UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10KSB
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
--------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-28058
BIG CITY BAGELS, INC.
(Name of small business issuer in its charter)
New York 11-3137508
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
99 Woodbury Road, Hicksville, New York 11801
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 932-5050
------------------------------------------------
(Issuer's telephone number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Class A Redeemable Common Stock Purchase Warrants
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ X ] No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $2,414,976.
As of March 14, 1997, the aggregate market value of the Issuer's Common
Stock held by non-affiliates of the Issuer (based on the average bid and asked
prices of such stock) was $9,084,972. At March 14, 1997, 4,932,021 shares of the
Issuer's Common Stock outstanding were outstanding.
Page 1 of 32 Pages
EXHIBIT INDEX - PAGE 31
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Big City Bagels, Inc. ("Company") is a New York corporation incorporated in
December 1992 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 six stores, which are located in
California, Arizona and Utah. The Company also sells Big City Bagels franchises.
Currently, there are eight franchises open and operating in California and
Minnesota. As of March 14, 1997, the Company had sold franchises to open an
additional 28 stores, which are in various stages of development. The Company
also sells its products wholesale to commercial accounts and food service
operators.
In May 1996, the Company completed its initial public offering, pursuant to
which it received approximately $4,100,000 in net proceeds from the sale of
1,293,750 units, each unit consisting of one share of Common Stock and one Class
A Redeemable Common Stock Purchase Warrant. Immediately prior to the closing of
the initial public offering, Pumpernickel Partners, L.P. ("Pumpernickel
Partners"), a Delaware limited partnership which then owned two Big City Bagels
franchises, and its sole general partner, Bagel Partners, Inc. ("Bagel
Partners"), each of which was under the common control of the principal
shareholders of the Company, became wholly-owned subsidiaries of the Company in
a combination by which all of the limited partners of Pumpernickel Partners and
each of the stockholders of Bagel Partners exchanged their limited partnership
interests in Pumpernickel Partners their capital stock of Bagel Partners,
respectively, for shares of Common Stock of the Company.
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 attract experienced, multi-unit
franchisees to operate its stores. In order to attract potential franchisees,
the Company plans 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 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.
Recent Acquisitions
In December 1996, the Company acquired one of its franchises located in
Scottsdale, Arizona for approximately $29,000 in cash and forgiveness of debt,
54,055 shares of Common Stock and the assumption of $136,000 in capital lease
obligations. Also in December 1996, the Company acquired one of its franchises
located in Mesa, Arizona for approximately $33,000 in cash and forgiveness of
debt, 60,952 shares of Common Stock and the assumption of $45,000 in capital
lease obligations. In February 1997, the Company acquired one of its franchises
located in Park City, Utah for approximately $84,000 in cash and forgiveness of
debt and 8,264 shares of Common Stock.
2
<PAGE>
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 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. Cream cheese spreads and
muffins also are prepared in each store daily from ingredients purchased from
independent suppliers in accordance with quality control guidelines. 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, juices and a variety of soft drinks. In addition, the Company
offers innovative products, such as bagel pockets and 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 stores in California, Utah and Arizona. By
supplying the Company-owned stores and franchises with bagel dough, the Company
is able to control the quality of its bagel products 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 typically are 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 2,200 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 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.
3
<PAGE>
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(1) 0 2(1)
California ......... 8(2) 4 12(2)
Idaho .............. 0 3 3
Minnesota .......... 3 9 12
Texas .............. 0 12 12
Utah ............... 1(3) 0 1(3)
--- --- ---
Total ..... 14 28 42
- - -----------------------------
<FN>
(1) Includes two Company-owned stores.
(2) Includes three Company-owned stores.
(3) Includes one Company-owned store.
</FN>
</TABLE>
Franchising
The Company offers single unit and multi-unit franchises throughout the
United States. The Company currently is 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 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 designed to furnish the Company with
reports and to provide franchisees with optimal cash controls and ensure that
they have access to information that 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, 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.
4
<PAGE>
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.,
Einstein/Noah Bagel Corporation, Manhattan Bagel Company, Inc., Big Apple
Bagels, Chesapeake Bagels, New York Bagel Enterprises and All American Bagel
Company. 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, 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.
Advertising
The Company currently advertises and plans to continue advertising its
franchises in its retail stores, newspapers and business opportunity magazines.
5
<PAGE>
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 Report, 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. The Company has been advised that an entity has
registered the name Big City Bagels in Benelux and the Company may not be able
to use its name in Belgium, Luxemborg and the Netherlands.
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 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. 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 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.
6
<PAGE>
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.
Employees
As of March 14, 1997, the Company had 48 full-time employees. 18 of the 48
full-time employees are salaried, while the other 30 are paid on an hourly
basis. In addition, the Company has 44 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.
7
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
<TABLE>
<CAPTION>
Approximate Approximate
Square Annual Lease
Location Use Footage Lease Expiration Payments
- - -------- --- ------- ---------------- -----------
<S> <C> <C> <C> <C>
Hicksville, NY Principal executive office 1,500 Month-to-month $16,200
Costa Mesa, CA Offices 2,400 December 1997 $32,640
Costa Mesa, CA Commissary/Company 4,400 November 1998; $53,250
store renewable for two
successive five-
year terms
Costa Mesa, CA Storage space 900 July 1997; $ 7,800
renewable for two
successive one-
year terms
Costa Mesa, CA Company store 1,750 March 1998; $54,700
renewable for two
successive five-
year terms
Laguna Niguel, Company store 1,600 March 1999; $44,800
CA renewable for one
additional five-
year term
Scottsdale, AZ Company store 1,960 December 2005; $31,400
renewable for one
additional five-year
term
Mesa, AZ Company store 2,200 January 2006; $27,600
renewable for two
successive five-
year terms
Park City, Utah Company store 2,335 October 2005; $57,800
renewable for two
successive five-
year terms
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
8
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Company's initial public offering, there was no established
trading market for the Company's securities. On May 7, 1996, the Company's
Common Stock and Class A Redeemable Common Stock Purchase Warrants commenced
quotation on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "BIGC" and
"BIGCW," respectively. The following table sets forth the high and low bid
prices for the Common Stock and Warrants as reported by Nasdaq for the periods
indicated. The prices represent inter-dealer quotations, which do not include
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Period Common Stock($) Warrants($)
- - ------------------- --------------------- --------------------
1996 High Low High Low
---- ---- --- ---- ---
<S> <C> <C> <C> <C>
Fourth Quarter 7-3/8 2-1/2 3-1/2 1
Third Quarter 10-1/2 7 4-1/4 2-3/4
Second Quarter 9-5/8 7-1/2 5 2-1/2
(from May 7, 1996)
</TABLE>
On March 14, 1997, the last sales prices for the Common Stock and Warrants
as reported by Nasdaq were $4-1/2 and $3-1/4, respectively.
As of March 14, 1997, there were 33 and 9 holders of record of the
Company's Common Stock and Warrants, respectively. The Company believes that
there are in excess of 500 beneficial holders of its Common Stock.
Dividends
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
position of the Company, general economic conditions and other pertinent
factors.
9
<PAGE>
Recent Sales of Unregistered Securities
During the year ended December 31, 1996 and through March 14, 1997, the
Company made the following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and If Option,
Description of Warrant or
Underwriting or Convertible
Other Discounts Exemption Security,
to Market Price from Terms of
Number Afforded to Registration Exercise or
Date of Sale Title of Security Sold Purchasers Claimed Conversion
- - ------------ ----------------- ---- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
1/96 - 12/96 options to 32,000 options granted - no 4(2) exercisable for
purchase consideration ten years from
Common Stock received by date of grant
granted to Company until at exercise
employees exercise prices ranging
from $3.25 to
$8.50
3/31/96 Common Stock 15,000 restricted stock 4(2) N/A
issued to employee
5/13/96 Common Stock 181,250 assets of two 4(2) N/A
franchises
12/19/96 Common Stock 54,055 assets of franchise 4(2) N/A
12/31/96 Common Stock 60,952 assets of franchise 4(2) N/A
2/1/97 Common Stock 8,264 assets of franchise 4(2) N/A
</TABLE>
ITEM 6. 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 hereto. 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.
Forward-Looking Statements
When used in the Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result,"
"management expects" or "the Company expects," "will continue," "is
anticipated," "estimated" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance
on any such forward-looking statements, each of which speak only as of the date
made. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
10
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
SUMMARY OF OPERATIONS: 1996 1995
---- ----
<S> <C> <C>
Total revenues $2,414,976 $1,550,255
Net income (loss) $(2,537,451) $(826,849)
Net income (loss) per common share $(.61) $(.28)
Weighted average common
shares outstanding 4,174,061 3,000,000
YEAR-END FINANCIAL POSITION:
Working capital (deficit) $1,251,022 $(795,936)
Total assets $3,502,239 $1,137,631
Total liabilities $823,639 $1,210,785
Stockholders' equity (deficit) $2,678,600 $(73,154)
</TABLE>
Results of Operations
Revenues for the year ended December 31, 1996 were $2,414,976, compared to
$1,550,255 for the year ended December 31, 1995, a 55.8% increase. This increase
was attributable to gains in the following areas: store and commissary products
sales, franchise fees, royalty income, and interest income. Store and commissary
products sales were $1,888,306 for the year ended December 31, 1996, compared to
$1,486,054 for the year ended December 31, 1995, a 27.1% increase. This increase
was due to the maturing of Company-owned retail operations, the acquisition of
two new retail stores in the latter part of 1996, the growth of the wholesale
business and increased commissary sales to franchise stores which opened in
1996. Franchise fee income was $309,250 for the year ended December 31, 1996,
compared to $40,000 for the year ended December 31, 1995, a 673.1% increase.
Revenue under franchise agreements generally is recognized when the franchise
stores are opened. Eleven stores opened during 1996 (one store left the
franchise system). Royalty income was $126,820 for the year ended December 31,
1996, compared to $22,147 for the year ended December 31, 1995, a 472.6%
increase. This was due to the maturing of operations of existing franchise
stores and the initial operations of new franchise stores that opened in 1996.
Interest income for the year ended December 31, 1996 was $75,634, resulting from
the cash proceeds of the initial public offering, which were deposited into
interest bearing accounts.
The Company had unearned franchise fee income of $263,750 as of December
31, 1996, compared to $309,250 as of December 31, 1995. Unearned franchise fee
income represents non-refundable franchise fees which will be recognized as
revenue as the related franchise stores are opened. In 1996, the Company entered
into four new franchise agreements and two new area development agreements (one
twelve store agreement and one three store agreement), none of which stores were
11
<PAGE>
opened by December 1996. During 1995, the Company signed three individual
franchise agreements and entered into three area development agreements (each
having three store territories). One of these three store area development
agreements was terminated in 1996.
Cost of sales were $1,029,955, representing 54.5% of net sales for the year
ended December 31, 1996, compared to $667,394 or 44.9% for the year ended
December 31, 1995. The increase in cost of sales as a percentage of sales was
primarily attributable to an increase in sales from the commissary to the
franchisees and increased sales from the wholesale business which generally
represent a lower gross profit percentage. The increase in cost of sales of
$362,561 was primarily due to increased store revenues resulting from the
additional stores acquired, increased wholesale business and increased sales to
franchisees.
Selling, general and administrative expenses (SG&A) were $3,163,820 for the
year ended December 31, 1996, an 88.1% increase from $1,681,892 for the year
ended December 31, 1995. This increase was primarily due to: a $564,177 increase
in salaries from $674,443 in 1995 to $1,238,620 in 1996, resulting from the
hiring of management and administrative level personnel and increases in
officers' salaries; and increases of $172,104 in advertising, $90,761 in
insurance, $209,123 in professional fees and $46,057 in travel expenses that
were mandated by a growing business.
Amortization of debt discount on the promissory notes ("Bridge Notes")
issued in January 1996 in connection with the Company's $1,000,000 private
financing ("Bridge Financing") for the year ended December 31, 1996 was
$683,542. There was no such amortization for the prior year (see Liquidity and
Capital Resources and Notes to Financial Statements).
Interest expense increased by $47,292 during the year ended December 31,
1996 due to the interest on the $1,000,000 of Bridge Financing, shareholders
loans and capital lease obligations.
The net loss for the year ended December 31, 1996 was $2,537,451, compared
to a net loss of $826,849 for the year ended December 31, 1995. The primary
reasons for the current year loss were due to the amortization expense of the
Bridge Financing, and increases in officers and operating salaries, interest,
advertising, professional fees, insurance, travel, storage and distribution
expenses.
Liquidity and Capital Resources
Prior to May 1996, the Company funded its operating losses and capital
expenditures primarily through capital contributions, shareholder loans and the
Bridge Financing. In May 1996, the Company completed its initial public
offering, at which time it received net proceeds of approximately $4,100,000,
$1,000,000 of which was used to repay the Bridge Notes and $375,000 of which was
used to repay a portion of shareholder loans.
Cash and United States Treasury Bills at December 31, 1996 were $1,661,026,
compared to $37,991 at December 31, 1995. This increase was attributable to the
Company's receipt of proceeds from the initial public offering.
Accounts receivable increased to $110,063 at December 31, 1996, from
$19,580 at December 31,1995. This increase was primarily due to increases in
commissary sales and the Company-owned stores' wholesale business.
Inventory increased to $74,272 at December 31, 1996, from $47,933 at
December 31, 1995. This increase was primarily due to more Company-owned stores
and increases in commissary sales which require the Company to keep higher
levels of inventory.
12
<PAGE>
Prepaid expenses and other current assets increased to $77,131 at December
31, 1996, from $9,572 at December 31, 1995. This increase was primarily due to
increases in payments made on various insurance policies.
The current portion of stockholder and partners' loans decreased to $87,468
at December 31, 1996, from $200,000 at December 31, 1995. This decrease was
attributable to the partial repayment of such loans from proceeds the Company
received from the initial public offering.
The current portion of notes payable and capital lease obligations
decreased to $51,918 at December 31, 1996, from $87,712 at December 31, 1995.
The Company paid a portion of these notes from the proceeds of the initial
public offering.
The noncurrent portion of capital lease obligations increased to $132,926
at December 31, 1996, from $11,044 at December 31, 1995 due to the assumption of
lease obligations upon the acquisition of two additional stores.
The combination of accounts payable and accrued expenses decreased to
$268,334 at December 31, 1996, from $314,050 at December 31, 1995. This decrease
was primarily due to the Company making payments to suppliers on a more timely
basis due to the availability of the proceeds from the initial public offering.
At December 31, 1996, the Company had $1,251,022 of working capital and a
current ratio of 2.9 to 1, principally due to the proceeds received from the
initial public offering.
The Company's operating activities used net cash of $1,960,103 during the
year ended December 31, 1996, as compared to net cash used in operations of
$280,646 for the year ended December 31, 1995. This increase was primarily due
to the increase of the Company's net loss, which was funded from the proceeds of
the Bridge Financing and the initial public offering.
Although the Company has no present need to raise additional capital to
support its existing operations, the Company does believe it will need to obtain
financing from outside sources to support its plans for growth. The Company is
exploring its ability to obtain financing for potential acquisitions and the
establishment of new Company-owned stores.
The Company anticipates increasing revenues and thereby generating
operating cash flow in the future by taking 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 has centralized its
wholesale business activity for its California Company-owned stores 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 continue to utilize
capital to increase franchise sales by (i) advertising in national and
regional publications and business magazines, (ii) creating additional
sales material such as a video and direct mail piece and (iii) hiring
additional sales personnel. In January 1997, the Company hired a Vice
President of Franchising who is responsible for expanding franchise
operations in the middle and western United States. The Company expects
to increase its franchise sales by opening or acquiring additional
Company- owned flagship stores in markets that would generate interest
for experienced multi-store developers to enter into area development
agreements.
Store Operations. The Company has hired experienced multi-unit food
service operation personnel and intends to improve store operations
and management.
13
<PAGE>
Making Acquisitions. The Company has completed the acquisition of three
previously franchised stores in Scottsdale and Mesa, Arizona and in
Park City, Utah. The Company intends to acquire other bagel stores or
complementary types of retail outlets which provide entry into new
markets.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Report of Independent Auditors............................................ F-1
Balance Sheets as of December 31, 1996 and 1995........................... F-2
Statements of Operations for the years ended
December 31, 1996 and 1995................................................F-3
Statements of Stockholders' Equity (Capital Deficiency) for the years
ended December 31, 1996 and 1995..........................................F-4
Statements of Cash Flows for the years ended
December 31, 1996 and 1995................................................F-5
Notes to Financial Statements..............................................F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Big City Bagels, Inc.
Hicksville, New York
We have audited the accompanying balance sheets of Big City Bagels,
Inc. as at December 31, 1996 and December 31, 1995, and the related statements
of operations, changes in stockholders' equity (capital deficiency) and cash
flows for the years then ended. 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 financial position of Big City Bagels,
Inc. at December 31, 1996 and December 31, 1995 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
- - ------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
February 26, 1997
F-1
<PAGE>
BIG CITY BAGELS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
A S S E T S 1996 1995
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................... $ 654,856 $ 37,991
Investments in United States Treasury bills ... 1,006,170
Accounts receivable ........................... 110,063 19,580
Inventory ..................................... 74,272 47,933
Prepaid expenses and other current assets ..... 77,131 9,572
----------- -----------
Total current assets ................... 1,922,492 115,076
Fixed assets, net of accumulated
depreciation .................................. 1,239,478 934,378
Intangible assets, net of accumulated
amortization .................................. 300,699 31,230
Deferred registration costs ...................... 25,000
Security deposits ................................ 39,570 31,947
----------- -----------
T O T A L .............................. $ 3,502,239 $ 1,137,631
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Current liabilities:
Stockholder loans ............................ $ 87,468 $ 200,000
Notes payable ................................ 68,947
Capital lease obligations .................... 51,918 18,765
Unearned franchise fee income ................ 263,750 309,250
Accounts payable ............................. 208,011 278,390
Accrued expenses ............................. 60,323 35,660
----------- -----------
Total current liabilities ............. 671,470 911,012
Deferred rent payable ........................... 19,243 26,261
Capital lease obligations, noncurrent ........... 132,926 11,044
Stockholder loans, noncurrent ................... 262,468
----------- -----------
Total liabilities ..................... 823,639 1,210,785
----------- -----------
Commitments
Stockholders' equity (capital deficiency):
Preferred stock; $.001 par value;
1,000,000 shares authorized; no
shares outstanding
Common stock; $.001 par value; 10,000,000
shares authorized; 4,923,757 and
2,818,750 shares issued and outstanding at
December 31, 1996 and December 31, 1995,
respectively ............................... 4,924 2,819
Additional paid-in capital .................. 4,340,180 972,181
Partners' capital ........................... 255,456
Accumulated deficit ......................... (1,629,004) (1,303,610)
Unearned portion of compensatory stock ...... (37,500)
----------- -----------
Total stockholders' equity
(capital deficiency) ............... 2,678,600 (73,154)
------------ -----------
T O T A L ............................ $ 3,502,239 $ 1,137,631
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-2
<PAGE>
BIG CITY BAGELS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Product sales by company owned stores. . . . $ 1,483,493 $1,313,297
Product sales to franchisees and others. . . 404,813 172,757
Franchise fees . . . . . . . . . . . . . . . 309,250 40,000
Royalty income . . . . . . . . . . . . . . . 126,820 22,147
Interest income. . . . . . . . . . . . . . . 75,634
Other income . . . . . . . . . . . . . . . . 14,966 2,054
----------- ----------
Total revenues. . . . . . . . . . . . 2,414,976 1,550,255
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . 1,029,955 667,394
Selling, general and administrative expenses 3,163,820 1,681,892
Amortization of debt discount. . . . . . . . 683,542
Interest expense . . . . . . . . . . . . . . 75,110 27,818
----------- -----------
Total costs and expenses. . . . . . . 4,952,427 2,377,104
----------- -----------
NET (LOSS). . . . . . . . . . . . . . . . . . . $(2,537,451) $ (826,849)
============ =============
Net (loss) per common share . . . . . . . . . . $(.61) $(.28)
======= =======
Weighted-average common shares
outstanding. . . . . . . . . . . . . . . . . 4,174,061 3,000,000
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
BIG CITY BAGELS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Unearned Portion of
Common Stock Additional Compensatory Stock
------------------ Paid-in Partners' Accumulated Treasury -----------------
Shares Amount Capital Capital Deficit Stock Shares Amount Total
-------- ------ ---------- --------- ------------ --------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995. . . . 2,593,250 $2,819 $ 978,181 $ 408,515 $ (629,820) $ (24,000) $ 735,695
Purchase of treasury stock . . . (56,375) (6,000) (6,000)
Reissuance of treasury stock . . 281,875 (6,000) 30,000 24,000
Net (loss) . . . . . . . . . . . (153,059) (673,790) (826,849)
---------- ------ --------- ---------- ----------- -------- ------ -------- ------------
Balance - December 31, 1995. . . 2,818,750 2,819 972,181 255,456 (1,303,610) - 0 - (73,154)
Issuance of Bridge units and
warrants. . . . . . . . . . . 500,000 500 683,042 683,542
Exchange of partnership interests
for common stock. . . . . . . 181,250 181 500,565 (211,199) 289,547
Termination of S corporation
status. . . . . . . . . . . . (2,167,800) 2,167,800 - 0 -
Shares issued through public
offering. . . . . . . . . . . 1,293,750 1,294 4,137,315 4,138,609
Shares issued as compensation. . 15,000 15 59,985 15,000 $(60,000) - 0 -
Options issued as compensation . 40,000 40,000
Issuance of common stock for
acquisition of franchise
stores . . . . . . . . . . . 115,007 115 114,892 115,007
Amortization of compensatory
stock . . . . . . . . . . . 22,500 22,500
Net (loss) . . . . . . . . . . (44,257) (2,493,195) (2,537,451)
--------- ------ ----------- --------- ------------ -------- ------- --------- ------------
BALANCE - DECEMBER 31, 1996. . 4,923,757 $4,924 $ 4,340,180 $ - 0 - $(1,629,004) $ - 0 - 15,000 $(37,500) $ 2,678,600
========= ====== =========== ========= ============ ======== ======= ========= ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
BIG CITY BAGELS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ..................................... $(537,451) $(826,849)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization ................. 155,166 115,862
Amortization of debt discount ................. 683,542
Issuance of common stock for compensation ..... 22,500
Issuance of compensatory stock options ........ 40,000
(Increase) decrease in:
Interest receivable on United States
Treasury bills ............................. (21,135)
Accounts receivable ......................... (102,970) (5,607)
Inventory ................................... (26,339) (753)
Prepaid expenses and other current assets ..... (67,559) (238)
Security deposits ........................... (7,623) (1,922)
Increase (decrease) in:
Accounts payable ............................ (70,379) 170,855
Accrued expenses ............................ 24,663 18,788
Unearned franchise fee income ............... (45,500) 244,250
Deferred rent payable ....................... (7,018) 4,968
----------- ----------
Net cash (used in) operating activities .. (1,960,103) (280,646)
----------- ----------
Cash flows from investing activities:
Acquisition of franchises ...................... (50,000)
Purchases of fixed assets ...................... (81,864) (54,181)
Purchase of United States Treasury bills ....... (1,231,842)
Sales of United States Treasury bills .......... 246,807
------------ ----------
Net cash (used in) investing activities . (1,116,899) (54,181)
------------ ----------
Cash flows from financing activities:
Proceeds from public offering .................. 4,163,609
Proceeds from (repayment of) stockholder loans . (375,000) 253,468
Proceeds from notes payable .................... 101,648
Repayment of notes payable ..................... (94,742) (2,892)
Purchase of treasury stock ..................... (6,000)
Deferred registration costs .................... (25,000)
Proceeds from Bridge loan and rights to
receive bridge units .......................... 1,000,000
Repayment of Bridge loan ....................... (1,000,000)
------------ ----------
Net cash provided by financing activities. 3,693,867 321,224
------------ ----------
NET INREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 616,865 (13,603)
Cash and cash equivalents - beginning of year ..... 37,991 51,594
----------- ----------
CASH AND CASH EQUIVALENTS - END OF YEAR ........... $ 654,856 $ 37,991
=========== ==========
Supplemental disclosure of cash flow
information: Cash paid during the year for:
Interest ..................................... $ 49,006 $ 2,795
Income taxes ................................. 1,925 3,578
Supplemental schedule of noncash activities:
Franchise costs acquired by the issuance of
181,250 shares of common stock for the
partnership interest of Pumpernickel Partners,
L.P. and the capital stock of Bagel Partners, Inc. 289,547
Compensatory issuance of common stock .......... 60,000
In October 1996, the Company acquired
all of the assets of two franchises for the following:
Forgiveness of outstanding accounts
receivable ................................ $ 12,487
Issuance of 115,007 shares of common stock . 115,007
Assumption of capital lease obligations .... 180,830
-----------
308,324
Cash paid .................................. 50,000
-----------
Total amount attributed to fixed assets .. $ 358,324
===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and Basis of Presentation:
The Company operates and franchises retail bagel stores and sells its
products wholesale to commercial accounts and food service operators. In May
1996, the Company effected a 28,187.5 for 1 stock split of its common stock in
the form of a stock dividend payable to shareholders of record on April 1, 1996.
The accompanying financial statements reflect the stock split retroactively.
The accompanying financial statements for the periods through May 13, 1996
include the combined accounts of the Company and two affiliated companies which
were under common control. On May 13, 1996, the Company acquired the two
affiliated entities for 181,250 shares of its common stock. The transaction was
accounted for as purchase of the interests of the unaffiliated owners of the
acquired entities resulting in an excess of the fair value of shares issued over
the fair value of the unaffiliated parties interests of $289,547, which amount
was assigned to franchise costs. The shares issued to affiliated parties were
valued at the book amount of their interests. All significant intercompany
balances and transactions were eliminated in combination.
(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] Franchise fees:
Franchise fees include fees earned from area development
agreements and franchise agreements.
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.
(continued)
F-6
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[3] Franchise fees: (continued)
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.
[4] Royalty income:
Franchise agreements provide for royalties of 4% of gross
sales, which are recognized as income when earned.
[5] Cash and cash equivalents:
The Company considers all cash accounts, which are not subject
to withdrawal restrictions or penalties, and all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents.
[6] Long-lived assets:
In accordance with Statement of Financial Accounting Standards
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 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. No such losses have been recorded through December 31,
1996.
[7] Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(continued)
F-7
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[8] Stock-based compensation:
During 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). The provisions of SAS No. 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in Accounting Principles Bulletin Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") but disclose the pro
forma effects on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply APB No. 25 in accounting
for its stock option incentive plans (see Note J).
[9] Net loss per share:
Net loss per share is calculated using the weighted-average
number of shares of common stock outstanding during each period retroactively
adjusted for the 28,187.5 to 1 split and the shares issued for affiliated
entities described in Note A. Common stock issuable upon the exercise of stock
options and warrants is not included in the calculation as the effect would be
antidilutive.
(NOTE C) - Fixed Assets:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995 Life
----------- --------- --------------
<S> <C> <C> <C>
Furniture and fixtures. . . . $ 297,518 $ 284,482 7 to 15 years
Machinery and equipment . . . 660,905 413,004 5 to 15 years
Leasehold improvements. . . . 577,651 398,988 Life of leases
---------- ----------
T o t a l . . . . . 1,536,074 1,096,474
Less accumulated depreciation 296,596 162,096
----------- ----------
B a l a n c e . . . $1,239,478 $ 934,378
=========== ==========
</TABLE>
(continued)
F-8
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Intangible Assets:
Intangible assets at cost, are amortized using the straight-line method
and consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995 Life
-------- -------- ---------
<S> <C> <C>
Franchise costs . . . . . . . $289,547 15 years
Organization cost . . . . . . 48,099 $48,099 5 years
Trademark costs . . . . . . . 3,000 3,000 15 years
-------- ------- ---------
T o t a l . . . . . 340,646 51,099
Less accumulated amortization 39,947 19,869
-------- -------
B a l a n c e . . . $300,699 $31,230
======== =======
</TABLE>
(NOTE E) - Capital Lease Obligations:
Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
--------- -------
<S> <C> <C>
Equipment leases collateralized
by certain equipment, bearing interest
at rates from 11% to 22% and requiring
aggregate monthly payments of $7,435
through April 2001 . . . . . . . . . . $184,844 $29,809
Less current portion. . . . . . . . . . 51,918 18,765
-------- -------
Long-term portion .. . . . . . . . . . . $132,926 $11,044
======== =======
</TABLE>
Future maturities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------- ---------
<S> <C> <C>
1997 . . . . . . . . . . $ 51,918
1998 . . . . . . . . . . 47,754
1999 . . . . . . . . . . 55,816
2000 . . . . . . . . . . 25,592
2001 . . . . . . . . . . 3,764
---------
T o t a l . . . . $184,844
=========
</TABLE>
(continued)
F-9
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Stockholder Loans:
Stockholder loans are payable in monthly installments aggregating $12,000
including interest at 10% commencing January 1, 1997.
(NOTE G) - Commitments:
[1] Operating leases:
The Company leases its commissary space and store locations
under various operating leases which expire between December 1997 and January
2006. Future minimum rental payments as of December 31, 1996 are approximately
as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C> <C>
1997. . . . . . . . . . . . . $ 265,955
1998. . . . . . . . . . . . . 228,377
1999. . . . . . . . . . . . . 99,427
2000. . . . . . . . . . . . . 74,549
2001. . . . . . . . . . . . . 74,549
Thereafter. . . . . . . . . . 301,000
----------
T o t a l . . . . . . $1,043,857
==========
</TABLE>
Rent expense for the years ended December 31, 1996 and
December 31, 1995 was $198,142 and $170,526, 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 has entered into three year employment agreements,
effective as of January 1, 1996 with two officers providing for aggregate annual
salaries of $330,000 with annual increments of 10%.
The Company has also entered into agreements with two
employees, one of which provides for an annual salary of $105,000 through
December 31, 1998 and the other of which provides for an annual salary of
$100,000 through May 15, 1997.
(continued)
F-10
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Income Taxes:
The Company has a deferred tax asset of approximately $500,000 at
December 31, 1996 which is attributable principally to net operating loss
carryforward. The deferred tax asset is fully reserved because the realization
of such benefit could not be established. Prior to May 7, 1996, Big City
qualified as an S corporation for federal and state income tax purposes and an
affiliated entity (Note A) was taxed as a partnership. Accordingly, all losses
incurred by the companies prior to May 7, 1996 were reportable by the
stockholders and partners and are not available as carryforwards to the Company.
(NOTE I) - Franchises:
During 1996 the Company entered into franchise agreements for nineteen
stores, none of which were opened as of December 31, 1996. During 1995 the
Company entered into franchise agreements for twelve stores, of which nine were
opened in 1996. At December 31, 1996 there were eight franchised stores and six
Company owned stores in operation. Deferred franchise fees at December 31, 1996
and December 31, 1995 represent fees received in advance of store openings.
Effective October 1996, the Company repurchased two previously sold
franchise stores for an aggregate of $50,000 cash, 115,007 shares of the
Company's common stock valued at $115,007 and the assumption of capital lease
obligations aggregating $181,000. Assets acquired consisted of machinery and
equipment and leasehold improvements. The results of operations include the
activities of these stores from the acquisition date.
The following unaudited pro forma data gives effect to the above
acquisitions as though they had occurred upon the opening of the franchise
stores (March and April 1996).
Year Ended
December 31,
1996
-------------
Total revenues. . . . . . . . . . $ 2,627,180
Net loss. . . . . . . . . . . . . (2,749,763)
Net loss per common share . . . . $(.65)
The unaudited pro forma information is not necessarily indicative of
results of operations that would have occurred had the acquisitions been made
upon the opening of the stores, or of future results of operations of the
Company.
(continued)
F-11
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Common Stock:
[1] Stock options:
The Company applies APB No. 25 in accounting for its stock
option incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of grant. The effect of applying SFAS No. 123 on
1996 pro forma net loss is not necessarily representative of the effects on
reported net loss for future years due to, among other things, (1) the vesting
period of the stock options and the (2) fair value of additional stock options
in future years. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in 1996 would have been approximately $2,582,000 or $0.62 per
share. The weighted-average fair value of the options granted during 1996 are
estimated as $2.65 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 70%, risk-free interest rate of 6.18% and expected life of six
years.
The Company adopted 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,
which generally vest over four years, 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. In March 1996,
the Company granted a restricted stock award of 15,000 shares of common stock
vesting in March 1998, to an employee. At December 31, 1996 the Company has
reserved 335,000 shares of common stock for issuance under the Plan.
Additional information with respect to the Plan's activity is
summarized as follows:
Weighted-
Average
Exercise
Shares Price
------- --------
Options granted during 1996 and
outstanding at December 31, 1996. . 32,000 $3.93
=======
Options exercisable at December 31,
1996. . . . . . . . . . . . . . . . 2,000 $8.50
=======
(continued)
F-12
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Common Stock: (continued)
[1] Stock options: (continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------
Weighted- Options Exercisable
Average ------------------------
Remaining Weighted- Weighted-
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (in Years) Price Exercisable Price
- - -------------- ----------- ----------- -------- ----------- -----------
<C> <C> <C> <C> <C> <C>
$3.25 to $4.00 30,000 10.2 $3.63
$8.50 2,000 9.5 8.50 2,000 $8.50
-------- --------
32,000 10.1 $3.93 2,000 $8.50
======== ========
</TABLE>
At December 31, 1996, options for 303,000 shares of common
stock were available for future grant under the Plan.
[2] Warrants and unit purchase options:
As at December 31, 1996, the Company has the following
warrants and unit purchase options outstanding:
<TABLE>
<CAPTION>
Shares Reserved Exercise Expiration
for Issuance Price Date
--------------- -------- ------------
<S> <C> <C> <C>
Class A warrants (i) (ii). 1,793,750 $4.50 May 7, 2000
Class B warrants (ii). . . 250,000 8.00 May 7, 2000
Unit purchase option (iii) 225,000 (iii) May 7, 2001
</TABLE>
(i) Consists of 1,293,750 warrants included in the units issued in
connection with the initial public offering and 500,000 warrants
included in the bridge units (Note K).
(ii) Redeemable at $.05 per warrant providing the market value of the
Company common stock reaches certain levels.
(iii)The underwriters were issued a purchase option for 112,500 units,
each unit consisting of one share of common stock and one
warrant. The unit purchase option is exercisable at a price of
$4.80 per unit. The warrant included in the unit is exercisable
for one share of common stock at a price of $4.50 per share. Both
the unit purchase option and the underlying warrant expire May 7,
2001. (continued)
F-13
<PAGE>
BIG CITY BAGELS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE K) - 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 (ii) the right to
receive upon the completion of the public 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 Class A warrant. Two Class B warrants, together, will entitle the holder to
purchase one share of common stock for $8.00 through May 7, 2000. The units and
warrants were valued at $684,000 and were accounted for as a debt discount which
was fully amortized as of the consummation of the public offering. The
promissory notes were repaid with the proceeds of the public offering.
F-14
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the Annual Meeting of Shareholders to be held on
June 10, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the Annual Meeting of Shareholders to be held on
June 10, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the Annual Meeting of Shareholders to be held on
June 10, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the Annual Meeting of Shareholders to be held on
June 10, 1997.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed.
See Exhibit Index appearing later in this Report.
(b) Reports on 8-K.
None.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 1997 BIG CITY BAGELS, INC.
By: /s/ Mark Weinreb
-----------------------------------
Mark Weinreb, Chairman of the Board
and Chief Executive Officer
In accordance with Section 13 or 15(d) of the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Mark Weinreb Chairman of the Board, Chief March 28, 1997
- - --------------------- Executive Officer and Chief
Mark Weinreb Financial Officer (and principal
accounting officer)
/s/ Jerry Rosner President and Director March 28, 1997
- - ---------------------
Jerry Rosner
/s/ Stanley Weinreb Vice President and Director March 28, 1997
- - ---------------------
Stanley Weinreb
/s/ Stanley Raphael Secretary and Director March 28, 1997
- - ---------------------
Stanley Raphael
/s/ Stephen J. Drescher Director March 28, 1997
- - -----------------------
Stephen J. Drescher
30
<PAGE>
EXHIBIT INDEX
Incorporated
By Reference No. in
Exhibit No. Description from Document Document Page
- - ----------- ----------- ------------- -------- ----
2.1 Form of Agreement and Plan of ........ A
Contribution among the Company and
the partners of Pumpernickel Partners,
L.P.
3.1 Restated Certificate of Incorporation A 3.1
3.2 Restated By-laws ...................... A 3.2
4.1 Form of Common Stock Certificate ...... A 4.1
4.2 Form of Class A Warrant Certificate ... A 4.2
4.3 Form of Class A Warrant Agreement ..... A 4.3
between Continental Stock Transfer &
Trust Company and the Company
4.4 Form of Class B Warrant ............... A 4.4
10.1 Form of Financial Consulting .......... A 10.1
Agreement between the Company and
the Underwriter
10.2 Employment Agreement between the ...... A 10.2
Company and Mark Weinreb
10.3 Employment Agreement between the ...... A 10.3
company and Jerry Rosner
10.4 1996 Performance Equity Plan .......... A 10.4
10.5 Master Distribution Agreement, dated .. A 10.5
January 1, 1996, between the
Company and Sysco Food Services of
Los Angeles, Inc.
10.6 Form of Franchise Agreement .......... A 10.6
10.7 Form of Area Development Agreement ... A 10.7
27 Financial Data Schedule .............. * 27 32
- - -------------------
* Filed herewith.
A The Company's Registration Statement on Form SB-2 (No. 333-2154) declared
effective by the Commission on May 7, 1996.
31
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 654,856
<SECURITIES> 1,006,170
<RECEIVABLES> 110,063
<ALLOWANCES> 0
<INVENTORY> 74,272
<CURRENT-ASSETS> 1,922,492
<PP&E> 1,536,074
<DEPRECIATION> 296,596
<TOTAL-ASSETS> 3,502,239
<CURRENT-LIABILITIES> 671,470
<BONDS> 0
0
0
<COMMON> 4,924
<OTHER-SE> 2,673,676
<TOTAL-LIABILITY-AND-EQUITY> 3,502,239
<SALES> 1,888,306
<TOTAL-REVENUES> 2,414,976
<CGS> 1,029,955
<TOTAL-COSTS> 4,952,427
<OTHER-EXPENSES> 3,847,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,110
<INCOME-PRETAX> (2,537,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,537,451)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
<PAGE>
</TABLE>
