FORM 10-KSB

U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549 

(Mark one)

| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)    OF THE SECURITIES EXCHANGE ACT OF 1934 
For    the fiscal year ended: November 30, 2002 [ ]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.)
8501 West Higgins Road, Suite 320, Chicago,Illinois 60631 

(Address of principal executive offices)(Zip Code) 

Issuer's telephone number: (773) 380-6100 

Check whether the issuer: (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. 

[X] Yes [ ] No 

Check if there is no disclosure of delinquent filers inresponse to Item 405 of Regulation S-B is not contained in this form, and no disclosurewill be contained, to the best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. [X] 

State issuer's revenues for its most recent fiscal year: 

$8,550,000

State the aggregate market value of the voting stock heldby nonaffiliates computed by reference to the price at which the stock was sold,orthe average bid and asked prices of such stock, as of a specified datewithin the past 60 days:$937,367 based on 3,177,516 shares heldbynonaffiliatesas of February 18, 2003 and the average of the closing bid ($0.19) and asked ($0.40)prices for said shares in the NASDAQ OTC Bulletin Board as of such date. 

State the number of shares outstanding of each of theissuer's classes of common equity, as of the latest practicable date: 7,542,452 shares ofCommon Stock, as of February 18, 2003. 

 

Transitional Small Business Disclosure Format (check one):

[ ] Yes [X] No 

 

 

FORM 10-KSB INDEX 
PART I Item 1Description of    BusinessOverviewCustomersSuppliersLocationsStore    OperationsFranchising    Competition    Trademarks and Service Marks Government    Regulation Employees Item 2 Description of    PropertyItem 3Legal    ProceedingsItem 4  Submission of    Matters to a Vote of Security HoldersPART IIItem 5.  Market for the    Common Equity and Related Stockholder MattersItem 6. Management's    Discussion and Analysis of Financial Condition and Results of OperationsItem 7. Financial    StatementsItem 8.  Changes in and    Disagreement with Accountants on Accounting and Financial DisclosurePART III Item 9. Directors,    Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the    Exchange ActItem 10.  Executive    CompensationItem 11. Security    Ownership of Certain Beneficial Owners and Management Item 12. Certain    Relationships and Related TransactionsItem 13. Exhibits and    Reports on Form 8-KItem 14. Controls and    Procedures
PART I 
ITEM 1.DESCRIPTION OF BUSINESS  OVERVIEW
BAB, Inc. (the Company) was incorporated under the laws ofthe State of Delaware on July 12, 2000.  The Company currently operates, franchisesand licenses bagel, muffin and coffee retail units under the Big Apple Bagels, My FavoriteMuffin and Brewster's Coffee trade names. At November 30, 2002, the Company had 214 unitsin operation in 27 states, one Canadian province, Egypt, Peru and U.A.E.. The Companyadditionally derives income from the sale of its trademark bagels, muffins and coffeethrough nontraditional channels of distribution including under licensing agreements withHMS Host (HMS), Mrs. Fields Famous Brands (Mrs. Fields), Alonti Cafe and Kohr Bros. FrozenCustard and through direct home delivery of specialty muffin gift baskets and coffee. 

The Big Apple Bagels brand franchise and Company-ownedstores feature daily baked "from scratch" bagels, flavored cream cheeses,premium coffees, gourmet bagel sandwiches and other related products. Licensed Big AppleBagels units serve the Company's par-baked frozen bagel products, freshly baked daily andrelated products. The My Favorite Muffin brand consists of units operating as "MyFavorite Muffin," featuring a large variety of freshly baked muffins, coffees andrelated products, and units operating as "My Favorite Muffin and Bagel Cafe,"featuring these products as well as a variety of specialty bagel sandwiches and relatedproducts. The Company's Brewster's Coffee unit is a specialty coffee shop featuring avariety of premium arabica bean coffees--freshly brewed or in bulk--and related products.Big Apple Bagels units are concentrated in the Midwest and Western United States, while MyFavorite Muffin units are clustered in the Middle Atlantic States and Florida. Brewster'sCoffee units are currently located in Ohio. The Brewster's coffee products are featured inall Company-owned and many of the franchised units. 

The Company has grown significantly since its initialpublic offering in November 1995 through growth in franchise units, Company-storedevelopment, acquisitions and the development of alternative distribution channels for itsbranded products. The Company intends to continue its expansion through growth infranchise units and further development of nontraditional distribution channels. TheCompany is leveraging on the natural synergy of distributing muffin products in existingBig Apple Bagels units and, alternatively, bagel products and Brewster's Coffee inexisting My Favorite Muffin units. The Company expects to continue to realize efficienciesin servicing the combined base of Big Apple Bagels and My Favorite Muffin franchisees. 

Operating Income

The Company reported income of $326,000 for the year endedNovember 30, 2002, and a  loss of ($1,090,000) for the year ended November 25,2001.  The Company believes that with its continued strong focus on franchising andlicensing operations and selected investment in its Company-owned stores, it will continueto be profitable.  The Company will continue to review and institute cost controlswhere deemed necessary and continue to review and if necessary sell or closeunder-performing Company-owned stores. 

Food Service Industry

Food service businesses are often affected by changes inconsumer tastes; national, regional, and local economic conditions; demographic trends;traffic patterns; and the type, number and location of competing restaurants. Multi-unitfood service chains, such as the Company's, can also be substantially adversely affectedby publicity resulting from problems with food quality, illness, injury or other healthconcerns or operating issues stemming from one store or a limited number of stores. Suchbusinesses are also subject to the risk that shortages or interruptions in supply causedby adverse weather or other conditions could negatively affect the availability, qualityand cost of ingredients and other food products. In addition, factors such as inflation,increased food and labor costs, regional weather conditions, availability and cost ofsuitable sites and the availability of experienced management and hourly employees mayalso adversely affect the food service industry in general and the Company's results ofoperations 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 ofcustomers.  Regarding the Company's franchising operation, the franchisees representa varied geographic and demographic group.  Among some of the primary services theCompany provides to its franchisees are time-tested, successful recipes, bulk purchasingdiscounts, food service knowledgeable personnel and brand recognition. 

SUPPLIERS

The Company's major suppliers are Coffee BeanInternational, Dawn Food Products, Inc. and Hawkeye Food Service Distributors.  TheCompany is not dependent on any of these suppliers for future growth and profitabilitysince the products purchased from these suppliers are readily available from othersources.

LOCATIONS

The Company has 6 Company-owned stores, 176franchised locations and 32 licensees.   Of the 214 locations, 204 are locatedin 27 states and 10 units are in International locations including Canada, Egypt, Peru andU.A.E..

   STORE OPERATIONS

BIG APPLE BAGELS--Big Apple Bagels franchised andCompany-owned stores daily bake "from scratch" over 18 varieties of fresh bagelsand offer up to 20 varieties of cream cheese spreads.  Licensed units under HMS servethe Company's par-baked frozen bagel products, freshly baked daily. Stores also offer avariety of breakfast and lunch bagel sandwiches, soups, various dessert items, and gourmetcoffees and other beverages. A typical Big Apple Bagels franchise or Company-owned storeis located within a three-mile radius of at least 25,000 residents in an area with a mixof both residential and commercial properties. The average Company-owned or franchisedstore ranges from 1,500 to 2,000 square feet. The Company's current store design isapproximately 2,000 square feet, with seating capacity for 30 to 40 persons, and includes750 square feet devoted to production and baking. A satellite store is typically smallerthan a production store, averaging 600 to 1,000 square feet. Although franchise stores mayvary in size from Company-owned stores, and from other franchise stores, store layout isgenerally consistent. Licensed units are generally located in airports, travel plazas,hotels and universities. 

MY FAVORITE MUFFIN--My Favorite Muffin franchised storesbake 20 to 25 varieties of muffins daily, from over 400 recipes, plus a variety of bagels.They also serve gourmet coffees, beverages and, at My Favorite Muffin and Bagel Cafelocations, a variety of bagel sandwiches and related products. While a number of MFM unitsare located in shopping mall locations with minimal square footage of 400 to 800 squarefeet, the typical strip mall prototype unit is approximately 2,000 square feet withseating for 30 to 40 persons. A typical MFM franchise store is located within a three-mileradius of at least 25,000 residents in an area with a mix of both residential andcommercial properties. 

BREWSTER'S COFFEE--Brewster's Coffee licensed units servea variety of arabica bean coffees, both freshly brewed and in bulk, and related productssuch as bagels, muffins and other beverages. The typical Brewster's coffee location isapproximately 1,500 square feet and offers seating for 20 to 30 persons and is generallylocated in high traffic urban or suburban location. 

FRANCHISING

The Company requires payment of an initial franchise feeper store, plus an ongoing 5% royalty on net sales. Additionally, Big Apple Bagels("BAB") and MFM franchisees are members of a national marketing fund requiringan ongoing 1% contribution based on net sales. The Company currently requires a franchisefee of $25,000 on a franchisee's first BAB or MFM store. The fee for subsequent productionstores is $20,000 and $15,000 for satellite and kiosk stores. 

The Company's current  Uniform Franchise OfferingCircular  provides for, among other things, the opportunity for prospectivefranchisees to enter into a preliminary agreement for their first production store. Thisagreement 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 approvedby 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 initialfranchise fee.  See also last paragraph under "Government Regulation"section in this 10-KSB.

The Company's franchise agreements provide a franchiseewith the right to develop one store at a specific location. Each franchise agreement isfor a term of 10 years with the right to renew. A franchisee is required to be inoperation not later than 10 months following the signing of the franchise agreement. 

Area development agreements, which may be granted to newor existing franchisees, provide that a franchisee may open a predetermined number ofconcept stores within a defined geographic area (an "Area of Exclusivity"). TheArea of Exclusivity is negotiated prior to the signing of the area development agreementand varies by agreement as to size of the area, the number of stores required, and theschedule for store development and opening. The Company's current area development fee is$5,000 per store to be developed. As additional franchise agreements are executedadditional franchise fees are collected. The area development fee is not refundable if nofranchise agreement is executed. 

The Company currently advertises its franchisingopportunities at franchise trade shows and in directories, newspapers, the internet andbusiness opportunity magazines worldwide. In addition, prospective franchisees contact theCompany as a result of patronizing an existing store. 

COMPETITION

The quick service restaurant industry is intenselycompetitive with respect to product quality, concept, location, service and price. Thereare a number of national, regional and local chains operating both owned and franchisedstores which may compete with the Company on a national level or solely in a specificmarket 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 conceptchains. 

The Company believes the most direct competitors of itsbagel concept units are Bruegger's Bagel Bakery, and New World Coffee-Manhattan Bagel Inc.who operates under Einstein Bros. Bagels, Noah's NY Bagel, Manhattan Bagel Bakery andChesapeake Bagel Bakery brands.  There are several other regional bagel chains withfewer than 50 stores, all of which may be expected to compete with the Company. There isnot a major national competitor in the muffin business, but there are a number of localand regional operators. Additionally, the Company competes directly with a number ofnational, regional and local coffee concept stores and brand names. 

The Company competes against numerous small, independentlyowned bagel bakeries, and national fast food restaurants, such as Dunkin' Donuts andMcDonald's, that offer bagels and muffins as part of their breakfast food offerings andsupermarket bakery sections.  In particular, the Company's bagels compete againstThomas' Bagels and other brands of fresh and frozen bagels offered in supermarkets.Certain of these competitors may have greater product and name recognition and largerfinancial, marketing and distribution capabilities than the Company.  In addition,the Company believes the startup costs associated with opening a retail food establishmentoffering similar products on a stand-alone basis are competitive with the startup costsassociated with opening its concept stores and, accordingly, such startup costs are not animpediment to entry into the retail bagel, muffin or coffee businesses. 

The Company believes that its stores compete favorably interms of taste, food quality, convenience, customer service and value, which the Companybelieves are important factors to its targeted customers.  Competition in the foodservice industry is often affected by changes in consumer taste, national, regional andlocal economic and real estate conditions, demographic trends, traffic patterns, the costand availability of labor, consumer purchasing power, availability of product and localcompetitive factors.  The Company attempts to manage or adapt to these factors, butnot all such factors are within the Company's control and such factors could cause theCompany and some, or all, of its area developers and franchisees to be adversely affected.

The Company competes for qualified franchisees with a widevariety of investment opportunities in the restaurant business, as well as otherindustries. Investment opportunities in the bagel store business include franchisesoffered by New World Coffee-Manhattan Bagel Inc.  The Company's continued success isdependent to a substantial extent on its reputation for providing high quality and valuewith respect to its service, products and franchises. This reputation may be affected notonly by the performance of Company-owned stores but also by the performance of itsfranchise stores, over which the Company has limited control. 

TRADEMARKSAND SERVICE MARKS

The trademarks and service marks used by the Companycontain common descriptive English words and thus may be subject to challenge by users ofthese words, alone or in combination with other words, to describe other services orproducts. Some persons or entities may have prior rights to those names or marks in theirrespective localities. Accordingly, there is no assurance that such marks are available inall locations. Any challenge, if successful, in whole or in part, could restrict theCompany's use of the marks in areas in which the challenger is found to have used the nameprior to the Company's use. Any such restriction could limit the expansion of theCompany's use of the marks into that region, and the Company and its franchisees may bematerially and adversely affected. 

The trademarks and service marks "Big AppleBagels," "Brewster's Coffee" and "My Favorite Muffin" areregistered under applicable federal trademark law. These marks are licensed by the Companyto its franchisees pursuant to franchise agreements.   In February 1999 theCompany acquired the trademark of "Jacobs Bros. Bagels" upon purchasing certainassets of Jacobs Bros. The "Jacobs Bros. Bagels" mark is also registered underapplicable federal trademark law. 

The Company is aware of the use by other persons andentities in certain geographic areas of names and marks which are the same as or similarto the Company's marks. Some of these persons or entities may have prior rights to thosenames or marks in their respective localities. Therefore, there is no assurance that themarks are available in all locations. It is the Company's policy to pursue registration ofits marks whenever possible and to vigorously oppose any infringement of its marks. 

GOVERNMENTREGULATION

The Company is subject to the Trade Regulation Rule of theFederal Trade Commission (the "FTC") entitled ``Disclosure Requirements andProhibitions Concerning Franchising and Business Opportunity Ventures'' (the "FTCFranchise Rule") andstate and local laws and regulations that governthe offer, sale and termination of franchises and the refusal to renew franchises.Continued compliance with this broad federal, state and local regulatory network isessential and costly, and the failure to comply with such regulations may have a materialadverse effect on the Company and its franchisees. Violations of franchising laws and/orstate laws and regulations regulating substantive aspects of doing business in aparticular state could limit the Company's ability to sell franchises or subject theCompany and its affiliates to rescission offers, monetary damages, penalties, imprisonmentand/or injunctive proceedings. In addition, under court decisions in certain states,absolute vicarious liability may be imposed upon franchisers based upon claims madeagainst franchisees. Even if the Company is able to obtain insurance coverage for suchclaims, there can be no assurance that such insurance will be sufficient to coverpotential claims against the Company. 

The Company and its franchisees are required to complywith federal, state and local government regulations applicable to consumer food servicebusinesses, including those relating to the preparation and sale of food, minimum wagerequirements, overtime, working and safety conditions, and citizenship requirements, aswell as regulations relating to zoning, construction, health and business licensing. Eachstore is subject to regulation by federal agencies and to licensing and regulation bystate and local health, sanitation, safety, fire and other departments. Difficulties orfailures in obtaining the required licenses or approvals could delay or prevent theopening of a new Company-owned or franchise store, and failure to remain in compliancewith applicable regulations could cause the temporary or permanent closing of an existingstore. The Company believes that it is in material compliance with these provisions.Continued compliance with these federal, state and local laws and regulations is costlybut essential, and failure to comply may have an adverse effect on the Company and itsfranchisees. 

The Company's franchising operations are subject toregulation by the Federal Trade Commission (the "FTC") under the UniformFranchise Act which requires, among other things, that the Company prepare andperiodically update a comprehensive disclosure document known as a Uniform FranchiseOffering Circular ("UFOC") in connection with the sale and operation of itsfranchises. In addition, some states require afranchiser to register its franchise with the state before it may offer afranchise to a prospective franchisee. The Company believes its UFOCs, together with anyapplicable state versions or supplements, comply with both the FTC guidelines and allapplicable state laws regulating franchising in those states in which it has offeredfranchises. 

The Company is also subject to a number of state laws, aswell 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, 2002, the Company employed 107 persons,consisting of  83 working in the Company-owned stores, of which 42 are part-timeemployees. The remaining employees are responsible for Corporate oversight andfranchising.  None of the Company's employees are subject to any collectivebargaining agreements and management considers its relations with its employees to begood. 

 

 

ITEM 2. DESCRIPTION OF PROPERTY 

The Company's principal executive office, consisting ofapproximately 7,300 square feet, is located in Chicago, Illinois and is leased pursuant toa lease expiring in June 2004.  The Company believes that these facilities will beadequate to meet its needs for the remainder of the lease term. Additionally, the Companyleases space for each of its Company-owned stores. Lease terms for these stores aregenerally for initial terms of five years and contain options for renewal for one or morefive-year terms. (See Note 7 to the audited consolidated financial statements includedherein.) 

 

 

ITEM 3. LEGAL PROCEEDINGS

None

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS 

None

PART II 

ITEM 5. MARKET FOR THE COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS 

The following table sets forth the quarterly high and lowsale prices for the Company's Common Stock, as reported in the Nasdaq SmallCap Market forthe two years ended November 30, 2002.  The Company's Common Stock is traded on theNASD OTC-Bulletin Board under the symbol "BABB."  The following numbershave been adjusted for a 4:1 stock split, which was effective January 20, 2003.

BAB, Inc.YEAR ENDED NOVEMBER 25, 2001LOWHIGHFirst quarter.03.17Second quarter.03.06Third quarter .02.05Fourth quarter.02.06YEAR ENDED NOVEMBER 30, 2002First quarter.04.09Second quarter .04.09
Third quarter.05.10Fourth quarter.05.20
As of February 18, 2003, the Company's Common Stock washeld of record by 180 holders. Registered ownership includes nominees whomay holdsecurities on behalf of multiple beneficial owners.The Company estimates that thenumber of beneficial owners of its common stock at February 20, 2003, is 1,600 based uponinformation provided by a proxy services firm. 

STOCK OPTIONS

In May 2001, the Company approved a Long-Term Incentiveand Stock Option Plan (The Plan).  The Plan reserves 1,100,000 shares of common stockfor grant.   During fiscal 2002, 600,000 stock options were granted to directors,officers and employees.  On December 1, 2002, the Committee granted an additional300,000 options, leaving 200,000 options available for grant.  As of February 18,2003, there were 32,000 stock options exercised since the initial grant on December 18,2001.  (See Note 11 in enclosed financial statements for additional information.)

DIVIDEND POLICY 

The Company has never declared or paid any cash dividendson its Common Stock, and the Board of Directors currently intends to retain all earnings,if any, for use in the Company's business for the foreseeable future.  Any futuredetermination as to declaration and payment of dividends will be made at the discretion ofthe Board of Directors, subject to the existence of any covenants restricting the paymentof dividends. 

 

ITEM 6.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The selected financial data contained herein has beenderived from the consolidated financial statements of the Company included elsewhere inthis Report on Form 10-KSB. The data should be read in conjunction with the consolidatedfinancial statements and notes thereto.  Certain statements contained in Management'sDiscussion and Analysis of Financial Condition and Results of Operations, includingstatements regarding the development of the Company's business, the markets for theCompany's products, anticipated capital expenditures, and the effects of completed andproposed acquisitions, and other statements and disclosures contained herein andthroughout this Annual Report regarding matters that are not historical facts, areforward-looking statements (as such term is defined in the Private Securities LitigationReform Act of 1995). In such cases, we may use words such as "believe,""intend," "expect," "anticipate" and the like.  Becausesuch statements include risks and uncertainties, actual results may differ materially fromthose expressed or implied by such forward-looking statements. Certain risks anduncertainties are wholly or partially outside the control of the Company and itsmanagement, including its ability to attract new franchisees; the continued success ofcurrent franchisees; the effects of competition on franchisee and Company-owned storeresults; consumer acceptance of the Company's products in new and existing markets;fluctuation in development and operating costs; brand awareness; availability and terms ofcapital; adverse publicity; acceptance of new product offerings; availability of locationsand terms of sites for store development; food, labor and employee benefit costs; changesin government regulation (including increases in the minimum wage; regional economic andweather conditions; the hiring, training, and retention of skilled corporate andrestaurant management; and the integration and assimilation of acquired concepts.Accordingly, readers are cautioned not to place undue reliance on these forward-lookingstatements, which reflect management's analysis only as of the date hereof.  TheCompany undertakes no obligation to publicly release the results of any revision to theseforward-looking statements which may be made to reflect events or circumstances after thedate hereof or toreflect the occurrence of unanticipatedevents. 
GENERAL 
The Company has 6 Company-owned stores and 208 franchisedand licensed units as of the end of fiscal 2002. Units in operation at the end of fiscal2001 included 7 Company-owned stores and 224 franchised and licensed units. System-widerevenues in fiscal 2002 were $64 million compared to $66 million in fiscal 2001. 

The Company's revenues are derived primarily from theoperation of Company-owned stores, receipt of initial franchise fees and receipt ofongoing royalties paid to the Company by its franchisees.  Additionally, the Companyderives revenue from the sale of licensed products as a result of purchasing trademarks(My Favorite Muffin and Brewster's) and licensing contracts (licenses with HMS), and bydirectly entering into licensingagreements(Mrs. Fields).  The numberof licensed units in fiscal 2002 decreased by 25 units as compared to fiscal 2001.  This was primarily a result of closures by HMS in airport locations.  The Companybelieves that these closures have had no material effect on its consolidated financialoperations.  

During fiscal 2002, the Company continued to decreasecosts in payroll, occupancy and overhead not only at the 6 Company-owned stores, but alsoin the Corporate Office as well.  At November 30, 2002, the Company had 24 employeesat the corporate level to oversee the franchise, licensed and Company-owned storeoperations, versus 25 at the end of 2001.  The Companycontinues to lower costs on an absolute basis.  Total operating costs, less provisionfor uncollectible accounts, depreciation and amortization and a write down in value ofassets held for resale, decreased $2,803,000, to $7,330,000 in fiscal 2002 versus$10,133,000 in fiscal 2001.  As noted above, the Company had 7 Company-ownedstores at the end of fiscal 2001 and 6 at the end of fiscal 2002.   Managementexpects that payroll and other operating costs related to Company-owned stores andCorporate will continue to decrease as a percentage of revenue as additional franchisesare opened and revenue from licensing and other nontraditional sources is added.  

Effective with the 2002 fiscal year end, the Companyadopted a month-end reporting beginning November 30, 2002.  This was a change fromthe prior reporting adopted in 1999 of a 52-53 week period ending on the last Sunday ofits fiscal year in November.  The  fiscal year ended  on November 30, 2002,contained 53 weeks whereas fiscal year ended November 25, 2001, contained 52 weeks. 

 

FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001

Total revenues from all sources decreased 18.7% to$8,550,000 in 2002 from $10,517,000 in the prior year.  Net sales at Company-ownedstores decreased 35.4% to $4,086,000 in fiscal 2002, versus $6,325,000 in fiscal2001.  The Company sold one store in fiscal 2002 which contributed $94,000 in revenuefor 2002, versus $343,000 in 2001.  Wholesale sales decreased by $565,000 in fiscal2002 due to the elimination of  sales to less profitable customers.  The loss ofrevenue from the stores closed or sold in fiscal 2001 contributed $1,290,000 to thedecrease in 2002 Company-owned store revenues.  Royalty fees from franchise storesremained relatively constant, $2,749,000 in fiscal 2002 versus $2,759,000 in fiscal 2001.Franchise and area development fee revenue was $570,000 in fiscal 2002 versus $330,000 infiscal 2001.   The increase of $240,000 in franchise and area developmentrevenue for fiscal 2002 was obtained primarily from the number of franchise storeopenings, 17 in fiscal 2002 versus 13 in fiscal 2001, of which 1 was a re-franchisedCompany-owned store in 2002 versus and 5 re-franchised Company-owned stores in fiscal2001.  This increase also included $73,000 of fees related to franchisedefaults.  Licensing fees and other income increased to $1,145,000 in fiscal 2002 ascompared to $1,102,000 in fiscal 2001.   This increase  was due to anincrease in Sign Shop revenues in fiscal 2002,  offset by a decrease in rentalrevenue in fiscal 2002 and a net loss on sale of company-owned stores versus a gain in theprevious year.

Food, beverage and paper costs incurred at Company-ownedstores decreased, as a percentage of revenue, from 34.7% in 2001 to 31.6% in 2002. Store payroll and other Company-owned store costs increased to 77.6% of revenues in fiscal2002 from 73.3% in fiscal 2001.  The percent increase is the result of  decreased Company-owned store revenues, as evidenced by the fact expenses decreasedon an absolute basis.  Food, beverage and paper costs  decreased by $902,000 andstore payroll and other Company-owned store operating expenses decreased by $1,464,000 infiscal 2002 as compared to 2001.

Selling, general and administrative costs were 43.3% ofrevenue in 2002 as compared to 42.5% in 2001, due primarily to the relatively fixed natureof  some of these expenses in this category and also lower revenues in 2002 versus2001.  On an absolute basis, selling, general and administrative expenses decreasedto $3,700,000 in 2002 versus $4,469,000 in 2001.  The greatest reductions in fiscal2002, as compared to fiscal 2001, occurred in Corporate and indirect payrolls, a decreaseof $156,000.  There was a reduction in depreciation and amortization expense of$131,000, the direct result of fewer Company-owned stores, and an improvement of $99,000from a reduction in the provision for uncollectible accounts.  Other areas ofsuccessful cost reduction for fiscal 2002 included travel, an improvement of $43,000,advertising and promotional, an improvement of $63,000, and professional fees, animprovement of $26,000.  There was a reduction of $130,000 in Other SG&A forfiscal 2002. 

Net income from operations for the period ended November30, 2002 was $387,000 as compared to a loss from operations of ($781,000) in fiscal2001.   As of the last quarter of fiscal 2002, the Company had 5consecutive profitable quarters of operations.   The Company's management teamhas continued to focus on cost control and expanding its franchising network.  Theresults of management's efforts have been continued bottom-line profitability.  Although total revenues have decreased,  expenses have decreased at a greater rate.Interest expense decreased to $169,000 during 2002 versus $226,000 in 2001 primarily dueto a decrease in the outstanding principal balance.  In fiscal 2001, the Companywrote down the value of the assets held for resale of $101,000 and a deferred income taxexpense was recorded due to an increase in the valuation allowance of $180,000. There were no such expense items in 2002. 

Net income totaled $326,000 during the current fiscal yearas compared to a net loss of ($1,090,000) in the prior year. 

 

LIQUIDITY AND CAPITAL RESOURCES

The net cash provided from operating activities totaled$1,163,000 during fiscal 2002. Cash provided from operating activities principallyrepresents net income, adjusted for depreciation and amortization of $716,000, the loss onsale of property and equipment of $53,000, a loss on write-off of assets of $21,000, plus the provision for uncollectible accounts of $117,000, a reduction in trade accountsreceivable of $110,000, reductions in  inventories of $18,000, and a decrease inNational Marketing Fund contributions receivable of $113,000,Thecash provided was reduced by a decrease in accounts payable of ($81,000), a decrease inaccrued liabilities of ($7,000), an increase in notes receivable of ($55,000), a decreasein deferred revenue of ($51,000), an increase in prepaids and other assets of($117,000).  In 2001, the net cash used in operating activities totaled $73,000,adjusted fordepreciation and amortization of $847,000, thegain on sale of property and equipment of ($47,000), a reduction in assets held for saleof $101,000 plus the provision for uncollectible accounts of $216,000, a reduction intrade accounts receivable of $162,000, reductions in accounts payable, inventories,National Marketing Fund accounts, prepaids and other liabilities of ($460,000) and anincrease in deferred revenue and deferred tax expense of $198,000.  Should a decreasein operating cash flow occur, there would be a negative impact on the Company's liquidity.  

Cash provided from investing activities during 2002totaled $130,000, and was provided from the sale of property, equipment and assets heldfor resale of $89,000, collection of notes receivable in the amount of $116,000 and theoffset of purchases of property and equipment of ($75,000).   Cash provided byinvesting activities in 2001 was $638,000. The two primary sources of cash were theproceeds from the sale of property and equipment and assets held for resale of $455,000and collections of notes receivable of $273,000, offset by the purchases of property andequipment of ($90,000). 

Financing activities used ($681,000) during fiscal 2002primarily related to the repayment of notes payable.  Financing activities used($406,000) during fiscal 2001 and consisted primarily of repayments on the line of creditof ($404,000) and purchase of treasury stock of ($2,000).   

Subsequent to year-end, the Company made a principalpayment to Planet Zanett (PZ) of $100,000.  If the Company pays PZ an additional$200,000 by August 7, 2003, the note due to PZ on October 18, 2004 will be extended toOctober 18, 2005.   The Company expects to make the payment.

The Company has no financial covenants on any of itsoutstanding debt.

 

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements, otherthan the lease commitments disclosed in Note 7.

 

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies arepresented in the Notes to the Consolidated Financial Statements (see Note 2 in Notes toFinancial Statements following).  While all of the significant accounting policiesimpact the Company's Consolidated Financial Statements, some of the policies may be viewedto be more critical.  These policies are those that are both most important to theportrayal of the Company's financial condition and results of operation and requiremanagement's most difficult, subjective or complex judgments and estimates.  Management bases its judgments and estimates on historical experience and various otherfactors that are believed to be reasonable under the circumstances.  The results ofjudgments and estimates form the basis for making judgments about the Company's value ofassets and liabilities that are not readily apparent from other sources.  Actualresults could differ from those estimates under different assumptions or conditions.  Management believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its ConsolidatedStatements.

Revenue Recognition 

Systems royalty fees from franchised stores represent afee of 5% of net retail sales of franchised units. Royalty revenues are recognized on theaccrual basis, based on past history, tempered by seasonality  on afranchise-by-franchise basis. 

The Company recognizes franchise fee revenue upon theopening of a franchise store. Direct costs associated with the franchise sales aredeferred until the franchise fee revenue is recognized.  These costs include siteapproval, construction approval, commissions, blueprints and training costs. In addition,Area development agreement revenue is recognized on a pro rata basis as each store coveredby the agreement opens. At the termination of an agreement, any remaining deferredfranchise and area development agreement revenue is recognized as such amounts are notrefundable. 

The Company's revenue recognition policies comply with thecriteria set forth in Staff Accounting Bulletin No. 101, "Revenue Recognition inFinancial Statements."

Long-Lived Assets

Property, plant and equipment are recorded at cost. Improvements and replacements are capitalized, while expenditures for maintenance androutine repairs that don't extend the life of the asset are charged to expenses asincurred.  Depreciation is calculated on the straight-line method over the estimateduseful lives of the assets.  Leasehold improvements and equipment are stated at cost,less accumulated depreciation.  Estimated useful lives for the purposeof depreciation are;machinery, equipment and fixtures- 3to 7 years, and leasehold improvements - 10 years or term of lease if less.

The Company's intangible assets consist primarily ofpatents, trademarks, copyrights, franchise contract rights and goodwill.  Patents,trademarks and copyrights are being amortized over 17 years. Franchise contract rights areamortized over varying periods from 8.5 to 20 years. Goodwill recorded as a result ofacquisitions was amortized over 40 years through fiscal 2002.  Effective withfiscal 2003, it will be evaluated annually for impairment in accordance with SFAS No. 142.

Concentrations of Credit Risk

Certain financial instruments potentially subject theCompany to concentrations of credit risk.  These financial instruments consistprimarily of trade receivables.  The Company's trade receivables consist primarily ofamounts owed for royalty fees and wholesale product sales.  Amounts due fromfranchisees represented approximately 60% of the receivable balance at fiscal year end2002.  Historically, the Company has maintained  adequate reserves for doubtfulaccounts.  The Company reviews the collectibility of accounts receivable on a regularbasis, taking into account customer payment history and industry conditions.

Valuation Allowance and Deferred Taxes

A valuation allowance is the portion of a deferred taxasset for which it is more likely than not that a tax benefit will not be realized.

As of November 30, 2002, the company has cumulative netoperating loss carryforwards expiring between 2011 and 2021 for U.S. federal income taxpurposes of approximately $7,949,000.  The net operating loss carryforwards aresubject to limitation in any given year as a result of the Company's initial publicoffering and may be further limited if certain other events occur.  A valuationallowance has been established for $2,878,518 at November 30, 2002 for the deferred taxbenefit related to those loss carryforwards and other deferred tax assets for which it isconsidered more likely than not that the benefit will not be realized.

The Company had established a full valuation allowancebecause it felt there was uncertainty as to realization of the net operating losscarryforward deferred tax asset based on historical operating results.  The fullvaluation allowance existed at the end of fiscal 2002 because the Company felt itappropriate to apply a conservative method until the Company's current profitabilityextended into an additional fiscal year.  The Company expects to adjust the allowancebased on the quarterly operating results going forward in 2003.

 

ITEM 7. FINANCIAL STATEMENTS 
The Consolidated Financial Statements and Report ofIndependent Auditors is included immediately following. 

 

BAB, Inc. 

Years Ended November 30, 2002 and November25, 2001

 

C o n t e n t s 

IndependentAuditor's Report 

ConsolidatedBalance Sheets   

ConsolidatedStatements of Operations 

ConsolidatedStatements of Stockholders' Equity   

ConsolidatedStatements of Cash Flows 

Notesto Consolidated Financial Statements 

 

IndependentAuditor's Report 

Stockholders and Board of Directors BAB, Inc. Chicago,Illinois 

We have audited the accompanying consolidated balancesheets of BAB, Inc. as of November 30, 2002 and November 25, 2001, and the relatedconsolidated statements of operations, stockholders' equity and cash flows for the yearsthen ended. These consolidated financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in theconsolidated financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financial position of BAB,Inc. as of November 30, 2002 and November 25, 2001, and the results of its operations andits cash flows for the years then ended in conformity with accounting principles generallyaccepted in the United States of America. 
January 17, 2003, except for Note 14 as to    which the date is February 7, 2003Chicago, Illinois
/s/Blackman Kallick Bartelstein, LLP 

 

 
**BAB, Inc.****Consolidated Balance Sheets****November 30, 2002 and    November 25, 2001**20022001
**ASSETS**Current AssetsCash and cash equivalents,    including restricted cash of $304,117 in 2002 and $191,431 in 2001$             1,119,743$              507,264Receivables     Trade    accounts receivable (Net of allowance for doubtful accounts of $94,186 in 2002 and    $211,057 in 2001) 395,247622,461     National    Marketing Fund contributions receivable from franchisees and stores 97,230218,412     Notes    receivable (Net of allowance for doubtful accounts of $60,745 in 2002 and $106,754 in    2001)169,949117,802Inventories101,124119,325Assets held for sale-178,000Prepaid expenses and other    current assets          202,918               86,090            Total Current Assets**        2,086,211****        1,849,354**Property and Equipment        Leasehold improvements 981,0601,069,808        Furniture and fixtures347,495375,039        Equipment      1,364,245     1,428,8162,692,8002,873,663     Less    accumulated depreciation   (1,911,903)   (1,802,148)            Total Property and Equipment, Net        780,897     1,071,515Notes Receivable        346,730        459,633Assets Held For Sale               8,750               5,750IntangiblesPatents, trademarks and    copyrights (Net of accumulated amortization of $353,929 in 2002 and $286,386 in 2001)778,991846,535Goodwill (Net of accumulated    amortization of $438,630 in 2002 and $370,048 in 2001)2,304,6342,373,216Franchise contract rights (Net of    accumulated amortization of $578,512 in 2002 and $474,898 in 2001)1,493,7711,597,385Other (Net of accumulated    amortization of $442,573 in 2002 and $343,580 in 2001)        164,674        263,667             Total Intangibles, Net     4,742,070     5,080,803
TOTAL ASSETS**$  7,964,658****$  8,467,055**
**LIABILITIES    AND STOCKHOLDERS' EQUITY**Current LiabilitiesAccounts payable$              182,426$              262,989Accrued liabilities441,095445,065Accrued professional and other    services103,319106,755Unexpended National Marketing    Fund contributions401,347409,844Long-term debt due within one    year522,053197,938Deferred  revenue70,83384,799Deferred  franchise fee    revenue          140,000          217,000     Total    Current Liabilities      **     1,861,073****     1,724,390**Noncurrent LiabilitiesDeferred revenue
39,736
-Long-term debt (Net of portion    included in current liabilities)         1,426,235         2,046,520             Total Noncurrent Liabilities           **       1,465,971****       2,046,520**             Total Liabilities**       3,327,044****       3,770,910**Stockholders' Equity Common stock - $.001 par value;    15,000,000 shares authorized; 7,524,452 and 9,150,956 shares issued, and 7,524,452 and    8,890,492 shares outstanding, as of November 30, 2002 and November 25, 2001, respectively 
13,507,327
13,507,669Additional paid-in capital803,2761,187,800Accumulated deficit(9,672,989)(9,953,411)
Treasury stock at    cost, 260,464 shares at November 25, 2001                               -           (45,913)             Total Stockholders' Equity**       4,637,614****       4,696,145**
TOTAL LIABILITIES & STOCKHOLDERS EQUITY**$   7,964,658****$   8,467,055**
 
**BAB, Inc.****Consolidated Statements of Operations****Years Ended November 30,    2002 and November 25, 2001**
**Revenues**20022001Net sales by    Company-owned stores $            4,086,110$            6,325,419Royalty fees from    franchised stores2,748,7612,759,420Franchise and area    development fees570,380329,600Licensing fees and    other income      1,145,005      1,102,413             Total Revenues **    8,550,256****   10,516,852****Operating    Costs and Expenses**Food, beverage and    paper costs1,291,0702,193,420Store payroll and    other operating expenses3,171,8564,635,535Selling, general and    administrative expensesPayroll-related    expenses1,495,3941,651,863Occupancy179,738198,936Advertising and    promotion198,921261,454Professional service    fees279,181305,515Travel expenses125,769168,563Depreciation and    amortization716,436847,244Provision for    uncollectible accounts116,912216,333Write down of assets    held for resale-101,386Other        587,724        717,729             Total Selling, General and Administrative Expenses     3,700,075     4,469,023             Total Operating Costs and Expenses**8,163,001****11,297,978**Income (Loss)     from Operations387,255(781,126)Interest Income64,45355,886Interest Expense(169,471)(225,849)Other Income          44,098          41,509Income (Loss)     before Taxes326,335(909,580)Provision for    Deferred Income Taxes                       -         180,000Net Income (Loss) **$              326,335****$     (1,089,580)**Income (Loss)     per Share - Basic and diluted **$                 .04****$                 ( 0.12)**Weighted Average    Number of Common Shares and Common Share Equivalents Outstanding:Basic8,598,6458,794,160Diluted8,695,7158,794,160
The accompanying notes are an integral partof the consolidated financial statements.

**BAB, Inc.Consolidated Statements ofStockholders' EquityYears Ended November 30, 2002 and November 25, 2001**
Common    StockSeries    A Preferred StockTreasury    StockAdditional Paid-in-CapitalAccumulated deficitTotalSharesAmountSharesAmountSharesAmountBalance as    of November 26, 20009,150,956$ 13,507,669
-
-
(200,464)
**$        (43,963)**$ 1,187,800$ (8,863,831)$ 5,787,675Purchase and Retirement of    Stock
-
-
-
-
(60,000)
(1,950)(385,186)-(385,531)Net Loss 
-
-
-
-
-
-
-(1,089,580)(1,089,580)Balance as of November 25,    2001 **9,150,956****$13,507,669**
**-**
**-**
(260,464)
**$      (45,913)****$    1,187,800****$    (9,953,411)****$    4,696,145**Stock Options Exercised14,0003----662-665Purchase and Retirement of    Stock(1,640,504)(345)--(260,464)45,913(385,186)        (45.913)(385,531)Net Income**-****-****-****-****-****-****-**326,335326,335Balance as of November 30,    2002**7,524,452****$13,507,327****-****-****-****-****$      803,276****$    (9,672,989)****$    4,637,614**
The accompanying notes are an integral partof the consolidated financial statements.

 

**BAB, Inc.Consolidated Statements of Cash FlowsYears Ended November 30, 2002 and November 25, 2001**

         2002     
        2001     Cash Flows from    Operating ActivitiesNet Income (Loss)$             326,335$         (1,089,580)     Adjustments to reconcile net income (loss) to net cash provided by (used in)        operating activities        Depreciation and amortization716,436847,244        Provision for store conversions-58,590        Provision for uncollectible accounts116,912216,333    Write    down of assets held for sale-101,386        Loss (gain) on sale of property and equipment73,812(46,784)        (Increase) decrease in            Trade accounts receivable110,302161,688           National Marketing Fund contributions receivable from franchisees and              stores121,18258,083           Inventories18,201119,143           Notes receivable(55,177)-           Prepaid expenses and other assets(116,827)239,801        Increase (decrease) in           Accounts payable(80,564)(526,946)           Accrued professional and other services(3,436)(14,147)           Liability for closed store expenses-(58,731)           Accrued liabilities(3,968)(345,440)           Unexpended National Marketing Fund contributions(8,498)8,788           Deferred  revenue(51,230)17,775           Deferred income taxes                  -   180,000           Total Adjustments  837,1451,016,783           Net Cash Provided by (Used in) Operating Activities  1,163,480   (72,797)Cash Flows from    Investing Activities      Purchases of property and equipment(75,199)(90,157)      Proceeds from sale of property and equipment and    assets held for sale89,300455,205      Repayments on notes receivable          115,934          272,507           Net Cash Provided by  Investing Activities          130,035          637,555Cash Flows Used    in Financing Activities   Debt    repayments(681,701)(403,800)      Other             665           (1,950)           Net Cash Used in Financing Activities       (681,036)       (405,750)Net Increase in    Cash and Cash Equivalents         612,479         159,008Cash and Cash    Equivalents, Beginning of Year          507,264          348,256Cash and Cash    Equivalents, End of Year**$ 1,119,743****$      507,264**
The accompanying notes are an integral partof the consolidated financial statements.
**BAB, Inc.****Notes to Consolidated Financial    Statements****Years Ended November 30,    2002 and November 25, 2001**
**Note 1 - Basis Of Presentation**

BAB, Inc. (the "Company") was incorporated underthe laws of the State of Delaware on July 12, 2000. After an affirmative vote of theshareholders of BAB Holdings, Inc., (Holdings), Holdings was merged into the Company onNovember 1, 2000.  The combined companies then merged with Planet Zanett, Inc. (PZ)on November 1, 2000.  On November 13, 2000, the Company was spun off from PZ to theformer shareholders of Holdings.

The Company has four wholly owned subsidiaries: BABOperations, Inc. (Operations); BAB Systems, Inc. (Systems); Brewster's FranchiseCorporation (BFC); and My Favorite Muffin Too, Inc. (MFM).  Operations was formed onAugust 30, 1995, primarily to operate Company-owned stores, currently "Big AppleBagels" and "Brewster's Coffee" concept stores, including one whichcurrently serves as the franchise training facility.  Systems was incorporated onDecember 2, 1992, and was primarily established to franchise "Big Apple Bagels"specialty bagel retail stores.  Systems has a wholly owned subsidiary, SystemsInvestments, Inc. (Investments), a dormant company.  BFC was established on February15, 1996, to franchise "Brewster's Coffee" concept coffee stores.  MFM, aNew Jersey corporation, was acquired on May 13, 1997.  MFMfranchises"My Favorite Muffin" concept muffin stores. The assets of Jacobs Bros. Bagels(Jacobs Bros.) were acquired on February 1, 1999 (See Note 11.)  The companycontinues to operate three stores with the Jacobs Bros. name. 

Stores purchased are operated as Company-owned units for aperiod of time prior to the ultimate resale as a franchised unit.

 

**Note 2 - Summary of Significant AccountingPolicies**

Principles of Consolidation

The consolidated financial statements include the accountsof the Company and its direct and indirect wholly owned subsidiaries. All intercompanyaccounts and transactions have been eliminated in consolidation. 

Inventories

Inventories are valued at the lower of cost, determined ona first-in, first-out (FIFO) basis, or market. 

Fiscal Year-End 

Effective with the 2002 fiscal year end, the Companyadopted a month-end reporting beginning with November 30, 2002.  This was a changefrom the prior reporting adopted in 1999 of a 52-53 week period ending on the last Sundayof its fiscal year in November.  The  fiscal year ended on November 30,2002 contained 53 weeks whereas fiscal year ended November 25, 2001 contained 52 weeks. 

Depreciation and Amortization 

Leasehold improvements and equipment are stated at costless accumulated depreciation.  Depreciation is calculated on the straight-linemethod over the estimated useful lives of the assets.  Estimated useful lives fordepreciation purposes are: leasehold improvements - 10 years or term of lease if less;machinery, equipment and fixtures - 3 to 7 years. 

The Company's intangible assets consist primarily ofpatents, trademarks, copyrights, franchise contract rights, and goodwill.  Patents,trademarks and copyrights are being amortized over 17 years. Franchise contract rights areamortized over varying periods from 8.5 to 20 years. Goodwill recorded as a result ofacquisitions was amortized over 40 years.   Amortization expense recorded in theaccompanying consolidated statements of operations for the years ended November 30, 2002and November 25, 2001 was $338,732 and $370,232, respectively. 

Stock Options 

The Company uses the intrinsic method, as allowed by SFAS123, " Accounting for Stock-Based Compensation," to account for stock optionsgranted for employees and directors.  No compensation expense is recognized for stockoptions because the exercise price of the options is at least equal to the market price ofthe underlying stock on the grant date. 

Stock Warrants 

Stock warrants granted as consideration in purchaseacquisitions have been recorded as an addition to additional paid-in capital in theaccompanying balance sheet based on the fair value of such stock warrants on the date ofthe acquisition. 

Revenue Recognition 

Systems royalty fees from franchised stores represent afee of 5% of net retail sales of franchised units. Royalty revenues are recognized on theaccrual basis. 

The Company recognizes franchise fee revenue upon theopening of a franchise store. Direct costs associated with the franchise sales aredeferred until the franchise fee revenue is recognized.  These costs include siteapproval, construction approval, commissions, blueprints and training costs.

Area development agreement revenue is recognized on a prorata basis as each store covered by the agreement opens. At the termination of anagreement, any remaining deferred franchise and area development agreement revenue isrecognized, as such amounts are not refundable. 

In addition to Company-owned and franchised stores, theCompany acts as licensor of "Big Apple Bagels" units owned and operatedprimarily by HMS Host.  Included below in "licensed units" are those unitslocated primarily in airport and travel plazas.  The Company derives a licensing feefrom certain sales at these units as well as a sales commission from the sale of par-bakedbagels to these units by a third-party commercial bakery. 

Stores which have been opened, and unopened stores forwhich an agreement has been executed at November 30, 2002, and November 25, 2001: 

      2002  
  2001  Stores Opened        Company-owned67        Franchisee-owned176167        Licensed        32        57      214      231Unopened stores        Franchise agreement         4         5Total**218****236**
Advertising Costs 

The Company expenses advertising costs as incurred.Advertising expense was $126,773 and $105,496 in 2002 and 2001, respectively.  Included in advertising expense was $56,125 and $54,625 in 2002 and 2001, respectively,related to the Company's franchise operations. 

Fair Value of Financial Instruments 

The Company evaluates its financial instruments based oncurrent market interest rates relative to stated interest rates, length to maturity andthe existence of a readily determinable market prices. Based on the Company's analysis,the fair value of financial instruments recorded on the consolidated balance sheet as ofNovember 30, 2002 and November 25, 2001, approximates their carrying value.

Comprehensive Income (Loss) 

The Company adopted Statement of Financial AccountingStandards (SFAS) No. 130, "Reporting Comprehensive Income," which establishedstandards for the reporting and display of comprehensive income (loss) and its componentsin the financial statements. Components of comprehensive income (loss) include amountsthat, under SFAS No. 130, are included in the comprehensive income (loss) but are excludedfrom net income (loss). There were no differences between the Company's netincome(loss) and comprehensive loss. 

Income Taxes

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes.  Under the TaxReform Act of 1986, the benefits from net operating losses carried forward may be impairedor limited in certain circumstances.  In addition, a valuation allowance can beprovided for deferred tax assets when it is more likely than not that all or some portionof the deferred tax asset will not be realized.  The Company has established a fullvaluation allowance on the aforementioned deferred tax assets due to the uncertainty ofrealization.  (See Note 5.)

Reclassification

Certain items in prior year financial statements have beenreclassified to conform to the presentation used in fiscal 2002.

New Accounting Standards 

Effective May 1, 2001, the Company adopted StaffAccounting Bulletin No. 101, "Revenue Recognition in FinancialStatements."  SAB 101 provides the SEC’s views in applying accountingprinciples generally accepted in the United States of America to revenue recognition infinancial statements. The adoption of SAB 101 did not have an effect on the financialstatements of the Company.

In June 2001, the FASB issuedSFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and OtherIntangible Assets," effective for years beginning after December 15, 2001. Under thenew rules, goodwill and certain other intangible assets will no longer be amortized, butwill instead be subject to annual impairment tests in accordance with the standards. Otherintangible assets will continue to be amortized over their useful lives. The pooling ofinterest method is no longer permitted for business combinations after June 30, 2001.Early adoption is permitted for companies with fiscal years beginning after March 15,2001, provided that their first quarter financial statements have not been issued prior tothe adoption. The Company is not required to adopt this new standard until the firstquarter of the fiscal year ending November 30, 2003.  The Company is in the processof determining the impact SFAS No. 142 will have on its consolidated financial positionand results of operation.

In June 2001, the FASB issuedSFAS No. 143, "Accounting for Asset Retirement Obligations," effective for yearsbeginning after June 15, 2002. Under this standard asset retirement obligations will berecognized at a discounted fair value basis and capitalized and allocated to expense overthe asset’s useful life. The Company does not expect that adoption of SFAS No. 143will have a material impact on its consolidated financial position or results ofoperation.

In August 2001, the FASB issuedSFAS No. 144, " Accounting for the Impairment or Disposal of Long-Lived Assets,"effective for years beginning after December 15, 2001. The new rules for long-lived assetsto be disposed by sale excludes the allocation of goodwill to be tested for impairment ofsuch assets, establishes a primary asset approach to be used for the estimation of futurecash flows and allows for probability-weighted future cash flow estimation for impairmenttesting.  The Company is not required to adopt this new standard until its fiscalyear ending November 30, 2003.  The Company is in the process of determining theimpact of SFAS No. 144 on its consolidated financial position and results of operation.

In December 2002, the FinancialAccounting Standards Board issued SFAS No. 148, "Accounting for Stock-BasedCompensation - Transition and Disclosure."  This Statement, which is effectivefor years ending after December 15, 2002 amends Statement No. 123, "Accounting forStock-Based Compensation," and provides alternative methods of transition for avoluntary change to the fair value-based method of accounting for stock-based employeecompensation.  In addition, Statement No. 148 amends the disclosure requirementsof  Statement No. 123 regardless of the accounting method used to account forstock-based compensation.  The Company has chosen to continue to account for stockbased compensation of employees using the intrinsic value method prescribed in AccountingPrinciples Board Opinion No. 25, "Accounting for Stock Issued to Employees" andrelated interpretations.  However, the enhanced disclosure provisions as defined bySFAS No. 148 will be effective for the fiscal quarter ending May 31, 2003.

Use of Estimates 

The preparation of financial statements in conformity withaccounting principles generally accepted  in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. 

 

**Note 3 - Restricted Cash**

The Company has Systems and MFM National Marketing Funds(Funds). Franchisees and Company-owned stores are required to contribute 1% of net salesto the Funds.  These monies are then used for advertising purposes to benefit all BigApple Bagels and My Favorite Muffin stores. As of November 30, 2002 and November 25, 2001,the combined Funds' cash balance was $304,117 and $191,431, respectively. 

**Note 4 - Special Charge**

During the fourth quarter of 1999, the Company made thedecision to refranchise certain Company-owned stores, in order to concentrate onfranchising and marketing and building equity in the branding of its trademarked names andproducts. The Company-owned stores, which were to be converted to franchised units werewritten down to fair value based upon actual selling prices or, if not sold prior toyear-end, upon management's judgment based upon the previous sale of such assets.Management's judgment is inherent in the estimated fair value determinations and,accordingly, actual results could vary significantly from such estimates. The estimatedfair value of the remaining assets to be sold totaled $8,750 and $183,750, of which $0 and$178,000 were recorded as current assets as of November 30, 2002 and November 25, 2001,respectively. In the year ended November 25, 2001, the Company recorded a writedown oflong-lived assets held for sale of  $101,386 in accordance with the accountingstandard, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of."  The remaining assets held for resale onNovember 30, 2002 consists of equipment. The remaining assets held for sale on November25, 2001 represented two stores and some equipment.

**Note 5 - Income Taxes**

The components of the income tax (benefit) provision areas follows: 

Year Ended
Year Ended20022001Income tax provision (benefit)    computed at federal statutory rate$                110,954$                 (309,257)State income taxes (benefit), net    of federal tax benefit15,723(43,824)Other adjustments2,0142,471Change in valuation allowance        (82,059)        530,610Utilization of NOL             (46,632)                    -Provision for Deferred     Income Taxes$                           -$                    180,000
Deferred income tax assets (liabilities) are as follows: 
20022001Franchise fee revenue$               97,266$               84,235National Marketing Fund net    contributions118,05274,310Allowance for uncollectible    accounts36,56181,928Notes receivable23,58041,440Net operating loss carryforwards3,085,6303,132,262Other-(60,563)Valuation allowance   (2,878,518)   (2,960,577)     Total    Deferred Income Tax Assets            482,571            393,035Depreciation      (480,359)      (343,789)Franchise Costs             (2,212)           (49,246)     Total    Deferred Income Tax Liabilities      (482,571)      (393,035)
Total Net Deferred Tax    Assets/Liabilities$                          -$                          -
As of November 30, 2002, the Company has cumulative netoperating loss carryforwards expiring between 2011 and 2021 for U.S. federal income taxpurposes of approximately $7,949,000.  The net operating loss carryforwards aresubject to limitation in any given year as a result of the Company's initial publicoffering and may be further limited if certain other events occur. A valuation allowancehas been established for $2,878,518 and $2,960,577 as of November 30, 2002 and November25, 2001, respectively, for the deferred tax benefit related to those loss carryforwardsand other deferred tax assets for which it is considered more likely than not that thebenefit will not be realized. 

 

**Note 6 - Long-Term Obligations**

Long-term debt consisted of the following: 
20022001Note payable to PZ$           697,884$      1,161,469Note payable to a finance company898,347926,562Other      352,057      156,4271,948,2882,244,458Less current portion   (522,053)   (197,938)Long-Term Debt, Net of Current    Portion$    1,426,235$    2,046,520
After the Spin Off, the Company obtained a loan from PZ.  This loan is secured by substantially all of the assets of the Company, excludingthose acquired through the Jacobs Bros. Acquisition. The interest rate on this loan wasprime plus 1% through October 18, 2002 and prime plus 2% through October 18,2004.   Interest payments are due quarterly. (See Note 14.)

In February 1999, the Company obtained a series ofamortizing loans in the amount of $1,350,000 from a finance company.  The notes bearinterest of 11.3% and are due and payable on January 2006.  The balance as ofNovember 30, 2002 on this loan is $742,297.

In June 1999, the Company obtained an amortizing loan inthe amount of $170,000 from a finance company.  Proceeds were used to purchase twostores from a franchisee in Wisconsin.  The balance as of November 30, 2002 on thisloan is $156,050.

On September 6, 2002, the Company signed a note payablefor a term of 15 years at 4.75% interest to a PZ shareholder in the amount of$385,531, in exchange for the purchase of his 1,380,040 shares of BAB common stock. The balance of the note to the PZ shareholder at November 30, 2002 was $352,057.

Interest expense of $169,471 and $225,849 was incurred forthe years ended November 30, 2002 and November 25, 2001, respectively.

As of November 30, 2002, annual maturities on long-termobligations due are as follows:
Year Ending November 2003$            522,0532004254,3062005808,806200689,551200722,005
Later years
________251,567
**$   1,948,288**
 

**Note 7 - Lease Commitments**

The Company rents its office and Company-owned storefacilities under leases, which require it to pay real estate taxes, insurance and generalrepairs and maintenance on these leased facilities. Rent expense for the years endedNovember 30, 2002 and November 25, 2001 was $510,304 and $667,720, net of sublease incomeof $207,404 and $215,249, respectively.  As of November 30, 2002, future minimumannual rental commitments under leases, net of sublease income of $163,081 in 2003,$168,436 in 2004, $136,432 in 2005, $127,636 in 2006 and $131,465 in 2007 are as follows:

 
Year Ending    November:2003$               527,0072004400,2532005205,849200677,8272007            22,159
**$     1,233,095**
 

**Note 8 - Noncash Transactions and Other Cash FlowInformation**

During fiscal 2002, the Company refranchised twoCompany-owned operations, receiving  $89,300 in cash.  The Company also placedinto operation $125,000 of assets previously held for sale.  During fiscal 2001, theCompany refranchised four stores, receiving a note in the amount of $90,000 and $280,000in cash.  The Company realized a loss of $52,851 and a gain of $ 46,784 relating tothese sales in the years ended November 30, 2002 and November 25, 2001, respectively.  

Common stock of BAB Inc. was purchased from a PZshareholder in exchange for a note payable from the Company.  (See Note 6.)

Cash paid for interest for fiscal year 2002 and 2001 was$158,435 and $196,204, respectively.

 

**Note 9 - Stockholders' Equity**

In fiscal 2002, the Company purchased and retired1,380,040 shares of common stock from a PZ shareholder.  On September 12, 2002 byapproval of the Board of Directors, all 260,464 shares of previously acquired treasurystock were retired.

On December 18, 2002, the Company declared a four-for-onesplit of the outstanding shares of common stock.  The dividend was payable January20, 2003 to shareholders of record at the close of business on January 6, 2003.  Allper share amounts and the number of shares outstanding in the accompanying consolidatedfinancial statements and notes have been restated for the stock split.

**Note 10 - Earnings Per Share**

The computation of basic and diluted income (loss) pershare is as follows: 

2002
2001Numerator:
Net income (loss) attributable to common stockholders
$           326,335$       (1,089,580)Denominator:
Denominator for basic earnings per share - weighted      average shares
8,598,6458,794,160
Stock Options Issued - weighted average shares
97,070-
Denominator for dilutive earnings per share - weighted      average shares
8,695,7158,794,160Basic and diluted income (loss)    per share$                0.04$               (0.12)
 

**Note 11 - Stock Options and Warrants**

In May of 2001, the Company approved a Long-Term Incentiveand Stock Option Plan (Plan).  The Plan reserves 1,100,000 shares of common stock forgrant.  The Plan will terminate on  May 25, 2011.  The Plan permitsgranting of awards to employees and non-employee officers, directors and agents of theCompany 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 bythe Board.   The Plan gives broad powers to the Board or Committee to administer andinterpret the Plan, including the authority to select the individuals to be grantedoptions and rights, and to prescribe the particular form and conditions of each option orright granted.  

Activity under the Plan during the two years endedNovember 30, 2002, is as follows:
Number    of SharesWeighted-Average    Option Price Per ShareOutstanding as of November 25,    2001 --Granted600,000$       0.055Exercised      (14,000)$         0.048 
 Outstanding as of November 30,    2002586,000$   0.055
On February 1, 1999, the Company purchased certain assetsof a related group of entities doing business as Jacobs Bros. Bagels (Jacob Bros.), achain operating retail bagel stores in the Chicago, Illinois area.  The assetsacquired included eight 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 commonstock.  The warrants provide for the purchase of 183,332 shares and 150,000 shares ofcommon stock at an exercise price of $1.88 and $2.25 per share, respectively.  Thewarrants were first exercisable on February 1, 2000 and expire on January 31, 2006. None of the warrants have yet been exercised.

The Company has adopted the disclosure-only provisions ofSFAS No. 123, "Accounting and Disclosure of Stock-Based Compensation." Accordingly, no employee compensation expense has been recognized for the Plan.  Hademployee compensation expense for the Company's Plan been recorded in the financialstatements, consistent with provisions of SFAS No. 123, net earnings would have beenreduced by $51,300 based on the Black-Scholes option-pricing model.  The Company'snet income and net income per share for fiscal 2002 would have been as follows:
20022001Net income (loss) attributable to    common stockholdersAs Reported$          326,335$           (1,089,580)Pro forma$          275,035N/ABasic and dilutive income per    share:As Reported0.04(0.12)Pro forma0.03N/A
The "As Reported" and "Proforma" numbers for fiscal year ended November 25, 2001 were not applicable (N/A)because no Plan was in effect at that date.

The fair value of each stock option grantedis estimated on the date of grant using the Black-Scholes option-pricing model.  Inorder to arrive at the aggregated expense allocation computed by the Black-Scholesoption-pricing model, the following weighted average assumptions were used for the periodended November 30, 2002:

Date    of Issuance
Shares    Issued
Exercise    Price
Expected      (Years)
Dividend    Yield
Risk-Free    Interest Rates
Volatility
December 18, 2001
380,000
$0.048-0.053
4.0-4.5
0.00%
5.34%
5.518
May 23, 2002
220,000
$0.050-0.069
3.0-4.5
0.00%
5.38%
5.518
 

**Note 12 - Related Party Transactions**

Michael K. Murtaugh, the Company's Vice President andGeneral Counsel, was a stockholder of Bagel One, Inc. which owned and operated a Big AppleBagels franchise store in Illinois.   Mr. Murtaugh bought out his partners'interest in Bagel One, Inc. in 1998 and became the sole stockholder of that company. 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 as of November 30, 2002 of $19,598, and thereare no payments in arrears.  

 

**Note 13 - Segment Information**

SFAS No. 131, "Disclosures About Segments of anEnterprise and Related Information" establishes standards for  reportinginformation about operating segments.  Under this standard, the Company has twooperating segments: Company-owned Store Operations and Franchise Operations.  Indetermining the operating income of each segment, certain general and corporate expensesare not allocated to operating segments. 
Years Ended November 30Net RevenuesOperating Income (Loss)2002200120022001Company Store Operations$       5,224,115$       7,427,832$       (886,585)$       (1,059,449)Franchise Operations3,326,1413,089,0201,535,225678,685Total Ongoing Business8,550,25610,516,852648,640(380,764)Corporate Expenses(261,385)(400,362)Interest Expense, Net of Interest    Income(105,018)(169,963))Other Income            44,098           41,509Income (Loss) before Taxes326,335(909,580)Provision for Deferred Income    Taxes                     -           180,000Net Income (Loss)$       326,335$  (1,089,580)
 
**Operating    Segment Data**Identifiable    AssetsCapital    ExpendituresDepreciation and    AmortizationYear ended November 30, 2002Company store operations$        4,531,642$       72,452$        595,368Franchise operations      2,110,354           2,747         121,068$     6,641,996$    75,199$    716,436Year ended November 25, 2001Company Store Operations$        5,359,304$       81,059$        697,862Franchise Operations      2,514,397           9,097         149,382$ 7,873,701$    90,156$    847,244
 
**Reconciliation    to Total Assets As Reported**
November 30,                   2002
November 25,                   2001AssetsTotal reportable segments -    Identifiable assets$       6,641,997$       7,873,701Unallocated amounts  Cash1,119,743507,264  Prepaid expenses and other    current assets           202,918            86,090Total Consolidated Assets$   7,964,658$   8,467,055
There were no sales to any individual customer duringeither year in the two-year period ended November 30, 2002 that represented 10% or more ofnet sales.

 

**Note 14 - Subsequent Event**

The Company signed an agreement on February 7, 2003,extending the maturity of the PZ note payable to October 18, 2005, conditioned on theCompany paying PZ $200,000 by August 7, 2003.  The Company intends to make thispayment, thereby extending the note maturity.  The interest rate will remain at primeplus 2% through October 18, 2005.

 

**ITEM 8. CHANGES IN ANDDISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None. 

 

**PART III**

**ITEM 9. DIRECTORS, EXECUTIVEOFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGEACT.**

Section 16(a) of the SecuritiesExchange Act of 1934 requires the Company's executive officers and directors, and personswho beneficially own more than ten percent of the Company's Common Stock, to file initialreports of ownership and reports of changes in ownership with the Securities and ExchangeCommission (the "SEC"). Executive officers, directors and greater than tenpercent beneficial owners are required by the SEC to furnish the Company with copies ofall Section 16(a) forms they file.
Based upon a review of the copies ofsuch forms furnished to the Company, the Company believes that all Section 16(a) filingrequirements applicable to its executive officers and directors were met during the fiscalyear ended November 30, 2002.

 

**ITEM 10. EXECUTIVECOMPENSATION.**

The following table sets forththe cash compensation earned by executive officers that received annual salary and bonuscompensation of more than $100,000 during fiscal years 2002, 2001 and 2000 (the"Named Executive Officers"). The Company has no employment agreements with anyof its executive officers.**Summary Compensation Table

Annual    Compensation
Long Term Compensation
Awards
Payouts
 

Name and Principal Position
Fiscal Year Ended 11/30
Salary

($)
Bonus

($)
Other

Annual Compensation

($)
Restricted Stock Awards

($)
Securities

Underlying

Options/

SARS (#)
LTIP

Payouts

($)
All Other

Compensation

($)Michael W.    Evans
President and CEO2002
2001

2000192,500
175,000

175,000
10,000

--

--
--

--

--
--

--

--
120,000

--

--
--

--

--
--

--

--Michael K.    Murtaugh
Vice President and

General Counsel2002
2001

2000143,000
130,000

130,000
10,000

--

--
--

--

--
--

--

--
120,000

--
--

--

--
--

--

--Jeffrey M.    Gorden
Chief Financial Officer2002
 112,369
 
--

 
--

 
--
43,332

 
--

 
--

 John J.    Bracken
Vice President Operations2002
 100,134
 
--

 
--

 
--
43,332
--

 
--

 
 
Stock options were issued at fair market value onthe 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 ofCompany stock.  Options issued during fiscal 2002 were issued on December 19, 2001and May 23, 2002.  Options issued to the above officers December 19, 2001 totaled206,664 and the options  have immediate vesting with a fair market exercise price of$0.19.  There were 120,000 stock options issued to the above officers on May 23, 2002with a fair market value of $0.25 and a vesting of 1/3 in 12 months, 1/3 in 24 months and1/3 in 36 months. 

Indemnification of Directors and Officers

The Company's Certificate of Incorporationlimits personal liability for breach of fiduciary duty by its directors to the fullestextent permitted by the Delaware General Corporation Law (the "Delaware Law").Such Certificate eliminates the personal liability of directors to the Company and itsshareholders for damages occasioned by breach of fiduciary duty, except for liabilitybased on breach of the director's duty of loyalty to the Company, liability for actsomissions not made in good faith, liability for acts or omissions involving intentionalmisconduct, liability based on payments or improper dividends, liability based onviolation of state securities laws, and liability for acts occurring prior to the datesuch provision was added. Any amendment to or repeal of such provisions in the Company'sArticles of Incorporation shall not adversely affect any right or protection of a directorof the Company for with respect to any acts or omissions of such director occurring priorto such amendment or repeal.

In addition to the Delaware Law, theCompany's Bylaws provide that officers and directors of the Company have the right toindemnification from the Company for liability arising out of certain actions to thefullest extent permissible by law. Insofar as indemnification for liabilities arisingunder 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 Commissionsuch indemnification is against public policy as expressed in the Act and is thereforeunenforceable.

 

**ITEM 11. SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**

The following table sets forth as of February 18,2003 the record and beneficial ownership of Common Stock held by (i) each person who isknown to the Company to be the beneficial owner of more than 5% of the Common Stock of theCompany; (ii) each current director; (iii) each "named executive officer" (asdefined in Regulation S-B, Item 402 under the Securities Act of 1933); and (iv) allexecutive officers and directors of the Company as a group. Securities reported as"beneficially owned" include those for which the named persons may exercisevoting power or investment power, alone or with others. Voting power and investment powerare not shared with others unless so stated. The number and percent of shares of CommonStock of the Company beneficially owned by each such person as of February 18, 2003includes 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 dividendas of January 20, 2003.

 
**Name and    Address****Shares**PercentageMichael W.    Evans
8501 W. Higgins Road

Chicago, IL 606313,918,550    (1) (6) 49.1Michael K.    Murtaugh
8501 W. Higgins Road

Chicago, IL 606313,846,226    (1) (2)(6) 48.2Holdings    Investments, LLC
220 DeWindt Road

Winnetka, IL 600933,273,972    (1)(3)43.4David L.    Epstein
9700 Higgins Road, Suite 630

Rosemont, IL 60018145,332    (4)(7) 1.8Robert B.    Nagel
516 Elder Drive

Winnetka, IL 6009386,000(7)    1.1Jeffrey M.    Gorden
8501 W. Higgins Road

Chicago, IL 6063142,221(8)    *John J.    Bracken
8501 W. Higgins Road

Chicago, IL 6063134,353    (5)(8) *All    executive officers and directors as a
group (6 persons)
4,798,710

(1)(2)(3)(4)(5)(6)(7)(8)60.2
____________________

* Less than 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.
- Includes 2,540 shares held by 401 (k) trust.
- Mr. Thomas F. Pick has beneficial ownership of 41.66% of Holdings    Investment, LLC, which is the equivalent of 1,364,133 shares of BAB, Inc. common stock.
- Includes 62,000 shares held indirectly by entities under    Mr. Epstein’s control, and 3,332 shares representing his proportionate ownership in    an entity that he does not control.
- Includes 2,800 shares held by 401 (k) trust.
- Includes 106,666 stock options fully exercisable.
- Includes 80,000 stock options fully exercisable.
- Includes 30,221 stock options fully exercisable.

 

**ITEM 12.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

The following informationrelates 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 willnot enter into any transactions with officers, directors or beneficial owners of more than5% of the Company's Common Stock, or any entity controlled by or under common control withany such person, on terms less favorable to the Company than could be obtained fromunaffiliated third parties and all such transactions require the consent of the majorityof disinterested members of the Board of Directors.
Management believes that the followingtransactions were effected on terms no less favorable to the Company than could have beenrealized in arm's length transactions with unaffiliated parties.

Executive Officers and Directors

Michael K. Murtaugh, the Company's Vice President andGeneral Counsel, was a stockholder of Bagel One, Inc., which owned and operated a BigApple Bagels franchise store in Illinois.   Mr. Murtaugh bought out hispartners' interest in Bagel One, Inc. in 1998 and became the sole stockholder of thatcompany.  A note receivable owed by Bagel One, Inc. to Systems,  guaranteed byMr. Murtaugh, effective March 2000 in the amount of $30,025 for a term of 6 years bearinga 9% interest,  had an outstanding balance at November 30, 2002 of $19,598 and thereare no payments in arrears.  

 

**ITEM 13. EXHIBITS ANDREPORTS ON FORM 8-K**

REPORTS ON FORM 8-K 

12/18/02 BAB Inc. declares stock split

12/4/02  On November 22, 2002 BAB Inc. changed fiscalyear ending

7/8/02 On June 30, 2002 BAB Inc. purchased shares ofcompany stock 

[i] Incorporated by reference to the Company'sRegistration Statement on Form SB-2, effective November 27, 1995 (Commission File No.33-98060C) 

[ii] Incorporated by reference to the Company'sRegistration Statement on Form 10-SB/A filed October 12, 2000 (Commission File No.0-31555)

 

**ITEM 14. CONTROLS ANDPROCEDURES**

Under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and our Chief Financial Officer, we haveevaluated the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14(c) of the Securities Exchange Act of 1934within 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 theCompany's disclosure controls and procedures are effective in timely alerting them tomaterial 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'sinternal controls or in other factors that could significantly affect the Company'sdisclosure controls and procedures subsequent to the 90 day evaluation period.  As aresult, no corrective actions were required or undertaken.

 

INDEX TO EXHIBITS 

 
INDEX NUMBERDESCRIPTION21.1 List of Subsidiaries of the Company 99.1Section 302 of the Sarbanes-Oxley Act of 200299.2Section 906 of the Sarbanes-Oxley Act of 2002
  

SIGNATURES 

In accordance with Section 13 of the Exchange Act, theRegistrant has duly caused this report on Form 10-KSB to be signed on its behalf by theundersigned, thereunto duly authorized. 

BAB, INC. 
Dated: February 27, 2003By /s/ Michael W. Evans Michael W. Evans, Chief Executive Officer    and President (Principal Executive Officer) 
Pursuant to the requirements of the Securities ExchangeAct of 1934, this report on Form 10-KSB has been signed below by the following persons onbehalf of the company and in the capacities and on the dates indicated. 
Dated: February 27, 2003By /s/ Michael W. Evans Michael W. Evans, Chief Executive Officer    and President (Principal Executive Officer) 
 
Dated: February 27, 2003/s/ Michael K. MurtaughMichael K. Murtaugh, Director and Vice    President/General Counsel and Secretary
 
Dated: February 27, 2003/s/ Jeffrey M. GordenJeffrey M. Gorden, Chief Financial Officer    and Treasurer (Principal Financial and Accounting Officer)
 
Dated: February 27, 2003/s/ David L. EpsteinDavid L. Epstein, Director
 
Dated: February 27, 2003/s/ Robert B. NagelRobert B. Nagel, Director
 
 
Exhibit 21.1SUBSIDIARIES OF BAB, INC.
BAB Systems, Inc., an Illinois corporation 

BAB Operations, Inc., an Illinois corporation 

Brewster's Franchise Corporation, an Illinois corporation 

My Favorite Muffin Too, Inc., a New Jersey corporation 

 
February 27, 2003CHICAGO, ILLINOIS  
/s/ Blackman Kallick Bartelstein, LLP 

Exhibit 99.1

**BAB,Inc**

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**PURSUANT TO THE SECURITIES EXCHANGE ACT OF1934, RULES 13a-14 AND 15d-14**

**AS ADOPTED PURSUANT TO SECTION 302OF THE SABANES-OXLEY ACT OF 2002**

In connection with the Annual Report of BAB, Inc. (the"Company") on Form 10-KSB for the period ended November 30, 2002 as filed withthe Securities and Exchange Commission on the date hereof (the "Report"), I,Michael W. Evans, Chief Executive Officer of the Company, certify pursuant to Rules 13a-14and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:- I have reviewed the report;
- Based on my knowledge, the Report does not contain any untrue    statement of a material fact or omit to state a material fact necessary in order to make    the statements made, in light of  the circumstances under which such statements were    made, not misleading;
- Based upon my knowledge, the financial statements, and other    financial information included in the Report, fairly present in all material respects the    financial condition and results of operations of the Company, as of, and for, the periods    presented in the Report;
- I and the other certifying officer of the Company:

a)     are responsible for establishing and  maintaining disclosure controls and procedures for the Company;

b)     have designed such disclosure  controls and procedures to ensure that material information is made known to us,  particularly  during the period in which the Report is being prepared;

c)     have evaluated the effectiveness of  the Company's disclosure controls and procedures within 90 days of the date of the  Report; and

d)     have presented in the Report our  conclusions about the effectiveness of the disclosure controls and procedures based on  the required evaluation.
- I and the other certifying officer have disclosed to the    Company's auditors and to the audit committee of the board of directors (or persons    fulfilling the equivalent function):

a)    all  significant deficiencies in the design or operation of internal controls (a pre-existing  term relating to internal controls  regarding financial reporting) which could  adversely affect the Company's ability to record, process, summarize and report    financial data and have identified for the Company's auditors any material weakness in  internal controls; and

b)    any fraud,  whether or not material, that involves management or other employees who have a  significant role in the Company's internal controls.
- I and the other certifying officer have indicated in the    Report whether or not there were significant changes in internal controls or in other    factors that could significantly affect internal controls subsequent to the date of their    evaluation, including any corrective actions with regard to significant deficiencies and    material weaknesses.

 

/s/ Michael W. Evans

Michael W. Evans, Chief Executive Officer,February 27, 2003

 

**BAB,Inc**

**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

**PURSUANT TO THE SECURITIES EXCHANGE ACT OF1934, RULES 13a-14 AND 15d-14**

**AS ADOPTED PURSUANT TO SECTION 302OF THE SABANES-OXLEY ACT OF 2002**

In connection with the Annual Report of BAB, Inc. (the"Company") on Form 10-KSB for the period ended November 30, 2002 as filed withthe Securities and Exchange Commission on the date hereof (the "Report"), I,Jeffrey M. Gorden, Chief Financial Officer of the Company, certify pursuant to Rules13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:- I have reviewed the report;
- Based on my knowledge, the Report does not contain any    untrue statement of a material fact or omit to state a material fact necessary in order to    make the statements made, in light of  the circumstances under which such statements    were made, not misleading;
- Based upon my knowledge, the financial statements, and    other financial information included in the Report, fairly present in all material    respects the financial condition and results of operations of the Company, as of, and for,    the periods presented in the Report;
- I and the other certifying officer of the Company:

a)     are responsible for establishing and  maintaining disclosure controls and procedures for the Company;

b)     have designed such disclosure  controls and procedures to ensure that material information is made known to us,  particularly during the period in which the Report is being prepared;

c)     have evaluated the effectiveness of  the Company's disclosure controls and procedures within 90 days of the date of the Report;  and

d)     have presented in the Report our  conclusions about the effectiveness of the disclosure controls and procedures based on  the required evaluation.
- I and the other certifying officer have disclosed to the    Company's auditors and to the audit committee of the board of directors (or persons    fulfilling the equivalent function):

a)     all significant deficiencies in the  design or operation of internal controls (a pre-existing term relating to internal  controls   regarding financial reporting) which could adversely affect the  Company's ability to record, process, summarize and report   financial data and  have identified for the Company's auditors any material weakness in internal controls; and

b)    any fraud, whether or not material,  that involves management or other employees who have a significant role in the Company's  internal controls.
- I and the other certifying officer have indicated in the    Report whether or not there were significant changes in internal controls or in other    factors that could significantly affect internal controls subsequent to the date of their    evaluation, including any corrective actions with regard to significant deficiencies and    material weaknesses.

 

/s/ Jeffrey M. Gorden

Jeffrey M. Gorden, Chief Financial Officer,February 27, 2003

Exhibit 99.2

**BAB,Inc**

**CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350**

**AS ADOPTED PURSUANT TO SECTION 906OF THE SABANES-OXLEY ACT OF 2002**

In connection with the BAB, Inc. (the "Company")Quarterly Report on Form 10-KSB for the period ended November 30, 2002, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, MichaelW. Evans, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to thebest of my knowledge:- The report fully complies with the requirements of section    13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
- The information contained in the Report fairly presents, in    all material respects, the financial condition, results of operations, and cash flows of    the Company.

Date:  February 27, 2003                                                                      By:          /s/  MICHAEL W. EVANS                                                                                                                                  Michael W. Evans,                                                                                                                                  Chief Executive Officer           

 

 

In connection with the BAB, Inc. (the "Company")Quarterly Report on Form 10-KSB for the period ended November 30, 2002, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, JeffreyM. Gorden, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to thebest of my knowledge:- The report fully complies with the requirements of section    13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
- The information contained in the Report fairly presents, in    all material respects, the financial condition, results of operations, and cash flows of    the Company.

 

Date:  February 27, 2003                                                              By:          /s/ JEFFREY M. GORDEN                                                                                                                                  Jeffrey M. Gorden,                                                                                                                                  Chief Financial Officer          ****** |
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