BAB, INC. - Annual Report: 2009 (Form 10-K)
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
one)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended: November 30, 2009
o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ______ to ______
Commission
file number: 0-31555
BAB,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
36-4389547
|
(State
or other jurisdiction of incorporation)
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(IRS
Employer or organization Identification
No.)
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500 Lake
Cook Road, Suite 475 Deerfield, Illinois 60015
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number: (847) 948-7520
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name of
exchange on which registered
|
||
Common Stock
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NASDAQ/OTC
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Securities
registered pursuant to Section 12(g) of the Act:
None
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(Title of
Class)
Indicate
by check mark if the issuer is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes x No
Indicate
by check mark whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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. x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). o Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large Accelerated Filer o, Accelerated
Filer o,
Non-Accelerated Filer o, Smaller Reporting
Company x.
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
State
issuer's revenues for its most recent fiscal year: $3,172,905
The
aggregate market value of the voting common equity held by nonaffiliates as of
the last business day of the registrant’s most recently completed second fiscal
quarter was: $1,562,766 based on 3,811,625 shares held by nonaffiliates as of
May 31, 2009; Closing price ($.41) for said shares in the NASDAQ OTC Bulletin
Board as of such date.
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 7,263,508 shares of Common Stock,
as of February 12, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
See index
to exhibits
FORM 10-K INDEX
PART
I
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Item
1
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3
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Item 1A | Risk Factors | 7 |
Item
2
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7
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Item
3
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7
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Item
4
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7
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PART
II
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Item
5.
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8
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Item
6.
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9
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Item
7.
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9
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Item
7A.
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13
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Item
8.
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14
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Item
9.
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32
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Item
9A.
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32
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Item
9B
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32
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PART
III
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Item
10.
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33
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Item
11.
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33
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Item
12.
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35
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Item
13.
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36
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Item
14.
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37
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PART
IV
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Item
15.
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38
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PART I
ITEM
1. DESCRIPTION OF BUSINESS
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. 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, 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. My Favorite
Muffin Too, Inc., a New Jersey corporation, was acquired on May 13,
1997. My Favorite Muffin Too, Inc. franchises (“MFM”) concept muffin
stores. The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were
acquired on February 1, 1999. All branded wholesale business uses this
trademark.
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 and
muffin retail units under the Big Apple Bagels ("BAB") and My Favorite Muffin
("MFM") trade names. At November 30, 2009, the Company had 108 units in
operation in 26 states, including 2 International units in United Arab
Emirates. The Company additionally derives income from the sale of its trademark
bagels, muffins and coffee through nontraditional channels of distribution
including under licensing agreements with Mrs. Fields Famous Brands (Mrs.
Fields), Kohr Bros. Frozen Custard and through direct home delivery of
specialty muffin gift baskets and coffee.
The BAB
brand franchised and Company-owned stores feature daily baked bagels, flavored
cream cheeses, premium coffees, gourmet bagel sandwiches and other related
products. Licensed BAB units serve the Company's par-baked frozen bagel and
related products baked daily. BAB units are primarily concentrated in the
Midwest and Western United States. The MFM brand consists of units
operating as "My Favorite Muffin," featuring a large variety of freshly baked
muffins, coffees and related products, and units operating as "My Favorite
Muffin and Bagel Cafe," featuring these products as well as a variety of
specialty bagel sandwiches and related products. MFM units are primarily
in the Middle Atlantic States. Although the Company doesn't actively
market Brewster's stand-alone franchises, Brewster's coffee products are sold in
the Company-owned store and most franchised
units.
The
Company has grown significantly since its initial public offering through growth
in franchise units and the development of alternative distribution channels for
its branded products. The Company is leveraging on the natural synergy of
distributing muffin products in existing BAB units and, alternatively, bagel
products and Brewster's Coffee in existing MFM units. The Company expects to
continue to realize efficiencies in servicing the combined base of BAB and MFM
franchisees.
Operating
Loss
The
Company reported a net loss of $2,066,000 for the year ended November 30, 2009,
and net income of $623,000 for the year ended November 30, 2008. The 2009
net loss was due to a goodwill impairment of $2,399,000 recorded in the first
quarter of 2009 (see Note 2, Goodwill and Other Intangible Assets). Excluding
the goodwill impairment, the Company had net income of $333,000. The
Company believes that with its continued focus on franchising and licensing
operations and cost control it will be profitable.
Food Service
Industry
Food
service businesses are often affected by changes in consumer tastes; national,
regional, and local economic conditions; demographic trends; traffic patterns;
and the type, number and location of competing restaurants. Multi-unit food
service chains, such as the Company's, can also be substantially adversely
affected by publicity resulting from problems with food quality, illness, injury
or other health concerns or operating issues stemming from one store or a
limited number of stores. The food service business is also subject to the risk
that shortages or interruptions in supply caused by adverse weather or other
conditions could negatively affect the availability, quality and cost of
ingredients and other food products. In addition, factors such as inflation,
increased food and labor costs, regional weather conditions, availability and
cost of suitable sites and the availability of experienced management and hourly
employees may also adversely affect the food service industry in general and the
Company's results of operations and financial condition in particular.
CUSTOMERS
The
Company-owned store sells to the general public; therefore, the Company is not
dependent on a particular customer or small group of customers. Regarding
the Company's franchising operation, the franchisees represent a varied
geographic and demographic group. Among some of the primary services the
Company provides to its franchisees are marketing assistance, training,
time-tested successful recipes, bulk purchasing discounts, food service
knowledgeable personnel and brand recognition.
SUPPLIERS
The
Company's major suppliers are Coffee Bean International, Dawn Food Products,
Inc., Schreiber Foods, Hawkeye Foodservice and Coca-Cola.
The Company is not dependent on any of these suppliers for future growth and
profitability since the products purchased from these suppliers are available
from other sources.
LOCATIONS
The
Company has 105 franchised locations, 2 licensees and 1 Company-owned
store. Of the 105 locations, 103 are located in 25 states and 2
International units are located in the United Arab Emirates.
STORE
OPERATIONS
BIG APPLE
BAGELS--BAB franchised and the Company-owned store daily bake a variety of fresh
bagels and offer up to 11 varieties of cream cheese spreads. Stores
also offer a variety of breakfast and lunch bagel sandwiches, salads, soups,
various dessert items, fruit smoothies, gourmet coffees and other beverages. A
typical BAB store is in an area with a mix of both residential and
commercial properties and ranges from 1,500 to 2,000 square feet. The Company's
current store design is approximately 1,800 square feet, with seating capacity
for 20 to 30 persons, and includes 750 square feet devoted to production and
baking. A satellite store is typically smaller than a production store,
averaging 600 to 1,000 square feet. Although franchise stores may vary in size
from the Company-owned store and from other franchise stores, store layout is
generally consistent.
MY
FAVORITE MUFFIN--MFM franchised stores bake 20 to 25 varieties of muffins daily,
from over 250 recipes, plus a variety of bagels. They also serve gourmet
coffees, beverages and, at My Favorite Muffin and Bagel Cafe locations, a
variety of bagel sandwiches and related products. While some MFM units are
located in shopping malls with minimal square footage of 400 to 800 square feet,
the typical retail center prototype unit is approximately 1,800 square feet with
seating for 20 to 30 persons.
BREWSTER'S
COFFEE--Although the Company doesn't have, or actively market, Brewster's
stand-alone franchises, Brewster's coffee products are sold in the Company-owned
store and most of the franchised units.
FRANCHISING
The
Company requires payment of an initial franchise fee per store, plus an ongoing
5% royalty on net sales. Additionally, BAB and MFM franchisees are members of
a marketing fund requiring an ongoing 3% contribution, consisting of 1% for
general system-wide marketing, and 2% for the local advertising and marketing.
The Company currently requires a franchise fee of $25,000 on a franchisee's
first full production BAB or MFM store. The fee for subsequent production stores
is $20,000.
The
Company's current Franchise Disclosure Document (“FDD”) provides for,
among other things, the opportunity for prospective franchisees to enter into a
Preliminary Agreement for their first production store. This agreement enables a
prospective franchisee a period of 60 days in which to locate a site. The fee
for this Preliminary Agreement is $10,000. If a site is not located and approved
by the franchisor within the 60 days, the prospective franchisee will receive a
refund of $7,000. If a site is approved, the entire $10,000 will be applied
toward the initial franchise fee. See also last paragraph under
"Government Regulation" section in this 10-K.
The
Company's Franchise Agreement provides a franchisee with the right to develop
one store at a specific location. Each Franchise Agreement is for a term of 10
years with the right to renew. Franchisees are expected to be in operation no
later than 10 months following the signing of the Franchise
Agreement.
The
Company currently advertises its franchising opportunities in directories,
newspapers, the internet and business opportunity magazines
worldwide. In addition, prospective franchisees contact the Company
as a result of patronizing an existing store.
COMPETITION
The quick
service restaurant industry is intensely competitive with respect to product
quality, concept, location, service and price. There are a number of national,
regional and local chains operating both owned and franchised stores which
compete with the Company on a national level or solely in a specific market or
region. The Company believes that because the industry is extremely fragmented,
there is a significant opportunity for expansion in the bagel, muffin and coffee
concept chains.
The
Company believes the primary direct competitors of its bagel concept units are
Bruegger's Bagel Bakery and New World Coffee-Manhattan Bagel Inc., which
operates under Einstein Bros. Bagels, Noah's NY Bagel and Manhattan Bagel Bakery
brands. There are several other regional bagel chains with fewer than 50
stores, all of which may compete with the Company. There is no major national
competitor in the muffin business, but there are a number of local and regional
operators. Additionally, the Company competes directly with a number of
national, regional and local coffee concept stores and brand names.
The
Company also competes against numerous small, independently owned bagel bakeries
and national fast food restaurants, such as Dunkin' Donuts, McDonald's, Panera
and Starbucks that offer bagels, muffins, coffee and related products as part of
their product offerings. In the supermarket bakery sections, the Company's
bagels compete against Thomas' Bagels and other brands of fresh and frozen
bagels. Certain of these competitors may have greater product and name
recognition and larger financial, marketing and distribution capabilities than
the Company. In addition, the Company believes the startup costs
associated with opening a retail food establishment offering similar products on
a stand-alone basis are competitive with the startup costs associated with
opening its concept stores and, accordingly, such startup costs are not an
impediment to entry into the retail bagel, muffin or coffee
businesses.
The
Company believes that its stores compete favorably in terms of food quality and
taste, convenience and customer service and value, which the Company believes
are important factors to its targeted customers. Competition in the food
service industry is often affected by changes in consumer tastes, national,
regional and local economic and real estate conditions, demographic trends,
traffic patterns, the cost and availability of labor, consumer purchasing power,
availability of product and local competitive factors. The Company
attempts to manage or adapt to these factors, but not all such factors are
within the Company's control and such factors could cause the Company and some,
or all, of its franchisees to be adversely affected.
The
Company competes for qualified franchisees with a wide variety of investment
opportunities in the restaurant business, as well as other industries.
Investment opportunities in the bagel bakery cafe business include franchises
offered by New World Coffee-Manhattan Bagel Inc. The Company's continued
success is dependent on its reputation for providing high quality and value with
respect to its service, products and franchises. This reputation may be affected
not only by the performance of the Company-owned store but also by the
performance of its franchise stores, over which the Company has limited control.
TRADEMARKS
AND SERVICE MARKS
The
trademarks, trade names and service marks used by the Company contain common
descriptive English words and thus may be subject to challenge by users of these
words, alone or in combination with other words, to describe other services or
products. Some persons or entities may have prior rights to these names or marks
in their respective localities. Accordingly, there is no assurance that such
names and marks are available in all locations. Any challenge, if successful, in
whole or in part, could restrict the Company's use of the names and marks in
areas in which the challenger is found to have used the name or mark prior to
the Company's use. Any such restriction could limit the expansion of the
Company's use of the names or marks into that region, and the Company and its
franchisees may be materially and adversely affected.
The
trademarks and service marks "Big Apple Bagels," "Brewster's Coffee" and "My
Favorite Muffin" are registered under applicable federal trademark law. These
marks are licensed by the Company to its franchisees pursuant to Franchise
Agreements. In February 1999, the Company acquired the trademark of
"Jacobs Bros. Bagels" upon purchasing certain assets of Jacobs Bros. The "Jacobs
Bros. Bagels" mark is also registered under applicable federal trademark
law.
The
Company is aware of the use by other persons and entities in certain geographic
areas of names and marks which are the same as or similar to the Company's names
and marks. Some of these persons or entities may have prior rights to those
names or marks in their respective localities. Therefore, there is no assurance
that the names and marks are available in all locations. It is the Company's
policy to pursue registration of its names and marks whenever possible and to
vigorously oppose any infringement of its names and marks.
GOVERNMENT
REGULATION
The
Company is subject to the Trade Regulation Rule of the Federal Trade Commission
(the "FTC") entitled “Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures'' (the "FTC Franchise Rule") and
state and local laws and regulations that govern the offer, sale and termination
of franchises and the refusal to renew franchises. Continued compliance with
this broad federal, state and local regulatory network is essential and costly;
the failure to comply with such regulations may have a material adverse effect
on the Company and its franchisees. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could limit the Company's ability to sell franchises or subject
the Company and its affiliates to rescission offers, monetary damages,
penalties, imprisonment and/or injunctive proceedings. In addition, under court
decisions in certain states, absolute vicarious liability may be imposed upon
franchisors based upon claims made against franchisees. Even if the Company is
able to obtain insurance coverage for such claims, there can be no assurance
that such insurance will be sufficient to cover potential claims against the
Company.
The
Company and its franchisees are required to comply with federal, state and local
government regulations applicable to consumer food service businesses, including
those relating to the preparation and sale of food, minimum wage requirements,
overtime, working and safety conditions, citizenship requirements, as well as
regulations relating to zoning, construction, health and business licensing.
Each store is subject to regulation by federal agencies and to licensing and
regulation by state and local health, sanitation, safety, fire and other
departments. Difficulties or failures in obtaining the required licenses or
approvals could delay or prevent the opening of a new Company-owned or franchise
store, and failure to remain in compliance with applicable regulations could
cause the temporary or permanent closing of an existing store. The Company
believes that it is in material compliance with these provisions. Continued
compliance with these federal, state and local laws and regulations is costly
but essential, and failure to comply may have an adverse effect on the Company
and its franchisees.
The
Company's franchising operations are subject to regulation by the FTC under the
Uniform Franchise Act which requires, among other things, that the Company
prepare and periodically update a comprehensive disclosure document known as a
FDD in connection with the sale and operation of its franchises. In addition,
some states require a franchisor to register its franchise with the state before
it may offer a franchise to a prospective franchisee. The Company believes its
FDD, together with any applicable state versions or supplements, comply with
both the FTC guidelines and all applicable state laws regulating franchising in
those states in which it has offered franchises.
The
Company is also subject to a number of state laws, as well as foreign laws (to
the extent it offers franchises outside of the United States), that regulate
substantive aspects of the franchisor-franchisee relationship, including, but
not limited to, those concerning termination and non-renewal of a
franchise.
EMPLOYEES
As of
November 30, 2009, the Company employed 24 persons, consisting of 9 working
in the Company-owned store, of which 8 are part-time employees. The
remaining employees are responsible for corporate management and oversight,
accounting, advertising and franchising. None of the Company's employees
are subject to any collective bargaining agreements and management considers its
relations with its employees to be good.
ITEM
1A. RISK FACTORS
Not
required for smaller reporting companies.
ITEM 2. PROPERTIES
The
Company's principal executive office, consisting of approximately 7,150 square
feet, is located in Deerfield, Illinois and is leased pursuant to a lease
expiring February 28, 2011. Additionally, the Company leases space for its
Company-owned store. The first option to renew the Company-owned store lease was
executed on January 1, 2007 for a term of five years with one additional five
year renewal option available.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
PART
II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The
following table sets forth the quarterly high and low sale prices for the
Company's common stock, as reported in the Nasdaq Small Cap Market for the two
years ended November 30, 2009 and 2008. The Company's common stock is
traded on the NASDAQ OTC-Bulletin Board under the symbol
"BABB."
Year
Ended: November 30, 2009
|
Low
|
High
|
||||||
First
quarter
|
0.41 | 0.92 | ||||||
Second
quarter
|
0.36 | 0.59 | ||||||
Third
quarter
|
0.35 | 0.51 | ||||||
Fourth
quarter
|
0.36 | 0.50 | ||||||
Year
Ended: November 30, 2008
|
Low
|
High
|
||||||
First
quarter
|
0.76 | 1.00 | ||||||
Second
quarter
|
0.80 | 1.00 | ||||||
Third
quarter
|
0.78 | 0.95 | ||||||
Fourth
quarter
|
0.62 | 1.10 |
As of
February 12, 2010, the Company's Common Stock was held by 171 holders of record.
Registered ownership includes nominees who may hold securities on behalf of
multiple beneficial owners. The Company estimates that the number of beneficial
owners of its common stock at February 12, 2010, is approximately 1,300 based
upon information provided by a proxy services firm.
STOCK
OPTIONS
In May
2001, the Company's Board of Directors approved a Long-Term Incentive and Stock
Option Plan (Plan), with an amendment in May 2003 to increase the Plan from the
reserve of 1,100,000 shares to 1,400,000 shares of Common Stock for grant.
A total of 1,400,000 stock options have been granted to directors,
officers and employees. In 2009 and 2008, no options were
granted. As of February 12, 2010, there were 1,031,627 stock options
exercised or forfeited under the Plan. (See Note 6 of the audited
consolidated financial statements included herein.)
DIVIDEND
POLICY
The Board
of Directors of the Company declared a quarterly cash dividend of $.02 per share
on December 4, 2008, to be paid on January 2, 2009 in the amount of $145,270 to
stockholders of record as of December 18, 2008. The Board of
Directors of the Company declared a quarterly cash dividend of $.01 per share on
March 9, May 22 and September 7, 2009. These dividends were payable
on April 13, July 8, and October 5, 2009, respectively, in the amount of $72,635
each. On December 7, 2009, the Board of Directors authorized a $.01
per share quarterly cash dividend in the amount of $72,635. The
dividend was paid January 4, 2010 to shareholders of record as of December 21,
2009.
The Board
of Directors of the Company declared quarterly cash dividends of $.02 per share
on March 5, June 13, and September 10, 2008. These dividends were
payable on April 10, July 8, and October 6, 2008, respectively, in the amount of
$145,270 each.
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 based on 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 if warranted.
ITEM 6. SELECTED FINANCIAL DATA
Not
required for smaller reporting companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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-K. 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.
GENERAL
The
Company has 105 franchised, 2 licensed units, and 1 Company-owned store as
of the end of 2009. Units in operation at the end of 2008 included 114
franchised, 3 licensed and 1 Company-owned store. System-wide revenues in
2009 were $38 million compared to $44 million in 2008.
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 for franchise
consistency and convenience the majority of signage to franchisees and the
Company-owned store, including but not limited to, posters, menu panels, build
charts, outside window stickers and counter signs.
YEAR
2009 COMPARED TO YEAR 2008
Total
revenues from all sources decreased $605,000, or 16.0%, to $3,173,000 in 2009
from $3,778,000 in the prior year primarily due to a decrease in all sources of
income.
Royalty
revenue from franchise stores was down $274,000, or 12.9%, to $1,842,000 in 2009
as compared to $2,116,000 in 2008. Franchise fee revenue decreased
$83,000, or 50.3%, to $82,000 in 2009 versus $165,000 in 2008. The Company
opened 4 stores with 1 opened at reduced fees and there were 3 transfers in 2009
versus 8 opened stores, 5 at reduced fees and 10 transfers in
2008. At November 30, 2009 the Company had 2 units under development
versus 5 at November 30, 2008. Company-owned store revenues decreased
$52,000 or 10.0%, to $468,000 from $520,000 in 2008. Licensing fees
and other income decreased $195,000, or 20.0%, to $781,000 in 2009 as compared
to $976,000 in 2008. The decline was primarily due to decreases in 2009
license fee revenues of $95,000, defaulted and terminated franchise contract
fees of $42,000 and non-redeemed gift certificate revenue of $36,000 compared to
2008.
Total
operating expenses excluding goodwill impairment were $2,844,000, or 89.6%, of
total revenues for 2009 versus $3,173,000, or 84.0%, for 2008. Total operating
expenses excluding goodwill impairment decreased $329,000 in 2009 compared to
2008. Including the goodwill impairment of $2,399,000 the total 2009
expenses were $5,243,000 or an increase of $2,070,000 compared to
2008.
Expenses
for Company-owned stores decreased $34,000, or 5.4%, in 2009, to $592,000, from
$626,000 in 2008. Cost of goods sold 2009 decreased $27,000, or
16.1%, to $141,000 in 2009 compared to $168,000 in 2008. Cost of
goods sold percentage to sales decreased 2.1% in 2009 to 30.2% compared to 32.3%
in 2008.
Corporate
office payroll and payroll related expenses decreased $202,000, or 13.5%, in
2009, to $1,289,000, from $1,491,000, in 2008. Advertising and promotion expense
decreased $65,000, or 46.8%, in 2009, to $74,000, from $139,000 in 2008
primarily due to reducing advertising, negotiating lower prices and placing
advertisements in less expensive publications. Travel decreased
$16,000, or 18.0%, to $73,000 in 2009, from $89,000 in 2008 due to better cost
control and operational efficiencies. There was a reduction in
depreciation and amortization expense of $8,000, or 20.5%, in 2009, to $31,000,
from $39,000, in 2008. Goodwill impairment was $2,399,000 in 2009
versus no impairment in 2008.
Income
from operations, excluding goodwill impairment, for the period ended November
30, 2009 was $329,000 as compared to $605,000 in 2008. Loss from
operations including goodwill impairment for 2009 was $2,070,000.
Interest
income decreased $16,000, to $15,000, in 2009, compared to $31,000, in 2008, as
a result of lower interest rates and lower cash balances to invest.
Interest
expense decreased $1,000 to $11,000 in 2009, compared to $12,000 in 2008,
primarily due to a decrease in outstanding debt.
Net
income before tax, excluding goodwill impairment totaled $333,000, or 10.5%, of
revenue in 2009 as compared to $623,000, or 16.5%, of revenue in the prior
year. Income tax expense for 2009 was $252,000, which relates to
increasing the valuation allowance for deferred tax assets which are more likely
than not to be realized. There were no taxes for 2008. The net
loss for 2009 including goodwill impairment and tax expense was
$2,318,000. The 2009 goodwill impairment of $2,399,000 was a non-cash
expense and no further impairment of goodwill is anticipated at this
time.
LIQUIDITY
AND CAPITAL RESOURCES
The net
cash provided from operating activities totaled $279,000 during 2009. Cash
provided from operating activities is comprised of a net loss of $2,318,000,
plus depreciation and amortization of $31,000, goodwill impairment of
$2,399,000, tax valuation expense of $252,000, share-based compensation of
$10,000 and bad debt of $36,000, plus changes in restricted cash of $82,000,
inventories of $13,000 and prepaid expenses and other of $40,000, less changes
in trade accounts and notes receivable of $35,000, marketing fund contributions
receivable of $1,000, accounts payable of $12,000, accrued liabilities of
$45,000, unexpended Marketing Fund contributions of $81,000 and deferred revenue
of $92,000. Cash provided from operating activities in 2008 totaled
$504,000, comprised of net income of $623,000, plus depreciation and
amortization of $39,000, share-based compensation of $25,000 and bad debt of
$2,000, plus changes in trade accounts and notes receivable of $4,000, marketing
fund contributions receivable of $24,000, 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 used
for investing activities during 2009 totaled $26,000, consisting of purchase of
equipment of $1,000 and trademark renewal expenditures of
$25,000. Cash used for investing activities during 2008 totaled
$57,000, consisting of the purchase of equipment of $1,000 and trademark renewal
expenditures of $56,000.
Financing
activities used $387,000 during 2009, due to the repayment of notes payable of
$24,000 and the payment of dividends equal to $363,000. 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.
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
based on 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 if
warranted. On December 7, 2009, the Board of Directors authorized a
$0.01 per share quarterly cash dividend. The dividend was paid
January 4, 2010 to shareholders of record as of December 21, 2009.
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.
OFF
BALANCE SHEET ARRANGEMENTS
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.
CRITICAL
ACCOUNTING POLICIES
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 from franchised stores represent a fee of 5% on net retail and wholesale
sales of franchised units. Royalty revenues are recognized on an
accrual basis using actual franchise receipts. Generally, franchisees
report and remit royalties on a weekly basis. The majority of
month-end receipts are recorded on an accrual basis based on actual numbers from
reports received from franchisees shortly after the
month-end. Estimates are utilized in certain instances where actual
numbers have not been received and such estimates are based on the last 10
weeks’ average.
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
includes 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.
Following
the guidelines contained in ASC 350, the corporation tests goodwill and
intangible assets that are not subject to amortization for impairment annually
or more frequently if events or circumstances indicate that impairment is
possible. Goodwill and intangible assets were tested at the end of
the first fiscal quarter, February 28, 2009 and it was found that the carrying
value of goodwill and intangible assets were impaired.
An
impairment test was performed at February 28, 2009 based on a discounted cash
flow model using management’s business plan projected for expected future cash
flows. Based on the computation of the discounted cash flows, it was
determined that the fair value of goodwill and intangible assets exceeded their
carrying value by $2,399,000.
A charge
of $2,399,000 was recorded for the year ended November 30, 2009 after the
impairment testing was completed during the first quarter
2009. Management does not believe that any further impairment exists
at November 30, 2009. There was no impairment charge recorded in
2008. (See Note 2 of the 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. 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, 2009, the Company has cumulative net operating loss carryforwards
expiring between 2012 and 2029 for U.S. federal income tax purposes of
approximately $6,209,000. A valuation allowance has been established
for $2,025,000 at November 30, 2009 for the deferred tax benefit related to
those loss carryforwards and other net 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 April
2008, the FASB issued new standards which provided guidance on how to determine
the useful life of intangible assets by amending the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets. This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. These
standards are effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years
and will be adopted beginning in the first quarter of fiscal
2010. The adoption of this guidance is not expected to have any
impact on our consolidated financial position, cash flows or results of
operations.
In April
2009, the FASB issued additional guidance under the “Financial Instruments
Topic” of the ASC.
This topic requires disclosure of the carrying amount and the
fair value of all financial instruments for interim and annual financial
statements of SEC-reporting entities (even if the financial instrument is not
recognized in the balance sheet), including the methods and significant
assumptions used to estimate the fair values and any changes in such methods and
assumptions. This topic also requires disclosures in summarized
financial information in interim financial statements. The Company
adopted this additional guidance as of November 30, 2009. The
adoption of this additional guidance did not have any impact on our consolidated
financial position, cash flows or results of operations.
In May
2009, the FASB issued new standards for subsequent events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The new standards are effective for interim and annual
reporting periods ending after June 15, 2009. We adopted the new standards
during fiscal 2009 and, as the pronouncement only requires additional
disclosures, the adoption did not have an impact on our consolidated financial
position, cash flows or results of operations. We have evaluated
subsequent events through February 23, 2010, the date that these consolidated
financial statements were issued.
In June
2009, the FASB issued the FASB Accounting Standards Codification (the
“Codification”) for financial statements issued for interim and annual periods
ending after September 15, 2009, which was effective for us beginning in the
fourth quarter of fiscal 2009. The Codification became the single authoritative
source for GAAP. Accordingly, previous references to GAAP accounting standards
are no longer used in our disclosures, including these Notes to the Financial
Statements. The Codification does not affect our consolidated financial
position, cash flows or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
In regard
to interest, foreign currency, and commodity price risk the Company does not
believe that these are significant risk factors.
ITEM 8. FINANCIAL STATEMENTS
The
Consolidated Financial Statements and Report of Independent Registered Public
Accounting Firm is included immediately following.
BAB,
Inc.
Years
Ended November 30, 2009 and 2008
C o n t e n t
s
Report
of Independent Registered Public Accounting Firm
|
15
|
Consolidated
Balance Sheets
|
16
|
Consolidated
Statements of Income
|
17
|
Consolidated
Statements of Stockholders’
Equity
|
18
|
Consolidated
Statements of Cash Flows
|
19
|
Notes
to Consolidated Financial Statements
|
20
|
Report
of Independent Registered Public Accounting Firm
Stockholders
and Board of Directors of BAB, Inc.
We have
audited the accompanying consolidated balance sheets of BAB, Inc. as of November
30, 2009 and 2008 and the related consolidated statements of income,
stockholders’ equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BAB, Inc. as of November 30,
2009 and 2008, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
By: /s/
Frank L. Sassetti & Company
Oak Park,
Illinois
February
23, 2010
BAB,
Inc
Consolidated
Balance Sheets
November
30, 2009 and 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 1,072,526 | $ | 1,207,108 | ||||
Restricted
cash
|
211,748 | 293,994 | ||||||
Receivables
|
||||||||
Trade
accounts and notes receivable (net of allowance for doubtful accounts of
$8,712 in 2009 and $3,841 in 2008)
|
103,346 | 104,153 | ||||||
Marketing
fund contributions receivable from franchisees and stores
|
14,209 | 13,245 | ||||||
Inventories
|
37,946 | 51,331 | ||||||
Prepaid
expenses and other current assets
|
105,981 | 145,953 | ||||||
Total
Current Assets
|
1,545,756 | 1,815,784 | ||||||
Property,
plant and equipment (net of accumulated depreciation of $575,407 in 2009
and $554,111 in 2008)
|
27,834 | 47,980 | ||||||
Trademarks
|
434,960 | 763,667 | ||||||
Goodwill
|
1,493,771 | 3,542,772 | ||||||
Definite
lived intangible assets (net of accumulated amortization of $113,494 in
2009 and $103,560 in 2008)
|
79,794 | 86,324 | ||||||
Deferred
tax asset
|
248,000 | 500,000 | ||||||
Total
Noncurrent Assets
|
2,284,359 | 4,940,743 | ||||||
Total
Assets
|
$ | 3,830,115 | $ | 6,756,527 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Current
portion of long-term debt
|
$ | 25,292 | $ | 24,145 | ||||
Accounts
payable
|
36,975 | 49,353 | ||||||
Accrued
expenses and other current liabilities
|
268,077 | 313,329 | ||||||
Unexpended
marketing fund contributions
|
173,211 | 254,493 | ||||||
Deferred
franchise fee revenue
|
30,000 | 125,000 | ||||||
Deferred
licensing revenue
|
39,583 | 36,996 | ||||||
Total
Current Liabilities
|
573,138 | 803,316 | ||||||
Long-term
debt (net of current portion)
|
179,078 | 204,371 | ||||||
Total
Noncurrent Liabilities
|
179,078 | 204,371 | ||||||
Total
Liabilities
|
752,216 | 1,007,687 | ||||||
Stockholders'
Equity
|
||||||||
Common
stock ($.001 par value; 15,000,000 shares authorized; 8,466,953 shares
issued and 7,263,508 shares outstanding as of November 30, 2009 and
2008
|
13,508,257 | 13,508,257 | ||||||
Additional
paid-in capital
|
967,441 | 957,264 | ||||||
Treasury
stock
|
(222,781 | ) | (222,781 | ) | ||||
Accumulated
deficit
|
(11,175,018 | ) | (8,493,900 | ) | ||||
Total
Stockholders' Equity
|
3,077,899 | 5,748,840 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 3,830,115 | $ | 6,756,527 |
See
accompanying notes
BAB,
Inc
Consolidated
Statements of Income
November
30, 2009 and 2008
2009
|
2008
|
|||||||
REVENUES
|
||||||||
Royalty
fees from franchised stores
|
$ | 1,842,382 | $ | 2,116,285 | ||||
Net
sales by Company-owned stores
|
468,072 | 520,466 | ||||||
Franchise
fees
|
81,500 | 165,000 | ||||||
Licensing
fees and other income
|
780,951 | 976,059 | ||||||
Total
Revenues
|
3,172,905 | 3,777,810 | ||||||
OPERATING
EXPENSES
|
||||||||
Store
food, beverage and paper costs
|
141,435 | 167,991 | ||||||
Store
payroll and other operating expenses
|
450,651 | 458,066 | ||||||
Selling,
general and administrative expenses:
|
||||||||
Payroll
and payroll-related expenses
|
1,288,947 | 1,490,938 | ||||||
Occupancy
|
142,386 | 140,198 | ||||||
Advertising
and promotion
|
73,549 | 139,127 | ||||||
Professional
service fees
|
186,076 | 189,082 | ||||||
Travel
expenses
|
73,168 | 88,533 | ||||||
Depreciation
and amortization
|
31,231 | 38,960 | ||||||
Other
|
456,424 | 460,290 | ||||||
Goodwill
Impairment
|
2,399,057 | - | ||||||
Total
Operating Expenses
|
5,242,924 | 3,173,185 | ||||||
Income
(Loss) from operations
|
(2,070,019 | ) | 604,625 | |||||
Interest
income
|
14,739 | 30,520 | ||||||
Interest
expense
|
(10,663 | ) | (11,767 | ) | ||||
Income
(Loss) before provision for income taxes
|
(2,065,943 | ) | 623,378 | |||||
Provision
for income taxes
|
||||||||
Current
tax expense
|
- | - | ||||||
Deferred
tax expense
|
252,000 | - | ||||||
252,000 | - | |||||||
Net
Income (Loss)
|
$ | (2,317,943 | ) | $ | 623,378 | |||
Net
Income (Loss) per share - Basic and Diluted
|
$ | (0.32 | ) | $ | 0.09 | |||
Weighted
average shares outstanding - Basic
|
7,263,508 | 7,263,508 | ||||||
Weighted
average shares outstanding - Diluted
|
7,263,508 | 7,271,732 | ||||||
Cash
dividends declared per share
|
$ | 0.05 | $ | 0.06 |
See
accompanying notes
BAB,
Inc
Consolidated
Statements of Stockholders’ Equity
November
30, 2009 and 2008
Additional
|
||||||||||||||||||||||||||||
Common
Stock
|
Paid-In
|
Treasury
Stock
|
Accumulated
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
Deficit
|
Total
|
||||||||||||||||||||||
November
30, 2007
|
8,466,953 | $ | 13,508,257 | $ | 932,038 | (1,203,445 | ) | $ | (222,781 | ) | $ | (8,681,467 | ) | $ | 5,536,047 | |||||||||||||
Stock
Compensation Expense
|
25,226 | 25,226 | ||||||||||||||||||||||||||
Dividends
Declared
|
(435,811 | ) | (435,811 | ) | ||||||||||||||||||||||||
Net
Income
|
623,378 | 623,378 | ||||||||||||||||||||||||||
November
30, 2008
|
8,466,953 | 13,508,257 | 957,264 | (1,203,445 | ) | (222,781 | ) | (8,493,900 | ) | 5,748,840 | ||||||||||||||||||
Stock
Compensation Expense
|
10,177 | 10,177 | ||||||||||||||||||||||||||
Dividends
Declared
|
(363,175 | ) | (363,175 | ) | ||||||||||||||||||||||||
Net
Loss
|
(2,317,943 | ) | (2,317,943 | ) | ||||||||||||||||||||||||
November
30, 2009
|
8,466,953 | $ | 13,508,257 | $ | 967,441 | (1,203,445 | ) | $ | (222,781 | ) | $ | (11,175,018 | ) | $ | 3,077,899 |
See
accompanying notes
BAB,
Inc
Consolidated
Statements of Cash Flow
November
30, 2009 and 2008
2009
|
2008
|
|||||||
Operating
activities
|
||||||||
Net
(loss) income
|
$ | (2,317,943 | ) | $ | 623,378 | |||
Depreciation
and amortization
|
31,231 | 38,960 | ||||||
Impairment
-other intangibles
|
2,399,057 | - | ||||||
Deferred
tax expense
|
252,000 | |||||||
Provision
for uncollectible accounts, net of recoveries
|
36,021 | 2,072 | ||||||
Share-based
compensation
|
10,177 | 25,226 | ||||||
Changes
in:
|
||||||||
Trade
accounts receivable and notes receivable
|
(35,214 | ) | 4,055 | |||||
Restricted
cash
|
82,246 | (22,024 | ) | |||||
Marketing
fund contributions receivable
|
(964 | ) | 23,511 | |||||
Inventories
|
13,385 | (7,385 | ) | |||||
Prepaid
expenses and other
|
39,972 | (16,377 | ) | |||||
Accounts
payable
|
(12,378 | ) | 8,883 | |||||
Accrued
liabilities
|
(45,252 | ) | (57,201 | ) | ||||
Unexpended
marketing fund contributions
|
(81,282 | ) | 877 | |||||
Deferred
revenue
|
(92,413 | ) | (119,647 | ) | ||||
Net
Cash Provided by Operating Activities
|
278,643 | 504,328 | ||||||
Investing
activities
|
||||||||
Purchase
of equipment
|
(1,150 | ) | (991 | ) | ||||
Proceeds
from sale of equipment
|
- | 200 | ||||||
Capitalization
of trademark renewals
|
(24,754 | ) | (56,392 | ) | ||||
Net
Cash Used In Investing Activities
|
(25,904 | ) | (57,183 | ) | ||||
Financing
activities
|
||||||||
Repayment
of borrowings
|
(24,146 | ) | (23,051 | ) | ||||
Payment
of dividends
|
(363,175 | ) | (727,278 | ) | ||||
Net
Cash Used In Financing Activities
|
(387,321 | ) | (750,329 | ) | ||||
Net
Decrease in Cash
|
(134,582 | ) | (303,184 | ) | ||||
Cash,
Beginning of Period
|
1,207,108 | 1,510,292 | ||||||
Cash,
End of Period
|
$ | 1,072,526 | $ | 1,207,108 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid
|
$ | 10,855 | $ | 11,949 | ||||
Income
taxes paid
|
$ | 9,797 | $ | - |
See
accompanying notes
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
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”) and My
Favorite Muffin (“MFM”) trade names. The Company additionally derives
income from the sale of its trademark bagels, muffin mix, cream cheese and
coffee through nontraditional channels of distribution, including under license
agreements and through direct home delivery of specialty muffin 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. 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, 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. My Favorite
Muffin Too, Inc., a New Jersey corporation, was acquired on May 13,
1997. My Favorite Muffin Too, Inc. franchises (“MFM”) concept muffin
stores. The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were
acquired on February 1, 1999. All branded wholesale business uses this
trademark.
Note
2 - Summary of Significant Accounting Policies
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue
Recognition
Royalty
fees from franchised stores represent a fee of 5% on net retail and wholesale
sales of franchised units. Royalty revenues are recognized on an
accrual basis using actual franchise receipts. Generally, franchisees
report and remit royalties on a weekly basis. The majority of
month-end receipts are recorded on an accrual basis based on actual numbers from
reports received from franchisees shortly after the
month-end. Estimates are utilized in certain instances where actual
numbers have not been received and such estimates are based on the last 10
weeks’ average.
The
Company recognizes franchise fee revenue upon the opening of a franchise
store. Direct costs associated with franchise sales are deferred
until the franchise fee revenue is recognized. These costs include
site approval, construction approval, commissions, blueprints and training
costs.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
2 - Summary of Significant Accounting Policies (Continued)
Revenue Recognition
(Continued)
The
Company earns a licensing fee from the sale of par-baked bagels, from the sale
of coffee and from the sale of BAB and MFM branded product to the franchised and
licensed units noted in the table below. The licensing fees received
are derived from these proprietary or recommended products sold primarily to the
franchise network. The Company records revenues on an accrual basis
based on actual and estimated sales to the franchise units.
Stores
which have been opened, and unopened stores for which a Franchise Agreement has
been executed at November 30, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Stores
opened
|
||||||||
Company-owned
|
1 | 1 | ||||||
Franchisee-owned
|
105 | 114 | ||||||
Licensed
|
2 | 3 | ||||||
108 | 118 | |||||||
Unopened
stores
|
||||||||
Franchise
Agreement
|
2 | 5 | ||||||
110 | 123 |
License
fees and other income primarily consist of license fees, Sign Shop revenues, and
defaulted and terminated franchise contract revenues. Revenue is
recorded on an accrual basis. Actual amounts are used to record the
majority of license fees although at times it is necessary to use estimates.
Revenues recorded for Sign Shop and defaulted and terminated franchise contract
revenue are actual amounts.
Segments
Accounting
standards have established annual reporting standards for an enterprise’s
operating segments and related disclosures about its products, services,
geographic areas and major customers. The Company’s operations are confined to
two reportable segments operating in the United States; Company-owned stores and
franchise operations.
Marketing
Fund
The
Company established a Marketing Fund during 1994. Domestic
franchise-operated units and the Company-owned store are required to contribute
a fixed percentage based on net retail sales to the Marketing
Fund. Liabilities for unexpended funds received from franchisees are
included as a separate line item in accrued expenses and Marketing Fund cash
accounts are included in restricted funds in the accompanying Balance
Sheet. The Marketing Fund also derives revenues from rebates paid by
certain vendors on the sale of BAB licensed products to
franchisees.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
2 - Summary of Significant Accounting Policies (Continued)
Cash
As of
November 30, 2009 and 2008, the Marketing Fund cash balances, which are
restricted, were $158,747 and $240,993, respectively. Also included
in restricted cash at both November 30, 2009 and 2008 is $53,001 for a
certificate of deposit that serves as collateral for a Letter of Credit that is
required for the Company’s office lease.
Deposits
are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000
for interest bearing accounts. Non-interest bearing business checking
accounts are insured to an unlimited amount through June 30, 2010. If
the Federal Reserve Bank does not extend the unlimited insured amount past June
30, 2010 the deposits may from time to time exceed federally insured
limits.
Accounts and Notes
Receivable
Receivables
are carried at original invoice amount less estimates made for doubtful
accounts. Certain receivables have been converted to unsecured
interest-bearing notes. Management determines the allowances for
doubtful accounts by reviewing and identifying troubled accounts on a periodic
basis by using historical experience applied to an aging of
accounts. A receivable is considered to be past due if any portion of
the receivable balance is outstanding 90 days past the due
date. Receivables are written off when deemed
uncollectible. Recoveries of receivables previously written off are
recorded as income when received
Inventories
Inventories
are valued at the lower of cost or market under the first-in, first-out (FIFO)
method.
Property, Plant and
Equipment
Property
and equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are 3 to 7 years for property and equipment and 10 years, or term
of lease, if less, for leasehold improvements. Maintenance and repairs are
charged to expense as incurred. Expenditures that materially extend the useful
lives of assets are capitalized.
Goodwill and Other
Intangible Assets
The
Company’s intangible assets consist of trademarks and goodwill. Accounting
Standard Codification (“ASC”) 350 (formerly SFAS No. 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 and other intangible assets, but instead on
an annual basis the Company’s intangible assets are tested for
impairment.
Following
the guidelines contained in ASC 350, the Company tests goodwill and intangible
assets that are not subject to amortization for impairment annually or more
frequently if events or circumstances indicate that impairment is
possible. Goodwill and intangible assets were tested at the end of
the first fiscal quarter, February 28, 2009 and it was found that the carrying
value of goodwill and intangible assets were impaired.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
2 - Summary of Significant Accounting Policies (Continued)
Goodwill and Other
Intangible Assets (Cont’d)
The
Company tests goodwill and intangible assets that are not subject to
amortization for impairment annually or more frequently if events or
circumstances indicate that impairment is possible.
Goodwill
and intangible assets were tested at the end of the first quarter, February 28,
2009 and it was found that the carrying value of goodwill and intangible assets
were impaired based on a discounted cash flow model using management’s business
plan projected for expected cash flows. Based on the computation of
the discounted cash flows, it was determined that the fair value of goodwill and
intangible assets exceeded their carrying value by $2,399,057.
A charge
of $2,399,057 was recorded for the year ended November 30, 2009 after the
impairment testing was completed during the first quarter
2009. Management does not believe that any further impairment exists
at November 30, 2009. There was no impairment charge recorded in
2008.
The net
book value of goodwill and intangible assets with indefinite and definite lives
are as follows:
Goodwill
|
Trademarks
|
Definite
Lived Intangibles
|
Total
|
|||||||||||||
Net
Balance as of November 30, 2007
|
$ | 3,542,772 | $ | 763,667 | $ | 36,204 | $ | 4,342,643 | ||||||||
Additions
|
- | - | 56,392 | 56,392 | ||||||||||||
Amortization
expense
|
(6,272 | ) | (6,272 | ) | ||||||||||||
Net
Balance as of November 30, 2008
|
3,542,772 | 763,667 | 86,324 | 4,392,763 | ||||||||||||
Additions
|
21,349 | 3,405 | 24,754 | |||||||||||||
Impairment
charges
|
(2,049,001 | ) | (350,056 | ) | - | (2,399,057 | ) | |||||||||
Amortization
expense
|
(9,935 | ) | (9,935 | ) | ||||||||||||
Net
Balance as of November 30, 2009
|
$ | 1,493,771 | $ | 434,960 | $ | 79,794 | $ | 2,008,525 |
Definitive
lived intangible assets are being amortized over their useful
lives. The estimated amortization expense for each of the next five
fiscal years and thereafter is as follows:
Fiscal
Period
|
Definite
Lived Intangibles
|
|||
2010
|
$ | 10,639 | ||
2011
|
10,639 | |||
2012
|
10,639 | |||
2013
|
10,639 | |||
2014
|
10,639 | |||
thereafter
|
26,599 | |||
Total
|
$ | 79,794 |
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
2 - Summary of Significant Accounting Policies (Continued)
Advertising and Promotion
Costs
The
Company expenses advertising and promotion costs as
incurred. Advertising and promotion expense was $73,549 and $139,127
in 2009 and 2008, respectively. Included in advertising expense was
$36,535 and $96,760 in 2009 and 2008, respectively, related to the Company’s
franchise operations.
Income
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. In addition, a valuation allowance can be provided for
deferred tax assets when it is more likely than not that all or some portion of
the deferred tax asset will not be realized.
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, 2009 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, 2009 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 $248,000, which management believes will be realized over future
profitable years. (See Note 3.)
Earnings Per
Share
The
Company computes earnings per share (“EPS”) under ACS 260 “Earnings per
Share.” Basic net earnings are divided by the weighted average number
of common shares outstanding during the year to calculate basic net earnings per
common share. Diluted net earnings per common share are calculated to
give effect to the potential dilution that could occur if options or other
contracts to issue common stock were exercised and resulted in the issuance of
additional common shares.
2009
|
2008
|
|||||||
Numerator:
|
||||||||
Net
income (loss) available to common shareholders
|
$ | (2,317,943 | ) | $ | 623,378 | |||
Denominator:
|
||||||||
Weighted
average outstanding shares
|
||||||||
Basic
|
7,263,508 | 7,263,508 | ||||||
Earnings
(Loss) per Share - Basic
|
$ | (0.32 | ) | $ | 0.09 | |||
Effect
of dilutive common stock
|
- | 8,224 | ||||||
Weighted
average outstanding shares
|
||||||||
Diluted
|
7,263,508 | 7,271,732 | ||||||
Earnings
(Loss) per share - Diluted
|
$ | (0.32 | ) | $ | 0.09 |
At
November 30, 2009 and 2008, there are 368,373 and 309,500, respectively of
unexercised options that are not included in the computation of dilutive EPS
because their impact would be antidilutive due to the loss in 2009 and the
market price of the common stock was higher than the option prices for
2008.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
2 - Summary of Significant Accounting Policies (Continued)
Stock-Based
Compensation
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. The Company recorded compensation expense arising from
share-based payment arrangements in payroll-related expenses on the Consolidated
Statement of Income for the Company’s stock option plan of $10,177 and $25,226
for the years ended November 30, 2009 and 2008, respectively.
Fair Value of Financial
Instruments
The
carrying amounts of financial instruments including cash, accounts receivable,
notes receivable, accounts payable and short-term debt approximate their fair
values because of the relatively short maturity of these
instruments. The carrying value of long-term debt, including the
current portion, approximate fair value based upon market prices for the same or
similar instruments.
Recent Accounting
Pronouncements
In April
2008, the FASB issued new standards which provided guidance on how to determine
the useful life of intangible assets by amending the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets. This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. These
standards are effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years
and will be adopted beginning in the first quarter of fiscal
2010. The adoption of this guidance is not expected to have any
impact on the Company’s consolidated financial position, cash flows or results
of operations.
In April
2009, the FASB issued additional guidance under the “Financial Instruments
Topic” of the ASC.
This topic requires disclosure of the carrying amount and the
fair value of all financial instruments for interim and annual financial
statements of SEC-reporting entities (even if the financial instrument is not
recognized in the balance sheet), including the methods and significant
assumptions used to estimate the fair values and any changes in such methods and
assumptions. This topic also requires disclosures in summarized
financial information in interim financial statements. The Company
adopted this additional guidance as of November 30, 2009. The
adoption of this additional guidance did not have any impact on the Company’s
consolidated financial position, cash flows or results of
operations.
In May
2009, the FASB issued new standards for subsequent events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The new standards are effective for interim and annual
reporting periods ending after June 15, 2009. The Company adopted the new
standards during fiscal 2009 and, as the pronouncement only requires additional
disclosures, the adoption did not have an impact on the Company’s consolidated
financial position, cash flows or results of operations. The Company
has evaluated subsequent events through February 23, 2010, the date that these
consolidated financial statements were issued.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting
Pronouncements (Continued)
In June
2009, the FASB issued the FASB Accounting Standards Codification (the
“Codification”) for financial statements issued for interim and annual periods
ending after September 15, 2009, which was effective for the Company beginning
in the fourth quarter of fiscal 2009. The Codification became the single
authoritative source for GAAP. Accordingly, previous references to GAAP
accounting standards are no longer used in the Company’s disclosures, including
these Notes to the Financial Statements. The Codification does not affect the
Company’s consolidated financial position, cash flows or results of
operations.
Note
3 – Income Taxes
The
effective tax rate used to compute income tax expense (benefit) and deferred tax
assets and liabilities is a federal rate of 34% and a state rate of 4.8%, net of
the federal tax effect.
The
components of the Company’s current provision (benefit) for income taxes are as
follows:
2009
|
2008
|
|||||||
Current
|
||||||||
Federal
|
$ | - | $ | - | ||||
State
|
- | - | ||||||
Deferred
|
252,000 | - | ||||||
Total
|
$ | 252,000 | $ | - |
A
reconciliation of the expected income tax expense (benefit) to the recorded
income tax expense (benefit) is as follows:
2009
|
2008
|
|||||||
Federal
income tax (benefit) provision computed at federal statutory
rate
|
$ | (702,421 | ) | $ | 211,949 | |||
State
income taxes net of federal tax provision
|
(99,537 | ) | 30,034 | |||||
Other
adjustments
|
17,869 | 1,589 | ||||||
Change
in valuation allowance
|
1,036,089 | (243,572 | ) | |||||
Income
Tax Provision (Benefit)
|
$ | 252,000 | $ | - |
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
3 – Income Taxes (Continued)
The
components of the Company’s deferred tax assets and liabilities for federal and
state income taxes consist of the following:
2009
|
2008
|
|||||||
Deferred
revenue
|
$ | 27,011 | $ | 62,884 | ||||
Deferred
rent revenue
|
9,279 | 15,215 | ||||||
Marketing
Fund net contributions
|
61,623 | 93,549 | ||||||
Allowance
for doubtful accounts
|
3,382 | 535 | ||||||
Allowance
for doubtful accounts-notes receivable
|
- | 956 | ||||||
Accrued
expenses
|
17,967 | 20,706 | ||||||
Net
operating loss carryforwards
|
2,410,188 | 2,348,092 | ||||||
Valuation
allowance
|
(2,024,819 | ) | (988,730 | ) | ||||
Total
Deferred Income Tax Assets
|
$ | 504,631 | $ | 1,553,207 | ||||
Depreciation
and amortization
|
$ | (255,178 | ) | $ | (1,044,931 | ) | ||
Franchise
Costs
|
(1,453 | ) | (8,276 | ) | ||||
Total
Deferred Income Tax Liabilities
|
$ | (256,631 | ) | $ | (1,053,207 | ) | ||
Total
Net Deferred Tax Assets/Liabilities
|
$ | 248,000 | $ | 500,000 |
As of
November 30, 2009, the Company has net operating loss carryforwards expiring
between 2012 and 2029 for U.S. federal income tax purposes of approximately
$6,209,000. The Company routinely reviews the future realization of
tax assets based on projected future reversals of taxable temporary differences,
available tax planning strategies and projected future taxable
income. A valuation allowance has been established for $2,024,819 and
$988,730 as of November 30, 2009 and 2008, respectively, for the deferred tax
benefit related to those loss carryforwards and other deferred tax assets, that
are more likely than not that the deferred tax asset will not be
realized. The increase in the valuation allowance of $1,036,089 in
2009 is a result of the net operating loss carryforward added in 2009, a
reduction of certain other deferred tax assets and a decrease in deferred tax
liabilities relating primarily to reduction of book value for goodwill and
intangibles related to the impairment.
Note
4 - Long-Term Debt
On
September 6, 2002, the Company signed a note payable requiring annual
installments of $35,000, including interest at a rate of 4.75% per annum, for a
term of 15 years, in the original amount of $385,531. The Company
purchased and retired 1,380,040 shares of BAB common stock from a former
stockholder. The balance of this note payable was $204,370 and
$228,516 as of November 30, 2009 and 2008, respectively.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
4 - Long-Term Debt (Continued)
As of
November 30, 2009, annual maturities on long-term obligations due are as
follows:
Year
Ending November 30:
|
||||
2010
|
$ | 25,292 | ||
2011
|
26,494 | |||
2012
|
27,752 | |||
2013
|
29,070 | |||
2014
|
30,451 | |||
Thereafter
|
65,311 | |||
Total
|
$ | 204,370 |
Note 5 - Stockholders’
Equity
On
December 4, 2008, a $.02 per share quarterly dividend was declared and was paid
January 2, 2009 to stockholders of record as of December 18, 2008. On
March 9, May 22, and September 7, 2009, a $.01 per share dividend was declared,
and was paid on April 13, July 8, and October 5, 2009,
respectively. On December 7, 2009, a $.01 per share quarterly cash
dividend was declared and paid January 4, 2010 to shareholders of record as of
December 21, 2009. On March 5, June 13, and September 10, 2008, a
$.02 per share dividend was declared, and was paid on April 10, July 8, and
October 6, 2008, respectively.
Note
6 - 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, all of which have been granted as of November 30, 2009. The
Plan will terminate on May 25, 2011. The Plan permits granting of
awards to employees and non-employee Directors and agents of the Company in the
form of stock appreciation rights, stock awards and stock
options. The Plan is currently administered by a Committee of the
Board of Directors appointed by the Board. The Plan gives broad
powers to the Board and Committee to administer and interpret the Plan,
including the authority to select the individuals to be granted options and
rights, and to prescribe the particular form and conditions of each option or
right granted.
Under the
Plan, the exercise price of each option equals the market price of the Company’s
stock on the date of grant. The options granted vary in vesting from
immediate to a vesting period over five years. The options granted
are exercisable within a 10 year period from the date of grant. All
stock issued from the granted options must be held for one year from date of
exercise. Options issued and outstanding expire on various dates
through November 28, 2016. The range of exercise prices of options
outstanding at November 30, 2009 are $0.46 to $1.38.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
6 - Stock Options and (Continued)
During
fiscal 2009 and 2008 there were no options granted or
exercised. Activity under the Plan during the two years ended
November 30 is as follows:
2009
|
2008
|
|||||||||||||||
Options
|
Weighted
average exercise price
|
Options
|
Weighted
average exercise price
|
|||||||||||||
Options
outstanding at beginning of year
|
369,373 | $ | 1.156 | 392,373 | $ | 1.156 | ||||||||||
Forfeited
|
(1,000 | ) | $ | 1.15 | (23,000 | ) | $ | 1.129 | ||||||||
Outstanding
at end of year
|
368,373 | $ | 1.156 | 369,373 | $ | 1.156 |
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
Range of exercise price
|
Options outstanding
|
Weighted average remaining contractual
life
|
Weighted average exercise
price
|
Options exercisable
|
Weighted average exercise
price
|
|||||||||||||||||
$ | 0.46 | 7,973 | 4.0 | $ | 0.460 | 7,973 | $ | 0.460 | ||||||||||||||
$ | 0.60 | 10,000 | 4.6 | $ | 0.600 | 10,000 | $ | 0.600 | ||||||||||||||
$ | 0.88 - $0.97 | 61,900 | 5.2 | $ | 0.938 | 61,900 | $ | 0.938 | ||||||||||||||
$ | 0.86 | 20,000 | 6.5 | $ | 0.860 | 20,000 | $ | 0.860 | ||||||||||||||
$ | 1.15 - $1.27 | 68,500 | 6.0 | $ | 1.22 | 68,500 | $ | 1.220 | ||||||||||||||
$ | 0.97 | 20,000 | 7.0 | $ | 0.970 | 20,000 | $ | 0.970 | ||||||||||||||
$ | 1.25 - $1.38 | 180,000 | 7.0 | $ | 1.322 | -- | -- | |||||||||||||||
368,373 | $ | 1.156 | 188,373 | $ | 0.998 |
The
aggregate intrinsic value in the table below is before income taxes, based on
the Company’s closing stock price of $.50 as of the last business day of the
period ended November 30, 2009. There were no options exercised in
2009 or 2008.
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||
Outstanding
|
Wghtd.
Avg.
|
Wghtd.
Avg.
|
Aggregate
|
Exercisable
|
Wghtd.
Avg.
|
Aggregate
|
||||||||||||||||||||
at
11/30/09
|
Remaining
Life
|
Exercise
Price
|
Intrinsic
Value
|
at
11/30/09
|
Exercise
Price
|
Intrinsic
Value
|
||||||||||||||||||||
368,373 | 6.30 | $ | 1.16 | $ | - | 188,373 | $ | 1.00 | $ | - |
The
Company recorded compensation cost arising from share-based payment arrangements
in payroll-related expenses on the Consolidated Statement of Income for the
Company’s stock option plan of $10,177 and $25,226 for the years ended November
30, 2009 and 2008, respectively.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
7 - Commitments
The
Company rents its Corporate Office, Company-owned store and property occupied by
two tenants located in Lincoln, NE under leases which require it to pay real
estate taxes, insurance and general repairs and maintenance. Rent
expense for the years ended November 30, 2009 and 2008 was $165,334 and
$123,898, net of sublease income of $107,203 and $130,420,
respectively. The Lincoln NE facility that is sub-leased, expires at
the end of December 2009 and will not be renewed. Monthly rent is
recorded on a straight-line basis over the term of the lease with a deferred
rent liability being recognized. As of November 30, 2009, future
minimum annual rental commitments under leases, net of sublease income of $5,825
in 2010 are as follows:
Year
Ending November 30:
|
||||
2010
|
$ | 155,597 | ||
2011
|
72,859 | |||
2012
|
3,849 | |||
Total
|
$ | 232,305 |
Note
8 – Employee Benefit Plan
The
Company maintains a qualified 401(k) plan which allows eligible participants to
make pretax contributions. Company contributions are
discretionary. The Company did not make a contribution in 2009 or
2008.
BAB,
Inc
Notes
to the Consolidated Financial Statements
November
30, 2009 and 2008
Note
9 - Segment Information
Segment
information has been reclassified to reflect licensing fees revenue, goodwill
and certain definite lived assets and the amortization expense related to these
intangibles in Systems, so as to reflect a truer segment income stream and asset
relationship, as the business is focused on the franchise division.
The
following tables present segment information for the years ended November 30,
2009 and 2008:
Net
Revenues
|
Operating
Income (Loss)
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Company
Store Operations
|
$ | 747,526 | $ | 822,224 | $ | (198,093 | ) | $ | (148,007 | ) | ||||||
Franchise
Operations and Licensing Fees
|
2,425,379 | 2,955,586 | (993,097 | ) | 1,719,059 | |||||||||||
$ | 3,172,905 | $ | 3,777,810 | $ | (1,191,190 | ) | $ | 1,571,052 | ||||||||
Corporate
Expenses
|
(878,828 | ) | (966,427 | ) | ||||||||||||
Interest
Income, Net of Interest Expense
|
4,075 | 18,753 | ||||||||||||||
Net
Income (Loss) before provision for taxes
|
(2,065,943 | ) | 623,378 | |||||||||||||
Deferred
tax expense
|
252,000 | - | ||||||||||||||
Net
Income (Loss)
|
$ | (2,317,943 | ) | $ | 623,378 | |||||||||||
Operating
Segment Data
|
Identifiable Assets
|
Capital and Intangible
Expenditures
|
Depreciation and
Amortization
|
Goodwill and Other Intangible
Impairment
|
|||||||||||||
Year
Ended November 30, 2009:
|
||||||||||||||||
Company
Store Operations
|
$ | 57,424 | $ | - | $ | 4,246 | $ | - | ||||||||
Franchise
Operations (other than goodwill)
|
625,911 | 1,150 | 17,051 | |||||||||||||
Definite
Lived Intangible Assets
|
79,794 | 3,404 | 9,934 | |||||||||||||
Goodwill
and Other Intangible Assets
|
1,928,731 | 21,350 | 2,399,057 | |||||||||||||
$ | 2,691,860 | $ | 25,904 | $ | 31,231 | $ | 2,399,057 | |||||||||
Year
Ended November 30, 2008:
|
||||||||||||||||
Company
Store Operations
|
$ | 74,336 | $ | 1,091 | $ | 6,522 | $ | - | ||||||||
Franchise
Operations (other than goodwill)
|
642,373 | 26,166 | ||||||||||||||
Definite
Lived Intangible Assets
|
86,324 | 56,392 | 6,272 | |||||||||||||
Goodwill
and Other Intangible Assets
|
4,306,439 | |||||||||||||||
$ | 5,109,472 | $ | 57,483 | $ | 38,960 | $ | - | |||||||||
Reconciliation
to Total Assets as Reported
|
2009 | 2008 | ||||||||||||||
Assets-Total
reportable segments - Identifiable assets
|
$ | 2,691,860 | $ | 5,109,472 | ||||||||||||
Unallocated
Amounts
|
||||||||||||||||
Cash
|
1,284,274 | 1,501,102 | ||||||||||||||
Prepaid
expenses and other current assets
|
105,981 | 145,953 | ||||||||||||||
Total
Consolidated Assets
|
$ | 4,082,115 | $ | 6,756,527 |
There
were no sales to any individual customer during either year in the two-year
period ended November 30, 2009 that represented 10% or more of net
sales.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In
connection with the audits of the Company’s consolidated financial statements
for each of the fiscal years ended November 30, 2009 and 2008, and through the
date of this Current Report, there were: (1) no disagreements between the
Company and Frank L. Sassetti & Company on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures.
ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES
BAB,
Inc.’s Chief Executive Officer and Chief Financial Officer have evaluated the
Company’s disclosure controls and procedures, as defined in Item 307 of
Regulation S-K of the Securities Exchange Act of 1934, as of the end of the
period covered by this report, and they have concluded that these controls and
procedures were effective (i) to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and (ii) to ensure that information required to be
disclosed by us in the reports that we submit under the Exchange Act is
accumulated and communicated to our management, including our executive and
financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
ITEM 9A(t). CONTROL AND
PROCEDURES
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, the Chief
Executive Officer and the Chief Financial Officer, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
Our
evaluation of internal control over financial reporting includes using the COSO
framework, an integrated framework for the evaluation of internal controls
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of our
control environment.
Based on
our evaluation under the framework described above, our management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company’s internal controls and procedures were effective over financial
reporting as of November 30, 2009.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
requirements by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permits the
Company to provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls or in other factors that could
materially affect these controls over financial reporting during the last fiscal
quarter. We have not identified any significant deficiencies or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
ITEM 9B. OTHER INFORMATION
None.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's executive
officers and directors, and persons who beneficially own more than ten percent
of the Company's Common Stock, to file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission (the "SEC").
Executive officers, directors and greater than ten percent beneficial owners are
required by the SEC to furnish the Company with copies of all Section 16(a)
forms they file.
Based
upon a review of the copies of such forms furnished to the Company, the Company
believes that all Section 16(a) filing requirements applicable to its executive
officers and directors were met during the year ended November 30,
2009.
BAB, Inc.
(the Company) has a formally established Code of Ethics, pursuant to Section 406
of the Sarbanes-Oxley Act. In order to view the Code of Ethics in its
entirety, see the BAB, Inc. Annual Report, Part III, Item 9, dated November 30,
2007 and filed with the Securities and Exchange Commission on February 28,
2008.
ITEM 11. EXECUTIVE COMPENSATION
The
following table sets forth the cash compensation by executive officers that
received annual salary and bonus compensation of more than $100,000 during years
2009 and 2008 (the "Named Executive Officers"). The Company has no employment
agreements with any of its executive officers.
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Options
Awards
($)
|
Nonequity
Incentive
Plan
Compensation
(S)
|
Non-qualified
deferred
Compensation
earnings
(S)
|
All
other
compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Michael
W. Evans
|
2009
|
249,831 | - | - | - | 26,027 | 275,858 | |||||||||||||||||||||||||||
President
and CEO
|
2008
|
249,831 | 57,187 | - | - | 29,239 | 336,257 | |||||||||||||||||||||||||||
Michael
K. Murtaugh
|
2009
|
187,380 | - | - | - | 24,189 | 211,569 | |||||||||||||||||||||||||||
Vice
President and General Counsel
|
2008
|
187,380 | 42,891 | - | - | 23,383 | 253,654 | |||||||||||||||||||||||||||
Jeffrey
M Gorden
|
2009
|
133,686 | 5,350 | - | - | 10,863 | 149,899 | |||||||||||||||||||||||||||
Chief
Financial Officer
|
2008
|
133,686 | 8,800 | - | - | 10,214 | 152,700 |
The
following tables set forth any stock or stock options awarded to executive
officers that that are exercisable and not yet exercised or unexercisable as of
November 30, 2009:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
Name
|
Number
of
securities
underlying unexercised options
(#)
Exercisable
|
Number
of
securities
underlying unexercised options
(#)
Unexercisable
|
Equity
incentive plan awards: number of securities underlying unexercised
unearned options
(#)
|
Option
exercise
price
($)
|
Option
expiration date
|
|||||||||||||||
Michael
W. Evans
|
20,000 | - | .97 | 2015 | ||||||||||||||||
President
and CEO
|
20,000 | - | 1.27 | 2016 | ||||||||||||||||
50,000 | - | 1.38 | 2016 | |||||||||||||||||
Michael
K. Murtaugh
|
20,000 | - | .97 | 2015 | ||||||||||||||||
Vice
President and General
|
20,000 | - | 1.27 | 2016 | ||||||||||||||||
Counsel
|
50,000 | - | 1.38 | 2016 | ||||||||||||||||
Jeffrey
M Gorden
|
1,833 | - | .51 | 2014 | ||||||||||||||||
Chief
Financial Officer
|
6,000 | - | .88 | 2015 | ||||||||||||||||
5,000 | - | 1.15 | 2015 | |||||||||||||||||
25,000 | - | 1.25 | 2016 |
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
(Continued)
Name
|
Number
of shares or units of stock that have not vested
(#)
|
Market
value of shares or units of stock that have not vested
($)
|
Equity
incentive plan awards: number of unearned shares, units or other rights
that have not vested
(#)
|
Equity
incentive plan awards: market or payout value of unearned shares, units or
other rights that have not vested
($)
|
||||||||||||
Michael
W. Evans
|
- | - | - | - | ||||||||||||
President
and CEO
|
- | - | - | - | ||||||||||||
Michael
K. Murtaugh
|
- | - | - | - | ||||||||||||
Vice
President and General Counsel
|
- | - | - | - | ||||||||||||
Jeffrey
M Gorden
|
- | - | - | - | ||||||||||||
Chief
Financial Officer
|
- | - | - | - |
The
following table sets forth any compensation paid to directors during fiscal year
ended November 30, 2009:
DIRECTOR
COMPENSATION
Compensation
for fiscal year ended November 30, 2009
Name
|
Fees
earned or paid in cash
($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive plan compensation
($)
|
Non-qualifies
deferred compensation earnings
($)
|
All
other compensation
($)
|
Total
($)
|
|||||||||||||||||||||
Steven
Feldman
|
2,500 | - | - | - | - | - | 2,500 | |||||||||||||||||||||
James
Lentz
|
2,500 | - | - | - | - | - | 2,500 |
Indemnification of Directors
and Officers
The
Company's Certificate of Incorporation limits personal liability for breach of
fiduciary duty by its directors to the fullest extent permitted by the Delaware
General Corporation Law (the "Delaware Law"). Such Certificate eliminates the
personal liability of directors to the Company and its shareholders for damages
occasioned by breach of fiduciary duty, except for liability based on breach of
the director's duty of loyalty to the Company, liability for acts or omissions
not made in good faith, liability for acts or omissions involving intentional
misconduct, liability based on payments or improper dividends, liability based
on violation of state securities laws, and liability for acts occurring prior to
the date such provision was added. Any amendment to or repeal of such provisions
in the Company's Certificate of Incorporation shall not adversely affect any
right or protection of a director of the Company for with respect to any acts or
omissions of such director occurring prior to such amendment or
repeal.
In
addition to the Delaware Law, the Company's Bylaws provide that officers and
directors of the Company have the right to indemnification from the Company for
liability arising out of certain actions to the fullest extent permissible by
law. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the Company pursuant to such indemnification provisions, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth as of February 12, 2010 the record and beneficial
ownership of Common Stock held by (i) each person who is known to the Company to
be the beneficial owner of more than 5% of the Common Stock of the Company; (ii)
each current director; (iii) each "named executive officer" (as defined in
Regulation S-B, Item 402 under the Securities Act of 1933); and (iv) all
executive officers and directors of the Company as a group. Securities reported
as "beneficially owned" include those for which the named persons may exercise
voting power or investment power, alone or with others. Voting power and
investment power are not shared with others unless so stated. The number and
percent of shares of Common Stock of the Company beneficially owned by each such
person as of February 12, 2010 includes the number of shares which such person
has the right to acquire within sixty (60) days after such date.
Name
and Address
|
Shares
|
Percentage
|
||
Michael
W. Evans
500
Lake Cook Road, Suite 475
Deerfield,
IL 60015
|
2,839,946
(1)(2)(3)(5)
|
38.34
|
||
Michael
K. Murtaugh
500
Lake Cook Road, Suite 475
Deerfield,
IL 60015
|
2,613,533
(1)(2)(4)(6)
|
35.29
|
||
Holdings
Investment, LLC
220
DeWindt Road
Winnetka,
IL 60093
|
2,096,195
(1)
|
28.30
|
||
Jeffrey
M. Gorden
500
Lake Cook Road, Suite 475
Deerfield,
IL 60015
|
92,500
(7)
|
1.25
|
||
Steven
G. Feldman
750
Estate Drive, Suite 104
Deerfield,
IL 60015
|
40,000
(8)
|
.54
|
||
James
A. Lentz
1415
College Lane South
Wheaton,
IL 60189
|
34,932
(9)
|
.48
|
||
All
executive officers and directors as a group (5 persons)
|
3,524,716
(1)(2)(3)(4)(5)(6)(7)(8) (9)
|
48.53
|
(1)
Includes all shares held of record by Holdings Investments, LLC. Messrs. Evans
and Murtaugh are members and managers of the LLC and together control all voting
power of the stock owned by the LLC.
(2)
Includes 40,000 stock options fully exercisable as of 2/12/10.
(3)
Includes 3,500 shares inherited by spouse.
(4)
Includes 22,222 shares held by children.
(5)
Includes 62,222 shares held by children.
(6)
Includes 5,004 shares held in an IRA.
(7)
Includes 12,833 stock options fully exercisable as of 2/12/10.
(8)
Includes 30,000 stock options fully exercisable as of 2/12/10.
(9)
Includes 20,000 stock options fully exercisable as of 2/12/10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
There are
no transactions between the Company and related parties, including officers and
directors of the Company. It is the Company's policy that it will not enter into
any transactions with officers, directors or beneficial owners of more than 5%
of the Company's Common Stock, or any entity controlled by or under common
control with any such person, on terms less favorable to the Company than could
be obtained from unaffiliated third parties and all such transactions require
the consent of the majority of disinterested members of the Board of
Directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board
of Directors upon recommendation of the Audit Committee, appointed the firm
Frank L. Sassetti & Company, certified public accountants, for 2009 audit
and tax services.
The audit
reports of Frank L. Sassetti & Company on the consolidated financial
statements of BAB, Inc. and Subsidiaries as of and for the years ended November
30, 2009 and 2008 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
Audit
fees relate to audit work performed on the financial statements as well as work
that generally only the independent auditor can reasonably be expected to
provide, including discussions surrounding the proper application of financial
accounting and/or reporting standards and reviews of the financial statements
included in quarterly reports filed on Form 10-Q. Fees for audit services
provided by Frank L. Sassetti & Company in fiscal 2009 amounted to
$62,300. Fees for audit services provided by Frank L. Sassetti &
Company for fiscal 2008 amounted to $60,600.
Tax
compliance services were provided by Frank L. Sassetti & Company for 2009
and 2008 with fees billed in the amount of $12,200 and $11,000,
respectively.
During
the years ended November 30, 2009 and 2008, Frank L. Sassetti & Company did
not perform any other services for the Company.
Preapproval of Policies and
Procedures by Audit Committee
The
accountants provide a quote for services to the Audit Committee before work
begins for the fiscal year. After discussion, the Audit Committee then
makes a recommendation to the Board of Directors on whether to accept the
proposal.
Percentage of Services
Approved by Audit Committee
All
services were approved by the Audit Committee.
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
(a) Documents filed as part of this
report:
|
(1)
|
Financial
Statements
|
Consolidated
Balance Sheets as at November 30, 2009 and 2008 and the Consolidated Statements
of Income (Loss), Shareholders’ Equity and Cash Flows for the years ended
November 30, 2009 and 2008 are reported on by Frank L. Sassetti and
Company These statements are prepared in accordance with United
States GAAP.
|
(2)
|
Financial
Statement Schedules - none
|
(b)
INDEX TO EXHIBITS
The
following Exhibits are filed herewith:
INDEX
NUMBER
|
DESCRIPTION
|
3.1
|
Articles
of Incorporation (See Form 10-KSB for year ended November 30,
2006)
|
3.2
|
Bylaws
of the Company (See Form 10-KSB for year ended November 30,
2006)
|
21.1
|
List
of Subsidiaries of the Company
|
Section
302 of the Sarbanes-Oxley Act of 2002
|
|
Section
906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
BAB, INC.
By /s/
Michael W. Evans
Michael
W. Evans, Chief Executive Officer and President (Principal Executive Officer)
Dated:
February 23, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report on Form
10-K has been signed below by the following persons on behalf of the Company and
in the capacities and on the dates indicated.
Dated:
February 23, 2010
By /s/
Michael W. Evans
Michael
W. Evans, Chief Executive Officer and President (Principal Executive Officer)
Dated:
February 23, 2010
By /s/
Michael K. Murtaugh
Michael
K. Murtaugh, Director and Vice President/General Counsel and
Secretary
Dated:
February 23, 2010
By /s/
Jeffrey M. Gorden
Jeffrey
M. Gorden, Chief Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
Dated:
February 23, 2010
By /s/
Steven G. Feldman
Steven G.
Feldman, Director
Dated:
February 23, 2010
By /s/
James A. Lentz
James A.
Lentz, Director
EXHIBIT
3.1 - Certificate of Incorporation
See Form
10-KSB for year ended November 30, 2006
EXHIBIT
3.2 - Bylaws of BAB, Inc.
See Form
10-KSB for year ended November 30, 2006
EXHIBIT
21.1 – List of Subsidiaries of the Company
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
- 39 -