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, 2005
[ ] 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.)
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 registrant 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 registrant'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:
$5,125,000
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: $3,324,189
based on 3,499,146 shares held by nonaffiliates as of February 16, 2006 and the
average of the closing bid ($0.95) and ask ($0.95) 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: 7,208,946 shares of Common Stock, as
of February 16, 2006.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No
FORM 10-KSB INDEX
PART I
Item 1 Description of Business
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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
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Item 3 Legal Proceedings
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Item 4 Submission of Matters to a Vote of Security Holders
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PART II
Item 5. Market for the Common Equity and Related Stockholder
Matters
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Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Item 7. Financial Statements
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Item 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure
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Item 8A. Controls and Procedures
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PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
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Code of Ethics
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Item 10. Executive Compensation
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Item 11. Security Ownership of Certain Beneficial Owners and
Management
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Item 12. Certain Relationships and Related Transactions
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Item 13. Exhibits and Reports on Form 8-K
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Item 14. Principal Accountant Fees and Services
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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, 2005, the Company had 150 units in operation in 26 states, and 1
International unit in United Arab Emirates. The Company additionally derives
income from the sale of its trademark bagels, muffins and coffee through
nontraditional channels of distribution including under licensing agreements
with Mrs. Fields Famous Brands (Mrs. Fields), Kohr Bros. Frozen Custard and
through direct home delivery of specialty muffin gift baskets and coffee.
The BAB brand franchised and Company-owned stores feature daily baked bagels,
flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other
related products. Licensed BAB units serve the Company's par-baked frozen bagel
products baked daily and related products. 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. The Company has one Brewster's Coffee unit, which is a
specialty coffee shop featuring a variety of premium arabica bean coffees,
freshly brewed on the premises, sold in bulk and also featuring related products
such as bagels, muffins and other beverages. Although the Company doesn't
actively market Brewster's stand-alone franchises, Brewster's coffee products
are sold in all Company-owned 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 $693,000 for the year ended November 30,
2005, and net income of $652,000 for the year ended November 30, 2004. 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 stores sell 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 and Hawkeye Foodservice. 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 145 franchised locations, 3 licensees and 2 Company-owned
stores. Of the 150 locations, 149 are located in 26 states and 1 International
unit is located in the United Arab Emirates. Subsequently, one Company-owned
location was closed (see Note 11).
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 franchise or Company-owned 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 stores, 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--The Company has one Brewster's Coffee unit, 1,500 square
feet, which is a specialty coffee shop featuring a variety of Arabica bean
coffees, freshly brewed on the premises and also sold in bulk, and also
featuring related products such as bagels, muffins and other beverages. Although
the Company doesn't 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 Company-owned stores
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, 2005, the Company employed 44 persons, consisting of 25
working in the Company-owned stores, of which 12 are part-time employees. The
remaining employees are responsible for management, 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.
The subsequent closure of one Company-owned store reduced the total employees by
9 full time and 3 part-time (see Note 11).
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 March 1, 2011. Additionally, the Company leases space for each of its
Company-owned stores. Lease terms for these stores are generally for initial
terms of five years and contain options for renewal for one or more 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, 2005. The Company's Common Stock is traded on the
NASDAQ OTC-Bulletin Board under the symbol "BABB." The following numbers have
been adjusted for a 4:1 stock split, which was effective January 20, 2003.
BAB, Inc.
YEAR ENDED NOVEMBER 30, 2004 LOW HIGH
First quarter .44 .82
Second quarter .55 1.15
Third quarter .55 .80
Fourth quarter .57 1.10
YEAR ENDED NOVEMBER 30, 2005
First quarter .75 1.00
Second quarter .78 .97
Third quarter .85 1.30
Fourth quarter .90 1.45
As of February 16, 2006, the Company's Common Stock was held by 196 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, 2006, is approximately
1,500 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 1,185,000 stock options have been granted since plan
inception. In 2005, 2004, 2003 and 2002, 95,000, 115,000, 300,000 and 600,000
stock options, respectively, were granted to directors, officers and employees.
On December 7, 2005, 75,000 options were granted, leaving 215,000 options
available for grant. As of February 16, 2006, there were 960,285 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 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. (See Note 5 of the audited consolidated
financial statements included herein.)
In 2004, cash dividend of $0.02 were declared January 1, 2004 and June 17, 2004
and paid February 2, 2004 and July 23, 2004, respectively. On November 2, 2004 a
$0.02 semi-annual and $0.06 per share special divided was declared and paid
January 7, 2005.
This transaction was recorded as a dividend payable at November 30, 2004 of
$572,982.
There can be no assurance that the Company will be able to pay dividends, either
regular or special, in the future.
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 148 franchised and licensed units and 2 Company-owned stores as
of the end of 2005. Units in operation at the end of 2004 included 167
franchised and licensed units and 3 Company-owned stores. System-wide revenues
in 2005 were $48 million compared to $50 million in 2004.
The Company's revenues are derived primarily from the ongoing royalties paid to
the Company by its franchisees, from the operation of Company-owned stores 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 2005, even though revenue declined due to fewer Company-owned stores and
lower franchising revenues, the Company continued to control costs. Total
operating expenses decreased to $4,398,000, or 85.8% of total revenue in 2005
compared to $4,999,000, or 87.6% in 2004.
YEAR 2005 COMPARED TO YEAR 2004
Total revenues from all sources decreased $583,000, or 10.2%, to $5,125,000 in
2005 from $5,708,000 in the prior year primarily due to fewer Company-owned
store locations and fewer franchise locations in 2005 versus 2004. Net sales at
Company-owned stores decreased $353,000, or 19.7% to $1,440,000 in 2005, versus
$1,793,000 in 2004. Of this decrease in revenue for Company-owned locations in
2005 compared to 2004, $297,000 was because of locations closed in 2005 and
2004. There was also a $21,000 decrease in wholesale revenue from operating
locations and a $103,000 decrease in store revenues from operating locations,
offset by a $69,000 increase in sales from a franchise location temporarily
managed by the Company-owned store division in 2005.
Royalty revenue from franchise stores was down $74,000, or 3.1%, to $2,277,000
in 2005 as compared $2,351,000 in 2004, primarily due to less franchise
locations open during 2005. Franchise fee revenue decreased $213,000, or 49.5%,
to $218,000, in 2005 versus $431,000 in 2004. The Company opened less units, 5,
in 2005 versus 12 in 2004, primarily due to the fact more new franchises are
opening stores in developing centers which leads to longer timeframes between
execution of franchise agreements to occupancy. At November 30, 2005, the
Company had 8 units under development versus only 4 at November 30, 2004.
Licensing fees and other income increased $56,000, or 4.9%, to $1,190,000 in
2005 as compared to $1,134,000 in 2004. A Trademark infringement lawsuit against
a former franchisee resulted in $90,000 of income in 2005, Sign Shop revenue
increased $29,000 in 2005 as compared to 2004 and a fee of $34,000 was received
for the sale of assets from a franchise location temporarily managed by the
Company-owned store division in 2005. These increases were offset by a $41,000
decrease in subleased property rent, a $51,000 decrease in licensing fees and a
$5,000 decrease in revenue for Company-owned assets sold.
Food, beverage and paper costs incurred at Company-owned stores decreased
$96,000, or 16.1% in 2005 to $500,000, or 34.7% of Company-owned store revenue,
compared to $596,000 in 2004, or 33.3% of Company-owned store revenue. In 2005
store payrolls decreased $151,000 to $531,000, or 36.9% of Company-owned store
revenue, as compared to $682,000, or 38.1% in 2004. Company-owned locations'
rent, taxes and utilities and other operating expenses decreased $329,000, or
34.7% to $618,000, or 42.9% of Company-owned store revenue in 2005, compared to
$947,000, or 52.8% of Company-owned store revenue in 2004.
Corporate office payroll and payroll related expenses increased $6,000, or less
than 1%, to $1,432,000, or 27.9% of revenue in 2005 from $1,426,000, or 25.0% in
2004, occupancy expense decreased $22,000, or 15.1% in 2005, to $125,000, from
$147,000 in 2004. Professional fees decreased to $208,000 in 2005, from $214,000
in 2004, and SG&A decreased to $571,000 in 2005 from $598,000 in 2004. There was
a reduction in depreciation and amortization expense of $69,000, or 44.9% in
2005, to $85,000, or 1.7% of revenues as compared to $154,000, or 2.7% in 2004,
primarily because of a reduction in depreciable assets in 2005 for Company-owned
store locations. Provision for uncollectible accounts increased $73,000, to
$36,000, or 0.7% in 2005 compared to ($37,000), or (0.7%) in 2004. In 2004,
management collected more than expected on accounts that were previously
considered uncollectible.
Management continues to control costs wherever possible as evidenced by the fact
total operating expense declined $601,000, or 12% from $4,999,000, or 87.6% of
revenue in 2004, to $4,398,000 or 85.8% in 2005.
Income from operations for the period ended November 30, 2005 was $727,000 as
compared to $709,000 in 2004. Interest expense decreased $38,000 to $44,000
during 2005, compared to $82,000 in 2004, primarily due to a decrease in
outstanding debt and a lower effective interest rate during 2005 compared to
2004.
Net income totaled $693,000, or 13.5% of revenue in 2005 as compared to
$652,000, or 11.4% of revenue in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided from operating activities totaled $943,000 during 2005.
Cash provided from operating activities principally represents net income of
$693,000, plus depreciation and amortization of $85,000 and provision for
doubtful accounts of $36,000, a reduction in trade accounts receivable of
$94,000, a reduction in restricted cash of $118,000 and 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 ($117,000), 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) in 2005. In 2004 the net cash provided
from operating activities totaled $845,000. Cash provided from operating
activities principally represented net income of $652,000, plus depreciation and
amortization of $154,000, the benefit for uncollectible accounts of ($37,000), a
gain on disposal of property of $3,000, a reduction in trade accounts receivable
of $58,000, a decrease in restricted cash of $43,000, an increase in accrued
liabilities of $51,000, a reduction in inventories of $13,000, an increase in
accounts payable of $22,000 and a decrease in prepaid expenses of $43,000,
offset by a decrease in Marketing Fund obligations of ($43,000) and a decrease
in deferred revenue of ($115,000) in 2004.
Cash provided from investing activities during 2005 totaled $15,000, and was
provided from the collection of notes receivable in the amount of $58,000,
offset by purchases of property and equipment of ($16,000) and issuance of notes
receivable of ($27,000). Cash provided from investing activities during 2004
totaled $27,000, and was provided from the sale of property and equipment of
$50,000 and collection of notes receivable in the amount of $120,000, offset by
the issuance of new notes receivable of ($26,000) and purchases of property and
equipment of ($117,000).
Financing activities used $946,000 during 2005, due to the repayment of notes
payable of ($253,000) and the payment of dividends ($717,000), offset by
proceeds of $24,000 from the exercise of stock options. Financing activities
used $549,000 during 2004, due to the repayment of notes payable of
($1,005,000), the purchase of Treasury Stock in the amount of ($11,000) and the
payment of dividends ($278,000), offset by proceeds of $724,000 received on a
term loan from Associated Bank and the exercise of stock options in the amount
of $20,000.
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 operation, 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's revenue recognition policies comply with the criteria set forth
in Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements."
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 55% and 56% of the receivable balance at November 30, 2005 and
2004, 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, 2005, the Company has cumulative net operating loss
carryforwards expiring between 2017 and 2021 for U.S. federal income tax
purposes of approximately $6,921,000. 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 $2,317,000 at November 30, 2005 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 2005 because the Company believes
it is appropriate.
Recent Accounting Pronouncements
--------------------------------
In December 2003, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement, which is effective
for years ending after December 15, 2003 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," and provides alternative methods of transition for a
voluntary change to the fair value-based methods of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 regardless of the accounting method used to account
for stock-based compensation. The Company has chosen to continue to account for
stock-based compensation of employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. The effects of the enhanced
disclosure provisions as defined by SFAS 148 are included in Note 6 of this
report.
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-an
amendment to APB Opinion No. 29." This Statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. Provisions of this Statement are effective for fiscal periods
beginning after June 15, 2005. Adoption of SFAS No. 153 is not expected to have
a material impact on the Company's consolidated financial position, results of
operations or cash flows.
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In December 2004, the FASB issues 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 interim or annual
reporting period that begins after June 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.
Management has considered all other recently issued accounting pronouncements
and does not believe that the adoption of such pronouncements will have a
material impact on the Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Report of Independent Auditors' is
included immediately following.
BAB, Inc.
Years Ended November 30, 2005 and November 30, 2004
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
Exhibit A
---------
BAB, Inc.
Consolidated Balance Sheets
November 30, 2005 and 2004
================================================================================
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors of
BAB, Inc.
We have audited the accompanying consolidated balance sheets of BAB, Inc. as of
November 30, 2005 and 2004 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BAB, Inc. as of
November 30, 2005 and 2004, 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.
Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
January 20, 2006
Exhibit A
---------
BAB, Inc.
Consolidated Balance Sheets
November 30, 2005 and 2004
================================================================================
2005 2004
------------------- -----------------
Assets
Current Assets
Cash $ 2,206,524 $ 2,194,834
Restricted Cash 204,055 321,605
Receivables
Trade accounts receivable (net of allowance for
doubtful accounts of $83,220 in 2005 and $83,914
in 2004) 104,110 223,685
Marketing fund contributions receivable
from franchisees and stores 30,389 64,406
Notes receivable (net of allowance for doubtful accounts
of $7,769 in 2005 and $17,293 in 2004) 33,700 46,020
Inventories 65,255 64,107
Prepaid expenses and other current assets 135,488 113,255
------------------- ----------------
Total Current Assets 2,779,521 3,027,912
------------------- ----------------
Property, plant and equipment, net 169,081 228,629
Notes Receivable 40,849 69,192
Trademarks 763,666 763,666
Goodwill 3,542,772 3,542,772
Other (net of accumulated amortization of $293,329 in 2005
and $284,173 in 2004) 12,053 21,209
------------------- -----------------
Total Noncurrent Assets 4,528,421 4,625,468
------------------- -----------------
Total Assets $ 7,307,942 $ 7,653,380
=================== =================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 266,824 $ 252,569
Accounts payable 93,428 132,530
Accrued expenses and other current liabilities 507,279 600,269
Dividends payable 577,781 572,982
Unexpended marketing fund contributions 158,913 309,997
Deferred revenue 71,579 37,500
Deferred franchise fee revenue 210,000 140,000
------------------- -----------------
Total Current liabilities 1,885,804 2,045,847
------------------- -----------------
Long-term debt net of current portion 444,307 711,131
Deferred revenue 86,980 -
------------------- -----------------
NonCurrent Liabilities 531,287 711,131
------------------- -----------------
Total Liabilties 2,417,091 2,756,978
------------------ -----------------
Stockholders' equity (deficit)
Common stock ($.001 par value; 15,000,000 shares authorized;
8,412,391 and 8,232,939 shares issued, and 7,208,946 and 7,029,494
shares outstanding as of November 30, 2005 and November 30, 2004,
respectively) 13,508,202 13,508,023
Additional paid-in capital 870,935 847,562
Treasury stock (222,781) (222,781)
Accumulated deficit (9,265,505) (9,236,402)
------------------- -----------------
Total Stockholders' equity 4,890,851 4,896,402
------------------- -----------------
Total Liabilities and Stockholders' Equity $ 7,307,942 $ 7,653,380
=================== =================
See accompanying notes
BAB, Inc.
Consolidated Statements of Income
Years Ended November 30, 2005 and 2004
2005 2004
------------------- ------------------
Revenues
Net sales by Company-owned stores $ 1,440,118 $ 1,792,560
Royalty fees from franchised stores 2,277,099 2,350,533
Franchise fees 217,500 430,500
Licensing fees and other income 1,190,378 1,134,453
------------------- ------------------
5,125,095 5,708,046
------------------- ------------------
Operating expenses
Food, beverage and paper costs 500,374 596,197
Store payroll and other operating expenses 1,148,849 1,628,721
Selling, general and administrative expenses
Payroll related expenses 1,431,847 1,426,372
Occupancy 125,185 147,449
Advertising and promotion 149,648 149,033
Professional service fees 207,529 214,064
Travel expenses 142,657 122,338
Depreciation and amortization 84,664 153,720
Other 607,359 560,660
------------------- ------------------
4,398,112 4,998,554
------------------- ------------------
Income from operations $ 726,983 $ 709,492
------------------- ------------------
Interest income 9,881 24,633
Interest expense (44,007) (81,849)
------------------- ------------------
(34,126) (57,216)
------------------- ------------------
Net income $ 692,857 $ 652,276
=================== ==================
Net income per common share
Basic $0.10 $0.09
Diluted $0.10 $0.09
Shares used in computing per share amounts
Basic 7,183,783 6,962,401
Diluted 7,240,721 7,194,120
See accompanying notes
BAB, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended November 30, 2005 and 2004
Additional
Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Capital Shares Amount Deficit Total
------ ------ ------- ------ ------ ------- -----
Balance,
November 30, 2003
(Restated) 7,969,403 $13,507,759 $827,451 (1,177,777) ($212,000) ($9,037,801) $5,085,409
Stock options
exercised 263,536 264 20,111 20,375
Purchase of
treasury stock (25,668) (10,781) (10,781)
Dividends
paid and
accrued (850,877) (850,877)
Net income 652,276 652,276
----------- ----------- ----------- ---------- ------------- --------------- ----------
Balance, 8,232,939 13,508,023 847,562 (1,203,445) (222,781) (9,236,402) $4,896,402
November 30, 2004
Stock options
exercised 179,452 179 23,373 23,552
Dividends
paid and
accrued (721,960) (721,960)
Net income 692,857 692,857
----------- ----------- ----------- ---------- ------------- --------------- ----------
Balance,
November 30, 2005 8,412,391 $13,508,202 $870,935 (1,203,445) ($222,781) ($9,265,505) $4,890,851
------------------------------------------------------------------------------------------------
See accompanying notes
BAB, Inc.
Consolidated Statements of Cash Flows
Years Ended November 30, 2005 and 2004
2005 2004
---------------- ----------------
Cash flows from operating activities
Net income $ 692,857 $ 652,276
Depreciation and amortization 84,664 153,720
Provision for doubtful accounts (net of recoveries) 36,000 (37,268)
Loss (gain) on sale or disposal of property and equipment - 3,145
Changes in
Trade accounts receivable 93,640 58,293
Restricted cash 117,550 43,053
Marketing Fund contributions receivable from franchisees and stores 34,017 26,017
Inventories (1,148) 13,355
Prepaid expenses and other assets (22,233) 42,921
Accounts payable (39,102) 22,147
Accrued expenses and other current liabilities (92,991) 51,319
Deferred revenue 191,059 (115,000)
Unexpended Marketing Fund (151,084) (68,996)
----------------- -----------------
Net cash provided by operating activities 943,229 844,982
----------------- -----------------
Investing activities
Purchases of property and equipment (15,959) (117,140)
Proceeds from sale of property and equipment - 49,897
Issuance of notes receivable (27,060) (25,972)
Proceeds from notes receivable 57,657 120,078
---------------- ----------------
Net cash provided by investing activities 14,638 26,863
---------------- ----------------
Financing activities
Proceeds from long term debt - 723,700
Repayment of long-term debt (252,568) (1,004,845)
Purchase of treasury stock - (10,781)
Proceeds from exercise of stock options 23,552 20,375
Dividends paid (717,161) (277,895)
---------------- -----------------
Net cash used in financing activities (946,177) (549,446)
---------------- -----------------
Net increase in cash 11,690 322,399
Cash, beginning of year 2,194,834 1,872,435
---------------- ----------------
Cash, end of year $ 2,206,524 $ 2,194,834
---------------- ----------------
Supplemental disclosure of cash flow information
Interest paid $ 45,232 $ 82,983
Income taxes paid 0 0
---------------- ----------------
Supplemental disclosure of noncash investing and financing activities:
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.
On November 2, 2004 a semi annual $.02 per share cash dividend and a special
dividend of $0.06 per share was declared, payable January 7, 2005, and recorded
as a dividend payable in the amount of $572,982 at November 30, 2004.
See accompanying notes.
See accompanying notes
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
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.) The company continues to operate one store with
the Jacobs Bros. name.
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.
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, 2005 and 2004
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, 2005 and 2004 are
as follows:
2005 2004
---- ----
Stores opened
Company-owned 2 3
Franchisee-owned 145 162
Licensed 3 5
------- -------
150 170
Unopened stores
Franchise Agreement 8 4
------- -------
158 174
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
Company-owned stores 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, 2005 and 2004, the Fund cash balances, which are restricted,
were $128,129 and $245,679 respectively. Also included in restricted cash at
both November 30, 2005 and 2004 is a $75,926 certificate of deposit 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, 2005 and 2004
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.
Note 2 - Summary of Significant Accounting Policies (Continued)
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 on 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, 2005 or 2004.
The net book value of intangible assets with definite lives totaled $12,053 and
$21,209 at November 30, 2005 and 2004, respectively. The gross value of definite
lived intangible assets and their respective accumulated amortization are as
follows:
Accumulated
Amortization as of
Definite Lived Intangible Assets Original Cost November 30, 2005
-------------------------------- ------------- -----------------
Noncompete Agreement $ 210,000 $ 210,000
Master Lease Origination Fees 95,382 83,329
----------- -----------
Total $ 305,382 $ 293,329
Definitive lived intangible assets are being amortized over their useful lives.
The Company recorded amortization expense for definitive lived intangible assets
of $9,157 and $20,965 for years ended November 30, 2005 and 2004, respectively.
The amortization expense on these intangible assets is as follows for November
30:
2006 9,200
2007 2,853
-----------
Total $ 12,053
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
Advertising and Promotion Costs
-------------------------------
The Company expenses advertising and promotion costs as incurred. Advertising
and promotion expense was $149,648 and $149,033 in 2005 and 2004, respectively.
Included in advertising expense was $66,331 and $66,384 in 2005 and 2004,
respectively, related to the Company's franchise operations.
Note 2 - Summary of Significant Accounting Policies (Continued)
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.
The computation of basic and diluted EPS is as follows:
2005 2004
----------------- -----------------
Numerator:
Net income attributable to common stockholders $ 692,857 $ 652,276
----------------- ------------------
Denominator:
Denominator for basic earnings per share -
Weighted average shares 7,183,783 6,962,401
Common stock equivalents 56,938 231,719
----------------- ------------------
Denominator for dilutive earnings per share -
Weighted average shares 7,240,721 7,194,120
================= ==================
Basic and diluted income per share $ 0.10 $ 0.09
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, 2005 and 2004
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.
Note 2 - Summary of Significant Accounting Policies (Continued)
Reclassification
----------------
Certain items in prior year financial statements have been reclassified to
conform to the presentation used in 2005.
Recent Accounting Pronouncements
--------------------------------
In December 2003, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement, which is effective
for years ending after December 15, 2003 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," and provides alternative methods of transition for a
voluntary change to the fair value-based methods of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 regardless of the accounting method used to account
for stock-based compensation. The Company has chosen to continue to account for
stock-based compensation of employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. The effects of the enhanced
disclosure provisions as defined by SFAS 148 are included in Note 6 of this
report.
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-an
amendment to APB Opinion No. 29." This Statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. Provisions of this Statement are effective for fiscal periods
beginning after June 15, 2005. Adoption of SFAS No. 153 is not expected to have
a material impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issues 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 interim or annual
reporting period that begins after June 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.
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
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.
Management has considered all other recently issued accounting pronouncements
and does not believe that the adoption of such pronouncements will have a
material impact on the Company's financial statements.
Note 3 - Income Taxes
The components of the income tax (benefit) provision are as follows:
2005 2004
--------------- ---------------
Federal income tax provision computed at federal statutory rate $ 235,571 $ 221,774
State income taxes net of federal tax provision 33,382 31,427
Other adjustments 98,469 7,292
Change in valuation allowance (230,564) (258,444)
Utilization of net operating losses (136,858) (2,049)
---------------- ----------------
Provision for Deferred Income Taxes $ - $ -
Deferred income tax assets (liabilities) are as follows:
2005 2004
-------------- --------------
Deferred revenue $ 143,068 $ 68,902
Deferred rent revenue 15,318 16,087
Marketing Fund net contributions 49,737 95,368
Allowance for doubtful accounts 32,304 32,574
Allowance for doubtful accounts-notes receivable 3,016 6,713
Accrued expenses 3,882 38,818
Net operating loss carryforwards 2,686,525 2,823,383
Other - 4,985
Valuation allowance (2,316,591) (2,684,013)
--------------- ---------------
Total Deferred Income Tax Assets 617,259 402,817
--------------- ---------------
Depreciation and amortization (611,126) (401,284)
Franchise Costs (6,133) (1,533)
--------------- ---------------
Total Deferred Income Tax Liabilities (617,259) (402,817)
--------------- ---------------
Total Net Deferred Tax Assets/Liabilities $ - $ -
=============== ===============
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
As of November 30, 2005, the Company has net operating loss carryforwards
expiring between 2017 and 2021 for U.S. federal income tax purposes of
approximately $6,921,000. 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 $2,316,591 and $2,684,013 as of November 30,
2005 and 2004, respectively, for the deferred tax benefit related to those loss
carryforwards and other deferred tax assets.
Note 4 - Long-Term Obligations
Long-term debt consisted of the following:
2005 2004
-------------- --------------
Bank note payable $ 416,552 $ 649,065
Note payable to former stockholder 294,579 314,635
-------------- --------------
711,131 963,700
Less current portion (266,824) (252,569)
--------------- ----------------
Long-Term Debt, Net of
Current Portion $ 444,307 $ 711,131
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 $416,552 and $649,065 as of November 30, 2005 and 2004, 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 $294,579 and $314,635 as of November 30, 2005
and 2004, respectively.
As of November 30, 2005, annual maturities on long-term obligations due are as
follows:
Year Ending November 30:
2006 266,824
2007 192,740
2008 23,051
2009 24,146
2010 25,292
Thereafter 179,078
-------------
Total $ 711,131
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
Note 5 - Stockholders' Equity
In 2004, the Company purchased 25,668 shares of common stock from a previous
member of the Board of Directors and in 2003 the Company purchased 1,177,777
shares of common stock from three stockholders. The Company is holding these
shares as treasury stock.
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. In 2004, cash dividends of $0.02 were declared on January 1,
2004, payable February 2, 2004 and June 17, 2004 payable July 23, 2004. On
November 2, 2004 a $0.02 semi-annual and $0.06 per share special dividend was
declared and paid January 7, 2005. The transaction was recorded as a dividend
payable of $572,982 at November 30, 2004.
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 stock option plans, 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 three 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 June 1,
2015. Range of exercise prices of options granted as of November 30, 2005 are
$0.065 to $0.97.
Activity under the Plan during the two years ended November 30, is as follows:
2005 2004
Options Weighted Average Options Weighted Average
exercise price exercise price
Options outstanding at beginning of year 258,486 $ 0.246 413,772 $ 0.065
Granted 95,000 0.914 115,000 0.506
Forfeited (11,000) 0.727 (6,750) 0.065
Exercised (179,452) 0.132 (263,536) 0.077
---------- --------- --------- ---------
Outstanding at end of year 163,034 $ 0.722 258,486 $ 0.246
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
Options Outstanding Options Exercisable
Range of exercise Options Weighted average Weighted average Options Weighted
price outstanding remaining contractual exercise price exercisable average
life exercise price
$0.065 2,284 6.5 $0.065 2,284 $0.065
$0.46 - $0.51 62,750 8.0 $0.492 17,917 $0.497
$0.60 10,000 8.6 $ 0.60 10,000 $ 0.60
$0.88 - $0.97 68.000 9.0 $0.933 -- --
$0.86 20,000 9.6 $0.86 20,000 0.86
-------- ----- ------ ----
163,034 $0.722 50,201 $0.643
Note 6 - Stock Options and Warrants (Continued)
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 $31,710 in fiscal 2005 and $25,987
in fiscal 2004 based on the Black-Scholes option-pricing model. The Company's
net income and net income per share for 2005 and 2004 would have been as
follows:
2005 2004
Pro forma impact of fair value method
Reported net income $ 692,857 $ 652,276
Less: fair value impact of employee stock compensation (31,710) (25,987)
------- --------
Pro forma net income $ 661,147 $ 626,289
Earnings per common share
Basic and diluted - as reported $ 0.10 $0.09
Basic and diluted - pro forma $ 0.09 $0.09
Weighted average Black-Scholes fair value assumptions
Risk free interest rate 4.0% 3.05%
Expected life 5.3 yrs 3.0 yrs
Expected volatility 2.548% 1.647%
Expected dividend yield 5.5% 7.0%
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
On February 1, 1999, the Company purchased certain assets of a related group of
entities doing business as Jacobs Bros. Bagels (Jacobs Bros.), a chain operating
retail bagel stores in the Chicago, Illinois area. The assets acquired included
8 retail locations and a central commissary facility in exchange for $950,000 in
cash and 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 expire on January 31, 2006. None
of the warrants have yet been exercised.
Note 7 - Commitments
The Company rents its Corporate Office and Company-owned store facilities under
leases which require it to pay real estate taxes, insurance and general repairs
and maintenance. Rent expense for the years ended November 30, 2005 and November
30, 2004 was $212,739 and $272,893, net of sublease income of $140,108 and
$163,938, 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, 2005, future minimum annual rental commitments under leases, net of
sublease income of $123,730 in 2006, $127,432 in 2007, $130,252 in 2008,
$132,952 in 2009 and $11,117 in 2010 are as follows:
Year Ending November30:
2006 $ 122,585
2007 120,812
2008 126,643
2009 139,250
2010 151,367
Thereafter 81,108
------------
Total $ 741,765
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 $2,244, and $6,244 as of November 30, 2005 and 2004, respectively. There are
no payments in arrears. Interest income recognized and received by Systems
amounted to $300 and $907 in 2005 and 2004, respectively.
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 and $20,000 in 2005 and 2004, respectively.
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.
The following tables present segment information for the years ended November
30, 2005 and 2004:
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
Net Revenues Operating Income (Loss)
2005 2004 2005 2004
--------------- ---------------- --------------- ----------------
Company Store Operations $ 1,906,953 $ 2,241,699 $ (364,624) $ (918,338)
Franchise Operations and Licensing Fees 3,218,142 3,466,347 1,805,089 1,764,902
--------------- ---------------- ----------------- ---------------
$ 5,125,095 $ 5,708,046 $ 1,440,465 $ 846,564
Corporate Expenses (713,482) (137,072)
Interest Expense, Net of Interest Income (34,126) (57,216)
---------------- -----------------
Net Income $ 692,857 $ 652,276
================ =================
Operating Segment Data
Identifiable Capital Depreciation and
Assets Expenditures Amortization
------------------ ------------------ --------------------
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
Year ended November 30, 2004
Company Store Operations $ 286,292 $ 7,739 $ 120,167
Franchise Operations (other than goodwill 430,955 109,401 33,553
Goodwill and Other Indefinite Lived Intangible Assets 4,306,439 - -
------------------ ------------------ --------------------
$ 5,023,686 $ 117,140 $ 153,720
Note 10 - Segment Information (continued)
Reconciliation to Total Assets as Reported
------------------------------------------
2005 2004
---- -----
Assets-Total reportable segments- Identifiable assets $ 4,761,875 $ 5,023,686
Unallocated amounts
Cash 2,410,579 2,516,439
Prepaid expenses and other current assets 135,488 113,255
------------------- -----------------
Total Consolidated Assets $ 7,307,942 $ 7,653,380
=================== =================
There were no sales to any individual customer during either year in the
two-year period ended November 30, 2005 that represented 10% or more of net
sales.
BAB, Inc
Notes to the Consolidated Financial Statements
November 30, 2005 and 2004
Note 11 - Subsequent event
During December 2005, management was negotiating the possible renewal of the
Company's lease, which was scheduled to expire on December 31, 2005, on one of
the two remaining Company-owned stores. Management was not able to negotiate
terms that were deemed to be acceptable and decided to close the store effective
December 31, 2005. Net sales for this store amounted to approximately $632,000
and $747,000 for the years ended November 30, 2005 and 2004, respectively. Food,
beverage and paper costs, store payroll and other operating expenses for this
store amounted to approximately $691,000 and $814,000 for the years ended
November 30, 2005 and 2004, respectively.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14(c) of the Securities Exchange
Act of 1934 within 90 days of the filing date of the annual report. Based upon
their evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including our consolidated subsidiaries) required to be included in our
periodic SEC filings.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the 90 day evaluation period. As a result, no
corrective actions were required or undertaken.
PART 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,
2005.
CODE OF ETHICS
--------------
BAB, Inc.
Code of Ethics
November 30, 2005
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
$100,000 during years 2005, 2004 and 2003 (the "Named Executive Officers"). The
Company has no employment agreements with any of its executive officers.
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payouts
Name and Principal Year Salary Bonus Other Restricted Securities LTIP All Other
Position End Stock Compensation
Awards
($) ($) ($) Underlying Payouts
Options/SARS ($)
($) (#) ($)
Michael W. Evans, 2005 233,492 35,851 -- -- 20,000 -- --
President and CEO 2004 221,209 39,600 -- -- 20,000 -- --
2003 211,750 20,000 -- -- 80,000 -- --
Michael K. 2005 175,902 26,888 -- -- 20,000 -- --
Murtaugh, 2004 165,906 29,700 -- -- 20,000 -- --
Vice President and 2003 157,300 20,000 -- -- 80,000 -- --
General Counsel
Jeffrey M. 2005 126,430 -- -- -- 6,000 -- --
Gorden, 2004 121,919 5,000 -- -- 5,500 -- --
Chief Financial 2003 116,443 6,000 -- -- 20,668 -- --
Officer
John J. Bracken,* 2005 99,053 -- -- -- 6,000 -- --
Vice President 2004 106,694 3,500 -- -- 3,000 -- --
Operations 2003 103,058 1,000 -- -- 20,668 -- --
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 and
all options expire 10 years after date of grant. Options issued during 2005 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. Options issued during 2004 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 24 months and 1/3 in 36 months from the issue
date. Options issued to the above officers totaled 48,500 or 42.2% of options
granted in 2004. Options issued in 2003 consisted of grants to Officers totaling
201,336, or 67.1% of total options granted in 2003. The fair market issue price
was $0.065 and vested as follows: 1/3 immediate, 1/3 in 12 months and 1/3 in 24
months.
* See Item 13 November 18, 2005 8k
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, 2006 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, 2006 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 2,860,485 (1)(2)(3)(4) 39.7
500 Lake Cook Road, Suite 475
Deerfield, IL 60015
Michael K. Murtaugh 2,781,783 (1)(2)(4)(5) 38.6
500 Lake Cook Road, Suite 475
Deerfield, IL 60015
Holdings Investment, LLC 2,096,195 (1)(6) 29.1
220 DeWindt Road
Winnetka, IL 60093
Jeffrey M. Gorden 81,667 (7) 2.2
500 Lake Cook Road, Suite 475
Deerfield, IL 60015
John J. Bracken * 64,628 (8) 1.8
500 Lake Cook Road, Suite 475
Deerfield, IL 60015
Steven G. Feldman 30,000 (9) 1.0
750 Estate Drive, Suite 104
Deerfield, IL 60015
James A. Lentz 24,932 (10) 1.0
1415 College Lane South
Wheaton, IL 60187
All executive officers and directors as a group 3,747,300 51.0
(6 persons) (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)
------------------------------------------------- -- --------------------------------------- ---------------------
* See Item 13 November 18, 2005 8k
(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 2/16/06.
(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 2,000 stock options fully exercisable as of 2/16/06.
(8) Includes 2,800 shares held by 401 (k) trust.
(9) Includes 20,000 stock options fully exercisable as of 2/16/06.
(10) Includes 10,000 stock options fully exercisable as of 2/16/06.
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
-------------------
11/18/05: Mr. John J. Bracken, Vice President of Operations of BAB, Inc. will
be retiring and leaving the Company effective November 18, 2005.
10/07/05: On October 7, 2005, the Board of Directors of BAB, Inc. approved a
$0.02 per share semi-annual cash dividend and a special $0.06 per share cash
dividend, payable January 3, 2006 to shareholders of record as of December 7,
2005.
5/13/05: On May 12, 2005, the Board of Directors of BAB, Inc. authorized $0.02
per share semi-annual cash dividend payable June 21, 2005 to shareholders of
record as of May 31, 2005.
1/14/05: On November 2, 2004 BAB, Inc. Board of Directors approved a $0.02 per
share semi-annual cash dividend and a $0.06 per share special dividend to common
stockholders. The dividend is payable January 7, 2005 to stockholders of record
as of December 17, 2004.
[i] Incorporated by reference to the Company's Registration Statement on Form
SB-2, effective November 27, 1995 (Commission File No. 33-98060C)
[ii] Incorporated by reference to the Company's Registration Statement on Form
10-SB/A filed October 12, 2000 (Commission File No. 0-31555)
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.
AM&G had at the time 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES(Continued)
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 billed from AM&G during
the years ended November 30, 2005 and 2004 for professional audit services
rendered amounted to $71,000 and $12,000, respectively.
Tax compliance services were provided by TBS for which fees amounted to $24,000
as of November 30, 2005 and there were no fees for the year ended November 30,
2004. Tax compliance services for 2005 will be provided by RSM.
During the years ended November 30, 2005 and November 30, 2004, AM&G and TBS did
not perform any management consulting services for the Company.
Previous to the engagement of AM&G and TBS on May 31, 2004, Blackman Kallick
Bartelstein LLP ("Blackman Kallick") served the Company as certified public
accountants. Fees billed for professional audit services rendered by Blackman
Kallick were $4,000 in 2005 and $87,000 in 2004. Fees billed for professional
audit services by AM&G amounted to $12,000 in 2004. Fees billed for tax
compliance services rendered by Blackman Kallick were $18,000 in 2004. During
the years ended November 30, 2005 and 2004, Blackman Kallick 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
INDEX NUMBER DESCRIPTION
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
SIGNATURES
----------
In accordance with Section 13 of the Exchange Act, the Registrant 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, 2006
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, 2006
By /s/ Michael W. Evans
Michael W. Evans, Chief Executive Officer and President (Principal Executive
Officer)
Dated: February 28, 2006
/s/ Michael K. Murtaugh
Michael K. Murtaugh, Director and Vice President/General Counsel and Secretary
Dated: February 28, 2006
/s/ Jeffrey M. Gorden
Jeffrey M. Gorden, Chief Financial Officer and Treasurer (Principal Financial
and Accounting Officer)
Dated: February 28, 2006
/s/ Steven G. Feldman
Steven G. Feldman, Director
Dated: February 28, 2006
/s/ James A. Lentz
James A. Lentz, Director