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, 1998
------------------------------------------------
[ ] 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 $3,432,084.
As of March 17, 1999, 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 $6,352,921. At March 17, 1999, 7,899,225 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 owns two
stores located in California. The Company also sells Big City Bagels franchises.
Currently, there are 19 franchises open and operating in Arizona, California,
Colorado, Idaho, Minnesota, Nevada and Washington and the Company has sold
franchises to open six additional stores, which are in various stages of
development. The Company also sells its products to wholesale accounts and food
service operators.
Recent Developments
In June 1998, management determined that the Company's business of
operating Company-owned retail stores no longer provided the opportunity for
growth or profitability. Accordingly, to reduce costs and losses and to
replenish capital needed for operations, the Company decided to sell
Company-owned stores, preferably to new or existing franchisees, or to close
stores that could not be timely sold. To date, the Company has sold or closed
all of its Company-owned stores except for two in California. The Company
expects to sell or close one store by the end of April 1999 and to sell the
other store by the end of May 1999.
Although the Company may maintain its core business as a franchisor and
operator of a commissary that supplies retail stores and wholesale accounts with
bagel products, the Company recognized that this remaining core business would
not generate sufficient revenues to achieve profitability. Accordingly, since
June 1998, the Company has been actively engaged in exploring possible
acquisitions or mergers with profitable companies, including companies outside
the food industry.
In February 1999, the Company reached an agreement in principle to
merge with VillageNet, Inc. ("VillageNet") and Intelligent Computer Solutions,
Inc. ("ICS"). VillageNet, founded in June 1995, is a community-oriented Internet
service provider specializing in educational and family-based Internet services
with a local emphasis on business advertising and shopping, chat rooms and
parent/student/teacher interaction. ICS, founded in October 1994, is a systems
integration firm specializing in network design, implementation and maintenance
and providing Internet/intranet messaging and security products.
The Company expects to issue a combination of Common Stock and voting
convertible preferred stock to the shareholders of VillageNet and ICS in an
amount which, after conversion of the preferred stock into Common Stock (which
is expected to be conditioned upon the Company amending its Certificate of
Incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue), will approximate 90% of the outstanding shares of
Common Stock following the transaction and conversion. Management of the Company
is expected to be assumed by the management of VillageNet and ICS after the
transaction.
The Company's due diligence regarding this transaction is ongoing and
transaction documents currently are being prepared. There can be no assurance
that definitive transaction documents will be executed or, if executed, that the
transaction will be completed.
Corporate Background
The Company was incorporated under the laws of the State of New York in
December 1992. The Company's principal executive offices are located at 99
Woodbury Road, Hicksville, New York 11801 and its telephone number is (516)
932-5050.
2
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Products and Distribution
The Company's bagel dough is prepared, in accordance with the Company's
strict quality control guidelines, in a Company- or franchisee-owned commissary
and then delivered to Company-owned stores, franchises and wholesale accounts.
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.
In March 1999, the Company relocated its commissary to a facility in
Santa Ana, California that it shares with an existing baked goods manufacturing
business. This commissary services most Big City Bagels stores and wholesale
clients. The Company expects to utilize existing equipment in the facility,
which the Company believes will streamline the manufacturing process. In
addition, this equipment will enable the Company to manufacture "par-baked"
bagels that are partially baked and then frozen. The Company expects to
distribute this product to wholesale clients in the second quarter of 1999. The
Company also has assisted one of its franchisees in establishing a commissary
owned and operated by such franchisee in Minneapolis to service its four stores
in the area.
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. 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.
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 2
California 10(1) 2
Colorado 1 0
Idaho 1 1
Minnesota 4 0
Nevada 1 0
Washington 1 1
--- ---
Total 19 6
- -----------------------------
(1) Includes two 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 approximately 40 states. All franchisees are required to operate
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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.
The Company also offers franchisees the opportunity to enter into area
development agreements, which provide that a franchisee may open a specific
number of stores within a specific area of exclusivity. The area of exclusivity
is negotiated prior to the signing of the area development agreement and varies
by agreement as to size of the area, the number of stores required and the
schedule for store development and opening. Upon signing the area development
agreement, fees are paid to the Company in the following manner: a $30,000
franchise fee is paid for the first store, as well as a $12,750 area development
fee for each additional store to be developed. A reduced franchise fee of
$25,500 per store is payable when the franchise agreement for each additional
location is executed, with a credit given for the previous $12,750 area
development fee paid.
Competition
The food service industry, in general, and the bagel industry, in
particular, are intensely competitive with respect to food quality, concept,
location, service and price. As a bagel retailer and franchisor, the Company
competes in a number of different markets with a number of different
competitors, including well-established food service companies with greater
product and name recognition and larger financial, marketing and distribution
capabilities than those of the Company, as well as innumerable local food
establishments that offer similar products. In addition, the Company believes
that the start-up costs associated with opening a retail food establishment
offering products similar to those offered by the Company, on a stand-alone
basis, are competitive with the start-up costs associated with opening a Big
City Bagels store and, accordingly, are not an impediment to entry of
competitors into the retail bagel business.
The Company faces competition in the bagel industry from independent
stores, larger chain stores and franchisors such as Bruegger's Corp.,
Einstein/Noah Bagel Corporation, New World Coffee & Bagels, Inc., 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
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provides advertising support to franchisees relating to grand openings and local
store marketing. 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 trademarks "Big City Bagels(R)" and "Big City
Pickles(R)," its service mark "A Bigger Bagel for Less Dough!(R)" and its
original 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)." The Company's franchise agreements provide all of its franchisees
with the nonexclusive right to use the Company's registered trademarks and
service mark. The Company considers its marks to be material to its business in
that the Company seeks to develop a strong association between such marks and
the Company's high quality food and stores in the minds of consumers.
Government Regulation
The Company and its franchisees are required to comply with federal,
state and local government regulations applicable to consumer food service
businesses generally, including those relating to the preparation and sale of
food, minimum wage requirements, overtime, working and safety conditions and
citizenship requirements, as well as regulations relating to zoning,
construction, health, business licensing and employment. The Company believes
that it is in material compliance with these provisions. Continued compliance
with this broad federal, state and local regulatory network is essential and
costly, and the failure to comply with such regulations may have an adverse
effect on the Company and its franchisees.
The Company's operations are subject to regulation by the FTC in
compliance with the FTC's rule entitled Disclosure Requirements and Prohibitions
Concerning Franchising and Business Opportunity Ventures, which requires, among
other things, that the Company prepare and update periodically a comprehensive
disclosure document, known as the Uniform Franchise Offering Circular ("UFOC"),
in connection with the sale and operation of its franchises. In addition, some
states require a franchisor to register its franchise with the state before it
may offer the franchise. The Company believes that its UFOC, together with any
applicable state versions or supplements, complies with both the FTC guidelines
and all applicable state laws regulating franchising in those states in which it
has offered franchises. The Company has revised its offering circular and is
substantially in compliance with the 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
5
<PAGE>
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 17, 1999, the Company had 29 full-time employees. 7 of the
29 full-time employees are salaried, while the other 22 are paid on an hourly
basis. In addition, the Company has 10 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.
ITEM 2. DESCRIPTION OF PROPERTY
<TABLE>
<CAPTION>
Approximate Approximate
Square Annual Lease
Location Use Footage Lease Expiration Payments
- ----------------- -------------------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
Hicksville, NY Principal executive 1,500 Month-to-month $21,000
office
Newport Beach, CA Offices 735 December 2000 $21,168
Costa Mesa, CA Company store 1,750 September 1999; renewable $54,700
for two successive
five-year terms
Laguna Niguel, CA Company store 1,600 March 1999; renewable for $44,800
one additional five-year term
(the Company is not renewing
the lease)
Scottsdale, AZ Company store (closed 1,960 December 2005; renewable $45,420
in July 1998) for one additional
five-year term
Santa Ana, CA Commissary 2,200 March 2001 $72,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On July 29, 1997, in the Superior Court of California, Los Angeles
County, Michael Schweid, et al, commenced a lawsuit 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 the shopping mall where the
former franchisees' store was located. Victor Saab was subsequently convicted of
arson and insurance fraud. On August 25, 1998, the court granted the Company's
motion for summary judgment and found that the claims against the Company were
without merit. On November 2, 1998, the court denied plaintiffs' motion for
reconsideration and to vacate the judgment of dismissal and, accordingly, upheld
its grant of summary judgment. In January 1999, the plaintiffs gave notice that
they are appealing the order granting summary judgment. The Company's insurance
carrier continues to assume the defense of this matter.
On September 24, 1997, in the Arizona Superior Court, County of
Maricopa, 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, commenced a lawsuit against the
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landlord (the owners of the mall), the former franchisee and the Company,
seeking an unspecified amount of damages. The landlord filed a cross-claim
against the Company for rent owed. Plaintiff's claim that their lease 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. On December 1, 1998, the court granted the Company's
motion for summary judgment and found that the claims against the Company were
without merit. On February 4, 1999, the Company entered into a settlement
agreement with the landlord, pursuant to which the Company paid the landlord
$20,000 and agreed to assign its judgment, if obtained, for attorneys' fees
against the plaintiffs.
On October 5, 1998, in the Arizona Superior Court, County of Maricopa,
Mercado del Lago L.L.C., owners of a shopping center in which a Big City Bagels
store, formally franchised and subsequently Company-owned, was located,
commenced a lawsuit against the former franchisee and the Company, seeking an
unspecified amount of damages. Plaintiff claims that the Company is in default
of its lease by not making required rent payments. The Company was unable to
economically operate the store and it was closed on July 31, 1998. The Company
intends to vigorously defend the claims asserted by the plaintiff.
On November 3, 1998, in the Arizona Superior Court, County of Maricopa,
Girardi-Riva Enterprises, Inc., a former franchisee, commenced a lawsuit against
the Company, seeking an unspecified amount of damages. In December 1996, the
Company purchased the franchise back from the plaintiff pursuant to the terms of
an asset purchase agreement. Plaintiff claims that the Company breached the
asset purchase agreement by failing to make certain equipment and real property
lease payments that the Company had assumed. The Company believes that it has no
liability in this matter. Both the plaintiff and the Company filed
cross-motions for summary judgment, and on March 29, 1999, the court granted the
Company's motion for summary judgment.
In December 1998, the previous owners of a New York City store that the
Company purchased in January 1998 brought a claim in arbitration against the
Company for approximately $90,000, claiming that the Company breached the
consulting agreement between the parties. On December 29, 1998, the parties
0entered into a settlement agreement, pursuant to which the Company paid $30,000
to the sellers and they surrendered to the Company 67,300 of the 69,300 shares
of Common Stock that they had received as part of the initial purchase price.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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 Class A
Warrants were delisted from Nasdaq on November 18, 1998 because there were no
active market makers registered to trade the securities. The Common Stock was
delisted from Nasdaq on March 11, 1999 because the Company was not in compliance
with various requirements for continued listing. The Common Stock currently is
traded on the OTC Bulletin Board. 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. The prices for the Common Stock
have been adjusted to reflect the Company's one-for-five reverse stock split
effected on June 24, 1998.
Period Common Stock Warrants
- ------ ------------------------- ---------------------
1997 High Low High Low
- ---- ---- --- ---- ---
First Quarter 25-1/8 13-1/8 4-5/8 1
Second Quarter 29-3/8 21-1/4 5 3-1/8
Third Quarter 29-3/8 16-1/4 5-9/16 3-1/8
Fourth Quarter 22-13/16 5 4 1/8
1998
- ------
First Quarter 7-1/2 3-3/4 3/8 1/16
Second Quarter 3-3/4 1-1/4 5/32 1/16
Third Quarter 1-1/32 3/8 1/16 1/32
Fourth Quarter 3/8 1/8 0 0
On March 17, 1999, the last sale price for the Common Stock as reported
by the OTC Bulletin Board was $1.00.
As of March 17, 1999, there were 53 and 9 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.
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Recent Sales of Unregistered Securities
During the quarter ended December 31, 1998 and thereafter through March
17, 1999, the Company made the following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration Received Exemption If Option,
and Description of from Warrant or
Underwriting or Other Registration Convertible
Discounts to Market Price Claimed Security, Terms
Title of Number Afforded of Exercise or
Date of Sale Security Sold to Purchasers Conversion
- ---------------- ------------ --------- ----------------------- --------- --------------
<S> <C> <C> <C> <C> <C>
12/13/98-2/15/99 Common Stock 6,536,713 Conversion of Class A 3(a)(9) Convertible at
Preferred Stock variable
conversion
rates ranging
from $0.2585 to
$0.6375 per
share
</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 April 3, 1998. 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.
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Selected Financial Data
Year Ended December 31,
----------------------------
1998 1997
SUMMARY OF OPERATIONS: ------------ ----------
Total revenues $3,432,084 $2,746,029
Net loss $(3,830,752) $(3,543,066)
Basic and diluted loss per common share $(2.73) $(3.33)
Weighted average common shares outstanding 1,401,465 1,065,265
YEAR-END FINANCIAL POSITION:
Working capital $430,844 $3,628,516
Total assets $1,932,407 $5,161,964
Total liabilities $977,000 $743,736
Stockholders' equity $955,407 $4,418,228
Results of Operations
Revenues for the year ended December 31, 1998 were $3,432,084 compared
to $2,746,029 for the year ended December 31, 1997, a 25% increase. This
increase was attributable to gains in store and commissary products sales and
royalty income. Store and commissary products sales were $2,945,410 for the year
ended December 31, 1998, compared to $2,370,318 for the year ended December 31,
1997, a 24.3% increase. This increase was due to the acquisition of one new
retail store in January 1998, the growth of the wholesale business and increased
commissary products sales to franchise stores that opened in 1998. Franchise fee
income was $141,000 for the year ended December 31, 1998, compared to $151,000
for the year ended December 31, 1997, a 6.6% decrease. This decrease was due to
fewer franchise store openings in 1998. Revenue under franchise agreements
generally is recognized when the franchise stores are opened. Five franchise
stores opened during 1998 and one franchise store closed, as compared to three
stores that opened and one that closed in 1997. $20,500 of franchise fees were
recognized when the Company terminated a seven-store area development agreement
and collected other franchise transfer fees. Royalty income was $212,067 for the
year ended December 31, 1998, compared to $162,486 for the year ended December
31, 1997, a 30.5% increase. This was due to the maturing of operations of some
existing franchise stores and the initial operations of new franchise stores
that opened in 1998. Interest income for the year ended December 31, 1998 was
$101,141, resulting from the cash proceeds of the Company's private placement of
Class A Preferred Stock ("Class A Preferred Stock") in December 1997 and the
exercise of the Company's Class A Warrants, Class B Warrants and Unit Purchase
Option in 1997, which were deposited into interest bearing accounts.
The Company had unearned franchise fee income of $201,000 as of
December 31, 1998, compared to $278,500 as of December 31, 1997. Unearned
franchise fee income represents nonrefundable franchise fees that will be
recognized as revenue as the related franchise stores are opened. In 1998, the
Company entered into one new franchise agreement when it sold a Company-owned
store to a new franchisee. The Company did not enter into any area development
agreements in 1998. 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 licensing agreement) that it does not intend to open any
additional stores. 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 franchisee has opened four stores and now is not
required to open additional stores.
Cost of sales were $1,528,621, representing 51.9% of net sales for the
year ended December 31, 1998, compared to $1,380,670, or 58.2%, for the year
ended December 31, 1997. The decrease in cost of sales as a percentage of sales
was primarily attributable to increased sales by Company-owned stores, which are
generally at higher margins than product sales to franchise and commercial
accounts. In addition, the Company was able to decease labor costs related to
franchise and wholesale product sales by achieving better production
efficiencies.
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<PAGE>
The increase in cost of sales of $147,951 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 $4,543,408 for
the year ended December 31, 1998, a 9.6% increase from $4,144,526 for the year
ended December 31, 1997. This increase was primarily a result of: (1) a $285,539
increase in salaries from $1,558,805 in 1997 to $1,844,344 in 1998, due to
hiring management and administrative level personnel, increases of approximately
$50,000 in officers' salaries, severance payments of approximately $155,000 and
additional salaries attributable to new Company-owned stores; (2) a $193,080
increase in rent attributable to new Company-owned locations; and (3) a $130,377
increase in professional fees, primarily due to costs associated with the
Company implementing a reverse stock split, the sale of Company-owned stores,
increased litigation activity and merger/acquisition activity. However, the
Company was able to reduce other SG&A expenses, which resulted in a net increase
to SG&A expenses of approximately $400,000.
The Company recorded a loss on an abandonment of a lease of $244,462.
Write-offs of fixed assets, goodwill and franchise costs were $930,326 for the
year ended December 31, 1998. 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 revalue the assets of its
stores and commissary after considering the possible sale of certain stores and
relocation of the commissary.
Interest expense decreased by $24,473 during the year ended December
31, 1998, substantially due to the Company retiring debt obligations in 1997 to
certain shareholders and the paydown of its capital lease obligation.
The net loss for the year ended December 31, 1998 was $3,830,752,
compared to a net loss of $3,543,066 for the year ended December 31, 1997.
Liquidity and Capital Resources
In July 1997, 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 $12.50 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 it received net proceeds of $2,334,158 through the sale of 265,000 shares
of Class A Preferred Stock to accredited investors. The Class A Preferred Stock
accrued dividends at the rate of 8% per annum, payable in cash or in shares of
Common Stock at the election of the Company. The dividends were paid on the date
the Class A Preferred Stock was converted into shares of Common Stock. During
1998 and through February 10, 1999, all 265,000 shares of Class A Preferred
Stock were converted into an aggregate of 6,152,545 shares of Common Stock and
dividends of $224,236 were paid through the issuance of 532,513 shares of
Common Stock. See Note K to the Financial Statements.
In July 1998, the Board of Directors authorized the Company to
repurchase from time to time up to 100,000 shares of Common Stock in the public
market. As of March 17, 1999, the Company had repurchased approximately 65,280
shares of Common Stock and does not expect to repurchase any additional shares.
Cash and United States Treasury Bills at December 31, 1998 were
$902,122, compared to $4,118,031 at December 31, 1997. This decrease was
primarily attributable to the Company funding its operating losses, making
capital expenditures to purchase or open new Company-owned stores, funding the
relocation and expansion of the Company's commissary and repurchasing Common
Stock from the marketplace.
Accounts receivable increased to $177,396 at December 31, 1998, from
$104,190 at December 31, 1997. This increase was primarily due to higher sales
volume. Inventory increased to $49,403 at December 31, 1998, from $43,868 at
December 31, 1997. This increase was primarily due to the Company's increased
business, which requires larger inventory.
11
<PAGE>
Prepaid expenses and other current assets increased to $50,753 at
December 31, 1998, from $41,133 at December 31, 1997. This increase resulted
primarily from a loan made by the Company to an employee.
Fixed assets, net of accumulated depreciation, decreased to $537,392 at
December 31, 1998, from $611,095 at December 31, 1997 and intangible assets, net
of accumulated amortization, increased to $35,784 at December 31, 1998, from
$23,267 at December 31, 1997. This net decrease was primarily due to new
acquisitions of Company-owned stores.
Security deposits and other assets decreased to $179,557 at December
31, 1998, from $220,380 at December 31, 1997. Although there was an increase in
security deposits in 1998 due to new Company-owned stores, the overall decease
resulted primarily from the advances paid in 1997 relating to the new commissary
which were not paid in 1998.
The current portion of capital lease obligations increased to $65,089
at December 31, 1998, from $38,862 at December 31, 1997, due to the Company not
making required payments of this obligation after June 1998.
The combination of accounts payable and accrued expenses increased to
$399,155 at December 31, 1998, from $361,344 at December 31, 1997 due to an
increase in purchases resulting from an increase in sales.
A deposit payable resulting from the potential sale of one Company-
owned store was $55,000 at December 31, 1998.
The non-current portion of capital lease obligations decreased to
$12,294 at December 31, 1998, from $57,235 at December 31, 1997 due to these
obligations becoming current. At December 31, 1998, the Company had $430,844 of
working capital and a current ratio of 1.6 to 1.
The Company's operating activities used net cash of $2,560,736 during
the year ended December 31, 1998, as compared to net cash used in operations of
$2,493,789 for the year ended December 31, 1997. The net cash used in 1998 was
primarily to fund the Company's operating losses.
In June 1998, management determined that the Company's business of
operating Company-owned retail stores no longer provided the opportunity for
growth or profitability. Accordingly, to reduce costs and losses and to
replenish capital needed for operations, the Company decided to sell
Company-owned stores, preferably to new or existing franchisees, or to close
stores that could not be timely sold. To date, the Company has sold or closed
all of its Company-owned stores except for two in California. The Company
expects to sell or close one store by the end of April 1999 and to sell the
other store by the end of May 1999.
To further reduce costs, in March 1999, the Company relocated its
commissary to a facility in Santa Ana, California that it shares with an
existing baked goods manufacturing business. The Company also reduced its
payroll throughout 1998 and continuing into 1999 by reducing operational and
administrative personnel and as a result of the resignation of its President in
June 1998. The Company also significantly reduced advertising costs during 1998
and has continued to do so in 1999.
Although the Company may maintain its core business as a franchisor and
operator of a co0mmissary that supplies retail stores and wholesale accounts
with bagel products, the Company recognized that this remaining core business
would not generate sufficient revenues to achieve profitability. Accordingly,
since June 1998, the Company has been actively engaged in exploring possible
acquisitions or mergers with profitable companies, including companies outside
the food industry. In February 1999, the Company reached an agreement in
principle to merge with VillageNet and ICS. See "Recent Developments" on page 2
for a description of the businesses of VillageNet and ICS.
If the Company is unable to complete this transaction, the Company
anticipates that it will not have sufficient capital to continue its operations
through the end of 1999.
12
<PAGE>
Year 2000 Compliance
Many computer systems currently in use were designed to use only two
digits in the date field and thus may experience difficulty processing dates
beyond the Year 1999. Consequently, some computer hardware and software will
need to modified prior to the Year 2000 to remain functional. The Company's own
systems are Year 2000 compliant, which means that the systems will accurately
process date/time date regardless of whether the date is in the twentieth
century or the twenty-first century.
The Company is also in the process of assessing its vendors, utilities,
banks and others with whom it does business to determine whether the failure of
any of the foregoing to be Year 2000 compliant would have a material adverse
effect on the Company. Management believes that the likelihood of such adverse
effect is immaterial. The Company's operations utilize relatively little
electronic data interchange with vendors and other third parties. However, to
the extent that such third parties, particularly utilities and banks, may not be
Year 2000 compliant, the Company may be adversely affected, although the
magnitude of such effect cannot be estimated. The cost to the Company of making
its third-party Year 2000 compliance assessment is not expected to be material.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto are included herewith
commencing on page F-1.
13
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information regarding the Company's
executive officers and directors. Except as otherwise set forth herein, the
executive officers are elected annually by the Board of Directors and serve at
the discretion of the board.
Name Age Position
----------------- ---- ----------------------------------------
Mark Weinreb 46 Chairman of the Board, Chief Executive
Officer and Secretary
Stanley Weinreb(1) 70 Director
Stanley Raphael(1) 63 Director
Nelson Braff 40 Director
Alan Pearlstein 45 Director
Howard J. Fein 57 Chief Financial Officer and Assistant
Secretary
________________________________________
(1) Member of Audit Committee.
Mark Weinreb has been the Chairman of the Board and Chief Executive
Officer of the Company since its inception in December 1992 and Secretary of the
Company since January 1998. From 1975 to 1989, Mr. Weinreb was employed by Bio
Health Laboratories, Inc. ("Bio Health"), a medical testing laboratory, and from
1985 to 1989, he was an owner and vice president of Bio Health, which was sold
in 1989. During his tenure at Bio Health, Mr. Weinreb was responsible for
day-to-day operations, including overseeing the technical aspects of the
laboratory, negotiating property and equipment leases and handling financing
proposals, mergers and acquisitions. From 1989 to 1992, Mr. Weinreb managed his
private investments. Mark Weinreb is the son of Stanley Weinreb.
Stanley Weinreb has been a director of the Company since inception and
served as Vice President of the Company from inception to January 1998. From
1952 to 1989, he was President and owner of Bio Health, a company which he
founded. During his tenure at Bio Health, Mr. Weinreb was the medical director
of the laboratory and was responsible for quality control, obtaining state and
federal licenses and regulatory compliance. Stanley Weinreb is the father of
Mark Weinreb.
Stanley Raphael has been a director of the Company since inception and
served as Secretary of the Company from inception to January 1998. Since 1984,
he has served as President and a director of Trade Consultants, Inc., a
management consulting company. Prior to 1984, Mr. Raphael was an international
trader of oils, chemicals and petrochemicals. He currently is a director of Edge
Petroleum Corp.
14
<PAGE>
Nelson Braff has been a director of the Company since January 1999.
Since July 1996, Mr. Braff has served as a vice president of Perrin, Holden &
Davenport Capital Corp. ("PHD"), an investment banking firm that he co-founded.
From February 1990 to June 1996, Mr. Braff was a partner in the law firm of
Jacobs, Zimms & Braff.
Alan Pearlstein has been a director of the Company since January 1999.
Mr. Pearlstein has been president of Long Island Auto Parts, a company that
retails and wholesales auto parts and accessories, since February 1993, and
served as its treasurer and corporate secretary from January 1980 to January
1993.
Howard J. Fein has been Chief Financial Officer and an Assistant
Secretary of the Company since February 1998. Mr. Fein is a certified public
accountant. He has been a principal of Fein & Fein, P.C., a certified public
accounting firm located in Hicksville, New York since 1972.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act, as amended, requires the Company's
officers, directors and persons who beneficially own more than ten percent of
the Company's Common Stock to file reports of ownership and changes in ownership
with the Commission. These reporting persons also are required to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on its review of the copies of such forms furnished to
it and representations that no other reports were required, the Company believes
that all Section 16(a) reporting requirements were complied with by the
Company's officers and directors during the year ended December 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Chief
Executive Officer in the year ended December 31, 1998. There were no executive
officers other than the Chief Executive Officer whose compensation exceeded
$100,000 in the year ended December 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------- ---------- -----------------------------------------------------
Annual Compensation
---------------- ---------------- -------------------
Salary Bonus Other Annual
($) ($) Compensation
Name and Principal Position Year ($)
- --------------------------------------------------- ---------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Mark Weinreb 1998 192,550 -- --
Chairman of the Board, Chief Executive Officer 1997 185,696 -- --
and Secretary 1996 149,000 -- --
- --------------------------------------------------- ---------- ---------------- ---------------- -------------------
</TABLE>
The Chief Executive Officer named above routinely receives other
benefits from the Company, the amounts of which are customary in the industry.
The Company has concluded, after reasonable inquiry, that the aggregate amounts
of such benefits during the year ended December 31, 1998 did not exceed the
lesser of $50,000 or 10% of the compensation set forth above as to the named
individual.
15
<PAGE>
The following table summarizes the number of shares and the terms of
stock options granted to the Company's Chief Executive Officer in the year ended
December 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
OPTION/SHARE GRANTS DURING YEAR ENDED DECEMBER 31, 1998
- ------------------------------------- --------------------------------- ------------ --------------- ---------------
Individual Grants
- ------------------------------------- ------------ -------------------- ------------ --------------- ---------------
Name and Position Options/ % of Total Exercise Market Price Expiration
During Period Shares Options/Shares Price on Date of Date
Granted Granted to ($/Share) Grant ($)
Employees in
Fiscal Year
- ------------------------------------- ------------ -------------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Mark Weinreb 2,000(1) 1.9% 4.6875 4.6875 3/30/2008
Chairman of the Board, Chief 100,000(2) 92.6% 1.00 1.00 8/20/2008
Executive Officer and Secretary
- ------------------------------------- ------------ -------------------- ------------ --------------- ---------------
</TABLE>
(1) Represents immediately exercisable options to purchase 2,000 shares of
Common Stock granted pursuant to the terms of the Company's 1996
Performance Equity Plan ("1996 Plan"), which provides for stock option
grants of 2,000 shares to be made to each director of the Company on
March 31st of each year. See "--1996 Performance Equity Plan."
(2) Represents immediately exercisable options under the Company's 1998
Performance Equity Plan ("1998 Plan") to purchase 100,000 shares of
Common Stock.
Employment Agreements
In August 1998, the Company entered into an Amended and Restated
Employment Agreement with Mark Weinreb, the Company's Chairman and Chief
Executive Officer. The amendment extended Mr. Weinreb's employment term for one
year until December 31, 1999 and provides for a salary at the rate of $200,000
per annum. The amendment also provides that if (1) the Company terminates Mr.
Weinreb's employment without cause, (2) the Company fails to renew his
employment agreement for one additional year or (3) Mr. Weinreb elects to
terminate his employment for "good reason" (as defined in the agreement), then
Mr. Weinreb will receive a lump sum cash payment of $200,000. In addition, the
Company granted to Mr. Weinreb an option under the 1998 Plan to purchase 100,000
shares of Common Stock at an exercise price of $1.00 per share. The option is
immediately exercisable and will remain exercisable until August 2008. In
connection with the Company's proposed merger with ICS and VillageNet, it is
anticipated that Mr. Weinreb's employment agreement will be amended to provide
for his resignation and to modify his current severance arrangement.
1996 Performance Equity Plan
In March 1996, the Company adopted the 1996 Plan. The 1996 Plan
authorizes the granting of awards of up to 70,000 shares of Common Stock to the
Company's key employees, officers, directors and consultants. Awards consist of
stock options (both nonqualified options and options intended to qualify as
"Incentive" stock options under Section 422 of the Internal Revenue Code of
1986, as amended), restricted stock awards, deferred stock awards, stock
appreciation rights and other stock-based awards, as described in the 1996 Plan.
As of March 16, 1999, 7,988 shares of Common Stock and options to purchase
23,780 shares of Common Stock were outstanding under the 1996 Plan, with 38,232
shares available for future grant.
16
<PAGE>
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. The 1996 Plan is administered by the Board of Directors
which determines the persons (other than directors) to whom awards will be
granted, the number of awards to be granted and the specific terms of each
grant, including the exercisability thereof, subject to the provisions of the
1996 Plan.
In connection with qualified stock options, the exercise price of each
option may not be less than 100% of the fair market value of the Common Stock on
the date of grant (or 110% of the fair market value in the case of a grantee
holding more than 10% of the outstanding stock of the Company). The aggregate
fair market value of shares for which qualified stock options are exercisable
for the first time by such employee during any calendar year may not exceed
$100,000. Nonqualified stock options granted under the 1996 Plan are also
required to have exercise prices not less than the fair market value of the
Common Stock on the date of grant.
The 1996 Plan also contains change in control provisions which could
cause options and other awards to become immediately exercisable and
restrictions and deferral limitations applicable to other awards to lapse in the
event any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including a "group" as defined in Section 13(d), but excluding
certain shareholders of the Company, acquires beneficial ownership of more than
25% of the Company's outstanding shares of Common Stock.
1998 Performance Equity Plan
In January 1998, the Board of Directors of the Company adopted, and in
June 1998 the stockholders approved the 1998 Plan. The 1998 Plan authorizes the
granting of awards of up to 400,000 shares of Common Stock to the Company's key
employees, officers, directors and consultants. Awards consist of stock options
(both nonqualified options and options intended to qualify as "Incentive" stock
options under Section 422 of the Internal Revenue Code of 1986, as amended),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards, as described in the 1998 Plan. As of March 17, 1999,
options to purchase 100,000 shares of Common Stock were outstanding under the
1998 Plan, with 300,000 shares available for future grant.
In connection with qualified stock options, the exercise price of each
option may not be less than 100% of the fair market value of the Common Stock on
the date of grant (or 110% of the fair market value in the case of a grantee
holding more than 10% of the outstanding stock of the Company). The aggregate
fair market value of shares for which qualified stock options are exercisable
for the first time by such employee during any calendar year may not exceed
$100,000. Nonqualified stock options granted under the 1998 Plan are also
required to have exercise prices not less than the fair market value of the
Common Stock on the date of grant.
The 1998 Plan also contains change in control provisions that are
identical to those described above with respect to the 1996 Plan.
17
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 17,
1999, with respect to (1) those persons or groups known to the Company to
beneficially own more than 5% of the outstanding shares of Common Stock, (2)
each director of the Company, (3) each executive officer whose compensation
exceeded $100,000 in the year ended December 31, 1998, and (4) all directors and
executive officers as a group. The information is determined in accordance with
Rule 13d-3 promulgated under the Exchange Act based upon information furnished
by the persons listed or contained in filings made by them with the Commission.
Except as indicated below, the shareholders listed possess sole voting and
investment power with respect to their shares. Except as otherwise indicated in
the table, the address of each of the persons listed is c/o Big City Bagels,
Inc., 99 Woodbury Road, Hicksville, New York 11801.
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class
- ------------------------ -------------------- --------
Management Group (1) 631,090 7.9%
Mark Weinreb 311,251(2)(3) 3.9%
Stanley Weinreb 160,513(2)(4) 2.0%
Stanley Raphael 159,326(2)(5) 2.0%
Nelson Braff
c/o Perrin, Holden & Davenport
Capital Corp.
5 Hanover Square
Mezzanine Level
New York, New York 10004 36,000(6) *
Alan Pearlstein
c/o Long Island Auto Parts
190-10 Northern Boulevard
Flushing, New York 11358 56,338(7) *
Orlac Finance, Ltd.
c/o Gerald Selbst
2 Kaplan Street
Tel Aviv, Israel 64734 978,876 12.4%
All executive officers and directors
as a group (six persons) 724,928(8) 9.0%
(footnotes on next page)
18
<PAGE>
- ---------------------------------
* Less than 1%.
(1) The Management Group consists of Mark Weinreb, Stanley Weinreb and
Stanley Raphael, each of whom is a party to, and has agreed to vote
their shares in accordance with, the Founders' Shareholder Agreement
described below. Each of the members of this group shares voting power
with respect to the shares of Common Stock held by each of the members.
The number of shares set forth in the table includes the shares held by
each member, including an aggregate of 112,000 shares of Common Stock
issuable upon exercise of currently exercisable options and 6,000
shares of Common Stock that will be issuable upon exercise of options
to be automatically granted on March 31, 1999.
(2) Does not include shares held by other members of the Management Group
(see Note 1) with respect to which each member shares voting power with
the other members of such group.
(3) Includes 104,000 shares of Common Stock issuable upon exercise of
currently exercisable options and 2,000 shares of Common Stock that
will be issuable upon exercise of options to be automatically granted
on March 31, 1999.
(4) Includes 4,000 shares of Common Stock issuable upon exercise of
currently exercisable options and 2,000 shares of Common Stock that
will be issuable upon exercise of options to be automatically granted
on March 31, 1999.
(5) Includes 4,000 shares of Common Stock issuable upon exercise of
currently exercisable options and 2,000 shares of Common Stock that
will be issuable upon exercise of options to be automatically granted
on March 31, 1999. Also includes 1,595 shares of Common Stock owned by
Trade Consultants, Inc. Pension Fund, of which Mr. Raphael is the
trustee.
(6) Includes 34,000 shares of Common Stock issuable upon exercise of
currently exercisable warrants owned by PHD. Mr. Braff disclaims
beneficial ownership of the securities owned by PHD, except to the
extent of his equity interest therein. Also includes 2,000 shares of
Common Stock that will be issuable upon exercise of options to be
automatically granted on March 31, 1999.
(7) Includes 54,338 shares of Common Stock owned by Brass Capital, L.L.C.
("Brass Capital"), a New York limited liability company of which Mr.
Pearlstein is a member. Mr. Pearlstein disclaims beneficial ownership
of the securities owned by Brass Capital, except to the extent of his
equity interest therein. Also includes 2,000 shares of Common Stock
that will be issuable upon exercise of options to be automatically
granted on March 31, 1999.
(8) Includes those shares of Common Stock deemed to be included in the
respective beneficial ownership of Mark Weinreb, Stanley Weinreb,
Stanley Raphael, Nelson Braff and Alan Pearlstein as set forth in the
table above. Also includes 1,500 shares of Common Stock issuable to
Howard J. Fein, Chief Financial Officer, upon exercise of currently
exercisable options.
19
<PAGE>
Founders' Shareholder Agreement
Mark Weinreb, Stanley Weinreb and Stanley Raphael are parties to the
Founders' Shareholder Agreement and the shares of Common Stock beneficially
owned by them are subject to the terms of the Founders' Shareholder Agreement.
Pursuant to the Founders' Shareholder Agreement, each of these members has
agreed to vote his shares for the election of each of the other members of the
group as a director of the Company as long as each such other member owns at
least 20,000 shares of Common Stock. In addition, the members have granted a
right of first refusal to the others with respect to any sales of Common Stock
held by them other than pursuant to a registration statement under the Exchange
Act or pursuant to Rule 144 promulgated thereunder.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1998, the Company appointed Howard J. Fein to serve as
part-time Chief Financial Officer (and principal accounting officer) of the
Company at a salary of $50,000 for 1998. Mr. Fein is a principal of Fein & Fein,
P.C., a certified public accounting firm which has rendered accounting
consulting services to the Company since its inception in 1992. In March 1996,
Mr. Fein was granted options to purchase 1,500 shares of Common Stock pursuant
to the 1996 Plan, at an exercise price of $20.00 per share, in consideration for
rendering consulting services to the Company. During 1997, in consideration for
accounting consulting services rendered by Fein & Fein, P.C. and Howard J. Fein,
the Company paid Fein & Fein, P.C. $100,201 in cash. In 1998, the Company paid
Fein & Fein, P.C. $52,822 in cash and granted an award of Common Stock to Howard
J. Fein with a value of $26,500 pursuant to the 1996 Plan (4,988 shares of
Common Stock based on the last sale price of the Common Stock on the date of
grant) in consideration for accounting consulting services rendered.
In connection with the proposed merger with VillageNet and ICS, it is
anticipated that PHD will receive warrants to purchase an aggregate of 500,000
shares of Common Stock in consideration for introducing the Company to
VillageNet and ICS. The warrants will be exercisable as follows: 250,000 of the
warrants will become exercisable one year after the date of grant at an exercise
price of $0.48 per share; 125,000 of the warrants will become exercisable 18
months after the date of grant at an exercise price of $0.75 per share; and
125,000 warrants will become exercisable two years after the date of grant at an
exercise price of $1.00 per share. Nelson Braff, a director of the Company, is
a vice president and co-founder of PHD.
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.
20
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Independent auditors' report F-1
Consolidated balance sheets as of December 31, 1998 and 1997 F-2
Consolidated statements of operations for the years ended
December 31, 1998 and 1997 F-3
Consolidated statements of stockholders' equity
for the years ended December 31, 1998 and 1997 F-4
Consolidated statements of cash flows for the years ended
December 31, 1998 and 1997 F-5
Notes to consolidated financial statements F-6
21
<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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity 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 consolidated 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note A, the
Company has sustained recurring losses and negative cash flows from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
- ---------------------------------
Richard A. Eisner & Company, LLP
New York, New York
February 22, 1999
With respect to Note L
March 23, 1999
F-1
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
---------------------
1998 1997
----------------------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 902,122 $4,118,031
Accounts receivable ............................... 177,396 104,190
Inventory ......................................... 49,403 43,868
Prepaid expenses and other current assets ......... 50,753 41,133
---------- ----------
Total current assets ........................... 1,179,674 4,307,222
Fixed assets, net of accumulated depreciation ........ 537,392 611,095
Intangible assets, net of accumulated amortization ... 35,784 23,267
Security deposits and other assets ................... 179,557 220,380
---------- ----------
$1,932,407 $5,161,964
========== ==========
LIABILITIES
Current liabilities:
Capital lease obligations ....................... $ 65,089 $ 38,862
Unearned franchise fee income ................... 201,000 278,500
Accounts payable ................................ 348,761 287,138
Accrued expenses ................................ 50,394 74,206
Obligation on abandoned lease ................... 28,586
Store purchase deposits ......................... 55,000
---------- ----------
Total current liabilities .................... 748,830 678,706
Obligation on abandoned lease, noncurrent .......... 215,876
Deferred rent payable .............................. 7,795
Capital lease obligations, noncurrent .............. 12,294 57,235
-------- --------
977,000 743,736
-------- --------
Commitments
STOCKHOLDERS' EQUITY
Convertible (redeemable) preferred stock;
$.001 par value; 1,000,000
shares authorized; 247,504 and
265,000 shares issued and outstanding
at December 31, 1998 and 1997,
respectively (liquidation value $3,093,800
and $3,312,500, respectively) ................. 247 265
Common stock; $.001 par value; 25,000,000
shares authorized; 1,511,107 and
1,268,693 shares issued and outstanding
at December 31, 1998 and 1997, respectively ... 1,511 1,269
Additional paid-in capital ....................... 10,127,706 9,682,264
Accumulated deficit .............................. (9,094,711) (5,258,070)
Treasury stock (132,579 shares at cost) .......... (79,346)
Unearned portion of compensatory stock ........... (7,500)
-------- --------
955,407 4,418,228
-------- --------
$ 1,932,407 $ 5,161,964
============ ============
See independent auditors' report and notes to financial statements F-2
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended December 31,
---------------------
1998 1997
----------------------
Revenues:
Product sales by company owned stores ........... $ 2,123,880 $ 1,657,271
Product sales to franchisees and others ......... 821,530 713,047
Franchise fees .................................. 141,000 151,000
Royalty income .................................. 212,067 162,486
Interest income ................................. 101,141 60,112
Other income .................................... 32,466 2,113
----------- -----------
3,432,084 2,746,029
----------- -----------
Costs and expenses:
Cost of sales ................................... 1,528,621 1,380,670
Selling, general and administrative expenses .... 4,543,408 4,144,526
Write-off of fixed assets and franchise costs ... 930,326 723,407
Loss on abandoned lease ......................... 244,462
Interest expense ................................ 16,019 40,492
----------- -----------
7,262,836 6,289,095
----------- -----------
Net loss ........................................... $(3,830,752) $(3,543,066)
=========== ===========
Basic and diluted loss per common share ............ $ (2.73) $ (3.33)
=========== ===========
Weighted average common shares outstanding ......... 1,401,465 1,065,265
=========== ===========
See independent auditors' report and notes to financial statements F-3
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- -------------- Paid-in
Shares Amount Shares Amount Capital
------- ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 984,752 $ 985 $ 4,344,119
Issuance of common
stock for acquisition
of franchise stores 1,653 2 8,262
Exercise of Class A
warrants 159,789 160 1,870,112
Exercise of Class B
warrants 100,000 100 499,900
Exercise of unit
purchase option 22,500 22 539,978
Private placement 265,000 $265 2,333,893
Beneficial conversion
feature of preferred
stock 86,000
Amortization of compen-
satory stock
Net loss
-------- ---- --------- ----- ---------
Balance - December 31, 1997 265,000 265 1,268,694 1,269 9,682,264
Registration costs -
related to December 1997
private placement (31,723)
Issuance of common stock for
acquisition of stores 73,064 73 444,927
Purchase of treasury stock
Shares and warrants issued as
compensation 4,988 5 26,495
Preferred stock converted to
common stock (17,496) (18) 158,209 158 (140)
Stock dividends 6,152 6 5,883
Amortization of compensatory
stock
Net loss
-------- ---- --------- ------ -----------
Balance - December 31, 1998 247,504 $247 1,511,107 $1,511 $10,127,706
======== ==== ========= ====== ===========
</TABLE>
(Table continued on next page)
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unearned Portion of
Treasury Stock Compensatory Stock
---------------- Accumulated -------------------
Shares Amount Deficit Shares Amount Total
------- -------- ----------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 $(1,629,004) 3,000 $ (37,500) $ 2,678,600
Issuance of common
stock for acquisition
of franchise stores 8,264
Exercise of Class A
warrants 1,870,272
Exercise of Class B
warrants 500,000
Exercise of unit
purchase option 540,000
Private placement 2,334,158
Beneficial conversion
feature of preferred
stock (86,000) 0
Amortization of compen-
satory stock 30,000 30,000
Net loss (3,543,066) (3,543,066)
----------- ------ --------- -----------
Balance - December 31, 1997 (5,258,070) 3,000 (7,500) 4,418,228
Registration costs -
related to December 1997
private placement (31,723)
Issuance of common stock for
acquisition of stores 445,000
Purchase of treasury stock (132,579) $(79,346) (79,346)
Shares and warrants issued as
compensation 26,500
Preferred stock converted to
common stock 0
Stock dividends (5,889) 0
Amortization of compensatory
stock 7,500 7,500
Net loss (3,830,752) (3,830,752)
--------- --------- ----------- ------ ------- -----------
Balance - December 31, 1998 (132,579) $(79,346) $(9,094,711) 3,000 $ 0 $ 955,407
========= ========= ============ ====== ======= ===========
</TABLE>
See independent auditors' report and notes to financial statements F-4
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
Year Ended December 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,830,752) $ (3,543,066)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on abandoned lease 244,462 84,797
Depreciation and amortization 173,908 232,092
Write-off of fixed assets and franchise costs 930,326 723,407
Gain on sale of equipment (11,529)
Amortization of common stock issued for compensation 7,500 30,000
Compensation expense attributable to issuance of common stock and warrants 26,500
Provision for bad debt 25,000 35,000
Changes in:
Accounts receivable (73,206) (83,801)
Inventory (5,535) 30,404
Prepaid expenses and other current assets (9,620) 35,998
Security deposits and other assets 9,694 (134,932)
Accounts payable 61,623 79,127
Accrued expenses (23,812) 13,883
Unearned franchise fee income (77,500) 14,750
Deferred rent payable (7,795) (11,448)
------------- -------------
Net cash used in operating activities (2,560,736) (2,493,789)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets 144,286
Acquisition of franchises/stores (335,000) (75,000)
Purchases of fixed assets (389,676) (32,421)
Payment for trademark (10,000)
Store purchase deposit 55,000
Proceeds on redemption of United States Treasury bills 1,006,170
------------- -------------
Net cash (used in) provided by investing activities (525,390) 888,749
------------- -------------
Cash flows from financing activities:
Payment of registration costs (31,723)
Repayment of stockholder loans (87,468)
Proceeds from exercise of warrants 2,370,272
Repayment of notes payable (18,714) (88,747)
Proceeds from exercise of unit purchase option 540,000
Proceeds from private placement 2,334,158
Purchase of treasury stock (79,346)
------------- ------------
Net cash (used in) provided by financing activities (129,783) 5,068,215
------------- -------------
Net (decrease) increase in cash and cash equivalents (3,215,909) 3,463,175
Cash and cash equivalents - beginning of year 4,118,031 654,856
------------- -------------
Cash and cash equivalents - end of year $ 902,122 $ 4,118,031
============= =============
</TABLE>
(Table continued on next page)
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
Year Ended December 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 10,126 $ 75,596
Income taxes $ 6,647 $ 3,500
Supplemental schedule of noncash activities:
In 1998, the Company acquired the assets of two stores for the following:
Issuance of 73,064 shares of common stock $ 445,000
Cash paid 335,000
-------------
Total amount attributable to fixed, intangible and other assets $ 780,000
=============
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 1,653 shares of common stock 8,264
-------------
17,060
Cash paid 75,000
-------------
Total amount attributed to fixed assets $ 92,060
=============
</TABLE>
See independent auditors' report and notes to financial statements F-5
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 1998, the Company effected a 1 for 5 reverse
stock split of its common stock. The accompanying financial statements reflect
the stock split retroactively.
During November 1997, the Company formed a wholly-owned subsidiary, Big City NY,
Inc. (BCNY). BCNY was formed to acquire in 1998 the assets of two bagel/deli
stores located in New York City.
All significant intercompany balances and transactions were eliminated in
consolidation.
The Company has experienced recurring losses from operations since inception
resulting in an accumulated deficit of $9,094,711. The Company is implementing
plans to reduce its operating losses and negative cash flows. Those plans
include selling the remaining company-owned stores and evaluating the
desirability of discontinuing its commissary/wholesale operations that require
the use of the Company's resources. There is no assurance, however, that the
Company's efforts will ultimately be successful. In February 1999, the Company
reached an agreement in principle to merge with two companies, one of which is
an Internet service provider and the other is a systems integration firm
providing network services and Internet messaging and security products (the
"Acquirees"). The Company expects to issue a combination of common stock and
voting convertible preferred stock to the Acquirees in an amount which, after
conversion of the preferred stock into common stock, will approximate 90%
of the Company's outstanding shares of common stock following the transaction
and conversion. There can be no assurance that the proposed merger agreement
will be executed or that, if executed, the transaction will be completed. The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. The financial statements do not include any
adjustments based on the realizability of the Company's assets or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
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.
F-6
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] Franchise fees:
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.
[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 accounting standards 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. During the year ended December 31, 1998,
a loss of $239,892 was charged to operations for the write-off of
machinery, equipment and leasehold improvements, a loss of $10,557 was
charged to operations for the write-off of trademark costs and a loss of
$679,877 was charged to operations for the write-off of goodwill recorded
upon the acquisition of two bagel/deli stores purchased in the first
quarter of 1998 which were sold in 1999 (Note L).
[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
and the disclosure of contingent 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.
F-7
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 Board 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).
[10] Loss per common share:
The Company calculates net loss per share pursuant to Statement of
Financial Accounting Standards No. 128 "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Dilutive earnings per share includes any dilutive
effects of such securities.
[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 were effective for the year
beginning January 1, 1998. These pronouncements did not have an effect
on the information presented in the Company's financial statements.
NOTE C - FIXED ASSETS
Fixed assets consist of the following:
December 31,
-------------------------
1998 1997 Life
------------ ----------- --------------
Furniture and fixtures $ 239,818 $ 400,592 7 to 15 years
Machinery and equipment 440,727 687,974 5 to 15 years
Leasehold improvements 187,991 487,192 Life of lease
----------- ---------
868,536 1,575,758
Less accumulated depreciation
and amortization 331,144 964,663
---------- ----------
$ 537,392 $ 611,095
=========== ==========
F-8
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE D - INTANGIBLE ASSETS
Intangible assets at cost, are amortized using the straight-line method and
consist of the following:
December 31,
-----------------------
1998 1997 Life
---------- ---------- --------
Goodwill, on store sold
January 1999 (Note B[6]) $ 74,002 15 years
Lease costs 13,289 $ 48,099 5 years
Trademark costs 13,000
---------- ----------
87,291 61,099
Less accumulated amortization 51,507 37,832
---------- ----------
$ 35,784 $ 23,267
========== ==========
NOTE E - STORE PURCHASE DEPOSITS
In October 1998, the Company signed an agreement with a current franchisee (the
"Franchisee"), whereby the Franchisee will purchase one company-owned store for
a purchase price of $210,000, $55,000 of which was received as a deposit prior
to year end. The Franchisee is awaiting financing to complete the transaction.
NOTE F - CAPITAL LEASE OBLIGATIONS
The Company has a commitment pursuant to a capital lease for furniture and
fixtures at a store that was closed during 1998. The net book value of the
furnitures and fixtures held under the capital lease is $27,427 and $37,024 at
December 31, 1998 and 1997, respectively.
Future lease payments as of December 31, 1998 are as follows:
Year Ending
December 31, Amount
------------ ----------
1999 $ 75,569
2000 12,595
----------
88,164
Less amount representing interest 10,781
----------
Present value of future lease payments at end of year 77,383
Less amounts due within one year 65,089
----------
Long-term capital lease obligation $ 12,294
==========
F-9
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE G - COMMITMENTS
[1] Operating leases:
The Company leases its commissary space and store locations under various
operating leases which expire between February 1999 and December 2005.
Future minimum rental payments as of December 31, 1998 are as follows:
Year Ending
December 31, Amount
------------ ----------
1999 $ 180,983
2000 147,588
2001 66,420
2002 45,420
2003 45,420
Thereafter 90,840
----------
$ 576,671
==========
The above amounts include lease obligations aggregating $317,940 for a
store that the Company has abandoned. The financial statements include a
liability of $244,962 for this lease.
Additionally, the Company remains obligated under an operating lease for
a store that was sold to a third party in 1998, in the event that the
acquirer defaults on the lease. The lease expires in October 2005 and
requires monthly payments of $4,666 through October 2001 and $5,086
through October 2005. At December 31, 1998, the Company has not been
informed that the lease is in default.
Rent expense for the years ended December 31, 1998 and December 31, 1997
was $526,150 and $333,070, 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:
In 1998, the Company modified an employment agreement with an officer
which was to expire on December 31, 1998. The modified agreement provides
for a salary of $200,000 per annum and expires on December 30, 1999. In
connection with the agreement, the officer was granted options to
purchase 100,000 shares of common stock at an exercise price of $1.00 per
share, expiring on August 20, 2008.
The agreement provides for various benefits including an additional
payment to the officer of $200,000 for separation from the Company, as
defined in the agreement, or in the event of death of the officer,
payment of salary and other health and medical benefits to a designated
beneficiary for a period of six months.
F-10
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE H - INCOME TAXES
At December 31, 1998, the Company has approximately $7,156,000 of net operating
loss carryforwards expiring through 2018.
At December 31, 1998, the Company has a deferred tax asset of approximately
$3,000,000 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 $1,076,000 (1998) and $1,465,000 (1997). 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.
NOTE I - FRANCHISES AND STORE ACQUISITIONS
During 1997, the Company entered into franchise agreements for twelve stores,
two of which were opened during 1998 and 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, 1998,
there were 15 franchised stores and 4 company-owned stores in operation, one of
which was sold and one of which was closed in January 1999. Deferred franchise
fees at December 31, 1998 and 1997 represent fees received in advance of store
openings.
In 1998, the Company purchased the assets and lease rights of two bagel/deli
stores for an aggregate amount of $780,000 of which $335,000 was paid in cash
and $445,000 with the Company's common stock. One of the stores was never opened
and the other store, was in operation for the majority of the year ended
December 31, 1998. The financial statements do not include pro forma information
as both stores were sold in the first quarter of 1999 (see Notes B[6] and L).
Such transactions do not have a continuing impact and accordingly, pro forma
information would not be useful in analyzing future prospects.
Effective February 1997, the Company repurchased a previously sold franchise
store for an aggregate of $75,000 cash, 1,653 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-11
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 1998 and 1997 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 1998 and 1997 would have been approximately
$3,917,000 and $3,736,000 or $(2.80) and $(3.51) per share. The weighted
average fair value of the options granted during 1998 and 1997 are
estimated at $0.80 and $14.30 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1998 1997
------------- -------------
Risk free rates 5.62% - 5.65% 5.74% - 6.66%
Expected option life in years 5 5
Expected stock price volatily 70% 70%
Expected dividend yield 0% 0%
(a) 1998 Performance Equity Plan:
During 1998 the Company adopted the 1998 Performance Equity Plan (the
"1998 Plan") which provides for the issuance of up to 400,000 shares
of common stock to employees, officers, directors and consultants.
The awards may consist of incentive stock options, nonqualified
options, restricted stock awards, deferred stock awards, stock
appreciation rights and other awards as described in the 1998 Plan.
Vesting periods are determined by the board of directors.
During 1998, the Company granted a nonqualified stock option award to
purchase 100,000 shares of common stock to an officer. The option is
exercisable immediately at $1.00 per share and terminates on August
20, 2008.
At December 31, 1998, options for 300,000 shares of common stock were
available for future grant under the 1998 Plan.
(b) 1996 Performance Equity Plan:
The Company's 1996 Performance Equity Plan (the "1996 Plan")
provides for the issuance of awards of up to 70,000 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 1996 Plan. In February 1998, the Company granted a stock award
of 4,988 shares of common stock to an officer. At December 31, 1998,
the Company has reserved 62,012 shares of common stock for issuance
under the 1996 Plan.
F-12
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE J - COMMON STOCK (CONTINUED)
[1] Stock options: (continued)
Additional information with respect to the 1996 Plan's activity is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1 16,900 $ 22.53 6,400 $19.65
Granted 8,480 4.60 13,500 22.50
Cancelled (1,600) 14.06 (3,000) 16.25
--------- ---------
Outstanding at December 31 23,780 16.71 16,900 22.53
========= =========
Shares exercisable 21,725 $ 17.49 13,400 $25.80
========= =========
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Weighted- Options Exercisable
Average ----------------------------
Remaining Weighted- Weighted-
Contractual Average Average
Number Life Exercise Number Exercise
Exercise Price Outstanding (in Years) Price Exercisable Price
-------------- ----------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
$ 3.125 480 9.31 $3.13 0
4.6875 8,000 9.25 4.69 8,000 $ 4.69
10.00 2,100 8.96 10.00 525 10.00
20.00 3,000 7.25 20.00 3,000 20.00
26.875 10,000 8.25 26.88 10,000 26.88
42.30 200 7.50 42.50 200 42.50
----------- -----------
23,780 8.52 16.71 21,725 17.49
=========== ===========
</TABLE>
At December 31, 1998, options for 38,232 shares of common stock were
available for future grant under the 1996 Plan.
F-13
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE J - COMMON STOCK (CONTINUED)
[2] Warrants:
As at December 31, 1998, the following warrants were outstanding:
<TABLE>
<CAPTION>
Shares Reserved Exercise Expiration
for Issuance Price Date
--------------- -------- ------------------
<S> <C> <C> <C> <C>
Class A Warrants 481,250 $12.50 May 7, 2000
Placement Agent Warrants 15,000 25.00 December 30, 2002
Placement Agent Warrants 25,000 6.5625 December 30, 2002
Other Warrants 4,000 5.00-8.75 April 30, 2003
</TABLE>
Effective July 11, 1997, the Company reduced the exercise price of its
358,750 Class A Warrants and its 50,000 Class B Warrants. The Class A
Warrants, which were previously exercisable at $22.50 per share, were
revised to be exercisable at $12.50 per share until October 8, 1997.
Holders of Class A Warrants who exercised prior to the expiration of the
special exercise period, were issued a new Class A Warrant upon
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 period, then the
exercise price of the Class A Warrants which were not exercised and the
new Class A Warrants would remain at $12.50 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, than the exercise price of the Class A Warrants which
were not exercised and the new Class A Warrants was to revert to $22.50
after the expiration of the special exercise period.
During the special exercise period, an aggregate of 159,789 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 $12.50 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 $12.50 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 $5.00
per share. On November 12, 1997 all 100,000 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 100,000 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 25,000 shares of common stock for $6.5625 per
share and 15,000 shares of common stock for $25.00 per share, in both
cases exercisable until December 30, 2002.
F-14
<PAGE>
BIG CITY BAGELS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 accrued 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 were 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 conversion rate was not effected by the
reverse stock split (see Note A). On December 31, 2000, the shares of preferred
stock then outstanding were to automatically convert into shares of common
stock. 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.
The Company had an option to 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.
In the first quarter of 1999, all of the preferred stock outstanding as of
December 31, 1998 was converted into 6,520,697 shares of the Company's common
stock including 526,361 shares for cumulative stock dividends aggregating
$218,347.
NOTE L - SUBSEQUENT EVENTS
In January and March 1999, the Company sold all the assets of two of its
Company-owned stores for $181,000, and $80,000 respectively net of selling
costs. The carrying value of the stores as of December 31, 1998 reflect such net
selling prices.
F-15
<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 29, 1999 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 Chairman of the Board, Chief March 29, 1999
- ------------------------------------ Executive Officer and Secretary
Mark Weinreb
/s/ Stanley Weinreb Director March 29, 1999
- ------------------------------------
Stanley Weinreb
/s/ Stanley Raphael Director March 29, 1999
- ------------------------------------
Stanley Raphael
/s/ Nelson Braff Director March 29, 1999
- ------------------------------------
Nelson Braff
/s/ Alan Pearlstein Director March 29, 1999
- ------------------------------------
Alan Pearlstein
/s/ Howard J. Fein Chief Financial Officer (and March 29, 1999
- ------------------------------------ principal accounting officer)
Howard J. Fein
</TABLE>
36
<PAGE>
EXHIBIT INDEX
<TABLE>
Incorporated
by Reference No. in
Exhibit No. Description from Document Document
- ----------- ----------------------------------------------------- ------------- ----------
<S> <C> <C> <C>
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
3.1.4 Amendment to Certificate of Incorporation E 3.1.4
3.2 Restated By-laws A 3.2
3.2.1 Restated By-laws, as amended *
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 Subscription Agreement between the Company and C 4.5
purchasers of Class A Preferred Stock
4.5 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
4.6 Form of warrant to purchase 75,000 shares of Common Stock C 4.7
at an exercise price of $5.00 per share issued to Perrin,
Holden & Davenport Capital Corp. and its designee, dated
December 31, 1997
4.7 Form of warrant to purchase 5,000 shares of Common Stock at *
an exercise price of $1.00 per share issued to Dian
Griesel, dated May 1, 1998
4.7.1 Schedule of omitted documents in the form of Exhibit 4.7, *
including material detail in which documents differ from
Exhibit 4.7
10.1 1996 Performance Equity Plan A 10.4
10.2 Form of Franchise Agreement A 10.6
10.3 Form of Area Development Agreement A 10.7
10.4 Form of Founders' Shareholder Agreement A 10.8
10.5 Stock option agreement, dated March 31, 1998, between the D 10.11
Company and Mark Weinreb
</TABLE>
37
<PAGE>
<TABLE>
Incorporated
by Reference No. in
Exhibit No. Description from Document Document
- ----------- ----------------------------------------------------- ------------- ----------
<S> <C> <C> <C>
10.5.1 Schedule of omitted documents in the form of Exhibit 10.11, D 10.11.1
including material detail in which such documents differ
from Exhibit 10.11
10.6 Amendment to Founders' Shareholder Agreement E 10.11
10.7 Amended and Restated Employment Agreement between the F 10.12
Company and Mark Weinreb
10.8 Stock option agreement between the Company and Mark F 10.13
Weinreb, dated August 21, 1998
10.9 1998 Performance Equity Plan G Appendix A
21 Subsidiaries of the Company *
23 Consent of Richard A. Eisner & Company LLP *
27.1 Financial Data Schedule (12/31/98) *
27.2 Restated Financial Data Schedule (12/31/97) *
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.
D The Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1998.
E The Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1998.
F The Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998.
G The Company's Definitive Proxy Statement, dated May 19, 1998.
38
<PAGE>
EXHIBIT 3.2.1
Adopted: April 25, 1996
Article II, Section 2.4 amended: August 13, 1998
BY-LAWS
OF
BIG CITY BAGELS, INC.
ARTICLE I
OFFICES
1.1 Office: The office shall be established and maintained at 99 Woodbury
Road, Hicksville, New York 11801.
1.2 Other Offices: The corporation may have other offices, either within or
without this State, at such place or places as the Board of Directors may from
time to time appoint or the business of the corporation may require.
ARTICLE II
SHAREHOLDERS
2.1 Place of Shareholders' Meetings. All meetings of the shareholders of
the corporation shall be held at such place or places, within or outside the
State of New York, as may be fixed by the Board of Directors from time to time
or as shall be specified in the respective notices thereof.
2.2 Date and Hour of Annual Meetings of Shareholders. An annual meeting of
shareholders shall be held each year following the completion of the
corporation's prior fiscal year on such date and time as may be fixed by the
Board of Directors.
2.3 Purposes of Annual Meetings. At each annual meeting, the shareholders
shall elect the members of the Board of Directors for the succeeding year. At
any such annual meeting any further proper business may be transacted.
2.4 Special Meetings of Shareholders. Special meetings of the shareholders
or of any class or series thereof entitled to vote may be called by the Chairman
of the Board or by the Board of Directors, or at the request in writing by
shareholders of record owning at least a majority of the issued and outstanding
shares of common stock of the corporation.
2.5 Notice of Meetings of Shareholders.
(a) Except as otherwise expressly required or permitted by law, not
less than ten days nor more than fifty days before the date of every
shareholders' meeting the Secretary shall give to each shareholder of record
entitled to vote at such meeting, written notice, served personally, by mail or
by telegram, stating the place, date and hour of the meeting and, in the case of
a special meeting, the purpose or purposes for which the meeting is called. Such
notice, if mailed, shall be deemed to be given when deposited in the United
States mail, postage prepaid, directed to the shareholder at his address for
notices to such shareholder as it appears on the records of the corporation.
<PAGE>
(b) If, at any shareholders' meeting, action is proposed to be taken
which would, if taken, entitle shareholders to receive payment for their shares
pursuant to Section 623 of the Business Corporation Law, the notice of such
meeting shall include a statement to that purpose and to that effect and shall
be accompanied by a copy of Section 623 of the Business Corporation Law or an
outline of its material terms.
Notice of any meeting need not be given to any person who may become a
shareholder of record after the mailing of such notice and prior to the meeting,
or to any shareholder who attends such meeting, in person or by proxy, or to any
shareholder who, in person or by proxy, submits a signed waiver of notice either
before or after such meeting.
(c) When a meeting is adjourned to another time or place, it shall not
be necessary to give any notice of the adjourned meeting if the time and place
to which the meeting is adjourned are announced at the meeting at which the
adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted on the original date of the meeting.
If, however, the Board of Directors shall fix a new record date for the
adjourned meeting, notice of the adjourned meeting shall be given each
shareholder of record of the new record date.
2.6 Quorum of Shareholders.
(a) Unless otherwise provided by the Certificate of Incorporation or
by law, at any meeting of the shareholders, the presence in person or by proxy
of holders of a majority of the shares entitled to vote thereat shall constitute
a quorum. The withdrawal of any shareholder after the commencement of a meeting
shall have no effect on the existence of a quorum, after a quorum has been
established at such meeting.
(b) At any meeting of the shareholders at which a quorum shall be
present, holders of a majority of the shares present in person or by proxy may
adjourn the meeting from time to time without notice other than announcement at
the meeting. In the absence of a quorum, the officer presiding thereat shall
have power to adjourn the meeting from time to time until a quorum shall be
present. Notice of any adjourned meeting, other than announcement at the
meeting, shall not be required to be given, except as provided in paragraph (d)
below and except where expressly required by law.
(c) At any adjourned session at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting
originally called but only those shareholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof, unless a new record date is fixed by the Board of Directors.
(d) If after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
2.7 Chairman and Secretary of Meeting. The Chairman of the Board, or, in
his absence, the President or, in their respective absences, a Vice President
shall preside at meetings of the shareholders. The Secretary shall act as
secretary of the meeting or, in his absence, an Assistant Secretary, shall act,
or if neither is present, then the presiding officer may appoint a person to act
as secretary of the meeting.
2.8 Voting by Shareholders. Except as may be otherwise provided by the
Certificate of Incorporation or these by-laws, at every meeting of the
shareholders each shareholder shall be entitled to one vote for each share of
stock standing in his name on the books of the corporation on the record date
for the meeting. All elections and questions other than election of directors
shall be decided by a majority of the votes cast at a meeting of the
shareholders by the holders of shares present in person or represented by proxy
and entitled to vote at the meeting. At any election of directors, directors
shall be elected by a plurality of the votes cast at a meeting of shareholders
by the holders of shares present in person or represented by proxy entitled to
vote in the election.
2.9 Proxies. Any shareholder entitled to vote at any meeting of
shareholders may vote either in person or by proxy. Every proxy shall be in
writing, subscribed by the shareholder or his duly authorized attorney-in-fact.
No proxy shall be valid after the expiration of eleven months from the date of
<PAGE>
its execution, unless the person executing it shall have specified therein the
length of time it is to continue in force.
2.10 Inspectors. The election of directors and any other vote by ballot at
any meeting of the shareholders shall be supervised by at least one inspector if
requested by a shareholder present in person or represented by proxy and
entitled to vote at such meeting. Such inspector(s) may be appointed by the
presiding officer before or at the meeting; or if the inspector(s) so appointed
shall refuse to serve or shall not be present, such appointment shall be made by
the officer presiding at the meeting.
2.11 List of Shareholders. A list of shareholders as of the record date,
certified by the corporate officer responsible for its preparation or by a
transfer agent, shall be produced at any meeting of shareholders upon the
request thereat or prior thereto of any shareholder. If the right to vote at any
meeting is challenged, the inspectors of election, or person presiding thereat,
shall require such list of shareholders to be produced as evidence of the right
of the persons challenged to vote at such meeting, and all persons who appear
from such list to be shareholders entitled to vote thereat may vote at such
meeting.
2.12 Procedure at Shareholders' Meetings. Except as otherwise provided by
these by-laws or any resolutions adopted by the shareholders or Board of
Directors, the order of business and all other matters of procedure at every
meeting of shareholders shall be determined by the presiding officer. Not less
than 15 minutes following the presentation of any resolution to any meeting of
shareholders, the presiding officer may announce that further discussion on such
resolution shall be limited to not more than three persons who favor and not
more than three persons who oppose such resolution, each of whom shall be
designated by the presiding officer and shall thereupon be entitled to speak
thereon for not more than five minutes. After such persons, or such a lesser
number thereof as shall advise the presiding officer of their desire so to
speak, shall have spoken on such resolution, the presiding officer may direct a
vote on such resolution without further discussion thereon at the meeting.
2.13 Action By Consent Without Meeting. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of shareholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of all outstanding shares entitled to vote
thereon.
ARTICLE III
DIRECTORS
3.1 Powers of Directors. The property, business and affairs of the
corporation shall be managed by its Board of Directors which may exercise all
the powers of the corporation except such as are by the law of the State of New
York or the Certificate of Incorporation or these by-laws required to be
exercised or done by the shareholders.
3.2 Number, Method of Election, Terms of Office of Directors. The number of
directors constituting the entire board shall be fixed from time to time by the
Board of Directors and shall not be less than three, except that where all the
shares of a corporation are owned beneficially and of record by less than three
shareholders, the number of directors may be less than three but not less than
the number of shareholders. Each director shall hold office until the next
annual meeting of shareholders and until his successor is elected and qualified,
provided, however, that a director may resign at any time. Directors need not be
shareholders.
3.3 Vacancies on Board of Directors; Removal.
(a) Any director may resign his office at any time by delivering his
resignation in writing to the Chairman of the Board or the Secretary. It will
take effect at the time specified therein or, if no time is specified, it will
be effective at the time of its receipt by the corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
<PAGE>
(b) Any vacancy, or newly created directorship resulting from any
increase in the authorized number of directors, may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and any director so chosen shall hold office until the next annual
election of directors by the shareholders and until his successor is duly
elected and qualified or until his earlier resignation or removal.
(c) Removal. Any director may be removed with cause at any time by the
affirmative vote of shareholders holding of record in the aggregate at least a
majority of the votes cast at a meeting of the shareholders by the holders of
shares present in person or represented by proxy entitled to vote at a special
meeting of the shareholders called for that purpose. Any director may be removed
without cause at any time by the affirmative vote of shareholders holding of
record in the aggregate at least 66 2/3 of the outstanding shares entitled to
vote at a special meeting of the shareholders called for that purpose.
3.4 Meetings of the Board of Directors.
(a) The Board of Directors may hold their meetings, both regular and
special, either within or outside the State of New York.
(b) Regular meetings of the Board of Directors may be held at such
time and place as shall from time to time be determined by resolution of the
Board of Directors. No notice of such regular meetings shall be required. If the
date designated for any regular meeting be a legal holiday, then the meeting
shall be held on the next day which is not a legal holiday.
(c) The first meeting of each newly elected Board of Directors shall
be held immediately following the annual meeting of the shareholders for the
election of officers and the transaction of such other business as may come
before it. If such meeting is held at the place of the shareholders' meeting, no
notice thereof shall be required.
(d) Special meetings of the Board of Directors shall be held whenever
called by direction of the Chairman of the Board or at the written request of a
majority of the whole Board.
(e) The Secretary shall give notice to each director of any special
meeting of the Board of Directors by mailing the same at least three days before
the meeting or by telefaxing, telegraphing, telexing, or delivering the same not
later than the day before the meeting. Unless required by law, such notice need
not include a statement of the business to be transacted at, or the purpose of,
any such meeting. Any and all business may be transacted at any meeting of the
Board of Directors. No notice of any adjourned meeting need be given, except as
may be given at the meeting at the time of its adjournment. No notice to or
waiver by any director shall be required with respect to any meeting at which
the director is present.
3.5 Nominations for Directors. Nominations for the election of directors
may be made by the Board of Directors or by any shareholder entitled to vote for
the election of directors. Any shareholder entitled to vote for the election of
directors at a meeting may nominate a person or persons for election as
directors only if written notice of such shareholder's intent to make such
nomination is given, either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Corporation not later than with respect
to an election to be held at an annual meeting of shareholders, 90 days in
advance of such meeting, and with respect to an election to be held at a special
meeting of shareholders for the election of directors, the close of business on
the seventh day following the date on which notice of such meeting is first
given shareholders. Each such notice shall set forth: the name and address of
the shareholder who intends to make the nomination and the person or persons to
be nominated; a representation that the shareholder is a holder of record of
stock of the Corporation entitled to vote at the meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; such other information regarding each nominee proposed by the
shareholder as would have been required to be included in a proxy statement
filing pursuant to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the Board of
Directors; and the consent of each nominee to serve as a Director of the
Corporation if so elected. The chairman of any meeting of shareholders to elect
directors and the Board of Directors may refuse to acknowledge the nomination of
any person not made in compliance with the foregoing procedure.
<PAGE>
3.6 Quorum and Action. A majority of the entire Board shall constitute a
quorum for the transaction of business, except that when a vacancy or vacancies
prevents such a majority, a majority of the directors in office shall constitute
a quorum, provided that such a majority shall constitute at least one-third of
the entire Board; but if there shall be less than a quorum at any meeting of the
Board, a majority of those present may adjourn the meeting from time to time.
The vote of a majority of the directors present at any meeting at which a quorum
is present shall be necessary to constitute the act of the Board of Directors.
3.7 Presiding Officer and Secretary of Meeting. The Chairman of the Board
or, in his absence, the President, or, in their absence a member of the Board of
Directors selected by the members present, shall preside at meetings of the
Board. The Secretary shall act as secretary of the meeting, but in his absence
the presiding officer may appoint a secretary of the meeting.
3.8 Action by Consent Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes or proceedings of the Board or committee.
3.9 Action by Telephonic Conference. Members of the Board of Directors, or
any committee designated by such Board, may participate in a meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in such a meeting shall constitute presence in
person at such meeting.
3.10 Committees.
(a) The Board of Directors may, by resolution or resolutions passed by
a majority of the whole board, designate an executive committee and other
committees, each committee to consist of three or more directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee.
(b) Any such committee, to the extent provided in the resolution of
the Board of Directors, or in these by-laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
authority as to the following matters:
(1) The submission to shareholders of any action that needs
shareholders' approval under this chapter.
(2) The filling of vacancies in the Board of Directors or in any
committee.
(3) The fixing of compensation of the directors for serving on
the Board or on any committee.
(4) The amendment or repeal of the by-laws, or the adoption of
new by-laws.
(5) The amendment or repeal of any resolution of the Board which
by its terms shall not be so amendable or repealable.
3.11 Compensation of Directors. Directors shall receive such reasonable
compensation for their service on the Board of Directors or any committees
thereof, whether in the form of salary or a fixed fee for attendance at
meetings, or both, with expenses, if any, as the Board of Directors may from
time to time determine. Nothing herein contained shall be construed to preclude
any director from serving in any other capacity and receiving compensation
therefor.
<PAGE>
ARTICLE IV
OFFICERS
4.1 Officers, Title, Elections, Terms.
(a) The elected officers of the corporation shall be a Chairman of the
Board, a President, one or more Vice Presidents, a Treasurer and a Secretary,
who shall be elected by the Board of Directors at its Annual Meeting following
the Annual Meeting of the Shareholders, to serve at the pleasure of the Board or
otherwise as shall be specified by the Board at the time of such election and
until their successors are elected and qualify. Any two or more offices may be
held by the same person, except the offices of President and Secretary. When all
of the issued and outstanding shares of the corporation are owned by one person,
such person may hold all or any combination of offices.
(b) The Board of Directors may elect or appoint at any time, and from
time to time, additional officers or agents with such duties as it may deem
necessary or desirable. Such additional officers shall serve at the pleasure of
the Board or otherwise as shall be specified by the Board at the time of such
election or appointment.
(c) Any vacancy in any office may be filled for the unexpired portion
of the term by the Board of Directors.
(d) Any officer may resign his office at any time. Such resignation
shall be made in writing and shall take effect at the time specified therein or,
if no time be specified, at the time of its receipt by the corporation. The
acceptance of a resignation shall not be necessary to make it effective, unless
expressly so provided in the resignation.
(e) The Board of Directors may require any officer to give security
for the faithful performance of his duties.
(f) All other officers shall have such duties and powers as are
provided in these by-laws, or as the Board of Directors may determine from time
to time, or as may be assigned to them by any superior officer.
4.2 Removal of Elected Officers. Any elected officer may be removed at any
time, either with or without cause, by resolution adopted at any regular or
special meeting of the Board of Directors by a majority of the directors then in
office.
4.3 Duties.
(a) Chairman of the Board. The Chairman of the Board shall be the
chief executive officer of the corporation and shall have general and active
management and direction of the business and affairs of the corporation and
general supervision thereof and over its several officers, agents and employees,
subject, however, to the control of the Board. He shall, if present, preside at
each meeting of the shareholders and of the Board. He shall see that all orders
and resolutions of the Board are carried into effect. He may sign, execute and
deliver in the name of the corporation all deeds, mortgages, bonds, contracts or
other instruments authorized by the Board, except in cases where the signing,
execution or delivery thereof shall be expressly delegated by the Board or by
these by-laws to some other officer or agent of the corporation or where any
thereof shall be required by law otherwise to be signed, executed or delivered,
and he may affix the seal of the corporation to any instrument which shall
require it; and, in general, he shall perform all duties incident to the office
of Chairman of the Board and such other duties as may from time to time be
assigned to him by the Board.
(b) President. The President shall be the chief operating officer of
the corporation and shall have general and active management and direction of
the business of the corporation and general supervision thereof and over its
officers, agents and employees, subject, however, to control of the Board and
the Chairman of the Board. In the absence of the Chairman of the Board he shall,
<PAGE>
if present, preside at each meeting of the shareholders and of the Board. He may
sign, execute and deliver in the name of the corporation all deeds, mortgages,
bonds, contracts and other instruments authorized by the Board, except in cases
where the signing, execution or delivery thereof shall be expressly delegated by
the Board or by these by-laws to some other officer or agent of the Corporation
or where any thereof shall be required by law otherwise to be signed, executed
or delivered; and, in general, he shall perform all duties incident to the
office of President and such other duties as may from time to time be assigned
to him by the Board. In case of the absence of the Chairman of the Board, or his
inability to act, the President shall perform the duties of the Chairman of the
Board and, when so acting, shall have all the powers of, and be subject to all
the restrictions upon, the Chairman of the Board.
(c) Vice President. Each Vice President, if any, shall have such
powers and perform such duties as the Board of Directors may determine or as may
be assigned to him by the Chairman of the Board or the President. In the absence
of the President or in the event of his death, or inability or refusal to act,
the Vice President (or in the event there be more than one Vice President, the
Vice Presidents in the order designated at the time of their election, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President and when so acting, shall have all the powers and be
subject to all the restrictions upon the President.
(d) Treasurer. The Treasurer shall (1) have charge and custody of and
be responsible for all funds and securities of the Corporation; (2) receive and
give receipts for moneys due and payable to the Corporation from any source
whatsoever; (3) deposit all such moneys in the name of the Corporation in such
banks, trust companies, or other depositaries as shall be selected in accordance
with the provisions of Article V of these by-laws; and (4) in general perform
all duties incident to the office of treasurer and such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors. He shall, if required by the Board of Directors, give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the Board of Directors shall determine.
(e) Secretary. The Secretary shall (1) keep the minutes of the
meetings of the shareholders, the Board of Directors, the Executive Committee
(if designated), and all other committees, if any, of which a secretary shall
not have been appointed, in one or more books provided for that purpose; (2) see
that all notices are duly given in accordance with the provisions of these
by-laws and as required by law; (3) be custodian of the corporate records and of
the seal of the Corporation and see that the seal of the Corporation is affixed
to all documents, the execution of which on behalf of the Corporation under its
seal, is duly authorized; (4) keep a register of the post office address of each
shareholder which shall be furnished to the Secretary by such shareholder; (5)
have general charge of stock transfer books of the Corporation; and (6) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the President or by the
Board of Directors.
(f) Assistant Secretaries and Assistant Treasurers. At the request of
the Secretary or in his absence or disability, one or more Assistant Secretaries
designated by him or by the Board of Directors shall have all the powers of the
Secretary for such period as he or it may designate or until he or it revokes
such designation. At the request of the Treasurer or in his absence or
disability, one or more Assistant Treasurers designated by him or by the Board
of Directors shall have all the powers of the Treasurer for such period as he or
it may designate or until he or it revokes such designation. The Assistant
Secretaries and Assistant Treasurers, in general, shall perform such duties as
shall be assigned to them by the Secretary or the Treasurer, respectively, or by
the President or the Board of Directors.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 Contracts. Except as otherwise provided by law, these by-laws or
resolutions of the Board of Directors, any contract, document or other
instrument shall be valid and binding on the Corporation only if executed and
delivered in its name and on its behalf by either the President or such other
persons who have been designated by resolution of the Board of Directors as
authorized signatories of contracts, documents and other instruments.
<PAGE>
5.2 Loans. No loan shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors and executed by either the Chairman of the
Board, President or a Vice President or such persons who have been designated by
resolution of the Board of Directors as authorized signatories of contracts,
documents and other instruments, or of those persons who have been designated by
resolution of the Board of Directors as authorized signatories for transactions
with any bank with which such loan is contracted. Such authority may be general
or confined to specific instances.
5.3 Checks, Drafts, Etc. All checks, drafts or other orders for the payment
of money, notes, or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such person or persons and in such manner as
shall from time to time be determined by resolution of the Board of Directors.
Each of such persons shall give such bond, if any, as the Board of Directors may
require.
5.4 Deposits. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such banks,
trust companies, or other depositaries as the Board of Directors may select or
as may be designated by any officer or officers of the Corporation.
ARTICLE VI
SHARES OF STOCK
6.1 Certificates of Stock.
(a) Every holder of shares in the corporation shall be entitled to
have a certificate signed by, or in the name of, the corporation by the Chairman
of the Board, President or a Vice President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the
number of shares owned by him.
(b) If such certificate is countersigned by a transfer agent other
than the corporation or its employee, or by a registrar other than the
corporation or its employee, the signatures of the officers of the corporation
may be facsimiles, and, if permitted by law, any other signature may be a
facsimile.
(c) In case any officer who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the date of issue.
(d) Certificates of stock shall be issued in such form not
inconsistent with the Certificate of Incorporation as shall be approved by the
Board of Directors. They shall be numbered and registered in the order in which
they are issued.
(e) All certificates surrendered to the corporation shall be cancelled
with the date of cancellation, and shall be retained by the Secretary, together
with the powers of attorney to transfer and the assignments of the shares
represented by such certificates, for such period of time as shall be prescribed
from time to time by resolution of the Board of Directors.
(f) No certificates representing shares shall be issued until the full
amount of consideration therefor has been paid, except as otherwise permitted by
law.
6.2 Record Ownership. A record of the name and address of the holder of
each certificate, the number of shares represented thereby and the date of issue
thereof shall be made on the corporation's books. The corporation shall be
entitled to treat the holder of any share as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in any share on the part of any other person, whether or not it shall
have express or other notice thereof, except as required by law.
<PAGE>
6.3 Transfer of Record Ownership. Transfers of shares shall be made on the
books of the corporation only by direction of the person named in the
certificate or his attorney, lawfully constituted in writing, and only upon the
surrender of the certificate therefor and a written assignment of the shares
evidenced thereby. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer if, when the certificates are presented to the corporation for
transfer, both the transferor and transferee request the corporation to do so.
6.4 Lost, Stolen or Destroyed Certificates. Certificates representing
shares of the stock of the corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed in such manner and on
such terms and conditions as the Board of Directors from time to time may
authorize.
6.5 Transfer Agent; Registrar; Rules Respecting Certificates. The
corporation shall maintain at its principal office or at the office of its
attorneys an office where shares of the corporation shall be transferable. The
corporation may also maintain one or more registry offices where such shares
shall be registered. The Board of Directors may make such rules and regulations
as it may deem expedient concerning the issue, transfer and registration of
certificates of stock.
6.6 Fixing Record Date for Determination of Shareholders of Record.
(a) The Board of Directors may fix, in advance, a date as the record
date for the purpose of determining the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or to express
consent to or dissent from any proposal without a meeting, or for the purpose of
determining shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action. Such date shall
not be more than fifty nor less than ten days before the date of such meeting,
nor more than fifty days prior to any other action.
(b) If no record date is fixed: The record date for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if no notice is given, the day on which the meeting is
held. For all other purposes, the record date for determining shareholders shall
be at the close of business on the day on which the resolution of the board
relating thereto is adopted.
(c) When a determination of shareholders or record entitled to notice
of or to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, unless the
Board of Directors fixes a new record date under this section for the adjourned
meeting.
6.7 Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the shares of
the corporation as and when they deem expedient. Before declaring any dividend
there may be set apart out of any funds of the corporation available for
dividends, such sum or sums as the Board of Directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
Board of Directors shall deem conducive to the interests of the corporation.
ARTICLE VII
SECURITIES HELD BY THE CORPORATION
7.1 Voting. Unless the Board of Directors shall otherwise order, the
Chairman of the Board, the President, any Vice President, the Secretary or the
Treasurer shall have full power and authority, on behalf of the corporation, to
attend, act and vote at any meeting of the stockholders of any corporation in
which the corporation may hold stock, and at such meeting to exercise any or all
rights and powers incident to the ownership of such stock, and to execute on
behalf of the corporation a proxy or proxies empowering another or others to act
as aforesaid. The Board of Directors from time to time may confer like powers
upon any other person or persons.
<PAGE>
7.2 General Authorization to Transfer Securities Held by the Corporation.
(a) Any of the following officers, to wit: the Chairman of the Board,
the President, any Vice President and the Treasurer shall be, and they hereby
are, authorized and empowered to transfer, convert, endorse, sell, assign, set
over and deliver any and all shares of stock, bonds, debentures, notes,
subscription warrants, stock purchase warrants, evidence of indebtedness, or
other securities now or hereafter standing in the name of or owned by the
corporation, and to make, execute and deliver, under the seal of the
corporation, any and all written instruments of assignment and transfer
necessary or proper to effectuate the authority hereby conferred.
(b) Whenever there shall be annexed to any instrument of assignment
and transfer executed pursuant to and in accordance with the foregoing paragraph
(a), a certificate of the Secretary of the corporation in office at the date of
such certificate setting forth the provisions of this Section 7.2 and stating
that they are in full force and effect and setting forth the names of persons
who are then officers of the corporation, then all persons to whom such
instrument and annexed certificate shall thereafter come, shall be entitled,
without further inquiry or investigation and regardless of the date of such
certificate, to assume and to act in reliance upon the assumption that the
shares of stock or other securities named in such instrument were theretofore
duly and properly transferred, endorsed, sold, assigned, set over and delivered
by the corporation, and that with respect to such securities the authority of
these provisions of the by-laws and of such officers is still in full force and
effect.
ARTICLE VIII
MISCELLANEOUS
8.1 Seal. The seal of the corporation shall be in such form and shall have
such content as the Board of Directors shall from time to time determine.
8.2 Notice and Waiver of Notice. Whenever any notice of the time, place or
purpose of any meeting of shareholders, directors or a committee is required to
be given under the law of the State of New York, the Certificate of
Incorporation or these by-laws, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the holding
thereof, or actual attendance at the meeting in person or, in the case of any
shareholder, by his attorney-in-fact, shall be deemed equivalent to the giving
of such notice to such persons.
8.3 Amendment of By-Laws.
(a) Board of Directors. The by-laws of the corporation may be altered,
amended or repealed or new by-laws may be made or adopted by the Board of
Directors at any regular, or special meeting of the Board; provided that
paragraph (c) of Section 3.3 and Section 8.3(a) of these by-laws may be altered,
amended or repealed only by action of the shareholders acting pursuant to
Section 8.3(b) hereof.
(b) By Shareholders. The by-laws of the corporation may also be
altered, amended or repealed or new by-laws may be made or adopted by the vote
of a majority in interest of the shareholders represented and entitled to vote
upon the election of directors, at any meeting at which a quorum is present.
8.4 Indemnity. The corporation shall indemnify its directors and officers
to the fullest extent allowed by law.
8.5 Fiscal Year. Except as from time to time otherwise determined by the
Board of Directors, the fiscal year of the corporation shall end on December 31.
<PAGE>
EXHIBIT 4.7
THIS WARRANT, AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT, HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") OR
APPLICABLE STATE LAW. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, AND
IN COMPLIANCE WITH APPLICABLE STATE LAW.
VOID AFTER 5:00 P.M. EASTERN TIME, APRIL 30, 2003
WARRANT
For the Purchase of
5,000 Shares of Common Stock
of
BIG CITY BAGELS, INC.
1. Warrant.
THIS CERTIFIES THAT, for good and valuable consideration provided by
The Investor Relations Group, Inc. on behalf of Dian Griesel ("Holder"), as
registered owner of this Warrant, to Big City Bagels, Inc. ("Company"), Holder
is entitled, at any time or from time to time at or after May 1, 1998
("Commencement Date"), and at or before 5:00 p.m., Eastern Time, April 30, 2003
("Expiration Date"), but not thereafter, to subscribe for, purchase and receive,
in whole or in part, up to Five Thousand (5,000) shares of Common Stock of the
Company, $.001 par value ("Common Stock"). If the Expiration Date is a day on
which banking institutions are authorized by law to close, then this Warrant may
be exercised on the next succeeding day which is not such a day in accordance
with the terms herein. During the period ending on the Expiration Date, the
Company agrees not to take any action that would terminate the Warrant. This
Warrant is initially exercisable at $1.00 per share of Common Stock purchased;
provided, however, that upon the occurrence of any of the events specified in
Section 6 hereof, the rights granted by this Warrant, including the exercise
price and the number of shares of Common Stock to be received upon such
exercise, shall be adjusted as therein specified. The term "Exercise Price"
shall mean the initial exercise price or the adjusted exercise price, depending
on the context, of a share of Common Stock. The term "Warrant Shares" shall mean
the shares of Common Stock issuable upon exercise of this Warrant.
2. Method of Exercise.
2.1 Exercise Form. In order to exercise this Warrant, the exercise form
attached hereto must be duly executed and completed and delivered to the
Company, together with this Warrant and payment of the Exercise Price for the
Warrant Shares being purchased. If the subscription rights represented hereby
shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration
Date, this Warrant shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 Legend. Each certificate for Warrant Shares purchased under this
Warrant shall bear a legend as follows, unless such Warrant Shares have been
registered under the Securities Act of 1933, as amended ("Act"):
<PAGE>
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act")
or applicable state law. The securities may not be offered for
sale, sold or otherwise transferred except pursuant to an
effective registration statement under the Act, or pursuant to an
exemption from registration under the Act, and in compliance with
applicable state law."
2.3 Conversion Right.
2.3.1 Determination of Amount. In lieu of the payment of the
Exercise Price in cash, the Holder shall have the right (but not the obligation)
to convert this Warrant, in whole or in part, into Common Stock ("Conversion
Right"), as follows: upon exercise of the Conversion Right, the Company shall
deliver to the Holder (without payment by the Holder of any of the Exercise
Price) that number of shares of Common Stock equal to the quotient obtained by
dividing (x) the "Value" (as defined below) of the portion of the Warrant being
converted at the time the Conversion Right is exercised by (y) the Market Price.
The "Value" of the portion of the Warrant being converted shall equal the
remainder derived from subtracting (a) the Exercise Price multiplied by the
number of shares of Common Stock being converted from (b) the Market Price of
the Common Stock multiplied by the number of shares of Common Stock being
converted. As used herein, the term "Market Price" at any date shall be deemed
to be the last reported sale price of the Common Stock on the trading day
immediately preceding such date, or, in case no such reported sale takes place
on the trading day immediately preceding such day, the average of the last
reported sale prices for the immediately preceding three trading days, in either
case as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or if any such
exchange on which the Common Stock is listed is not its principal trading
market, the last reported sale price as furnished by the National Association of
Securities Dealers, Inc. ("NASD") through the Nasdaq National Market or SmallCap
Market, or, if applicable, the OTC Bulletin Board, or if the Common Stock is not
listed or admitted to trading on any of the foregoing markets, or similar
organization, as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available to it.
2.3.2 Exercise of Conversion Right. The Conversion Right may
be exercised by the Holder on any business day on or after the Commencement Date
and not later than the Expiration Date by delivering the Warrant with a duly
executed exercise form attached hereto with the conversion section completed to
the Company, exercising the Conversion Right and specifying the total number of
shares of Common Stock the Holder will purchase pursuant to such conversion.
3. Transfer.
3.1 Representations of Holder. The Holder hereby represents and
warrants to, and agrees with, the Company that:
(i) Holder shall acquire the Warrant and the Warrant Shares
for her own account, for investment, and not with a view towards the
distribution thereof;
(ii) Holder has received a copy of all reports and documents
required to be filed by the Company with the Commission pursuant to the Exchange
Act within the last 24 months and all reports issued by the Company to its
shareholders;
(iii) Holder understands that she must bear the economic risk
of the investment in the Warrants and the Warrant Shares, which cannot be sold
by Holder unless they are registered under the Act or an exemption therefrom is
available thereunder, and that the Company is under no obligation to register
the Warrants and the Warrant Shares for sale under the Act;
(iv) Holder has had both the opportunity to ask questions and
receive answers from the officers and directors of the Company and all persons
acting on its behalf concerning the terms and conditions of the offer made
hereunder and to obtain any additional information to the extent the Company
possesses or may possess such information or can acquire it without unreasonable
<PAGE>
effort or expense necessary to verify the accuracy of the information obtained
pursuant to clause (ii) above;
(v) Holder is aware that the Company shall place stop transfer
orders with its transfer agent against the transfer of the Warrants and the
Warrant Shares in the absence of registration under the Act or an exemption
therefrom as provided herein; and
(vi) If, at the time of issuance of the Warrant Shares, the
issuance of such shares have not been registered under the Act, the certificates
evidencing the Warrant Shares shall bear the following legend:
"The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended ("Act") or applicable state law. The
securities may not be offered for sale, sold or
otherwise transferred, except pursuant to an
effective registration statement under the Act; or
pursuant to an exemption from registration under the
Act, and in compliance with applicable state law."
3.2 General Restrictions. The registered Holder of this Warrant, by its
acceptance hereof, agrees that it will not sell, transfer or assign or
hypothecate this Warrant to anyone except upon compliance with, or pursuant to
exemptions from, applicable securities laws as described in Section 3.3. In
addition, in order to make any permitted assignment, the Holder must deliver to
the Company the assignment form attached hereto duly executed and completed,
together with this Warrant and payment of all transfer taxes, if any, payable in
connection therewith. The Company shall immediately transfer this Warrant on the
books of the Company and shall execute and deliver a new Warrant or Warrants of
like tenor to the appropriate assignee(s) expressly evidencing the right to
purchase the aggregate number of shares of Common Stock purchasable hereunder or
such portion of such number as shall be contemplated by any such assignment.
3.3 Restrictions Imposed by Securities Laws. This Warrant and the
Warrant Shares shall not be transferred unless and until (i) the Company has
received the opinion of counsel for the Holder that such securities may be sold
pursuant to an exemption from registration under the Act, and applicable state
law, the availability of which is established to the reasonable satisfaction of
the Company, or (ii) a registration statement relating to such Warrant Shares
has been filed by the Company with, and declared effective by, the Securities
and Exchange Commission and the transfer would be in compliance with applicable
state law. The Company has no obligation under this Warrant to register this
Warrant or the Warrant Shares with the Securities and Exchange Commission.
4. New Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in
Section 3 hereof, this Warrant may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Warrant for cancellation, together with the duly executed exercise or
assignment form and funds (or conversion equivalent) sufficient to pay any
Exercise Price and/or transfer tax, the Company shall cause to be delivered to
the Holder without charge a new Warrant of like tenor to this Warrant in the
name of the Holder evidencing the right of the Holder to purchase the aggregate
number of shares of Common Stock purchasable hereunder as to which this Warrant
has not been exercised or assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
and of reasonably satisfactory indemnification, the Company shall execute and
deliver a new Warrant of like tenor and date. Any such new Warrant executed and
delivered as a result of such loss, theft, mutilation or destruction shall
constitute a substitute contractual obligation on the part of the Company.
<PAGE>
5. Adjustments.
5.1 Adjustments to Exercise Price and Number of Securities. The
Exercise Price and the number of shares of Common Stock underlying this Warrant
shall be subject to adjustment from time to time as hereinafter set forth:
5.1.1 Stock Dividends, Recapitalization, Reclassification,
Split-Ups. If, after the date hereof, and subject to the provisions of Section
5.2 below, the number of outstanding shares of Common Stock is increased by a
stock dividend on the Common Stock payable in shares of Common Stock or by a
split-up, recapitalization or reclassification of shares of Common Stock or
other similar event which affects the corporate structure of the Company and the
Common Stock of the Company, as a class, then, on the effective date thereof,
the number of shares of Common Stock issuable on exercise of this Warrant shall
be increased in proportion to such increase in outstanding shares.
5.1.2 Aggregation of Shares. If after the date hereof, and
subject to the provisions of Section 5.1.3, the number of outstanding shares of
Common Stock is decreased by a reverse stock split, consolidation, combination
or reclassification of shares of Common Stock or other similar event, then, upon
the effective date thereof, the number of shares of Common Stock issuable on
exercise of this Warrant shall be decreased in proportion to such decrease in
outstanding shares.
5.1.3 Adjustments in Exercise Price. Whenever the number of
shares of Common Stock purchasable upon the exercise of this Warrant is
adjusted, as provided in this Section 5.1, the Exercise Price shall be adjusted
(to the nearest cent) by multiplying such Exercise Price immediately prior to
such adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock purchasable upon the exercise of this Warrant immediately
prior to such adjustment, and (y) the denominator of which shall be the number
of shares of Common Stock so purchasable immediately thereafter.
5.1.4 Replacement of Securities Upon Reorganization, Etc. In
case of any reclassification or reorganization of the outstanding shares of
Common Stock other than a change covered by Sections 5.1.1 and 5.1.2 hereof or
which solely affects the par value of such shares of Common Stock, or in the
case of any merger or consolidation of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification or
reorganization of the outstanding shares of Common Stock), or in the case of any
sale or conveyance to another corporation or entity of the property of the
Company as an entirety or substantially as an entirety in connection with which
the Company is dissolved, the Holder of this Warrant shall have the right
thereafter (until the expiration of the right of exercise of this Warrant) to
receive upon the exercise hereof, for the same aggregate Exercise Price payable
hereunder immediately prior to such event, the kind and amount of shares of
stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or other transfer, by a Holder of the number of shares
of Common Stock of the Company obtainable upon exercise of this Warrant
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Sections 5.1.1 or 5.1.2, then such
adjustment shall be made pursuant to Sections 5.1.1, 5.1.2, 5.1.3 and this
Section 5.1.4. The provisions of this Section 5.1.4 shall similarly apply to
successive reclassifications, reorganizations, mergers or consolidations, sales
or other transfers.
5.1.5 Changes in Form of Warrant. This form of Warrant need
not be changed because of any change pursuant to this Section, and Warrants
issued after such change may state the same Exercise Price and the same number
of shares of Common Stock and Warrants as are stated in the Warrants initially
issued pursuant to this Agreement. The acceptance by any Holder of the issuance
of new Warrants reflecting a required or permissive change shall not be deemed
to waive any rights to a prior adjustment or the computation thereof.
5.2 Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of this Warrant, nor shall it be required to issue scrip or
pay cash in lieu of any fractional interests, it being the intent of the parties
<PAGE>
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
6. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of this Warrant, such number of shares of Common Stock
or other securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the Warrants
and payment of the Exercise Price therefor, all shares of Common Stock and other
securities issuable upon such exercise shall be duly and validly issued, fully
paid and non-assessable and not subject to preemptive rights of any stockholder.
As long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon exercise of the
Warrants to be listed (subject to official notice of issuance) on all securities
exchanges (or, if applicable on Nasdaq) on which the Common Stock is then listed
and/or quoted.
7. Certain Notice Requirements.
7.1 Holder's Right to Receive Notice. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the events
described in Section 7.2 shall occur, then, in one or more of said events, the
Company shall give written notice of such event at least fifteen days prior to
the date fixed as a record date or the date of closing the transfer books for
the determination of the stockholders entitled to such dividend, distribution,
conversion or exchange of securities or subscription rights, or entitled to vote
on such proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of the closing of the transfer books, as
the case may be.
7.2 Events Requiring Notice. The Company shall be required to give the
notice described in this Section 7 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a cash dividend or distribution,
(ii) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor, (iii) a merger or reorganization in which the
Company is not the surviving party, or (iv) a dissolution, liquidation or
winding up of the Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property, assets and
business shall be proposed.
7.3 Notice of Change in Exercise Price. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 5
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's Chief Executive Officer and Chief Financial Officer.
7.4 Transmittal of Notices. All notices, requests, consents and other
communications under this Warrant shall be in writing and shall be deemed to
have been duly made on the date of delivery if delivered personally or sent by
overnight courier, with acknowledgment of receipt by the party to which notice
is given, by confirmed facsimile or on the fifth day after mailing if mailed to
the party to whom notice is to be given, by registered or certified mail, return
receipt requested, postage prepaid and properly addressed as follows: (i) if to
the registered Holder of this Warrant, to the address of such Holder as
indicated on the signature page of this Warrant or such other address as the
Holder in writing shall so designate to the Company by giving notice under this
Section 7.4, or (ii) if to the Company, to its principal executive office.
<PAGE>
8. Miscellaneous.
8.1 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Warrant.
8.2 Entire Agreement. This Warrant (together with the other agreements
and documents being delivered pursuant to or in connection with this Warrant)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
8.3 Binding Effect. This Warrant shall inure solely to the benefit of
and shall be binding upon, the Holder and the Company and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Warrant or any provisions herein contained.
8.4 Governing Law; Submission to Jurisdiction. This Warrant shall be
governed by and construed and enforced in accordance with the law of the State
of New York, without giving effect to conflict of laws. The Company and the
Holder, by accepting this Warrant, hereby agree that any action, proceeding or
claim arising out of, or relating in any way to this Warrant shall be brought
and enforced in the courts of the State of New York or of the United States of
America for the Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company and the Holder,
by accepting this Warrant, hereby waive any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any process
or summons to be served upon the Company may be served by transmitting a copy
thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 8 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. Each of the Company and the Holder,
by accepting this Warrant, agrees that the prevailing party(ies) in any such
action shall be entitled to recover from the other party(ies) all of its
reasonable attorneys' fees and expenses relating to such action or proceeding
and/or incurred in connection with the preparation therefor.
8.5 Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Warrant shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Warrant or any provision hereof or the right of the Company or
any Holder to thereafter enforce each and every provision of this Warrant. No
waiver of any breach, non-compliance or non-fulfillment of any of the provisions
of this Warrant shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of such
waiver is sought; and no waiver of any such breach, non-compliance or
non-fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer as of the 1st day of May, 1998.
BIG CITY BAGELS, INC. Address: 99 Woodbury Road
Hicksville, NY 11801
Fax: 516/932-5056
By:____________________________________
Mark Weinreb, Chairman of the Board
and Chief Executive Officer
REGISTERED HOLDER:
__________________________________
DIAN GRIESEL
<PAGE>
Form to be used to exercise Warrant:
The Board of Directors
Big City Bagels, Inc.
99 Woodbury Road
Hicksville, New York 11801
Date:_________________, _____
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase ____ shares of Common Stock of Big City Bagels, Inc. and
hereby makes payment of $____________ (at the rate of $_________ per share of
Common Stock) in payment of the Exercise Price pursuant thereto. Please issue
the Common Stock as to which this Warrant is exercised in accordance with the
instructions given below.
or
The undersigned hereby elects irrevocably to convert its right
to purchase ____________ shares of Common Stock purchasable under the within
Warrant into __________ shares of Common Stock of
__________________________________________ (based on a "Market Price" of
$________ per share of Common Stock). Please issue the Common Stock in
accordance with the instructions given below.
------------------------------
Signature
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name ________________________________________________________
(Print in Block Letters)
Address ________________________________________________________
<PAGE>
Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED,____________________________________ does
hereby sell, assign and transfer unto_______________________ the right to
purchase __________________ shares of Common Stock of Big City Bagels, Inc.
("Company") evidenced by the within Warrant and does hereby authorize the
Company to transfer such right on the books of the Company.
Dated:___________________, ______
------------------------------
Signature
- --------------------------
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written upon
the face of the within Warrant in every particular without alteration or
enlargement or any change whatsoever, and must be guaranteed by a bank, other
than a savings bank, or by a trust company or by a firm having membership on a
registered national securities exchange.
<PAGE>
EXHIBIT 4.7.1
Schedule of Omitted Documents in the Form of
Exhibit 4.7, including Material Detail in
Which Such Documents Differ from Exhibit 4.7
1. Warrant to purchase 5,000 shares of Common Stock at an exercise price
of $1.25 per share issued to Dian Griesel, dated May 1, 1998; become
exercisable on July 1, 1998.
2. Warrant to purchase 5,000 shares of Common Stock at an exercise price
of $1.50 per share issued to Dian Griesel, dated May 1, 1998; become
exercisable on October 1, 1998.
3. Warrant to purchase 4,000 shares of Common Stock at an exercise price
of $1.75 per share issued to Jacqueline Resto, dated May 1, 1998;
become exercisable on January 1, 1999.
4. Warrant to purchase 1,000 shares of Common Stock at an exercise price
of $1.75 per share issued to Takashi Crum, dated May 1, 1998; become
exercisable on January 1, 1999.
The form of the documents listed above does not differ in material
detail from the form of Exhibit 4.7 except with respect to the name of the
holder, the exercise price and the date the warrant becomes exercisable.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
State of Date of
Name Incorporation Incorporation Status
- ----- ------------- ----------------- ---------------------
Big City Bagels NY, Inc. New York November 26, 1997 Wholly-owned by
Big City Bagels, Inc.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
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 22, 1999 (March 23, 1999 with respect to Note L), 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, 1998.
/s/ Richard A. Eisner & Company, LLP
RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 29, 1999
<PAGE>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<PAGE>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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0
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