Item 2.
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Bab, Inc - Recent Material EventCertain
statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations, including statements regarding the
development of the Company's business, the markets for the Company's products,
anticipated capital expenditures, and the effects of completed and proposed
acquisitions, and other statements contained herein regarding matters that are
not historical facts, are forward-looking statements as is within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Because such statements include risks and uncertainties,
actual results could differ materially from those expressed or implied by such
forward-looking statements as set forth in this report, the Company's Annual
Report on Form 10-KSB and other reports that the Company files with the
Securities and Exchange Commission. Certain risks and uncertainties are wholly
or partially outside the control of the Company and its management, including
its ability to attract new franchisees; the continued success of current
franchisees; the effects of competition on franchisees and Company-owned store
results; consumer acceptance of the Company's products in new and existing
markets; fluctuation in development and operating costs; brand awareness;
availability and terms of capital; adverse publicity; acceptance of new product
offerings; availability of locations and terms of sites for store development;
food, labor and employee benefit costs; changes in government regulation
(including increases in the minimum wage); regional economic and weather
conditions; the hiring, training, and retention of skilled corporate and
restaurant management; and the integration and assimilation of acquired
concepts. Accordingly, readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
General
The
Company has 1 Company-owned store, 122 franchised and 3 licensed units at May
31, 2008. Units in operation at May 31, 2007 included 1 Company-owned
store, 131 franchised and 2 licensed units. System-wide revenues for the
six months ended May 31, 2008 were $22.3 million as compared to May 31, 2007
which were $22.9 million.
The
Company's revenues are derived primarily from ongoing royalties paid to the
Company by its franchisees, from the operation of Company-owned stores and
receipt of franchise fees. Additionally, the Company derives revenue from the
sale of licensed products (My Favorite Muffin mix, Big Apple Bagels cream cheese
and Brewster's coffee), and through licensing agreements (Kohr Bros. and Mrs.
Fields Famous Brands).
The
Company had 19 employees at the Corporate level to oversee operations of the
franchise, licensed and Company-owned store operations at May 31, 2008 and May
31, 2007.
Results
of Operations
Three
Months Ended May 31, 2008 versus Three Months Ended May 31, 2007
For the
three months ended May 31, 2008, the Company reported net income of $177,000
versus net income of $240,000 for the same period in 2007. Total
revenue of $945,000 decreased $92,000, for the three months ended May 31, 2008,
as compared to total revenue of $1,037,000 for the three months ended May 31,
2007.
Royalty
fee revenue of $558,000, for the quarter ended May 31, 2008, decreased $13,000
from the quarter ended May 31, 2007. The Company had 122 franchise
locations at May 31, 2008 as compared to 131 locations at May 31,
2007.
Franchise
fee revenue of $35,000, for the quarter ended May 31, 2008, decreased $13,000
from the quarter ended May 31, 2007. Two stores opened during the
quarter ended May 31, 2008, a Big Apple Bagels Xpress and a satellite location
with franchisee fees of $5,000 each versus one store location with a $25,000
franchise fee in the same quarter of 2007.
Licensing
fee and other income of $214,000, for the quarter ended May 31, 2008, decreased
$86,000 from the quarter ended May 31, 2007. In the 2nd quarter
2008, Sign Shop revenue decreased $41,000 primarily due to 2007 sales being
higher than normal as a result work done for franchisees in conjunction with
programs initiated at the 2006 franchise
convention. Other income in Systems was higher in 2007 by
$45,000 because of $25,000 in unexecuted development fees and $20,000 for a
franchisee settlement.
Company-owned
store sales of $138,000, for the quarter ended May 31, 2008, increased $20,000
from the quarter ended May 31, 2007.
Total
operating expenses of $772,000, decreased $38,000, for the quarter ended May 31,
2008, versus $810,000 in 2007. Sign Shop expenses decreased
$30,000.
Interest
income of $7,000 decreased $10,000, for the quarter ended May 31, 2008, over the
same period in 2007, due to lower interest rates and cash balances in
2008.
Interest
expense of $3,000 in 2008 decreased $1,000 due to lower outstanding
debt.
Net
Income per share, as reported for basic and diluted outstanding shares, was
$0.02 for the three months ended May 31, 2008 and $0.03 per share for the three
months ended May 31, 2007.
Six
Months Ended May 31, 2008 versus Six Months Ended May 31, 2007
For the
six months ended May 31, 2008, the Company reported net income of $320,000
versus net income of $361,000 for the same period in 2007. Total
revenue of $1,917,000 decreased $72,000, for the six months ended May 31, 2008,
as compared to the six months ended May 31, 2007.
Royalty
fee revenue of $1,073,000, for the six months ended May 31, 2008, decreased
$26,000 from the six months ended May 31, 2007. The Company had 122
franchise locations at May 31, 2008 as compared to 131 locations at May 31,
2007.
Franchise
fee revenue of $140,000, for the six months ended May 31, 2008, increased
$15,000 from the six months ended May 31, 2007. There were 6 new
store openings ($95,000), which included 1 Big Apple Bagels Xpress and 1
satellite store which have lower franchise fees and 9 transfers during the six
months ended May 31, 2008, versus 3 full service new store openings ($75,000)
and 8 transfers in the same period of 2007.
Licensing
fee and other income of $450,000, for the six months ended May 31, 2008,
decreased $81,000 from the six months ended May 31, 2007. In 2008,
Sign Shop revenue decreased $61,000 primarily due to 2007 sales being higher
than normal as a result work done for franchisees in conjunction with programs
initiated at the 2006 franchise convention. Other income in Systems
was higher in 2007 by $20,000 because of a franchisee settlement.
Company-owned
store sales of $254,000, for the six months ended May 31, 2008, increased
$20,000 from the six months ended May 31, 2007.
Total
operating expenses of $1,610,000 decreased $43,000 for the six months ended May
31, 2008, versus $1,653,000 in 2007. Sign Shop expenses decreased
$47,000 in 2008.
Interest
income of $20,000 decreased $15,000, for the six months ended May 31, 2008, over
the same period in 2007, due to of lower interest rates and cash balances in
2008.
Interest
expense of $6,000 in 2008 decreased $3,000 due to lower outstanding
debt.
Net
Income per share, for the six months ended May 31, 2008, was $0.04 on a basic
and fully diluted basis versus $0.05 on a basic and fully diluted basis for the
six months ended May 31, 2007.
Liquidity
and Capital Resources
The net
cash provided by operating activities totaled $205,000 for the six months ended
May 31, 2008, versus cash provided by operating activities of $162,000 for the
same period in 2007. Cash provided by operating activities principally
represents net income of $320,000, plus depreciation and amortization of $19,000
and share-based compensation of $14,000, less a reduction in the provision for
uncollectible accounts of $2,000, restricted cash of $33,000, inventories of
$1,000, accounts payable of $18,000, accrued liabilities of $56,000 and deferred
revenue of $112,000 plus changes in trade accounts receivable of $12,000,
Marketing Fund contributions receivable of $22,000, notes receivable of $4,000,
prepaid expenses and other assets of $34,000 and unexpended Marketing Fund
contributions of $3,000. Operating activities in 2007 provided
$162,000, represented by net income of $361,000, plus depreciation and
amortization of $27,000 and share-based compensation of $17,000, less a
reduction in the provision for uncollectible accounts of $5,000, less trade
receivables of $7,000, restricted cash of $12,000, inventories of $8,000,
prepaid expenses of $3,000, accounts payable of $12,000, accrued liabilities of
$113,000, deferred revenue of $99,000 and unexpended Marketing Fund
contributions of $1,000, plus Marketing Fund contributions receivable of $12,000
and notes receivable of $6,000.
Cash used
in investing activities during the six months ended May 31, 2008 totaled
$12,000, for the purchase of equipment of $1,000 and $11,000 for capitalized
trademark renewals. Cash used during 2007 totaled $1,000,
representing equipment purchases.
Financing
activities used $436,000 during the six months ended May 31, 2008 for the
payment of cash dividends. In fiscal 2007 for this same period,
financing activities used $543,000 due to repayment of notes payable of $128,000
and payment of cash dividends of $436,000, offset by proceeds from the exercise
of stock options in the amount of $21,000.
Dividend
Policy
It is the
Company’s intent that future dividends will be considered after reviewing
returns to shareholders, profitability expectations and financing needs and will
be declared at the discretion of the Board of Directors. Although
there can be no assurances the Company will be able to pay future dividends, it
is the Company’s intent going forward to continue to declare and pay cash
dividends on a quarterly basis.
The
Company believes execution of this policy will not have any material adverse
effects on its ability to fund current operations or future capital
investments.
The
Company has no financial covenants on any of its outstanding debt.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141R, Business Combinations, which replaces
FASB Statement No. 141. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008 (Company’s Fiscal 2010). The Company does not
believe adoption of SFAS 141R will have a material effect on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
51, which establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008 (Company’s Fiscal 2010). The Company does not
believe adoption of SFAS 160 will have a material effect on the Company’s
consolidated financial statements.
In May
2008 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally
Accepted Accounting Principles. This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). This statement is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversite Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not believe adoption of SFAS 162 will have a material effect on the
Company’s consolidated financial statements.
Critical
Accounting Policies
The
Company has identified significant accounting policies that, as a result of the
judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved, could result in material changes
to its financial condition or results of operations under different conditions
or using different assumptions. The Company's most critical accounting
policies are related to the following areas: revenue recognition, long-lived
assets, concentrations of credit risks, valuation allowance and deferred
taxes. Details regarding the Company's use of these policies and the
related estimates are described in the Company's Annual Report on Form 10-KSB
for the fiscal year ended November 30, 2007, filed with the Securities and
Exchange Commission on February 27, 2008. There have been no material
changes to the Company's critical accounting policies that impact the Company's
financial condition, results of operations or cash flows for the six months
ended May 31, 2008.
Disclosure
controls
The Chief
Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as
amended) as of May 31, 2008. Management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on that evaluation, Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as of such date to ensure that
information required to be disclosed in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and
forms.
Internal
control over financial reporting
The Chief
Executive Officer and the Chief Financial Officer confirm that there was no
change in the Company’s internal control over financial reporting during the
quarter ended May 31, 2008 that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
Compliance
with Section 404 of Sarbanes-Oxley Act
In order
to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the
“Act”) by November 30, 2008, the Company has begun the system and process
documentation and evaluation needed to comply with Section 404.
PART
II
None.
None.
None.
None
None.
See index
to exhibits
In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BAB,
Inc.
INDEX
TO EXHIBITS
(a)
EXHIBITS
The
following exhibits are filed herewith.
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