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, 2007
[ ] 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
incorporation 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 10, 2007, BAB, Inc. had : 7,263,099 shares of Common Stock
outstanding.
TABLE OF CONTENTS
PART I
Item 1. Unaudited 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 Unregistered Sales of Equity Securities and Use of Proceeds
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Item 3 Defaults Upon Senior Securities
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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
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SIGNATURE
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PART I
ITEM 1. FINANCIAL INFORMATION
BAB, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
May 31, 2007
ASSETS
Current Assets
Cash $ 1,409,695
Restricted cash 246,488
Receivables
Trade accounts receivable (net of allowance for doubtful accounts of $11,365) 101,543
Marketing fund contributions receivable from franchisees and stores 17,058
Notes receivable (net of allowance for doubtful accounts of $8,641) 6,968
Inventories 54,194
Prepaid expenses and other current assets 103,419
--------------
Total Current Assets 1,939,365
--------------
Property, plant and equipment (net of accumulated depreciation of $512,374) 78,177
Notes receivable (net of allowance for doubtful accounts of $5,204) 2,920
Trademarks 763,667
Goodwill 3,542,772
--------------
Total Noncurrent Assets 4,387,536
--------------
Total Assets $ 6,326,901
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 64,598
Accounts payable 43,466
Accrued expenses and other current liabilities 332,044
Unexpended marketing fund contributions 185,253
Deferred franchise fee revenue 150,000
Deferred revenue 64,079
--------------
Total Current Liabilities 839,440
--------------
Long-term debt (net of current portion) 251,567
Deferred revenue (net of current portion) 18,984
--------------
Total Noncurrent Liabilities 270,551
--------------
Total Liabilities 1,109,991
--------------
Stockholders' Equity (Deficit)
Common stock 13,508,256
Additional paid-in capital 914,660
Treasury stock (222,781)
Accumulated deficit (8,983,225)
--------------
Total Stockholders' Equity 5,216,910
--------------
Total Liabilities and Stockholders' Equity $ 6,326,901
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SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
3 months ended 6 months ended
------------------------- ---------------------------
Restated Restated
------------ ------------ ------------ --------------
May 31, 2007 May 31, 2006 May 31, 2007 May 31, 2006
------------ ------------ ------------ --------------
REVENUES
Royalty fees from franchised stores $ 571,419 $ 590,198 $1,098,895 $ 1,123,971
Net sales by Company-owned stores 118,088 125,128 233,362 268,241
Franchise fees 47,500 105,500 125,000 205,500
Licensing fees and other income 300,291 227,706 531,219 426,995
------------ ------------ ------------ --------------
Total Revenues 1,037,298 1,048,532 1,988,476 2,024,707
------------ ------------ ------------ --------------
OPERATING EXPENSES
Food, beverage and paper costs 38,141 37,693 71,948 87,886
Store payroll and other operating expenses 108,704 115,635 224,044 260,993
Selling, general and administrative expenses: -
Payroll-related expenses 348,608 335,571 741,473 715,608
Occupancy 38,811 36,855 73,230 71,661
Advertising and promotion 29,929 28,636 54,803 59,625
Professional service fees 25,948 44,190 112,122 121,619
Travel expenses 28,426 28,160 43,315 46,164
Depreciation and amortization 11,641 16,876 26,795 34,568
Other 179,579 121,805 305,408 242,259
------------ ------------ ------------ --------------
Total Operating Expenses 809,787 765,421 1,653,138 1,640,383
------------ ------------ ------------ --------------
Income from operations 227,511 283,111 335,338 384,324
Interest income 16,942 12,059 34,719 12,708
Interest expense (4,150) (7,935) (9,174) (16,620)
Other income 0 1,185 1,585
------------ ------------ ------------ --------------
Income before provision for income taxes 240,303 288,420 360,883 381,997
------------ ------------ ------------ --------------
Provision for income taxes
Current - - - -
Deferred - - - -
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
Net Income $ 240,303 $ 288,420 $ 360,883 $ 381,997
============ ============ ============ ==============
Net Income per share - Basic $ 0.03 $ 0.04 $ 0.05 $ 0.05
------------ ------------ ------------ --------------
Net Income per share - Diluted $ 0.03 $ 0.04 $ 0.05 $ 0.05
------------ ------------ ------------ --------------
Weighted average number of
shares outstanding - Basic 7,263,099 7,222,526 7,260,011 7,222,186
Weighted average number of
shares outstanding - Diluted 7,278,712 7,255,759 7,276,332 7,260,462
Cash dividends per share $ 0.02 $ 0.02 $ 0.06 $ 0.10
============ ============ ============ ==============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAB, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
6 Months Ended
---------------------------
Restated
------------ -------------
May 31, 2007 May 31, 2006
------------ -------------
Operating activities
Net income $ 360,883 $ 381,997
Depreciation and amortization 26,795 34,568
Loss on sale of equipment - 17,151
Provision for uncollectible accounts,
net of recoveries (4,848) -
Share-based compensation 17,225
Changes in:
Trade accounts receivable (7,069) 18,384
Restricted cash (12,374) (39,577)
Marketing fund contributions receivable 12,420 8,821
Notes receivable 6,407 50,229
Inventories (8,146) 19,319
Prepaid expenses and other (2,981) 52,200
Accounts payable (12,494) (63,970)
Accrued liabilities (113,461) (49,696)
Unexpended marketing fund contributions (1,226) 4,141
Deferred revenue (99,334) (141,832)
------------ -------------
Net Cash Provided by Operating Activities 161,797 291,735
------------ -------------
Investing activities
Purchase of equipment (1,316) (6,940)
Proceeds from sale of equipment - 5,000
------------ -------------
Net Cash Used In Investing Activities (1,316) (1,940)
------------ -------------
Financing activities
Repayment of borrowings (128,143) (121,266)
Proceeds from exercise of stock options 20,477 6,077
Payment of dividend (435,786) (722,226)
------------ -------------
Net Cash Used In Financing Activities (543,452) (837,415)
------------ -------------
Net Decrease in Cash (382,971) (547,620)
Cash, Beginning of Period 1,792,666 2,206,524
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Cash, End of Period $1,409,695 $1,658,904
============ =============
Supplemental disclosure of cash flow information:
------------ -------------
Interest paid $ 3,258 $ 10,134
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Income taxes paid $ - $ -
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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 for the year ended November 30, 2006
which was filed February 28, 2007. 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, 2007 are as follows:
Stores open:
Company-owned 1
Franchisees 131
Licensed 2
Under development 6
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Total 140
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3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
3 months ended 6 months ended
------------------------- ---------------------------
Restated Restated
------------------------- ---------------------------
May 31, 2007 May 31, 2006 May 31, 2007 May 31, 2006
------------ ------------ ------------- ------------
Numerator:
Net income available to common
shareholders $ 240,303 $ 288,420 360,883 381,997
Denominator:
Weighted average outstanding shares
Basic 7,263,099 7,222,526 7,260,011 7,222,186
Earnings per Share - Basic $ 0.03 $ 0.04 $ 0.05 $ 0.05
Effect of dilutive common stock 15,613 33,233 16,321 38,276
Weighted average outstanding shares
Diluted 7,278,712 7,255,759 7,276,332 7,260,462
Earnings per share - Diluted $ 0.03 $ 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, 2007, 1,400,000 stock options were granted to directors, officers and
employees. As of May 31, 2007, there were 956,036 stock options exercised and
51,182 stock options forfeited or expired under the Plan.
6 months ended
--------------
May 31, 2007 May 31, 2006
------------ ------------
Options Options
------- -------
Options Outstanding at
beginning of period 432,949 163,034
Granted 0 75,000
Forfeited 0 (5,499)
Exercised (40,167) (13,986)
-------- --------
Options Outstanding at end
of period 392,782 218,549
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
$17,000 for the six months ended May 31, 2007.
The following table illustrates the pro forma effect on the Company's net income
and net income per share as if the Company had adopted the fair value based
method of accounting for stock-based compensation under FASB No. 123,
"Accounting for Stock-Based Compensation," for the three months and six months
ended May 31, 2006 and the assumptions used to estimate the fair value of
options granted under the stock option plan for the three and six months then
ended.
3 months ended 6 months ended
-------------- --------------
Restated Restated
May 31, 2006 May 31, 2006
-------------- --------------
Pro forma impact of fair value method
Reported net income $ 288,420 $ 381,997
Less: Fair value impact of employee stock
compensation (11,206) (22,191)
-------------- --------------
Pro forma net income $ 277,214 $ 359,806
-------------- --------------
Earnings per common share
Basic - as reported $ 0.04 $ 0.05
Diluted - as reported $ 0.04 $ 0.05
Basic - pro forma $ 0.04 $ 0.05
Diluted - pro forma $ 0.04 $ 0.05
Weighted average Black Scholes fair value
assumptions
Risk free interest rate 4.39% 4.39%
Expected life 10.0 yrs 10.0 yrs
Expected volatility 1.228 1.228
Expected dividend yield 7.00% 7.00%
As of May 31, 2007, there was approximately $83,000 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 4.5 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 used 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 options expire in 10 years and vary in vesting from
immediate to a vesting period over five years.
The following table summarizes the stock options outstanding and exercisable at
May 31, 2007:
--------------------------------------------------------- ------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------------
Outstanding Wghtd. Avg. Wghtd. Avg. Aggregate Exercisable Wghtd. Avg. Aggregate
at 5/31/07 Remaining Life Exercise Price Intrinsic Value at 5/31/07 Exercise Price Intrinsic Value
--------------------------------------------------------- ------------------------------------------
392,782 8.79 $ 1.120 $ - 127,649 $ 0.920 $ 7,659
The aggregate intrinsic value in the table above is before income taxes, based
on the Company's closing stock price of $.98 as of the last business day of the
period ended May 31, 2007. Total intrinsic value of those options exercised
during the quarter and six months ended May 31, 2007 is $0 and $19,000,
respectively.
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, 2007, and it indicated no
impairment of goodwill.
7. Commitments and Contingencies
None
8. Restatement
During the last quarter of the year ended November 30, 2006, the Company adopted
SEC Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which addresses how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in current
year financial statements. As a result, an adjustment was made to the November
30, 2005 Stockholders' Equity, in the amount of $74,000, relating to the accrual
for accounting fees and the period in which services for the respective fiscal
period were to be performed. The effect of the adoption of SAB No. 108 on the
statement of operations for the three and six months ended May 31, 2006 was to
decrease and increase professional service fees by $5,000 and $17,000,
respectively, and, therefore, increase and decrease the previously reported net
income.
The impact to the specific balances in the Consolidated Statement of Income as
of and for the three and six months May 31, 2006, as a result of the above
adjustments, is as follows. The amounts previously reported are derived from the
original Form 10-QSB for the quarter ended May 31, 2006 filed on July 17, 2006.
3 Months Ended 5/31/06 6 Months Ended 5/31/06
-------------------------- -------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------ ------------ ------------ -------------
Statement of Operations Captions:
Total Revenues $1,048,532 $1,048,532 $2,024,707 $2,024,707
Food, beverage and paper costs 37,693 37,693 87,886 87,886
Store payroll and other operating expenses 115,635 115,635 260,993 260,993
Selling, general and administrative expenses: -
Payroll-related expenses 335,571 335,571 715,608 715,608
Occupancy 36,855 36,855 71,661 71,661
Advertising and promotion 28,636 28,636 59,625 59,625
Professional service fees 52,635 44,190 104,729 121,619
Travel expenses 28,160 28,160 46,164 46,164
Depreciation and amortization 16,876 16,876 34,568 34,568
Other 118,555 121,805 242,259 242,259
------------ ------------ ----------- -------------
Total Operating Expenses 770,616 765,421 1,623,493 1,640,383
------------ ------------ ----------- -------------
Income from operations 277,916 283,111 401,214 384,324
Interest income 12,059 12,059 12,708 12,708
Interest expense (7,935) (7,935) (16,620) (16,620)
Other income 1,185 1,185 1,585 1,585
------------ ------------ ----------- -------------
Income before provision for income taxes $ 283,225 $ 288,420 $ 398,887 $ 381,997
------------ ------------ ----------- -------------
Provision for income taxes
Current -- -- -- --
Deferred -- -- -- --
------------ ------------ ----------- -------------
------------ ------------ ----------- -------------
Net Income $ 283,225 $ 288,420 $ 398,887 $ 381,997
============ ============ =========== =============
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
------------ ------------ ----------- -------------
9. Segment Information
The following table presents segment information for the six months ended May
31, 2007 and 2006:
Net Revenues Operating Income (Loss)
--------------------------- -------------------------------
6 months ended 6 months ended
--------------------------- -------------------------------
Restated Restated
-------------- ------------ ---------------- --------------
5/31/2007 5/31/2006 5/31/2007 5/31/2006
-------------- ------------ ---------------- --------------
Company Store Operations $ 452,837 $ 392,804 $ (80,803) $ (153,615)
Franchise Operations and Licensing Fees 1,535,639 1,631,903 868,126 972,797
-------------- ------------ ---------------- --------------
$ 1,988,476 $2,024,707 $ 787,323 $ 819,182
-------------- ------------ ---------------- --------------
Corporate Expenses (451,985) (433,273)
Interest Expense, Net of Interest Income 25,545 (3,912)
---------------- --------------
Net Income $ 360,883 $ 381,997
================ ==============
There has not been a substantial change in total assets of either segment since
November 30, 2006.
10. Subsequent Event
On July 2, 2007, the Company paid out a $0.02 per share quarterly cash dividend.
Total dividend payment equaled $145,261.98.
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 131 franchised and 2 licensed units
at May 31, 2007. Units in operation at May 31, 2006 included one Company-owned
store and 143 franchised and 4 licensed units. System-wide revenues in the six
months ended May 31, 2007 were $22.9 million as compared to May 31, 2006 which
were $23.4 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).
At May 31, 2007, the Company had 19 employees at the Corporate level to oversee
operations of the franchise, licensed and Company-owned store operations, as
compared to 18 employees at May 31, 2006.
Results of Operations
Three Months Ended May 31, 2007 versus Three Months Ended May 31, 2006
(Restated)
For the three months ended May 31, 2007, the Company reported net income of
$240,000 versus net income of $288,000 for the same period in 2006. Total
revenue decreased $11,000, for the three months ended May 31, 2007, as compared
to the three months ended May 31, 2006.
Royalty fee revenue of $571,000, for the quarter ended May 31, 2007, decreased
$19,000 from the quarter ended May 31, 2006. The Company had 131 franchise
locations at May 31, 2007 as compared to 143 locations at May 31, 2006.
Franchise fee revenue of $48,000, for the quarter ended May 31, 2007, decreased
$58,000 from the quarter ended May 31, 2006. Three stores opened during the
quarter ended May 31, 2006, versus one in the same quarter of 2007.
Licensing fee and other income of $300,000, for the quarter ended May 31, 2007,
increased $73,000 from the quarter ended May 31, 2006. In 2007, Sign shop
revenue increased $44,000 due to work associated with the November 2006
Franchise Convention, $20,000 was received in a legal settlement, and $25,000
was received from an unexecuted franchise development, offset by a decrease in
non-traditional income of $18,000.
Company-owned store sales of $118,000, for the quarter ended May 31, 2007,
decreased $7,000 from the quarter ended May 31, 2006.
Total operating expenses of $810,000, were 78% of total revenues, for the
quarter ended May 31, 2007, versus $765,000, or 73%, in 2006. Sign shop expenses
increased $29,000 due to work associated with the November 2006 Franchise
Convention and $9,000 of compensation expense is recorded in the current quarter
as a result of adopting FASB 123(R) (See Note 5).
Interest income of $17,000 increased $5,000, for the current quarter over the
same period in 2006, as a result of the Company's decision to invest excess cash
in higher yield investments.
Interest expense of $4,000 decreased $4,000 due to lower outstanding debt.
Net Income per share, as reported for basic and diluted outstanding shares, for
the three months ended May 31, 2007, was $0.03 versus $0.04 for the three months
ended May 31, 2006 on a basic and fully diluted basis.
Six Months Ended May 31, 2007 versus Six Months Ended May 31, 2006 (Restated)
For the six months ended May 31, 2007, the Company reported net income of
$361,000 versus net income of $382,000 for the same period in 2006. Total
revenue decreased $36,000, for the six months ended May 31, 2007, as compared to
the six months ended May 31, 2006.
Royalty fee revenue of $1,099,000, for the six months ended May 31, 2007,
decreased $25,000 from the six months ended May 31, 2006. The Company had 131
franchise locations at May 31, 2007 as compared to 143 locations at May 31,
2007.
Franchise fee revenue of $125,000, for the six months ended May 31, 2007,
decreased $81,000 from the six months ended May 31, 2006. There were 7 new store
openings during the six months ended May 31, 2006, versus 3 in the same period
of 2007. Note the Company has 6 under development at May 31, 2007, versus only 3
at May 31, 2006, which should narrow the franchise fee gap by year-end if the
stores under development do in fact open by year-end.
Licensing fee and other income of $531,000, for the six months ended May 31,
2007, increased $104,000 from the six months ended May 31, 2006. In 2007, Sign
shop revenue increased $74,000 due to work associated with the November 2006
Franchise Convention, $20,000 was received in a legal settlement and $25,000 was
received from an unexecuted franchise development, offset by a decrease in
non-traditional income of $36,000.
Company-owned store sales of $233,000, for the six months ended May 31, 2007,
decreased $35,000 from the six months ended May 31, 2006. This decrease is due
to the fact the Company had one Company-owned store for the entire period in
2007, versus two Company-owned stores for a portion of the same period in 2006.
Sales for the existing Company-owned store have decreased $10,000 from the same
period in 2006.
Total operating expenses of $1,653,000, were 83% of total revenues, for the six
months ended May 31, 2007, versus $1,640,000, or 81%, in 2006. Sign shop
expenses increased $48,000 in 2007, as a result of the work associated with the
November 2006 Franchise Convention and $17,000 of compensation expense is
recorded in the current period as a result of adopting FASB 123(R) (See Note 5).
Interest income of $35,000 increased $22,000, for the current six months over
the same period in 2006, as a result of the Company's decision to invest excess
cash in higher yield investments.
Interest expense of $9,000 decreased $7,000 due to lower outstanding debt.
Net Income per share, as reported for basic and diluted outstanding shares, was
$.05 for the six months ended May 31, 2007, and May 31, 2006.
Liquidity and Capital Resources
The net cash provided by operating activities totaled $162,000 for the six
months ended May 31, 2007, versus cash provided by operating activities of
$292,000 for the same period in 2006. Cash provided by operating activities
principally represents net income of $361,000, plus depreciation and
amortization of $27,000, a decrease in the provision for uncollectible accounts
of $5,000, increase in share-based compensation expense of $17,000, with
increases to trade accounts receivable of $7,000, restricted cash of $12,000,
inventory of $8,000, prepaid expenses and other assets of $3,000, and decreases
to Marketing Fund contributions receivable of $12,000, notes receivable of
$6,000, accounts payable of $12,000, accrued liabilities of $113,000, unexpended
Marketing Fund contributions of $1,000, and deferred revenue of $99,000.
Operating activities in 2006 provided $292,000, represented by net income of
$382,000, plus depreciation and amortization of $35,000, and a loss on sale of
equipment of $17,000, with increases to restricted cash of $40,000, unexpended
Marketing Fund contributions of $4,000, and decreases to trade accounts
receivable of $18,000, Marketing Fund contributions receivable of $9,000, notes
receivable of $50,000, inventories of $19,000, prepaid expenses and other of
$52,000, accounts payable of $64,000, accrued liabilities of $50,000, and
deferred revenue of $142,000.
Cash used in investing activities during the six months ended May 31, 2007
totaled $1,000, for the purchase of equipment. Cash used during 2006 totaled
$2,000, representing equipment purchases of $7,000, offset by proceeds from
equipment sales of $5,000.
Financing activities used $543,000 during the six months ended May 31, 2007, due
to the repayment of notes payable of $128,000 and the payment of cash dividends
of $436,000, offset by proceeds from the exercise of stock options in the amount
of $20,000. In fiscal 2006 for this same period, financing activities used
$837,000 due to repayment of notes payable of $121,000 and payment of cash
dividends of $722,000, offset by proceeds from the exercise of stock options in
the amount of $6,000.
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.
Adoption of SEC Staff Bulletin No. 108
During the year ended November 30, 2006, the Company adopted the SEC Staff
issued Staff Accounting Bulletin (SAB) No. 108 Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which addresses how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in current
year financial statements. For the year ended November 30, 2006, there was an
adjustment to Stockholders' Equity, in the amount of $73,938, related to the
accrual for accounting fees and the period in which services for the respective
fiscal period were performed, and there was no income statement effect because
the related accrual was overstated by the same amount at the beginning and end
of the year. (See Note 8 Restatement)
Recent Accounting Pronouncements
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
$17,000 for the six months ended May 31, 2007.
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. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006 (the Company's fiscal year beginning
December 1, 2007). The Company has not yet determined the impact, if any, that
may result from the adoption of FIN No. 48.
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 (the Company's fiscal year
beginning December 1, 2007), and interim periods within those fiscal years.
Earlier adoption is encouraged. The adoption of SFAS No. 157 is not expected to
have a material impact on the Company's financial position, or results of
operations or cash flows.
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, 2006, filed with the Securities and Exchange Commission on
February 28, 2007. 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, 2007.
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, 2007. 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, 2007 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. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
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 23, 2007. Each of the proposals passed.
1. Election of directors
For Withheld
----------- -----------
Michael W. Evans 6,937,536 46,400
Michael K. Murtaugh 6,932,536 51,400
Steven G. Feldman 6,947,838 36,098
James A. Lentz 6,947,838 36,098
2. Appointment of McGladrey & Pullen, LLP as independent auditors of the Company
for the fiscal year ending November 30, 2007
For 6,943,933
Against 33,335
Abstain 6,668
Subsequent to the above vote count appointing McGladrey & Pullen, LLP as
independent auditors, the Company's Board of Directors approved the dismissal of
McGladrey & Pullen, LLP and the engagement of Frank L. Sassetti & Co. as the
Company's independent auditors. See Item 6(b), Form 8-K filed 5/30/07.
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
6/5/07 On June 5, 2007, the Board of Directors of BAB, Inc. authorized a $0.02
per share quarterly cash dividend. The dividend is payable July 2, 2007 to
shareholders of record as of June 15, 2007.
5/30/07 On May 30, 2007, the Company announced a change in small business
issuer's certifying accountant. The Company dismissed McGladrey & Pullen, LLP
and engaged Frank L. Sassetti & Co. as its independent registered public
accounting firm.
3/9/07 On March 9, 2007, the Board of Directors of BAB, Inc. authorized a $.02
per share quarterly cash dividend. The dividend is payable April 10, 2007 to
stockholders of record as of March 26, 2007.
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 10, 2007 /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