<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 30, 1999
Big City Bagels, Inc.
(Exact Name of Registrant as Specified in Charter)
New York 0-28058 11-3137508
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
99 Woodbury Road, Hicksville, New York 11801
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 932-5050
N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
General
On July 1, 1999, Big City Bagels, Inc. ("Company"), BCB Acquisition Corp. I
("BCB I") and BCB Acquisition Corp. II ("BCB II" and, together with the Company
and BCB I, the "Big City Parties") consummated the transactions contemplated by
the Agreement and Plan of Reorganization and Merger with Intelligent Computer
Solutions, Inc. ("ICS"), Village Net, Inc. ("Village Net") and each of the
shareholders of ICS and Village Net (collectively, the "Shareholders" and,
together with ICS and Village Net, the "Target Corporation Parties"), dated May
21, 1999 and as amended on June 28, 1999 (the "Merger Agreement"). The Merger
Agreement provided for the merger (the "Merger") of BCB I and BCB II with and
into ICS and Village Net, respectively, for the separate corporate existence of
BCB I and BCB II to cease and for ICS and Village Net to be the surviving
corporations of the Merger, continuing after the Merger as wholly-owned
subsidiaries of the Company.
Merger Consideration
Under the terms of the Merger Agreement, all 100 shares of common stock of
each of BCB I and BCB II outstanding immediately prior to the time that the
Merger became effective ("Effective Time") were converted into and exchanged for
100 shares of common stock of each of ICS and Village Net, respectively, which
now represent all of the issued and outstanding shares of capital stock of each
of ICS and Village Net. At the Effective Time, (i) the 1,400 shares of the
common stock, representing all the outstanding capital stock of ICS, were
converted into the right to receive 4,309,733 shares of the Company's common
stock ("Big City Common Stock") and 254,076 shares of Class D Preferred Stock
("Big City Preferred Stock" and, together with the Big City Common Stock, the
"ICS Merger Consideration") and (ii) the 1,000 shares of common stock of
Village Net, representing all the outstanding capital stock of Village Net,
will be converted into the right to receive 4,309,733 shares of Big City Common
Stock and 254,076 shares of Big City Preferred Stock ("Village Net Merger
Consideration"). The holders of Big City Preferred Stock will have the right to
convert all 508,152 shares of Big City Preferred Stock into an aggregate of
70,124,978 shares of Big City Common Stock at a conversion rate of 138 shares
of Big City Common Stock for each share of Big City Preferred Stock. The
holders may convert the Big City Preferred Stock, in whole or in part, at any
time after the Effective Time, provided that the Company is then authorized to
issue a sufficient number of shares of Big City Common Stock. The Certificate of
Incorporation of the Company currently authorizes the Company to issue
25,000,000 shares of Big City Common Stock. As of July 1, 1999, the Company had
outstanding 16,643,691 shares of Big City Common Stock (excluding 65,279 shares
of treasury stock) and had reserved for issuance upon the exercise of
outstanding options and warrants or pursuant to the Company's outstanding stock
plans, 1,412,262 shares of Big City Common Stock. Accordingly, at July 1, 1999,
the Big City Preferred Stock could only be converted into a maximum of
6,944,047 shares of Big City Common Stock. The Certificate of Incorporation of
Big City is anticipated to be amended to increase the number of shares of Big
City Common Stock that the Company is authorized to issue at some time
subsequent to the closing of the Merger. The Big City Preferred Stock will be
transferable, subject to compliance with applicable securities laws. The
holders of Big City Preferred Stock also will have voting rights equal to the
number of shares of Big City Common Stock into which each share of Big City
Preferred Stock is then convertible. Assuming the conversion of all of the
shares of Big City Preferred Stock, the ICS Merger Consideration and Village Net
Merger Consideration together would represent approximately 90% of the Big City
Common Stock outstanding after the Effective Time, calculated on a fully
diluted basis assuming the exercise of the Company's outstanding options and
warrants that have an exercise price of $1.00 or less.
<PAGE> 3
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits
(a) Financial Statements
(b) Pro Forma Financial Statements
(c) Exhibits
Exhibit Number Description
- --------------------------
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 30, 1999 BIG CITY BAGELS, INC.
---------------------
(Registrant)
/s/ Peter Keenan
---------------------
Peter Keenan
President
<PAGE> 5
Big City Bagels, Inc. and Subsidiary
Index to Pro Forma Financial Information
<TABLE>
<S> <C>
Pro Forma unaudited condensed consolidated balance sheet at June 30, 1999 P-2
Notes to pro forma unaudited condensed balance sheet P-4
Pro forma unaudited condensed statements of operations for the six months
ended June 30, 1999 and for the year ended December 31, 1998 P-5
Notes to the pro forma unaudited condensed statement of operations for the
six months ended June 30, 1999 P-7
Pro forma unaudited condensed statement of operations for the year
ended December 31, 1998 P-8
Notes to the pro forma unaudited condensed statement of operations for the year
ended December 31, 1998 P-9
</TABLE>
P-1
<PAGE> 6
Big City Bagels, Inc. and Subsidiary
Pro Forma Unaudited Condensed
Consolidated Balance Sheet
At June 30, 1999
The following pro forma unaudited condensed consolidated balance sheet reflects
the July 1, 1999 merger of Big City Bagels, Inc. ("the Company") with Village
Net, Inc. ("Village Net") and Intelligent Computer Solutions, Inc. ("ICS"). The
merger is accounted for as an acquisition of the Company and ICS by Village Net,
as the former shareholders of Village Net own a majority of the shares of the
combined companies as of the completion of the transaction. The reverse
acquisition of the Company is treated as a purchase with the issuance of common
stock and options to purchase common stock to the pre-merger shareholders and
option holders of the Company in exchange for the net assets of the Company,
valued at fair value of the net assets acquired and to be sold. The acquisition
of ICS will be accounted for as a purchase with the securities issued as
consideration for ICS valued at $2,577524, based on the opinion of an
independent appraiser. The pro forma unaudited condensed consolidated balance
sheet gives effect to the merger as if it occurred on June 30, 1999. In the
opinion of management of the Company, all adjustments necessary to present
fairly such pro forma balance sheet have been made.
The pro forma unaudited condensed consolidated balance sheet should be read in
conjunction with the notes thereto, and the financial statements of the Company,
Village Net and ICS, and the notes thereto. The pro forma unaudited condensed
consolidated balance sheet is not necessarily indicative of what the actual
financial position would have been had the transaction occurred on June 30,
1999, nor does it purport to represent the future financial position of the
Company.
P-2
<PAGE> 7
BIG CITY BAGELS, INC. AND SUBSIDIARY
Pro Forma Unaudited Condensed Consolidated Balance Sheet
At June 30,1999
<TABLE>
<CAPTION>
VILLAGE PRO FORMA PRO FORMA
THE COMPANY NET ICS ADJUSTMENTS TOTAL
------------ --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 69,754 $ 18,642 $ 69,552 -- $ 157,948
Accounts receivable -- 27,952 651,086 -- 679,038
Inventory -- -- 47,189 -- 47,189
Prepaid expenses and other current assets -- -- 39,385 -- 39,385
------------ --------- --------- ---------- ------------
Total Current Assets 69,754 46,594 807,212 -- 923,560
Fixed assets, net of accumulated depreciation -- 204,135 61,278 -- 265,413
Intangible assets, net of accumulated amortization -- 876 -- 2,354,923(A) 2,355,799
Net assets of discontinued operations 135,205 -- -- -- 135,205
Deferred tax asset 56,700 -- -- 56,700
Security deposits and other assets -- -- 12,883 -- 12,883
------------ --------- --------- ---------- ------------
TOTAL $ 204,959 $ 308,305 $ 881,373 2,354,923 $ 3,749,560
============ ========= ========= ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable -- -- $ 104,453 -- $ 104,453
Deferred income -- $ 18,871 -- -- 18,871
Accounts payable and accrued expenses -- 77,203 325,773 -- 402,976
Loan payable 315,426 -- 315,426
Other current liabilities -- 686 26,659 -- 27,345
------------ --------- --------- ---------- ------------
Total Current Liabilities -- 96,760 772,311 -- 869,071
Loans payable -- 31,028 176,652 -- 207,680
Due to affiliate -- 277,791 (277,791) -- --
Deferred taxes payable -- 8,900 6,600 -- 15,500
Security deposits payable -- 1,419 -- -- 1,419
------------ --------- --------- ---------- ------------
Total Liabilities -- 415,898 677,772 -- 1,093,670
------------ --------- --------- ---------- ------------
STOCKHOLDERS' EQUITY
Preferred stock -- -- 2,000 508 (A) 508
-- -- -- (2,000)(A)
Common stock 7,964 1,000 1,000 7,619 (A) 16,708
-- -- -- (1,000)(B)
-- -- -- 125 (C)
Additional paid in capital 10,325,651 -- -- 2,348,796 (A) 2,955,891
-- -- -- (9,843,431)(B)
-- -- -- 124,875 (C)
Accumulated deficit (10,064,032) (108,593) 200,601 9,844,431 (A) (252,593)
-- -- -- (125,000)(C)
Treasury stock (64,624) -- -- -- (64,624)
------------ --------- --------- ---------- ------------
Total stockholders' equity 204,959 (107,593) 203,601 2,354,923 2,655,890
------------ --------- --------- ---------- ------------
TOTAL $ 204,959 $ 308,305 $ 881,373 $2,354,923 $ 3,749,560
============ ========= ========= ========== ============
</TABLE>
P-3
<PAGE> 8
Big City Bagels, Inc. and Subsidiary
Notes to Pro Forma Unaudited Condensed Consolidated Balance Sheet
(A) To reflect the acquisition of ICS.
(B) To reflect the reverse acquisition of the Company by Village Net.
(C) To record 125,000 shares of common stock issued in buy-out of employment
agreement of former president of the Company.
P-4
<PAGE> 9
Big City Bagels, Inc. and Subsidiary
Pro Forma Unaudited Condensed Statements of Operations
For the Six Months Ended June 30, 1999 and Year Ended December 31, 1998
The following pro forma unaudited condensed statements of operations for the six
months ended June 30, 1999 and the year ended December 31, 1998, reflect the
results of operations of Village Net and ICS, as if the acquisition of ICS by
Village Net had occurred on January 1, 1999 and January 1, 1998, respectively.
As the Company is discontinuing its bagel business, the operations of the
Company prior to the reverse acquisition by Village Net are discontinued and
accordingly are not included in the pro forma statements of operations.
In the opinion of management all adjustments necessary to present fairly such
pro forma statements of operations have been made. These pro forma unaudited
condensed statements of operations should be read in conjunction with the notes
thereto. The pro forma unaudited condensed statements of operations are not
necessarily indicative of what the actual results of operations would have been
had the transactions occurred on January 1, 1999 or January 1, 1998, nor do they
purport to indicate the results of future operations.
P-5
<PAGE> 10
Big City Bagels, Inc. and Subsidiary
Pro Forma Unaudited Condensed Statement of Operations
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
VILLAGE NET ICS ADJUSTMENTS TOTAL
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Subscription services $ 180,308 -- -- $ 180,308
Hardware sales -- $ 1,221,842 -- 1,221,842
Installation services -- 308,635 (6,000)(A) 302,635
Other -- 166,553 -- 166,553
----------- ----------- ----------- -----------
Total Revenues 180,308 1,697,030 (6,000) 1,871,338
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 101,724 1,096,110 (6,000)(A) 1,191,834
Selling, general and administrative 65,220 561,154 157,500 (B) 783,874
Amortization of excess of cost over fair value
of net assets acquired 78,497 (C) 78,497
Interest expense 1,284 2,242 -- 3,526
----------- ----------- ----------- -----------
Total costs and expenses 168,228 1,659,506 229,997 2,057,731
----------- ----------- ----------- -----------
Income from Operations $ 12,080 $ 37,524 $ (235,997) $ (186,393)
=========== =========== =========== ===========
</TABLE>
P-6
<PAGE> 11
Big City Bagels, Inc. and Subsidiary
Notes to Pro Forma Unaudited Statements of Operations
For the Six Months Ended June 30, 1999
(A) To eliminate inter-company billings and expenses.
(B) To reflect the costs of the buy-out of the employment agreement and the new
consulting agreement entered into with the former president of the Company.
(C) To reflect the amortization of goodwill over its estimated useful life of 15
years.
P-7
<PAGE> 12
Big City Bagels, Inc. and Subsidiary
Pro Forma Unaudited Condensed Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
VILLAGE NET ICS ADJUSTMENTS TOTAL
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Subscription services $ 418,712 -- -- $ 418,712
Hardware sales -- $4,433,899 -- 4,433,899
Installation services -- 1,281,821 (12,000)(A) 1,269,821
Other -- 368,931 -- 368,931
---------- ---------- ------- ---------
Total Revenues 418,712 6,084,651 (12,000) 6,491,363
---------- ---------- ------- ---------
COSTS AND EXPENSES:
Cost of sales 191,292 4,619,271 (12,000)(A) 4,798,563
Selling, general and administrative 125,802 1,007,364 157,500 (B) 1,290,666
Amortization of excess of cost over fair value
of net assets acquired 156,995 (C) 156,995
Interest expense -- 25,157 -- 25,157
---------- ---------- ------- ---------
Total costs and expenses 317,094 5,651,792 302,495 6,271,381
---------- ---------- ------- ---------
Income before provision for income taxes 101,618 432,859 (314,495) 219,982
Provision for income taxes 31,200 186,100 (127,900)(D) 89,400
---------- ---------- ------- ---------
Net income $ 70,418 $ 246,759 $ (186,595) $ 130,582
========== ========== ========== ==========
</TABLE>
P-8
<PAGE> 13
Big City Bagels, Inc. and Subsidiary
Notes to Pro Forma Unaudited Statements of Operations
For the Year Ended December 31, 1998
(A) To eliminate inter-company billings and expenses.
(B) To reflect the costs of the buy-out of the employment agreement and the new
consulting agreement entered into with the former president of the Company.
(C) To reflect the amortization of goodwill over its estimated useful life of 15
years.
(C) To reflect the income tax effect of the pro forma adjustments.
P-9
<PAGE> 14
INTELLIGENT COMPUTER SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 69,552 $ 186,638
Accounts Receivable 651,086 1,068,215
Inventories 47,189 477,017
Due from Affiliates 277,791 283,115
Prepaid Expenses 39,385 12,058
---------- ----------
Total Current Assets 1,085,003 2,027,043
Fixed assets, net of accumulated depreciation 61,278 49,513
Security Deposits 12,883 6,270
---------- ----------
TOTAL $1,159,164 $2,082,826
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note Payable $ 80,000 $ --
Current Portion of Long-Term Debt 24,453 21,971
Accounts Payable 281,641 1,030,430
Accrued Expenses 44,132 112,996
Income Taxes Payable 195,575
Due to Affiliate 315,426 305,325
Other Current Liabilities 26,659 48,200
---------- ----------
Total Current Liabilities 772,311 1,714,497
Note Payable - Related Parties 176,652 176,652
Deferred Taxes Payable 6,600 6,600
---------- ----------
Total Liabilities 955,563 1,897,749
---------- ----------
Stockholders' Equity
Preferred stock - no par value, Authorized - 100 shares,
Issued and outstanding 40 shares 2,000 2,000
Common stock - no par value, Authorized - 2000 shares,
Issued and outstanding - 1000 shares 1,000 1,000
Retained Earnings 200,601 182,077
---------- ----------
Total Stockholders' Equity 203,601 185,077
---------- ----------
TOTAL $1,159,164 $2,082,826
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 15
INTELLIGENT COMPUTER SOLUTIONS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
REVENUES:
Hardware sales $ 1,221,842 $ 1,375,152
Installation services 308,635 453,712
Other 166,553 80,375
----------- -----------
Total Revenues 1,697,030 1,909,239
----------- -----------
COSTS AND EXPENSES:
Cost of sales 1,096,110 1,426,763
Selling, general and administrative 552,047 462,771
Interest expense 11,349 9,294
Equity loss -- 332
----------- -----------
Total costs and expenses 1,659,506 1,899,160
----------- -----------
Income before provision for income taxes 37,524 10,079
Provision for income taxes 19,000 2,400
----------- -----------
Net income 18,524 7,679
Retained Earnings (Deficit) - Beginning 182,077 (64,682)
----------- -----------
Retained Earnings (Deficit) - Ending $ 200,601 $ (57,003)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 16
INTELLIGENT COMPUTER SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 26,524 $ 246,759
--------- ---------
Adjustments to reconcile net income to net cash
(used) provided by operating
activities:
Depreciation 8,848 20,944
Deferred Tax Expense 6,600
Loss from Operations of Affiliate 332
(Increase) decrease in:
Accounts Receivable 417,129 (857,676)
Inventory 429,828 (428,575)
Other Current Assets (35,327) (9,875)
Increase (decrease) in:
Accounts Payable (817,653) 821,106
Accrued Expenses 85,309
Income Taxes Payable (195,575) 195,575
Other Current Liabilities (21,541) 48,200
--------- ---------
Total adjustments (214,291) (118,060)
--------- ---------
Net Cash (Used) Provided by Operating Activities (187,767) 128,699
--------- ---------
Cash Flows From Investing Activities:
Purchase of Fixed Assets (20,613) (20,515)
(Increase) in Security Deposits (6,613)
Decrease (Increase) in Due from Affiliate 5,325 44,858
--------- ---------
Net Cash (Used) Provided by Investing Activities (21,901) 24,343
--------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term debt 2,482 9,458
Note Payable 80,000 (50,000)
Issuance of Preferred Stock 2,000
Increase in Due to Affiliates 10,100 65,051
--------- ---------
Net Cash Provided by Financing Activities 92,582 26,509
--------- ---------
Net (decrease) increase in cash (117,086) 179,551
Cash - Beginning 186,638 7,087
--------- ---------
Cash - Ending $ 69,552 $ 186,638
========= =========
Supplemental Information:
Taxes Paid $ 230,875 $ 325
Interest Paid 9,108 15,699
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 17
INTELLIGENT COMPUTER SOLUTIONS, INC.
NOTE TO FINANCIAL STATEMENTS
(NOTE A)- THE COMPANY AND BASIS OF PRESENTATION
The Company is a full service system integration firm
specializing in high-end computer networking infrastructures,
internet solutions, and Local and Wide Area Network
installations. The Company markets its services throughout the
United States.
The information herein is unaudited. However, in the opinion
of management, such information reflects all adjustments
(consisting only of normal recurring accruals) necessary to
make the financial statements not misleading. Additionally, it
should be noted that the accompanying financial statements do
not purport to contain complete disclosures in conformity with
generally accepted accounting principles.
The results of operations for the three and six months ended
June 30, 1999 are not necessarily indicative of the results of
operations for the full year ending December 31, 1999.
(NOTE B)- MERGER
On July 1, 1999, the Company was acquired by Village Net, Inc.
("Village Net") and merger with Big City Bagels, Inc. ("Big
City"), for 8.6 million shares of Common Stock and 508,152
shares of Class B Preferred Stock.
The transaction will be accounted for as an acquisition of Big
City and the Company by Village Net as the former shareholders
of Village Net own a majority of the shares of the combined
companies as of the completion of the transaction. In
addition, as Big City is discontinuing its bagel business, the
reverse acquisition of Big City will be treated as a purchase
with the issuance of common stock and options to purchase
common stock to the pre-merger shareholders and option holders
of Big City in exchange for the net assets of Big City, valued
at fair value of the net assets acquired and to be sold. The
acquisition of the Company will be accounted for as a purchase
with the securities issued as consideration for the Company
valued at $2,577,524 based on the opinion of an independent
appraiser
<PAGE> 18
VILLAGE NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 18,642 $ 21,897
Accounts receivable, net of allowance 27,952 43,454
--------- ---------
Total Current Assets 46,594 65,351
Fixed assets, net of accumulated depreciation 204,135 141,485
Intangible - net of accumulated amortization 876 916
Deferred tax asset 56,700 56,700
--------- ---------
TOTAL $ 308,305 $ 264,452
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable and accrued expenses $ 77,889 $ 24,320
Deferred income 18,871 40,785
--------- ---------
Total Current Liabilities 96,760 65,105
Due to affiliate 277,791 277,785
Due to stockholders 31,028 28,516
Deferred taxes payable 8,900 8,900
Deposits payable 1,419 1,419
--------- ---------
Total Liabilities 415,898 381,725
--------- ---------
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 1,000 shares authorized
1,000 shares issued and outstanding 1,000 1,000
Accumulated deficit (108,593) (118,273)
--------- ---------
Total Stockholders' Deficiency (107,593) (117,273)
--------- ---------
TOTAL $ 308,305 $ 264,452
========= =========
</TABLE>
<PAGE> 19
VILLAGE NET, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Subscription services $ 180,308 $ 215,077
--------- ---------
COSTS AND EXPENSES:
Cost of sales 101,724 74,635
Selling, general and administrative 65,220 86,140
Interest expense 1,284 --
--------- ---------
Total costs and expenses 168,228 160,775
--------- ---------
Income before provision for income taxes 12,080 54,302
Provision for income taxes 2,400 17,000
--------- ---------
Net income 9,680 37,302
Accumulated Deficit - beginning (118,273) (188,691)
--------- ---------
Accumulated Deficit - end $(108,593) $(151,389)
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 20
VILLAGE NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,680 $ 70,418
-------- --------
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation 13,477 21,216
Deferred tax (credit) 8,900
(Increase) decrease in:
Accounts receivable 15,502 (32,664)
Other assets 22,300
Increase (decrease) in:
Accounts payable and accrued expenses 56,503 (19,117)
Income taxes (2,934)
Deferred revenue (21,914) 24,785
-------- --------
Total adjustments 60,634 25,420
-------- --------
Net cash provided (used) by operating activities 70,314 95,838
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (76,087) (65,085)
Increase in deposits payable 201
Increase in due to stockholders 2,512 37,326
-------- --------
Cash from Investing (73,575) (27,558)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to affiliate 6 (48,075)
-------- --------
Net (decrease) increase in cash (3,255) 20,205
Cash - beginning 21,897 1,692
-------- --------
Cash - end $ 18,642 $ 21,897
======== ========
Supplemental Information:
Taxes Paid $ 4,688
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 21
VILLAGE NET, INC.
NOTE TO FINANCIAL STATEMENTS
(NOTE A)- THE COMPANY AND BASIS OF PRESENTATION
The Company is a provider of Internet on-line services,
offering its subscribers a wide variety of services including
electronic mail, software, computing support, and easy access
of the Internet. In addition, the Company provides small
businesses with fully managed services that include Internet
connections, remote dial access and Web hosting services.
The information herein is unaudited. However, in the opinion
of management, such information reflects all adjustments
(consisting only of normal recurring accruals) necessary to
make the financial statements not misleading. Additionally, it
should be noted that the accompanying financial statements do
not purport to contain complete disclosures in conformity with
generally accepted accounting principles.
The results of operations for the three and six months ended
June 30, 1999 are not necessarily indicative of the results of
operations for the full year ending December 31, 1999.
(NOTE B)- MERGER
On July 1, 1999, the Company completed its merger with Big
City Bagels, Inc. ("Big City") and Intelligent Computer
Solutions, Inc. ("ICS"), for 8.6 million shares of Common
Stock and 508,152 shares of Class B Preferred Stock.
The transaction will be accounted for as an acquisition of Big
City and ICS by the Company as the former shareholders of the
Company own a majority of the shares of the combined companies
as of the completion of the transaction. In addition, as Big
City is discontinuing its bagel business, the reverse
acquisition of Big City will be treated as a purchase with the
issuance of common stock and options to purchase common stock
to the pre-merger shareholders and option holders of Big City
in exchange for the net assets of Big City, valued at fair
value of the net assets acquired and to be sold. The
acquisition of ICS will be accounted for as a purchase with
the securities issued as consideration for ICS valued at
$2,577,524 based on the opinion of an independent appraiser.
<PAGE> 22
VILLAGE NET, INC.
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT .............................................F-1
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1998 and 1997............................F-2
Statements of Operations and Accumulated Deficit for the Years Ended
December 31, 1998 and 1997 .............................................F-3
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 ...F-4
Notes to Financial Statements ............................................F-5-6
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
May 24, 1999
To the Board of Directors
Village Net, Inc.
620 Johnson Ave.
Bohemia, New York 11716
We have audited the accompanying balance sheets of Village Net, Inc. as of
December 31, 1998 and 1997 and the related statements of operations, accumulated
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Village Net, Inc. as of December
31, 1998 and 1997 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
LAURENCE ROTHBLATT & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
F-1
<PAGE> 24
VILLAGE NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 21,897 $ 1,692
Accounts receivable, net of allowance 43,454 10,790
--------- ---------
Total Current Assets 65,351 12,482
Fixed assets, net of accumulated depreciation 141,485 97,537
Due from stockholders' -- 8,810
Intangible--net of accumulated amortization 916 995
Deferred tax credits (Note 4) 56,700 79,000
--------- ---------
TOTAL $ 264,452 $ 198,824
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable and accrued expenses $ 24,320 $ 43,437
Deferred income--(Note 2) 40,785 16,000
--------- ---------
Total Current Liabilities 65,105 59,437
Due to affiliate 277,785 325,860
Due to stockholders 28,516 --
Deferred taxes payable 8,900 --
Deposits payable 1,419 1,218
--------- ---------
Total Liabilities 381,725 386,515
--------- ---------
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 1,000 shares authorized
1,000 shares issued and outstanding 1,000 1,000
Accumulated deficit (118,273) (188,691)
--------- ---------
Total Stockholders' Deficiency (117,273) (187,691)
--------- ---------
TOTAL $ 264,452 $ 198,824
========= =========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-2
<PAGE> 25
VILLAGE NET, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
REVENUES:
Subscription services $ 418,712 $ 425,074
Other -- 96,000
--------- ---------
Total Revenues 418,712 521,074
--------- ---------
COSTS AND EXPENSES:
Cost of sales 191,292 229,711
Selling, general and administrative 125,802 300,481
--------- ---------
Total costs and expenses 317,094 530,192
--------- ---------
Income before provision for income taxes 101,618 (9,118)
Provision (credit) for income taxes 31,200 (2,500)
--------- ---------
Net income (loss) 70,418 (6,618)
Accumulated Deficit--beginning of year (188,691) (182,073)
--------- ---------
Accumulated Deficit--end of year $(118,273) $(188,691)
========= =========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-3
<PAGE> 26
VILLAGE NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 70,418 $ (6,618)
---------- -----------
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation 21,216 12,139
Deferred tax (credit) 8,900 (2,500)
(Increase) decrease in:
Accounts receivable (32,664) 3,410
Other assets 22,300 135
Increase (decrease) in:
Accounts payable and accrued expenses (19,117) (28,963)
Deferred revenue 24,785 16,000
--------- ---------
Total adjustments 25,420 221
--------- ---------
Net cash provided (used) by operating activities 95,838 (6,397)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (65,085) (60,991)
Increase (decrease) in deposits payable 201 (5,478)
(Increase) decrease in due from stockholders 8,810 (8,159)
Increase in due to stockholders 28,516 --
--------- ---------
Cash from investing (27,558) (74,628)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to affiliate (48,075) 87,865
--------- ---------
Net increase in cash 20,205 6,840
Cash (overdraft)--beginning of year 1,692 (5,148)
--------- ---------
Cash--end of year $ 21,897 $ 1,692
========= =========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-4
<PAGE> 27
VILLAGE NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION
Village Net, Inc. ("the Company") was incorporated in the State of New York in
June 1995. The Company, based in New York, is a provider of Internet on-line
services, offering its subscribers a wide variety of services including
electronic mail, software, computing support, and easy access of the Internet.
In addition, the Company provides small businesses with fully managed services
that include Internet connections, remote dial access and Web hosting services.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable
The Company uses the allowance method for bad debts.
Revenue Recognition
On-line service revenues are recognized over the period that services are
provided. Other revenues, which consist principally of electronic commerce and
advertising revenues as well as data network service revenues are recognized as
the services are performed or when the goods are delivered. Deferred revenue
consists primarily of annual prepaid subscription fees billed in advance.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs, which do
not improve or extend the useful lives of the respective assets, are expensed
currently. Depreciation is computed using the straight-line method over the
estimated useful lives ranging from five to seven years.
Intangibles
Intangibles are recorded at cost. Intangibles are amortized on the straight-line
method over the estimated useful lives.
Income Taxes
The Company provides for income taxes currently payable, as well as deferred
income taxes resulting from temporary differences between the basis of assets
and liabilities for tax purposes and for financial statement purposes.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
effect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, notes
receivable from related parties, notes payable to related parties. The carrying
amount of these financial instrument have been estimated by management to
approximate fair value.
F-5
<PAGE> 28
VILLAGE NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Internet equipment $ 172,277 $ 107,192
Computer equipment 4,992 4,992
Furniture and fixtures 1,228 1,228
--------- ---------
178,497 113,412
Accumulated depreciation (37,012) (15,875)
--------- ---------
Total $ 141,485 $ 97,537
========= =========
</TABLE>
NOTE 4 - INCOME TAXES
The provision for income taxes as of December 31, consists of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current:
Federal $14,000 $ 0
State 8,300 0
Deferred:
Federal 6,700 (2,500)
State 2,400 0
------- -------
Total $31,400 $(2,500)
======= =======
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<S> <C> <C>
Federal statutory rate $ 36,700 $ (3,200)
Federal statutory rate differential (12,500) 1,800
State taxes, net of federal benefit 7,000 (1,100)
-------- --------
Total $ 31,200 $ (2,500)
======== ========
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards of
approximately $180,000 for tax purposes, which will be available to offset
future taxable income. If not used, these carryforwards will expire between 2011
and 2012.
F-6
<PAGE> 29
VILLAGE NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4 - INCOME TAXES (CONTINUED)
Deferred income reflects the net tax effects of a net operating loss.
Significant components of the Company's deferred tax asset at December 31,
consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 105,300 $ 105,300
Loss carry forward utilization (22,300) 0
Valuation allowance for deferred assets (26,300) (26,300)
--------- ---------
$ 56,700 $ 79,000
========= =========
Deferred tax liabilities:
Property and equipment $ 8,900 $ 0
========= =========
</TABLE>
NOTE 5 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998 and 1997, the had purchases from a
related party of approximately $10,500 and $13,500 respectively. The Company had
sales to this related party of $12,000 for the year ended December 31, 1998. The
Company has a loan of $ 277,785 as of December 31, 1998.
During the year ended December 31, 1997 the Company provided internet service
and consulting support of $96,000 to a related party.
The Company has demand loans to stockholders of $ 28,516, as of December 31,
1998.
The Company leased office space in Ronkonkoma, New York which is owner by an
entity owned by similar stockholders of the Company. Rent expense to this
related party amounted to $18,000 and $4,000 for the years ended December 31,
1998 and 1997, respectively.
NOTE 6 - EMPLOYEE BENEFIT PLAN
The Company has a savings plan ("the savings plan") that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Savings Plan, participating employees may defer a portion of their pretax
earnings, up to the Internal Revenue Service annual contribution limit. The
Company matches up to one third of each employee's contributions up to a maximum
matching contribution of 2% of the employee's earnings.
NOTE 7 - SUBSEQUENT EVENT
On May 21, 1999, the Company and a related party, Intelligent Computer
Solutions, Inc. (ICS) have signed an agreement for the acquisition by merger
with Big City Bagels, Inc. The merger is subject to several conditions,
including receipt of a fairness opinion from Heritage Capital Corp. and is
expected to close in June 1999. Big City, founded in December 1992, operates and
franchises upscale bagel/deli cafes under the registered trademark Big City
Bagels.
The stockholders of the Company and ICS expects to exchange their stock for a
combination of Common Stock and voting convertible preferred stock from the
shareholders of Big City in an amount which, after conversion of preferred stock
into Common Stock, will approximate 90% of the outstanding shares of the Common
Stock following the transaction and conversion. Management of Big City will be
assumed by the management of Village Net and ICS.
F-7
<PAGE> 30
ICSFN98A
INTELLIGENT COMPUTER SOLUTIONS, INC.
TABLE OF CONTENTS
Independent Auditors' Report ..............................................F-1
Balance Sheets as of December 31, 1998 and 1997............................F-2
Statements of Income and Retained Earnings (Deficit) for the Years Ended
December 31, 1998 and 1997...............................................F-3
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997....F-4
Notes to Financial Statements .............................................F-5-8
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
INTELLIGENT COMPUTER SOLUTIONS, INC.
Bohemia, New York
We have audited the accompanying balance sheets of Intelligent Computer
Solutions, Inc. as of December 31, 1998 and 1997 and the related statements of
income and retained earnings (deficit) and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Village Net, Inc. as of December
31, 1998 and 1997 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
WEISBERG, LESK, & KAMPFER, LLP
CERTIFIED PUBLIC ACCOUNTANTS
May 10, 1999
Except for Note 9
Which is May 21, 1999
F-1
<PAGE> 32
INTELLIGENT COMPUTER SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
restated
<S> <C> <C>
ASSETS
Cash $ 186,638 $ 7,087
Accounts Receivable 1,068,215 210,539
Inventories (Note 2) 477,017 48,442
Due from Affiliates (Note 3) 283,115 327,973
Prepaid Expenses 12,058 2,183
---------- --------
Total Current Assets 2,027,043 596,224
Fixed assets, net of accumulated depreciation 49,513 49,942
Investment in Affiliate (Note 3) -- 332
Security Deposits 6,270 6,270
---------- --------
TOTAL $2,082,826 $652,768
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Note Payable $ -- $ 50,000
Current Portion of Long-Term Debt (Note 4) 21,971 12,513
Accounts Payable 1,030,430 209,324
Accrued Expenses 112,996 27,687
Income Taxes Payable (Note 5) 195,575 --
Due to Affiliate (Note 3) 305,325 240,274
Other Current Liabilities 48,200 --
---------- --------
Total Current Liabilities 1,714,497 539,798
Note Payable -- Related Parties (Note 4) 176,652 176,652
Deferred Taxes Payable (Note 5) 6,600 --
---------- --------
Total Liabilities 1,897,749 716,450
---------- --------
Stockholders' Equity (Deficiency)
Preferred stock (Note 7) -- no par value,
Authorized -- 100 shares, Issued and
outstanding 40 shares 2,000 --
Common stock -- no par value, Authorized --
2000 shares, Issued and outstanding --
1000 1,000 1,000
Retained Earnings (Deficit) 182,077 (64,682)
---------- --------
Total Stockholders' Equity (Deficiency) 185,077 (63,682)
---------- --------
TOTAL $2,082,826 $652,768
========== ========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-2
<PAGE> 33
INTELLIGENT COMPUTER SOLUTIONS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
restated
<S> <C> <C>
REVENUES:
Hardware sales $4,433,899 $3,936,225
Installation services 1,281,821 1,682,479
Other 368,931 221,471
---------- ----------
Total Revenues 6,084,651 5,840,175
---------- ----------
COSTS AND EXPENSES:
Cost of sales 4,619,271 5,031,473
Selling, general and administrative 1,007,364 745,069
Interest expense 25,157 11,720
---------- ----------
Total costs and expenses 5,651,792 5,788,262
---------- ----------
Income before provision for income taxes 432,859 51,913
Provision for income taxes 186,100 325
---------- ----------
Net income 246,759 51,588
Accumulated Deficit -- Beginning (64,682) (116,270)
---------- ----------
Retained Earnings (Deficit) -- Ending $ 182,077 $ (64,682)
========== ==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-3
<PAGE> 34
INTELLIGENT COMPUTER SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
restated
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 246,759 $ 51,588
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation 20,944 19,514
Deferred Tax Expense 6,600 --
Loss from Operations of Affiliate 332 168
(Increase) decrease in:
Accounts Receivable (857,676) 383,003
Estimated Earnings in Excess of Billings -- 26,312
Inventory (428,575) 266,984
Prepaid Expenses (9,875) (2,183)
Increase (decrease) in:
Accounts Payable 821,106 (721,725)
Accrued Expenses 85,309 890
Income Taxes Payable 195,575 --
Sales Tax Payable -- (115)
Other Current Liabilities 48,200 (5,350)
--------- ---------
Net Cash Provided by Operating Activities 128,699 19,086
--------- ---------
Cash Flows From Investing Activities:
Purchase of Fixed Assets (20,515) (36,479)
(Increase) in Security Deposits -- (6,270)
Decrease (Increase) in Due from Affiliate 44,858 (269,830)
--------- ---------
Net Cash Provided (Used) by Investing Activities 24,343 (312,579)
--------- ---------
Cash Flows From Financing Activities:
Note Payable 9,458 8,833
Line of Credit (50,000) 50,000
Issuance of Preferred Stock 2,000 --
Increase in Due to Affiliates 65,051 240,274
--------- ---------
Net Cash Provided by Financing Activities 26,509 299,107
--------- ---------
Net increase in Cash 179,551 5,614
Cash -- Beginning 7,087 1,473
--------- ---------
Cash -- Ending $ 186,638 $ 7,087
========= =========
Supplemental Information:
Taxes Paid $ 325 $ 325
Interest Paid 15,699 8,020
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-4
<PAGE> 35
INTELLIGENT COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION
The Company was incorporated on October 21, 1994 pursuant to the provisions of
the State of New York. On August 1, 1996 Peter Keenan purchased 510 shares of
the Company's stock, which represents a 51% ownership interest in the Company.
The Board of Directors also named him President of the Company.
The Company is a full service system integration firm specializing in high-end
computer networking infrastructures, internet solutions, and Local and Wide Area
Network installations. The Company markets its services throughout the United
States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company, as summarized
below, are in conformity with generally accepted accounting principles.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined on the
first-in, first-out basis.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using accelerated and
straight-line methods over the estimated useful lives of the related assets.
Maintenance, repairs and minor renewals are charged to expense when incurred.
Replacements and major renewals are capitalized.
Income Taxes
The Company and its stockholders' were previously taxed as a small business
under the provisions of Section 1362 of the Internal Revenue Code and the
applicable provision for the New York State Corporation tax code. Effective
January 1, 1998 the Company terminated its election to be treated as a small
business corporation and therefore will record its state and federal tax
liability in accordance with Financial Accounting Standards Board Statement No.
109 "Accounting for Income Taxes".
Deferred taxes payable are recorded for temporary differences between the
recognition of income and expense for tax and financial reporting purposes,
using current tax rates. Temporary differences result principally from reporting
accelerated depreciation over the straight-line method of depreciation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
effect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, notes
receivable from related parties, notes payable to related parties. The carrying
amount of these financial instrument have been estimated by management to
approximate fair value.
F-5
<PAGE> 36
INTELLIGENT COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restatement
The Company has restated its equity investment in Intelligent Computer Solutions
Network Systems, Inc. The Company has reduced its investment to the amount
actually invested for the year ended December 31, 1998.
NOTE 3 - RELATED PARTY TRANSACTIONS
A) During the year ended December 31, 1998 and 1997, the had sales to a
related party of approximately $10,500 and $13,500 respectively. The
Company had purchases from this related party of $12,000 for the year ended
December 31, 1998.
B) On December 31, 1997 the Company acquired a 50% interest in the outstanding
common stock of Intelligent Computer Solutions Network Systems, Inc. During
1998 as a result of additional shares being issued, the Company's equity
interest was reduced to 35% of the outstanding common stock. The investment
is accounted for using the equity method. The carrying value of this
investment was $ 0 and $ 300 at December 31, 1998 and 1997, respectively.
NOTE 4 - NOTES PAYABLE
The Company has a note payable, dated August 1,1996, to a related party. The
outstanding balance is $176,651, which bears interest at a rate of five percent
per annum. Principal and interest payments are due on a quarterly basis
beginning August 1, 1997, equal to the Company's net profit before taxes. In no
event shall such quarterly payments be less than $2,000. This note is due and
payable on May 1, 2002. As of December 31, 1997 no payments have been made to
the related party. Interest of approximately $9,5000 and $8,800 has been accrued
for the years ended December 31, 1998 and 1997, respectively.
NOTE 5 - INCOME TAXES
The provision for income taxes at December 31, 1998 consists of:
<TABLE>
<S> <C>
Current:
Federal $133,100
State 46,400
Deferred:
Federal 4,900
State 1,700
--------
Total $186,100
========
</TABLE>
F-6
<PAGE> 37
INTELLIGENT COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective tax
rate follows:
<TABLE>
<S> <C>
Federal statutory rate $ 157,200
Federal statutory rate differential (4,500)
State taxes, net of federal benefit 33,400
---------
Total $ 186,100
=========
Deferred tax liabilities:
Property and equipment $ 6,600
=========
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
A) The Company occupies its present office and warehouse space under a
five-year lease expiring March 31, 2002. The terms of the lease require
minimum annual rent of $33,000 and increases annually at the rate of four
percent per year on each anniversary date of the lease.
Minimum future rental commitments under operating leases are payable as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $ 40,000
2000 41,000
2001 40,000
2002 10,000
--------
Total minimum future rental commitments $131,000
========
</TABLE>
B) The Company leases a vehicle under an operating lease through April 2000.
C) The Company has an employment agreement with the President of the Company
which provides for compensation at the rate of $ 50,000 per year. This
amount may be increased annually by the Board of Directors up to a maximum
of $ 125,000 per year, provided there is an additional employee(s),
designated by two members of the Board, added to the Company's payroll who
will be paid an annual salary equal to any excess amount over $ 50,000 per
year paid to the President.
NOTE 7 - PREFERRED STOCK
On January 1, 1998 the Company authorized 100 shares of no par value preferred
stock. The preferred stock is convertible into shares of common stock at the
conversion rate of one to one.
F-7
<PAGE> 38
INTELLIGENT COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - PENSION PLAN
The Company maintains a tax qualified IRC section 401(k) retirement plan for all
qualified employees. The employees may contribute a maximum amount of 15% of
their gross wages to the plan. The Company contributes up to one-third of each
employee's contributions to a maximum contribution of 2% of the gross wages for
each employee participating in the plan. For the years ended December 31, 1998
and 1997 the annual pension expense was approximately $7,000 and $5,000,
respectively.
NOTE 9 - SUBSEQUENT EVENT
On May 21, 1999, the Company and a related party, Village Net have signed an
agreement for the acquisition by merger with Big City Bagels, Inc. The merger is
subject to several conditions, including receipt of a fairness opinion from
Heritage Capital Corp. and is expected to close in June 1999. Big City, founded
in December 1992, operates and franchises upscale bagel/deli cafes under the
registered trademark Big City Bagels.
The stockholders' of the Company and Village Net expects to exchange their stock
for a combination of Common Stock and voting convertible preferred stock from
the shareholders of Big City in an amount which, after conversion of preferred
stock into Common Stock, will approximate 90% of the outstanding shares of the
Common Stock following the transaction and conversion. Management of Big City
will be assumed by the management of ICS and Village Net.
F-8
