FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 2006
[ ] 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 (I.R.S. Employer
or organization) 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 _X_ No __
As of July 17, 2006, BAB, Inc. had : 7,222,932 shares of Common Stock
outstanding.
TABLE OF CONTENTS
PART I
Item 1 Financial Information
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Item 2 Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
Item 3 Controls and Procedures
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PART II
Item 1 Legal Proceedings
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Item 2 Changes in Securities
---------------------
Item 3 Defaults Upon Senior Securities
-------------------------------
Item 4 Submission of Matters to a Vote of Security Holders
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Item 5 Other Information
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Item 6 Exhibits and Reports on Form 8-K
--------------------------------
SIGNATURE
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PART I
ITEM 1. FINANCIAL INFORMATION
BAB, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
May 31, 2006
ASSETS
Current Assets
Cash $ 1,658,904
Restricted cash 243,632
Receivables
Trade accounts receivable (net of allowance for
doubtful accounts of $43,854) 92,836
Marketing fund contributions receivable from
franchisees and stores 21,568
Notes receivable (net of allowance for doubtful
accounts of $8,576) 10,418
Inventories 45,936
Prepaid expenses and other current assets 83,288
------------
Total Current Assets 2,156,582
------------
Property, plant and equipment, (net of accumulated
depreciation of $343,667) 123,881
Notes receivable (net of current portion) 6,792
Trademarks 763,667
Goodwill 3,542,772
Other (net of accumulated amortization of $297,908) 7,474
------------
Total Noncurrent Assets 4,444,586
------------
Total Assets $ 6,601,168
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Liabilities
Current portion of long-term debt $ 273,701
Accounts payable 29,459
Accrued expenses and other current liabilities 440,691
Unexpended marketing fund contributions 163,054
Dividends payable 144,459
Deferred franchise fee revenue 105,000
Deferred revenue 59,079
------------
Total Current Liabilities 1,215,443
------------
Long-term debt (net of current portion) 316,164
Deferred revenue (net of current portion) 62,649
------------
Total Noncurrent Liabilities 378,813
------------
Total Liabilities 1,594,256
------------
Stockholders' Equity (Deficit)
Common stock 13,508,817
Additional paid-in capital 876,398
Treasury stock (222,781)
Accumulated deficit (9,155,522)
------------
Total Stockholders' Equity 5,006,912
------------
Total Liabilities and Stockholders' Equity $ 6,601,168
============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
BAB, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
3 months ended 6 months ended
-------------------------------------------------------------
May 31, 2006 May 31, 2005 May 31, 2006 May 31, 2005
-------------------------------------------------------------
REVENUES
Net sales by Company-owned stores $ 125,128 $ 399,690 $ 268,241 $ 745,028
Royalty fees from franchised stores 590,198 581,216 1,123,971 1,122,112
Franchise fees 105,500 77,500 205,500 107,500
Licensing fees and other income 227,706 386,271 426,995 673,601
------------- ------------- ------------- -------------
Total Revenues 1,048,532 1,444,677 2,024,707 2,648,241
------------- ------------- ------------- -------------
OPERATING EXPENSES
Food, beverage and paper costs 37,693 134,886 87,886 252,302
Store payroll and other operating expenses 115,635 336,548 260,993 622,648
Selling, general and administrative expenses:
Payroll-related expenses 335,571 340,118 715,608 677,053
Occupancy 36,855 29,989 71,661 63,677
Advertising and promotion 28,636 42,054 59,625 83,297
Professional service fees 52,635 55,264 104,729 108,384
Travel expenses 28,160 27,723 46,164 48,062
Depreciation and amortization 16,876 21,203 34,568 42,402
Other 118,555 167,457 242,259 348,369
------------- ------------- ------------- -------------
Total Operating Expenses 770,616 1,155,242 1,623,493 2,246,194
------------- ------------- ------------- -------------
Income from operations 277,916 289,435 401,214 402,047
Interest income 12,059 1,822 12,708 4,342
Interest expense (7,935) (11,518) (16,620) (23,667)
Other income 1,185 -- 1,585
------------- ------------- ------------- -------------
Income before provision for income taxes 283,225 279,739 398,887 382,722
------------- ------------- ------------- -------------
Provision for income taxes
Current -- -- -- --
Deferred -- -- -- --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net Income $ 283,225 $ 279,739 $ 398,887 $ 382,722
------------- ------------- ------------- -------------
Net Income per share - Basic $0.04 $0.04 $0.06 $0.05
------------- ------------- ------------- -------------
Net Income per share - Diluted $0.04 $0.04 $0.05 $0.05
------------- ------------- ------------- -------------
Weighted average number of shares outstanding -
Basic 7,222,526 7,166,191 7,222,186 7,158,483
Weighted average number of shares outstanding -
Diluted 7,255,759 7,240,866 7,260,462 7,240,956
Cash dividends per share $0.02 $0.02 $0.10 $0.02
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
BAB, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
6 Months Ended
---------------------------
May 31, 2006 May 31, 2005
---------------------------
Operating activities
Net income $ 398,887 $ 382,722
Depreciation and amortization 34,568 42,402
Loss on sale of equipment 17,151 -
Provision for uncollectible accounts - 24,000
Changes in:
Trade accounts receivable 18,384 (3,023)
Restricted cash (39,577) 68,503
Marketing fund contributions receivable 8,821 2,615
Inventories 19,319 (18,945)
Prepaid expenses and other 52,200 (5,013)
Accounts payable (63,970) (52,069)
Accrued liabilities (66,587) (152,447)
Unexpended marketing fund 4,141 (71,066)
Deferred franchise fee revenue (117,501) -
Other deferred revenue (24,331) 76,502
Notes receivable (3,806) (14,201)
---------------------------
Net Cash Provided by Operating Activities 237,701 279,980
---------------------------
Investing activities
Purchase of equipment (6,940) (1,540)
Proceeds from sale of equipment 5,000 -
Collection of notes receivable 54,035 39,565
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Net Cash Provided by Investing Activities 52,094 38,025
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Financing activities
Repayment of borrowings (121,266) (114,761)
Proceeds from exercise of stock options 6,077 23,552
Payment of dividend (722,226) (572,982)
---------------------------
Net Cash Used In Financing Activities (837,415) (664,191)
---------------------------
Net Decrease in Cash (547,620) (346,186)
Cash, Beginning of Period 2,206,524 2,194,834
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Cash, End of Period $ 1,658,904 $ 1,848,648
===========================
Supplemental disclosure of cash flow information:
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Interest paid 10,134 16,638
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SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
BAB, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(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, muffin and coffee retail units under the Big Apple Bagels
("BAB"), My Favorite Muffin ("MFM") and Brewster's Coffee trade names. The
Company additionally derives income from the sale of its trademark bagels,
muffins and coffee through nontraditional channels of distribution, including
license agreements and direct home delivery of specialty muffin gift baskets and
coffee.
The Company has four wholly owned subsidiaries: BAB Systems, Inc. (Systems); BAB
Operations, Inc. (Operations); 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 BAB specialty bagel retail stores.
Operations was formed on August 30, 1995, primarily to operate Company-owned
stores. There is currently one Company-owned store which 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 "MFM" concept muffin stores.
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/A for the year ended November 30, 2005
which was filed April 14, 2006. 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, 2006 are as follows:
Stores open:
Company-owned 1
Franchisees 143
Licensed 4
Under development 3
----
Total 151
3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
3 months ended 6 months ended
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May 31, 2006 May 31, 2005 May 31, 2006 May 31, 2005
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Numerator:
Net income available to common
shareholders $ 283,225 $ 279,739 $ 398,887 $ 382,722
Denominator:
Weighted average outstanding shares
Basic 7,222,526 7,166,191 7,222,186 7,158,483
Earnings per Share - Basic $0.04 $0.04 $0.06 $0.05
Effect of dilutive common stock 33,233 74,675 38,276 82,473
Weighted average outstanding shares
Diluted 7,255,759 7,240,866 7,260,462 7,240,956
Earnings per share - Diluted $0.04 $0.04 $0.05 $0.05
4. Long-Term Debt
On June 25, 2004, the Company entered into a Business Loan and Security
Agreement ("Bank Agreement") with Associated Bank which provides for a term loan
in the original amount of $723,700. The term loan under the Bank Agreement is
secured by substantially all of the assets of the Company and is being repaid in
monthly installments of $21,900, including interest at a rate of 5.5 percent per
annum, with final payment due July 1, 2007.
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, 2006, 1,185,000 stock options were granted to directors, officers and
employees, leaving 215,000 options available for grant. As of May 31, 2006,
there were 915,869 stock options exercised and 50,582 stock options forfeited or
expired under the Plan.
6 months ended
--------------
May 31, 2006 May 31, 2005
------------ ------------
Options Options
Options Outstanding at 163,034 258,486
beginning of period
Granted 75,000 75,000
Forfeited (5,499) (500)
Exercised (13,986) (179,452)
--------- ---------
Options Outstanding at end
of period 218,549 153,534
The Company uses the intrinsic method, as allowed by SFAS 123, "Accounting for
Stock-Based Compensation," to account for stock options granted to employees and
directors. No compensation expense is recognized for stock options because the
exercise price of the options is at least equal to the market price of the
underlying stock on the grant date. The pro forma impact of utilizing the fair
value method to account for stock-based employee compensation, on an annual
basis is presented in Note 6 of the Company's audited financial statements
presented in the 10-KSB/A filed April 14, 2006.
For those companies that do not elect to change their method of accounting for
stock-based employee compensation, SFAS Statement No. 148 requires increased
disclosure of the pro forma impact of applying the fair value method to the
reported operating results. The increased disclosure requirements apply to the
Company's interim and annual financial statements. Had employee compensation
expense for the Company's Plan been recorded in the financial statements,
consistent with provisions of SFAS 123, net income would have been reduced by
$11,000 for the 3 months ended May 31, 2006, $22,000 for the 6 months ended May
31, 2006, $7,000 for the 3 months ended May 31, 2005, and $13,000 for the 6
months ended May 31, 2005 based on the Black-Scholes option-pricing model.
The following table illustrates the effect on net income and earnings per share:
3 months ended 6 months ended
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May 31, 2006 May 31, 2005 May 31, 2006 May 31, 2005
------------------------------------------------------------------
Pro forma impact of fair value method
Reported net income $283,225 $279,739 $398,887 $382,722
Less: Fair value impact of employee stock
compensation $ (11,206) $ (7,300) $ (22,191) $ (13,000)
------------------------------------------------------------------
Pro forma net income $272,019 $272,439 $376,696 $369,722
------------------------------------------------------------------
Earnings per common share
Basic - as reported $0.04 $0.04 $0.06 $0.05
Diluted - as reported $0.04 $0.04 $0.05 $0.05
Basic - pro forma $0.04 $0.04 $0.05 $0.05
Diluted - pro forma $0.04 $0.04 $0.05 $0.05
Weighted average Black Scholes fair value
assumptions
Risk free interest rate 4.39% 3.71% 4.39% 3.71%
Expected life 10.0 yrs 6.0 yrs 10.0 yrs 6.0 yrs
Expected volatility 1.23 1.53 1.23 1.53
Expected dividend yield 7.00% 5.00% 7.00% 5.00%
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 28, 2006, and it indicated no
impairment of goodwill.
Net intangible assets with definitive lives, representing master lease
origination fees with an original cost of $95,000, totaled $7,000, net of
accumulated amortization expense of $88,000, as of May 31, 2006.
Amortization expense of intangible assets with definitive lives for the six
months ended May 31, 2006 was $5,000. The estimated amortization expense on
these intangible assets is $9,200 in 2006 and $2,900 in 2007.
7. Commitments and Contingencies
None
ITEM 2. 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 and 143 franchised and 4 licensed units at
May 31, 2006. Units in operation at May 31, 2005 included 3 Company-owned stores
and 151 franchised and 4 licensed units. System-wide revenues in the six months
ended May 31, 2006 were $23 million as compared to May 31, 2005 which were $24
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 (Chartwell, Kohr Bros.
and Mrs. Fields Famous Brands).
At May 31, 2006, the Company had 18 employees, including 1 part-time employee,
at the Corporate level to oversee operations of the franchise, licensed and
Company-owned store operations, as compared to 24 employees at May 31, 2005.
Results of Operations
Three months Ended May 31, 2006 versus Three Months Ended May 31, 2005.
For the three months ended May 31, 2006, the Company reported net income of
$283,000 versus net income of $280,000 for the same period in 2005. Total
revenue decreased $396,000, for the three months ended May 31, 2006, as compared
to the three months ended May 31, 2005, primarily due to a decrease in
Company-owned store sales of $275,000 and a decrease in licensing fees and other
income of $159,000.
Royalty fee revenue of $590,000, for the quarter ended May 31, 2006, increased
$9,000, or 1.5%, from the quarter ended May 31, 2005. The $9,000 increase is
positive in that we had fewer franchise stores open than in the quarter ended
May 31, 2005.
Franchise fee revenue of $106,000, for the quarter ended May 31, 2006, increased
$28,000 from the quarter ended May 31, 2005. The $106,000 includes three store
openings and five transfers versus two store openings, two defaults on
Preliminary Agreements, and two transfers for the quarter ended May 31, 2005.
Licensing fee and other income of $228,000, for the quarter ended May 31, 2006,
decreased $159,000 from the quarter ended May 31, 2005. In 2005 the Company
earned and received a $90,000 trademark infringement fee. In addition, Sign Shop
revenue decreased $44,000 in 2006. In 2005, the Sign Shop received considerable
revenue from work received as a result of the Company's convention in late 2004.
Company-owned store sales of $125,000, for the quarter ended May 31, 2006,
decreased $275,000 from the quarter ended May 31, 2005. This decrease is due to
the fact the Company had one Company-owned store, versus three Company-owned
stores for the quarter ending May 31, 2005.
Total operating expenses of $771,000, were 74% of total revenues, for the
quarter ended May 31, 2006, versus $1,155,000, or 80%, in 2005. Expenses
declined because there was only one Company-owned store operating in quarter
ended May 31, 2006, versus three in the quarter ended May 31, 2005, and because
of continued tight cost controls.
Interest income increased approximately $10,000 for the current quarter over the
same period in 2005 as a result of the Company's decision to invest excess cash
in higher yield investments.
Interest expense of $8,000 decreased $4,000 due to a lower outstanding debt
balance.
Net Income per share, as reported for basic and diluted outstanding shares, for
the three months ended May 31, 2006, is $0.04 versus $0.04 for May 31, 2005.
Six Months Ended May 31, 2006 versus Six Months Ended May 31, 2005
For the six months ended May 31, 2006, the Company reported net income of
$399,000 versus net income of $383,000 for the same period in 2005. Total
revenue decreased $624,000, for the six months ended May 31, 2006, as compared
to the six months ended May 31, 2005, primarily due to a decrease in
Company-owned store sales of $477,000, and a decrease in licensing fees and
other income of $247,000, offset by an increase in franchise fee revenue of
$98,000.
Royalty fee revenue of $1,124,000, for the six months ended May 31, 2006,
increased $2,000 from the six months ended May 31, 2005. The $2,000 increase is
positive in that we had fewer franchise stores open than in the period ended May
31, 2005, indicating higher sales volume.
Franchise fee revenue of $206,000, for the six months ended May 31, 2006,
increased by $98,000 from the same period in 2005. There were seven new
franchise store openings in 2006, as compared to only two new franchise store
openings in 2005.
Licensing fee and other income of $427,000, for the first six months ended May
31, 2006, decreased $247,000 from the same period in 2005 because the Company
earned and received a $90,000 trademark infringement fee in May, 2005, and Sign
Shop revenue decreased $97,000 in 2006. In 2005, the Sign Shop received
considerable revenue from work received as a result of the Company's convention
in late 2004.
Company-owned store sales of $268,000, for the six months ended May 31, 2006,
decreased $477,000 as a result of one Company-owned store in 2006, versus three
Company-owned stores in 2005.
Total operating expenses of $1,623,000, were 80% of total revenues for the six
months ended May 31, 2006 versus $2,246,000, or 85%, in 2005. Expenses declined
because there was only one Company-owned store operating for a majority of the
six months ended May 31, 2006, versus three in the six months ended May 31,
2005, and because of continued tight cost controls.
Interest income increased $8,000 for the six months ended May 31, 2006 over the
same period in 2005 as a result of the Company's decision to invest excess cash
in higher yield investments.
Interest expense of $17,000 decreased $7,000 due to a lower outstanding debt
balance.
Net Income per share, for the six months ended May 31, 2006, was $0.06 basic and
$0.05 fully diluted versus income per share of $0.05 on both a basic and fully
diluted basis at May 31, 2005.
Liquidity and Capital Resources
-------------------------------
The net cash provided by operating activities totaled $242,000 for the six
months ended May 31, 2006, versus cash provided from operating activities of
$280,000 for the same period in 2005. Cash provided by operating activities
principally represents net income of $399,000, plus depreciation and
amortization of $35,000, a loss on disposal of equipment of $17,000, a decrease
to Marketing Fund contributions receivable of $9,000, an $18,000 decrease in
accounts receivable, a reduction in inventories of $19,000 a reduction in
prepaid assets of $52,000, and an increase in unexpended Marketing Fund
contributions of $4,000. Uses of funds from operations were due to a $40,000
increase in restricted cash, a reduction in payables of $64,000, a reduction in
accrued professional fees and other accrued liabilities of $67,000, a decrease
in deferred franchise fee revenue of $118,000, a $24,000 decrease in other
deferred revenue, and a $4,000 issuance of notes receivable.
Cash provided from investing activities during the six months ended May 31, of
2006 totaled $48,000, and was provided by collection of notes receivable of
$54,000 and proceeds from sale of equipment of $5,000, offset by purchases of
equipment of $7,000. Cash provided from investing activities during 2005 totaled
$38,000, and was provided from collection of notes receivable equal to $40,000,
offset by purchases of equipment for $2,000.
Financing activities used $837,000 during the first six months of 2006, due to
the repayment of notes payable of $121,000 and the payment of cash dividends
$722,000, offset by proceeds from the exercise of stock options in the amount of
$6,000. In fiscal 2005 for this same period, financing activities used $664,000
due to repayment of notes payable of $115,000 and payment of cash dividends of
$573,000, offset by proceeds from the exercise of stock options in the amount of
$24,000.
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. It is
the Company's intent going forward 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 2003, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement, which is effective
for years ending after December 15, 2003 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," and provides alternative methods of transition for a
voluntary change to the fair value-based methods of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 regardless of the accounting method used to account
for stock-based compensation. The Company has chosen to continue to account for
stock-based compensation of employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. The effects of the enhanced
disclosure provisions as defined by SFAS 148 are included in Note 5 of this
report.
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-an
amendment to APB Opinion No. 29." This Statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. Provisions of this Statement are effective for fiscal periods
beginning after June 15, 2005. Adoption of SFAS No. 153 has not had a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In December 2004, the FASB issues SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) establishes accounting standards for transactions in which a company
exchanges its equity instruments for goods or services. In particular, this
Statement will require companies to record compensation expense for all
share-based payments, such as employee stock options, at fair market value. This
Statement is effective as of the beginning of the first annual reporting period
that begins after December 15, 2005 (the Company's period beginning December 1,
2006). Adoption of SFAS No. 123(R) is not expected to have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This Statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005 (the Company's period beginning December 1,
2006). Early adoption is permitted for accounting changes and correction of
errors made in fiscal years beginning after the date this Statement is issued.
Adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
Management has considered all other recently issued accounting pronouncements
and does not believe that the adoption of such pronouncements will have a
material impact on the Company's 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/A for the fiscal year
ended November 30, 2005, filed with the Securities and Exchange Commission on
April 14, 2006. 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, 2006.
ITEM 3. CONTROLS AND PROCEDURES
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, 2006. 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, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the registrant's annual meeting of
shareholders held May 25, 2006. Each of the proposals passed.
1. Election of directors
For Withheld
Michael W. Evans 6,773,904 222,814
Michael K. Murtaugh 6,594,489 402,229
Steven G. Feldman 6,798,238 198,480
James A. Lentz 6,797,774 198,944
2. Appointment of Altschuler, Melvoin and Glasser, LLP as independent
auditors for the fiscal year ended November 30, 2006
For 6,777,313
Against 28,353
Abstain 190,962
Non-Vote 90
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See index to exhibits
(b) REPORTS ON FORM 8-K
5/25/06 On May 25, 2006, the Board of Directors of BAB, Inc. authorized a $0.02
per share quarterly cash dividend. The dividend is payable July 5, 2006 to
stockholders of record as of June 14, 2006.
SIGNATURE
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 17, 2006 /s/ Jeffrey M. Gorden
---------------------
Jeffrey M. Gorden
Chief Financial Officer
INDEX TO EXHIBITS
(a) EXHIBITS
The following exhibits are filed herewith.
INDEX NUMBER DESCRIPTION
21.1 List of Subsidiaries of the Company
31.1 Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer
31.2 Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer
32.1 Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer
32.2 Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer