BAB, Inc.
500 Lake Cook Road, Suite 475
Deerfield, Illinois 60015
(847) 948-7520
April 24, 2006
Dear Shareholder:
You are cordially invited to attend the Company's Annual Meeting of Shareholders
to be held at 11:00 a.m. on Thursday, May 25, 2006, in the Conference Center,
located at 540 Lake Cook Road (within The Corporate 500 Centre complex),
Deerfield, IL 60015.
In addition to electing four members to the Board of Directors, you are being
asked to ratify the appointment of the independent registered public accounting
firm for the year ending November 30, 2006. We hope that these proposals will be
adopted at the Annual Meeting.
We look forward to greeting personally those of you who are able to be present
at the meeting. However, whether or not you plan to attend, it is important that
your shares be represented. Accordingly, you are requested to sign and date the
enclosed proxy and mail it in the envelope provided at your earliest
convenience.
Very truly yours,
Michael W. Evans,
President and Chief Executive Officer
BAB, Inc.
500 Lake Cook Road, Suite 475
Deerfield, Illinois 60015
(847) 948-7520
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 26, 2006
To the Shareholders of BAB, Inc.:
The Annual Meeting of shareholders of BAB, Inc. (the "Company") will be held at
11:00 a.m. on Thursday May 25, 2006, in the Conference Center located at 540
Lake Cook Road (within the Corporate 500 Centre complex), Deerfield, IL 60015,
for the following purposes:
1. To elect four directors to serve for a one-year term expiring when
their successors are elected and qualified at the next annual meeting.
2. To act upon a proposal to ratify the appointment of Altschuler,
Melvoin and Glasser LLP, as independent registered public accounting
firm of the Company for the fiscal year ending November 30, 2006.
3. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on April 7, 2006, as the
record date for the determination of shareholders entitled to vote at the Annual
Meeting and to receive notice thereof. The transfer books of the Company will
not be closed.
A PROXY STATEMENT AND FORM OF PROXY ARE ENCLOSED. SHAREHOLDERS ARE REQUESTED TO
DATE, SIGN AND RETURN THE ENCLOSED PROXY TO WHICH NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES. IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON. SHAREHOLDERS WHO
ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON IF THEY DESIRE.
By Order of the Board of Directors
Michael K. Murtaugh,
Vice President and General Counsel
April 24, 2006
TABLE OF CONTENTS
General Information 1.
Record Date and Voting 2.
Principal Shareholders and Ownership of Management 3.
Proposal 1 - Election of Directors 4.
Management 5.
Executive Compensation 7.
Indemnification of Directors and Officers 8.
Subsequent Event 8.
Section 16(a) Beneficial Ownership Reporting Compliance 9.
Certain Transactions 9.
Audit Committee 10.
Proposal 2 - Ratification of Appointment of Independent Registered
Public Accounting Firm 11.
Proposal for Fiscal 2006 Annual Meeting 11.
Available Information 11.
Audit Committee Charter Appendix I
BAB, Inc.
500 Lake Cook Road, Suite 475
Deerfield, IL 60015
(847) 948-7520
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 25, 2006
GENERAL INFORMATION
This proxy statement is furnished to shareholders by the Board of Directors of
BAB, Inc. (the "Company") for solicitation of proxies for use at the Annual
Meeting of Shareholders at 11:00 a.m. on Thursday, May 25, 2006, in the
Conference Center located at 540 Lake Cook Road (within the Corporate 500 Centre
complex), Deerfield, IL 60015, and all adjournments thereof for the purposes set
forth in the attached Notice of Annual Meetings of Shareholders. The Board of
Directors is not currently aware of any other matters that may or could properly
come before the Meeting.
Shareholders may revoke proxies before exercise by submitting a subsequent dated
proxy or by voting in person at the Annual Meeting. Unless a shareholder gives
contrary instructions on the proxy card, proxies will be voted at the meeting
(a) for the election of the nominees named herein and on the proxy card to the
Board of Directors; (b) for the appointment of Altschuler, Melvoin and Glasser
LLP as independent registered public accounting firm of the Company; and (c) in
the discretion of the proxy holder as to other matters which may properly come
before the Meeting. This proxy statement and the enclosed proxy are being mailed
to the shareholders of the Company on or about April 24, 2006.
Please read the proxy carefully. You will find additional information about the
Company in the most recent 10-KSB/A enclosed, which includes the audited
consolidated financial statements. The Company will make arrangements with
brokerage houses and other custodians, nominees and fiduciaries to send proxies
and proxy material to the beneficial owners of the shares and will reimburse
them for their expenses in so doing. To ensure adequate representation of shares
at the Meeting, officers, agents and employees of the Company may communicate
with shareholders, banks, brokerage houses and others by telephone, facsimile,
or in person to request that proxies be furnished. All expenses incurred in
connection with this solicitation will be borne by the Company.
-1-
RECORD DATE AND VOTING
The Board of Directors has fixed April 7, 2006, as the record date for the
determination of shareholders entitled to vote at the Annual Meeting. As of the
close of business on the record date, there were outstanding 7,222,265 shares of
Common Stock, $0.001 par value, which is the only outstanding class of stock of
the Company. All matters being voted upon by the shareholders require a majority
vote of the shares represented at the Annual Meeting either in person or by
proxy, except for election of directors, which is by plurality vote in the event
of more nominees than positions (i.e. the four nominees receiving the highest
number of votes would be elected).
The presence at the Annual Meeting in person or by proxy of the holders of a
majority of the outstanding shares of the Company's Common Stock entitled to
vote constitutes a quorum for the transaction of business. Shares voted as
abstentions and broker non-votes on any matter (or a "withheld authority" vote
as to directors) will be counted as present and entitled to vote for purposes of
determining a quorum and for purposes of calculating the vote with respect to
such matter, but will not be deemed to have been voted in favor of such matter.
"Broker non-votes" are shares held by brokers or nominees which are present in
person or represented by proxy, but which are not voted on a particular matter
because instructions have not been received from the beneficial owner and the
broker indicates that it does not have discretionary authority to vote certain
shares on that matter.
BOARD RECOMMENDATIONS
The Board of Directors recommends a vote FOR election of each nominee for
director named herein, and FOR ratification of the appointment of Altschuler,
Melvoin and Glasser LLP as independent registered public accounting firm. It is
intended that proxies solicited by the Board of Directors will be voted FOR each
nominee and FOR each such other proposals unless otherwise directed by the
shareholder submitting the proxy.
-2-
PRINCIPAL SHAREHOLDERS AND OWNERSHIP OF MANAGEMENT
The Following table sets forth as of April 7, 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 April 7, 2006, includes the number of shares, which such person has
the right to acquire within sixty (60) days after such date.
--------------------------------------------------------------------------------
Name and Address Shares Percentage
--------------------------------------------------------------------------------
Michael W. Evans 2,860,485 (1)(2)(3)(4) 39.6
500 Lake Cook Road
Deerfield, IL 60015
--------------------------------------------------------------------------------
Michael K. Murtaugh 2,774,183 (1)(2)(4)(5) 38.4
500 Lake Cook Road
Deerfield, IL 60015
--------------------------------------------------------------------------------
Holdings Investment, LLC 2,096,195 (1)(6) 29.0
220 DeWindt Road
Winnetka, IL 60093
--------------------------------------------------------------------------------
Jeffrey M. Gorden 81,667 (7) 1.1
500 Lake Cook Road
Deerfield, IL 60015
--------------------------------------------------------------------------------
Steven G. Feldman 30,000 (2) *
750 Estate Drive, Suite 104
Deerfield, IL 60015
--------------------------------------------------------------------------------
James A. Lentz 24,932 (8) *
1415 College Lane South
Wheaton, IL 60187
--------------------------------------------------------------------------------
All executive officers and directors as 3,675,072 51.2
a group (5 persons) (1)(2)(3)(4)(5)(6)(7)(8)
*Less than 1%
--------------------------------------------------------------------------------
(1) Includes all shares held of record by Holdings Investment, 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 within 60 days of April 7,
2006
(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 Pick has beneficial ownership of 25.18% of Holdings Investment,
LLC which is the equivalent of 527,888 shares of BAB, Inc. Common Stock.
(7) Includes 2,000 stock options fully exercisable within 60 days of April 7,
2006.
(8) Includes 10,000 stock options fully exercisable within 60 days of April 7,
2006.
-3-
PROPOSAL 1
--------------
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall be as fixed
from time to time by resolution of the shareholders subject to increase by the
Board of Directors. The directors elected at this Annual Meeting, and at annual
meetings thereafter unless otherwise determined by the Board or the
shareholders, will serve a one-year term expiring upon the election of their
successors at the next annual meeting. The four persons designated by the Board
of Directors as nominees for election as directors at the Annual Meeting are
Michael W. Evans, Michael K. Murtaugh, Steven G. Feldman and James A. Lentz.
Messrs. Evans, Murtaugh, Feldman and Lentz are currently members of the Board of
Directors. Mr. Feldman and Mr. Lentz are considered independent directors for
Audit Committee purposes as outlined in SEC regulations.
In the event any nominee should be unavailable to stand for election at the time
of the Annual Meeting, the proxies may be voted for a substitute nominee
selected by the Board of Directors.
See "Management" for biographical information concerning Messrs. Evans and
Murtaugh, who are employees of the Company. The following biographical
information is furnished with respect to each of the nominees.
Steven G. Feldman joined the Company as director in May 2003. Mr. Feldman is the
managing principal of Graphtech Systems, L.L.C., a Chicago-based technology firm
specializing in networking, consulting and supporting technology for Education,
Graphic Arts and Corporate clients since 1998. During 1997 and 1998, he was a
partner at Friedman Eisenstein Raemer and Schwartz, LLP, providing technology
consulting services for the firm's clients. From 1987 until 1997 he was the
managing partner for Automated Offices, Ltd., a computer consulting firm. He is
a graduate of the University of Illinois-Champaign/Urbana and he is a Certified
Public Accountant. Mr. Feldman is a frequent speaker on "Controlling the Total
Cost of Ownership of Technology," and other related topics.
James A. Lentz joined the Company as director in May 2004. From 1971 until 2000,
Mr. Lentz was a full-time business professor for Moraine Valley Community
College. He is currently an adjunct professor, teaching on a part-time basis at
Moraine Valley Community College. During his tenure at Moraine Valley Community
College, Mr. Lentz has taught a variety of business related classes, including
accounting, finance and marketing. In addition, Mr. Lentz has 10 years of
experience in the food industry, including holding the position of Director of
Franchise Training for BAB Systems, Inc. from 1992 through 1996. Mr. Lentz
graduated from Northern Illinois University with a Masters in Business
Administration in 1971.
-4-
MANAGEMENT
Directors and Executive Officers
The following tables set forth certain information with respect to each of the
Directors and Executive Officers of the Company and certain key management
personnel.
--------------------------------------------------------------------------------
Directors and Executive
Officers Age Position Held with Company
--------------------------------------------------------------------------------
Michael W. Evans 49 Chief Executive Officer, President and
Director
--------------------------------------------------------------------------------
Michael K. Murtaugh 61 Vice President, General Counsel and
Director
--------------------------------------------------------------------------------
Jeffrey M. Gorden 50 Chief Financial Officer and Treasurer
--------------------------------------------------------------------------------
Steven G. Feldman 49 Director
--------------------------------------------------------------------------------
James A. Lentz 58 Director
--------------------------------------------------------------------------------
Michael W. Evans has served as Chief Executive Officer and Director of the
Company since January 1993 and is responsible for all aspects of franchise
development and marketing, as well as all corporate franchise sales performance
and operations programs. In February 1996, he was appointed President. Mr. Evans
has over 19 years of experience in the food service industry.
Michael K. Murtaugh joined the Company as a Director in January 1993 and was
appointed Vice President and General Counsel in January 1994. Mr. Murtaugh is
responsible for dealing directly with state franchise regulatory officials and
for the negotiation and enforcement of franchise and area development agreements
and for negotiations of acquisition and other business arrangements. Before
joining the Company, Mr. Murtaugh was a partner with the law firm of Baker &
McKinzie, where he practiced law from 1971 to 1993. He also currently serves as
Vice President and Secretary of American Sports Enterprises, Inc., which owns a
controlling interest in the Kane County Cougars, a minor league baseball team.
Jeffrey M. Gorden joined the Company as its Chief Financial Officer and
Treasurer in April 2001 and is responsible for accounting, financial reporting,
risk management and human resource administration. Mr. Gorden is a Certified
Public Accountant. From 1977 to 1979, Mr. Gorden was with Ernst & Young. From
1979 to 1994 he held internal auditing leadership roles at several Fortune 500
companies. From 1995 to 2001, he held senior financial management roles, the
last being at Arrow Financial Services, LLC in Lincolnwood, Illinois.
-5-
The Board of Directors had three standing committees during the last fiscal
year: the Compensation Committee, the Audit Committee and the Options Committee.
The Compensation Committee has three members: Steven G. Feldman, James A. Lentz
and Michael W. Evans, the first two being non-employee directors. The function
of the Compensation Committee is to set the compensation for the Executive
Officers and to recommend the compensation to the Board of Directors for
approval. The Audit Committee has two members: Steven G. Feldman and James A.
Lentz, both are non-employee directors. The function of the Audit Committee is
to interact with the independent registered public accounting firm of the
Company and to recommend to the Board of Directors the appointment of the
independent registered public accounting firm. The Options Committee has three
members: Steven G. Feldman, James A. Lentz and Michael K. Murtaugh, the first
two being non-employee directors. The function of the Option Committee is to
consider, determine and recommend to the Board of Directors the granting of
options. The Audit Committee met at least four times during the year and all
other standing committees met at least once during the year and all members were
in attendance at the meetings.
The Board of Directors met four times during the 2005 fiscal year. None of the
Directors attended fewer than 75% of the meetings of the Board of Directors.
Director Compensation
Each non-employee director of the Company is paid a fee of $200 for each Board
meeting and each Committee meeting attended, as well as reimbursement of
reasonable expenses. In addition, the non-employee directors are eligible to
receive stock options pursuant to the Company's 2001 Long-Term Incentive and
Stock Option Plan.
-6-
Executive Compensation
The following table sets forth the cash compensation earned by executive
officers that received annual salary and bonus compensation of more than
$100,000 during fiscal years 2005, 2004 and 2003 (the "Named Executive
Officers"). The Company has no employment agreements with any of its executive
officers.
------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------------------------------------------------------------------------
Fiscal Other Restricted Securities
Name and Year Annual Stock Underlying LTIP
Principal Ended Salary Bonus Compensation Awards Options/SARS Payouts All Other
Position 11/30 ($) ($) ($) ($) (#) ($) Compensation
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Michael W.
Evans 2005 233,492 35,851 --- --- 20,000 --- ---
President 2004 221,209 39,600 --- --- 20,000 --- ---
and CEO 2003 211,750 20,000 --- --- 80,000 --- ---
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Michael K.
Murtaugh 2005 175,902 26,888 --- --- 20,000 --- ---
Vice
President and 2004 165,906 29,700 --- --- 20,000 --- ---
General
Counsel 2003 157,300 20,000 --- --- 80,000 --- ---
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Jeffrey M.
Gorden Chief 2005 126,430 --- --- --- 6,000 --- ---
Financial 2004 121,919 5,000 --- --- 5,500 --- ---
Officer 2003 116,443 6,000 --- --- 20,668 --- ---
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
-7-
Indemnification of Directors and Officers
The Company's Certificate of Incorporation limits personal liability for breach
of fiduciary duty by its directors to the fullest extent permitted by the
Delaware General Corporation Law (the "Delaware Law"). Such Certificate
eliminates the personal liability of directors to the Company and its
shareholders for damages occasioned by breach of fiduciary duty, except for
liability based on breach of the director's duty of loyalty to the Company,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
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.
Subsequent Event
On December 7, 2005, the Board of Directors granted 75,000 stock options to
officers and employees. Company officers received 45,000 stock options and
Non-Executive/Non-Director employees received 30,000 stock options. The stock
options granted December 7, 2005 vest 1/3 in 12 months, 1/3 in 24 months and 1/3
in 36 months. Each is exercisable at the fair market value on the issue date of
$1.15, (those individuals owning greater than 10% of outstanding stock have
exercise prices at 110%, or $1.27) and each exercised share is restricted for
one year from the date of exercise.
-8-
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 10%
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 (10%) 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 for the fiscal year ended November 30,
2005.
CERTAIN 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 transaction was 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 $30,025
for a term of 6 years bearing 9% interest, had an outstanding balance as of
November 30, 2005 of $2,244 and all payments are current.
-9-
Audit Committee
The following is a report of the Audit Committee. The Audit Committee consists
of two members, who are both independent directors. The two independent
directors comply with the definition of "independent directors" as required by
current law and regulations. The Audit Committee has adopted a written Audit
Charter that is included in its entirety as Appendix I at the end of this Proxy
Statement.
Report of Audit Committee
To the Board of Directors of BAB, Inc.:
We have reviewed and discussed with management the Company's audited financial
statements as of and for the fiscal year ended November 30, 2005. We ascertain
that we meet the criteria as required by the SEC for independent directors.
We have discussed with Altschuler, Melvoin and Glasser LLP, the Company's
independent registered public accounting firm, the matters required to be
discussed by Statement of Auditing Standards No. 61, "Communication with Audit
Committees" as amended, by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
We have received and reviewed the written disclosures and the letter from
Altschuler, Melvoin and Glasser LLP required by Independence Standard No. 1,
"Independence Discussions with Audit Committees," as amended, by the Independent
Standards Board, and have discussed with Altschuler, Melvoin and Glasser LLP its
independence.
Based on the reviews and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-KSB/A for the fiscal year ended
November 30, 2005.
For the year ending November 30, 2005, fees billed to the Company were $71,000
from Altschuler, Melvoin and Glasser LLP and $4,000 from Blackman Kallick
Bartelstein for audit services rendered to the Company. Tax compliance services
were provided by American Express Tax and Business Services for fees which
amounted to $24,000. Altschuler, Melvoin and Glasser LLP became the Company's
certified public accountants with the quarter beginning June 1, 2004, with
Blackman Kallick Bartelstein LLP being the previous certified public accounting
firm.
We recommend to the Board of Directors that the firm of Altschuler, Melvoin and
Glasser LLP be retained for fiscal 2006 as the firm's independent registered
public accounting firm and we believe that the payments made to Altschuler,
Melvoin and Glasser LLP are reasonable and compatible with Auditor's
independence.
/s/ Steven G. Feldman
/s/ James A. Lentz
-10-
PROPOSAL 2
--------------
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors has appointed Altschuler, Melvoin and Glasser LLP,
independent registered public accounting firm, to audit the financial statements
of the Company for the fiscal year ending November 30, 2006. If the shareholders
fail to ratify such appointment, the Board of Directors will select another firm
to perform the required audit function. A representative of Altschuler, Melvoin
and Glasser LLP is expected to be present at the shareholders meeting with the
opportunity to make a statement if such representative desires to do so and is
expected to be available to respond to appropriate questions. For the fiscal
year ending November 30, 2005, fees billed to the Company for auditing and
accounting fees from Altschuler, Melvoin and Glasser LLP, American Express Tax
and Business Services and Blackman Kallick Bartelstein LLP totaled $99,000.
PROPOSALS FOR FISCAL 2006 ANNUAL MEETING
It is currently anticipated that the next meeting, for the fiscal year ending
November 30, 2006 (the "2006 Annual Meeting") will be held in May 2007.
Shareholders who intend to submit proposals for inclusion in the 2006 Proxy
Statement and Proxy for shareholder action at the 2006 Annual Meeting must do so
by sending the proposal and supporting statements, if any, to the Company at its
corporate offices no later than December 15, 2006.
Additionally, if the Company receives notice of a shareholder proposal after
February 15, 2007, the proposal will be considered untimely pursuant to SEC
Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited by the Board
of Directors of the Company may exercise discretionary voting power with respect
to the proposal.
AVAILABLE INFORMATION
Copies of the Company's Annual Report on Form 10-KSB/A will be sent without
charge to any shareholder requesting the same in writing from: BAB, Inc.,
Attention: Investor Relations, 500 Lake Cook Road, Suite 475, Deerfield, IL
60015, Phone (847) 948-7520.
By Order of the Board of Directors
Michael K. Murtaugh
Vice President and General Counsel
Dated: April 24, 2006
Deerfield, Illinois
-11-
Appendix I
----------
BAB, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
-------------------------------------------------
I. PURPOSE
------------
The primary function of the Audit Committee (Committee) is to assist the Board
of Directors (Board) in fulfilling its oversight responsibilities by reviewing
the financial reports and other financial information to be provided by the
Company to any governmental body or the public, reviewing the Company's systems
of accounting internal control and reviewing the Company's accounting and
financial reporting processes. The Committee's primary duties and
responsibilities are to:
|X| Be directly responsible for the appointment, compensation, retention and
oversight of the work of any registered public accounting firm (independent
auditors) engaged for the purpose of preparing or issuing an audit report
or performing other audit, review or attest services for the issuer, and
the independent auditors must report directly to the Committee.
|X| Establish procedures for the receipt, retention and treatment of complaints
regarding accounting, internal accounting controls or auditing matters,
including procedures for the confidential, anonymous submission by
employees of concerns regarding questionable accounting or auditing
matters.
|X| Engage independent counsel and other advisors as it deems necessary to
carry out its duties.
|X| Monitor the Company's financial reporting process and internal control
system and recommend changes to the Board.
While the Committee shall have the responsibilities and powers set forth in this
Charter, it shall not be the duty of the Committee to plan or conduct audits, or
to determine whether the Company's financial statements are complete, accurate
or in accordance with generally accepted accounting principles (GAAP). These are
the responsibilities of management and the Company's independent auditor. Nor
shall it be the duty of the Committee to conduct investigations to resolve
disagreements, if any, between management and the Company's independent auditor,
or to assure compliance with laws and regulations or the Company's own policies
or Code of Conduct.
The Committee will primarily fulfill these responsibilities by carrying out the
activities enumerated in Section IV of this Charter.
II. COMPOSITION
----------------
The Committee shall be comprised of at least two directors elected by the Board,
each of whom shall be an independent director, as defined by current laws and
regulations. All members of the Committee will be free from any relationship
that, in the opinion of the Board, would interfere with the exercise of his
independent judgment as a member of the Committee. All members of the Committee
shall be financially literate and at least one member of the Committee shall be
designated as a "financial expert" as defined by current laws and regulations.
The Committee may hire independent counsel or other consultants as necessary to
fulfill its duties.
The members of the Committee shall be elected by the Board at the annual meeting
of the Board and shall serve until their successors shall be duly elected and
qualified.
III. MEETINGS
-------------
The Committee shall meet at least four times annually which typically would be
prior to issuance of the Company's quarterly and annual financial statements to
the public. The Committee can meet more often as circumstances dictate. Meetings
may be executed by conference calls and/or via email of correspondence to/from
the Company's management and independent auditors. The Committee may ask members
of management or others to attend the meetings and provide pertinent information
as necessary.
IV. RESPONSIBILITIES
---------------------
To fulfill its responsibilities and duties the Committee shall:
1. Review and recommend amendments to this Charter periodically as
conditions dictate.
2. Recommend to the Board the selection, retention or dismissal of the
independent auditors (considering independence and effectiveness) and
approve the fees and other compensation to be paid to the independent
auditors.
3. Pre-approve all audit and non-audit services, including fees and terms
thereof, to be performed for the Company by the independent auditors
to the extent required by and in the manner consistent with applicable
law.
4. Advise the independent auditors that they are ultimately accountable
to the Board and the Committee.
5. Receive and review disclosures made to the Committee by the Company's
CEO and CFO during their certification process for the Company's Form
10-KSB and 10-QSB.
6. Review the Company's annual and quarterly financial statements as well
as the reports, opinions or reviews rendered by the independent
auditors in connection with such financial statements and discuss them
as necessary with the Company's management and independent auditors
prior to public filing.
7. Consult quarterly with the Company's financial management and the
independent auditors as to the quality (not only the acceptability) of
Company's accounting principles as applied to its financial reporting.
8. Consult annually with the independent auditors relative to the
Company's internal controls.
9. Based upon a review of the annual financial statements, the
accompanying Report of Independent Auditors and discussions with the
independent auditors, recommend (or not recommend) the inclusion of
the annual financial statements in the Company's Annual Report on Form
10-KSB. As part of this review, examine the independent auditors'
audit adjustments as well as the schedule of adjustments passed.
10. On an annual basis, obtain and review a formal written statement from
the independent auditors disclosing relationships with and services
provided to the Company which may affect their objectivity and
independence.
11. Discuss with the independent auditors and the Company's financial
management, the integrity of the organization's financial reporting
processes, both internal and external and oversee management's
development of and adherence to a sound system of internal accounting
and financial controls.
12. Consider, and if appropriate, recommend to the Board changes to the
Company's accounting principles and practices as suggested by the
independent auditors or management.
13. Inquire of management and the independent auditors about the
significant risks or exposures facing the Company, assess management's
actions and proposals to minimize such risks and periodically review
compliance with such steps.
14. Review with the independent auditor the critical accounting policies
and procedures used by the Company and alternative treatments of
financial information within GAAP that have been discussed with
management and the ramifications of each alternative.
15. Review with the CFO and independent auditors the independent auditors'
Management Letter and Company management's response to ensure
significant findings are adequately addressed.
16. Review with management and the independent auditor the effect of
regulatory and accounting pronouncements and initiatives, as well as
any off-balance-sheet arrangements.
17. Review with management and the independent auditors any serious
difficulties or disputes with management encountered during the annual
audit and matters required to be discussed by Statement on Auditing
Standards (SAS) No. 61, Communication with Audit Committees.
18. Periodically review the Company's Code of Conduct to ensure it's
adequate and up-to-date and there is a method to ensure it's being
complied with.
19. Review the procedures for receipt, retention and treatment of
complaints, including confidential, anonymous submissions by
employees, received by the Company regarding accounting, internal
controls or auditing matters that may be submitted by internal and
external parties to the Company.