnership's initial acquisitions
have been equity interests in Internet companies, it is dependent on the success
of the market for Internet-related companies in general and for initial public
offerings of those
- 17 -
companies in particular. Until March 2000, there had been a substantial number
of Internet-related initial public offerings and private venture financings.
Commencing during the second half of March 2000, the domestic and international
stock markets have generally experienced a significant correction and the public
trading prices, market capitalizations and valuations of many technology and
Internet-related companies have significantly decreased. During this period,
Internet-related initial public offerings and private venture financings have
decreased in both number and size. If present market conditions continue for an
extended period of time, the ability of Planet Zanett's affiliate companies to
grow and access the capital markets may be impaired and Planet Zanett may need
to provide additional capital to its affiliate companies in order to ensure that
they meet their business plans on a timely basis and to protect the value of
Planet Zanett's equity holdings. Furthermore, if present market conditions
continue for an extended period of time, Planet Zanett may be unable to access
the capital markets to raise sufficient funds to enable it to provide additional
capital to its affiliate companies on a timely basis. If Planet Zanett is unable
to provide additional capital to its affiliate companies in these circumstances
on a timely basis, the affiliate companies' operations may suffer, and Planet
Zanett may not successfully implement its business plan resulting in the
decrease in value of its common stock.
Planet Zanett's plans to expand into international markets exposes it to less
developed markets, currency fluctuations and political instability which could
adversely impact its financial results and its affiliate companies' ability to
conduct business.
Planet Zanett is pursuing B2B e-commerce opportunities outside the United
States. This international expansion exposes it to several risks, including the
following:
Less Developed Markets. Planet Zanett believes that e-commerce markets
----------------------
outside the United States are less developed than the United States e-commerce
market. If the e-commerce markets outside the United States do not continue to
mature, any of its affiliate companies outside the United States may not
succeed.
Currency Fluctuations. When Planet Zanett purchases interests in
---------------------
non-United States affiliate companies for cash, it will likely have to pay for
the interests using the currency of the country where the prospective affiliate
company is located. Similarly, although it is Planet Zanett's intention to act
as a long-term affiliate to its affiliate companies, if Planet Zanett sold an
interest in a non-United States affiliate company it might receive foreign
currency.
To the extent that Planet Zanett transacts business in foreign currencies,
fluctuations in the relative value of these currencies and the United States
dollar may adversely impact its financial results.
Compliance with Laws. As Planet Zanett expands internationally, it will
--------------------
become increasingly subject to the laws and regulations of foreign countries.
Planet Zanett may not be familiar with these laws and regulations, and these
laws and regulations may change at any time.
Political Instability. Planet Zanett may purchase interests in foreign
---------------------
affiliate companies that are located, or transact business in, parts of the
world that experience political instability.
- 18 -
Political instability may have an adverse impact on the subject country's
economy, and may limit or eliminate an affiliate company's ability to conduct
business.
Planet Zanett may be unable to obtain maximum value for its affiliate company
interests.
Planet Zanett has significant positions in its affiliate companies. While
Planet Zanett generally does not anticipate selling its interests in the
affiliate companies, if Planet Zanett were to divest all or part of an interest
in an affiliate company, it may not receive maximum value for this position. For
affiliate companies with publicly- traded stock, Planet Zanett may be unable to
sell its interest at then-quoted market prices. Furthermore, for those affiliate
companies that do not have publicly- traded stock, the realizable value of
Planet Zanett interests may ultimately prove to be lower than the carrying value
currently reflected in our consolidated financial statements.
Planet Zanett may not have opportunities to acquire interests in additional
companies, which would affect its growth strategy.
Planet Zanett may be unable to identify companies that complement its
strategy, and even if it does identify a company that complements its strategy,
we may be unable to acquire an interest in the company for many reasons,
including: a failure to agree on the terms of the acquisition, such as the
amount or price of the acquired interest; incompatibility between Planet Zanett
and management of the company; competition from other acquirors of B2B
e-commerce companies; a lack of capital to acquire an interest in the company;
and the unwillingness of the company to affiliate with Planet Zanett. If Planet
Zanett cannot acquire interests in attractive companies, our strategy to build a
collaborative network of affiliate companies may not succeed.
Planet Zanett's resources and its ability to manage newly acquired affiliate
companies may be strained as it acquires more and larger interests in B2B
e-commerce companies.
Planet Zanett has acquired, and plans to continue to acquire, significant
interests in B2B e-commerce companies that complement its business strategy. In
the future, Planet Zanett may acquire larger percentages or larger interests in
companies than it has in the past, or it may seek to acquire 100% ownership of
companies. Planet Zanett may also spend more on individual acquisitions than it
has in the past. These larger acquisitions may place significantly greater
strain on Planet Zanett's resources, ability to manage such companies and
ability to integrate them into its collaborative network. Future acquisitions
are subject to the following risks: Planet Zanett's acquisitions may cause a
disruption in its ongoing support of affiliate companies, distract its
management and other resources and make it difficult to maintain Planet Zanett's
standards, controls and procedures. Planet Zanett may acquire interests in
companies in B2B e-commerce markets in which it has little experience. Planet
Zanett may not be able to facilitate collaboration between affiliate companies
and new companies that it acquires. To fund future acquisitions Planet Zanett
may be required to incur debt or issue equity securities, which may be dilutive
to existing shareholders.
There is a scarcity of and competition for acquisition opportunities.
- 19 -
There are a limited number of technology-based businesses seeking
investment capital which Planet Zanett deems to be desirable candidates to
become affiliate companies and there is a very high level of competition among
companies seeking to acquire interests in these entities. Planet Zanett is and
will continue to be a very minor participant in the business of seeking business
relationships with, and acquisitions of interests in, early stage technology
businesses of which Internet companies presently constitute the largest
concentration. A large number of established and well-financed entities,
including venture capital firms, are active in acquiring interests in companies
which Planet Zanett may find to be desirable candidates to become affiliate
companies. Many of these investment-oriented entities have significantly greater
financial resources, technical expertise and managerial capabilities than Planet
Zanett. Consequently, Planet Zanett will be at a competitive disadvantage in
negotiating and executing possible investments in these entities as many
competitors generally have easier access to capital, which entrepreneurs of
development stage companies generally place greater emphasis on than obtaining
the management skills and networking services that Planet Zanett provides to its
affiliate companies. Even if Planet Zanett is able to successfully compete with
these venture capital entities, this competition may affect the terms of
completed transactions and, as a result, Planet Zanett may pay more than it
expected for interests in affiliate companies. Planet Zanett may not be able to
identify companies that complement its strategy, and even if it identifies a
company that complements its strategy, it may be unable to acquire an interest
in the company for many reasons, including:
o a failure to agree on the terms necessary for a transaction, such as
the amount or price of Planet Zanett's equity interest;
o incompatibility between Planet Zanett's operational strategies and
management philosophies and those of the affiliate company;
o competition from other acquirers of Internet companies; and
o the unwillingness of a potential affiliate company to affiliate with
Planet Zanett's corporation or its other affiliate companies.
If Planet Zanett is unable to successfully compete with other entities in
identifying and executing possible business opportunities, then it will not be
able to successfully implement its business plan.
Planet Zanett faces competition from other potential acquirers of B2B
e-commerce companies which could affect its ability to build successful
affiliate companies. Planet Zanett faces competition from other capital
providers, including publicly-traded Internet companies, venture capital
companies and large corporations. Many of these competitors have greater
financial resources and brand name recognition than Planet Zanett. These
competitors may limit Planet Zanett's opportunity to acquire interests in new
affiliate companies. If Planet Zanett cannot acquire interests in attractive
companies on reasonable terms, its strategy to build a collaborative network of
affiliate companies may not succeed.
- 20 -
Planet Zanett may be required to dispose of its interests in its affiliate
companies or take other actions which it would not otherwise take in order to
avoid classification as an investment company under the Investment Company Act
of 1940.
Although Planet Zanett is primarily engaged in the business of e-commerce
through its affiliate companies, and in managing the assets of the Partnership
its ownership of minority equity interests in affiliate companies could result
in Planet Zanett's classification as an investment company under the Investment
Company Act of 1940. If Planet Zanett is required to register as an investment
company, then it will incur substantial additional expense as the result of the
Investment Company Act of 1940's record keeping, reporting, voting, proxy
disclosure and other requirements. In addition, restrictions on transactions
between an investment company and its affiliates under the Investment Company
Act of 1940 would make it difficult, if not impossible, for Planet Zanett to
fully implement its strategy of actively managing, operating and promoting
collaboration among its network of affiliate companies. As a result, Planet
Zanett intends to take whatever steps are necessary in order not to be required
to register as an investment company, and may be forced to sell interests in
affiliate companies which it otherwise would continue to hold. Such sales may be
for less than fair market value due to Planet Zanett's need to dispose of the
securities. The rules under the Investment Company Act provide in part that an
entity is presumed not to be an investment company if 45% or less of the value
of its total assets (excluding government securities and cash) consists of, and
45% or less of its income over the last four quarters is derived from,
securities other than either government securities or securities issued by
entities that it primarily controls which are not themselves engaged in the
business of investing in securities. As the regulations governing the
relationship between an investment company and the entities in which it invests
are inconsistent with the manner in which Planet Zanett intends to provide
services to its affiliate companies, it is critical to Planet Zanett's business
plan that Planet Zanett not be an investment company subject to the Investment
Company Act.
Under current federal securities regulations, Planet Zanett will be
considered to primarily control an entity if it owns more than 25% of its voting
securities and has more control than any other single owner. To alleviate
concerns raised by the Investment Company Act of 1940, if Planet Zanett intends
to maintain a controlling interest in the affiliate company for the foreseeable
future, it may hold that interest directly.
- 21 -
Planet Zanett expects its affiliate companies to grow rapidly and if Planet
Zanett is unable to assist them in sustaining and managing their growth, the
affiliate companies' businesses will suffer, which will adversely affect Planet
Zanett's business.
Planet Zanett's affiliate companies may experience rapid growth as they
introduce new products and services and hire additional employees to manage
expanded areas of development and service a growing number of consumers. Since
such growth may not be accompanied by immediate increases in revenues, this
growth is likely to place significant strain on their resources and on the
resources Planet Zanett allocates to assist its affiliate companies. In
addition, Planet Zanett's management may be unable to convince its affiliate
companies to adopt its ideas effectively, and the affiliate companies may fail
in their attempt to execute its ideas or successfully manage their growth. If
Planet Zanett is unable to effectively assist its affiliate companies in
managing their growth, then they may not sustain profitable operations and the
value of our common stock may decrease.
Planet Zanett's growth is dependent upon Planet Zanett producing revenue
sufficient to cover Planet Zanett's increasing expenses.
Planet Zanett's expenses will increase as it builds an infrastructure to
implement its business model. Planet Zanett expects to hire additional employees
and expand information technology systems. Planet Zanett also plans to
significantly increase its operating expenses to: broaden its affiliate company
support capabilities; explore acquisition opportunities and alliances with other
companies; facilitate business arrangements among affiliate companies; and
expand its business internationally. Expenses will also increase due to the
effect of goodwill amortization and other charges resulting from completed and
future acquisitions. If any of these and other expenses are not accompanied by
increased revenue, Planet Zanett's losses will be greater than anticipated.
Planet Zanett's success is dependent on its continued employment of Claudio
Guazzoni and David McCarthy, and the continued employment by its affiliate
companies of their key personnel, and if Planet Zanett were to lose the services
of these individuals, its business and the businesses of the affiliate companies
would be negatively affected.
Planet Zanett believes its success and the success of its affiliates will
depend on continued employment of senior management and key technical personnel.
If one or more members of our management team or the management teams of any of
its affiliate companies are unable or unwilling to continue in their present
positions, Planet Zanett's business and operations could be disrupted.
- 22 -
Planet Zanett's efficiency may be limited while Messrs. Guazzoni and
McCarthy are the only members of the management team. In addition, Planet Zanett
may be unable to identify and hire additional qualified management and
professional personnel to help lead it and its affiliate companies.
Planet Zanett's affiliate companies will need to continue to hire
additional qualified personnel as their businesses grow. A shortage in the
number of trained technical and marketing personnel could limit the ability of
its affiliate companies to increase the sales of their existing products and
services and launch new product offerings.
Planet Zanett expects its quarterly results will fluctuate significantly.
Overall Planet Zanett expects its quarterly results will fluctuate
significantly due to many factors, including: the operating results of its
affiliate companies; changes in equity losses or income and amortization of
goodwill related to the acquisition or divestiture of interests in affiliate
companies; changes in methods of accounting for affiliate company interests,
which may result from changes in ownership percentages of affiliate companies;
sales of equity securities by affiliate companies, which could cause to
recognize gains or losses under applicable accounting rules; the pace of
development or a decline in growth of the B2B e-commerce market; intense
competition from other potential acquirors of B2B e-commerce companies, which
could increase Planet Zanett's cost of acquiring interests in additional
companies, and competition for the goods and services offered by its affiliate
companies; and Planet Zanett's ability to effectively manage its growth and the
growth of its affiliate companies during the anticipated rapid growth of the
global B2B e-commerce market. Planet Zanett believes period-to-period
comparisons of its operating results are not meaningful. If Planet Zanett's
operating results in one or more quarters do not meet securities analysts' or
stockholder's expectations, the price of its Common Stock could decrease.
Planet Zanett invests in early stage companies which may never develop into
profitable operating companies.
Planet Zanett invests in conceptual-stage, development-stage and
newly-formed operating companies. These companies may not evolve into profitable
operating companies or Planet Zanett may stop funding an affiliate company
before it has the opportunity to become profitable. In addition, Planet Zanett
may stop the development of affiliate companies created in-house. Accordingly,
certain of the affiliate companies contained in this Proxy Statement may never
evolve into profitable operating companies and Planet Zanett and the Partnership
may incur significant losses from their investments.
Most of Planet Zanett's affiliate companies will require significant additional
financing to execute their business plans.
Most of Planet Zanett's affiliate companies will require significant
additional financing to execute their business plans. Although Planet Zanett
intends to assist its affiliate companies in obtaining this financing, there is
no assurance that these affiliate companies will be able to obtain
- 23 -
this financing on a timely basis. If any of Planet Zanett's affiliate companies
are unable to obtain the required financing on a timely basis, then they may not
be able to execute their business plans.
Planet Zanett's affiliate companies have competitors.
Planet Zanett's affiliate companies may fail if their competitors provide
superior Internet-related offerings or continue to have greater resources than
its affiliate companies. Competition for Internet products and services is
intense. As the market for B2B e-commerce grows, Planet Zanett expects that
competition will intensify. Barriers to entry are minimal, and competitors can
offer products and services at a relatively low cost. In addition, many of
Planet Zanett's affiliate companies' competitors have greater financial,
marketing and other resources than its affiliate companies.
Planet Zanett's affiliate companies compete for a share of a customer's
purchasing budget for services, materials and supplies with other online
providers and traditional distribution channels, dollars spent on consulting
services with many established information systems and management consulting
firms, and advertising budget with online services and traditional off-line
media, such as print and trade associations. In addition, some of Planet
Zanett's affiliate companies compete to attract and retain a critical mass of
buyers and sellers.
Several companies offer competitive solutions that compete with one or
more of Planet Zanett's affiliate companies. Planet Zanett expects that
additional companies will offer competing solutions on a stand-alone or combined
basis in the future. Furthermore, Planet Zanett's affiliate companies'
competitors may develop Internet products or services that are superior to, or
have greater market acceptance than, the solutions offered by its affiliate
companies. If Planet Zanett's affiliate companies are unable to compete
successfully against their competitors, its affiliate companies may fail.
Planet Zanett's affiliate companies' businesses may be disrupted if they are
unable to upgrade their systems to meet increased demand.
Capacity limits on some of Planet Zanett's affiliate companies'
technology, transaction processing systems and network hardware and software may
be difficult to project and they may
- 24 -
not be able to expand and upgrade their systems to meet increased use. As
traffic on Planet Zanett's affiliate companies' Web sites continues to increase,
they must expand and upgrade their technology, transaction processing systems
and network hardware and software. Affiliate companies may be unable to
accurately project the rate of increase in use of their Web sites. In addition,
affiliate companies may not be able to expand and upgrade their systems and
network hardware and software capabilities to accommodate increased use of their
Web sites. If Planet Zanett's affiliate companies are unable to appropriately
upgrade their systems and network hardware and software, the operations and
processes of its affiliate companies may be disrupted.
The success of Planet Zanett's affiliate companies presently depends on the
development of the e-commerce market, which is uncertain.
Most of Planet Zanett's affiliate companies rely on the Internet for the
success of their businesses. The development of the e-commerce market is in its
early stages. If widespread commercial use of the Internet does not continue to
develop, or if the Internet does not expand as an effective medium for the sale
of products and services, Planet Zanett's affiliate companies may not succeed.
If consumer use of the Internet to purchase goods and services does not
continue to develop and expand, then these affiliate companies may not attract a
sufficient customer base and their businesses may be adversely affected. In
addition, if businesses do not continue to use or expand their use of the
Internet for conducting business then some of Planet Zanett's affiliate
companies may not develop an adequate customer base to execute their business
plans.
A number of factors could prevent the long-term acceptance of e-commerce
business, including the following:
o the unwillingness of businesses to shift from traditional business
processes to e-commerce processes;
o the necessary network infrastructure for substantial growth in usage
of e-commerce may not be adequately developed;
o increased government and securities regulation or taxation may
adversely affect the viability of e-commerce;
o insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response times
for the users of e-commerce; and
o concern and adverse publicity about the security of e-commerce
transactions.
Changes in federal and state tax treatment of Internet sales could result in
decreased revenues for some of Planet Zanett's affiliate companies.
The imposition of sales taxes on Internet sales would increase the
effective cost of goods to purchasers from certain of Planet Zanett's affiliate
companies and may result in lower sales. Currently, affiliate companies are not
required to charge any customer sales and usage tax, and there is a federally
imposed moratorium on taxation of Internet transactions. However, the
- 25 -
growth of Internet commerce is likely to lead state revenue agencies to pursue
taxation on Internet sales. To the extent that states are successful in imposing
taxes on Internet sales, the result will be an effective increase in the cost of
goods purchased through Internet websites. Consumers may respond by shifting to
traditional purchasing methods such as catalog sales which often do not impose
sales tax or interstate shipments or store purchases which do not involve
shipping costs.
Concerns regarding security of transactions and transmitting confidential
information over the Internet may have an adverse impact on the business
of Planet Zanett's affiliate companies.
Planet Zanett believes that concern regarding the security of confidential
information transmitted over the Internet prevents many potential customers from
engaging in online transactions. If Planet Zanett's affiliate companies that
depend on these types of transactions do not add sufficient security features to
their future product releases, its affiliate companies' products may not gain
market acceptance or its affiliate companies may incur additional legal
exposure. Despite the measures taken by Planet Zanett's affiliate companies,
their web sites remain potentially vulnerable to physical or electronic
break-ins, viruses or similar problems. If a person circumvents the security
measures imposed by any one of Planet Zanett's affiliate companies, he or she
could misappropriate proprietary information or cause interruption in operations
of the affiliate company. Security breaches that result in access to
confidential information could damage the reputation of any one of the affiliate
companies and expose the affiliate company affected to a risk of loss or
liability. Some of Planet Zanett's affiliate companies may be required to make
significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more widespread, affiliate
companies' customers will become more concerned about security. If affiliate
companies are unable to adequately address these concerns, they may be unable to
sell their goods and services.
Rapid technological changes may prevent Planet Zanett's affiliate companies from
remaining current with their technical resources and maintaining competitive
product and service offerings.
The markets in which affiliate companies operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If Planet Zanett's affiliate companies are unable to successfully respond to
these developments or do not respond in a cost-effective way, its business,
financial condition and operating results will be adversely affected. To be
successful, affiliate companies must adapt to their rapidly changing markets by
continually improving the responsiveness, services and features of their
products and services and by developing new features to meet the needs of their
customers. Planet Zanett's success will depend, in part, on its affiliate
companies' ability to license leading technologies useful in their businesses,
enhance their existing products and services and develop new offerings and
technology that address the needs of their customers. Planet Zanett's affiliate
companies will also need to respond to technological advances and emerging
industry standards in a cost- effective and timely manner.
- 26 -
Government regulations and legal uncertainties may place financial burdens on
Planet Zanett's business and the businesses of its affiliate companies.
There are few laws or regulations, at either the state or federal level,
directed specifically at e-commerce. Despite the scarcity of laws targeted at
e-commerce, courts and administrative agencies have shown an increased
willingness to apply traditional legal doctrines to cyberspace in areas
including libel, wire fraud, copyright, trade secrets, unfair competition,
consumer protection, monopolies, and unfair trade practices, creating an aura of
uncertainty regarding the legality of certain widespread practices. It is
possible that court decisions on issues such as protection of databases and
privacy rights may affect the valuation of Planet Zanett's business and the
businesses of its affiliate companies, call into question the viability of
current business practices, and require the revision of certain business models.
Because of the Internet's popularity and increasing use, as well as the
sometimes imperfect fit of traditional legal doctrines to Internet-related
issues, new laws and regulations may be adopted. These laws and regulations may
cover issues such as the collection and use of data from Web site visitors and
related privacy issues, spam, pricing, content, copyrights, online gambling,
distribution and quality of goods and services. The enactment of any additional
laws or regulations may impede the growth of the Internet and B2B e-commerce,
which could decrease the revenue of Planet Zanett's affiliate companies and
place additional financial burdens on its business and the businesses of
affiliate companies. Laws and regulations directly applicable to e-commerce or
Internet communications are becoming more prevalent. For example, the United
States Congress recently enacted laws regarding online copyright infringement
and the protection of information collected online from children. Although these
and other laws may not have a direct adverse effect on Planet Zanett's business
or those of its affiliate companies, they add to the legal and regulatory
uncertainty faced by B2B e-commerce companies. Importantly, the current
moratorium on certain Internet taxes expires in October 2001, and there is some
chance that it will not be extended. If not, e-commerce businesses could be
faced with an array of state and local taxes that could impede the growth
prospects of Planet Zanett's affiliate companies.
Following the Merger, BAB's Common Stock price is likely to be highly volatile.
The trading prices of many technology and Internet-related company stocks,
have experienced significant price and volume fluctuations in recent months.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. Any negative change in the public's
perception of the prospects of Internet or e-commerce companies could depress
the stock price regardless of results. The following factors will add to BAB's
Common Stock price's volatility: actual or anticipated variations in quarterly
results and those of the affiliate companies; new sales formats or new products
or services offered affiliate companies and their competitors; changes in the
financial estimates of the affiliate companies by securities analysts; changes
in the size, form or rate of Planet Zanett's acquisitions; conditions or trends
in the Internet industry in general and the B2B e-commerce industry in
particular; announcements by the affiliate companies and their competitors of
technological innovations; announcements by us or our affiliate companies or our
competitors of significant acquisitions, strategic partnerships or joint
ventures; changes in the market valuations of the affiliate companies and other
Internet companies; BAB's capital commitments; negative changes in the public's
perception of the
- 27 -
prospects of e-commerce companies; general economic conditions such as a
recession, or interest rate or currency rate fluctuations; additions or
departures of key personnel of BAB or of affiliate companies; and additional
sales of BAB securities. Many of these factors will be beyond BAB's control.
These factors may decrease the market price of BAB's Common Stock, regardless of
operating performance. In the past, securities class action litigation has often
been brought against a company following periods of volatility in the market
price of its securities. BAB may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources, which could have a material adverse effect
on BAB's business, operating results and financial condition.
BAB Stockholders may experience dilution of their ownership interests due to the
issuance of additional shares of our common stock.
We may in the future issue previously authorized and unissued securities
which will result in the dilution of the ownership interests of existing
stockholders. In particular, we may issue additional shares of its common stock
in connection with:
o the hiring of additional personnel;
o future acquisitions;
o for other valid business purposes within the discretion of the Board
of Directors.
The influx of additional shares of BAB common stock into the market may create
downward pressure on the trading price of BAB common stock.
The initial sale or secondary resale of substantial amounts of BAB common
stock in the public markets can have an adverse effect on the market price of
BAB common stock and make it more difficult for us to sell equity securities in
the future at prices deemed appropriate. Since our operations may be funded
through the sale of restricted securities, a significant amount of issued and
outstanding securities may not be eligible for public resale until completion of
holding periods imposed by contract and/or by statute. The resale of these
shares into the public market, or the mere perception that these resales could
occur, could adversely affect the market price of BAB common stock and could
impair our ability to obtain capital through securities offerings.
BAB stock may be delisted from the Nasdaq SmallCap Market.
Prior to the Merger, BAB common stock will be traded on the Nasdaq
SmallCap Market. Due to the change in BAB's business as a result of the Merger
and Spin-off, BAB will be required to reapply for Nasdaq SmallCap Market
listing. Although we believe that this listing application will be approved, it
may not be, in which event BAB's common stock will be quoted on the OTC Bulletin
Board. This market tends to be less liquid and more volatile than the Nasdaq
SmallCap Market, as a result of which BAB's stock may be more prone to
fluctuations in price.
- 28 -
Risks Particular to the Spin-off
These risk factors relate to the historical business of BAB (which
consisted solely of the operations of the "Operating Subsidiaries", i.e., BAB
Operations, Inc., BAB Systems, Inc., My Favorite Muffin Too, Inc. and Brewster's
Coffee, Inc.) and the anticipated future operations of BAB, Inc.
There may not be a significant trading market for BAB, Inc. common stock.
Once the Spin-off is effected, BAB, Inc.'s common stock will trade in the
over-the-counter market on the Nasdaq OTC Bulletin Board. This market tends to
be less liquid than national or regional exchanges or the Nasdaq National or
SmallCap Markets. There are currently no plans, proposals, arrangements or
understandings with any person with regard to the development of a trading
market in the common stock. It is uncertain whether an active trading market in
the common stock will develop, or if such a market develops, that it will be
sustained. In addition, there is a greater chance for market volatility for
securities that trade in on the Bulletin Board as opposed to a national exchange
or quotation system. Consequently, the liquidity of the company's securities is
likely to be limited, both in the number of shares which can be bought and sold
and by delays in the timing of the transactions. In addition, BAB, Inc. expects
limited (if any) coverage by security analysts and news media. All of these
factors could make it difficult to sell BAB, Inc. shares and could tend to
depress the price of BAB, Inc. shares.
BAB has experienced operating losses.
BAB 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, BAB, Inc.
believes that with a renewed focus on franchising and licensing operations and
selected investment in company-owned stores, it will generate revenues
sufficient to exceed the expenses necessary to support its operations in the
foreseeable future.
BAB has grown by acquisitions and BAB, Inc. may continue to do so.
A significant part of the growth in the business of the Operating
Subsidiaries is attributable to business acquisitions. Consequently, operating
results achieved to date may not be indicative of the results that may be
achieved in the future by BAB, Inc. As a result of acquisitions, the business
has expanded in geographic area 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 ability to integrate the operations of acquired businesses is
essential to the future success of BAB, Inc. There can be no assurance as to
BAB, Inc.'s ability to integrate new businesses nor as to its success in
managing the significantly larger operations resulting therefrom. Additionally,
amortization of intangible
- 29 -
assets recorded as a result of the acquisitions will have a significant impact
on future operating results.
BAB has experienced impaired recoverability of intangible assets.
The Operating Subsidiaries have recorded significant intangible assets in
connection with certain acquisitions. Applicable accounting standards require
review of long-lived assets (such as goodwill and other identifiable intangible
assets) 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, BAB recorded a restructuring charge of $1,600,000. Of this
amount, $113,000 related to intangible assets. 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 BAB, Inc. financial results.
BAB, Inc. may not be able to manage continued growth.
The opening and success of franchised Big Apple Bagels, Brewster's Coffee
and My Favorite Muffin stores depends 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 BAB, Inc. and its franchisees, the ability
of BAB, Inc. to successfully manage expansion and to hire and train personnel,
and general economic and business conditions. Not all of the foregoing factors
are within the control of BAB, Inc.
BAB, Inc. may 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 its results of operations and financial condition.
There can be no assurance that BAB, Inc. will be able to manage expanding
operations effectively or that it will be able to attain, maintain, or
accelerate growth.
BAB, Inc. may not have access to additional capital when it needs it.
- 30 -
BAB, Inc. believes that its cash flows from current operations will
provide sufficient working capital to enable BAB, Inc. to meet operating
requirements and compensating cash balance requirements for the foreseeable
future, however, it is possible that additional financing will be required. BAB,
Inc. 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 BAB, Inc. Any future equity financing may result in dilution to
holders of the common stock and any future debt financing may reduce earnings.
If BAB, Inc. 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. As of May 31, 2000 current liabilities exceed
current assets.
BAB, Inc. is dependent on franchisees.
Historically, a significant portion of the revenues of the Operating
Subsidiaries consist of initial franchise fees and continuing royalty payments
from franchisees. Although the Operating Subsidiaries use 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 franchise concepts and
standards. Additionally, no assurance can be given that desirable locations and
acceptable leases can be obtained by franchisees. If franchisees encounter
business or operational difficulties, BAB, Inc.'s revenues will be adversely
affected. The poor performance of any franchisee may also negatively impact BAB,
Inc.'s ability to sell new franchises. Consequently, at present, BAB, Inc.'s
financial prospects are substantially related to the success of the franchise
stores, over which the BAB, Inc. has limited control. There can be no assurance
that BAB, Inc. will be able to successfully attract new franchisees or that the
BAB, Inc.'s franchisees will be able to successfully develop and operate stores.
Although BAB, Inc. monitors franchisees' compliance with ongoing
obligations on the basis of weekly revenue, and BAB, Inc.'s standard franchise
agreement also grants BAB, Inc. 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 BAB, Inc.'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 BAB, Inc.'s business. The franchise agreement gives BAB, Inc. the
choice of seeking legal remedies, which
- 31 -
could be time-consuming and expensive, and terminating the franchisee, which
would diminish BAB, Inc.'s revenue until such time, if ever, as a new franchisee
replaces the terminated franchisee.
BAB, Inc.'s industry is highly competitive.
The food service industry in general, and the fast food/take-out sector in
particular, are highly competitive, and competition is likely to increase. BAB,
Inc. believes that specialty bagel, muffin and coffee retail businesses are
growing rapidly and are likely to become increasingly competitive. BAB, Inc.
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
BAB, Inc. BAB, Inc.'s principal competitors include Bruegger's Bagel Bakery
("Bruegger's"), Einstein/Noah Bagel Corp. ("Einstein") and New World Coffee and
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 BAB, Inc.'s
or its franchisees' sites are located could have a material adverse effect on
the BAB, Inc.'s sales and revenues. BAB, Inc. 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.
The food service industry is impacted by many external trends and pressures.
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 BAB, Inc.'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. Several
prominent bagel store franchisors and operators have experienced significant
losses in recent years, resulting in several bankruptcies and sales. Many of the
factors which contributed to their demise are factors which all affect BAB,
Inc.
BAB, Inc. is subject to extensive government regulation.
BAB, Inc. 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
- 32 -
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.
BAB, Inc. may be unable to recruit or recruit or retain qualified personnel.
BAB, Inc.'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
BAB, Inc. will be able to attract and retain such personnel.
BAB, Inc.'s trademarks and service marks may be challenged.
The trademarks and service marks used by BAB, Inc. 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 BAB, Inc.'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 use of the marks that region and BAB, Inc. and its
franchisees may be materially and adversely affected.
BAB, Inc.'s charter documents and state law contains antitakeover provisions.
Certain provisions of the Delaware General Corporation Law (the "DGCL")
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 DGCL 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.
BAB, Inc. may be subject to penny stock regulations.
In the event BAB, Inc.'s securities are traded on the National Association
of Securities Dealers Electronic Bulletin Board, its 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
- 33 -
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.
The IRS may treat the transaction as taxable.
The Spin-off is intended to be a tax-free distribution pursuant to Section
355 of the Internal Revenue Code to the holders of BAB Common Stock as of the
record date. BAB will not be seeking a ruling from the Internal Revenue Service
("IRS") to determine whether the IRS will treat the Spin-off as a tax-free event
to BAB and its shareholders. The IRS could challenge BAB's position that the
Spin-off qualifies as a tax-free distribution and deny tax-free treatment,
creating a substantial tax liability to BAB's shareholders. If the Spin-off
fails to qualify as tax-free, the distribution of BAB, Inc. stock to the BAB
shareholders will be treated as a distribution, taxable to the shareholders as a
dividend to the extent of BAB's current and accumulated earnings and profits.
PRO FORMA FINANCIAL INFORMATION
The following tables set forth unaudited pro forma financial and operating
data for the three months ended February 27, 2000. This information is presented
as if the completion of the Merger and the Spin-off occurred as of February 27,
2000. Pro forma information giving effect to the Merger and the Spin-off as if
the Merger and the Spin-off took place as of December 31, 1999 is not meaningful
and therefore is not presented. The pro forma information is unaudited and is
not necessarily indicative of what the financial position and results of
operations of BAB or BAB, Inc. would have been as of and for the period
indicated, nor does it purport to represent the financial position and results
of operations for future periods.
- 34 -
BAB Holdings, Inc.
Pro Forma Condensed Balance Sheet
BAB Holdings,
Inc. Planet Zanett Planet Zanett
Pro Forma
Historical Historical As adjusted
As of As of Pro Forma As of
Feb. 27,2000 Feb. 27,2000 Adjustment Feb. 27,2000
----------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 214,411 $ 98 $ 2,385,687 $ 2,600,098
Receivables 2,073,595 -673,595 1,400,000
Assets held for sale 1,191,236 -1,191,236 0
Other current assets 1,069,047 -1,069,047 0
---------------------------------------------------------------
Total current assets 4,548,289 98 -548,191 4,000,098
---------------------------------------------------------------
Property and equipment, net of accumulated deprecation 1,904,984 -1,904,984 0
Goodwill, net of accumulated amortization 2,493,233 -2,493,233 0
Franchise contract rights, net of accumulated amortization 1,790,392 -1,790,392 0
Investment in closely held companies 100 100
Other 1,861,805 -1,861,805 0
---------------------------------------------------------------
Total Assets $12,598,703 $ 98 $-8,598,505 $ 4,000,198
===============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,175,335 $ 5,771 $-2,169,564 $ 5,771
Current portion of long-term debt 1,658,210 -1,658,210 0
Other 738,493 -738,493 0
---------------------------------------------------------------
Total current liabilities 4,572,038 5,771 -4,566,267 5,771
---------------------------------------------------------------
Noncurrent liabilities 0 0
Deferred liabilities 706,185 -706,185 0
Long-term debt, net of portion included in current liabilities 1,204,338 -1,204,338 0
---------------------------------------------------------------
Total noncurrent liabilities 1,910,523 0 -1,910,523 0
---------------------------------------------------------------
Stockholders' Equity
Common stock 13,507,669 -13,507,569 100
Additional paid-in capital 1,187,696 2,812,304 4,000,000
Accumulated deficit -8,535,260 -5,673 8,529,587 -5,673
Treasury stock at cost -43,963 43,963 0
---------------------------------------------------------------
6,116,142 -5,673 -2,121,715 3,994,427
---------------------------------------------------------------
Total Liabilities and Stockholders' Equity $12,598,703 $ 98 $-8,598,505 $ 4,000,198
===============================================================
- 35 -
BAB Holdings, Inc.
Pro Forma Condensed Income Statement
Planet Zanett
BAB Holdings, Inc. Planet Zanett Pro Forma,
Historical Historical As adjusted
For the three months For the three months Pro Forma For the three months
Ended Feb. 27,2000 Ended Feb. 27,2000 Adjustment Ended Feb. 27,2000
---------------------------------------------------------------------------------
Revenues
Net sales by Company-owned stores $2,265,392 0 $-2,265,392 0
Royalty fees from franchised stores 752,096 0 -752,096 0
Franchise and area development fees 239,400 0 -239,400 0
Licensing fees and other income 245,737 0 -245,737 0
---------------------------------------------------------------------------------
Total Revenues 3,502,625 0 -3,502,625 0
---------------------------------------------------------------------------------
Operating Costs and Expenses
Food, beverage and paper costs 655,840 0 -655,840 0
Store payroll and other operating expenses 1,560,043 0 -1,560,043 0
Selling, general and administrative expenses
Payroll-related expenses 506,450 0 -506,450 0
Occupancy 83,351 0 -83,351 0
Advertising and promotion 52,817 0 -52,817 0
Professional service fees 78,856 0 -78,856 0
Franchise-related expenses 18,842 0 -18,842 0
Depreciation and amortization 212,354 0 -212,354 0
Travel 33,980 0 -33,980 0
Other 212,763 0 -212,763 0
---------------------------------------------------------------------------------
Total Operating Costs and Expenses 3,415,296 0 -3,415,296 0
---------------------------------------------------------------------------------
Income before interest 87,330 0 -87,330 0
Interest Expense -82,556 0 82,556 0
Interest Income 15,881 0 -15,881 0
---------------------------------------------------------------------------------
Net Income 20,655 0 -20,655 0
=================================================================================
Notes to BAB Holdings, Inc. Pro Forma Financial Statements
o Planet Zanett Corporate Incubator Inc. will merge with and into PZ
Acquisition, Inc. The independent existence of Planet Zanett Corporate
Incubator Inc. will cease and PZ Acquisition, Inc. will be the surviving
corporation.
o Messrs. Guazzoni and McCarthy will contribute $4,000,000 of capital to
Planet Zanett Corporate Incubator, Inc.
o Planet Zanett Corporate Incubator, Inc. will make a loan of $1,400,000 to
BAB, Inc. which will be used to retire BAB Holdings, Inc. current bank
line of credit with CIB Bank.
o All of the assets of BAB Holdings, Inc. related to its current business
operations will be distributed to BAB, Inc., which will assume all
liabilities of BAB Holdings, Inc. related to its current business
operations.
- 36 -
BAB, Inc.
Pro Forma Condensed Balance Sheet
Adjustment,
Dividend of BAB, Inc.
BAB Holdings, Inc. Pro Forma,
BAB, Inc. Historical As adjusted
As of Feb. 27,2000 As of Feb. 27,2000 As of Feb. 27,2000
---------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 0 $ 214,411 214,411
Receivables 0 2,073,595 2,073,595
Assets held for sale 0 1,191,236 1,191,236
Other current assets 0 1,069,047 1,069,047
---------------------------------------------------------
Total current assets 0 $ 4,548,289 $ 4,548,289
---------------------------------------------------------
Property and equipment, net of accumulated deprecation 0 1,904,984 1,904,984
Goodwill, net of accumulated amortization 0 2,493,233 2,493,233
Franchise contract rights, net of accumulated amortization 0 1,790,392 1,790,392
Investment in closely held companies 0
Other 0 1,861,805 1,861,805
---------------------------------------------------------
Total Assets 0 12,598,703 12,598,703
=========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses 0 2,175,335 2,175,335
Current portion of long-term debt 0 1,658,210 1,658,210
Other 0 738,493 738,493
---------------------------------------------------------
Total current liabilities 0 $ 4,572,038 $ 4,572,038
---------------------------------------------------------
Noncurrent liabilities
Deferred liabilities 0 706,185 706,185
Long-term debt, net of portion included in current liabilities 0 1,204,338 1,204,338
---------------------------------------------------------
Total noncurrent liabilities 0 1,910,523 1,910,523
---------------------------------------------------------
Stockholders' Equity
Common stock 0 13,507,669 13,507,669
Additional paid-in capital 0 1,187,696 1,187,696
Accumulated deficit 0 -8,535,260 -8,535,260
Treasury stock at cost 0 -43,963 -43,963
---------------------------------------------------------
0 6,116,142 6,116,142
---------------------------------------------------------
Total Liabilities and Stockholders' Equity 0 $12,598,703 $12,598,703
=========================================================
- 37 -
BAB, Inc.
Pro Forma Condensed Income Statement
Adjustment,
Dividend of BAB, Inc.
BAB Holdings, Inc. Pro Forma,
BAB, Inc. Historical As adjusted
For the three months For the three months For the three months
Ended Feb. 27,2000 Ended Feb. 27,2000 Ended Feb. 27,2000
-------------------- --------------------------------------------------
Revenues
Net sales by Company-owned stores 0 $2,265,392 2,265,392
Royalty fees from franchised stores 0 752,096 752,096
Franchise and area development fees 0 239,400 239,400
Licensing fees and other income 0 245,737 245,737
-------------------- --------------------------------------------------
Total Revenues 0 3,502,625 3,502,625
-------------------- --------------------------------------------------
Operating Costs and Expenses
Food,beverage and paper costs 0 655,840 655,840
Store payroll and other operating expenses 0 1,560,043 1,560,043
Selling,general and administrative expenses
Payroll-related expenses 0 506,450 506,450
Occupancy 0 83,351 83,351
Advertising and promotion 0 52,817 52,817
Professional service fees 0 78,856 78,856
Franchise-related expenses 0 18,842 18,842
Depreciation and amortization 0 212,354 212,354
Travel 0 33,980 33,980
Other 0 212,763 212,763
-------------------- --------------------------------------------------
Total Operating Costs and Expenses 0 3,415,296 3,415,296
-------------------- --------------------------------------------------
Income before interest 0 87,330 87,330
Interest Expense 0 -82,556 -82,556
Interest Income 0 15,881 15,881
-------------------- --------------------------------------------------
Net Income 0 20,655 20,655
==================== ==================================================
Notes to BAB, Inc. Pro Forma Financial Statements
o All of the assets of BAB Holdings, Inc. related to its current business
operations will be transferred to BAB, Inc. which will assume all
liabilities of BAB Holdings, Inc. related to its current business
operations.
- 38 -
INFORMATION CONCERNING BAB
Description of Business
Overview
BAB 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 May 28, 2000, BAB had 247 units in operation
in 28 states, two Canadian provinces, Peru and Egypt. BAB additionally derives
income from the sale of its trademark bagels, muffins and coffee through
non-traditional 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 BAB-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 BAB'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. BAB'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 BAB-owned
and many of the franchised units.
BAB has grown significantly since its initial public offering in November
1995 through growth in franchise units, BAB-store development, acquisitions and
the development of alternative distribution channels for its branded products.
BAB 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, BAB
immediately added 60 franchise and five BAB-operated units. Through this
acquisition BAB 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, BAB 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 BAB-owned tri-branded stores
and three will continue to operate under the Jacobs Bros. Bagels trade name.
Locations
The following table sets forth the states and provinces in which BAB's
units were located as of May 28, 2000:
- 39 -
COMPANY
STATE/PROVINCE OWNED FRANCHISED LICENSED TOTAL
UNITED STATES:
Alabama 2 2
California 3 4 2 9
Colorado 3 3
Connecticut 1 2 3
Florida 4 2 6
Georgia 3 4 7
Illinois 7 29 12 48
Indiana 7 7
Iowa 9 9
Kentucky 2 2
Maryland 1 1
Michigan 30 3 33
Minnesota 7 1 8
Missouri 9 9
Nebraska 3 3
Nevada 2 5 7
New Jersey 13 2 15
New York 2 3 5
North Carolina 5 5
Ohio 2 6 2 10
Oregon 1 1
Pennsylvania 10 10
Rhode Island 2 2
Texas 5 5
Utah 1 1
Virginia 1 1
Washington 2 2
Wisconsin 6 16 2 24
CANADA:
British Columbia 1 2 3
Ontario 2 2
PERU: 3 3
EGYPT: 1 1
TOTAL 18 172 57 247
Store Operations
BIG APPLE BAGELS--Big Apple Bagels franchised and BAB-owned stores daily
bake "from scratch" over 18 varieties of fresh bagels and offer up to 18
varieties of cream cheese spreads. Licensed units under Host Marriott, and
Choice Picks Food Courts serve BAB'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 BAB-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 BAB-owned or franchised
store ranges from 1,500 to 2,000 square feet. BAB'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 BAB-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 BAB-owned stores
bake 20 to 25 varieties of muffins daily, from over 400 recipes, plus a variety
of bagels. They also
- 40 -
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
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
BAB 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 1% contribution based on net
sales. MFM franchisees pay a 1% net sales contribution to a national marketing
fund. BAB 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.
BAB 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."
BAB'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. BAB'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. BAB
currently advertises its franchising opportunities at franchise trade shows, on
the internet and in directories, newspapers and business opportunity magazines
worldwide. In addition, a substantial number of prospective franchisees contact
BAB as a result of patronizing an existing store.
- 41 -
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 BAB on a national level or solely in a
specific market or region. BAB believes that because the industry is extremely
fragmented, there is a significant opportunity for expansion in the bagel,
muffin and coffee concept chains.
BAB 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 BAB. There is currently not
a major national competitor in the muffin business, but there are a number of
local and regional operators. Additionally, BAB competes directly with a number
of national, regional and local coffee concept stores and brandnames.
BAB 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, BAB'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
BAB. In addition, BAB believes that the start-up costs associated with opening a
retail food establishment offering similar products on a stand-alone basis are
competitive with the start-up costs associated with opening its concept stores
and, accordingly, such start-up costs are not an impediment to entry into the
retail bagel, muffin or coffee businesses.
BAB believes that its stores compete favorably in terms of taste, food
quality, convenience, customer service, and value, which BAB 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. BAB attempts to manage or adapt to these
factors, but not all such factors are within BAB's control and such factors
could cause BAB and some or all of its area developers and franchisees to be
adversely affected.
BAB competes for qualified franchisees with a wide variety of investment
opportunities in the restaurant business and in other industries. BAB'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
BAB-owned stores but also by the performance of its franchise stores, over which
BAB has limited control.
- 42 -
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 BAB to its franchisees pursuant to franchise
agreements, and BAB 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 BAB, who sold the
license to a third party in 1999. Mr. Stolzer served as a consultant to BAB
through February 1999. In February 1999 BAB 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.
BAB 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 BAB'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 BAB's policy to pursue registration
of its marks whenever possible and to vigorously oppose any infringement of its
marks.
Government Regulation
BAB 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 BAB-owned or
franchise store, and failure to remain in compliance with applicable regulations
could cause the temporary or permanent closing of an existing store. BAB
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 BAB and its
franchisees.
BAB'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 BAB 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. BAB believes its UFOCs,
together with any applicable state versions or supplements, complies with both
the FTC guidelines and all applicable state laws regulating franchising in those
states in which it has offered franchises.
BAB 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.
- 43 -
Employees
As of May 31, 2000, BAB employed 261 persons. Of these individuals, 229
work in BAB-owned stores and the majority are part-time employees. The remaining
employees are responsible for oversight of franchising and BAB-store operations.
None of BAB's employees are subject to any collective bargaining agreements, and
management considers its relations with its employees to be good.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
BAB was started in November 1992, and, at May 28, 2000, had 18
company-owned stores and 229 franchised and licensed units. Units in operation
at May 31, 1999 included 26 company-owned stores and 253 franchised and licensed
units. System-wide revenues in the first six months of fiscal 2000 reached $37.5
million compared to $39.5 million in the year ago period. BAB's revenues are
derived primarily from the operation of company-owned stores, initial franchise
fees and ongoing royalties paid to BAB by its franchisees. Additionally, BAB
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 (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, while six
stores were sold during the first six months of fiscal 2000. The remaining five
stores are expected to be sold during the latter half of fiscal year 2000. In
addition BAB 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., BAB has controlled expenses in
payroll, occupancy and overhead costs in the corporate offices. At May 28, 2000,
BAB had 32 employees at the corporate level who oversee operations of the
franchise, licensed and company-owned store operations, down from 43 at May 31,
1999.
Results of Operations
Six Months Ended May 28, 2000 versus Six Months Ended May 31, 1999. Total
revenues decreased 3% to $6,903,000 in the first half of fiscal 2000 from
$7,135,000 in the prior year period. Net sales by Company stores totaled
$4,588,000 during the second quarter of fiscal 2000 compared to $4,831,000 in
the second quarter of fiscal 1999. The change in company store sales
- 44 -
relates to the number of stores in operation. The number of Company stores in
operation in the six months ended May 28, 2000 were 18 stores in operation for
the full six months and 6 additional stores open for varying portions of the six
month period. For the six months ended May 31, 1999 there were 18 stores owned
and operated for six months and 8 additional stores open for four months of the
six month period. Royalties are 4% lower in 2000 due primarily to the number of
franchised stores in operation for the six months of 2000 versus fiscal 1999.
Licensing fees and other income in total increased $12,000 to $521,000 from the
year-ago period as BAB continues to leverage its three strong brands. Finally,
franchise and area development fee revenue increased 29% to $271,000 from the
year-ago period because of the timing of store openings and international deals.
Costs associated with company-owned store operations as a percentage of sales
increased 4% in the first six months of fiscal 2000 versus 1999. However, stores
that have been identified as part of the restructuring program contributed a
combined loss of $175,000 for the most recent six month period. On an absolute
basis, selling, general and administrative expenses net of depreciation and
amortization were $229,000 lower in 2000 than in 1999. While on a percentage
basis, S,G&A expenses net of depreciation and amortization were at 28.8% in 2000
versus 31.1% in 1999. Loss from operations was ($40,000) in the six months of
fiscal 2000 versus a loss of ($204,000) generated in the prior year period.
Interest expense increased to $168,000 from $132,000 in the year ago period as
BAB increased its long term debt to finance the purchase of the Jacobs Bros.
assets in February 1999. This is partially mitigated as BAB continues to reduce
its borrowings under its line of credit. Net loss was ($174,000) in the six
months ended May 28, 2000 versus a loss of ($238,000) in the year-ago period.
Dividends on the Preferred Stock of $77,000 were accumulated during the year ago
period. Net loss per share for the six months ended May 28, 2000 was ($0.08)
versus a loss per share for the year-ago period of ($0.22) on both a basic and
diluted basis. Average shares outstanding increased by 831,000 shares due to the
conversion of 60,000 shares of Preferred Stock to 818,000 shares of Common Stock
on October 21, 1999.
Fiscal Year 1999 versus 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 BAB-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.
- 45 -
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
Six Months Ended May 28, 2000 versus Six Months Ended May 31, 1999. The
net cash provided by operating activities totaled $152,000 during the first six
months of fiscal 2000. Cash provided represents the net loss, adjusted for
depreciation and amortization of $489,000, and is offset principally by an
increase in notes receivable of $155,000, a decrease in accounts payable of
$195,000 and a decrease in deferred franchise fee revenue of $88,000. Accounts
receivable and inventories were reduced by $163,000 and $75,000. The net cash
provided in operating activities in the year-ago quarter totaled $147,000.
Investing activities provided $631,000 during the six months ended May 28, 2000,
and consisted of sales of Company stores and collection of notes receivable. In
the year ago period, investing activities used $436,000 because of the Jacobs
Bros. acquisition. Cash used in financing activities was $448,000 during the six
months ended May 28, 2000 and relates to repayments under BAB's Line of Credit
and other borrowings. During the period ended May 31, 1999, cash used by
financing activities of $151,000 relates primarily to debt repayments offset by
the borrowings received to finance the Jacobs Bros. acquisition. The net
increase in cash and equivalents was $335,000 in fiscal 2000 versus a decrease
in cash and equivalents of $441,000 in the period ended May 31, 1999.
Fiscal Year 1999 versus Fiscal Year 1998. 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
- 46 -
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. BAB Paid down its
line of credit with its bank by $345,000 and also repaid $111,000 on its
amortizing loan. BAB 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.
Selected Historical Financial Data
Six Months Ended
May 28,
STATEMENT OF EARNINGS DATA (Unaudited)
(In thousands, except per share amounts) 2000 1999 1999
------------ ------------ ------------
Net Sales $ 4,588 $ 4,831 $ 10,311
Fees and Other Income 2,315 2,304 4,630
Total Revenues 6,903 7,135 14,941
Total Assets 12,010,385 14,478,999 12,854,578
Operating Expenses:
Food, beverage and paper costs 1,378 1,506 3,149
Store payroll and other operating
costs 3,084 2,984 6,601
Selling, general and 2,481 2,850 6,978
administrative expenses
Total Operating Costs and Expenses 6,943 7,340 18,329
Long Term Debt 1,161,959 23,079 1,255,862
Operating Income (loss) before interest (40) (204) (3,388)
Interest Expense (168) (132) (292)
Interest and other Income 34 98 215
Net Income (loss) (174) (238) 3,465
Basic and diluted earnings (0.08) (0.22) (2.32)
(loss) per common share
Average number of shares 2,237,557 1,406,774 1,496,323
outstanding-basic and diluted
Year Ended November 30,
STATEMENT OF EARNINGS DATA
(In thousands, except per share amounts) 1998 1997 1996 1995
------------ ------------ ------------ ------------
Net Sales $ 8,930 $ 9,846 $ 3,484 $ 563
Fees and Other Income 5,619 4,320 2,839 1,470
Total Revenues 14,549 14,166 6,324 2,033
Total Assets 14,444,991 14,627,246 11,147,987 8,491,632
Operating Expenses:
Food, beverage and paper costs 2,998 3,310 1,222 191
Store payroll and other operating
costs 5,213 5,859 1,753 283
Selling, general and 5,930 6,566 3,318 1,979
administrative expenses
Total Operating Costs and Expenses 14,034 17,572 6,944 2,454
Long Term Debt 1,759,954 1,676,895 1,758 236,294
Operating Income (loss) before interest 515 (3,406) (621) (421)
Interest Expense (206) (75) (5) (31)
Interest and other Income 173 75 317 16
Net Income (loss) 647 (4,050) (321) (436)
Basic and diluted earnings 0.37 (3.28) (0.26) (0.77)
(loss) per common share
Average number of shares 1,751,373 1,236,802 1,227,271 563,819
outstanding-basic and diluted
Market Price Information
- 47 -
The following table sets forth the quarterly high and low sale prices for
BAB's Common Stock, as reported in the Nasdaq SmallCap Market for the two years
ended November 28, 1999 and the first two quarters of 2000. The Company's
Common Stock is traded under the symbol "BAGL."
YEAR ENDED NOVEMBER 30, 1998
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
YEAR ENDED NOVEMBER 26, 2000
First quarter 1.00 2.63
Second quarter 1.06 3.00
All share prices reflect the 1:6 reverse split of the Common Stock effected on
December 10, 1999. No dividends have been paid.
Securities Ownership of Certain Beneficial Owner and Management
The following table sets forth as of June 30, 2000 the record and
beneficial ownership of Common Stock held by (i) each person who is known to BAB
to be the beneficial owner of more than 5% of the Common Stock of BAB; (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 BAB 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 BAB beneficially owned by each such person as of June 30, 2000
includes the number of shares which such person has the right to acquire within
sixty (60) days after such date.
Name Shares Percent
Michael W. Evans 954,914(1)(3) 42.2
8501 West Higgins Road
Chicago, IL 60631
Michael K. Murtaugh 912,387(2)(3) 40.5
8501 West Higgins Road
Chicago, IL 60631
Holdings Investments, LLC 818,491(3) 36.6
220 DeWindt Road
Winnetka, IL 60093
- 48 -
Name Shares Percent
Aladdin International Inc. 169,246 7.6
3806 Abbott Avenue South
Minneapolis, MN 55410
David L. Epstein 18,249 (4) *
9700 Higgins Road, Suite 630
Rosemont, IL 60018
Tom J. Fletcher 16,224 (5) *
8501 West Higgins Road
Chicago, IL 60631
Robert B. Nagel 2,165 (6) *
516 Elder Drive
Winnetka, IL 60093
Mark E. Majewski 2,499 (7) *
8501 West Higgins Road
Chicago, IL 60631
All executive officers and 1,087,947(1)(2)(3)(4)(5)(6)(7)
directors as a group
(7 persons)
- ----------
* 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 1,916 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 15,833 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 2,499 shares that may be acquired pursuant to currently
exercisable options.
- 49 -
INFORMATION CONCERNING PLANET ZANETT
Description of Business
Overview
Planet Zanett was originally organized under the laws of the state of
Nevada on March 21, 1996 under the name Willow Bay Associates, LLC ("Willow
Bay"). Willow Bay changed its name to Planet Zanett Corporate Incubator, LLC on
June 12, 2000 and on July 25, 2000 was merged into Planet Zanett Corporate
Incubator, Inc., a Nevada corporation, in order to convert to corporate form.
Since inception, Planet Zanett has provided financial, managerial and business
plan consulting services to concept-stage and development-stage e-commerce
companies.
Growth of the Internet and B2B E-Commerce. People and businesses are
increasingly relying on the Internet to access and share information as well as
to purchase and sell products and services. A rapidly growing number of
businesses use the Internet to market and sell their products and streamline
business operations.
The Internet's substantial growth creates tremendous market opportunities
for companies that connect buyers and sellers, and companies that create
applications and systems for traditional businesses wishing to engage in
e-commerce. Historically, B2B e-commerce has occurred through electronic data
interchange over proprietary networks, which are costly and available only to a
limited number of participants. The Internet provides an open platform with
common communication protocols to build efficient, cost-effective networks that
facilitate e-commerce. As Internet-based network reliability, speed and security
have improved in recent years and as more businesses have connected to the
Internet, traditional businesses are beginning to use the Internet to conduct
e-commerce and exchange information with customers, suppliers and distributors.
While the business-to-consumer e-commerce market currently is significant in
size, the B2B e-commerce market is larger and is predicted to grow dramatically.
Planet Zanett believes the B2B e-commerce market is beginning a period of
rapid development and growth for the following reasons:
Expanded Access to New and Existing Customers and Suppliers. In the past,
businesses have relied on their sales forces and purchasing departments to
develop and maintain customer and supplier relationships. This model is
constrained by the time and cost required to exchange current information
regarding requirements, prices and product availability, and the difficulty of
cost-effectively locating new customers and suppliers and managing existing
relationships. Traditional businesses can leverage the Internet to obtain
real-time, accurate information regarding requirements, prices and products to a
global audience, including suppliers, customers and business partners. This
makes it easier for businesses to attract new customers and suppliers, improve
service and increase revenue.
- 50 -
Increased Efficiency and Reduced Cost. Traditional businesses can utilize
the Internet to automate their internal operations, including manufacturing,
finance, sales and purchasing functions. The Internet can also be used to
increase information flow and access throughout an organization. This increases
operational efficiency by reducing the time, costs and resources required to
transact business, lowering inventory levels and procurement costs, and
improving responsiveness to customers and suppliers.
Challenges Facing Emerging B2B E-Commerce Companies
Planet Zanett believes emerging B2B e-commerce companies face certain
challenges, including:
Developing a Successful Business Model. B2B e-commerce companies must
develop business models that capitalize on the Internet's capabilities to
provide solutions to traditional companies in target industries. This requires
industry-specific expertise because each industry and market has distinct
characteristics including existing distribution channels, levels of
concentration and fragmentation among buyers and sellers, procurement policies,
product information and customer support requirements. B2B e-commerce companies
also require Internet expertise in order to apply their capabilities to their
target industries.
Building Corporate Infrastructure. Many B2B e-commerce companies have been
recently formed and require sales and marketing, executive recruiting and human
resources, information technology, and finance and business development
assistance. These companies also require capital and significant resources and
may be required to build technological capabilities and internal operations.
Finding the Best People. Entrants into the B2B e-commerce market require
management with expertise in the applicable market, an understanding of the
Internet's capabilities, the ability to manage rapid growth and the flexibility
to adapt to the changing Internet marketplace. Planet Zanett believes very few
people have these skills, and those that do are highly sought after. To be
successful, companies must attract and retain highly qualified personnel. Planet
Zanett believes most successful B2B e-commerce companies will rapidly identify
market demands and move quickly to satisfy those demands. B2B e-commerce
companies that accomplish this goal may establish new standards, gain market
share, secure critical partnerships and create a brand name, making competition
more difficult for new entrants. In addition, B2B e-commerce companies must keep
abreast of Internet and industry-specific developments and adapt to a rapidly
changing environment.
The Internet Incubator Business
Planet Zanett divides its Internet Incubator operations into three
distinct categories: (i) businesses which develop Web-based applications for
corporate transactions, (ii) Asset Based Internet(TM) businesses which Planet
Zanett forms in conjunction with a non-Web business to develop internet
applications for that non-web business that can be marketed to other industry
participants, and (iii) existing businesses that need to transfer a portion or
all of their business operations to the Internet. While Planet Zanett may not
provide all incubation services to this last category of affiliate company,
- 51 -
significant investments are being made in such companies in order to provide
them with services necessary for their growth.
Planet Zanett is actively engaged in building a network of businesses,
both domestically and abroad, with significant Internet features and is building
applications which offer significant growth opportunities. Generally, Planet
Zanett will work with two types of businesses: early stage businesses that have
been started by others and have sought the financial and management assistance
of Planet Zanett, and established companies which require Internet solutions to
existing or potential business issues. If Planet Zanett wishes to enter a market
in which it cannot locate an attractive affiliate company candidate, a new
company may be created or assistance may be rendered to an affiliate company to
enable penetration into the new market. Planet Zanett will generate income by
charging affiliate companies for use of facilities and equipment, network
administration, telecommunications, business plan development and personnel and
services.
Planet Zanett's operating strategy is for Planet Zanett or the Partnership
to acquire a significant equity interest in, and for Planet Zanett to provide
the services listed above to, the selected businesses. Planet Zanett will
integrate affiliate companies into a collaborative network that leverages
collective knowledge and resources. With the goal of holding the affiliate
company interests for the long-term, Planet Zanett will use these collective
resources to actively develop the business strategies, operations and management
teams of affiliate companies. Planet Zanett's resources include the experience,
industry relationships and specific expertise of its management team and
affiliate companies. Planet Zanett intends to take an active role in the
management and development of these businesses. Planet Zanett and/or the
Partnership also may participate in subsequent rounds of financing, involving
potentially larger investments.
Each business will be managed as part of an integrated support network of
affiliate companies that build on Planet Zanett's initial support and develop
interrelationships among themselves, thereby accelerating their growth and
development. Planet Zanett has established and will continue to establish
relationships with companies outside of its network that will enable them to
deliver additional services to affiliate companies that they might not otherwise
be able to obtain.
The current management team consists of Mr. Claudio Guazzoni and Mr.
David McCarthy. Additional key personnel will join Planet Zanett in the future.
In addition, Planet Zanett will have an Advisory Board consisting of
knowledgeable and successful executives from a variety of backgrounds.
Implementation of the Operating Strategy
There are four steps to the implementation of Planet Zanett's operating
strategy: (i) create or identify companies with the potential to become industry
leaders, acquire significant interests in such companies and incorporate them
into Planet Zanett's collaborative network; (ii) provide strategic guidance and
operational support to affiliate companies; and (iv) promote collaboration among
affiliate companies.
Create or Identify Companies With the Potential to Become Market Leaders.
Planet Zanett seeks to acquire an interest in Internet companies that offer a
combination of a potentially
- 52 -
compelling market opportunity, a strategic plan for attempting to maximize the
opportunity, and a management team with the necessary experience to execute that
plan. Planet Zanett looks for companies that have a strategy designed to create
value for the end users of the products or services offered, and that have an
opportunity to be profitable.
Planet Zanett seeks long-term relationships with companies managed by
individuals who recognize that creating a technology business requires a focus
on teamwork and operational excellence, developing relationships with other
technology-based companies, both within and outside of the company's industry,
and managing processes in areas as diverse as brand development, sales,
marketing, management and technology. Planet Zanett seeks individuals with
management experience in the industry in which their company will operate.
Industry experience is a key differentiating factor, enabling affiliate
companies to enter industries with the experience necessary to effectively
operate and grow through their extensive network of contacts.
When evaluating whether to enter a market by building a company or
acquiring an interest in an existing company, Planet Zanett considers the
following factors:
o Inefficiency. Whether the industry suffers from inefficiencies that
may be alleviated through e-commerce. The relative amount of
inefficiency is considered, as more inefficient industries present
greater profit potential.
o Competition. The amount of competition that a potential affiliate
company faces from e-commerce and traditional businesses.
o Industry Potential. When evaluating a potential affiliate company,
the number and dollar value of transactions in its corresponding
industry is considered by evaluating the incremental efficiency to
be gained from conducting or supporting transactions online and
estimating the potential to transfer transactions online. By
considering these factors, Planet Zanett can focus on industries for
which the leading industry participant can eventually generate
significant dollar volumes of profit.
o Centralized Information Sources. When evaluating a potential
affiliate company, Planet Zanett considers whether the industry has
product catalogs, trade journals and other centralized sources of
information regarding products, prices, customers and other factors.
The availability of this information makes it easier for a company
to facilitate communication and transactions.
o Service Provider Profit Potential. When evaluating service
providers, Planet Zanett examines the size of the market
opportunity, the profit potential in serving the target market and
whether the service provider can provide assistance to Planet
Zanett's affiliate companies.
o Industry Leader. Planet Zanett will partner with a company only if
it believes that the company has the products and skills to become a
leader in its industry.
- 53 -
o Significant Ownership. Planet Zanett considers whether it will be
able to obtain a significant equity position in the company and
exert influence over the company.
o Network Synergy. The degree to which a potential affiliate company
may contribute to Planet Zanett's network and benefit from the
network and operational resources is considered.
o Management Quality. The overall quality and industry expertise of a
potential affiliate company's management is assessed.
Provide Strategic Guidance and Operational Support to Affiliate Companies.
Through the collective experience of Planet Zanett's management team, Planet
Zanett promotes the development of the incubated businesses by offering business
development services that cover core management disciplines and other services
such as:
Website Development Services. Planet Zanett will provide affiliate
companies with website development services. Planet Zanett will acquire web
development companies or contract with web developers or develop in-house
capabilities to provide web development services to affiliate companies.
Executive Matching. Planet Zanett believes a strong management team is
essential to implementing a business plan and creating a successful business. In
those instances in which Planet Zanett identifies a concept and forms and funds
a company to develop the concept, Planet Zanett will recruit management for the
company who can implement the plan.
Additionally, Planet Zanett is able to apply the experience of both the
management team and network of affiliate companies to:
o Review and formulate business models;
o Create specific performance benchmarks;
o Provide introductions to strategic partners;
o Advise on, and facilitate the completion of secondary rounds of
financing; and
o Develop Internet businesses in joint ventures with non-technology
companies.
Although Planet Zanett recognizes that the development of early stage
businesses are subject to material risks, value in the affiliate companies is
expected to increase when those companies:
o commence initial stage operations and begin to execute on their
business plans;
o enter later stages of operations and begin to realize significant
revenues and capture meaningful market share;
o secure subsequent rounds of venture funding at higher levels of
valuation;
o complete initial public offerings; or
o are sold to a third party.
Promote Collaboration Among Affiliate Companies. One of the principal
goals of Planet Zanett's network is to promote innovation and collaboration
among affiliate companies,
- 54 -
which will result in shared knowledge and business contacts among affiliate
companies and the formation of numerous strategic alliances.
Funding
Planet Zanett's affiliates will have access to funding by Planet Zanett
and/or the Partnership. After a detailed analysis of an affiliate company's
business plan, Planet Zanett will determine whether to provide funding. If
funding is provided, Planet Zanett or the Partnership will deposit money into an
escrow account earmarked for that affiliate company. A pre-determined amount of
money will be released monthly to the affiliate company for so long as the
affiliate company meets predetermined goals. If the affiliate company fails to
meet its goals, further funding may be withheld until the problem is corrected.
After a detailed analysis of the situation, if Planet Zanett believes the
affiliate company will not meet expectations, Planet Zanett will discontinue
funding of that affiliate company.
Investments in affiliate companies will be made in one of two ways. If
Planet Zanett intends to maintain a controlling interest in the affiliate
company for the foreseeable future, it may hold the interest in that company
directly. The Partnership will hold the interests in other affiliate companies.
The general partner of the Partnership, PZAM, holds a 20% interest in the
Partnership. The remainder of the Partnership's capital will come from private
investors. PZAM will receive a management fee of 20% of the net new profits of
the Partnership in addition to its parnership interest.
Generally capital and services enable Planet Zanett or the Partnership to
secure a significant interest in the affiliate company. While Planet Zanett or
the Partnership remains a significant stockholder of an affiliate company,
varying degrees of control are exercised over its operations by retaining some
or all of the following:
o approval rights over significant corporate decisions such as annual
budgets, executive compensation, indebtedness, capital expenditures
and new securities issuances;
o the right to establish and maintain the size of the Board of
Directors;
o the right to elect one or more members to the Board of Directors;
o the right to participate in future fundings;
o certain enhanced voting rights; and
o the right to designate outside accountants and approval rights over
attorneys, public relations firms and other outside consultants.
- 55 -
Benefits Of Our Services
Affiliation with Planet Zanett will provide affiliate companies with the
following benefits:
Hands-on strategic, operational and technology expertise. Planet Zanett's
management team is experienced in assisting technology companies in the
implementation and understanding of areas such as strategic planning, sales,
marketing, partnership strategy, capital planning, brand development,
management, technology implementation, negotiations and divestiture/acquisition
planning.
Speed and flexibility. As entrepreneurs who are experienced in the capital
raising process, Planet Zanett's management team recognizes the importance of
rapid yet prudent funding decisions. The goal is to make funding decisions and
to deliver funds to those companies which Planet Zanett chooses to fund within
several weeks of receiving a business plan and completing due diligence review
of the prospective candidate. In addition to acting quickly and prudently,
Planet Zanett believes in providing a high degree of flexibility to affiliate
companies.
Network of companies and people. In a time where marketing, capital,
technology and partnerships are critical, Planet Zanett believes that people and
relationships remain the most important elements of success for development
stage enterprises. Planet Zanett's management team has participated in
transactions involving alliances among technology companies and possess an
extensive contact list consisting of individuals who work in the technology
industry. Through this network of relationships and experiences, the management
team can provide superior business assistance to affiliate companies.
Although Planet Zanett intends to acquire and hold equity interests in
affiliate companies on a long-term basis, it will negotiate rights that will
enable it to dispose of all or a portion of Planet Zanett's interests in an
affiliate company. The decision to sell Planet Zanett's equity interest in an
affiliate company will be based on a number of factors, including whether the
affiliate company continues to fit within the business strategy and complements
the network of affiliate companies, whether Planet Zanett's assets, represented
by the interest in the affiliate company, can be better applied to benefit other
affiliate companies or to fund new investments and whether Planet Zanett needs
to dispose of an interest in order not to be required to register as an
investment company.
Affiliate Companies
Planet Zanett and the Partnership currently own, or have agreements to
acquire, interests in the following affiliate companies as set forth below.
The Partnership holds interests in the following affiliate companies:
Name of Affiliate Description of Business Investment
----------------- ----------------------- ----------
Transpartner.com, Inc. B2B platform over the trucking $600,000 invested
industry. Helps trucking for a 40% interest
companies to avoid trips
without cargo. Development
stage company
- 56 -
Name of Affiliate Description of Business Investment
----------------- ----------------------- ----------
Failsafe.com B2B platform servicing doctors, $100,000 invested
health care providers, and hospitals. for a 10%
Failsafe will store, transfer, and interest;$300,000
sort large medical pictures, scans, total to be
and patient records, and create and invested for a
file insurance forms - development 30% interest.
stage company.
GlobeDrive.Com, Inc. B2B platform enabling business $300,000 invested
employees to contact office systems for a 9%
from remote location (home or travel) interest; $1.0
seamlessly, as if they were in actual million total to
office. -development stage company. be invested for a
30% interest.
IJE, Inc. B2B on-line head hunting firm $400,000 invested
dedicated to the $500k+ job market for a 15%
chiefly servicing the mutual/hedge interest.
fund industry. Operating Company.
Planet Zanett holds interests in the following affiliate companies:
Name of Affiliate Description of Business Interest
----------------- ----------------------- --------
Software Professional High end custom software, Upon consummation
Services middleware, and back-end code of the Merger,
writing, boutique mainly Planet Zannet
designing transaction software intends to acquire
for tier 1 broker dealers 50% in exchange
Operating company. for $10,000,000 in
cash and
securities.
iZanett, Inc. On line investment banking firm, 70%
targeted to institutions and high
net worth exempt individuals,
focusing on secondary and private
placement offerings. Conceptual
stage company.
While the Partnership owns interests in the following affiliate companies,
the investment in each company will represent less than a ten percent interest
in each company and Planet Zanett will not be providing these companies with
incubator services:
Name of Affiliate Description of Business Investment
----------------- ----------------------- ----------
Skoodles, Inc. B2B, B2C development stage $500,000
company with an educational
platform. Providing children from
the ages of 2-12 with an
enjoyable and safe internet
environment. It is the first
Internet network just for
children. It features 3D fantasy
worlds with kid-centric avatars,
instant messaging, online games,
homework help, puzzles, and many
specially chosen, kid-approved
web sites. While children are
surfing they are safe from contact
with inappropriate material and
predatory individuals who stalk
children on the Internet. Headed
by the founder of Electric
Company and Nickelodeon. Target
markets include schools and
day care centers
- 57 -
Name of Affiliate Description of Business Investment
----------------- ----------------------- ----------
iSwag, Inc. B2B site servicing the $100,000
corporate branded merchandise
sector. iSwag consolidates the
purchasing process and
communication lines between
corporate brand managers,
distributors, and suppliers,
and has enabled all groups in
the branded merchandise and
promotions industry to
communicate via the Internet.
For distributors, iSwag offers
a complete suite of tools and
services called DUO(TM),
Distribution Utilities Online.
DUO(TM); is comprised of order
management tools, product
offering management, client
e-commerce BrandCenter(TM);
enabling, as well as several
reporting features. For brand
managers, LOGO Enabled(TM)
BrandCenters provides the
ability to monitor the
creation, storing of virtual
inventory, distribution, and
sale of their promotional
products via the Internet. For
suppliers, eSupplier(sm) grants
the ability to communicate
with distributors through a
simple, web-based interface
which facilitates order
management, order histories,
special offerings, and
provides a full suite of
product management and
communications tools.
Operating Company.
e.Salon, Inc. Operating company, B2B hub $225,000
servicing the 20,000 SKU
market supplying beauty salon
professionals. Partner with
Pivot Point International,
Inc., the pre-eminent
educational resource for
beauty industry professionals,
providing professional
training programs and
education materials.
eSalon.com's Business Center
offers salon professionals
advice and support in
accounting, insurance and
financial services; the
Superstore will ultimately
offer 35,000 different
products at prices below
wholesale; and a Community
section lets beauty industry
professionals connect with
peers, share ideas and catch
up on the latest industry
trends. The Website also
offers guidance for
advertising and promoting
salon businesses as well.
The following affiliate companies are conceptual stage companies in
which Planet Zanett intends to maintain a large equity interest. Currently,
Planet Zanett has invested no money in these affiliate companies:
Name of Affiliate Description of Business
----------------- -----------------------
Codewriter.com Hub built around the software codewriter who
prefers to be an independent contractor.
Contract placement service for software
codewriters.
LawyerForm.com B2C platform servicing form filing for
specific legal needs.
WirelessPlanet Application designer boutique focusing on
transactional application based on wireless
devices.
RadioActiveFile.com (HotFile.com) B2B platform focusing on governmental
regulation of the nuclear waste cleanup
industry.
- 58 -
Investment Company Act of 1940
Planet Zanett is primarily engaged in the building of Internet e-commerce
companies that it manages as part of an integrated supportive network of
"affiliate companies". However, due to its ownership of equity securities of
affiliate companies, Planet Zanett could be considered an "investment company"
under the Investment Company Act of 1940, which regulates mutual funds and other
entities which meet the definition of an "investment company." An "investment
company" generally includes any entity that is engaged primarily in the business
of investing, reinvesting and trading in securities. The rules under the
Investment Company Act provide in part that an entity is presumed not to be an
investment company if 45% or less of the value of its total assets (excluding
government securities and cash) consists of, and 45% or less of its income over
the last four quarters is derived from, securities other than either government
securities, securites of majority owned subsidiaries or securities issued by
entities that it primarily controls which are not themselves engaged in the
business of investing in securities. As the regulations governing the
relationship between an investment company and the entities in which it invests
are inconsistent with the manner in which Planet Zanett intends to provide
services to its affiliate companies, it is critical to Planet Zanett's business
plan that it not be an investment company subject to the Investment Company Act.
Under current federal securities regulations, Planet Zanett will be
considered to primarily control an entity if it owns more than 25% of its voting
securities and have more control than any other single owner. To alleviate
concerns raised by the Investment Company Act of 1940, investments in affiliate
companies will be made in one of two ways. If Planet Zanett intends to maintain
a controlling interest in the affiliate company for the foreseeable future, it
will make that investment directly. If Planet Zanett anticipates its investment
will be diluted and it will not have a controlling interest, the Partnership
will make the investment.
Employees
As of June 30, 2000, excluding affiliate companies, Planet Zanett had 4
full-time employees. None of Planet Zanett's employees are currently covered by
collective bargaining agreements and it considers relations with its employees
to be satisfactory.
Facilities
Planet Zanett's principal office, consisting of approximately 12,800
square feet, is located at 135 East 57th Street, 15th Floor, New York, NY 10022.
Zanett Securities Corporation, the leaseholder of the office space and an
affiliate of Planet Zanett, has agreed to provide the use of facilities to
Planet Zanett and its affiliate companies, in exchange for potential business
opportunities introduced to Zanett Securities Corporation.
- 59 -
by Planet Zanett, Zanett Securities is providing Planet Zanett with use of the
facilities. Zanett Securities will utilize approximately 1,500 square feet,
leaving approximately 11,300 available for Planet Zanett's activities. Affiliate
companies will be charged for services provided by Planet Zanett.
Legal Proceedings
Planet Zanett filed a complaint February 2000 in the United States
District Court of the District of Delaware asserting an action for breach of
contract against a party and seeking damages in excess of $750,000. During
March, 2000 the defendant filed its response to the action and counterclaims
against Planet Zanett alleging misrepresentation, breach of contract, and breach
of the covenant of good faith and fair dealing. Planet Zanett responded to the
counterclaim denying all of the allegations.
Discovery has not yet started and, therefore, no opinion as to the
ultimate outcome of this matter can be expressed at this time. However, Planet
Zanett intends to vigorously pursue its action for breach of contract and will
vigorously defend itself against the counterclaims.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Because Planet Zanett acquires significant interests in B2B e-commerce
companies, many of which generate net losses, it has experienced, and expects to
continue to experience, significant volatility in quarterly results. Planet
Zanett does not know if it will report net income in any period and expects that
it will report net losses in many quarters for the foreseeable future.
Planet Zanett was inactive in the year ending December 31, 1998. In 1999,
revenues totaled $375,000 while total operating expenses equaled $380,661. This
resulted in a net loss for the year of $5,661. At year ending 1999 and at the
end of the first quarter, March 31, 2000, cash on hand was Planet Zanett's only
asset and the balance was under $200. For the same period, a deficit of $5,661
remained in retained earnings, consisting of the net loss from 1999. Also in the
same period, accounts payable and accrued expenses, Planet Zanett's only
liabilities, remained unchanged at $5,771.
Liquidity and Capital Resources
Prior to the Merger, the shareholders of Planet Zanett, will contribute a
minimum of $4,000,000 in cash to Planet Zanett.
To date, Planet Zanett has made investments totaling $2,225,000 in seven
affiliate companies and has contributed its interests in those entities to the
Partnership in exchange for a 20% ownership in the Partnership. Upon consumation
of the Merger, Planet Zanett intends to acquire 50% of Software Professional
Services in exchange for $10,000,000 in cash and securities. Planet Zanett
anticipates significant additional capital will be invested in the Partnership
by outside investors.
Selected Historical Financial Data
Years Ended December 31,
1999 1998 1997 1996
INCOME STATEMENT DATA:
Revenues $ 375,000 0 18,663 0
Operating Costs 380,661 0 1,672 0
BALANCE SHEET DATA:
Cash and Equivalents $ 185 0 0 0
Current Liabilities 5,771 0 0 0
Stockholder's Equity (5,586) 0 0 0
- 60 -
Following are the Proposals the BAB stockholders will be asked to consider
and vote upon at the Special Meeting:
PROPOSAL 1
Approve the proposal to merge BAB with and into BAB Delaware, a newly
formed wholly-owned Delaware subsidiary corporation, for the purpose of becoming
a Delaware corporation.
Principal Reasons for the Domestication Merger
The Domestication Merger will make BAB a Delaware corporation, subject to
the laws of Delaware rather than Illinois. Planet Zanett is requiring the
Domestication Merger as a condition to the merger as it believes that Delaware
corporate law is preferable to Illinois law because it offers greater management
flexibility and is more fully developed and supported by extensive judicial
decisions.
Domestication Merger
Pursuant to the Merger Agreement, immediately before the Merger, BAB will
merge with and into BAB Delaware (the "Domestication Merger") and file the
Certificate of Merger with the Secretary of State in both the States of Delaware
and Illinois. The separate and independent existence of BAB will cease and BAB
Delaware will be the surviving entity, governed by Delaware law.
Certificate of Incorporation and By-laws
Once the Certificate of Merger is filed with the Secretary of State in the
State of Delaware and in the State of Illinois, the Certificate of Incorporation
and By-laws of BAB Delaware, as in effect immediately prior to the Domestication
Merger, will be the Certificate of Incorporation and By-laws of the surviving
entity.
Directors and Officers
After the Domestication Merger, the officers and directors of BAB
immediately preceding the Domestication Merger will become the directors of the
surviving entity.
Comparison of Rights of Illinois Stockholders and Rights of Delaware
Stockholders
The following is a summary of the material rights and differences between
Illinois and Delaware stockholders. In general the differences arise from
different provisions in the companies' certificate of incorporation, bylaws and
the variations between Illinois and Delaware corporate law.
The discussion of the comparative rights of the stockholders set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to the articles of incorporation and bylaws of BAB, the
certificate of incorporation and bylaws of BAB Delaware,
- 61 -
the Illinois Business Corporation Act (IBCA) and the Delaware General
Corporation Law (DGCL).
Authorized Capital
BAB. BAB's authorized capital stock consists of 20,000,000 shares of
common stock with no par value and 4,000,000 shares of Preferred Stock,
3,880,000 of which have a par value of $0.01, and the other 120,000 of which are
designated as Series A and have a par value of $25.00 per share. BAB has no
outstanding Preferred Stock. Therefore, this comparison of material shareholder
rights will only discuss the BAB Common Stock.
BAB Delaware. BAB Delaware's authorized capital stock consists of
50,000,000 shares of common stock and 10,000,000 shares of "blank check"
preferred stock.
Voting Rights-Election of Board of Directors
BAB. Each holder of common stock is entitled to one vote for each share
held of record on all matters submitted to a vote and may not cumulate votes for
the election of directors. Consequently, the holders of a majority of the shares
voted at a meeting of stockholders may, if they so choose, elect all directors
to be selected at that meeting, thereby precluding minority stockholder
representation.
BAB Delaware. Each holder of common stock is entitled to one vote for each
share held of record on all matters submitted to a vote and may not cumulate
votes for the election of directors. Consequently, the holders of a majority of
the shares voted at a meeting of stockholders may, if they so choose, elect all
directors to be selected at that meeting, thereby precluding minority
stockholder representation.
Number of Directors
BAB. The board of directors shall consist of four directors.
BAB Delaware. The board of directors shall consist of four directors.
Committees of the Board
BAB. A majority of the board of directors may create one or more
committees of two or more members to exercise appropriate authority of the board
of directors, and that a majority of such committee shall constitute a quorum
for transaction of business. Additionally, a committee may transact business
without a meeting by unanimous resolution.
BAB Delaware. Under the bylaws of BAB Delaware, the board, in designating
committees, is limited only to the extent provided for under the DGCL. The DGCL
provides that the board of directors may designate 1 or more committees, each
committee to consist of 1 or more of the directors of the corporation. Any such
committee, to the extent provided in the resolution of the board of directors,
or in the bylaws of the corporation, shall have and may exercise all the powers
and authority of the board of directors in the management of the business
- 62 -
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to the following matter: (i) approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by this chapter to be submitted to stockholders for approval or (ii)
adopting, amending or repealing any bylaw of the corporation.
Removal of Directors
BAB. One or more directors may be removed with or without cause, by a
majority vote of shareholders. BAB's bylaws provide that a director may be
removed with or without cause by the shareholders.
BAB Delaware. A director or the entire board of directors may be removed,
with or without cause, by a majority vote of shareholders, except (i) in the
case of a corporation whose board is classified, directors may be removed only
for cause unless the certificate of incorporation provides otherwise, or (ii) if
the corporation has cumulative voting, in which event if less than the entire
board is to be removed, no director may be removed without cause if the votes
cast against the director's removal would be sufficient to elect that director.
BAB Delaware's certificate of incorporation does not provide for either a
classified board or cumulative voting and therefore, its board of directors may
be removed with or without cause by a majority vote.
Amendment to Bylaws
BAB. Unless the power to make, alter, amend or repeal the by-laws is
reserved to the shareholders by the articles of incorporation, the by-laws may
be made, altered, amended or repealed by the shareholders or the board of
directors, but no by-law adopted by the shareholders may be altered, amended or
repealed by the board of directors if the by-laws so provide.
BAB Delaware. Bylaws may be altered, amended, supplemented or repealed, or
new bylaws adopted, by: (a) a stockholders' vote, (b) by the board of directors,
or (c) by any other manner authorized by the certificate of incorporation. BAB
Delaware's bylaws provide that bylaws may be amended by (a) the board of
director's majority vote at either a regular or special meeting, or by written
consent; or (b) by a majority vote of outstanding shares.
Amendments to Certificate or Articles of Incorporation
BAB. Amendments to a corporation's articles of incorporation must be
adopted by the action of the board of directors and approved by two-thirds (66
2/3%) of all votes entitled to vote on the amendment. Additionally, if any class
or series of shares is entitled to vote as a class, the proposed amendment must
be approved by at least two-thirds (66 2/3%) of the votes of the shares of each
class or series of shares entitled to vote as a class. A corporation is entitled
to decrease the voting requirement.
- 63 -
BAB's restated articles of incorporation do not provide for a decrease of
the voting requirement; however, its bylaws provide that any change to the
articles of incorporation which affect the preferences or other rights of the
holder of BAB's preferred stock must be approved by at least 60% of the
outstanding shares of preferred stock.
BAB Delaware. Amendments to a corporation's certificate of incorporation
must be approved by: (a) the board of directors, (b) a majority vote of the
outstanding shares entitled to vote for the amendment, and (c) a majority vote
of the outstanding stock of each class entitled to vote for the amendment,
unless a higher vote is required by the corporation's certificate of
incorporation.
BAB Delaware's certificate of incorporation provides that BAB Delaware may
amend its certificate of incorporation in any manner provided for under DGCL.
Under DGCL, amendments to the certificate of incorporation require the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote on that matter. In addition, the holders of the outstanding shares of a
class are entitled to vote as a class on any amendment to the certificate of
incorporation, whether or not they are entitled to vote on that matter by the
certificate of incorporation, if the amendment would increase or decrease the
aggregate number of authorized shares of the class, increase or decrease the par
value of the shares of the class or alter or change the powers, preferences or
special rights of the class so as to affect them adversely.
Action by Written Consent of Holders of Common Stock
BAB. Unless otherwise provided in a corporation's articles of
incorporation, any action required or permitted to be taken at a meeting of
shareholders may be taken without a meeting and without a vote, if a consent in
writing is signed by holders of shares having at least the number of votes
necessary to authorize or take such action at a shareholder meeting. If this
consent is not signed by all of the shareholders entitled to vote on the subject
matter then that consent will only become effective if, at least five days prior
to execution, written notice is give to all shareholders.
BAB's bylaws permit any action to be taken at an annual or special meeting
to be taken by written consent of shareholders which consent requires five days
written notice to all shareholders prior to execution of the consent. If all
shareholders entitled to vote sign such a consent, then the five day notice
period is not applicable.
BAB Delaware. Unless otherwise provided in a corporation's certificate of
incorporation, any action required or permitted to be taken by a corporation's
stockholders may be effected by less than unanimous consent without prior notice
and without a vote.
BAB Delaware's Certificate of Incorporation is silent with regard to
action by written consent of stockholders, and therefore, such action is
permitted.
Limitation of Personal Liability of Directors
BAB. A corporation may include in its articles of incorporation a
provision limiting the liability of its directors to the corporation and its
shareholders for money damages for breach of fiduciary duty as a director,
except:
o for any breach of the director's duty of loyalty to the corporation
or its shareholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- 64 -
o for unlawful payment of dividends or other unlawful acts after the
dissolution of the corporation; or
o for any transaction from which the director derived an improper
personal benefit.
The provision does not eliminate nor limit the liability of a director for
any act or omission occurring before the date the provision became effective.
BAB' restated articles of incorporation contain such a provision which limits
director's liability, except for the exceptions listed above.
BAB Delaware. A corporation may eliminate or limit the personal liability
of directors to the corporation or its stockholders for damages for any breach
of fiduciary duty in such capacity, except under the following circumstances:
o for any breach of the director's duty of loyalty to the corporation
or its stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o for unlawful payment of dividends or other unlawful acts after the
dissolution of the corporation; or
o for any transaction from which the director derived an improper
personal benefit.
The provision does not eliminate or limit the liability of a director for
any act or omission occurring before the date the provision became effective.
BAB Delaware's certificate of incorporation contains a provision eliminating the
personal liability of directors to the corporation and the stockholders for
damages for any breach of fiduciary duty in such capacity to the fullest extent
permitted under Delaware law.
Stockholders Meetings
BAB. The bylaws provide that an annual meeting shall be held on the second
Thursday in January of each year or at such time as the board of directors may
designate for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the day fixed for the annual
meeting is a legal holiday, the meeting shall be held on the next succeeding
business day.
Special Meetings may be called either by the president, by the board of
directors of by the holders of at least one-fifth (20%) of all the outstanding
shares of BAB entitled to vote, for the purpose or purposes stated in the call
of the meeting. The board of directors may designate any place, as the place of
meeting of any annual meeting or for any special meeting called by the board of
directors.
Written notice stating the place, date, and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than 10 nor more than 60 days before the
date of the meeting or, in the case of a merger, consolidation, share exchange,
dissolution or sale, lease or exchange of assets not less than 20 days nor more
than 60 days before the date of the meeting, to each shareholder of record
entitled to vote at such meeting.
- 65 -
BAB Delaware. The annual meeting of shareholders shall be held on such
date and at such place and time as may be fixed by resolution of the board of
directors.
BAB Delaware's bylaws provide that special meetings may be called either
by the president or by the board of directors for the purpose or purposes stated
in the call of the meeting. The board of directors may designate any place, as
the place of meeting of any annual meeting or for any special meeting called by
the board of directors.
Written notice stating the place, date, and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than 10 nor more than 60 days before the
date of the meeting or, in the case of a merger, consolidation, share exchange,
dissolution or sale, lease or exchange of assets not less than 20 days nor more
than 60 days before the date of the meeting, to each shareholder of record
entitled to vote at such meeting.
Merger or Sale of Assets
BAB. The bylaws state that shareholders may act by a simple majority of
shares present at a meeting and entitled to vote, unless otherwise provided by
BAB' restated articles of incorporation, Bylaws, or the IBCA. IBCA requires that
a merger or sale of all or substantially all assets be approved by holders of
two-thirds (66 2/3%) of the outstanding stock entitled to vote.
BAB Delaware. BAB Delaware's certificate of incorporation and bylaws
contain no provisions governing a merger or sale of all or substantially all of
its property and assets, but Delaware corporate law, unlike Illinois corporate
law, requires such transactions to be approved by holders of a simple majority
of the outstanding stock entitled to vote thereon.
Business Combinations and Anti-Takeover Provisions
BAB. BAB is governed by the provisions of section 11.75 of the IBCA.
Section 11.75 provides that a merger, consolidation or disposition of assets or
securities involving an "interested shareholder" defined as a person
beneficially owning 15% or more of a corporation's voting stock, would be
prohibited for three years following the date such person became an interested
shareholder unless:
o before such person became an interested shareholder, the board of
directors of the corporation approved the transaction in which the
interested shareholder became an interested shareholder;
o upon consummation of the transaction that resulted in the interested
shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of the voting shares of the
corporation outstanding at the time the transaction commenced; or
- 66 -
o following the transaction in which such person became an interested
shareholder, the transaction is approved by the board of directors
and authorized at a meeting of shareholders by the affirmative vote
of the holders of two-thirds of the outstanding voting shares not
owned by the interested shareholder.
Section 7.85 of the Illinois Business Illinois law provides an extra
protection for Illinois interested shareholder transactions in Section 7.85 of
the Illinois Business Corporation Act by requiring any business combination to
be approved by at least 80% of the combined voting power of outstanding shares
of all classes and two-thirds of the disinterested shares. The higher voting
requirements of this provision do not apply to a transaction if (1) two-thirds
of the disinterested directors approve the transaction or (2) certain price and
procedure requirements of Section 7.85 are satisfied.
Sections 7.85 and 11.75 only apply to Illinois corporations, such as BAB
which have a class of voting shares that is listed on a national securities
exchange, is quoted on an interdealer quotation system such as Nasdaq or is held
of record by more than 2,000 shareholders. An Illinois corporation may elect not
to be governed by Sections 7.85 and 11.75 in its original articles of
incorporation or an amendment thereto or in its bylaws, which amendment must be
approved by majority shareholder vote and may not be further amended by the
board of directors. BAB is governed by Sections 7.85 and 11.75.
BAB Delaware. The DGCL bars a corporation which has securities traded on
an exchange, designated on the Nasdaq National Market or held of record by more
than 2,000 stockholders from engaging in certain business combinations,
including a merger, sale of substantial assets, loan or substantial issuance of
stock, with an interested stockholder, or an interested stockholder's affiliates
and associates, for a three-year period beginning on the date the interested
stockholder acquires 15% or more of the outstanding voting stock of the
corporation. The restrictions on business combinations do not apply if (a) the
board of directors gives prior approval to the transaction in which the 15%
ownership level is exceeded, (b) the interested stockholder acquires at one time
at least 85% of the corporation's stock (excluding those shares owned by persons
who are directors and also officers as well as employee stock plans in which
employees do not have a confidential right to vote), or (c) the business
combination is approved by the board of directors and authorized at a meeting of
stockholders by the holders of at least two-thirds of the outstanding voting
stock, excluding shares owned by the interested stockholder.
Dissenters' or Appraisal Rights
BAB. Under Illinois law, shareholders are entitled to dissent from and
obtain payment for their shares in the event of any of the following corporate
actions:
o mergers and share exchanges if shareholder authorization is required
for the transaction by the IBCA or the corporation's articles of
incorporation;
o the sale, lease or exchange of all or substantially all of the
corporate assets; or
o amendments to the articles of incorporation that materially and
adversely affect rights in respect of a dissenter's shares.
- 67 -
BAB Delaware. Under Delaware law, appraisal rights may be available in
connection with a statutory merger or consolidation in certain specific
situations. Appraisal rights are not available when a corporation is to be the
surviving corporation and no vote of its shareholders is required to approve the
Merger or consolidation. In addition, no appraisal rights are available to
holders of shares of any class of stock which is either: (1) listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or (2) held of record by more than 2,000 stockholders, unless such
stockholders are required by the terms of the Merger or consolidation to accept
anything other than:
o shares of the surviving corporation;
o shares of stock that are listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 stockholders;
o cash in lieu of fractional shares; or
o any combination of the foregoing.
Shareholders do not have dissenters' appraisal rights with respect to any
transaction involving the sale, lease or exchange of all or substantially all of
the assets of the corporation.
Shareholders who perfect their appraisal rights are entitled to receive
cash from the corporation equal to the value of their shares as established by
judicial appraisal. Corporations may enlarge these statutory rights by including
in their certificate of incorporation a provision allowing the appraisal rights
in any merger or consolidation in which the corporation is a constituent
corporation. BAB Delaware's certificate of incorporation does not enlarge these
rights.
Vote Required for Approval
For approval, this Proposal requires the affirmative vote of two-thirds of
the shares of BAB Common Stock issued and outstanding as of the Record Date
present in person or represented by Proxy at the Special Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 1
DESCRIBED ABOVE.
- 68 -
PROPOSAL 2
Approve the proposal to merge Planet Zanett with and into PZ Acquisition,
Inc., pursuant to the Agreement and Plan of Merger dated May 4, 2000 (the
"Merger Agreement") and the issuance of 21,889,295 shares of BAB Common Stock in
connection with the Merger (see page ___); and
Background of the Merger
On or about January, 4, 2000, Mr. McCarthy contacted Michael Murtaugh, the
Vice President and General Counsel of BAB, to introduce Planet Zanett and
briefly introduce Planet Zanett's idea for an Internet incubator. Approximately
two weeks later, Mr. McCarthy and Mr. Murtaugh scheduled a meeting at BAB's
Illinois headquarters to further discuss the possibility of a combination of the
two companies.
On January 17, 2000, Messrs. Guazzoni and McCarthy traveled to BAB's
headquarters to meet with Mr. Murtaugh and Michael Evans, the President and
Chief Executive Officer of BAB. During this meeting the parties spoke about the
potential merger and the various options and benefits for BAB's current
operations. A week later, Messrs. Evans, Murtaugh, Guazzoni and McCarthy had a
conference call to discuss in detail Planet Zanett's plans for an Internet
incubator and described how BAB could be a part of that plan. Subsequently, on
January 27, 2000, BAB and Zanett Capital, Inc., an affiliate of Planet Zanett,
executed a "Standstill Agreement" whereby both parties agreed to certain
confidentiality provisions and BAB agreed not to solicit merger proposals from
any other entity.
On March 1, 2000, BAB and Planet Zanett began negotiating the Letter of
Understanding relating to the Merger proposal, which was executed on April 4,
2000.
During the following week, Messrs. Guazzoni, Evans and Murtaugh met in New
York at the previous location of Planet Zanett at 12 East 49th Street in New
York city where Mr. Guazzoni spoke with BAB about the office space Planet Zanett
intended to use as a "tech center" for the incubator and described in detail
Planet Zanett's business plan and the types of affiliate companies Planet Zanett
sought for the Internet incubator.
On May 3, 2000, BAB's Board of Directors conducted a special meeting
wherein they discussed and passed a resolution approving the Merger. BAB and
Planet Zanett executed the Merger Agreement on the next day. On May 5, 2000, Mr.
McCarthy, appeared at BAB's annual stockholders meeting. At that meeting, Mr.
McCarthy discussed Planet Zanett's plan for an Internet incubator and answered
questions posed by BAB stockholders and employees.
- 69 -
Potential Negative Factors Associated with the Merger
The BAB board of directors also considered the following potentially
negative factors in its deliberation concerning the Planet Zanett merger and
subsequent spin-off of BAB assets:
Planet Zanett is a private entity. Planet Zanett is a newly formed
corporation with a limited operating history. This limited operating history,
coupled with the fact that Planet Zanett owns, directly or indirectly, interests
in privately held companies which also have limited operating histories, meant
that analyzing Planet Zanett's financial information was more difficult than if
Planet Zanett had been a publicly-traded entity. In addition, Planet Zanett's
management infrastructure is not as well-developed as that of a publicly-traded
company.
Successful integration of affiliate companies may not be realized. Planet
Zanett's success depends upon the ability to develop or select its affiliate
companies. If the affiliate companies do not successfully implement their
business plans with the assistance of Planet Zanett's experiences and
methodologies, Planet Zanett will not be able to achieve its business plan.
Also, the success of Planet Zanett's operation will be dependent upon the
management and operations of the affiliate companies, the timing of the
marketing of the affiliate companies' products and numerous other factors beyond
their control.
Inherent challenges to effecting the transaction. The management of BAB
faces the inherent challenges to effecting the Merger and the attendant risk
that BAB management resources may be diverted from other strategic opportunities
and from operational matters for an extended period of time.
The board of directors of BAB concluded that the potential negative
factors considered by it were not sufficient, either individually or
collectively, to outweigh the advantages of the proposed Merger with Planet
Zanett.
Merger of Planet Zanett into PZ Acquisition, Inc.
Pursuant to the Merger Agreement, at the Effective Time and in accordance
with provisions of Section 252 of the DGCL and Title 7, Chapter 92A Section 100
of and Nevada Revised Statutes, Title 7 ("NRS"), Planet Zanett will be merged
with and into PZ Acquisition, Inc. Following the Merger, the separate and
independent existence of Planet Zanett will cease and PZ Acquisition, Inc. will
continue as Planet Zanett, and will be governed by the DGCL.
- 70 -
The Effective Time
Simultaneously with the Closing, the parties will cause the Merger to be
consummated by (i) filing a certificate of merger (the "Certificate of Merger"),
in accordance with the relevant provisions of DGCL and NRS, and (ii) making all
other filings or recordings required under DGCL and NRS. The Merger will become
effective at such time as the Certificate of Merger is duly filed with each of
the Secretaries of State of the States of Delaware and Nevada.
Certificate of Incorporation
At the Effective Time, the Certificate of Incorporation of PZ Acquisition,
Inc., as in effect immediately prior to the Effective Time, will be the
Certificate of Incorporation of Planet Zanett.
By-laws of PZ Acquisition, Inc.
At the Effective Time, the by-laws of PZ Acquisition, Inc., as in effect
immediately prior to the Effective Time, will be the by-laws of Planet Zanett.
Effect on Securities
At the Effective Time, the issued and outstanding common stock of Planet
Zanett immediately prior to the Effective Time will be converted into and
exchanged for shares of BAB Common Stock, in the ratio of 219,892.95 shares of
BAB Common Stock for each share of Planet Zanett common stock, or an aggregate
of 21,989,295 Shares of BAB Common Stock. As a result, there will be 24,226,852
shares of BAB Common Stock outstanding.
Stock Transfer Restrictions
The issuance shares of BAB Common Stock to the shareholders of Planet
Zanett will not be registered under any federal or state securities laws and,
accordingly, those shares will be "restricted securities" as defined in Rule 144
under the Securities Act of 1933 and may only be sold under certain
circumstances.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who owns shares that were purchased from us (or any
affiliate) at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three-month period, a number of
shares that does not exceed 1% of the then outstanding shares of our common
stock. If our common stock is subsequently included for trading in an automated
inter-dealer quotation system (such as the Nasdaq SmallCap Market) or listed on
a national securities exchange, then the volume limitation will become the
greater of:
o 1% of the then outstanding shares of our common stock; or
- 71 -
o the average weekly trading volume of our common stock during the
four calendar weeks preceding the date on which notice of the sale
is filed with the Securities and Exchange commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person (or persons whose shares are aggregated) who is not deemed to have been
our affiliate at any time during the 90 days preceding a sale, and who owns
shares within the definition of "restricted securities" under Rule 144 under the
Securities Act that were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
Indemnification of BAB and PZ Acquisition, Inc. by BAB, Inc.
Pursuant to the Certificate and Indemnification Agreement between BAB,
Inc., BAB and Planet Zanett, BAB, Inc. has agreed to certify the accuracy of
BAB's representations and warranties in the Merger Agreement, and indemnify BAB,
PZ Acquisition, Inc. and Planet Zanett for any breach of those representations
and warranties.
Management of BAB Following the Merger
Upon consummation of the Merger, the BAB Board will be set at four
directors and Claudio M. Guazzoni, David M. McCarthy, Sebastian Cassetta and Dr.
Andrew Schiff will be the BAB Board. Concurrently therewith, the current
directors of BAB will resign and will be appointed as the Board of Directors of
BAB, Inc.
At the Effective Time, all of the current officers of BAB will resign and
Claudio M. Guazzoni and David M. McCarthy will be elected or appointed as the
officers of BAB, to serve until the earlier of their death, resignation or
removal or until their respective successors are duly elected and qualified.
The following sets forth certain information with respect to the Directors
and Officers of BAB after the Merger, based on information supplied by such
persons. The following information is as of June 30, 2000, unless otherwise
specified.
NAME AGE TITLE
- ---- --- -----
Claudio M. Guazzoni 38 President and Director
David M. McCarthy 38 Chief Executive Officer and
Director
Sebastion Cassetta 51 Director
Dr. Andrew Schiff 34 Director
Claudio M. Guazzoni. Mr. Guazzoni co-founded The Zanett Securities
Corporation, of which he is President, in 1993. Mr.
Guazzoni has served on the board of
- 72 -
directors of SmartServe Online Inc. since January 1998. Mr. Guazzoni was
graduated from Yale University in 1984.
David M. McCarthy. Mr. McCarthy co-founded Zanett Securities Corporation,
of which he is Vice President and Chairman, in 1993. Mr. McCarthy received a
B.A., Political Science from the University of Massachusetts at Amherst in 1986.
Sebastian Cassetta. Mr. Cassetta has been the Chairman & Chief Executive
Officer of SmartServ Online, Inc. since its inception in 1993. Prior to
SmartServ, Mr. Cassetta was the founder and President of Burns and Roe Securacom
Inc., an engineering and large-scale systems intergration firm. He was also a
former Director, managing Director and Vice president of Brinks Inc. At Brinks,
Mr. Cassetta expanded international operations in over 15 countries and became
the youngest person to be appointed Vice President in Brinks' 140 year history.
Andrew Schiff, MD. Dr. Schiff is currently an Associate with Perseus-Soros
Biopharmaceutical Fund, LP. Dr. Schiff joined Perseus-Soros as an associate in
September of 1999. Over the last 10 years, Dr. Schiff has practiced internal
medicine at The New York Presbyterian Hospital where he serves as an Assistant
Professor of Medicine. In addition, he has also has been a partner of a small
family run investment fund, Kuhn, Loeb & Co. as well as a consultant for
Northwood Ventures, a Long Island, New York based venture group. In these
capacities, he has been responsible for generating deal flow, evaluating
investment potential of numerous opportunities in the life science and
technology areas, and raising additional financing for portfolio companies. Dr.
Schiff received his MD from Cornell University Medical College and his MBA from
Columbia University. His bachelor's degree in neuroscience was awarded with
honors by Brown University.
Messrs. Guazzoni, McCarthy, Cassetta and Schiff will not receive any
compensation from BAB in the form of salary, bonus or otherwise.
The Merger Agreement
General Description
BAB is seeking your approval to certain transactions contemplated by the
Merger Agreement between BAB and Planet Zanett. The Merger Agreement
contemplates a series of transactions as a result of which BAB will divest
itself of its current operations and acquire Planet Zanett, in exchange for 90%
of BAB's common stock, and you will receive 100% of the common stock of BAB,
Inc., which will carry on BAB's current business. Capitalized terms not defined
in this summary are defined in the Merger Agreement. This discussion is a
summary of certain provisions of the Merger Agreement and is qualified in its
entirety by the Merger Agreement which is attached to this Proxy Statement.
Exchange of Stock Certificates
BAB will deliver to each holder of Planet Zanett common stock a
certificate evidencing the number of whole shares of BAB Common Stock to which
such holder is entitled. Until so issued, each outstanding share of Planet
Zanett will be deemed for all purposes to evidence the ownership of the number
of whole shares of BAB Common Stock into which such share is converted.
Representations and Warranties
The Merger Agreement contains customary representations made in merger
agreements by Planet Zanett and BAB as to, among other things:
o due organization, good standing and absence of violations of
organizational documents;
o capital structure;
o validity of financial and other information supplied;
o ownership of subsidiaries;
- 73 -
o requisite corporate power and authority to enter into the Merger
Agreement and the agreements related thereto and to consummate the
transactions provided for thereby;
o due authorization, execution and delivery of the Merger Agreement
and the agreements related thereto;
o validity and enforceability of the Merger Agreement and the
agreements related thereto;
o the disclosures contained in documents filed with the SEC (including
this Proxy Statement);
o required filings and approvals;
o absence of defaults;
o absence of undisclosed liabilities and material changes;
o absence of litigation;
o compliance with applicable laws;
o employee benefit plans;
o compliance with environmental laws and regulations;
o tax matters;
o material contracts;
o title to properties;
o intellectual property matters;
o condition and sufficiency of assets;
o absence of certain transactions with affiliates;
o insurance; and
o corporate records.
None of the representations and warranties contained in the Merger
Agreement survives the Closing; therefore, neither of Planet Zanett nor BAB has
any remedies for breach of the representations and warranties which may first be
discovered after the Closing. However, Planet Zanett may have a remedy against
BAB, Inc. under its Certificate and Indemnification Agreement.
Covenants
Each of Planet Zanett and BAB has made certain covenants in the Merger
Agreement relating to the conduct of its respective businesses prior to the
Merger. In addition, each of BAB and Planet Zanett has agreed to:
o maintain its corporate existence in good standing;
o maintain the general character of its business;
o maintain in effect all of its presently existing insurance coverage
(or substantially equivalent insurance coverage);
o preserve its business organization intact, preserve its good will,
keep available the services of its current officers and employees
and preserve its present business relationships with its customers,
clients and other Persons with which it has business relations; and
o in all respects conduct its business only in the usual and ordinary
manner consistent with past practice.
- 74 -
BAB has agreed to use its best efforts to negotiate and effect the sale of
approximately 13 existing stores which are listed on a schedule to the Merger
Agreement, and will apply seventy-five percent (75%) of the proceeds from such
sales to repayment of BAB's indebtedness to CIB Bank. To date, BAB has sold two
stores and two other stores are under contract.
Non-Solicitation
BAB has agreed to cease any existing discussions or negotiations, if any,
with any parties conducted heretofore with respect to any acquisition or
exchange of all or any material portion of the assets of, or any equity interest
in, BAB or any of its subsidiaries or any business combination with BAB or any
of its subsidiaries, except that BAB may initiate or continue any existing
discussions or negotiations with respect to the stores listed in the Merger
Agreement. BAB also has agreed that, prior to the Effective Time or December 31,
2000, whichever is earlier, it will not, and will not authorize or permit any of
its subsidiaries or any of its or its subsidiaries' directors, officers,
employees, agents or representatives, directly or indirectly, to solicit,
initiate, encourage or facilitate, or furnish or disclose non-public information
in furtherance of, any inquiries or the making of any proposal with respect to
any merger, liquidation, recapitalization, consolidation or other business
combination involving BAB or its subsidiaries or acquisition of any capital
stock or any material portion of the assets of BAB or any of its subsidiaries
(other than the stores listed in the Merger Agreement), or any combination of
the foregoing, or negotiate, explore or otherwise engage in discussion with any
person other than Planet Zanett with respect to any acquisition transaction, or
enter into any agreement, arrangement or understanding requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions
contemplated by the Merger Agreement; provided that BAB may furnish information
to, and negotiate or otherwise engage in discussions with, any party who
delivers a bona fide written proposal for an acquisition transaction if the BAB
Board determines in good faith and on a reasonable basis by a majority vote,
after consultation with its outside counsel and financial advisors, that such
acquisition transaction is reasonably likely to be more favorable to BAB and its
stockholders from a financial point of view than the transactions contemplated
by the Merger Agreement and that failure to take such action would thus
constitute a breach of the fiduciary duties of the BAB Board.
BAB will, as soon as practicable, advise Planet Zanett in writing of the
receipt, directly or indirectly, of the existence of any discussions,
negotiations, proposals or substantive inquiries relating to an acquisition
transaction, identify the offeror and furnish to Planet Zanett a copy of such
proposal or substantive inquiry, if it is in writing, or a written summary of
any oral proposal or substantive inquiry relating to an acquisition transaction.
BAB will as soon as practicable advise Planet Zanett in writing of any
substantive development relating to such proposal, including the results of any
substantive discussion or negotiations with respect thereto.
Neither the BAB Board nor any committee thereof will (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Planet Zanett,
the approval or recommendation of the BAB Board or a committee thereof of the
Merger Agreement or the transactions contemplated thereby or (ii) recommend to
the BAB Stockholders, or propose to recommend to the BAB Stockholders, any
Acquisition Transaction except at or after the termination of the Merger
- 75 -
Agreement pursuant to and in accordance with the termination provisions provided
in the Merger Agreement.
Planet Zanett has agreed to immediately cease any existing discussions or
negotiations, if any, with any parties conducted heretofore with respect to any
acquisition or exchange of all or any material portion of the assets of, or any
equity interest in, Planet Zanett or any business combination with Planet
Zanett. Planet Zanett agrees that, prior to the Effective Time, it will not, and
will not authorize or permit any of its directors, officers, employees, agents
or representatives, directly or indirectly, to solicit, initiate, encourage or
facilitate, or furnish or disclose non-public information in furtherance of, any
inquiries or the making of any proposal with respect to any merger, liquidation,
recapitalization, consolidation or other business combination involving Planet
Zanett or acquisition of any common stock, or any material portion of the
assets of Planet Zanett or any combination of the foregoing, or negotiate,
explore or otherwise engage in discussion with any Person (other than BAB or its
directors, officers, employees, agents and representatives) with respect to any
such transaction, or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Merger or any other
transactions contemplated by the Merger Agreement.
Indemnification and Insurance
Pursuant to the Merger Agreement the parties have agreed that:
The indemnification provisions set forth in BAB's Charter and Bylaws will
not be amended, repealed or otherwise modified for a period of six years from
the Effective Time in any manner that would adversely affect the rights
thereunder as of the Effective Time of individuals who at the Effective Time
were directors, officers, employees or agents of BAB or its Subsidiaries, unless
such modification is required after the Effective Time by Law.
BAB will, to the fullest extent permitted under applicable Law or under
the BAB Charter Documents, indemnify and hold harmless each present and former
director, officer, employee or agent of Planet Zanett against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative (collectively, "Actions"), (x) arising out of or
pertaining to any breach by BAB of its representations, warranties and/or
covenants contained in the Merger Agreement, or any failure by BAB to perform
its obligations under the Merger Agreement or under the Transaction Documents
and the related agreements or (y) otherwise with respect to any acts or
omissions of BAB occurring at or prior to the Effective Time, in each case for a
period of six years after the Effective Time; provided, however, that, in the
event that any claim or claims for indemnification are asserted or made within
such six-year period, all rights to indemnification in respect of any such claim
or claims will continue until the disposition of any and all such claims.
BAB and Planet Zanett will, to the fullest extent permitted under
applicable Law or under the BAB Charter Documents, indemnify and hold harmless
each present and former director, officer, employee or agent of BAB against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any Actions, (x) arising out of or pertaining to any breach by
Planet Zanett of its
- 76 -
representations, warranties and/or covenants contained in the Merger Agreement,
or any failure by Planet Zanett to perform its obligations under the Merger
Agreement or under the Transaction Documents and the related agreements or (y)
otherwise with respect to any acts or omissions of Planet Zanett occurring at or
prior to the Effective Time, in each case for a period of six years after the
Effective Time; provided, however, that, in the event that any claim or claims
for indemnification are asserted or made within such six-year period, all rights
to indemnification in respect of any such claim or claims will continue until
the disposition of any and all such claims.
Pursuant to the Certificate and Indemnification Agreement the parties have
agreed that:
BAB, Inc. will indemnify and hold harmless BAB, PZ Acquisition, Inc.,
Planet Zanett and Messrs. Guazzoni and McCarthy as the holders of BAB's Common
Stock following the Merger from, against and with respect to any and all claims,
demands, losses, costs, expenses, obligations, liabilities, damages, recoveries,
and deficiencies, including interest, penalties, and reasonable attorneys' fees
and expenses, costs of litigation and costs of investigation resulting from a
breach of the representations and warranties made by BAB pursuant to the Merger
Agreement.
Additional Covenants
In addition to the covenants detailed above, each of the parties have made
certain additional covenants, relating to, among other matters, the following:
o restrictions on the making of press releases;
o maintenance of confidentiality;
o tax filings;
o preparation and distribution of this proxy statement;
o mutual notification of particular events;
o public announcements;
o coordination of special meetings;
o providing of access to one another's facilities and records;
o the tax treatment of the Merger; and
o cooperation regarding filings with governmental and other agencies
and organizations.
Conditions to Consummation of the Merger
The respective obligations of each party to consummate the Merger are
subject to the satisfaction at or prior to the Effective Time of a number of
conditions as set forth in more detail in the Merger Agreement. The conditions
include the following:
Conditions to Each Party's Obligations to Effect the Merger. From and
after the date of the Merger Agreement and continuing until the Closing Date or
earlier termination as provided for in the Merger Agreement, the respective
obligations of each party under the Merger Agreement to effect the Merger and
the other transactions contemplated by the Merger Agreement, the Transaction
Documents and the related agreements (including the Related
- 77 -
Transactions) are subject to the full satisfaction at or prior to the Closing
Date of the following conditions:
o no statute, rule, regulation, executive order, decree, ruling or
injunction will have been enacted, entered, promulgated or enforced
by any Governmental Entity which prohibits, restrains, enjoins or
restricts the consummation of the transactions contemplated by the
Merger Agreement;
o all required consents, approvals, waivers and authorizations which
are necessary to effect the transactions contemplated by the Merger
Agreement will have been obtained;
o the parties' businesses have continued in the normal course and
consistent with past practices.
o the absence of any litigation resulting from the threat or claim of
a third party concerning the consummation of the Merger;
Conditions to the Obligations of Planet Zanett. The obligation of Planet
Zanett to effect the Merger is subject to the satisfaction at or prior to the
Effective Time of the following conditions:
o the representations and warranties of BAB set forth in the Merger
Agreement that are qualified as to materiality will be true and
correct, and the representations and warranties of BAB set forth in
the Merger Agreement that are not so qualified will be true and
correct in all material respects;
o BAB will have obtained the consent, approval or waiver of each
non-governmental person whose consent, approval or waiver will be
required in order for BAB to consummate the transactions
contemplated by the Merger Agreement;
o each of the covenants and obligations of BAB to be performed at or
before the Effective Time pursuant to the terms of the Merger
Agreement and the obligations of BAB and each other party (other
than Planet Zanett) to each of the related agreements to be
performed at or before the Effective Time pursuant to the terms of
each such related agreement will have been duly performed in all
material respects at or before the Effective Time;
o since November 28, 1999, no change or event will have occurred which
has had or could reasonably be expected to have, individually or in
the aggregate, a material adverse effect on BAB;
o BAB will have presented evidence satisfactory to Planet Zanett's
counsel that any and all liabilities of BAB (other than the CIB Bank
debt) have been transferred to its subsidiaries in such a way that
the transfer prevents the possibility of a creditor of BAB to file
suit against Planet Zanett and survive a motion for summary
judgement;
- 78 -
o Planet Zanett will have satisfactorily completed its due diligence
on BAB;
o Planet Zanett will have received the BAB, Inc. Indemnification.
Conditions to the Obligations of BAB. The obligations of BAB to effect the
Merger and the other transactions contemplated by the Merger Agreement, the
Transaction Documents and the related agreements are subject to the satisfaction
at or prior to the Effective Time of the following conditions:
o the representations and warranties of Planet Zanett set forth in the
Merger Agreement that are qualified as to materiality will be true
and correct, and the representations and warranties of Planet Zanett
set forth in the Merger Agreement that are not so qualified will be
true and correct in all material respects;
o Planet Zanett will have obtained the consent, approval or waiver of
each non-governmental Person whose consent, approval or waiver will
be required in order for Planet Zanett to consummate the
transactions contemplated by the Merger Agreement;
o each of the covenants and obligations of Planet Zanett to be
performed at or before the Effective Time pursuant to the terms of
the Merger Agreement and the obligations of Planet Zanett and each
other party (other than BAB) to each of the related agreements to be
performed at or before the Effective Time pursuant to the terms of
each such related agreement will have been duly performed in all
material respects at or before the Effective Time;
o since November 28, 1999, no change or event will have occurred which
has had or could reasonably be expected to have, individually or in
the aggregate, a material adverse effect on Planet Zanett;
o BAB will receive evidence reasonably satisfactory that Planet Zanett
has at least Four Million Dollars ($4,000,000) in cash, cash
equivalents or marketable securities.
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time, but prior to the Effective Time, notwithstanding approval thereof by
Planet Zanett Stockholders and the BAB Stockholders:
o by mutual written consent of BAB and Planet Zanett;
o by either BAB or Planet Zanett, if any final order, decree or ruling
permanently restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement or
the related agreements (including
- 79 -
the Merger or the Related Transactions) will have been entered by
any Governmental Entity and will have become final and
non-appealable;
o by BAB if any of the BAB stockholder proposals submitted to the vote
of the BAB stockholders will fail to receive the requisite vote for
approval at the BAB stockholders meeting, unless Planet Zanett has
waived in writing such requirement;
o by Planet Zanett, if BAB has materially breached any material
representation or warranty or failed to perform any material
covenant or agreement contained in the Merger Agreement, which
breach has not been cured on or prior to 30 days following delivery
of written notice of such breach by Planet Zanett to BAB; or
o by BAB, if Planet Zanett has materially breached any material
representation or warranty or failed to perform any material
covenant or agreement contained in the Merger Agreement, which
breach has not been cured on or prior to 30 days following delivery
of written notice of such breach by BAB to Planet Zanett.
Amendment and Waiver
The Merger Agreement may be amended by action taken by Planet Zanett and
BAB at any time before or after approval of the Merger by Planet Zanett
shareholders and the BAB Stockholders but, after any such approval, no amendment
will be made which requires the approval of such equity holders under applicable
Law without such approval. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of the parties.
At any time prior to the Effective Time, each party may
o extend the time for the performance of any of the obligations or
other acts of the other party,
o waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document, certificate or
writing delivered pursuant hereto or
o waive compliance by the other party with any of the agreements or
conditions contained herein.
Any agreement on the part of either party hereto to any such extension or
waiver will be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of either party to assert any of its rights
under the Merger Agreement will not constitute a waiver of such rights.
Fees and Expenses
Except as provided below, Planet Zanett and BAB will each bear its
respective fees, costs and expenses incurred in connection with the Merger
Agreement and the related agreements and the transactions contemplated hereby
and thereby; provided that Planet Zanett will bear the expense of, and its
counsel will have primary responsibility for, preparation of documents
- 80 -
necessary to effect the Merger and the Domestication Merger and preparation and
filing of the Proxy Statement.
In the event that the Merger Agreement is terminated because BAB has
failed to complete an obligation that was within its control to complete, BAB
will reimburse or pay the out-of-pocket fees and expenses Planet Zanett incurred
in connection with the preparation and negotiation of this Agreement,
preparation and filing of SEC documents, or otherwise in connection with the
transactions contemplated in the Merger Agreement.
Affiliate Agreement
At or before the Effective Time, Planet Zanett will enter into a binding
agreement (the "Affiliates Agreement") with Zanett Securities Corporation,
Claudio Guazzoni and David McCarthy ("Zanett Affiliates"), providing that all
Internet incubator investments which would result in Planet Zanett having
"primary control," as defined in the Investment Company Act of 1940 will be made
only through Planet Zanett.
U.S. Federal Income Tax Consequences
The following general discussion summarizes the anticipated material U.S.
federal income tax consequences of the Merger to BAB stockholders.
The following discussion is not binding on the Internal Revenue Service.
It is based upon the Internal Revenue Code of 1986, as amended, regulations,
rulings and decisions in effect as of the date of this document, all of which
are subject to change, possibly with retroactive effect. Tax consequences under
state, local and foreign laws and U.S. federal laws other than U.S. federal
income tax laws, are not addressed.
It is intended that the Merger qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Assuming the Merger
qualifies as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, holders of Planet Zanett common stock that receive BAB
Common Stock in the Merger will not recognize gain or loss for U.S. federal
income tax purposes. Each stockholder's aggregate tax basis in the BAB Common
Stock received in the merger will be the same as his aggregate tax basis in the
Planet Zanett common stock surrendered in the Merger.
- 81 -
Because BAB Common Stock remains unchanged in the Merger, the Merger will
not cause BAB stockholders to recognize any gain or loss. No gain or loss will
be recognized by BAB or Planet Zanett.
Tax matters are very complicated and the tax consequences of the Merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisors for a full description of the tax consequences of the Merger to
you.
Equity Ownership of BAB
As a result of the Merger and the related transactions, the BAB Common
Stock will be held as follows:
Number of Shares Percent
------ -------
Planet Zanett Stockholders 21,989,295 90%
BAB Stockholders(1) 2,443,255 10%
Total 24,432,550 100%
----
(1) Includes 205,698 shares issuable on the exercise of outstanding options
and warrants
Description of BAB Capital Stock
The following is a summary of the material terms of BAB's capital stock
and is qualified in its entirety by reference to BAB's current Articles of
Incorporation and Bylaws. Because it is only a summary, it does not contain all
information that may be important to stockholders.
As of the date of this Proxy Statement, BAB's authorized capital stock
consists of 20,000,000 shares of common stock no par value, of which 2,237,557
shares are issued and outstanding and 3,880,000 shares of preferred stock no par
value, of which no shares are issued and outstanding. No other classes of
capital stock are authorized under BAB's current Charter.
Common Stock
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result in
a dilution of the interest of existing shareholders should additional shares of
Common Stock be issued. Holders of the Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of assets legally
available therefor and to share ratably in the assets of the Company available
upon liquidation, subject to rights of holders of the Preferred Stock, if any.
The shares currently outstanding are, and the are offered hereby, upon payment
and issuance as described in this Prospectus, will be fully paid and
nonassessable.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. Accordingly,
the holders of more than 50% of all of the outstanding shares of Common Stock
can elect all of the directors. Significant corporate transactions such as
amendments to the Articles of Incorporation, mergers, sales of assets and
dissolution or liquidation require approval by the affirmative vote of the
majority of the outstanding shares of Common Stock. Other matters to be voted
upon by the holders of Common
- 82 -
Stock normally require an affirmative vote of a majority of the shares present
at the particular shareholders meeting. As of the date of this Proxy Statement,
BAB's directors and officers own approximately 47.8% of the outstanding shares
of BAB's Common Stock and following the Merger will own 90% of the outstanding
shares. Accordingly, BAB's directors and executive officers have significant
voting influence in connection with election of the directors of BAB and control
of BAB's business and affairs.
Preferred Stock
The Board of Directors of the Company may, without further action by the
shareholders, from time to time, issue Preferred Stock in one or more series and
determine the rights, preferences, privileges, and restrictions, including
voting rights, dividend rights, dividend rate, liquidation preference,
conversion or exchange rights, redemption and sinking fund provisions, and the
number of shares constituting and the designation of any such series. The
holders of such shares of Preferred Stock, if issued, would likely have rights,
preferences, and privileges in addition to those afforded the holders of shares
of Common Stock. The Board of Directors currently has no plans to issue any
shares of Preferred Stock.
The issuance of Preferred Stock in certain circumstances may have the
effect of delaying, deferring, or preventing a change in control of the Company
without further action by the shareholders, may discourage bids for the Common
Stock at a premium over the market price of the Common Stock, and may adversely
affect the market price of, and the voting and other rights of the holders of,
the Common Stock.
Accounting Treatment of the Merger
For accounting purposes, the Merger will be treated as a recapitalization
of Planet Zanett with Planet Zanett as the acquiror (reverse acquisition).
Regulatory Approvals
No regulatory approvals are required to complete the transactions
contemplated by the Merger Agreement.
Vote Required for Approval
For approval, this Proposal requires the affirmative vote of two-thirds of
the shares of BAB Common Stock issued and outstanding as of the Record Date
present in person or represented by Proxy at the Special Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 2
DESCRIBED ABOVE.
PROPOSAL 3
Approve the declaration of a dividend, consisting of all of the common
stock of BAB, Inc., to the holders of BAB Common Stock as of the Spin-off Record
Date.
- 83 -
General Description of the Spin-off Proposal
Pursuant to the Merger Agreement, prior to the Effective Time, BAB will
declare a dividend consisting of all of the common stock of BAB, Inc. to holders
of BAB Common Stock as of a Spin-off Record Date prior to the Effective Time,
payable as soon as practicable following the Effective Time. Planet Zanett
shareholders receiving BAB Common Stock in the Merger will not participate in
the dividend.
Principal Reasons for the Spin-off Proposal
The purpose of this transaction is to provide BAB's Stockholders with the
same interest in BAB's historical operations they had prior to the Merger. All
of the assets of BAB related to BAB's current business operations will be
transferred to BAB, Inc., which will assume all liabilities of BAB related to
its current business operations. The current management of BAB will be the
management of BAB, Inc.
Potential Negative Factors Associated with the Spin-off
Limited public trading. Following the Spin-off, BAB, Inc.'s common stock
will not be traded on the Nasdaq SmallCap Market but will be conducted in the
over-the-counter markets on the OTC Bulletin Board. Consequently, the liquidity
of BAB, Inc.'s securities will likely be impaired, not only in the number of
shares which may 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 BAB, Inc. and lower prices for BAB, Inc.'s securities than might
otherwise prevail.
Future growth uncertain. There can be no assurance that BAB, Inc. will be
able to manage its operations effectively or that it will be able to maintain or
accelerate its growth. The impact of the dividend on BAB's operations remains
uncertain.
In view of the wide variety of factors considered, the BAB board of
directors did not find it practicable to, and did not quantify or otherwise
attempt to assign relative weights to the specific factors considered. The BAB
board of directors viewed its position and recommendation as being based on the
totality of the information presented to and considered by it. After taking into
consideration all the factors set forth above, the BAB board of directors
determined that the potential benefits of the dividend outweighed the potential
detriments.
Formation of BAB, Inc.
BAB has formed BAB, Inc. under the laws of the State of Delaware. BAB,
Inc. was formed to hold all of the operating subsidiaries of BAB, to be spun-off
as a dividend to the shareholders of BAB.
Certificate of Incorporation of BAB, Inc.
The Certificate of Incorporation of BAB, Inc. was filed July 12, 2000, and
will be the Certificate of Incorporation of BAB, Inc. unless and until
thereafter changed or amended as provided therein or in accordance with
applicable law.
- 84 -
By-laws of BAB, Inc.
At the time of the Spin-off, the by-laws in effect for BAB, Inc. will be
the by-laws of BAB, Inc. unless and until thereafter changed or amended as
provided therein or in the Certificate of Incorporation or by applicable law.
Management of BAB, Inc. After the Spin-off
The initial Board of Directors of BAB, Inc. will consist solely of those
persons who comprised the Board of Directors of BAB prior to the Effective Time,
or a sub-set of them, selected by them, and any subsequent members who take
office for any reason (including removal of any incumbent director for cause)
will be elected solely from nominees so elected by the remaining BAB, Inc.
Directors, BAB as sole shareholder of BAB, Inc. will vote its shares solely for
such nominees.
Tax Consequences of the Spin-off
The distribution of the BAB, Inc. stock to the BAB Shareholders should
qualify as a tax-free spin-off to BAB's U.S. stockholders under the tax-free
spin-off provisions of the Internal Revenue Code of 1986 (the "Code") and BAB
should have no income tax due as a result of the Spin-off. No legal opinions or
Internal Revenue Service rulings have been requested with respect to these
matters.
The discussion set forth below is based on current provisions of the Code,
existing regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. No attempt has been made to
comment on all federal income tax consequences of the distribution that may be
relevant to particular holders, including holders that are subject to special
tax rules such as dealers in securities, foreign persons, mutual funds,
insurance companies, tax-exempt entities, stockholders who acquire their BAB
Common Stock pursuant to the exercise of employee stock options or otherwise as
compensation and holders who do not hold their BAB Common Stock as capital
assets. Holders of BAB Common Stock are urged to consult their own tax advisors
regarding the federal income tax consequences of the distribution in light of
their personal circumstances and the consequences under applicable state, local
and foreign tax laws.
If the distribution qualifies as a tax-free distribution under the
tax-free spin-off provisions of the Code:
o A BAB stockholder should not recognize any income, gain or
loss as a result of the distribution;
o A BAB stockholder's aggregate tax basis for his or her BAB
Common Stock on which BAB Common Stock is distributed and the
BAB, Inc. common stock received by such stockholder in the
distribution should be the same as the basis of BAB Common
Stock held by such stockholder immediately prior to the
distribution. A BAB stockholder's aggregate tax basis should
be allocated between his or her BAB Common Stock and BAB, Inc.
common stock received in the distribution in proportion to the
fair market value of both the BAB, Inc. common stock and BAB
Common Stock on the distribution date;
- 85 -
o A BAB stockholder's holding period for the BAB, Inc. common
stock received in the distribution should include the holding
period of the BAB Common Stock on which the distribution is
made, provided that such BAB Common Stock is held as a capital
asset by such stockholder on the distribution date;
There are numerous requirements that must be satisfied in order for the
distribution to be accorded tax-free treatment under the Code, many of which are
fact specific and subjective. If the distribution fails to qualify as a tax-free
spin-off under the spin-off provisions of the Code, each BAB stockholder would
be generally treated as if such stockholder had received a taxable distribution
in an amount equal to the fair market value of the BAB, Inc. common stock
received. That distribution would be taxable as a dividend to the extent of each
such shareholder's pro rata portion of BAB's earnings and profits, the excess
will be a return of such shareholder's basis in such shareholder's stock and the
excess, after basis is returned to zero, will be treated as gain from the sale
of the stock.
Current United States Treasury regulations require each BAB stockholder
who receives BAB, Inc. common stock pursuant to the spin-off to attach to his or
her federal income tax return for the year in which the distribution occurs a
detailed statement setting forth such data as may be appropriate in order to
show the applicability under the tax-free spin-off provisions of the Code to the
distribution. BAB will provide the appropriate information to each stockholder
of record as of the record date (____________, 2000).
Vote Required for Approval
Stockholder approval of the dividend is not required by Delaware law, but
is sought to facilitate distribution of the dividend under the securities laws
of certain states in which shareholders reside. The dividend is an integral part
of the reorganization contemplated by Proposals 1 and 2. As elsewhere disclosed
is this Proxy Statement, unless all three proposals are approved none of the
proposals will be implemented.
For approval, this Proposal requires the affirmative vote of a majority of
the shares of BAB Common Stock present in person or represented by Proxy at the
Special Meeting.
- 86 -
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 3
DESCRIBED ABOVE.
CERTAIN TRANSACTIONS
The following information relates to certain relationships and
transactions between BAB and related parties, including officers and directors
of BAB. It is BAB's policy that it will not enter into any transactions with
officers, directors or beneficial owners of more than 5% of BAB's Common Stock,
or any entity controlled by or under common control with any such person, on
terms less favorable to BAB 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 BAB than could have been realized in arm's length
transactions with unaffiliated parties.
Michael K. Murtaugh, BAB'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 BAB 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
BAB, is a principal of J.H. Chapman Group, LLC ("Chapman"), who assists BAB from
time to time in the identification and negotiation of potential acquisitions. In
February 1997, Chapman assisted BAB 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 BAB,
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 BAB in negotiating the acquisition of certain asset s of
a related group of entities doing business as Jacobs Bros. Bagels. On February
26, 1999, BAB 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.
- 87 -
OTHER MATTERS
Revocability of Proxies
Any Proxy solicited hereby by the person giving it at any time before it
has been exercised at the Special Meeting may be revoked by giving notice of
revocation to the Secretary of BAB in writing, submitting a later-dated Proxy or
by voting the shares in person at the Special Meeting. Holders whose shares are
in street name should consult with their brokers concerning procedures for
revocation. Subject to such revocation, all shares represented by a properly
executed Proxy will be voted as directed by the holder on the Proxy card. If no
choice is specified, proxies will be voted FOR each of Proposals 1, 2 and 3.
Solicitation Costs
Planet Zanett will pay the cost of preparing and mailing this Proxy
statement and other costs of the Proxy solicitation made by BAB's Board of
Directors. Certain of BAB's officers and employees may solicit the submission of
proxies authorizing the voting of shares in accordance with the Board of
Directors' recommendations, but no additional reimbursement will be paid by BAB
or Planet Zanett for the solicitation of those proxies. Such solicitation may by
made by personal interview, telephone, and telegram. Arrangements have also been
made with brokerage firms and others for the forwarding of Proxy solicitation
materials to the beneficial owners of Common Stock, and Planet Zanett will
reimburse them for reasonable out-of-pocket expenses incurred in connection
therewith.
Legal Matters
The legality of BAB Common Stock issued in the Merger will be passed upon
for BAB by its counsel, Moss & Barnett, A Professional Association, Minneapolis,
Minnesota.
Experts
The financial statements of Planet Zanett as of December 31, 1999 and 1998
and for each of the two years in the period ended December 31, 1999 included in
this document have been so included in reliance on the reports of McEnerney,
Brady & Company LLC, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of BAB as of November 30, 1999 and
1998 and for each of the two years in the period ended November 30, 1999
included in this proxy statement have been so included in reliance on the report
of Blackman Kalleck Bartelstein, LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
- 88 -
Representatives of Blackman Kalleck Bartelstein, LLP are not expected to
be present at the special meeting.
Other Matters
The Board of Directors does not know of any matters other than those
described in this Proxy Statement that will be presented for action at the
Special Meeting. If other matters are presented, it is the intention of the
persons named as proxies in the accompanying Proxy Card to vote in their
discretion all shares represented by validly executed proxies.
Where You Can Find More Information
BAB files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any reports, statements or other information that BAB files with
the SEC at the SEC's public reference rooms at the following locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. These SEC filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the SEC at "http://www.sec.gov."
Although they are not incorporated by reference in this proxy statement,
BAB has filed the documents set forth below with the SEC. BAB has supplied all
information contained in this proxy statement relating to BAB.
BAB FILINGS
(FILE NO. 0-27068) PERIOD
Annual Report on Form 10-KSB Year ended November 30, 1999
Quarterly Report on Form 10-QSB Quarter ended May 28, 2000
- 89 -
You can obtain the documents that BAB has filed with the SEC, including
those incorporated by reference herein, through the SEC or the SEC's Internet
web site as described above. Such documents are available from the companies
without charge, excluding all exhibits, except that if BAB has specifically
incorporated by reference an exhibit in this proxy statement, the exhibit will
also be provided without charge.
You may obtain such documents by requesting them in writing or by
telephone from BAB at the following address:
BAB Holdings, Inc.
8501 W. Higgins Road
Suite 320
Chicago, IL 60631
(773) 380-6100
You should rely on the information contained or incorporated by reference
in this proxy statement. neither BAB nor Planet Zanett has authorized anyone to
provide you with information that is different form what is contained or
incorporated by reference in this proxy statement. This proxy statement is dated
_____, 2000. You should not assume that the information contained in this proxy
statement is accurate as of any date other than that date. Neither the mailing
of this proxy statement to shareholders not the issuance of BAB Common Stock in
the Merger creates any implication to the contrary.
Special Note Regarding Forward-Looking Statements
This proxy statement contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with respect
to the financial condition, results of operations, business strategies,
operating efficiencies or synergies, competitive positions, growth opportunities
for existing products, plans and objectives of management, markets for stock of
BAB and Planet Zanett and other matters. Statements in this proxy statement that
are not historical facts are hereby identified as "forward-looking statements"
for the purpose of the safe harbor provided by Section 21E of the Exchange act
and Section 27A of the Securities Act. These forward-looking statements,
including, without limitation, those relating to the future business prospects,
revenues and income, in each case relating to BAB, Planet Zanett and BAB, Inc.,
wherever they occur in this proxy statement are necessarily estimates reflecting
the best judgment of the senior management of BAB and Planet Zanett and involve
a number of risks and uncertainties that could cause actual results to differ
materially from those suggested by the forward-looking statements. these
forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth in this proxy statement. Certain
risks and uncertainties will be wholly or partially outside the control of BAB,
Inc. and its management, including its ability to attract new franchisees; the
continued success of current franchisees; the effects of competition on
franchisee and BAB, Inc.-owned store results; consumer acceptance of BAB, Inc.'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
- 90 -
weather conditions; the hiring, training, and retention of skilled corporate and
restaurant management; and the integration and assimilation of acquired
concepts. Planet Zanett's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Proxy
Statement. In addition, Planet Zanett has undergone a shift in its core
business. It was formerly engaged in consulting, research and related services
to corporations. Planet Zanett's core business will function to incubate early
stage internet companies focusing on infrastructure, wireless applications and
internet solutions to industrial corporations worldwide while providing
development stage companies with capital, office space, infrastructure and
managerial guidance. The effects of this fundamental change in business strategy
are unknown and all financial data and forward-looking statements must be
interpreted taking into account this transformation.
Words such as "estimate," "project," "plan," "intend," "expect," "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
proxy statement and the other documents referred to herein. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this proxy statement, or in the case of a document
incorporated by reference, the date of that document. Neither BAB not Planet
Zanett undertakes any obligation to publicly update or release any revisions to
these forward-looking statements to reflect events or circumstances after the
date of this proxy statement or to reflect occurrence of unanticipated events.
- 91 -
INDEX TO FINANCIAL STATEMENTS
Page
----
Bab Holdings, Inc.
Audited Annual Financial Information
Report of Independent Auditors................................. F-2
Consolidated Balance Sheet as of November
30, 1999 and 1998............................................ F-3
Consolidated Statement of Operations for the
Years ended November 30, 1999 and 1998....................... F-5
Consolidated Statement of Changes in Stockholders Equity
for the Years ended November 30, 1999 and 1998............... F-6
Consolidated Statement of Cash Flows for the Years
ended November 30, 1999 and 1998............................. F-7
Notes to Consolidated Financial Statements..................... F-9
Unaudited Interim Financial Information
Consolidated Balance Sheet as of May 28, 2000.................. F-24
Consolidated Statement of Operations for the
Six Months ended May 28, 2000 and May 31, 1999............... F-26
Consolidated Statement of Cash Flows for the
Six Months ended May 28, 2000 and May 31, 1999............... F-28
Notes to Consolidated Financial Statements..................... F-30
Planet Zanett Corporate Incubator, Inc.
(formerly Willow Bay Associates, LLC)
Audited Annual Financial Information
Report of Independent Auditors................................. F-34
Statement of Financial Position as of
December 31, 1999............................................ F-35
Statement of Income and Changes in Member's Equity as of
December 31, 1999............................................ F-36
Statement of Cash Flows as of
December 31, 1999............................................ F-37
Notes to Financial Position.................................... F-38
Unaudited Interim Financial Information
Statement of Financial Position as of
March 31, 2000 .............................................. F-49
Statement of Operations as of
March 31, 2000............................................... F-50
Statement of Cash Flows as of
March 31, 2000............................................... F-51
BAB HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
YEARS ENDED NOVEMBER 30, 1999 AND 1998
AND
SIX MONTH PERIOD ENDING JUNE 30, 2000
F-1
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.
BLACKMAN KALLICK BARTELSTEIN, LLP
Chicago, Illinois
February 3, 2000
F-2
BAB HOLDINGS, INC.
Consolidated Balance Sheets
November 30, 1999 and 1998
================================================================================
ASSETS
1999 1998
------------ ------------
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
from franchisees and stores 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 (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
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
Current Liabilities
Accounts payable $ 939,787 $ 1,014,734
Accrued liabilities 875,563 714,789
Liability for store conversions 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
Additional paid-in capital 1,187,696 1,252,402
Accumulated deficit (8,555,915) (4,967,566)
Treasury stock at cost, 50,116 shares and 48,883
shares, respectively (43,963) (36,067)
------------ ------------
Total Stockholders' Equity 6,095,487 9,227,952
------------ ------------
$ 12,854,578 $ 14,444,991
============ ============
F-4
BAB HOLDINGS, INC.
Consolidated Statements of Operations
Years Ended November 30, 1999 and 1998
================================================================================
1999 1998
------------ ------------
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
Depreciation and amortization 1,247,868 1,180,259
Provision for uncollectible accounts 1,043,993 124,521
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
------------ ------------
(Loss) Income from Operations (3,387,732) 515,155
Interest Expense (292,457) (205,618)
Other Income 215,620 173,266
------------ ------------
(Loss) Income before Taxes (3,464,569) 482,803
------------ ------------
Provision (Benefit) for Income Taxes
Current -- 16,039
Deferred -- (180,000)
------------ ------------
-- (163,961)
------------ ------------
Net (Loss) Income (3,464,569) 646,764
Preferred Stock Dividends Accumulated (123,780) 147,864)
------------ ------------
Net (Loss) Income Attributable to Common Stockholders $ (3,588,349) $ 498,900
============ ============
(Loss) Income per Share - Basic and Diluted $ (2.32) $ 0.37
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
BAB HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
Years Ended November 30, 1999 and 1998
================================================================================
Series A
Common Stock Preferred Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
----------------------- ---------------------- ----------------------
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 112,000 522,390 (18,710) (441,173) -- --
Preferred Dividends
Accumulated -- -- -- 147,864 -- --
Preferred Dividends
Paid -- -- -- (19,995) -- --
Termination of Options
in Connection with
Acquisitions -- -- -- -- -- --
Purchase of
Treasury Stock -- -- -- -- (3,883) (18,567)
Net Income -- -- -- -- -- --
-------------------------------------------------------------------------------------
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 -- --
Issuance of Warrants -- -- -- -- -- --
Issuance of Common Stock
In Acquisitions 26,666 140,000 -- -- -- --
Purchase of
Treasury Stock -- -- -- -- (1,233) (7,896)
Net Loss -- -- -- -- -- --
-------------------------------------------------------------------------------------
Balance as of
November 30, 1999 2,287,656 $13,507,669 -- -- (50,116) (43,963)
(Wide Table Continued)
Additional
Paid in Accumulated
Capital Deficit Total
------- ------- -----
Balance as of
November 30, 1997 1,368,619 (5,466,466) 8,654,750
Conversion of Preferred
to Common Stock (81,217) -- --
Preferred Dividends
Accumulated -- (147,864) --
Preferred Dividends
Paid -- -- (19,995)
Termination of Options
in Connection with
Acquisitions (35,000) -- (35,000)
Purchase of
Treasury Stock -- -- (18,567)
Net Income -- 646,764 646,764
------------------------------------------
Balance as of
November 30, 1998 1,252,402 (4,967,566) 9,227,952
Conversion of
Preferred to
Common Stock (264,706) -- --
Preferred Dividends
Accumulated -- (123,780) --
Issuance of Warrants 200,000 -- 200,000
Issuance of Common Stock
In Acquisitions -- -- 140,000
Purchase of
Treasury Stock -- -- (7,896)
Net Loss -- (3,464,569) (3,464,569)
------------------------------------------
Balance as of
November 30, 1999 1,187,696 (8,555,915) 6,095,487
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
BAB HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years Ended November 30, 1999 and 1998
================================================================================
1999 1998
----------- -----------
Cash Flows from Operating Activities
Net (loss) income $(3,464,569) $ 646,764
----------- -----------
Adjustments to reconcile net (loss) income to net cash
(used in) provided by 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
from franchisees and stores (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)
Liability for closed store expenses (36,344) (467,815)
Accrued liabilities 36,476 (140,192)
Unexpended National Marketing Fund
contributions 85,758 (57,549)
Jacobs Bros noncompete agreement (90,000) --
Deferred franchise fee revenue (99,207) (281,500)
----------- -----------
Total Adjustments 2,934,744 (343,572)
----------- -----------
Net Cash (Used in) Provided by
Operating Activities (529,825) 303,192
----------- -----------
The accompanying notes are an integral part of
the consolidated financial statements.
F-7
BAB HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years Ended November 30, 1999 and 1998
================================================================================
1999 1998
--------- ---------
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)
Repayments on notes receivable 247,059 138,900
Other 40,445 (31,029)
--------- ---------
Net Cash Provided by (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 (Used in) Provided by
Financing Activities (357,773) 153,169
--------- ---------
Net (Decrease) Increase 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
========= =========
The accompanying notes are an integral part of
the consolidated financial statements.
F-8
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.
F-9
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
F-10
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 follows (see Note 4):
1999 1998
------- -------
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
======= =======
F-11
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
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 operation, 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.
F-12
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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:
Loss associated with actual and expected conversion
of stores to franchises $1,236,568
Severance, lease termination and other costs 250,713
Write-off of Canadian franchise rights 113,125
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 over accrual
in 1997 for store closing costs.
F-13
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
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:
1999 1998
----------- -----------
Income tax (benefit) provision 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)
=========== ===========
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:
1999 1998
----------- -----------
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 carry forward 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
=========== ===========
As of November 30, 1999, the Company has cumulative net operating loss carry
forward expiring between 2008 and 2014 for U.S. federal income tax purposes of
$6,516,323. The net operating loss carry forward 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
carry forward and other deferred tax assets for which it is considered more
likely than not that the benefit will not be realized.
F-14
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 6 - LONG-TERM OBLIGATIONS
Long-term debt consisted of the following:
1999 1998
----------- -----------
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
=========== ===========
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:
Year Ending November 30:
2000 $ 1,818,087
2001 180,363
2002 199,427
2003 222,763
2004 247,052
Thereafter 406,257
-------------
$ 3,073,949
=============
F-15
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 6 - LONG-TERM OBLIGATIONS (Continued)
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. An additional $120,000 was used to purchase the assets of 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:
Year Ending November 30:
2000 $ 1,011,776
2001 978,325
2002 808,090
2003 814,345
2004 559,559
Thereafter 402,642
------------
$ 4,574,737
============
F-16
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
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.
F-17
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 10 - EARNINGS PER SHARE
The computation of basic and diluted (loss) earnings per share is as follows:
1999 1998
----------- -----------
Numerator:
Net (loss) income $(3,464,569) $ 646,764
Preferred stock dividend accumulated (123,780) (147,864)
----------- -----------
Numerator for basic (loss) earnings per share -
(loss) income attributable to common stockholders (3,588,349) 498,900
Effect of dilutive securities:
Preferred stock dividend accumulated 123,780 147,864
----------- -----------
Numerator for diluted (loss) earnings per share -
(loss) income attributable to common stockholders $(3,464,569) $ 646,764
=========== ===========
Denominator:
Denominator for basic (loss) earnings per share -
weighted average shares 1,496,323 1,350,180
Effect of dilutive securities:
Convertible preferred stock -- 401,193
----------- -----------
Denominator for diluted (loss) earnings per share -
weighted average shares $ 1,496,323 1,751,373
=========== ===========
Basic and diluted (loss) earnings per share $ (2.32) $ 0.37
=========== ===========
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.
F-18
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
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.
F-19
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 11 - STOCK OPTIONS PLANS (Continued)
Activity under the Incentive Plan and Directors Plan during the two years ended
November 30, 1999, is as follows:
Weighted-
Average
Number of Option Price
Shares Per Share
--------- ------------
Outstanding as of November 30, 1997 49,667 $37.50
Granted 25,239 $ 7.92
Exercised -- --
Canceled (4,330) $12.72
------
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
======
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:
1999 1998
----------- -----------
Net (loss) income attributable to common stockholders:
As reported $(3,588,349) $ 498,900
Pro forma $(3,811,986) $ 89,973
Basic (loss) income per share:
As reported $ (2.32) $ 0.37
Pro forma $ (2.54) $ 0.06
Diluted (loss) income per share:
As reported $ (2.32) $ 0.37
Pro forma $ (2.54) $ 0.06
F-20
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 11 - STOCK OPTIONS PLANS (Continued)
Information on options outstanding under the Incentive Plan and the Directors
Plan as of November 30, 1999, is as follows:
Weighted-
Average Weighted-
Range of Number of Remaining Average
Exercise Price Options Contractual Life Exercise Price
------------------ --------- ---------------- --------------
$ 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
See Note 12 for disclosures regarding stock warrants.
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.
F-21
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
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.
Year Ended November 30
----------------------------------------------------------------------
Net Revenues Operating (Loss) Income
1999 1998 1999 1998
--------------- -------------- --------------- ----------------
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 574,538 552,767
Interest Expense, Net of Interest
Income 138,700 86,374
--------------- ----------------
(Loss) Income before Income
Taxes (3,464,569) 482,803
Benefit for Income Taxes -- (163,961)
--------------- ----------------
Net (Loss) Income $ (3,464,569) $ 646,764
=============== ================
F-22
BAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended November 30, 1999 and 1998
================================================================================
NOTE 13 - SEGMENT INFORMATION (Continued)
Operating, Segment Data
Identifiable Capital Depreciation and
Assets Expenditures Amortization
------------ ------------ ----------------
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, 1999 November 30, 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 assets 276,717 206,952
Other 530,005 431,719
----------- -----------
Total Consolidated Assets $12,854,578 $14,444,991
=========== ===========
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.
F-23
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
May 28, 2000
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents, including restricted cash
of $153,668 $ 365,924
Receivables
Accounts receivable, net of allowance for doubtful
accounts of $898,339 943,004
National Marketing Fund contributions receivable
from franchisees and stores 366,837
Notes receivable, net of allowance for doubtful
accounts of $201,000 376,297
Inventory 218,429
Assets held for sale 1,068,736
Prepaid and other current 349,476
Deferred income taxes 530,005
-----------
Total Current Assets 4,218,708
-----------
Property and Equipment, net of accumulated depreciation of $1,753,939 1,671,075
Notes Receivable 457,806
Patents, trademarks and copyrights, net of accumulated
amortization of $226,257 943,254
Goodwill, net of accumulated amortization of $267,177 2,476,087
Franchise contract rights, net of accumulated amortization
of $319,477 1,764,488
Other, net of accumulated amortization of $330,253 478,967
-----------
Total Assets $12,010,385
===========
F-24
BAB Holdings, Inc.
Condensed Consolidated Balance Sheet
May 28, 2000
(Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 745,198
Accrued liabilities 933,867
Liability for store conversions 113,736
Accrued professional and other services 196,584
Unexpected National Marketing Fund contributions 604,679
Current portion of long-term debt 1,464,021
Deferred franchise fee revenue 179,475
------------
Total current liabilities 4,237,560
------------
Noncurrent Liabilities
Deferred revenue 339,334
Deferred income taxes 350,005
Long-term debt, net of portion included in
current liabilities 1,161,959
------------
Total noncurrent liabilities 1,851,298
------------
Stockholders' Equity
Common stock 13,507,669
Additional paid-in capital 1,187,696
Treasury Stock (43,963)
Accumulated deficit (8,729,875)
------------
Total Stockholders' Equity 5,921,527
------------
Total Liabilities and Stockholders' Equity $ 12,010,385
============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-25
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
May 28, 2000
(Unaudited)
- --------------------------------------------------------------------------------
3 month ended 6 month ended
------------- -------------
May 28, 2000 May 31, 1999 May 28, 2000 May 31, 1999
------------ ------------ ------------ ------------
Revenues
Net sales by Company-
owned stores $ 2,323,088 $ 2,744,937 $ 4,588,480 $ 4,831,024
Royalty fees from
franchised stores 770,343 770,299 1,522,439 1,585,379
Licensing fees and other
income 275,657 272,001 521,394 509,274
Franchise and area
development fees 31,468 79,000 270,868 209,500
----------- ----------- ----------- -----------
Total Revenues 3,400,556 3,866,237 6,903,181 7,135,177
----------- ----------- ----------- -----------
Operating Costs
and Expenses
Food, beverage, and paper
costs 722,632 800,748 1,378,472 1,505,555
Store payroll and other
operating expenses 1,523,572 1,787,151 3,083,615 2,983,504
Selling, general, and
administrative expenses
Payroll-related 517,793 658,305 1,024,243 1,211,484
Occupancy 123,595 100,628 206,946 162,442
Advertising and promotion 71,928 70,766 124,745 148,480
Professional service fees 85,651 62,287 164,506 167,382
Franchise-related expenses 10,553 38,648 29,395 94,056
Depreciation and amortization 243,683 338,097 489,037 630,545
Travel 33,615 52,849 67,595 107,868
Other 194,371 95,766 374,134 328,352
----------- ----------- ----------- -----------
Total Operating costs and
Expenses 3,527,393 4,005,245 6,942,688 7,339,668
(Loss) before interest (126,837) (139,008) (39,507) (204,491)
Interest expense (85,505) (92,510) (168,061) (131,532)
Interest income 17,727 66,668 33,608 97,767
----------- ----------- ----------- -----------
Net (loss) (194,615) (164,850) (173,960) (238,256)
Preferred stock dividends
accumulated -- (31,397) -- (77,096)
F-26
BAB Holdings, Inc.
Condensed Consolidated Statements of Operations
May 28, 2000
(Unaudited)
- --------------------------------------------------------------------------------
Net (loss) attributable to
common shareholders $ (194,615) $ (196,247) $ (173,960) $ (315,352)
Basic and diluted loss per
common share $ ($0.09) $ (0.14) $ ($0.08) $ (0.22)
Average number of shares
outstanding-basic and
diluted 2,237,557 1,419,051 2,237,557 1,406,774
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-27
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
May 28, 2000
(Unaudited)
- --------------------------------------------------------------------------------
May 28, 2000 May 31, 1999
------------ ------------
Cash Flows from Operating Activities
Net income (loss) $(173,960) $(238,256)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 489,037 630,545
(Increase) decrease in
Trade accounts receivable 163,006 (434,658)
National Marketing Fund contributions
receivable 48,480 (130,920)
Inventories 75,409 (56,442)
Deferred franchise costs -- 6,640
Notes receivable (155,000) 122,942
Prepaid expenses and other assets (72,758) (29,724)
Increase (decrease) in
Accounts payable (194,588) 159,743
Accrued professional and other services (32,569) --
Reserve for closed store expenses (54,984) --
Accrued liabilities 102,304
Unexpended National Marketing Fund
franchisee contributions 60,052 174,471
Jacobs Bros. non-compete agreement (44,000) --
Deferred franchise fee revenue (88,025) (53,500)
Other 29,545 (4,013)
Total Adjustments 325,907 385,084
Net Cash Provided by Operating
Activities 151,947 146,828
Cash Flows from Investing Activities
Purchases of property and equipment (21,137) (293,260)
Collection of notes receivable 207,941 18,289
Sale of property and equipment 189,321
Sale of assets held for sale 255,000
Other (161,416)
--------- ---------
Net Cash Provided (Used in)
Investing Activities 631,125 (436,387)
Cash Flows from Financing Activities
Debt repayments (442,935) (323,925)
Borrowings -- 180,453
Other (5,034) (7,897)
F-28
BAB Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
May 28, 2000
(Unaudited)
- --------------------------------------------------------------------------------
May 28, 2000 May 31, 1999
------------ ------------
Net Cash (Used in) Financing Activities (447,969) (151,369)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 335,103 (440,928)
Cash and Cash Equivalents, Beginning of Year 30,818 700,162
Cash and Cash Equivalents, End of Quarter $ 365,921 $ 259,234
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-29
BAB Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
May 28, 2000
(Unaudited)
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 8. The Company continues to operate four stores with
the Jacob Bros. name. The accompanying condensed consolidated financial
statements are unaudited. These financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company's management, the condensed consolidated financial
statements for the unaudited interim periods presented include all adjustments
necessary to fairly present the results of such interim periods and the
financial position as of the end of said period. These adjustments were of a
normal recurring nature and did not have a material impact on the financial
statements presented.
2. Stores Open and Under Development
Stores which have been opened at May 28, 2000 are as follows:
Stores opened:
Company-owned 18
Franchisee-owned 172
Licensed 57
----
Total 247
3. 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
F-30
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 $1,191,236 and was recorded as a current asset as of May 28, 2000. The
actual and planned conversions resulted in a pre-tax loss of $1,600,406 during
the fourth quarter of 1999. As of May 28, 2000, $113,736 of the charge,
primarily for severance and lease termination costs, remains as a liability for
store conversions.
4. Preferred Stock - Series A Convertible Preferred Stock
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.
5. Line of Credit Agreement
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 75% of accounts receivable under 90 days and 40% of original cost of
equipment, furniture and fixtures. Interest was payable monthly at prime plus 1%
with principal due upon maturity on December 31, 1999. 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. 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% (13.50% at May 28,
2000). As of May 28, 2000, the Company had borrowed $1,296,000 on the Line. The
new Line expires on July 29, 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. 6. Notes Payable 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 were used to purchase
certain assets of Jacobs Bros. Bagels, equipment and fund remodeling required on
the units acquired in the purchase.
7. Earnings (Loss) per Share
The following tables sets forth the computation of basic and diluted loss per
share:
3 months ended 6 months ended
-------------- --------------
May 28, 2000 May 31, 1999 May 28, 2000 May 31, 1999
------------ ------------ ------------ ------------
Numerator
Net income (loss) $ (194,615) $ (164,850) $ (173,960) $ (238,256)
Preferred stock dividend (31,397) (77,096)
F-31
accumulated
----------- ---------- ---------- ----------
Numerator for basic and
diluted loss per share - loss
attributable to common
shareholders $ (194,615) (196,247) $ (173,960) (315,352)
Denominator
Denominator for basic and
diluted loss per share - 2,237,557 1,419,051 2,237,557 1,406,774
weighted average shares
Basic and diluted loss per $(0.09) $(0.14) $(0.08) $(0.22)
share
Options to purchase 77,648 shares of common stock at varying prices are
outstanding at May 28, 2000 under the Company's 1995 Long-Term Incentive and
Stock Option Plan (the Incentive Plan) and the 1995 Outside Directors Stock
Option Plan (the Directors' Plan). Also outstanding during the period ended May
28, 2000 was a warrant sold in connection with the Company's initial public
offering to the underwriter to purchase 42,498 shares of common stock at $19.20
per share. Additionally, in connection with various acquisitions, the Company
issued options to purchase 83,333 shares of common stock issuable at varying
exercise prices ranging from $7.50 per share to $9.00 per share. Further, a
warrant issued to the placement agent of the Preferred Stock to purchase 2,219
shares of common stock at $19.74 per share was outstanding. The exercise of
options and warrants outstanding during the quarters ended May 28, 2000 and May
31, 1999 and the conversion of convertible securities outstanding during the
quarter ended May 31, 1999 is not assumed as the result is antidilutive to the
reported loss per share.
8. Acquisitions and Dispositions
During the first half of fiscal 2000, the Company sold six stores identified as
part of the restructuring described in Note 3 above. The stores were sold at or
near their estimated fair market value as determined in the fourth quarter of
1999. Consequently, the sale of the stores had no material impact on earnings.
The Company-owned stores were converted to franchised units. During the fourth
quarter of 1999, the Company acquired a store from a franchisee as consideration
for forgiveness of a note receivable. The Company operated the store until it
was sold during the first quarter of fiscal 2000. In addition, the Company
accepted a prepayment at a discount on a note receivable during the first
quarter of 2000. The notes receivable were adequately reserved for and,
consequently, the transactions had no impact on earnings.
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 May 28, 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.
F-32
WILLOW BAY ASSOCIATES, LLC
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
YEAR ENDED DECEMBER 31, 1999 AND 1998
AND
THREE MONTH PERIOD ENDING MARCH 31, 2000
F-33
Certified Public Accountants
293 Eisenhower Parkway, suite 320
Livingston, New Jersey 07039
(973) 535-2880
Fax (973) 535-5893
- --------------------------------------------------------------------------------
McENERNEY, BRADY & COMPANY, LLC
INDEPENDENT AUDITORS' REPORT
To the Members of
Willow Bay Associates, LLC
New York, New York
We have audited the accompanying statement of financial position of Willow Bay
Associates, LLC ("Willow Bay") (a limited liability corporation) as of December
31, 1999 and the related statements of income and changes in member's equity and
cash flows for the year then ended. These financial statements are the
responsibility of Willow Bay'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 Willow Bay Associates, LLC as
of December 31, 1999 and the results of its operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
Livingston, New Jersey McEnerney, Brady & Company, LLC
February 7, 2000
(Except for Note 3, as to which
the date is May 11, 2000)
F-34
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF FINANCIAL POSITION
DECEMBER 31,1999
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 185
Total Assets $ 185
=======
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 5,771
-------
Total Current Liabilities 5,771
-------
Commitments and Contingencies
Member's Equity
Paid-in capital
75
Retained earnings (deficit)
(5,661)
Total Member's Equity (5,586)
-------
Total Liabilities and Member's Equity $ 185
=======
See the notes to financial statements.
F-35
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF INCOME AND CHANGES IN MEMBER'S EQUITY
YEAR ENDED DECEMBER 31,1999
- --------------------------------------------------------------------------------
Revenues
Consulting fees - related party $ 255,000
Settlements 120,000
---------
Net Revenues 375,000
---------
Operating Expenses
Expense reimbursements - related party 168,074
Commissions expense 202,800
Accounting and audit fees 5,750
Travel and meals 798
Telephone 2,563
Bank Charges 116
Internet domain fee 70
Searches - fees 490
---------
Total Operating Expenses 380,661
---------
Net Income (Loss) (5,661)
Member's Equity, Beginning of Year -0-
---------
Member's Equity, End of Year $ (5,661)
=========
See the notes to financial statements.
F-36
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,1999
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income (Loss) $(5,661)
(Increase) decrease in assets:
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 5,771
-------
Net Cash Provided by Operating Activities 110
-------
Cash Flows from Fund-raising Activities
Member's capital contribution 75
-------
Net Cash provided by Financing Activities 75
-------
Net Increase in cash
185
Cash, January 1, 1999 -0-
Cash, December 31, 1999 $ 185
=======
Other Disclosures
Interest paid during year $ -0-
=======
Income taxes paid during year $ -0-
=======
See the notes to financial statements.
F-37
WILLOW BAY ASSOCIATES, LLC
NOTES TO FINANCIAL POSITION
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is a Nevada limited liability company chartered in the State of
Nevada with an office located in New York City, which is engaged in consulting,
research, and related services to corporations. The Company is affected by
economic, political, and competitive market conditions.
Recognition of Revenues and Expenses
The Company's revenues and expenses are recorded on the accrual basis of
accounting in accordance with generally accepted accounting principles. Fee
income is recorded on the dates earned from customers and expenses are recorded
as they are incurred. The Fees earned from one related party customer
represented approximately 70% of the 1999 revenues.
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 disclosures 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.
Income Taxes
The Company, with consent of its member, elected to be treated as a sole
proprietorship for Federal and State income tax purposes. The income of a
limited liability company (which elects to flow income to the member) is not
taxed at the federal and state corporate level). The member is personally
responsible for income taxes due on the flow-through income. The Federal and New
York State tax on the income of the Company is paid personally by the member of
the Company (even if the income is not distributed to the member in the form of
cash or other assets).
NOTE 2 - RELATED PARTY TRANSACTIONS
Willow Bay Associates, LLC reimbursed a related party corporation $168,074 for
expenses incurred during 1999 (including payroll taxes, rent, and other
operating expenses.) The member of Willow Bay Associates, LLC is also a fifty
percent (50%) stockholder in the related party corporation.
NOTE 3 - SUBSEQUENT EVENTS/COMMITMENTS AND CONTINGENCIES
A) On April 28, 2000, the member issued an additional member certificate
indicating a fifty percent (50%) ownership transfer to stockholder of a
related party corporation as compensation for services rendered in the
year 2000.
F-38
WILLOW BAY ASSOCIATES, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUBSEQUENT EVENTS/COMMITMENTS AND CONTINGENCIES (Continued)
B) On April 4, 2000, Willow Bay Associates, LLC signed a "Letter of
Understanding" concerning a merger with a wholly owned subsidiary of BAB
Holding, Inc. The merger must be approved by BAB Holding, Inc.'s
shareholders and the members of Willow Bay Associates, LLC prior to
completion. According to the "Letter of Understanding", a key element to
completion of the merger is the assignment of all assets and liabilities
of BAB Holdings, Inc. to a subsidiary of BAB Holding, Inc. Before the
proposed merger, BAB Holding, Inc. has an outstanding indebtedness to CIB
Bank of approximately $1.5 million, which will not be assigned to the
subsidiary and which matures April 30, 2000. Affiliates of Willow Bay
Associates, LLC have agreed to provide financing to pay off the CIB Bank
debt of approximately $1.5 million in order to facilitate the merger. BAB
Holdings, Inc.'s liability to CIB bank is secured by collateral consisting
of approximately thirteen (13) of its company owned stores. An additional
condition to the closing of the merger is Willow Bay Associates, LLC
providing evidence of $4 million cash and cash equivalents on hand at the
time of the merger.
C) On April 10, 2000, BAB Holding, Inc. (listed on NASDAQ small-cap market )
announced it executed a letter of intent to merge with a leading New York
based Internet Incubator. The Company press release announced the
following:
o "Upon completion of the merger, BAB's current business would be assigned
to a subsidiary, which would be operated by BAB management. The agreement
anticipates the subsidiary would continue to own the same number of
shares, which would represent ten percent (10%) of the equity of the
merged company."
o "An affiliate of the New York Internet Incubator would provide substitute
long-term financing for the current bank debt of obligation of the
Company."
o "BAB Holdings, Inc. operates franchises and licenses of Big Apple Bagels,
My Favorite Muffin and Brewster's Coffee. It currently has units in
twenty-eight (28) states, two (2) Canadian provinces, Peru and Egypt and
has master franchise agreements for South Korea and the United Arab
Emirates. BAB owns Jacobs Bros. Bagels, a Chicago based bagel bakery chain
and has licensing agreements with Host Marriott, Mrs. Fields Cookies,
Beatrice Group, Inc., a division of Con Agra and Alanti Deli."
F-39
WILLOW BAY ASSOCIATES, LLC
NOTES TO FINANCIAL POSITION
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUBSEQUENT EVENTS/COMMITMENTS AND CONTINGENCIES (Continued)
D) Willow Bay Associates, LLC is in the process of filing for a name change
to "Planet Zanett Corporate Incubator" according to a press release dated
May 14, 2000. The newly named Planet Zanett Corporate Incubator is
intended to greatly expand its corporate consulting and business
activities in the future. The newly named entity will function to incubate
early stage internet companies focusing on infrastructure, wireless
applications, and internet solutions to industrial corporations worldwide.
Planet Zanett Corporate Incubator will provide development stage companies
with capital, office space, infrastructure, and managerial guidance.
E) Willow Bay Associates, LLC (the Company) filed a complaint February 2000
in the United States District Court of the District of Delaware asserting
an action for breach of contract against a party and seeking damages in
excess of $750,000. During March, 2000 the defendant filed its response to
the action and a counterclaim against the Company alleging
misrepresentation, breach of contract, and breach of covenant of good
faith and fair dealing. The Company responded to the counterclaim denying
all of the allegations.
Discovery has not yet started and, therefore, no opinion as to the
ultimate outcome of this matter can be expressed at this time. However,
the Company intends to vigorously pursue its action for breach of contract
and will vigorously defend itself against the counterclaim. The Company's
position is its breach of contract claim against the defendant is a strong
one, and that the counterclaim filed by the defendant is merely an attempt
to divert the court's attention away from the defendant's breach of
contract. Accordingly, no amounts have been accrued relating to these
actions in the accompanying financial statements because management
estimates the ultimate outcome is uncertain.
F-40
Certified Public Accountants
293 Eisenhower Parkway, suite 320
Livingston, New Jersey 07039
(973) 535-2880
Fax (973) 535-5893
- --------------------------------------------------------------------------------
McENERNEY, BRADY & COMPANY, LLC
INDEPENDENT AUDITORS' REPORT
To the Members of
Willow Bay Associates, LLC
New York, New York
We have audited the accompanying statement of financial position of Willow Bay
Associates, LLC (a limited liability corporation) as of December 31, 1998 and
the related statements of income and changes in member's equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 a 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 Willow Bay Associates, LLC as
of December 31, 1998 and the results of its operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
Livingston, New Jersey McEnerney, Brady & Company, LLC
June 5, 2000
F-41
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ -0-
--------
Total Assets $ -0-
========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ -0-
--------
Total Current Liabilities $ -0-
--------
Commitments and Contingencies
Member's Equity
Paid-in capital $ -0-
--------
Retained earnings (deficit) $ -0-
--------
Total Member's Equity $ -0-
--------
Total Liabilities and Member's Equity $ -0-
========
See the notes to financial statements.
F-42
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF INCOME AND CHANGES IN MEMBER'S EQUITY
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Revenues
Consulting fees $ -0-
--------
Net Revenues $ -0-
--------
Operating Expenses $ -0-
--------
Total Operating Expenses $ -0-
--------
Net Income (Loss) $ -0-
--------
Member's Equity, Beginning of Year $ -0-
--------
Member's Equity, End of Year $ -0-
========
See the notes to financial statements.
F-43
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Cash Flows from Operation Activities
Net Income (Loss) $ -0-
--------
Net Cash Provided by Operating Activities $ -0-
--------
Net Increase in cash $ -0-
--------
Cash, January 1, 1998 $ -0-
--------
Cash, December 31, 1998 $ -0-
========
Other Disclosures
Interest paid during year $ -0-
========
Income taxes paid during year $ -0-
========
See the notes to financial statements.
F-44
WILLOW BAY ASSOCIATES, LLC
NOTES TO FINANCIAL POSITION
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
The Company is a Nevada limited liability company chartered in the State of
Nevada with an office located in New York City, which is engaged in consulting,
research, and related services to corporations. The Company is affected by
economic, political, and competitive market conditions.
Recognition of Revenues and Expenses
The Company's revenues and expenses are recorded on the accrual basis of
accounting in accordance with generally accepted accounting principles. Fee
income is recorded on the dates earned from customers and expenses are recorded
as they are incurred.
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 disclosures 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.
Income Taxes
The Company, with consent of its member, elected to be treated as a sole
proprietorship for Federal and State income tax purposes. The income of a
limited liability company (which elects to flow income to the member) is not
taxed at the federal and state corporate level). The member is personally
responsible for income taxes due on the flow-through income. The Federal and New
York State tax on the income of the Company is paid personally by the member of
the Company (even if the income is not distributed to the member in the form of
cash or other assets).
NOTE 2 - SUBSEQUENT EVENTS/COMMITMENTS AND CONTINGENCIES
A) On April 28, 2000, the member issued an additional member certificate
indicating a fifty percent (50%) ownership transfer to stockholder of a
related party corporation as compensation for services rendered in the
year 2000.
F-45
WILLOW BAY ASSOCIATES, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUBSEQUENT EVENTS/COMMITMENTS AND CONTINGENCIES (Continued)
B) On April 4, 2000, Willow Bay Associates, LLC signed a "Letter of
Understanding" concerning a merger with a wholly owned subsidiary of BAB
Holding, Inc. The merger must be approved by BAB Holding, Inc.'s
shareholders and the members of Willow Bay Associates, LLC prior to
completion. According to the "Letter of Understanding", a key element to
completion of the merger is the assignment of all assets and liabilities
of BAB Holdings, Inc. to a subsidiary of BAB Holding, Inc. Before the
proposed merger, BAB Holding, Inc. has an outstanding indebtedness to CIB
Bank of approximately $1.5 million, which will not be assigned to the
subsidiary and which matures April 30, 2000. Affiliates of Willow Bay
Associates, LLC have agreed to provide financing to pay off the CIB Bank
debt of approximately $1.5 million in order to facilitate the merger. BAB
Holdings, Inc.'s liability to CIB bank is secured by collateral consisting
of approximately thirteen (13) of its company owned stores. An additional
condition to the closing of the merger is Willow Bay Associates, LLC
providing evidence of $4 million cash and cash equivalents on hand at the
time of the merger.
C) On April 10, 2000, BAB Holding, Inc. (listed on NASDAQ small-cap market )
announced it executed a letter of intent to merge with a leading New York
based Internet Incubator. The Company press release announced the
following:
o "Upon completion of the merger, BAB's current business would be assigned
to a subsidiary, which would be operated by BAB management. The agreement
anticipates the subsidiary would continue to own the same number of
shares, which would represent ten percent (10%) of the equity of the
merged company."
o "An affiliate of the New York Internet Incubator would provide substitute
long-term financing for the current bank debt of obligation of the
Company."
o "BAB Holdings, Inc. operates franchises and licenses of Big Apple Bagels,
My Favorite Muffin and Brewster's Coffee. It currently has units in
twenty-eight (28) states, two (2) Canadian provinces, Peru and Egypt and
has master franchise agreements for South Korea and the United Arab
Emirates. BAB owns Jacobs Bros. Bagels, a Chicago based bagel bakery chain
and has licensing agreements with Host Marriott, Mrs. Fields Cookies,
Beatrice Group, Inc., a division of Con Agra and Alanti Deli."
F-46
WILLOW BAY ASSOCIATES, LLC
NOTES TO FINANCIAL POSITION
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUBSEQUENT EVENTS/COMMITMENTS AND CONTINGENCIES (Continued)
D) Willow Bay Associates, LLC filed and received approval to change its name
to "Planett Zanett Corporate Incubator" effective June 12, 2000. The newly
named Planett Zanett Corporate Incubator is intended to greatly expand its
corporate consulting and business activities in the future. The newly
named entity will function to incubate early stage internet companies
focusing on infrastructure, wireless applications, and internet solutions
to industrial corporations worldwide. Planett Zanett Corporate Incubator
will provide development stage companies with capital, office space,
infrastructure, and managerial guidance.
E) Willow Bay Associates, LLC (the Company) filed a complaint February 2000
in the United States District Court of the District of Delaware asserting
an action for breach of contract against a party and seeking damages in
excess of $750,000. During March, 2000 the defendant filed its response to
the action and a counterclaim against the Company alleging
misrepresentation, breach of contract, and breach of covenant of good
faith and fair dealing. The Company responded to the counterclaim denying
all of the allegations.
Discovery has not yet started and, therefore, no opinion as to the
ultimate outcome of this matter can be expressed at this time. However,
the Company intends to vigorously pursue its action for breach of contract
and will vigorously defend itself against the counterclaim. The Company's
position is its breach of contract claim against the defendant is a strong
one, and that the counterclaim filed by the defendant is merely an attempt
to divert the court's attention away from the defendant's breach of
contract. Accordingly, no amounts have been accrued relating to these
actions in the accompanying financial statements because management
estimates the ultimate outcome is uncertain.
F-47
Certified Public Accountants
293 Eisenhower Parkway, suite 320
Livingston, New Jersey 07039
(973) 535-2880
Fax (973) 535-5893
- --------------------------------------------------------------------------------
McENERNEY, BRADY & COMPANY, LLC
To the Board of Directors and Members of
Willow Bay Associates, LLC
New York, New York
We have compiled the accompanying balance sheet of Willow Bay Associates, LLC as
March 31, 2000 and the accompanying statements of operations and cash flows for
the three months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying statements and, accordingly, do not express an opinion
or any other form of assurance on them.
The accompanying financial statements are not intended to be a complete
presentation of Willow Bay Associates, LLC as of March 31, 2000, as this
presentation omits the footnotes for the three months ended March 31, 2000.
McEnerney, Brady & Company, LLC
Livingston, New Jersey
June 5, 2000
F-48
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF FINANCIAL POSITION (Unaudited)
THREE MONTH PERIOD ENDING
MARCH 31, 2000
- --------------------------------------------------------------------------------
BALANCE SHEET
ASSETS
Current Assets
Cash $ 98
Total Current Assets 98
-------
Total Assets $ 98
=======
LIABILITIES & EQUITY (DEFICIT)
Current Liabilities
Accrued Expenses $ 5,771
Total Current Liabilities 5,771
=======
Member's Equity (Deficit) (5,673)
-------
Total Liabilities & Equity (Deficit) $ 98
=======
F-49
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF OPERATIONS (Unaudited)
THREE MONTH PERIOD ENDING
MARCH 31, 2000
- --------------------------------------------------------------------------------
Revenues -0-
Expenses
Bank Charges 87
-------
Net Loss (87)
Members' Equity (Deficit) - January 1, 2000 (5,661)
-------
Members' Equity (Deficit) - March 31, 2000 $(5,748)
=======
See accountants' compilation report.
F-50
WILLOW BAY ASSOCIATES, LLC
STATEMENT OF CASH FLOWS (Unaudited)
THREE MONTH PERIOD ENDING
MARCH 31, 2000
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Loss $ (87)
-----
Net Cash Used by Operating Activities (87)
-----
Net Decrease in Cash (87)
Cash, January 1, 2000 185
-----
Cash, March 31, 2000 $ 98
=====
Other Disclosures
Interest paid $ -0-
=====
Income taxes paid $ -0-
=====
See accountants' compilation report.
F-51
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of May 4, 2000 (this
"AGREEMENT"), by and between BAB Holdings, Inc., a Illinois corporation ("BAB"),
and Willow Bay Associates, L.L.C., a Nevada limited liability company (the
"COMPANY"). Certain other capitalized terms used in this Agreement have the
meanings given them in Section 8.11.
W I T N E S S E T H:
WHEREAS, the boards of directors of BAB and Merger Sub and the managers of
the Company, deeming it advisable and in the best interests of their respective
stockholders or members, have each approved and have also recommended to their
respective stockholders or members to approve this Agreement pursuant to which,
among other things, the Company will be merged with and into Merger Sub (the
"MERGER") on the terms and conditions contained herein and in accordance with
the Delaware General Corporate Law ("DGCL") and Nevada Revised Statutes, Title 7
("NRS");
WHEREAS, the parties hereto intend, by approving resolutions authorizing
this Agreement, to adopt this Agreement as a plan of reorganization within the
meaning of Section 368 of the United States Internal Revenue Code of 1986, as
amended (the "CODE"), and the regulations promulgated thereunder, and that the
transactions contemplated by this Agreement be undertaken pursuant to such plan;
WHEREAS, pursuant to the Merger, the outstanding membership interests in
the Company (the "COMPANY MEMBERSHIP INTERESTS"), shall be automatically
converted into the right to receive the number of shares of BAB's Common Stock
as specified in Article 2 upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the respective
agreements herein contained and for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by each of the parties hereto,
the parties hereto agree to be legally bound under this Agreement as follows:
ARTICLE 1 THE MERGERS
SECTION 1.1 The Mergers.
(a) (i) Prior to the Effective Time, BAB shall cause to be organized a
Delaware corporation ("BAB DOMESTICATION MERGER SUB"), for the sole purpose of
effectuating the Domestication Merger. Immediately before the Merger, BAB shall
merge with and into BAB Domestication Merger Sub (the "DOMESTICATION MERGER"),
file the Certificate of Merger with the Secretary of State in both the States of
Delaware and Illinois and the separate and independent existence of BAB shall
cease and BAB Domestication Merger Sub shall be the surviving corporation and
shall be governed by the DGCL. The Domestication Merger shall have the effects
specified in the DGCL. Prior to the Domestication Merger, BAB Domestication
Merger Sub shall adopt this Agreement. Unless this Agreement otherwise requires,
all references in this Agreement to BAB shall be deemed to mean BAB prior to the
consummation of the Domestication Merger and BAB Domestication Merger Sub
thereafter.
(ii) Once the Certificate of Merger is filed with each of the
Secretaries of State in the States of Delaware and Illinois, the Certificate of
Incorporation of BAB Domestication Merger Sub, as in effect immediately prior to
the Domestication Merger and as approved by the Company, shall be the
Certificate of Incorporation of the surviving entity unless and until thereafter
changed or amended as provided therein or in accordance with applicable Law.
(iii) After the Domestication Merger, the by-laws of BAB
Domestication Merger Sub, as in effect immediately prior to the Domestication
Merger and as approved by the Company, shall be the by-laws of the surviving
entity unless and until thereafter changed or amended as provided therein or in
the Certificate of Incorporation of the surviving entity or by applicable Law.
(iv) After the Domestication Merger, the directors of BAB
immediately preceding the Domestication Merger shall become the directors of the
surviving entity to serve until the earlier of their death, resignation,
removal or until their respective successors are duly elected and qualified.
After the Domestication Merger, the officers of BAB immediately preceding the
Domestication Merger shall become the officers of the surviving entity until the
earlier of their death, resignation, removal or until their respective
successors are duly elected and qualified.
(b) (i) As promptly as practicable following the execution of this
Agreement, BAB shall cause to be organized for the sole purpose of effectuating
the Merger contemplated herein a corporation organized under the laws of the
State of Delaware ("MERGER SUB" and, together with BAB, the "BAB ENTITIES"). The
certificate of incorporation and Bylaws of Merger Sub shall be in such forms as
shall be mutually determined by BAB and the Company as soon as practicable
following the execution of this Agreement and the authorized capital stock of
Merger Sub shall initially consist of 100 shares of common stock. All of the
outstanding shares of Merger Sub shall be issued to BAB at a price of $1.00 per
share.
(ii) As promptly as practicable following the execution of this
Agreement, BAB shall take all requisite action to designate the directors and
officers of Merger Sub and take such steps as may be necessary or appropriate to
complete the organization of Merger Sub. BAB shall cause the directors of Merger
Sub to ratify and approve this Agreement.
(iii) As promptly as practicable following the organization of
Merger Sub, BAB, as sole stockholder of Merger Sub, shall cause Merger Sub to
adopt this Agreement and to perform its obligations under this Agreement. As
promptly as practicable after the organization of Merger Sub, the parties shall
cause this Agreement to be amended to add Merger Sub as a party hereto. Such
amendment shall provide for the making by Merger Sub of those representations
and warranties set forth in Article 4 hereof that apply to Merger Sub, and the
covenants and obligations set forth herein that apply to Merger Sub, and Merger
Sub shall become a constituent corporation in the Merger.
(c) (i) Upon the terms and subject to the conditions of this Agreement, at
the Effective Time and in accordance with provisions of Section 252 of the DGCL
and Title 7, Chapter 92A Section 100 of the NRS, the Company shall be merged
with and into Merger Sub. Following the Merger, the separate and independent
existence of the Company shall cease and Merger Sub shall continue as the
surviving corporation (the "SURVIVING CORPORATION"),and shall be governed by the
DGCL. The Merger shall have the effects specified in the DCGL.
(ii) The closing of the transactions contemplated hereby shall take
place at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 260 S.
Broad Street, Philadelphia, PA 19102 (the "CLOSING"), as soon as practicable
after all of the conditions to the Closing set forth in Article 6 have been
satisfied or waived, unless another date, time or place is agreed to in writing
by the parties hereto. The date on which the Closing actually occurs is
hereinafter referred to as the "CLOSING DATE."
(iii) Simultaneously with the Closing, the parties hereto shall
cause the Merger to be consummated by (i) filing a certificate of merger (the
"CERTIFICATE OF MERGER"),in such form as is required by and executed in
accordance with the relevant provisions of DGCL and NRS, and (ii) making all
other filings or recordings required under DGCL and NRS. The Merger shall become
effective at such time as the Certificate of Merger is duly filed with each of
the Secretaries of State of the States of Delaware and Nevada (the date and time
the Merger becomes effective being the "EFFECTIVE TIME").
(iv) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation, unless and until
thereafter changed or amended as provided therein or in accordance with
applicable Law.
(v) At the Effective Time, the by-laws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the by-laws of the Surviving
Corporation, unless and until
thereafter changed or amended as provided therein or in the Certificate of
Incorporation of the Surviving Corporation or by applicable Law.
(vi) At the Effective Time, those persons set forth on Schedule
1.1(b)(vi) shall become the directors of the Surviving Corporation to serve
until the earlier of their death, resignation, removal or until their respective
successors are duly elected and qualified.
SECTION 1.2 Future Actions. If at any time after the Effective Time, BAB shall
determine that any further deeds, assignments, conveyances, agreements,
documents, instruments or assurances in law or any other things are necessary or
desirable to vest, perfect, confirm or record in the Surviving Corporation the
title to any property, rights, privileges, powers and franchises of the Company
by reason of, or as a result of, the Merger, or otherwise to carry out the
provisions of this Plan of Merger, the officers of the Company shall execute and
deliver, upon BAB's request, any instruments or assurances, and do all other
things necessary or proper to vest, perfect, confirm or record title to such
property, rights, privileges, powers and franchises in the Surviving
Corporation, and otherwise to carry out the provisions of this Agreement.
ARTICLE 2
CONVERSION OF SECURITIES OF THE CONSTITUENT PARTIES
SECTION 2.1 Effect on Securities. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder of any shares of Merger Sub's
capital stock or membership interests of the Company:
(a) Each issue and outstanding share of capital stock of Merger Sub
shall not change.
(b) Subject to the provisions of Section 2.2, the issued and
outstanding membership interests of the Company immediately prior to the
Effective Time shall automatically by virtue of the Merger be converted into and
exchanged for shares of BAB Common Stock, in the ratio of 219,892.95 shares of
BAB Common Stock for each one percent (1%) membership interest in the Company
(the "MERGER CONSIDERATION" or the "MERGER STOCK").
SECTION 2.2 Exchange.
(a) Within one (1) business day after the Effective Time, BAB shall
cause to be delivered to each holder of record of membership interests in the
Company a certificate evidencing the number of whole shares of BAB Common Stock
to which such holder is entitled pursuant to Section 2.1(b). Until so issued,
each outstanding membership interest in the Company will be deemed from and
after the Effective Time, for all purposes, to evidence the ownership of the
number of whole shares of BAB Common Stock into which such membership interest
shall have been so converted pursuant to Sections 2.1(b).
(b) Notwithstanding anything to the contrary in this Section 2.2,
none of the Surviving Corporation, BAB or any party hereto shall be liable to
any holder of Company membership interests for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar Law.
(c) All shares of BAB Common Stock issued upon the surrender for
exchange of Company membership interests in accordance with the terms hereof
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such membership interests that were outstanding immediately prior
to the Effective Time.
(d) BAB or any agent designated by it shall be entitled to deduct
and withhold from the consideration otherwise payable pursuant to this Agreement
to any holder of Company membership interests such amounts as BAB or such agent
is required to deduct and withhold with respect to the making of such payment
under the Code, or any provision of state, local or foreign tax law. To the
extent that amounts are so deducted and withheld by BAB or any agent designated
by it, such deducted and withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of Company membership interests
in respect of which such deduction and withholding was made by BAB or such
agent.
(e) Notwithstanding any provision of this Agreement to the contrary,
neither certificates nor scrip for fractional shares of BAB Common Stock shall
be issued in connection with the Merger, but in lieu thereof each holder of
Company membership interests otherwise entitled to a fraction of a share of BAB
Common Stock pursuant to the provisions of 2.1(b) shall receive one whole share
of BAB Common Stock in respect of such fraction, if such fraction is one-half or
more, and such right to receive a fraction of a share shall be cancelled if such
fraction is less than one-half.
SECTION 2.3 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code and the regulations promulgated thereunder. The parties hereto hereby
adopt this Agreement as a plan of reorganization within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations with respect
to the Merger.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to the BAB Entities to enter into this Agreement
and to consummate the transaction contemplated hereby, the Company hereby
represents and warrants to the BAB Entities as of this date hereof and as of the
Closing Date, each of which is relied upon by the BAB Entities regardless of any
investigation made or in formation obtained by BAB (unless and to the extent
specifically and expressly waived in writing by BAB on or before the Closing
Date):
SECTION 3.1 Organization and Qualification; Subsidiaries.
(a) The Company has been duly organized and is validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization, as the case may be, and has the requisite power and authority to
own, lease and operate its properties and to carry on its business as it is now
being conducted. The Company is duly qualified or licensed to do business, and
is in good standing, in each jurisdiction where the character of the properties
owned, leased or operated by it or the nature of its business makes such
qualification or licensing necessary, except for such failure to be so qualified
or licensed and in good standing that could not reasonably be expected to have,
individually orin the aggregate, a Company Material Adverse Effect. For purposes
of this Agreement, "COMPANY MATERIAL ADVERSE EFFECT" means any change, event or
effect (i) in, on or relating to the business of the Company that is, or is
reasonably likely to be, materially adverse to the business, properties, assets,
liabilities, condition (financial or otherwise) or results of operations of the
Company, taken as a whole, other than any change or effect arising out of
general economic conditions in the United States or (ii) that may prevent or
materially delay the performance of this Agreement, the Transaction Documents or
the related agreements by the Company or the consummation by the Company of the
transactions contemplated by this Agreement, the Transaction Documents or the
related agreements (including the Merger and the Related Transactions). The
Company does not have any subsidiaries.
(b) The Company has delivered to BAB correct and complete copies of
the Company's Certificate of Formation and Operating Agreement (the "COMPANY
CHARTER DOCUMENTS"). The Company Charter Documents are or will be at the Closing
in full force and effect. The Company is not in violation of any of the
provisions of the Company Charter Documents.
SECTION 3.2 Capitalization of the Company. All of the issued and outstanding
membership interests in the Company have been duly authorized and validly issued
and are fully paid, nonassessable and free of preemptive rights. None of the
issued and outstanding membership interests were issued in violation of the
registration requirements of any federal or state securities laws. Except as set
forth on Schedule 3.2(a) to this Agreement, or as contemplated in the related
agreements, there are no outstanding (i) voting securities of the Company (ii)
any securities of the Company that are convertible or exercisable into or
exchangeable for voting securities of the Company, (iii) options to acquire from
the Company, and no obligations of the Company to issue, any voting securities
or securities convertible or exercisable into or exchangeable for membership
interests or voting securities of the Company, (iv) no equity equivalents,
interests in the ownership or earnings of the Company or other similar rights
(the items listed in subclauses (i), (ii), (iii) and (iv) of this sentence being
referred to, collectively, as "COMPANY SECURITIES") nor (v) obligations of the
Company to repurchase, redeem or otherwise acquire any Company Securities.
Except as set forth on Schedule 3.2 to this Agreement, there are no voting
trusts or other agreements or understandings to which the Company is a party or
by which it is bound relating to the voting or registration of any membership
interests of the Company.
SECTION 3.3 Authority Relative to this Agreement; Board Action.
(a) The Company has all necessary power and authority to execute and
deliver this Agreement, the Transaction Documents and the related agreements to
which it is a party and the Related Transactions (including the Merger), and to
perform its obligations under this Agreement, the Transaction Documents and the
related agreements to which it is a party. The execution and delivery by the
Company of this Agreement, the Transaction Documents and the related agreements
to which it is a party and the consummation by the Company of the transactions
contemplated by this Agreement, the Transaction Documents and the related
agreements to which it is a party have been duly authorized and approved by the
board of managers of the Company (the "COMPANY BOARD") and the Company members,
and no other proceedings on the part of the Company are, or will be, necessary
to authorize this Agreement, the Transaction Documents and the related
agreements to which it is a party or to consummate the transactions contemplated
by this Agreement, the Transaction Documents or the related agreements to which
it is a party. This Agreement, each of the Transaction Documents and the related
agreements to which the Company is a party have been, or will be at the Closing,
assuming the due authorization, execution and delivery of the same by each of
the other parties hereto or thereto, duly and validly executed and delivered by
the Company and constitutes, or will constitute at the Closing, a valid, legal
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium and other similar
laws now or hereafter in effect relating to or affecting creditors' rights
generally, and (ii) general principles of equity (regardless of whether
considered in a proceeding at law or in equity).
(b) The Company Board, by resolutions duly adopted at a meeting duly
called and held and not subsequently rescinded or modified in any way, has duly
(i) determined that this Agreement and the Merger are in the best interests of
the Company and its members (the "COMPANY MEMBERS"),(ii) approved and adopted
this Agreement and the Merger, and (iii) unanimously recommended that the
Company Members approve and adopt this Agreement and the Merger.
(c) The Company Members, by resolutions duly adopted and a meeting
duly called and held and not subsequently rescinded or modified in any way, have
unanimously approved and adopted this Agreement and the Merger.
SECTION 3.4 Financial Statements.
(a) For purposes of this Agreement: (i) "COMPANY FINANCIAL
STATEMENTS" shall mean the audited balance sheet of the Company, dated as of
December 31, 1999, and the related income statement for the year then ended, and
(ii) "COMPANY INTERIM FINANCIAL STATEMENTS" shall mean the unaudited balance
sheet of the Company as of March 31, 2000, and the related income statement for
the three months ended on March 31, 2000. The Company has delivered to BAB
correct and complete copies of the Company Financial Statements and Company
Interim Financial Statements.
(b) The Company Financial Statements (i) have been prepared from the
books and records of the Company in accordance with GAAP, and (ii) fairly
present in all material respects the financial position of the Company as of
December 31, 1999, and the results of its operations for the fiscal year then
ended, respectively. The Company Interim Financial Statements (i) have been
prepared from the books and records of the Company in accordance with GAAP on a
basis consistent with the Company's historical practices, and (ii) fairly
present in all material respects the financial position of the Company as of
March 31, 2000, and the results of its operations for the three months then
ended; provided, however, the Company Interim Financial Statements (x) are
subject to normal year-end adjustments, and (y) do not include footnotes.
SECTION 3.5 Information Supplied. None of the written information supplied or to
be supplied by the Company for inclusion in the Proxy Statement (the "COMPANY
PROXY INFORMATION"), will, on the date first mailed to the BAB Stockholders and
at the time of the BAB Stockholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, the Company makes no representation or warranty with respect to any
information supplied by any of the BAB Entities which is contained or
incorporated by reference in, or furnished in connection with the preparation
of, the Proxy Statement.
SECTION 3.6 Consents and Approvals; No Violations.
(a) Except as set forth on Schedule 3.6(a) to this Agreement, no
filing, registration or submission with or notice to, and no permit,
authorization, consent or approval of or with (collectively, "FILINGS AND
APPROVALS"), any Governmental Entity is, or will be, necessary for the execution
and delivery by the Company of this Agreement, the Transaction Documents or the
related agreements to which the Company is a party or the consummation by the
Company of the transactions contemplated by this Agreement, the Transaction
Documents or the related agreements to which it is a party (including the
Merger), except (i) Filings and Approvals to, of or with the Securities and
Exchange Commission ("SEC") and any other regulatory, self-regulatory and trade
agencies, boards, commissions, organizations, departments and entities (the
"REGULATORY AGENCIES"), (ii) the filing of the Certificate of Merger with the
Secretaries of State of the States of Delaware and Nevada, and (iii) Filings and
Approvals that, if not made or obtained, could not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
(b) Except as set forth on Schedule 3.6(b) to this Agreement, no
consent or approval of any third party is, or will be, necessary for the
execution and delivery by the Company of this Agreement, the Transaction
Documents, or the related agreements to which the Company is a party or the
consummation by the Company of the transactions contemplated by this Agreement,
the Transaction Documents or the related agreements to which it is a party
(including the Merger).
(c) Except as set forth on Schedule 3.6(c) to this Agreement,
neither the execution, delivery and performance by the Company of this
Agreement, the Transaction Documents or the related agreements to which the
Company is a party, nor the consummation by the Company of the transactions
contemplated by this Agreement, the Transaction Documents or the related
agreements to which it is a party (including the Merger) will (i) conflict with
or result in any breach of any provision of the Company Charter Documents or any
comparable organizational documents of the Subsidiary of the Company, (ii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration or Lien) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which the Company is a
party or by which its properties or assets are bound, or (iii) assuming that all
Filings and Approvals have been made or obtained, violate any Law or any
Governmental Order applicable to the Company or its properties or assets, except
in the case of clauses (ii) or (iii) for violations, breaches or defaults which
could not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
SECTION 3.7 No Default. Except as set forth on Schedule 3.7 to this Agreement,
the Company is not in default or violation (and no event has occurred which with
due notice or the lapse of time or both would constitute a default or violation)
of any term, condition or provision of (i) the Company Charter Documents, (ii)
any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which the Company is a party or by which any
of their respective properties or assets are bound, or (iii) any Governmental
Order applicable to the Company or any of its properties or assets, except in
the case of clauses (ii) or (iii) for violations, breaches or defaults that
could not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
SECTION 3.8 No Undisclosed Liabilities; Absence of Changes.
(a) Except as set forth on Schedule 3.8(a) to this Agreement, and
except as reflected in, reserved against or otherwise described in the balance
sheet included in the Company Financial Statements (including the notes
thereto), as of December 31, 1999, the Company does not have any liabilities or
obligations of any nature, whether accrued, contingent or otherwise, and whether
due or to become due or asserted or unasserted, which would be required by GAAP
to be reflected in, reserved against or otherwise described in the balance sheet
of the Company (including the notes thereto) as of such date, except for
liabilities and obligations that could not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
(b) Except as disclosed by the Company on Schedule 3.8(b) to this
Agreement, since January 1, 2000, the business of the Company has been carried
on only in the ordinary course and in a manner consistent with past practice,
the Company has not incurred any liabilities or obligations of any nature,
whether accrued, contingent or otherwise, and whether due or to become due or
asserted or unasserted, except in the ordinary course of business and in a
manner consistent with past practice, none of which could reasonably be likely
to have, individually or in the aggregate,
a Company Material Adverse Effect, and there has not been any event, condition
or occurrence that, individually or in the aggregate, has resulted or which
could reasonably be expected to result in, a Company Material Adverse Effect.
Except as disclosed on Schedule 3.8(b) to this Agreement, since January 1, 2000,
there has not been (i) any material change by the Company in its accounting
methods, principles or practices, (ii) any declaration, setting aside or payment
of any dividend or distribution in respect of membership interests of the
Company or any redemption, purchase or other acquisition of any of the Company's
membership interests, or (iii) any increase in the compensation or benefits or
establishment of any bonus, insurance, severance, deferred compensation,
pension, retirement, profit sharing, option (including, without limitation, the
granting of options, performance awards, restricted unit awards or similar
awards), membership interests purchase or other employee benefit plan, or any
other increase in the compensation payable or to become payable, or the
Company's obligations in respect of any program or arrangement for, officers or
other key employees of the Company.
SECTION 3.9 No Litigation. Except as disclosed on Schedule 3.9 to this
Agreement, there is no suit, claim, action, investigation, litigation,
arbitration or other proceeding ("PROCEEDING"), pending or, to the Knowledge of
the Company, threatened against the Company or any of their respective
properties or assets which (a) if adversely determined, could reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect, or (b) questions the validity of this Agreement, any Transaction
Document or any Related Agreement to which the Company is a party or any action
to be taken by the Company in connection with the consummation of the
transactions contemplated by this Agreement, the Transaction Documents or the
related agreements to which the Company is a party (including the Merger) or
could otherwise prevent, delay, make illegal or otherwise interfere with the
consummation of such transactions. Except as disclosed on Schedule 3.9 to this
Agreement, the Company is not subject to any outstanding Governmental Order
which could reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.10 Compliance with Applicable Law.
(a) Except as disclosed on Schedule 3.10(a) to this Agreement, the
Company has made or has obtained and holds all registrations, filings,
submissions, certificates, determinations, permits, licenses, variances,
exemptions, orders and approvals of all Governmental Entities (collectively,
"PERMITS"), necessary for the lawful conduct of their respective businesses,
except where the failure to make, obtain or hold any such Permit would not have,
individually or in the aggregate, a Company Material Adverse Effect. Except as
disclosed on Schedule 3.10(a) to this Agreement, (i) the Permits of the Company
are valid and in full force and effect, (ii) the Company is not in default
under, and no condition exists that with notice or lapse of time or both would
constitute a default under, such Permits, and (iii) none of such Permits will be
terminated or impaired or become terminable, in whole or in part, as a result of
the transactions contemplated by this Agreement, the Transaction Documents or
the related agreements to which the Company is a party, except in the case of
clauses (i), (ii) and (iii) for Permits, the failure of which to be valid or in
full
force and effect or of the Company to hold could not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
(b) Except as disclosed on Schedule 3.10(b) to this Agreement, the
businesses of the Company has not been conducted in violation of any Law, except
for violations or possible violations which could not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
Except as disclosed on Schedule 3.10(b) to this Agreement, no material
investigation or review by any Governmental Entity with respect to the Company
is pending or, to the Knowledge of the Company, threatened, nor, to the
Knowledge of the Company, has any Governmental Entity indicated an intention to
conduct the same.
SECTION 3.11 Employee Benefits and ERISA.
(a) Schedule 3.11(a) to this Agreement contains a true and complete
list of each material employee benefit plan, policy, program, practice,
agreement, understanding, arrangement or commitment (whether written or
unwritten) providing compensation, benefits or perquisites of any kind to any
current or former officer, employee or consultant (or to any dependent or
beneficiary thereof) of the Company, which are now, or were within the past six
years, maintained by, contributed to, by or with respect to which an obligation
to contribute exists or existed on the part of any of the Company, its
predecessors, or any other trade or business (whether or not incorporated)
which, together with the Company, is treated as a single employer under Section
414 of the Code (such other trades or businesses, collectively, the "COMMONLY
CONTROLLED COMPANY ENTITIES") or with respect to which the Company or any
Commonly Controlled Company Entity has or may have any material liability
(including, without limitation, a liability arising out of an indemnification,
guarantee, hold harmless or similar agreement) including, without limitation,
all material employment or consulting agreements, incentive, bonus, deferred
compensation, pension, profit sharing, vacation, holiday, cafeteria, medical,
disability, stock purchase, stock option, stock appreciation, phantom stock,
restricted stock or other stock based compensation plans, policies, programs,
practices or arrangements and any "employee benefit plan"within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
from time to time ("ERISA"), whether or not subject to ERISA (each, a "COMPANY
PLAN" and together, the "COMPANY PLANS"). (b) With respect to each Company Plan,
the Company has delivered or made available to BAB, to the extent applicable:
(i) a current, correct and complete copy of each written plan document
(including without limitation, any employment agreement, employment policies and
procedures and plan instrument, and any amendments thereto) or, to the extent no
such written plan document exists, an accurate written description thereof; (ii)
any related trust agreement or other funding instrument; (iii) the most recent
determination letter with respect to any Company Plan intended to be qualified
under Section 401(a) of the Code; (iv) any summary plan description, summary of
material modifications or other material written communication from the Company
to its employees concerning the extent of the benefits provided under any
Company Plan; and (v) for the three most recent years (A) the Form 5500 and
attached schedules, (B) unaudited financial statements and (C) actuarial
valuation reports.
(b) Each Company Plan has been established and maintained, in form
and operation, in all material respects (A) in accordance with its terms, and
(B) in compliance with the applicable provisions of ERISA, the Code and other
applicable Laws, rules and regulations; (ii) each Company Plan that is intended
to be qualified within the meaning of Section 401(a) of the Code has received a
favorable determination letter as to its qualification, and, to the Knowledge of
the Company, nothing has occurred, whether by action or failure to act, that
would reasonably be expected to cause such determination letter to be revoked.
(c) Except as set forth on Schedule 3.11(c), no Company Plan
provides for benefits, including, without limitation, medical or health benefits
(through insurance or otherwise), or provides for the continuation of such
benefits or coverage for any participant or any dependent or beneficiary of any
participant, after such participant's retirement or other termination of
employment (except (i) as maybe required by applicable Law, (ii) retirement or
death benefits under any employee pension plan, (iii) disability benefits under
any employee welfare plan that have been fully provided for by insurance or
otherwise, (iv) deferred compensation benefits accrued as liabilities on the
books of the Company; or (v) benefits in the nature of severance pay).
(d) For each Company Plan with respect to which a Form 5500 has been
filed, no change has occurred with respect to the matters covered by the most
recent Form 5500 since the date thereof other than any such change as would not
be reasonably likely to result in a material liability to the Company.
(e) Except as disclosed on Schedule 3.11(e) to this Agreement, with
respect to each Company Plan that is subject to Title IV of ERISA:
(i) no such Company Plan has been terminated so as to result,
directly or indirectly, in any material liability, contingent or otherwise, of
the Company or any Commonly Controlled Company Entity;
(ii) no complete or partial withdrawal from such Company Plan
has been made by the Company or any Commonly Controlled Company Entity, or by
any other Person, so as to result in a material liability to the Company or any
Commonly Controlled Company Entity, whether such liability is contingent or
otherwise;
(iii) no proceeding has been initiated by any Person
(including the PBGC) to terminate any such Company Plan or to appoint a trustee
for any such Company Plan;
(iv) no condition or event currently exists or currently is
expected to occur that would reasonably be expected to result, directly or
indirectly, in any material liability of the Company or any Commonly Controlled
Company Entity under Title IV of ERISA, whether to the Pension Benefit Guaranty
Corporation ("PBGC") or otherwise, on account of the termination of any such
Company Plan;
(v) if any such Company Plan were to be terminated as of the
Closing Date, neither the Company nor any Commonly Controlled Company Entity
would incur, directly or indirectly, any material liability under Title IV of
ERISA;
(vi) no "reportable event" (as defined in section 4043 of
ERISA) has occurred with respect to any such Company Plan; and
(vii) no such Company Plan has incurred any "accumulated
funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the
Code, respectively), whether or not waived.
(f) Except as disclosed on Schedule 3.11(f) to this Agreement, with
respect to any Company Plan that is a multi-employer plan (within the meaning of
Section 3(37) of ERISA): (i) neither the Company nor any Commonly Controlled
Company Entity would be subject to any withdrawal liability if, as of the
Closing Date, the Company or any Commonly Controlled Company Entity were to
engage in a complete withdrawal (as defined in Section 4203 of ERISA) or partial
withdrawal (as defined in Section 4205 of ERISA) from any such multi-employer
plan; and (ii) no such multi-employer plan is in reorganization or insolvent (as
those terms are defined in Sections 4241 and 4245 of ERISA, respectively).
(g) Except as disclosed on Schedule 3.11(g) to this Agreement or as
would not be reasonably likely to result in a material liability to the Company,
with respect to any Company Plan that is not a multi- employer plan (within the
meaning of Section 3(37) of ERISA): (i) no actions, suits or claims (other than
routine claims for benefits in the ordinary course) are pending or, to the
Knowledge of the Company, threatened; (ii) no facts or circumstances exist that
could give rise to any such actions, suits or claims; and (iii) no written or
oral communication has been received from the PBGC in respect of any Company
Plan subject to Title IV of ERISA concerning the funded status of any such
Company Plan or any transfer of assets and liabilities from any such plan in
connection with the transactions contemplated herein.
(h) Except as disclosed on Schedule 3.11(h) to this Agreement,
neither the Company nor any Commonly Controlled Company Entity has agreed to or
communicated to employees any changes to any Company Plan that would: (i) cause
an increase in benefits or create new benefits under any Company Plan; or (ii)
change any employee coverage so as to cause an increase in the expense of
maintaining any such Company Plan.
(i) Except as disclosed on Schedule 3.11(i) to this Agreement, the
consummation of the transactions contemplated hereby will not result in: (a) any
payment (including, without limitation, any severance, unemployment
compensation, golden parachute or bonus payment) becoming due to any current or
former director, officer, employee or consultant of the Company or any of its
Affiliates; (b) any increase in the amount of compensation or benefits payable
in respect of any current or former director, officer, employee or consultant of
the Company or any of its Affiliates; or (c) the acceleration of vesting or time
of payment of any benefits or compensation
payable in respect of any current or former director, officer, employee or
consultant of the Company or any of its Affiliates, and the transactions
contemplated by this Agreement will not result in any payment or series of
payments constituting a "parachute payment" within the meaning of Section 280G
of the Code.
(j) Except as disclosed on Schedule 3.11(j) to this Agreement,
neither the Company nor any Commonly Controlled Company Entity has engaged in or
participated in any transaction, whether or not related to a Company Plan, that
could, directly or indirectly, result in any tax, penalty or liability imposed
by ERISA or the Code including, without limitation, any excise tax under Section
4975 of the Code or any civil penalty under Section 409 or 502 of ERISA, that,
alone or together with any other such tax or penalty, could have a Company
Material Adverse Effect.
(k) Neither the Company nor any affiliate thereof (as defined in
Part V(d) of Department of Labor Prohibited Transaction Class Exemption
84-14)(the "QPAM EXEMPTION"), nor any owner, direct or indirect, of a 5 percent
or more interest in the Company, is a Person who has engaged in any act
described in Part I(g) of the QPAM Exemption.
(l) Except as disclosed on Schedule 3.11(l) to this Agreement, the
Company is not a party to any collective bargaining or other labor union
contract applicable to employees of the Company, and no collective bargaining
agreement or other labor union contract is being negotiated by the Company. As
of the date of this Agreement, there is no labor dispute, strike or work
stoppage against the Company pending or threatened in writing which will
materially interfere with the business activities of the Company. As of the date
of this Agreement, none among the Company, its representatives or employees has
committed within the past five years any unfair labor practices in connection
with the operation of the business of the Company, and there is no charge or
complaint against the Company by the National Labor Relations Board or any
comparable state or foreign agency pending or, to the Knowledge of the Company,
threatened in writing.
(m) Except as disclosed on Schedule 3.11(m) to this Agreement, as of
the Effective Time, the Company has not incurred any liability or obligation
under the Worker Adjustment and Retraining Notification Act, as it may be
amended from time to time, and, to the Knowledge of the Company, within the
90-day period immediately following the Effective Time will not incur any such
liability or obligation if, during such 90-day period, only terminations of
employment in the normal course of operations occur.
SECTION 3.12 Environmental Laws and Regulations.
(a) Except as disclosed on Schedule 3.12(a) to this Agreement, (i)
the Company is in compliance, in all material respects, with all applicable Laws
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata) (collectively, "ENVIRONMENTAL LAWS"), which
compliance includes, but is not limited to, the possession by the Company of all
material Permits and other governmental authorizations required under applicable
Environmental Laws, and
compliance with the terms and conditions thereof; (ii) the Company has not
received written notice of, or, to the Knowledge of the Company, is the subject
of, any material action, cause of action, claim, investigation, demand or notice
by any Person or entity alleging liability under or non-compliance with any
Environmental Law (an "ENVIRONMENTAL CLAIM"); and (iii) to the Knowledge of the
Company, there are no circumstances that are reasonably likely to prevent or
interfere with such material compliance in the future.
(b) Except as disclosed on Schedule 3.12(b) to this Agreement, to
the Knowledge of the Company, there are no material Environmental Claims that
are pending or threatened against any Person whose liability for any
Environmental Claim the Company has or may have retained or assumed either
contractually or by operation of Law.
SECTION 3.13 Tax Matters.
(a) The Company has timely and accurately filed, or caused to be
timely and accurately filed, all material Tax Returns (as hereinafter defined)
required to be filed and has paid, collected or withheld, or caused to be paid,
collected or withheld, all material amounts of Taxes (as hereinafter defined)
required to be paid, collected or withheld, other than such Taxes for which
adequate reserves have been established or which are being contested in good
faith. Except as set forth on Schedule 3.13(a) to this Agreement, there are no
material claims or assessments pending against the Company for any alleged
deficiency in any Tax, there are no pending or, to the Knowledge of the Company,
threatened audits or investigations for or relating to any liability in respect
of any Taxes, and the Company has not been notified in writing of any proposed
Tax claims or assessments against the Company (other than claims or assessments
for which adequate reserves have been established or which are being contested
in good faith or are immaterial in amount).
(b) For purposes of this Agreement, the term "TAXES" shall mean any
United States or non-United States federal, national, state, provincial, local
or other jurisdictional income, gross receipts, property, sales, use, license,
excise, franchise, employment, payroll, alternative or add-on minimum, ad
valorem, transfer or excise tax, or any other tax, custom, duty, governmental
fee or other like assessment or charge imposed by any Governmental Entity,
together with any interest or penalty imposed thereon. The term "TAX RETURNS"
shall mean a report, return or other information (including any attached
schedules or any amendments to such report, return or other information)
required to be supplied to or filed with a Governmental Entity with respect to
any Tax, including an information return, claim for refund, amended return or
declaration or estimated Tax.
(c) Except as set forth on Schedule 3.13(c) to this Agreement, the
Company is not liable for Taxes of any other Person, or is currently under any
contractual obligation to indemnify any Person with respect to Taxes (except for
customary agreements to indemnify lenders or security holders in respect of
Taxes other than income Taxes), or is a party to any Tax sharing agreement or
any other agreement providing for payments by the Company with respect to Taxes.
Except as set forth on Schedule 3.13(c) to this Agreement, there are no
outstanding powers of attorney enabling any party to represent the Company with
respect to Tax matters. The Company has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor, member
or other third Person. All material elections with respect to Taxes made by the
Company as of the date hereof are set forth on Schedule 3.13(c) to this
Agreement. There are no private letter rulings in respect of any Tax pending
between the Company and any Tax authority. The Company is not a personal holding
company within the meaning of Section 542 of the Code. The Company is not a
party to any joint venture, partnership or other arrangement or contract which
could be treated as a partnership for Tax purposes. The Company has not agreed
to nor is required, as a result of a change in method of accounting or
otherwise, to include any adjustment under Section 481 of the Code (or any
corresponding provision of state, local or foreign Law) in taxable income. The
Company is not a party to any contract, arrangement or plan that could result
(taking into account the transactions contemplated by this Agreement and the
related agreements), separatelyor in the aggregate,in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code. Schedule
3.13(c) to this Agreement contains a list of all jurisdictions to which any Tax
is properly payable or in which any Tax Return is required to be filed by the
Company, and no written claim has ever been made by any Tax authority in any
other jurisdiction that the Company is subject to taxation in such jurisdiction.
SECTION 3.14 Material Contracts.
(a) Set forth on Schedule 3.14(a) to this Agreement is a correct and
complete list of each of the following contracts and agreements (and all
amendments, modifications and supplements thereto and all related letters to
which the Company is a party affecting the obligations of any party thereunder)
to which the Company is a party or by which any of their respective properties
or assets are bound, correct and complete copies of which have been delivered to
BAB: (i) each employment, consulting, non-competition, severance, golden
parachute or indemnification contract (including, without limitation, any
contract to which the Company is a party involving employees of the Company)
which contemplates payments equal to or in excess of $30,000 per year; (ii) each
agreement under which the Company has a continuing obligation to provide
financial advisory or other consulting services; (iii) contracts granting a
right of first refusal or first negotiation; (iv) each partnership or joint
venture agreement; (v) each agreement for the acquisition, sale, lease or
license of properties or assets of the Company or by the Company or (by merger,
purchase or sale of assets or stock or otherwise), including commitments to make
an investment by the Company, in which the aggregate amount to be paid or
received by the Company is equal to or in excess of $5,000; (vi) each contract
or agreement with any Governmental Entity; (vii) each agreement relating to
indebtedness of the Company or guarantees of indebtedness by the Company in
excess of $5,000; (viii) each non competition, exclusivity or other agreement
restricting the ability of the Company to hire any Person or operate its
business as now, or contemplated to be, conducted, except for any such agreement
which could not reasonably be expected to have a Company Material Adverse
Effect; (ix) each agreement between the Company and any of their respective
officers, directors, holders of 5% of the outstanding Company membership
interests or other Affiliates of the Company; (x) each contract or agreement
that contains a "change of control" provision; (xi) any agreement which
encumbers or places a Lien on any assets of the Company; and (xii) all
commitments and agreements to enter into any of the foregoing (collectively, the
"COMPANY MATERIAL CONTRACTS").
(b) Except as set forth on Schedule 3.14(b) to this Agreement:
(i) Each Company Material Contract is in full force and effect
and there is no default under any Company Material Contract either by the
Company or, to the Knowledge of the Company, by any other party thereto, and no
event has occurred that with the lapse of time or the giving of notice or both
would constitute a default thereunder by the Company or, to the Knowledge of the
Company, any other party, in any such case in which such default or event could
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(ii) No party to any such Company Material Contract has given
notice to the Company of or made a claim against the Company with respect to any
breach or default thereunder, in any such case in which such breach or default
could reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.15 Title to Properties; Encumbrances. Schedule 3.15 to this Agreement
contains a complete and accurate list of all real property, leaseholds or other
interests in real property owned or used by the Company. The Company has
delivered or made available to BAB correct and complete copies of the leases or
other agreements to which the Company is party and pursuant to which it uses or
occupies any real property. Except as set forth in Schedule 3.15 to this
Agreement, the Company has good title to all of the properties and assets, real
and personal, tangible and intangible, they own or purport to own, including
those reflected on their respective books and records and in the Company
Financial Statements and the Company Interim Financial Statements (except for
accounts receivable collected and materials and supplies disposed of in the
ordinary course of business consistent with past practice after the date of the
Company Financial Statements and the Company Interim Financial Statements). To
its Knowledge, the Company has a valid leasehold, license or other interest in
all of the other properties and assets, tangible or intangible, which are used
in the operation of their respective businesses. Except as set forth in Schedule
3.15 to this Agreement, all properties and assets owned, leased or used by the
Company are free and clear of all Liens, except for (a) Liens for current Taxes
not yet due, (b) workmen's, common carrier and other similar Liens arising in
the ordinary course of business, none of which materially detracts from the
value or materially impairs the use of the property or asset subject thereto, or
materially impairs the operations of the Company, (c) Liens disclosed in the
Company Financial Statements, and (d) such imperfections of title and other
Liens, if any, which do not individually or in the aggregate materially
interfere with the value or the use of such properties or assets or otherwise
could not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
SECTION 3.16 Intellectual Property. Except as disclosed on Schedule 3.16 to this
Agreement, the Company owns or is licensed or otherwise has legally enforceable
rights to use all patents,
copyrights, trademarks, service marks and trade names, including any
registrations or applications for registration of any of the foregoing trade
secrets, know-how, computer software programs and applications, internet domain
names, and proprietary information and materials (collectively, "INTELLECTUAL
PROPERTY"), used or otherwise material to the operation of the business of the
Company as presently conducted. To the Knowledge of the Company, the use of the
Intellectual Property by the Company does not infringe upon or otherwise violate
any material Intellectual Property rights of third parties. To the Knowledge of
the Company, no third party, including any employee, former employee,
independent contractor or consultant, is infringing upon or otherwise violating
the rights of the Company in the Intellectual Property that, individually or in
the aggregate, would reasonably be expected to have a Company Material Adverse
Effect. Except as disclosed on Schedule 4.16, or as would not reasonably be
expected, individually or in the aggregate, to have a Company Material Adverse
Effect, no claims (i) are currently pending or, to the Knowledge of the Company,
threatened with respect to the Intellectual Property of the Company, or (ii)
are, to the Knowledge of the Company, currently pending or threatened with
respect to the Intellectual Property rights of a third party to the extent
arising out of any use, reproduction or distribution of the Intellectual
Property of such third party by the Company.
SECTION 3.17 Condition and Sufficiency of Assets. Except as disclosed on
Schedule 3.17 to this Agreement, all of the properties and assets owned, leased
or used by the Company is in good operating condition and repair (normal wear
and tear excepted), are suitable for the purposes used and are adequate and
sufficient for all current operations of the Company. Following the Effective
Time, the Surviving Corporation will be able to conduct the business of the
Company as it was conducted prior thereto.
SECTION 3.18 Investment Securities. Schedule 3.18 to this Agreement sets forth a
complete and correct list of all securities (including warrants) beneficially
owned by the Company on the date hereof, and the percentage interests in the
issuers thereof represented thereby. To the Company's Knowledge, it has good and
marketable title to all such securities (except securities sold under repurchase
agreements (which are indicated as such on Schedule 3.18) or held in any
fiduciary or agency capacity (which are indicated as such on Schedule 3.18)),
free and clear of any Lien, except to the extent such securities are pledged in
the ordinary course of business consistent with prudent business practices to
secure obligations of the Company. Such securities are valued on the books of
the Company in accordance with GAAP.
SECTION 3.19 Brokers. Except as set forth on Schedule 3.19 to this Agreement, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the other transactions
contemplated by this Agreement, the Transaction Documents or the related
agreements (including the Related Transactions) based upon arrangements made by
or on behalf of the Company or any of its Affiliates.
SECTION 3.20 Transactions with Affiliates. Except as set forth on Schedule 3.20
to this Agreement, since January 1, 2000, no member, officer, director or
Affiliate of the Company has entered into any transaction with or is a party to
any contract with the Company. Except as set forth
in Schedule 3.20, no member, officer, director or Affiliate of the Company owns
any direct or indirect interest of any kind in, or controls or is a member,
stockholder, director, officer, employee or partner of, or consultant to, or
lender or borrower from or has the right to participate in the profits of, any
Person which is a competitor, client, landlord, tenant, creditor or debtor of
the Company.
SECTION 3.21 Insurance. Schedule 3.21 to this Agreement sets forth a list of all
policies or binders of fire, liability, workmen's compensation or other
insurance held by or on behalf of the Company (specifying the insurer, the
policy number or covering note number with respect to binders). Correct and
complete copies of such policies or binders have been delivered or made
available to BAB. To its Knowledge, the Company (i) is not in default with
respect to any material provision contained in any such policy or binder, and
(ii) has not received a notice of cancellation or non-renewal of any such policy
or binder. All of such insurance is in full force and effect and all premiums
due and payable thereon have been paid.
SECTION 3.22 Books and Records. All constituent documents, business licenses,
minute books, certificate books, transfer ledgers and other records of the
Company (collectively, the "COMPANY RECORDS") have been maintained in accordance
with reasonable business practices, GAAP and applicable legal requirements. The
Company Records are complete and correct in all material respects and contain
all material matters required to be reflected in such Company Records.
SECTION 3.23 Disclosure. The representations and warranties by the Company
contained in this Agreement and in any Schedule or certificate furnished or to
be furnished by it pursuant hereto do not contain or will not, as of the Closing
Date, contain any untrue statement of a material fact, and do not omit or will
not, as of the Closing Date, omit to state any fact required to be stated
therein or necessary in order to make the statements herein or therein, in light
of the circumstances under which they were made, not misleading. The
representations and warranties contained in this Section 3.23 or elsewhere in
this Agreement or in any Schedule or certificate furnished or to be furnished as
aforesaid pursuant hereto shall not be affected or deemed waived by reason of
the fact that the BAB Entities or their representatives know or should have
known that any such representation or warranty is or might be inaccurate in any
respect.
SECTION 3.24 Members of the Company. The Company has two (2) members and each
member is an "accredited" investor within the meaning of Rule 501 under the
Securities Act.
SECTION 3.25 Not an Investment Company, Investment Adviser or Broker/Dealer. The
Company is not an investment company required to be registered under the
Investment Company Act, an investment adviser required to be registered under
the Investment Advisers Act of 1940 or a broker/dealer required to be registered
under the Exchange Act.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE BAB ENTITIES
As a material inducement to the Company to enter into this Agreement and
to consummate the transaction contemplated hereby, the BAB Entities, jointly and
severally, hereby represent and warrant to the Company as of this date hereof
and as of the Closing Date, each of which is relied upon by the Company
regardless of any investigation made or in formation obtained by the Company
(unless and to the extent specifically and expressly waived in writing by the
Company on or before the Closing Date):
SECTION 4.1 Organization and Qualification; Subsidiaries.
(a) BAB and each Subsidiary of BAB has been duly organized and is
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, as the case may be, and has the requisite
corporate or other power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted. BAB and each
Subsidiary of BAB is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that could not reasonably be expected to have, individually
or in the aggregate, a BAB Material Adverse Effect. For purposes of this
Agreement, a "BAB MATERIAL ADVERSE EFFECT" means any change, event or effect (i)
in, on or relating to the business of BAB and the Subsidiaries of BAB that is,
or is reasonably likely to be, materially adverse to the business, properties,
assets, liabilities, condition (financial or otherwise) or results of operations
of BAB and its Subsidiaries taken as a whole, other than any change or effect
arising out of general economic conditions in the United States; or (ii) that
may prevent or materially delay performance of this Agreement, the Transaction
Documents or the related agreements by any of the BAB Entities or the
consummation by any of the BAB Entities of the transactions contemplated by this
Agreement, the Transaction Documents or the related agreements (including the
Merger and the Related Transactions). Schedule 4.1(a) to this Agreement sets
forth a complete and accurate list of each Subsidiary of BAB, the jurisdiction
of incorporation or organization of each such Subsidiary and each jurisdiction
where each such Subsidiary is qualified or licensed to do business. Neither BAB
nor any Subsidiary of BAB is a general partner in any partnership, except as set
forth on Schedule 4.1(a).
(b) The copies of BAB's Articles of Incorporation, as amended, and
By-laws (collectively, the "BAB CHARTER DOCUMENTS") that are incorporated as
Exhibits to BAB's Annual Report on Form 10-KSB for the year ended November 28,
1999, and the Certificate of Incorporation and By-laws or comparable
organizational documents of Merger Sub and each other Subsidiary of BAB in the
forms delivered to the Company, are complete and correct copies thereof. The BAB
Charter Documents and all comparable organizational documents of each Subsidiary
of BAB are in full force and effect. BAB is not in violation of any of the
provisions of the BAB Charter Documents and no Subsidiary of BAB is in violation
of its organizational documents.
SECTION 4.2 Capitalization of BAB and its Subsidiaries.
(a) The authorized capital stock of BAB consists of (i) 20,000,000
shares of common stock, no par value (the "BAB Common Stock") of which 2,237,557
shares are issued and outstanding, and (ii) 3,880,000 shares of preferred stock,
no par value, of which no shares are issued or outstanding. All of the issued
and outstanding shares of BAB Common Stock have been duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights. None of
the issued and outstanding shares of BAB Common Stock were issued in violation
of the registration requirements of any federal or state securities laws. The
shares of BAB Common Stock that will be issued as a result of the Merger and the
Related Transactions will be, when issued in accordance with the terms of this
Agreement and the related agreements, duly authorized, validly issued, fully
paid and non-assessable. As of the date hereof, 205,698 shares of BAB Common
Stock were reserved for issuance and issuable upon or otherwise deliverable in
connection with the exercise of outstanding Options. Of the Options referred to
in the foregoing sentence, 77,648 consist of employee and director Options which
will be cancelled and replaced by a like number of Options under the same terms
by the BAB Domestication Merger Sub. Schedule 4.2(a) to this Agreement sets
forth, as of the date hereof, (i) the Persons to whom Options have been granted
by BAB, (ii) the exercise price for Options held by each such Person, (iii) the
number of vested and unvested Options and (iv) the termination dates of such
Options. Except as disclosed in the BAB Filed SEC Reports or as set forth on
Schedule 4.2(a) to this Agreement, no shares of BAB capital stock have been
issued other than pursuant to the exercise of stock options already in existence
on such date, and no stock options have been granted by BAB to any Person.
Except as disclosed in the BAB Filed SEC Reports, as set forth above or in
Schedule 4.2(a) to this Agreement or as contemplated by this Agreement, the
Transaction Documents or the related agreements, there are outstanding (i) no
shares of capital stock or other voting securities of BAB or its Subsidiaries,
(ii) no securities of BAB or any Subsidiary of BAB convertible or exercisable
into or exchangeable for shares of capital stock or voting securities of BAB or
any Subsidiary of BAB, (iii) no Options to acquire from BAB or any Subsidiary of
BAB, and no obligations of BAB or any Subsidiary of BAB to issue, any capital
stock, voting securities or securities convertible or exercisable into or
exchangeable for capital stock or voting securities of BAB or any Subsidiary of
BAB, (iv) no equity equivalents, interests in the ownership or earnings of BAB
or any Subsidiary of BAB or other similar rights (including stock appreciation
rights) (the items listed in subclauses (i), (ii), (iii) and (iv) being referred
to, collectively, as "BAB SECURITIES") and (v) no obligations of BAB or any
Subsidiary of BAB to repurchase, redeem or otherwise acquire any BAB Securities.
Except as set forth on Schedule 4.2(a) to this Agreement, there are no
stockholders agreements, voting trusts or other agreements or understandings to
which BAB or any Subsidiary of BAB is a party or to which any of them is bound
relating to the voting or registration of any shares of capital stock of BAB or
any Subsidiary of BAB.
(b) When incorporated, the authorized capital stock of Merger Sub
will consist of 100 shares of Merger Sub Common Stock, of which 100 shares will
be issued and outstanding. All of the issued and outstanding shares of Merger
Sub Common Stock have been duly authorized and validly issued and are fully
paid, non-assessable and free of preemptive rights. All of the issued and
outstanding shares of Merger Sub Common Stock are owned by BAB, free and clear
of any Lien.
(c) The authorized and outstanding shares of each class of capital
stock of each Subsidiary of BAB is completely and accurately set forth on
Schedule 4.2(c) to this Agreement. Each outstanding share of capital stock of
each Subsidiary of BAB is duly authorized and validly issued and is fully paid
and nonassessable and owned by BAB or a Subsidiary of BAB free and clear of any
Lien or any other limitation or restriction (including any restriction on the
right to vote or sell the same, except as may be provided as a matter of law).
(d) The BAB Common Stock constitutes the only class of equity
securities of BAB or any BAB Subsidiary registered or required to be registered
under the Exchange Act.
SECTION 4.3 Authority Relative to this Agreement; Board Action.
(a) Each of the BAB Entities has all necessary corporate or other
power and authority to execute and deliver this Agreement, the Transaction
Documents and the related agreements to which it is a party, to consummate the
transactions contemplated by this Agreement, the Transaction Documents and the
related agreements to which it is a party (including the Merger and the Related
Transactions), and to perform its obligations under this Agreement, the
Transaction Documents and the related agreements to which it is a party. The
execution and delivery by each of the BAB Entities of this Agreement, the
Transaction Documents and the related agreements to which it is a party and the
consummation by each of the BAB Entities of the transactions contemplated by
this Agreement, the Transaction Documents and the related agreements to which it
is a party (including the Merger and the Related Transactions) have been duly
and validly authorized by the Board of Directors of BAB (the "BAB BOARD"), and
the Board of Directors of Merger Sub (the "MERGER SUB BOARD"), and the sole
stockholder of Merger Sub,and no other corporate or other proceedings on the
part of any BAB Entity are, or will be, necessary to authorize this Agreement,
the Transaction Documents and the related agreements to which any such BAB
Entity is a party or to consummate the transactions contemplated by this
Agreement, the Transaction Documents or the related agreements (including the
Merger and the Related Transactions), other than, the approval by the
stockholders of BAB (the "BAB STOCKHOLDERS"), of (i) the issuance of Merger
Stock in connection with the Merger, and (ii) the Related Transactions (the "BAB
STOCKHOLDER PROPOSALS"). This Agreement, each of the Transaction Documents and
the related agreements to which any of the BAB Entities is a party has been, or
will be at the Closing, assuming the due authorization, execution and delivery
of the same by each of the other parties hereto or thereto, duly and validly
executed and delivered by the BAB Entities and constitutes, or will constitute
at the Closing, a valid, legal and binding agreement of the BAB Entities,
enforceable against such BAB Entities in accordance with its terms, subject to
(x) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer,
moratorium and other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally and (y) general principles of equity
(regardless of whether considered in a proceeding at law or in equity).
(b) The BAB Board, by resolutions duly adopted at a meeting duly
called and held and not subsequently rescinded or modified in any way, has duly
(i) determined that each of the BAB Stockholder Proposals are in the best
interests of BAB and the BAB Stockholders; (ii)
approved and adopted this Agreement, the Merger and the Related Transactions and
(iii) unanimously recommended that the BAB Stockholders approve and adopt this
Agreement, the Merger and the Related Transactions.
(c) The Merger Sub Board, by resolutions duly adopted at a meeting duly
called and held and not subsequently rescinded or modified in any way, has duly
(i) determined that this Agreement, the Merger and the Related Transactions are
in the best interests of Merger Sub and its sole stockholder, (ii) approved and
adopted this Agreement, the Merger and the Related Transactions and (iii)
unanimously recommended that the sole stockholder of Merger Sub approve and
adopt this Agreement, the Merger and the Related Transactions.
SECTION 4.4 SEC Filings; Financial Statements.
(a) Since November 30, 1997, BAB has filed all forms, reports, schedules,
statements and other documents (including all exhibits thereto) (the "BAB SEC
FILINGS") required to be filed with the SEC, each of which has complied with all
applicable requirements of the Securities Act and the Exchange Act, each as in
effect on the dates such forms, reports, schedules, statements and other
document were filed. BAB has heretofore delivered to or made available to the
Company, in the form filed with the SEC (including any amendments and all
exhibits thereto), the following (the "BAB FILED SEC REPORTS"): (i) the Annual
Reports on Form 10-KSB for each of the three fiscal years ended November 28,
1999, (ii) all definitive proxy statements relating to BAB's meetings of
stockholders (whether annual or special) held since November 30, 1997, and prior
to the date of this Agreement and (iii) all other forms, reports or registration
statements filed prior to the date of this Agreement by BAB with the SEC since
January 1, 1998 (other than quarterly reports on Form 10-QSB or current reports
on Form 8-K filed before January 1, 1999). As of their respective dates, none of
the BAB SEC Filings or documents, including, without limitation, any financial
statements or schedules included or incorporated by reference therein, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstance under which they
were made, not misleading. The consolidated financial statements of BAB (the
"BAB FINANCIAL STATEMENTS"), included or incorporated by reference in the BAB
SEC Filings complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto and all of such financial statements were prepared from the
books and records of BAB and fairly present in all material respects, in
conformity with GAAP (except as may be indicated in the notes thereto and except
that the unaudited financial statements may not include all notes thereto
required by GAAP), the consolidated statement of assets and liabilities,
investment in securities of BAB and its Subsidiaries as of the dates thereof and
their consolidated statements of operations, changes in net assets and cash
flows for the periods then ended (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments). Since November 28, 1999,
there has not been any change, or any application or request for any change, by
BAB or any Subsidiary of BAB in accounting principles, methods or policies for
financial accounting or tax purposes.
(b) BAB has heretofore made available to the Company a complete and
correct copy of any material amendment or modification, which has not yet been
filed with the SEC, to agreements, documents or other instruments which prior to
the date of this Agreement had been filed by BAB with the SEC pursuant to the
Securities Act, the Exchange Act or the Investment Company Act.
(c) As of February 27, 2000, the unconsolidated balance sheet of BAB
reflects: (ii) a maximum balance of One Million Five Hundred Thousand Dollars
($1,500,000) in notes payable and no additional liabilities and/or no higher
liability balances than are disclosed on its February 27, 2000 unconsolidated
balance sheet, attached as Schedule 4.4(c) to this Agreement, excluding
reasonable accounting and attorneys fees and such other reasonable expenses
related to this Agreement, the Merger and the Related Transactions.
SECTION 4.5 Information Supplied. None of the information included or
incorporated by reference in the Proxy Statement will, on the date mailed to the
BAB Stockholders and at the time of the BAB Stockholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Proxy
Statement will comply as to form in all material respects with the Investment
Company Act and the Exchange Act, respectively, and the rules and regulations of
the SEC thereunder. Notwithstanding the foregoing, BAB makes no representation
or warranty with respect to any Company Proxy Information.
SECTION 4.6 Consents and Approvals; No Violations.
(a) Except as set forth on Schedule 4.6(a) to this Agreement, no Filings
and Approvals to, of or with any Governmental Entity are, or will be, necessary
for the execution and delivery by any of the BAB Entities of this Agreement, the
Transaction Documents or the related agreements to which any BAB Entity is a
party or the consummation by any of the BAB Entities of the transactions
contemplated by this Agreement, the Transaction Documents or the related
agreements to which any such BAB Entity is a party (including the Merger and the
Related Transactions), except for those required (i) under the DGCL and NRS with
respect to the filing of the Certificate of Merger, (ii) under the Securities
Act and the Exchange Act or by any Regulatory Agency, and (iii) such Filings and
Approvals that, if not made or obtained could not reasonably be expected to
have, individually or in the aggregate, a BAB Material Adverse Effect.
(b) Except as set forth on Schedule 4.6(b) to this Agreement, no consent
or approval of any third party is, or will be, necessary for the execution and
delivery by any of the BAB Entities of this Agreement, any Transaction Documents
or any related agreements to which any such BAB Entity is a party or the
consummation by any of the BAB Entities of the transactions contemplated by this
Agreement, the Transaction Documents or the related agreements to which any such
BAB Entity is a party (including the Merger and the Related Transactions).
(c) Except as set forth on Schedule 4.6(c) to this Agreement, neither the
execution, delivery and performance of this Agreement, the Transaction Documents
or the related agreements to which any of the BAB Entities is a party, or the
consummation by any of the BAB Entities of the transactions contemplated by this
Agreement, the Transaction Documents or the related agreements to which any such
BAB Entity is a party (including the Merger and the Related Transactions) will
(i) conflict with or result in any breach of any provision of the BAB Charter
Documents or any comparable organizational documents of Merger Sub or any other
Subsidiary of BAB, (ii) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration or Lien) under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which any of the BAB Entities is a party or by which any of their respective
properties or assets are bound, or (iii) assuming that all Filings and Approvals
have been made or obtained, violate any Law or any Governmental Order applicable
to any of the BAB Entities or any of their respective properties or assets,
except in the case of clauses (ii) or (iii) for violations, breaches or defaults
which could not reasonably be expected to have, individually or in the
aggregate, a BAB Material Adverse Effect.
SECTION 4.7 No Default. Except as set forth on Schedule 4.7 to this Agreement,
none of the BAB Entities or any other Subsidiary of BAB is in default or
violation (and no event has occurred which with due notice or the lapse of time
or both would constitute a default or violation) of any term, condition or
provision of (i) the BAB Charter Documents or comparable organizational
documents of Merger Sub or any other Subsidiary of BAB, (ii) any note, bond,
mortgage, indenture, lease, license, contract, agreement or other instrument or
obligation to which any BAB Entity or any other Subsidiary of BAB is a party or
by which any of them or any of their respective properties or assets are bound,
or (iii) any Governmental Order applicable to any BAB Entity or any other
Subsidiary of BAB or any of their respective properties or assets, except in the
case of clauses (ii) or (iii) for violations, breaches or defaults that could
not reasonably be expected to have, individually or in the aggregate, a BAB
Material Adverse Effect, except for liabilities of any Subsidiary of BAB owed to
BAB or to any other wholly-owned Subsidiary of BAB.
SECTION 4.8 No Undisclosed Liabilities; Absence of Changes.
(a) Except as and to the extent disclosed in the BAB Filed SEC Reports or
on Schedule 4.8(a) to this Agreement, as of February 27, 2000, neither BAB nor
any Subsidiary of BAB had any liabilities or obligations of any nature, whether
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which would be required by GAAP to be reflected in, reserved
against or otherwise described in the consolidated balance sheet of BAB
(including the notes thereto) as of such date, except for liabilities and
obligations that could not reasonably be expected to have, individually or in
the aggregate, a BAB Material Adverse Effect.
(b) Except as disclosed in the BAB Filed SEC Reports or on Schedule 4.8(b)
to this Agreement, since November 28, 1999, the business of BAB and its
Subsidiaries has been carried on only in the ordinary course and in a manner
consistent with past practice, neither BAB nor any
of its Subsidiaries has incurred any liabilities or obligations of any nature,
whether accrued, contingent or otherwise, and whether due or to become due or
asserted or unasserted, except in the ordinary course of business and in a
manner consistent with past practice, none of which could reasonably be likely
to have, individually or in the aggregate, a BAB Material Adverse Effect, and
there has not been any event, condition or occurrence that, individually or in
the aggregate, has resulted or which could reasonably be expected to result in,
a BAB Material Adverse Effect. Except as disclosed in the BAB Filed SEC Reports
or on Schedule 4.8(b), since November 28, 1999, there has not been (i) any
material change by BAB in its accounting methods, principles or practices, (ii)
any declaration, setting aside or payment of any dividend or distribution in
respect of shares of the capital stock of BAB or any of its Subsidiaries or any
redemption, purchase or other acquisition of any of the BAB Securities, or (iii)
any increase in the compensation or benefits or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, restricted stock awards
or similar awards), stock purchase or other employee benefit plan, or any other
increase in the compensation payable or to become payable, or BAB's obligations
in respect of any program or arrangement for, officers or other key employees of
BAB or any BAB Subsidiary.
SECTION 4.9 No Litigation. Except as disclosed in the BAB Filed SEC Reports or
on Schedule 4.9 to this Agreement, there is no Proceeding pending or, to the
Knowledge of BAB, threatened against any BAB Entity or any other Subsidiary of
BAB or any of their respective properties or assets which (a) if adversely
determined, could reasonably be expected to have, individually or in the
aggregate, a BAB Material Adverse Effect, or (b) questions the validity of this
Agreement, any Transaction Document or any Related Agreement or any action to be
taken by any of the BAB Entities in connection with the consummation of the
transactions contemplated by this Agreement, the Transaction Documents or the
related agreements (including the Merger and the Related Transactions) or could
otherwise prevent, delay, make illegal or otherwise interfere with the
consummation of such transactions. Except as disclosed on Schedule 4.9 to this
Agreement, neither BAB nor any Subsidiary of BAB is subject to any outstanding
Governmental Order which could reasonably be expected to have a BAB Material
Adverse Effect.
SECTION 4.10 Compliance with Applicable Law.
(a) Except as disclosed in the BAB Filed SEC Reports or in Schedule
4.10(a) to this Agreement, BAB and all Subsidiaries of BAB have made or have
obtained and hold all Permits necessary for the lawful conduct of their
respective businesses, except where the failure to obtain any such Permit would
not have, individually or in the aggregate, a BAB Material Adverse Effect.
Except as disclosed on Schedule 4.10(a) to this Agreement, (i) the Permits of
BAB and its Subsidiaries are valid and in full force and effect, (ii) none of
the BAB Entities or any Subsidiary of BAB is in default under, and no condition
exists that with notice or lapse of time or both would constitute a default
under, such Permits, and (iii) none of such Permits will be terminated or
impaired or become terminable, in whole or in part, as a result of the
transactions contemplated by this Agreement, the Transaction Documents or the
related agreements, except in the case of clauses (i),
(ii) and (iii) for Permits, the failure of which to be valid or in full force
and effect or of BAB or its Subsidiaries to hold could not reasonably be
expected to have, individually or in the aggregate, a BAB Material Adverse
Effect.
(b) Except as disclosed in the BAB Filed SEC Reports or on Schedule
4.10(b) of this Agreement, the businesses of BAB and its Subsidiaries have not
been conducted in violation of any Law that applies to their business including
but not limited to any federal or state franchising laws and/or regulations,
except for violations or possible violations which could not reasonably be
expected to have, individually or in the aggregate, a BAB Material Adverse
Effect. Except as disclosed in the BAB Filed SEC Reports or on Schedule 4.10(b)
to this Agreement, no material investigation or review by any Governmental
Entity with respect to BAB or any of its Subsidiaries is pending or, to the
Knowledge of BAB, threatened, nor, to the Knowledge of BAB, has any Governmental
Entity indicated an intention to conduct the same.
SECTION 4.11 Employee Benefits and ERISA.
(a) Schedule 4.11(a) to this Agreement contains a true and complete list
of each material employee benefit plan, policy, program, practice, agreement,
understanding, arrangement or commitment (whether written or unwritten)
providing compensation, benefits or perquisites of any kind to any current or
former officer, employee or consultant (or to any dependent or beneficiary
thereof) of BAB, which are now, or were within the past six years, maintained
by, contributed to, by or with respect to which an obligation to contribute
exists or existed on the part of any of BAB, its predecessors, or any other
trade or business (whether or not incorporated) which, together with BAB, is
treated as a single employer under Section 414 of the Code (such other trades or
businesses, collectively, the "COMMONLY CONTROLLED BAB ENTITIES") or with
respect to which BAB or any Commonly Controlled BAB Entity has or may have any
material liability (including, without limitation, a liability arising out of an
indemnification, guarantee, hold harmless or similar agreement) including,
without limitation, all material employment or consulting agreements, incentive,
bonus, deferred compensation, pension, profit sharing, vacation, holiday,
cafeteria, medical, disability, stock purchase, stock option, stock
appreciation, phantom stock, restricted stock or other stock-based compensation
plans, policies, programs, practices or arrangements and any "employee benefit
plan" within the meaning of Section 3(3) of ERISA, whether or not subject to
ERISA (each, a "BAB PLAN" and together, the "BAB PLANS"). Schedule 4.11(a) to
this Agreement contains a true and complete list of the liabilities that are
directly related to the BAB Plans.
(b) With respect to each BAB Plan, BAB has delivered or made available to
the Company, to the extent applicable: (i) a current, correct and complete copy
of each written plan document (including without limitation, any employment
agreement, employment policies and procedures and plan instrument, and any
amendments thereto) or, to the extent no such written plan document exists, an
accurate written description thereof drafted by a responsible officer for
governing the operation of such plan; (ii) any related trust agreement or other
funding instrument; (iii) the most recent determination letter with respect to
any BAB Plan intended to be qualified under
Section 401(a) of the Code; (iv) any summary plan description, summary of
material modifications or other material written communication from BAB to its
employees concerning the extent of the benefits provided under any BAB Plan; and
(v) for the three most recent years (A) the Form 5500 and attached schedules,
(B) audited financial statements and (C) actuarial valuation reports.
(c) (i) Each BAB Plan has been established and maintained, in form and
operation, in all material respects (A) in accordance with its terms, and (B) in
compliance with the applicable provisions of ERISA, the Code and other
applicable Laws, rules and regulations; and (ii) each BAB Plan that is intended
to be qualified within the meaning of Section 401(a) of the Code has received a
favorable determination letter as to its qualification, and, to the Knowledge of
BAB, nothing has occurred, whether by action or failure to act, that would
reasonably be expected to cause such determination letter to be revoked.
(d) Except as set forth on Schedule 4.11(d), no BAB Plan provides for
benefits, including, without limitation, medical or health benefits (through
insurance or otherwise), or provides for the continuation of such benefits or
coverage for any participant or any dependent or beneficiary of any participant,
after such participant's retirement or other termination of employment (except
(i) as may be required by applicable law, (ii) retirement or death benefits
under any employee pension plan, (iii) disability benefits under any employee
welfare plan that have been fully provided for by insurance or otherwise, (iv)
deferred compensation benefits accrued as liabilities on the books of BAB; or
(v) benefits in the nature of severance pay).
(e) For each BAB Plan with respect to which a Form 5500 has been filed, no
change has occurred with respect to the matters covered by the most recent Form
5500 since the date thereof other than any such change as would not be
reasonably likely to result in a material liability to BAB.
(f) Except as disclosed on Schedule 4.11(f) to this Agreement, with
respect to each BAB Plan that is subject to Title IV of ERISA:
(i) no such BAB Plan has been terminated so as to result, directly
or indirectly, in any material liability, contingent or otherwise, of BAB or any
Commonly Controlled BAB Entity;
(ii) no complete or partial withdrawal from such BAB Plan has been
made by BAB or any Commonly Controlled BAB Entity, or by any other Person, so as
to result in a material liability to BAB or any Commonly Controlled BAB Entity,
whether such liability is contingent or otherwise;
(iii) no proceeding has been initiated by any Person (including the
PBGC) to terminate any such BAB Plan or to appoint a trustee for any such BAB
Plan;
(iv) no condition or event currently exists or currently is expected
to occur that would reasonably be expected to result, directly or indirectly, in
any material liability of BAB or any Commonly Controlled BAB Entity under Title
IV of ERISA, whether to the PBGC or otherwise, on account of the termination of
any such BAB Plan;
(v) if any such BAB Plan were to be terminated as of the Closing
Date, neither BAB nor any Commonly Controlled BAB Entity would incur, directly
or indirectly, any material liability under Title IV of ERISA;
(vi) no "reportable event" (as defined in Section 4043 of ERISA) has
occurred with respect to any such BAB Plan; and
(vii) no such BAB Plan has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code,
respectively), whether or not waived.
(g) Except as disclosed on Schedule 4.11(g) to this Agreement, with
respect to any BAB Plan that is a multi-employer plan (within the meaning of
Section 3(37) of ERISA): (i) neither BAB nor any Commonly Controlled BAB Entity
would be subject to any withdrawal liability if, as of the date of the Closing,
BAB or any Commonly Controlled BAB Entity were to engage in a complete
withdrawal (as defined in ERISA section 4203) or partial withdrawal (as defined
in Section 4205 of ERISA) from any such multi employer plan; and (ii) no such
multi-employer plan is in reorganization or insolvent (as those terms are
defined in Sections 4241 and 4245 of ERISA, respectively).
(h) Except as disclosed on Schedule 4.11(h) to this Agreement or as would
not be reasonably likely to result in a material liability to BAB, with respect
to any BAB Plan that is not a multi employer plan (within the meaning of Section
3(37) of ERISA): (i) no actions, suits or claims (other than routine claims for
benefits in the ordinary course) are pending or, to the Knowledge of BAB,
threatened; (ii) no facts or circumstances exist that could give rise to any
such actions, suits or claims; and (iii) no written or oral communication has
been received from the PBGC in respect of any BAB Plan subject to Title IV of
ERISA concerning the funded status of any such BAB Plan or any transfer of
assets and liabilities from any such plan in connection with the transactions
contemplated herein.
(i) Except as disclosed on Schedule 4.11(i) to this Agreement, neither BAB
nor any Commonly Controlled BAB Entity has agreed to or communicated to
employees any changes to any BAB Plan that would: (i) cause an increase in
benefits or create new benefits under any BAB Plan; or (ii) change any employee
coverage so as to cause an increase in the expense of maintaining any such BAB
Plan.
(j) Except as disclosed on Schedule 4.11(j) to this Agreement, the
consummation of the transactions contemplated hereby will not result in: (i) any
payment (including, without limitation, any severance, unemployment
compensation, golden parachute or bonus payment)
becoming due to any current or former director, officer, employee or consultant
of BAB or any of its Affiliates; (ii) any increase in the amount of compensation
or benefits payable in respect of any current or former director, officer,
employee or consultant of BAB or any of its Affiliates; or (iii) the
acceleration of vesting or time of payment of any benefits or compensation
payable in respect of any current or former director, officer, employee or
consultant of BAB or any of its Affiliates, and the transactions contemplated by
this Agreement will not result in any payment or series of payments constituting
a "parachute payment" within the meaning of Section 280G of the Code.
(k) Except as disclosed on Schedule 4.11(k) to this Agreement, neither BAB
nor any Commonly Controlled BAB Entity has engaged in or participated in any
transaction, whether or not related to a BAB Plan, that could, directly or
indirectly, result in any tax, penalty or liability imposed by ERISA or the Code
including, without limitation, any excise tax under Section 4975 of the Code or
any civil penalty under Section 409 or 502 of ERISA, that, alone or together
with any other such tax or penalty, could have a BAB Material Adverse Effect.
(l) Neither BAB nor any affiliate thereof (as defined in the QPAM
Exemption, nor any owner, direct or indirect, of a five percent (5%) or more
interest in BAB, is a Person who has engaged in any act described in Part I(g)
of the QPAM Exemption.
(m) Except as disclosed on Schedule 4.11(m) to this Agreement, BAB is not
a party to any collective bargaining or other labor union contract applicable to
employees of BAB, and no collective bargaining agreement or other labor union
contract is being negotiated by BAB. As of the date of this Agreement, there is
no labor dispute, strike or work stoppage against BAB pending or threatened in
writing which will materially interfere with the business activities of BAB. As
of the date of this Agreement, none among BAB, its representatives or employees
has committed within the past five years any unfair labor practices in
connection with the operation of the business of BAB, and there is no charge or
complaint against BAB by the National Labor Relations Board or any comparable
state or foreign agency pending or, to the Knowledge of BAB, threatened in
writing.
(n) Except as disclosed on Schedule 4.11(n) to this Agreement, as of the
Effective Time, BAB has not incurred any liability or obligation under the
Worker Adjustment and Retraining Notification Act, as it may be amended from
time to time, and, to Knowledge of BAB, within the 90-day period immediately
following the Effective Time will not incur any such liability or obligation if,
during such 90-day period, only terminations of employment in the normal course
of operations occur.
SECTION 4.12 Environmental Laws and Regulations.
(a) Except as disclosed in the BAB Filed SEC Reports or on Schedule
4.12(a) to this Agreement, (i) each of BAB and its Subsidiaries is in
compliance, in all material respects, with all applicable Environmental Laws,
which compliance includes, but is not limited to, the possession by BAB and its
Subsidiaries of all material Permits and other governmental authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof; (ii)
neither BAB nor any of its Subsidiaries has received written notice of, or, to
the Knowledge of BAB, is the subject of, any Environmental Claim; and (iii) to
the Knowledge of BAB, there are no circumstances that are reasonably likely to
prevent or interfere with such material compliance in the future.
(b) Except as disclosed on Schedule 4.12(b)to this Agreement, to the
Knowledge of BAB, there are no material Environmental Claims that are pending or
threatened against any Person whose liability for any Environmental Claim BAB or
any Subsidiary of BAB has or may have retained or assumed either contractually
or by operation of Law.
SECTION 4.13 Tax Matters.
(a) BAB and its Subsidiaries have timely and accurately filed, or caused
to be timely and accurately filed, all material Tax Returns required to be filed
by them, and have paid, collected or withheld, or caused to be paid, collected
or withheld, all material amounts of Taxes required to be paid, collected or
withheld, other than such Taxes for which adequate reserves have been
established or which are being contested in good faith. Except as set forth on
Schedule 4.13(a) to this Agreement, no material claim or assessment of any Tax
authority is pending against BAB or any of its Subsidiaries for any alleged
deficiency in any Tax, there are no pending or, to the Knowledge of BAB,
threatened audits or investigations for or relating to any liability in respect
of any Taxes, and neither BAB nor any of its Subsidiaries have been notified in
writing of any proposed Tax claims or assessments against BAB or any Subsidiary
of BAB (other than in each case, claims or assessments for which adequate
reserves have been established or which are being contested in good faith or are
immaterial in amount).
(b) Except as set forth on Schedule 4.13(b) to this Agreement, neither BAB
nor any of its Subsidiaries is liable for Taxes of any other Person, or is
currently under any contractual obligation to indemnify any Person with respect
to Taxes (except for customary agreements to indemnify lenders or security
holders in respect of Taxes other than income Taxes), or is a party to any Tax
sharing agreement or any other agreement providing for payments by BAB or any of
its Subsidiaries with respect to Taxes. Except as set forth on Schedule 4.13(b)
to this Agreement, there are no outstanding powers of attorney enabling any
party to represent BAB or any of its Subsidiaries with respect to Tax matters.
BAB and its Subsidiaries have withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third Person. All
material elections with respect to Taxes made by BAB and its Subsidiaries as of
the date hereof are set forth on Schedule 4.13(b) to this Agreement. There are
no private letter rulings in respect of any Tax pending between BAB and its
Subsidiaries and any Tax authority. Except as set forth on Schedule 4.13(b) to
this Agreement, neither BAB nor any of its Subsidiaries is a party to any joint
venture, partnership or other arrangement or contract which could be treated as
a partnership for Tax purposes. Neither BAB nor any of its Subsidiaries has
agreed to or is required, as a result of a change in method of accounting or
otherwise, to include any adjustment under Section 481 of the Code (or any
corresponding provision of state, local or foreign Law) in taxable income.
Neither BAB nor any of
its Subsidiaries is a party to any contract, arrangement or plan that could
result (taking into account the transactions contemplated by this Agreement and
the related agreements), separately or in the aggregate, in the payment of an
"excess parachute payments" within the meaning of Section 280G of the Code.
Schedule 4.13(b) to this Agreement contains a list of all jurisdictions to which
any Tax is properly payable or in which any Tax Return is required to be filed
by BAB and its Subsidiaries, and no written claim has ever been made by any Tax
authority in any other jurisdiction that BAB or any of its Subsidiaries is
subject to taxation in such jurisdiction.
SECTION 4.14 Material Contracts.
(a) Set forth on Schedule 4.14(a) to this Agreement is a correct and
complete list of each of the following contracts and agreements (and all
amendments, modifications and supplements thereto and all related letters to
which BAB is a party affecting the obligations of any party thereunder) to which
BAB is a party or by which any of its properties or assets are bound, correct
and complete copies of which have been delivered to the Company: (i) each
employment, consulting, non-competition, severance, golden parachute or
indemnification contract (including, without limitation, any contract to which
BAB is a party involving employees of BAB) which contemplates payments equal to
or in excess of $30,000 per year; (ii) each agreement under which BAB has a
continuing obligation to provide financial advisory or other consulting
services; (iii) contracts granting a right of first refusal or first
negotiation; (iv) each partnership or joint venture agreement; (v) each
agreement for the acquisition, sale, lease or license of properties or assets of
BAB or by BAB (by merger, purchase or sale of assets or stock or otherwise),
including, without limitation, commitments for future investments, in which the
aggregate amount to paid or received by BAB is equal to or in excess of $5,000;
(vi) each contract or agreement with any Governmental Entity; (vii) each
agreement relating to indebtedness of BAB or guarantees of indebtedness by BAB
in excess of $5,000; (viii) each non-competition, exclusivity or other agreement
restricting the ability of BAB to hire any Person or operate its business as
now, or contemplated to be, conducted, except for any such agreement which could
not reasonably be expected to have a BAB Material Adverse Effect; (ix) each
agreement between BAB and any of its officers, its directors, holders of 5% of
the outstanding BAB Common Stock or other Affiliates of BAB; (x) each contract
or agreement that contains a "change of control" provision; (xi) any agreement
which encumbers or places a Lien on any assets of BAB; and (xii) all commitments
and agreements to enter into any of the foregoing (collectively, together with
the contracts and agreements filed as exhibits to the BAB Filed SEC Reports, the
"BAB MATERIAL CONTRACTS").
(b) Except as set forth on Schedule 4.14(b) to this Agreement:
(i) Each BAB Material Contract is in full force and effect and there
is no default under any BAB Material Contract either by BAB or, to the Knowledge
of BAB, by any other party thereto, and no event has occurred that with the
lapse of time or the giving of notice or both would constitute a default
thereunder by BAB or any of its Subsidiaries or, to the Knowledge of BAB, any
other party, in any such case in which such default or event could reasonably be
expected to have, individually or in the aggregate, a BAB Material Adverse
Effect.
(ii) No party to any such BAB Material Contract has given notice to
BAB of or made a claim against BAB with respect to any breach or default
thereunder, in any such case in which such breach or default could reasonably be
expected to have, individually or in the aggregate, a BAB Material Adverse
Effect.
SECTION 4.15 Title to Properties; Encumbrances. Except as set forth in Schedule
4.15 to this Agreement, BAB and its Subsidiaries have good title to all of the
properties and assets, real and personal, tangible and intangible, it owns or
purports to own, including those reflected on their books and records and in the
BAB Financial Statements (except for accounts receivable collected and materials
and supplies disposed of in the ordinary course of business consistent with past
practice after the respective dates of the BAB Financial Statements). BAB and
its Subsidiaries have a valid leasehold, license or other interest in all of the
other properties and assets, tangible or intangible, which are used in the
operation of their respective businesses. Except as set forth in Schedule 4.15
to this Agreement, all properties and assets owned, leased or used by BAB and
its Subsidiaries are free and clear of all Liens, except for (a) Liens for
current Taxes not yet due, (b) workmen's, common carrier and other similar Liens
arising in the ordinary course of business, none of which materially detracts
from the value or materially impairs the use of the asset or property subject
thereto, or materially impairs the operations of BAB and its Subsidiaries, (c)
Liens disclosed in the BAB Financial Statements, and (d) such imperfections of
title and other Liens, if any, which do not individually or in the aggregate
materially interfere with the value or the use of such properties or assets or
otherwise could not reasonably be expected to have, individually or in the
aggregate, a BAB Material Adverse Effect.
SECTION 4.16 Intellectual Property. Except as disclosed on Schedule 4.16 to this
Agreement, BAB and its Subsidiaries own or are licensed or otherwise have
legally enforceable rights to use all Intellectual Property used or otherwise
material to the operation of the business of BAB and its Subsidiaries as
presently conducted. To the Knowledge of BAB, the use of the Intellectual
Property by BAB and its Subsidiaries does not infringe upon or otherwise violate
any material Intellectual Property rights of third parties. To the Knowledge of
BAB, no third party, including any employee, former employee, independent
contractor or consultant, is infringing upon or otherwise violating the rights
of BAB or any Subsidiary of BAB in the Intellectual Property that, individually
or in the aggregate, would reasonably be expected to have a BAB Material Adverse
Effect. Except as disclosed on Schedule 4.16, or as would not reasonably be
expected, individually or in the aggregate, to have a BAB Material Adverse
Effect, no claims (i) are currently pending or, to the Knowledge of BAB,
threatened with respect to the Intellectual Property of BAB or any Subsidiary of
BAB, or (ii) are, to the Knowledge of BAB, currently pending or threatened with
respect to the Intellectual Property rights of a third party to the extent
arising out of any use, reproduction or distribution of the Intellectual
Property of such third party by BAB or a Subsidiary of BAB.
SECTION 4.17 Condition and Sufficiency of Assets. Except as disclosed on
Schedule 4.17 to this Agreement, all of the properties and assets owned, leased
or used by BAB is in good
operating condition and repair (normal wear and tear excepted), are suitable for
the purposes used and are adequate and sufficient for all current operations of
BAB.
SECTION 4.18 Investment Securities. Schedule 4.18 to this Agreement sets forth a
complete and correct list of all securities (including warrants) owned by BAB
and its Subsidiaries on the date specified in Schedule 4.18, which date shall be
no more than ten days prior to the date hereof. Except as described in Schedule
4.18 to this Agreement, BAB and its Subsidiaries have good and marketable title
to all such securities (except securities sold under repurchase agreements
(which are indicated as such on Schedule 4.18) or held in any fiduciary or
agency capacity (which are indicated as such on Schedule 4.18)), free and clear
of any Lien, except to the extent such securities are pledged in the ordinary
course of business consistent with prudent business practices to secure
obligations of BAB or such Subsidiary. Such securities are valued on the books
of BAB in accordance with the methods and procedures described in the BAB Filed
SEC Reports.
SECTION 4.19 Ownership of Merger Sub.
(a) When formed, Merger Sub will be a direct, newly formed wholly-owned
subsidiary of BAB. Merger Sub will be duly formed solely for the purpose of
engaging in the transactions contemplated by this Agreement.
(b) As of the date of its formation and the Effective Time, except for
obligations or liabilities incurred in connection with its incorporation or
organization and the transactions contemplated by this Agreement, the
Transaction Documents and the related agreements and except for this Agreement,
the Transaction Documents and the related agreements, Merger Sub will not have
incurred, directly or indirectly, through any Subsidiary or Affiliate, any
obligation or liability or engaged in any business activity of any type or kind
whatsoever or entered into any agreement or arrangement with any Person, except
for liability for corporate franchise taxes and other incorporation expenses.
(c) As of the date of its formation and the Effective Time, Merger Sub
will not have any assets.
SECTION 4.20 Brokers. Except as set forth on Schedule 4.20 to this Agreement, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the other transactions
contemplated by this Agreement, the Transaction Documents or the related
agreements (including the Related Transactions) based upon arrangements made by
or on behalf of BAB or any of its Affiliates.
SECTION 4.21 Transactions with Affiliates. Except as disclosed in the BAB Filed
SEC Reports or as set forth on Schedule 4.21 to this Agreement, since January 1,
2000, no stockholder, officer, director or Affiliate of BAB or any Subsidiary of
BAB has entered into any transaction with or is a party to any contract with BAB
or any of its Subsidiaries. No officer, director or Affiliate of BAB or any
Subsidiary of BAB owns any direct or indirect interest of any kind in, or
controls or is
a director, officer, employee or partner of, or consultant to, or lender or
borrower from or has the right to participate in the profits of, any Person
which is a competitor, client, landlord, tenant, creditor or debtor of BAB or
its Subsidiaries. All agreements or arrangements relating to any transaction
involving BAB or any of its Subsidiaries and any of their respective directors,
officers, principal employees or Affiliates which are required to be described
in the BAB Filed SEC Reports are described therein, and such descriptions set
forth the material terms of all such transactions and do not omit to state any
material facts with respect to any such transaction.
SECTION 4.22 Books and Records. All constituent documents, business licenses,
minute books, stock certificate books, stock transfer ledgers and other records
of BAB and its Subsidiaries (collectively, the "BAB RECORDS") have been
maintained in accordance with reasonable business practices and applicable legal
requirements. The BAB Records are complete and correct in all material respects
and contain all material matters required to be reflected in such BAB Records.
SECTION 4.23 Disclosure. The representations and warranties by the BAB Entities
contained in this Agreement and in any Schedule or certificate furnished or to
be furnished by them pursuant hereto do not contain or will not, as of the
Closing Date, contain any untrue statement of a material fact, and do not omit
or will not, as of the Closing Date, omit to state any fact required to be
stated therein or necessary in order to make the statements herein or therein,
in light of the circumstances under which they were made, not misleading. The
representations and warranties contained in this Section 4.23 or elsewhere in
this Agreement or in any Schedule or certificate furnished or to be furnished as
aforesaid pursuant hereto shall not be affected or deemed waived by reason of
the fact that the Company or its representatives know or should have known that
any such representation or warranty is or might be inaccurate in any respect.
ARTICLE 5
COVENANTS
The parties, as applicable, hereby covenant and agree as follows:
SECTION 5.1 Conduct of Business of the Company. From the date hereof until the
Effective Time, the Company shall: (i) maintain its corporate existence in good
standing; (ii) maintain the general character of its business; (iii) maintain in
effect all of its presently existing insurance coverage (or substantially
equivalent insurance coverage); (iv) preserve its business organization intact,
preserve its good will, keep available to the Company the services of its
current officers and employees and preserve its present business relationships
with its customers, clients and other Persons with which the Company has
business relations; and (v) in all respects conduct its business only in the
usual and ordinary manner consistent with past practice and perform in all
material respects all Company Material Contracts or other obligations with
banks, customers, clients, employees and others.
SECTION 5.2 Conduct of Business of BAB.
(a) From the date hereof until the Effective Time and excluding the
Related Transactions, BAB shall and shall cause each of its Subsidiaries to: (i)
maintain its corporate existence in good standing; (ii) maintain the general
character of its business; (iii) maintain in effect all of its presently
existing insurance coverage (or substantially equivalent insurance coverage);
(iv) preserve its business organization intact, preserve its good will, keep
available the services of its current officers and employees and preserve its
present business relationships with its customers, clients and other Persons
with which it has business relations; and (v) in all respects conduct its
business only in the usual and ordinary manner consistent with past practice and
perform in all material respects all BAB Material Contracts or other obligations
with banks, customers, clients, employees and others.
(b) Without limiting the provisions of Section 5.2(a) and except as
expressly provided herein, from the date hereof until the Effective Time, none
of the BAB Entities shall, directly or indirectly, do, or propose to do, any of
the following without the prior written consent of the Company:
(i) except as contemplated by this Agreement, amend or otherwise
modify any Charter Documents or any of the organizational documents;
(ii) issue, sell, dispose of or encumber or authorize the issuance,
sale, disposition or encumbrance of, or grant or issue any Option, warrant or
other right to acquire or make any agreement of the type referred to in Section
4.2 with respect to, any shares of its capital stock or any other of its
securities or any security convertible or exercisable into or exchangeable for
any such shares or securities, or alter any term of any of its outstanding
securities or make any change in its outstanding shares of capital stock or its
capitalization, whether by reason of a reclassification, recapitalization, stock
split, combination, exchange or readjustment of shares, stock dividend or
otherwise;
(iii) encumber any of its material assets or properties;
(iv) declare, set aside, make or pay any dividend or other
distribution to any stockholder with respect to its capital stock;
(v) redeem, purchase or otherwise acquire any BAB Securities;
(vi) increase the compensation or other remuneration or benefits
payable or to become payable to any director or executive officer of the BAB
Entities, or increase the compensation or other remuneration or benefits payable
or to become payable to any of its other employees or agents, except, with
respect to such other employees or agents only, for increases in the ordinary
course of business consistent with past practice;
(vii) except as set forth on Schedule 5.2(b)(vii) to this Agreement,
adopt or (except as otherwise required by Law) amend or make any unscheduled
contribution to any employee benefit plan for or with employees, or enter into
any collective bargaining agreement;
(viii) except as set forth on Schedule 5.2(b)(viii) to this
Agreement, terminate or modify any BAB Material Contract requiring future
payments to or from BAB, except for terminations of BAB Material Contracts upon
their expiration during such period in accordance with their terms;
(ix) except as set forth on Schedule 5.2(b)(ix) to this Agreement,
create, incur, assume or otherwise become liable for any indebtedness or
guarantee or endorse any obligation or the net worth of any Person, except for
endorsements of negotiable instruments for collection in the ordinary course of
business;
(x) except as set forth on Schedule 5.2(b)(x) to this Agreement,
pay, discharge or satisfy any claim, obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, in an aggregate amount in
excess of $20,000, except for liabilities incurred prior to the date hereof in
the ordinary course of business in a manner consistent with past practice;
(xi) except as described in Subsection 5.2(c) below or as part of
its plan to sell company-owned stores, sell, transfer, lease or otherwise
dispose of any of its assets or properties, except in the ordinary course of
business in a manner consistent with past practice and for a cash consideration
equal to the fair value thereof at the time of such sale, transfer, lease or
other disposition;
(xii) cancel, compromise, release or waive any material debt, claim
or right other than compromising royalty and franchise fee claims against
franchisees in the ordinary course of business;
(xiii) make any loan or advance to any Person other than travel and
other similar routine advances in the ordinary course of business consistent
with past practice, or acquire for cash (a "BAB ACQUISITION") the capital stock
or other securities or any ownership interest in, or substantially all of the
assets of, any other business enterprise;
(xiv) make any material capital investment or expenditure or capital
improvement, addition or betterment;
(xv) change its method of accounting or the accounting principles or
practices utilized in the preparation of BAB Financial Statements, other than as
required by GAAP;
(xvi) institute or settle any Proceeding before any Governmental
Entity relating to it or its assets or properties;
(xvii) adopt a plan of dissolution or liquidation with respect to
itself;
(xviii) except as set forth in Schedule 5.2(b)(xviii) to this
Agreement, enter into any contract, except contracts made in the ordinary course
of business consistent with past practice;
(xix) make any new election with respect to Taxes or any change in
current elections with respect to Taxes, or settle or compromise any federal,
state, local or foreign Tax liability or agree to an extension of a statute of
limitations; or
(xx) enter into any commitment to do any of the foregoing, or any
action which would make any of the representations or warranties of the BAB
Entities contained in this Agreement untrue or incorrect in any material respect
(subject to the Knowledge and materiality limitations set forth therein) or
cause any covenant, condition or agreement of the BAB Entities in this Agreement
not to be complied with or satisfied in any material respect.
(c) BAB shall use its best efforts to negotiate and effect the sale of the
franchise stores which are listed on Schedule 5.2(c) to this Agreement, and
shall apply seventy-five percent (75%) of the proceeds from such sales to
repayment of BAB's indebtedness to CIB Bank.
SECTION 5.3 BAB Bagel Operation's Assets and Liabilities.
(a) Prior to the Effective Date, BAB shall form a new wholly-owned
subsidiary ("BAGEL SUB"), shall transfer to Bagel Sub all assets of BAB related
to BAB's current business operations and shall cause Bagel Sub to assume all
liabilities of BAB related to its current business operation, including without
limitation the CIB Bank indebtedness. All subsidiaries of BAB engaged in BAB's
current business operations shall either become wholly-owned subsidiaries of
Bagel Sub or shall be merged with and into Bagel Sub. BAB shall obtain from all
creditors of BAB, who are listed on Schedule 5.3(a), as of the date of such
transfer other than CIB Bank releases of BAB from further liability with respect
to the liabilities assumed by Bagel Sub.
(b) Prior to the Effective Date, BAB shall declare a dividend consisting
of all of the common stock of Bagel Sub to holders of BAB Common Stock as of a
record date prior to the Effective Date, payable as soon as practicable
following the Effective Date. Such dividend shall be payable only following the
effective date of a registration statement filed with the SEC on Form 10-SB with
respect to Bagel Sub's common stock and distribution to the holders of BAB
Common Stock as of the record date of an Information Statement containing the
information required by Schedule 14C under the Exchange Act. BAB and the Company
shall cooperate in the preparation and filing of Form 10-SB and preparation and
distribution of the Bagel Sub Information Statement.
(c) The initial Board of Directors of Bagel Sub shall consist solely of
those persons who comprise the Board of Directors of BAB prior to the Effective
Time, or a sub-set of them, selected by them, and any subsequent members who
take office for any reason (including
removal of any incumbent director for cause) shall be elected solely from
nominees so elected by the remaining Bagel Sub Directors, BAB as sole
shareholder of Bagel Sub shall vote its shares solely for such nominees.
(d) At the sole discretion of the Board of Directors of Bagel Sub, the
assets of Bagel Sub may be sold to one or more third parties or distributed to
the holders of BAB common stock as of the record date for the dividend described
above.
SECTION 5.4 Preparation and Filing of Proxy Statement; BAB Stockholders Meeting.
(a) As promptly as practicable following the date of this Agreement, but
no later than thirty (30) days after the date of this Agreement, BAB shall
prepare and file with the SEC the proxy materials relating to the BAB
Stockholders Meeting to be held in connection with the transactions contemplated
by this Agreement (including the approval of the Merger), the Transaction
Documents and the Related Agreements (the "PROXY STATEMENT"). The Proxy
Statement shall comply as to form with the applicable provisions of the Exchange
Act and the rules and regulations thereunder. BAB shall, as promptly as
practicable after receipt thereof, provide copies of any written comments
received from the SEC with respect to the Proxy Statement to the Company and
advise the Company of any oral comments with respect to the Proxy Statement
received from the SEC. BAB shall provide the Company with a reasonable
opportunity to review and comment on the Proxy Statement and any amendment or
supplement to the Proxy Statement prior to filing such with the SEC, and shall
provide the Company with a copy of all such filings made with the SEC. No
amendment or supplement to the information supplied by the Company for inclusion
in the Proxy Statement shall be made without the approval of the Company, which
approval shall not be unreasonably withheld or delayed.
(b) BAB shall, as promptly as practicable following the date of this
Agreement and the completion of any SEC review of the Proxy Statement, duly
call, give notice of, convene and hold a meeting of its stockholders (the "BAB
STOCKHOLDERS MEETING") for the purpose of obtaining the requisite approval of
the BAB Stockholders of each of the BAB Stockholder Proposals. BAB shall,
through the BAB Board, recommend to its stockholders approval of each of the BAB
Stockholders proposals.
SECTION 5.5 SEC and Other Governmental Filings. BAB and the Company shall
promptly provide the other (or its counsel) with copies of all filings made by
it or any of its Subsidiaries with the SEC or any other Governmental Entity in
connection with this Agreement, the Transaction Documents and the related
agreements and the transactions contemplated hereby and thereby (including the
Merger and the Related Transactions).
SECTION 5.6 Related Transactions. For the purposes of this Agreement, "RELATED
TRANSACTIONS" means:
(A) Changing the name of BAB Merger Domestication Sub to
PlanetZanett.com, Inc. or another name designated in writing by the
Company;
(B) The Domestication Merger; and
(C) The transfer of all of the assets and liabilities of BAB related to
its current business operations to Bagel Sub, the releases from the
BAB Creditors, except CIB Bank, and the dividend declaration, as
described in Section 5.3.
SECTION 5.7 Voting Agreement. The Company acknowledges that it has entered into
the Voting Agreement, dated as of May ____, 2000 (the "VOTING AGREEMENT"),
attached as Exhibit "A" to this Agreement, pursuant to which Michael Evans
("EVANS"), and Michael Murtaugh ("MURTAUGH"), agreed to vote all shares of BAB
Common Stock over which they have direct or indirect voting power in favor of
the Merger and the Related Transactions.
SECTION 5.8 Updating Schedules. The parties shall use their best efforts to
negotiate in good faith mutually acceptable Schedules prior to Closing.
SECTION 5.9 Press Releases. No party will issue or cause the publication of any
press release or other public announcement with respect to this Agreement or the
transactions contemplated by this Agreement, the Transaction Documents and the
related agreements, other than the Proxy Statement without the prior written
consent of the other parties hereto; provided, however, that nothing herein will
prohibit any party from issuing or causing publication of any such press release
or public announcement to the extent that such party determines such action to
be required by Law, in which case the party making such determination will allow
the other parties reasonable time to comment on such release or announcement in
advance of its issuance.
SECTION 5.10 Access to Information; Confidentiality. Upon reasonable notice, the
Company and BAB each shall afford to the members, officers, employees,
accountants, counsel and other representatives of the other reasonable access,
during the period prior to the Effective Time, to all its facilities,
properties, assets, books, contracts and records and, during such period, the
Company and BAB each shall furnish promptly to the other all information
concerning its business, facilities, properties, assets and personnel as such
other party may reasonably request, and each shall make available to the other
the appropriate individuals (including officers, employees, accountants, counsel
and other professionals) for discussion of the other's business, facilities,
properties, assets and personnel as either the Company or BAB may reasonably
request. Each party shall keep such information confidential in accordance with
the terms of the Confidentiality Agreement.
SECTION 5.11 Non-Solicitation.
(a) Except as permitted in subsection (c) below, the BAB Entities, their
Affiliates and their respective officers, directors, employees, representatives
and agents shall immediately cease any existing discussions or negotiations, if
any, with any parties conducted heretofore with
respect to any acquisition or exchange of all or any material portion of the
assets of, or any equity interest in, BAB or any of its subsidiaries or any
business combination with BAB or any of its subsidiaries, except that BAB may
initiate or continue any existing discussions or negotiations with respect to
the stores listed in Schedule 5.2(c). BAB agrees that, prior to the Effective
Time or December 31, 2000, whichever is earlier, it shall not, and shall not
authorize or permit any of its subsidiaries or any of its or its subsidiaries'
directors, officers, employees, agents or representatives, directly or
indirectly, to solicit, initiate, encourage or facilitate, or furnish or
disclose non-public information in furtherance of, any inquiries or the making
of any proposal with respect to any merger, liquidation, recapitalization,
consolidation or other business combination involving BAB or its subsidiaries or
acquisition of any capital stock or any material portion of the assets of BAB or
any of its subsidiaries (other than the stores listed on Schedule 5.2(c)), or
any combination of the foregoing (an "ACQUISITION TRANSACTION"), or negotiate,
explore or otherwise engage in discussion with any Person (other than the
Company or its directors, officers, employees, agents and representatives) with
respect to any Acquisition Transaction, or enter into any agreement, arrangement
or understanding requiring it to abandon, terminate or fail to consummate the
Merger, the Related Transactions or any other transactions contemplated by this
Agreement; provided that BAB may furnish information to, and negotiate or
otherwise engage in discussions with, any party who delivers a bona fide written
proposal for an Acquisition Transaction if (i) the BAB Board determines in good
faith and on a reasonable basis by a majority vote, after consultation with its
outside counsel and financial advisors, that (x) such Acquisition Transaction is
reasonably likely to be more favorable to BAB and its stockholders from a
financial point of view than the transactions contemplated by this Agreement and
(y) that failure to take such action would thus constitute a breach of the
fiduciary duties of the BAB Board, and (ii) BAB enters into a customary
confidentiality agreement with respect thereto, and (iii) BAB complies with the
provisions of Section 5.11(b). The term "Acquisition Transaction" shall not
include any of the Related Transactions provided for in Section 5.6.
(b) Except as permitted in subsection (c) below, from and after the
execution of this Agreement, BAB shall, as soon as practicable, advise the
Company in writing of the receipt, directly or indirectly, of the existence of
any discussions, negotiations, proposals or substantive inquiries relating to an
Acquisition Transaction, identify the offeror and furnish to the Company a copy
of such proposal or substantive inquiry, if it is in writing, or a written
summary of any oral proposal or substantive inquiry relating to an Acquisition
Transaction. BAB shall as soon as practicable advise the Company in writing of
any substantive development relating to such proposal, including the results of
any substantive discussion or negotiations with respect thereto.
(c) This Section 5.11 shall not apply to any negotiations or discussion
with companies interested in the assets or operations of Bagel Sub and its
subsidiaries only.
(d) Neither the BAB Board nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to the Company,
the approval or recommendation of the BAB Board or a committee thereof of this
Agreement or the transactions contemplated hereby or (ii) recommend to the BAB
Stockholders, or propose to recommend to the
BAB Stockholders, any Acquisition Transaction except at or after the termination
of this Agreement pursuant to and in accordance with Section 7.1(g).
(e) The Company and its respective officers, directors, employees,
representatives and agents shall immediately cease any existing discussions or
negotiations, if any, with any parties conducted heretofore with respect to any
acquisition or exchange of all or any material portion of the assets of, or any
equity interest in, the Company or any business combination with the Company.
The Company agrees that, prior to the Effective Time, it shall not, and shall
not authorize or permit or any of its directors, officers, employees, agents or
representatives, directly or indirectly, to solicit, initiate, encourage or
facilitate, or furnish or disclose non-public information in furtherance of, any
inquiries or the making of any proposal with respect to any merger, liquidation,
recapitalization, consolidation or other business combination involving the
Company or acquisition of any membership interests or any material portion of
the assets of the Company or any combination of the foregoing (a "COMPANY
TRANSACTION"), or negotiate, explore or otherwise engage in discussion with any
Person (other than BAB or its directors, officers, employees, agents and
representatives) with respect to any Company Transaction, or enter into any
agreement, arrangement or understanding requiring it to abandon, terminate or
fail to consummate the Merger, the Related Transactions or any other
transactions contemplated by this Agreement.
SECTION 5.12 Commercially Reasonable Best Efforts; Further Action. Upon the
terms and subject to the conditions set forth in this Agreement, each of the
parties hereto agrees to use its commercially reasonable best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, or causing to be done, all things
necessary, proper or advisable to fulfill all conditions applicable to such
party pursuant to this Agreement, the Transaction Documents and the related
agreements and to consummate and make effective, in the most expeditious manner
practicable, the Merger, the Related Transactions and the other transactions
contemplated by this Agreement, the Transaction Documents and the related
agreements, including (i) the obtaining of all necessary actions or non-actions,
waivers, consents and approvals from Governmental Entities and the making of all
necessary registrations and filings and the taking of all reasonable steps as
may be necessary to make or obtain a Filing and Approval to, of or with, or to
avoid an action or Proceeding by, any Governmental Entity; (ii) the obtaining of
all necessary consents, approvals, waivers or exemption from non-governmental
third parties; and (iii) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes and intent of, this Agreement, the Transaction
Documents and the related agreements.
SECTION 5.13 Indemnification and Insurance.
(a) The indemnification provisions set forth in BAB's Charter and Bylaws
shall not be amended, repealed or otherwise modified for a period of six years
from the Effective Time in any manner that would adversely affect the rights
thereunder as of the Effective Time of individuals who at the Effective Time
were directors, officers, employees or agents of BAB or its Subsidiaries, unless
such modification is required after the Effective Time by Law.
(b) BAB shall, to the fullest extent permitted under applicable Law or
under the BAB Charter Documents, indemnify and hold harmless each present and
former director, officer, employee or agent of the Company against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative (collectively, "ACTIONS"), (x) arising out of or
pertaining to any breach by BAB of its representations, warranties and/or
covenants contained herein, or any failure by BAB to perform its obligations
hereunder or under the Transaction Documents and the related agreements or (y)
otherwise with respect to any acts or omissions of BAB occurring at or prior to
the Effective Time, in each case for a period of six years after the Effective
Time; provided, however, that, in the event that any claim or claims for
indemnification are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until the
disposition of any and all such claims.
(c) BAB and the Surviving Corporation shall, to the fullest extent
permitted under applicable Law or under the BAB Charter Documents, indemnify and
hold harmless each present and former director, officer, employee or agent of
BAB against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any Actions, (x) arising out of or pertaining to
any breach by the Company of its representations, warranties and/or covenants
contained herein, or any failure by the Company to perform its obligations
hereunder or under the Transaction Documents and the related agreements or (y)
otherwise with respect to any acts or omissions of the Company occurring at or
prior to the Effective Time, in each case for a period of six years after the
Effective Time; provided, however, that, in the event that any claim or claims
for indemnification are asserted or made within such six-year period, all rights
to indemnification in respect of any such claim or claims shall continue until
the disposition of any and all such claims.
(d) In the event of any such Action (whether arising before or after the
Effective Time), the parties claiming indemnification under Subsection (a) or
(b) above (the "INDEMNIFIED PARTIES") shall promptly notify the party obligated
to provide indemnification (the "INDEMNIFYING PARTY") in writing, but the
failure to so notify shall not relieve the Indemnifying Party of its obligations
under this Section 5.12(b) except to the extent it is materially prejudiced by
such failure, and the Indemnifying Party shall have the right to assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such Indemnified Parties. The Indemnified Parties shall have the right to employ
separate counsel in any such Action and to participate in (but not control) the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Parties unless (a) the Indemnifying Party has agreed
to pay such fees and expenses, (b) the Indemnifying Party shall have failed to
assume the defense of such Action, or (c) the named parties to such Action
include both the Indemnifying Party and the Indemnified Parties, the Indemnified
Parties shall have been reasonably advised in writing by counsel that there may
be one or more legal defenses available to the Indemnified Parties which are in
conflict with those available to the Indemnifying Party. In the event such
Indemnified Parties employ separate counsel at the expense of the Indemnifying
Party pursuant to clauses (b) or (c) of
the previous sentence, (i) any counsel retained by the Indemnified Parties for
any period after the Effective Time shall be reasonably satisfactory to the
Indemnifying Party; (ii) the Indemnified Parties as a group may retain only one
law firm to represent them in each applicable jurisdiction with respect to any
single Action unless there is, under applicable standards of professional
conduct, a conflict on any significant issue between the positions of any two or
more Indemnified Parties, in which case each Indemnified Person with respect to
whom such a conflict exists (or group of such Indemnified Persons who among them
have no such conflict) may retain one separate law firm in each applicable
jurisdiction; (iii) after the Effective Time, the Indemnifying Party shall pay
the reasonable fees and expenses of such counsel, promptly after statements
therefor are received; and (iv) the Indemnifying Party will cooperate in the
defense of any such Action. The Indemnifying Party shall not be liable for any
settlement of any such Action effected without its written consent.
(e) The provisions of this Section 5.13 shall survive the consummation of
the Merger.
(f) At the Closing, BAB shall cause Bagel Sub to execute and deliver a
Certificate and Indemnification Agreement in the form attached hereto as Exhibit
"B" (the "BAGEL SUB INDEMNIFICATION").
SECTION 5.14 Notification of Certain Matters. The Company shall give prompt
notice to BAB, and BAB shall give prompt notice to the Company, of (i) the
occurrence or nonoccurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at or prior to the
Effective Time, (ii) any material failure of the Company or any of the BAB
Entities, as the case may be, to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement, any
Transaction Document or any Related Agreement, (iii) any notice of, or other
communication relating to, a default or event which, with notice or lapse of
time or both, would become a default, received by it or any of its subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time, under
any contract or agreement material to the businesses, properties, assets,
liabilities, condition (financial or otherwise) or results of operations of it
and its subsidiaries taken as a whole to which it or any of its subsidiaries is
a party or by which any of their respective properties or assets are bound, (iv)
any notice or other communication from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated by this Agreement, the Transaction Documents or the related
agreements (including the Merger and the Related Transactions), or (v) any BAB
Material Adverse Effect (in the case of BAB) or Company Material Adverse Effect
(in the case of the Company); provided, however, that the delivery of any notice
pursuant to this Section 5.14 shall not cure such breach, non-compliance or
non-satisfaction or limit or otherwise affect the remedies if any, available
hereunder to the party receiving such notice.
SECTION 5.15 Tax Treatment. Each of the parties hereto shall use its
commercially reasonable best efforts to cause the Merger to qualify, and will
not (either before or after consummation of the Merger) knowingly take any
actions, or fail to take any action, that might
reasonably be expected to prevent the Merger from qualifying as a reorganization
under the provisions of Section 368 of the Code. BAB shall, and shall use its
reasonable best efforts to cause the Surviving Corporation to, report, to the
extent required by the Code, the Merger for United States federal income tax
purposes as a reorganization within the meaning of Section 368 of the Code.
SECTION 5.16 State Takeover Laws. BAB shall, upon the request of the Company,
take all reasonable steps to assist in any challenge to the validity or
applicability of the transactions contemplated by this Agreement, the
Transaction Documents and the related agreements (including the Merger and
Related Transactions), of any state takeover law.
SECTION 5.17 BAB Board and Officers.
(a) Upon consummation of the Merger, the BAB Board shall be set at five
(5) directors and those persons set forth on Schedule 1.1(b)(vi) shall be the
BAB Board. Concurrently therewith, the current directors of BAB shall be
appointed as the Board of Directors of BAB Bagel Sub.
(b) At the Effective Time, all of the current officers of BAB shall resign
or be removed and the individuals identified on Schedule 5.17(b) to this
Agreement shall be elected or appointed to the offices of BAB set forth opposite
their respective names on Schedule 5.17(b), to serve until the earlier of their
death, resignation or removal or until their respective successors are duly
elected and qualified.
SECTION 5.18 Incubator Activity. The Company shall enter into a binding
agreement with Zanett Securities Corporation, Claudio Guazzoni and David
McCarthy ("ZANETT AFFILIATES"), providing that all Internet incubator
investments which would result in the Company having "primary control," as
defined (the "AFFILIATES AGREEMENT") in the Investment Company Act of 1940 shall
be made only through the Surviving Corporation. The agreement shall also provide
a commitment from the Affiliates of additional financing that equals the excess
of the value of the Merger Consideration, as reasonably determined taking into
account all factors over the value of the Company's assets.
SECTION 5.19 Missing Schedules and Exhibits. Any Disclosure Schedules not
delivered at the time of execution of this Agreement shall be submitted by
either party to the other party no later than fifteen (15) days following
execution hereof. Notwithstanding the delivery of such Schedules, no
representation or warranty set forth herein shall be deemed modified by the
information set forth in such Schedules unless the receiving party accepts such
Schedules in writing; provided that completion of Closing shall be deemed
acceptance of Schedules delivered pursuant to this Subsection.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Merger. From
and after the date hereof and continuing until the Closing Date or earlier
termination as provided for in Section 7 hereof, the respective obligations of
each party hereto to effect the Merger and the other transactions contemplated
by this Agreement, the Transaction Documents and the related agreements
(including the Related Transactions) are subject to the full satisfaction at or
prior to the Closing Date of the following conditions:
(a) BAB's and Merger Sub's stockholders, and the Company's members, shall
have duly approved resolutions approving the Merger and related agreements;
(b) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, restrains, enjoins or restricts the
consummation of the transactions contemplated by this Agreement, the Transaction
Documents or the related agreements (including the Merger and the Related
Transactions) or which subjects any party to substantial damages as a result of
the consummation of the transactions contemplated by this Agreement, the
Transaction Documents or the related agreements (including the Merger and the
Related Transactions);
(c) all required consents, approvals, waivers and authorizations of any
Governmental Entity or Regulatory Agency which are necessary to effect the
transactions contemplated by this Agreement, the Transaction Documents and the
related agreements (including the Merger and the Related Transactions) shall
have been obtained;
(d) the parties' businesses have continued in the normal course and
consistent with past practices.
(e) the absence of any litigation resulting from the threat or claim of a
third party concerning the consummation of the Merger;
(f) the approval of the Merger by the Boards of Directors of BAB and
Merger Sub and the Managers of the Company;
(g) afford reasonable access to all of its books, records and personnel to
the other party and to its representatives, accountants, counsel and other
agents; and
(h) the refinancing of the CIB Bank debt by an affiliate of the Company in
accordance with the March 10, 2000 letter of understanding between BAB and the
Company.
SECTION 6.2 Conditions to the Obligations of the Company. The obligation of the
Company to effect the Merger is subject to the satisfaction at or prior to the
Effective Time of the following conditions:
(a) the representations and warranties of the BAB Entities set forth in
this Agreement or in any Schedule or certificate delivered pursuant hereto that
are qualified as to materiality shall be true and correct, and the
representations and warranties of the BAB Entities set forth in this Agreement
or in any Schedule or certificate delivered pursuant hereto that are not so
qualified shall be true and correct in all material respects, in each case as of
the date of this Agreement and as of the Effective Time, as though made on and
as of the Effective Time, except to the extent the representation or warranty is
expressly limited by its terms to another date;
(b) each of the BAB Entities shall have obtained the consent, approval or
waiver of each non-governmental Person whose consent, approval or waiver shall
be required in order for such BAB Entity to consummate the transactions
contemplated by this Agreement, the Transaction Documents and the related
agreements, except those for which the failure to obtain such consent, approval
or waiver, individually or in the aggregate, is not reasonably likely to have a
BAB Material Adverse Effect;
(c) each of the covenants and obligations of the BAB Entities to be
performed at or before the Effective Time pursuant to the terms of this
Agreement and the obligations of BAB and each other party (other than the
Company) to each of the related agreements to be performed at or before the
Effective Time pursuant to the terms of each such related agreement shall have
been duly performed in all material respects at or before the Effective Time;
(d) the Company shall have received the opinion of Moss & Barnett, counsel
to BAB, dated the Closing Date, in form and substance reasonably satisfactory to
the Company and its counsel.
(e) the Company shall have received a certificate, in form and substance
reasonably satisfactory to it, signed by the Secretary of BAB, certifying (i)
that full and complete copies of the following are attached thereto: (A)
resolutions or similar documents evidencing the authorization and approval by
the BAB Board and the Merger Sub Board of this Agreement, the Transaction
Documents and the Related Transactions and the transactions contemplated by this
Agreement, the Transaction Documents and the related agreements (including the
Merger and the Related Transactions), (B) resolutions or similar documents
evidencing the authorization and approval by the BAB stockholders, (C) the BAB
Charter Documents and the charter documents of Merger Sub; and (ii) as to the
incumbency and specimen signature of each representative of each BAB Entity
signing this Agreement, the Transaction Documents, the related agreements and
any other document in connection herewith or therewith;
(f) since November 28, 1999, no change or event shall have occurred which
has had or could reasonably be expected to have, individually or in the
aggregate, a BAB Material Adverse Effect;
(g) the Transaction Documents and related agreements to which any BAB
Entity is a party shall have been duly executed and delivered to the Company;
(h) the Related Transactions shall have been closed;
(i) the current officers of BAB shall have resigned or been removed and
the new officers identified on Schedule 5.17(b) to this Agreement shall have
been elected or appointed pursuant to Section 5.17(b);
(j) the Company shall have received a certificate of an executive officer
of BAB, dated the Closing Date, certifying as to the matters set forth in (a),
(b), (f), (h), (i), (k), (l), (m) and (p) of this Section 6.2 as of the Closing
Date;
(k) BAB's current Board of Directors have resigned as of the Closing Date
and have been appointed to the Board of Directors of Bagel Sub;
(l) BAB has properly incorporated BAB Bagel Sub in the State of Delaware
and have received approving resolutions to transfer all the BAB assets and
liabilities that relate to the business of Bagel Sub to Bagel Sub;
(n) the Company shall receive stock certificates representing the Merger
Stock;
(o) BAB shall have prepared, mailed and received approving proxies from
its stockholders regarding this transaction;
(p) BAB shall have presented evidence satisfactory to the Company's
counsel that any and all liability of BAB has been transferred to its
subsidiaries in such a way that the transfer prevents the possibility of a
creditor of BAB to file suit against the Company and survive a motion for
summary judgement;
(q) The Company shall have satisfactorily completed its due diligence on
BAB and the BAB Entities;
(r) BAB shall have consummated the Domestication Merger; and
(s) The Company shall have received the Bagel Sub Indemnification.
SECTION 6.3 Conditions to the Obligations of BAB Entities. The obligations of
the BAB Entities, severally and jointly, to effect the Merger and the other
transactions contemplated by this
Agreement, the Transaction Documents and the related agreements (including the
Related Transactions) are subject to the satisfaction at or prior to the
Effective Time of the following conditions:
(a) the representations and warranties of the Company set forth in this
Agreement or in any Schedule or certificate delivered pursuant hereto that are
qualified as to materiality shall be true and correct, and the representations
and warranties of the Company set forth in this Agreement or in any Schedule or
certificate delivered pursuant hereto that are not so qualified shall be true
and correct in all material respects, in each case as of the date of this
Agreement and as of the Effective Time, as though made on and as of the
Effective Time, except to the extent the representation or warranty is expressly
limited by its terms to another date;
(b) the Company shall have obtained the consent, approval or waiver of
each nongovernmental Person whose consent, approval or waiver shall be required
in order for the Company to consummate the transactions contemplated hereby and
by the Transaction Documents and the related agreements to which it is a party,
except those for which the failure to obtain such consent, approval or waiver,
individually or in the aggregate, is not reasonably likely to have, a Company
Material Adverse Effect;
(c) each of the covenants and obligations of the Company to be performed
at or before the Effective Time pursuant to the terms of this Agreement and the
obligations of the Company and each other party (other than the BAB Entities) to
each of the related agreements to be performed at or before the Effective Time
pursuant to the terms of each such Related Agreement shall have been duly
performed in all material respects at or before the Effective Time;
(d) BAB shall have received the opinion of Klehr, Harrison, Harvey,
Branzburg & Ellers, LLP, counsel to the Company, dated the Closing Date, in form
and substance reasonably satisfactory to BAB and its counsel;
(e) BAB shall have received a certificate, in form and substance
reasonably satisfactory to it, signed by the Secretary of the Company,
certifying (i) that full and complete copies of the following are attached
thereto: (A) resolutions or similar documents evidencing the authorization and
approval by the Company Board of Managers and the Company members of this
Agreement, the Transaction Documents and the related agreements and the
transactions contemplated by this Agreement, the Transaction Documents and the
related agreements (including the Merger and the Related Transactions), (B) the
Company Charter Documents; and (ii) as to the incumbency and specimen signature
of each representative of the Company signing this Agreement, the Transaction
Documents and the related agreements to which it is a party and any other
document in connection herewith or therewith.
(f) since November 28, 1999, no change or event shall have occurred which
has had or could reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect;
(g) the Transaction Documents and related agreements to which the Company
is a party shall have been duly executed and delivered to BAB;
(h) BAB shall have received a certificate of an executive officer of the
Company, dated the Closing Date, certifying as to the matters set forth in (a),
(c) and (f) of this Section 6.3 as of the Closing Date;
(i) BAB shall have received the executed Affiliate Agreement; and
(j) BAB shall receive evidence reasonably satisfactory that the Company
has at least Four Million Dollars ($4,000,000) in cash, cash equivalents or
marketable securities.
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER; FEES AND EXPENSES
SECTION 7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time, but prior to the Effective Time, notwithstanding approval
thereof by the Company Stockholders and the BAB Stockholders:
(a) by mutual written consent of BAB and the Company;
(b) by either BAB or the Company, if any final order, decree or ruling
permanently restraining, enjoining or otherwise prohibiting the consummation of
the transactions contemplated by this Agreement or the related agreements
(including the Merger or the Related Transactions) shall have been entered by
any Governmental Entity and shall have become final and non-appealable;
(c) by either BAB if any of the BAB stockholder proposals submitted to the
vote of the BAB stockholders shall fail to receive the requisite vote for
approval at the BAB stockholders meeting, unless the Company has waived in
writing such requirement;
(d) by the Company, if any BAB Entity has materially breached any material
representation or warranty or failed to perform any material covenant or
agreement contained in this Agreement, which breach has not been cured on or
prior to 30 days following delivery of written notice of such breach by the
Company to the breaching BAB Entity; or
(e) by BAB, if the Company has materially breached any material
representation or warranty or failed to perform any material covenant or
agreement contained in this Agreement, which breach has not been cured on or
prior to 30 days following delivery of written notice of such breach by BAB to
the Company.
SECTION 7.2 Procedure for and Effect of Termination. In the event that this
Agreement is terminated and the Merger is abandoned pursuant to Section 7.1,
written notice of such termination and abandonment shall forthwith be given to
the other parties and this Agreement shall terminate and the Merger shall be
abandoned without any further action. If this Agreement is terminated as
provided herein, no party hereto and none of their respective subsidiaries or
any of the officers or directors of any of them shall have any liability of any
nature whatsoever hereunder, or in connection with the transactions contemplated
hereby, except as provided in Section 7.4. Article 8 shall survive any
termination of this Agreement, and no such termination shall relieve any party
of the consequences of any breach of this Agreement.
SECTION 7.3 Amendment; Extension Waiver.
(a) This Agreement may be amended by action taken by the Company and the
BAB Entities at any time before or after approval of the Merger by the Company
members and the BAB Stockholders but, after any such approval, no amendment
shall be made which requires the approval of such equity holders under
applicable Law without such approval. This Agreement may not be amended except
by an instrument in writing signed on behalf of the parties hereto.
(b) At any time prior to the Effective Time, each party hereto may (i)
extend the time for the performance of any of the obligations or other acts of
the other party, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document, certificate
or writing delivered pursuant hereto or (iii) waive compliance by the other
party with any of the agreements or conditions contained herein. Any agreement
on the part of either party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of either party hereto to assert any of its rights hereunder
shall not constitute a waiver of such rights.
SECTION 7.4 Fees and Expenses.
(a) Except as provided in Section 7.4(b), the Company and the BAB Entities
shall each bear its respective fees, costs and expenses incurred in connection
with this Agreement, the Transaction Documents, the related agreements and the
transactions contemplated hereby and thereby; provided that the Company shall
bear the expense of, and its counsel shall have primary responsibility for,
preparation of documents necessary to effect the Merger and the Domestication
Merger and preparation and filing of the Proxy Statement.
(b) In the event that this Agreement is terminated because BAB or the BAB
Entities have failed to complete an obligation that was within their control to
complete, BAB shall reimburse or pay the out-of-pocket fees and expenses the
Company incurred in connection with the preparation and negotiation of this
Agreement, preparation and filing of SEC documents, or otherwise in connection
with the transactions contemplated hereby.
ARTICLE 8 MISCELLANEOUS
SECTION 8.1 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements of the Company or the
BAB Entities contained herein shall survive the Effective Time.
SECTION 8.2 Entire Agreement; Assignment. This Agreement (a) constitutes the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all other prior agreements and understandings (other than
the Confidentiality Agreement), both written and oral, between the parties with
respect to the subject matter hereof and (b) shall not be assigned by operation
of law or otherwise. BAB guarantees the full and punctual performance by each of
the other BAB Entities of all the obligations hereunder of the other BAB
Entities.
SECTION 8.3 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in Person, by cable,
telegram, facsimile or telex, or by registered or certified mail (postage
prepaid, return receipt requested), to the other party as follows:
if to the BAB Entities:
BAB Operations, Inc.
8501 West Higgins
Suite 320
Chicago, IL 60631
Attention: Michael Evans
Facsimile:
(773) 380-6183
with a copy to:
BAB Operations, Inc.
8501 West Higgins
Suite 320
Chicago, IL
60631 Attention: Michael Murtagh
Facsimile: (773) 380-6183
if to the Company to:
Willow Bay Associates, LLC
135 E. 57th Street
15th Floor
New York, NY 10022
Attention: David McCarthy
Facsimile: (646) 521-8532
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers
260 South Broad Street
Philadelphia, PA 19102
Attention: Lawrence D. Rovin
Facsimile: (215) 568-6603
or to such other address, facsimile number or Person's attention as the Person
to whom notice is given may have previously furnished to the other in writing in
the manner set forth above.
SECTION 8.4 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and its successors and permitted
assigns, and nothing in this Agreement, express or implied, other than the
express provisions of Section 5.17, is intended to or shall confer upon any
other Person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement. The Persons covered by the provisions of Section
5.17 shall have the right to enforce such provisions against BAB.
SECTION 8.5 Severability. If any term or other provision of this Agreement is
invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
SECTION 8.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 8.7 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section, Article, Schedule or
Exhibit, such reference shall be to a Section or Article of or Schedule or
Exhibit to this Agreement unless otherwise indicated. Where the reference
"hereby" or "herein" appears in this Agreement, such reference shall be deemed
to be a reference to this Agreement as a whole. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." Words denoting the singular include
the plural, and vice versa, and references to it or its or words denoting any
gender shall include all genders.
SECTION 8.8 Governing Law and Venue. THIS AGREEMENT SHALL BE DEEMED TO BE MADE
IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT
OF LAW PRINCIPLES THEREOF, EXCEPT THAT THE DGCL SHALL APPLY TO THE EXTENT
REQUIRED IN CONNECTION WITH THE ADOPTION OF THE RESTATED CHARTER.
SECTION 8.9 Waiver of Jury Trial. EACH OF THE BAB ENTITIES AND THE COMPANY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT,
TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 8.10 Certain Definitions.
(a) For the purposes of this Agreement, the following terms shall have the
meanings ascribed to them in this Section 8.10:
(i) "AFFILIATE" means, with respect to any Person, any Person
directly or indirectly controlling, controlled by or under common control with
such Person;
(ii) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any successor law.
(iii) "GAAP" means United States generally accepted accounting
principles, consistently applied.
(iv) "GOVERNMENTAL ENTITY" means any federal or national, state or
provincial, municipal or local government, governmental authority, regulatory or
administrative agency (including the SEC), governmental commission, department,
board, bureau, agency or instrumentality, political subdivision, court,
tribunal, official arbitrator or arbitral body, in each case whether domestic or
foreign.
(v) "GOVERNMENTAL ORDER" means any order, writ, rule, judgment,
injunction, decree, stipulation, determination, decision, consent, agreement or
award entered into by or with any Governmental Entity.
(vi) "INVESTMENT COMPANY ACT" means the Investment Company Act of
1940, as amended, or any successor law.
(vii) "KNOWLEDGE" means (i) with respect to the Company, the actual
knowledge of any executive officer of the Company after conducting a reasonable
investigation and (ii) with respect to the BAB Entities, the actual knowledge of
Messrs. Evans and Murtaugh.
(viii) "LAW" means all applicable provisions of all constitutions,
treaties, statutes, laws (including, but not limited to, common law), rules,
regulations, ordinances codes or orders of any Governmental Entity.
(ix) "LIENS" means any mortgage, lien, debt, pledge, security
interest, encumbrance, assessment, restriction charge or other adverse claim or
interest of every nature.
(x) "OPTIONS" means any right, option, warrant or agreement to
purchase or subscribe for any securities of another Person.
(xi) "PERSON" means any individual, corporation (including any
nonprofit corporation) general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, labor union or
other entity or governmental body or Governmental Entity.
(xii) "SEC" means the Securities and Exchange Commission.
(xiii) "SECURITIES ACT" means the Securities Act of 1933, as
amended, or any successor law.
(xiv) "SUBSIDIARY" or "SUBSIDIARIES" of any Person means any
corporation, partnership, limited liability company or other legal entity of
which such Person, either directly or indirectly through or with any other
Subsidiary, owns more than 50% of the stock or other equity interests the
holders of which are generally entitled to vote for the election of the board of
directors or other governing body of such legal entity.
(xv) "TRANSACTION DOCUMENTS" means the [Employment Agreements - are
there any?], the Affiliates Agreement, the Voting Agreement, the Certifications
from Messrs. Evans and Murtaugh, the Affiliates Agreement and the other
agreements, documents or instruments executed and delivered by a party hereto as
contemplated under this Agreement (other than the related agreements).
(b) Other terms set forth below are defined in the Section of this
Agreement set forth opposite such term:
Term Section
- ---- -------
Acquisition Transaction 5.11(a)
Actions 5.13(b)
Affiliate Agreement 5.18
Agreement Recitals
BAB Recitals
BAB Acquisition 5.2(b)(xiii)
BAB Board 4.3(a)
BAB Charter Documents 4.1(b)
BAB Common Stock 4.2(a)
BAB Domestication Merger Sub 1.1(a)
BAB Entities Recitals
BAB Filed SEC Reports 4.4(a)
BAB Financial Statements 4.4(a)
BAB Material Adverse Effect 4.1(a)
BAB Material Contracts 4.14(a)
BAB Merger Sub 1.1(b)
BAB Plan 4.11(a)
BAB Plans 4.11(a)
BAB Records 4.22
BAB SEC Filings 4.4(a)
BAB Securities 4.2(a)
BAB Stockholder Proposals 4.3(a)
BAB Stockholders 4.3(a)
BAB Stockholders Meeting 5.4(b)
Bagel Sub 5.3(a)
Bagel Sub Indemnification 5.13(f)
Certificate of Merger 1.1(b)(iii)
Closing 1.1(b)(ii)
Closing Date 1.1(b)(ii)
Code Recitals
Commonly Controlled Company Entities 3.11(a)
Commonly Controlled BAB Entities 4.11(a)
Company Recitals
Company Board 3.3(a)
Company Charter Documents 3.1(b)
Company Financial Statements 3.4(a)
Company Interim Financial Statements 3.4(a)
Company Material Adverse Effect 3.1(a)
Company Material Contracts 3.14(a)
Company Members 3.3(b)
Company Membership Interests Recitals
Company Plan 3.11(a)
Company Plans 3.11(a)
Company Proxy Information 3.5
Company Records 3.22
Company Securities 3.2
Company Transaction 5.11(e)
DGCL Recitals
Domestication Merger 1.1(a)
Effective Time 1.1(b)(iii)
Environmental Claim 3.12(a)
Environmental Laws 3.12(a)
ERISA 3.11(a)
Evans 5.7
Filings and Approvals 3.6(a)
Indemnified Parties 5.13(d)
Indeminfying Parties 5.13(d)
Intellectual Property 3.16
Merger Recitals
Merger Consideration 2.2(b)
Merger Stock 2.2(b)
Merger Sub Recitals
Merger Sub Board 4.3(a)
Murtaugh 5.7
NRS Recitals
PBGC 3.11(e)(iv)
Permits 3.10(a)
Proceeding 3.9
Proxy Statement 5.4(a)
QPAM Exemption 3.11(k)
Regulatory Agencies 3.6(a)
Related Transactions 5.6
SEC 3.6(a)
Surviving Corporation 1.1(b)(i)
Taxes 3.13(b)
Tax Returns 3.13(b)
Termination Fee 7.4(b)
Voting Agreement 5.7
Zanett Affiliates 5.18
[Remainder of This Page Intentionally Left Blank]
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
BAB HOLDINGS, INC.
By:_____________________________________
WILLOW BAY ASSOCIATES, LLC
By:_____________________________________
EXHIBIT B
CHAPTER 805. BUSINESS ORGANIZATIONS CORPORATIONS
ACT 5. BUSINESS CORPORATION ACT OF 1983
ARTICLE 11. MERGER AND CONSOLIDATION-DISSENTERS' RIGHTS
ss.11.70. Procedure to Dissent.
(a) If the corporate action giving rise to the right to dissent is to be
approved at a meeting of shareholders, the notice of meeting shall inform the
shareholders of their right to dissent and the procedure to dissent. If, prior
to the meeting, the corporation furnishes to the shareholders material
information with respect to the transaction that will objectively enable a
shareholder to vote on the transaction and to determine whether or not to
exercise dissenters' rights, a shareholder may assert dissenters' rights only if
the shareholder delivers to the corporation before the vote is taken a written
demand for payment for his or her shares if the proposed action is consummated,
and the shareholder does not vote in favor of the proposed action.
(b) If the corporate action giving rise to the right to dissent is not to
be approved at a meeting of shareholders, the notice to shareholders describing
the action taken under Section 11.30 or Section 7.10 shall inform the
shareholders of their right to dissent and the procedure to dissent. If, prior
to or concurrently with the notice, the corporation furnishes to the
shareholders material information with respect to the transaction that will
objectively enable a shareholder to determine whether or not to exercise
dissenters' rights, a shareholder may assert dissenter's rights only if he or
she delivers to the corporation within 30 days from the date of mailing the
notice a written demand for payment for his or her shares.
(c) Within 10 days after the date on which the corporate action giving
rise to the right to dissent is effective or 30 days after the shareholder
delivers to the corporation the written demand for payment, whichever is later,
the corporation shall send each shareholder who has delivered a written demand
for payment a statement setting forth the opinion of the corporation as to the
estimated fair value of the shares, the corporation's latest balance sheet as of
the end of a fiscal year ending not earlier than 16 months before the delivery
of the statement, together with the statement of income for that year and the
latest available interim financial statements, and either a commitment to pay
for the shares of the dissenting shareholder at the estimated fair value thereof
upon transmittal to the corporation of the certificate or certificates, or other
evidence of ownership, with respect to the shares, or instructions to the
dissenting shareholder to sell his or her shares within 10 days after delivery
of the corporation's statement to the shareholder. The corporation may instruct
the shareholder to sell only if there is a public market for the shares at which
the shares may be readily sold. If the shareholder does not sell within that 10
day period after being so instructed by the corporation, for purposes of this
Section the shareholder shall be deemed to have sold his or her shares at the
average closing price of the shares, if listed on a national exchange, or the
average of
the bid and asked price with respect to the shares quoted by a principal market
maker, if not listed on a national exchange, during that 10 day period.
(d) A shareholder who makes written demand for payment under this Section
retains all other rights of a shareholder until those rights are cancelled or
modified by the consummation of the proposed corporate action. Upon consummation
of that action, the corporation shall pay to each dissenter who transmits to the
corporation the certificate or other evidence of ownership of the shares the
amount the corporation estimates to be the fair value of the shares, plus
accrued interest, accompanied by a written explanation of how the interest was
calculated.
(e) If the shareholder does not agree with the opinion of the corporation
as to the estimated fair value of the shares or the amount of interest due, the
shareholder, within 30 days from the delivery of the corporation's statement of
value, shall notify the corporation in writing of the shareholder's estimated
fair value and amount of interest due and demand payment for the difference
between the shareholder's estimate of fair value and interest due and the amount
of the payment by the corporation or the proceeds of sale by the shareholder,
whichever is applicable because of the procedure for which the corporation opted
pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the shareholder
notification of estimate of fair value of the shares and interest due, the
corporation and the dissenting shareholder have not agreed in writing upon the
fair value of the shares and interest due, the corporation shall either pay the
difference in value demanded by the shareholder, with interest, or file a
petition in the circuit court of the county in which either the registered
office or the principal office of the corporation is located, requesting the
court to determine the fair value of the shares and interest due. The
corporation shall make all dissenters, whether or not residents of this State,
whose demands remain unsettled parties to the proceeding as an action against
their shares and all parties shall be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication as
provided by law. Failure of the corporation to commence an action pursuant to
this Section shall not limit or affect the right of the dissenting shareholders
to otherwise commence an action as permitted by law.
(g) The jurisdiction of the court in which the proceeding is commenced
under subsection (f) by a corporation is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the power described
in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds that the fair value of his or
her shares, plus interest, exceeds the amount paid by the corporation or the
proceeds of sale by the shareholder, whichever amount is applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of the appraisers, if any,
appointed by the court under subsection (g), but shall exclude the fees and
expenses of counsel and experts for the respective parties. If the fair value of
the shares as determined by the court materially exceeds the amount which the
corporation estimated to be the fair value of the shares or if no estimate was
made in accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter estimated to
be the fair value of the shares materially exceeds the fair value of the shares
as determined by the court, then all or any part of the costs may be assessed
against that dissenter. The court may also assess the fees and expenses of
counsel and experts for the respective parties, in amounts the court finds
equitable, as follows:
(1) Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with the
requirements of subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and in favor of
any other party if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this Section.
If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award to that counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who are benefited. Except as otherwise provided in this Section,
the practice, procedure, judgment and costs shall be governed by the Code of
Civil Procedure.
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the consummation of the corporate action
to which the dissenter objects excluding any appreciation or depreciation in
anticipation of the corporate action, unless exclusion would be inequitable.
(2) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
BAB HOLDINGS, Inc.
FOR THE HOLDERS OF COMMON STOCK
PROXY SOLICITED BY THE BOARD OF DIRECTORS
Special Meeting of the Shareholders - [DATE]
The undersigned shareholder of BAB Holdings, Inc. ("BAB"), revoking all previous
proxies, hereby appoints [__________________] and each of them acting
individually, as proxies of the undersigned, and authorizes either or both of
them to vote all shares of BAB's Common Stock held of record by the undersigned
as of the close of business on [ , 2000] at the [ , 2000 Special Meeting of
Shareholders of BAB to be held on [ ], at [ ], local time, at
[_____________________________________________], and at any adjournment(s) or
postponement(s) thereof (the "Special Meeting"), according to the votes the
undersigned would be entitled to cast if then personally present.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED "FOR" THE ITEM LISTED IN PROPOSAL 1, "FOR" THE ITEM LISTED IN PROPOSAL 2
AND "FOR" THE ITEM LISTED IN PROPOSAL 3.
PROPOSAL 1
Approve the proposal to merge BAB with and into BAB Delaware, a newly formed
wholly-owned Delaware subsidiary corporation, for the purpose of becoming a
Delaware corporation and approve and adopt the related Certificate of Merger.
|_| FOR |_| AGAINST |_| ABSTAIN
PROPOSAL 2
Approve the proposal to merge (the "Merger") Planet Zanett Corporate Incubator,
Inc. (formerly known as Willow Bay Associates, LLC), a Nevada limited liability
company ("Planet Zanett"), with and into PZ Acquisition, Inc., a newly formed
wholly-owned Delaware subsidiary of BAB, pursuant to the Agreement and Plan of
Merger dated May 4, 2000 (the "Merger Agreement") and the issuance of 21,989,295
shares of BAB Common Stock in connection with the Merger.
|_| FOR |_| AGAINST |_| ABSTAIN
PROPOSAL 3
Approve the declaration of a dividend, consisting of all of the common stock of
BAB, Inc., to the holders of BAB Common Stock as of the Spin-off Record Date.
|_| FOR |_| AGAINST |_| ABSTAIN
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF NOTICE OF THE ANNUAL MEETING AND
THE PROXY STATEMENT FURNISHED IN CONNECTION THEREWITH. The undersigned also
hereby ratifies all that the said proxies do by virtue hereof and hereby
confirms that this Proxy will be valid and may be voted regardless of whether
the shareholder's name is signed as set forth below or a seal affixed or the
description, authority or capacity of the person signing is given or any other
defect of signature exists.
DATED:____________________________, 2000
__________________________________(SEAL)
(Stockholder's Signature)
__________________________________(SEAL)
(Stockholder's Signature)
Please sign this Proxy exactly as the
name appears in the address above. If
shares are registered in more than one
name, all owners should sign. If
signing in a fiduciary or
representative capacity, such as
attorney-in-fact, executor,
administrator, trustee or guardian,
please give full title and attach
evidence of authority. If signer is a
corporation, please sign the full
corporate name and an authorized
officer should sign such officer's name
and title and affix the corporate seal,
if any.