UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(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, 1997
--------------------------------
[ ] 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 (I.R.S. Employer Identification No.)
of 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 $2,746,029.
As of March 16, 1998, the aggregate market value of the Issuer's Common
Stock held by non-affiliates of the Issuer (based on the last sale price of such
stock) was $3,834,507. At March 16, 1998, 6,714,904 shares of the Issuer's
Common Stock were outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Big City Bagels, Inc. ("Company") operates and franchises upscale
bagel/deli 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 recently
expanded its concept to include more deli product offerings, including new
sandwich menu items, and has created a new store design with a stronger deli
emphasis. The Company owns five stores, which are located in California, Arizona
and New York. The Company also sells Big City Bagels franchises. Currently,
there are 13 franchises open and operating in California, Colorado, Idaho and
Minnesota and the Company has sold franchises to open an additional 16 stores,
which are in various stages of development. The Company also sells its products
to wholesale accounts and food service operators.
Business Strategy
The Company's long-term objective is to become a leading national
bagel/deli store chain. The Company seeks to achieve this objective by: (i)
expanding its concept to include a stronger deli emphasis; (ii) opening
additional stores and acquiring existing bagel stores or chains; and (iii)
increasing sales to wholesale accounts.
Expand Concept to Include a Stronger Deli Emphasis
The Company has added a wide variety of sandwiches, breads and other
lunch items to its menu and has created a new store design. The Company believes
that expanding its concept to include a stronger deli emphasis will increase
retail sales by generating more lunch and afternoon business, both from
increased in-store traffic and through catering and office delivery to
commercial accounts. The Company also believes that this expanded concept will
enable the Company to offer more to prospective franchisees than other bagel
store chains.
Open Additional Company-owned Stores
The Company plans to open additional Company-owned stores in strategic
geographic locations and acquire existing bagel stores or chains and possibly
other retail enterprises that the Company believes will enhance its operations
and provide entry into new markets. In January 1998, the Company purchased a
bagel store located in New York City and has an exclusive option to purchase an
additional store in New York City until January 1999. The Company also has
leased retail space in New York City where it intends to open another
Company-owned store in June 1998. In determining whether to make a particular
acquisition, the Company will consider, among other things, the size, location
and existing operations of the acquisition candidate, as well as such candidates
potential to maximize growth and increase revenues. Although the Company
regularly evaluates possible acquisition opportunities, the Company currently is
not a party to any agreements with respect to any acquisition. As part of its
expansion strategy, the Company will focus its resources on higher volume
stores. The Company's ability to make acquisitions and open new Company- owned
stores (other than the second store in New York City) is dependent upon the
Company's ability to obtain financing from outside sources.
Expand Wholesale Business
As name recognition and product acceptance continues to grow, the
Company intends to continue to expand its business by targeting wholesale
accounts. The Company currently is the exclusive supplier of bagels for certain
domestic flights for Northwest Airlines.
2
<PAGE>
Corporate Background
The Company and its wholly-owned subsidiary, Big City NY, Inc., were
incorporated under the laws of the State of New York in December 1992 and
November 1997, respectively. The Company's principal executive offices are
located at 99 Woodbury Road, Hicksville, New York 11801 and its telephone number
is (516) 932-5050.
Products and Distribution
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 accordance with the Company's strict quality control guidelines,
either in Company- or franchisee- owned commissaries or by an independent
supplier and then delivered to Company-owned stores, franchises and wholesale
accounts (with the exception that the Company's New York City store prepares the
bagel dough at that location). The bagels are then baked in each store daily
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 in
accordance with quality control guidelines from ingredients purchased from
independent suppliers. 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 currently owns and operates a commissary located in Costa
Mesa, California, which services many Big City Bagels stores. In April 1998, the
Company will be moving this commissary to a facility located in Ontario,
California, which contains cold storage space, eliminating the Company's need to
maintain a separate cold storage facility. The Company also has assisted one of
its franchisees, who entered into an area development agreement with the Company
to open stores in the Minneapolis/St. Paul, Minnesota area, in establishing a
commissary owned and operated by such franchisee in Minneapolis to service these
stores. The Company also uses an independent supplier to prepare bagel dough for
certain Company-owned stores, franchises and wholesale accounts, thereby
enabling the Company to supply more stores and wholesale accounts without having
to build additional commissaries.
Store Design and Locations
Big City Bagels stores are designed to be upscale bagel/deli cafes. The
Company's store design is adaptable to various site locations, including
shopping centers, free-standing units, drive-thru and commercial sites, which
are selected on heavily-traveled thoroughfares. One of the Company's franchisees
in Idaho currently is operating a drive-thru store and the Company anticipates
that one of its franchisees in Fayetteville, North Carolina will open a
drive-thru store in April 1998. 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. Such stores would be serviced by stores
where baked goods would be prepared and then delivered to the satellite stores,
thereby eliminating the need for baking equipment in the satellite stores. The
Company recently turned one of its Costa Mesa, California stores into a
satellite store and intends to open another satellite store in Tustin,
California in May 1998, both of which are or will be serviced by the Company's
other Costa Mesa, California store. Big City Bagels stores are typically highly
visible and easily accessible. The stores generally are 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.
3
<PAGE>
The following table sets forth by location the number of currently
opened Company-owned stores and franchises and the number of franchises that
have been sold but not yet opened:
<TABLE>
<CAPTION>
Stores Not Yet Opened
Location Stores Open Under Franchises Sold
- ------------------ ----------------- ---------------------
<S> <C> <C>
Arizona......................................... 1(1) 3
California...................................... 10(2) 2
Colorado........................................ 1 0
Idaho........................................... 1 1
Minnesota....................................... 4 0
Nevada.......................................... 0 1
New York........................................ 1(1) 0
North Carolina.................................. 0 7
Washington...................................... 0 2
--- ---
Total.................................. 18 16
</TABLE>
- -----------------------------
(1) Includes one Company-owned store.
(2) Includes three Company-owned stores.
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'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.
4
<PAGE>
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., Chesapeake Bagel
Bakery, Big Apple Bagels, New York Bagel Enterprises and Dunkin' Donuts. 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 and its franchisees advertise in local newspapers and
through direct mailings. As exclusive supplier of bagels for certain domestic
flights for Northwest Airlines, the Company's product and franchise
advertisements also are included in Northwest's in-flight magazine. The Company
provides advertising support to franchisees relating to grand openings and local
store marketing, including the preparation of a national marketing calendar
which provides advance notice to franchisees of special Company-wide promotions.
Franchisees are required under their franchise agreements to spend 2% of gross
sales on local advertising and to contribute 1% of monthly gross sales to a
national advertising cooperative. However, to date, a national fund has not been
established and the Company has not required this contribution.
Trademarks and Service Marks
The Company's trademark "Big City Bagels(R)", its service mark "A
Bigger Bagel for Less Dough!(R)" and its distinctive logo are registered with
the United States Patent and Trademark Office pursuant to federal law. The
Company has filed trademark applications with the United States Patent and
Trademark Office seeking registration for "Big City Deli(TM)" and "Big City
Pickles(TM)". 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.
5
<PAGE>
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.
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 16, 1998, the Company had 70 full-time employees. 24 of the
70 full-time employees are salaried, while the other 46 are paid on an hourly
basis. In addition, the Company has 23 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.
6
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
<TABLE>
<CAPTION>
Approximate
Approximate Annual
Square Lease
Location Use Footage Lease Expiration Payments
<S> <C> <C>
Hicksville, NY Principal executive 1,500 Month-to-month $19,800
office
Newport Beach, CA Offices 735 December 2000 $21,168
Costa Mesa, CA Commissary/Company 4,400 November 1998; renewable $53,250
satellite store for two successive five-year
terms
Ontario, CA Commissary/cold plant 1,900 April 1999; renewable for $59,400
storage space (opening one additional three-year
April 1998) term
Costa Mesa, CA Company store 1,750 March 1998; renewable for $54,700
two successive five-year
terms
Tustin, CA Company satellite store 500 February 1999; renewable $14,400
(opening May 1998) for one additional one-year
term
Laguna Niguel, CA Company store 1,600 March 1999; renewable for $44,800
one additional five-year term
Scottsdale, AZ Company store 1,960 December 2005; renewable $31,400
for one additional five-year
term
New York, NY Company store 2,000 September 2007 $144,000
New York, NY Company store 2,400 September 2011 $108,000
(opening June 1998)
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On July 29, 1997, in the Superior Court of Los Angeles County, a
lawsuit was commenced by Michael Schweid, et al, against Victor Saab and George
Saab, et al, former franchisees of the Company, and the Company, seeking an
unspecified amount of damages for property damage and business interruptions
resulting from a fire which partially destroyed a shopping mall in which the
former franchisees' store was located. Victor Saab was subsequently convicted of
arson and insurance fraud. The Company believes the lawsuit against the Company
is without merit. All costs associated with this litigation are covered by
insurance. The Company's insurance carrier has assumed defense of this matter
and has moved to dismiss the lawsuit.
On September 24, 1997, in the Arizona Superior Court, County of
Maricopo, a lawsuit was commenced by Earl and Linda Fraley (dba "Xtremely
Xpresso"), owners of a store in a shopping mall in which a Big City Bagels'
store, formerly franchised and subsequently Company-owned, was located, against
the landlord (the owners of the mall), the former franchisee and the Company,
seeking an unspecified amount of damages. The landlord has filed a cross-claim
against the Company for rent owed. Plaintiff's claim is based upon a provision
in their lease which plaintiffs assert prohibits the owner from leasing space to
other tenants who sell substantial amounts of coffee products, and therefore,
7
<PAGE>
prohibited the owner from leasing space for the Big City Bagels store. As a
result of events that caused the Company to be unable to economically operate
the store, it was closed on October 23, 1997. The Company believes it has no
liability in this matter and that it is the obligation of the owner to indemnify
the Company for these claims. The Company also believes that the owner has
breached its obligations to the Company under its lease. The Company intends to
move for summary judgment against the plaintiff and to vigorously defend the
cross-claim asserted by the landlord.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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
("Class A 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 Class A
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>
Second Quarter (from May 7, 1996)................. 9-5/8 7-1/2 5 2-1/2
Third Quarter..................................... 10-1/2 7 4-1/4 2-3/4
Fourth Quarter.................................... 7-3/8 2-1/2 3-1/2 1
1997
- ------
First Quarter..................................... 5-1/8 2-5/8 4-5/8 1
Second Quarter.................................... 5-7/8 4-1/4 5 3-1/8
Third Quarter..................................... 5-7/8 3-1/4 5-9/16 3-1/8
Fourth Quarter.................................... 4-9/16 1 4 1/8
</TABLE>
On March 16, 1998, the last sale prices for the Common Stock and Class
A Warrants as reported by Nasdaq were $1.00 and $0.0625, respectively.
As of March 16, 1998, there were 39 and 7 holders of record of Common
Stock and Class A Warrants, respectively. The Company believes that there are in
excess of 500 beneficial holders of its Common Stock.
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
8
<PAGE>
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.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 1997 and thereafter through March
16, 1998, the Company made the following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and If Option,
Description of Warrant or
Underwriting or Other Exemption Convertible
Discounts to Market from Security, Terms
Number Price Afforded Registration of Exercise or
Date of Sale Title of Security Sold to Purchasers Claimed Conversion
- ---------------- -------------------- --------- ---------------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
12/16/97 options to purchase 13,500 options granted - no 4(2) exercisable for
Common Stock consideration received ten years from
granted to by Company until date of grant at
employees exercise $2.00 per share
1/7/98 Common Stock 346,497 asset purchase 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. Factors that could affect the Company's
results of operations and cause its results to differ from these statements are
discussed in the Company's prospectus, dated July 9, 1997. 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.
9
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
SUMMARY OF OPERATIONS: 1997 1996
---- ----
<S> <C> <C>
Total revenues................................................. $2,746,029 $2,414,976
Net loss....................................................... $(3,543,066) $(2,537,451)
Basic and diluted loss per common share........................ $(.67) $(.61)
Weighted average common shares outstanding..................... 5,326,327 4,174,061
YEAR-END FINANCIAL POSITION:
Working capital................................................ $3,628,516 $1,251,022
Total assets................................................... $5,161,964 $3,502,239
Total liabilities.............................................. $743,736 $823,639
Stockholders' equity........................................... $4,418,228 $2,678,600
</TABLE>
Results of Operations
Revenues for the year ended December 31, 1997 were $2,746,029, compared
to $2,414,976 for the year ended December 31, 1996, a 13.7% increase. This
increase was attributable to gains in the following areas: store and commissary
products sales and royalty income. Store and commissary products sales were
$2,370,318 for the year ended December 31, 1997, compared to $1,888,306 for the
year ended December 31, 1996, a 25.5% increase. This increase was due to the
maturing of Company-owned retail operations, the acquisition of one new retail
store in February 1997, the growth of the wholesale business and increased
commissary products sales to franchise stores which opened in 1997. Franchise
fee income was $151,000 for the year ended December 31, 1997, compared to
$309,250 for the year ended December 31, 1996, a 51.2% decrease. Revenue under
franchise agreements generally is recognized when the franchise stores are
opened. Three stores opened during 1997 and one franchise store closed, as
compared to ten stores that opened in 1996. $81,000 of franchise fees were
recognized when the Company terminated an area development agreement during
1997. Royalty income was $162,486 for the year ended December 31, 1997, compared
to $126,820 for the year ended December 31, 1996, a 28.1% increase. This was due
to the maturing of operations of existing franchise stores and the initial
operations of new franchise stores that opened in 1997. Interest income for the
year ended December 31, 1997 was $60,112, resulting from the cash proceeds of
the Company's initial public offering and the exercise of the Company's Class A
Redeemable Common Stock Purchase Warrants ("Class A Warrants"), Class B
Redeemable Common Stock Purchase Warrants ("Class B Warrants") and the Unit
Purchase Option, which were deposited into interest bearing accounts. See
"--Liquidity and Capital Resources."
The Company had unearned franchise fee income of $278,500 as of
December 31, 1997, compared to $263,750 as of December 31, 1996. Unearned
franchise fee income represents nonrefundable franchise fees which will be
recognized as revenue as the related franchise stores are opened. In 1997, the
Company entered into two new franchise agreements and two new area development
agreements (one seven-store agreement and one three-store agreement), none of
which were opened by December 31, 1997. In September 1997, the Company entered
into a licensing agreement with Total Petroleum Inc., pursuant to which
following a short trial the licensee intended to operate a minimum of seven full
service Big City Bagels stores. The first store opened in January 1998. Soon
thereafter, the licensee was acquired by another company which notified the
Company (in accordance with the terms of the license agreement) that it does not
intend to open any additional stores. Also in September 1997, the Company
terminated a twelve-store area development agreement that it had entered into in
1996 providing for the opening of stores in Texas because the franchisee failed
to open any stores due to health reasons. In January 1998, the Company
renegotiated a twelve-store area development agreement that it had entered into
in 1996 providing for the opening of stores in Minnesota. The
10
<PAGE>
franchisee has opened four stores and now is not required to open additional
stores. The franchisee still operates its own commissary and may elect to open
new stores in the future. Management believes that these business decisions were
in the best interest of the Company and does not believe this reflects a trend
within its franchise system.
Cost of sales were $1,380,670, representing 58.2% of net sales for the
year ended December 31, 1997, compared to $1,029,955, or 54.5%, for the year
ended December 31, 1996. The increase in cost of sales as a percentage of sales
was primarily attributable to increased product sales to franchises and
commercial accounts, which are generally at lower margins than product sales by
Company-owned stores.
The increase in cost of sales of $350,715 was primarily due to
increases in sales by Company-owned stores, the Company's commercial business
and product sales to franchisees.
Selling, general and administrative expenses (SG&A) were $4,144,526 for
the year ended December 31, 1997, a 31.0% increase from $3,163,820 for the year
ended December 31, 1996. This increase was primarily due to: a $320,185 increase
in salaries from $1,238,620 in 1996 to $1,558,805 in 1997, resulting from the
hiring of management and administrative level personnel, increases in officers'
salaries and additional salaries attributable to new Company- owned stores; and
increases of $50,350 in advertising, $51,278 in insurance, $134,928 in rent and
$423,965 for various other expenses, all of which increased by less than $50,000
from the prior year. This was all mandated by a growing business. Write-offs of
fixed assets, goodwill and franchise costs were $723,407 for the year ended
December 31, 1997. This write-off was 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" ("SFAS 121"). The value of
the assets led to management's decision to re-value the assets of its stores and
commissary after considering the possible sale of certain stores and relocation
of the commissary. 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 of debt discount in 1997.
See "--Liquidity and Capital Resources" and Notes to the Financial Statements.
Interest expense decreased by $34,618 during the year ended December
31, 1997, substantially due to the Company retiring its debt obligations to its
shareholders from proceeds raised through its initial public offering.
The net loss for the year ended December 31, 1997 was $3,543,066,
compared to a net loss of $2,537,451 for the year ended December 31, 1996.
Liquidity and Capital Resources
In 1996, the Company funded its operating losses and capital
expenditures primarily through its initial public offering in May 1996, 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.
In July 1997, in order to induce holders to exercise the Company's
Class A Warrants and Class B Warrants, the Company reduced the exercise price of
such warrants. In October 1997, the exercise price of the Class B Warrants was
further reduced. The Company derived net proceeds of $2,370,272 from the
exercise of these warrants. The exercise price of the Class A Warrants
subsequently was permanently reduced to $2.50 per share. See Note J[2] to the
Financial Statements. In addition, proceeds of $540,000 were received when the
underwriter of the Company's initial public offering exercised its Unit Purchase
Option. On December 31, 1997, the Company completed a private placement from
which the Company received net proceeds of $2,334,158 through the sale of
265,000 shares of Class A Preferred Stock ("Preferred Stock") to accredited
investors. See Note J[3] and Note K to the Financial Statements.
Cash and United States Treasury Bills at December 31, 1997 were
$4,118,031, compared to $1,661,026 at December 31, 1996. This increase was
primarily attributable to the Company's receipt of proceeds from the exercise of
warrants and the Unit Purchase Option and from the private placement of
Preferred Stock.
Accounts receivable decreased to $104,190 at December 31, 1997, from
$110,063 at December 31, 1996. This decrease was primarily due to the Company's
establishing a $35,000 allowance for doubtful accounts. Inventory
11
<PAGE>
decreased to $43,868 at December 31, 1997, from $74,272 at December 31, 1996.
This decrease was primarily due to the Company improving its inventory controls.
Prepaid expenses and other current assets decreased to $41,133 at
December 31, 1997, from $77,131 at December 31, 1996. This decrease resulted
from the reclassification of a $40,000 promissory note receivable from prepaid
expenses and other current assets to security deposits and other assets.
Fixed assets, net of accumulated depreciation, decreased to $611,095 at
December 31, 1997, from $1,239,478 at December 31, 1996 and intangible assets,
net of accumulated amortization, decreased to $23,267 at December 31, 1997, from
$300,699 at December 31, 1996. This decrease was primarily due to management's
analysis of asset value in accordance with SFAS 121 after considering the
possible sale of certain stores and the relocation of the commissary.
Security deposits and other assets increased to $220,380 at December
31, 1997, from $39,570 at December 31, 1996. This increase resulted
predominantly from deposits the Company placed during the year for equipment and
leasehold improvements for the new commissary. It also includes approximately
$45,000 of promissory notes.
Shareholder and partners' loans of $87,468 at December 31, 1996 were
entirely repaid as of December 31, 1997. The current portion of notes payable
and capital lease obligations decreased to $38,862 at December 31, 1997, from
$51,918 at December 31, 1996, due to the regular payments of these obligations
throughout the year.
The combination of accounts payable and accrued expenses increased to
$361,344 at December 31, 1997, from $268,334 at December 31, 1996 due to the
increase in purchases resulting from an increase in sales.
The non-current portion of capital lease obligations decreased to
$57,235 at December 31, 1997, from $132,926 at December 31, 1996 due to the
regular payments of these obligations throughout the year. At December 31, 1997,
the Company had $3,628,516 of working capital and a current ratio of 6.3 to 1,
principally due to the proceeds received from the exercise of warrants and the
Unit Purchase Option and from the private placement of Preferred Stock.
The Company's operating activities used net cash of $2,493,789 during
the year ended December 31, 1997, as compared to net cash used in operations of
$1,960,103 for the year ended December 31, 1996. This increase was primarily due
to the increase of the Company's net loss, which was funded from the proceeds of
the exercise of warrants and the Unit Purchase Option and from the private
placement of Preferred Stock.
Although the Company has no present need to raise additional capital to
support its existing operations through 1998, the Company does believe it will
need to obtain financing from outside sources to fund its plans for growth and
to support its operations beyond 1998, including for potential acquisitions and
the establishment of new Company- owned stores. The Company currently is
exploring its ability to obtain such financing.
The Company's plans to increase revenues, reduce costs and implement
its expansion strategy are as follows:
Increase Revenues
o The Company recently expanded its concept to include more deli
product offerings, including new sandwich menu items, and has
created a new store design with a stronger deli emphasis. The
Company believes that this expanded concept will increase retail
sales by generating more lunch and afternoon business, both from
increased in-store traffic and through catering and office
delivery to commercial accounts. The Company's revenues would
increase as a result of increases in: (i) retail sales in
Company-owned stores, (ii) royalty payments from franchises with
increased retail sales and (iii) commissary sales to franchises.
However, there can be no assurance that the Company's expanded
concept will be accepted or successful.
o The Company also intends to increase revenues by attracting
wholesale business. The Company has entered into an agreement
with Northwest Airlines to be the exclusive supplier
12
<PAGE>
of bagels on certain domestic Northwest flights. The agreement is
for a three-year term, although either party may terminate the
agreement after the second year. The Company anticipates that
this arrangement will generate approximately $2,200,000 in
revenues over a three-year period based upon Northwest's
currently anticipated requirements. There can be no assurance
that the Company will be able to obtain additional wholesale
business or that it will be able to meet Northwest's
requirements. If the Company is unable to service Northwest, then
Northwest may terminate the agreement and the Company will not
generate revenues as anticipated.
o In order to increase revenues generated by commissary sales, in
March 1998 the Company increased its prices for prepared bagel
dough sold to franchises. In addition, in April 1998 the Company
intends to increase retail prices in its Company-owned stores and
has encouraged its franchisees to do the same.
o The Company will make increased efforts to promote its franchise
sales by the Company's visibility in trade and business
publications. Two new franchise stores have opened in 1998 and
two additional franchise stores are expected to open in April
1998.
Reduce Costs
o The Company will be moving its Costa Mesa, California commissary
to a new location in Ontario, California, which contains a cold
storage facility, thereby eliminating the need for a second
facility for storage. The Company also recently moved its west
coast corporate offices to a smaller, less expensive facility.
o The Company believes that it can maintain the quality of its
products without having to prepare the dough exclusively in its
own commissaries. The Company has now arranged for an independent
supplier to supply bagel dough to certain Company-owned stores,
franchises and wholesale accounts. The Company believes that this
will enable it to supply more stores and wholesale accounts
without having to build additional commissaries. Although the
Company is confident that independent suppliers can serve the
Company well, there can be no assurance that the Company will be
able to maintain product quality or engage and retain acceptable
suppliers. In addition, since the Company will not be able to
exercise direct day-to-day control over the preparation or
delivery of its products, it could suffer from variations in
product quality and delays in shipments. In the event that the
independent supplier is unable to service the Company's needs
sufficiently, the Company's California commissary will be able to
adequately supply the Company-owned stores, franchises and
wholesale accounts.
o The Company has been evaluating the desirability of discontinuing
the operations of the lower volume stores that drain the
Company's resources. As part of this process, in October 1997,
the Company closed its Mesa, Arizona stores and in February 1998,
the Company sold its store located in Park City, Utah to an
unaffiliated entity for $50,000.
o The Company's area development agreements all provide for
territory exclusivity. The Company intends to continue to
evaluate its area developers and to renegotiate with those
developers who are not opening stores in a timely fashion in
order to open up the restricted territories to other prospective
franchisees. In 1997, the Company terminated its relationship
with its Texas area developer and renegotiated its agreement with
its Minnesota area developer.
13
<PAGE>
Expansion
o The Company plans to open additional Company-owned stores and
acquire other bagel stores or complementary retail food outlets
which will enhance existing operations or provide entry into new
markets. In January 1998, the Company purchased a bagel store
located in New York City and has an exclusive option to purchase
an additional store in New York City until January 1999. The
Company entered into consulting agreements with the two former
owners of this bagel store, pursuant to which they agreed to
assist the Company to operate this store and in opening
additional stores in New York City. The Company recently leased
retail space in New York City where it intends to open another
Company- owned store in June 1998. The Company's ability to make
acquisitions and open new Company-owned stores (other than the
second New York City store) is dependent upon its ability to
obtain financing from outside sources. While the Company is
exploring its ability to obtain such financing, there can be no
assurance that it will be able to do so.
o The Company intends to open smaller satellite stores. Such stores
would be serviced by stores where baked goods would be prepared
and then delivered to the satellite stores, thereby eliminating
the need for baking equipment in the satellite stores. The
satellite stores would sell these baked goods as well as
sandwiches and other non-baked items which can be prepared at the
satellite stores. The Company recently turned one of its Costa
Mesa, California stores into a satellite store and intends to
open another satellite store in Tustin, California in May 1998,
both of which are or will be serviced by the Company's other
Costa Mesa, California store.
Chief Financial Officer
In February 1998, the Company hired a part-time Chief Financial
Officer. The Company believes that the increased day-to-day involvement of its
Chief Financial Officer, who has provided the Company with consulting services
in the past, will provide it with a greater degree of financial acumen and
oversight relating to its operations and strategic planning.
Year 2000 Compliance
The Company has evaluated the potential impact of the situation
commonly referred to as the "Year 2000 Issue" ("Y2K"). The Y2K problem concerns
the inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information relating to the year
2000 and beyond. Many of the world's computer systems currently record years in
a two-digit format. Such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the
United States and internationally. The potential costs and uncertainties
associated with Y2K will depend on a number of factors, including software,
hardware and the nature of the industry in which a company operates.
To ensure that the Company's computer systems are Y2K compliant, the
Company has been reviewing each of its systems and programs over the past year.
The Company also is working with all of its major external vendors and suppliers
to assess their compliance efforts and the Company's exposure to them. Any
entities with which the Company interacts electronically, such as its creditors
and banks, can affect its ability to address the Y2K problem. Based on the
foregoing, the Company has determined that additional costs associated with the
Y2K issue should not have a material adverse effect on the Company's operating
results or financial condition.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Independent Auditors' Report ............................................ F-1
Consolidated Balance Sheets as of
December 31, 1997 and 1996 ............................................ F-2
Consolidated Statements of Operations for
the years ended December 31, 1997 and 1996..............................F-3
Consolidated Statements of Stockholders'
Equity (Capital Deficiency) for the years
ended December 31, 1997 and 1996........................................F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1997 and 1996..................................F-5
Notes to Consolidated Financial Statements................................F-6
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Big City Bagels, Inc.
Hicksville, New York
We have audited the accompanying consolidated balance sheets of Big City Bagels,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (capital deficiency)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of Big
City Bagels, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
New York, New York
February 24, 1998
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,118,031 $ 654,856
Investments in United States Treasury bills 1,006,170
Accounts receivable 104,190 110,063
Inventory 43,868 74,272
Prepaid expenses and other current assets 41,133 77,131
--------------- --------------
Total current assets 4,307,222 1,922,492
Fixed assets, net of accumulated depreciation 611,095 1,239,478
Intangible assets, net of accumulated amortization 23,267 300,699
Security deposits and other assets 220,380 39,570
--------------- ----------------
$ 5,161,964 $ 3,502,239
=============== ================
LIABILITIES
Current liabilities:
Stockholder loans $ 87,468
Capital lease obligations $ 38,862 51,918
Unearned franchise fee income 278,500 263,750
Accounts payable 287,138 208,011
Accrued expenses 74,206 60,323
--------------- ----------------
Total current liabilities 678,706 671,470
Deferred rent payable 7,795 19,243
Capital lease obligations, noncurrent 57,235 132,926
--------------- ----------------
743,736 823,639
--------------- ----------------
Commitments
STOCKHOLDERS' EQUITY
Convertible (redeemable) preferred stock; $.001 par value; 1,000,000 shares
authorized; 265,000 shares issued and outstanding (liquidation value
$3,312,500) 265
Common stock; $.001 par value; 25,000,000 shares authorized; 6,343,466 and
4,923,757 shares issued and outstanding at December 31, 1997 and
December 31, 1996, respectively 6,344 4,924
Additional paid-in capital 9,677,189 4,340,180
Accumulated deficit (5,258,070) (1,629,004)
Unearned portion of compensatory stock (7,500) (37,500)
---------------- -----------------
4,418,228 2,678,600
---------------- ----------------
$ 5,161,964 $ 3,502,239
=============== ================
</TABLE>
See notes to financial statements F-2
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996
------------- ---------------
<S> <C> <C>
Revenues:
Product sales by company owned stores $ 1,657,271 $ 1,483,493
Product sales to franchisees and others 713,047 404,813
Franchise fees 151,000 309,250
Royalty income 162,486 126,820
Interest income 60,112 75,634
Other income 2,113 14,966
-------------- ---------------
2,746,029 2,414,976
-------------- ---------------
Costs and expenses:
Cost of sales 1,380,670 1,029,955
Selling, general and administrative expenses 4,144,526 3,163,820
Write-off of fixed assets and franchise costs 723,407
Amortization of debt discount 683,542
Interest expense 40,492 75,110
-------------- --------------
6,289,095 4,952,427
-------------- --------------
Net loss $ (3,543,066) $ (2,537,451)
============== ==============
Basic and diluted loss per common share $(.67) $(.61)
===== =====
Weighted-average common shares outstanding 5,326,327 4,174,061
========= =========
</TABLE>
See notes to financial statements F-3
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
<TABLE>
<CAPTION>
Unearned Portion
Additional of Compensatory
Preferred Stock Common Stock Paid-in Partners' Accumulated Stock
--------------- --------------- ----------- -------------- ---------
Shares Amount Shares Amount Capital Capital Deficit Shares Amount Total
------ ------ --------- ------- --------- ----------- ------------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 2,818,750 $ 2,819 $ 972,181 $ 255,456 $(1,303,610) $(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) (2,493,194) (2,537,451)
--------- ------ -------- --------- ----------- ------- ------- -----------
Balance - December 31, 1996 4,923,757 4,924 4,340,180 0 (1,629,004) 15,000 (37,500) 2,678,600
Issuance of common stock for
acquisition of franchise stores 8,264 8 8,256 8,264
Exercise of Class A warrants 798,945 799 1,869,473 1,870,272
Exercise of Class B warrants 500,000 500 499,500 500,000
Exercise of unit purchase option 112,500 113 539,887 540,000
Private placement 265,000 $ 265 2,333,893 2,334,158
Beneficial conversion feature of
preferred stock 86,000 (86,000) 0
Amortization of compensatory
stock 30,000 30,000
Net loss (3,543,066) (3,543,066)
--------- ------ ---------- ------ --------- ------- ---------- -------- ------- ----------
Balance - December 31, 1997 265,000 $ 265 $6,343,466 $6,344 $9,677,189 $ 0 $(5,258,070) 15,000 $(7,500) $4,418,228
========= ====== =========== ====== ========== ======= ============ ======== ======== ==========
</TABLE>
See notes to financial statements F-4
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,543,066) $ (2,537,451)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 232,092 155,166
Write-off of fixed assets and franchise costs 723,407
Amortization of debt discount 683,542
Amortization of common stock issued for compensation 30,000 22,500
Issuance of compensatory stock options 40,000
Provision for bad debt 35,000
Loss on abandonment of leasehold improvements 84,797
Changes in:
Interest receivable on United States Treasury bills (21,135)
Accounts receivable (83,801) (102,970)
Inventory 30,404 (26,339)
Prepaid expenses and other current assets 35,998 (67,559)
Security deposits and other assets (134,932) (7,623)
Accounts payable 79,127 (70,379)
Accrued expenses 13,883 24,663
Unearned franchise fee income 14,750 (45,500)
Deferred rent payable (11,448) (7,018)
---------- -----------
Net cash used in operating activities (2,493,789) (1,960,103)
---------- -----------
Cash flows from investing activities:
Acquisition of franchises (75,000) (50,000)
Purchases of fixed assets (32,421) (81,864)
Payment for trademark (10,000)
Purchase of United States Treasury bills (1,231,842)
Sales of United States Treasury bills 1,006,170 246,807
--------- -----------
Net cash provided by (used in) investing activities 888,749 (1,116,899)
--------- -----------
Cash flows from financing activities:
Proceeds from public offering 4,163,609
Repayment of stockholder loans (87,468) (375,000)
Proceeds from exercise of warrants 2,370,272
Repayment of notes payable (88,747) (94,742)
Proceeds form exercise of unit purchase option 540,000
Proceeds from private placement 2,334,158
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 5,068,215 3,693,867
--------- -----------
Net increase in cash and cash equivalents 3,463,175 616,865
Cash and cash equivalents - beginning of year 654,856 37,991
--------- ----------
Cash and cash equivalents - end of year $ 4,118,031 $ 654,856
=========== ===========
</TABLE>
See notes to financial statements F-5
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
<TABLE>
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 75,596 $ 49,006
Income taxes $ 3,500 $ 1,925
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, LP 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
=============
In February 1997, the Company acquired all of the assets of one franchise for the following:
Forgiveness of outstanding accounts receivable $ 8,796
Issuance of 8,264 shares of common stock 8,264
------------
17,060
Cash paid 75,000
------------
Total amount attributed to fixed assets $ 92,060
=============
</TABLE>
See notes to financial statements
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Big City Bagels, Inc. and subsidiary (the "Company") operates and franchises
retail bagel/deli 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. See Note B[6]. 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.
During November 1997, the Company formed a wholly-owned subsidiary, Big City NY,
Inc. (BCNY). BCNY was formed to acquire the assets of two unaffiliated
bagel/deli stores located in New York City (Note M).
The Company has incurred recurring losses from operations since inception
resulting in an accumulated deficit of $5,258,070. The Company is implementing
plans to reduce its operating losses and negative cash flows. Those plans
include evaluating the desirability of discontinuing the operations of low
volume stores that drain the Company's resources. There is no assurance, however
that the Company's efforts will ultimately be successful.
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.
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 stores.
F-6
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[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. During the year ended
December 31, 1997, a loss of $464,431 was charged to operations for the
write-off of machinery, equipment and leasehold improvements and a loss
of $258,976 was charged to operations for the write-off of franchise
costs recorded upon the acquisition of two affiliated entities in May
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.
[8] Fair value of financial instruments:
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and capitalized lease obligations
approximate fair value due to their short-term nature or their underlying
terms.
[9] 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 SFAS 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).
F-7
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[10] Loss per common share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share". Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Dilutive earnings per share is very similar to the previously
reported fully diluted earnings per share. In accordance with Statement
No. 128, which was adopted by the Company in 1997 and retroactively
applied to 1996, basic and diluted net loss per common share is based on
the net loss divided by the weighted average number of common shares
outstanding during the years. No effect has been given to outstanding
options, warrants or convertible preferred stock in the diluted
computation as their effect would be antidilutive.
[11] Recent accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", and No. 131, "Disclosure about Segments of an Enterprise and
Related Information", which are effective for years beginning after
December 15, 1997. The Company believes that these pronouncements will
not have a significant effect on the information presented in the
financial statements.
NOTE C - FIXED ASSETS
Fixed assets consist of the following:
December 31,
----------------------
1997 1996 Life
--------- ---------- ---------------
Furniture and fixtures $ 400,592 $ 297,518 7 to 15 years
Machinery and equipment 687,974 660,905 5 to 15 years
Leasehold improvements 487,192 577,651 Life of leases
---------- ----------
1,575,758 1,536,074
Less accumulated depreciation
and amortization 964,663 296,596
--------- ---------
$ 611,095 $1,239,478
=========== ==========
NOTE D - INTANGIBLE ASSETS
Intangible assets at cost, are amortized using the straight-line method and
consist of the following:
December 31,
--------------------------
1997 1996 Life
----------- ----------- --------
Franchise costs $ 289,547 15 years
Organization cost $ 48,099 48,099 5 years
Trademark costs 13,000 3,000 15 years
---------- ------------
61,099 340,646
Less accumulated amortization 37,832 39,947
--------- ------------
$ 23,267 $ 300,699
========== =============
F-8
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE E - CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following:
December 31,
--------------------------
1997 1996
----------- ----------
Equipment leases collateralized by
certain equipment, bearing interest at
14.63% and requiring monthly payments
of $4,198 through March 15, 2000 $ 96,097 $ 184,844
Less current portion 38,862 51,918
----------- -----------
Long-term portion $ 57,235 $ 132,926
=========== ===========
Future maturities at December 31, 1997 are as follows:
Year Ending
December 31, Amount
------------ ---------
1998 $ 38,862
1999 44,941
2000 12,294
--------
$ 96,097
========
NOTE F - STOCKHOLDER LOANS
Stockholder loans were fully paid during 1997.
NOTE G - COMMITMENTS
[1] Operating leases:
The Company leases its commissary space and store locations under various
operating leases which expire between November 1998 and September 2011.
Future minimum rental payments as of December 31, 1997 are as follows:
Year Ending
December 31, Amount
------------ ----------
1998 $ 551,016
1999 451,601
2000 431,818
2001 351,255
2002 370,060
Thereafter 2,413,401
---------
$ 4,569,151
===========
F-9
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE G - COMMITMENTS (CONTINUED)
[1] Operating leases: (continued)
Rent expense for the years ended December 31, 1997 and December 31, 1996
was $333,070 and $198,142, 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 an agreement with an employee, which
provides for an annual salary of $105,000 through December 31, 1998.
NOTE H - INCOME TAXES
At December 31, 1997, the Company has approximately $4,463,000 of net operating
loss carryforwards expiring through 2012.
At December 31, 1997, the Company has a deferred tax asset of approximately
$1,965,000 representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible. The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 34% and the
Company's effective tax rate of 0% is substantially due to the increase in the
valuation allowance of $1,465,000 (1997) and $500,000 (1996). The Company's
ability to utilize its net operating loss carryforwards may be subject to an
annual limitation in future periods pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended.
Prior to May 7, 1996, the Company 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 1997 the Company entered into franchise agreements for twelve stores,
none of which were opened as of December 31, 1997. During 1996 the Company
entered into franchise agreements for nineteen stores, of which two were opened
in 1997. At December 31, 1997 there were ten franchised stores and five Company
owned stores in operation. Deferred franchise fees at December 31, 1997 and
December 31, 1996 represent fees received in advance of store openings.
Effective February 1997, the Company repurchased a previously sold franchise
store for an aggregate of $75,000 cash, 8,264 shares of the Company's common
stock valued at $8,264 and forgiveness of outstanding accounts receivable of
$8,796. Assets acquired consisted of machinery and equipment and leasehold
improvements. The results of operations include the activities of this store
from the acquisition date.
F-10
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE I - FRANCHISES (CONTINUED)
The following unaudited pro forma data gives effect to the above acquisition as
though it had occurred upon the opening of the franchise store during March
1996.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Total revenues $ 2,766,988 $ 2,621,214
Net loss (3,552,618) (2,632,968)
Basic and diluted loss per common share $(.67) $(.63)
</TABLE>
The unaudited pro forma information is not necessarily indicative of results of
operations that would have occurred had the acquisition been made upon the
opening of the store, or of future results of operations of the Company.
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 1997 and 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
(2) the 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 1997 and 1996 would have been approximately
$3,736,197 and $2,582,000 or $0.70 and $0.62 per share. The
weighted-average fair value of the options granted during 1997 and 1996
are estimated as $2.86 and $2.65 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1997 1996
------------- -----
Risk free rates 5.74% - 6.66% 6.18%
Expected option life in years 5 6
Expected stock price volatily 70% 70%
Expected dividend yield 0% 0%
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, 1997 the Company has reserved 335,000 shares of common stock
for issuance under the Plan.
F-11
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE J - COMMON STOCK (CONTINUED)
Additional information with respect to the Plan's activity is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding at January 1 32,000 $3.93
Granted 67,500 4.31 32,000 $3.93
Cancelled (15,000) 3.25
----------- -------- --------- -----------
Outstanding at December 31 84,500 4.36 32,000 3.93
============ ========= ========= ==========
Shares exercisable 67,000 $4.97 2,000 $8.50
============ ========= ========= ==========
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:
<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
- ---------------- ----------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00 to $4.00 32,500 9.67 $2.92 15,000 $4.00
$5.13 to $8.50 52,000 9.22 5.25 52,000 5.25
------ ------ ------ ---------- -----
84,500 9.40 $4.36 67,000 $4.97
====== ===== ====== ========= =====
</TABLE>
At December 31, 1997, options for 250,500 shares of common stock were
available for future grant under the Plan.
[2] Warrants:
As at December 31, 1997, the following warrants were outstanding:
Shares Reserved Exercise Expiration
for Issuance Price Date
--------------- -------- -----------------
Class A Warrants 2,406,250 $2.50 May 7, 2000
Placement agent Warrants 75,000 5.00 December 30, 2002
Placement agent Warrants 125,000 1.3125 December 30, 2002
Effective July 11, 1997, the Company reduced the exercise price of its 1,793,750
Class A Warrants and its 250,000 Class B Warrants. The Class A Warrants, which
were previously exercisable at $4.50 per share, were revised to be exercisable
at $2.50 per share until October 8, 1997. Holders of Class A Warrants who
F-12
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE J - COMMON STOCK (CONTINUED)
[2] Warrants: (continued)
exercised prior to the expiration of the special exercise period, were
issued a new Class A Warrant upon the expiration of the special exercise
period. The Company agreed that if an aggregate of at least $2,000,000 of
gross proceeds were derived from the exercise of the Class A Warrants
during this special exercise period, then the exercise price of the Class
A Warrants which were not exercised and the new Class A Warrants would
remain at $2.50 per share until their expiration on May 7, 2000. If less
than $2,000,000 of gross proceeds were derived from the exercise of the
Class A Warrants during this special exercise period, then the exercise
price of the Class A Warrants which were not exercised and the new Class
A Warrants was to revert to $4.50 after the expiration of the special
exercise period.
During the special exercise period, an aggregate of 798,945 Class A
Warrants were exercised, from which the Company derived gross proceeds of
$1,997,363. Although $2,000,000 of gross proceeds was not received by the
Company, the Company determined on October 14, 1997 to permanently reduce
the exercise price of the Class A Warrants to $2.50 per share , which
price will remain in effect until the Class A Warrants expire on May 7,
2000. This exercise price reduction also applies to the additional Class
A Warrants issued to holders of Class A Warrants that were exercised
during the special exercise period.
During this special exercise period, each Class B Warrant entitled the
holder to purchase one share of common stock for $2.50 per share and, if
so exercised, the holder would be issued a new Class A Warrant upon the
expiration of the special exercise period. On November 5, 1997, the
Company further reduced the exercise price of the Company's Class B
Redeemable Common Stock Purchase Warrants ("Class B Warrants"), to $1.00
per share. On November 12, 1997 all 500,000 Class B Warrants were
exercised at the reduced exercise price, from which the Company has
received gross proceeds of $500,000 and the holder was issued 500,000 new
Class A Warrants.
[3] Private placement:
In connection with the Private Placement (Note K) the Company issued the
Placement Agent and its designee Placement Agent Warrants which entitle
the holders to purchase 125,000 shares of common stock for $1.3125 per
share and 75,000 shares of common stock for $5.00 per share, in both
cases exercisable until December 30, 2002.
NOTE K - PREFERRED STOCK
On December 31, 1997, the Company completed a private placement in which it
received net proceeds of $2,334,158 through the sale of 265,000 shares of Class
A preferred stock. The preferred stock accrues dividends at the rate of 8% per
annum, payable in cash or in shares of common stock at the election of the
Company on the date the preferred stock is converted into shares of common
stock. The preferred stock and dividends accrued are convertible at the election
of the holder into shares of common stock at a conversion rate per share equal
to the greater of (i) 75% of the average closing bid price of the common stock
for the five consecutive trading days immediately prior to the date of
conversion (subject to reduction, in 1% increments, between May 1, 1998 and
August 29, 1998 to 70% if the Registration Statement has not been declared
effective by the Securities and Exchange Commission and not approved by the
National Association of Securities Dealers) or (ii) $0.2585. On December 31,
2000, the shares of preferred stock then outstanding automatically convert into
shares of common stock.
F-13
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE K - PREFERRED STOCK (CONTINUED)
The Company may redeem the preferred stock in whole as a class at a price
payable in cash equal to the sum of (i) 125% of the stated value of the shares
being redeemed plus (ii) the dividends accrued through the redemption date.
Due to the beneficial conversion feature of the preferred stock the Company
recorded a charge of $86,000 to retained earnings (accumulated deficit) on
December 31, 1997, with a credit of like amount to additional paid-in capital.
NOTE L - 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 bore 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 consisted of one share of common stock and one
Class A warrant. Two Class B warrants, together, entitled 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.
NOTE M - SUBSEQUENT EVENTS
During January 1998 BCNY a wholly owned subsidiary of the Company (Note A)
acquired all the assets of an unaffiliated bagel store located in New York City.
The purchase price was $700,000 for which the Company paid the seller $275,000
in cash and $425,000 by the issuance of 346,497 shares of the Company's common
stock at fair value ($425,000).
During February 1998, BCNY acquired certain equipment and was assigned a lease
of an unaffiliated restaurant located in New York City. The purchase price was
$80,000 for which approximately $50,000 is attributable to the equipment
purchased. The Company paid $60,000 in cash and the remaining $20,000 will be
paid by the issuance of shares of the Company's common stock to be calculated
based on the average of the closing sale prices for the five trading days
immediately preceding the date of the lease assignment.
During February 1998 the Company sold the franchise store repurchased during
1997 (Note I) for $50,000 in cash plus an additional amount for inventory
located in the store at the closing date.
F-14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 30, 1998.
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 30, 1998.
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 30, 1998.
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 30, 1998.
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 Form 8-K.
None.
30
<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 30, 1998 BIG CITY BAGELS, INC.
By: /s/ Mark Weinreb
------------------------------------
Mark Weinreb, Chairman of the Board,
Chief Executive Officer and Secretary
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.
<TABLE>
<S> <C> <C>
/s/ Mark Weinreb March 30, 1998
- ------------------------------------ Chairman of the Board, Chief
Mark Weinreb Executive Officer and Secretary
/s/ Jerry Rosner March 30, 1998
- ------------------------------------ President, Chief Operating Officer
Jerry Rosner and Director
/s/ Stanley Weinreb March 30, 1998
- ------------------------------------ Director
Stanley Weinreb
/s/ Stanley Raphael March 30, 1998
- ------------------------------------ Director
Stanley Raphael
/s/ Howard J. Fein March 30, 1998
- ----------------------------------- Chief Financial Officer (and
Howard J. Fein principal accounting officer)
</TABLE>
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated
by Reference No. in
Exhibit No. Description from Document Document
- ----------- ----------- ------------- --------
<S> <C> <C> <C>
2.1 Form of Agreement and Plan of Contribution among the A 2.1
Company and the partners of Pumpernickel Partners, L.P.
3.1 Restated Certificate of Incorporation A 3.1
3.1.2 Amendment to Restated Certificate of Incorporation B 3.1.2
3.1.3 Amendment to Certificate of Incorporation, as corrected C 3.1.3
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 between Continental Stock A 4.3
Transfer & Trust Company and the Company
4.3.1 Form of Amendment to Form of Class A Warrant Agreement B 4.3.1
between Continental Stock Transfer & Trust Company and the
Company
4.4 Form of Class A Preferred Stock Certificate C 4.4
4.5 Form of Subscription Agreement between the Company and C 4.5
purchasers of Class A Preferred Stock
4.6 Form of warrant to purchase 125,000 shares of Common Stock C 4.6
at an exercise price of $1.3125 per share issued to Perrin, Holden
& Davenport Capital Corp. and its designee, dated December 31,
1997
4.7 Form of warrant to purchase 75,000 shares of Common Stock at C 4.7
an exercise price of $5.00 per share issued to Perrin, Holden &
Davenport Capital Corp. and its designee, dated December 31,
1997
10.1 Form of Financial Consulting Agreement between the Company A 10.1
and the Underwriter
10.2 Employment Agreement between the Company and Mark A 10.2
Weinreb
10.2.1 Amendment to Employment Agreement between the Company B 10.2.1
and Mark Weinreb
10.3 Employment Agreement between the Company and Jerry Rosner A 10.3
10.3.1 Amendment to Employment Agreement between the Company B 10.3.1
and Jerry Rosner
10.4 1996 Performance Equity Plan A 10.4
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Incorporated
by Reference No. in
Exhibit No. Description from Document Document
- ---------- ----------- -------------- --------
<S> <C> <C> <C>
10.5 Master Distribution Agreement, dated January 1, 1996, between A 10.5
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
10.8 Form of Founders' Shareholder Agreement A 10.8
10.9.1 Consolidation Agreement and Promissory Note, dated April 30, A 10.9.1
1996, between the Company and Mark Weinreb
10.9.1(a) Agreement to Loan Funds and Amendment to Consolidation B
10.9.1(a) Agreement and Promissory Note, dated April 30, 1996,
between the Company and Mark Weinreb, dated June 11, 1997
10.9.2 Consolidation Agreement and Promissory Note, dated April 30, A 10.9.2
1996, between the Company and Stanley Weinreb
10.9.2(a) Agreement to Loan Funds and Amendment to Consolidation B
10.9.2(a) Agreement and Promissory Note, dated April 30, 1996,
between the Company and Stanley Weinreb, dated June 11, 1997
10.9.3 Consolidation Agreement and Promissory Note, dated April 30, A 10.9.3
1996, between the Company and Stanley Raphael
10.9.3(a) Agreement to Loan Funds and Amendment to Consolidation B
10.9.3(a) Agreement and Promissory Note, dated April 30, 1996,
between the Company and Stanley Raphael, dated June 11, 1997
21 Subsidiaries of the Company *
23 Consent of Richard A. Eisner & Company LLP *
27 Financial Data Schedule *
99.1 Notice to Holders of Class A Warrants B 99.1
</TABLE>
- -------------------
* Filed herewith.
A The Company's Registration Statement on Form SB-2 (No.
333-2154) declared effective by the Commission on May 7, 1996.
B The Company's Registration Statement on Form SB-2 (No.
333-29297) declared effective by the Commission on July 9,
1997.
C The Company's Registration Statement on Form S-3 (No.
333-44773) declared effective by the Commission on February 9,
1998.
33
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name State of Incorporation Date of Incorporation Status
- ----- ---------------------- --------------------- -------
<S> <C> <C> <C>
Big City Bagels NY, Inc. New York November 26, 1997 Wholly-owned by Big
City Bagels, Inc.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Big City Bagels, Inc.
We hereby consent to the incorporation by reference in the registration
statement on Form S-3 (No. 333-44773) of Big City Bagels, Inc. of our report
dated February 24, 1998, relating to the financial statements of Big City
Bagels, Inc. appearing in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 30, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,118,031
<SECURITIES> 0
<RECEIVABLES> 139,190
<ALLOWANCES> 35,000
<INVENTORY> 43,868
<CURRENT-ASSETS> 4,307,222
<PP&E> 1,111,327
<DEPRECIATION> 500,232
<TOTAL-ASSETS> 5,161,964
<CURRENT-LIABILITIES> 678,706
<BONDS> 0
<COMMON> 6,344
0
265
<OTHER-SE> 4,411,619
<TOTAL-LIABILITY-AND-EQUITY> 5,161,964
<SALES> 2,370,318
<TOTAL-REVENUES> 2,746,029
<CGS> 1,380,670
<TOTAL-COSTS> 6,289,095
<OTHER-EXPENSES> 4,867,933
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,492
<INCOME-PRETAX> (3,543,066)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,543,066)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
