Rule 424(b)(3)
Registration No. 333-29297
BIG CITY BAGELS, INC.
Common Stock
Common Stock Purchase Warrants
This Prospectus relates to shares of common stock, par value $.001 per
share ("Common Stock"), of Big City Bagels, Inc. ("Company") issuable upon
conversion of 265,000 shares of the Company's Class A Preferred Stock, $.001 par
value and $10.00 stated value ("Preferred Stock"), that may be offered for
resale for the account of the holders of the 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 thereon 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 or (ii)
$0.2585. The shares of Preferred Stock then outstanding automatically convert
into shares of Common Stock on December 31, 2000. The Company may redeem the
Preferred Stock, in whole as a class and not in part, upon 30 days' prior
written notice, 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.
This Prospectus also relates to 200,000 Common Stock Purchase Warrants
("Placement Agent Warrants" and, together with the Common Stock offered hereby,
the "Securities") and the shares of Common Stock issuable upon exercise of such
warrants that may be offered for resale for the accounts of the holders of the
Placement Agent Warrants. The Placement Agent Warrants entitle the holder
thereof 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.
All of the Securities offered hereby are being registered for the
respective accounts of the holders of the Preferred Stock and of the Placement
Agent Warrants (collectively, the "Selling Securityholders") set forth in this
Prospectus under the heading "Selling Securityholders." No period of time has
been fixed within which the Securities covered by this Prospectus may be offered
or sold. The Company will not receive any of the proceeds from the sale of the
Securities; however, it will receive an aggregate of $539,062.50 in gross
proceeds if the Placement Agent Warrants are fully exercised. See "Use of
Proceeds" and "Selling Securityholders."
All costs, expenses and fees in connection with the registration of the
Securities offered by this Prospectus will be borne by the Company. Such
expenses are estimated at $55,000. Brokerage commissions and discounts, if any,
attributable to the sale of the Securities for the accounts of the Selling
Securityholders will be borne by them.
The Common Stock of the Company is quoted on The Nasdaq SmallCap Market
under the symbol "BIGC." On April 3, 1998, the last sale price for the Common
Stock was $0.75.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 3, 1998
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No person has been authorized to give any information or to make any
representations not contained or incorporated by reference in this Prospectus in
connection with the offer described in this Prospectus and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Company or any of the Selling Securityholders. Neither the
delivery of this Prospectus nor any sale made under this Prospectus shall under
any circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or since the date of any documents
incorporated herein by reference. This Prospectus does not constitute an offer
or solicitation in any state to any person to whom it is unlawful to make such
offer in such state.
TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION.................................................... 2
DOCUMENTS INCORPORATED BY REFERENCE...................................... 3
PROSPECTUS SUMMARY....................................................... 4
RISK FACTORS............................................................. 7
USE OF PROCEEDS.......................................................... 10
SELLING SECURITYHOLDERS.................................................. 11
PLAN OF DISTRIBUTION..................................................... 12
LEGAL MATTERS............................................................ 12
EXPERTS.................................................................. 12
INDEMNIFICATION.......................................................... 12
AVAILABLE INFORMATION
The Company has filed with the Commission, in Washington, D.C., a
Registration Statement on Form S-3 ("Registration Statement") under the
Securities Act of 1933, as amended ("Securities Act"), with respect to the
Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and exhibits thereto. For
further information with respect to the Company and the Securities, reference is
hereby made to the Registration Statement and exhibits. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit are not complete and the description of such contract or document is
qualified in its entirety by reference to such contract or document. The
Registration Statement, together with the exhibits, may be inspected at the
Commission's principal office in Washington, D.C. and copies may be obtained
upon payment of the fees prescribed by the Commission.
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company under the Exchange Act may be inspected and copied at the public
reference facilities of the Commission, Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following Regional
Offices: 7 World Trade Center, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies also can be obtained at
prescribed rates from the Commission's Public Reference Section, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such web site is http://www.sec.gov. The Common Stock is listed
on The Nasdaq SmallCap Market and information concerning the Company can be
inspected and copied at The Nasdaq Stock Market, 1735 K Street, N.W. Washington,
D.C. 20006.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference into this Prospectus and made a part hereof:
(a) The Company's proxy statement, dated June 4, 1997, for its annual
meeting of shareholders, filed with the Commission pursuant to Section 14(a) of
the Exchange Act and Rule 14a-6 thereunder; and
(b) The Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997, filed with the Commission pursuant to Section 13(a) of the
Exchange Act.
The description of the Company's Common Stock is contained in the
Company's Registration Statement on Form 8-A declared effective by the
Commission on May 7, 1996, which registration statement is also incorporated
into this Prospectus by reference and made a part hereof.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and shall be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference in this Prospectus and filed with the Commission prior
to the date of this Prospectus shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein, or
in any other subsequently filed document which is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). A written or telephone request
should be directed to Big City Bagels, Inc., 99 Woodbury Road, Hicksville, New
York 11801, telephone number (516) 932-5050, Attention: Investor Relations.
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PROSPECTUS SUMMARY
The information set forth below is qualified in its entirety by the information
set forth in those documents incorporated herein by reference. Certain
statements contained in the Prospectus Summary and elsewhere in this Prospectus
regarding matters that are not historical facts, such as statements regarding
growth trends in the bagel industry and the Company's growth strategy and
expansion plans, are forward-looking statements (as such term is defined in the
Securities Act). Since such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed herein under "Risk
Factors" as well as those discussed elsewhere in this Prospectus.
The Company
General
The 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.
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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.
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
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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.
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:
Stores Not Yet Opened
Location Stores Open Under Franchises Sold
- - --------- ----------- ---------------------
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
- - -----------------------------
(1) Includes one Company-owned store.
(2) Includes three Company-owned stores.
December 1997 Private Placement
On December 31, 1997, the Company completed a private placement
("Private Placement") from which the Company received gross proceeds of
$2,650,000 through the sale of 265,000 shares of Preferred Stock to accredited
investors. Perrin, Holden & Davenport Capital Corp., a member of the National
Association of Securities Dealers, Inc. ("Placement Agent"), acted as exclusive
placement agent for the Company and received a commission of $265,000, or 10% of
the offering price of the Preferred Stock. The Company also issued to the
Placement Agent and its designee Placement Agent Warrants, which entitle the
holders thereof to purchase 125,000 shares of Common Stock for $1.3125 per share
(the average of the closing bid prices of the Common Stock for the five trading
days immediately preceding the closing date of the Private Placement) and 75,000
shares of Common Stock for $5.00 per share, in both cases exercisable until
December 30, 2002. Total costs of the Private Placement, including the Placement
Agent's commission and costs to register the Securities, are estimated at
$325,000.
The Company has agreed to register for resale by the Selling
Securityholders (i) the shares of Common Stock issuable upon conversion of the
Preferred Stock, (ii) the Placement Agent Warrants and (iii) the shares of
Common Stock issuable upon exercise of the Placement Agent Warrants under the
Securities Act pursuant to the Registration Statement of which this Prospectus
is a part.
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RISK FACTORS
The securities offered hereby are speculative and involve a high degree of risk.
Accordingly, in analyzing an investment in these securities, prospective
investors should carefully consider, along with other matters referred to
herein, the following risk factors.
Limited Revenues and Significant and Continuing Losses. Since inception
in December 1992, the Company has generated limited revenues and has incurred
significant losses, including net losses of $2,537,451 and $3,543,066,
respectively, for the years ended December 31, 1996 and 1997. Losses are
expected to continue at least through 1998. Inasmuch as the Company will
continue to have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with its proposed expansion
(including salaries of executive, marketing and other personnel), the Company
anticipates that losses will continue until such time, if ever, as the Company
is able to generate sufficient revenues to finance its operations and the costs
of continuing expansion. There can be no assurance that the Company will be able
to generate significant revenues or achieve profitable operations.
Need for Additional Financing. Although the Company has no present need
to raise additional capital to support its existing operations through 1998, the
Company does believe that it will need to obtain financing from outside sources
to support its operations beyond 1998 and to fund its plans for growth,
including making potential acquisitions and establishing new Company-owned
stores (other than the second New York City store). While the Company is
currently exploring its ability to obtain such financing, there can be no
assurance that it will be able to do so.
Uncertainty of Expansion. Currently, 18 Big City Bagels stores are open
and operating. In addition, the Company has sold franchises for an additional 16
stores. The opening and success of Big City Bagels stores depends on various
factors, including customer acceptance of the Big City Bagels store concept in
new markets, the availability of suitable sites, the negotiation of acceptable
lease terms for new locations, the receipt of necessary permits and regulatory
compliance, the ability to meet construction schedules, the financial and other
capabilities of the Company and its franchisees, the ability of the Company to
successfully manage this anticipated expansion and to hire and train personnel,
and general economic and business conditions. Not all of the foregoing factors
are within the control of the Company or its franchisees.
The Company's plans for expansion include acquiring existing bagel
stores or chains and possibly other retail enterprises that the Company believes
will complement its operations. No assurance can be given that the Company will
be able to evaluate successfully the advisability of any particular acquisition
or that it will successfully integrate, convert, or operate any acquired
business. These acquisitions may not be subject to approval or review by the
Company's shareholders. The Company's expansion also will require the
implementation of enhanced operational and financial systems as well as
additional management, operational and financial resources. Failure to implement
these systems and add these resources could have a material adverse effect on
the Company's results of operations and financial condition. There can be no
assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth.
Dependence on Franchisees. The Company realizes a substantial portion
of its revenues from sales of bagel dough to franchisees, initial franchise and
area development fees and continuing royalty payments from its franchisees. The
Company is therefore substantially dependent upon its ability to attract, retain
and contract with suitable franchisees and the ability of franchisees to
successfully open and operate their franchises. Should the Company experience
difficulty in attracting suitable franchisees, or the franchisees encounter
business or operational difficulties, the Company's revenues will be materially
adversely affected. Such reduction in revenues also may negatively impact the
Company's ability to sell new franchises. Consequently, the Company's financial
prospects are directly related to the success of its franchisees in promoting
the Big City Bagels concept and the success of each store, over which the
Company has no direct control. There can be no assurance that the Company will
be able to successfully develop new franchises or that the Company's franchisees
will be able to successfully develop and operate stores.
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Food Service Industry. Food service businesses often are affected by
changes in consumer tastes, national, regional and local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing businesses. Multi-unit food service chains such as the Company also
can be materially adversely affected by publicity resulting from poor food
quality, illness, injury or other health concerns or operating issues stemming
from one store or a limited number of stores. In addition, factors such as
inflation, increased food, labor and employee benefit costs, regional weather
conditions and the unavailability of experienced management and hourly employees
also may materially adversely affect the food service industry in general, and
the Company's results of operations and financial condition in particular.
Competition. The food service industry in general, and the take-out
sector in particular, are intensely competi tive. The Company competes against
well-established food service companies with greater product and name
recognition and larger financial, marketing and distribution capabilities than
those of the Company, as well as innumerable local food establishments that
offer similar products. In addition, the Company believes that the start-up
costs associated with opening a retail food establishment offering products
similar to those offered by the Company, on a stand-alone basis, are competitive
with the start-up costs associated with opening a Big City Bagels store and
accordingly, are not an impediment to entry of competitors into the retail bagel
business. There can be no assurance that the Company can compete successfully in
this complex market.
Government Regulation. The Company's franchise operations are subject
to regulation by the Federal Trade Commission (the "FTC") in compliance with the
FTC's rule entitled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, which requires, among other
things, that the Company prepare and update periodically a comprehensive
disclosure document in connection with the sale and operation of its franchises.
The Company and its franchisees also must comply with state franchising laws and
a wide range of other state and local rules and regulations applicable to their
business. Continued compliance with this broad federal, state and local
regulatory network is essential and costly and the failure to comply with such
regulations may have an adverse effect on the Company and its franchisees.
Violations of franchising laws and/or state laws and regulations regulating
substantive aspects of doing business in a particular state could subject the
Company and its affiliates to rescission offers, monetary damages, penalties,
imprisonment and/or injunctive proceedings. In addition, under court decisions
in certain states, absolute vicarious liability may be imposed upon franchisors
based upon claims made against franchisees. Even if the Company is able to
obtain coverage for such claims, there can be no assurance that such insurance
will be sufficient to cover potential claims against the Company.
Raw Material Cost Fluctuations; Dependence on Suppliers. As the Company
expands its Company-owned store operations, the Company's operating results and
financial condition may be materially adversely affected by fluctuations in the
cost of flour, its primary raw material. Such costs are determined by constantly
changing market forces over which the Company has no control. The Company has no
long-term contracts with any of its suppliers. The loss of any of its suppliers
could materially adversely affect the Company's business until alternative
arrangements were secured. Although the Company believes that arrangements
similar to those which the Company currently has with its suppliers could be
secured with other suppliers, there can be no assurance of this.
Dependence on Key Personnel. The Company's operations are dependent on
the efforts of Mark Weinreb, its Chairman of the Board and Chief Executive
Officer, and Jerry Rosner, its President. Although the Company has employment
agreements with each of Messrs. Weinreb and Rosner, the terms of such agreements
expire on December 31, 1998, and the loss of the services of either of these
officers could have a material adverse effect on the Company. There can be no
assurance that a suitable replacement could be found in the event of the death,
disability or resignation of either of Messrs. Weinreb or Rosner. The Company
has obtained key-person life insurance on the lives of Messrs. Weinreb and
Rosner in the amount of $2 million each.
Continuing Control by Management. Messrs. Mark Weinreb, Jerry Rosner,
Stanley Raphael and Stanley Weinreb, each of whom is also a director of the
Company, currently own, in the aggregate, approximately 43% of the Company's
outstanding Common Stock. In addition, these persons are parties to a
shareholder agreement, pursuant to which each of them has agreed to vote his
shares for the election of each of the others as a director of the Company as
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long as each such other person owns at least 100,000 shares of Common Stock.
Accordingly, such shareholders, acting together, will be in a position to
effectively control, or at least strongly influence, the Company, including the
election of all of the directors of the Company.
No Dividends. The Company never has paid dividends on its Common Stock.
The Company intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
Volatility of Market Price. The trading price of the Common Stock could
be subject to wide fluctuations in response to quarterly variations in operating
results, failure to meet expectations of, or a change in recommendations by,
securities analysts, announcements of new products by the Company or its
competitors, government policy changes and other events or factors including
factors outside the Company's control. The market price of the Company's Common
Stock has been highly volatile to date and the market price of the Common Stock
may continue to be highly volatile in the future.
Possible Delisting of Securities from Nasdaq System. The Company's
Common Stock is listed on The Nasdaq SmallCap Market ("Nasdaq"). Effective
February 22, 1998, in order to continue to be listed on Nasdaq, a company must,
among other things, maintain $2 million in net tangible assets or,
alternatively, a $35 million market capitalization or $500,000 of net income,
and a minimum bid price of $1.00 per share. The Company was notified on April 3,
1998 that, based on Nasdaq's review of the price data covering the last 30
consecutive trade dates, the Common Stock has failed to maintain a minimum bid
price of $1.00 per share. The Company has until July 2, 1998 to regain
compliance with the minimum bid price requirement, and can do so only if the
Common Stock maintains a minimum bid price of $1.00 for ten consecutive trading
days. In addition, continued inclusion on Nasdaq requires the adoption of
corporate governance requirements including, among other things, a minimum of
two independent directors. The Company's Board of Directors has determined that
Stanley Raphael and Stanley Weinreb meet the criteria to be considered
independent directors, although there can be no assurance that Nasdaq will
accept this determination in view of the fact that Stanley Weinreb is Mark
Weinreb's father. The failure to meet these maintenance criteria in the future
may result in the delisting of the Company's securities from Nasdaq and trading,
if any, in the Company's securities would thereafter be conducted on the NASD
OTC Bulletin Board. As a result of such delisting, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Company's securities. In addition, if the Common Stock were to become
delisted from trading on Nasdaq and the trading price of the Common Stock were
to fall below $5.00 per share, trading in the Common Stock also would be subject
to the requirements of certain rules promulgated under the Exchange Act, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage them from effecting transactions in the
Company's securities, which could severely limit the liquidity of the Company's
securities and the ability of purchasers in this Offering to sell such
securities in the secondary market.
Potential Adverse Effect of Issuance of Preferred Stock Without
Shareholder Approval; Restriction on Issuance of Capital Stock. The Company's
Certificate of Incorporation authorizes the issuance of 1,000,000 shares of
Preferred Stock with such rights, preferences and designations as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock and, in certain circumstances, depress the market price of the securities
offered hereby. In the event of issuance, the Preferred Stock could be utilized
under certain circumstances as a method of discouraging, delaying or preventing
a change in control of the Company. The Company currently has 265,000 shares
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of Preferred Stock outstanding. Although the Company has no present intention of
issuing additional shares of Preferred Stock, there can be no assurance that the
Company will not issue additional shares of Preferred Stock in the future.
USE OF PROCEEDS
All of the Securities offered hereby are being registered for the
respective accounts of the Selling Securityholders. The Company will not receive
any of the proceeds from the sale of the Securities; however, it will receive an
aggregate of $539,062.50 in gross proceeds if the Placement Agent Warrants are
fully exercised. The Company is unable to estimate the number of Placement Agent
Warrants that may be exercised. The Company believes that the exercise of the
Placement Agent Warrants primarily will be dependent on the market price of a
share of Common Stock at the time of exercise and its relation to their exercise
price. See "Selling Securityholders."
The Company intends to use the net proceeds from the exercise of any of
the Placement Agent Warrants for working capital and general corporate purposes.
Pending application of the proceeds, the Company intends to place the funds in
interest-bearing investments such as bank accounts, certificates of deposit,
money market funds and United States government obligations.
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SELLING SECURITYHOLDERS
The tables set forth below provide certain information with respect to
the beneficial ownership of the Company's Common Stock by the Selling
Securityholders as of February 6, 1998, and as adjusted to give effect to the
sale of all of the securities offered hereby. See "Plan of Distribution." Except
as otherwise indicated, the number of shares of Common Stock reflected in the
tables has been determined in accordance with Rule 13d-3 promulgated under the
Exchange Act. Under this rule, each Selling Shareholder is deemed to
beneficially own the number of shares of Common Stock issuable upon conversion
of the Preferred Stock and upon exercise of the Placement Agent Warrants since
such Preferred Stock and warrants are presently convertible or exercisable, as
the case may be. Accordingly, the number of shares of Common Stock set forth in
the column on each table entitled "Number of Shares of Common Stock Owned Prior
to Offering and Being Sold in Offering" includes the number of shares of Common
Stock issuable upon conversion of the Preferred Stock and upon exercise of the
Placement Agent Warrants. For purposes of presentation in the tables, it is
assumed that the Selling Securityholders will convert all of the shares of
Preferred Stock and exercise all of the Placement Agent Warrants indicated as
being owned and then resell all of the shares of Common Stock received upon
conversion or exercise thereof. Unless otherwise indicated, each of the Selling
Securityholders possesses sole voting and investment power with respect to the
securities shown and none of the Selling Securityholders has had a material
relationship with the Company or any of its predecessors or affiliates within
the past three years.
<TABLE>
<CAPTION>
Dollar Amount of Preferred Number of Shares of Common
Stock Owned Prior to Stock Owned Prior to Offering
Name Offering(1) and Being Sold in Offering(2)
- - ----- ---------------------------- ------------------------------
<S> <C> <C>
Michael Ackerman...................................... $50,000 62,016
Brass Capital, L.L.C.................................. $50,000 62,016
Mendel Gluckowsky..................................... $25,000 31,008
Gross Foundation Inc.................................. $100,000 124,031
International Investment Group Equities Fund N.V...... $500,000 620,155
International Investment Group L.L.C.................. $200,000 248,062
Kadar Investment Company, Ltd......................... $175,000 217,054
Leon Kahn............................................. $50,000 62,016
Sara Liebowitz........................................ $300,000 372,093
Orlac Finance, Ltd.................................... $750,000 930,233
Jaime Radusky......................................... $50,000 62,016
Wilma C. Rossi & Joseph W. McGuire, JTWROS............ $50,000 62,016
Chava Scharf.......................................... $50,000 62,016
Starling Corporation.................................. $250,000 310,078
Rina Sugarman......................................... $50,000 62,016
</TABLE>
- - ------------------------------------
(1) Does not include dividends, which accrue at the rate of 8% per annum
and are convertible, at the election of the holder, into shares of
Common Stock at the same conversion rate as the Preferred Stock.
(2) Calculated, for purposes of presentation, by dividing the dollar amount
of Preferred Stock owned by each holder by an assumed conversion rate
of $0.80625 based on the average of the closing bid prices of the
Common Stock for the five trading days ended February 6, 1998.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Number of Warrants Owned Owned Prior to
Prior to Offering and Being Offering and Being Sold in
Name Sold Offering
- - ---------- ---------------------------- ----------------------------
<S> <C> <C>
Perrin, Holden & Davenport Capital Corp........ 170,000 170,000
Donald Kleban.................................. 30,000 30,000
</TABLE>
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PLAN OF DISTRIBUTION
The Selling Securityholders have advised the Company that sales of the
Securities may be effected from time to time in transactions (which may include
block transactions) on Nasdaq, in negotiated transactions, or a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Securityholders have advised the Company that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their Securities. The Selling
Securityholders may effect such transactions by selling their Securities
directly to purchasers or to or through broker-dealers (including the Placement
Agent), which may act as agents or principals. Such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Securityholders and/or the purchasers of the Securities for whom such
broker-dealers may act as agents or to whom they sell as principal, or both. The
Selling Securityholders and any broker-dealers that act in connection with the
sale of the Securities might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act. The Selling Securityholders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the Securities against certain liabilities, including
liabilities arising under the Securities Act. The holders of the Placement Agent
Warrants have agreed that they will not sell, transfer, assign, pledge or
hypothecate the Placement Agent Warrants or the shares of Common Stock issuable
upon exercise of the Placement Agent Warrants until February 9, 1999, except to
the limited extent provided by, and in accordance with, NASD Conduct Rule
2710(C)(7)(A).
The registration rights granted to the Selling Securityholders
generally provide that the Company and the Selling Securityholders indemnify
each other against certain liabilities, including liabilities under the
Securities Act. In the opinion of the Commission, such indemnification is
against public policy and is, therefore, unenforceable. See "Indemnification."
The Company has agreed to keep the Registration Statement, of which
this Prospectus is a part, effective until the earlier of the sale of all the
Securities or all the Securities may be sold by the holders thereof under Rule
144.
LEGAL MATTERS
Certain matters with respect to the legality of the issuance and sale
of the Securities offered hereby will be passed upon for the Company by Graubard
Mollen & Miller, New York, New York.
EXPERTS
The financial statements incorporated by reference in this Prospectus
have been audited by Richard A. Eisner & Company, LLP, independent auditors, to
the extent and for the periods set forth in their report incorporated herein by
reference, and are incorporated herein in reliance upon such report given upon
the authority of such firm as experts in auditing and accounting.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described above, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by such director, officer or controlling person in
connection with the registration of the Shares, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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