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<PAGE>
BIG CITY BAGELS, INC.
1,125,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
[LOGO]
Big City Bagels, Inc. (the 'Company' or 'Big City Bagels'), a New York
corporation, hereby offers (the 'Offering') 1,125,000 units (the 'Units'), each
Unit consisting of one share of common stock, par value $.001 per share (the
'Common Stock'), and one Class A Redeemable Common Stock Purchase Warrant (the
'Warrants'). Each Warrant entitles the holder to purchase one share of Common
Stock for $4.50 during the three-year period commencing one year after the date
of this Prospectus. The Company may redeem the Warrants, with the consent of
Monroe Parker Securities, Inc. (the 'Underwriter'), at a price of $.05 per
Warrant at any time after they become exercisable upon not less than 30 days'
prior written notice if the last sale price of the Common Stock has been at
least $7.00 per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given. The Company may redeem
the Warrants without the consent of the Underwriter on the same terms, provided
that the last sale price of the Common Stock has been at least $8.00 per share
on 20 consecutive trading days ending within ten days prior to the date on which
notice of redemption is given. The Common Stock and Warrants comprising the
Units are immediately detachable and separately tradeable. See 'Description of
Securities.'
Prior to this Offering there has been no public market for the Units, Common
Stock or Warrants and there can be no assurance that any such market will
develop. See 'Underwriting' for information relating to the factors considered
in determining the initial public offering price of the Units and the exercise
price of the Warrants. The Units, Common Stock and Warrants have been approved
for quotation on the Nasdaq SmallCap Market under the symbols 'BIGCU,' 'BIGC'
and 'BIGCW,' respectively.
The Registration Statement of which this Prospectus forms a part also
registers up to 500,000 bridge units (the 'Bridge Units'), each consisting of
one share of Common Stock and one Warrant, on behalf of certain persons (the
'Selling Securityholders') that may be sold by them for their accounts from time
to time in open market transactions. The Bridge Units and the Common Stock and
Warrants comprising the Bridge Units are collectively referred to herein as the
'Registered Bridge Securities.' The Registered Bridge Securities offered by the
Selling Securityholders are not part of the underwritten Offering. The Selling
Securityholders may not sell the Registered Bridge Securities prior to 13 months
from the date of this Prospectus without the prior consent of the Underwriter.
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE 'RISK FACTORS' AT PAGE 7 AND 'DILUTION' AT PAGE 14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit....................................................... $4.00 $.40 $3.60
Total(3)....................................................... $4,500,000 $450,000 $4,050,000
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to the Underwriter. The Company also has agreed to sell to the
Underwriter an option (the 'Unit Purchase Option') to purchase 112,500 Units
and to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the 'Securities
Act'). See 'Underwriting.'
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $135,000 ($155,250 if the
Underwriter's over-allotment option is exercised in full), estimated at
$485,000.
(3) The Company has granted the Underwriter an option, exercisable within 30
days from the date of this Prospectus, to purchase up to 168,750 additional
Units on the same terms set forth above, solely for the purposes of covering
over-allotments, if any. If such over-allotment option is exercised in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $5,175,000, $517,500 and $4,657,500,
respectively. See 'Underwriting.'
------------------------
The Units are being offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriter reserves the right to withdraw this Offering pursuant to the terms
of the Underwriting Agreement and to reject any order in whole or in part. It is
expected that delivery of certificates representing the securities comprising
the Units offered hereby will be made against payment therefor at the offices of
the Underwriter in Purchase, New York on or about May 13, 1996.
------------------------
MONROE PARKER SECURITIES, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS MAY 7, 1996.
<PAGE>
<PAGE>
[PHOTO]
Big City Bagels'r' and A Bigger Bagel for Less Dough!'r' is a registered
trademark and service mark, respectively, of the Company.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS, COMMON
STOCK AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including notes thereto) appearing elsewhere in this Prospectus.
Each prospective investor is urged to read this Prospectus in its entirety.
Unless otherwise indicated, the information in this Prospectus gives effect to
(i) the 28,187.5-for-1 stock split in the form of a stock dividend of the Common
Stock declared by the Company on March 5, 1996 and to be effected on the date of
the closing of this Offering (the 'Stock Split'); and (ii) the proposed
combination of Pumpernickel Partners, L.P. and the Company to be effected
immediately prior to the closing of this Offering, and assumes that the Selling
Securityholders will exercise their right to receive the Bridge Units
simultaneously with the closing of this Offering. See 'Prospective Combination.'
THE COMPANY
Big City Bagels is a New York corporation that operates and franchises
upscale bagel bakery cafes under the Company's registered trademark 'Big City
Bagels'r'.' These stores sell a wide variety of oversized, fresh baked bagels,
including unique specialty bagels, and cream cheese spreads, muffins and other
bakery products for take-out and eat-in consumption. Big City Bagels stores also
sell salads, sandwiches, specialty coffees and other beverages. The Company owns
three stores, two of which are located in Costa Mesa, California and one of
which is located in Laguna Niguel, California. The Company also sells Big City
Bagels franchises. Currently, there are eight franchises open and operating in
California, Minnesota, Utah and Arizona. As of the date of this Prospectus, the
Company has sold franchises to open an additional 30 stores, which are in
various stages of development. The Company also sells its products wholesale to
commercial accounts and food service operators.
The Company seeks to ensure a high quality, consistent product by
controlling the preparation and distribution of its bagel dough, muffin mixes
and cream cheese spreads. This control is maintained by using regional
commissaries in which bagel dough and other products are prepared and then
delivered to surrounding Company-owned stores and franchises. The Company's
bagels are then baked in each store daily in accordance with the Company's
quality control guidelines using a traditional technique which requires the
bagels to be boiled and then baked. The Company currently owns and operates one
commissary located in Costa Mesa, California, which services most existing Big
City Bagels stores. The Company also has assisted one of its franchisees, who
entered into an area development agreement with the Company to open 12 stores in
the Minneapolis/St. Paul, Minnesota area, in establishing a commissary owned and
operated by such franchisee in Minneapolis to service these stores. This
commissary is required to adhere to the Company's strict quality control
guidelines. The Company distributes its bagel dough and other products to its
franchises in California, Utah and Arizona under a distribution agreement with
Sysco Food Services of Los Angeles, Inc. ('Sysco'). The Company may enter into
similar agreements with distributors throughout the country as additional stores
are opened or may distribute its bagel dough and other products itself to these
stores.
The Company's objective is to become a leading national bagel store chain.
The Company intends to achieve this objective by (i) expanding its franchise
operations; (ii) increasing the number of Company-owned stores by opening
additional stores and acquiring existing bagel stores or chains; and (iii)
increasing revenues from sales to commercial and wholesale accounts. With
respect to its franchise operations, the Company believes that its consistent
product quality, visually-appealing, upscale store design and well-organized
business operations will enable the Company to secure experienced, multi-unit
franchisees to operate its stores. In order to attract potential franchisees,
the Company plans to use a portion of the proceeds of this Offering to open
Company-owned flagship stores in strategic geographic locations around the
country. Such franchises would be serviced by regional commissaries, which the
Company plans to use as additional stores are opened. The Company also intends
to expand by acquiring existing bagel stores or chains and possibly other retail
enterprises that the Company believes will complement and enhance its
operations. In determining whether to make an acquisition, the Company will
consider, among other things, the size, location and existing operations of the
acquisition candidate, as well as such candidate's potential to maximize growth
and increase revenues. Although the Company regularly evaluates possible
acquisition opportunities, as of the date of this
3
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Prospectus, the Company is not a party to any agreements, commitments,
arrangements or understandings with respect to any acquisition.
In January 1996, the Company completed a bridge financing (the 'Bridge
Financing'), pursuant to which it issued an aggregate of (i) $1,000,000
principal amount of promissory notes (the 'Bridge Notes'), which bear interest
at the rate of 8% per annum and are due and payable on the earlier of the
completion of this Offering or July 19, 1997 and (ii) the right to receive upon
completion of this Offering an aggregate of 500,000 Bridge Units and 500,000
Class B Warrants. Each Bridge Unit consists of one share of Common Stock and one
Warrant. Two Class B Warrants together, will entitle the holder to purchase one
share of Common Stock for $8.00 per share during the three-year period
commencing one year after the completion of this Offering. The Company is
registering for sale on the Registration Statement of which this Prospectus
forms a part, the Bridge Units and the Common Stock and Warrants comprising the
Bridge Units. See 'Description of Securities -- Bridge Units.'
The Company was incorporated in the State of New York on December 14, 1992.
Its principal executive offices are located at 99 Woodbury Road, Hicksville, New
York 11801 and its telephone number is (516) 932-5050.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................... 1,125,000 Units, each Unit consisting of one share of Common Stock
and one Warrant. Each Warrant entitles the holder to purchase one
share of Common Stock for $4.50 during the three-year period
commencing one year after the date of this Prospectus. The Company
may redeem the Warrants, with the consent of the Underwriter, at a
price of $.05 per Warrant at any time after they become
exercisable upon not less than 30 days' prior written notice if
the last sale price of the Common Stock has been at least $7.00
per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given. The
Company may redeem the Warrants without the consent of the
Underwriter on the same terms, provided that the last sale price
of the Common Stock has been at least $8.00 per share on 20
consecutive trading days ending within ten days prior to the date
on which notice of redemption is given. The Common Stock and
Warrants comprising the Units are immediately detachable and
separately tradeable. See 'Description of Securities.'
Nasdaq SmallCap Market Symbols(1)............ Units: BIGCU
Common Stock: BIGC
Warrants: BIGCW
Common Stock Outstanding Prior to the
Offering................................... 3,000,000 shares(2)
Common Stock to be Outstanding After the
Offering................................... 4,625,000 shares(3)
</TABLE>
- ------------
(1) The Company may terminate the quotation of the Units on the Nasdaq SmallCap
Market ('Nasdaq'), with the Underwriter's consent, at any time commencing on
the 30th day after the date of this Prospectus without notice to the
Company's securityholders upon not less than 15 days' prior notice to
Nasdaq.
(2) Does not include 500,000 shares of Common Stock included in the Bridge
Units.
(3) Includes 500,000 shares of Common Stock included in the Bridge Units
issuable at the closing of this Offering upon the exercise by the Selling
Securityholders of their right to receive the Bridge Units.
4
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USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering to open
Company-owned flagship stores; repay the Bridge Notes; expand or relocate the
Company's Costa Mesa, California commissary and possibly establish additional
commissaries; partially repay indebtedness owed to certain of its shareholders
(the 'Shareholder Loans'); increase marketing, promotional, advertising and
public relations activities aimed at both customers and potential franchisees;
and for working capital and general corporate purposes. See 'Use of Proceeds.'
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk and immediate substantial dilution and should not be purchased by investors
who cannot afford the loss of their entire investment. See 'Risk Factors' at
page 7 and 'Dilution' at page 14.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Statement of Operations Data:
Total revenues................................................................... $ 544,135 $1,550,255
Total costs and expenses......................................................... 1,302,728 2,377,104
Net (loss) -- historical......................................................... (758,593) (826,849)
Pro forma adjustment:
Increase in officers' salaries(1)........................................... 212,333
Net (loss) -- pro forma.......................................................... (1,039,182)
Pro forma net (loss) per common share(2)......................................... -- (.35)
Pro forma weighted average common shares outstanding............................. -- 3,000,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
----------- ------------ --------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets.................................................. $ 1,137,631 $1,390,933 $4,725,330
Working capital (deficit)..................................... (795,936) (795,936) 2,763,461
Total liabilities............................................. 1,210,785 1,210,785 1,010,785
Accumulated deficit........................................... (1,303,610) -- (714,145)
Total stockholders' equity (deficiency)....................... (73,154) 180,148 3,714,545
</TABLE>
- ------------
(1) Gives effect to the salaries specified under the employment agreements as if
the agreements were in effect from the later of January 1, 1995 or the date
of employment.
(2) Assuming $375,000 of shareholder and partner loans was repaid from the
proceeds of this Offering as of the later of January 1, 1995 or the date of
the loans, supplemental loss per share would be ($.32).
(3) Gives effect to the exchange of the partnership interests in Pumpernickel
Partners, L.P. for 181,250 shares of the Company's Common Stock and the
termination of the Company's S corporation status. See 'Prospective
Combination.'
(4) Gives effect to the sale of the Units offered hereby and the application of
the estimated net proceeds therefrom. See 'Use of Proceeds.' Also gives
effect to the recognition of a non-cash
(footnotes continued on next page)
5
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<PAGE>
(footnotes continued from previous page)
charge of an aggregate of $693,542 of debt issuance costs and original issue
discount to be incurred in the quarter ending March 31, 1996 and upon
closing of this Offering.
Unless otherwise indicated, the information in this Prospectus does not
give effect to the exercise of the Underwriter's over-allotment option, the Unit
Purchase Option or the Warrants included in the Units offered hereby, and does
not include: (i) 350,000 shares of Common Stock reserved for issuance upon the
exercise of options granted or to be granted under the Company's 1996
Performance Equity Plan (the '1996 Plan'); (ii) 500,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants included in the Bridge
Units; and (iii) 250,000 shares of Common Stock reserved for issuance upon
exercise of the Class B Warrants. See 'Management -- 1996 Performance Equity
Plan' and 'Description of Securities -- Bridge Units.'
6
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PROSPECTIVE COMBINATION
Pumpernickel Partners, L.P. ('Pumpernickel Partners') is a Delaware limited
partnership which currently owns and operates two Big City Bagels franchises in
Costa Mesa and Laguna Niguel, California. Bagel Partners, Inc. ('Bagel
Partners') is the sole general partner of Pumpernickel Partners, and owns a 5%
interest in Pumpernickel Partners. Messrs. Mark Weinreb, Chairman of the Board
and Chief Executive Officer of the Company, Stanley Weinreb, Vice President and
a director of the Company, and Stanley Raphael, Secretary and a director of the
Company, each own 22.5% of Bagel Partners, as well as a 6.9%, 6.9% and 3.45%
limited partnership interest in Pumpernickel Partners, respectively. Jerry
Rosner, President and a director of the Company, owns 10% of Bagel Partners.
These four individuals are also the sole shareholders of the Company as of the
date of this Prospectus. Immediately prior to the closing of this Offering, all
of the limited partners of Pumpernickel Partners will contribute to the Company
their partnership interests in Pumpernickel Partners, and all of the
shareholders of Bagel Partners will contribute to the Company all of the capital
stock of Bagel Partners in exchange for an aggregate of 181,250 shares of Common
Stock of the Company (the 'Combination'). The number of shares of Common Stock
to be issued in the Combination was derived by dividing the $725,000 aggregate
capital contributions of the partners of Pumpernickel Partners by the public
offering price of $4.00 per share (attributing no value to the Warrants included
in the Units). For financial statement purposes, those shares issued to the
unaffiliated limited partners are valued at $3.20 per share, which represents a
discount of 20% from the public offering price per share since these shares have
not been registered for resale. As a result of the Combination, Pumpernickel
Partners and Bagel Partners will become wholly-owned subsidiaries of the Company
immediately prior to the closing of the Offering. As soon as practicable
following the closing of this Offering, the Company will commence the
liquidation of Pumpernickel Partners and Bagel Partners, whereupon all of the
assets of Pumpernickel Partners will be owned directly by the Company. As used
in this Prospectus, except when the context otherwise requires, references to
the 'Company' or 'Big City Bagels' mean Big City Bagels, Inc. and Pumpernickel
Partners.
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Accordingly, in analyzing an investment in these securities, prospective
investors should carefully consider, along with other matters referred to
herein, the following risk factors. No investor should participate in this
Offering unless such investor can afford a complete loss of his or her
investment.
Limited Operating History and Revenues; Significant and Continuing Losses;
Accumulated Deficit. The Company was organized in December 1992 and has a
limited operating history upon which an evaluation of the Company's future
performance and prospects can be made. The Company's prospects must be
considered in light of the risks, expenses, delays, problems and difficulties
frequently encountered in the establishment of a new business in an emerging and
evolving industry characterized by intense competition. Since inception, the
Company has generated limited revenues and has incurred significant losses,
including losses of $758,593 and $826,849, respectively, for the years ended
December 31, 1994 and 1995. At December 31, 1995, without giving effect to the
Combination, Big City Bagels, Inc. had an accumulated deficit of $1,303,610.
Pumpernickel Partners has incurred losses of $469,544 since inception. Losses
are expected to continue at least through 1996. Inasmuch as the Company will
continue to have a high level of operating expenses following this Offering and
will be required to make significant up-front expenditures in connection with
its proposed expansion (including salaries of executive, marketing and other
personnel), the Company anticipates that losses will continue until such time,
if ever, as the Company is able to generate sufficient revenues to finance its
operations and the costs of continuing expansion. There can be no assurance that
the Company will be able to generate significant revenues or achieve profitable
operations. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and Financial Statements.
Working Capital Deficit; Dependence on Offering Proceeds to Implement
Proposed Expansion; Possible Need for Additional Financing. At December 31,
1995, the Company had a working capital deficit of $795,936. The Company is
dependent on the proceeds of this Offering to implement its
7
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proposed expansion and to finance its working capital requirements. The Company
anticipates, based on currently proposed plans and assumptions relating to its
operations (including the costs associated with its proposed expansion), that
the proceeds of this Offering, together with projected cash flow from
operations, will be sufficient to satisfy its anticipated cash requirements for
at least 12 months following the completion of this Offering. In the event that
the Company's plans change, its assumptions change or prove to be inaccurate or
the proceeds of this Offering or cash flow prove to be insufficient to fund the
Company's operations (due to unanticipated expenses, delays, problems,
difficulties or otherwise), the Company may need to seek additional financing.
There can be no assurance that additional financing will be available to the
Company on commercially reasonable terms, or at all. See 'Use of Proceeds' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
Dependence on Franchisees. The Company realizes a substantial portion of
its revenues from sales of bagel dough, cream cheese spreads and muffin mixes to
franchisees, initial franchise and area development fees and continuing royalty
payments from its franchisees. The Company is therefore substantially dependent
upon its ability to attract, retain and contract with suitable franchisees and
the ability of franchisees to successfully open and operate their franchises.
Should the Company experience difficulty in attracting suitable franchisees, or
the franchisees encounter business or operational difficulties, the Company's
revenues will be adversely affected. Such reduction in revenues also may
negatively impact the Company's ability to sell new franchises. Consequently,
the Company's financial prospects are directly related to the success of its
franchisees in promoting the Big City Bagels concept and the success of each
store, over which the Company has no direct control. There can be no assurance
that the Company will be able to successfully develop new franchises or that the
Company's franchisees will be able to successfully develop and operate stores.
See 'Business -- Franchising.'
Uncertainty of Expansion. Currently, eleven Big City Bagels stores are open
and operating. In addition, the Company has sold franchises for an additional 30
stores. The opening and success of Big City Bagels stores depends on various
factors, including customer acceptance of the Big City Bagels store concept in
new markets, the availability of suitable sites, the negotiation of acceptable
lease terms for new locations, the receipt of necessary permits and regulatory
compliance, the ability to meet construction schedules, the financial and other
capabilities of the Company and its franchisees, the ability of the Company to
successfully manage this anticipated expansion and to hire and train personnel,
and general economic and business conditions. Not all of the foregoing factors
are within the control of the Company or its franchisees. See
'Business -- Strategy.'
The Company's plans for expansion include acquiring existing bagel stores
or chains and possibly other retail enterprises that the Company believes will
complement and enhance its operations. No assurance can be given that the
Company will be able to evaluate successfully the advisability of any particular
acquisition or that it will successfully integrate, convert or operate any
acquired business. The Company's expansion also will require the implementation
of enhanced operational and financial systems as well as additional management,
operational and financial resources. Failure to implement these systems and add
these resources could have a material adverse effect on the Company's results of
operations and financial condition. There can be no assurance that the Company
will be able to manage its expanding operations effectively or that it will be
able to maintain or accelerate its growth. See 'Business -- Strategy.'
Food Service Industry. Food service businesses are often affected by
changes in consumer tastes, national, regional and local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing businesses. Multi-unit food service chains such as the Company also
can be substantially adversely affected by publicity resulting from poor food
quality, illness, injury or other health concerns or operating issues stemming
from one store or a limited number of stores. In addition, factors such as
inflation, increased food, labor and employee benefit costs, regional weather
conditions and the unavailability of experienced management and hourly employees
also may adversely affect the food service industry in general, and the
Company's results of operations and financial condition in particular. See
'Business.'
8
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Quarterly Fluctuations. The Company's quarterly results of operations may
be affected by the timing of the opening of new stores and recognition of
franchise and area development fees. In addition, the Company's quarterly
results also could be affected by expenses associated with the Company's
expansion.
Competition. The food service industry, in general, and the take-out
sector, in particular, are intensely competitive. The Company competes, and can
be expected to compete, against well-established food service companies with
greater product and name recognition and larger financial, marketing and
distribution capabilities than those of the Company, as well as innumerable
local food establishments that offer similar products. In addition, the Company
believes that the start-up costs associated with opening a retail food
establishment offering products similar to those offered by the Company, on a
stand-alone basis, are competitive with the start-up costs associated with
opening a Big City Bagels store and accordingly, are not an impediment to entry
of competitors into the retail bagel business. There can be no assurance that
the Company can compete successfully in this complex market. See
'Business -- Competition.'
Government Regulation. The Company's franchise operations are subject to
regulation by the Federal Trade Commission (the 'FTC') in compliance with the
FTC's rule entitled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, which requires, among other
things, that the Company prepare and update periodically a comprehensive
disclosure document in connection with the sale and operation of its franchises.
The Company and its franchisees also must comply with state franchising laws and
a wide range of other state and local rules and regulations applicable to their
business. Continued compliance with this broad federal, state and local
regulatory network is essential and costly and the failure to comply with such
regulations may have an adverse effect on the Company and its franchisees.
Violations of franchising laws and/or state laws and regulations regulating
substantive aspects of doing business in a particular state could subject the
Company and its affiliates to rescission offers, monetary damages, penalties,
imprisonment and/or injunctive proceedings. In addition, under court decisions
in certain states, absolute vicarious liability may be imposed upon franchisors
based upon claims made against franchisees. Even if the Company is able to
obtain coverage for such claims, there can be no assurance that such insurance
will be sufficient to cover potential claims against the Company. See
'Business -- Government Regulation.'
Dependence on Independent Distributors. Pursuant to a distribution
agreement, Sysco distributes the Company's bagel dough, muffin mixes and cream
cheese spreads to the Company's franchises in California, Utah and Arizona and
offers them a wide variety of food and paper products. In connection with its
expansion plans, the Company may rely upon independent distributors to
distribute its products. As a result, the Company is subject to the risk of
delays in shipment, work stoppages and termination of its present and future
distribution agreements. The occurrence of any such events or the loss of a
distributor could adversely affect the Company's business until alternative
arrangements were secured. Although the Company believes that similar
distribution arrangements could be secured with other distributors, there can be
no assurance of this. In the event the Company determines that no distributor is
available to service some or all of its stores in certain locations, the Company
may distribute its bagel dough and other products itself to these stores. As a
result, the Company would be required to purchase and/or lease trucks and
storage facilities which would necessitate the expenditure of significant
capital. Such expenditures may have an adverse effect on the Company's financial
condition and results of operations. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations.'
Raw Material Cost Fluctuations; Dependence on Suppliers. As the Company
expands its Company-owned store operations, the Company's operating results and
financial condition may be adversely affected by fluctuations in the cost of
flour, its primary raw material. Such costs are determined by constantly
changing market forces over which the Company has no control. The Company has no
long-term contracts with any of its suppliers. The loss of any of its suppliers
could adversely affect the Company's business until alternative arrangements
were secured. Although the Company believes that arrangements similar to those
which the Company currently has with its suppliers could be secured with other
suppliers, there can be no assurance of this. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
9
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Dependence on Key Personnel. The Company's operations are dependent on the
efforts of Mark Weinreb, its Chairman of the Board and Chief Executive Officer,
and Jerry Rosner, its President. Although the Company has entered into
three-year employment agreements with each of Messrs. Weinreb and Rosner, the
loss of the services of these officers could have a material adverse effect on
the Company, and there is no assurance that a suitable replacement could be
found in the event of the death, disability or resignation of either of Messrs.
Weinreb or Rosner. The Company has obtained key-person life insurance on the
lives of Messrs. Weinreb and Rosner in the amount of $2 million each.
Continuing Control by Management. Upon completion of this Offering, Messrs.
Mark Weinreb, Jerry Rosner, Stanley Raphael and Stanley Weinreb, each of whom is
also a director of the Company, will beneficially own, in the aggregate,
approximately 61.7% of the Company's outstanding Common Stock. In addition,
these persons are parties to a shareholder agreement, pursuant to which each of
them has agreed to vote his shares for the election of each of the others as a
director of the Company as long as each such other person owns at least 100,000
shares of Common Stock. Accordingly, such shareholders, acting together, will be
in a position to effectively control the Company, including the election of all
of the directors of the Company. See 'Management' and 'Principal Shareholders.'
Broad Discretion in Application of Proceeds by Management; Allocation of
Proceeds to Repay Indebtedness, including Loans from Principal Shareholders;
Potential Use of Portion of Net Proceeds for Unspecified Acquisitions.
Approximately $415,000 (11.6%) of the estimated net proceeds of this Offering
has been allocated to working capital and general corporate purposes.
Accordingly, the Company's management will have broad discretion as to the
application of such proceeds. Approximately $1,200,000 (33.7%) of the estimated
net proceeds of this Offering has been allocated to the repayment of the Bridge
Notes and a portion of the Shareholder Loans and will not be available for other
corporate purposes. In addition, if the Underwriter's over-allotment option is
exercised, the first $175,000 in net proceeds received by the Company will be
used to repay a portion of the Shareholder Loans. A portion of the net proceeds
allocated to working capital may be used by the Company for acquisitions.
Although the Company has no agreement, arrangement or understanding with respect
to any acquisition, should an acquisition opportunity be identified by the
Company, the Board of Directors will have the ability to approve such
acquisition without seeking the approval of the shareholders of the Company. See
'Use of Proceeds.'
Immediate and Substantial Dilution. This Offering involves an immediate and
substantial dilution of $3.26 (81.5%) per share between the pro forma net
tangible book value per share after the Offering and the public offering price
of $4.00 per share (assuming no value is attributed to the Warrants). See
'Dilution.'
No Dividends. The Company has never paid dividends on its Common Stock. The
Company intends to retain earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. See 'Dividend
Policy.'
Shares Eligible for Future Sale. Upon completion of this Offering, the
Company will have outstanding 4,625,000 shares of Common Stock. The 3,000,000
shares of Common Stock outstanding prior to this Offering, as well as the
500,000 shares of Common Stock included in the Bridge Units, are 'restricted
securities' as that term is defined in Rule 144 under the Securities Act and may
not be sold unless such sale is registered under the Securities Act or is made
pursuant to an exemption from registration under the Securities Act, including
the exemption provided by Rule 144. Of such shares, 2,818,750 will be available
for sale pursuant to Rule 144 immediately, subject to the 24-month lock-up
described below. An additional 681,250 shares will be available for sale
pursuant to Rule 144 commencing two years from the date of this Prospectus. Of
these latter shares, 500,000 have been included in the Registration Statement of
which this Prospectus forms a part. The holders of these shares have agreed not
to sell these shares without the prior consent of the Underwriter until 13
months after the date of this Prospectus. All officers, directors and 5%
shareholders of the Company as of the date of this Prospectus (who hold in the
aggregate 2,855,456 shares) have agreed that for a period of 24 months from the
date of this Prospectus (18 months in the event that after the date of this
Prospectus the closing bid price of the Company's Common Stock exceeds $12.00
for 20 consecutive trading days), they will not sell any of their shares without
the prior consent of the Underwriter. The Company is
10
<PAGE>
<PAGE>
unable to predict the effect that sales made under Rule 144 or otherwise may
have on the market price of the Common Stock. However, the possibility that
substantial amounts of Common Stock may be sold in the public market may have an
adverse effect on the market prices for the Company's Common Stock. See
'Underwriting' and 'Shares Eligible for Future Sale.'
No Assurance of Public Market; Determination of Public Offering Price;
Possible Volatility of Market Prices. Prior to this Offering, there has been no
market for the Units, Common Stock or Warrants. The initial public offering
price of the Units and the exercise price of the Warrants were determined solely
through negotiations between the Company and the Underwriter and do not
necessarily reflect the Company's book value or other established criteria of
value. There can be no assurance that an active market will develop for such
securities or be sustained or that the market price of a Unit will not decline
below the public offering price or be subject to wide fluctuations in response
to quarterly variations in operating results and other events or factors. Recent
history relating to the market price of newly public companies indicates that
the market price of the Units, Common Stock and Warrants may be highly volatile
following this Offering. In the absence of an established trading market,
holders of the Company's securities may be unable to sell their holdings in an
efficient manner. See 'Description of Securities,' 'Shares Eligible for Future
Sale' and 'Underwriting.'
Inexperience of the Underwriter. The Underwriter has been actively engaged
in the securities brokerage and investment banking business since 1994. However,
the Underwriter has engaged in only limited underwriting activities and this
Offering is only the second public offering in which the Underwriter has acted
as the sole underwriter. There can be no assurance that the Underwriter's
limited experience as an underwriter of public offerings will not adversely
affect the proposed public offering of the Units, the subsequent development of
a trading market, if any, or the market for and liquidity of the Company's
securities. Accordingly, purchasers of the Units offered hereby may suffer a
lack of liquidity in their investment or a material diminution of the value of
their investment.
Current Prospectus and State Securities Law Qualification Required to
Exercise Warrants. The Company will be able to issue shares of its Common Stock
upon exercise of the Warrants only if there is then a current prospectus
relating to such Common Stock and only if such Common Stock is qualified for
sale or exempt from qualification under applicable state securities laws of the
jurisdictions in which the various holders of the Warrants reside. The Company
has undertaken and intends to file and keep current a prospectus which will
permit the purchase and sale of the Common Stock underlying the Warrants at such
times as the market price exceeds the exercise price, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the securities are to be offered, no assurance can be
given that such qualification will occur. The Warrants may be deprived of any
value and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if the Warrants cannot be exercised by holders because such Common
Stock is not qualified or exempt from qualification in the jurisdictions in
which the holders of the Warrants then reside. See 'Description of Securities --
Warrants.'
Potential Adverse Effect of Redemption of Warrants. The Warrants may be
redeemed by the Company, with the consent of the Underwriter, at a price of $.05
per Warrant at any time after they become exercisable upon not less than 30
days' prior written notice if the last sale price of the Common Stock has been
at least $7.00 per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given. The Company may redeem
the Warrants without the consent of the Underwriter on the same terms, provided
that the last sale price of the Common Stock has been at least $8.00 per share
on 20 consecutive trading days ending within ten days prior to the date on which
notice of redemption is given. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
then current market price when they might otherwise wish to hold the Warrants or
to accept the redemption price, which is likely to be substantially less than
the market value of the Warrants at the time of redemption. See 'Description of
Securities -- Warrants.'
11
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<PAGE>
Possible Delisting of Securities from Nasdaq System; Risks Associated with
Low-Priced Stocks. The Company's Units, Common Stock and Warrants will be listed
on the Nasdaq SmallCap Market ('Nasdaq') on the date of this Prospectus.
However, in order to continue to be listed on Nasdaq, a company must maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market makers and a minimum bid price of $1.00 per share; provided,
however, that if a company falls below such minimum bid price, it will remain
eligible for continued inclusion on Nasdaq if the market value of the public
float is at least $1,000,000 and the company has $2,000,000 in capital and
surplus. The failure to meet these maintenance criteria in the future may result
in the delisting of the Company's securities from Nasdaq and trading, if any, in
the Company's securities would thereafter be conducted in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's securities. In addition, if the Common Stock was to
become delisted from trading on Nasdaq and the trading price of the Common Stock
was to fall below $5.00 per share, trading in the Common Stock would also be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended ('Exchange Act'), which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage them from effecting transactions in the Units, Common Stock and
Warrants, which could severely limit the liquidity of the Units, Common Stock
and Warrants and the ability of purchasers in this Offering to sell the Units,
Common Stock and Warrants in the secondary market.
Potential Adverse Effect of Issuance of Preferred Stock Without Shareholder
Approval; Restriction on Issuance of Capital Stock. The Company's Restated
Certificate of Incorporation authorizes the issuance of 1,000,000 shares of
Preferred Stock with such rights, preferences and designations as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock and, in certain circumstances, depress the market price of the securities
offered hereby. In the event of issuance, the Preferred Stock could be utilized
under certain circumstances as a method of discouraging, delaying or preventing
a change in control of the Company. Although the Company has no present
intention of issuing shares of Preferred Stock, there can be no assurance that
the Company will not issue shares of Preferred Stock in the future. The Company
has agreed not to issue any of its shares of capital stock for 24 months from
the date of this Prospectus (18 months in the event that after the date of this
Prospectus the closing bid price of the Company's Common Stock exceeds $12.00
for 20 consecutive trading days) without the prior written consent of the
Underwriter, which consent may not be unreasonably withheld. See 'Description of
the Securities -- Preferred Stock' and 'Underwriting.'
Limited Liability of Directors. As permitted by the Business Corporation
Law of New York (the 'BCL'), the Company's Restated Certificate of Incorporation
eliminates personal liability of a director to the Company and its shareholders
for monetary damages for breach of fiduciary duty as a director except in
certain circumstances. Accordingly, except in such circumstances, the Company's
directors will not be liable to the Company or its shareholders for breach of
such duty. See 'Management -- Limitation of Liability of Directors.'
12
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby
are estimated to be $3,565,000 ($4,152,250 if the Underwriter's over-allotment
option is exercised in full). The Company intends to apply the net proceeds
approximately as follows:
(i) $1,200,000 or 33.7% to open Company-owned flagship stores;
(ii) $1,000,000 or 28.1% for the repayment of the Bridge Notes, which
bear interest at the rate of 8% per annum and are due and
payable on the earlier of the completion of this Offering or
July 19, 1997. The proceeds from the Bridge Notes were used by
the Company to purchase equipment for the Company's commissary
in California, for general working capital purposes and to pay
certain expenses of this Offering. As of the date of this
Prospectus, approximately $250,000 of the proceeds from the
Bridge Financing is still available to the Company and will be
used for working capital purposes;
(iii) $600,000 or 16.8% to expand or relocate the Company's Costa
Mesa, California commissary and possibly establish additional
commissaries;
(iv) $200,000 or 5.6% to repay a portion of the Shareholder Loans,
which bear interest at the rate of 10% per annum and of which
$200,000 is due and payable upon completion of this Offering, an
additional $175,000 is due and payable from the first proceeds
derived from the exercise of the Underwriter's over-allotment
option and the balance is payable in equal monthly installments
of $12,000 commencing January 1997. The Shareholder Loans were
used by the Company to purchase equipment, for leasehold
improvements and for general working capital purposes;
(v) $150,000 or 4.2% for marketing, promotional, advertising and
public relations activities aimed at both customers and potential
franchisees; and
(vi) $415,000 or 11.6% for working capital and general corporate
purposes, which may include, among other things, salaries of
additional financial and management personnel, including a chief
financial officer, and the costs of possible acquisitions of
businesses complementary to the Company's operations. Currently,
the Company has no plans, intentions, commitments,
understandings or arrangements with respect to any such
acquisition. If the Underwriter exercises the over-allotment
option in full, the Company will realize additional net proceeds
of $587,250, $175,000 of which will be used to repay a portion
of the Shareholder Loans and the remainder will be added to
working capital. Management will have significant discretion
regarding how and when such proceeds will be applied.
The Company anticipates, based on current plans and assumptions relating to
its operations, that the proceeds of this Offering, together with existing
resources and cash generated from operations, if any, will be sufficient to
satisfy the Company's contemplated cash requirements for at least the next 12
months. There can be no assurance, however, that the Company's cash requirements
during this period will not exceed its available resources.
The allocation of the net proceeds of this Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors change, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes.
Proceeds not immediately required for the purposes described above will be
invested in short-term United States government securities, short-term bank
certificates of deposit, money market funds or other investment grade,
short-term, interest-bearing instruments.
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DILUTION
For purposes of the following discussion of dilution and tables, no value
is attributed to the Warrants included in the Units. After giving effect to the
Combination, at December 31, 1995, the Company had a pro forma negative net
tangible book value of $(129,384) or $(0.04) per share of Common Stock. Net
tangible book value per share as of December 31, 1995 represents the amount of
the Company's total stockholders' equity, less intangible assets, as of such
date, divided by 3,000,000, the number of shares of Common Stock outstanding as
of such date after giving effect to the Combination. Net tangible book value
dilution per share represents the difference between the amount per share of
Common Stock paid by purchasers of Units in this Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
this Offering.
After giving effect to the sale of 1,125,000 Units offered hereby, the
application of a portion of the net proceeds to the repayment of the Bridge
Notes in the aggregate principal amount of $1,000,000 and the exercise by the
Selling Securityholders of their right to receive the Bridge Units, the pro
forma net tangible book value of the Common Stock as of December 31, 1995, would
have been $3,430,013 or $0.74 per share of Common Stock. This represents an
immediate increase in net tangible book value of $0.78 per share to existing
shareholders and an immediate dilution in net tangible book value of $3.26 per
share, or 81.5%, to purchasers of Units in this Offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................................. $4.00
Pro forma net tangible book value per share at
December 31, 1995.................................................... $(0.04)
Increase per share attributable to new investors....................... 0.78
------
Pro forma net tangible book value per share after the Offering.............. 0.74
-----
Net tangible book value dilution per share to new investors................. $3.26
-----
-----
</TABLE>
The following table summarizes as of December 31, 1995, the difference
between the existing shareholders and purchasers of Units in this Offering with
respect to the number and percentage of shares of Common Stock to be held after
completion of this Offering, the amount and percentage of consideration paid and
the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders and Selling
Securityholders........................ 3,500,000 75.7% $1,700,000 27.4% $0.49
New Investors............................ 1,125,000 24.3 4,500,000 72.6% $4.00
--------- ------- ---------- -------
Total............................... 4,625,000 100.0% $6,200,000 100.0%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>
14
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CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
December 31, 1995, (ii) the pro forma capitalization of the Company as of such
date after giving effect to the Combination and the termination of the Company's
S corporation status and (iii) the pro forma capitalization of the Company as of
such date after giving effect to the items referred to in the preceding clause
and as adjusted to give effect to the sale of the 1,125,000 Units offered
hereby, the application of the estimated net proceeds therefrom and the exercise
by the Selling Securityholders of their right to receive the Bridge Units. See
'Use of Proceeds.' This table should be read in conjunction with the Financial
Statements of the Company and the related Notes thereto appearing elsewhere in
this Prospectus. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations,' 'Use of Proceeds' and 'Prospective
Combination.'
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED(1)
---------- --------- --------------
<S> <C> <C> <C>
Long-term obligations:
Long-term debt, less current portion................... $ 273,512 $273,512 $ 273,512
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; no shares outstanding.................... -- -- --
Common Stock, $.001 par value, 10,000,000 shares
authorized; 2,818,750 shares issued and outstanding,
actual; 3,000,000 shares issued and outstanding, pro
forma; 4,625,000 shares issued and outstanding, as
adjusted............................................. 2,819 3,000 4,625
Additional paid-in capital............................. 972,181 177,148 4,424,065
Partners' capital...................................... 255,456 -- --
Accumulated deficit.................................... (1,303,610) -- (714,145)
---------- --------- --------------
Total stockholders' equity........................ (73,154) 180,148 3,714,545
---------- --------- --------------
Total capitalization.............................. $ 200,358 $453,660 $3,988,057
---------- --------- --------------
---------- --------- --------------
</TABLE>
- ------------
(1) Gives effect to the recognition of a non-cash charge of an aggregate of
693,542 of debt issuance costs and original issue discount to be incurred in
the quarter ending March 31, 1996 and upon closing of this Offering. See
Note J of Notes to Financial Statements.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock in the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
portion of the Company, general economic conditions and other pertinent factors.
15
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1995 were $1,550,255, a 185%
increase from 1994 revenues of $544,135. This increase is primarily attributable
to an increase in store and commissary product sales of $973,993, or 190%, to
$1,486,054 in 1995 from $512,061 in 1994, due to having a full year of wholesale
and retail operations in 1995. The Company's stores opened in May, June and
September 1994. In addition, management increased the selling prices at the
retail stores. Franchise fee revenues were $40,000 in 1995, a 33% increase over
the prior year amount of $30,000. Revenue under franchise agreements is
recognized when substantially all of the Company's initial obligations to the
franchisee, which include site selection approval, approval of store blueprints,
provision of operations and systems guidelines and manuals and training, are
fulfilled. This historically has been upon the opening of franchise stores. The
Company has unearned franchise income of $309,250 at December 31, 1995, which
represents nonrefundable franchise fees which will be recognized as revenue as
the related franchise stores are opened. The increase in franchise fee revenue
of $10,000 and the increase in unearned franchise income of $244,250 from 1994
to 1995 are primarily due to the hiring of a full-time vice president of
business development, increased franchise advertising and the growth of brand
name recognition. In 1994, the Company entered into one single-store franchise
agreement and a 12-store area development agreement. In 1995, the Company
entered into agreements for three single-store franchises and three area
development agreements, each for three stores. Royalty income increased by
$21,990 to $22,147 from $157 in 1994, due to a full year of operations of one
franchise store and partial year operations of another franchise store in 1995.
Cost of sales increased by $417,885, or 168%, to $667,394 in 1995 from
$249,509 in 1994. This increase is primarily due to increased product sales.
Cost of sales decreased as a percentage of product sales to 45% in 1995, from
49% in 1994. The decrease as a percentage of product sales is attributed to
buying materials at reduced prices, purchasing such materials in bulk quantities
and by obtaining volume discounts. Management also instituted efficiency and
waste control procedures.
Selling, general and administrative expenses increased by $646,365, or 62%,
to $1,681,892 in 1995 from $1,035,527 in 1994. This change is primarily
attributable to the following factors: (i) Salaries increased by $276,477, or
70%, to $674,443 in 1995, from $397,966 in 1994 due to the hiring of a vice
president of business development, training/operations personnel and additional
administrative personnel. Two corporate officers began taking nominal salaries
during 1995. Payroll taxes and related fringe benefits increased proportionately
to salaries. (ii) Rents increased by $40,227, or 31%, to $170,526 in 1995, from
$130,299 in 1994. This change was due to the rental of new and larger
administrative offices and additional storage space, and a full year of rent for
the Company-owned stores and commissary in 1995. (iii) Promotion and travel
increased by $50,877, or 123%, to $92,147 in 1995, from $41,270 in 1994. This
increase is attributed to travel necessary to sell franchises, visit proposed
retail store locations and to provide on-site store training. (iv) Advertising
increased by $69,060, or 139%, to $118,905 in 1995 from $49,485 in 1994. The
increase is primarily due to a major effort to promote franchise sales.
Advertising also increased for the retail stores as a result of the
Company-owned stores being in operation for a full year. In addition, the
Company engaged the services of a public relations firm in the last quarter of
1995. (v) Utilities increased by $24,299, or 64%, to $62,087 in 1995 from
$37,788 in 1994 as a result of increased product preparation in the Costa Mesa,
California commissary and increased baking in the stores due to higher sales
volume and a full year of operations in 1995. The Company expects that selling,
general and administrative expenses will increase significantly in 1996 due to
the Company's obligation to pay each of Mark Weinreb, Chairman of the Board and
Chief Executive Officer of the Company, and Jerry Rosner, President of the
Company, base annual salaries of $125,000
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until completion of this Offering and $165,000 thereafter. See
'Management -- Employment Agreements.'
The net loss for the year ended December 31, 1995 was $826,849, which was a
9% increase, as compared to a net loss of $758,593 for the year ended December
31, 1994. The Company is continuing to operate at a loss as a result of its
development of an operating infrastructure in preparation for franchise sales,
Company store growth and commissary sales. Total sales have yet to reach the
level needed to support the Company's fixed overhead. For 1996, the Company
anticipates that it will increase its revenues through additional store
openings, increased royalty income, increased commissary income through sales to
franchise stores, increases in existing store sales, the opening of new Company-
owned stores and increasing its wholesale business. The Company also anticipates
increasing revenues by acquiring other existing bagel stores or chains.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant capital to fund its working capital needs
and capital expenditures required for expansion. Revenues are not yet sufficient
to support the Company's operating expenses and are not expected to reach such a
level during 1996. Cash used by operating activities in 1995 was $280,646 and
capital expenditures were $54,181. Cash and cash equivalents at December 31,
1995 aggregated $37,991 and the working capital deficit was $795,936.
The Company has funded its operating losses and capital expenditures
primarily through capital contributions and Shareholder Loans and, to a lesser
extent, by utilizing vendor credit and third party borrowings.
Accounts payable and accrued expenses were $314,050 at December 31, 1995,
compared to $124,407 at December 31, 1994. The Company generally pays its
inventory vendors within 30 days and has been able to purchase inventory as
required. In 1995, the Company borrowed approximately $100,000 under two
equipment loans and a $70,000 line of credit. The line of credit was repaid in
its entirety in the first quarter of 1996 and was not renewed.
Shareholder Loans aggregated $462,468 at December 31, 1995. Capital
contributions to both Big City Bagels and Pumpernickel Partners aggregated
$1,700,000.
In January 1996, the Company completed its Bridge Financing, pursuant to
which it issued an aggregate of (i) $1,000,000 principal amount of Bridge Notes
which bear interest at the rate of 8% per annum and are due and payable on the
earlier of the completion of this Offering or July 19, 1997 and (ii) the right
to receive upon completion of this Offering an aggregate of 500,000 Bridge Units
and 500,000 Class B Warrants. Each Bridge Unit consists of one share of Common
Stock and one Warrant. Two Class B Warrants together, will entitle the holder to
purchase one share of Common Stock for $8.00 per share during the three-year
period commencing one year after the completion of this Offering. The proceeds
from the Bridge Financing were used by the Company to purchase equipment for the
Company's commissary in California, for general working capital purposes and to
pay certain expenses of this Offering. As of the date of this Prospectus,
approximately $250,000 of the proceeds from the Bridge Financing is available to
the Company and will be used for working capital purposes.
The Company requires the proceeds of this Offering, estimated to be
$3,565,000 ($4,152,250 if the Underwriter's over-allotment option is exercised
in full), to open Company-owned flagship stores ($1,200,000), repay the Bridge
Notes ($1,000,000), expand or relocate its Costa Mesa, California commissary
($600,000), repay a portion of the Shareholder Loans ($200,000), expand
marketing, promotional, advertising and public relations activities aimed at
both customers and potential franchisees ($150,000) and for working capital and
general corporate purposes ($415,000).
The Company expects that its liquidity will be significantly impacted in
1996 due to the Company's obligation to pay each of Messrs. Mark Weinreb and
Jerry Rosner base annual salaries of $125,000 until completion of this Offering
and $165,000 thereafter. See 'Management -- Employment Agreements.'
17
<PAGE>
<PAGE>
The Company anticipates increasing revenues and thereby generating
operating cash flow in the future by implementing the following actions:
Increasing Product Sales. The Company intends to open new Company-owned
retail stores and expects increased sales from its commissary in
California to new franchise stores. The Company continuously develops new
products to increase sales and provide a variety of products offered. The
Company expects to hire an advertising firm to help increase store
revenues, increase franchise sales and promote brand name recognition. The
Company is currently servicing many wholesale accounts and expects this
business to grow due to an increase in name recognition, product
acceptance and additional sales efforts.
Expanding Franchise Operations. The Company will utilize capital to
increase franchise sales by (i) hiring an advertising firm to prepare
marketing and promotional material, (ii) advertising in national and
regional publications and business magazines and (iii) possibly hiring
additional sales personnel. The Company expects to increase its franchise
sales by opening Company-owned flagship stores in markets that would
generate interest for experienced multi-store developers to enter into
area development agreements. Additional franchise revenue should be
realized as stores open. The Company may choose to develop a new
franchising opportunity by introducing a 'satellite' concept for its
stores to serve other markets.
Making Acquisitions. The Company intends to acquire other bagel stores or
complementary types of retail outlets which provide entry into new
markets. It is contemplated that over a period of time, these acquisitions
will increase revenues significantly.
Although these actions will require significant costs and expenditures, the
Company anticipates, based on current plans and assumptions relating to its
operations, that the proceeds of this Offering, together with existing resources
and cash generated from operations, if any, will enable the Company to
accomplish its immediate goals of increasing product sales and expanding
franchise operations, although there can be no assurance of this. If the Company
derives significant revenues from increasing product sales and expanding
franchise operations, the Company should not require any capital beyond that
provided by this Offering to achieve its current business plans. However, if the
Company were to seek to expand its operations through the acquisition of
existing bagel stores or chains and possibly other retail enterprises that the
Company believes will complement and enhance its operations or if the expansion
of the Company's retail and franchise operations requires more funds than the
Company currently anticipates, the Company could require capital beyond that
provided by this Offering.
FUTURE CAPITAL EXPENDITURES
As the Company grows and more stores are opened, it may become essential to
relocate and expand the Costa Mesa, California commissary and, as new regions
are developed, to open additional commissaries to service these areas.
Additional equipment, computers and leasehold improvements will be needed for
the commissaries, the new retail Company-owned stores and the administrative
offices. As the Company expands, it expects to hire a director of operations, a
chief financial officer, a training facilitator manager and additional support
personnel as needed. The Company has engaged the services of an outside
consulting firm to evaluate its current commissary operations and to help set up
a strategic plan to support the Company's growth and expansion. The Company
expects to hire an advertising agency to help increase franchise sales and to
prepare advertisements to increase store revenues. The Company engaged the
services of a public relations firm in the last quarter of 1995 and expects to
increase efforts to promote the Big City Bagels name to gain stronger national
recognition.
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BUSINESS
OVERVIEW
Big City Bagels is a New York corporation that operates and franchises
upscale bagel bakery cafes under the Company's registered trademark 'Big City
Bagels'r'.' These stores sell a wide variety of oversized, fresh baked bagels,
including unique specialty bagels, and cream cheese spreads, muffins and other
bakery products for take-out and eat-in consumption. Big City Bagels stores also
sell salads, sandwiches, specialty coffees and other beverages. The Company owns
three stores, two of which are located in Costa Mesa, California and one of
which is located in Laguna Niguel, California. The Company also sells Big City
Bagels franchises. Currently, there are eight franchises open and operating in
California, Minnesota, Utah and Arizona. As of the date of this Prospectus, the
Company has sold franchises to open an additional 30 stores, which are in
various stages of development. The Company also sells its products wholesale to
commercial accounts and food service operators.
INDUSTRY BACKGROUND
The increased demand by American consumers for healthy, appetizing and
economical food products has impacted the consumer food products industry
significantly. The Company believes that American consumers are actively seeking
inexpensive ways to reduce fat intake and improve the nutritional content of
their diets without having to sacrifice flavor. Not only do bagels have a
significantly lower fat content than foods typically purchased for breakfast
take-out such as donuts and pastries, but they are tasty, satisfying and
inexpensive. Accordingly, the Company believes that consumers perceive bagels to
be a healthy alternative and a good value.
The popularity of bagels has increased significantly throughout the
country. One survey has reported that 75% of Americans currently have an
awareness of bagels as compared to 20% only a decade ago. Bagels are believed to
be the fastest growing breakfast food in the United States and industry surveys
indicate that national bagel sales were estimated to be in excess of $1 billion
in 1994 and continue to grow at a rate of approximately 8% per year. According
to the United States Department of Commerce, the average American consumed
approximately 3.5 pounds of bagels in 1993, up nearly 46% from 2.5 pounds in
1988. It is estimated that the average American consumed approximately 4.5
pounds of bagels in 1995.
The bagel industry predominantly consists of small operations of one or a
few stores and larger chains that generally have the bagel dough prepared at
each retail location or at independently-operated regional facilities. As a
result, bagel quality can vary from location to location within these chains.
The Company believes that its ability to prepare consistent quality bagels and
distribute such product nationally places the Company at an advantage over these
chains. While there are certain chains that prepare their bagels in regional
commissaries similar to the Company's, the Company believes that its oversized,
freshly baked bagels and the visually-appealing, upscale design of its stores
will enable the Company to compete successfully with such companies. See
'Business -- Competition.'
STRATEGY
The Company's objective is to become a leading national bagel store chain.
The Company intends to achieve this objective by (i) expanding its franchise
operations, (ii) increasing the number of Company-owned stores by opening
additional stores and acquiring existing bagel stores or chains and (iii)
increasing revenues from sales to commercial and wholesale accounts. With
respect to its franchise operations, the Company believes that its consistent
product quality, visually-appealing, upscale store design and well-organized
business operations will enable the Company to secure experienced, multi-unit
franchisees to operate its stores. In order to attract potential franchisees,
the Company plans to use a portion of the proceeds of this Offering to open
Company-owned flagship stores in strategic geographic locations around the
country. Such franchises would be serviced by regional commissaries, which the
Company plans to use as additional stores are opened. The Company also intends
to expand by acquiring existing bagel stores or chains and possibly other retail
enterprises that the Company
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believes will complement and enhance its operations. In determining whether to
make an acquisition, the Company will consider, among other things, the size,
location and existing operations of the acquisition candidate, as well as such
candidate's potential to maximize growth and increase revenues. Although the
Company regularly evaluates possible acquisition opportunities, as of the date
of this Prospectus, the Company is not a party to any agreements, commitments,
arrangements or understandings with respect to any acquisition.
PRODUCTS AND DISTRIBUTION
The Company seeks to provide its customers with consistent quality
products, primarily bagels, cream cheese spreads and muffins, and excellent
service in a visually-appealing, upscale environment. The proprietary recipes
for the Company's unique products were created by Jerry Rosner, President of the
Company, drawing upon his 20-plus years of bagel-making experience. Utilizing
these recipes, the Company's bagel dough is prepared in its regional
commissaries and then delivered to surrounding Company-owned stores and
franchises. The Company's bagels are then baked in each store daily in
accordance with the Company's quality control guidelines using a traditional
technique which requires the bagels to be boiled and then baked. In addition,
the Company blends a wide variety of regular and low-fat cream cheese spreads
and supplies these spreads, as well as muffin mixes, to its Company-owned stores
and franchises. The Company purchases cream cheese from independent suppliers
and mixes in ingredients at its commissaries. While bagel and cream cheese sales
currently represent a significant portion of retail sales, the stores also offer
a variety of breakfast and lunch bagel sandwiches, soups, freshly baked muffins
and other bakery products, gourmet coffee and espresso drinks, freshly squeezed
juices and a variety of soft drinks. In addition, the Company offers three-foot
party bagels and imaginative catering platters to service its customers.
The Company believes that it has developed significant know-how and
technical expertise for replicating the Company's bagels in various locations
and conditions to produce a high-quality product more commonly associated with
smaller bakeries. The Company believes this system enables Big City Bagels
stores to provide its customers with consistent quality products, thereby
helping to build brand name awareness and customer loyalty. The Company
currently owns and operates a commissary located in Costa Mesa, California,
which services most existing Big City Bagels stores. The Company also has
assisted one of its franchisees, who entered into an area development agreement
with the Company to open 12 stores in the Minneapolis/St. Paul, Minnesota area,
in establishing a commissary owned and operated by such franchisee in
Minneapolis to service these stores. This commissary is required to adhere to
the Company's strict quality control guidelines. The Company distributes its
bagel dough and other products to its franchises in California, Utah and Arizona
under a distribution agreement with Sysco. By supplying the Company-owned stores
and franchises with bagel dough, muffin mixes and cream cheese spreads, the
Company is able to control the quality of product sold in the stores.
STORE DESIGN AND LOCATIONS
Big City Bagels stores are designed to be upscale bagel bakery cafes that
are efficient as well as visually appealing. Most of the products sold in the
stores are uniquely presented in large, attractive display cases to provide
customers with the opportunity to see the products they wish to purchase. The
display cases are typically located near the store entrance and where customers
place their orders to attract customers and promote spontaneous purchases.
The Company's store design is adaptable to various site locations,
including shopping centers, free-standing units, drive-thrus and commercial
sites, which are selected on heavily-traveled thoroughfares. The Company
believes that its concept also could be applied to smaller 'satellite' stores,
such as kiosks located in airports, commercial buildings and shopping malls. Big
City Bagels stores are typically highly visible and easily accessible. The
stores are generally located within a three-mile radius of at least 30,000
residents in an area with a mix of both residential and commercial properties.
The average store is approximately 1,600 to 2,000 square feet with a seating
capacity of 20 to 60 persons. Although the stores may vary in size, store layout
and design are generally consistent and typically include, among other
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things, a traditional, bakery-style tin ceiling, glass display cases, a menu
board and a neon sign in the form of the Company's logo.
The Company plans to open Company-owned flagship stores in high profile
locations utilizing the net proceeds of this Offering. These stores are expected
to be larger than a typical Big City Bagels store and contain increased seating
capacity. The Company also intends to offer an expanded menu and possibly an
enhanced delicatessen/appetizer section, as well as a gourmet beverage counter
in its flagship stores.
The following table sets forth by location the number of currently open
Company-owned stores and franchises and the number of franchises that have been
sold but not yet opened:
<TABLE>
<CAPTION>
FRANCHISES SOLD TOTAL
LOCATION STORES OPEN BUT NOT YET OPENED STORES
- -------------------------------------------------- ----------- ------------------ ------
<S> <C> <C> <C>
Arizona........................................... 2 2 4
California........................................ 6* 6 12*
Minnesota......................................... 2 10 12
Texas............................................. 0 12 12
Utah.............................................. 1 0 1
-- -- --
Total........................................ 11 30 41
</TABLE>
- ------------
* Includes three Company-owned stores.
FRANCHISING
The Company offers single unit and multi-unit franchises throughout the
United States. The Company is currently permitted to offer and sell its
franchises in over 40 states. The Company attempts to attract suitable
franchisees who are committed to the Company's high standards of product quality
and customer service. All franchisees are required to operate their stores in
accordance with the guidelines set forth in the Company's franchise and area
development agreements and the standards detailed in the Company's operations
and administration manuals. The Company conducts regular inspections of its
franchised stores to determine whether the stores meet applicable standards and
works with franchisees to improve performance.
The Company assists franchisees in site selection by reviewing market
demographics, visiting the sites and giving final approval. During the design
phase, all blueprints are prepared, reviewed and approved by the Company and
discussed with the franchisee. A franchisee is required to purchase bagel dough,
muffin mixes, cream cheese spreads and 'Big City Bagels' branded products only
from the Company or suppliers designated by the Company. A franchisee may
purchase the equipment necessary to operate a Big City Bagels store from any
vendor of its choice, provided that such vendor has been approved by the Company
and meets the Company's equipment specifications. However, all franchises are
required to purchase and use a cash register system specially designed for the
Company in order to furnish the Company with uniform reports systemwide and to
provide franchisees with optimal cash controls and ensure that they have access
to information which the Company believes will assist franchisees in operating
their business.
Prior to opening a new store, the Company offers to all of its franchisees
an extensive training program run by the Company, which includes classroom
training in administrative record keeping, marketing and advertising and
inventory control, and training in baking, food preparation and store
operations. The Company also provides on-site personnel immediately prior to and
during each store's opening. After a store opens, the Company monitors
operational results, visits stores for on-site consultation and provides advice
based on the experience of other franchisees. Management of the Company reviews
franchise store sales monthly and provides operational assistance as necessary.
The Company provides extensive field support services to its franchisees in
an effort to help franchisees maximize business and financial management,
acquire local market area penetration,
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maintain quality control and customer service excellence, stay abreast of new
product developments, provide advertising services and to allow the franchisees
the opportunity to share new business ideas with the Company.
The Company's current franchise agreements require payments to the Company
of a $30,000 initial franchise fee per store and a monthly 4% royalty on gross
sales (exclusive of sales taxes). In addition, franchisees are required to spend
2% of gross sales on local advertising and at least $5,000 to advertise and
promote grand openings. Franchise agreements provide each franchisee with the
exclusive right to open the franchise within a defined geographic area. Each
franchise agreement is for a term of ten years, with the right to renew for an
additional ten years at no additional fee. The franchise agreement also requires
a franchisee to find a suitable store location within 180 days of signing the
agreement. The Company estimates that a franchisee's cost to open a Big City
Bagels store, including the initial franchise fee, cost of construction, leasing
of space and other start-up expenses, is approximately between $285,000 and
$330,000. A period of approximately six to eight months generally elapses
between the signing of a franchise agreement and the opening of the store.
The Company also offers franchisees the opportunity to enter into area
development agreements, which provide that a franchisee may open a specific
number of stores within a specific area of exclusivity. The area of exclusivity
is negotiated prior to the signing of the area development agreement and varies
by agreement as to size of the area, the number of stores required and the
schedule for store development and opening. Upon signing the area development
agreement, fees are paid to the Company in the following manner: a $30,000
franchise fee is paid for the first store, as well as a $12,750 area development
fee for each additional store to be developed. A reduced franchise fee of
$25,500 per store is payable when the franchise agreement for each additional
location is executed, with a credit given for the previous $12,750 area
development fee paid.
COMPETITION
The food service industry, in general, and the bagel industry, in
particular, are intensely competitive with respect to food quality, concept,
location, service and price. As a bagel retailer and franchisor, the Company
competes in a number of different markets with a number of different
competitors, including well-established food service companies with greater
product and name recognition and larger financial, marketing and distribution
capabilities than those of the Company, as well as innumerable local food
establishments that offer similar products. In addition, the Company believes
that the start-up costs associated with opening a retail food establishment
offering products similar to those offered by the Company, on a stand-alone
basis, are competitive with the start-up costs associated with opening a Big
City Bagels store and, accordingly, are not an impediment to entry of
competitors into the retail bagel business.
The Company faces competition in the bagel industry from independent
stores, larger chain stores and franchisors such as Bruegger's Corp.
('Bruegger's'), Manhattan Bagel Company, Inc. ('Manhattan'), Chesapeake Bagel
Bakery ('Chesapeake') and Big Apple Bagels ('Big Apple'). Recently, competition
has developed from a number of large food service companies which are seeking
entry into the bagel industry. For example, Boston Chicken, Inc.'s ('Boston
Chicken') loan to Einstein Bros. Bagels, Inc. ('Einstein'), a 100-unit bagel
chain created through the combination of three regional bagel retailers, is
convertible into a minority interest, and under certain conditions into a
majority equity interest, in Einstein. With Boston Chicken's financial support,
Einstein recently acquired Noah's New York Bagels, Inc., a California chain of
approximately 37 stores, in which Starbucks Coffee Co. owned a 20% equity
interest. In addition, Quality Dining, Inc., a restaurant operator, recently
announced its plans to acquire Bruegger's for stock currently valued at $133
million. The Company's bagel stores also compete with take-out restaurants, fast
food restaurants, delicatessens and prepared food stores, as well as with
supermarket bakeries and convenience stores.
As a franchisor, the Company competes for qualified franchisees with a wide
variety of investment opportunities both in the restaurant business and in other
industries. In this respect, the Company believes that its consistent product
quality, visually-appealing, upscale store design and well-organized business
operations help the Company to compete favorably, especially against bagel
franchisors,
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although it should be noted that the Company is a relatively minor newcomer in
the industry and its competitors are well-established, have greater name
recognition and financial resources and command a greater share of the market
than the Company. The Company believes that Bruegger's, Manhattan, Einstein,
Chesapeake and Big Apple currently have approximately 275, 160, 100, 88 and 73
stores in operation, respectively. Within the past two years, the Company has
sold 38 franchises, with eight franchises in operation and 30 franchises in
various stages of development, and has opened three Company-owned stores.
ADVERTISING
The Company presently advertises and plans to continue advertising its
franchises in its retail stores, newspapers and business opportunity magazines.
The Company and its franchisees also advertise in local newspapers and through
direct mailings. Franchisees are required to spend 2% of gross sales on local
advertising and to contribute 1% of monthly gross sales to a national
advertising cooperative. However, as of the date of this Prospectus, a national
fund has not been established.
TRADEMARKS AND SERVICE MARKS
The Company's trademark 'Big City Bagels'r' and its service mark 'A Bigger
Bagel for Less Dough!'r' are registered with the United States Patent and
Trademark Office pursuant to federal law. The Company has applied for
registration of its distinctive logo. The Company's franchise agreements provide
all of its franchisees with the nonexclusive right to use the Company's
registered trademark and service mark. The Company considers its marks to be
material to its business in that the Company seeks to develop a strong
association between such marks and the Company's high quality food and stores in
the minds of consumers.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply with federal, state
and local government regulations applicable to consumer food service businesses
generally, including those relating to the preparation and sale of food, minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements, as well as regulations relating to zoning, construction, health,
business licensing and employment. The Company believes that it is in material
compliance with these provisions. Continued compliance with this broad federal,
state and local regulatory network is essential and costly, and the failure to
comply with such regulations may have an adverse effect on the Company and its
franchisees.
The Company's operations are subject to regulation by the FTC in compliance
with the FTC's rule entitled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, which requires, among other
things, that the Company prepare and update periodically a comprehensive
disclosure document, known as the Uniform Franchise Offering Circular ('UFOC'),
in connection with the sale and operation of its franchises. In addition, some
states require a franchisor to register its franchise with the state before it
may offer the franchise. The Company believes that its UFOC, together with any
applicable state versions or supplements, complies with both the FTC guidelines
and all applicable state laws regulating franchising in those states in which it
has offered franchises. The Company has revised its offering circular and is
substantially in compliance with the new UFOC guidelines which became effective
on January 1, 1995. The UFOC document has been written in plain english and
certain of the current disclosure items have been expanded and/or eliminated.
The revisions have not had an effect upon the Company's operations.
In addition to the rules governing the offer and sale of franchises, the
Company also is subject to a number of state laws that regulate substantive
aspects of the franchisor-franchisee relationship, including, but not limited
to, those concerning termination and non-renewal. Currently, 18 states, the
District of Columbia, Puerto Rico and the Virgin Islands have Franchise
Termination and Non-Renewal Laws. These laws govern the termination and/or
non-renewal of the franchise agreement and, by and large, require the franchisor
to have good cause, reasonable cause or just cause in order to terminate or
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not renew the franchise agreement. In addition, some of these laws provide for
longer cure periods than which currently exist in the Company's franchise
agreement.
Each store is subject to regulation by federal agencies and to licensing
and regulation by state and local health, sanitation, safety, fire and other
departments. Difficulties or failures in obtaining the required licenses or
approvals could delay or prevent the opening of a new store. The Company
believes that it is in substantial compliance with the applicable laws and
regulations governing its operations.
While the Company intends to comply with all federal and state laws and
regulations, there can be no assurance that it will continue to meet the
requirements of such laws and regulations, which, in turn, could result in a
withdrawal of approval to franchise in one or more jurisdictions. Any such loss
of approval would have a material adverse effect upon the Company's ability to
successfully market its franchises. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could subject the Company and its affiliates to rescission
offers, monetary damages, penalties, imprisonment and/or injunctive proceedings.
The state laws and regulations concerning termination and non-renewal of
franchisees are not expected to have a material impact on the Company's
operations. In addition, under court decisions in certain states, absolute
vicarious liability may be imposed upon franchisors based upon claims made
against franchisees. Even if the Company is able to obtain coverage for such
claims, there can be no assurance that such insurance will be sufficient to
cover potential claims against the Company. Further, there can be no assurance
that existing or future franchise regulations will not have an adverse effect on
the Company's ability to expand its franchise program.
PROPERTIES
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
SQUARE ANNUAL
LOCATION USE FOOTAGE LEASE EXPIRATION LEASE PAYMENTS
- ------------------ ------------------------- ----------- ------------------------- --------------
<S> <C> <C> <C> <C>
Principal executive
Hicksville, NY office 500 Month-to-month $ 9,600
Costa Mesa, CA* Offices 2,400 December 1996 32,000
Costa Mesa, CA Commissary/Company store 4,400 November 1998; renewable 50,400
for two successive
five-year terms
Costa Mesa, CA Storage space 900 April 1996; renewable for 6,000
two successive one-year
terms
Costa Mesa, CA Company store 1,750 March 1998; renewable for 47,040
two successive five-year
terms
Laguna Niguel, CA Company store 1,600 March 1999; renewable for 42,300
one additional five-year
term
</TABLE>
- ------------
* The Company subleases some of the space at this location on a month-to-month
basis at a monthly rental of $640.
The Company believes that its facilities are adequate for its present
purposes. The Company believes that as it grows, it will require additional
facilities, and that such facilities will be readily available.
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EMPLOYEES
As of April 15, 1996, the Company had 32 full-time employees, consisting of
two members of management, one marketing and advertising personnel, one
franchise sales personnel, one training and store operations personnel, three
administrative personnel, one multi-unit store manager and 23 other employees.
17 of the 32 full-time employees are salaried, while the other 15 are paid on an
hourly basis. In addition, the Company has 21 part-time employees, who are paid
on an hourly basis. None of the Company's employees is represented by a
collective bargaining agreement nor has the Company experienced any work
stoppage. The Company believes its relationship with its employees is
satisfactory.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the Company's
executive officers, directors and key employee. Except as otherwise set forth
herein, executive officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Executive Officers and Directors
Mark Weinreb............................... 43 Chairman of the Board and Chief Executive Officer
Jerry Rosner............................... 36 President, Chief Operating Officer and Director
Stanley Weinreb............................ 68 Vice President and Director
Stanley Raphael............................ 60 Secretary and Director
Key Employee
Michael Reynolds........................... 32 Vice President of Business Development
</TABLE>
Mark Weinreb has been the Chairman of the Board and Chief Executive Officer
of the Company since its inception in December 1992. From 1975 to 1989, Mr.
Weinreb was employed by Bio Health Laboratories, Inc. ('Bio Health'), a medical
testing laboratory, and from 1985 to 1989, he was an owner and vice president of
Bio Health, which was sold in 1989. During his tenure at Bio Health, Mr. Weinreb
was responsible for day-to-day operations, including overseeing the technical
aspects of the laboratory, negotiating property and equipment leases and
handling financing proposals, mergers and acquisitions. From 1989 to 1992, Mr.
Weinreb managed his private investments. Mark Weinreb is the son of Stanley
Weinreb.
Jerry Rosner has been President, Chief Operating Officer and a director of
the Company since inception. From 1983 to August 1995, Mr. Rosner was President
and co-owner of Bagel Boss East, Inc. ('Bagel Boss'), a company which owned and
operated a bagel store in Bay Shore, New York. At Bagel Boss, Mr. Rosner was
responsible for all aspects of operations, including production, recipe
development, equipment purchases, lease negotiations, labor relations and
wholesale operations. Mr. Rosner has over 20 years of experience in the bagel
industry.
Stanley Weinreb has been Vice President and a director of the Company since
inception. From 1952 to 1989, he was President and owner of Bio Health, a
company which he founded. During his tenure at Bio Health, Mr. Weinreb was the
medical director of the laboratory and was responsible for quality control,
obtaining state and federal licenses and regulatory compliance. Stanley Weinreb
is the father of Mark Weinreb.
Stanley Raphael has been Secretary and a director of the Company since
inception. Since 1984, he has served as President and a director of Trade
Consultants, Inc., a management consulting company. Prior to 1984, Mr. Raphael
was an international trader of oils, chemicals and petrochemicals. He currently
is a director of a number of companies, including American Polymer, Inc. and
Edge Petroleum Corp.
Michael S. Reynolds has been Vice President of Business Development since
January 1995. From March 1994 to December 1994, he was a Regional Franchise
Manager for Arby's, Inc., where he was responsible for handling franchise sales
to both new and existing franchisees in 15 states. From May 1990 to March 1994,
he served as Franchise Development Manager for Haagen-Dazs Co., Inc., where he
was responsible for franchise sales in the western United States. From March
1987 to May 1990, Mr. Reynolds was a Franchise Business Consultant for Postal
Instant Press (PIP Printing), where he worked with franchisees to implement
marketing and advertising programs to increase sales.
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EXECUTIVE COMPENSATION
During the fiscal years ended December 31, 1994 and December 31, 1995, no
executive officers of the Company had annual compensation in excess of $100,000.
Mark Weinreb, Chairman of the Board and Chief Executive Officer of the Company,
and Jerry Rosner, President and Chief Operating Officer of the Company, each
received a salary of approximately $17,000 from the Company during the fiscal
year ended December 31, 1995. The Company had no stock option plan or other
employee benefit or compensation plan during the fiscal year ended December 31,
1995.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Mark
Weinreb, its Chairman of the Board and Chief Executive Officer and Jerry Rosner,
its President and Chief Operating Officer, providing for initial three-year
terms commencing January 1, 1996, and base annual salaries of $125,000 until
completion of this Offering and $165,000 thereafter, plus annual 10% increases.
These agreements also provide that the Company will continue to pay the base
salary to the employee or legal representative in the event of the employee's
termination due to disability or death for a six-month period following
termination. The agreements contain provisions prohibiting the employee from
competing with the Company during the term of employment and for a period of two
years thereafter.
1996 PERFORMANCE EQUITY PLAN
In March 1996, the Board of Directors of the Company adopted, and the
shareholders approved, the Company's 1996 Performance Equity Plan (the '1996
Plan'). The 1996 Plan authorizes the granting of awards of up to 350,000 shares
of Common Stock to the Company's key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as 'Incentive' stock options under Section 422 of
the Internal Revenue Code of 1986, as amended), restricted stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the 1996 Plan. As of the date of this Prospectus, the Company
has granted under the 1996 Plan options to purchase 7,500 shares of Common Stock
to each of two independent consultants of the Company, at exercise prices of
$4.00 per share. The Company also has granted a restricted stock award of 15,000
shares of Common Stock, that will vest in two years, to Michael Reynolds, Vice
President of Business Development of the Company.
In March of each calendar year during the term of the 1996 Plan, assuming
there are enough shares then available for grant under the 1996 Plan, each
person who is then a director of the Company will be awarded stock options to
purchase 10,000 shares of the Company's Common Stock at the fair market value
thereof (as determined in accordance with the 1996 Plan), all of which options
will be immediately exercisable as of the date of grant and have a term of ten
years. These are the only awards which may be granted to a director of the
Company under the 1996 Plan. The 1996 Plan is administered by the Board of
Directors which determines the persons (other than directors) to whom awards
will be granted, the number of awards to be granted and the specific terms of
each grant, including the exercisability thereof, subject to the provisions of
the 1996 Plan.
In connection with qualified stock options, the exercise price of each
option may not be less than 100% of the fair market value of the Common Stock on
the date of grant (or 110% of the fair market value in the case of a grantee
holding more than 10% of the outstanding stock of the Company). The aggregate
fair market value of shares for which qualified stock options are exercisable
for the first time by such employee during any calendar year may not exceed
$100,000. Nonqualified stock options granted under the 1996 Plan are also
required to have exercise prices not less than the fair market value of the
Common Stock on the date of grant.
The 1996 Plan also contains certain change in control provisions which
could cause options and other awards to become immediately exercisable and
restrictions and deferral limitations applicable to other awards to lapse in the
event any 'person,' as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including a 'group' as defined in Section 13(d), but excluding
certain shareholders of
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the Company, acquires beneficial ownership of more than 25% of the Company's
outstanding shares of Common Stock.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, after
giving effect to the Combination ('Before Offering'), and as adjusted to reflect
the sale of the Units offered hereby and the issuance of the Bridge Units
('After Offering'), by (i) each shareholder or group known by the Company to be
the beneficial owner of five percent or more of the outstanding Common Stock;
(ii) each director and executive officer individually; and (iii) all directors
and executive officers as a group. Except as otherwise indicated in the
footnotes below, the Company believes that each of the beneficial owners of the
Common Stock listed in the table, based on information furnished by such owner,
has sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
PERCENTAGE
----------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Management Group ............................................... 2,855,456(1) 95.2% 61.7%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
Mark Weinreb ................................................... 859,538(2) 28.7% 18.6%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
Jerry Rosner ................................................... 790,154(2) 26.3% 17.1%
c/o Big City Bagels, Inc.
151 Kalmus Drive
Costa Mesa, CA 92626
Stanley Weinreb ................................................ 605,851(2) 20.2% 13.1%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
Stanley Raphael ................................................ 599,913(2)(3) 20.0% 13.0%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
All executive officers and directors as a group
(four persons)................................................ 2,855,456 95.2% 61.7%
</TABLE>
- ------------
(1) The Management Group consists of Messrs. Mark Weinreb, Jerry Rosner, Stanley
Weinreb and Stanley Raphael, each of whom is a party to, and has agreed to
vote their shares in accordance with, the Founders' Shareholder Agreement
described below. Each of the members of this group shares voting power with
respect to the shares of Common Stock held by each of the members. The
number of shares set forth in the table includes the shares held by each
member.
(2) Does not include shares held by other members of the Management Group (see
Note 1) with respect to which each member shares voting power with the other
members of such group.
(3) Includes 5,938 shares of Common Stock owned by Trade Consultants, Inc.
Pension Fund, of which Mr. Raphael is the trustee.
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FOUNDERS' SHAREHOLDER AGREEMENT
Messrs. Mark Weinreb, Jerry Rosner, Stanley Weinreb and Stanley Raphael are
parties to the Founders' Shareholder Agreement and the shares of Common Stock
beneficially owned by them are subject to the terms of the Founders' Shareholder
Agreement. Pursuant to the Founders' Shareholder Agreement, each of these
members has agreed to vote his shares for the election of each of the other
members of the group as a director of the Company as long as each such other
member owns at least 100,000 shares of Common Stock. In addition, the members
have granted a right of first refusal to the others with respect to any sales of
Common Stock held by them other than pursuant to a registration statement under
the Securities Act or pursuant to Rule 144 promulgated thereunder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In consideration of capital contributions aggregating approximately
$980,000 made at various times since the Company's inception by Messrs. Mark
Weinreb, Chairman of the Board and Chief Executive Officer of the Company, Jerry
Rosner, President, Chief Operating Officer and a director of the Company,
Stanley Raphael, Secretary and a director of the Company and Stanley Weinreb,
Vice President and a director of the Company, the Company has from time to time
issued to such individuals an aggregate of 845,625, 789,250, 591,938 and 591,938
shares of Common Stock, respectively.
Since the Company's inception, its operations have been partially funded
from time to time by loans to the Company made directly by Messrs. Mark Weinreb,
Stanley Weinreb and Stanley Raphael, or indirectly through corporations
controlled by Messrs. Mark Weinreb and Stanley Weinreb, certain amounts of which
have been repaid (the 'Shareholder Loans'). At December 31, 1995, the principal
amount of the Shareholder Loans, which bear interest at 10% per annum,
aggregated $462,468, of which $200,000 is due and payable from the proceeds of
this Offering, an additional $175,000 is due and payable from the first proceeds
derived from the exercise of the Underwriter's over-allotment option and the
balance is payable in equal monthly installments of $12,000 commencing in
January 1997.
Pumpernickel Partners is a Delaware limited partnership that was formed in
August 1993 which currently owns and operates two Big City Bagels franchises in
Costa Mesa and Laguna Niguel, California. Pursuant to an agreement between the
Company and Pumpernickel Partners, Pumpernickel Partners currently is entitled
to receive 40% of the distributable cash flow derived from sales by the
Company's Costa Mesa, California commissary to stores located in Orange County
and San Diego County, California, which currently includes the two stores
operated by Pumpernickel Partners, the Company-owned store in Costa Mesa,
California and the two franchises located in San Diego and Fountain Valley,
California. Messrs. Mark Weinreb, Stanley Weinreb and Stanley Raphael each own
22.5%, and Jerry Rosner owns 10%, of the general partner, Bagel Partners, which
owns a 5% interest in Pumpernickel Partners. The remaining 22.5% interest of
Bagel Partners is owned by an individual who is responsible for the day-to-day
operations of the two stores operated by Pumpernickel Partners. Messrs. Mark
Weinreb, Stanley Weinreb and Stanley Raphael also own a 6.9%, 6.9% and 3.45%
limited partnership interest in Pumpernickel Partners, respectively. Immediately
prior to the closing of this Offering, all of the limited partners of
Pumpernickel Partners will contribute to the Company their limited partnership
interests in Pumpernickel Partners, and all of the shareholders of Bagel
Partners will contribute to the Company all of the capital stock of Bagel
Partners in exchange for an aggregate of 181,250 shares of Common Stock of the
Company. As a result of their interests in Bagel Partners and Pumpernickel
Partners, Messrs. Mark Weinreb, Jerry Rosner, Stanley Weinreb and Stanley
Raphael will receive 13,913, 904, 13,913 and 7,975 shares of Common Stock,
respectively.
In October 1994, Messrs. Mark Weinreb, Jerry Rosner, Stanley Raphael and
Stanley Weinreb, along with one other individual, formed a Nevada corporation
called Gotham City Equipment, Inc. ('Gotham'), and each owns 20% of its capital
stock. Gotham sells store equipment and fixtures to the Company and its
franchisees, although the franchisees have no obligation to purchase equipment
from Gotham. Following completion of this Offering, the four directors will
divest themselves of their ownership interest in Gotham.
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All future transactions between the Company and a director, executive
officer or shareholder beneficially owning more than 5% of the outstanding
Common Stock of the Company, including the granting or forgiveness of a loan,
will require approval by a majority of the disinterested directors of the
Company as being on terms and conditions no less favorable to the Company than
those available from unaffiliated third parties.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 11,000,000 shares,
consisting of 10,000,000 shares of Common Stock, $.001 par value per share, and
1,000,000 shares of preferred stock, $.001 par value per share ('Preferred
Stock'). As of the date of this Prospectus, 3,500,000 shares of Common Stock are
outstanding and held of record by 24 shareholders. Upon completion of this
Offering, there will be 4,625,000 shares of Common Stock outstanding (4,793,750
if the Underwriter's over-allotment option is exercised in full). No shares of
Preferred Stock are currently outstanding.
UNITS
Each Unit consists of one share of Common Stock and one Warrant, each
Warrant entitling the holder to purchase one share of Common Stock. The Common
Stock and Warrants comprising the Units are immediately detachable and
separately transferable.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by shareholders. Provided a
quorum is present, the election of directors requires a plurality vote of those
shares of Common Stock represented at any shareholders' meeting. The Certificate
of Incorporation does not provide for cumulative voting for the election of
directors. The holders of shares of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of Common Stock, as
such, have no redemption, preemptive or other subscription rights, and there are
no conversion provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock included in the
Units, when issued and paid for as set forth in this Prospectus, will be fully
paid and nonassessable.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one or
more series, and the Board of Directors is authorized, without further action by
the shareholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate
preferences in liquidation and the number of shares constituting any series. The
Company believes that the availability of Preferred Stock issuable in series
will provide increased flexibility for structuring possible future financings
and acquisitions, if any, and in meeting other corporate needs. It is not
possible to state the actual effect of the authorization and issuance of any
series of Preferred Stock upon the rights of holders of Common Stock until the
Board of Directors determines the specific terms, rights and preferences of a
series of Preferred Stock. However, such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, or impairing the liquidation rights of such shares without
further action by holders of the Common Stock. In addition, under various
circumstances, the issuance of Preferred Stock may have the effect of
facilitating, as well as impeding or discouraging, a merger, tender offer, proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent
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management. Issuance of Preferred Stock could also adversely affect the market
price of the Common Stock. The Company has no present plan to issue any shares
of Preferred Stock.
WARRANTS
Each Warrant is issued pursuant to a Warrant Agreement between the Company
and Continental Stock Transfer & Trust Company as warrant agent.
During the three-year period commencing one year after the date of this
Prospectus, each Warrant will entitle the registered holder to purchase one
share of Common Stock at an exercise price of $4.50 per share. No fractional
shares of Common Stock will be issued in connection with the exercise of
Warrants. Upon exercise, the Company will pay the holder the value of any such
fractional shares in cash, based upon the market value of the Common Stock at
such time.
Unless extended by the Company at its discretion, the Warrants will expire
at 5:00 p.m., New York time, on the fourth anniversary of the date of this
Prospectus. In the event a holder of Warrants fails to exercise the Warrants
prior to their expiration, the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.
The Company may redeem the Warrants with the Underwriter's prior consent,
at a price of $.05 per Warrant at any time after they become exercisable upon
not less than 30 days' prior written notice if the last sale price of the Common
Stock has been at least $7.00 per share on 20 consecutive trading days ending
within ten days prior to the date on which notice of redemption is given. The
Company may redeem the Warrants without the consent of the Underwriter on the
same terms, provided that the last sale price of the Common Stock has been at
least $8.00 per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given.
No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Warrants under an effective registration statement filed with the
Securities and Exchange Commission (the 'Commission') and such shares have been
qualified for sale or are exempt from qualification under the securities laws of
the state of residence of the holder of such Warrants. Although the Company
intends to have all shares so qualified for sale in those states where the Units
are being offered and to maintain a current prospectus relating thereto until
the expiration of the Warrants, subject to the terms of the Warrant Agreement,
there can be no assurance that it will be able to do so.
A holder of Warrants will not have any rights, privileges or liabilities as
a shareholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. No assurance can be given that the market
price of the Common Stock will exceed the exercise price of the Warrants at any
time during the exercise period.
BRIDGE UNITS
In January 1996, the Company completed the Bridge Financing, pursuant to
which it issued an aggregate of (i) $1,000,000 principal amount of Bridge Notes,
which bear interest at the rate of 8% per annum and are due and payable on the
earlier of the completion of this Offering or July 19, 1997 and (ii) the right
to receive upon completion of this Offering an aggregate of 500,000 Bridge Units
and 500,000 Class B Warrants. Each Bridge Unit consists of one share of Common
Stock and one Warrant. Two Class B Warrants together, will entitle the holder to
purchase one share of Common Stock for $8.00 per share during the three-year
period commencing one year after the completion of this Offering. The Company
may redeem the Class B Warrants, with the consent of the Underwriter, a price of
$.05 per Class B Warrant at any time after they become exercisable upon not less
than 30 days' prior written notice if the last sale price of the Common Stock
has been at least $12.00 per share on 20 consecutive trading days ending within
ten days prior to the date on which notice of redemption is given. The
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Company is registering for sale on the Registration Statement of which this
Prospectus forms a part, the Bridge Units, the Common Stock and Warrants
comprising the Bridge Units, the Common Stock underlying the Warrants included
in the Bridge Units and the Common Stock underlying the Class B Warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain of the federal income tax
consequences, under current law, of purchase and ownership of the Units, Common
Stock and Warrants. The Company has not requested and does not intend to request
a ruling from the Internal Revenue Service or a formal tax opinion from its
counsel on any tax aspect of this Offering. This tax discussion is intended only
as a descriptive summary and does not purport to be a complete analysis or
listing of all potential federal income tax effects of the purchase and
ownership of the Units, Common Stock or Warrants. Prospective purchasers of the
Units should consult their own tax advisors with respect to the tax consequences
to them of the purchase and ownership of such securities, including the Common
Stock and Warrants, and the applicability and effect of federal, state, local,
foreign and other tax laws.
An investor must allocate the cost of each Unit between each of its
elements (one share of Common Stock and one Warrant to purchase one share of
Common Stock) in accordance with their relative fair market values at the time
of issuance. Since the Common Stock and Warrants comprising the Units are
immediately detachable and a trading market for each is expected to develop
following this Offering, their relative fair market values will be determinable
based upon their respective trading prices at the commencement of trading. The
fair market value basis of allocation is the only method upon which such
allocation may be made in accordance with the Internal Revenue Code of 1986. The
portion of the cost of a Unit allocated to each element will constitute the
initial tax basis of such element for federal income tax purposes.
No gain or loss will be recognized by a holder of a Warrant on the holder's
purchase of Common Stock for cash upon exercise of the Warrant. The adjusted tax
basis of the Common Stock so acquired will be equal to the tax basis of the
Warrant plus the exercise price. The holding period of the Common Stock acquired
upon the exercise of the Warrant will begin on the date the Warrant is
exercised.
The sale of a share of Common Stock or the sale of a Warrant will result in
the recognition of gain or loss to the holder in an amount equal to the
difference between the amount realized (generally the cash and fair market value
of other property received) and the holder's adjusted tax basis therein. Such a
sale of Common Stock will result in capital gain or loss, provided the Common
Stock is a capital asset in the hands of the holder. The sale of a Warrant
(other than a sale to the Company) will likewise result in capital gains or
loss, provided the Warrant is a capital asset in the hands of the holder and the
Common Stock underlying the Warrant would be a capital asset to the holder if
acquired by the holder. Such capital gain or loss will be long-term capital gain
or loss if the Common Stock or Warrant being sold has been held for more than
one year at the time of such sale or exchange.
Based upon the Company's obligation to redeem the Warrants on a pro rata
basis, the redemption of a Warrant by the Company would be treated as a sale or
exchange of a capital asset and, any gain or loss recognized on the transaction
would be a capital gain or loss. Such gain or loss will be long-term capital
gain or loss if the holding period of the Warrant exceeds one year at the time
of redemption.
If a Warrant is not exercised and allowed to expire, the Warrant will be
deemed to have been sold or exchanged for no consideration on the expiration
date. Any loss to the holder of a Warrant will be a capital loss if the Warrant
was held as a capital asset and if the Common Stock underlying the Warrant would
have been a capital asset had such Warrant been exercised. Any capital loss will
be tong-term if the holding period of the Warrant exceeds one year at the time
it expires.
No gain or loss will be recognized by the Company upon the acquisition,
exercise or expiration of any Warrants.
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LIMITATION OF LIABILITY OF DIRECTORS
As permitted by the Business Corporation Law of New York, the Company's
Restated Certificate of Incorporation eliminates the personal liability of a
director to the Company and its shareholders for monetary damages for breach of
a director's fiduciary duty except in certain instances. Accordingly, except in
such circumstances, the Company's directors will not be liable to the Company or
its shareholders for breach of such duty.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation of the Company provides that the Company
shall indemnify, to the fullest extent permitted by New York law, any person
whom it may indemnify thereunder, including directors and officers of the
Company. Such indemnification (other than as ordered by a court) shall be made
by the Company only upon a determination that indemnification is proper in the
circumstances because the individual met the applicable standard of conduct.
Advances for such indemnification may be made pending such determination.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR.
The transfer agent, warrant agent and registrar for the Common Stock and
Warrants is Continental Stock Transfer & Trust Company, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,625,000 shares of Common Stock, not including shares of Common Stock issuable
upon exercise of outstanding options, warrants or the Underwriter's Unit
Purchase Option and assuming no exercise of the over-allotment option granted to
the Underwriter. Of these outstanding shares, the 1,125,000 shares of Common
Stock sold to the public in this Offering may be freely traded without
restriction or further registration under the Securities Act, except that any
shares that may be held by an 'affiliate' of the Company (as that term is
defined in the rules and regulations under the Securities Act) may be sold only
pursuant to a registration under the Securities Act or pursuant to an exemption
from registration under the Securities Act, including the exemption provided by
Rule 144 adopted under the Securities Act. The 3,000,000 shares of Common Stock
outstanding prior to this Offering, as well as the 500,000 shares of Common
Stock included in the Bridge Units, are 'restricted securities,' as that term is
defined in Rule 144 under the Securities Act and may not be sold unless such
sale is registered under the Securities Act or is made pursuant to an exemption
from registration under the Securities Act, including the exemption provided by
Rule 144. Of such shares, 2,818,750 will be available for sale pursuant to Rule
144 immediately, subject to a 24-month lock-up described below. An additional
681,250 shares will be available for sale pursuant to Rule 144 commencing two
years from the date of this Prospectus. 500,000 of these latter shares have been
included in the Registration Statement of which this Prospectus forms a part.
The holders of these shares have agreed not to sell these shares without the
prior consent of the Underwriter until 13 months after the date of this
Prospectus. All officers, directors and 5% shareholders of the Company as of the
date of this Prospectus (who hold in the aggregate 2,855,456
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shares) have agreed that for a period of 24 months from the date of this
Prospectus (18 months in the event that after the date of this Prospectus the
closing bid price of the Company's Common Stock exceeds $12.00 for 20
consecutive trading days), they will not sell any of their shares without the
prior consent of the Underwriter. The Company is advised by the Underwriter that
in determining whether to give or withhold their consent to any sale within the
applicable lock-up period, the Underwriter will consider whether such sale would
have an adverse effect on the market for the Company's Common Stock. No
shareholder subject to any lock-up agreement has requested to be released from
his lock-up.
In general, under Rule 144 as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least two years (including a shareholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Commission, provided certain
public information, manner of sale and notice requirements are satisfied. A
shareholder who is deemed to be an affiliate of the Company, including members
of the Board of Directors and senior management of the Company, will still need
to comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
that are not restricted securities, unless such sale is registered under the
Securities Act. A shareholder (or shareholders whose shares are aggregated) who
is deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale by such shareholder, and who has beneficially owned
restricted shares for at least three years, will be entitled to sell such shares
under Rule 144 without regard to the volume limitations described above.
Prior to this Offering, there has been no public trading market for the
Common Stock of the Company, and no predictions can be made as to the effect, if
any, that future sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect the then prevailing market price.
UNDERWRITING
Monroe Parker Securities, Inc. (the 'Underwriter') has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 1,125,000 Units on a firm commitment basis. The obligations
of the Underwriter under the Underwriting Agreement are subject to approval of
certain legal matters by counsel and various other conditions precedent, and the
Underwriter is obligated to purchase all of the Units offered by this Prospectus
(other than the Units covered by the over-allotment option described below), if
any are purchased.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at that price less a concession not in
excess of $.20 per Unit. After this Offering, the offering price and other
selling terms may be changed by the Underwriter. The Underwriter does not intend
to sell any of the securities of the Company to accounts for which it exercises
discretionary authority.
The Company has granted to the Underwriter an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase from the
Company at the offering price, less underwriting discounts and the
nonaccountable expense allowance, up to an aggregate of 168,750 additional Units
for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company also
has agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the Units
underwritten (including the sale of any Units subject to the Underwriter's
over-allotment option). The Company also has agreed to pay all expenses in
connection with qualifying the Units offered hereby for sale under the laws of
such states as the Underwriter may designate, including legal fees (up to
$40,000) and expenses of counsel retained for such purposes by the Underwriter.
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In connection with this Offering, the Company has agreed to sell to the
Underwriter for an aggregate of $112.50, the right to purchase up to an
aggregate of 112,500 Units (the 'Unit Purchase Option'). The Units issuable upon
exercise of the Unit Purchase Option are identical to those offered hereby. The
Unit Purchase Option is exercisable initially at $4.80 per Unit for a period of
four years commencing one year from the date of this Prospectus. The Unit
Purchase Option may not be transferred, sold, assigned or hypothecated during
the one-year period following the date of this Prospectus except to officers of
the Underwriter and to the selected dealers and their officers or partners. The
Unit Purchase Option grants to the holders thereof certain 'piggyback' and
demand rights for periods of seven and five years, respectively, from the date
of this Prospectus with respect to the registration under the Securities Act of
the securities directly and indirectly issuable upon exercise of the Unit
Purchase Option.
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Warrants. To the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission, the Company has agreed to pay the Underwriter for bona fide
services rendered a commission equal to 4% of the exercise price for each
Warrant exercised (other than Warrants held by the Underwriter and its
affiliates) if the exercise was solicited by the Underwriter. In addition to
soliciting, either orally or in writing, the exercise of the Warrants, such
services may also include disseminating information, either orally or in
writing, to Warrantholders about the Company or the market for the Company's
securities, and assisting in the processing of the exercise of Warrants. No
compensation will be paid to the Underwriter in connection with the exercise of
the Warrants if the market price of the underlying shares of Common Stock is
lower than the exercise price, the Warrants are held in a discretionary account,
the Warrants are exercised in an unsolicited transaction or the arrangement to
pay the commission is not disclosed in the prospectus provided to Warrantholders
at the time of exercise. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, while it is soliciting
exercise of the Warrants, the Underwriter will be prohibited from engaging in
solicited brokerage activities with regard to the Company's securities unless
the Underwriter has waived its right to receive a fee for the exercise of the
Warrants.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units and the terms
of the Warrants have been arbitrarily determined by negotiations between the
Company and the Underwriter and do not necessarily bear any relation to
established valuation criteria. Factors considered in determining such prices
and terms, in addition to prevailing market conditions, included an assessment
of the prospects for the industry in which the Company will compete, the
Company's management and the Company's capital structure.
Pursuant to the Underwriting Agreement, the Company has agreed not to issue
any of its shares of capital stock for 24 months from the date of this
Prospectus (18 months in the event that after the date of this Prospectus the
closing bid price of the Company's Common Stock exceeds $12.00 for 20
consecutive trading days) without the prior written consent of the Underwriter,
which consent may not be unreasonably withheld.
All of the Company's officers, directors and shareholders who own at least
5% of the outstanding Common Stock of the Company have agreed not to sell any of
their shares of Common Stock for a period of two years from the date of this
Prospectus without the prior written consent of the Underwriter. The Underwriter
does not intend to sell any of the securities of the Company to accounts for
which it exercises discretionary authority.
The Underwriting Agreement provides that, for a period of three years from
the date of this Prospectus, the Company will nominate a person selected by the
Underwriter and reasonably acceptable to the Company for election to serve as a
member of the Company's Board of Directors. The Company also has engaged the
Underwriter as its financial consultant for a period of two years from the date
of this Prospectus at a monthly fee of $1,000. Additionally, if within five
years of the date of this Prospectus, the Company completes a merger,
acquisition, joint venture or any other capital business transaction with a
party introduced to the Company by the Underwriter, the Underwriter will receive
a finder's fee equal to 5% of the first $3 million of consideration, 3% of the
next $2 million, 2% of the next $2 million and 1% of the excess, if any, over
$10 million.
35
<PAGE>
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Graubard Mollen & Miller, New York, New York. Bernstein & Wasserman,
LLP, New York, New York has acted as counsel for the Underwriter in connection
with this Offering.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for the years then ended have been included herein and in the Registration
Statement of which this Prospectus is a part, in reliance upon the report of
Richard A. Eisner & Company, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Units offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, certain portions having been omitted from this
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, the securities offered by this
Prospectus and such omitted information, reference is made to the Registration
Statement, including any and all exhibits and amendments thereto. Statements
contained in this Prospectus concerning the provisions of any document filed as
an exhibit are of necessity brief descriptions thereof and are not necessarily
complete, and in each instance reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in its entirety by this reference.
Following the effectiveness of the Registration Statement, the Company will
be subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith, the Company will file reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material, including the Registration Statement, can
be obtained from the Commission's Public Reference Section at prescribed rates.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent auditors and such
other periodic reports as the Company may determine to be appropriate or as may
be required by law.
36
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditor's Report............................................................................ F-2
Combined Balance Sheet as of December 31, 1995.......................................................... F-3
Combined Statements of Operations for the Years Ended December 31, 1995 and 1994........................ F-4
Combined Statements of Changes in Stockholders' Equity and Partners' Capital for the Years Ended
December 31, 1995 and 1994............................................................................ F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1994........................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Partners
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
Hicksville, New York
We have audited the accompanying combined balance sheet of Big City Bagels,
Inc. and Pumpernickel Partners, L.P. as at December 31, 1995, and the related
combined statements of operations, changes in stockholders' equity and partners'
capital and cash flows for the years ended December 31, 1995 and December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the combined financial position of Big City Bagels,
Inc. and Pumpernickel Partners, L.P. at December 31, 1995 and the results of
their operations and their cash flows for the years ended December 31, 1995 and
December 31, 1994 in conformity with generally accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
February 21, 1996
With respect to Note A
March 6, 1996
F-2
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED BALANCE SHEET
AS AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (NOTE A)
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 37,991 $ 37,991
Accounts receivable............................................................. 19,580 19,580
Inventory....................................................................... 47,933 47,933
Prepaid expenses and other current assets....................................... 9,572 9,572
----------- ----------
Total current assets....................................................... 115,076 115,076
Fixed assets, net of accumulated depreciation........................................ 934,378 934,378
Intangible assets, net of accumulated amortization of $19,869........................ 31,230 284,532
Deferred registration costs.......................................................... 25,000 25,000
Security deposits.................................................................... 31,947 31,947
----------- ----------
Total...................................................................... $ 1,137,631 $1,390,933
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities:
Stockholder and partner loans................................................... $ 200,000 $ 200,000
Notes payable................................................................... 87,712 87,712
Unearned franchise fee income................................................... 309,250 309,250
Accounts payable................................................................ 278,390 278,390
Accrued expenses................................................................ 35,660 35,660
----------- ----------
Total current liabilities.................................................. 911,012 911,012
Deferred rent payable................................................................ 26,261 26,261
Loans payable, noncurrent............................................................ 11,044 11,044
Stockholder and partner loans, noncurrent............................................ 262,468 262,468
----------- ----------
Total liabilities.......................................................... 1,210,785 1,210,785
----------- ----------
Stockholders equity and partners' capital:
Preferred stock $.001 par value; 1,000,000 shares authorized; no shares
outstanding
Common stock $.001 par value; 10,000,000 shares authorized; 2,818,750 shares
issued and outstanding, historical; 3,000,000 shares issued and outstanding,
pro forma...................................................................... 2,819 3,000
Additional paid-in capital...................................................... 972,181 177,148
Partners' capital............................................................... 255,456
Accumulated deficit............................................................. (1,303,610)
----------- ----------
Total stockholders' equity (deficiency) and partners' capital.............. (73,154) 180,148
----------- ----------
Total...................................................................... $ 1,137,631 $1,390,933
----------- ----------
----------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Revenues:
Product sales by company owned stores........................................... $ 1,313,297 $ 451,568
Product sales to franchisees and others......................................... 172,757 60,493
Franchise fees.................................................................. 40,000 30,000
Royalty income.................................................................. 22,147 157
Other income.................................................................... 2,054 1,917
----------- ----------
Total revenues............................................................. 1,550,255 544,135
----------- ----------
Costs and expenses:
Cost of sales................................................................... 667,394 249,509
Selling, general and administrative expenses.................................... 1,681,892 1,035,527
Interest expense................................................................ 27,818 17,692
----------- ----------
Total costs and expenses................................................... 2,377,104 1,302,728
----------- ----------
Net (Loss)........................................................................... (826,849) $ (758,593)
----------
----------
Pro forma adjustment:
Increase in officers salary..................................................... 212,333
-----------
Pro forma net (loss)................................................................. $(1,039,182)
-----------
-----------
Pro forma net (loss) per common share................................................ $(.35)
-----------
-----------
Pro forma weighted average common shares outstanding................................. 3,000,000
-----------
-----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN PARTNERS' ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL CAPITAL DEFICIT STOCK
--------- ------ ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1994................ 2,818,750 $2,819 $ 27,181 $ 506,408 $ (169,120)
Capital contributions..................... 951,000 200,000
Purchase of treasury stock................ (225,500) $(24,000)
Net (loss)................................ (297,893) (460,700)
--------- ------ ----------- --------- ----------- --------
Balance -- December 31, 1994.............. 2,593,250 2,819 978,181 408,515 (629,820) (24,000)
Purchase of treasury stock................ (56,375) (6,000)
Reissuance of treasury stock.............. 281,875 (6,000) 30,000
Net (loss)................................ (153,059) (673,790)
--------- ------ ----------- --------- ----------- --------
Balance -- December 31, 1995.............. 2,818,750 2,819 972,181 255,456 (1,303,610) - 0 -
Exchange of partnership interests for
common stock............................ 181,250 181 508,577 (255,456)
Termination of S corporation status....... (1,303,610) 1,303,610
--------- ------ ----------- --------- ----------- --------
Pro Forma Balance December 31, 1995....... 3,000,000 $3,000 $ 177,148 $ - 0 - $ - 0 - $ - 0 -
--------- ------ ----------- --------- ----------- --------
--------- ------ ----------- --------- ----------- --------
<CAPTION>
TOTAL
----------
<S> <C>
Balance -- January 1, 1994................ $ 367,288
Capital contributions..................... 1,151,000
Purchase of treasury stock................ (24,000)
Net (loss)................................ (758,593)
----------
Balance -- December 31, 1994.............. 735,695
Purchase of treasury stock................ (6,000)
Reissuance of treasury stock.............. 24,000
Net (loss)................................ (826,849)
----------
Balance -- December 31, 1995.............. (73,154)
Exchange of partnership interests for
common stock............................ 253,302
Termination of S corporation status....... - 0 -
----------
Pro Forma Balance December 31, 1995....... $ 180,148
----------
----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)........................................................................ $(826,849) $ (758,593)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation and amortization................................................ 115,862 62,064
(Increase) decrease in:
Accounts receivable..................................................... (5,607) (12,373)
Inventory............................................................... (753) (47,180)
Prepaid expenses........................................................ (238) 13,643
Other assets............................................................ (1,922) (2,971)
Increase in:
Accounts payable........................................................ 170,855 86,395
Accrued expenses........................................................ 18,788 7,574
Unearned franchise fee income........................................... 244,250 65,000
Deferred rent payable................................................... 4,968 18,286
--------- ----------
Net cash (used in) operating activities............................ (280,646) (568,155)
--------- ----------
Cash flows from investing activities:
Purchases of fixed assets......................................................... (54,181) (921,920)
--------- ----------
Cash flows from financing activities:
Proceeds from capital contributions............................................... 1,151,000
Proceeds from stockholder loans................................................... 253,468 83,000
Proceeds from notes payable....................................................... 101,648
Repayment of notes payable........................................................ (2,892)
Purchase of treasury stock........................................................ (6,000)
Deferred registration costs....................................................... (25,000)
--------- ----------
Net cash provided by financing activities.......................... 321,224 1,234,000
--------- ----------
Net (Decrease) in Cash and Cash Equivalents............................................ (13,603) (256,075)
Cash and cash equivalents -- beginning of year......................................... 51,594 307,669
--------- ----------
Cash and Cash Equivalents -- End of Year............................................... $ 37,991 $ 51,594
--------- ----------
--------- ----------
Supplemental disclosure of cash paid:
Interest.......................................................................... $ 2,795 $ 17,692
Income taxes...................................................................... 3,578 1,339
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- THE COMPANY AND BASIS OF PRESENTATION:
Big City Bagels, Inc. ('Big City') operates and franchises retail bagel
stores and sells its products wholesale to commercial accounts and food service
operators. Pumpernickel Partners, L.P. ('Pumpernickel') operates two such bagel
stores. The combined financial statements include the accounts of Big City and
Pumpernickel (collectively, the 'Company'), which are under common control as
the principal stockholders of Big City are also the principal stockholders of
Bagel Partners, Inc. ('Bagel Partners'), the general partner of Pumpernickel.
The Company commenced operations in 1993. All significant intercompany balances
and transactions have been eliminated. Bagel Partners had no assets or
liabilities other than its interest in Pumpernickel, which if the financial
statements of Bagel Partners were combined herewith, would have been eliminated.
The Company has incurred losses since inception and has a working capital
deficit of $795,936 at December 31, 1995. In January 1996 the Company raised
$1,000,000 through a bridge financing (Note J) which management believes will be
sufficient to fund its operations through at least December 31, 1996. In
addition, the Company expects to offer its securities in a public offering (the
'Offering') however, there is no assurance that such offering will be
consummated (Note K).
Immediately prior to the closing of the Offering the limited partners of
Pumpernickel and the stockholders of Bagel Partners, Inc., the general partner
of Pumpernickel, will exchange their partnership interests and all their capital
stock, respectively, for 181,250 shares of the Company's common stock. This
transaction will be accounted for as a purchase of the interests of the
unaffiliated limited partners in Pumpernickel. The common stock issued to the
stockholders of Bagel Partners and the affiliated limited partners of
Pumpernickel will be valued at their respective equity interests in
Pumpernickel. The excess of the fair value of the shares of common stock
(144,535 shares) issued to such limited partners over the book amount of their
interest in Pumpernickel has been assigned to the franchise costs and included
with intangible assets in the accompanying pro forma balance sheet ($253,302).
The accompanying pro forma balance sheet reflects this transaction as if it had
occurred on December 31, 1995. In addition, in February 1996 the Company amended
its certificate of incorporation, increasing its authorized shares, and in March
1996 the Company effected a 28,187.5 for 1 stock split of its common stock in
the form of stock dividend payable at the closing of the Offering to
shareholders of record on April 1, 1996. The accompanying financial statements
reflect these transactions retroactively.
(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) INVENTORY:
Inventory is stated at the lower of cost (first-in, first-out) or market.
(2) DEPRECIATION:
Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets.
(3) INTANGIBLE ASSETS:
Intangible assets consists of organization costs which are being amortized
over 5 years and trademark costs which are being amortized over 15 years.
(4) FRANCHISE FEES:
Franchise fees include fees earned from area development agreements and
franchise agreements.
F-7
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Under an area development agreement, a developer purchases the right to
develop a specified area for future franchises. Area development fees are
recognized as revenue on a pro rata basis as each store in the area is opened.
Generally, franchise agreements provide for a franchise fee of $30,000 for
a franchisee's first store and $25,500 for subsequent stores. A deposit is
required at the signing of the franchise agreement and the balance is payable
when the franchisee obtains a lease commitment for the site. The Company's
initial obligations under the franchise agreement are to provide operational
guidelines and manuals, to assist in and approve the proposed site selection and
to provide training to the franchisee. Revenues are recognized when
substantially all material obligations have been provided, historically upon
opening of the respective store.
(5) ROYALTY INCOME:
Franchise agreements provide for royalties of 4% of gross sales, which are
recognized as income when earned.
(6) INCOME TAXES:
Big City and Pumpernickel file separate tax returns. Big City has elected S
corporation tax status for federal and certain state income tax reporting
purposes. Pumpernickel is treated as a partnership for federal and state income
tax reporting purposes. Accordingly, the losses of the Company are deductible by
the stockholders and partners and will not be available as a loss carryforward
to the Company. Upon closing of the proposed public offering (Note K), the
Company will be subject to income taxes.
(7) PRO FORMA NET (LOSS) PER SHARE:
Pro forma net (loss) per share is computed on the basis of the weighted
average number of common shares outstanding during each period adjusted for the
28,187.5 to 1 stock split and as if the exchange described in Note A[1] had
occurred on January 1, 1995 and as if the employment agreements described in
Note F[2] had been in effect since the later of January 1, 1995 or the date of
employment of the respective individual.
(8) LONG-LIVED ASSETS:
In accordance with FASB Statement No. 121, 'Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of', the Company
records impairment losses on long-lived assets used in operations, including
goodwill and intangible assets, when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
(NOTE C) -- FIXED ASSETS:
Fixed assets consists of the following:
<TABLE>
<CAPTION>
LIFE
--------------
<S> <C> <C>
Furniture and fixtures.................................................. $ 284,482 7 to 15 years
Machinery and equipment................................................. 413,004 5 to 15 years
Leasehold improvements.................................................. 398,988 Life of leases
----------
Total.............................................................. 1,096,474
Less accumulated depreciation........................................... 162,096
----------
Balance............................................................ $ 934,378
----------
----------
</TABLE>
F-8
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE D) -- NOTES PAYABLE:
The Company has borrowed $68,947 from a bank pursuant to two line of credit
agreements. The full amount was repaid in January 1996. The agreements provide
for aggregate borrowings of up to $70,000 with interest payable at 15.25%.
In addition, the Company owes $29,809 pursuant to two equipment loans,
payable in monthly installments of principal and interest totaling $1,940
through December 1997.
(NOTE E) -- STOCKHOLDER AND PARTNER LOANS:
Stockholder and partner loans are payable $200,000 upon closing of the
Offering, $175,000 from the first proceeds to the Company from the exercise of
the underwriter's over-allotment option in the Offering, and the balance monthly
with interest at 10% commencing January 1997. If the offering does not take
place the loans are payable monthly with interest at 10% commencing July 1996
through June 2001. Assuming the repayment of $375,000 of stockholder and partner
loans had been repaid from the proceeds of the Offering at the later of January
1, 1995 or the date of the loan, supplemental loss per share would be $(.32) for
1995.
(NOTE F) -- COMMITMENTS AND CONTINGENCIES:
(1) OPERATING LEASES:
The Company leases its commissary space and store locations under various
operating leases which expire between December 1996 and March 1999. Future
minimum rental payments as of December 31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- --------
<S> <C>
1996.............................................................................. $176,166
1997.............................................................................. 148,596
1998.............................................................................. 138,720
1999.............................................................................. 20,573
--------
Total........................................................................ $484,055
--------
--------
</TABLE>
Rent expense for the years ended December 31, 1995 and December 31, 1994
was $170,526 and $130,299, respectively. Rent expense under the Company's lease
for its commissary and one store, which provides for scheduled rent increases,
is recognized on a straight-line basis over the term of the lease.
(2) EMPLOYMENT AGREEMENTS:
The Company intends to enter into three year employment agreements,
effective as of January 1, 1996 with two officers providing for aggregate annual
salaries of $250,000, increasing to $330,000 after the closing of the Offering,
with annual increments of 10%.
The Company has also entered into an agreement with an employee providing
for an annual salary of $85,000 though December 31, 1998.
(NOTE G) -- INCOME TAXES:
If the Company had been subject to tax as a C corporation, there would have
been no pro forma income tax expense for the years ended December 31, 1995 and
December 31, 1994. Also, in accordance with SFAS 109, a pro forma deferred tax
asset of approximately $711,000 and $379,000 at December 31,
F-9
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995 and December 31, 1994, respectively, attributable principally to net
operating loss carryforwards would be fully reserved because the realization of
such benefit could not be established.
(NOTE H) -- FRANCHISES:
During 1995 the Company entered into franchise agreements for twelve
stores, none of which were opened as of December 31, 1995. During 1994 the
Company entered into franchise agreements for two stores, one of which was
opened in each of 1995 and 1994. At December 31, 1995 there were two franchised
stores and three Company owned stores in operation. Deferred franchise fees at
December 31, 1995 and December 31, 1994 represent fees received in advance of
store openings.
(NOTE I) -- COMMON STOCK:
The Company intends to adopt its 1996 Performance Equity Plan (the 'Plan')
which provides for the issuance of awards of up to 350,000 shares of common
stock to employees, officers, directors and consultants. The awards may consist
of incentive stock options, nonqualified options, restricted stock awards,
deferred stock awards, stock appreciation rights and other awards as described
in the Plan. Although no awards have yet been granted under the Plan, the
Company has agreed to issue options to purchase 15,000 shares of common stock to
an employee at an exercise price of $4.00 per share.
(NOTE J) -- BRIDGE FINANCING:
In January 1996, the Company completed a bridge financing, pursuant to
which it issued (i) an aggregate of $1,000,000 principal amount of promissory
notes, which bear interest at the rate of 8% per annum and are due on the
earlier of the completion of the Offering or July 19, 1997 and (ii) the right to
receive upon the completion of the Offering an aggregate of 500,000 bridge units
and 500,000 Class B redeemable common stock purchase warrants ('Class B
warrants'). Each bridge unit consists of one share of common stock and one
warrant identical to the Class A warrants described in Note K. Two Class B
warrants, together, will entitle the holder to purchase one share of common
stock for $8.00 during the three-year period commencing one year after the
completion of the Offering. The bridge units and Class B warrants contain
registration rights and the Company intends to register such securities
simultaneously with the Offering. The units and warrants have been valued at
$684,000 and will be accounted for as a debt discount increasing the effective
interest rate on the notes to 169%.
(NOTE K) -- INITIAL PUBLIC OFFERING:
The Company intends to offer securities to the public in an initial public
offering. In connection therewith, the Company has incurred expenses of $25,000
through December 31, 1995 and expects to incur significant other expenses which,
if the Offering does not take place, will be charged to expense. The Offering
consists of 1,125,000 units, each unit consisting of one share of common stock
and one Class A warrant which entitles the holder thereof to purchase one share
of common stock at $4.50 per share for a three-year period commencing one year
after the effective date of the Offering.
F-10
<PAGE>
<PAGE>
_____________________________ _____________________________
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................................................................................... 3
Prospective Combination..................................................................................................... 7
Risk Factors................................................................................................................ 7
Use of Proceeds............................................................................................................. 13
Dilution.................................................................................................................... 14
Capitalization.............................................................................................................. 15
Dividend Policy............................................................................................................. 15
Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 16
Business.................................................................................................................... 19
Management.................................................................................................................. 26
Principal Shareholders...................................................................................................... 28
Certain Relationships and Related Transactions.............................................................................. 29
Description of Securities................................................................................................... 30
Shares Eligible for Future Sale............................................................................................. 33
Underwriting................................................................................................................ 34
Legal Matters............................................................................................................... 36
Experts..................................................................................................................... 36
Available Information....................................................................................................... 36
Index to Financial Statements............................................................................................... F-1
</TABLE>
------------------------
UNTIL JUNE 3, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS, COMMON
STOCK AND WARRANTS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,125,000 UNITS
[LOGO]
BIG CITY BAGELS, INC.
-------------------------
PROSPECTUS
-------------------------
MONROE PARKER
SECURITIES, INC.
MAY 7, 1996
_____________________________ _____________________________
<PAGE>
<PAGE>
Rule 424(b)(3)
No. 333-2154
BIG CITY BAGELS, INC.
500,000 BRIDGE UNITS, 500,000 SHARES OF
COMMON STOCK AND 500,000 CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
[LOGO]
Pursuant to the Registration Statement of which this Prospectus forms a
part, the Company is making an initial public offering (the 'Offering') of
1,125,000 units (the 'Units'), each Unit consisting of one share of common
stock, $.001 par value per share (the 'Common Stock') and one Class A Redeemable
Common Stock Purchase Warrant (the 'Warrants'). Each Warrant entitles the holder
to purchase one share of Common Stock for $4.50 during the three-year period
commencing one year after the date of this Prospectus. The Company may redeem
the Warrants, with the consent of Monroe Parker Securities, Inc. (the
'Underwriter'), at a price of $.05 per Warrant at any time after they become
exercisable upon not less than 30 days' prior written notice if the last sale
price of the Common Stock has been at least $7.00 per share on 20 consecutive
trading days ending within ten days prior to the date on which notice of
redemption is given. The Company may redeem the Warrants without the consent of
the Underwriter on the same terms, provided that the last sale price of the
Common Stock has been at least $8.00 per share on 20 consecutive trading days
ending within ten days prior to the date on which notice of redemption is given.
In January 1996, the Company completed a bridge financing (the 'Bridge
Financing'), pursuant to which it issued an aggregate of (i) $1,000,000
principal amount of promissory notes (the 'Bridge Notes') and (ii) the right to
receive upon completion of the Offering an aggregate of 500,000 bridge units
(the 'Bridge Units') and 500,000 Class B Redeemable Common Stock Purchase
Warrants (the 'Class B Warrants'). Each Bridge Unit consists of one share of
Common Stock and one Warrant. Two Class B Warrants together, entitle the holder
to purchase one share of Common Stock for $8.00 per share during the period
commencing one year after the completion of the Offering.
The Registration Statement of which this Prospectus forms a part also
registers up to 500,000 Bridge Units on behalf of certain persons (the 'Selling
Securityholders') that may be sold by them for their accounts from time to time
in open market transactions. The Bridge Units and the Common Stock and Warrants
comprising the Bridge Units are collectively referred to herein as the
'Registered Bridge Securities.' The Registered Bridge Securities offered by the
Selling Securityholders are not part of the underwritten Offering. The Selling
Securityholders may not sell the Registered Bridge Securities until June 7, 1997
without the prior consent of the Underwriter.
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE 'RISK FACTORS' AT PAGE 7 AND 'DILUTION' AT PAGE 14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit....................................................... $4.00 $.40 $3.60
Total(3)....................................................... $4,500,000 $450,000 $4,050,000
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to the Underwriter. The Company also has agreed to sell to the
Underwriter an option (the 'Unit Purchase Option') to purchase 112,500 Units
and to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the 'Securities
Act'). See 'Underwriting.'
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $135,000 ($155,250 if the
Underwriter's over-allotment option is exercised in full), estimated at
$485,000.
(3) The Company has granted the Underwriter an option, exercisable within 30
days from the date of this Prospectus, to purchase up to 168,750 additional
Units on the same terms set forth above, solely for the purposes of covering
over-allotments, if any. If such over-allotment option is exercised in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $5,175,000, $517,500 and $4,657,500,
respectively. See 'Underwriting.'
------------------------
The Units are being offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriter reserves the right to withdraw this Offering pursuant to the terms
of the Underwriting Agreement and to reject any order in whole or in part. It is
expected that delivery of certificates representing the securities comprising
the Units offered hereby will be made against payment therefor at the offices of
the Underwriter in Purchase, New York on or about May 13, 1996.
------------------------
MONROE PARKER SECURITIES, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS MAY 7, 1996
<PAGE>
<PAGE>
[PHOTO]
Big City Bagels'r' and A Bigger Bagel for Less Dough!'r' is a registered
trademark and service mark, respectively, of the Company.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS, COMMON
STOCK AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including notes thereto) appearing elsewhere in this Prospectus.
Each prospective investor is urged to read this Prospectus in its entirety.
Unless otherwise indicated, the information in this Prospectus gives effect to
(i) the 28,187.5-for-1 stock split in the form of a stock dividend of the Common
Stock declared by the Company on March 5, 1996 and to be effected on the date of
the closing of this Offering (the 'Stock Split'); and (ii) the proposed
combination of Pumpernickel Partners, L.P. and the Company to be effected
immediately prior to the closing of this Offering, and assumes that the Selling
Securityholders will exercise their right to receive the Bridge Units
simultaneously with the closing of this Offering. See 'Prospective Combination.'
THE COMPANY
Big City Bagels is a New York corporation that operates and franchises
upscale bagel bakery cafes under the Company's registered trademark 'Big City
Bagels'r'.' These stores sell a wide variety of oversized, fresh baked bagels,
including unique specialty bagels, and cream cheese spreads, muffins and other
bakery products for take-out and eat-in consumption. Big City Bagels stores also
sell salads, sandwiches, specialty coffees and other beverages. The Company owns
three stores, two of which are located in Costa Mesa, California and one of
which is located in Laguna Niguel, California. The Company also sells Big City
Bagels franchises. Currently, there are eight franchises open and operating in
California, Minnesota, Utah and Arizona. As of the date of this Prospectus, the
Company has sold franchises to open an additional 30 stores, which are in
various stages of development. The Company also sells its products wholesale to
commercial accounts and food service operators.
The Company seeks to ensure a high quality, consistent product by
controlling the preparation and distribution of its bagel dough, muffin mixes
and cream cheese spreads. This control is maintained by using regional
commissaries in which bagel dough and other products are prepared and then
delivered to surrounding Company-owned stores and franchises. The Company's
bagels are then baked in each store daily in accordance with the Company's
quality control guidelines using a traditional technique which requires the
bagels to be boiled and then baked. The Company currently owns and operates one
commissary located in Costa Mesa, California, which services most existing Big
City Bagels stores. The Company also has assisted one of its franchisees, who
entered into an area development agreement with the Company to open 12 stores in
the Minneapolis/St. Paul, Minnesota area, in establishing a commissary owned and
operated by such franchisee in Minneapolis to service these stores. This
commissary is required to adhere to the Company's strict quality control
guidelines. The Company distributes its bagel dough and other products to its
franchises in California, Utah and Arizona under a distribution agreement with
Sysco Food Services of Los Angeles, Inc. ('Sysco'). The Company may enter into
similar agreements with distributors throughout the country as additional stores
are opened or may distribute its bagel dough and other products itself to these
stores.
The Company's objective is to become a leading national bagel store chain.
The Company intends to achieve this objective by (i) expanding its franchise
operations; (ii) increasing the number of Company-owned stores by opening
additional stores and acquiring existing bagel stores or chains; and (iii)
increasing revenues from sales to commercial and wholesale accounts. With
respect to its franchise operations, the Company believes that its consistent
product quality, visually-appealing, upscale store design and well-organized
business operations will enable the Company to secure experienced, multi-unit
franchisees to operate its stores. In order to attract potential franchisees,
the Company plans to use a portion of the proceeds of this Offering to open
Company-owned flagship stores in strategic geographic locations around the
country. Such franchises would be serviced by regional commissaries, which the
Company plans to use as additional stores are opened. The Company also intends
to expand by acquiring existing bagel stores or chains and possibly other retail
enterprises that the Company believes will complement and enhance its
operations. In determining whether to make an acquisition, the Company will
consider, among other things, the size, location and existing operations of the
acquisition candidate, as well as such candidate's potential to maximize growth
and increase revenues. Although the Company regularly evaluates possible
acquisition opportunities, as of the date of this
3
<PAGE>
<PAGE>
Prospectus, the Company is not a party to any agreements, commitments,
arrangements or understandings with respect to any acquisition.
In January 1996, the Company completed a bridge financing (the 'Bridge
Financing'), pursuant to which it issued an aggregate of (i) $1,000,000
principal amount of promissory notes (the 'Bridge Notes'), which bear interest
at the rate of 8% per annum and are due and payable on the earlier of the
completion of this Offering or July 19, 1997 and (ii) the right to receive upon
completion of this Offering an aggregate of 500,000 Bridge Units and 500,000
Class B Warrants. Each Bridge Unit consists of one share of Common Stock and one
Warrant. Two Class B Warrants together, will entitle the holder to purchase one
share of Common Stock for $8.00 per share during the three-year period
commencing one year after the completion of this Offering. The Company is
registering for sale on the Registration Statement of which this Prospectus
forms a part, the Bridge Units and the Common Stock and Warrants comprising the
Bridge Units. See 'Description of Securities -- Bridge Units.'
The Company was incorporated in the State of New York on December 14, 1992.
Its principal executive offices are located at 99 Woodbury Road, Hicksville, New
York 11801 and its telephone number is (516) 932-5050.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................... 1,125,000 Units, each Unit consisting of one share of Common Stock
and one Warrant. Each Warrant entitles the holder to purchase one
share of Common Stock for $4.50 during the three-year period
commencing one year after the date of this Prospectus. The Company
may redeem the Warrants, with the consent of the Underwriter, at a
price of $.05 per Warrant at any time after they become
exercisable upon not less than 30 days' prior written notice if
the last sale price of the Common Stock has been at least $7.00
per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given. The
Company may redeem the Warrants without the consent of the
Underwriter on the same terms, provided that the last sale price
of the Common Stock has been at least $8.00 per share on 20
consecutive trading days ending within ten days prior to the date
on which notice of redemption is given. The Common Stock and
Warrants comprising the Units are immediately detachable and
separately tradeable. See 'Description of Securities.'
Nasdaq SmallCap Market Symbols(1)............ Units: BIGCU
Common Stock: BIGC
Warrants: BIGCW
Common Stock Outstanding Prior to the
Offering................................... 3,000,000 shares(2)
Common Stock to be Outstanding After the
Offering................................... 4,625,000 shares(3)
</TABLE>
- ------------
(1) The Company may terminate the quotation of the Units on the Nasdaq SmallCap
Market ('Nasdaq'), with the Underwriter's consent, at any time commencing on
the 30th day after the date of this Prospectus without notice to the
Company's securityholders upon not less than 15 days' prior notice to
Nasdaq.
(2) Does not include 500,000 shares of Common Stock included in the Bridge
Units.
(3) Includes 500,000 shares of Common Stock included in the Bridge Units
issuable at the closing of this Offering upon the exercise by the Selling
Securityholders of their right to receive the Bridge Units.
4
<PAGE>
<PAGE>
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering to open
Company-owned flagship stores; repay the Bridge Notes; expand or relocate the
Company's Costa Mesa, California commissary and possibly establish additional
commissaries; partially repay indebtedness owed to certain of its shareholders
(the 'Shareholder Loans'); increase marketing, promotional, advertising and
public relations activities aimed at both customers and potential franchisees;
and for working capital and general corporate purposes. See 'Use of Proceeds.'
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk and immediate substantial dilution and should not be purchased by investors
who cannot afford the loss of their entire investment. See 'Risk Factors' at
page 7 and 'Dilution' at page 14.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Statement of Operations Data:
Total revenues................................................................... $ 544,135 $1,550,255
Total costs and expenses......................................................... 1,302,728 2,377,104
Net (loss) -- historical......................................................... (758,593) (826,849)
Pro forma adjustment:
Increase in officers' salaries(1)........................................... 212,333
Net (loss) -- pro forma.......................................................... (1,039,182)
Pro forma net (loss) per common share(2)......................................... -- (.35)
Pro forma weighted average common shares outstanding............................. -- 3,000,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
----------- ------------ --------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets.................................................. $ 1,137,631 $1,390,933 $4,725,330
Working capital (deficit)..................................... (795,936) (795,936) 2,763,461
Total liabilities............................................. 1,210,785 1,210,785 1,010,785
Accumulated deficit........................................... (1,303,610) -- (714,145)
Total stockholders' equity (deficiency)....................... (73,154) 180,148 3,714,545
</TABLE>
- ------------
(1) Gives effect to the salaries specified under the employment agreements as if
the agreements were in effect from the later of January 1, 1995 or the date
of employment.
(2) Assuming $375,000 of shareholder and partner loans was repaid from the
proceeds of this Offering as of the later of January 1, 1995 or the date of
the loans, supplemental loss per share would be ($.32).
(3) Gives effect to the exchange of the partnership interests in Pumpernickel
Partners, L.P. for 181,250 shares of the Company's Common Stock and the
termination of the Company's S corporation status. See 'Prospective
Combination.'
(4) Gives effect to the sale of the Units offered hereby and the application of
the estimated net proceeds therefrom. See 'Use of Proceeds.' Also gives
effect to the recognition of a non-cash
(footnotes continued on next page)
5
<PAGE>
<PAGE>
(footnotes continued from previous page)
charge of an aggregate of $693,542 of debt issuance costs and original issue
discount to be incurred in the quarter ending March 31, 1996 and upon
closing of this Offering.
Unless otherwise indicated, the information in this Prospectus does not
give effect to the exercise of the Underwriter's over-allotment option, the Unit
Purchase Option or the Warrants included in the Units offered hereby, and does
not include: (i) 350,000 shares of Common Stock reserved for issuance upon the
exercise of options granted or to be granted under the Company's 1996
Performance Equity Plan (the '1996 Plan'); (ii) 500,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants included in the Bridge
Units; and (iii) 250,000 shares of Common Stock reserved for issuance upon
exercise of the Class B Warrants. See 'Management -- 1996 Performance Equity
Plan' and 'Description of Securities -- Bridge Units.'
6
<PAGE>
<PAGE>
PROSPECTIVE COMBINATION
Pumpernickel Partners, L.P. ('Pumpernickel Partners') is a Delaware limited
partnership which currently owns and operates two Big City Bagels franchises in
Costa Mesa and Laguna Niguel, California. Bagel Partners, Inc. ('Bagel
Partners') is the sole general partner of Pumpernickel Partners, and owns a 5%
interest in Pumpernickel Partners. Messrs. Mark Weinreb, Chairman of the Board
and Chief Executive Officer of the Company, Stanley Weinreb, Vice President and
a director of the Company, and Stanley Raphael, Secretary and a director of the
Company, each own 22.5% of Bagel Partners, as well as a 6.9%, 6.9% and 3.45%
limited partnership interest in Pumpernickel Partners, respectively. Jerry
Rosner, President and a director of the Company, owns 10% of Bagel Partners.
These four individuals are also the sole shareholders of the Company as of the
date of this Prospectus. Immediately prior to the closing of this Offering, all
of the limited partners of Pumpernickel Partners will contribute to the Company
their partnership interests in Pumpernickel Partners, and all of the
shareholders of Bagel Partners will contribute to the Company all of the capital
stock of Bagel Partners in exchange for an aggregate of 181,250 shares of Common
Stock of the Company (the 'Combination'). The number of shares of Common Stock
to be issued in the Combination was derived by dividing the $725,000 aggregate
capital contributions of the partners of Pumpernickel Partners by the public
offering price of $4.00 per share (attributing no value to the Warrants included
in the Units). For financial statement purposes, those shares issued to the
unaffiliated limited partners are valued at $3.20 per share, which represents a
discount of 20% from the public offering price per share since these shares have
not been registered for resale. As a result of the Combination, Pumpernickel
Partners and Bagel Partners will become wholly-owned subsidiaries of the Company
immediately prior to the closing of the Offering. As soon as practicable
following the closing of this Offering, the Company will commence the
liquidation of Pumpernickel Partners and Bagel Partners, whereupon all of the
assets of Pumpernickel Partners will be owned directly by the Company. As used
in this Prospectus, except when the context otherwise requires, references to
the 'Company' or 'Big City Bagels' mean Big City Bagels, Inc. and Pumpernickel
Partners.
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Accordingly, in analyzing an investment in these securities, prospective
investors should carefully consider, along with other matters referred to
herein, the following risk factors. No investor should participate in this
Offering unless such investor can afford a complete loss of his or her
investment.
Limited Operating History and Revenues; Significant and Continuing Losses;
Accumulated Deficit. The Company was organized in December 1992 and has a
limited operating history upon which an evaluation of the Company's future
performance and prospects can be made. The Company's prospects must be
considered in light of the risks, expenses, delays, problems and difficulties
frequently encountered in the establishment of a new business in an emerging and
evolving industry characterized by intense competition. Since inception, the
Company has generated limited revenues and has incurred significant losses,
including losses of $758,593 and $826,849, respectively, for the years ended
December 31, 1994 and 1995. At December 31, 1995, without giving effect to the
Combination, Big City Bagels, Inc. had an accumulated deficit of $1,303,610.
Pumpernickel Partners has incurred losses of $469,544 since inception. Losses
are expected to continue at least through 1996. Inasmuch as the Company will
continue to have a high level of operating expenses following this Offering and
will be required to make significant up-front expenditures in connection with
its proposed expansion (including salaries of executive, marketing and other
personnel), the Company anticipates that losses will continue until such time,
if ever, as the Company is able to generate sufficient revenues to finance its
operations and the costs of continuing expansion. There can be no assurance that
the Company will be able to generate significant revenues or achieve profitable
operations. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and Financial Statements.
Working Capital Deficit; Dependence on Offering Proceeds to Implement
Proposed Expansion; Possible Need for Additional Financing. At December 31,
1995, the Company had a working capital deficit of $795,936. The Company is
dependent on the proceeds of this Offering to implement its
7
<PAGE>
<PAGE>
proposed expansion and to finance its working capital requirements. The Company
anticipates, based on currently proposed plans and assumptions relating to its
operations (including the costs associated with its proposed expansion), that
the proceeds of this Offering, together with projected cash flow from
operations, will be sufficient to satisfy its anticipated cash requirements for
at least 12 months following the completion of this Offering. In the event that
the Company's plans change, its assumptions change or prove to be inaccurate or
the proceeds of this Offering or cash flow prove to be insufficient to fund the
Company's operations (due to unanticipated expenses, delays, problems,
difficulties or otherwise), the Company may need to seek additional financing.
There can be no assurance that additional financing will be available to the
Company on commercially reasonable terms, or at all. See 'Use of Proceeds' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
Dependence on Franchisees. The Company realizes a substantial portion of
its revenues from sales of bagel dough, cream cheese spreads and muffin mixes to
franchisees, initial franchise and area development fees and continuing royalty
payments from its franchisees. The Company is therefore substantially dependent
upon its ability to attract, retain and contract with suitable franchisees and
the ability of franchisees to successfully open and operate their franchises.
Should the Company experience difficulty in attracting suitable franchisees, or
the franchisees encounter business or operational difficulties, the Company's
revenues will be adversely affected. Such reduction in revenues also may
negatively impact the Company's ability to sell new franchises. Consequently,
the Company's financial prospects are directly related to the success of its
franchisees in promoting the Big City Bagels concept and the success of each
store, over which the Company has no direct control. There can be no assurance
that the Company will be able to successfully develop new franchises or that the
Company's franchisees will be able to successfully develop and operate stores.
See 'Business -- Franchising.'
Uncertainty of Expansion. Currently, eleven Big City Bagels stores are open
and operating. In addition, the Company has sold franchises for an additional 30
stores. The opening and success of Big City Bagels stores depends on various
factors, including customer acceptance of the Big City Bagels store concept in
new markets, the availability of suitable sites, the negotiation of acceptable
lease terms for new locations, the receipt of necessary permits and regulatory
compliance, the ability to meet construction schedules, the financial and other
capabilities of the Company and its franchisees, the ability of the Company to
successfully manage this anticipated expansion and to hire and train personnel,
and general economic and business conditions. Not all of the foregoing factors
are within the control of the Company or its franchisees. See
'Business -- Strategy.'
The Company's plans for expansion include acquiring existing bagel stores
or chains and possibly other retail enterprises that the Company believes will
complement and enhance its operations. No assurance can be given that the
Company will be able to evaluate successfully the advisability of any particular
acquisition or that it will successfully integrate, convert or operate any
acquired business. The Company's expansion also will require the implementation
of enhanced operational and financial systems as well as additional management,
operational and financial resources. Failure to implement these systems and add
these resources could have a material adverse effect on the Company's results of
operations and financial condition. There can be no assurance that the Company
will be able to manage its expanding operations effectively or that it will be
able to maintain or accelerate its growth. See 'Business -- Strategy.'
Food Service Industry. Food service businesses are often affected by
changes in consumer tastes, national, regional and local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing businesses. Multi-unit food service chains such as the Company also
can be substantially adversely affected by publicity resulting from poor food
quality, illness, injury or other health concerns or operating issues stemming
from one store or a limited number of stores. In addition, factors such as
inflation, increased food, labor and employee benefit costs, regional weather
conditions and the unavailability of experienced management and hourly employees
also may adversely affect the food service industry in general, and the
Company's results of operations and financial condition in particular. See
'Business.'
8
<PAGE>
<PAGE>
Quarterly Fluctuations. The Company's quarterly results of operations may
be affected by the timing of the opening of new stores and recognition of
franchise and area development fees. In addition, the Company's quarterly
results also could be affected by expenses associated with the Company's
expansion.
Competition. The food service industry, in general, and the take-out
sector, in particular, are intensely competitive. The Company competes, and can
be expected to compete, against well-established food service companies with
greater product and name recognition and larger financial, marketing and
distribution capabilities than those of the Company, as well as innumerable
local food establishments that offer similar products. In addition, the Company
believes that the start-up costs associated with opening a retail food
establishment offering products similar to those offered by the Company, on a
stand-alone basis, are competitive with the start-up costs associated with
opening a Big City Bagels store and accordingly, are not an impediment to entry
of competitors into the retail bagel business. There can be no assurance that
the Company can compete successfully in this complex market. See
'Business -- Competition.'
Government Regulation. The Company's franchise operations are subject to
regulation by the Federal Trade Commission (the 'FTC') in compliance with the
FTC's rule entitled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, which requires, among other
things, that the Company prepare and update periodically a comprehensive
disclosure document in connection with the sale and operation of its franchises.
The Company and its franchisees also must comply with state franchising laws and
a wide range of other state and local rules and regulations applicable to their
business. Continued compliance with this broad federal, state and local
regulatory network is essential and costly and the failure to comply with such
regulations may have an adverse effect on the Company and its franchisees.
Violations of franchising laws and/or state laws and regulations regulating
substantive aspects of doing business in a particular state could subject the
Company and its affiliates to rescission offers, monetary damages, penalties,
imprisonment and/or injunctive proceedings. In addition, under court decisions
in certain states, absolute vicarious liability may be imposed upon franchisors
based upon claims made against franchisees. Even if the Company is able to
obtain coverage for such claims, there can be no assurance that such insurance
will be sufficient to cover potential claims against the Company. See
'Business -- Government Regulation.'
Dependence on Independent Distributors. Pursuant to a distribution
agreement, Sysco distributes the Company's bagel dough, muffin mixes and cream
cheese spreads to the Company's franchises in California, Utah and Arizona and
offers them a wide variety of food and paper products. In connection with its
expansion plans, the Company may rely upon independent distributors to
distribute its products. As a result, the Company is subject to the risk of
delays in shipment, work stoppages and termination of its present and future
distribution agreements. The occurrence of any such events or the loss of a
distributor could adversely affect the Company's business until alternative
arrangements were secured. Although the Company believes that similar
distribution arrangements could be secured with other distributors, there can be
no assurance of this. In the event the Company determines that no distributor is
available to service some or all of its stores in certain locations, the Company
may distribute its bagel dough and other products itself to these stores. As a
result, the Company would be required to purchase and/or lease trucks and
storage facilities which would necessitate the expenditure of significant
capital. Such expenditures may have an adverse effect on the Company's financial
condition and results of operations. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations.'
Raw Material Cost Fluctuations; Dependence on Suppliers. As the Company
expands its Company-owned store operations, the Company's operating results and
financial condition may be adversely affected by fluctuations in the cost of
flour, its primary raw material. Such costs are determined by constantly
changing market forces over which the Company has no control. The Company has no
long-term contracts with any of its suppliers. The loss of any of its suppliers
could adversely affect the Company's business until alternative arrangements
were secured. Although the Company believes that arrangements similar to those
which the Company currently has with its suppliers could be secured with other
suppliers, there can be no assurance of this. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
9
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<PAGE>
Dependence on Key Personnel. The Company's operations are dependent on the
efforts of Mark Weinreb, its Chairman of the Board and Chief Executive Officer,
and Jerry Rosner, its President. Although the Company has entered into
three-year employment agreements with each of Messrs. Weinreb and Rosner, the
loss of the services of these officers could have a material adverse effect on
the Company, and there is no assurance that a suitable replacement could be
found in the event of the death, disability or resignation of either of Messrs.
Weinreb or Rosner. The Company has obtained key-person life insurance on the
lives of Messrs. Weinreb and Rosner in the amount of $2 million each.
Continuing Control by Management. Upon completion of this Offering, Messrs.
Mark Weinreb, Jerry Rosner, Stanley Raphael and Stanley Weinreb, each of whom is
also a director of the Company, will beneficially own, in the aggregate,
approximately 61.7% of the Company's outstanding Common Stock. In addition,
these persons are parties to a shareholder agreement, pursuant to which each of
them has agreed to vote his shares for the election of each of the others as a
director of the Company as long as each such other person owns at least 100,000
shares of Common Stock. Accordingly, such shareholders, acting together, will be
in a position to effectively control the Company, including the election of all
of the directors of the Company. See 'Management' and 'Principal Shareholders.'
Broad Discretion in Application of Proceeds by Management; Allocation of
Proceeds to Repay Indebtedness, including Loans from Principal Shareholders;
Potential Use of Portion of Net Proceeds for Unspecified Acquisitions.
Approximately $415,000 (11.6%) of the estimated net proceeds of this Offering
has been allocated to working capital and general corporate purposes.
Accordingly, the Company's management will have broad discretion as to the
application of such proceeds. Approximately $1,200,000 (33.7%) of the estimated
net proceeds of this Offering has been allocated to the repayment of the Bridge
Notes and a portion of the Shareholder Loans and will not be available for other
corporate purposes. In addition, if the Underwriter's over-allotment option is
exercised, the first $175,000 in net proceeds received by the Company will be
used to repay a portion of the Shareholder Loans. A portion of the net proceeds
allocated to working capital may be used by the Company for acquisitions.
Although the Company has no agreement, arrangement or understanding with respect
to any acquisition, should an acquisition opportunity be identified by the
Company, the Board of Directors will have the ability to approve such
acquisition without seeking the approval of the shareholders of the Company. See
'Use of Proceeds.'
Immediate and Substantial Dilution. This Offering involves an immediate and
substantial dilution of $3.26 (81.5%) per share between the pro forma net
tangible book value per share after the Offering and the public offering price
of $4.00 per share (assuming no value is attributed to the Warrants). See
'Dilution.'
No Dividends. The Company has never paid dividends on its Common Stock. The
Company intends to retain earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. See 'Dividend
Policy.'
Shares Eligible for Future Sale. Upon completion of this Offering, the
Company will have outstanding 4,625,000 shares of Common Stock. The 3,000,000
shares of Common Stock outstanding prior to this Offering, as well as the
500,000 shares of Common Stock included in the Bridge Units, are 'restricted
securities' as that term is defined in Rule 144 under the Securities Act and may
not be sold unless such sale is registered under the Securities Act or is made
pursuant to an exemption from registration under the Securities Act, including
the exemption provided by Rule 144. Of such shares, 2,818,750 will be available
for sale pursuant to Rule 144 immediately, subject to the 24-month lock-up
described below. An additional 681,250 shares will be available for sale
pursuant to Rule 144 commencing two years from the date of this Prospectus. Of
these latter shares, 500,000 have been included in the Registration Statement of
which this Prospectus forms a part. The holders of these shares have agreed not
to sell these shares without the prior consent of the Underwriter until 13
months after the date of this Prospectus. All officers, directors and 5%
shareholders of the Company as of the date of this Prospectus (who hold in the
aggregate 2,855,456 shares) have agreed that for a period of 24 months from the
date of this Prospectus (18 months in the event that after the date of this
Prospectus the closing bid price of the Company's Common Stock exceeds $12.00
for 20 consecutive trading days), they will not sell any of their shares without
the prior consent of the Underwriter. The Company is
10
<PAGE>
<PAGE>
unable to predict the effect that sales made under Rule 144 or otherwise may
have on the market price of the Common Stock. However, the possibility that
substantial amounts of Common Stock may be sold in the public market may have an
adverse effect on the market prices for the Company's Common Stock. See
'Underwriting' and 'Shares Eligible for Future Sale.'
No Assurance of Public Market; Determination of Public Offering Price;
Possible Volatility of Market Prices. Prior to this Offering, there has been no
market for the Units, Common Stock or Warrants. The initial public offering
price of the Units and the exercise price of the Warrants were determined solely
through negotiations between the Company and the Underwriter and do not
necessarily reflect the Company's book value or other established criteria of
value. There can be no assurance that an active market will develop for such
securities or be sustained or that the market price of a Unit will not decline
below the public offering price or be subject to wide fluctuations in response
to quarterly variations in operating results and other events or factors. Recent
history relating to the market price of newly public companies indicates that
the market price of the Units, Common Stock and Warrants may be highly volatile
following this Offering. In the absence of an established trading market,
holders of the Company's securities may be unable to sell their holdings in an
efficient manner. See 'Description of Securities,' 'Shares Eligible for Future
Sale' and 'Underwriting.'
Inexperience of the Underwriter. The Underwriter has been actively engaged
in the securities brokerage and investment banking business since 1994. However,
the Underwriter has engaged in only limited underwriting activities and this
Offering is only the second public offering in which the Underwriter has acted
as the sole underwriter. There can be no assurance that the Underwriter's
limited experience as an underwriter of public offerings will not adversely
affect the proposed public offering of the Units, the subsequent development of
a trading market, if any, or the market for and liquidity of the Company's
securities. Accordingly, purchasers of the Units offered hereby may suffer a
lack of liquidity in their investment or a material diminution of the value of
their investment.
Current Prospectus and State Securities Law Qualification Required to
Exercise Warrants. The Company will be able to issue shares of its Common Stock
upon exercise of the Warrants only if there is then a current prospectus
relating to such Common Stock and only if such Common Stock is qualified for
sale or exempt from qualification under applicable state securities laws of the
jurisdictions in which the various holders of the Warrants reside. The Company
has undertaken and intends to file and keep current a prospectus which will
permit the purchase and sale of the Common Stock underlying the Warrants at such
times as the market price exceeds the exercise price, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the securities are to be offered, no assurance can be
given that such qualification will occur. The Warrants may be deprived of any
value and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if the Warrants cannot be exercised by holders because such Common
Stock is not qualified or exempt from qualification in the jurisdictions in
which the holders of the Warrants then reside. See 'Description of Securities --
Warrants.'
Potential Adverse Effect of Redemption of Warrants. The Warrants may be
redeemed by the Company, with the consent of the Underwriter, at a price of $.05
per Warrant at any time after they become exercisable upon not less than 30
days' prior written notice if the last sale price of the Common Stock has been
at least $7.00 per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given. The Company may redeem
the Warrants without the consent of the Underwriter on the same terms, provided
that the last sale price of the Common Stock has been at least $8.00 per share
on 20 consecutive trading days ending within ten days prior to the date on which
notice of redemption is given. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
then current market price when they might otherwise wish to hold the Warrants or
to accept the redemption price, which is likely to be substantially less than
the market value of the Warrants at the time of redemption. See 'Description of
Securities -- Warrants.'
11
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<PAGE>
Possible Delisting of Securities from Nasdaq System; Risks Associated with
Low-Priced Stocks. The Company's Units, Common Stock and Warrants will be listed
on the Nasdaq SmallCap Market ('Nasdaq') on the date of this Prospectus.
However, in order to continue to be listed on Nasdaq, a company must maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market makers and a minimum bid price of $1.00 per share; provided,
however, that if a company falls below such minimum bid price, it will remain
eligible for continued inclusion on Nasdaq if the market value of the public
float is at least $1,000,000 and the company has $2,000,000 in capital and
surplus. The failure to meet these maintenance criteria in the future may result
in the delisting of the Company's securities from Nasdaq and trading, if any, in
the Company's securities would thereafter be conducted in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's securities. In addition, if the Common Stock was to
become delisted from trading on Nasdaq and the trading price of the Common Stock
was to fall below $5.00 per share, trading in the Common Stock would also be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended ('Exchange Act'), which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage them from effecting transactions in the Units, Common Stock and
Warrants, which could severely limit the liquidity of the Units, Common Stock
and Warrants and the ability of purchasers in this Offering to sell the Units,
Common Stock and Warrants in the secondary market.
Potential Adverse Effect of Issuance of Preferred Stock Without Shareholder
Approval; Restriction on Issuance of Capital Stock. The Company's Restated
Certificate of Incorporation authorizes the issuance of 1,000,000 shares of
Preferred Stock with such rights, preferences and designations as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock and, in certain circumstances, depress the market price of the securities
offered hereby. In the event of issuance, the Preferred Stock could be utilized
under certain circumstances as a method of discouraging, delaying or preventing
a change in control of the Company. Although the Company has no present
intention of issuing shares of Preferred Stock, there can be no assurance that
the Company will not issue shares of Preferred Stock in the future. The Company
has agreed not to issue any of its shares of capital stock for 24 months from
the date of this Prospectus (18 months in the event that after the date of this
Prospectus the closing bid price of the Company's Common Stock exceeds $12.00
for 20 consecutive trading days) without the prior written consent of the
Underwriter, which consent may not be unreasonably withheld. See 'Description of
the Securities -- Preferred Stock' and 'Underwriting.'
Limited Liability of Directors. As permitted by the Business Corporation
Law of New York (the 'BCL'), the Company's Restated Certificate of Incorporation
eliminates personal liability of a director to the Company and its shareholders
for monetary damages for breach of fiduciary duty as a director except in
certain circumstances. Accordingly, except in such circumstances, the Company's
directors will not be liable to the Company or its shareholders for breach of
such duty. See 'Management -- Limitation of Liability of Directors.'
12
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby
are estimated to be $3,565,000 ($4,152,250 if the Underwriter's over-allotment
option is exercised in full). The Company intends to apply the net proceeds
approximately as follows:
(i) $1,200,000 or 33.7% to open Company-owned flagship stores;
(ii) $1,000,000 or 28.1% for the repayment of the Bridge Notes, which
bear interest at the rate of 8% per annum and are due and
payable on the earlier of the completion of this Offering or
July 19, 1997. The proceeds from the Bridge Notes were used by
the Company to purchase equipment for the Company's commissary
in California, for general working capital purposes and to pay
certain expenses of this Offering. As of the date of this
Prospectus, approximately $250,000 of the proceeds from the
Bridge Financing is still available to the Company and will be
used for working capital purposes;
(iii) $600,000 or 16.8% to expand or relocate the Company's Costa
Mesa, California commissary and possibly establish additional
commissaries;
(iv) $200,000 or 5.6% to repay a portion of the Shareholder Loans,
which bear interest at the rate of 10% per annum and of which
$200,000 is due and payable upon completion of this Offering, an
additional $175,000 is due and payable from the first proceeds
derived from the exercise of the Underwriter's over-allotment
option and the balance is payable in equal monthly installments
of $12,000 commencing January 1997. The Shareholder Loans were
used by the Company to purchase equipment, for leasehold
improvements and for general working capital purposes;
(v) $150,000 or 4.2% for marketing, promotional, advertising and
public relations activities aimed at both customers and potential
franchisees; and
(vi) $415,000 or 11.6% for working capital and general corporate
purposes, which may include, among other things, salaries of
additional financial and management personnel, including a chief
financial officer, and the costs of possible acquisitions of
businesses complementary to the Company's operations. Currently,
the Company has no plans, intentions, commitments,
understandings or arrangements with respect to any such
acquisition. If the Underwriter exercises the over-allotment
option in full, the Company will realize additional net proceeds
of $587,250, $175,000 of which will be used to repay a portion
of the Shareholder Loans and the remainder will be added to
working capital. Management will have significant discretion
regarding how and when such proceeds will be applied.
The Company anticipates, based on current plans and assumptions relating to
its operations, that the proceeds of this Offering, together with existing
resources and cash generated from operations, if any, will be sufficient to
satisfy the Company's contemplated cash requirements for at least the next 12
months. There can be no assurance, however, that the Company's cash requirements
during this period will not exceed its available resources.
The allocation of the net proceeds of this Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors change, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes.
Proceeds not immediately required for the purposes described above will be
invested in short-term United States government securities, short-term bank
certificates of deposit, money market funds or other investment grade,
short-term, interest-bearing instruments.
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DILUTION
For purposes of the following discussion of dilution and tables, no value
is attributed to the Warrants included in the Units. After giving effect to the
Combination, at December 31, 1995, the Company had a pro forma negative net
tangible book value of $(129,384) or $(0.04) per share of Common Stock. Net
tangible book value per share as of December 31, 1995 represents the amount of
the Company's total stockholders' equity, less intangible assets, as of such
date, divided by 3,000,000, the number of shares of Common Stock outstanding as
of such date after giving effect to the Combination. Net tangible book value
dilution per share represents the difference between the amount per share of
Common Stock paid by purchasers of Units in this Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
this Offering.
After giving effect to the sale of 1,125,000 Units offered hereby, the
application of a portion of the net proceeds to the repayment of the Bridge
Notes in the aggregate principal amount of $1,000,000 and the exercise by the
Selling Securityholders of their right to receive the Bridge Units, the pro
forma net tangible book value of the Common Stock as of December 31, 1995, would
have been $3,430,013 or $0.74 per share of Common Stock. This represents an
immediate increase in net tangible book value of $0.78 per share to existing
shareholders and an immediate dilution in net tangible book value of $3.26 per
share, or 81.5%, to purchasers of Units in this Offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................................. $4.00
Pro forma net tangible book value per share at
December 31, 1995.................................................... $(0.04)
Increase per share attributable to new investors....................... 0.78
------
Pro forma net tangible book value per share after the Offering.............. 0.74
-----
Net tangible book value dilution per share to new investors................. $3.26
-----
-----
</TABLE>
The following table summarizes as of December 31, 1995, the difference
between the existing shareholders and purchasers of Units in this Offering with
respect to the number and percentage of shares of Common Stock to be held after
completion of this Offering, the amount and percentage of consideration paid and
the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders and Selling
Securityholders........................ 3,500,000 75.7% $1,700,000 27.4% $0.49
New Investors............................ 1,125,000 24.3 4,500,000 72.6% $4.00
--------- ------- ---------- -------
Total............................... 4,625,000 100.0% $6,200,000 100.0%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>
14
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
December 31, 1995, (ii) the pro forma capitalization of the Company as of such
date after giving effect to the Combination and the termination of the Company's
S corporation status and (iii) the pro forma capitalization of the Company as of
such date after giving effect to the items referred to in the preceding clause
and as adjusted to give effect to the sale of the 1,125,000 Units offered
hereby, the application of the estimated net proceeds therefrom and the exercise
by the Selling Securityholders of their right to receive the Bridge Units. See
'Use of Proceeds.' This table should be read in conjunction with the Financial
Statements of the Company and the related Notes thereto appearing elsewhere in
this Prospectus. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations,' 'Use of Proceeds' and 'Prospective
Combination.'
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED(1)
---------- --------- --------------
<S> <C> <C> <C>
Long-term obligations:
Long-term debt, less current portion................... $ 273,512 $273,512 $ 273,512
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; no shares outstanding.................... -- -- --
Common Stock, $.001 par value, 10,000,000 shares
authorized; 2,818,750 shares issued and outstanding,
actual; 3,000,000 shares issued and outstanding, pro
forma; 4,625,000 shares issued and outstanding, as
adjusted............................................. 2,819 3,000 4,625
Additional paid-in capital............................. 972,181 177,148 4,424,065
Partners' capital...................................... 255,456 -- --
Accumulated deficit.................................... (1,303,610) -- (714,145)
---------- --------- --------------
Total stockholders' equity........................ (73,154) 180,148 3,714,545
---------- --------- --------------
Total capitalization.............................. $ 200,358 $453,660 $3,988,057
---------- --------- --------------
---------- --------- --------------
</TABLE>
- ------------
(1) Gives effect to the recognition of a non-cash charge of an aggregate of
693,542 of debt issuance costs and original issue discount to be incurred in
the quarter ending March 31, 1996 and upon closing of this Offering. See
Note J of Notes to Financial Statements.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock in the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
portion of the Company, general economic conditions and other pertinent factors.
15
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1995 were $1,550,255, a 185%
increase from 1994 revenues of $544,135. This increase is primarily attributable
to an increase in store and commissary product sales of $973,993, or 190%, to
$1,486,054 in 1995 from $512,061 in 1994, due to having a full year of wholesale
and retail operations in 1995. The Company's stores opened in May, June and
September 1994. In addition, management increased the selling prices at the
retail stores. Franchise fee revenues were $40,000 in 1995, a 33% increase over
the prior year amount of $30,000. Revenue under franchise agreements is
recognized when substantially all of the Company's initial obligations to the
franchisee, which include site selection approval, approval of store blueprints,
provision of operations and systems guidelines and manuals and training, are
fulfilled. This historically has been upon the opening of franchise stores. The
Company has unearned franchise income of $309,250 at December 31, 1995, which
represents nonrefundable franchise fees which will be recognized as revenue as
the related franchise stores are opened. The increase in franchise fee revenue
of $10,000 and the increase in unearned franchise income of $244,250 from 1994
to 1995 are primarily due to the hiring of a full-time vice president of
business development, increased franchise advertising and the growth of brand
name recognition. In 1994, the Company entered into one single-store franchise
agreement and a 12-store area development agreement. In 1995, the Company
entered into agreements for three single-store franchises and three area
development agreements, each for three stores. Royalty income increased by
$21,990 to $22,147 from $157 in 1994, due to a full year of operations of one
franchise store and partial year operations of another franchise store in 1995.
Cost of sales increased by $417,885, or 168%, to $667,394 in 1995 from
$249,509 in 1994. This increase is primarily due to increased product sales.
Cost of sales decreased as a percentage of product sales to 45% in 1995, from
49% in 1994. The decrease as a percentage of product sales is attributed to
buying materials at reduced prices, purchasing such materials in bulk quantities
and by obtaining volume discounts. Management also instituted efficiency and
waste control procedures.
Selling, general and administrative expenses increased by $646,365, or 62%,
to $1,681,892 in 1995 from $1,035,527 in 1994. This change is primarily
attributable to the following factors: (i) Salaries increased by $276,477, or
70%, to $674,443 in 1995, from $397,966 in 1994 due to the hiring of a vice
president of business development, training/operations personnel and additional
administrative personnel. Two corporate officers began taking nominal salaries
during 1995. Payroll taxes and related fringe benefits increased proportionately
to salaries. (ii) Rents increased by $40,227, or 31%, to $170,526 in 1995, from
$130,299 in 1994. This change was due to the rental of new and larger
administrative offices and additional storage space, and a full year of rent for
the Company-owned stores and commissary in 1995. (iii) Promotion and travel
increased by $50,877, or 123%, to $92,147 in 1995, from $41,270 in 1994. This
increase is attributed to travel necessary to sell franchises, visit proposed
retail store locations and to provide on-site store training. (iv) Advertising
increased by $69,060, or 139%, to $118,905 in 1995 from $49,485 in 1994. The
increase is primarily due to a major effort to promote franchise sales.
Advertising also increased for the retail stores as a result of the
Company-owned stores being in operation for a full year. In addition, the
Company engaged the services of a public relations firm in the last quarter of
1995. (v) Utilities increased by $24,299, or 64%, to $62,087 in 1995 from
$37,788 in 1994 as a result of increased product preparation in the Costa Mesa,
California commissary and increased baking in the stores due to higher sales
volume and a full year of operations in 1995. The Company expects that selling,
general and administrative expenses will increase significantly in 1996 due to
the Company's obligation to pay each of Mark Weinreb, Chairman of the Board and
Chief Executive Officer of the Company, and Jerry Rosner, President of the
Company, base annual salaries of $125,000
16
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<PAGE>
until completion of this Offering and $165,000 thereafter. See
'Management -- Employment Agreements.'
The net loss for the year ended December 31, 1995 was $826,849, which was a
9% increase, as compared to a net loss of $758,593 for the year ended December
31, 1994. The Company is continuing to operate at a loss as a result of its
development of an operating infrastructure in preparation for franchise sales,
Company store growth and commissary sales. Total sales have yet to reach the
level needed to support the Company's fixed overhead. For 1996, the Company
anticipates that it will increase its revenues through additional store
openings, increased royalty income, increased commissary income through sales to
franchise stores, increases in existing store sales, the opening of new Company-
owned stores and increasing its wholesale business. The Company also anticipates
increasing revenues by acquiring other existing bagel stores or chains.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant capital to fund its working capital needs
and capital expenditures required for expansion. Revenues are not yet sufficient
to support the Company's operating expenses and are not expected to reach such a
level during 1996. Cash used by operating activities in 1995 was $280,646 and
capital expenditures were $54,181. Cash and cash equivalents at December 31,
1995 aggregated $37,991 and the working capital deficit was $795,936.
The Company has funded its operating losses and capital expenditures
primarily through capital contributions and Shareholder Loans and, to a lesser
extent, by utilizing vendor credit and third party borrowings.
Accounts payable and accrued expenses were $314,050 at December 31, 1995,
compared to $124,407 at December 31, 1994. The Company generally pays its
inventory vendors within 30 days and has been able to purchase inventory as
required. In 1995, the Company borrowed approximately $100,000 under two
equipment loans and a $70,000 line of credit. The line of credit was repaid in
its entirety in the first quarter of 1996 and was not renewed.
Shareholder Loans aggregated $462,468 at December 31, 1995. Capital
contributions to both Big City Bagels and Pumpernickel Partners aggregated
$1,700,000.
In January 1996, the Company completed its Bridge Financing, pursuant to
which it issued an aggregate of (i) $1,000,000 principal amount of Bridge Notes
which bear interest at the rate of 8% per annum and are due and payable on the
earlier of the completion of this Offering or July 19, 1997 and (ii) the right
to receive upon completion of this Offering an aggregate of 500,000 Bridge Units
and 500,000 Class B Warrants. Each Bridge Unit consists of one share of Common
Stock and one Warrant. Two Class B Warrants together, will entitle the holder to
purchase one share of Common Stock for $8.00 per share during the three-year
period commencing one year after the completion of this Offering. The proceeds
from the Bridge Financing were used by the Company to purchase equipment for the
Company's commissary in California, for general working capital purposes and to
pay certain expenses of this Offering. As of the date of this Prospectus,
approximately $250,000 of the proceeds from the Bridge Financing is available to
the Company and will be used for working capital purposes.
The Company requires the proceeds of this Offering, estimated to be
$3,565,000 ($4,152,250 if the Underwriter's over-allotment option is exercised
in full), to open Company-owned flagship stores ($1,200,000), repay the Bridge
Notes ($1,000,000), expand or relocate its Costa Mesa, California commissary
($600,000), repay a portion of the Shareholder Loans ($200,000), expand
marketing, promotional, advertising and public relations activities aimed at
both customers and potential franchisees ($150,000) and for working capital and
general corporate purposes ($415,000).
The Company expects that its liquidity will be significantly impacted in
1996 due to the Company's obligation to pay each of Messrs. Mark Weinreb and
Jerry Rosner base annual salaries of $125,000 until completion of this Offering
and $165,000 thereafter. See 'Management -- Employment Agreements.'
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The Company anticipates increasing revenues and thereby generating
operating cash flow in the future by implementing the following actions:
Increasing Product Sales. The Company intends to open new Company-owned
retail stores and expects increased sales from its commissary in
California to new franchise stores. The Company continuously develops new
products to increase sales and provide a variety of products offered. The
Company expects to hire an advertising firm to help increase store
revenues, increase franchise sales and promote brand name recognition. The
Company is currently servicing many wholesale accounts and expects this
business to grow due to an increase in name recognition, product
acceptance and additional sales efforts.
Expanding Franchise Operations. The Company will utilize capital to
increase franchise sales by (i) hiring an advertising firm to prepare
marketing and promotional material, (ii) advertising in national and
regional publications and business magazines and (iii) possibly hiring
additional sales personnel. The Company expects to increase its franchise
sales by opening Company-owned flagship stores in markets that would
generate interest for experienced multi-store developers to enter into
area development agreements. Additional franchise revenue should be
realized as stores open. The Company may choose to develop a new
franchising opportunity by introducing a 'satellite' concept for its
stores to serve other markets.
Making Acquisitions. The Company intends to acquire other bagel stores or
complementary types of retail outlets which provide entry into new
markets. It is contemplated that over a period of time, these acquisitions
will increase revenues significantly.
Although these actions will require significant costs and expenditures, the
Company anticipates, based on current plans and assumptions relating to its
operations, that the proceeds of this Offering, together with existing resources
and cash generated from operations, if any, will enable the Company to
accomplish its immediate goals of increasing product sales and expanding
franchise operations, although there can be no assurance of this. If the Company
derives significant revenues from increasing product sales and expanding
franchise operations, the Company should not require any capital beyond that
provided by this Offering to achieve its current business plans. However, if the
Company were to seek to expand its operations through the acquisition of
existing bagel stores or chains and possibly other retail enterprises that the
Company believes will complement and enhance its operations or if the expansion
of the Company's retail and franchise operations requires more funds than the
Company currently anticipates, the Company could require capital beyond that
provided by this Offering.
FUTURE CAPITAL EXPENDITURES
As the Company grows and more stores are opened, it may become essential to
relocate and expand the Costa Mesa, California commissary and, as new regions
are developed, to open additional commissaries to service these areas.
Additional equipment, computers and leasehold improvements will be needed for
the commissaries, the new retail Company-owned stores and the administrative
offices. As the Company expands, it expects to hire a director of operations, a
chief financial officer, a training facilitator manager and additional support
personnel as needed. The Company has engaged the services of an outside
consulting firm to evaluate its current commissary operations and to help set up
a strategic plan to support the Company's growth and expansion. The Company
expects to hire an advertising agency to help increase franchise sales and to
prepare advertisements to increase store revenues. The Company engaged the
services of a public relations firm in the last quarter of 1995 and expects to
increase efforts to promote the Big City Bagels name to gain stronger national
recognition.
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BUSINESS
OVERVIEW
Big City Bagels is a New York corporation that operates and franchises
upscale bagel bakery cafes under the Company's registered trademark 'Big City
Bagels'r'.' These stores sell a wide variety of oversized, fresh baked bagels,
including unique specialty bagels, and cream cheese spreads, muffins and other
bakery products for take-out and eat-in consumption. Big City Bagels stores also
sell salads, sandwiches, specialty coffees and other beverages. The Company owns
three stores, two of which are located in Costa Mesa, California and one of
which is located in Laguna Niguel, California. The Company also sells Big City
Bagels franchises. Currently, there are eight franchises open and operating in
California, Minnesota, Utah and Arizona. As of the date of this Prospectus, the
Company has sold franchises to open an additional 30 stores, which are in
various stages of development. The Company also sells its products wholesale to
commercial accounts and food service operators.
INDUSTRY BACKGROUND
The increased demand by American consumers for healthy, appetizing and
economical food products has impacted the consumer food products industry
significantly. The Company believes that American consumers are actively seeking
inexpensive ways to reduce fat intake and improve the nutritional content of
their diets without having to sacrifice flavor. Not only do bagels have a
significantly lower fat content than foods typically purchased for breakfast
take-out such as donuts and pastries, but they are tasty, satisfying and
inexpensive. Accordingly, the Company believes that consumers perceive bagels to
be a healthy alternative and a good value.
The popularity of bagels has increased significantly throughout the
country. One survey has reported that 75% of Americans currently have an
awareness of bagels as compared to 20% only a decade ago. Bagels are believed to
be the fastest growing breakfast food in the United States and industry surveys
indicate that national bagel sales were estimated to be in excess of $1 billion
in 1994 and continue to grow at a rate of approximately 8% per year. According
to the United States Department of Commerce, the average American consumed
approximately 3.5 pounds of bagels in 1993, up nearly 46% from 2.5 pounds in
1988. It is estimated that the average American consumed approximately 4.5
pounds of bagels in 1995.
The bagel industry predominantly consists of small operations of one or a
few stores and larger chains that generally have the bagel dough prepared at
each retail location or at independently-operated regional facilities. As a
result, bagel quality can vary from location to location within these chains.
The Company believes that its ability to prepare consistent quality bagels and
distribute such product nationally places the Company at an advantage over these
chains. While there are certain chains that prepare their bagels in regional
commissaries similar to the Company's, the Company believes that its oversized,
freshly baked bagels and the visually-appealing, upscale design of its stores
will enable the Company to compete successfully with such companies. See
'Business -- Competition.'
STRATEGY
The Company's objective is to become a leading national bagel store chain.
The Company intends to achieve this objective by (i) expanding its franchise
operations, (ii) increasing the number of Company-owned stores by opening
additional stores and acquiring existing bagel stores or chains and (iii)
increasing revenues from sales to commercial and wholesale accounts. With
respect to its franchise operations, the Company believes that its consistent
product quality, visually-appealing, upscale store design and well-organized
business operations will enable the Company to secure experienced, multi-unit
franchisees to operate its stores. In order to attract potential franchisees,
the Company plans to use a portion of the proceeds of this Offering to open
Company-owned flagship stores in strategic geographic locations around the
country. Such franchises would be serviced by regional commissaries, which the
Company plans to use as additional stores are opened. The Company also intends
to expand by acquiring existing bagel stores or chains and possibly other retail
enterprises that the Company
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believes will complement and enhance its operations. In determining whether to
make an acquisition, the Company will consider, among other things, the size,
location and existing operations of the acquisition candidate, as well as such
candidate's potential to maximize growth and increase revenues. Although the
Company regularly evaluates possible acquisition opportunities, as of the date
of this Prospectus, the Company is not a party to any agreements, commitments,
arrangements or understandings with respect to any acquisition.
PRODUCTS AND DISTRIBUTION
The Company seeks to provide its customers with consistent quality
products, primarily bagels, cream cheese spreads and muffins, and excellent
service in a visually-appealing, upscale environment. The proprietary recipes
for the Company's unique products were created by Jerry Rosner, President of the
Company, drawing upon his 20-plus years of bagel-making experience. Utilizing
these recipes, the Company's bagel dough is prepared in its regional
commissaries and then delivered to surrounding Company-owned stores and
franchises. The Company's bagels are then baked in each store daily in
accordance with the Company's quality control guidelines using a traditional
technique which requires the bagels to be boiled and then baked. In addition,
the Company blends a wide variety of regular and low-fat cream cheese spreads
and supplies these spreads, as well as muffin mixes, to its Company-owned stores
and franchises. The Company purchases cream cheese from independent suppliers
and mixes in ingredients at its commissaries. While bagel and cream cheese sales
currently represent a significant portion of retail sales, the stores also offer
a variety of breakfast and lunch bagel sandwiches, soups, freshly baked muffins
and other bakery products, gourmet coffee and espresso drinks, freshly squeezed
juices and a variety of soft drinks. In addition, the Company offers three-foot
party bagels and imaginative catering platters to service its customers.
The Company believes that it has developed significant know-how and
technical expertise for replicating the Company's bagels in various locations
and conditions to produce a high-quality product more commonly associated with
smaller bakeries. The Company believes this system enables Big City Bagels
stores to provide its customers with consistent quality products, thereby
helping to build brand name awareness and customer loyalty. The Company
currently owns and operates a commissary located in Costa Mesa, California,
which services most existing Big City Bagels stores. The Company also has
assisted one of its franchisees, who entered into an area development agreement
with the Company to open 12 stores in the Minneapolis/St. Paul, Minnesota area,
in establishing a commissary owned and operated by such franchisee in
Minneapolis to service these stores. This commissary is required to adhere to
the Company's strict quality control guidelines. The Company distributes its
bagel dough and other products to its franchises in California, Utah and Arizona
under a distribution agreement with Sysco. By supplying the Company-owned stores
and franchises with bagel dough, muffin mixes and cream cheese spreads, the
Company is able to control the quality of product sold in the stores.
STORE DESIGN AND LOCATIONS
Big City Bagels stores are designed to be upscale bagel bakery cafes that
are efficient as well as visually appealing. Most of the products sold in the
stores are uniquely presented in large, attractive display cases to provide
customers with the opportunity to see the products they wish to purchase. The
display cases are typically located near the store entrance and where customers
place their orders to attract customers and promote spontaneous purchases.
The Company's store design is adaptable to various site locations,
including shopping centers, free-standing units, drive-thrus and commercial
sites, which are selected on heavily-traveled thoroughfares. The Company
believes that its concept also could be applied to smaller 'satellite' stores,
such as kiosks located in airports, commercial buildings and shopping malls. Big
City Bagels stores are typically highly visible and easily accessible. The
stores are generally located within a three-mile radius of at least 30,000
residents in an area with a mix of both residential and commercial properties.
The average store is approximately 1,600 to 2,000 square feet with a seating
capacity of 20 to 60 persons. Although the stores may vary in size, store layout
and design are generally consistent and typically include, among other
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things, a traditional, bakery-style tin ceiling, glass display cases, a menu
board and a neon sign in the form of the Company's logo.
The Company plans to open Company-owned flagship stores in high profile
locations utilizing the net proceeds of this Offering. These stores are expected
to be larger than a typical Big City Bagels store and contain increased seating
capacity. The Company also intends to offer an expanded menu and possibly an
enhanced delicatessen/appetizer section, as well as a gourmet beverage counter
in its flagship stores.
The following table sets forth by location the number of currently open
Company-owned stores and franchises and the number of franchises that have been
sold but not yet opened:
<TABLE>
<CAPTION>
FRANCHISES SOLD TOTAL
LOCATION STORES OPEN BUT NOT YET OPENED STORES
- -------------------------------------------------- ----------- ------------------ ------
<S> <C> <C> <C>
Arizona........................................... 2 2 4
California........................................ 6* 6 12*
Minnesota......................................... 2 10 12
Texas............................................. 0 12 12
Utah.............................................. 1 0 1
-- -- --
Total........................................ 11 30 41
</TABLE>
- ------------
* Includes three Company-owned stores.
FRANCHISING
The Company offers single unit and multi-unit franchises throughout the
United States. The Company is currently permitted to offer and sell its
franchises in over 40 states. The Company attempts to attract suitable
franchisees who are committed to the Company's high standards of product quality
and customer service. All franchisees are required to operate their stores in
accordance with the guidelines set forth in the Company's franchise and area
development agreements and the standards detailed in the Company's operations
and administration manuals. The Company conducts regular inspections of its
franchised stores to determine whether the stores meet applicable standards and
works with franchisees to improve performance.
The Company assists franchisees in site selection by reviewing market
demographics, visiting the sites and giving final approval. During the design
phase, all blueprints are prepared, reviewed and approved by the Company and
discussed with the franchisee. A franchisee is required to purchase bagel dough,
muffin mixes, cream cheese spreads and 'Big City Bagels' branded products only
from the Company or suppliers designated by the Company. A franchisee may
purchase the equipment necessary to operate a Big City Bagels store from any
vendor of its choice, provided that such vendor has been approved by the Company
and meets the Company's equipment specifications. However, all franchises are
required to purchase and use a cash register system specially designed for the
Company in order to furnish the Company with uniform reports systemwide and to
provide franchisees with optimal cash controls and ensure that they have access
to information which the Company believes will assist franchisees in operating
their business.
Prior to opening a new store, the Company offers to all of its franchisees
an extensive training program run by the Company, which includes classroom
training in administrative record keeping, marketing and advertising and
inventory control, and training in baking, food preparation and store
operations. The Company also provides on-site personnel immediately prior to and
during each store's opening. After a store opens, the Company monitors
operational results, visits stores for on-site consultation and provides advice
based on the experience of other franchisees. Management of the Company reviews
franchise store sales monthly and provides operational assistance as necessary.
The Company provides extensive field support services to its franchisees in
an effort to help franchisees maximize business and financial management,
acquire local market area penetration,
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maintain quality control and customer service excellence, stay abreast of new
product developments, provide advertising services and to allow the franchisees
the opportunity to share new business ideas with the Company.
The Company's current franchise agreements require payments to the Company
of a $30,000 initial franchise fee per store and a monthly 4% royalty on gross
sales (exclusive of sales taxes). In addition, franchisees are required to spend
2% of gross sales on local advertising and at least $5,000 to advertise and
promote grand openings. Franchise agreements provide each franchisee with the
exclusive right to open the franchise within a defined geographic area. Each
franchise agreement is for a term of ten years, with the right to renew for an
additional ten years at no additional fee. The franchise agreement also requires
a franchisee to find a suitable store location within 180 days of signing the
agreement. The Company estimates that a franchisee's cost to open a Big City
Bagels store, including the initial franchise fee, cost of construction, leasing
of space and other start-up expenses, is approximately between $285,000 and
$330,000. A period of approximately six to eight months generally elapses
between the signing of a franchise agreement and the opening of the store.
The Company also offers franchisees the opportunity to enter into area
development agreements, which provide that a franchisee may open a specific
number of stores within a specific area of exclusivity. The area of exclusivity
is negotiated prior to the signing of the area development agreement and varies
by agreement as to size of the area, the number of stores required and the
schedule for store development and opening. Upon signing the area development
agreement, fees are paid to the Company in the following manner: a $30,000
franchise fee is paid for the first store, as well as a $12,750 area development
fee for each additional store to be developed. A reduced franchise fee of
$25,500 per store is payable when the franchise agreement for each additional
location is executed, with a credit given for the previous $12,750 area
development fee paid.
COMPETITION
The food service industry, in general, and the bagel industry, in
particular, are intensely competitive with respect to food quality, concept,
location, service and price. As a bagel retailer and franchisor, the Company
competes in a number of different markets with a number of different
competitors, including well-established food service companies with greater
product and name recognition and larger financial, marketing and distribution
capabilities than those of the Company, as well as innumerable local food
establishments that offer similar products. In addition, the Company believes
that the start-up costs associated with opening a retail food establishment
offering products similar to those offered by the Company, on a stand-alone
basis, are competitive with the start-up costs associated with opening a Big
City Bagels store and, accordingly, are not an impediment to entry of
competitors into the retail bagel business.
The Company faces competition in the bagel industry from independent
stores, larger chain stores and franchisors such as Bruegger's Corp.
('Bruegger's'), Manhattan Bagel Company, Inc. ('Manhattan'), Chesapeake Bagel
Bakery ('Chesapeake') and Big Apple Bagels ('Big Apple'). Recently, competition
has developed from a number of large food service companies which are seeking
entry into the bagel industry. For example, Boston Chicken, Inc.'s ('Boston
Chicken') loan to Einstein Bros. Bagels, Inc. ('Einstein'), a 100-unit bagel
chain created through the combination of three regional bagel retailers, is
convertible into a minority interest, and under certain conditions into a
majority equity interest, in Einstein. With Boston Chicken's financial support,
Einstein recently acquired Noah's New York Bagels, Inc., a California chain of
approximately 37 stores, in which Starbucks Coffee Co. owned a 20% equity
interest. In addition, Quality Dining, Inc., a restaurant operator, recently
announced its plans to acquire Bruegger's for stock currently valued at $133
million. The Company's bagel stores also compete with take-out restaurants, fast
food restaurants, delicatessens and prepared food stores, as well as with
supermarket bakeries and convenience stores.
As a franchisor, the Company competes for qualified franchisees with a wide
variety of investment opportunities both in the restaurant business and in other
industries. In this respect, the Company believes that its consistent product
quality, visually-appealing, upscale store design and well-organized business
operations help the Company to compete favorably, especially against bagel
franchisors,
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although it should be noted that the Company is a relatively minor newcomer in
the industry and its competitors are well-established, have greater name
recognition and financial resources and command a greater share of the market
than the Company. The Company believes that Bruegger's, Manhattan, Einstein,
Chesapeake and Big Apple currently have approximately 275, 160, 100, 88 and 73
stores in operation, respectively. Within the past two years, the Company has
sold 38 franchises, with eight franchises in operation and 30 franchises in
various stages of development, and has opened three Company-owned stores.
ADVERTISING
The Company presently advertises and plans to continue advertising its
franchises in its retail stores, newspapers and business opportunity magazines.
The Company and its franchisees also advertise in local newspapers and through
direct mailings. Franchisees are required to spend 2% of gross sales on local
advertising and to contribute 1% of monthly gross sales to a national
advertising cooperative. However, as of the date of this Prospectus, a national
fund has not been established.
TRADEMARKS AND SERVICE MARKS
The Company's trademark 'Big City Bagels'r' and its service mark 'A Bigger
Bagel for Less Dough!'r' are registered with the United States Patent and
Trademark Office pursuant to federal law. The Company has applied for
registration of its distinctive logo. The Company's franchise agreements provide
all of its franchisees with the nonexclusive right to use the Company's
registered trademark and service mark. The Company considers its marks to be
material to its business in that the Company seeks to develop a strong
association between such marks and the Company's high quality food and stores in
the minds of consumers.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply with federal, state
and local government regulations applicable to consumer food service businesses
generally, including those relating to the preparation and sale of food, minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements, as well as regulations relating to zoning, construction, health,
business licensing and employment. The Company believes that it is in material
compliance with these provisions. Continued compliance with this broad federal,
state and local regulatory network is essential and costly, and the failure to
comply with such regulations may have an adverse effect on the Company and its
franchisees.
The Company's operations are subject to regulation by the FTC in compliance
with the FTC's rule entitled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, which requires, among other
things, that the Company prepare and update periodically a comprehensive
disclosure document, known as the Uniform Franchise Offering Circular ('UFOC'),
in connection with the sale and operation of its franchises. In addition, some
states require a franchisor to register its franchise with the state before it
may offer the franchise. The Company believes that its UFOC, together with any
applicable state versions or supplements, complies with both the FTC guidelines
and all applicable state laws regulating franchising in those states in which it
has offered franchises. The Company has revised its offering circular and is
substantially in compliance with the new UFOC guidelines which became effective
on January 1, 1995. The UFOC document has been written in plain english and
certain of the current disclosure items have been expanded and/or eliminated.
The revisions have not had an effect upon the Company's operations.
In addition to the rules governing the offer and sale of franchises, the
Company also is subject to a number of state laws that regulate substantive
aspects of the franchisor-franchisee relationship, including, but not limited
to, those concerning termination and non-renewal. Currently, 18 states, the
District of Columbia, Puerto Rico and the Virgin Islands have Franchise
Termination and Non-Renewal Laws. These laws govern the termination and/or
non-renewal of the franchise agreement and, by and large, require the franchisor
to have good cause, reasonable cause or just cause in order to terminate or
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not renew the franchise agreement. In addition, some of these laws provide for
longer cure periods than which currently exist in the Company's franchise
agreement.
Each store is subject to regulation by federal agencies and to licensing
and regulation by state and local health, sanitation, safety, fire and other
departments. Difficulties or failures in obtaining the required licenses or
approvals could delay or prevent the opening of a new store. The Company
believes that it is in substantial compliance with the applicable laws and
regulations governing its operations.
While the Company intends to comply with all federal and state laws and
regulations, there can be no assurance that it will continue to meet the
requirements of such laws and regulations, which, in turn, could result in a
withdrawal of approval to franchise in one or more jurisdictions. Any such loss
of approval would have a material adverse effect upon the Company's ability to
successfully market its franchises. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could subject the Company and its affiliates to rescission
offers, monetary damages, penalties, imprisonment and/or injunctive proceedings.
The state laws and regulations concerning termination and non-renewal of
franchisees are not expected to have a material impact on the Company's
operations. In addition, under court decisions in certain states, absolute
vicarious liability may be imposed upon franchisors based upon claims made
against franchisees. Even if the Company is able to obtain coverage for such
claims, there can be no assurance that such insurance will be sufficient to
cover potential claims against the Company. Further, there can be no assurance
that existing or future franchise regulations will not have an adverse effect on
the Company's ability to expand its franchise program.
PROPERTIES
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
SQUARE ANNUAL
LOCATION USE FOOTAGE LEASE EXPIRATION LEASE PAYMENTS
- ------------------ ------------------------- ----------- ------------------------- --------------
<S> <C> <C> <C> <C>
Principal executive
Hicksville, NY office 500 Month-to-month $ 9,600
Costa Mesa, CA* Offices 2,400 December 1996 32,000
Costa Mesa, CA Commissary/Company store 4,400 November 1998; renewable 50,400
for two successive
five-year terms
Costa Mesa, CA Storage space 900 April 1996; renewable for 6,000
two successive one-year
terms
Costa Mesa, CA Company store 1,750 March 1998; renewable for 47,040
two successive five-year
terms
Laguna Niguel, CA Company store 1,600 March 1999; renewable for 42,300
one additional five-year
term
</TABLE>
- ------------
* The Company subleases some of the space at this location on a month-to-month
basis at a monthly rental of $640.
The Company believes that its facilities are adequate for its present
purposes. The Company believes that as it grows, it will require additional
facilities, and that such facilities will be readily available.
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<PAGE>
EMPLOYEES
As of April 15, 1996, the Company had 32 full-time employees, consisting of
two members of management, one marketing and advertising personnel, one
franchise sales personnel, one training and store operations personnel, three
administrative personnel, one multi-unit store manager and 23 other employees.
17 of the 32 full-time employees are salaried, while the other 15 are paid on an
hourly basis. In addition, the Company has 21 part-time employees, who are paid
on an hourly basis. None of the Company's employees is represented by a
collective bargaining agreement nor has the Company experienced any work
stoppage. The Company believes its relationship with its employees is
satisfactory.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the Company's
executive officers, directors and key employee. Except as otherwise set forth
herein, executive officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Executive Officers and Directors
Mark Weinreb............................... 43 Chairman of the Board and Chief Executive Officer
Jerry Rosner............................... 36 President, Chief Operating Officer and Director
Stanley Weinreb............................ 68 Vice President and Director
Stanley Raphael............................ 60 Secretary and Director
Key Employee
Michael Reynolds........................... 32 Vice President of Business Development
</TABLE>
Mark Weinreb has been the Chairman of the Board and Chief Executive Officer
of the Company since its inception in December 1992. From 1975 to 1989, Mr.
Weinreb was employed by Bio Health Laboratories, Inc. ('Bio Health'), a medical
testing laboratory, and from 1985 to 1989, he was an owner and vice president of
Bio Health, which was sold in 1989. During his tenure at Bio Health, Mr. Weinreb
was responsible for day-to-day operations, including overseeing the technical
aspects of the laboratory, negotiating property and equipment leases and
handling financing proposals, mergers and acquisitions. From 1989 to 1992, Mr.
Weinreb managed his private investments. Mark Weinreb is the son of Stanley
Weinreb.
Jerry Rosner has been President, Chief Operating Officer and a director of
the Company since inception. From 1983 to August 1995, Mr. Rosner was President
and co-owner of Bagel Boss East, Inc. ('Bagel Boss'), a company which owned and
operated a bagel store in Bay Shore, New York. At Bagel Boss, Mr. Rosner was
responsible for all aspects of operations, including production, recipe
development, equipment purchases, lease negotiations, labor relations and
wholesale operations. Mr. Rosner has over 20 years of experience in the bagel
industry.
Stanley Weinreb has been Vice President and a director of the Company since
inception. From 1952 to 1989, he was President and owner of Bio Health, a
company which he founded. During his tenure at Bio Health, Mr. Weinreb was the
medical director of the laboratory and was responsible for quality control,
obtaining state and federal licenses and regulatory compliance. Stanley Weinreb
is the father of Mark Weinreb.
Stanley Raphael has been Secretary and a director of the Company since
inception. Since 1984, he has served as President and a director of Trade
Consultants, Inc., a management consulting company. Prior to 1984, Mr. Raphael
was an international trader of oils, chemicals and petrochemicals. He currently
is a director of a number of companies, including American Polymer, Inc. and
Edge Petroleum Corp.
Michael S. Reynolds has been Vice President of Business Development since
January 1995. From March 1994 to December 1994, he was a Regional Franchise
Manager for Arby's, Inc., where he was responsible for handling franchise sales
to both new and existing franchisees in 15 states. From May 1990 to March 1994,
he served as Franchise Development Manager for Haagen-Dazs Co., Inc., where he
was responsible for franchise sales in the western United States. From March
1987 to May 1990, Mr. Reynolds was a Franchise Business Consultant for Postal
Instant Press (PIP Printing), where he worked with franchisees to implement
marketing and advertising programs to increase sales.
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<PAGE>
EXECUTIVE COMPENSATION
During the fiscal years ended December 31, 1994 and December 31, 1995, no
executive officers of the Company had annual compensation in excess of $100,000.
Mark Weinreb, Chairman of the Board and Chief Executive Officer of the Company,
and Jerry Rosner, President and Chief Operating Officer of the Company, each
received a salary of approximately $17,000 from the Company during the fiscal
year ended December 31, 1995. The Company had no stock option plan or other
employee benefit or compensation plan during the fiscal year ended December 31,
1995.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Mark
Weinreb, its Chairman of the Board and Chief Executive Officer and Jerry Rosner,
its President and Chief Operating Officer, providing for initial three-year
terms commencing January 1, 1996, and base annual salaries of $125,000 until
completion of this Offering and $165,000 thereafter, plus annual 10% increases.
These agreements also provide that the Company will continue to pay the base
salary to the employee or legal representative in the event of the employee's
termination due to disability or death for a six-month period following
termination. The agreements contain provisions prohibiting the employee from
competing with the Company during the term of employment and for a period of two
years thereafter.
1996 PERFORMANCE EQUITY PLAN
In March 1996, the Board of Directors of the Company adopted, and the
shareholders approved, the Company's 1996 Performance Equity Plan (the '1996
Plan'). The 1996 Plan authorizes the granting of awards of up to 350,000 shares
of Common Stock to the Company's key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as 'Incentive' stock options under Section 422 of
the Internal Revenue Code of 1986, as amended), restricted stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the 1996 Plan. As of the date of this Prospectus, the Company
has granted under the 1996 Plan options to purchase 7,500 shares of Common Stock
to each of two independent consultants of the Company, at exercise prices of
$4.00 per share. The Company also has granted a restricted stock award of 15,000
shares of Common Stock, that will vest in two years, to Michael Reynolds, Vice
President of Business Development of the Company.
In March of each calendar year during the term of the 1996 Plan, assuming
there are enough shares then available for grant under the 1996 Plan, each
person who is then a director of the Company will be awarded stock options to
purchase 10,000 shares of the Company's Common Stock at the fair market value
thereof (as determined in accordance with the 1996 Plan), all of which options
will be immediately exercisable as of the date of grant and have a term of ten
years. These are the only awards which may be granted to a director of the
Company under the 1996 Plan. The 1996 Plan is administered by the Board of
Directors which determines the persons (other than directors) to whom awards
will be granted, the number of awards to be granted and the specific terms of
each grant, including the exercisability thereof, subject to the provisions of
the 1996 Plan.
In connection with qualified stock options, the exercise price of each
option may not be less than 100% of the fair market value of the Common Stock on
the date of grant (or 110% of the fair market value in the case of a grantee
holding more than 10% of the outstanding stock of the Company). The aggregate
fair market value of shares for which qualified stock options are exercisable
for the first time by such employee during any calendar year may not exceed
$100,000. Nonqualified stock options granted under the 1996 Plan are also
required to have exercise prices not less than the fair market value of the
Common Stock on the date of grant.
The 1996 Plan also contains certain change in control provisions which
could cause options and other awards to become immediately exercisable and
restrictions and deferral limitations applicable to other awards to lapse in the
event any 'person,' as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including a 'group' as defined in Section 13(d), but excluding
certain shareholders of
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the Company, acquires beneficial ownership of more than 25% of the Company's
outstanding shares of Common Stock.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, after
giving effect to the Combination ('Before Offering'), and as adjusted to reflect
the sale of the Units offered hereby and the issuance of the Bridge Units
('After Offering'), by (i) each shareholder or group known by the Company to be
the beneficial owner of five percent or more of the outstanding Common Stock;
(ii) each director and executive officer individually; and (iii) all directors
and executive officers as a group. Except as otherwise indicated in the
footnotes below, the Company believes that each of the beneficial owners of the
Common Stock listed in the table, based on information furnished by such owner,
has sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
PERCENTAGE
----------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Management Group ............................................... 2,855,456(1) 95.2% 61.7%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
Mark Weinreb ................................................... 859,538(2) 28.7% 18.6%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
Jerry Rosner ................................................... 790,154(2) 26.3% 17.1%
c/o Big City Bagels, Inc.
151 Kalmus Drive
Costa Mesa, CA 92626
Stanley Weinreb ................................................ 605,851(2) 20.2% 13.1%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
Stanley Raphael ................................................ 599,913(2)(3) 20.0% 13.0%
c/o Big City Bagels, Inc.
99 Woodbury Road
Hicksville, NY 11801
All executive officers and directors as a group
(four persons)................................................ 2,855,456 95.2% 61.7%
</TABLE>
- ------------
(1) The Management Group consists of Messrs. Mark Weinreb, Jerry Rosner, Stanley
Weinreb and Stanley Raphael, each of whom is a party to, and has agreed to
vote their shares in accordance with, the Founders' Shareholder Agreement
described below. Each of the members of this group shares voting power with
respect to the shares of Common Stock held by each of the members. The
number of shares set forth in the table includes the shares held by each
member.
(2) Does not include shares held by other members of the Management Group (see
Note 1) with respect to which each member shares voting power with the other
members of such group.
(3) Includes 5,938 shares of Common Stock owned by Trade Consultants, Inc.
Pension Fund, of which Mr. Raphael is the trustee.
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FOUNDERS' SHAREHOLDER AGREEMENT
Messrs. Mark Weinreb, Jerry Rosner, Stanley Weinreb and Stanley Raphael are
parties to the Founders' Shareholder Agreement and the shares of Common Stock
beneficially owned by them are subject to the terms of the Founders' Shareholder
Agreement. Pursuant to the Founders' Shareholder Agreement, each of these
members has agreed to vote his shares for the election of each of the other
members of the group as a director of the Company as long as each such other
member owns at least 100,000 shares of Common Stock. In addition, the members
have granted a right of first refusal to the others with respect to any sales of
Common Stock held by them other than pursuant to a registration statement under
the Securities Act or pursuant to Rule 144 promulgated thereunder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In consideration of capital contributions aggregating approximately
$980,000 made at various times since the Company's inception by Messrs. Mark
Weinreb, Chairman of the Board and Chief Executive Officer of the Company, Jerry
Rosner, President, Chief Operating Officer and a director of the Company,
Stanley Raphael, Secretary and a director of the Company and Stanley Weinreb,
Vice President and a director of the Company, the Company has from time to time
issued to such individuals an aggregate of 845,625, 789,250, 591,938 and 591,938
shares of Common Stock, respectively.
Since the Company's inception, its operations have been partially funded
from time to time by loans to the Company made directly by Messrs. Mark Weinreb,
Stanley Weinreb and Stanley Raphael, or indirectly through corporations
controlled by Messrs. Mark Weinreb and Stanley Weinreb, certain amounts of which
have been repaid (the 'Shareholder Loans'). At December 31, 1995, the principal
amount of the Shareholder Loans, which bear interest at 10% per annum,
aggregated $462,468, of which $200,000 is due and payable from the proceeds of
this Offering, an additional $175,000 is due and payable from the first proceeds
derived from the exercise of the Underwriter's over-allotment option and the
balance is payable in equal monthly installments of $12,000 commencing in
January 1997.
Pumpernickel Partners is a Delaware limited partnership that was formed in
August 1993 which currently owns and operates two Big City Bagels franchises in
Costa Mesa and Laguna Niguel, California. Pursuant to an agreement between the
Company and Pumpernickel Partners, Pumpernickel Partners currently is entitled
to receive 40% of the distributable cash flow derived from sales by the
Company's Costa Mesa, California commissary to stores located in Orange County
and San Diego County, California, which currently includes the two stores
operated by Pumpernickel Partners, the Company-owned store in Costa Mesa,
California and the two franchises located in San Diego and Fountain Valley,
California. Messrs. Mark Weinreb, Stanley Weinreb and Stanley Raphael each own
22.5%, and Jerry Rosner owns 10%, of the general partner, Bagel Partners, which
owns a 5% interest in Pumpernickel Partners. The remaining 22.5% interest of
Bagel Partners is owned by an individual who is responsible for the day-to-day
operations of the two stores operated by Pumpernickel Partners. Messrs. Mark
Weinreb, Stanley Weinreb and Stanley Raphael also own a 6.9%, 6.9% and 3.45%
limited partnership interest in Pumpernickel Partners, respectively. Immediately
prior to the closing of this Offering, all of the limited partners of
Pumpernickel Partners will contribute to the Company their limited partnership
interests in Pumpernickel Partners, and all of the shareholders of Bagel
Partners will contribute to the Company all of the capital stock of Bagel
Partners in exchange for an aggregate of 181,250 shares of Common Stock of the
Company. As a result of their interests in Bagel Partners and Pumpernickel
Partners, Messrs. Mark Weinreb, Jerry Rosner, Stanley Weinreb and Stanley
Raphael will receive 13,913, 904, 13,913 and 7,975 shares of Common Stock,
respectively.
In October 1994, Messrs. Mark Weinreb, Jerry Rosner, Stanley Raphael and
Stanley Weinreb, along with one other individual, formed a Nevada corporation
called Gotham City Equipment, Inc. ('Gotham'), and each owns 20% of its capital
stock. Gotham sells store equipment and fixtures to the Company and its
franchisees, although the franchisees have no obligation to purchase equipment
from Gotham. Following completion of this Offering, the four directors will
divest themselves of their ownership interest in Gotham.
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All future transactions between the Company and a director, executive
officer or shareholder beneficially owning more than 5% of the outstanding
Common Stock of the Company, including the granting or forgiveness of a loan,
will require approval by a majority of the disinterested directors of the
Company as being on terms and conditions no less favorable to the Company than
those available from unaffiliated third parties.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 11,000,000 shares,
consisting of 10,000,000 shares of Common Stock, $.001 par value per share, and
1,000,000 shares of preferred stock, $.001 par value per share ('Preferred
Stock'). As of the date of this Prospectus, 3,500,000 shares of Common Stock are
outstanding and held of record by 24 shareholders. Upon completion of this
Offering, there will be 4,625,000 shares of Common Stock outstanding (4,793,750
if the Underwriter's over-allotment option is exercised in full). No shares of
Preferred Stock are currently outstanding.
UNITS
Each Unit consists of one share of Common Stock and one Warrant, each
Warrant entitling the holder to purchase one share of Common Stock. The Common
Stock and Warrants comprising the Units are immediately detachable and
separately transferable.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by shareholders. Provided a
quorum is present, the election of directors requires a plurality vote of those
shares of Common Stock represented at any shareholders' meeting. The Certificate
of Incorporation does not provide for cumulative voting for the election of
directors. The holders of shares of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of Common Stock, as
such, have no redemption, preemptive or other subscription rights, and there are
no conversion provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock included in the
Units, when issued and paid for as set forth in this Prospectus, will be fully
paid and nonassessable.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one or
more series, and the Board of Directors is authorized, without further action by
the shareholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate
preferences in liquidation and the number of shares constituting any series. The
Company believes that the availability of Preferred Stock issuable in series
will provide increased flexibility for structuring possible future financings
and acquisitions, if any, and in meeting other corporate needs. It is not
possible to state the actual effect of the authorization and issuance of any
series of Preferred Stock upon the rights of holders of Common Stock until the
Board of Directors determines the specific terms, rights and preferences of a
series of Preferred Stock. However, such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, or impairing the liquidation rights of such shares without
further action by holders of the Common Stock. In addition, under various
circumstances, the issuance of Preferred Stock may have the effect of
facilitating, as well as impeding or discouraging, a merger, tender offer, proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent
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management. Issuance of Preferred Stock could also adversely affect the market
price of the Common Stock. The Company has no present plan to issue any shares
of Preferred Stock.
WARRANTS
Each Warrant is issued pursuant to a Warrant Agreement between the Company
and Continental Stock Transfer & Trust Company as warrant agent.
During the three-year period commencing one year after the date of this
Prospectus, each Warrant will entitle the registered holder to purchase one
share of Common Stock at an exercise price of $4.50 per share. No fractional
shares of Common Stock will be issued in connection with the exercise of
Warrants. Upon exercise, the Company will pay the holder the value of any such
fractional shares in cash, based upon the market value of the Common Stock at
such time.
Unless extended by the Company at its discretion, the Warrants will expire
at 5:00 p.m., New York time, on the fourth anniversary of the date of this
Prospectus. In the event a holder of Warrants fails to exercise the Warrants
prior to their expiration, the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.
The Company may redeem the Warrants with the Underwriter's prior consent,
at a price of $.05 per Warrant at any time after they become exercisable upon
not less than 30 days' prior written notice if the last sale price of the Common
Stock has been at least $7.00 per share on 20 consecutive trading days ending
within ten days prior to the date on which notice of redemption is given. The
Company may redeem the Warrants without the consent of the Underwriter on the
same terms, provided that the last sale price of the Common Stock has been at
least $8.00 per share on 20 consecutive trading days ending within ten days
prior to the date on which notice of redemption is given.
No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Warrants under an effective registration statement filed with the
Securities and Exchange Commission (the 'Commission') and such shares have been
qualified for sale or are exempt from qualification under the securities laws of
the state of residence of the holder of such Warrants. Although the Company
intends to have all shares so qualified for sale in those states where the Units
are being offered and to maintain a current prospectus relating thereto until
the expiration of the Warrants, subject to the terms of the Warrant Agreement,
there can be no assurance that it will be able to do so.
A holder of Warrants will not have any rights, privileges or liabilities as
a shareholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. No assurance can be given that the market
price of the Common Stock will exceed the exercise price of the Warrants at any
time during the exercise period.
BRIDGE UNITS
In January 1996, the Company completed the Bridge Financing, pursuant to
which it issued an aggregate of (i) $1,000,000 principal amount of Bridge Notes,
which bear interest at the rate of 8% per annum and are due and payable on the
earlier of the completion of this Offering or July 19, 1997 and (ii) the right
to receive upon completion of this Offering an aggregate of 500,000 Bridge Units
and 500,000 Class B Warrants. Each Bridge Unit consists of one share of Common
Stock and one Warrant. Two Class B Warrants together, will entitle the holder to
purchase one share of Common Stock for $8.00 per share during the three-year
period commencing one year after the completion of this Offering. The Company
may redeem the Class B Warrants, with the consent of the Underwriter, a price of
$.05 per Class B Warrant at any time after they become exercisable upon not less
than 30 days' prior written notice if the last sale price of the Common Stock
has been at least $12.00 per share on 20 consecutive trading days ending within
ten days prior to the date on which notice of redemption is given. The
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Company is registering for sale on the Registration Statement of which this
Prospectus forms a part, the Bridge Units, the Common Stock and Warrants
comprising the Bridge Units, the Common Stock underlying the Warrants included
in the Bridge Units and the Common Stock underlying the Class B Warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain of the federal income tax
consequences, under current law, of purchase and ownership of the Units, Common
Stock and Warrants. The Company has not requested and does not intend to request
a ruling from the Internal Revenue Service or a formal tax opinion from its
counsel on any tax aspect of this Offering. This tax discussion is intended only
as a descriptive summary and does not purport to be a complete analysis or
listing of all potential federal income tax effects of the purchase and
ownership of the Units, Common Stock or Warrants. Prospective purchasers of the
Units should consult their own tax advisors with respect to the tax consequences
to them of the purchase and ownership of such securities, including the Common
Stock and Warrants, and the applicability and effect of federal, state, local,
foreign and other tax laws.
An investor must allocate the cost of each Unit between each of its
elements (one share of Common Stock and one Warrant to purchase one share of
Common Stock) in accordance with their relative fair market values at the time
of issuance. Since the Common Stock and Warrants comprising the Units are
immediately detachable and a trading market for each is expected to develop
following this Offering, their relative fair market values will be determinable
based upon their respective trading prices at the commencement of trading. The
fair market value basis of allocation is the only method upon which such
allocation may be made in accordance with the Internal Revenue Code of 1986. The
portion of the cost of a Unit allocated to each element will constitute the
initial tax basis of such element for federal income tax purposes.
No gain or loss will be recognized by a holder of a Warrant on the holder's
purchase of Common Stock for cash upon exercise of the Warrant. The adjusted tax
basis of the Common Stock so acquired will be equal to the tax basis of the
Warrant plus the exercise price. The holding period of the Common Stock acquired
upon the exercise of the Warrant will begin on the date the Warrant is
exercised.
The sale of a share of Common Stock or the sale of a Warrant will result in
the recognition of gain or loss to the holder in an amount equal to the
difference between the amount realized (generally the cash and fair market value
of other property received) and the holder's adjusted tax basis therein. Such a
sale of Common Stock will result in capital gain or loss, provided the Common
Stock is a capital asset in the hands of the holder. The sale of a Warrant
(other than a sale to the Company) will likewise result in capital gains or
loss, provided the Warrant is a capital asset in the hands of the holder and the
Common Stock underlying the Warrant would be a capital asset to the holder if
acquired by the holder. Such capital gain or loss will be long-term capital gain
or loss if the Common Stock or Warrant being sold has been held for more than
one year at the time of such sale or exchange.
Based upon the Company's obligation to redeem the Warrants on a pro rata
basis, the redemption of a Warrant by the Company would be treated as a sale or
exchange of a capital asset and, any gain or loss recognized on the transaction
would be a capital gain or loss. Such gain or loss will be long-term capital
gain or loss if the holding period of the Warrant exceeds one year at the time
of redemption.
If a Warrant is not exercised and allowed to expire, the Warrant will be
deemed to have been sold or exchanged for no consideration on the expiration
date. Any loss to the holder of a Warrant will be a capital loss if the Warrant
was held as a capital asset and if the Common Stock underlying the Warrant would
have been a capital asset had such Warrant been exercised. Any capital loss will
be tong-term if the holding period of the Warrant exceeds one year at the time
it expires.
No gain or loss will be recognized by the Company upon the acquisition,
exercise or expiration of any Warrants.
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LIMITATION OF LIABILITY OF DIRECTORS
As permitted by the Business Corporation Law of New York, the Company's
Restated Certificate of Incorporation eliminates the personal liability of a
director to the Company and its shareholders for monetary damages for breach of
a director's fiduciary duty except in certain instances. Accordingly, except in
such circumstances, the Company's directors will not be liable to the Company or
its shareholders for breach of such duty.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation of the Company provides that the Company
shall indemnify, to the fullest extent permitted by New York law, any person
whom it may indemnify thereunder, including directors and officers of the
Company. Such indemnification (other than as ordered by a court) shall be made
by the Company only upon a determination that indemnification is proper in the
circumstances because the individual met the applicable standard of conduct.
Advances for such indemnification may be made pending such determination.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR.
The transfer agent, warrant agent and registrar for the Common Stock and
Warrants is Continental Stock Transfer & Trust Company, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,625,000 shares of Common Stock, not including shares of Common Stock issuable
upon exercise of outstanding options, warrants or the Underwriter's Unit
Purchase Option and assuming no exercise of the over-allotment option granted to
the Underwriter. Of these outstanding shares, the 1,125,000 shares of Common
Stock sold to the public in this Offering may be freely traded without
restriction or further registration under the Securities Act, except that any
shares that may be held by an 'affiliate' of the Company (as that term is
defined in the rules and regulations under the Securities Act) may be sold only
pursuant to a registration under the Securities Act or pursuant to an exemption
from registration under the Securities Act, including the exemption provided by
Rule 144 adopted under the Securities Act. The 3,000,000 shares of Common Stock
outstanding prior to this Offering, as well as the 500,000 shares of Common
Stock included in the Bridge Units, are 'restricted securities,' as that term is
defined in Rule 144 under the Securities Act and may not be sold unless such
sale is registered under the Securities Act or is made pursuant to an exemption
from registration under the Securities Act, including the exemption provided by
Rule 144. Of such shares, 2,818,750 will be available for sale pursuant to Rule
144 immediately, subject to a 24-month lock-up described below. An additional
681,250 shares will be available for sale pursuant to Rule 144 commencing two
years from the date of this Prospectus. 500,000 of these latter shares have been
included in the Registration Statement of which this Prospectus forms a part.
The holders of these shares have agreed not to sell these shares without the
prior consent of the Underwriter until 13 months after the date of this
Prospectus. All officers, directors and 5% shareholders of the Company as of the
date of this Prospectus (who hold in the aggregate 2,855,456
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shares) have agreed that for a period of 24 months from the date of this
Prospectus (18 months in the event that after the date of this Prospectus the
closing bid price of the Company's Common Stock exceeds $12.00 for 20
consecutive trading days), they will not sell any of their shares without the
prior consent of the Underwriter. The Company is advised by the Underwriter that
in determining whether to give or withhold their consent to any sale within the
applicable lock-up period, the Underwriter will consider whether such sale would
have an adverse effect on the market for the Company's Common Stock. No
shareholder subject to any lock-up agreement has requested to be released from
his lock-up.
In general, under Rule 144 as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least two years (including a shareholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Commission, provided certain
public information, manner of sale and notice requirements are satisfied. A
shareholder who is deemed to be an affiliate of the Company, including members
of the Board of Directors and senior management of the Company, will still need
to comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
that are not restricted securities, unless such sale is registered under the
Securities Act. A shareholder (or shareholders whose shares are aggregated) who
is deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale by such shareholder, and who has beneficially owned
restricted shares for at least three years, will be entitled to sell such shares
under Rule 144 without regard to the volume limitations described above.
Prior to this Offering, there has been no public trading market for the
Common Stock of the Company, and no predictions can be made as to the effect, if
any, that future sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect the then prevailing market price.
UNDERWRITING
Monroe Parker Securities, Inc. (the 'Underwriter') has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 1,125,000 Units on a firm commitment basis. The obligations
of the Underwriter under the Underwriting Agreement are subject to approval of
certain legal matters by counsel and various other conditions precedent, and the
Underwriter is obligated to purchase all of the Units offered by this Prospectus
(other than the Units covered by the over-allotment option described below), if
any are purchased.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at that price less a concession not in
excess of $.20 per Unit. After this Offering, the offering price and other
selling terms may be changed by the Underwriter. The Underwriter does not intend
to sell any of the securities of the Company to accounts for which it exercises
discretionary authority.
The Company has granted to the Underwriter an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase from the
Company at the offering price, less underwriting discounts and the
nonaccountable expense allowance, up to an aggregate of 168,750 additional Units
for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company also
has agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the Units
underwritten (including the sale of any Units subject to the Underwriter's
over-allotment option). The Company also has agreed to pay all expenses in
connection with qualifying the Units offered hereby for sale under the laws of
such states as the Underwriter may designate, including legal fees (up to
$40,000) and expenses of counsel retained for such purposes by the Underwriter.
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In connection with this Offering, the Company has agreed to sell to the
Underwriter for an aggregate of $112.50, the right to purchase up to an
aggregate of 112,500 Units (the 'Unit Purchase Option'). The Units issuable upon
exercise of the Unit Purchase Option are identical to those offered hereby. The
Unit Purchase Option is exercisable initially at $4.80 per Unit for a period of
four years commencing one year from the date of this Prospectus. The Unit
Purchase Option may not be transferred, sold, assigned or hypothecated during
the one-year period following the date of this Prospectus except to officers of
the Underwriter and to the selected dealers and their officers or partners. The
Unit Purchase Option grants to the holders thereof certain 'piggyback' and
demand rights for periods of seven and five years, respectively, from the date
of this Prospectus with respect to the registration under the Securities Act of
the securities directly and indirectly issuable upon exercise of the Unit
Purchase Option.
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Warrants. To the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission, the Company has agreed to pay the Underwriter for bona fide
services rendered a commission equal to 4% of the exercise price for each
Warrant exercised (other than Warrants held by the Underwriter and its
affiliates) if the exercise was solicited by the Underwriter. In addition to
soliciting, either orally or in writing, the exercise of the Warrants, such
services may also include disseminating information, either orally or in
writing, to Warrantholders about the Company or the market for the Company's
securities, and assisting in the processing of the exercise of Warrants. No
compensation will be paid to the Underwriter in connection with the exercise of
the Warrants if the market price of the underlying shares of Common Stock is
lower than the exercise price, the Warrants are held in a discretionary account,
the Warrants are exercised in an unsolicited transaction or the arrangement to
pay the commission is not disclosed in the prospectus provided to Warrantholders
at the time of exercise. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, while it is soliciting
exercise of the Warrants, the Underwriter will be prohibited from engaging in
solicited brokerage activities with regard to the Company's securities unless
the Underwriter has waived its right to receive a fee for the exercise of the
Warrants.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units and the terms
of the Warrants have been arbitrarily determined by negotiations between the
Company and the Underwriter and do not necessarily bear any relation to
established valuation criteria. Factors considered in determining such prices
and terms, in addition to prevailing market conditions, included an assessment
of the prospects for the industry in which the Company will compete, the
Company's management and the Company's capital structure.
Pursuant to the Underwriting Agreement, the Company has agreed not to issue
any of its shares of capital stock for 24 months from the date of this
Prospectus (18 months in the event that after the date of this Prospectus the
closing bid price of the Company's Common Stock exceeds $12.00 for 20
consecutive trading days) without the prior written consent of the Underwriter,
which consent may not be unreasonably withheld.
All of the Company's officers, directors and shareholders who own at least
5% of the outstanding Common Stock of the Company have agreed not to sell any of
their shares of Common Stock for a period of two years from the date of this
Prospectus without the prior written consent of the Underwriter. The Underwriter
does not intend to sell any of the securities of the Company to accounts for
which it exercises discretionary authority.
The Underwriting Agreement provides that, for a period of three years from
the date of this Prospectus, the Company will nominate a person selected by the
Underwriter and reasonably acceptable to the Company for election to serve as a
member of the Company's Board of Directors. The Company also has engaged the
Underwriter as its financial consultant for a period of two years from the date
of this Prospectus at a monthly fee of $1,000. Additionally, if within five
years of the date of this Prospectus, the Company completes a merger,
acquisition, joint venture or any other capital business transaction with a
party introduced to the Company by the Underwriter, the Underwriter will receive
a finder's fee equal to 5% of the first $3 million of consideration, 3% of the
next $2 million, 2% of the next $2 million and 1% of the excess, if any, over
$10 million.
35
<PAGE>
<PAGE>
SELLING SECURITYHOLDERS
Up to 500,000 Bridge Units, 500,000 shares of Common Stock and 500,000
Warrants (the 'Registered Bridge Securities') may be offered by the Selling
Securityholders who acquired the right to receive such securities in the January
1996 Bridge Financing. The Company has agreed to bear all expenses (other than
underwriting or selling commissions or any fees and disbursements of counsel to
such Selling Securityholders) in connection with the registration of these
shares.
The following table sets forth certain information with respect to holders
for whom the Company registering these securities for resale to the public. None
of the Selling Securityholders has held any position or office or has had a
material relationship with the Company or any of its affiliates within the past
three years. The Company believes that none of the holders listed below owns any
other securities of the Company. The Company will not receive any of the
proceeds from the sale of these shares by the Selling Securityholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES
OWNED PRIOR TO REGISTERED FOR SHARES BENEFICIALLY
RESALE(1) RESALE OWNED AFTER RESALE
------------------- ---------------- -------------------
<S> <C> <C> <C>
Charles Junger......................................... 137,500 137,500 0
Plus One Finance Limited............................... 125,000 125,000 0
360 Central Corp....................................... 100,000 100,000 0
Min Computer Consultants, Inc. Retirement Trust........ 62,500 62,500 0
Harry Shuster.......................................... 50,000 50,000 0
Bridge Ventures, Inc................................... 25,000 25,000 0
</TABLE>
- ------------
(1) Does not include shares issuable upon exercise of the Warrants included in
the Bridge Units or the Class B Warrants, which Warrants and Class B
Warrants will become exercisable one year from the date of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF WARRANTS
WARRANTS BENEFICIALLY REGISTERED FOR WARRANTS BENEFICIALLY
OWNED PRIOR TO RESALE RESALE OWNED AFTER RESALE
--------------------- ------------------ ---------------------
<S> <C> <C> <C>
Charles Junger................................... 137,500 137,500 0
Plus One Finance Limited......................... 125,000 125,000 0
360 Central Corp................................. 100,000 100,000 0
Min Computer Consultants, Inc. Retirement
Trust.......................................... 62,500 62,500 0
Harry Shuster.................................... 50,000 50,000 0
Bridge Ventures, Inc............................. 25,000 25,000 0
</TABLE>
36
<PAGE>
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers and agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The Selling
Securityholders and intermediaries through whom such securities are sold may be
deemed 'underwriters' within the meaning of the Securities Act with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Selling Securityholders may also elect to
sell such securities pursuant to one or more exemptions from registration under
the Securities Act, including but not limited to sales under Rule 144.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the numbers of shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for shares purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged in
a distribution of the securities of the Company offered by this Prospectus may
not simultaneously engage in market-making activities with respect to such
securities of the Company during the applicable 'cooling off' period (nine days)
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rule 10b-6 and 10b-7, in connection
with the transactions in such securities, which provisions may limit the timing
of purchases and sales of such securities by the Selling Securityholders.
All costs, expenses and fees in connection with the registration of the
shares offered by the Selling Securityholders will be borne by the Company.
Brokerage commissions, if any, attributable to the sale of the securities
offered by the Selling Securityholders will be borne by the Selling
Securityholders. The Company has agreed to indemnify the Selling
Securityholders, and the Selling Securityholders have agreed to indemnify the
Company, against certain liabilities, including liabilities under the Securities
Act.
The Selling Securityholders have agreed that they will not sell any of the
shares registered herein until June 7, 1997 without the prior consent of the
Underwriter.
37
<PAGE>
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Graubard Mollen & Miller, New York, New York. Bernstein & Wasserman,
LLP, New York, New York has acted as counsel for the Underwriter in connection
with this Offering.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for the years then ended have been included herein and in the Registration
Statement of which this Prospectus is a part, in reliance upon the report of
Richard A. Eisner & Company, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Units offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, certain portions having been omitted from this
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, the securities offered by this
Prospectus and such omitted information, reference is made to the Registration
Statement, including any and all exhibits and amendments thereto. Statements
contained in this Prospectus concerning the provisions of any document filed as
an exhibit are of necessity brief descriptions thereof and are not necessarily
complete, and in each instance reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in its entirety by this reference.
Following the effectiveness of the Registration Statement, the Company will
be subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith, the Company will file reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material, including the Registration Statement, can
be obtained from the Commission's Public Reference Section at prescribed rates.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent auditors and such
other periodic reports as the Company may determine to be appropriate or as may
be required by law.
38
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditor's Report............................................................................ F-2
Combined Balance Sheet as of December 31, 1995.......................................................... F-3
Combined Statements of Operations for the Years Ended December 31, 1995 and 1994........................ F-4
Combined Statements of Changes in Stockholders' Equity and Partners' Capital for the Years Ended
December 31, 1995 and 1994............................................................................ F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1994........................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Partners
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
Hicksville, New York
We have audited the accompanying combined balance sheet of Big City Bagels,
Inc. and Pumpernickel Partners, L.P. as at December 31, 1995, and the related
combined statements of operations, changes in stockholders' equity and partners'
capital and cash flows for the years ended December 31, 1995 and December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the combined financial position of Big City Bagels,
Inc. and Pumpernickel Partners, L.P. at December 31, 1995 and the results of
their operations and their cash flows for the years ended December 31, 1995 and
December 31, 1994 in conformity with generally accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
February 21, 1996
With respect to Note A
March 6, 1996
F-2
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED BALANCE SHEET
AS AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (NOTE A)
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 37,991 $ 37,991
Accounts receivable............................................................. 19,580 19,580
Inventory....................................................................... 47,933 47,933
Prepaid expenses and other current assets....................................... 9,572 9,572
----------- ----------
Total current assets....................................................... 115,076 115,076
Fixed assets, net of accumulated depreciation........................................ 934,378 934,378
Intangible assets, net of accumulated amortization of $19,869........................ 31,230 284,532
Deferred registration costs.......................................................... 25,000 25,000
Security deposits.................................................................... 31,947 31,947
----------- ----------
Total...................................................................... $ 1,137,631 $1,390,933
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities:
Stockholder and partner loans................................................... $ 200,000 $ 200,000
Notes payable................................................................... 87,712 87,712
Unearned franchise fee income................................................... 309,250 309,250
Accounts payable................................................................ 278,390 278,390
Accrued expenses................................................................ 35,660 35,660
----------- ----------
Total current liabilities.................................................. 911,012 911,012
Deferred rent payable................................................................ 26,261 26,261
Loans payable, noncurrent............................................................ 11,044 11,044
Stockholder and partner loans, noncurrent............................................ 262,468 262,468
----------- ----------
Total liabilities.......................................................... 1,210,785 1,210,785
----------- ----------
Stockholders equity and partners' capital:
Preferred stock $.001 par value; 1,000,000 shares authorized; no shares
outstanding
Common stock $.001 par value; 10,000,000 shares authorized; 2,818,750 shares
issued and outstanding, historical; 3,000,000 shares issued and outstanding,
pro forma...................................................................... 2,819 3,000
Additional paid-in capital...................................................... 972,181 177,148
Partners' capital............................................................... 255,456
Accumulated deficit............................................................. (1,303,610)
----------- ----------
Total stockholders' equity (deficiency) and partners' capital.............. (73,154) 180,148
----------- ----------
Total...................................................................... $ 1,137,631 $1,390,933
----------- ----------
----------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Revenues:
Product sales by company owned stores........................................... $ 1,313,297 $ 451,568
Product sales to franchisees and others......................................... 172,757 60,493
Franchise fees.................................................................. 40,000 30,000
Royalty income.................................................................. 22,147 157
Other income.................................................................... 2,054 1,917
----------- ----------
Total revenues............................................................. 1,550,255 544,135
----------- ----------
Costs and expenses:
Cost of sales................................................................... 667,394 249,509
Selling, general and administrative expenses.................................... 1,681,892 1,035,527
Interest expense................................................................ 27,818 17,692
----------- ----------
Total costs and expenses................................................... 2,377,104 1,302,728
----------- ----------
Net (Loss)........................................................................... (826,849) $ (758,593)
----------
----------
Pro forma adjustment:
Increase in officers salary..................................................... 212,333
-----------
Pro forma net (loss)................................................................. $(1,039,182)
-----------
-----------
Pro forma net (loss) per common share................................................ $(.35)
-----------
-----------
Pro forma weighted average common shares outstanding................................. 3,000,000
-----------
-----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN PARTNERS' ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL CAPITAL DEFICIT STOCK
--------- ------ ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1994................ 2,818,750 $2,819 $ 27,181 $ 506,408 $ (169,120)
Capital contributions..................... 951,000 200,000
Purchase of treasury stock................ (225,500) $(24,000)
Net (loss)................................ (297,893) (460,700)
--------- ------ ----------- --------- ----------- --------
Balance -- December 31, 1994.............. 2,593,250 2,819 978,181 408,515 (629,820) (24,000)
Purchase of treasury stock................ (56,375) (6,000)
Reissuance of treasury stock.............. 281,875 (6,000) 30,000
Net (loss)................................ (153,059) (673,790)
--------- ------ ----------- --------- ----------- --------
Balance -- December 31, 1995.............. 2,818,750 2,819 972,181 255,456 (1,303,610) - 0 -
Exchange of partnership interests for
common stock............................ 181,250 181 508,577 (255,456)
Termination of S corporation status....... (1,303,610) 1,303,610
--------- ------ ----------- --------- ----------- --------
Pro Forma Balance December 31, 1995....... 3,000,000 $3,000 $ 177,148 $ - 0 - $ - 0 - $ - 0 -
--------- ------ ----------- --------- ----------- --------
--------- ------ ----------- --------- ----------- --------
<CAPTION>
TOTAL
----------
<S> <C>
Balance -- January 1, 1994................ $ 367,288
Capital contributions..................... 1,151,000
Purchase of treasury stock................ (24,000)
Net (loss)................................ (758,593)
----------
Balance -- December 31, 1994.............. 735,695
Purchase of treasury stock................ (6,000)
Reissuance of treasury stock.............. 24,000
Net (loss)................................ (826,849)
----------
Balance -- December 31, 1995.............. (73,154)
Exchange of partnership interests for
common stock............................ 253,302
Termination of S corporation status....... - 0 -
----------
Pro Forma Balance December 31, 1995....... $ 180,148
----------
----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)........................................................................ $(826,849) $ (758,593)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation and amortization................................................ 115,862 62,064
(Increase) decrease in:
Accounts receivable..................................................... (5,607) (12,373)
Inventory............................................................... (753) (47,180)
Prepaid expenses........................................................ (238) 13,643
Other assets............................................................ (1,922) (2,971)
Increase in:
Accounts payable........................................................ 170,855 86,395
Accrued expenses........................................................ 18,788 7,574
Unearned franchise fee income........................................... 244,250 65,000
Deferred rent payable................................................... 4,968 18,286
--------- ----------
Net cash (used in) operating activities............................ (280,646) (568,155)
--------- ----------
Cash flows from investing activities:
Purchases of fixed assets......................................................... (54,181) (921,920)
--------- ----------
Cash flows from financing activities:
Proceeds from capital contributions............................................... 1,151,000
Proceeds from stockholder loans................................................... 253,468 83,000
Proceeds from notes payable....................................................... 101,648
Repayment of notes payable........................................................ (2,892)
Purchase of treasury stock........................................................ (6,000)
Deferred registration costs....................................................... (25,000)
--------- ----------
Net cash provided by financing activities.......................... 321,224 1,234,000
--------- ----------
Net (Decrease) in Cash and Cash Equivalents............................................ (13,603) (256,075)
Cash and cash equivalents -- beginning of year......................................... 51,594 307,669
--------- ----------
Cash and Cash Equivalents -- End of Year............................................... $ 37,991 $ 51,594
--------- ----------
--------- ----------
Supplemental disclosure of cash paid:
Interest.......................................................................... $ 2,795 $ 17,692
Income taxes...................................................................... 3,578 1,339
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- THE COMPANY AND BASIS OF PRESENTATION:
Big City Bagels, Inc. ('Big City') operates and franchises retail bagel
stores and sells its products wholesale to commercial accounts and food service
operators. Pumpernickel Partners, L.P. ('Pumpernickel') operates two such bagel
stores. The combined financial statements include the accounts of Big City and
Pumpernickel (collectively, the 'Company'), which are under common control as
the principal stockholders of Big City are also the principal stockholders of
Bagel Partners, Inc. ('Bagel Partners'), the general partner of Pumpernickel.
The Company commenced operations in 1993. All significant intercompany balances
and transactions have been eliminated. Bagel Partners had no assets or
liabilities other than its interest in Pumpernickel, which if the financial
statements of Bagel Partners were combined herewith, would have been eliminated.
The Company has incurred losses since inception and has a working capital
deficit of $795,936 at December 31, 1995. In January 1996 the Company raised
$1,000,000 through a bridge financing (Note J) which management believes will be
sufficient to fund its operations through at least December 31, 1996. In
addition, the Company expects to offer its securities in a public offering (the
'Offering') however, there is no assurance that such offering will be
consummated (Note K).
Immediately prior to the closing of the Offering the limited partners of
Pumpernickel and the stockholders of Bagel Partners, Inc., the general partner
of Pumpernickel, will exchange their partnership interests and all their capital
stock, respectively, for 181,250 shares of the Company's common stock. This
transaction will be accounted for as a purchase of the interests of the
unaffiliated limited partners in Pumpernickel. The common stock issued to the
stockholders of Bagel Partners and the affiliated limited partners of
Pumpernickel will be valued at their respective equity interests in
Pumpernickel. The excess of the fair value of the shares of common stock
(144,535 shares) issued to such limited partners over the book amount of their
interest in Pumpernickel has been assigned to the franchise costs and included
with intangible assets in the accompanying pro forma balance sheet ($253,302).
The accompanying pro forma balance sheet reflects this transaction as if it had
occurred on December 31, 1995. In addition, in February 1996 the Company amended
its certificate of incorporation, increasing its authorized shares, and in March
1996 the Company effected a 28,187.5 for 1 stock split of its common stock in
the form of stock dividend payable at the closing of the Offering to
shareholders of record on April 1, 1996. The accompanying financial statements
reflect these transactions retroactively.
(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) INVENTORY:
Inventory is stated at the lower of cost (first-in, first-out) or market.
(2) DEPRECIATION:
Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets.
(3) INTANGIBLE ASSETS:
Intangible assets consists of organization costs which are being amortized
over 5 years and trademark costs which are being amortized over 15 years.
(4) FRANCHISE FEES:
Franchise fees include fees earned from area development agreements and
franchise agreements.
F-7
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Under an area development agreement, a developer purchases the right to
develop a specified area for future franchises. Area development fees are
recognized as revenue on a pro rata basis as each store in the area is opened.
Generally, franchise agreements provide for a franchise fee of $30,000 for
a franchisee's first store and $25,500 for subsequent stores. A deposit is
required at the signing of the franchise agreement and the balance is payable
when the franchisee obtains a lease commitment for the site. The Company's
initial obligations under the franchise agreement are to provide operational
guidelines and manuals, to assist in and approve the proposed site selection and
to provide training to the franchisee. Revenues are recognized when
substantially all material obligations have been provided, historically upon
opening of the respective store.
(5) ROYALTY INCOME:
Franchise agreements provide for royalties of 4% of gross sales, which are
recognized as income when earned.
(6) INCOME TAXES:
Big City and Pumpernickel file separate tax returns. Big City has elected S
corporation tax status for federal and certain state income tax reporting
purposes. Pumpernickel is treated as a partnership for federal and state income
tax reporting purposes. Accordingly, the losses of the Company are deductible by
the stockholders and partners and will not be available as a loss carryforward
to the Company. Upon closing of the proposed public offering (Note K), the
Company will be subject to income taxes.
(7) PRO FORMA NET (LOSS) PER SHARE:
Pro forma net (loss) per share is computed on the basis of the weighted
average number of common shares outstanding during each period adjusted for the
28,187.5 to 1 stock split and as if the exchange described in Note A[1] had
occurred on January 1, 1995 and as if the employment agreements described in
Note F[2] had been in effect since the later of January 1, 1995 or the date of
employment of the respective individual.
(8) LONG-LIVED ASSETS:
In accordance with FASB Statement No. 121, 'Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of', the Company
records impairment losses on long-lived assets used in operations, including
goodwill and intangible assets, when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
(NOTE C) -- FIXED ASSETS:
Fixed assets consists of the following:
<TABLE>
<CAPTION>
LIFE
--------------
<S> <C> <C>
Furniture and fixtures.................................................. $ 284,482 7 to 15 years
Machinery and equipment................................................. 413,004 5 to 15 years
Leasehold improvements.................................................. 398,988 Life of leases
----------
Total.............................................................. 1,096,474
Less accumulated depreciation........................................... 162,096
----------
Balance............................................................ $ 934,378
----------
----------
</TABLE>
F-8
<PAGE>
<PAGE>
BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE D) -- NOTES PAYABLE:
The Company has borrowed $68,947 from a bank pursuant to two line of credit
agreements. The full amount was repaid in January 1996. The agreements provide
for aggregate borrowings of up to $70,000 with interest payable at 15.25%.
In addition, the Company owes $29,809 pursuant to two equipment loans,
payable in monthly installments of principal and interest totaling $1,940
through December 1997.
(NOTE E) -- STOCKHOLDER AND PARTNER LOANS:
Stockholder and partner loans are payable $200,000 upon closing of the
Offering, $175,000 from the first proceeds to the Company from the exercise of
the underwriter's over-allotment option in the Offering, and the balance monthly
with interest at 10% commencing January 1997. If the offering does not take
place the loans are payable monthly with interest at 10% commencing July 1996
through June 2001. Assuming the repayment of $375,000 of stockholder and partner
loans had been repaid from the proceeds of the Offering at the later of January
1, 1995 or the date of the loan, supplemental loss per share would be $(.32) for
1995.
(NOTE F) -- COMMITMENTS AND CONTINGENCIES:
(1) OPERATING LEASES:
The Company leases its commissary space and store locations under various
operating leases which expire between December 1996 and March 1999. Future
minimum rental payments as of December 31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- --------
<S> <C>
1996.............................................................................. $176,166
1997.............................................................................. 148,596
1998.............................................................................. 138,720
1999.............................................................................. 20,573
--------
Total........................................................................ $484,055
--------
--------
</TABLE>
Rent expense for the years ended December 31, 1995 and December 31, 1994
was $170,526 and $130,299, respectively. Rent expense under the Company's lease
for its commissary and one store, which provides for scheduled rent increases,
is recognized on a straight-line basis over the term of the lease.
(2) EMPLOYMENT AGREEMENTS:
The Company intends to enter into three year employment agreements,
effective as of January 1, 1996 with two officers providing for aggregate annual
salaries of $250,000, increasing to $330,000 after the closing of the Offering,
with annual increments of 10%.
The Company has also entered into an agreement with an employee providing
for an annual salary of $85,000 though December 31, 1998.
(NOTE G) -- INCOME TAXES:
If the Company had been subject to tax as a C corporation, there would have
been no pro forma income tax expense for the years ended December 31, 1995 and
December 31, 1994. Also, in accordance with SFAS 109, a pro forma deferred tax
asset of approximately $711,000 and $379,000 at December 31,
F-9
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BIG CITY BAGELS, INC. AND
PUMPERNICKEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995 and December 31, 1994, respectively, attributable principally to net
operating loss carryforwards would be fully reserved because the realization of
such benefit could not be established.
(NOTE H) -- FRANCHISES:
During 1995 the Company entered into franchise agreements for twelve
stores, none of which were opened as of December 31, 1995. During 1994 the
Company entered into franchise agreements for two stores, one of which was
opened in each of 1995 and 1994. At December 31, 1995 there were two franchised
stores and three Company owned stores in operation. Deferred franchise fees at
December 31, 1995 and December 31, 1994 represent fees received in advance of
store openings.
(NOTE I) -- COMMON STOCK:
The Company intends to adopt its 1996 Performance Equity Plan (the 'Plan')
which provides for the issuance of awards of up to 350,000 shares of common
stock to employees, officers, directors and consultants. The awards may consist
of incentive stock options, nonqualified options, restricted stock awards,
deferred stock awards, stock appreciation rights and other awards as described
in the Plan. Although no awards have yet been granted under the Plan, the
Company has agreed to issue options to purchase 15,000 shares of common stock to
an employee at an exercise price of $4.00 per share.
(NOTE J) -- BRIDGE FINANCING:
In January 1996, the Company completed a bridge financing, pursuant to
which it issued (i) an aggregate of $1,000,000 principal amount of promissory
notes, which bear interest at the rate of 8% per annum and are due on the
earlier of the completion of the Offering or July 19, 1997 and (ii) the right to
receive upon the completion of the Offering an aggregate of 500,000 bridge units
and 500,000 Class B redeemable common stock purchase warrants ('Class B
warrants'). Each bridge unit consists of one share of common stock and one
warrant identical to the Class A warrants described in Note K. Two Class B
warrants, together, will entitle the holder to purchase one share of common
stock for $8.00 during the three-year period commencing one year after the
completion of the Offering. The bridge units and Class B warrants contain
registration rights and the Company intends to register such securities
simultaneously with the Offering. The units and warrants have been valued at
$684,000 and will be accounted for as a debt discount increasing the effective
interest rate on the notes to 169%.
(NOTE K) -- INITIAL PUBLIC OFFERING:
The Company intends to offer securities to the public in an initial public
offering. In connection therewith, the Company has incurred expenses of $25,000
through December 31, 1995 and expects to incur significant other expenses which,
if the Offering does not take place, will be charged to expense. The Offering
consists of 1,125,000 units, each unit consisting of one share of common stock
and one Class A warrant which entitles the holder thereof to purchase one share
of common stock at $4.50 per share for a three-year period commencing one year
after the effective date of the Offering.
F-10
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_____________________________ _____________________________
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................................................................................... 3
Prospective Combination..................................................................................................... 7
Risk Factors................................................................................................................ 7
Use of Proceeds............................................................................................................. 13
Dilution.................................................................................................................... 14
Capitalization.............................................................................................................. 15
Dividend Policy............................................................................................................. 15
Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 16
Business.................................................................................................................... 19
Management.................................................................................................................. 26
Principal Shareholders...................................................................................................... 28
Certain Relationships and Related Transactions.............................................................................. 29
Description of Securities................................................................................................... 30
Shares Eligible for Future Sale............................................................................................. 33
Underwriting................................................................................................................ 34
Selling Securityholders..................................................................................................... 36
Plan of Distribution........................................................................................................ 37
Legal Matters............................................................................................................... 38
Experts..................................................................................................................... 38
Available Information....................................................................................................... 38
Index to Financial Statements............................................................................................... F-1
</TABLE>
------------------------
UNTIL JUNE 3, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS, COMMON
STOCK AND WARRANTS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
500,000 BRIDGE UNITS,
500,000 SHARES
OF COMMON STOCK AND
500,000 CLASS A
REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
[LOGO]
BIG CITY BAGELS, INC.
-------------------------
PROSPECTUS
-------------------------
MONROE PARKER
SECURITIES, INC.
MAY 7, 1996
_____________________________ _____________________________
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as............'r'
<PAGE>
