FORM 10-KSB

U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549 

(Mark one)

| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)    OF THE SECURITIES EXCHANGE ACT OF 1934 
For    the fiscal year ended: November 30, 2003[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d)    OF THE SECURITIES EXCHANGE ACT OF 1934 
For    the transition period from ______ to ______ 

Commission file number: 0-31555 
 

BAB, Inc. 

(Name of small business issuer in its charter) 
Delaware 
36-4389547(State or other jurisdiction of    incorporation)(IRS Employer  or organization    Identification No.)
8501 West Higgins Road, Suite 320, Chicago,Illinois 60631 

(Address of principal executive offices)(Zip Code) 

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

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

[X] Yes [ ] No 

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

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

$7,158,000

State the aggregate market value of the voting stock heldby nonaffiliates computed by reference to the price at which the stock was sold, or theaverage bid and asked prices of such stock, as of a specified date within the past 60days: $2,117,067 based on 3,333,963 shares held by nonaffiliates as of February 19, 2004and the average of the closing bid ($0.62) and asked ($0.65) prices for said shares in theNASDAQ OTC Bulletin Board as of such date. 

State the number of shares outstanding of each of theissuer's classes of common equity, as of the latest practicable date: 6,865,892 shares ofCommon Stock, as of February 19, 2004. 

 

Transitional Small Business Disclosure Format (check one):

[ ] Yes [X] No 

 

 

FORM 10-KSB INDEX 
PART I Item 1Description of    BusinessOverviewCustomersSuppliersLocationsStore    OperationsFranchising    Competition    Trademarks and Service Marks Government    Regulation Employees Item 2 Description of    PropertyItem 3Legal    ProceedingsItem 4  Submission of    Matters to a Vote of Security HoldersPART IIItem 5.  Market for the    Common Equity and Related Stockholder MattersItem 6. Management's    Discussion and Analysis of Financial Condition and Results of OperationsItem 7. Financial    StatementsItem 8.  Changes in and    Disagreement with Accountants on Accounting and Financial DisclosurePART III Item 9. Directors,    Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the    Exchange ActCode of    EthicsItem 10.  Executive    CompensationItem 11. Security    Ownership of Certain Beneficial Owners and Management Item 12. Certain    Relationships and Related TransactionsItem 13. Exhibits and    Reports on Form 8-KItem 14. Controls and    Procedures
PART I 
ITEM 1.DESCRIPTION OF BUSINESS  OVERVIEW
BAB, Inc. (the "Company") was incorporated underthe laws of the State of Delaware on July 12, 2000.  The Company currently operates,franchises and licenses bagel, muffin and coffee retail units under the Big Apple Bagels,My Favorite Muffin and Brewster's Coffee trade names. At November 30, 2003, the Companyhad 182 units in operation in 27 states, and 8 units are in International locations,including   Egypt, Peru and U.A.E.. The Company additionally derives income from thesale of its trademark bagels, muffins and coffee through nontraditional channels ofdistribution including under licensing agreements with Mrs. Fields Famous Brands (Mrs.Fields),  Kohr Bros. Frozen Custard and through direct home delivery of specialtymuffin gift baskets and coffee. 

The Big Apple Bagels brand franchised and Company-ownedstores feature daily baked bagels, flavored cream cheeses, premium coffees, gourmet bagelsandwiches and other related products. Licensed Big Apple Bagels units serve the Company'spar-baked frozen bagel products, freshly baked daily and related products. The My FavoriteMuffin brand consists of units operating as "My Favorite Muffin," featuring alarge variety of freshly baked muffins, coffees and related products, and units operatingas "My Favorite Muffin and Bagel Cafe," featuring these products as well as avariety of specialty bagel sandwiches and related products. The Company's Brewster'sCoffee unit is a specialty coffee shop featuring a variety of premium arabica beancoffees--freshly brewed or in bulk--and related products. Big Apple Bagels units areconcentrated in the Midwest and Western United States, while My Favorite Muffin units areclustered in the Middle Atlantic States. The Brewster's coffee products are featured inall Company-owned and many of the franchised units. 

The Company has grown significantly since its initialpublic offering in November 1995 through growth in franchise units and the development ofalternative distribution channels for its branded products. The Company intends tocontinue its expansion through growth in franchise units and further development ofnontraditional distribution channels. The Company is leveraging on the natural synergy ofdistributing muffin products in existing Big Apple Bagels units and, alternatively, bagelproducts and Brewster's Coffee in existing My Favorite Muffin units. The Company expectsto continue to realize efficiencies in servicing the combined base of Big Apple Bagels andMy Favorite Muffin franchisees. 

Operating Income

The Company reported net income of $589,000 for the yearended November 30, 2003, and net income of $326,000 for the year ended November 30,2002.  The Company believes that with its continued strong focus on franchising andlicensing operations, and continued operation of Company-owned stores that meet profitexpectations, it will continue to be profitable.  The Company will also continue toreview and institute cost controls where deemed necessary.  

Food Service Industry

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

CUSTOMERS

The Company-owned stores sell to the general public;therefore the Company is not dependent on a particular customer or small group ofcustomers.  Regarding the Company's franchising operation, the franchisees representa varied geographic and demographic group.  Among some of the primary services theCompany provides to its franchisees are time-tested, successful recipes, bulk purchasingdiscounts, food service knowledgeable personnel and brand recognition. 

SUPPLIERS

The Company's major suppliers are Coffee BeanInternational, Dawn Food Products, Inc. and Hawkeye Foodservice.  The Company is notdependent on any of these suppliers for future growth and profitability since the productspurchased from these suppliers are readily available from other sources.

LOCATIONS

The Company has 4 Company-owned stores, 173franchised locations and 5 licensees.   Of the 182 locations, 174 are located in27 states and 8 units are in International locations including Egypt, Peru and U.A.E.

STORE OPERATIONS

BIG APPLE BAGELS--Big Apple Bagels franchised andCompany-owned stores daily bake a variety of fresh bagels and offer up to 11 varieties ofcream cheese spreads.   Stores also offer a variety of breakfast and lunch bagelsandwiches, salads, soups, various dessert items, and gourmet coffees and other beverages.A typical Big Apple Bagels franchise or Company-owned store is  in an area with a mixof both residential and commercial properties. The average Company-owned or franchisedstore ranges from 1,500 to 2,000 square feet. The Company's current store design isapproximately 2,000 square feet, with seating capacity for 30 to 40 persons, and includes750 square feet devoted to production and baking. A satellite store is typically smallerthan a production store, averaging 600 to 1,000 square feet. Although franchise stores mayvary in size from Company-owned stores, and from other franchise stores, store layout isgenerally consistent.

MY FAVORITE MUFFIN--My Favorite Muffin (MFM) franchisedstores bake 20 to 25 varieties of muffins daily, from over 250 recipes, plus a variety ofbagels. They also serve gourmet coffees, beverages and, at My Favorite Muffin and BagelCafe locations, a variety of bagel sandwiches and related products. While a number of MFMunits are located in shopping mall locations with minimal square footage of 400 to 800square feet, the typical strip mall prototype unit is approximately 2,000 square feet withseating for 30 to 40 persons. A typical MFM franchise store is located within a three-mileradius of at least 25,000 residents in an area with a mix of both residential andcommercial properties. 

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

FRANCHISING

The Company requires payment of an initial franchise feeper store, plus an ongoing 5% royalty on net sales. Additionally, Big Apple Bagels("BAB") and MFM franchisees are members of a national marketing fund requiringan ongoing 1% contribution based on net sales. The Company currently requires a franchisefee of $25,000 on a franchisee's first BAB or MFM store. The fee for subsequent productionstores is $20,000 and $15,000 for a satellite location and $10,000 for a kiosk. 

The Company's current  Uniform Franchise OfferingCircular  provides for, among other things, the opportunity for prospectivefranchisees to enter into a preliminary agreement for their first production store. Thisagreement enables a prospective franchisee a period of 60 days in which to locate a site.The fee for this preliminary agreement is $10,000. If a site is not located and approvedby the franchiser within the 60 days, the prospective franchisee will receive a refund of$7,000. If a site is approved, the entire $10,000 will be applied toward the initialfranchise fee.  See also last paragraph under "Government Regulation"section in this 10-KSB.

The Company's franchise agreements provide a franchiseewith the right to develop one store at a specific location. Each franchise agreement isfor a term of 10 years with the right to renew. Franchisees are expected to be inoperation no later than 10 months following the signing of the franchise agreement. 

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

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

COMPETITION

The quick service restaurant industry is intenselycompetitive with respect to product quality, concept, location, service and price. Thereare a number of national, regional and local chains operating both owned and franchisedstores which may compete with the Company on a national level or solely in a specificmarket or region. The Company believes that because the industry is extremely fragmented,there is a significant opportunity for expansion in the bagel, muffin and coffee conceptchains. 

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

The Company competes against numerous small, independentlyowned bagel bakeries, and national fast food restaurants, such as Dunkin' Donuts,McDonald's and Panera, that offer bagels and muffins as part of their breakfast foodofferings and supermarket bakery sections.  In particular, the Company's bagelscompete against Thomas' Bagels and other brands of fresh and frozen bagels offered insupermarkets. Certain of these competitors may have greater product and name recognitionand larger financial, marketing and distribution capabilities than the Company.  Inaddition, the Company believes the startup costs associated with opening a retail foodestablishment offering similar products on a stand-alone basis are competitive with thestartup costs associated with opening its concept stores and, accordingly, such startupcosts are not an impediment to entry into the retail bagel, muffin or coffee businesses. 

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

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

TRADEMARKSAND SERVICE MARKS

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

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

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

GOVERNMENTREGULATION

The Company is subject to the Trade Regulation Rule of theFederal Trade Commission (the "FTC") entitled ``Disclosure Requirements andProhibitions Concerning Franchising and Business Opportunity Ventures'' (the "FTCFranchise Rule") and state and local laws and regulations that govern the offer, saleand termination of franchises and the refusal to renew franchises. Continued compliancewith this broad federal, state and local regulatory network is essential and costly, andthe failure to comply with such regulations may have a material adverse effect on theCompany and its franchisees. Violations of franchising laws and/or state laws andregulations regulating substantive aspects of doing business in a particular state couldlimit the Company's ability to sell franchises or subject the Company and its affiliatesto rescission offers, monetary damages, penalties, imprisonment and/or injunctiveproceedings. In addition, under court decisions in certain states, absolute vicariousliability may be imposed upon franchisers based upon claims made against franchisees. Evenif the Company is able to obtain insurance coverage for such claims, there can be noassurance that such insurance will be sufficient to cover potential claims against theCompany. 

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

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

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

EMPLOYEES

As of November 30, 2003, the Company employed 91 persons,consisting of  71 working in the Company-owned stores, of which 44 are part-timeemployees. The remaining employees are responsible for Corporate oversight andfranchising.  None of the Company's employees are subject to any collectivebargaining agreements and management considers its relations with its employees to begood. 

 

ITEM 2. DESCRIPTION OF PROPERTY 

The Company's principal executive office, consisting ofapproximately 7,300 square feet, is located in Chicago, Illinois and is leased pursuant toa lease expiring in June 2004.  The Company signed a new lease December 12, 2003,with IL-Corporate 500 Centre, L.L.C.  for it's executive office facilities which willbe located in Deerfield, IL.  The new facility is approximately 7,100 square feet.The lease payments begin on August 1, 2004  with the lease period through January 31,2011.   The facility is to be ready for occupancy in April 2004.   Additionally,the Company leases space for each of its Company-owned stores. Lease terms for thesestores are generally for initial terms of five years and contain options for renewal forone or more five-year terms. (See Note 7 in the audited consolidated financial statementsincluded herein.) 

 

ITEM 3. LEGAL PROCEEDINGS

None

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS 

None

 

PART II 

ITEM 5. MARKET FOR THE COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS 

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

BAB, Inc.YEAR ENDED NOVEMBER 30, 2002LOWHIGHFirst quarter.04.09Second quarter.04.09Third quarter .05.10Fourth quarter.05.20YEAR ENDED NOVEMBER 30, 2003First quarter.07.70Second quarter .18.35
Third quarter.18.95Fourth quarter.37.60
As of February 19, 2004, the Company's Common Stock washeld by 194 holders of record. Registered ownership includes nominees who may holdsecurities on behalf of multiple beneficial owners. The Company estimates that the numberof beneficial owners of its common stock at February 19, 2004, is approximately 1,600based upon information provided by a proxy services firm. 

STOCK OPTIONS

In May 2001, the Company's Board of Directors approved aLong-Term Incentive and Stock Option Plan ( Plan), with an amendment in May 2003 toincrease the Plan from the reserve of 1,100,000 shares to 1,400,000 shares of common stockfor grant.   During fiscal 2003, 300,000 stock options were granted to directors,officers and employees.  In fiscal 2002, 600,000 stock options were granted todirectors, officers and employees.  On December 2, 2003, 95,000 options were granted,leaving 405,000 options available for grant.  As of February 19, 2004, therewere 458,895 stock options exercised since the initial grant on December 19, 2001. (See Note 11 of the audited consolidated financial statements included herein.)

DIVIDEND POLICY 

The Board of Directors of the Company declared asemi-annual cash dividend of $0.02 per share on July 29, 2003 to be paid  on August26, 2003 to common stock shareholders of record as of August 11, 2003.  After theclose of the fiscal year, a semi-annual $0.02 per share cash dividend was approved by theBoard of Directors on January 1, 2004 payable on February 2, 2004 to common stockshareholders of record as of January 16, 2004.  There were no dividends declared orpaid in fiscal 2002.

 

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

The selected financial data contained herein has beenderived from the consolidated financial statements of the Company included elsewhere inthis Report on Form 10-KSB. The data should be read in conjunction with the consolidatedfinancial statements and notes thereto.  Certain statements contained in Management'sDiscussion and Analysis of Financial Condition and Results of Operations, includingstatements regarding the development of the Company's business, the markets for theCompany's products, anticipated capital expenditures, and the effects of completed andproposed acquisitions, and other statements and disclosures contained herein andthroughout this Annual Report regarding matters that are not historical facts, areforward-looking statements (as such term is defined in the Private Securities LitigationReform Act of 1995). In such cases, we may use words such as "believe,""intend," "expect," "anticipate" and the like.  Becausesuch statements include risks and uncertainties, actual results may differ materially fromthose expressed or implied by such forward-looking statements. Certain risks anduncertainties are wholly or partially outside the control of the Company and itsmanagement, including its ability to attract new franchisees; the continued success ofcurrent franchisees; the effects of competition on franchisee and Company-owned storeresults; consumer acceptance of the Company's products in new and existing markets;fluctuation in development and operating costs; brand awareness; availability and terms ofcapital; adverse publicity; acceptance of new product offerings; availability of locationsand terms of sites for store development; food, labor and employee benefit costs; changesin government regulation (including increases in the minimum wage; regional economic andweather conditions; the hiring, training, and retention of skilled corporate andrestaurant management; and the integration and assimilation of acquired concepts.Accordingly, readers are cautioned not to place undue reliance on these forward-lookingstatements, which reflect management's analysis only as of the date hereof.  TheCompany undertakes no obligation to publicly release the results of any revision to theseforward-looking statements which may be made to reflect events or circumstances after thedate hereof or to reflect the occurrence of unanticipated events. 
GENERAL 
The Company has 4 Company-owned stores and 178 franchisedand licensed units as of the end of fiscal 2003. Units in operation at the end of fiscal2002 included 6 Company-owned stores and 208 franchised and licensed units. System-widerevenues in fiscal 2003 were $59 million compared to $64 million in fiscal 2002. 

The Company's revenues are derived primarily from theoperation of Company-owned stores, receipt of initial franchise fees and receipt ofongoing royalties paid to the Company by its franchisees.  Additionally, the Companyderives revenue from the sale of licensed products as a result of purchasing trademarks(My Favorite Muffin and Brewster's) and licensing contracts, and by directly entering intolicensing agreements (Mrs. Fields). The number of licensed units in fiscal 2003 decreasedby 27 units as compared to fiscal 2002 due primarily to the HMS Host (HMS) contracttermination.  (See Note 4 of the audited consolidated financial statements includedherein.)  The Company believes that these closures have had no material effect on itsconsolidated financial results.  

During fiscal 2003, the Company continued to decreasecosts in payroll, occupancy and overhead not only at the 4 Company-owned stores, but alsoin the Corporate Office as well.  At November 30, 2003, the Company had 20 employeesat the corporate level to oversee the franchise, licensed and Company-owned storeoperations, versus 24 at the end of 2002.  The Company continues to lower costs on anabsolute basis.  Total operating costs, excluding provision for uncollectibleaccounts and depreciation and amortization, and less interest and other income andexpenses, decreased $1,472,000, to $5,858,000, or 81.8% of total revenue in fiscal 2003versus $7,330,000, or 85.7% of total revenue in fiscal 2002. As noted above, the Companyhad 6 Company-owned stores at the end of fiscal 2002 but only 4 at the end of fiscal 2003.Management expects that payroll and other operating costs related to Company-owned storesand the Corporate office will continue to decrease as a percentage of revenue asadditional franchises are opened and revenue from licensing and other non-traditionalsources increases.  

Effective with the 2002 fiscal year-end, the Companyadopted a month-end reporting beginning November 30, 2002.  This was a change fromthe prior reporting adopted in 1999 of a 52-53 week period ending on the last Sunday ofits fiscal year in November.  The  fiscal year ended  on November 30, 2003,contained 52 weeks whereas fiscal year ended November 30, 2002, contained 53 weeks. 

FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

Total revenues from all sources decreased 16.3% to$7,158,000 in 2003 from $8,550,000 in the prior year. Net sales at Company-owned storesdecreased 26.6% to $3,001,000 in fiscal 2003, versus $4,086,000 in fiscal 2002. TheCompany sold 1 store and closed another in fiscal 2003 which contributed $254,000 inrevenue for fiscal 2003, versus $644,000 in 2002.  In addition, a store that closedin 2002 contributed $94,000 in revenue for that year. Wholesale sales decreased by$395,000 in fiscal 2003 as compared to fiscal 2002. Part of the difference, $181,000, wasdue to sales at locations open in 2002 that closed in 2003. Another $214,000 of thedifference was due to the elimination of sales to less profitable customers.  Royaltyfees from franchise stores were down $199,000, or 7.2%, in fiscal 2003 as compared tofiscal 2002, primarily due to less days of revenue in 2003 as compared to 2002, (5 fewerdays in 2003).  Franchise fee revenue was $410,000 in fiscal 2003 versus $570,000 infiscal 2002, a decrease of $160,000, or 28.1%.  Of this $160,000 decrease infranchise fee revenue, $138,000 was because of fewer new store openings in fiscal 2003,12, as compared to fiscal 2002, 17. In addition, revenue for defaulted preliminaryagreements was down $50,000 in 2003 as compared to 2002, whereas transfer fees were up in2003 by $28,000 as compared to 2002. Licensing fees and other income increased $52,000 infiscal 2003 as compared to fiscal 2002, due primarily to $23,000 less loss on storessold in fiscal 2003 as compared to 2002, and an increase in the general licensing feerevenues of $29,000 in fiscal 2003 as compared to 2002. 

Food, beverage and paper costs incurred at Company-ownedstores decreased $293,000 in fiscal 2003 to $998,000 from $1,291,000 in fiscal 2002. As a percentage to net Company-owned store revenues, fiscal 2003 costs were 33.3% ascompared to 31.6% for fiscal 2002.  Store payroll and other Company-owned store costsincreased to 82.8% of net Company-owned store revenues in fiscal 2003, from 77.6% infiscal 2002.  Company-owned store payroll and other expenses decreased $688,000 infiscal 2003 to $2,484,000 from $3,172,000 in fiscal 2002.  

Selling, general and administrative costs were 44.7% ofrevenues in fiscal 2003 as compared to 43.3% for fiscal 2002.  On an absolute basis,selling, general and administrative expenses decreased $501,000 in fiscal 2003 to$3,199,000 versus $3,700,000 in 2002.  In the SG&A category, there was areduction in depreciation and amortization expense of $268,000.  The primary reasonfor the decrease was a reduction in amortization expense for fiscal 2003 of $236,000 asthe result of adoption of SFAS 142 "Goodwill and Other Intangible Assets." Goodwill and other non-lived intangible assets are no longer amortized, but instead arenow tested for impairment.  (See Note 2 of the audited consolidated financialstatements included herein.)  The balance of the change in depreciation andamortization was due to Company-owned locations sold or closed during 2002 and2003.  Corporate payrolls and payroll related expenses decreased $113,000 in fiscal2003, going to $1,382,000, from $1,495,000 in fiscal 2002.  Other areas in whichmanagement succeeded in cost control for fiscal 2003, as compared to 2002, included an$88,000 reduction in insurance expense, a $47,000 decrease in occupancy expense and a$37,000 reduction in professional fees.  These reductions in expenses were offset byincreases in expenses for fiscal 2003 as compared to 2002 for bad debt expense of $35,000and an increase in other general expenses of $28,000.  On November 26, 2003, atermination of contract agreement was signed with HMS. This termination agreement resultedin cash proceeds of $525,000, a $256,000 goodwill impairment and a loss on abandonment ofassets of $46,000.  (See Note 4 of the audited consolidated financial statementsincluded herein.)

Net income from operations for the period ended November30, 2003 was $699,000 as compared to net income from operations of $387,000 at November30, 2002.   As of the last quarter of fiscal 2003, the Company had 9consecutive profitable quarters.   The Company's management team has continuedto focus on the franchising system and cost control which has resulted in continuedbottom-line profitability.   Although total revenues have decreased,  asexpected, expenses have decreased at a greater rate. Interest expense decreased to$136,000 during 2003, from $169,000 in 2002, primarily due to a decrease in outstandingdebt.  

Net income totaled $589,000 during the current fiscal yearas compared to a net income of $326,000 in the prior year. 

LIQUIDITY AND CAPITAL RESOURCES

The net cash provided from operating activities totaled$1,615,000 during fiscal 2003. Cash provided from operating activities principallyrepresents net income, plus depreciation and amortization of $448,000, the proceeds on theHMS contract termination of $525,000, the loss on sale of property and equipment of$1,000,  the provision for uncollectible accounts of $152,000, a reduction in tradeaccounts receivable of $76,000, an increase in accrued liabilities of $60,000, an increasein deferred revenue of $42,000, a decrease in prepaids and other assets of $44,000 andreductions in  inventories of $24,000. The cash provided was reduced by a gain on theHMS contract termination of ($221,000), a decrease in National Marketing Fund obligationsof ($16,000), a decrease in accounts payable of ($72,000) and an increase in notesreceivable of ($38,000).   The net cash provided from operating activitiestotaled $1,163,000 during fiscal 2002. In fiscal 2002, cash provided from operatingactivities principally represents net income, plus depreciation and amortization of$716,000, the loss on sale of property and equipment of $74,000, the provision foruncollectible accounts of $117,000, a reduction in trade accounts receivable of $110,000,reductions in  inventories of $18,000, and a decrease in National Marketing Fundcontributions receivable of $113,000.  The cash provided was also reduced by adecrease in accounts payable of ($81,000), a decrease in accrued liabilities of ($7,000),increase in notes receivable of ($55,000), a decrease in deferred revenue of ($51,000), anincrease in prepaids and other assets of ($117,000).   Should a decrease inoperating cash flow occur, there would be an obvious negative impact on the Company'sliquidity.    

Cash provided from investing activities during 2003totaled $373,000, and was provided from the sale of property and equipment of $142,000 andcollection of notes receivable in the amount of $268,000, offset by purchases of propertyand equipment of ($36,000).  Cash provided from investing activities during 2002totaled $130,000, and was provided from the sale of property, equipment and assets heldfor resale of $89,000 and collection of notes receivable of $116,000, offset by purchasesof property and equipment of ($75,000).   

Financing activities used ($871,000) during fiscal 2003,due to the repayment of notes payable of ($547,000), the purchase of Treasury Stock in theamount of ($212,000) and the payment of stock dividends ($136,000), offset by the exerciseof stock options in the amount of $25,000.  In fiscal 2002, financing activities used($681,000) due to repayment of notes payable.

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

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements, otherthan the lease commitments disclosed in Note 7 of the audited consolidated financialstatements included herein.

 

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies arepresented in the Notes to the Consolidated Financial Statements (see Note 2 of the auditedconsolidated financial statements included herein).  While all of the significantaccounting policies impact the Company's Consolidated Financial Statements, some of thepolicies may be viewed to be more critical.  The more critical policies are thosethat are most important to the portrayal of the Company's financial condition and resultsof operation, and that require management's most difficult, subjective and/or complexjudgments and estimates.   Management bases its judgments and estimates on historicalexperience and various other factors that are believed to be reasonable under thecircumstances.  The results of judgments and estimates form the basis for makingjudgments about the Company's value of assets and liabilities that are not readilyapparent from other sources.  Actual results could differ from those estimates underdifferent assumptions or conditions.   Management believes the following are it'smost critical accounting policies because they require more significant judgments andestimates in preparation of its Consolidated Statements.

Revenue Recognition 

Systems royalty fees from franchised stores represent afee of 5% of net retail sales of franchised units. Royalty revenues are recognized on theaccrual basis using estimates based on past history and seasonality. 

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

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

Long-Lived Assets

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

The Company's intangible assets consist primarily oftrademarks and goodwill.  Beginning with fiscal 2003, SFAS 142, "Goodwill andOther Intangible Assets" was adopted by the Company.  This requires that assetswith indefinite lives no longer be amortized, but instead be subject to annual impairmenttests.  The Company no longer amortizes goodwill or trademarks.  (See Note 2 ofthe audited consolidated financial statements included herein.)

Concentrations of Credit Risk

Certain financial instruments potentially subject theCompany to concentrations of credit risk.  These financial instruments consistprimarily of royalty and wholesale accounts receivables.   Amounts due fromfranchisees represented approximately 56% of the receivable balance at fiscal year end2003 as compared to 60% at fiscal year end 2002.  The Company believes it hasmaintained  adequate reserves for doubtful accounts.  The Company reviews thecollectibility of receivables periodically, taking into account payment history andindustry conditions.

Valuation Allowance and Deferred Taxes

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

As of November 30, 2003, the company has cumulative netoperating loss carryforwards expiring between 2017 and 2020 for U.S. federal income taxpurposes of approximately $7,255,000.  The net operating loss carryforwards aresubject to limitation in any given year as a result of the Company's initial publicoffering and may be further limited if certain other events occur.  A valuationallowance has been established for $2,942,000 at November 30, 2003 for the deferred taxbenefit related to those loss carryforwards and other deferred tax assets for which it isconsidered more likely than not that the benefit will not be realized.   (See Note 5of the audited consolidated financial statements included herein.)

In prior years, the Company established a full valuationallowance because it believed there was uncertainty as to realization of the net operatingloss carryforward deferred tax asset based on historical operating results.  The fullvaluation allowance still exists at the end of fiscal 2003 because the Company believes itis appropriate based on conservatism.  

 

ITEM 7. FINANCIAL STATEMENTS 

The Consolidated Financial Statements and Report ofIndependent Auditors is included immediately following. 

 

BAB, Inc. 

Years Ended November 30, 2003 and 2002

 

C o n t e n t s 

IndependentAuditor's Report 

ConsolidatedBalance Sheets   

ConsolidatedStatements of Operations 

ConsolidatedStatements of Stockholders' Equity   

ConsolidatedStatements of Cash Flows 

Notesto Consolidated Financial Statements 

 

IndependentAuditor's Report 

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

We have audited the accompanying consolidated balancesheets of BAB, Inc. as of November 30, 2003 and  2002, and the related consolidatedstatements of operations, stockholders' equity and cash flows for the years then ended.These consolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits. 

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financial position of BAB,Inc. as of November 30, 2003 and  2002, and the results of its operations and itscash flows for the years then ended in conformity with accounting principles generallyaccepted in the United States of America. 
January 17, 2004Chicago, Illinois
/s/Blackman Kallick Bartelstein, LLP 

 

 
**BAB, Inc.****Consolidated Balance Sheets****November 30, 2003 and 2002**20032002
**ASSETS**Current AssetsCash, including restricted cash    of $364,658 in 2003 and $304,117 in 2002$             2,237,093$             1,119,743Receivables     Trade    accounts receivable (Net of allowance for doubtful accounts of $72,537 in 2003 and $94,186    in 2002) 313,023395,247     National    Marketing Fund contributions receivable from franchisees and stores 90,42397,230     Notes    receivable (Net of allowance for doubtful accounts of $115,212 in 2003 and $60,745 in    2002)76,012169,949Inventories77,462101,124Prepaid expenses and other    current assets          167,236           211,668             **Total Current Assets****     2,961,249****     2,094,961**Property and Equipment        Leasehold improvements 816,062981,060        Furniture and fixtures172,565347,495        Equipment         955,620     1,364,2451,944,2472,692,800     Less    accumulated depreciation   (1,634,162)   (1,911,903)            Total Property and Equipment, Net        310,085        780,897Notes Receivable          64,993        346,730IntangiblesTrademarks  (Net of    accumulated amortization of  $347,361 in 2002)763,666763,666Goodwill (Net of accumulated    amortization of $1,017,142 in 2002)3,542,7723,798,405Other (Net of accumulated    amortization of $449,141 in 2003 and $442,573 in 2002)        47,785        179,999             Total Intangibles, Net     4,354,223     4,742,070
TOTAL ASSETS**$  7,690,550****$  7,964,658**
**LIABILITIES    AND STOCKHOLDERS' EQUITY**Current Liabilities20032002Accounts payable$              110,383$              182,426Accrued liabilities239,455251,471Accrued payroll and payroll taxes169,967126,955Accrued gift certificates88,61062,669Accrued professional and other    services106,500103,319Unexpended National Marketing    Fund contributions378,993401,347Long-term debt due within one    year333,888522,053Deferred  revenue47,91770,833Deferred  franchise fee    revenue          230,000          140,000     Total    Current Liabilities      **     1,705,713****     1,861,073**Noncurrent LiabilitiesDeferred revenue
14,583
39,736Long-term debt (Net of portion    included in current liabilities)         1,067,008         1,426,235             Total Noncurrent Liabilities           **       1,081,591****       1,465,971**             Total Liabilities**       2,787,304****       3,327,044**Stockholders' Equity (Deficit)Common stock - $.001 par value;    15,000,000 shares authorized; 7,969,403 and 7,524,452 shares issued, and 6,791,626 and    7,524,452 outstanding as of November 30, 2003 and 2002, respectively 
13,507,759
13,507,327Additional paid-in capital827,451803,276Treasury stock, at cost(212,000)-Accumulated deficit          (9,219,964)          (9,672,989)             Total Stockholders' Equity**       4,903,246****       4,637,614**
TOTAL LIABILITIES & STOCKHOLDERS'    EQUITY**$   7,690,550****$   7,964,658**
 
**BAB, Inc.****Consolidated Statements of Operations****Years Ended November 30,    2003 and 2002**
**Revenues**20032002Net sales by    Company-owned stores $            3,001,218$            4,086,110Royalty fees from    franchised stores2,549,4982,748,761Franchise and area    development fees410,000570,380Licensing fees and    other income      1,196,874      1,145,005             Total Revenues **    7,157,590****    8,550,256****Operating    Costs and Expenses**Food, beverage and    paper costs998,4281,291,070Store payroll and    other operating expenses2,484,4753,171,856Selling, general and    administrative expensesPayroll-related    expenses1,381,9581,495,394Occupancy132,600179,738Advertising and    promotion189,725198,921Professional service    fees242,268279,181Travel expenses124,328125,769Depreciation and    amortization448,215716,436Provision for    uncollectible accounts152,265116,912Other        527,343        587,724             Total Selling, General and Administrative Expenses     3,198,702     3,700,075  **           Other Operating (Income) Expense from Contract Termination**Contract termination    fee(525,000)-      Loss on impairment of    goodwill255,633-      Loss on abandonment    of assets         46,160                -                    Total Operating Costs and Expenses**  6,458,398****  8,163,001**Income  from    Operations699,192387,255Interest Income25,71764,453Interest Expense(136,051)(169,471)Other Income                      -              44,098Net Income**588,858****326,335**Income per Share -    Basic and Diluted **$                          .08****$                          .04**Weighted Average    Common Shares OutstandingBasic7,067,4728,598,645Diluted7,399,9218,695,715
The accompanying notes are an integral partof the consolidated financial statements.

**BAB, Inc.Consolidated Statements ofStockholders' EquityYears Ended November 30, 2003 and 2002**
Common    StockTreasury    Stock
        Additional            Paid-In-CapitalAccumulated  Deficit           Total        Shares      Amount  Shares  Amount      Balance as of November 25,    2001 **8,890,492****$13,507,669**
-
**       -****      $    1,187,800****$       (9,999,324)****$      4,696,145**Stock Options Exercised14,0003**-**-662
-665Purchase and Retirement of    Treasury Stock(1,380,040)(345)--(385,186)
-(385,531)Net Income
**-**
**-**
**-**
**-**
**-**326,335326,335Balance as of November 30,    2002**7,524,452****$13,507,327****-****-****     803,276****(9,672,989)****4,637,614**Stock Options Exercised444,895432--24,175-24,607Purchase of Treasury Stock    and Other56-(1,177,777)(212,000)
--(212,000)Dividends Paid
-
-
-
-
-(135,833)(135,833)Net Income
-
-
-
-
-588,858588,858Balance as of November 30,    2003**7,969,403****$13,507,759****(1,177,777)****$      (212,000)****$      827,451****  $      (9,219,964)****       $4,903,246**
The accompanying notes are an integral partof the consolidated financial statements.

 

**BAB, Inc.Consolidated Statements of Cash FlowsYears Ended November 30, 2003 and 2002**

         2003     
         2002     Cash Flows from    Operating ActivitiesNet income$             588,858$             326,335     Adjustments to reconcile net income to net cash provided by operating activities        Depreciation and amortization448,215716,436        Proceeds on contract termination525,000-        Gain on termination of contract(220,907)-        Provision for uncollectible accounts152,265116,912         Loss on sale of property and equipment95173,812        (Increase) decrease in            Trade accounts receivable75,932110,302           National Marketing Fund contributions receivable from franchisees and stores6,807121,182           Inventories23,66218,201           New notes receivable(38,022)(55,177)           Prepaid expenses and other assets44,432(116,827)        Increase (decrease) in           Accounts payable(72,043)(80,564)           Accrued professional and other services3,181(3,436)           Accrued liabilities56,938(3,968)           Unexpended National Marketing Fund contributions(22,354)(8,498)           Deferred  revenue           41,931     (51,230)           Total Adjustments  1,025,988  837,145           Net Cash Provided by Operating Activities  1,614,846  1,163,480Cash Flows from    Investing Activities      Purchases of property and equipment(36,300)(75,199)      Proceeds from sale of property and equipment 141,70089,300Collection of    notes receivable          267,723          115,934           Net Cash Provided by  Investing Activities          373,123          130,035Cash Flows from    Financing Activities   Debt    repayments(547,392)(681,701)      Purchase of treasury stock(212,000)
-      Exercise of stock options24,606665      Dividends paid             (135,833)
                              -           Net Cash Used in Financing Activities       (870,619)       (681,036)Net Increase in    Cash       1,117,350         612,479Cash, Beginning    of Year        1,119,743          507,264Cash, End of Year**$ 2,237,093****$ 1,119,743**
The accompanying notes are an integral partof the consolidated financial statements.
**BAB, Inc.****Notes to Consolidated Financial    Statements****Years Ended November 30,    2003 and 2002**
**Note 1 - Basis of Presentation**

BAB, Inc. (the"Company") was incorporated underthe laws of the State of Delaware on July 12, 2000. 

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

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

 

**Note 2 - Summary of Significant AccountingPolicies**

Cash Equivalents

The Company has no cash equivalents.

Receivables

Receivables are carried at original invoice amount lessestimates made for doubtful receivables. Management determines the allowances for doubtfulaccounts by reviewing and identifying troubled accounts on a periodic basis by usinghistorical experience applied to an aging of accounts. A receivable is considered to bepast due if any portion of the receivable balance is outstanding 90 days past the duedate. Receivables are written off when deemed uncollectible. Recoveries of receivablespreviously written off are recorded when they are received.

Principles of Consolidation

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

Inventories

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

Fiscal Year End 

Effective with the 2002 fiscal year end, the Companyadopted a month end reporting beginning with November 30, 2002.  This was a changefrom the prior reporting period adopted in 1999 of a 52-53 week period ending on the lastSunday of its fiscal year in November.  The fiscal year ended on November30, 2003 contained 52 weeks whereas the fiscal year ended November 30, 2002 contained 53weeks. 

Depreciation and Amortization 

Leasehold improvements and equipment are stated at costless accumulated depreciation. Depreciation is calculated on the straight-line method overthe estimated useful lives of the assets. Estimated useful lives for depreciation andamortization are 10 years, or term of lease if less, for leasehold improvements and 3 to 7years for machinery, equipment and fixtures. 

The Company’s intangible assets consist primarily oftrademarks and goodwill. An intangible asset, formerly termed Franchise Contract Rights,is now correctly classified and included in the total goodwill due to the nature of theasset. Beginning with the first quarter ending February 28, 2003, SFAS 142, “Goodwilland other Intangible Assets” was adopted by the Company. This requires that goodwilland other indefinite lived intangible assets no longer be amortized, but instead besubject to annual impairment tests. The Company determined by utilization of a discountedcash flow analysis that there was a goodwill impairment of $255,633 related to a contracttermination.  (See Note 4.)  Prior to the aforementioned adoption, the Companywas amortizing goodwill on a straight-line basis over 40 years.  Accordingly, theCompany no longer amortizes goodwill but there was amortization of $235,576 for the yearended November 30, 2002.  A reconciliation of previously reported net income and netincome per share to the amounts adjusted for the exclusion of amortization related togoodwill and other indefinite lived assets is as follows:

         2003      
         2002       Reported net income$  588,858$  326,335Add back amortization           -                  235,576Adjusted net income$  588,858$  561,911Reported net income per share - Basic and    Diluted   $            0.08   $             0.04Add back amortization - earnings per share            -                      0.03Adjusted net income per share - Basic and    Diluted$            0.08$             0.07
The net book value of intangible assets with definitelives totaled $47,785 as of November 30, 2003. The gross value of definite livedintangible assets and their respective accumulated amortization are as follows:
Definite Lived Intangible    Assets
Original    Cost
Accumulated         Amortization as of  November 30, 2003 Noncompete Agreement$  210,000$  203,000Master Lease Origination Fees95,38265,016Other         33,661         23,242Total$  339,043$ 291,258
Definite lived intangible assets are being amortized overtheir useful lives.  There was amortization expense for definite lived intangibleassets recorded in the accompanying consolidated statements of operations in the amountsof $103,156 and $101,181 for the years ended November 30, 2003 and2002,respectively.  The estimated amortization expense on these intangible assets isas follows for November 30:
2004$  21,000200514,000200610,0002007    3,000Total$48,000
Stock Options 

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

Stock Warrants 

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

Revenue Recognition 

Systems royalty fees from franchised stores represent afee of 5% of net retail sales of franchised units. Royalty revenues are recognized on theaccrual basis.  The Company currently requires a franchise fee of $25,000 on afranchise's first BAB or MFM production store and $20,000 for each subsequent productionstore.  A franchise fee of $15,000 is required for a satellite location and $10,000for a kiosk. 

Franchisees are allowed to transfer their ownership uponcompany approval.  There is a transfer fee of $2,500 to $5,000 paid to the Companydependent upon the date of the original franchise agreement.  The Company approved 25transfers in 2003, versus 19 in 2002.

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

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

The Company derives a licensing fee from the sale ofpar-baked bagels from a third-party commercial bakery and sale of coffee from our coffeebean roaster for the sale of BAB branded product to the licensed units noted below. 

Stores which have been opened, and unopened stores forwhich a franchise agreement has been executed as of November 30, 2003 and 2002 are asfollows:

      2003  
  2002  Stores Opened        Company-owned46        Franchisee-owned173176        Licensed          5        32      182      214 Unopened stores    - Franchise agreement           9         4**191****218**
 

Advertising Costs 

The Company expenses advertising costs as incurred.Advertising expense was $135,204 and $126,773 in 2003 and 2002, respectively.  Included in advertising expense was $63,666 and $56,125 in 2003 and 2002, respectively,related to the Company's franchise operations. 

Comprehensive Income

The Company adopted Statement of Financial AccountingStandards (SFAS) 130, "Reporting Comprehensive Income," which establishedstandards for the reporting and display of comprehensive income and its components in theconsolidated financial statements. Components of comprehensive income  includeamounts that, under SFAS 130, are included in comprehensive income but are excluded fromnet income. There are currently no differences between the Company's net income andcomprehensive income. 

Income Taxes

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

Reclassification

Certain items in prior year financial statements have beenreclassified to conform to the presentation used in fiscal 2003.

New Accounting Standards 

In June 2001, the Financial Accounting Standards Board("FASB") issued SFAS 141, "Business Combinations," and SFAS 142,"Goodwill and Other Intangible Assets," effective for years beginning afterDecember 15, 2001. Under the new rules, goodwill and certain other intangible assets willno longer be amortized, but will instead be subject to annual impairment tests inaccordance with the standards. Other intangible assets will continue to be amortized overtheir useful lives. The pooling of interest method is no longer permitted for businesscombinations after June 30, 2001.  The Company adopted these new standards with thefirst quarter of the fiscal year ended November 30, 2003.  (See "Depreciationand Amortization" above and Note 4.)

In June 2001, the FASB issued SFAS 143, "Accountingfor Asset Retirement Obligations," effective for years beginning after June 15, 2002.  Under this standard, asset retirement obligations will be recognized at adiscounted fair value basis and capitalized and allocated to expense over the asset'suseful life.  The adoption of SFAS 143 did not have any material impact on theCompany's consolidated financial position or results of operations.

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for yearsbeginning after December 15, 2001. The new rules for long-lived assets to be disposed bysale excludes the allocation of goodwill to be tested for impairment of such assets,establishes a primary asset approach to be used for the estimation of future cash flowsand allows for probability-weighted future cash flow estimation for impairmenttesting.  The Company adopted this new standard with its fiscal year ended November30, 2003.  Adoption of SFAS 144 did not have any impact on the Company's consolidatedfinancial position or results of operations.

In December 2002, the FASB issued SFAS 148,"Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement, which is effective for years ending after December 15, 2003 amends SFAS123, "Accounting for Stock-Based Compensation," and provides alternative methodsof transition for a voluntary change to the fair value-based method of accounting forstock-based employee compensation.  In addition, SFAS 148 amends the disclosurerequirements of  SFAS 123 regardless of the accounting method used to account forstock-based compensation.  The Company has chosen to continue to account forstock-based compensation of employees using the intrinsic value method prescribed inAccounting Principles Board Opinion 25, "Accounting for Stock Issued toEmployees" and related interpretations.  The enhanced disclosure provisions asdefined by SFAS 148 are included in Note 11 of this report.  

In January 2003, the FASB issued Interpretation 46("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation ofARB 51, which expands on and strengthens existing accounting guidance concerning when acompany should include in its financial statements the assets, liabilities and activitiesof another entity.  A variable interest entity ("VIE") does not shareeconomic risk and reward through typical equity ownership arrangements; instead,contractual or other relationships re-distribute economic risks and rewards among equityholders and other parties.   Once an entity is determined to be a VIE, the party withthe controlling financial interest, the primary beneficiary, is required to consolidateit.  FIN 46 also requires disclosures about VIEs that the company is not required toconsolidate but in which it has a significant variable interest.  Adoption did nothave any impact on the Company's consolidated financial position or results of operations.

In April 2003, the FASB issued SFAS 149, "Amendmentof Statement 133 on Derivative Instruments and Hedging Activities."  SFAS 149amends and clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under SFAS 133, "Accountingfor Derivative Instruments and Hedging Activities."  SFAS 149 is effective forcontracts entered into or modified after June 30, 2003, and for hedging relationshipsdesignated after June 30, 2003.  The adoption of this statement did not have anyimpact on the Company's consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS 150, "Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity."  This statement establishes standards for how an issuer classifies andmeasures in its balance sheet certain financial instruments with characteristics of bothliabilities and equity.  In accordance with the standard, a financial instrument thatembodies an obligation for the issuer is required to be classified as a liability (or anasset in some circumstances).  SFAS 150 is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003. The adoption of this statementdid not have any impact on the Company's consolidated financial position or results ofoperations.

Use of Estimates 

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

 

**Note 3 - Restricted Cash**

The Company has Systems and MFM National Marketing Funds(Funds). Franchisees and Company-owned stores are required to contribute 1% of net salesto Funds.  These monies are then used for advertising purposes to benefit all BigApple Bagels and My Favorite Muffin stores. As of November 30, 2003 and 2002, the combinedFunds' cash balance was $288,732 and $304,117, respectively. 

Also included in restricted as of November 30, 2003, is a$75,926 certificate of deposit that serves as collateral for a letter of credit for a newlease for the corporate facility, as required by the lease.

**Note 4 - Contract Termination Fee**

On November 26, 2003, the Company entered into atermination of contract agreement with HMS Host (HMS). HMS will no longer be restricted tocarrying only BAB branded bagels at its airport locations. HMS may, at its discretion,continue to sell BAB branded product, but if so,  will not be subject to a 3% royaltypayment to the Company. HMS will  purchase BAB branded product from a BAB licensee.  The Company will receive a fee from the licensee for the sale of product to HMS.

The Company received $525,000 in cash from HMS for thecontract termination. At the time of the contract termination, abandoned assets related tothe HMS contract were equipment with a net book value of $17,102 and contract rights, witha net book value of $29,058. In addition, as required by SFAS 142, goodwill was tested forimpairment and based upon the reduction of future cash flows, goodwill was determined tobe impaired by $255,633. The gain on the contract termination, net of expenses, was$220,907.

**Note 5 - Income Taxes**

The components of the income tax provision are as follows:
20032002Income tax provision computed at    federal statutory rate$                200,212$                110,954State income taxes, net of    federal tax benefit28,37115,723Other adjustments3,4202,014Change in valuation allowance        (48,444)        3,731Utilization of NOL            (183,559)             (132,422)Provision for Deferred     Income Taxes
                   $                        -
                       $                           -
Deferred income tax assets (liabilities) are as follows: 
20032002Deferred revenue$               113,543$               13,031Deferred rent revenue10,51226,161National Marketing Fund net    contributions112,080118,052  Allowance for    uncollectible accounts28,15736,561Notes receivable44,72323,580Net operating loss carryforwards2,816,2822,999,841Valuation allowance   (2,942,457)   (2,990,901)     Total    Deferred Income Tax Assets            182,840            226,325Depreciation      (179,036)      (224,113)Franchise costs             (3,804)             (2,212)     Total    Deferred Income Tax Liabilities      (182,840)      (226,325)
Total Net    Deferred Tax Assets/Liabilities$                       -   $                    -   
As of November 30, 2003, the Company has cumulative netoperating loss carryforwards expiring between 2017 and 2020 for U.S. federal income taxpurposes of approximately $7,255,000. The net operating loss carryforwards are subject tolimitation in any given year as a result of the Company’s initial public offering andmay be further limited if certain other events occur. A valuation allowance has beenestablished for $2,942,457 and $2,990,901 as of November 30, 2003 and November 30, 2002,respectively, for the deferred tax benefit related to those loss carryforwards and otherdeferred tax assets for which it is considered more likely than not that the benefit willnot be realized.

**Note 6 - Long-Term Obligations**

Long-term debt consisted of the following: 
20032002Note payable to Zanett, Inc.$           394,614$           697,884Note payable to a finance company672,502898,347Note payable to former    stockholder      333,780      352,0571,400,8961,948,288Less current portion   (333,888)   (522,053)Long-Term Debt, Net of Current    Portion$    1,067,008$    1,426,235
The note payable to Zanett, Inc. (Zanett) is secured bysubstantially all of the assets of the Company, excluding those acquired through theJacobs Bros. acquisition. The interest rate on this loan was prime plus 1% through October18, 2002 and prime plus 2% through the maturity date of October 18, 2006. Interestpayments are due quarterly. The balance as of November 30, 2003 on this loan is $394,614.

In 1999, the Company obtained a series of amortizing loansin the amount of $1,520,000 from a finance company. The notes bear interest of 11.3% andthe final payment due and payable January 2006. The balance as of November 30, 2003 onthese loans is $672,502.  Assets acquired from the Jacobs Bros. acquisitioncollateralize these loans.

On September 6, 2002, the Company signed an unsecured notepayable for a term of 15 years at 4.75% interest to a former stockholder in the amount of$385,531, in exchange for the purchase of his 1,380,040 shares of BAB common stock. Thebalance of the note to the former stockholder as of November 30, 2003 was $333,780.

Interest expense of $136,051 and $169,471 was incurred forthe years ended November 30, 2003 and November 30, 2002, respectively.

As of November 30, 2003, annual maturities on long-termobligations due are as follows:
Year Ending November: 2004$            333,8882005309,2302006484,205200722,005200823,051
Later years
_______228,517
$   1,400,896
 

**Note 7 - Lease Commitments**

The Company rents its office and Company-owned storefacilities under leases which require it to pay real estate taxes, insurance and generalrepairs and maintenance. Rent expense for the years ended November 30, 2003 and November30, 2002 was $565,997 and $510,304, net of sublease income of $210,364 and $207,404,respectively.  The existing lease for the office terminates on June 30, 2004 and willnot be renewed.  A lease for a new location was entered into on December 12, 2003with monthly rent ranging from $7,200 to $8,890.  Monthly rent will be recorded on astraight-lined basis over the term of the lease with a deferred rent liability beingrecognized.  As of November 30, 2003, future minimum annual rental commitments underleases (including new Corporate lease), net of sublease income of  $174,250 in 2004and $44,564 in 2005 are as follows:

 
Year Ending    November:2004$               307,0702005244,8972006144,2372007116,449200897,668Thereafter           223,253
$     1,133,574
 

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

During fiscal year 2003, the Company refranchised oneCompany-owned operation, receiving $92,000 in cash, and sold assets from a closedCompany-owned store, receiving $4,100 in cash. The Company also received cash of $23,900for assets sold when a commissary location was closed. During fiscal year 2002, theCompany refranchised two Company-owned operations, receiving $89,300 in cash. The Companyalso placed into operation $125,000 of assets previously held for sale. The Companyrealized net losses of $38,795 and $52,851 relating to these transactions in the yearsended November 30, 2003 and  2002, respectively.

Cash paid for interest for fiscal years 2003 and 2002 was$110,003 and $158,435, respectively.

**Note 9 - Stockholders' Equity**

In fiscal year 2003, the Company purchased 1,177,777shares of common stock from 3 stockholders. The Company is holding these shares astreasury stock. In fiscal year 2002, the Company purchased and retired 1,380,040 shares ofcommon stock from a former stockholder.

On December 18, 2002, the Company declared a four-for-onesplit (4:1) of the outstanding shares of common stock. The dividend was payable January20, 2003 to stockholders of record at the close of business on January 6, 2003. All pershare amounts and the number of shares outstanding in the accompanying consolidatedfinancial statements and notes have been restated for the stock split.

On July 29, 2003, the Board of Directors approved a $0.02per share cash dividend to be paid August 26, 2003 to stockholders of record as of August11, 2003.

**Note 10 - Earnings Per Share**

The computation of basic and diluted income per share isas follows: 

2003
2002Numerator:
Net income attributable to common stockholders
$           588,858$           326,335Denominator:
Denominator for basic earnings per share - weighted      average shares
7,067,4728,598,645
Common stock equivalents
       332,449        97,070
Denominator for dilutive earnings per share - Weighted      average shares
7,399,9218,695,715Basic and diluted income per    share$                0.08$                0.04
 

**Note 11 - Stock Options and Warrants**

On February 1, 1999, the Company purchased certain assetsof a related group of entities doing business as Jacobs Bros., a chain operating retailbagel stores in the Chicago, Illinois area.  The assets acquired included 8 retaillocations and a central commissary facility in exchange for $950,000 in cash and warrantsto acquire 333,332 shares of the Company's common stock.  The warrants provide forthe purchase of 183,332 shares and 150,000 shares of common stock at an exercise price of$1.88 and $2.25 per share, respectively.  The warrants were first exercisable onFebruary 1, 2000 and expire on January 31, 2006.  None of the warrants have yet beenexercised.

In May of 2001, the Company approved a Long-Term Incentiveand Stock Option Plan (Plan).  The Plan reserves 1,400,000 shares of common stock forgrant.  The Plan will terminate on  May 25, 2011.  The Plan permitsgranting of awards to employees and non-employee directors and agents of the Company inthe form of stock appreciation rights, stock awards and stock options.  The Plan iscurrently administered by a Committee of the Board of Directors appointed by the Board.  The Plan gives broad powers to the Board or Committee to administer and interpretthe Plan, including the authority to select the individuals to be granted options andrights, and to prescribe the particular form and conditions of each option or rightgranted.  

Under the stock option plans, the exercise price of eachoption equals the market price of the Company's stock on the date of grant.  Theoptions granted vary in vesting from immediate to a vesting period over two 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 ofexercise.  As of November 30, 2003, 15 persons held outstanding options.  Options issued and outstanding expire on various dates through 12/01/2012.   Range ofexercise prices of options granted as of November 30, 2003 are $0.0475 to $0.0725.

Activity under the Plan during the two years endedNovember 30, 2003 is as follows:
20032002OptionsWeighted Average exercise    priceOptionsWeighted Average exercise    priceOutstanding at beginning of year586,000$ 0.055Granted300,000   0.069600,000$  0.055Forfeited(27,333)    0.056--Exercised(444,895)   0.055(14,000)    0.048Outstanding at end of year413,772$  0.065586,000$ 0.055
 
Options OutstandingOptions ExercisableRange of Exercise pricesOptions OutstandingWeighted average remaining contractual lifeWeighted average exercise priceOptions exercisableWeighted average exercise price$0.048 - $0.053  51,3368.06$0.04851,336$0.048$0.063 - $0.069140,0008.48$0.06546,667$0.063$0.065 - $0.073222,4369.01$0.07031,770$0.072413,7728.45$0.065129,773$0.059
The Company has adopted the disclosure-only provisions ofSFAS 123, "Accounting and Disclosure of Stock-Based Compensation." Accordingly, no employee compensation expense has been recognized for the Plan in thefinancial statements.  Had employee compensation expense for the Company's Plan beenrecorded in the financial statements, consistent with provisions of SFAS 123, net earningswould have been reduced by $8,832 in fiscal 2003 and $25,405 in fiscal year 2002 based onthe Black-Scholes option-pricing model.  The Company's net income and net income pershare for fiscal year 2003 and 2002 would have been as follows:
20032002Net income attributable to common    stockholdersAs reported$          588,858$          326,335Employee compensation expense              (8,832)            (25,405)Pro forma$          580,026$          300,930Basic and dilutive income per    share:As reported0.080.04Pro forma0.080.03
The fair value of each stock option granted is estimatedon the date of grant using the Black-Scholes option-pricing model.  In order toarrive at the aggregated expense allocation computed by the Black-Scholes option-pricingmodel, the following weighted-average assumptions were used for the period ended November30, 2003:

Date    of Grant
Options    Granted
Exercise    Price
Expected    Years
Dividend    Yield
Risk-Free    Interest Rate
Volatility
December 19, 2001
380,000
$0.048-0.053
4.0-4.5
0.00%
5.34%
5.518
May 23, 2002
220,000
$0.050-0.069
3.0-4.5
0.00%
5.38%
5.518December 1, 2002300,000$0.065-0.072
3.0-4.5
0.00%4.07%5.936
 

**Note 12 - Related Party Transactions**

Michael K. Murtaugh, the Company's Vice President andGeneral Counsel, was a stockholder of Bagel One, Inc. which owned and operated a Big AppleBagels franchise store in Illinois.   Mr. Murtaugh bought out his partners'interest in Bagel One, Inc. in 1998 and became the sole stockholder of that company. A note receivable owed by Bagel One, Inc. to Systems,  guaranteed by Mr. Murtaugh,effective March 2000 in the amount of $30,025 for a term of 6 years bearing 9%interest,  had an outstanding balance of $13,288 and $19,958 as of November 30, 2003and 2002, respectively.  There are no payments in arrears relating to thisnote.  

 

**Note 13 - Segment Information**

SFAS 131, "Disclosures About Segments of anEnterprise and Related Information" establishes standards for  reportinginformation about operating segments.  Under this standard, the Company has twooperating segments: Company-owned Store Operations and Franchise Operations.  Indetermining the operating income of each segment, certain general and corporate expensesare not allocated to operating segments. 

In connection with transition to SFAS 142 in the firstquarter 2003, segment information has been reclassified to place licensing fees revenue,goodwill and certain definite lived assets and the amortization expense related to theseintangibles, formerly in Company Store Operations to Franchise Operations so as to reflecta truer picture of each segments income stream and asset utilization.
Year Ended November 30Net RevenuesOperating Income (Loss)
     2003    
     2002    
      2003     
      2002     Company Store Operations $       3,376,694$       4,496,217$       (1,449,280)$       (1,487,449)   Franchise Operations    and Licensing Fees3,780,8964,054,0392,129,2912,095,131   Contract Termination    Revenues525,000   -             Loss on    Impairment of Goodwill                                                (255,633)                 -     Total Ongoing Business$         7,157,590$        8,550,256949,378607,682Corporate Expense(250,186)(220,427)Interest Expense, Net of Interest    Income(110,334)(105,018)Other Income                     -                44,098Net Income$       588,858$       326,335
 
**Operating    Segment Data**
Identifiable    Assets
Capital    Expenditures
Depreciation    and Amortization    Year ended November 30, 2003Company Store Operations$            615,516$       21,257$        379,392Franchise Operations other than    Goodwill          364,266           15,043         68,823Goodwill and Other Indefinite    Lived Intangible Assets          4,306,439                -                -$     5,286,221$    36,300$    448,215Year Ended November 30, 2002Company Store Operations$        1,383,344$       72,452$        459,242Franchise Operations   943,464           2,747         21,618Goodwill and Other Indefinite    Lived Intangible Assets          4,306,439                -                235,576$ 6,633,247$    75,199$    716,436
 
**Reconciliation    to Total Assets As Reported**
       2003     
      2002    Assets - Total reportable segments    - Identifiable assets$       5,286,221$       6,633,247Unallocated amounts  Cash2,237,0931,119,743  Prepaid expenses and other    current assets           167,236           211,668Total Consolidated Assets$   7,690,550$   7,964,658
There were no sales to any individual customer duringeither year in the two-year period ended November 30, 2003 and 2002 that represented 10%or more of net sales.

 

**Note 14 - Subsequent Event**

On January 5, 2004, the Company declared a $0.02 cashdividend per share of common stock. The dividend is payable to stockholders of record onJanuary 16, 2004 and payable on February 2, 2004.

 

 

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

None. 

 

**PART III**

**ITEM 9. DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THEEXCHANGE ACT.**

Section 16(a) of the Securities Exchange Act of 1934requires the Company's executive officers and directors, and persons who beneficially ownmore than ten percent of the Company's Common Stock, to file initial reports of ownershipand reports of changes in ownership with the Securities and Exchange Commission (the"SEC"). Executive officers, directors and greater than ten percent beneficialowners 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, theCompany believes that all Section 16(a) filing requirements applicable to its executiveofficers and directors were met during the fiscal year ended November 30, 2003.

CODE OF ETHICS
BAB, Inc.Code of EthicsFormally Adopted November 30, 2003
BAB, Inc. (the Company) is formally establishing, although it believes it hascomplied with the tenants of such a document during its existence, a Code of Ethics,pursuant to Section 406 of the Sarbanes-Oxley Act, which is designed to deter wrongdoingand to promote:- Honest and ethical conduct, including the ethical handling of    actual or apparent conflicts of interest between personal and professional    relationships;             
- Full, fair, accurate, timely and understandable disclosure in    reports and documents that the Company files with, or submits to, the Securities and    Exchange Commission, and in other public communications made by the Company; 
- Compliance with applicable government laws, rules and    regulations; 
- The prompt internal reporting of violations of the Code to the    appropriate person or persons identified in the Code; and 
- Accountability for adherence to the Code. 

The Code of Ethics promulgated by Sarbanes-Oxley, expects the highest standardof ethical conduct and fair dealing of its Senior Financial Officers (SFO), defined as theChief Executive Officer and Chief Financial Officer.  While, per Sarbanes-Oxley, thispolicy is intended to only cover the actions of the SFO, the Company expects itsController, other officers, directors and employees will also review this Code and abideby its provisions.  The Company's reputation is a valuable asset and as such mustcontinually be guarded by all associated with the Company so as to earn the trust,confidence and respect of our suppliers, customers and shareholders.

The Company's SFO are committed to conducting business in accordance with thehighest ethical standards.  The SFO must comply with all applicable laws, rules andregulations.  Furthermore, SFO must not commit an illegal or unethical act, orinstruct or authorize others to do so.

CONFLICTS OF INTEREST

The SFO must act in the best interests of the Company, and should avoid anysituation that presents an actual, potential or apparent conflict between their personalinterests and the interests of the Company.

The SFO have a conflict when their personal interests, relationships oractivities, or those of a member of their immediate family, interfere or conflict, or evenappear to interfere or conflict, with the company's interests.  A conflict ofinterest prevents one from acting objectively with the Company's best interests in mind,or prevents one from exercising sound, ethical business judgement.

PUBLIC COMMUNICATIONS

The Company is committed to providing Company information to the public in amanner that complies with all applicable legal and regulatory requirements and thatpromotes investor confidence by facilitating fair, orderly and efficient behavior. The Company's reports and documents filed with the Securities and Exchange Commission, aswell as any other public communications, must be complete, fair, accurate andtimely.  The SFO must do everything in their power to comply with these standards.

GIFTS

The SFO may not give or receive kickbacks, rebates, gifts, services or any otherbenefits, other than gifts of nominal value (amounts would be considered in excess ofnominal value if they create the appearance of impropriety, or actually influence theCompany to give preferential, versus arms-length, treatment to the provider) from asupplier, competitor, government official, customer or any other person the Company does,or expects to do business with.

LOANS

SFO may not accept loans, or loan guarantees, from the Company, or from anypersons or entities, either doing business with, or seeking business with theCompany.  The Company will not make any loans to SFO, officers, directors, employeesor any outside parties doing business with, or seeking business with the Company.

CONFIDENTIAL INFORMATION

SFO, officers, directors and employees are to respect the confidentiality ofCompany, employee, supplier, customer, competitor and any other persons or entities'information that is not a matter of public record.   Confidential information mustnot be used for personal gain.

COMPLIANCE WITH THIS CODE

SFO are expected to fully comply with this Code.  This Code will bestrictly enforced and any violations will be dealt with immediately, and depending on theseverity of noncompliance, could lead to disciplinary action including termination. Furthermore, violations involving unlawful behavior will be reported to appropriateoutside authorities.  If anyone is unclear as to the possibility of a violation ofthis Code, he should seek the opinion of the Company's Vice President and General Counsel,the Audit Committee and/or outside legal counsel.

If SFO, officers, directors and employees have knowledge, or are suspicious ofany non-compliance with this Code, or are concerned that circumstances could lead to aviolation of this Code, they should discuss this with their immediate supervisor, theCompany's Vice President and General Counsel, the Audit Committee and/or outside legalcounsel.

The Company will not allow any retaliation against an employee, officer, ordirector who acts in good faith in reporting any actual or suspected violation.  Opencommunication of issues and concerns without fear of retribution or retaliation is vitalto the success of this Code.

ADHERENCE TO THE CODE

The Vice President and General Counsel will have primary authority andresponsibility for the enforcement of this Code, subject to the supervision of the AuditCommittee of the Board of Directors, and shall promptly notify the Audit Committee of anyviolation of this Code.

 

****ITEM 10. EXECUTIVE COMPENSATION.****

The following table sets forth the cash compensation earned by executiveofficers that received annual salary and bonus compensation of more than $100,000 duringfiscal years 2003, 2002 and 2001 (the "Named Executive Officers"). The Companyhas no employment agreements with any of its executive officers.

**Summary Compensation Table**
Annual    Compensation
Long Term Compensation
Awards
Payouts
 

Name and Principal Position
Fiscal Year Ended 11/30
Salary

($)
Bonus

($)
Other

Annual Compensation

($)
Restricted Stock Awards

($)
Securities

Underlying

Options/

SARS (#)
LTIP

Payouts

($)
All Other

Compensation

($)Michael W.    Evans
President and CEO2003
2002

2001211,750
192,500

175,000
20,000

--

--
--

--

--
--

--

--
80,000

120,000

--
--

--

--
--

--

--Michael K.    Murtaugh
Vice President and

General Counsel2003
2002

2001157,300
143,000

130,000
20,000

--

--
--

--

--
--

--

--
80,000

120,000
--

--

--
--

--

--Jeffrey M. Gorden
Chief    Financial Officer2003
2002

 116,443
112,369
6,000

 
--

 
--

 
20,668

43,332
--

 
--

 John J. Bracken
Vice    President Operations2003
2002103,058
100,134
1,000

 
--

 
--
20,668

43,332
--

 
--

 
Stock options were issued at fair market value on theissue date to officers owning less than 10% of the Company stock and 110% of fair marketvalue at issue date to those officers having a 10% or greater ownership of Companystock.  Options issued during fiscal 2003 were issued on December 1, 2002. Options issued to the above officers totaled 201,336 in fiscal 2003 with a fair marketexercise price of $0.065 and vest as follows: 1/3 immediate, 1/3 in 12 months and 1/3 in24 months.  The options issued in 2002 consisted of grants totaling 326,664options.  The options issued December 19, 2001 have a fair market exercise price of$0.0475 and vest immediately.  The options issued May 23, 2002 have a fair marketexercise price of $0.0625 and  vest as follows:  1/3 immediate, 1/3 in 12 monthsand 1/3 in 24months.

Indemnification of Directors and Officers

The Company's Certificate of Incorporation limits personalliability for breach of fiduciary duty by its directors to the fullest extent permitted bythe Delaware General Corporation Law (the "Delaware Law"). Such Certificateeliminates the personal liability of directors to the Company and its shareholders fordamages occasioned by breach of fiduciary duty, except for liability based on breach ofthe director's duty of loyalty to the Company, liability for acts omissions not made ingood faith, liability for acts or omissions involving intentional misconduct, liabilitybased on payments or improper dividends, liability based on violation of state securitieslaws, and liability for acts occurring prior to the date such provision was added. Anyamendment to or repeal of such provisions in the Company's Articles of Incorporation shallnot adversely affect any right or protection of a director of the Company for with respectto any acts oromissions of such director occurring prior tosuch amendment or repeal.

In addition to the Delaware Law, the Company's Bylawsprovide that officers and directors of the Company have the right to indemnification fromthe Company for liability arising out of certain actions to the fullest extent permissibleby law. Insofar as indemnification for liabilities arising under the Securities Act of1933 (the "Act") may be permitted to directors, officers or persons controllingthe Company pursuant to such indemnification provisions, the Company has been advised thatin the opinion of the Securities and Exchange Commission such indemnification is againstpublic policy as expressed in the Act and is therefore unenforceable.

   

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT.**

The following table sets forth as of February 19, 2004 the record andbeneficial ownership of Common Stock held by (i) each person who is known to the Companyto be the beneficial owner of more than 5% of the Common Stock of the Company; (ii) eachcurrent director; (iii) each "named executive officer" (as defined in RegulationS-B, Item 402 under the Securities Act of 1933); and (iv) all executive officers anddirectors 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 unlessso stated. The number and percent of shares of Common Stock of the Company beneficiallyowned by each such person as of****February 19, 2004 includes the number ofshares, which such person has the right to acquire within sixty (60) days after such date.  All shares have been adjusted for a 4:1 stock dividend as of January 20, 2003.
 
**Name    and Address****Shares**PercentageMichael W. Evans
8501    W. Higgins Road

Chicago, IL 606312,785,773    (1) (6) 39.8Michael K.    Murtaugh
8501 W. Higgins Road

Chicago, IL 606312,708,449    (1) (2)(6) 38.7Holdings    Investments, LLC
220 DeWindt Road

Winnetka, IL 600932,096,195(1)(3)29.9David L. Epstein
9700    Higgins Road, Suite 630

Rosemont, IL 60018155,332(4)(7)    2.2Jeffrey M. Gorden
8501    W. Higgins Road

Chicago, IL 6063155,7780.1John J. Bracken
8501    W. Higgins Road

Chicago, IL 6063147,906    (5)0.1Steven G. Feldman
750    Estate Drive, Suite104

Deerfield, IL 6001510,000(8)    *All executive    officers and directors as a
group (6 persons)
3,667,043

(1)(2)(3)(4)(5)(6)(7)(8)52.4
____________________

* Less than 1%.- Includes all shares held of record by Holdings    Investments, LLC. Messrs. Evans and Murtaugh are members and managers of the LLC and    together control all voting power of the stock owned by the LLC.Includes 2,540 shares held by 401 (k) trust.Mr. Thomas F. Pick has beneficial ownership of    25.18% of Holdings Investment, LLC, which is the equivalent of 527,884 shares of BAB, Inc.    common stock.
Includes 62,000 shares held indirectly by entities    under Mr. Epstein’s control, and 3,332 shares representing his proportionate    ownership in an entity that he does not control.
Includes 2,800 shares held by 401 (k) trust.
Includes 17,557 stock options fully exercisable.
Includes 90,000 stock options fully exercisable.
Includes 10,000 stock options fully exercisable

 

**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

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

Executive Officers and Directors

Michael K. Murtaugh, the Company's Vice President and General Counsel, was astockholder of Bagel One, Inc., which owned and operated a Big Apple Bagels franchisestore in Illinois.   Mr. Murtaugh bought out his partners' interest in BagelOne, Inc. in 1998 and became the sole stockholder of that company.  A note receivableowed by Bagel One, Inc. to Systems,  guaranteed by Mr. Murtaugh, effective March 2000in the amount of $30,025 for a term of 6 years bearing a 9% interest,  had anoutstanding balance at November 30, 2003 of $13,288 and there are no payments inarrears.  

 

**ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**

REPORTS ON FORM 8-K 

1/5/04 BAB, Inc. Board of Directors approved a $0.02 per share cash dividend tocommon stock shareholders payable on February 2, 2003 to shareholders of record as ofJanuary 16, 2004.

12/1/03 BAB, Inc. entered into a Settlement and Termination Agreement with HMSHost on November 26, 2003.

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

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

 

**ITEM 14. CONTROLS AND PROCEDURES**

Under the supervision and with the participation of our management, includingour Chief Executive Officer and our Chief Financial Officer, we have evaluated theeffectiveness of the design and operation of our disclosure controls and procedurespursuant to Exchange Act Rule 13a-14(c) of the Securities Exchange Act of 1934 within 90days of the filing date of the annual report.  Based upon their evaluation, our ChiefExecutive Officer and our Chief Financial Officer have concluded that the Company'sdisclosure controls and procedures are effective in timely alerting them to materialinformation relating to the Company (including our consolidated subsidiaries) required tobe included in our periodic SEC filings.

There were no significant changes in the Company's internal controls or in otherfactors that could significantly affect the Company's disclosure controls and proceduressubsequent to the 90 day evaluation period.  As a result, no corrective actions wererequired or undertaken.

 

**INDEX TO EXHIBITS**

 
INDEX NUMBERDESCRIPTION21.1 List of Subsidiaries of the Company 31.1, 31.2Section 302 of the Sarbanes-Oxley Act of 200232.1, 32.2Section 906 of the Sarbanes-Oxley Act of 2002
  

SIGNATURES

In accordance with Section 13 of the Exchange Act, the Registrant has dulycaused this report on Form 10-KSB to be signed on its behalf by the undersigned, thereuntoduly authorized. 

BAB, INC. 
Dated: February 26, 2004By /s/ Michael W. Evans Michael W. Evans, Chief Executive Officer and President (Principal    Executive Officer) 
Pursuant to the requirements of the Securities Exchange Act of 1934, this reporton Form 10-KSB has been signed below by the following persons on behalf of the company andin the capacities and on the dates indicated. 
Dated: February 26, 2004By /s/ Michael W. Evans Michael W. Evans, Chief Executive Officer and President (Principal    Executive Officer) 
 
Dated: February 26, 2004/s/ Michael K. MurtaughMichael K. Murtaugh, Director and Vice President/General Counsel    and Secretary
 
Dated: February 26, 2004/s/ Jeffrey M. GordenJeffrey M. Gorden, Chief Financial Officer and Treasurer    (Principal Financial and Accounting Officer)
 
Dated: February 26, 2004/s/ David L. EpsteinDavid L. Epstein, Director
 
Dated: February 26, 2004/s/ Steven G. FeldmanSteven G. Feldman, Director
 
 
Exhibit 21.1SUBSIDIARIES OF BAB, INC.
BAB Systems, Inc., an Illinois corporation 

BAB Operations, Inc., an Illinois corporation 

Brewster's Franchise Corporation, an Illinois corporation 

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

 
February 26, 2004CHICAGO, ILLINOIS  
/s/ Blackman Kallick Bartelstein, LLP 

 

Exhibit 31.1

**BAB, Inc**

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, RULES 13a-14AND 15d-14**

**AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEYACT OF 2002**

In connection with the Annual Report of BAB, Inc. (the "Company") onForm 10-KSB for the period ended November 30, 2003 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Michael W. Evans,Chief Executive Officer of the Company, certify pursuant to Rules 13a-14 and 15d-14 of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002, that, to the best of my knowledge:- I have reviewed the report;
- Based on my knowledge, the Report does not contain any untrue statement of a material    fact or omit to state a material fact necessary in order to make the statements made, in    light of  the circumstances under which such statements were made, not misleading;
- Based upon my knowledge, the financial statements, and other financial information    included in the Report, fairly present in all material respects the financial condition    and results of operations of the Company, as of, and for, the periods presented in the    Report;
- I and the other certifying officer of the Company:

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

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

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

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

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

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

 

/s/ Michael W. Evans

Michael W. Evans, Chief Executive Officer, February 26, 2004

 

Exhibit 31.2

**BAB, Inc**

**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

**PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, RULES 13a-14AND 15d-14**

**AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEYACT OF 2002**

In connection with the Annual Report of BAB, Inc. (the "Company") onForm 10-KSB for the period ended November 30, 2003 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Jeffrey M. Gorden,Chief Financial Officer of the Company, certify pursuant to Rules 13a-14 and 15d-14 of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002, that, to the best of my knowledge:- I have reviewed the report;
- Based on my knowledge, the Report does not contain any untrue statement of a material    fact or omit to state a material fact necessary in order to make the statements made, in    light of  the circumstances under which such statements were made, not misleading;
- Based upon my knowledge, the financial statements, and other financial information    included in the Report, fairly present in all material respects the financial condition    and results of operations of the Company, as of, and for, the periods presented in the    Report;
- I and the other certifying officer of the Company:

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

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

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

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

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

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

 

/s/ Jeffrey M. Gorden

Jeffrey M. Gorden, Chief Financial Officer, February 26, 2004

Exhibit 32.1

**BAB, Inc**

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

**AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002**

In connection with the BAB, Inc. (the "Company") Quarterly Report onForm 10-KSB for the period ended November 30, 2003, as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Michael W. Evans,Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of myknowledge:- The report fully complies with the requirements of section 13(a) or 15(d) of the    Securities and Exchange Act of 1934, as amended; and
- The information contained in the Report fairly presents, in all material respects, the    financial condition, results of operations, and cash flows of the Company.

Date:  February 26, 2004                                                                     By:          /s/  MICHAEL W. EVANS                                                                                                                                  Michael W. Evans,                                                                                                                                  Chief Executive Officer           

 

Exhibit 32.2

 

**BAB, Inc**

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

**AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002**

In connection with the BAB, Inc. (the "Company") Quarterly Report onForm 10-KSB for the period ended November 30, 2003, as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Jeffrey M. Gorden,Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of myknowledge:- The report fully complies with the requirements of section 13(a) or 15(d) of the    Securities and Exchange Act of 1934, as amended; and
- The information contained in the Report fairly presents, in all material respects, the    financial condition, results of operations, and cash flows of the Company.

 

Date:  February 26, 2004                                                             By:          /s/ JEFFREY M. GORDEN                                                                                                                                  Jeffrey M. Gorden,                                                                                                                                 ChiefFinancial Officer          **** |
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