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| BABB.OB > SEC Filings for BABB.OB > Form 10KSB on 20-Feb-2009 | All Recent SEC Filings |
20-Feb-2009
Annual Report
The selected financial data contained herein has been derived from the consolidated financial statements of the Company included elsewhere in this Report on Form 10-KSB. The data should be read in conjunction with the consolidated financial statements and notes thereto. 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 and disclosures contained herein and throughout this Annual Report regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). In such cases, we may use words such as "believe," "intend," "expect," "anticipate" and the like. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. 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.
The Company has 114 franchised, 3 licensed units, and 1 Company-owned store as of the end of 2008. Units in operation at the end of 2007 included 126 franchised, 2 licensed and 1 Company-owned store. System-wide revenues in 2008 were $44 million compared to $46 million in 2007.
The Company's revenues are derived primarily from the ongoing royalties paid to the Company by its franchisees, from the operation of the Company-owned store and receipt of initial 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). Also included in licensing fees and other income is Operation's Sign Shop which provides the majority of signage to franchisees and the Company-owned store, including but not limited to, posters, menu panels, build charts, outside window and counter signs for franchisee consistency and convenience.
Total revenues from all sources decreased $217,000, or 5.4%, to $3,778,000 in 2008 from $3,995,000 in the prior year primarily due to a decrease in royalty and franchise revenue and other non-traditional sources of income.
Royalty revenue from franchise stores was down $102,000, or 4.6%, to $2,116,000 in 2008 as compared to $2,218,000 in 2007. Franchise fee revenue decreased $70,000, or 29.8%, to $165,000 in 2008 versus $235,000 in 2007. The Company opened 8 stores with 5 opened at reduced fees and there were 10 transfers in 2008 versus 6 opened stores and 15 transfers in 2007. At November 30, 2008, the Company had 5 units under development, versus 7 at November 30, 2007. More new franchises are opening in developing centers which leads to longer timeframes between execution of franchise agreements and occupancy. Company-owned store revenues increased $36,000, or 7.4% to $520,000 from $484,000 in 2007. Licensing fees and other income decreased $82,000, or 7.8%, to $976,000 in 2008 as compared to $1,058,000 in 2007. The decline was due to Sign Shop revenue which decreased $106,000 and nontraditional revenue decreased $59,000, offset by an increase in defaulted and terminated franchise contract fees of $77,000 in 2008.
Total operating expenses of $3,173,000, were 84.0% of total revenues for 2008 versus $3,303,000, or 82.7%, for 2007. Total operating expenses decreased $130,000 in 2008 compared to 2007.
Corporate office payroll and payroll related expenses decreased $38,000, or 2.5% in 2008, to $1,491,000, from $1,529,000, in 2007. Advertising and promotion expense increased $16,000, or 13.0% in 2008, to $139,000, from $123,000 in 2007 primarily due to updated menu panels paid for by BAB Systems and provided to the franchisees. Professional fees increased $37,000, or 24.3%, to $189,000 in 2008, from $152,000 in 2007, and Other expenses decreased $126,000, or 21.5%, to $460,000 in 2008 from $586,000 in 2007, primarily due to a decrease of $79,000 related to Sign Shop revenues which, as noted above, decreased $106,000, a decrease of $15,000 in 2008 because there was no 401(k) match and a decrease in franchise development expenses in 2008 of $19,000. There was a reduction in depreciation and amortization expense of $6,000, or 13.3% in 2008, to $39,000, from $45,000, in 2007.
Income from operations for the period ended November 30, 2008 was $605,000 as compared to $692,000 in 2007.
Interest income decreased $37,000, to $31,000, in 2008, compared to $68,000, in 2007, as a result of lower interest rates and lower cash balances to invest.
Interest expense decreased $4,000 to $12,000 in 2008, compared to $16,000 in 2007, primarily due to a decrease in outstanding debt. The Company paid off its outstanding bank debt in July, 2007.
Net income totaled $623,000, or 16.5% of revenue in 2008 as compared to $1,244,000, or 31.1% of revenue in the prior year. Included in 2007 net income was a non-cash $500,000 deferred tax benefit recognized for a reduction in the valuation reserve associated with the tax benefit of net operating loss carryforwards for income tax purposes. The 2007 percentage of net income to revenue without the $500,000 tax adjustment was 18.6%
The net cash provided from operating activities totaled $503,000 during 2008. Cash provided from operating activities is comprised of net income of $623,000, plus depreciation and amortization of $39,000 and share-based compensation of $25,000 and bad debt of $2,000, plus changes in trade accounts receivable of $2,000, marketing fund contributions receivable of $24,000, notes receivable of $2,000, accounts payable of $9,000 and unexpended Marketing Fund contributions of $1,000, less changes in restricted cash of $22,000, inventory of $7,000, prepaid expenses and other of $16,000, accrued liabilities of $57,000 and deferred revenue of $120,000. Cash provided from operating activities in 2007 totaled $673,000, comprised of net income of $1,244,000, plus depreciation and amortization of $45,000 and share-based compensation of $34,000, less bad debt of $5,000 and deferred tax benefit of $500,000, plus changes in notes receivable of $12,000, inventory of $2,000 and unexpended Marketing Fund contributions of $67,000, less changes in trade accounts receivable of $11,000, restricted cash of $38,000, Marketing Fund contributions receivable of $7,000, prepaid expenses and other of $29,000, accounts payable of $15,000, accrued liabilities of $74,000 and deferred revenue of $51,000.
Cash used for investing activities during 2008 totaled $57,000, consisting of purchase of equipment of $1,000 and trademark renewal expenditures of $56,000. Cash used for investing activities during 2007 totaled $57,000, consisting of the purchase of equipment of $19,000 and trademark renewal expenditures of $38,000.
Financing activities used $750,000 during 2008, due to the repayment of notes payable of $23,000 and the payment of dividends equal to $727,000. Financing activities used $898,000 during 2007, due to the repayment of notes payable of $193,000 and the payment of dividends equal to $726,000, offset by proceeds of $21,000 from the exercise of options.
Although there can be no assurances that the Company will be able to pay dividends in the future, it is the Company's intent that future dividends will be considered after reviewing returns to shareholders, profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company's intent going forward to declare and pay cash dividends on a quarterly basis. On December 4, 2008, the Board of Directors authorized a $0.02 per share quarterly cash dividend. The dividend was paid January 2, 2009 to shareholders of record as of December 18, 2008.
The Company believes execution of its dividend policy will not have any material adverse effects on its cash or its ability to fund current operations or future capital investments.
The Company has no financial covenants on its outstanding debt.
The Company has no off balance sheet arrangements, other than the lease commitments disclosed in Note 7 of the audited consolidated financial statements included herein.
The Company's significant accounting policies are presented in the Notes to the Consolidated Financial Statements (see Note 2 of the audited consolidated financial statements included herein). While all of the significant accounting policies impact the Company's Consolidated Financial Statements, some of the policies may be viewed to be more critical. The more critical policies are those that are most important to the portrayal of the Company's financial condition and results of operations and that require management's most difficult, subjective and/or complex judgments and estimates. Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of judgments and estimates form the basis for making judgments about the Company's value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions. Management believes the following are its most critical accounting policies because they require more significant judgments and estimates in preparation of its consolidated financial statements.
Revenue Recognition
Royalty fees represent a 5% charge on franchised stores' net retail and wholesale sales. Royalty revenues are recognized on the accrual basis using estimates based on past history and seasonality.
The Company recognizes franchise fee revenue upon the opening of a franchise store. Direct costs associated with the franchise sales are deferred until the franchise fee revenue is recognized. These costs include site approval, construction approval, commissions, blueprints and training costs.
The Company earns a licensing fee from the sale of BAB branded products, which include coffee, cream cheese, muffin mix and par baked bagels from a third-party commercial bakery to the franchised and licensed units.
Long-Lived Assets
Property and equipment are recorded at cost. Improvements and replacements are capitalized, while expenditures for maintenance and routine repairs that don't extend the life of the asset are charged to expense as incurred. Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets. Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation. Estimated useful lives for the purpose of depreciation and amortization are 3 to 7 years for property and equipment and 10 years, or the term of the lease if less, for leasehold improvements.
The Company's intangible assets consist primarily of trademarks and goodwill. SFAS 142, "Goodwill and Other Intangible Assets" requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests. The Company no longer amortizes goodwill or trademarks. No impairment was recorded for the years ended November 30, 2008 and 2007. (See Note 2 of the audited consolidated financial statements included herein.)
Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of royalty and wholesale accounts receivables. Amounts due from franchisees represented approximately 67% and 61% of the receivable balance at November 30, 2008 and 2007, respectively. The Company believes it has maintained adequate reserves for doubtful accounts. The Company reviews the collectibility of receivables periodically taking into account payment history and industry conditions.
Valuation Allowance and Deferred Taxes
A valuation allowance is the portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.
As of November 30, 2008, the Company has cumulative net operating loss carryforwards expiring between 2012 and 2021 for U.S. federal income tax purposes of approximately $6,049,000. A valuation allowance has been established for $1,489,000 at November 30, 2008 for the deferred tax benefit related to those loss carryforwards and other deferred tax assets for which it is considered more likely than not that the benefit will not be realized. (See Note 3 of the audited consolidated financial statements included herein.)
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("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. Effective December 1, 2007, the Company adopted FIN No. 48. The Company files a consolidated U.S. income tax return and tax returns in various state jurisdictions. Review of the Company's possible tax uncertainties as of November 30, 2008 did not result in any positions requiring disclosure. Should the Company need to record interest and/or penalties related to uncertain tax positions or other tax authority assessments, it would classify such expenses as part of the income tax provision. The Company has not changed any of its tax policies or adopted any new tax positions during the fiscal year ended November 30, 2008 and believes it has filed appropriate tax returns in all jurisdictions for which it has nexus. This review included the Company's net deferred income tax asset of $500,000, which management believes will be realized over future profitable years.
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, and interim periods within those
fiscal years. Effective December 1, 2007, the Company adopted SFAS No.
157. Adoption of SFAS No. 157 had no material impact on the Company's
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities to measure at fair value many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Effective December 1, 2007, the Company adopted SFAS No. 159. Adoption of SFAS No. 159 had no material effect on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces FASB Statement No. 141. SFAS No. 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 No. 141R is effective for fiscal years beginning after December 15, 2008 (Company's Fiscal 2010). The Company does not believe adoption of SFAS No. 141R will have a material effect on the Company's current consolidated financial statements, but would impact any future business combinations entered into after adoption of the pronouncement.
In December 2007, the FASB issued SFAS No. 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 No. 160 is effective for fiscal years beginning after December 15, 2008 (Company's Fiscal 2010). The Company does not believe adoption of SFAS No. 160 will have a material effect on the Company's consolidated financial statements.
In May 2008 the FASB issued 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 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 No. 162 will have a material effect on the Company's consolidated financial statements.
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