10QSB/A 1 qtrthree2003.htm BAB INC THIRD QUARTER 10-QSB 2003 10QSB 4 NASD 0000946713 08/31/2003 10QSB

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, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _________________

Commission file number: 0-31555

BAB, Inc.

(Name of small business issuer in its charter)

Delaware

36-4389547
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

  8501 West Higgins Road, Suite 320, Chicago, Illinois 60631

(Address of principal executive offices) (Zip Code)

Issuer's telephone number (773) 380-6100

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 14, 2003, BAB, Inc. had : 6,791,626 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
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation
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

PART I 

ITEM 1. FINANCIAL INFORMATION

 

BAB, Inc. Condensed Consolidated Balance Sheet

August 31, 2003

(Unaudited)

ASSETS
  Current assets
     Cash and cash equivalents, including restricted cash of $309,889 $ 1,380,910
   Receivables 
     Accounts receivable, net of allowance for doubtful accounts of $92,091 305,436
     National Marketing Fund contributions receivable from franchisees and stores 91,362
     Notes receivable 98,913
  Inventory 76,250
  Assets held for sale 12,490
  Prepaid and other current 184,262
--------------
          Total current assets 2,149,623
--------------
  Property and equipment, net of accumulated depreciation of $2,027,389 427,184
  Notes receivable, net of allowance of $64,482 112,569
  Trademarks, net of accumulated amortization of $347,361 763,667
  Goodwill, net of accumulated amortization of $438,630 2,304,634
  Franchise contract rights, net of accumulated amortization of $578,512 1,493,771
  Other, net of accumulated amortization of $526,508 102,632
----------------
          Total Assets $7,354,080
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities
     Accounts payable  $ 145,707
     Accrued liabilities 328,569
     Accrued professional and other services 114,814
     Unexpended National Marketing Fund contributions 402,076
     Current portion of long-term debt 307,777
     Deferred revenue 33,333
     Deferred Franchise revenue 230,000
--------------
         Total current liabilities 1,562,276
--------------
  Noncurrent liabilities
     Deferred revenue 20,833
     Long-term debt, net of portion included in current liabilities 1,168,813
--------------
          Total noncurrent liabilities 1,189,646
--------------
Stockholders' Equity
     Common stock 13,507,537
     Additional paid-in capital

814,973
     Treasury stock (212,000)
     Dividends Paid (135,833)
     Accumulated deficit (9,372,519)
----------------
          Total stockholders' equity 4,602,158
----------------
          Total Liabilities and Stockholders' Equity $7,354,080
=========

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, 2003 August 25, 2002 August 31, 2003 August 25, 2002
REVENUES
     Net sales by Company-owned stores $704,636 957,387 $ 2,362,567 3,084,230
     Royalty fees from franchised stores 652,371 664,504 1,933,505 2,018,279
     Licensing fees and other income 277,482 299,429 885,716 773,739
     Franchise and area development fees 115,500 100,080 282,990 362,880
------------ ------------ ------------ ------------
          TOTAL REVENUES 1,749,989 2,021,400 5,464,778 6,239,128
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
     Food, beverage, and paper costs 240,094 294,904 785,045 976,852
     Store payroll and other operating expenses 582,005 807,923 1,933,686 2,476,497
Selling, general, and administrative expenses
     Payroll-related 326,218 353,758 982,137 1,083,811
     Occupancy 29,111 49,237 94,223 146,927
     Advertising and promotion 35,991 46,360 153,523 129,011
     Professional service fees 72,446 67,946 217,339 201,200
     Franchise-related expenses 27,397 28,985 62,748 53,238
     Depreciation and amortization 116,633 170,282 337,904 547,291
     Travel 25,258 14,699 73,076 68,761
     Provision for Uncollectible Accounts 36,000 18,048 116,265 59,831
     Other 107,486 113,076 318,405 328,904
------------ ------------ ------------ ------------
          Total Operating Costs and Expenses 1,598,639 1,965,218 5,074,351 6,072,323
------------ ------------ ------------ ------------
Income before interest $151,350 $56,182 390,427 $166,805
     Interest expense (32,664) (40,899) (111,855) (126,626)
     Interest income 5,846 10,837 21,899 45,207
     Other income ---     42,348 47,105
------------ ------------ ------------ ------------
Net  Income $124,532 68,468 $300,471 $132,491
Net Income per share - Basic and Diluted $ 0.02 $ 0.01 $ 0.04 $ 0.01
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic 7,160,855 8,904,492 7,160,855 8,904,492
Weighted average number of shares outstanding - Diluted 7,324,495 8,963,016 7,324,495 8,963,016
Cash dividends per share $ 0.02 -- $ 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, 2003 August 25, 2002
Cash Flows from Operating Activities
       Net Income $ 300,471 $ 132,491
Adjustments to reconcile net income to net cash  provided by  operating activities
     Depreciation and amortization 337,904 547,293
     Provision for uncollectible accounts 116,265 59,831
     (Increase) decrease in
         Trade accounts receivable 68,790 144,145
         National Marketing Fund contributions receivable 5,868 131,145
         Inventories 24,874 22,100
         Notes receivable (38,022) (103,101)
         Loss on sale of property and equipment 33,460

52,851
         Prepaid expenses and other assets 18,656 (82,542)
     Increase (decrease) in
         Accounts payable (36,719) (132,276)
         Accrued professional and other services 11,495 (758)
         Accrued liabilities (112,527) 11,510
         Unexpended National Marketing Fund franchisee contributions 729 (7,464)
         Deferred  revenue 33,597 52,535
---------- ----------
Total Adjustments 464,370 695,269
---------- ----------
Net Cash Provided by Operating Activities 764,841 827,760
---------- ----------
Cash Flows from Investing Activities
         Collection of notes receivable

247,976

 72,134
         Purchases of property and equipment (27,632) (63,117)
         Proceeds from sale of property and equipment 83,605 89,300
---------- ----------
Net Cash Provided by  Investing Activities 303,949 98,317
---------- ----------
Cash Flows from Financing Activities
         Debt repayments (471,697) (496,823)
         Purchase common stock for treasury (212,000) - 
         Dividend Paid (135,833) - 
         Options Exercised for Common stock 11,907 - 
---------- ----------
Net Cash Used in  Financing Activities (807,623) (496,823)
---------- ----------
Net  Increase in Cash and Cash Equivalents 261,167 429,254
Cash and Cash Equivalents, Beginning of Year 1,119,743 507,264
-------- --------
Cash and Cash Equivalents, End of Third Quarter $ 1,380,910 $ 936,518
======= =======

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

BAB, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Unaudited)

 

1. Basis of Presentation

BAB, Inc. (the Company) has four wholly owned subsidiaries: BAB Operations, Inc. (Operations); BAB Systems, Inc. (Systems); 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 "Big Apple Bagels" specialty bagel retail stores.  Operations was formed on August 30, 1995, primarily to operate Company-owned  "Big Apple Bagels"   concept stores, including one which currently 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 "My Favorite Muffin" concept muffin stores. The assets of Jacobs Bros. Bagels (Jacobs Bros.) were acquired on February 1, 1999.  

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 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, 2002 which was filed February 27, 2003.  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 have been opened or are under development at August 31, 2003 are as follows:

Stores opened:
     Company-owned 4
     Franchisee-owned 172
     Licensed 30
     Under Development 9
     ----
     Total 215

 

3. Earnings per Share

The following tables sets forth the computation of basic and diluted earnings per share:

9 months ended

August 31, 2003

August 25, 2002
Numerator:
 

Net income attributable to common shareholders

 $    300,471 $   132,491
Denominator:
Weighted average outstanding
shares - Basic 		7,160,855 8,904,492
Earnings per share - Basic $0.04 $ 0.01
Effect of dilutive common equivalent
shares - Weighted average stock options outstanding		 163,640 58,524
Weighted average outstanding
shares - Diluted		 7,324,495 8,963,016
Earnings per share - Diluted $0.04 $ 0.01

 

4.  Stock Options

In  May  2001, the Company approved a Long-Term Incentive and Stock Option Plan.  The plan reserved 1,100,000 (as adjusted for a 4:1 split) shares of common stock for grant and provides that the term of each award be determined by the Board or a committee of the Board.  An additional 300,000 stock options were added to this plan by a vote of the shareholders at the annual meeting held May 29, 2003, making the plan total 1,400,000.  As of August 31, 2003, 900,000 options have been issued to directors, officers and employees in 3 separate grants.   Of these 900,000 options granted, 27,333 have expired due to forfeiture and 489,332 options have been exercised as of August 31, 2003.   

The Company uses the intrinsic method, as allowed by SFAS 123, "Accounting for Stock-Based Compensation," to account for stock options granted to employees and directors.  No compensation expense is recognized for stock options because the exercise price of the options is at least equal to the market price of the underlying stock on the grant date.    The  pro forma impact of utilizing the fair value method to account for stock-based employee compensation, on an annual basis is presented in Note 11 of the Company's audited financial statements presented in the 10-KSB filed February 27, 2003. 

For those companies that do not elect to change their method of accounting for stock-based employee compensation, SFAS Statement No. 148 required 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 beginning this quarter.   Had employee compensation expense for the Company's Plan been recorded in the financial statements, consistent with provisions of  SFAS Statement No. 123, net earnings would have been reduced by $6,600 for the 9 months ended August 31, 2003 and $19,100 for 9 the months ended August 25, 2002 based on the Black-Scholes option-pricing model. 

The following table illustrates the effect on net income and earnings per share:

 

9 months ended
August 31, 2003

August 25, 2002
Net Earnings:
As reported

      $       300,471

$      132,491
Pro forma      $       293,871 $       113,391
Net earnings per common and common equivalent share:
Basic and diluted -as reported $ 0.04 $ 0.01
Basic and diluted -pro forma $ 0.04 $ 0.01

                                     

5. Acquisitions and Dispositions

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 franchisee 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 was started in November 1992, and includes 4 Company-owned stores and 202 franchised and licensed units at August 31, 2003.  Units in operation at August 25, 2002 included 6 Company-owned stores and 209 franchised and licensed units.  System-wide revenues in the nine months ended August 31, 2003 was $45.0 million as compared to August 25, 2002 which were $47.0 million.

The Company's revenues are derived primarily from the operation of Company-owned stores, initial franchise fees and ongoing royalties paid to the Company by its franchisees. 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 licensing contracts (licenses with HMS Host), and by directly entering into licensing agreements (Kohr Bros and Mrs. Fields Famous Brands). 

The Company has controlled expenses in payroll, occupancy and overhead costs in the corporate offices. At August 31, 2003, the Company had 22 employees at the corporate level who oversee operations of the franchise, licensed and Company-owned store operations, the same number as at the end of the 3rd quarter of 2002.

Effective with the 2002 fiscal year end, the Company adopted a month-end reporting beginning November 30, 2002.  This was a change from the prior reporting adopted in 1999 of a 52-53 week reporting period ending on the last Sunday of its fiscal year in November.  The first nine months of fiscal 2003 had 274 days as compared to 273 days in 2002.

Results of Operations

Three months Ended August 31, 2003 versus Three Months Ended August 25, 2002.

In the three months ended August 31, 2003, the Company reported income of $125,000 versus income of $68,000 for the same period in 2002.  Total revenues decreased by $271,000 for the three months ending August 31, 2003, as compared to the three months ending August 25, 2002, due primarily to a decrease in Company-owned store revenues of $253,000, a slight decrease in royalty revenue of $12,000 and a decrease in licensing fee and other income of $22,000.  This was offset by an increase in franchise fee revenue of $15,000.

The primary factors contributing to the decrease in revenues of $253,000 for Company-owned stores for third quarter 2003 as compared to same period 2002 was a $142,000 decrease in revenue relating to stores sold or closed during 2002 and 2003, and a $62,000 decrease in wholesale revenues as part of management's goal of eliminating sales to less profitable customers.  In addition, sales for the four Company-owned stores were down slightly, $49,000 for the three months ending August 31, 2003, as compared to the same period 2002.  Licensing fee and other revenue decreased by $22,000, of which $33,000 was attributed to a loss on sold or closed Company-owned stores, offset by an actual increase of $11,000 for licensing fees and other income due to renegotiations of licensing fee contracts at more favorable terms.

Royalty revenue was down $12,000 for the three months ending August 31, 2003, as compared to the three months ended August 25, 2002, mainly as a result of being down 3 franchise units at the end of the third quarter, 172 units at August 31, 2003 versus 175 units same period 2002.   Franchise fee revenues increased by $15,000 in comparison to 2002.  The Company opened 3 new franchise stores in both third quarter 2003 and 2002; however, more franchise operated stores transferred ownership in 2003 generating an increase in transfer fees. 

Company-owned store direct costs decreased $281,000 in third quarter 2003 as compared to same period 2002.  The total expenses in the third quarter of 2003 for Company operated locations, including cost of goods, was $822,000 as compared to $1,103,000 for the same period of 2002.

With the close of the third quarter of 2003, the Company has had eight consecutive profitable quarters.  Management will continue to focus it's energies on franchising and cost control.

Interest expense decreased $8,000 in the third quarter 2003, compared to same the period 2002, because of lower total debt outstanding.  Net income per share as reported for basic and diluted outstanding shares for the three months ended August 31, 2003, was $0.02, versus net income per share of $0.01 for the year-ago period on both a basic and diluted basis. 

Nine Months Ended August 31, 2003 versus Nine  Months Ended May 26, 2002.

In the nine months ended August 31, 2003, the Company reported income of $300,000 compared to income of $132,000 for the same period  2002. 

Total revenues decreased by  $774,000 in the nine months of fiscal 2003, as compared to the same period 2002, due primarily to a decrease in Company-owned store revenues of $722,000, a decrease in royalty revenue of $85,000, and a decrease in franchise fee revenue of $80,000, which was offset by an increase in license fees and other income of $112,000. 

The decrease in revenue of $722,000 from Company-owned stores for the nine months ending August 31, 2003, as compared to the same period for 2002, is due to a decrease in revenues for Company-owned stores sold or closed during 2002 and 2003 of $317,000, a decrease in wholesale revenues of $273,000 in 2003 due to management's decision to eliminate wholesale sales to less profitable customers and a decrease in Company-owned store sales of $131,000 in 2003 versus 2002.  The increase of $112,000 in license fees and other income was due primarily to renegotiations of licensing fee contracts at more favorable terms. 

Royalty revenue decreased slightly, 4.2% or $85,000, for the first nine months of 2003 compared to 2002.  Total system-wide sales were down slightly for the nine months ended August 31, 2003, as compared to the same period 2002.  The Company had 3 fewer  franchise units, 172 at August 31, 2003, as compared to 175 franchise units in the same period 2002.  Franchise fee revenue decreased $80,000, primarily due to fewer new store openings, 7 new stores opened as of August 31, 2003, as compared to 10 opening in the same period for 2002.    

Company-owned store food, beverage and paper costs decreased $192,000 in 2003, Company-owned  store personnel payroll decreased $266,000 in 2003 and other direct Company-owned store expenses decreased $277,000, as compared to same period 2002.  Direct expenses related to Company-owned locations decreased a total of $735,000, which was $13,000 greater than the decrease in Company-owned store location revenue of $722,000.  The Company's continued emphasis on cost control resulted not only in savings in the Company-owned operations, but also in corporate payroll and occupancy related expenses, which decreased $154,000.  The total decrease in operating expenses  was $998,000, going from $6,072,000 in 2002 to $5,074,000 in 2003.

Interest expense decreased by $15,000 to $112,000 in 2003, compared to $127,000 in the year ago period as the Company continues to reduce debt.  Net income per share for the nine months ended August 31, 2003, was $0.04 on both a basic and diluted basis versus income per share of $0.01 for the year-ago period on both a basic and diluted basis.  

Liquidity and Capital Resources

The net cash provided by operating activities totaled $765,000 during the nine months of fiscal 2003, versus cash provided by operations of $828,000 in the year-ago period.  Cash provided from operating activities primarily represents net income of $300,000, adjusted for depreciation and amortization of $338,000, the provision for doubtful accounts of $116,000 and a loss on Company-owned store assets of $33,000.  Sources of funds were provided by a decrease in both accounts receivable and inventories of $69,000 and $25,000, respectively, a decrease in prepaid expenses of $19,000, a decrease in the National Marketing Fund receivables (net of liabilities) of $7,000, and an increase in deferred revenue of $34,000.  This was offset principally by a decrease in accounts payable of $37,000, an increase in notes receivable of $38,000, and a decrease in accrued liabilities of $101,000.  Investing activities provided $304,000 during the nine months ended August 31, 2003, and consisted of  collection of notes receivable of $248,000,  less $28,000 spent for purchases of equipment plus proceeds of $84,000 from the sale of equipment.  In the year ago period, investing activities provided $98,000 consisting of $72,000 from the collection of notes receivable, and proceeds from the sale of property and equipment of $89,000, less $63,000 for the purchases of equipment.  Cash used in financing activities was $808,000 during the nine months ended August 31, 2003, and consisted of $472,000 in debt repayments and $212,000 to purchase Company common stock and $136,000 paid out as cash dividends to common stock holders, reduced by $12,000 for   proceeds from exercised stock options.  During the period ended August 25, 2002, cash used in financing activities was $497,000, all for debt repayments.  The net increase in cash and equivalents was $261,000 in fiscal 2003, versus an increase in cash and equivalents of $429,000 in the period ended August 25, 2002.

The Company has no financial covenants on any of its outstanding debt.

 

New Accounting Standards

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations."  SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001, and eliminates the pooling-of-interests method.  Adoption of SFAS No. 141 did not have a material effect on the Company's financial position, results of operation and cash flows.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," effective for years beginning after December 15, 2001.  The Company adopted SFAS No. 142 on December 1, 2002.  SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired and the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition.  Under the new rules, goodwill and intangible assets acquired, other than in a business combination with indefinite lives, will no longer be amortized, but instead will be subject to annual impairment tests.  The goodwill arising from business acquisitions prior to July 1, 2001, was amortized on a straight-line basis over 40 years.  Other indefinite lived intangible assets, including franchise contract rights, trade names and trademarks, were being amortized on a straight-line basis over 17 - 20 years  prior to December 1, 2002.  These indefinite-lived intangibles and goodwill are no longer being amortized, effective December 1, 2002.  Total restated expenses related to the amortization of other indefinite-lived intangibles and goodwill for the nine months ended August 31, 2002, was $179,472, or $0.02 per share on a basic and diluted basis.

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 goodwill impairment assessment during the first quarter ending February 28, 2003, as required, which indicated no impairment of goodwill.  A reconciliation of previously reported net income and net income per share to the amounts adjusted for the exclusion of goodwill and other indefinite-lived intangible assets is as follows:

9 months ended

August 31, 2003

August 25, 2002
Reported net income

$    300,471

$    132,491
Add back amortization

             --

   179,472
Adjusted net income

$    300,471

$    311,963
Reported net income per share- Basic and Diluted

$0.04

$ 0.01
Add back amortization- earnings per share basis

             --

       $0.02
Reported net income per share- Basic and Diluted $ 0.04 $ 0.03

Net intangible assets with definite lives totaled $102,632 for the quarter ended August 31, 2003.  The definite lived intangible assets and their respective accumulated amortization are as follows:

Definite Lived Intangible Assets Original Cost

Amortization as of August 31, 2003
Host Contract Rights

$ 268,205

$ 231,180
NonCompete Agreement

210,000

192,500
Master Lease Origination Fees 95,382 62,727
Other

      55,553

      40,101

Total

$ 629,140

$ 526,508

Amortization expense of intangible assets with a definite life for the first nine months ended August 31, 2003 was $77,400.  The estimated amortization expense on these intangible assets is as follows for November 30:

2003

 $       103,000

2004

         50,000

2005

    14,000

2006

    10,000

2007

                3,000

Total      

  $       180,000

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for years beginning after June 15, 2002. Under this standard, asset retirement obligations will be recognized at a discounted fair value basis and capitalized and allocated to expense over the asset’s useful life. The adoption of SFAS No. 143 did not have an impact on the Company's consolidated financial position or results of operation.

In August 2001, the FASB issued SFAS No. 144, " Accounting for the Impairment or Disposal of Long-Lived Assets," effective for years beginning after December 15, 2001. The new rules for long-lived assets to be disposed by sale excludes the allocation of goodwill to be tested for impairment of such assets, establishes a primary asset approach to be used for the estimation of future cash flows and allows for probability-weighted future cash flow estimation for impairment testing.  The impairment testing as of the quarter ending May 31, 2003, indicated no impairment as defined by SFAS No. 144.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."  This Statement, which is effective for years ending after December 15, 2002 amends Statement No. 123, "Accounting for Stock-Based Compensation," and provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation.  In addition, Statement No. 148 amends the disclosure requirements of  Statement 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.  However, the enhanced disclosure provisions as defined by SFAS No. 148 was effective for the quarter ending May 31, 2003. 

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities."  SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."   SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003.  The adoption of this statement did not have a material impact on the Company's financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."  This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity.  In accordance with the standard, a financial instrument that embodies an obligation for the issuer is required to be classified as a liability (or an asset in some circumstances).  SFAS No. 150 is effective for financial instruments entered into of modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement is not expected to have a material impact on the Company's financial position, results of operation or cash flows.

 

Critical Accounting Policies

The Company has identified significant accounting policies that, as a result of the judgements, 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 and valuation allowance and deferred taxes.  Details regarding the Company's use of these policies and the related estimates are described in BAB's Annual Report on Form 10-KSB for the fiscal year ended November 30, 2002, filed with the Securities and Exchange Commission.  There have been no material changes to the Company's critical accounting policies that impact BAB's financial condition or results of operations for the nine months of ending August 31, 2003.

 

ITEM 3. CONTROLS AND PROCEDURES

Under the supervision of, and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) of the Securities Exchange Act of 1934 within 90 days of the filing date of this quarterly report.  Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the 90 day evaluation period.  As a result, no corrective actions were required or undertaken.

 

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES

On December 16, 2002, the Board of Directors approved a 4-for-1 stock split to all common stock shareholders of record on January 6, 2003.   This stock dividend was paid on January 20, 2003.

On May 23, 2003 the Board of Directors approved a plan to purchase 1,177,777 shares of BAB common stock at a price of $0.18 per share.  These shares will be held by the Company as treasury stock.

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

12/4/02 BAB, Inc. files notice of a change in fiscal year end.

12/18/02 BAB, Inc. declares a stock split.

05/28/03 BAB, Inc. purchases Company common stock.

7/31/03 BAB Inc., announced that its Board of Directors approved and declared a semiannual cash dividend of $0.02 per share payable to shareholders of record as of August 11, 2003.  This cash dividend was paid on August 26, 2003.

 

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 14, 2003

/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

 

 

Exhibit 21.1 SUBSIDIARIES OF BAB, INC.

 

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

 

Exhibit 31.1

BAB, Inc

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, RULES 13a-14 AND 15d-14

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BAB, Inc. (the "Company") on Form 10-QSB for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. Evans, Chief Executive Officer of the Company, certify pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

  1. I have reviewed the report;
  2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of  the circumstances under which such statements were made, not misleading;
  3. Based upon my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition and results of operations of the Company, as of, and for, the periods presented in the Report;
  4. I and the other certifying officer of the Company:

a)     are responsible for establishing and maintaining disclosure controls and procedures for the Company;

b)     have designed such disclosure controls and procedures to ensure that material information is made known to us, particularly during the period in which the Report is being prepared;

c)     have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days of the date of the Report; and

d)     have presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation.

  1. I and the other certifying officer have disclosed to the Company's auditors and to the audit committee of the Board of Directors (or persons fulfilling the equivalent function):

a)       all significant deficiencies in the design or operation of internal controls (a pre-existing term relating to internal controls  regarding financial reporting) which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weakness in  internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the  Company's internal controls.

  1. I and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

/s/ Michael W. Evans

Michael W. Evans, Chief Executive Officer, October 14, 2003

Exhibit 31.2

BAB, Inc

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, RULES 13a-14 AND 15d-14

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BAB, Inc. (the "Company") on Form 10-QSB for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey M. Gorden, Chief Financial Officer of the Company, certify pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

  1. I have reviewed the report;
  2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of  the circumstances under which such statements were made, not misleading;
  3. Based upon my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition and results of operations of the Company, as of, and for, the periods presented in the Report;
  4. I and the other certifying officer of the Company:

a)     are responsible for establishing and maintaining disclosure controls and procedures for the Company;

b)     have designed such disclosure controls and procedures to ensure that material information is made known to us,   particularly during the period in which the Report is being prepared;

c)     have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days of the date of the Report; and

d)     have presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation.

  1. I and the other certifying officer have disclosed to the Company's auditors and to the audit committee of the Board of Directors (or persons fulfilling the equivalent function):

a)      all significant deficiencies in the design or operation of internal controls (a pre-existing term relating to internal controls regarding financial reporting) which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weakness in internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls.

  1. I and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

/s/ Jeffrey M. Gorden

Jeffrey M. Gorden, Chief Financial Officer, October 14, 2003

Exhibit 32.1

BAB, Inc

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the BAB, Inc. (the "Company") Quarterly Report on Form 10-QSB for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. Evans, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

  1. The report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition, results of operations, and cash flows of the Company.

Date:  October 14, 2003                                                                        By:        /s/  MICHAEL W. EVANS                                                                                                                                   Michael W. Evans,                                                                                                                                  Chief Executive Officer          

 

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the BAB, Inc. (the "Company") Quarterly Report on Form 10-QSB for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey M. Gorden, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

  1. The report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition, results of operations, and cash flows of the Company.

 

Date:  October 14, 2003                                                               By:       /s/ JEFFREY M. GORDEN                                                                                                                        Jeffrey M. Gorden,                                                                                                                       Chief Financial Officer