form10qsb.htm
FORM
10-QSB
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
|
S
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended: May 31, 2008
|
£
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________________ to _________________
Commission
file number: 0-31555
BAB,
Inc.
(Name of
small business issuer in its charter)
|
Delaware
|
36-4389547
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
500
Lake Cook Road, Suite 475, Deerfield, Illinois 60015
(Address
of principal executive offices) (Zip Code)
Issuer's
telephone number (847) 948-7520
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes S No £
As
of July 10, 2008, BAB, Inc. had: 7,263,508 shares of Common Stock
outstanding.
|
PART
I
|
|
| |
|
|
Item
1.
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| |
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|
Item
2
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| |
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Item
3
|
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PART
II
|
|
| |
|
|
Item
1.
|
|
| |
|
|
Item
2
|
|
| |
|
|
Item
3
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|
| |
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|
Item
4
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Item
5
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Item
6
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| |
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|
|
PART
I
BAB,
Inc.
Condensed
Consolidated Balance Sheet (Unaudited)
As
of May 31, 2008
|
ASSETS
|
|
|
|
|
Current
Assets
|
|
|
|
|
Cash
|
|
$ |
1,267,362 |
|
|
Restricted
cash
|
|
|
304,957 |
|
|
Receivables
|
|
|
|
|
|
Trade
accounts receivable (net of allowance for doubtful accounts of
$6,856)
|
|
|
91,968 |
|
|
Marketing
fund contributions receivable from franchisees and stores
|
|
|
14,990 |
|
|
Notes
receivable (net of allowance for doubtful accounts of
$10,233)
|
|
|
3,667 |
|
|
Inventories
|
|
|
45,080 |
|
|
Prepaid
expenses and other current assets
|
|
|
96,013 |
|
|
Total
Current Assets
|
|
|
1,824,037 |
|
|
|
|
|
|
|
|
Property,
plant and equipment (net of accumulated depreciation of
$539,484)
|
|
|
64,496 |
|
|
Notes
receivable
|
|
|
792 |
|
|
Trademarks
|
|
|
763,667 |
|
|
Goodwill
|
|
|
3,542,772 |
|
|
Definite
lived intangible assets (net of accumulated amortization of
$309,500)
|
|
|
45,350 |
|
|
Deferred
tax asset
|
|
|
500,000 |
|
|
Total
Noncurrent Assets
|
|
|
4,917,077 |
|
|
Total
Assets
|
|
$ |
6,741,114 |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
23,051 |
|
|
Accounts
payable
|
|
|
22,063 |
|
|
Accrued
expenses and other current liabilities
|
|
|
315,837 |
|
|
Unexpended
marketing fund contributions
|
|
|
257,017 |
|
|
Deferred
franchise fee revenue
|
|
|
130,000 |
|
|
Deferred
licensing revenue
|
|
|
36,302 |
|
|
Total
Current Liabilities
|
|
|
784,270 |
|
|
|
|
|
|
|
|
Long-term
debt (net of current portion)
|
|
|
228,516 |
|
|
Deferred
revenue (net of current portion)
|
|
|
3,504 |
|
|
Total
Noncurrent Liabilities
|
|
|
232,020 |
|
|
Total
Liabilities
|
|
|
1,016,290 |
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
Common
stock ($.001 par value; 15,000,000 shares authorized;
|
|
|
|
|
|
8,466,953
shares issued, and 7,263,508 shares outstanding)
|
|
|
13,508,257 |
|
|
Additional
paid-in capital
|
|
|
945,792 |
|
|
Treasury
stock
|
|
|
(222,781 |
) |
|
Accumulated
deficit
|
|
|
(8,506,444 |
) |
|
Total
Stockholders' Equity
|
|
|
5,724,824 |
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
6,741,114 |
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
BAB,
Inc.
Condensed
Consolidated Statements of Operations
For
the Quarter and Year to Date Periods Ended May 31, 2008 and 2007
(Unaudited)
|
|
|
3
Months Ended
|
|
|
6
Months Ended
|
|
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
fees from franchised stores
|
|
$ |
558,487 |
|
|
$ |
571,419 |
|
|
$ |
1,072,703 |
|
|
$ |
1,098,895 |
|
|
Net
sales by Company-owned stores
|
|
|
137,655 |
|
|
|
118,088 |
|
|
|
253,841 |
|
|
|
233,362 |
|
|
Franchise
fees
|
|
|
35,000 |
|
|
|
47,500 |
|
|
|
140,000 |
|
|
|
125,000 |
|
|
Licensing
fees and other income
|
|
|
213,951 |
|
|
|
300,291 |
|
|
|
449,997 |
|
|
|
531,219 |
|
|
Total
Revenues
|
|
|
945,093 |
|
|
|
1,037,298 |
|
|
|
1,916,541 |
|
|
|
1,988,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
food, beverage and paper costs
|
|
|
45,110 |
|
|
|
38,141 |
|
|
|
84,791 |
|
|
|
71,948 |
|
|
Store
payroll and other operating expenses
|
|
|
107,528 |
|
|
|
108,704 |
|
|
|
226,152 |
|
|
|
224,044 |
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
and payroll-related expenses
|
|
|
342,307 |
|
|
|
348,608 |
|
|
|
733,634 |
|
|
|
741,473 |
|
|
Occupancy
|
|
|
35,347 |
|
|
|
38,811 |
|
|
|
70,769 |
|
|
|
73,230 |
|
|
Advertising
and promotion
|
|
|
53,678 |
|
|
|
29,929 |
|
|
|
83,586 |
|
|
|
54,803 |
|
|
Professional
service fees
|
|
|
23,571 |
|
|
|
25,948 |
|
|
|
108,253 |
|
|
|
112,122 |
|
|
Depreciation
and amortization
|
|
|
9,937 |
|
|
|
11,641 |
|
|
|
18,584 |
|
|
|
26,795 |
|
|
Other
|
|
|
154,938 |
|
|
|
208,005 |
|
|
|
284,417 |
|
|
|
348,723 |
|
|
Total
Operating Expenses
|
|
|
772,416 |
|
|
|
809,787 |
|
|
|
1,610,186 |
|
|
|
1,653,138 |
|
|
Income
from operations
|
|
|
172,677 |
|
|
|
227,511 |
|
|
|
306,355 |
|
|
|
335,338 |
|
|
Interest
income
|
|
|
7,425 |
|
|
|
16,942 |
|
|
|
19,915 |
|
|
|
34,719 |
|
|
Interest
expense
|
|
|
(2,987 |
) |
|
|
(4,150 |
) |
|
|
(5,975 |
) |
|
|
(9,174 |
) |
|
Income
before provision for income taxes
|
|
|
177,115 |
|
|
|
240,303 |
|
|
|
320,295 |
|
|
|
360,883 |
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
tax (benefit)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Deferred
tax (benefit)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
Income
|
|
$ |
177,115 |
|
|
$ |
240,303 |
|
|
$ |
320,295 |
|
|
$ |
360,883 |
|
|
Net
Income per share - Basic
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
Net
Income per share - Diluted
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - Basic
|
|
|
7,263,508 |
|
|
|
7,263,099 |
|
|
|
7,263,508 |
|
|
|
7,260,011 |
|
|
Weighted
average shares outstanding - Diluted
|
|
|
7,273,305 |
|
|
|
7,278,712 |
|
|
|
7,273,579 |
|
|
|
7,276,332 |
|
|
Cash
dividends paid per share
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
BAB,
Inc.
Condensed
Consolidated Statements of Cash Flows
For
the Year to Date Periods Ended May 31, 2008 and 2007
(Unaudited)
|
|
|
6 Months
Ended
|
|
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
320,295 |
|
|
$ |
360,883 |
|
|
Depreciation
and amortization
|
|
|
18,584 |
|
|
|
26,795 |
|
|
Provision
for uncollectible accounts, net of recoveries
|
|
|
(2,362 |
) |
|
|
(4,848 |
) |
|
Share-based
compensation
|
|
|
13,754 |
|
|
|
17,225 |
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
12,342 |
|
|
|
(7,069 |
) |
|
Restricted
cash
|
|
|
(32,987 |
) |
|
|
(12,374 |
) |
|
Marketing
fund contributions receivable
|
|
|
21,766 |
|
|
|
12,420 |
|
|
Notes
receivable
|
|
|
3,872 |
|
|
|
6,407 |
|
|
Inventories
|
|
|
(1,133 |
) |
|
|
(8,146 |
) |
|
Prepaid
expenses and other
|
|
|
33,562 |
|
|
|
(2,981 |
) |
|
Accounts
payable
|
|
|
(18,407 |
) |
|
|
(12,494 |
) |
|
Accrued
liabilities
|
|
|
(55,621 |
) |
|
|
(113,461 |
) |
|
Unexpended
marketing fund contributions
|
|
|
3,402 |
|
|
|
(1,226 |
) |
|
Deferred
revenue
|
|
|
(111,837 |
) |
|
|
(99,334 |
) |
|
Net
Cash Provided by Operating Activities
|
|
|
205,230 |
|
|
|
161,797 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(990 |
) |
|
|
(1,316 |
) |
|
Capitalization
of trademark renewals
|
|
|
(11,359 |
) |
|
|
- |
|
|
Net
Cash Used In Investing Activities
|
|
|
(12,349 |
) |
|
|
(1,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Repayment
of borrowings
|
|
|
- |
|
|
|
(128,143 |
) |
|
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
20,477 |
|
|
Payment
of dividends
|
|
|
(435,811 |
) |
|
|
(435,786 |
) |
|
Net
Cash Used In Financing Activities
|
|
|
(435,811 |
) |
|
|
(543,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
(242,930 |
) |
|
|
(382,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Period
|
|
|
1,510,292 |
|
|
|
1,792,666 |
|
|
Cash,
End of Period
|
|
$ |
1,267,362 |
|
|
$ |
1,409,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
- |
|
|
$ |
3,258 |
|
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
SEE ACCOMPANYING NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Quarter
and Year to Date Periods Ended May 31, 2008 and May 31, 2007
(Unaudited)
Note
1 - Nature of Operations
BAB, Inc.
(the "Company") was incorporated under the laws of the State of Delaware on July
12, 2000. The Company currently operates, franchises and licenses bagel
and muffin retail units under the Big Apple Bagels ("BAB"), My Favorite Muffin
("MFM") and Brewster's Coffee trade names. At May 31, 2008, the Company had 122
units in operation in 26 states, including 3 International units in United
Arab Emirates. The Company additionally derives income from the sale of its
trademark bagels, muffins and coffee through nontraditional channels of
distribution including under licensing agreements with Mrs. Fields Famous Brands
(Mrs. Fields), Kohr Bros. Frozen Custard and through direct home delivery
of specialty muffin gift baskets and coffee.
The BAB
brand franchised and Company-owned stores feature daily baked bagels, flavored
cream cheeses, premium coffees, gourmet bagel sandwiches and other related
products. Licensed BAB units serve the Company's par-baked frozen bagel and
related products baked daily. BAB units are primarily concentrated in the
Midwest and Western United States. The MFM 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. MFM units are primarily
in the Middle Atlantic States. Although the Company doesn't actively
market Brewster's stand-alone franchises, Brewster's coffee products are sold in
the Company-owned store and most franchised units. In addition, the
Company’s franchised and Company-owned stores derive income from wholesale of
Jacobs Bros. Bagels, also registered as a trademark of the Company.
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 U.S. generally accepted accounting principles have been omitted
pursuant to such SEC rules and regulations: nevertheless, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements and the notes hereto should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended November 30, 2007
which was filed February 27, 2008. In the opinion of the Company's
management, the condensed consolidated financial statements for the unaudited
interim periods presented include all adjustments, including normal recurring
adjustments, necessary to fairly present the results of such interim periods and
the financial position as of the end of said period. The results of operations
for the interim period are not necessarily indicative of the results for the
full year.
2.
Stores Open and Under Development
Stores
which are open or under development at May 31, 2008 are as follows:
|
Stores
open:
|
|
|
|
|
Company-owned
|
|
|
1 |
|
|
Franchisees
|
|
|
122 |
|
|
Licensed
|
|
|
3 |
|
|
Under
development
|
|
|
5 |
|
|
|
|
|
|
|
|
Total
|
|
|
131 |
|
3.
Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
|
3
months ended
|
|
|
6
months ended
|
|
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
177,115 |
|
|
$ |
240,303 |
|
|
$ |
320,295 |
|
|
$ |
360,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares - Basic
|
|
|
7,263,508 |
|
|
|
7,263,099 |
|
|
|
7,263,508 |
|
|
|
7,260,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share - Basic
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive common stock
|
|
|
9,797 |
|
|
|
15,613 |
|
|
|
10,071 |
|
|
|
16,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares - Diluted
|
|
|
7,273,305 |
|
|
|
7,278,712 |
|
|
|
7,273,579 |
|
|
|
7,276,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Diluted
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
The
following shares attributable to outstanding stock options were excluded from
the calculation of diluted earnings per share because their inclusion would have
been anti-dilutive.
|
|
|
3 months
ended
|
|
|
6 months
ended
|
|
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
excluded from calculation of diluted EPS
|
|
|
327,500 |
|
|
|
267,500 |
|
|
|
327,500 |
|
|
|
267,500 |
|
4.
Long-Term Debt
The
current total debt balance of $251,567 represents a note payable to a former
shareholder that requires an annual payment of $35,000, including interest at
4.75%, due October 1 and running through 2016.
5.
Stock Options
In May 2001,
the Company approved a Long-Term Incentive and Stock Option Plan
(Plan). The Plan reserves 1,400,000 shares of common stock for
grant. As of May 31, 2008, 1,400,000 stock options were granted to
directors, officers and employees. As of May 31, 2008, there were
1,007,627 stock options exercised or forfeited under the
Plan.
|
|
|
6 Months Ended
|
|
|
|
|
May 31, 2008
|
|
|
May 31, 2007
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Options
Outstanding at beginning of period
|
|
|
392,373 |
|
|
|
432,949 |
|
|
Granted
|
|
|
0 |
|
|
|
0 |
|
|
Forfeited
|
|
|
0 |
|
|
|
0 |
|
|
Exercised
|
|
|
0 |
|
|
|
(40,167 |
) |
|
Options
Outstanding at end of period
|
|
|
392,373 |
|
|
|
392,782 |
|
Effective
December 1, 2006, the Company adopted the provisions of FASB Statement No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified
prospective transition method. Under this method, prior periods are
not revised for comparative purposes and the Company recognizes compensation
cost using a fair-value based method for all share-based payments granted after
November 30, 2006, plus any awards granted to employees up through November 30,
2006 that remain unvested at that time. Prior to December 1, 2006,
the Company accounted for its share-based compensation plans in accordance with
the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” The Company recorded
compensation cost arising from share-based payment arrangements in
payroll-related expenses on the Condensed Consolidated Statement of Operations
for the Company’s stock option plan of approximately $14,000 for the six months
ended May 31, 2008 and $17,000 for the six months ended May 31,
2007.
As of May
31, 2008, there was approximately $41,000 of total unrecognized compensation
cost related to non-vested stock option compensation arrangements granted under
the incentive plan. That cost is to be recognized over a weighted
average period of approximately 3.5 years.
The
Company uses historical volatility of common stock over a period equal to the
expected life of the options to estimate their fair value. The
dividend yield assumption is based on the Company’s history and expectation of
future dividend payouts on the common stock. The risk-free interest rate is
based on the implied yield available on U.S. treasury zero-coupon issues with an
equivalent remaining term. The expected term of the options represents the
estimated period of time until exercise and is based on historical experience of
similar awards, giving consideration to the contractual terms, vesting schedules
and expectations of future employee behavior. To value option grants and other
awards for actual and pro forma stock-based compensation, the Company uses the
Black-Scholes option valuation model. When the measurement date is certain, the
fair value of each option grant is estimated on the date of grant and is based
on the assumptions used for the expected stock price volatility, expected term,
risk-free interest rates and future dividend payments.
The
Company’s stock option terms expire in 10 years and vary in vesting from
immediate to a vesting period of five years.
The
following table summarizes the stock options outstanding and exercisable at May
31, 2008:
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Outstanding
|
|
|
Wghtd.
Avg.
|
|
|
Wghtd.
Avg.
|
|
|
Aggregate
|
|
|
Exercisable
|
|
|
Wghtd.
Avg.
|
|
|
Aggregate
|
|
|
at
5/31/08
|
|
|
Remaining
Life
|
|
|
Exercise
Price
|
|
|
Intrinsic
Value
|
|
|
at
5/31/08
|
|
|
Exercise
Price
|
|
|
Intrinsic
Value
|
|
| |
392,373 |
|
|
|
7.79 |
|
|
$ |
1.12 |
|
|
$ |
- |
|
|
|
173,206 |
|
|
$ |
0.96 |
|
|
$ |
- |
|
The
aggregate intrinsic value in the table above is before income taxes, based on
the Company’s closing stock price of $.88 as of the last business day of the
period ended May 31, 2008. No options were exercised during the
quarter ended May 31, 2008.
6.
Goodwill and Other Intangible Assets
In
accordance with SFAS No. 142, goodwill and indefinite-lived intangible assets
are tested for impairment upon adoption of the standard and annually
thereafter. SFAS No. 142 requires that goodwill be tested for impairment
using a two-step process. The first step is to identify a potential
impairment and the second step measures the amount of the impairment loss, if
any. Goodwill is deemed to be impaired if the carrying amount of a
reporting unit's net assets exceeds its estimated fair value. SFAS No. 142
requires that indefinite-lived intangible assets be tested for impairment using
a one-step process, which consists of a comparison of the fair value to the
carrying value of the intangible asset. Intangible assets are deemed to be
impaired if the net book value exceeds the estimated fair value. The
Company completed its annual goodwill impairment assessment during the first
quarter ended February 29, 2008, and it indicated no impairment of
goodwill.
7.
Segment Information
The
following table presents segment information for the six months ended May 31,
2008 and 2007:
|
|
|
Net
Revenues
|
|
|
Operating
Income (Loss)
|
|
|
|
|
6 Months
Ended
|
|
|
6 Months
Ended
|
|
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
May 31,
2008
|
|
|
May 31,
2007
|
|
|
Company
Store Operations
|
|
|
412,582 |
|
|
$ |
452,837 |
|
|
$ |
(74,222 |
) |
|
$ |
(80,803 |
) |
|
Franchise
Operations and Licensing Fees
|
|
|
1,503,959 |
|
|
|
1,535,639 |
|
|
|
845,145 |
|
|
|
868,126 |
|
|
|
|
$ |
1,916,541 |
|
|
$ |
1,988,476 |
|
|
$ |
770,923 |
|
|
$ |
787,323 |
|
|
Corporate
Expenses
|
|
|
|
|
|
|
|
|
|
|
(464,568 |
) |
|
|
(451,985 |
) |
|
Interest
Income, Net of Interest Expense
|
|
|
|
|
|
|
|
|
|
|
13,940 |
|
|
|
25,545 |
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
$ |
320,295 |
|
|
$ |
360,883 |
|
There has
not been a substantial change in total assets of either segment since November
30, 2007.
8. Recent
Accounting Pronouncements
In July
2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109. FIN No. 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN No.
48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation, and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. Effective December 1,
2007, the Company adopted FIN 48. The Company files a consolidated
U.S. income tax return and tax returns in various state
jurisdictions. Review of the Company’s possible tax uncertainties as
of May 31, 2008 did not result in any positions requiring
disclosure. Should the Company need to record interest and/or
penalties related to uncertain tax positions or other tax authority assessments,
it would classify such expenses as part of the income tax
provision. The Company has not changed any of its tax policies or
adopted any new tax positions during the quarter ended May 31, 2008 and believes
it has filed appropriate tax returns in all jurisdictions for which it has
nexus. This review included the Company’s net deferred income tax
asset of $500,000, which management believes will be realized over future
profitable years.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. Where applicable, SFAS No. 157 simplifies
and codifies related guidance within GAAP and does not require any new fair
value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Effective December 1,
2007, the Company adopted SFAS 157. Adoption of SFAS No. 157 had no
material impact on the Company’s consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”).
SFAS 159 allows entities to measure at fair value many financial
instruments and certain other assets and liabilities that are not otherwise
required to be measured at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Effective December 1, 2007, the
Company adopted SFAS 159. Adoption of SFAS No. 159 had no material
impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS 141R, Business Combinations, which replaces
FASB Statement No. 141. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008 (Company’s Fiscal 2010). The Company does not
believe adoption of SFAS 141R will have a material effect on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
51, which establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008 (Company’s Fiscal 2010). The Company does not
believe adoption of SFAS 160 will have a material effect on the Company’s
consolidated financial statements.
In May
2008 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally
Accepted Accounting Principles. This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). This statement is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversite Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not believe adoption of SFAS 162 will have a material effect on the
Company’s consolidated financial statements.
9.
Subsequent Event
On June
13, 2008, the Company declared a $0.02 per share cash dividend payable July 8,
2008 to shareholders of record at the close of business on June 23,
2008.
|
|
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Certain
statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations, including statements regarding the
development of the Company's business, the markets for the Company's products,
anticipated capital expenditures, and the effects of completed and proposed
acquisitions, and other statements contained herein regarding matters that are
not historical facts, are forward-looking statements as is within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Because such statements include risks and uncertainties,
actual results could differ materially from those expressed or implied by such
forward-looking statements as set forth in this report, the Company's Annual
Report on Form 10-KSB and other reports that the Company files with the
Securities and Exchange Commission. Certain risks and uncertainties are wholly
or partially outside the control of the Company and its management, including
its ability to attract new franchisees; the continued success of current
franchisees; the effects of competition on franchisees and Company-owned store
results; consumer acceptance of the Company's products in new and existing
markets; fluctuation in development and operating costs; brand awareness;
availability and terms of capital; adverse publicity; acceptance of new product
offerings; availability of locations and terms of sites for store development;
food, labor and employee benefit costs; changes in government regulation
(including increases in the minimum wage); regional economic and weather
conditions; the hiring, training, and retention of skilled corporate and
restaurant management; and the integration and assimilation of acquired
concepts. Accordingly, readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
General
The
Company has 1 Company-owned store, 122 franchised and 3 licensed units at May
31, 2008. Units in operation at May 31, 2007 included 1 Company-owned
store, 131 franchised and 2 licensed units. System-wide revenues for the
six months ended May 31, 2008 were $22.3 million as compared to May 31, 2007
which were $22.9 million.
The
Company's revenues are derived primarily from ongoing royalties paid to the
Company by its franchisees, from the operation of Company-owned stores and
receipt of franchise fees. Additionally, the Company derives revenue from the
sale of licensed products (My Favorite Muffin mix, Big Apple Bagels cream cheese
and Brewster's coffee), and through licensing agreements (Kohr Bros. and Mrs.
Fields Famous Brands).
The
Company had 19 employees at the Corporate level to oversee operations of the
franchise, licensed and Company-owned store operations at May 31, 2008 and May
31, 2007.
Results
of Operations
Three
Months Ended May 31, 2008 versus Three Months Ended May 31, 2007
For the
three months ended May 31, 2008, the Company reported net income of $177,000
versus net income of $240,000 for the same period in 2007. Total
revenue of $945,000 decreased $92,000, for the three months ended May 31, 2008,
as compared to total revenue of $1,037,000 for the three months ended May 31,
2007.
Royalty
fee revenue of $558,000, for the quarter ended May 31, 2008, decreased $13,000
from the quarter ended May 31, 2007. The Company had 122 franchise
locations at May 31, 2008 as compared to 131 locations at May 31,
2007.
Franchise
fee revenue of $35,000, for the quarter ended May 31, 2008, decreased $13,000
from the quarter ended May 31, 2007. Two stores opened during the
quarter ended May 31, 2008, a Big Apple Bagels Xpress and a satellite location
with franchisee fees of $5,000 each versus one store location with a $25,000
franchise fee in the same quarter of 2007.
Licensing
fee and other income of $214,000, for the quarter ended May 31, 2008, decreased
$86,000 from the quarter ended May 31, 2007. In the 2nd quarter
2008, Sign Shop revenue decreased $41,000 primarily due to 2007 sales being
higher than normal as a result work done for franchisees in conjunction with
programs initiated at the 2006 franchise
convention. Other income in Systems was higher in 2007 by
$45,000 because of $25,000 in unexecuted development fees and $20,000 for a
franchisee settlement.
Company-owned
store sales of $138,000, for the quarter ended May 31, 2008, increased $20,000
from the quarter ended May 31, 2007.
Total
operating expenses of $772,000, decreased $38,000, for the quarter ended May 31,
2008, versus $810,000 in 2007. Sign Shop expenses decreased
$30,000.
Interest
income of $7,000 decreased $10,000, for the quarter ended May 31, 2008, over the
same period in 2007, due to lower interest rates and cash balances in
2008.
Interest
expense of $3,000 in 2008 decreased $1,000 due to lower outstanding
debt.
Net
Income per share, as reported for basic and diluted outstanding shares, was
$0.02 for the three months ended May 31, 2008 and $0.03 per share for the three
months ended May 31, 2007.
Six
Months Ended May 31, 2008 versus Six Months Ended May 31, 2007
For the
six months ended May 31, 2008, the Company reported net income of $320,000
versus net income of $361,000 for the same period in 2007. Total
revenue of $1,917,000 decreased $72,000, for the six months ended May 31, 2008,
as compared to the six months ended May 31, 2007.
Royalty
fee revenue of $1,073,000, for the six months ended May 31, 2008, decreased
$26,000 from the six months ended May 31, 2007. The Company had 122
franchise locations at May 31, 2008 as compared to 131 locations at May 31,
2007.
Franchise
fee revenue of $140,000, for the six months ended May 31, 2008, increased
$15,000 from the six months ended May 31, 2007. There were 6 new
store openings ($95,000), which included 1 Big Apple Bagels Xpress and 1
satellite store which have lower franchise fees and 9 transfers during the six
months ended May 31, 2008, versus 3 full service new store openings ($75,000)
and 8 transfers in the same period of 2007.
Licensing
fee and other income of $450,000, for the six months ended May 31, 2008,
decreased $81,000 from the six months ended May 31, 2007. In 2008,
Sign Shop revenue decreased $61,000 primarily due to 2007 sales being higher
than normal as a result work done for franchisees in conjunction with programs
initiated at the 2006 franchise convention. Other income in Systems
was higher in 2007 by $20,000 because of a franchisee settlement.
Company-owned
store sales of $254,000, for the six months ended May 31, 2008, increased
$20,000 from the six months ended May 31, 2007.
Total
operating expenses of $1,610,000 decreased $43,000 for the six months ended May
31, 2008, versus $1,653,000 in 2007. Sign Shop expenses decreased
$47,000 in 2008.
Interest
income of $20,000 decreased $15,000, for the six months ended May 31, 2008, over
the same period in 2007, due to of lower interest rates and cash balances in
2008.
Interest
expense of $6,000 in 2008 decreased $3,000 due to lower outstanding
debt.
Net
Income per share, for the six months ended May 31, 2008, was $0.04 on a basic
and fully diluted basis versus $0.05 on a basic and fully diluted basis for the
six months ended May 31, 2007.
Liquidity
and Capital Resources
The net
cash provided by operating activities totaled $205,000 for the six months ended
May 31, 2008, versus cash provided by operating activities of $162,000 for the
same period in 2007. Cash provided by operating activities principally
represents net income of $320,000, plus depreciation and amortization of $19,000
and share-based compensation of $14,000, less a reduction in the provision for
uncollectible accounts of $2,000, restricted cash of $33,000, inventories of
$1,000, accounts payable of $18,000, accrued liabilities of $56,000 and deferred
revenue of $112,000 plus changes in trade accounts receivable of $12,000,
Marketing Fund contributions receivable of $22,000, notes receivable of $4,000,
prepaid expenses and other assets of $34,000 and unexpended Marketing Fund
contributions of $3,000. Operating activities in 2007 provided
$162,000, represented by net income of $361,000, plus depreciation and
amortization of $27,000 and share-based compensation of $17,000, less a
reduction in the provision for uncollectible accounts of $5,000, less trade
receivables of $7,000, restricted cash of $12,000, inventories of $8,000,
prepaid expenses of $3,000, accounts payable of $12,000, accrued liabilities of
$113,000, deferred revenue of $99,000 and unexpended Marketing Fund
contributions of $1,000, plus Marketing Fund contributions receivable of $12,000
and notes receivable of $6,000.
Cash used
in investing activities during the six months ended May 31, 2008 totaled
$12,000, for the purchase of equipment of $1,000 and $11,000 for capitalized
trademark renewals. Cash used during 2007 totaled $1,000,
representing equipment purchases.
Financing
activities used $436,000 during the six months ended May 31, 2008 for the
payment of cash dividends. In fiscal 2007 for this same period,
financing activities used $543,000 due to repayment of notes payable of $128,000
and payment of cash dividends of $436,000, offset by proceeds from the exercise
of stock options in the amount of $21,000.
Dividend
Policy
It is the
Company’s intent that future dividends will be considered after reviewing
returns to shareholders, profitability expectations and financing needs and will
be declared at the discretion of the Board of Directors. Although
there can be no assurances the Company will be able to pay future dividends, it
is the Company’s intent going forward to continue to declare and pay cash
dividends on a quarterly basis.
The
Company believes execution of this policy will not have any material adverse
effects on its ability to fund current operations or future capital
investments.
The
Company has no financial covenants on any of its outstanding debt.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141R, Business Combinations, which replaces
FASB Statement No. 141. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008 (Company’s Fiscal 2010). The Company does not
believe adoption of SFAS 141R will have a material effect on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
51, which establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008 (Company’s Fiscal 2010). The Company does not
believe adoption of SFAS 160 will have a material effect on the Company’s
consolidated financial statements.
In May
2008 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally
Accepted Accounting Principles. This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). This statement is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversite Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not believe adoption of SFAS 162 will have a material effect on the
Company’s consolidated financial statements.
Critical
Accounting Policies
The
Company has identified significant accounting policies that, as a result of the
judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved, could result in material changes
to its financial condition or results of operations under different conditions
or using different assumptions. The Company's most critical accounting
policies are related to the following areas: revenue recognition, long-lived
assets, concentrations of credit risks, valuation allowance and deferred
taxes. Details regarding the Company's use of these policies and the
related estimates are described in the Company's Annual Report on Form 10-KSB
for the fiscal year ended November 30, 2007, filed with the Securities and
Exchange Commission on February 27, 2008. There have been no material
changes to the Company's critical accounting policies that impact the Company's
financial condition, results of operations or cash flows for the six months
ended May 31, 2008.
Disclosure
controls
The Chief
Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as
amended) as of May 31, 2008. Management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on that evaluation, Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as of such date to ensure that
information required to be disclosed in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and
forms.
Internal
control over financial reporting
The Chief
Executive Officer and the Chief Financial Officer confirm that there was no
change in the Company’s internal control over financial reporting during the
quarter ended May 31, 2008 that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
Compliance
with Section 404 of Sarbanes-Oxley Act
In order
to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the
“Act”) by November 30, 2008, the Company has begun the system and process
documentation and evaluation needed to comply with Section 404.
PART
II
None.
|
|
UNREGISTERED SALES OF EQUITY AND
USE OF PROCEEDS
|
None.
|
|
DEFAULTS UPON SENIOR
SECURITIES
|
None.
|
|
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
|
None
None.
See index
to exhibits
In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BAB,
Inc.
|
Dated: July
10, 2008
|
/s/ Jeffrey M.
Gorden
|
|
|
Jeffrey
M. Gorden
|
|
|
Chief
Financial Officer
|
INDEX
TO EXHIBITS
(a)
EXHIBITS
The
following exhibits are filed herewith.
|
INDEX
NUMBER
|
DESCRIPTION
|
|
|
List
of Subsidiaries of the Company
|
|
|
Section
302 of the Sarbanes-Oxley Act of 2002 Certification of Chief
Executive Officer
|
|
|
Section
302 of the Sarbanes-Oxley Act of 2002 Certification of Chief
Financial Officer
|
|
|
Section
906 of the Sarbanes-Oxley Act of 2002 Certification of Chief
Executive Officer
|
|
|
Section
906 of the Sarbanes-Oxley Act of 2002 Certification of Chief
Financial Officer
|