U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _______________
Commission File number 0-28058
BIG CITY BAGELS, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
New York 11-3137508
- ------------------------------- --------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
99 Woodbury Road, Hicksville, NY 11801
----------------------------------------
(Address of Principal Executive Offices)
(516) 932-5050
---------------------------------------------
(Issuer's Telephone Number Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
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 registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At August 10, 1998, the issuer had
outstanding 1,495,092 shares of Common stock, par value $.001 per share.
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 2,182,284 $ 4,118,031
Accounts receivable ...................................................... 207,371 104,190
Inventory ................................................................ 60,757 43,868
Prepaid expenses and other current assets ................................ 116,585 41,133
------------ ------------
Total current assets ................................................ 2,566,997 4,307,222
Fixed assets, net of accumulated depreciation ............................ 735,107 611,095
Intangible assets, net of accumulated
amortization ............................................................. 161,851 23,267
Security deposits and other assets ....................................... 136,932 220,380
------------ ------------
TOTAL ............................................................... $ 3,600,887 $ 5,161,964
============ ============
LIABILITIES
Current liabilities:
Capital lease obligations ................................................ $ 41,790 $ 38,862
Unearned franchise fee income ............................................ 213,500 278,500
Accounts payable ......................................................... 299,286 287,138
Accrued expenses ......................................................... 190,623 74,206
------------ ------------
Total current liabilities ........................................... 745,199 678,706
Deferred rent payable .................................................... 2,071 7,795
Capital lease obligations, noncurrent .................................... 35,592 57,235
------------ ------------
Total liabilities ................................................... 782,862 743,736
------------ ------------
STOCKHOLDERS' EQUITY
Convertible (redeemable) preferred stock; $.001 par value; 1,000,000 shares
authorized; 250,440 shares issued and
outstanding (liquidation value $3,130,500) ................................. 250 265
Common stock; $.001 par value; 25,000,000 shares authorized;
1,443,642 and 1,268,694 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively
1,444 1,269
Additional paid-in capital ..................................................... 10,121,881 9,682,264
Accumulated deficit ............................................................ (7,305,550) (5,258,070)
Unearned portion of compensatory stock ......................................... 0 (7,500)
------------ ------------
Total stockholders' equity ................................................ 2,818,025 4,418,228
------------ ------------
TOTAL ..................................................................... $ 3,600,887 $ 5,161,964
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales by company-owned stores $ 1,358,023 $ 881,415 $ 661,183 $ 424,841
Product sales to franchisees and others 359,960 334,126 186,230 183,843
Franchise fees 124,500 60,000 64,000 60,000
Royalty income 101,405 87,643 56,836 44,289
Interest and other income 84,148 30,989 44,461 13,509
----------------- --------------- ----------------- --------------
Total revenues 2,028,036 1,394,173 1,012,710 726,482
----------------- --------------- ----------------- --------------
COSTS AND EXPENSES:
Cost of sales 845,647 701,710 418,117 343,054
Selling, general and administrative
expenses 2,649,745 2,147,517 1,400,811 1,048,844
Interest expense 7,929 24,584 4,527 11,616
Write-off of intangible assets 572,195 572,195
----------------- --------------- ----------------- --------------
Total costs and expenses 4,075,516 2,873,811 2,395,650 1,403,514
----------------- --------------- ----------------- --------------
NET (LOSS) $ (2,047,480) $ (1,479,638) $ (1,382,940) $ (677,032)
================= =============== ================= ==============
Basic and diluted net (loss) per common
share $ (1.51) $ (1.50) $ (0.98) $ (0.69)
================= =============== ================= ==============
Weighted average common shares
outstanding 1,360,308 986,121 1,414,979 986,404
================= =============== ================= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Portion of
Additional Compensatory Stock
Preferred Stock Common Stock Paid-In Accumulated ---------------
Shares Amount Shares Amount Capital Deficit Shares Amount Total
------ ------ ------ ------ ----------- ------------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 265,000 $ 265 1,268,694 $ 1,269 $ 9,682,264 $ (5,258,070) 3,000 $ (7,500) $4,418,228
Issuance of common stock
for acquisition of assets 73,064 73 444,927 445,000
Shares issued as
compensation 4,988 5 26,495 26,500
Preferred stock converted
to common stock (14,560) (15) 93,952 94 (79)
Amortization of
compensatory stock 7,500 7,500
Registration costs (31,723) (31,723)
Stock dividends 2,944 3 (3)
Net loss (2,047,480) (2,047,480)
_____________________________________________________________________________________________________
BALANCE, June 30, 1998 250,440 $ 250 1,443,642 $ 1,444 $ 10,121,881 $ (7,305,550) 3,000 $ 0 $ 2,818,025
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
CASH FLOWS STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (2,047,480) $ (1,479,638)
------------- --------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 99,887 121,787
Write off of intangible assets......................................... 572,195 0
Issuance of common stock for compensation and
professional services............................................. 34,000 15,000
Gain on sale of equipment.............................................. (11,981) 0
(Increase) Decrease in:
Accounts receivable.................................................. (103,181) (99,790)
Inventory....................................................... (16,889) 23,931
Interest receivable on U.S. Treasury bills.......................... 0 21,135
Prepaid expenses and other current assets............................ (55,452) 16,877
Increase (Decrease) in:
Unearned franchise fee income........................................ (65,000) 71,875
Deferred rent payable................................................ (5,724) (5,724)
Accounts payable..................................................... 12,148 125,076
Accrued expenses..................................................... 116,417 122,412
--------------- ---------------
Total adjustments......................................................... 576,420 412,579
--------------- ---------------
Net cash used in operating activities..................................... (1,471,060) (1,067,059)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of franchise store......................................... 0 (75,000)
Purchases of fixed and intangible assets............................... (634,515) (13,472)
Sale of fixed assets................................................... 136,818 0
Decrease (Increase) in security deposits and other assets.............. 83,448 (10,795)
Purchase of United States Treasury bills............................... 0 (243,880)
Sales of United States Treasury bills.................................. 0 1,228,487
--------------- ---------------
Net cash (used in) provided by in investing activities.................... (414,249) 885,340
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Registration costs..................................................... (31,723) (65,286)
Repayment of stockholder loans......................................... 0 (23,700)
Repayment of notes payable............................................. (18,715) (24,958)
--------------- ---------------
Net cash used in financing activities..................................... (50,438) (113,944)
--------------- ---------------
NET DECREASE IN CASH...................................................... (1,935,747) (295,663)
Cash, beginning of period................................................. $ 4,118,031 $ 654,856
=============== ==============
Cash, end of period....................................................... $ 2,182,284 $ 359,193
=============== ==============
</TABLE>
(Continued on next page)
-5-
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
CASH FLOWS STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30,
Supplemental disclosure of non cash activities:
Cash paid during the year for: 1998 1997
---- ----
Interest.................................... $ 7,929 $ 22,350
Income taxes................................ 5,650 1,900
In February 1997, the Company acquired
all of the assets of a franchise store for the
following:
Forgiveness of outstanding accounts receivable......... $ 8,796
Issuance of 1,653 shares of common stock............... 8,264
----------
17,060
Cash paid.............................................. 75,000
----------
Total amount attributed to fixed assets...... $ 92,060
==========
Assets purchased by the issuance of 73,064
shares of common stock..................... $445,000
Cash paid..................................... 386,466
--------
Total amount attributed to fixed assets... $831,466
========
The accompanying notes are an integral part of the financial statements.
-6-
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and Basis of Presentation:
The Company operates and franchises retail bagel stores and sells
its products wholesale to commercial accounts and food service
operators.
The information herein is unaudited. However, in the opinion of
management, such information reflects all adjustments (consisting
only of normal recurring accruals) necessary to make the
financial statements not misleading. Additionally, it should be
noted that the accompanying financial statements do not purport
to contain complete disclosures in conformity with generally
accepted accounting principles.
The results of operations for the three and six months ended June
30, 1998 are not necessarily indicative of the results of
operations for the full year ending December 31, 1998. These
statements should be read in conjunction with the Company's
financial statements for the year ended December 31, 1997
appearing in the Company's Annual Report on Form 10- KSB.
On June 23, 1998, the Company effected a one-for-five reverse
stock split of the Company's Common Stock (the "Reverse Split").
All per-share data and references to number of shares have been
retroactively restated in these financial statements. Holders of
outstanding shares of the Company's Class A Preferred Stock
("Preferred Stock") were not affected by the Reverse Split. The
Reverse Split affected the holders of each class of warrants and
options outstanding insofar as the exercise price of each warrant
was adjusted upward by a factor of five and the number of shares
of common stock issuable upon exercise of each warrant were
reduced by a factor of five.
(NOTE B) - Acquisitions and Sales:
In January 1998, BCNY, Inc., a wholly-owned subsidiary of the
Company, 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 69,299 shares of the Company's common stock at
fair value ($425,000).
In February 1998, BCNY, Inc. 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 was paid by the
issuance of 3,765 shares of the Company's common stock at fair
value ($20,000).
In February 1998, the Company sold the franchise store
repurchased during 1997 for $50,000 in cash, representing the
carrying value of the franchise, plus $5,147 for inventory
located in the store.
In June 1998, the Company sold one of its retail stores in Costa
Mesa, California for $75,000 in cash to a new franchisee.
-7-
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Dividends Paid
Pursuant to the private placement of 265,000 shares of Preferred
Stock, the Company paid a dividend of 2,944 shares of common
stock to the preferred shareholders, cumulative through June 30,
1998.
(NOTE D) - Common Stock Options:
Pursuant to the Company's 1996 Performance Equity Plan ("1996
Plan"), on March 31st of each calendar year during the term of
the 1996 Plan, assuming there are enough shares then available
for grant under the 1996 Plan, each person who is then a director
of the Company will be awarded stock options to purchase 2,000
shares of Common Stock at the fair market value thereof (as
determined in accordance with the 1996 Plan), all of which
options are immediately exercisable as of the date of grant and
have a term of ten years. These are the only awards which may be
granted to a director of the Company under the 1996 Plan. On
March 31, 1998, the directors of the Company were granted options
to purchase an aggregate of 8,000 shares of Common Stock at an
exercise price of $4.6875 per share.
-8-
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
Forward-Looking Statements
When used in the Form 10-QSB 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," "estimated" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company has no obligation to publicly release the results 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.
Results of Operations
Revenues for the three and six months ended June 30, 1998, were $1,012,710
and $2,028,036, respectively, a 39% and 45% increase from revenues of $726,482
and $1,394,173 for the three and six months ended June 30, 1997. This increase
was attributable to gains in the following areas: store and commissary product
sales, royalty income and interest income. Store and commissary product sales
increased by $238,729 and $502,442, respectively, a 39% and 41% increase, to
$847,413 and $1,717,983 for the three and six months ended June 30, 1998 from
$608,684 and $1,215,541 for the three and six months ended June 30, 1997. This
increase was due to the maturing of Company-owned retail store operations, the
acquisition of one new store in January 1998, the growth of the wholesale
business and increased commissary sales to franchise stores. Franchise fee
revenues for the three and six months ended June 30, 1998 were $64,000 and
$124,500, respectively, as compared with $60,000 and $60,000 of franchise fee
revenues for the three and six months ended June 30, 1997, due to the fact that
more stores opened during the three and six months ended June 30,1998. Revenue
under franchise agreements generally is recognized when the franchise stores are
opened. The Company has unearned franchise fee income of $213,500 at June 30,
1998, compared to $335,625 at June 30, 1997 due to related franchise store
openings and no new franchise sales. Unearned franchise fee income represents
non-refundable franchise fees which will be recognized as revenue as the related
franchise stores are opened. Royalty income increased by $12,547 and $13,762, or
28% and 16%, to $56,836 and $101,405 for the three and six months ended June 30,
1998, from $44,289 and $87,643 for the three and six months ended June 30, 1997.
This was due to the maturing of operations of existing franchise stores and the
commencement of operations of new franchise stores that opened in 1998. Interest
income for the three and six months ended June 30, 1998 was $29,297 and $68,984,
respectively, a 117% increase and 123% increase from the interest income for the
three and six months ended June 30, 1997. Interest income resulted from the cash
proceeds of the Company's private placement of preferred stock in December 1997,
and the exercise of the Company's Class A Redeemable Common Stock Purchase
Warrants ("Class A Warrants"), Class B Redeemable Common Stock Purchased
Warrants ("Class B Warrants") and the Unit Purchase Options, which were
deposited into interest bearing accounts.
During the six months ended June 30, 1998, the Company entered into no new
franchise agreements as compared to two franchise agreements and one franchise
area development agreement (three stores) for the six months ended June 30,
1997.
-9-
<PAGE>
Cost of sales were $418,117 and $845,647, representing 49% and 49% of net
sales for the three and six months ended June 30, 1998, compared to $343,054 and
$701,710 or 56% and 58% of net sales for the three and six months ended June 30,
1997. The decrease in cost of sales as a percentage of sales was primarily
attributable to an increase in the mix between sales from the Company-owned
stores and sales from the commissary to franchisees, which generally represents
a higher gross profit percentage. The increase in cost of sales of $75,063 and
$143,937, respectively, was primarily due to increased product sales resulting
from the additional Company-owned store acquired, increased wholesale business
and increased sales from the commissary to franchisees.
Selling, general and administrative expenses (SG&A) were $1,400,811 and
$2,649,745, respectively, for the three and six months ended June 30, 1998, a
34% and 23% increase from $1,048,844 and $2,147,517 for the three and six months
ended June 30, 1997. This increase was primarily a result of: (i) an increase in
salaries of $230,723 and $328,491 from $415,421 and $834,053 for the three and
six months ended June 30, 1997 to $646,144 and $1,162,544 for the three and six
months ended June 30, 1998, due to the hiring of a part-time chief financial
officer, a one time officer's severance contract termination payment and the
opening of additional Company-owned stores and (ii) increases of $72,411 and
$99,111 in rent, and $41,921 and $29,731 in consulting and professional fees,
for the three and six months ended June 30, 1998, respectively, that were
mandated by a growing business.
Interest expense decreased by $7,089 and $16,655 respectively, for the
three and six months ended June 30, 1998, primarily due to the Company retiring
its debt obligations to its shareholders.
The net losses of the three and six months ended June 30, 1998 were
$1,382,940 and $2,047,480, respectively, compared to net losses of $677,032 and
$1,479,638 for the three and six months ended June 30, 1997. The reasons for the
increase in the loss were primarily due to the severance payment of
approximately $150,000 resulting from the termination of an officer's contract,
and a write down of goodwill in the amount of $572,195.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1998 were $2,182,284, compared to
$4,118,031 at December 31, 1997. This decrease was primarily attributable to
funding the Company's operating losses for the six months ended June 30, 1998, a
one time severance contract termination payment, and for the purchase of two
stores in New York City.
Accounts receivable increased to $207,371 at June 30, 1998, from $104,190
at December 31, 1997. This increase was primarily due to increases in commissary
sales to franchisees and the Company's wholesale business.
Inventory increased to $60,757 at June 30, 1998, from $ 43,868 at December
31, 1997, due to the purchase of a Company-owned store and increased commissary
sales to franchisees and the Company's wholesale business.
Prepaid expenses and other current assets increased to $116,585 at June 30,
1998 from $41,133 at December 31, 1997, due to the renovation of the Company's
two New York City stores.
Fixed assets, net of accumulated depreciation, increased to $735,107 at
June 30, 1998 from $611,095 at December 31, 1997, resulting from the opening of
the Company's new commissary and the purchase of stores in New York City.
-10-
<PAGE>
Intangible assets, net of accumulated amortization, increased to $161,851
at June 30, 1998 from $23,267 at December 31, 1997, resulting from the net
goodwill realized on the acquisition and the subsequent write down of a bagel
store in New York City.
Security deposits and other assets decreased to $136,932 at June 30, 1998
from $220,380 at December 31, 1997, due to the opening of the new commissary
which costs were capitalized until operations began in 1998.
The current and non-current portion of capital lease obligations decreased
to $77,382 at June 30, 1998 from $96,097 at December 31, 1997, as a result of
the Company making the required lease payments during this period.
The combination of accounts payable and accrued expenses increased to
$489,909 at June 30, 1998 from $361,344 at December 31, 1997. This increase was
primarily due to the growth of the Company.
At June 30, 1998, the Company had $1,821,798 of working capital and a
current ratio of 3.4 to 1.
The Company's operating activities used net cash of $1,471,060 during the
six months ended June 30, 1998, as compared to net cash used in operations of
$1,067,059 for the corresponding period of the prior year. This increase was
primarily due to a pay down of accounts payable, additional prepayment of
assets, a decrease in unearned franchise fees received, progress payments made
for the construction for the new commissary and Company-owned satellite store in
New York City, and a one time officer's severance contract termination payment.
Although the Company has no present need to raise additional capital to
support its existing operations, the Company does believe it will need to obtain
financing from outside sources to support its plans for growth and potential
acquisitions. The Company is considering a strategic refocusing of its business,
which may include the acquisition of companies outside of the food industry. The
Company's ability to make such acquisitions may require it to obtain financing
from outside sources, although there can be no assurance that it will be able to
do so.
The Company's plans to increase revenues and reduce costs are as follows:
Increase Revenues
The Company recently expanded its concept to include more deli products
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. In April 1998, the Company increased retail prices in its
Company-owned stores and has encouraged its franchisees to do the same. The
Company's revenues would increase as a result of increases in: (i) royalty
payments from existing franchises with increased retail sales, (ii) royalty
payments from new franchise stores opened, and (iii) commissary sales to
franchises. However, there can be no assurance that the Company's expanded
concept will be accepted or successful.
The Company intends to increase revenue by attracting new wholesale
business. The Company relocated its bagel production facilities to Ontario,
California from its Costa Mesa, California facility. The new facility is large
enough to service the Company's existing wholesale clients and retail stores and
will enable the Company to service the requirements of potential new franchise
and wholesale clients. The Company's agreement with Northwest Airlines as the
exclusive supplier on certain domestic Northwest flights has provided increased
wholesale revenues to the Company. If the Company is unable to service Northwest
-11-
<PAGE>
or Northwest experiences labor or equipment problems, then the Company may not
generate revenues as anticipated.
The Company has engaged DME Interactive Services to design and service an
electronic commerce web site that will retail the Company's bagels, muffins,
breads and other assorted products via the Internet. The Company believes that
the scope of the Internet will provide the Company with a new opportunity to
sell its products, although to date the web site is not online and there are no
projected sales expectations. The Company intends to have the web site operating
by September 1998. Additional pages on the web site will be designed to
introduce potential franchisees to the Company's bagel/deli cafe opportunities.
The Company will make increased efforts to promote its franchise sales
through advertising in trade and business publications as well as through
increased exposure expected from the web site. Four new franchise stores and one
store under a licensing agreement have opened in the first six months of 1998.
The Company opened a satellite store in Tustin, California in May 1998,
which is being serviced by the Company's Costa Mesa, California store.
Reduce Costs
The Company has taken steps to reduce operational and administrative
expenses. In June 1998, Jerry Rosner, President and Chief Operating Officer of
the Company, resigned to pursue other interests. Other reductions in payroll
have been made without impairing the Company's ability to conduct its business.
Relocating the Company's commissary has enabled the Company to adequately
supply California Company-owned stores, franchises and wholesale accounts. Due
to the efficiencies and product volume capabilities of this new commissary, the
Company no longer has to use independent bagel dough suppliers. The Company has
been evaluating the desirability of discontinuing the operations of certain
Company-owned stores that drain the Company's resources. As part of this
process, in June 1998, the Company sold its satellite store located in Costa
Mesa, California to a new franchisee for $75,000 and in July 1998, the Company
closed its Scottsdale, Arizona store. The Company is evaluating the sale of
other Company-owned stores to new or existing franchisees as well as to
unaffiliated parties to further reduce costs.
Other Information
Board of Directors Authorizes Repurchases of Common Stock
On July 10, 1998, the Board of Directors authorized the Company to
repurchase from time to time up to 100,000 shares of the Company's Common Stock
in the public market. The Company believes that the share price at the time was
below value. As of August 10, 1998, the Company had repurchased approximately
26,400 shares of Common Stock.
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 ("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. The dividend is paid on the date the Preferred Stock is
converted into shares of common stock. As of August 10, 1998, 17,060 shares of
Preferred Stock have been converted into 148,136 shares of common stock.
-12-
<PAGE>
Item 1 - Legal Proceedings
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 breach of the lease and claims that it is entitled to rent owed,
damages arising out of the breach and to be indemnified by the Company for
losses arising out of the litigation. The Company has filed a cross-claim
against the landlord. Plaintiffs' 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, 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 that it has no liability in
this matter and that it is the obligation of the landlord to indemnify the
Company for these claims. The Company also believes that the landlord has
breached its obligations to the Company under its lease. The Company has moved
for summary judgment against the plaintiff and intends to move for summary
judgment against the landlord. The Company intends to vigorously defend the
cross claim asserted by the landlord.
Item 2 - Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the three months ended June 30, 1998, the Company made the following
sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration Received
and Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Exemption from Security, Terms of
Price Afforded to Registration Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
- ------------ ----------------- ----------- -------------- ------- -----------------
<S> <C> <C> <C> <C> <C>
5/1/98 - 6/22/98 Common Stock 96,896 Conversion of Preferred 4(2) Convertible at
Stock conversion rates
ranging from $.2585
to $.421875 per share
- ------------------ -------------- ------------ ----------------------- -------------- ----------------------
</TABLE>
Item 4 - Submission of Matters to a Vote of Security Holders
On June 19, 1998, the Company held its annual meeting of shareholders, at
which the Company's shareholders considered (i) the election of directors, (ii)
the approval of the Company's 1998 Performance Equity Plan ("1998 Plan"), (iii)
the approval of an amendment to the Company's Certificate of Incorporation to
implement a reverse stock split of the Company's Common Stock of between
one-for-two up to one-for-five and (iv) the approval of the issuance, in the
discretion of the Board of Directors, of up to 5,000,000 shares of Common Stock
on a pre-split basis at a purchase price reflecting a discount of up to 50% of
the fair market value of the Common Stock on the date of issuance ("Stock
Issuance"). Shareholders voted to elect Mark Weinreb, Jerry Rosner, Stanley
Weinreb and Stanley Raphael to serve as directors for the ensuing year and until
their successors are elected and qualified. 1,208,575 shares were voted for and
12,070 shares were withheld in Mark Weinreb's and Stanley Raphael's election,
1,208,395 shares were voted for and 12,250 shares were withheld in Jerry
Rosner's election and 1,208,375 shares were voted for and 12,270 shares were
withheld in Stanley Weinreb's election. With respect to approval of the 1998
Plan, 1,164,547 shares were voted for, 54,278 shares were voted against and
-13-
<PAGE>
1,820 shares abstained from voting. With respect to the reverse stock split,
1,140,313 shares were voted for, 79,792 shares were voted against and 540 shares
abstained from voting. With respect to the Stock Issuance, 638,558 shares were
voted for, 86,592 shares were voted against, 6,860 shares abstained from voting
and 488,634 shares were not voted.
Item 5 - Other Information
Pursuant to Rule 14a-4 promulgated by the Securities and Exchange
Commission, shareholders are advised that the Company's management shall be
permitted to exercise discretionary voting authority under proxies it solicits
and obtains for the Company's 1999 Annual Meeting of Shareholders with respect
to any proposal presented by a shareholder at such meeting, without any
discussion of the proposal in the Company's proxy statement for such meeting,
unless the Company receives notice of such proposal at its principal offices in
Hicksville, New York no later than April 3, 1999.
In April 1998, the Company received correspondence from the Nasdaq Stock
Market regarding the continued listing of the Company's Common Stock and
warrants on the Nasdaq SmallCap Market. The Company needed to maintain a closing
bid price greater than or equal to $1.00 to be eligible for continued listing of
all securities, except warrants and rights. The Company was provided ninety (90)
calendar days in which to regain compliance with the minimum bid price
requirement. Although the bid price of the Common Stock was $1.00 or more for
only several of the last days during such 90-day period, since July 10, 1998,
the bid price of the Common stock has been at least $1.00.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1.4 Amendment to Certificate of Incorporation
10.11 Amendment to Founders' Shareholder Agreement
27.1 Financial Data Schedule (6/30/98)
27.2 Restated Financial Data Schedule (6/30/97)
(b) Reports on Form 8-K
None
-14-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Big City Bagels, Inc.
-------------------------
(Registrant)
/s/ Mark Weinreb
Dated: August 14, 1998 By:____________________________________
Mark Weinreb, Chairman and
Chief Executive Officer
/s/ Howard J. Fein
By:____________________________________
Howard J. Fein, Chief Financial Officer
(and principal accounting officer)
-15-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
3.1.4 Amendment to Certificate of Incorporation.............. 17
10.11 Amendment to Founders' Shareholder Agreement........... 20
27.1 Financial Data Schedule (6/30/98)...................... 21
27.2 Restated Financial Data Schedule (6/30/97).............. 22
-16-
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
BIG CITY BAGELS, INC.
- - - - - - - - - - - - - - - - - - - -
Under Section 805 of the
Business Corporation Law
- - - - - - - - - - - - - - - - - - - -
Big City Bagels, Inc. (the "Corporation"), by its Chairman of the Board and
Secretary, hereby certifies as follows:
1. The name of the Corporation is Big City Bagels, Inc.
2. The Corporation's original Certificate of Incorporation was filed with
the Department of State of the State of New York on December 14, 1992, and the
Corporation's Restated Certificate of Incorporation was filed with the
Department of State of the State of New York on February 2, 1996.
3. The text of the Certificate of Incorporation is hereby amended to
include a provision to implement a one-for-five reverse stock split of the
outstanding shares of Common Stock.
4. In order to effect the change set forth in paragraph 3 above, the text
of paragraph (a) to Article Fourth of the Certificate of Incorporation of the
Corporation is hereby amended to read in full as follows:
"FOURTH: (a) The aggregate number of shares of stock which the Corporation
shall have authority to issue is 26,000,000 shares, consisting of 25,000,000
shares, with a par value of $.001 per share, classified as common shares (the
"Common Stock"), and 1,000,000 shares, with a par value of $.001 per share,
classified as preferred shares (the "Preferred Stock").
<PAGE>
Each five shares of Common Stock, par value $.001 per share, issued and
outstanding immediately prior to the effective date of this Certificate of
Amendment shall, without any action on the part of the holder thereof, be
reclassified and changed into one fully paid and nonassessable share of Common
Stock, par value $.001 per share, and each holder of record of a certificate for
shares of Common Stock as of the close of business on the effective date of the
Certificate of Amendment shall be entitled to receive, as soon as practicable,
and upon surrender of such certificate, a certificate or certificates
representing one share of Common Stock for each five shares of Common Stock
represented by the certificate of such holder, with the next higher number of
whole shares being issued in lieu of fractional shares.
The number, par value and class of the issued shares changed and issued
shares resulting from the change (plus such greater number of shares which will
result from rounding) are as follows:
Shares Number Par Value Class
- ------ ------ --------- -----
Issued shares changed 7,218,208 $.001 per share Common
Issued shares resulting 1,443,642 $.001 per share Common
from change
The number, par value and class of the unissued shares of Common Stock,
$.001 par value, shall be unchanged, except that the number of unissued shares
shall increase as a result of the reduction in the number of issued shares
resulting from the change in issued shares effected by this Certificate of
Amendment.
5. This Amendment to the Certificate of Incorporation was authorized by all
of the members of the Board of Directors of the Corporation at a meeting held on
June 19, 1998.
6. Subsequent to the authorization by the Board of Directors, the amendment
to the Certificate of Incorporation was approved and authorized by the
affirmative vote of the holders of a majority of all of the outstanding shares
2
<PAGE>
of Common Stock of the Corporation entitled to vote at the Annual Meeting of
Shareholders held on June 19, 1998.
IN WITNESS WHEREOF, this Certificate of Amendment has been signed by Mark
Weinreb, its Chairman of the Board, and Howard J. Fein, its Assistant Secretary,
this 19th day of June, 1998, and they affirm the statements contained herein are
true under penalties of perjury.
/s/ Mark Weinreb
___________________________________
Mark Weinreb, Chairman of the Board
and Chief Executive Officer
/s/ Howard J. Fein
___________________________________
Howard J. Fein, Assistant Secretary
3
<PAGE>
AMENDMENT TO FOUNDERS' SHAREHOLDER AGREEMENT
AMENDMENT, dated as of July 7, 1998, among Mark Weinreb, Stanley Weinreb,
Stanley S. Raphael, Jerry Rosner, Trade Consultants, Inc., Pension Fund and Big
City Bagels, Inc. ("Company").
WHEREAS, Jerry Rosner ("Rosner") is transferring certain shares of Common
Stock of the Company owned by him to certain of the other parties to the
Founders' Shareholder Agreement, dated as of March 31, 1996, among the parties
hereto ("Founders' Shareholder Agreement"); and
WHEREAS, the parties hereto desire to remove Rosner as a party thereto;
IT IS AGREED:
1. Effective as of the date hereof, Rosner shall no longer be considered a
"Shareholder" under the Founders' Shareholder Agreement and he shall have no
further rights or obligations thereunder.
2. All certificates representing shares of Common Stock of Company held by
Rosner not being transferred to other parties concurrently with the execution of
this Amendment shall have the restrictive legend set forth in Section 3(a) of
the Founders' Shareholder Agreement removed and the Company shall eliminate any
stop transfer order implemented pursuant to Section 3(b) thereof.
3. Except as expressly set forth herein, the Founders' Shareholder Agreement
shall continue in full force and effect with respect to the other parties
thereto.
4. This Amendment may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which taken together shall constitute
but one Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first above written.
TRADE CONSULTANTS, INC. PENSION FUND
/s/ Mark Weinreb /s/ Stanley S. Raphael
________________________ By:_________________________________
Mark Weinreb Stanley S. Raphael, Trustee
/s/ Stanley Weinreb
_________________________
Stanley Weinreb BIG CITY BAGELS, INC.
/s/ Stanley S. Raphael /s/ Mark Weinreb
_________________________
Stanley S. Raphael By:__________________________________
Mark Weinreb, Chairman
/s/ Jerry Rosner
_________________________
Jerry Rosner
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Jun-30-1998
<CASH> 2,182,284
<SECURITIES> 0
<RECEIVABLES> 242,371
<ALLOWANCES> 35,000
<INVENTORY> 60,757
<CURRENT-ASSETS> 2,566,997
<PP&E> 1,046,070
<DEPRECIATION> 310,963
<TOTAL-ASSETS> 3,600,887
<CURRENT-LIABILITIES> 745,199
<BONDS> 0
<COMMON> 1,444
0
250
<OTHER-SE> 2,813,331
<TOTAL-LIABILITY-AND-EQUITY> 3,600,887
<SALES> 1,717,983
<TOTAL-REVENUES> 2,028,036
<CGS> 845,647
<TOTAL-COSTS> 4,075,516
<OTHER-EXPENSES> 3,221,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,929
<INCOME-PRETAX> (2,047,480)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,047,480)
<EPS-PRIMARY> (1.51)
<EPS-DILUTED> (1.51)
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Jun-30-1997
<CASH> 359,193
<SECURITIES> 0
<RECEIVABLES> 201,057
<ALLOWANCES> 0
<INVENTORY> 50,341
<CURRENT-ASSETS> 670,845
<PP&E> 1,641,605
<DEPRECIATION> 403,891
<TOTAL-ASSETS> 2,310,846
<CURRENT-LIABILITIES> 965,723
<BONDS> 0
<COMMON> 4,932
0
0
<OTHER-SE> 1,217,294
<TOTAL-LIABILITY-AND-EQUITY> 2,310,846
<SALES> 1,215,541
<TOTAL-REVENUES> 1,394,173
<CGS> 701,710
<TOTAL-COSTS> 2,873,811
<OTHER-EXPENSES> 2,147,517
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,584
<INCOME-PRETAX> (1,479,638)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,479,638)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
