U.S. SECURITIES AND EXCHANGE COMMISSION




Washington, DC 20549





FORM 10-K





(Mark one)





x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended: November 30, 2010


o
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.


(Exact name of registrant as specified in its charter)


Delaware
36-4389547(State or other jurisdiction of incorporation)
(IRS Employer or organization Identification No.)


500 Lake Cook Road, Suite 475   Deerfield, Illinois 60015


(Address of principal executive offices) (Zip Code)


Registrant’s telephone number: (847) 948-7520





Securities registered pursuant to Section 12(b) of the Act:Title of each class
Name of exchange on which registeredCommon Stock
NASDAQ/OTC





Securities registered pursuant to Section 12(g) of the Act:None(Title of Class)





Indicate by check mark if the issuer is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes x No





Indicate by check mark whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o Yes x No





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes o No




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one): Large Accelerated Filer  o, Accelerated Filer  o, Non-Accelerated Filer  o, Smaller Reporting Company x.





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x


State issuer's revenues for its most recent fiscal year: $2,913,741.





The aggregate market value of the voting common equity held by nonaffiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was: $1,357,370 based on 3,915,625 shares held by nonaffiliates as of May 31, 2010; Closing price ($.42) for said shares in the NASDAQ OTC Bulletin Board as of such date.





State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 7,263,508shares of Common Stock, as of February 11, 2011.





DOCUMENTS INCORPORATED BY REFERENCE


See index to exhibits





-1-





FORM 10-K INDEX




PART IItem 1
Description of Business
3Item 1A
Risk Factors
7Item 2
Properties
7Item 3
Legal Proceedings
7Item 4
Submission of Matters to a Vote of Security Holders
7PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
8Item 6.
Selected Financial Data
9Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
9Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
13Item 8.
Financial Statements and Supplementary Data
14Item 9.
Changes in and Disagreement with Accountants on Accounting and Financial Disclosure
32Item 9A.
Controls and Procedures
32Item 9B
Other Information
33PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
33Item 11.
Executive Compensation
33Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
36Item 13.
Certain Relationships, Related Transactions and Director Independence
37Item 14.
Principal Accountant Fees and Services
37PART IVItem 15.
Exhibits and Financial Statement Schedules
38





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 Index





PART I





ITEM 1.
DESCRIPTION OF BUSINESS





BAB, Inc has four wholly owned subsidiaries: BAB Systems, Inc. (Systems); BAB Operations, Inc. (“Operations”); Brewster’s Franchise Corporation (“BFC”) and My Favorite Muffin Too, Inc.  Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagel (“BAB”) specialty bagel retail stores.  Operations was formed on August 30, 1995, primarily to operate Company-owned stores, including one which currently serves as the franchise training facility.  BFC was established on February 15, 1996 to franchise “Brewster’s Coffee” concept coffee stores.  My Favorite Muffin Too, Inc., a New Jersey corporation, was acquired on May 13, 1997.  My Favorite Muffin Too, Inc. franchises My Favorite Muffin (“MFM”) concept muffin stores which are included as part of the Systems franchise operating and financial information.  The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired on February 1, 1999. All branded wholesale business uses this trademark.




The Company was incorporated under the laws of the State of Delaware on July 12, 2000.  The Company currently operates franchises and licenses bagel and muffin retail units under the BAB and MFM trade names. At November 30, 2010, the Company had 98 franchise units, 7 licensed units and 1 Company-owned store in operation in 26 states.  The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under licensing agreements with Mrs. Fields Famous Brands (Mrs. Fields), Kohr Bros. Frozen Custard, Braeda Cafe, Kaleidoscoops and through direct home delivery of specialty muffin gift baskets and coffee.





The BAB brand franchised and the Company-owned store consists of units operating as “Big Apple Bagels,” featuring daily baked bagels, flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other related products. Licensed BAB units serve the Company's par-baked frozen bagel and related products baked daily.  BAB units are primarily concentrated in the Midwest and Western United States.  The MFM brand consists of units operating as "My Favorite Muffin," featuring a large variety of freshly baked muffins, coffees and related products, and units operating as "My Favorite Muffin and Bagel Cafe," featuring these products as well as a variety of specialty bagel sandwiches and related products.  MFM units are primarily in the Middle Atlantic States.   Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in most franchised units and the Company-owned store.





The Company has grown significantly since its initial public offering through growth in franchise units and the development of alternative distribution channels for its branded products.  The Company is leveraging on the natural synergy of distributing muffin products in existing BAB units and, alternatively, bagel products and Brewster's Coffee in existing MFM units. The Company expects to continue to realize efficiencies in servicing the combined base of BAB and MFM franchisees.




Net Income





The Company reported net income of $410,000 for the year ended November 30, 2010, and a net loss of $2,318,000 for the year ended November 30, 2009.  The 2009 net loss was due to a goodwill impairment charge of $2,399,000 recorded in the first quarter of 2009.





Food Service Industry





Food service businesses are often affected by changes in consumer tastes; national, regional, and local economic conditions; demographic trends; traffic patterns; and the type, number and location of competing restaurants. Multi-unit food service chains, such as the Company's, can also be substantially adversely affected by publicity resulting from problems with food quality, illness, injury or other health concerns or operating issues stemming from one store or a limited number of stores. The food service business is also subject to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could negatively affect the availability, quality and cost of ingredients and other food products. In addition, factors such as inflation, increased food and labor costs, regional weather conditions, availability and cost of suitable sites and the availability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company's results of operations and financial condition in particular.





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 Index





CUSTOMERS





The Company-owned store sells to the general public; therefore, the Company is not dependent on a particular customer or small group of customers.  Regarding the Company's franchising operation, the franchisees represent a varied geographic and demographic group.  Among some of the primary services the Company provides to its franchisees are marketing assistance, training, time-tested successful recipes, bulk purchasing discounts, food service knowledgeable personnel and brand recognition.




SUPPLIERS





The Company's major suppliers are Coffee Bean International, Dawn Food Products, Inc., Schreiber Foods,  Coca-Cola and Hawkeye Foodservice.  The Company is not dependent on any of these suppliers for future growth and profitability since the products purchased from these suppliers are available from other sources.





LOCATIONS





The Company has 98 franchised locations, 7 licensed units and 1 Company-owned store.   The franchised and licensed units are locatedin 26 states.




STORE OPERATIONS





BIG APPLE BAGELS--BAB franchised and the Company-owned store daily bake a variety of fresh bagels and offer up to 11 varieties of cream cheese spreads.   Stores also offer a variety of breakfast and lunch bagel sandwiches, salads, soups, various dessert items, fruit smoothies, gourmet coffees and other beverages. A typical BAB store is in an area with a mix of both residential and commercial properties and ranges from 1,500 to 2,000 square feet. The Company's current store design is approximately 1,800 square feet, with seating capacity for 20 to 30 persons, and includes approximately 750 square feet devoted to production and baking. A satellite store is typically smaller than a production store, averaging 800 to 1,200 square feet. Although franchise stores may vary in size from the Company-owned store and from other franchise stores, store layout is generally consistent.





MY FAVORITE MUFFIN--MFM franchised stores daily bake 20 to 25 varieties of muffins from over 250 recipes, plus a variety of bagels. They also serve gourmet coffees, beverages and, at My Favorite Muffin and Bagel Cafe locations, a variety of bagel sandwiches and related products. The typical MFM store design is approximately 1,800 square feet, with seating capacity for 20 to 30 persons.





BREWSTER'S COFFEE--Although the Company doesn't have, or actively market, Brewster's stand-alone franchises, Brewster's coffee products are sold in most of the franchised units and the Company-owned store.





FRANCHISING




The Company requires payment of an initial franchise fee per store, plus an ongoing 5% royalty on net sales. Additionally, BAB and MFM franchisees are members of a marketing fund requiring an ongoing 3% contribution, consisting of 1% for general system-wide marketing, and 2% for the local advertising and marketing. The Company currently requires a franchise fee of $25,000 on a franchisee's first full production BAB or MFM store. The fee for subsequent production stores is $20,000.




The Company's current Franchise Disclosure Document (“FDD”) provides for, among other things, the opportunity for prospective franchisees to enter into a Preliminary Agreement for their first production store. This agreement enables a prospective franchisee a period of 60 days in which to locate a site. The fee for this Preliminary Agreement is $10,000. If a site is not located and approved by the franchisor within the 60 days, the prospective franchisee will receive a refund of $7,000. If a site is approved, the entire $10,000 will be applied toward the initial franchise fee.  See also last paragraph under "Government Regulation" section in this 10-K.





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 Index





The Company's Franchise Agreement provides a franchisee with the right to develop one store at a specific location. Each Franchise Agreement is for a term of 10 years with the right to renew. Franchisees are expected to be in operation no later than 10 months following the signing of the Franchise Agreement.




The Company currently advertises its franchising opportunities in directories, newspapers and the internet.  In addition, prospective franchisees contact the Company as a result of patronizing an existing store.




COMPETITION




The quick service restaurant industry is intensely competitive with respect to product quality, concept, location, service and price. There are a number of national, regional and local chains operating both owned and franchised stores which compete with the Company on a national level or solely in a specific market or region. The Company believes that because the industry is extremely fragmented, there is a significant opportunity for expansion in the bagel, muffin and coffee concept chains.




The Company believes the primary direct competitors of its bagel concept units are Bruegger's Bagel Bakery and New World Coffee-Manhattan Bagel Inc., which operates under Einstein Bros. Bagels, Noah's NY Bagel and Manhattan Bagel Bakery brands.  There are several other regional bagel chains with fewer than 50 stores, all of which may compete with the Company. There is no major national competitor in the muffin business, but there are a number of local and regional operators. Additionally, the Company competes directly with a number of national, regional and local coffee concept stores and brand names.




The Company also competes against numerous small, independently owned bagel bakeries and national fast food restaurants, such as Dunkin' Donuts, McDonald's, Panera and Starbucks that offer bagels, muffins, coffee and related products as part of their product offerings.  Other competition includes supermarket bakery sections and prepackaged, fresh and frozen bagels. Certain of these competitors may have greater product and name recognition and larger financial, marketing and distribution capabilities than the Company.  In addition, the Company believes the startup costs associated with opening a retail food establishment offering similar products on a stand-alone basis are competitive with the startup costs associated with opening its concept stores and, accordingly, such startup costs are not an impediment to entry into the retail bagel, muffin or coffee businesses.




The Company believes that its stores compete favorably in terms of food quality and taste, convenience and customer service and value, which the Company believes are important factors to its targeted customers.  Competition in the food service industry is often affected by changes in consumer tastes, national, regional and local economic and real estate conditions, demographic trends, traffic patterns, the cost and availability of labor, consumer purchasing power, availability of product and local competitive factors.  The Company attempts to manage or adapt to these factors, but not all such factors are within the Company's control, and such factors could cause the Company and some, or all, of its franchisees to be adversely affected.




The Company competes for qualified franchisees with a wide variety of investment opportunities in the restaurant business, as well as other industries. Investment opportunities in the bagel bakery cafe business include franchises offered by New World Coffee-Manhattan Bagel Inc.  The Company's continued success is dependent on its reputation for providing high quality and value with respect to its service, products and franchises. This reputation may be affected not only by the performance of the Company-owned store but also by the performance of its franchise stores, over which the Company has limited control.





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 Index





TRADEMARKS AND SERVICE MARKS





The trademarks, trade names and service marks used by the Company contain common descriptive English words and thus may be subject to challenge by users of these words, alone or in combination with other words, to describe other services or products. Some persons or entities may have prior rights to these names or marks in their respective localities. Accordingly, there is no assurance that such names and marks are available in all locations. Any challenge, if successful, in whole or in part, could restrict the Company's use of the names and marks in areas in which the challenger is found to have used the name or mark prior to the Company's use. Any such restriction could limit the expansion of the Company's use of the names or marks into that region, and the Company and its franchisees may be materially and adversely affected.





The trademarks and service marks "Big Apple Bagels," "My Favorite Muffin" and "Brewster's Coffee" are registered under applicable federal trademark law. These marks are licensed by the Company to its franchisees pursuant to Franchise Agreements.   In February 1999, the Company acquired the trademark of "Jacobs Bros. Bagels" upon purchasing certain assets of Jacobs Bros. The "Jacobs Bros. Bagels" mark is also registered under applicable federal trademark law.





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





GOVERNMENT REGULATION





The Company is subject to the Trade Regulation Rule of the Federal Trade Commission (the "FTC") entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures'' (the "FTC Franchise Rule") and state and local laws and regulations that govern the offer, sale and termination of franchises and the refusal to renew franchises. Continued compliance with this broad federal, state and local regulatory network is essential and costly; the failure to comply with such regulations may have a material adverse effect on the Company and its franchisees. Violations of franchising laws and/or state laws and regulations regulating substantive aspects of doing business in a particular state could limit the Company's ability to sell franchises or subject the Company and its affiliates to rescission offers, monetary damages, penalties, imprisonment and/or injunctive proceedings. In addition, under court decisions in certain states, absolute vicarious liability may be imposed upon franchisors based upon claims made against franchisees. Even if the Company is able to obtain insurance coverage for such claims, there can be no assurance that such insurance will be sufficient to cover potential claims against the Company.





The Company and its franchisees are required to comply with federal, state and local government regulations applicable to consumer food service businesses, including those relating to the preparation and sale of food, minimum wage requirements, overtime, working and safety conditions, citizenship requirements, as well as regulations relating to zoning, construction, health and business licensing. Each store is subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire and other departments. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new Company-owned or franchise store, and failure to remain in compliance with applicable regulations could cause the temporary or permanent closing of an existing store. The Company believes that it is in material compliance with these provisions. Continued compliance with these federal, state and local laws and regulations is costly but essential, and failure to comply may have an adverse effect on the Company and its franchisees.





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 Index





The Company's franchising operations are subject to regulation by the FTC under the Uniform Franchise Act which requires, among other things, that the Company prepare and periodically update a comprehensive disclosure document known as a FDD in connection with the sale and operation of its franchises. In addition, some states require a franchisor to register its franchise with the state before it may offer a franchise to a prospective franchisee. The Company believes its FDD, together with any applicable state versions or supplements, comply with both the FTC guidelines and all applicable state laws regulating franchising in those states in which it has offered franchises.




The Company is also subject to a number of state laws, as well as foreign laws (to the extent it offers franchises outside of the United States), that regulate substantive aspects of the franchisor-franchisee relationship, including, but not limited to, those concerning termination and non-renewal of a franchise.





EMPLOYEES





As of November 30, 2010, the Company employed 24 persons, consisting of 9 working in the Company-owned store, of which 8 are part-time employees.  The remaining 15 employees, which 2 are part-time,  are responsible for corporate management and oversight, accounting, advertising and franchising.  None of the Company's employees are subject to any collective bargaining agreements and management considers its relations with its employees to be good.




ITEM 1A.
RISK FACTORS





Not required for smaller reporting companies.





ITEM 2.
PROPERTIES





The Company's principal executive office, consisting of approximately 7,150 square feet, is located in Deerfield, Illinois and is leased.  The lease term expires September 30, 2018.  Additionally, the Company leases space for its Company-owned store. The first option to renew the Company-owned store lease was executed on January 1, 2007 for a term of five years with one additional five year renewal option available that has not yet been exercised as the Company is exploring various options.





ITEM 3.
LEGAL PROCEEDINGS





None





ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None





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 Index





PART II




ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





The following table sets forth the quarterly high and low sale prices for the Company's common stock, as reported in the Nasdaq Small Cap Market for the two years ended November 30, 2010 and 2009.  The Company's common stock is traded on the NASDAQ OTC-Bulletin Board under the symbol "BABB."





Year Ended: November 30, 2010

Low


HighFirst quarter


0.37



0.51Second quarter


0.38



0.50Third quarter


0.25



0.64Fourth quarter


0.33



0.50Year Ended: November 30, 2009

Low


HighFirst quarter


0.41



0.92Second quarter


0.30



0.59Third quarter


0.35



0.51Fourth quarter


0.36



0.50





As of February 11, 2011, the Company's Common Stock was held by 180 holders of record. Registered ownership includes nominees who may hold securities on behalf of multiple beneficial owners. The Company estimates that the number of beneficial owners of its common stock at February 11, 2011, is approximately 1,100 based upon information provided by a proxy services firm.





STOCK OPTIONS





In May 2001, the Company's Board of Directors approved a Long-Term Incentive and Stock Option Plan (Plan), with an amendment in May 2003 to increase the Plan from the reserve of 1,100,000 shares to 1,400,000 shares of Common Stock for grant.  A total of 1,400,000 stock options have been granted to directors, officers and employees.  In 2010 and 2009, no options were granted.  As of February 11, 2011, there were 1,031,627 stock options exercised or forfeited under the Plan.  (See Note 6 of the audited consolidated financial statements included herein.)





CASH DISTRIBUTION AND DIVIDEND POLICY





The Board of Directors declared a cash distribution/dividend on December 7, 2009, March 9, 2010, May 20, 2010 and September 3, 2010 of $0.01 per share, paid January 4, 2010, April 14, 2010, July 8, 2010 and September 30, 2010.





On December 6, 2010 a $0.01 quarterly cash distribution/dividend and a $0.02 special cash distribution/dividend was declared and paid January 5, 2011.





The Board of Directors declared a quarterly cash dividend on December 4, 2008, of $.02 per share, paid January 2, 2009.  On March 9, May 22, and September 7, 2009, a $.01 per share dividend was declared, and paid on April 13, July 8, and October 5, 2009, respectively.





Although there can be no assurances that the Company will be able to pay cash distributions/dividends in the future, it is the Company’s intent that future cash distributions/dividends will be considered based on profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company’s intent going forward to declare and pay cash distributions/dividends on a quarterly basis if warranted.





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 Index





ITEM 6.
SELECTED FINANCIAL DATA





Not required for smaller reporting companies.





ITEM7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The selected financial data contained herein has been derived from the consolidated financial statements of the Company included elsewhere in this Report on Form 10-K. The data should be read in conjunction with the consolidated financial statements and notes thereto.  Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the development of the Company's business, the markets for the Company's products, anticipated capital expenditures, and the effects of completed and proposed acquisitions, and other statements and disclosures contained herein and throughout this Annual Report regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). In such cases, we may use words such as "believe," "intend," "expect," "anticipate" and the like.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Certain risks and uncertainties are wholly or partially outside the control of the Company and its management, including its ability to attract new franchisees; the continued success of current franchisees; the effects of competition on franchisee and Company-owned store results; consumer acceptance of the Company's products in new and existing markets; fluctuation in development and operating costs; brand awareness; availability and terms of capital; adverse publicity; acceptance of new product offerings; availability of locations and terms of sites for store development; food, labor and employee benefit costs; changes in government regulation (including increases in the minimum wage); regional economic and weather conditions; the hiring, training, and retention of skilled corporate and restaurant management; and the integration and assimilation of acquired concepts.  Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof.  The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.





GENERAL





The Company has 98 franchised, 7 licensed units, and 1 Company-owned store as of the end of 2010. Units in operation at the end of 2009 included 105 franchised, 2 licensed and 1 Company-owned store.  System-wide revenues in 2010 were $36 million compared to $38 million in 2009.




The Company's revenues are derived primarily from the ongoing royalties paid to the Company by its franchisees, from the operation of the Company-owned store and receipt of initial franchise fees.  Additionally, the Company derives revenue from the sale of licensed products (My Favorite Muffin mix, Big Apple Bagels cream cheese and Brewster's coffee), and through licensing agreements (Kohr Bros., Braeda Café, Kaleidoscoops and Mrs. Fields).  Also included in licensing fees and other income is Operation’s Sign Shop which provides for franchise consistency and convenience the majority of signage to franchisees and the Company-owned store, including but not limited to, posters, menu panels, build charts, outside window stickers and counter signs.





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 Index





YEAR 2010 COMPARED TO YEAR 2009





Total revenues from all sources decreased $259,000, or 8.2%, to $2,914,000 in 2010 from $3,173,000 in the prior year primarily due to decreases in royalty revenue, Company-owned store revenue and licensing fees and other income, offset by an increase in franchise fee revenue.





Royalty revenue from franchise stores was down $105,000, or 5.7%, to $1,737,000 in 2010 as compared to $1,842,000 in 2009.  Franchise fee revenue increased $23,000, or 28.0%, to $105,000 in 2010 versus $82,000 in 2009.  The Company opened 4 stores and transferred 5 stores in 2010 versus opening 4 franchise stores and transferring 3 in 2009.  At November 30, 2010 the Company had 3 units under development versus 2 at November 30, 2009.  Company-owned store revenues decreased $23,000 or 4.9%, to $445,000 from $468,000 in 2009.  Licensing fees and other income decreased $155,000, or 19.8%, to $626,000 in 2010 as compared to $781,000 in 2009.  The decline was primarily due to a $154,000 decrease in rent revenue for the Lincoln NE facility, (lease ended December 2009), a $24,000 decrease in 2010 license fee revenues and a $28,000 decrease in Sign Shop revenue versus 2009.  This was offset by revenue increases in 2010 for non-redeemed gift certificates of $25,000, a franchise audit adjustment of $18,000 and an increase in settlement income of $7,000 compared to 2009.





Total operating expenses in 2010 were $2,502,000, or 85.9% of revenues, compared to total operating expenses in 2009 of $2,844,000, (excluding $2,399,000 goodwill impairment) or 89.6% of total revenues. Total operating expenses decreased $342,000 in 2010 compared to 2009 excluding goodwill impairment.





Expenses for the Company-owned store decreased $172,000, or 29.1%, in 2010, to $420,000, from $592,000 in 2009.  Cost of goods sold in 2010 decreased $6,000, or 4.3%, to $135,000 in 2010 compared to $141,000 in 2009.  Cost of goods sold as a percentage of sales increased 0.2% in 2010 to 30.3% compared to 30.1% in 2009.





Corporate office payroll and payroll related expenses decreased $26,000, or 2.0%, in 2010, to $1,263,000, from $1,289,000, in 2009.  There was a reduction in the bad debt expense of $44,000 in 2010 yielding a net recovery of $8,000 compared to bad debt expense of $36,000 in 2009, primarily due to a specific recovery of a single balance of $28,000.  Professional fees decreased $17,000, or 9.1%, in 2010, to $169,000, from $186,000 in 2009 primarily due to decreased legal expenses for franchise collection expense.  Travel decreased $30,000, or 41.1%, to $43,000 in 2010, from $73,000 in 2009 due to better cost control and operational efficiencies.  There was no goodwill impairment in 2010 versus goodwill impairment of $2,399,000 in 2009.


Interest income decreased $7,000, to $8,000, in 2010, compared to $15,000, in 2009, as a result of lower interest rates.





Interest expense decreased $1,000 to $10,000 in 2010, compared to $11,000 in 2009, primarily due to a decrease in outstanding debt.




Net income totaled $410,000, or 14.1%, of revenue in 2010 as compared to $81,000, excluding goodwill impairment of $2,399,000, or 2.6%, of revenue in the prior year.  There was no income tax expense for 2010.  Income tax expense for 2009 was $252,000, which relates to increasing the valuation allowance for deferred tax assets which are more likely than not to be realized.  The net loss for 2009 was $2,318,000.





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 Index





LIQUIDITY AND CAPITAL RESOURCES





The net cash provided from operating activities totaled $527,000 during 2010. Cash provided from operating activities is comprised of a net income of $410,000, plus depreciation and amortization of $28,000, share-based compensation of $10,000 less bad debt of $8,000, plus changes in inventories of $4,000, prepaid expenses and other of $16,000, accrued liabilities of $3,000, unexpended Marketing Fund contributions of $66,000 and deferred revenue of $68,000 less changes in trade accounts and notes receivable of $19,000, restricted cash of $46,000 and Marketing Fund contributions receivable of $5,000.  Cash provided from operating activities in 2009 totaled $279,000, comprised of net loss of $2,318,000, plus depreciation and amortization of $31,000, goodwill impairment of $2,399,000, tax valuation expense of $252,000,  share-based compensation of $10,000 and bad debt of $36,000, plus restricted cash of $82,000, inventory of $13,000 and prepaid expenses and other of $40,000, less changes in trade accounts and notes receivable of $35,000, Marketing Fund contributions receivable of $1,000, accounts payable of $12,000 accrued liabilities of $45,000, unexpended Marketing Fund contributions of $81,000 and deferred revenue of $92,000.




Cash used for investing activities during 2010 totaled $41,000, consisting of purchase of equipment of $22,000 and trademark renewal expenditures of $19,000.  Cash used for investing activities during 2009 totaled $26,000, consisting of the purchase of equipment of $1,000 and trademark renewal expenditures of $25,000.





Financing activities used $316,000 during 2010, due to the repayment of notes payable of $25,000 and the payment of cash distributions/dividends equal to $291,000.  Financing activities used $387,000 during 2009, due to the repayment of notes payable of $24,000 and the payment of cash dividends equal to $363,000.





Although there can be no assurances that the Company will be able to pay cash distributions/dividends in the future, it is the Company’s intent that future cash distributions/dividends will be considered based on profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company’s intent going forward to declare and pay cash distributions/dividends on a quarterly basis if warranted.  On December 7, 2010, the Board of Directors authorized a $0.01 per share quarterly cash distribution/dividend and a $0.02 per share special cash distribution/dividend.  The cash distribution/dividend was paid January 5, 2011.


The Company believes execution of its cash distribution/dividend policy will not have any material adverse effects on its cash or its ability to fund current operations or future capital investments.




The Company has no financial covenants on its outstanding debt.




OFF BALANCE SHEET ARRANGEMENTS





The Company has no off balance sheet arrangements, other than the lease commitments disclosed in Note 7 of the audited consolidated financial statements included herein.




CRITICAL ACCOUNTING POLICIES





The Company's significant accounting policies are presented in the Notes to the Consolidated Financial Statements (see Note 2 of the audited consolidated financial statements included herein).  While all of the significant accounting policies impact the Company's Consolidated Financial Statements, some of the policies may be viewed to be more critical.  The more critical policies are those that are most important to the portrayal of the Company's financial condition and results of operations and that require management's most difficult, subjective and/or complex judgments and estimates.   Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances.  The results of judgments and estimates form the basis for making judgments about the Company's value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions.   Management believes the following are its most critical accounting policies because they require more significant judgments and estimates in preparation of its consolidated financial statements.





-11-
 Index





Revenue Recognition





Royalty fees from franchised stores represent a 5% fee on net retail and wholesale sales of franchised units.  Royalty revenues are recognized on an accrual basis using actual franchise receipts.  Generally, franchisees report and remit royalties on a weekly basis.  The majority of month-end receipts are recorded on an accrual basis based on actual numbers from reports received from franchisees shortly after the month-end.  Estimates are utilized in certain instances where actual numbers have not been received and such estimates are based on the average of the last 10 weeks actual reported sales.





The Company recognizes franchise fee revenue on the store’s opening. Direct costs associated with the sale of franchises are deferred until the franchise fee revenue is recognized.  These costs include site approval, construction approval, commissions, blueprints and training costs.





The Company earns a licensing fee from the sale of BAB branded products, which includes coffee, cream cheese, muffin mix and par baked bagels from a third-party commercial bakery to the franchised and licensed units.





Long-Lived Assets





Property and equipment are recorded at cost.  Improvements and replacements are capitalized, while expenditures for maintenance and routine repairs that don't extend the life of the asset are charged to expense as incurred.  Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets.  Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation.  Estimated useful lives for the purpose of depreciation and amortization are 3 to 7 years for property and equipment and 10 years, or the term of the lease if less, for leasehold improvements.





Following the guidelines contained in ASC 350, the corporation tests goodwill and intangible assets that are not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible.  Goodwill and intangible assets were tested at the end of the first fiscal quarter, February 28, 2010 and it was found that the carrying value of goodwill and intangible assets were not impaired.





An impairment test was performed at February 28, 2010 based on a discounted cash flow model using management’s business plan projected for expected future cash flows.  Based on the computation of the discounted cash flows, it was determined that the fair value of goodwill and intangible assets were not impaired.





In 2009 a charge of $2,399,000 was recorded after the impairment testing was completed during the first quarter 2009.  (See Note 2 of the consolidated financial statements included herein.)





Concentrations of Credit Risk





Certain financial instruments potentially subject the Company to concentrations of credit risk.  These financial instruments consist primarily of royalty and wholesale accounts receivables.   The Company believes it has maintained adequate reserves for doubtful accounts.  The Company reviews the collectibility of receivables periodically taking into account payment history and industry conditions.





Valuation Allowance and Deferred Taxes





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





As of November 30, 2010, the Company has cumulative net operating loss carryforwards expiring between 2012 and 2029 for U.S. federal income tax purposes of approximately $5,952,000.   A valuation allowance has been established for $1,857,000 at November 30, 2010 for the deferred tax benefit related to those loss carryforwards and other net deferred tax assets for which it is considered more likely than not that the benefit will not be realized. (See Note 3 of the audited consolidated financial statements included herein.)





-12-
 Index





Recent Accounting Pronouncements





In January 2010, the FASB issued ASU 2010-05, “Compensation-Stock Compensation.” This update is a clarification of the treatment of escrowed share arrangements and provides guidance on the presumption of compensation under such arrangements. The Company has determined that the changes to the accounting standards required by this update do not have a material effect on its consolidated financial position, cash flows or results of operations.





In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosure.”  This guidance requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements.  The guidance is effective for interim and annual periods beginning after December 15, 2009, except for gross presentation of activity in level 3 which is effective for annual periods beginning after December 15, 2010, and for interim periods in those years.  The adoption of this guidance did not have any impact on the Company’s consolidated financial position, cash flows or results of operations.





Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of November 30, 2010 that would have or are expected to have any significant effect on the Company’s consolidated financial position, cash flows or results of operations.




ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





In regard to interest, foreign currency and commodity price risk the Company does not believe that these are significant risk factors.





-13-
 Index





ITEM8.
FINANCIAL STATEMENTS





The Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm is included immediately following.





BAB, Inc.


Years Ended November 30, 2010 and 2009





C o n t e n t s





Report of Independent Registered Public Accounting Firm
15Consolidated Balance Sheets
16Consolidated Statements of Income
17Consolidated Statements of Stockholders’ Equity
18Consolidated Statements of Cash Flows
19Consolidated Statements of Cash Flows
20





-14-
 Index





Report of Independent Registered Public Accounting Firm





Stockholders and Board of Directors of BAB, Inc.





We have audited the accompanying consolidated balance sheets of BAB, Inc. and subsidiaries as of November 30, 2010 and 2009 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BAB, Inc. and subsidiaries as of November 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.





By:  /s/ Frank L. Sassetti & Co





Oak Park, Illinois


February 24, 2011





-15-
 Index





BAB, Inc


Consolidated Balance Sheets


November 30, 2010 and 2009





2010


2009ASSETSCurrent AssetsCash

$
1,242,937


$
1,072,526Restricted cash


257,395



211,748ReceivablesTrade accounts and notes receivable (net of allowance for doubtful accounts of $26,787 in 2010 and $8,712 in 2009)


130,252



103,346Marketing fund contributions receivable from franchisees and stores


19,184



14,209Inventories


34,105



37,946Prepaid expenses and other current assets


89,993



105,981Total Current Assets


1,773,866



1,545,756Property, plant and equipment (net of accumulated depreciation of $592,851 in 2010 and $575,407 in 2009)


32,359



27,834Trademarks


442,285



434,960Goodwill


1,493,771



1,493,771Definite lived intangible assets (net of accumulated amortization of $124,454in 2010 and $113,494 in 2009)


80,309



79,794Deferred tax asset


248,000



248,000Total Noncurrent Assets


2,296,724



2,284,359Total Assets

$
4,070,590


$
3,830,115LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesCurrent portion of long-term debt

$
26,494


$
25,292Accounts payable


36,949



36,975Accrued expenses and other current liabilities


271,358



268,077Unexpended marketing fund contributions


238,870



173,211Deferred franchise fee revenue


100,000



30,000Deferred licensing revenue


37,500



39,583Total Current Liabilities


711,171



573,138Long-term debt (net of current portion)


152,584



179,078Total Liabilities


863,755



752,216Stockholders' EquityCommon stock ($.001 par value; 15,000,000 shares authorized;8,466,953 shares issued and 7,263,508 shares outstanding as of November 30, 2010 and 2009


13,508,257



13,508,257Additional paid-in capital


977,389



967,441Treasury stock


(222,781
)


(222,781
)Accumulated deficit


(11,056,030
)


(11,175,018
)Total Stockholders' Equity


3,206,835



3,077,899Total Liabilities and Stockholders' Equity

$
4,070,590


$
3,830,115





See accompanying notes





-16-
 Index





BAB, Inc


Consolidated Statements of Income


Years Ended November 30, 2010 and 2009





2010


2009REVENUESRoyalty fees from franchised stores

$
1,737,361


$
1,842,382Net sales by Company-owned stores


445,157



468,072Franchise fees


105,000



81,500Licensing fees and other income


626,223



780,951Total Revenues


2,913,741



3,172,905OPERATING EXPENSESStore food, beverage and paper costs


134,957



141,435Store payroll and other operating expenses


285,436



450,651Selling, general and administrative expenses:Payroll and payroll-related expenses


1,263,261



1,288,947Occupancy


145,824



142,386Advertising and promotion


69,356



73,549Professional service fees


168,791



186,076Travel expenses


42,687



73,168Depreciation and amortization


28,404



31,231Other


363,511



456,424Goodwill impairment


-



2,399,057Total Operating Expenses


2,502,227



5,242,924Income (Loss) from operations


411,514



(2,070,019
)Interest income


7,521



14,739Interest expense


(9,507
)


(10,663
)Income (Loss) before provision for income taxes


409,528



(2,065,943
)Provision for income taxesCurrent tax expense


-



-Deferred tax expense


-



252,000Total Income Taxes


-



252,000Net  Income (Loss)

$
409,528


$
(2,317,943
)Net Income (Loss) per share - Basic and Diluted

$
0.06


$
(0.32
)Weighted average shares outstanding - Basic


7,263,508



7,263,508Weighted average shares outstanding - Diluted


7,263,508



7,263,508Cash dividends declared per share

$
0.04


$
0.05





See accompanying notes





-17-
 Index





BAB, Inc


Consolidated Statements of Stockholders’ Equity


Years Ended November 30, 2010 and 2009





AdditionalCommon Stock


Paid-In


Treasury Stock


AccumulatedShares


Amount


Capital


Shares


Amount


Deficit


TotalNovember 30, 2008


8,466,953


$
13,508,257


$
957,264



(1,203,445
)

$
(222,781
)

$
(8,493,900
)

$
5,748,840Stock Compensation Expense










10,177















10,177Dividends Declared






















(363,175
)


(363,175
)Net Loss






















(2,317,943
)


(2,317,943
)November 30, 2009


8,466,953



13,508,257



967,441



(1,203,445
)


(222,781
)


(11,175,018
)


3,077,899Stock Compensation Expense










9,948















9,948Dividends Declared






















(290,540
)


(290,540
)Net Income






















409,528



409,528November 30, 2010


8,466,953


$
13,508,257


$
977,389



(1,203,445
)

$
(222,781
)

$
(11,056,030
)

$
3,206,835





See accompanying notes





-18-
 Index





BAB, Inc


Consolidated Statements of Cash Flows


Years Ended November 30, 2010 and 2009





2010


2009Operating activitiesNet income (loss)

$
409,528


$
(2,317,943
)Depreciation and amortization


28,404



31,231Impairment -other intangibles


-



2,399,057Deferred tax expense


-



252,000Provision for uncollectible accounts, net of recoveries


(8,084
)


36,021Share-based compensation


9,948



10,177Changes in:Trade accounts receivable and notes receivable


(18,822
)


(35,214
)Restricted cash


(45,647
)


82,246Marketing fund contributions receivable


(4,975
)


(964
)Inventories


3,841



13,385Prepaid expenses and other


15,988



39,972Accounts payable


(26
)


(12,378
)Accrued liabilities


3,281



(45,252
)Unexpended marketing fund contributions


65,659



(81,282
)Deferred revenue


67,917



(92,413
)Net Cash Provided by Operating Activities


527,012



278,643Investing activitiesPurchase of equipment


(21,969
)


(1,150
)Capitalization of trademark renewals


(18,800
)


(24,754
)Net Cash Used In Investing Activities


(40,769
)


(25,904
)Financing activitiesRepayment of borrowings


(25,292
)


(24,146
)Payment of cash distributions


(290,540
)


(363,175
)Net Cash Used In Financing Activities


(315,832
)


(387,321
)Net Increase (Decrease) in Cash


170,411



(134,582
)Cash, Beginning of Period


1,072,526



1,207,108Cash, End of Period

$
1,242,937


$
1,072,526Supplemental disclosure of cash flow information:Interest paid

$
9,708


$
10,855Income taxes paid

$
852


$
9,797





See accompanying notes





-19-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 1 - Nature of Operations





BAB, Inc has four wholly owned subsidiaries: BAB Systems, Inc. (Systems); BAB Operations, Inc. (“Operations”); Brewster’s Franchise Corporation (“BFC”) and My Favorite Muffin Too, Inc.  Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagel (“BAB”) specialty bagel retail stores.  Operations was formed on August 30, 1995, primarily to operate Company-owned stores, including one which currently serves as the franchise training facility.  BFC was established on February 15, 1996 to franchise “Brewster’s Coffee” concept coffee stores.  My Favorite Muffin Too, Inc., a New Jersey corporation, was acquired on May 13, 1997.  My Favorite Muffin Too, Inc. franchises My Favorite Muffin (“MFM”) concept muffin stores which are included as part of the Systems franchise operating and financial information.  The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired on February 1, 1999. All branded wholesale business uses this trademark.




The Company was incorporated under the laws of the State of Delaware on July 12, 2000.  The Company currently operates franchises and licenses bagel and muffin retail units under the BAB and MFM trade names. At November 30, 2010, the Company had 98 franchise units, 7 licensed units and one Company-owned store in operation in 26 states.  The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under licensing agreements with Mrs. Fields Famous Brands (Mrs. Fields), Kohr Bros. Frozen Custard, Braeda Cafe, Kaleidoscoops and through direct home delivery of specialty muffin gift baskets and coffee.





Note 2 - Summary of Significant Accounting Policies





Principles of Consolidation





The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.





Use of Estimates





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





Revenue Recognition





Royalty fees from franchised stores represent a 5% fee on net retail and wholesale sales of franchised units.  Royalty revenues are recognized on an accrual basis using actual franchise receipts.  Generally, franchisees report and remit royalties on a weekly basis.  The majority of month-end receipts are recorded on an accrual basis based on actual numbers from reports received from franchisees shortly after the month-end.  Estimates are utilized in certain instances where actual numbers have not been received and such estimates are based on the average of the last 10 weeks actual reported sales.





The Company recognizes franchise fee revenue on the store’s opening. Direct costs associated with the sale of franchises are deferred until the franchise fee revenue is recognized.  These costs include site approval, construction approval, commissions, blueprints and training costs.





-20-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 2 - Summary of Significant Accounting Policies (Continued)





Revenue Recognition (Continued)





The Company earns a licensing fee from the sale of par-baked bagels, from the sale of coffee and from the sale of BAB and MFM branded product to the franchised and licensed units noted in the table below.  Actual amounts are used to accrue the license fees.





Big Apple Bagels and My Favorite Muffin stores which have been opened, licensed units and unopened stores for which a Franchise Agreement has been executed, are as follows:





2010


2009Operating UnitsBAB Operations, Inc.-owned


1



1Franchisee-owned stores


98



105Licensed Units


7



2106



108Unopened stores with Franchise Agreements:


3



2Total operating units with Franchise Agreements


109



110





License fees and other income primarily consist of license fees, Sign Shop revenues and defaulted and terminated franchise contract revenues.  Revenue is recorded on an accrual basis.  Actual amounts are used to record the majority of license fees although at times it is necessary to use estimates. Revenues recorded for Sign Shop and defaulted and terminated franchise contract revenue are actual amounts.  The Company-owned store is a retail establishment that accepts cash and credit cards with revenue being recognized upon receipt.





Segments





Accounting standards have established annual reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. The Company’s operations are confined to two reportable segments operating in the United States; Company-owned stores and franchise operations.





Marketing Fund





The Company established a Marketing Fund during 1994.  Franchise-operated units and the Company-owned store are required to contribute a fixed percentage based on net retail sales to the Marketing Fund.  Liabilities for unexpended funds received from franchisees are included as a separate line item in accrued expenses and Marketing Fund cash accounts are included in restricted funds in the accompanying Balance Sheet.  The Marketing Fund also derives revenues from rebates paid by certain vendors on the sale of BAB licensed products to franchisees.





-21-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 2 - Summary of Significant Accounting Policies (Continued)





Cash





As of November 30, 2010 and 2009, the Marketing Fund cash balances, which are restricted, were $219,432 and $158,747, respectively.  Also included in restricted cash November 30, 2010 and 2009, respectively is $37,963 and $53,001 for a certificate of deposit that serves as collateral for a Letter of Credit that is required for the Company’s office lease.





Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 for interest bearing accounts.  Non-interest bearing business checking accounts are insured to an unlimited amount through December 31, 2012.  The Company maintains account balances within FDIC limits.





Accounts and Notes Receivable





Receivables are carried at original invoice amount less estimates for doubtful accounts.  Management determines the allowance for doubtful accounts by reviewing and identifying troubled accounts and by using historical collection experience.  A receivable is considered to be past due if any portion of the receivable balance is outstanding 90 days past the due date.  Receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded as income when received.  Certain receivables have been converted to unsecured interest-bearing notes.





Inventories





Inventories are valued at the lower of cost or market under the first-in, first-out (FIFO) method.





Property, Plant and Equipment





Property and equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization.  Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.  Estimated useful lives are 3 to 7 years for property and equipment and 10 years, or term of lease, if less, for leasehold improvements.  Maintenance and repairs are charged to expense as incurred.  Expenditures that materially extend the useful lives of assets are capitalized.





Goodwill and Other Intangible Assets





The Company’s intangible assets consist of trademarks and goodwill. Accounting Standard Codification (“ASC”) 350 (formerly SFAS No. 142) “Goodwill and Other Intangible Assets” requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests.  The Company no longer amortizes goodwill and other intangible assets, but instead on an annual basis the Company’s intangible assets are tested for impairment.





The Company tests goodwill and intangible assets that are not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible.  Goodwill and intangible assets were tested at the end of the first quarter, February 28, 2010 and it was found that the carrying value of goodwill and intangible assets was not impaired based on a discounted cash flow model using management’s business plan projected for expected cash flows.  A charge of $2,399,057 was recorded for the year ended November 30, 2009 after the impairment testing was completed during the first quarter 2009.  Management does not believe that any impairment exists at November 30, 2010.





-22-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 2 - Summary of Significant Accounting Policies (Continued)





Goodwill and Other Intangible Assets (Cont’d)





The net book value of goodwill and intangible assets with indefinite and definite lives are as follows:





Goodwill


Trademarks


Definite Lived Intangibles


TotalNet Balance as of November 30, 2008

$
3,542,772


$
763,667


$
86,324


$
4,392,763Additions


-



21,349



3,405



24,754Impairment charges


(2,049,001
)


(350,056
)


-



(2,399,057
)Amortization expense


-



-



(9,935
)


(9,935
)Net Balance as of November 30, 2009


1,493,771



434,960



79,794



2,008,525Additions


-



7,325



11,475



18,800Amortization expense


-



-



(10,960
)


(10,960
)Net Balance as of November 30, 2010

$
1,493,771


$
442,285


$
80,309


$
2,016,365





Definite lived intangible assets are being amortized over their useful lives.  The estimated amortization expense for each of the next five fiscal years and thereafter is as follows:





Fiscal Period

Definite Lived Intangibles2011

$
12,3552012


12,3552013


12,3552014


12,3552015


12,355thereafter


18,534Total

$
80,309





-23-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009








Note 2 - Summary of Significant Accounting Policies (Continued)





Advertising and Promotion Costs





The Company expenses advertising and promotion costs as incurred.  Advertising and promotion expense was $69,356 and $73,549 in 2010 and 2009, respectively.  Included in advertising expense was $36,707 and $36,535 in 2010 and 2009, respectively, related to the Company’s franchise operations.





Income Taxes





Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The benefits from net operating losses carried forward may be impaired or limited in certain circumstances.  In addition, a valuation allowance can be provided for deferred tax assets when it is more likely than not that all or some portion of the deferred tax asset will not be realized.





The Company files a consolidated U.S. income tax return and tax returns in various state jurisdictions.  Review of the Company’s possible tax uncertainties as of November 30, 2010 did not result in any positions requiring disclosure.  Should the Company need to record interest and/or penalties related to uncertain tax positions or other tax authority assessments, it would classify such expenses as part of the income tax provision.  The Company has not changed any of its tax policies or adopted any new tax positions during the fiscal year ended November 30, 2010 and believes it has filed appropriate tax returns in all jurisdictions for which it has nexus.  (See Note 3.)





Earnings Per Share





The Company computes earnings per share (“EPS”) under ACS 260 “Earnings per Share.”  Basic net earnings are divided by the weighted average number of common shares outstanding during the year to calculate basic net earnings per common share.  Diluted net earnings per common share are calculated to give effect to the potential dilution that could occur if options or other contracts to issue common stock were exercised and resulted in the issuance of additional common shares.





2010


2009Numerator:Net income (loss) available to common shareholders

$
409,528


$
(2,317,943
)Denominator:Weighted average outstanding sharesBasic


7,263,508



7,263,508Earnings (Loss) per Share - Basic

$
0.06


$
(0.32
)Effect of dilutive common stock


-



-Weighted average outstanding sharesDiluted


7,263,508



7,263,508Earnings (Loss) per share - Diluted

$
0.06


$
(0.32
)





At November 30, 2010 and 2009, there are 368,373 of unexercised options that are not included in the computation of dilutive EPS because their impact would be antidilutive due to the market price of the common stock being higher than the option prices for 2010 and the loss in 2009.





-24-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 2 - Summary of Significant Accounting Policies (Continued)





Stock-Based Compensation





The Company recognizes compensation cost using a fair-value based method for all share-based payments granted after November 30, 2006, plus any awards granted to employees up through November 30, 2006 that remain unvested at that time.  The Company recorded compensation expense arising from share-based payment arrangements in payroll-related expenses on the Consolidated Statement of Income for the Company’s stock option plan of $9,948 and $10,177 for the years ended November 30, 2010 and 2009, respectively.





Fair Value of Financial Instruments





The carrying amounts of financial instruments including cash, accounts receivable, notes receivable, accounts payable and short-term debt approximate their fair values because of the relatively short maturity of these instruments.  The carrying value of long-term debt, including the current portion, approximate fair value based upon market prices for the same or similar instruments.





Recent Accounting Pronouncements





In January 2010, the FASB issued ASU 2010-05, “Compensation-Stock Compensation” This update is a clarification of the treatment of escrowed share arrangements and provides guidance on the presumption of compensation under such arrangements. The Company has determined that the changes to the accounting standards required by this update do not have a material effect on its consolidated financial position, cash flows or results of operations.





In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosure.”  This guidance requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements.  The guidance is effective for interim and annual periods beginning after December 15, 2009, except for gross presentation of activity in level 3 which is effective for annual periods beginning after December 15, 2010, and for interim periods in those years.  The adoption of this guidance did not have any impact on the Company’s consolidated financial position, cash flows or results of operations.





Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of November 30, 2010 that would have or are expected to have any significant effect on the Company’s consolidated financial position, cash flows or results of operations.





-25-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 3 – Income Taxes





The effective tax rate used to compute income tax expense (benefit) and deferred tax assets and liabilities is a federal rate of 34% and a state rate of 4.8%, net of the federal tax effect.





The components of the Company’s current provision (benefit) for income taxes are as follows:





2010


2009CurrentFederal

$
-


$
-State


-



-Deferred


-



252,000Total

$
-


$
252,000





A reconciliation of the expected income tax expense (benefit) to the recorded income tax expense (benefit) is as follows:





2010


2009Federal income tax (benefit) provision computed at federal statutory rate

$
139,240


$
(702,421
)State income taxes net of federal tax provision


19,731



(99,537
)Other adjustments


8,382



17,869Change in valuation allowance


(167,353
)


1,036,089Income Tax Provision (Benefit)

$
-


$
252,000





-26-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 3 – Income Taxes (Continued)





The components of the Company’s deferred tax assets and liabilities for federal and state income taxes consist of the following:





2010



2009Deferred revenue

$
53,375


$
27,011Deferred rent


2,031



9,279Marketing Fund net contributions


85,179



61,623Allowance for doubtful accounts and notes receivable


10,398



3,382Accrued expenses


17,967



17,967Net operating loss carryforwards


2,310,363



2,410,188Valuation allowance


(1,857,466
)


(2,024,819
)Total Deferred Income Tax Assets

$
621,847


$
504,631Depreciation and amortization

$
(369,062
)

$
(255,178
)Franchise Costs


(4,785
)


(1,453
)Total Deferred Income Tax Liabilities

$
(373,847
)

$
(256,631
)Total Net Deferred Tax Assets/Liabilities

$
248,000


$
248,000





As of November 30, 2010, the Company has net operating loss carryforwards expiring between 2012 and 2029 for U.S. federal income tax purposes of approximately $5,952,000.  The Company routinely reviews the future realization of tax assets based on projected future reversals of taxable temporary differences, available tax planning strategies and projected future taxable income.  A valuation allowance has been established for $1,857,466 and $2,024,819 as of November 30, 2010 and 2009, respectively, for the deferred tax benefit related to those loss carryforwards and other deferred tax assets, that are more likely than not that the deferred tax asset will not be realized.  The decrease in the valuation allowance of $167,343 in 2010 is a result of the recognition of a portion of the net operating loss carryforwards and an increase in deferred tax liabilities relating primarily to depreciation and amortization.





-27-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 4 - Long-Term Debt





On September 6, 2002, the Company signed a note payable requiring annual installments of $35,000, including interest at a rate of 4.75% per annum, for a term of 15 years, in the original amount of $385,531.  The Company purchased and retired 1,380,040 shares of BAB common stock from a former stockholder.  The balance of this note payable was $179,078 and $204,370 as of November 30, 2010 and 2009, respectively.





As of November 30, 2010, annual maturities on long-term obligations due are as follows:





Year Ending November 30:2011


$
26,4942012



27,7522013



29,0702014



30,4512015



31,898Thereafter



33,413Total


$
179,078





Note 5 - Stockholders’ Equity





On December 7, 2009, March 9, 2010, May 20, 2010 and September 3, 2010 a $0.01 per share cash distribution/dividend was declared, paid January 4, 2010, April 14, 2010, July 8, 2010 and September 30, 2010.  On December 4, 2008, a $.02 per share quarterly dividend was declared and paid January 2, 2009.  On March 9, May 22, and September 7, 2009, a $.01 per share dividend was declared, and paid on April 13, July 8, and October 5, 2009, respectively.





On December 6, 2010 a $0.01 quarterly cash distribution and a $0.02 special distribution was declared and paid January 5, 2011.





Note 6 - Stock Options





In May 2001, the Company approved a Long-Term Incentive and Stock Option Plan (“Plan”).  The Plan reserves 1,400,000 shares of common stock for grant, all of which have been granted as of November 30, 2009.  The Plan will terminate on May 25, 2011.  The Plan permits granting of awards to employees and non-employee Directors and agents of the Company in the form of stock appreciation rights, stock awards and stock options.  The Plan is currently administered by a Committee of the Board of Directors appointed by the Board.  The Plan gives broad powers to the Board and Committee to administer and interpret the Plan, including the authority to select the individuals to be granted options and rights, and to prescribe the particular form and conditions of each option or right granted.





-28-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 6 - Stock Options (Continued)





Under the Plan, the exercise price of each option equals the market price of the Company’s stock on the date of grant.  The options granted vary in vesting from immediate to a vesting period over five years.  The options granted are exercisable within a 10 year period from the date of grant.  All stock issued from the granted options must be held for one year from date of exercise.  Options issued and outstanding expire on various dates through November 28, 2016.  The range of exercise prices of options outstanding at November 30, 2010 are $0.46 to $1.38.





During fiscal 2010 and 2009 there were no options granted or exercised.  Activity under the Plan during the two years ended November 30 is as follows:





2010


2009Options


Weighted

average exercise

price


Options


Weighted

average exercise

priceOptions outstanding at beginning of year


368,373


$
1.156



369,373


$
1.156Forfeited


-



-



(1,000
)


1.150Outstanding at end of year


368,373


$
1.156



368,373


$
1.156





Options Outstanding


Options ExercisableRange of exercise price


Options outstanding


Weighted average remaining contractual life


Weighted average exercise price


Options exercisable


Weighted average exercise price$
0.46



7,973



3.0


$
0.460



7,973


$
0.460$
0.60



10,000



3.67.20


$
0.600



10,000


$
0.600$
0.88 - $0.97



61,900



4.2


$
0.938



61,900


$
0.938$
0.86



20,000



5.5


$
0.860



20,000


$
0.860$
1.15 - $1.27



68,500



5.0


$
1.22



68,500


$
1.220$
0.97



20,000



6.0


$
0.970



20,000


$
0.970$
1.25 - $1.38



180,000



6.0


$
1.322



--



--368,373






$
1.156



188,373


$
0.998





-29-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 6 - Stock Options (Continued)





The aggregate intrinsic value in the table below is before income taxes, based on the Company’s closing stock price of $0.46 as of the last business day of the period ended November 30, 2010.  There were no options exercised in 2010 or 2009.





Options Outstanding


Options ExercisableOutstanding


Wghtd. Avg.

Wghtd. Avg.


Aggregate


Exercisable


Wghtd. Avg.


Aggregateat 11/30/10


Remaining Life

Exercise Price


Intrinsic Value


at 11/30/10


Exercise Price


Intrinsic Value368,373



5.30


$
1.16


$
-



188,373


$
1.00


$
-





The Company recorded compensation cost arising from share-based payment arrangements in payroll-related expenses on the Consolidated Statement of Income for the Company’s stock option plan of $9,948 and $10,177 for the years ended November 30, 2010 and 2009, respectively.





Note 7 - Commitments





The Company rents its Corporate office and Company-owned store locations under leases which require it to pay real estate taxes, insurance and general repairs and maintenance.  The Corporate office lease was extended through September 30, 2018. The first option to renew the Company-owned store lease was executed on January 1, 2007 for a term of five years with one additional five year renewal option available that has not yet been exercised as the Company is exploring various options.  On December 31, 2009 the lease and sub-leases for the Lincoln Nebraska location ended and the lease period extension was not exercised by the Company.  Rent expense for the years ended November 30, 2010 and 2009 was $156,836 and $165,334, net of sublease income of $5,825 and $107,203, respectively.  Monthly rent is recorded on a straight-line basis over the term of the lease with a deferred rent liability being recognized.  As of November 30, 2010, future minimum annual rental commitments under leases are as follows:





Year Ending November 30:2011

$
149,0622012


101,4842013


110,4342014


113,7092015


116,983Thereafter


370,297Total

$
961,969





-30-
 Index





BAB, Inc


Notes to the Consolidated Financial Statements


November 30, 2010 and 2009





Note 8 – Employee Benefit Plan





The Company maintains a qualified 401(k) plan which allows eligible participants to make pretax contributions.  Company contributions are discretionary.  The Company did not make a contribution in 2010 or 2009.




Note 9 - Segment Information





Segment information has been reclassified to reflect licensing fees revenue, goodwill and certain definite lived assets and the amortization expense related to these intangibles in Systems, so as to reflect a truer segment income stream and asset relationship, as the business is focused on the franchise division.





The following table presents segment information for the years ended November 30, 2010 and 2009:




Net Revenues


Operating Income (Loss)2010


2009


2010


2009Company Store Operations

$
542,285


$
747,526


$
(137,274
)

$
(198,093
)Franchise Operations and Licensing Fees


2,371,456



2,425,379



1,434,622



(993,097
)$
2,913,741


$
3,172,905


$
1,297,348


$
(1,191,190
)Corporate Expenses










(885,834
)


(878,828
)Interest Income, Net of Interest Expense










(1,986
)


4,075Net Income (Loss) before provision for taxes










409,528



(2,065,943
)Deferred tax expense










-



252,000Net Income (Loss)









$
409,528


$
(2,317,943
)Operating Segment Data
  Identifiable Assets


Capital and Intangible Expenditures


Depreciation and Amortization


Goodwill and Other Intangible ImpairmentYear Ended November 30, 2010:Company Store Operations

$
49,126


$
4,714


$
5,911


$
-Franchise Operations (other than goodwill)


672,169



17,255



11,533Definite Lived Intangible Assets


80,309



11,475



10,960Goodwill and Other Intangible Assets


1,936,056



7,325$
2,737,660


$
40,769


$
28,404


$
-Year Ended November 30, 2009:Company Store Operations

$
57,424


$
-


$
4,246


$
-Franchise Operations (other than goodwill)


373,911



1,150



17,051Definite Lived Intangible Assets


79,794



3,404



9,934Goodwill and Other Intangible Assets


1,928,731



21,350







2,399,057$
2,439,860


$
25,904


$
31,231


$
2,399,057Reconciliation to Total Assets as Reported






2010



2009Assets-Total reportable segments - Identifiable assets





$
2,737,660


$
2,439,860Unallocated AmountsCash






1,242,937



1,284,274Prepaid expenses and other current assets






89,993



105,981Total Consolidated Assets





$
4,070,590


$
3,830,115




There were no sales to any individual customer during either year that represented 10% or more of net sales.





-31-
 Index





ITEM9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





In connection with the audits of the Company’s consolidated financial statements for each of the fiscal years ended November 30, 2010 and 2009, and through the date of this Current Report, there were: (1) no disagreements between the Company and Frank L. Sassetti & Co. on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures.





ITEM9A.
CONTROLS AND PROCEDURES





Disclosure Controls and Procedures





BAB, Inc.’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Item 307 of Regulation S-K of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures were effective (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our executive and financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.





Internal Control Over Financial Reporting





Management’s Annual Report on Internal Control over Financial Reporting


.


Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial Officer, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.





Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.





Based on our evaluation under the framework described above, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s internal controls and procedures were effective over financial reporting as of November 30, 2010.





This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits the Company to provide only management’s report in this annual report.





Changes in Internal Control Over Financial Reporting





There were no changes in our internal controls or in other factors that could materially affect these controls over financial reporting during the last fiscal quarter. We have not identified any significant deficiencies or material weaknesses in our internal controls, and therefore there were no corrective actions taken.





ITEM 9B.
OTHER INFORMATION





None.




-32-
 Index




PART III





ITEM10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of the Company's Common Stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the "SEC"). Executive officers, directors and greater than ten percent beneficial owners are required by the SEC to furnish the Company with copies of all Section 16(a) forms they file.





Based upon a review of the copies of such forms furnished to the Company, the Company believes that all Section 16(a) filing requirements applicable to its executive officers and directors were met during the year ended November 30, 2010.





BAB, Inc. (the Company) has a formally established Code of Ethics, pursuant to Section 406 of the Sarbanes-Oxley Act.  In order to view the Code of Ethics in its entirety, see the BAB, Inc. Annual Report, Part III, Item 9, dated November 30, 2007 and filed with the Securities and Exchange Commission on February 28, 2008.





ITEM 11.
EXECUTIVE COMPENSATION





The following table sets forth the cash compensation by executive officers that received annual salary and bonus compensation of more than $100,000 during years 2010 and 2009 (the "Named Executive Officers"). The Company has no employment agreements with any of its executive officers.





Summary Compensation Table





Name and Principal Position

Year

Salary ($)


Bonus ($)


Stock Awards ($)


Options Awards ($)


Nonequity Incentive Plan Compensation(S)


Non-qualified deferred Compensation earnings (S)


All other compensation ($)


Total($)Michael W. Evans

2010


249,831



33,898



-



-



-



-



-



283,729President and CEO

2009


249,831



-



-



-



-



-



-



249,831Michael K. Murtaugh

2010


187,380



25,424



-



-



-



-



-



212,804Vice President and General Counsel

2009


187,380



-



-



-



-



-



-



187,380Jeffrey M Gorden

2010


133,686



-



-



-



-



-



-



133,686Chief Financial Officer

2009


133,686



5,350



-



-



-



-



-



139,036





The following tables set forth any stock or stock options awarded to executive officers that that are exercisable and not yet exercised or unexercisable as of November 30, 2010:





-33-
 Index





OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END





Name

Number of securities underlying unexercised options (#) Exercisable


Number of securities underlying unexercised options (#) Unexercisable


Equity incentive plan awards: number of securities underlying unexercised unearned options (#)


Option exercise price ($)


Option expiration dateMichael W. Evans


20,000






-



.97



2015President and CEO


20,000






-



1.27



201650,000



-



1.38



2016Michael K. Murtaugh


20,000







-



.97



2015Vice President and General Counsel


20,000







-



1.27



201650,000



-



1.38



2016Jeffrey M Gorden


1,833







-



.46



2014Chief Financial Officer


6,000







-



.88



20155,000







-



1.15



201525,000



-



1.25



2016








OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END


(Continued)





Name

Number of shares or units of stock that have not vested (#)


Market value of shares or units of stock that have not vested ($)


Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#)


Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($)Michael W. Evans


-



-



-



-President and CEO


-



-



-



-Michael K. Murtaugh


-



-



-



-Vice President and General Counsel


-



-



-



-Jeffrey M Gorden


-



-



-



-Chief Financial Officer


-



-



-



-





The following table sets forth any compensation paid to directors during fiscal year ended November 30, 2010:





-34-
 Index





DIRECTOR COMPENSATION


Compensation for fiscal year ended November 30, 2010





Name

Fees earned or paid in cash

($)


Stock awards ($)


Option awards ($)


Non-equity incentive plan compensation ($)


Non-qualifies deferred compensation earnings

($)


All other compensation ($)


Total ($)Steven Feldman


2,500



-



-



-



-



-



2,500James Lentz


2,500



-



-



-



-



-



2,500





Indemnification of Directors and Officers





The Company's Certificate of Incorporation limits personal liability for breach of fiduciary duty by its directors to the fullest extent permitted by the Delaware General Corporation Law (the "Delaware Law"). Such Certificate eliminates the personal liability of directors to the Company and its shareholders for damages occasioned by breach of fiduciary duty, except for liability based on breach of the director's duty of loyalty to the Company, liability for acts or omissions not made in good faith, liability for acts or omissions involving intentional misconduct, liability based on payments or improper dividends, liability based on violation of state securities laws, and liability for acts occurring prior to the date such provision was added. Any amendment to or repeal of such provisions in the Company's Certificate of Incorporation shall not adversely affect any right or protection of a director of the Company for with respect to any acts or omissions of such director occurring prior to such amendment or repeal.





In addition to the Delaware Law, the Company's Bylaws provide that officers and directors of the Company have the right to indemnification from the Company for liability arising out of certain actions to the fullest extent permissible by law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers or persons controlling the Company pursuant to such indemnification provisions, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.





-35-
 Index




ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The following table sets forth as of February 11, 2011 the record and beneficial ownership of Common Stock held by (i) each person who is known to the Company to be the beneficial owner of more than 5% of the Common Stock of the Company; (ii) each current director; (iii) each "named executive officer" (as defined in Regulation S-B, Item 402 under the Securities Act of 1933); and (iv) all executive officers and directors of the Company as a group. Securities reported as "beneficially owned" include those for which the named persons may exercise voting power or investment power, alone or with others. Voting power and investment power are not shared with others unless so stated. The number and percent of shares of Common Stock of the Company beneficially owned by each such person as of February 11, 2011 includes the number of shares which such person has the right to acquire within sixty (60) days after such date.





Name and Address

Shares

PercentageMichael W. Evans

500 Lake Cook Road, Suite 475

Deerfield, IL 60015

1,534,690(1)(2)(3)

20.72Michael K. Murtaugh

500 Lake Cook Road, Suite 475

Deerfield, IL 60015

1,189,276(1)(4)(5)

16.06Jeffrey M. Gorden

500 Lake Cook Road, Suite 475

Deerfield, IL 60015

44,945(6)

.61Steven G. Feldman

750 Estate Drive, Suite 104

Deerfield, IL 60015

40,000(7)

.54James A. Lentz

1415 College Lane South

Wheaton, IL 60189

34,932(8)

.47All executive officers and directors as a group (5 persons)

2,843,843(1)(2)(3)(4)(5)(6)(7)(8)

38.40





(1) Includes 40,000 stock options fully exercisable as of 2/11/11.


(2) Includes 3,500 shares inherited by spouse.


(3) Includes 62,222 shares held by children.


(4) Includes 22,222 shares held by children.


(5) Includes 5,004 shares held in an IRA.


(6) Includes 12,833 stock options fully exercisable as of 2/11/11.


(7) Includes 30,000 stock options fully exercisable as of 2/11/11.


(8) Includes 20,000 stock options fully exercisable as of 2/11/11.





-36-
 Index





ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE





There are no transactions between the Company and related parties, including officers and directors of the Company. It is the Company's policy that it will not enter into any transactions with officers, directors or beneficial owners of more than 5% of the Company's Common Stock, or any entity controlled by or under common control with any such person, on terms less favorable to the Company than could be obtained from unaffiliated third parties and all such transactions require the consent of the majority of disinterested members of the Board of Directors.








ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





The Board of Directors upon recommendation of the Audit Committee, appointed the firm Frank L. Sassetti & Co., certified public accountants, for 2010 audit and tax services.





The audit reports of Frank L. Sassetti & Co. on the consolidated financial statements of BAB, Inc. and Subsidiaries as of and for the years ended November 30, 2010 and 2009 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.





Audit fees relate to audit work performed on the financial statements as well as work that generally only the independent auditor can reasonably be expected to provide, including discussions surrounding the proper application of financial accounting and/or reporting standards and reviews of the financial statements included in quarterly reports filed on Form 10-Q.  Fees for audit services provided by Frank L. Sassetti & Co. in fiscal 2010 amounted to $62,200.  Fees for audit services provided by Frank L. Sassetti & Co. for fiscal 2009 amounted to $62,300.





Tax compliance services were provided by Frank L. Sassetti & Co. for 2010 and 2009 with fees billed in the amount of $12,200.





During the years ended November 30, 2010 and 2009, Frank L. Sassetti & Co. did not perform any other services for the Company.





Preapproval of Policies and Procedures by Audit Committee





The accountants provide a quote for services to the Audit Committee before work begins for the fiscal year.  After discussion, the Audit Committee then makes a recommendation to the Board of Directors on whether to accept the proposal.





Percentage of Services Approved by Audit Committee





All services were approved by the Audit Committee.





-37-
 Index





PART IV





ITEM15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.








(a) Documents filed as part of this report:


(1)
Financial Statements


Consolidated Balance Sheets as at November 30, 2010 and 2009 and the Consolidated Statements of Income, Shareholders’ Equity and Cash Flows for the years ended November 30, 2010 and 2009 are reported on by Frank L. Sassetti and Co.  These statements are prepared in accordance with United States GAAP.


(2)
Financial Statement Schedules - none


.


(b) INDEX TO EXHIBITS





The following Exhibits are filed herewith:





INDEX NUMBER
DESCRIPTION3.1
Articles of Incorporation (See Form 10-KSB for year ended November 30, 2006)3.2
Bylaws of the Company (See Form 10-KSB for year ended November 30, 2006)21.1
List of Subsidiaries of the Company31.1, 31.2
Section 302 of the Sarbanes-Oxley Act of 200232.1, 32.2
Section 906 of the Sarbanes-Oxley Act of 2002




-38-
 Index





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





BAB, INC.





By /s/ Michael W. Evans


Michael W. Evans, Chief Executive Officer and President (Principal Executive Officer)


Dated: February 24, 2011





Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.





Dated: February 24, 2011


By /s/ Michael W. Evans


Michael W. Evans, Chief Executive Officer and President (Principal Executive Officer)





Dated: February 24, 2011


By /s/ Michael K. Murtaugh


Michael K. Murtaugh, Director and Vice President/General Counsel and Secretary





Dated: February 24, 2011


By /s/ Jeffrey M. Gorden


Jeffrey M. Gorden, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)





Dated: February 24, 2011


By /s/ Steven G. Feldman


Steven G. Feldman, Director





Dated: February 24, 2011


By /s/ James A. Lentz


James A. Lentz, Director





-39-
 Index





EXHIBIT 3.1 - Certificate of Incorporation





See Form 10-KSB for year ended November 30, 2006





EXHIBIT 3.2 - Bylaws of BAB, Inc.





See Form 10-KSB for year ended November 30, 2006





EXHIBIT 21.1 – List of Subsidiaries of the Company


BAB Systems, Inc., an Illinois corporation


BAB Operations, Inc., an Illinois corporation


Brewster’s Franchise Corporation, an Illinois corporation


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