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: August 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 October 13, 2006, BAB, Inc. had : 7,222,932 shares of Common Stock
outstanding.
TABLE OF CONTENTS
PART I
Item 1. Financial Information
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation
Item 3 Controls and Procedures
PART II
Item 1. Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURE
ITEM 1. FINANCIAL INFORMATION
BAB, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
August 31, 2006
ASSETS
Current Assets
Cash $ 1,821,229
Restricted cash 241,510
Receivables
Trade accounts receivable (net of allowance for doubtful accounts of $32,787) 87,879
Marketing fund contributions receivable from franchisees and stores 22,269
Notes receivable (net of allowance for doubtful accounts of $8,616) 14,502
Inventories 44,628
Prepaid expenses and other current assets 120,595
-----------
Total Current Assets 2,352,612
-----------
Property, plant and equipment (net of accumulated depreciation of $358,608) 108,940
Notes receivable (net of current portion) 4,304
Trademarks 763,667
Goodwill 3,542,772
Other (net of accumulated amortization of $300,197) 5,185
-----------
Total Noncurrent Assets 4,424,868
-----------
Total Assets $ 6,777,480
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 254,454
Accounts payable 39,095
Accrued expenses and other current liabilities 475,749
Unexpended marketing fund contributions 189,160
Deferred franchise fee revenue 185,000
Deferred revenue 57,829
-----------
Total Current Liabilities 1,201,287
-----------
Long-term debt (net of current portion) 273,572
Deferred revenue (net of current portion) 59,233
-----------
Total Noncurrent Liabilities 332,805
-----------
Total Liabilities 1,534,092
-----------
Stockholders' Equity (Deficit)
Common stock 13,508,216
Additional paid-in capital 876,999
Treasury stock (222,781)
Accumulated deficit (8,919,046)
-----------
Total Stockholders' Equity 5,243,388
-----------
Total Liabilities and Stockholders' Equity $ 6,777,480
===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
3 months ended 9 months ended
--------------------------------- ---------------------------------
August 31, 2006 August 31, 2005 August 31, 2006 August 31, 2005
--------------- --------------- --------------- ---------------
REVENUES
Net sales by Company-owned stores $ 116,282 $ 370,594 $ 384,523 $ 1,115,622
Royalty fees from franchised stores 591,519 581,675 1,715,490 1,703,787
Franchise fees 20,000 40,000 225,500 147,500
Licensing fees and other income 217,158 273,368 644,153 946,969
--------------- --------------- --------------- ---------------
Total Revenues 944,959 1,265,637 2,969,666 3,913,878
--------------- --------------- --------------- ---------------
OPERATING EXPENSES
Food, beverage and paper costs 35,893 136,030 123,779 388,332
Store payroll and other operating expenses 108,822 316,565 369,815 939,213
Selling, general and administrative expenses:
Payroll-related expenses 314,869 336,407 1,030,477 1,013,460
Occupancy 34,903 33,398 106,564 97,075
Advertising and promotion 18,857 32,525 78,482 115,822
Professional service fees 52,999 54,506 157,728 162,890
Travel expenses 27,209 27,015 73,373 75,077
Depreciation and amortization 17,229 21,106 51,797 63,508
Other 111,056 152,054 353,315 500,423
--------------- --------------- --------------- ---------------
Total Operating Expenses 721,837 1,109,606 2,345,330 3,355,800
--------------- --------------- --------------- ---------------
Income from operations 223,122 156,031 624,336 558,078
Interest income 20,421 2,249 33,129 6,080
Interest expense (7,067) (10,696) (23,687) (34,363)
Other income 0 -- 1,585 512
--------------- --------------- --------------- ---------------
Income before provision for income taxes 236,476 147,584 635,363 530,307
--------------- --------------- --------------- ---------------
Provision for income taxes
Current -- -- -- --
Deferred -- -- -- --
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net Income $ 236,476 $ 147,584 $ 635,363 $ 530,307
=============== =============== =============== ===============
Net Income per share - Basic $ 0.03 $ 0.02 $ 0.09 $ 0.07
--------------- --------------- --------------- ---------------
Net Income per share - Diluted $ 0.03 $ 0.02 $ 0.09 $ 0.07
--------------- --------------- --------------- ---------------
Weighted average number of shares
outstanding - Basic 7,222,932 7,208,946 7,222,436 7,175,427
Weighted average number of shares 7,255,733 7,250,558 7,258,862 7,245,677
outstanding - Diluted
Cash dividends per share $ 0.02 $ - $ 0.12 $ 0.02
=============== =============== =============== ===============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
9 Months Ended
---------------------------------
August 31, 2006 August 31, 2005
--------------- ---------------
Operating activities
Net income $ 635,363 $ 530,307
Depreciation and amortization 51,797 65,795
Loss on sale of equipment 17,151 -
Provision for uncollectible accounts, net of recoveries (7,951) 36,000
Changes in:
Trade accounts receivable 31,291 66,530
Restricted cash (37,455) 111,565
Marketing fund contributions receivable 8,120 12,369
Notes receivable (3,634) (22,739)
Inventories 20,627 (9,299)
Prepaid expenses and other 14,893 (21,140)
Accounts payable (54,333) (59,880)
Accrued liabilities (31,530) (126,476)
Unexpended marketing fund contributions 30,247 (123,888)
Deferred franchise fee revenue (38,751) 184,475
Other deferred revenue (27,747)
--------------- ---------------
Net Cash Provided by Operating Activities 608,088 643,619
--------------- ---------------
Investing activities
Purchase of equipment (6,940) (17,429)
Proceeds from sale of equipment 5,000 -
Collection of notes receivable 52,269 49,073
--------------- ---------------
Net Cash Provided by Investing Activities 50,329 31,644
--------------- ---------------
Financing activities
Repayment of borrowings (183,104) (173,225)
Proceeds from exercise of stock options 6,077 23,552
Payment of dividend (866,685) (717,161)
--------------- ---------------
Net Cash Used In Financing Activities (1,043,712) (866,834)
--------------- ---------------
Net Decrease in Cash (385,295) (191,571)
Cash, Beginning of Period 2,206,524 2,194,834
--------------- ---------------
Cash, End of Period $ 1,821,229 $ 2,003,263
=============== ===============
Supplemental disclosure of cash flow information:
--------------- ---------------
Interest paid $ 13,996 $ 23,875
--------------- ---------------
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 August 31, 2006 are as follows:
Stores open:
Company-owned 1
Franchisees 140
Licensed 4
Under development 7
----
Total 152
3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
3 months ended 9 months ended
------------------------------------ ----------------------------------
August 31, 2006 August 31, 2005 August 31, 2006 August 31, 2005
------------------------------------ ----------------------------------
Numerator:
Net income available to common
shareholders $ 236,476 $ 147,584 $ 635,363 $ 530,307
Denominator:
Weighted average outstanding shares
Basic 7,222,932 7,208,946 7,222,436 7,175,427
Earnings per Share - Basic $ 0.03 $ 0.02 $ 0.09 $ 0.07
Effect of dilutive common stock 32,801 41,612 36,426 70,250
Weighted average outstanding shares
Diluted 7,255,733 7,250,558 7,258,862 7,245,677
Earnings per share - Diluted $ 0.03 $ 0.02 $ 0.09 $ 0.07
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
August 31, 2006, 1,185,000 stock options were granted to directors, officers and
employees, leaving 215,000 options available for grant. As of August 31, 2006,
there were 915,869 stock options exercised and 50,582 stock options forfeited or
expired under the Plan.
9 months ended
-------------------------------------------
August 31, 2006 August 31, 2005
----------------- -----------------
Options Options
----------------- -----------------
Options Outstanding at 163,034 258,486
beginning of period
Granted 75,000 95,000
Forfeited (5,499) (3,000)
Exercised (13,986) (179,452)
----------------- -----------------
Options Outstanding at end of
period 218,549 171,034
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.
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
approximately $8,000 for the 3 months ended August 31, 2006, $31,000 for the 9
months ended August 31, 2006, $9,000 for the 3 months ended August 31, 2005, and
$22,000 for the 9 months ended August 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 9 months ended
---------------------------------- --------------------------------
August 31, 2006 August 31, 2005 August 31, 2006 August 31, 2005
---------------------------------- --------------------------------
Pro forma impact of fair value method
Reported net income $ 236,476 $ 147,584 $ 635,363 $ 530,307
Less: Fair value impact of employee stock
compensation (8,403) (9,400) (30,594) (22,300)
Pro forma net income $ 228,073 $ 138,184 $ 604,769 $ 508,007
Earnings per common share
Basic - as reported $ 0.03 $ 0.02 $ 0.09 $ 0.07
Diluted - as reported $ 0.03 $ 0.02 $ 0.09 $ 0.07
Basic - pro forma $ 0.03 $ 0.02 $ 0.08 $ 0.07
Diluted - pro forma $ 0.03 $ 0.02 $ 0.08 $ 0.07
Weighted average Black Scholes fair value
assumptions
Risk free interest rate 4.39% 4.00% 4.39% 4.00%
Expected life 10.0 yrs 5.3 yrs 10.0 yrs 5.3 yrs
Expected volatility 1.23 2.53 1.23 2.53
Expected dividend yield 7.00% 4.60% 7.00% 4.60%
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 $5,000, net of
accumulated amortization expense of $90,000, as of August 31, 2006.
Amortization expense of intangible assets with definitive lives for the nine
months ended August 31, 2006 was $7,000. 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 one Company-owned store and 140 franchised and 4 licensed units
at August 31, 2006. Units in operation at August 31, 2005 included three
Company-owned stores and 147 franchised and 4 licensed units. System-wide
revenues in the nine months ended August 31, 2006 were $35 million as compared
to August 31, 2005 which were $36 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 August 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 20 employees at
August 31, 2005.
Results of Operations
Three Months Ended August 31, 2006 versus Three Months Ended August 31, 2005
For the three months ended August 31, 2006, the Company reported net income of
$236,000 versus net income of $148,000 for the same period in 2005. Total
revenue decreased $321,000, for the three months ended August 31, 2006, as
compared to the three months ended August 31, 2005, primarily due to a decrease
in Company-owned store sales of $254,000. Other income decreased by $41,000 and
franchise fee revenue decreased $20,000.
Royalty fee revenue of $592,000, for the quarter ended August 31, 2006,
increased $10,000 from the quarter ended August 31, 2005. The Company earned
$15,000 income in 2006 due to the premature closing of a franchisee's store.
Franchise fee revenue of $20,000, for the quarter ended August 31, 2006,
decreased $20,000 from the quarter ended August 31, 2005. One store opened
during the quarter ended August 31, 2005, versus none in the same quarter of
2006.
Licensing fee and other income of $217,000, for the quarter ended August 31,
2006, decreased $56,000 from the quarter ended August 31, 2005. In 2005 the
Company earned $34,000 for the sale of a Company-owned store. Sign Shop revenue
decreased $19,000 in 2006.
Company-owned store sales of $116,000, for the quarter ended August 31, 2006,
decreased $254,000 from the quarter ended August 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 August 31, 2005.
Total operating expenses of $722,000, were 76% of total revenues, for the
quarter ended August 31, 2006, versus $1,110,000, or 88%, in 2005. Expenses
declined because there was only one Company-owned store operating in the quarter
ended August 31, 2006, versus three in the quarter ended August 31, 2005, and
because of continued tight cost controls.
Interest income of $20,000 increased approximately $18,000 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 $7,000 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 August 31, 2006, was $0.03 versus $0.02 for the three
months ended August 31, 2005.
Nine Months Ended August 31, 2006 versus Nine Months Ended August 31, 2005
For the nine months ended August 31, 2006, the Company reported net income of
$635,000 versus net income of $530,000 for the same period in 2005. Total
revenue decreased $944,000, for the nine months ended August 31, 2006, as
compared to the nine months ended August 31, 2005, primarily due to a decrease
in Company-owned store sales of $731,000, and a decrease in licensing fees and
other income of $303,000, offset by an increase in franchise fee revenue of
$78,000.
Royalty fee revenue of $1,715,000, for the nine months ended August 31, 2006,
increased $12,000 from the nine months ended August 31, 2005. Included in the
2006 revenue is $15,000 of income from the premature closing of a franchisee's
store.
Franchise fee revenue of $226,000, for the nine months ended August 31, 2006,
increased by $78,000 from the same period in 2005. There were seven new
franchise store openings in 2006, as compared to only three new franchise store
openings in 2005.
Licensing fee and other income of $644,000, for the nine months ended August 31,
2006, decreased $303,000 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 $116,000 in 2006. In 2005, the Sign Shop received considerable
revenue from work received as a result of the Company's convention in late 2004.
The nine month period in 2005 also includes $34,000 from the sale of assets at
an operating store and $29,000 additional sublease rental income.
Company-owned store sales of $385,000, for the nine months ended August 31,
2006, decreased $731,000 as a result of one Company-owned store in 2006, versus
three Company-owned stores in 2005.
Total operating expenses of $2,345,000, were 79% of total revenues for the nine
months ended August 31, 2006 versus $3,356,000, or 86%, in 2005. Expenses
declined because there was only one Company-owned store operating for a majority
of the nine months ended August 31, 2006, versus three in the nine months ended
August 31, 2005, and because of continued tight cost controls.
Interest income of $33,000 increased $27,000 for the nine months ended August
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 $24,000 decreased $11,000 due to a lower outstanding debt
balance.
Net Income per share, for the nine months ended August 31, 2006, was $0.09 on a
basic and fully diluted basis versus $0.07 on a basic and fully diluted basis
for the nine months ended August 31, 2005.
Liquidity and Capital Resources
-------------------------------
The net cash provided by operating activities totaled $608,000 for the nine
months ended August 31, 2006, versus cash provided from operating activities of
$644,000 for the same period in 2005. Cash provided by operating activities
principally represents net income of $635,000, plus depreciation and
amortization of $52,000, a loss on disposal of equipment of $17,000, a reduction
in bad debt of $8,000, a decrease to Marketing Fund contributions receivable of
$8,000, a $31,000 decrease in accounts receivable, a reduction in inventories of
$21,000, a reduction in prepaid assets of $15,000, and an increase in unexpended
Marketing Fund contributions of $30,000. Uses of funds from operations were due
to a $37,000 increase in restricted cash, a reduction in payables of $54,000, a
reduction in accrued professional fees and other accrued liabilities of $32,000,
a decrease in deferred franchise fee revenue of $39,000, a $28,000 decrease in
other deferred revenue, and issuance of $4,000 in notes receivable.
Cash provided from investing activities during the nine months ended August 31,
2006 totaled $50,000, and was provided by collection of notes receivable of
$52,000 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
$32,000, and was provided from collection of notes receivable equal to $49,000,
offset by purchases of equipment for $17,000.
Financing activities used $1,044,000 during the nine months ended August 31,
2006, due to the repayment of notes payable of $183,000 and the payment of cash
dividends of $867,000, 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 $867,000 due to repayment of notes payable of $173,000 and payment of cash
dividends of $717,000, 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, 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 nine months ended August 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 August 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 August 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
None
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
None filed during this quarter.
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: October 13, 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
SUBSIDIARIES OF BAB, INC.
Exhibit 21.1
BAB Systems, Inc., an Illinois corporation
BAB Operations, Inc., an Illinois corporation
Brewster's Franchise Corporation, an Illinois corporation
My Favorite Muffin Too, Inc., a New Jersey corporation