FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended: November 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-31555
BAB, Inc.
(Name of small business issuer in its charter)
Delaware 36-4389547
(State or other jurisdiction of incorporation) (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)
Issuer's telephone number: (847) 948-7520
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the small business issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of small business issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year:
$3,917,391
The aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: $3,741,662 based on 3,704,616 shares held by nonaffiliates as of February 16, 2007; Closing price ($1.01), bid ($0.96) and ask ($1.01) prices 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: 7,263,099 shares of Common Stock, as of February 16, 2007.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
FORM 10-KSB INDEX
PART I
Item 1 Description of Business 3
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Overview
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Customers
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Suppliers
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Locations
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Store Operations
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Franchising
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Competition
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Trademarks and Service Marks
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Government Regulation
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Employees
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Item 2 Description of Property 7
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Item 3 Legal Proceedings 7
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Item 4 Submission of Matters to a Vote of Security Holders 7
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PART II
Item 5. Market for the Common Equity and Related Stockholder Matters 8
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Item 6. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
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Item 7. Financial Statements 13
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Item 8. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 33
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Item 8A. Controls and Procedures 33
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 33
Section 16(a) of the Exchange Act
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Code of Ethics
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Item 10. Executive Compensation 36
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Item 11. Security Ownership of Certain Beneficial Owners and Management 37
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Item 12. Certain Relationships and Related Transactions 38
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Item 13. Exhibits and Reports on Form 8-K 39
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Item 14. Principal Accountant Fees and Services 39
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Exhibits
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PART I
ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW
BAB, Inc. (the "Company") was incorporated under the laws of the State of Delaware on July 12, 2000. The Company currently operates, franchises and licenses bagel, muffin and coffee retail units under the Big Apple Bagels ("BAB"), My Favorite Muffin ("MFM") and Brewster's Coffee trade names. At November 30, 2006, the Company had 140 units in operation in 26 states, and 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 store features 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 in November 1995 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 Income
The Company reported net income of $717,000 for the year ended November 30, 2006, and net income of $693,000 for the year ended November 30, 2005. The Company believes that with its continued focus on franchising and licensing operations, it will continue to be profitable. The Company will also continue to review and institute cost controls where deemed necessary.
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 readily available from other sources.
LOCATIONS
The Company has 136 franchised locations, 3 licensees and 1 Company-owned store. Of the 136 locations, 134 are located in 26 states and 2 International units are located in the United Arab Emirates.
STORE OPERATIONS
BIG APPLE BAGELS--BAB franchised and Company-owned stores 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 2,000 square feet, with seating capacity for 30 to 40 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 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 mall locations with minimal square footage of 400 to 800 square feet, the typical retail center prototype unit is approximately 2,000 square feet with seating for 30 to 40 persons. A typical MFM franchise store is located within a three-mile radius of at least 25,000 residents in an area with a mix of both residential and commercial properties.
BREWSTER'S COFFEE--Although the Company doesn't have, or actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in all Company-owned 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 1% contribution based on net sales. The Company currently requires a franchise fee of $25,000 on a franchisee's first BAB or MFM store. The fee for subsequent production stores is $20,000 and $15,000 for a satellite location and $10,000 for a kiosk.
The Company's current Uniform Franchise Offering Circular 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 franchiser 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-KSB.
The Company's franchise agreements provide 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 at franchise trade shows and 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 may 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, Manhattan Bagel Bakery and Chesapeake Bagel Bakery brands. There are several other regional bagel chains with fewer than 50 stores, all of which may be expected to compete with the Company. There is not a 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 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, 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 taste, 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 to a substantial extent 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, tradenames 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 marks are available in all locations. Any challenge, if successful, in whole or in part, could restrict the Company's use of the marks in areas in which the challenger is found to have used the name prior to the Company's use. Any such restriction could limit the expansion of the Company's use of the 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 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 marks are available in all locations. It is the Company's policy to pursue registration of its marks whenever possible and to vigorously oppose any infringement of its 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 franchisers 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 Uniform Franchise Offering Circular ("UFOC") in connection with the sale and operation of its franchises. In addition, some states require a franchiser to register its franchise with the state before it may offer a franchise to a prospective franchisee. The Company believes its UFOC, 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 franchiser-franchisee relationship, including, but not limited to, those concerning termination and non-renewal of a franchise.
EMPLOYEES
As of November 30, 2006, the Company employed 33 persons, consisting of 14 working in the Company-owned store, of which 10 are part-time employees. The remaining employees are responsible for Corporate management and oversight, 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 2. DESCRIPTION OF PROPERTY
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 January 31, 2011. Additionally, the Company leases space for its Company-owned store. The lease term for the store is for an initial term of five years and contains an option for renewal for two five-year terms. (See Note 7 in the audited consolidated financial statements included herein.)
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 2006. The Company's Common Stock is traded on the NASDAQ OTC-Bulletin Board under the symbol "BABB."
Year Ended: November 30, 2005 Low High ------------------------------------------------------------------------------------------------------- First quarter 0.75 1.00 Second quarter 0.78 0.97 Third quarter 0.85 1.30 Fourth quarter 0.90 1.45 Year Ended: November 30, 2006 Low High ------------------------------------------------------------------------------------------------------- First quarter 0.90 1.22 Second quarter 0.73 1.01 Third quarter 0.85 1.01 Fourth quarter 0.95 1.07 |
As of February 16, 2007, the Company's Common Stock was held by 185 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 16, 2007, is approximately 1,400 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 since plan inception. In 2006, 2005, 2004 and 2003, 290,000, 95,000, 115,000, and 300,000 stock options, respectively, were granted to directors, officers and employees. As of November 30, 2006, 1,400,000 stock options were granted to directors, officers and employees, leaving zero options available for grant. As of February 16, 2007, there were 1,007,218 stock options exercised or forfeited under the stock option plan. (See Note 6 of the audited consolidated financial statements included herein.)
DIVIDEND POLICY
The Board of Directors of the Company declared quarterly cash dividends of $.02 per share on March 13, 2006, May 25, 2006, September 6, 2006, and November 16, 2006. A $.02 per share special dividend was also declared on November 16, 2006. These dividends were payable on April 13, 2006, July 5, 2006, October 9, 2006, and January 11, 2007, respectively, in the amounts of $144,445, $144,459, $144,459, and $290,524. (See Note 5 of the audited consolidated financial statements included herein.)
The Board of Directors of the Company declared semi-annual cash dividends of $0.02 per share on May 12, 2005, payable June 21, 2005 to common stockholders of record as of May 31, 2005. On October 7, 2005, the Board of Directors of the Company declared a $0.02 semi-annual dividend and a special dividend of $0.06 per share, payable January 3, 2006 to common stockholders of record as of December 7, 2005. This transaction was recorded as a dividend payable of $577,781 as of November 30, 2005.
Although there can be no assurances that the Company will be able to pay dividends in the future, it is the Company's intent that future dividends will be considered after reviewing returns to shareholders, profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company's intent going forward to declare and pay cash dividends on a quarterly basis.
ITEM 6. 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-KSB. The data should be read in conjunction with the consolidated financial statements and notes thereto. Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the development of the Company's business, the markets for the Company's products, anticipated capital expenditures, and the effects of completed and proposed acquisitions, and other statements and disclosures contained herein and throughout this Annual Report regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). In such cases, we may use words such as "believe," "intend," "expect," "anticipate" and the like. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Certain risks and uncertainties are wholly or partially outside the control of the Company and its management, including its ability to attract new franchisees; the continued success of current franchisees; the effects of competition on franchisee and Company-owned store results; consumer acceptance of the Company's products in new and existing markets; fluctuation in development and operating costs; brand awareness; availability and terms of capital; adverse publicity; acceptance of new product offerings; availability of locations and terms of sites for store development; food, labor and employee benefit costs; changes in government regulation (including increases in the minimum wage); regional economic and weather conditions; the hiring, training, and retention of skilled corporate and restaurant management; and the integration and assimilation of acquired concepts; Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
GENERAL
The Company has 136 franchised, 3 licensed units, and 1 Company-owned store as of the end of 2006. Units in operation at the end of 2005 included 145 franchised, 3 licensed, and 2 Company-owned stores. System-wide revenues in 2006 were $ 47 million compared to $48 million in 2005.
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).
During 2006, even though revenue declined due to fewer Company-owned stores and slightly lower franchising revenues, the Company continued to control costs. Total operating expenses decreased to $3,228,000, or 82.4% of total revenue in 2006 compared to $4,398,000, or 85.8% in 2005.
YEAR 2006 COMPARED TO YEAR 2005
Total revenues from all sources decreased $1,208,000, or 23.6%, to $3,917,000 in 2006 from $5,125,000 in the prior year primarily due to fewer Company-owned store locations in 2006 versus 2005. Net sales at Company-owned stores decreased $939,000, or 65.2% to $501,000 in 2006, versus $1,440,000 in 2005 because the Company had one Company-owned store in 2006, versus three in 2005.
Royalty revenue from franchise stores was down $2,000, or .1%, to $2,275,000 in
2006 as compared to $2,277,000 in 2005. Franchise fee revenue increased $55,000,
or 25.2%, to $272,000, in 2006 versus $218,000 in 2005. The Company opened 8
stores in 2006 versus 5 in 2005. At November 30, 2006, the Company had 8 units
under development, the same as November 30, 2005. More new franchises are
opening in developing centers which leads to longer timeframes between execution
of franchise agreements and occupancy. Licensing fees and other income decreased
$321,000, or 27.0%, to $869,000 in 2006 as compared to $1,190,000 in 2005. A
trademark infringement lawsuit against a former franchisee resulted in $90,000
of income in 2005. Sign Shop revenue was $130,000 higher in 2005 as a result of
2004 post convention sales. The Company received $34,000 for the sale of assets
from a franchise location temporarily managed by the Company-owned store
division in 2005, and the Company had $29,000 more sublease rental income in
2005. Total operating expenses of $3,227,890, were 82.4% of total revenues for
2006 versus $4,398,112, or 85.8%, for 2005. Expenses declined because there was
only one Company-owned store operating for a majority of 2006, versus three
stores in 2005, and because of continued tight cost controls.
Corporate office payroll and payroll related expenses increased $49,000, or
3.4%, to $1,481,000, from $1,432,000, in 2005. Occupancy expense increased
$12,000, or 9.7% in 2006, to $137,000, from $125,000 in 2005. Professional fees
decreased $21,000, or 10.1%, to $187,000 in 2006, from $208,000 in 2005, and
Other expenses decreased $135,000, or 22.3%, to $472,000 in 2006 from $607,000
in 2005. There was a reduction in depreciation and amortization expense of
$15,000, or 17.7% in 2006, to $70,000, from $85,000, in 2005. Provision for
uncollectible accounts decreased $44,000, to ($8,000), in 2006 compared to
$36,000, in 2005. Income from operations for the period ended November 30, 2006
was $690,000 as compared to $727,000 in 2005. Interest income increased $47,000,
to $57,000, in 2006, compared to $10,000, in 2005, as a result of the Company
investing excess cash in higher yielding investments. Interest expense decreased
$14,000 to $30,000 in 2006, compared to $44,000 in 2005, primarily due to a
decrease in outstanding debt.
Net income totaled $717,000, or 18.3% of revenue in 2006 as compared to $693,000, or 13.5% of revenue in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided from operating activities totaled $868,000 during 2006. Cash provided from operating activities principally represents net income of $717,000, plus depreciation and amortization of $70,000, plus the loss on the sale of equipment of $18,000, less the change in the provision for doubtful accounts of ($8,000), plus a reduction in trade accounts receivable of $12,000, less an increase in restricted cash of $30,000, plus a decrease in Marketing Fund contributions receivable of $900, plus a decrease in inventory of $19,000, plus a decrease in notes receivable of $69,000, plus a decrease in prepaid expenses of $35,000, less a decrease in accounts payable of $37,000, a decrease in accrued liabilities of $62,000, plus an increase in unexpended Marketing Fund contributions of $28,000, and less a decrease in deferred revenue of $36,000. Cash provided from operating activities in 2005 totaled $974,000. This cash principally represented net income of $693,000, plus depreciation and amortization of $85,000, plus the increase in provision for doubtful accounts of $36,000, plus a reduction in trade accounts receivable of $94,000, plus a reduction in restricted cash of $118,000, plus a reduction in Marketing Fund contributions receivable of $34,000, plus a reduction in notes receivable of $31,000, plus an increase in deferred revenue of $191,000, offset by a decrease in accrued liabilities of $93,000, a decrease in Marketing Fund obligations of $151,000, an increase in prepaid and other assets of $22,000, an increase in inventories of $1,000, and a decrease in accounts payable of $39,000.
Cash used for investing activities during 2006 totaled $10,000, consisting of the purchase of equipment of $14,000, offset by proceeds from the sale of equipment of $4,000. Cash used for investing activities during 2005 totaled $16,000, for the purchase of property and equipment.
Financing activities used $1,272,000 during 2006, due to the repayment of notes payable of $267,000 and the payment of dividends equal to $1,011,000, offset by proceeds of $6,000 from the exercise of options. Financing activities used $946,000 during 2005, due to the repayment of notes payable of $253,000 and the payment of dividends of $717,000, offset by proceeds of $24,000 from the exercise of stock options.
It is the Company's intent that future dividends will be considered after reviewing returns to shareholders, profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company's intent going forward to declare and pay dividends on a quarterly basis.
The Company believes execution of this 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 any of 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
Systems royalty fees from franchised stores represent a fee of 5% of net retail sales of franchised units. Royalty revenues are recognized on the accrual basis using estimates based on past history and seasonality.
The Company recognizes franchise fee revenue upon the opening of a franchise store. Direct costs associated with the franchise sales are deferred until the franchise fee revenue is recognized. These costs include site approval, construction approval, commissions, blueprints and training costs.
The Company earns a licensing fee from the sale of par-baked bagels from a third-party commercial bakery and from the sale of coffee from a coffee bean roaster for the sale of BAB branded product to the franchised and licensed units.
Long-Lived Assets
Property and equipment are recorded at cost. Improvements and replacements are capitalized, while expenditures for maintenance and routine repairs that don't extend the life of the asset are charged to expense as incurred. Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets. Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation. Estimated useful lives for the purpose of depreciation and amortization are 3 to 7 years for property and equipment and 10 years, or the term of the lease if less, for leasehold improvements.
The Company's intangible assets consist primarily of trademarks and goodwill. Beginning in 2003, SFAS 142, "Goodwill and Other Intangible Assets" was adopted by the Company. This requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests. The Company no longer amortizes goodwill or trademarks. (See Note 2 of the audited consolidated financial statements included herein.)
Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of royalty and wholesale accounts receivables. Amounts due from franchisees represented approximately 60% and 55% of the receivable balance at November 30, 2006 and 2005, respectively. The Company believes it has maintained adequate reserves for doubtful accounts. The Company reviews the collectibility of receivables periodically, taking into account payment history and industry conditions.
Valuation Allowance and Deferred Taxes
A valuation allowance is the portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.
As of November 30, 2006, the Company has cumulative net operating loss carryforwards expiring between 2017 and 2021 for U.S. federal income tax purposes of approximately $6,578,000. The net operating loss carryforwards are subject to limitation in any given year as a result of the Company's initial public offering and may be further limited if certain other events occur. A valuation allowance has been established for $2,032,000 at November 30, 2006 for the deferred tax benefit related to those loss carryforwards and other deferred tax assets for which it is considered more likely than not that the benefit will not be realized. (See Note 3 of the audited consolidated financial statements included herein.) In prior years, the Company established a full valuation allowance because it believed there was uncertainty as to realization of the net operating loss carryforward deferred tax asset based on historical operating results. The full valuation allowance still exists at the end of 2006 because the Company believes it is appropriate.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) establishes accounting standards for transactions in which a company exchanges its equity instruments for goods or services. In particular, this Statement will require companies to record compensation expense for all share-based payments, such as employee stock options, at fair market value. This Statement is effective as of the beginning of the first annual reporting period that begins after December 15, 2005 (the Company's period beginning December 1, 2006). Adoption of SFAS No. 123(R) is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and correction of errors made in fiscal years beginning after the date this Statement is issued. Adoption of SFAS No. 154 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN No. 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, that may result from the adoption of FIN No. 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is encouraged. The adoption of SFAS No. 157 is not expected to have a material impact on the Company's financial position or results of operations.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm is included immediately following.
BAB, Inc. Years Ended November 30, 2006 and November 30, 2005
C o n t e n t s
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors of BAB, Inc.
We have audited the accompanying consolidated balance sheet of BAB, Inc. as of November 30, 2006 and the related consolidated statements of income, stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As disclosed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements", on November 30, 2006.
By: /s/ McGladrey and Pullen, LLP Chicago, Illinois February 27, 2007 |
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors of BAB, Inc.
We have audited the accompanying consolidated balance sheet of BAB, Inc. as of November 30, 2005, and the related consolidated statements of income, stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
By: /s/ ALTSCHULER, MELVOIN AND GLASSER LLP Chicago, Illinois January 20, 2006 |
BAB, Inc Consolidated Balance Sheets November 30 2006 and 2005
2006 2005
------------ ------------
ASSETS
Current Assets
Cash $1,792,666 $2,206,524
Restricted cash 234,114 204,055
Receivables
Trade accounts receivable (net of allowance for doubtful
accounts of $32,352 in 2006 and $83,220 in 2005) 92,377 104,110
Marketing fund contributions receivable from franchisees
and stores 29,478 30,389
Notes receivable (net of allowance for doubtful accounts of
$10,690 in 2006 and $7,769 in 2005) 8,262 33,700
Inventories 46,048 65,255
Prepaid expenses and other current assets 100,439 135,488
------------ ------------
Total Current Assets 2,303,384 2,779,521
------------ ------------
Property, plant and equipment 100,761 169,081
Notes receivable (net of allowance for doubtful accounts of
$5,906 in 2006) 5,282 40,849
Trademarks 763,667 763,666
Goodwill 3,542,772 3,542,772
Other (net of accumulated amortization of $302,486 in 2006
and $293,329 in 2005) 2,896 12,053
------------ ------------
Total Noncurrent Assets 4,415,378 4,528,421
------------ ------------
Total Assets $6,718,762 $7,307,942
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $192,740 $266,824
Accounts payable 55,961 93,428
Accrued expenses and other current
liabilities 445,506 507,279
Dividends payable 290,524 577,781
Unexpended marketing fund contributions 186,479 158,913
Deferred franchise fee revenue 210,000 210,000
Deferred licensing revenue 76,579 71,579
------------ ------------
Total Current Liabilities 1,457,789 1,885,804
------------ ------------
Long-term debt (net of current portion) 251,567 444,307
Deferred revenue (net of current portion) 45,818 86,980
------------ ------------
Total Noncurrent Liabilities 297,385 531,287
------------ ------------
Total Liabilities 1,755,174 2,417,091
------------ ------------
Stockholders' Equity
Common stock ($.001 par value; 15,000,000 shares
authorized; 8,426,377 and 8,412,391 shares issued,
and 7,222,932 and 7,208,946 shares outstanding as of
November 30, 2006 and 2005, respectively) 13,508,216 13,508,202
Additional paid-in capital 876,999 870,935
Treasury stock (222,781) (222,781)
Accumulated deficit (9,198,846) (9,265,505)
------------ ------------
Total Stockholders' Equity 4,963,588 4,890,851
------------ ------------
Total Liabilities and Stockholders' Equity $6,718,762 $7,307,942
============ ============
See accompanying notes
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BAB, Inc Consolidated Statements of Income November 30, 2006 and 2005
2006 2005
---------------- ----------------
Revenues
Net sales by Company-owned stores $ 500,689 $ 1,440,118
Royalty fees from franchised stores 2,275,483 2,277,099
Franchise fees 272,219 217,500
Licensing fees and other income 869,000 1,190,378
---------------- ----------------
Total Revenues 3,917,391 5,125,095
---------------- ----------------
Operating Expenses
Food, beverage and paper costs 159,615 500,374
Store payroll and other operating expenses 472,029 1,148,849
Selling, general and administrative expenses:
Payroll-related expenses 1,481,174 1,431,847
Occupancy 137,268 125,185
Advertising and promotion 110,055 149,648
Professional service fees 186,644 207,529
Travel expenses 139,337 142,657
Depreciation and amortization 69,653 84,664
Other 472,115 607,359
---------------- ----------------
Total Operating Expenses 3,227,890 4,398,112
---------------- ----------------
Income from operations 689,501 726,983
---------------- ----------------
Interest income 56,790 9,881
Interest expense (29,684) (44,007)
---------------- ----------------
Income before provision for income taxes 716,607 692,857
---------------- ----------------
Provision for income taxes
Current - -
Deferred - -
---------------- ----------------
---------------- ----------------
Net Income $ 716,607 $ 692,857
================ ================
Net Income per share - Basic $ 0.10 $ 0.10
---------------- ----------------
Net Income per share - Diluted $ 0.10 $ 0.10
---------------- ----------------
Weighted average number of shares outstanding - Basic 7,222,560 7,183,783
Weighted average number of shares outstanding - Diluted 7,259,149 7,240,721
See accompanying notes
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BAB, Inc Consolidated Statements of Stockholders' Equity November 30, 2006 and 2005
Additional
Common Stock Paid-In Treasury Stock Accumulated
Shares Amount Capital Shares Amount Deficit Total
------------------------ ---------- --------------------------- -------------- ----------------
November 30, 2004 $8,232,939 $13,508,023 $847,562 $(1,203,445) $ (222,781) $ (9,236,402) $ 4,896,402
Stock Options Exercised 179,452 179 23,373 23,552
Dividends Declared (721,960) (721,960)
Net Income 692,857 692,857
November 30, 2005, ----------- ------------ ---------- ------------ -------------- -------------- ----------------
as previously reported 8,412,391 13,508,202 870,935 (1,203,445) (222,781) (9,265,505) 4,890,851
----------- ------------ ---------- ------------ -------------- -------------- ----------------
Cumulative effect of
adjustment to reflect
adoption of SEC Staff
Accounting Bulletin No.
108 (See Note 2) 73,938 73,938
----------- ------------ ---------- ------------ -------------- -------------- ----------------
November 30, 2005, as
restated 8,412,391 13,508,202 870,935 (1,203,445) (222,781) (9,191,567) 4,964,789
----------- ------------ ---------- ------------ -------------- -------------- ----------------
Stock Options Exercised 13,986 14 6,064 6,078
Dividends Declared (723,886) (723,886)
Net Income 716,607 716,607
----------- ------------ ---------- ------------ -------------- -------------- ----------------
November 30, 2006 $8,426,377 $13,508,216 $876,999 $(1,203,445) $ (222,781) $ (9,198,846) $ 4,963,588
----------- ------------ ---------- ------------ -------------- -------------- ----------------
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See accompanying notes
BAB, Inc Consolidated Statements of Cash Flow November 30, 2006 and 2005
2006 2005
---------------- ----------------
Operating activities
Net income $ 716,607 $ 692,857
Depreciation and amortization 69,653 84,664
Loss on sale of equipment 17,651 -
Provision for uncollectible accounts, net of recoveries (8,346) 36,000
Changes in:
Trade accounts receivable 11,733 93,640
Restricted cash (30,059) 117,550
Marketing fund contributions receivable 911 34,017
Notes Receivable 69,352 30,597
Inventories 19,207 (1,148)
Prepaid expenses and other 35,050 (22,233)
Accounts payable (37,466) (39,102)
Accrued liabilities 12,164 (92,991)
Unexpended marketing fund contributions 27,566 (151,084)
Deferred revenue (36,162) 191,059
---------------- ----------------
Net Cash Provided by Operating Activities 867,861 973,826
---------------- ----------------
Investing activities
Purchase of equipment (14,327) (15,959)
Proceeds from sale of equipment 4,500 -
---------------- ----------------
Net Cash Used In Investing Activities (9,827) (15,959)
---------------- ----------------
Financing activities
Repayment of borrowings (266,825) (252,568)
Proceeds from exercise of stock options 6,077 23,552
Payment of dividend (1,011,144) (717,161)
---------------- ----------------
Net Cash Used In Financing Activities (1,271,892) (946,177)
---------------- ----------------
Net Increase (Decrease) in Cash (413,858) 11,690
Cash, Beginning of Period 2,206,524 2,194,834
---------------- ----------------
Cash, End of Period $ 1,792,666 $ 2,206,524
================ ================
Supplemental disclosure of cash flow information:
Interest paid $ 30,977 $ 45,232
================ ================
Income taxes paid $ - $ -
================ ================
|
Supplemental disclosure of noncash investing and financing activities:
On November 16, 2006, a quarterly $0.02 per share cash dividend and a $0.02 per
share special dividend was declared, payable January 11, 2007, and recorded as a
dividend payable in the amount of $290,524 at November 30, 2006. On October 7,
2005 a semi-annual $0.02 per share cash dividend and a special dividend of $0.06
per share was declared, payable January 3, 2006, and was recorded as a dividend
payable in the amount of $577,781 at November 30, 2005.
See accompanying notes
BAB, Inc
Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 1 - Nature of Operations
BAB, Inc. (the "Company") was incorporated under the laws of the State of Delaware on July 12, 2000. The Company currently operates, franchises and licenses bagel, muffin and coffee retail units under the Big Apple Bagels ("BAB"), My Favorite Muffin ("MFM") and Brewster's Coffee trade names. The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution, including 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. (See Note 6.)
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect 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
Systems royalty fees from franchised stores represent a fee of 5% of net sales of franchised units. Royalty revenues are recognized on the accrual basis using estimates based on past history and seasonality.
The Company recognizes franchise fee revenue upon the opening of a franchise store. Direct costs associated with 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, 2006 and 2005
Note 2 - Summary of Significant Accounting Policies (Continued)
The Company earns a licensing fee from the sale of par-baked bagels from a third-party commercial bakery and from the sale of coffee from a coffee bean roaster for the sale of BAB branded product to the franchised and licensed units noted in the table below. Stores which have been opened, and unopened stores for which a Franchise Agreement has been executed at November 30, 2006 and 2005 are as follows:
2006 2005
------------- -------------
Stores opened
Company-owned 1 2
Franchisee-owned 136 145
Licensed 3 3
------------- -------------
140 150
Unopened stores
Franchise Agreement 8 8
------------- -------------
148 158
------------- -------------
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Segments
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which 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 within two reportable segments operating in the United States:
Company Store Operations and Franchise Operations.
Marketing Fund
Systems established a Marketing Fund (Fund) during 1994. Franchisees and the Company-owned store are required to contribute to the Fund based on their retail sales. The Fund also earns revenues from commissions paid by certain vendors on the sale of BAB licensed products to franchisees.
Cash
Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Deposits may from time to time exceed federally insured limits. As of November 30, 2006 and 2005, the Fund cash balances, which are restricted, were $155,300 and $128,129 respectively. Also included in restricted cash at November 30, 2006 and 2005 is a $78,814 and $75,926 certificate of deposit, respectively, that serves as collateral for a Letter of Credit for the Corporate Office facility lease entered with IL-Corporate 500 Centre, L.L.C., as required by the lease.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 2 - Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Receivables are carried at original invoice amount less estimates made for doubtful accounts. Management determines the allowances for doubtful accounts by reviewing and identifying troubled accounts on a periodic basis and 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. Certain receivables have been converted to unsecured interest bearing notes.
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 primarily of trademarks and goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets" was adopted beginning with the quarter ended February 29, 2003. This requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests using a discounted cash flow model to determine the assets fair value. The Company no longer amortizes goodwill or trademarks, but instead, the Company's intangible assets are tested annually for impairment. No impairment has been recorded for the years ended November 30, 2006 or 2005.
The net book value of intangible assets with definite lives totaled $2,896 and $12,053 at November 30, 2006 and 2005, respectively. The gross value of definite lived intangible assets and their respective accumulated amortization are as follows:
Accumulated Amortization
Definite Lived Intangible Assets Original Cost November 30, 2006
--------------------------------------------------------------------------------------
Master Lease Origination Fees $95,382 $92,486
--------------------------------------------------------------------------------------
|
Definitive lived intangible assets are being amortized over their useful lives. The Company recorded amortization expense for definitive lived intangible assets of $9,157 for both years ended November 30, 2006 and 2005. The amortization expense on these intangible assets will be $2,896 for the year ending November 30, 2007.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
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 $110,055 and $149,648 in 2006 and 2005, respectively. Included in advertising expense was $73,171 and $66,331 in 2006 and 2005, 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 has established a full valuation allowance on the net deferred tax assets due to the uncertainty of realization. (See Note 3.)
Earnings Per Share
The Company computes earnings per share ("EPS") under SFAS No. 128, "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 warrants, options or other contracts to issue common stock were exercised and resulted in the issuance of additional common shares.
2006 2005
----------- -----------
Numerator:
Net income available to common
shareholders $ 716,607 $ 692,857
Denominator:
Weighted average outstanding shares
Basic 7,222,560 7,183,783
----------- -----------
Earnings per Share - Basic $ 0.10 $ 0.10
----------- -----------
Effect of dilutive common stock 36,589 56,938
Weighted average outstanding shares
Diluted 7,259,149 7,240,721
----------- -----------
Earnings per share - Diluted $ 0.10 $ 0.10
----------- -----------
|
There are 267,500 unexercised options at November 30, 2006 that are not included in the computation of dilutive EPS because their impact would be antidilutive based on current market prices.
Stock Options
The Company uses the intrinsic method, as allowed by SFAS No. 123, "Accounting for Stock-Based Compensation," to account for stock options granted to employees and directors. No compensation expense is recognized for stock options because the exercise price of the options is at least equal to the market price of the underlying stock on the grant date.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 2 - Summary of Significant Accounting Policies (Continued)
Stock Warrants
Stock warrants granted as consideration in purchase acquisitions have been recorded as an addition to additional paid-in capital in the accompanying balance sheet based on the fair value of such stock warrants on the date of the acquisition.
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.
Reclassification
Certain items in prior year Notes to the Consolidated Financial Statements have
been reclassified to conform to the presentation used in 2006.
Adoption of SEC Staff Bulletin No. 108
During the year the Company adopted the SEC Staff issued Staff Accounting
Bulletin (SAB) No. 108 Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, which addresses
how the effects of prior-year uncorrected misstatements should be considered
when quantifying misstatements in current year financial statements. The
adjustment to Stockholders' Equity, in the amount of $73,938, relates to the
accrual for accounting fees and the period in which services for the respective
fiscal period are performed, and there is no income statement effect because the
related accrual was overstated by the same amount at the beginning and end of
the year.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) establishes accounting standards for transactions in which a company exchanges its equity instruments for goods or services. In particular, this Statement will require companies to record compensation expense for all share-based payments, such as employee stock options, at fair market value. This Statement is effective as of the beginning of the first annual reporting period that begins after December 15, 2005 (the Company's period beginning December 1, 2006). Adoption of SFAS No. 123(R) is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of SFAS No. 154 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN No. 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, that may result from the adoption of FIN No. 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is encouraged. The adoption of SFAS No. 157 is not expected to have a material impact on the Company's financial position or results of operations.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 3 - Income Taxes
The components of the income tax (benefit) provision are as
follows:
2006 2005
---------------- ----------------
Federal income tax provision computed at federal
statutory rate $ 243,646 $ 235,571
State income taxes net of federal tax provision 34,526 33,382
Other adjustments 6,544 98,469
Change in valuation allowance (151,566) (230,564)
Utilization of net operating losses (133,150) (136,858)
---------------- ----------------
---------------- ----------------
Provision for Deferred Income Taxes $ - $ -
================ ================
Deferred income tax assets (liabilities) are as follows:
2006 2005
---------------- ----------------
Deferred revenue 129,030 143,068
Deferred rent revenue 15,811 15,318
Marketing Fund net contributions 60,285 49,737
Allowance for doubtful accounts 12,558 32,304
Allowance for doubtful accounts-notes receivable 6,442 3,016
Accrued expenses 12,577 3,882
Net operating loss carryforwards 2,553,375 2,686,525
Other - -
Valuation allowance (2,031,875) (2,316,591)
---------------- ----------------
Total Deferred Income Tax Assets $ 758,205 $ 617,259
---------------- ----------------
Depreciation and amortization (751,583) (611,126)
Franchise Costs (6,622) (6,133)
---------------- ----------------
Total Deferred Income Tax Liabilities $ (758,205) $ (617,259)
---------------- ----------------
---------------- ----------------
Total Net Deferred Tax Assets/Liabilities $ - $ -
================ ================
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As of November 30, 2006, the Company has net operating loss carryforwards expiring between 2017 and 2021 for U.S. federal income tax purposes of approximately $6,578,000. The net operating loss carryforwards are subject to limitation in any given year as a result of the Company's initial public offering and may be further limited if certain other events occur. A valuation allowance has been established for $2,031,875 and $2,316,591 as of November 30, 2006 and 2005, respectively, for the deferred tax benefit related to those loss carryforwards and other deferred tax assets.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 4 - Long-Term Obligations
Long-term debt consisted of the following:
2006 2005
----------- -----------
Bank note payable $ 170,735 $ 416,552
Note payable to former stockholder $ 273,572 $ 294,579
----------- -----------
$ 444,307 $ 711,131
Less current portion ($192,740) ($266,824)
----------- -----------
Long-Term Debt, Net of Current Portion $ 251,567 $ 444,307
----------- -----------
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On June 25, 2004, the Company entered into a Business Loan and Security Agreement ("Bank Agreement") with Associated Bank which provided for a term loan in the original amount of $723,700. The term loan under the Bank Agreement is secured by substantially all of the assets of the Company and is to be repaid in monthly installments of $21,900, including interest at a rate of 5.5 % per annum, with a final payment due July 1, 2007. The balance of this note payable was $170,735 and $416,552 as of November 30, 2006 and 2005, respectively.
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 $273,572 and $294,579 as of November 30, 2006 and 2005, respectively.
As of November 30, 2006, annual maturities on long-term obligations due are as follows:
Year Ending November 30:
---------------------------- --------------
2007 $192,740
2008 $23,051
2009 $24,146
2010 $25,292
2011 $26,494
Thereafter $152,585
---------------------------- ----------
Total $444,308
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BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 5 - Stockholders' Equity
On March 13, 2006, May 25, 2006, and September 6, 2006, a $.02 per share dividend was declared, and was paid on April 13, 2006, July 5, 2006, and October 9, 2006, respectively. On November 16, 2006, a $.02 quarterly dividend and a $.02 special dividend was declared, payable January 11, 2007. A dividend payable, in the amount of $290,524, was recorded at November 30, 2006. On May 12, 2005, a $0.02 per share dividend was declared and was paid on June 21, 2005. On October 7, 2005, an $0.08 cash dividend was declared consisting of a $0.02 semi-annual and a $0.06 special dividend payable January 3, 2006. This transaction was recorded as a dividend payable in the amount of $577,781 at November 30, 2005.
Note 6 - Stock Options and Warrants
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. 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 or 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. Range of exercise prices of options granted as of November 30, 2006 are $0.065 to $1.27.
Activity under the Plan during the two years ended November 30, is as follows:
2006 2005
------------------------------------------------------------------------
Options Weighted average Options Weighted average
exercise price exercise price
-------------------------------------- ---------- -------------------- ---------- --------------------
Options outstanding at beginning of
year 163,034 $0.722 258,486 $0.246
Granted 290,000 $1.221 95,000 $0.914
Forfeited (6,099) $0.833 (11,000) $0.727
Exercised (13,986) $0.434 (179,452) $0.132
-------------------------------------- ---------- -------------------- ---------- --------------------
Outstanding at end of year 432,949 $1.064 163,034 $0.722
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BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 6 - Stock Options and Warrants (Continued)
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------
Weighted average
Range of Options remaining Weighted average Options Weighted average
exercise price outstanding contractual life exercise price exercisable exercise price
---------------- -------------- -------------------- -------------------- -------------- --------------------
$0.46 - $0.51 50,049 7.0 $0.500 28,634 $0.507
$0.60 10,000 7.6 $0.600 10,000 $0.600
$0.88 - $0.97 65,400 8.0 $0.935 21,800 $0.935
$0.86 20,000 8.5 $0.860 20,000 $0.860
$1.15 - $1.27 72,500 9.0 $1.216 -- --
$0.97 20,000 10.0 $0.970 20,000 $0.970
$1.25 100,000 10.0 $1.250 -- --
$1.25 95,000 10.0 $1.250 -- --
-------------- -------------------- -------------- --------------------
432,949 $1.064 100,434 $0.772
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The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting and Disclosure of Stock-Based Compensation." Accordingly, no employee compensation expense has been recognized for the Plan in the financial statements. Had employee compensation expense for the Company's Plan been recorded in the financial statements, consistent with provisions of SFAS No. 123, net earnings would have been reduced by $43,460 in fiscal 2006 and $31,710 in fiscal 2005 based on the Black-Scholes option-pricing model. The Company's net income and net income per share for 2006 and 2005 would have been as follows:
2006 2005
----------- -----------
Pro forma impact of fair value method
Reported net income $ 716,607 $ 692,857
Less: Fair value impact of employee stock
compensation (43,460) (31,710)
----------- -----------
Pro forma net income $ 673,147 $ 661,147
----------- -----------
Earnings per common share
Basic - as reported $ 0.10 $ 0.10
Diluted - as reported $ 0.10 $ 0.10
Basic - pro forma $ 0.09 $ 0.09
Diluted - pro forma $ 0.09 $ 0.09
Weighted average Black Scholes fair value
assumptions
Risk free interest rate 4.67% 4.00%
Expected life 10.0 yrs 5.3 yrs
Expected volatility 0.527 2.548
Expected dividend yield 6.4% 5.5%
Fair Value of grants $ 0.29 $ 0.60
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On February 1, 1999, the Company purchased certain assets of a related group of entities doing business as Jacobs Bros. Bagels, a chain operating retail bagel stores in the Chicago, Illinois area. The assets acquired included 8 retail locations and a central commissary facility paid for with $950,000 in cash and issuance of warrants to acquire 333,332 shares of the Company's common stock. The warrants provide for the purchase of 183,332 and 150,000 shares of common stock at an exercise price of $1.88 and $2.25 per share, respectively. The warrants were first exercisable on February 1, 2000 and expired on January 31, 2006. None of the warrants were exercised.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
Note 7 - Commitments
The Company rents its Corporate Office and the Company-owned store under leases which require it to pay real estate taxes, insurance and general repairs and maintenance. Rent expense for the years ended November 30, 2006 and November 30, 2005 was $122,128 and $212,739, net of sublease income of $123,950 and $140,108, respectively. 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, 2006, future minimum annual rental commitments under leases, net of sublease income of $126,423 in 2007, $128,648 in 2008, $130,913 in 2009 and $10,941 in 2010 are as follows:
2007 $120,672
2008 $125,858
2009 $137,394
2010 $149,911
Thereafter $67,818
-------------------------------------
Total $601,653
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Note 8 - Related Party Transactions
Michael K. Murtaugh, the Company's Vice President and General Counsel, was the sole stockholder of Bagel One, Inc., which owned and operated a Big Apple Bagels franchise store in Illinois. A note receivable owed by Bagel One, Inc. to Systems, guaranteed by Mr. Murtaugh, effective March 2000 in the amount of $30,025 for a term of six years bearing 9% interest, had an outstanding balance of $0 and $2,244 as of November 30, 2006 and 2005, respectively. There are no payments in arrears. Interest income recognized and received by Systems amounted to $47 and $300 in 2006 and 2005, respectively. The note was paid off in full in 2006.
Note 9 - 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 contributed $15,000 in both 2006 and 2005.
Note 10 - 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 has changed focus to the franchise division.
BAB, Inc Notes to the Consolidated Financial Statements November 30, 2006 and 2005
The following tables present segment information for the years ended November
30, 2006 and 2005:
Net Revenues Operating Income (Loss)
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
Company Store Operations $ 759,490 $ 1,906,888 $ (246,238) $ (364,624)
Franchise Operations and Licensing Fees 3,157,901 3,218,207 1,783,954 1,805,089
---------------- ---------------- ---------------- ----------------
$ 3,917,391 $ 5,125,095 $ 1,537,716 $ 1,440,465
---------------- ----------------
Corporate Expenses (848,215) (713,482)
Interest Expense, Net of Interest Income 27,106 (34,126)
---------------- ----------------
Net Income $ 716,607 $ 692,857
================ ================
Operating Segment Data
Identifiable Capital Depreciation and
Assets Expenditures Amortization
---------------- ---------------- ----------------
Year Ended November 30, 2006:
Company Store Operations $ 95,910 $ 7,464 $ 48,080
Franchise Operations (other than goodwill) 189,194 6,863 21,573
Goodwill and Other Indefinite Lived Intangible Assets 4,306,439
---------------- ---------------- ----------------
$ 4,591,543 $ 14,327 $ 69,653
================ ================ ================
Year Ended November 30, 2005:
Company Store Operations $ 187,467 $ 14,422 $ 66,752
Franchise Operations (other than goodwill) 267,969 1,537 17,912
Goodwill and Other Indefinite Lived Intangible Assets 4,306,439
---------------- ---------------- ----------------
$ 4,761,875 $ 15,959 $ 84,664
================ ================ ================
Reconciliation to Total Assets as Reported 2006 2005
---------------- ----------------
Assets-Total reportable segments - Identifiable
assets $ 4,591,543 $ 4,761,875
Unallocated Amounts
Cash 2,026,780 2,410,579
Prepaid expenses and other current assets 100,439 135,488
---------------- ----------------
Total Consolidated Assets $ 6,718,762 $ 7,307,942
================ ================
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There were no sales to any individual customer during either year in the two-year period ended November 30, 2006 that represented 10% or more of net sales.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
Disclosure controls
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended) as of November 30, 2006. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Internal control over financial reporting
The Chief Executive Officer and the Chief Financial Officer confirm that there was no change in the Company's internal control over financial reporting during the year ended November 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
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, 2006.
CODE OF ETHICS
BAB, Inc.
Code of Ethics
November 30, 2006
BAB, Inc. (the Company) is formally establishing, although it believes it has complied with the tenants of such a document during its existence, a Code of Ethics, pursuant to Section 406 of the Sarbanes-Oxley Act, which is designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
o Full, fair, accurate, timely and understandable disclosure in reports
and documents that the Company files with, or submits to, the
Securities and Exchange Commission, and in other public communications
made by the Company;
o Compliance with applicable government laws, rules and regulations;
o The prompt internal reporting of violations of the Code to the
appropriate person or persons identified in the Code; and o
Accountability for adherence to the Code.
The Code of Ethics promulgated by Sarbanes-Oxley, expects the highest standard of ethical conduct and fair dealing of its Senior Financial Officers (SFO), defined as the Chief Executive Officer and Chief Financial Officer. While, per Sarbanes-Oxley, this policy is intended to only cover the actions of the SFO, the Company expects it's Controller, other officers, directors and employees will also review this Code and abide by its provisions. The Company's reputation is a valuable asset and as such must continually be guarded by all associated with the Company so as to earn the trust, confidence and respect of our suppliers, customers and shareholders.
The Company's SFO are committed to conducting business in accordance with the highest ethical standards. The SFO must comply with all applicable laws, rules and regulations. Furthermore, SFO must not commit an illegal or unethical act, or instruct or authorize others to do so.
CONFLICTS OF INTEREST
The SFO must act in the best interests of the Company, and should avoid any situation that presents an actual, potential or apparent conflict between their personal interests and the interests of the Company.
The SFO have a conflict when their personal interests, relationships or activities, or those of a member of their immediate family, interfere or conflict, or even appear to interfere or conflict, with the Company's interests. A conflict of interest prevents one from acting objectively with the Company's best interests in mind, or prevents one from exercising sound, ethical business judgment.
PUBLIC COMMUNICATIONS
The Company is committed to providing Company information to the public in a manner that complies with all applicable legal and regulatory requirements and that promotes investor confidence by facilitating fair, orderly and efficient behavior. The Company's reports and documents filed with the Securities and Exchange Commission, as well as any other public communications, must be complete, fair, accurate and timely. The SFO must do everything in their power to comply with these standards.
CODE OF ETHICS (Continued)
GIFTS
The SFO may not give or receive kickbacks, rebates, gifts, services or any other benefits, other than gifts of nominal value (amounts would be considered in excess of nominal value if they create the appearance of impropriety, or actually influence the Company to give preferential, versus arms-length, treatment to the provider) from a supplier, competitor, government official, customer or any other person the Company does, or expects to do business with.
LOANS
SFO may not accept loans, or loan guarantees, from the Company, or from any persons or entities, either doing business with, or seeking business with the Company. The Company will not make any loans to SFO, officers, directors, employees or any outside parties doing business with, or seeking business with the Company.
CONFIDENTIAL INFORMATION
SFO, officers, directors and employees are to respect the confidentiality of Company, employee, supplier, customer, competitor and any other persons or entities' information that is not a matter of public record. Confidential information must not be used for personal gain.
COMPLIANCE WITH THIS CODE
SFO are expected to fully comply with this Code. This Code will be strictly enforced and any violations will be dealt with immediately, and depending on the severity of noncompliance, could lead to disciplinary action including termination. Furthermore, violations involving unlawful behavior will be reported to appropriate outside authorities. If anyone is unclear as to the possibility of a violation of this Code, he should seek the opinion of the Company's Vice President and General Counsel, the Audit Committee and/or outside legal counsel.
If SFO, officers, directors and employees have knowledge, or are suspicious of any non-compliance with this Code, or are concerned that circumstances could lead to a violation of this Code, they should discuss this with their immediate supervisor, the Company's Vice President and General Counsel, the Audit Committee and/or outside legal counsel.
The Company will not allow any retaliation against an employee, officer, or director who acts in good faith in reporting any actual or suspected violation. Open communication of issues and concerns without fear of retribution or retaliation is vital to the success of this Code.
ADHERENCE TO THE CODE
The Vice President and General Counsel will have primary authority and responsibility for the enforcement of this Code, subject to the supervision of the Audit Committee of the Board of Directors, and shall promptly notify the Audit Committee of any violation of this Code.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation earned by executive officers that received annual salary and bonus compensation of more than $100,000 during years 2006, 2005 and 2004 (the "Named Executive Officers"). The Company has no employment agreements with any of its executive officers.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------------
Awards Payouts
------------------------------------------------------------------------------------------
Restricted Securities
Stock Underlying LTIP All Other
------------------------------
Name and Year Salary Bonus Other Awards Options/SARS(#) Payouts Compensation
Principal Position End ($) ($) ($) ($) ($) ($)
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
2006 245,571 72,178 -- -- 70,000 -- --
Michael W. Evans, ----------------------------------------------------------------------------------------------------
President and CEO 2005 233,492 35,851 -- -- 20,000 -- --
----------------------------------------------------------------------------------------------------
2004 221,209 39,600 -- -- 20,000 -- --
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
2006 184,033 54,135 -- -- 70,000 -- --
Michael K. Murtaugh,----------------------------------------------------------------------------------------------------
Vice President and 2005 175,902 26,888 -- -- 20,000 -- --
General Counsel ----------------------------------------------------------------------------------------------------
2004 165,906 29,700 -- -- 20,000 -- --
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
2006 132,957 9,500 -- -- 30,000 -- --
Jeffrey M. Gorden, ----------------------------------------------------------------------------------------------------
Chief Financial 2005 126,430 -- -- -- 6,000 -- --
Officer ----------------------------------------------------------------------------------------------------
2004 121,919 5,000 -- -- 5,500 -- --
------------------------------------------------------------------------------------------------------------------------
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Stock options were issued at fair market value on the issue date to officers
owning less than 10% of the Company stock and 110% of fair market value at issue
date to those officers having a 10% or greater ownership of Company stock. All
options expire 10 years after date of grant. Options issued during 2006 were as
follows: (1) 75,000 on December 7, 2005 with a fair market issue price of $1.15
and vests 1/3 in 12 months, 1/3 in 24 months, and 1/3 in 36 months from the
issue date; (2) 20,000 issued November 15, 2006 with a fair market value of $.97
with immediate vesting; (3) 100,000 issued November 15, 2006 with a fair market
value of $1.25 that vest after 5 years; and (4) 95,000 issued November 28, 2006
with a fair market value of $1.25 that vest after 5 years. Options issued to the
above officers totaled 170,000 shares or 58.6% of total options issued. During
2005, 75,000 options were issued on January 25, 2005 with a fair market issue
price of $0.88 and vests as follows: 1/3 in 12 months, 1/3 in 24 months and 1/3
in 36 months from issue date and 20,000 options issued June 1, 2005 with a fair
market issue price of $0.86 and vests immediately. Options issued to the above
officers totaled 52,000 shares or 54.7% of total options issued. During 2004,
95,000 options were issued on December 2, 2003 with a fair market issue price of
$0.46 and vests as follows: 1/3 in 12 months, 1/3 in 24 months and 1/3 in 36
months from the issue date and 20,000 options were issued July 1, 2004 with a
fair market issue price of $.60 and vests immediately.
Options issued to the above officers totaled 48,500 or 42.2% of options granted
in 2004.
Options and percentages issued to officers, as discussed above, include amounts issued to John J. Bracken (former Vice President Operations), who retired November, 2005.
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 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 Articles 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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 16, 2007 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 16, 2007 includes the number of shares, which such person has the right to acquire within sixty (60) days after such date. All shares have been adjusted for a 4:1 stock dividend as of January 20, 2003.
--------------------------------------------------------------------------------------------------------------------
Name and Address Shares Percentage
--------------------------------------------------------------------------------------------------------------------
Michael W. Evans
500 Lake Cook Road, Suite 475 2,829,946 (1)(2)(3)(4) 38.45
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
Michael K. Murtaugh
500 Lake Cook Road, Suite 475 2,760,133 (1)(2)(4)(5) 37.50
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
Holdings Investment, LLC
220 DeWindt Road 2,096,195 (1)(6) 28.48
Winnetka, IL 60093
--------------------------------------------------------------------------------------------------------------------
Jeffrey M. Gorden
500 Lake Cook Road, Suite 475 87,167 (7) 1.18
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
Steven G. Feldman
750 Estate Drive, Suite 104 40,000 (8) .54
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
James A. Lentz
1415 College Lane South 34,932 (9) .47
Wheaton, IL 60187
--------------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group
(5 persons) 3,655,983 (1)(2)(3)(4)(5)(6)(7)(8)(9) 49.67
--------------------------------------------------------------------------------------------------------------------
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(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 20,000 stock options fully exercisable as of 2/16/07.
(3) Includes 3,500 shares inherited by spouse
(4) Includes 22,222 shares held by children
(5) Includes 2,540 shares held by 401 (k) trust.
(6) Mr. Thomas F. Pick has beneficial ownership of 25.18% of Holdings
Investment, LLC, which is the equivalent of 527,884 shares of BAB, Inc.
Common stock.
(7) Includes 7,500 stock options fully exercisable as of 2/16/07.
(8) Includes 30,000 stock options fully exercisable as of 2/16/07.
(9) Includes 20,000 stock options fully exercisable as of 2/16/07.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information relates to certain relationships and 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.
Management believes that the following transactions were effected on terms no less favorable to the Company than could have been realized in arm's length transactions with unaffiliated parties.
Executive Officers and Directors
Michael K. Murtaugh, the Company's Vice President and General Counsel, was the sole stockholder of Bagel One, Inc., which owned and operated a Big Apple Bagels franchise store in Illinois. A note receivable owed by Bagel One, Inc. to Systems, guaranteed by Mr. Murtaugh, effective March 2000 in the amount of $30,025 for a term of 6 years bearing 9% interest, had an outstanding balance at November 30, 2005 of $2,244 and there are no payments in arrears. This note was paid off in full during fiscal year 2006.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
12/4/06 On December 4, 2006, the Company announced a change in small business issuer's certifying accountant. A majority of the partners at AM&G, LLP have become partners of McGladrey & Pullen, LLP. McGladrey & Pullen, LLP was appointed as the Company's new auditor.
9/6/06 On September 6, 2006, the Board of Directors of BAB, Inc. authorized a $0.02 per share quarterly cash dividend. The dividend is payable October 9, 2006 to stockholders of record as of September 18, 2006.
5/25/06 On May 25, 2006, the Board of Directors of BAB, Inc. authorized a $0.02 per share quarterly cash dividend. The dividend is payable July 5, 2006 to stockholders of record as of June 14, 2006.
3/13/06 On March 10, 2006, the Board of Directors of BAB, Inc. authorized a $0.02 per share quarterly cash dividend. The dividend is payable April 13, 2006 to stockholders of record as of March 23, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board of Directors, upon recommendation of the Audit Committee, appointed the firm Altschuler, Melvoin & Glasser LLP ("AM&G") certified public accountants for 2005. On November 29, 2006, BAB, Inc. ("Company") was notified that a majority of the partners of Altschuler, Melvoin and Glasser LLP (AM&G), including the lead audit partner for the Company, had become partners of McGladrey & Pullen, LLP and, as a consequence, that AM&G was compelled to resign and would no longer be the auditor for the Company. McGladrey & Pullen, LLP was appointed as the Company's new auditor.
The audit reports of AM&G on the consolidated financial statements of BAB, Inc. and Subsidiaries as of and for the years ended November 30, 2005 and 2004 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to engage McGladrey & Pullen, LLP was approved by the board of directors.
In connection with the audits of the Company's consolidated financial statements for each of the fiscal years ended November 30, 2005 and 2004, and through the date of this Current Report, there were: (1) no disagreements between the Company and AM&G on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of AM&G, would have caused AM&G to make reference to the subject matter of the disagreement in their reports on the Company's financial statements for such years, and (2) no reportable events within the meaning set forth in Item 304(a)(1)(iv)(B) of Regulation S-B.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (Continued)
AM&G had, at the time it was initially appointed to be the Company's auditor, a relationship with American Express Tax and Business Services, Inc. (TBS) from which it leased auditing staff who were full time, permanent employees of TBS and through which its partners provided non-audit services. As a result of this arrangement, AM&G had no full time employees and therefore, none of the audit services performed were provided by permanent full-time employees of AM&G. Effective October 1, 2005, TBS was acquired by RSM McGladry, Inc. (RSM) and AM&G's relationship with TBS has been replaced with a similar relationship with RSM. AM&G manages and supervises the audit and audit staff, and is exclusively responsible for the opinion rendered in connection with its examination.
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 provide by AM&G for the years ended November 30, 2006 and 2005 amounted to $17,000 and $70,000, respectively, and fees for audit services provided by McGladrey and Pullen, LLP amounted to $62,000 for the year ended November 30, 2006.
Tax compliance services were provided by RSM McGladrey for 2006 and fees billed amounted to $20,000. In 2005, tax compliance services were provided by TBS for which fees amounted to $24,000.
During the year ended November 30, 2006 and 2005, McGladrey & Pullen, LLP, AM&G, and TBS did not perform any management consulting 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
INDEX TO EXHIBITS
The following Exhibits are filed herewith:
INDEX NUMBER DESCRIPTION ------------ ----------- 3.1 Articles of Incorporation as included within 3.2 Bylaws of the Company 21.1 List of Subsidiaries of the Company 31.1, 31.2 Section 302 of the Sarbanes-Oxley Act of 2002 32.1, 32.2 Section 906 of the Sarbanes-Oxley Act of 2002 |
In accordance with Section 13 of the Exchange Act, the Small business issuer has duly caused this report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.
BAB, INC.
Dated: February 28, 2007 By /s/ Michael W. Evans -------------------- Michael W. Evans, Chief Executive Officer and President (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-KSB has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Dated: February 28, 2007 By /s/ Michael W. Evans -------------------- Michael W. Evans, Chief Executive Officer and President (Principal Executive Officer) Dated: February 28, 2007 By /s/ Michael K. Murtaugh ----------------------- Michael K. Murtaugh, Director and Vice President/General Counsel and Secretary Dated: February 28, 2007 By /s/ Jeffrey M. Gorden --------------------- Jeffrey M. Gorden, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Dated: February 28, 2007 By /s/ Steven G. Feldman --------------------- Steven G. Feldman, Director Dated: February 28, 2007 By /s/ James A. Lentz ------------------ James A. Lentz, Director |
EXHIBIT 3.1 - Certificate of Incorporation
CERTIFICATE OF INCORPORATION
OF
BAB, Inc.
The undersigned, a natural person, for the purpose of organizing a corporation under the laws of the State of Delaware, makes, files and records this Certificate of Incorporation, and hereby certifies that:
I.
The name of the corporation is BAB, Inc.
II.
The address of the registered office of the corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the registered agent of the corporation at that address is The Corporation Trust Company.
III.
The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law.
IV.
The total number of shares of all classes of stock that the Corporation shall have the authority to issue is 20,000,000 shares, consisting of:
(a) 15,000,000 shares of Common Stock, par value $0.001 per share;
(b) 5,000,000 shares of Preferred Stock, par value $0.001 per share.
The board of directors is authorized, subject to limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, voting, powers, preferences and rights of the shares or each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing any series of Preferred Stock.
V.
The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, and the directors need not be elected by written ballot unless required by the bylaws of the corporation.
VI.
In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to make, amend and repeal the bylaws.
VII.
The corporation reserves the right to alter, amend or repeal any provision contained in this Certificate of Incorporation in the manner now or hereinafter prescribed by the laws of the State of Delaware. All rights herein conferred are granted subject to this reservation.
VIII.
A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after the filing of the Certificate of Incorporation of which this article is a part to authorize corporate action further eliminating or limiting the personal liability of the directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification.
IX.
The incorporator is Michael K. Murtaugh, whose mailing address is c/o BAB Holdings, Inc., 8501 W. Higgins Road, Suite 320, Chicago, IL 60631. Upon filing of this Certificate of Incorporation, the powers of the incorporator shall terminate and all powers of governance of the corporation shall be vested in the persons named in Article X as the initial members of the Board of Directors.
X.
The initial members of the Board of Directors, who shall serve until the first annual meeting of stockholders, are:
Name Address Michael W. Evans 8501 W. Higgins Road Chicago, IL 60631 Michael K. Murtaugh 8501 W. Higgins Road Chicago, IL 60631 David L. Epstein 9700 Higgins Road, Suite 630 Rosemont, IL 60018 Robert B. Nagel 516 Elder Drive Winnetka, IL 60093 |
IN WITNESS WHEREOF, this Certificate has been subscribed this 28th day of August, 2000, by the undersigned, who affirms that the statements made herein are true and correct.
Michael K. Murtaugh, Incorporator
EXHIBIT 3.2 - Bylaws of BAB, Inc.
BYLAWS
OF
BAB, Inc.
ARTICLE I
OFFICES
Section 1.01 Registered Office. The registered office of BAB, Inc. (hereinafter called the "Corporation"), in the State of Delaware shall be at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware. The name of the registered agent in charge thereof shall be The Corporation Trust Company.
Section 1.02 Other Offices. The Corporation may also have an office or offices at such other place or places either within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
SEAL
Section 2.01 Corporate Seal. The Board may provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the word "Delaware" and figures representing the year of its incorporation. The use of the seal by the Corporation on a document is not necessary and the use or nonuse of the corporate seal does not affect the validity, recordability or enforceability of a document or act.
ARTICLE III
STOCKHOLDERS
Section 3.1 Place of Meeting. Each meeting of the stockholders of the Corporation shall be held at such place either within or without the State of Delaware as shall be fixed by the Board of Directors and specified in the respective notices or waivers of notice of said meeting.
Section 3.2 Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such place, date and hour as shall be designated in the notice thereof.
Section 3.3 Special Meetings. A special meeting of the stockholders for any purpose may be called at any time by order of the Board of Directors, the Chairman of the Board or the President, unless otherwise prescribed by statute or by the Certificate of Incorporation.
Section 3.4 Notice of Annual and Special Meetings. Written notice of the annual and any special meetings of stockholders, stating the place, date and hour of the meeting, and, for special meetings, the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting, either personally or by mail, not less than ten (10), nor more than sixty (60) days before the date of the meeting.
When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting.
Section 3.05 Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time.
Section 3.06 Organization. Such person as the Board of Directors may have designated or, in the absence of such a person, the chief executive officer of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority such person as of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. The secretary of the meeting shall be the secretary of the Corporation, or, in the absence of the secretary of the Corporation, such person as the chairman appoints.
Section 3.07 Conduct of Business. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting.
Section 3.08 Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.
All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefore by a stockholder entitled to vote or by his or her proxy, a vote by written ballots shall be taken, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting.
Section 3.09 Required Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of statute or by the Certificate of Incorporation or these Bylaws, a different vote is required, in which case such express provisions shall govern and control the decision of such question.
Section 3.10 Consent of Stockholders in Lieu of Meeting. Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the date of the earliest dated consent delivered to the Corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the Corporation in the manner prescribed in the first paragraph of this Section.
ARTICLE IV
BOARD OF DIRECTORS
Section 4.01 Number and Term of Office. The number of directors who shall constitute the whole Board shall be four or such greater or lesser number as the stockholders shall from time to time have designated, at either a regular or special meeting; provided that the Board may increase the number of members by one during any period between annual meetings of the stockholders at which directors are elected. Each director shall be elected for a term of one year and until his or her successor is elected and qualified, except as otherwise provided herein or required by law.
Any decrease in the authorized number of directors shall not become effective until the expiration of the term of the directors then in office unless, at the time of such decrease, there shall be vacancies on the board which are being eliminated by the decrease.
Section 4.02 Vacancies. If the office of any director becomes vacant by reason of death, resignation, disqualification, removal or other cause, a majority of the directors remaining in office, although less than a quorum, may elect a successor for the unexpired term and until his or her successor is elected and qualified.
Section 4.03 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required.
Section 4.04 Special Meetings. Special meetings of the Board of Directors may be called by one-third (1/3) of the directors then in office (rounded up to the nearest whole number) or by the chief executive officer and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than five (5) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than forty-eight (48) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting.
Section 4.05 Quorum. At any meeting of the Board of Directors, a majority of the total number of the directors in office at the time shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof.
Section 4.06 Participation in Meetings By Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting.
Section 4.07 Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law.
Section 4.08 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of the proceedings of the Board of Directors of such committee.
Section 4.09 Compensation of Directors. Each director, in consideration of his serving as such, shall be entitled to receive from the Corporation such compensation as the Board of Directors shall from time to time determine. The Board of Directors may likewise provide that the Corporation shall reimburse each director or member of a committee for any expenses incurred by him on account of his attendance at any such meeting. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving proper compensation therefor.
ARTICLE V
COMMITTEES
Section 5.01 Committees of the Board of Directors. The Board of Directors may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member.
Section 5.02 Conduct of Business. Each committee may determine the procedural
rules for meeting and conducting its business and shall act in accordance
therewith, except as otherwise provided herein or required by law. Adequate
provision shall be made for notice to members of all meetings; one-half (1/2) of
the members shall constitute a quorum unless the committee shall consist of one
(1) or two (2) members, in which event one (1) member shall constitute a quorum;
and all matters shall be determined by a majority vote of the members present.
Action may be taken by any committee without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of such committee.
ARTICLE VI
OFFICERS
Section 6.01 Generally. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person.
Section 6.02 President. The President shall be the chief executive officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation.
Section 6.03 Vice President. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One (1) Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability.
Section 6.04 Treasurer. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe.
Section 6.05 Secretary. The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe.
Section 6.06 Chairman of the Board. The Chairman of the Board, if elected, shall preside at all meetings of the stockholders and of the Board of Directors and shall perform such other duties and have such responsibilities as the Board of Directors may from time to time determine.
Section 6.07 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.
Section 6.08 Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors.
Section 6.09 Action with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation.
ARTICLE VII
STOCK
Section 7.01 Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile.
Section 7.02 Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 7.04 of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor.
Section 7.03 Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as herein before described; provided, however, that if no record date for determining stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall be not more than ten (10) days after the date upon which the resolution fixing the record date is adopted. If no record date has been fixed by the Board of Directors and no prior action by the Board of Directors is required by the Delaware General Corporation Law, the record date shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in the manner prescribed by Section 3.10 hereof. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Delaware General Corporation Law with respect to the proposed action by written consent of the stockholders, the record date for determining stockholders entitled to consent to corporate action in writing shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.
Section 7.04 Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity.
Section 7.05 Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish.
ARTICLE VIII
NOTICES
Section 8.01 Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by pre-paid telegram or mailgram. Any such notice shall be addressed to such stockholder, director, office, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by telegram or mailgram, shall be the time of the giving of the notice.
Section 8.02 Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE IX
MISCELLANEOUS
Section 9.01 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof.
Section 9.02 Reliance upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
Section 9.03 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors.
Section 9.04 Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
ARTICLE X
INDEMNIFICATION OF DIRECTORS AND OFFICER
Section 10.01 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 10.03 hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.
Section 10.02 Right to Advancement of Expenses. The right to indemnification conferred in Section 10.01 shall include the right to be paid by the Corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is not further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 10.02 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 10.01 and 10.02 hereof shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators.
Section 10.03 Right of Indemnitee to Bring Suit. If a claim under Sections 10.01 or 10.02 is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also to the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE X or otherwise shall be on the Corporation.
Section 10.04 Non-Exclusivity of Rights. The right to indemnification and to the advancement of expenses conferred in this ARTICLE X shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, Bylaws, agreement, vote of stockholder or disinterested directors or otherwise.
Section 10.05 Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.
Section 10.06 Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
ARTICLE XI
AMENDMENTS
These Bylaws may be amended or repealed by the Board of Directors at any meeting or by the stockholders at any meeting.
Approved and adopted by the Board of Directors of BAB, Inc. effective August 28, 2000.
/s/ Michael K. Murtaugh Secretary |
Exhibit 21.1
SUBSIDIARIES OF BAB, INC.
BAB Systems, Inc., an Illinois corporation
BAB Operations, Inc., an Illinois corporation
Brewster's Franchise Corporation, an Illinois corporation
My Favorite Muffin Too, Inc., a New Jersey corporation
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14 (a) OR RULE 15d-14 (a) OF THE SECURITIES EXCHANGE ACT OF 1934.
I, Michael W. Evans, certify that:
(1) I have reviewed this annual report on Form 10-KSB of BAB, Inc.
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
(4) The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
(5) The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: February 28, 2007 By /s/ Michael W. Evans
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Michael W. Evans, Chief Executive Officer
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14 (a) OR RULE 15d-14 (a) OF THE SECURITIES EXCHANGE ACT OF 1934.
I, Jeffrey M. Gorden, certify that:
(1) I have reviewed this annual report on Form 10-KSB of BAB, Inc.
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
(4) The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
(5) The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: February 28, 2007 By: /s/ Jeffrey M. Gorden
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Jeffrey M. Gorden, Chief Financial Officer
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Exhibit 32.1
BAB, Inc
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the BAB, Inc. (the "Company") Annual Report on Form 10-KSB for the period ended November 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. Evans, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition, results of operations, and
cash flows of the Company.
Date: February 28, 2007 By: /s/ MICHAEL W. EVANS
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Michael W. Evans, Chief Executive Officer
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Exhibit 32.2
BAB, Inc
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the BAB, Inc. (the "Company") Annual Report on Form 10-KSB for the period ended November 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey M. Gorden, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition, results of operations, and
cash flows of the Company.
Date: February 28, 2007 By: /s/ JEFFREY M. GORDEN
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Jeffrey M. Gorden, Chief Financial Officer
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