<PAGE>
As filed with the Securities and Exchange Commission on December 24, 1996
Registration No. 333-
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
TUSCANY, INC.
(Exact name of small business issuer as specified in its charter)
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<CAPTION>
<S> <C> <C>
Washington 5812 91-1548202
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
</TABLE>
Two Union Square
601 Union Street, Suite 4620
Seattle, Washington 98101
(206) 292-1550
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------
Jim Simonson
President
Tuscany, Inc.
Two Union Square
601 Union Street, Suite 4620
Seattle, Washington 98101
(206) 292-1550
(Name, address and telephone number of agent for service)
------
Copies of all communications to:
ROBERT J. MITTMAN, ESQ. ALAN H. ARONSON, ESQ.
Tenzer Greenblatt LLP Akerman, Senterfitt & Eidson, P.A.
The Chrysler Building One Southeast 3rd Avenue
405 Lexington Avenue Miami, Florida 33131-1704
New York, New York 10174-0208 Telephone: (305) 374-5600
Telephone: (212) 885-5000 Facsimile: (305) 374-5095
Facsimile: (212) 885-5001
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=============================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
- - ----------------------------------------------------------------------------------------------
Proposed
Maximum Offering Proposed Maximum Amount of
Title of Each Class of Amount to Price Per Aggregate Offering Registration
Securities to be Registered be Registered Security (1) Price (1) Fee
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share .................. 1,840,000(2) $5.00 $9,200,000 $2,787.88
- - ----------------------------------------------------------------------------------------------
Warrants, each to purchase
one share of Common Stock .. 1,840,000(2) $.10 $184,000 $55.76
- - ----------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share, issuable
upon exercise of the
Warrants (3) ............. 1,840,000 $5.00 $9,200,000 $2,787.88
- - ----------------------------------------------------------------------------------------------
Total ....................................................... $18,584,000 $5,631.51
- - ----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Underwriter's over-allotment option to purchase up to 240,000
additional shares of Common Stock and/or 240,000 Warrants is exercised in
full.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Common Stock as may become issuable upon exercise of
the Warrants pursuant to anti-dilution provisions contained in the
Warrants.
<PAGE>
TUSCANY, INC.
CROSS REFERENCE SHEET PURSUANT TO RULE 404
<TABLE>
<CAPTION>
Registration Statement Item Number and Caption Prospectus Caption
--------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
1. Front of the Registration Statement and Outside Front
Cover Page of Prospectus ............................. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus ........................................ Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors ................. Prospectus Summary; Risk Factors
4. Use of Proceeds ...................................... Use of Proceeds
5. Determination of Offering Price ...................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution ............................................. Risk Factors; Dilution
7. Selling Security Holders ............................. Not Applicable
8. Plan of Distribution ................................. Outside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings .................................... Not applicable
10. Directors, Executive Officers, Promoters and Control
Persons .............................................. Management
11. Security Ownership of Certain Beneficial
Owners and Management ................................ Principal Shareholders
12. Description of Securities ............................ Outside and Inside Front Cover Pages of Prospectus; Prospectus
Summary; Capitalization; Description of Securities
13. Interest of Named Experts and Counsel ................ Legal Matters
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities ....................... Exculpatory Provisions and Indemnification Matters
15. Organization Within Last Five Years .................. Certain Transactions
16. Description of Business .............................. Prospectus Summary; Risk Factors; Use of Proceeds; Business
17. Management's Discussion and Analysis or Plan
of Operation ......................................... Management's Discussion and Analysis of Financial Condition
and Results of Operations
18. Description of Property .............................. Business
19. Certain Relationships and Related Transactions ....... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters .............................................. Outside Front Cover Page: Risk Factors; Dividend Policy;
Description of Securities
21. Executive Compensation ............................... Management
22. Financial Statements ................................. Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure .................. Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
PRELIMINARY PROSPECTUS DATED DECEMBER 24, 1996
SUBJECT TO COMPLETION
TUSCANY, INC.
1,600,000 SHARES OF COMMON STOCK AND REDEEMABLE WARRANTS
TO PURCHASE 1,600,000 SHARES OF COMMON STOCK
The Company is offering hereby 1,600,000 shares (the "Shares") of the
common stock of the Company (the "Common Stock") and redeemable warrants to
purchase 1,600,000 shares of Common Stock (the "Warrants"). The Shares and
Warrants may be purchased separately and will be separately transferrable
immediately upon issuance. Each Warrant entitles the registered holder
thereof to purchase one share of Common Stock at a price of $5.00, subject to
adjustment in certain circumstances, at any time until , 2002. The Warrants
are redeemable by the Company, upon the consent of the Underwriter, at any
time upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives
notice has been at least 150% (currently $7.50, subject to adjustment) of the
then effective exercise price of the Warrants. See "Description of
Securities."
Prior to this offering there has been no public market for the Common
Stock or Warrants and there can be no assurance that any such market will
develop. It is anticipated that the Common Stock and Warrants will be quoted
on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "BGEL" and
"BGELW," respectively. The offering prices of the Shares and Warrants, and
the exercise price of the Warrants, were determined pursuant to negotiations
between the Company and the Underwriter and do not necessarily relate to the
Company's book value or any other established criteria of value. For a
discussion of the factors considered in determining the offering prices of
the Shares and Warrants, see "Underwriting."
------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 8 AND "DILUTION" ON PAGE 18.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- - -----------------------------------------------------------------------------
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- - -----------------------------------------------------------------------------
Per Share ..................... $5.00 $.50 $4.50
- - -----------------------------------------------------------------------------
Per Warrant .................. $.10 $.01 $.09
- - -----------------------------------------------------------------------------
Total (3) .................... $8,160,000 $816,000 $7,344,000
- - -----------------------------------------------------------------------------
(1) The Company has agreed to pay to the Underwriter a 3% nonaccountable
expense allowance, to sell to the Underwriter warrants (the
"Underwriter's Warrants") to purchase up to 160,000 shares of Common
Stock and/or 160,000 warrants and to retain the Underwriter as a
financial consultant. The Company has also agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
Underwriter's nonaccountable expense allowance in the amount of $244,800
($281,520 if the Underwriter's over-allotment option is exercised in
full), estimated at $644,000.
(3) The Company has granted to the Underwriter an option, exercisable within
45 days from the date of this Prospectus, to purchase up to 240,000
additional shares of Common Stock and/or 240,000 additional Warrants on
the same terms set forth above, solely for the purpose of covering
over-allotments, if any. If the Underwriter's over-allotment option is
exercised in full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $9,384,000, $938,400 and
$8,445,600, respectively. See "Underwriting."
------
The Shares and Warrants are being offered, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify this offering
and to reject any order in whole or in part. It is expected that delivery of
certificates representing the Shares and Warrants will be made against
payment therefor at the offices of the Underwriter, 7 Hanover Square, New
York, New York 10004, on or about , 1997.
------
Paragon Capital Corporation
The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its shareholders with
annual reports containing audited financial statements and such other
periodic reports as the Company deems appropriate or as may be required by
law.
- - ------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all share and per
share data and information in this Prospectus (i) gives retroactive effect to
a 1- for -3.4 reverse split of the Common Stock effected on December 5, 1996
and (ii) assumes no exercise of the Underwriter's over-allotment option to
purchase up to 240,000 additional shares of Common Stock and/or 240,000
additional Warrants. See "Underwriting" and Note 11 to Notes to Financial
Statements.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
THE COMPANY
Tuscany, Inc. (the "Company") operates 28 specialty coffee and bagel cafes
and bars under the Tuscany name, all of which offer gourmet and specialty
coffee beverages and coffee beans and 20 of which also offer fresh baked
bagels and related food products. The Company's stores are currently located
in the Pittsburgh and Philadelphia, Pennsylvania; Cleveland, Ohio; St. Louis,
Missouri; Denver, Colorado; and Dallas and Houston, Texas metropolitan areas.
The Company developed its Tuscany cafe concept by combining the relaxed
atmosphere of a coffee house with the warm, inviting environment of a bagel
bakery in a "cafe" style setting to differentiate its Tuscany cafes from
other coffee stores and other bagel bakeries and to appeal to a broad range
of customers.
In an effort to increase the Tuscany name recognition and customer
loyalty, the Company has developed a prototypical image for its coffee and
bagel cafes and bars. The Company's 16 coffee and bagel cafes feature the use
of rich woods, custom wall coverings, sconce lighting, tile and hardwood
floors and comfortable seating. These Tuscany cafes generally range in size
from 1,000 to 3,000 square feet and generally have seating capacities from
approximately 20 to 90 customers. The Company also operates 12 coffee and
bagel bars, ranging in size from 300 to 1,250 square feet, which are targeted
primarily towards the take-out or "on-the-run" customer and have limited
seating capacities. These Tuscany bars feature the distinctive Tuscany
signage, logos and color scheme and are designed to compliment the Tuscany
cafe concept. The Company's coffee and bagel cafes are primarily located in
shopping and retail centers in upper middle class and affluent suburban
residential neighborhoods and its coffee and bagel bars are primarily located
in lobbies of large office buildings.
The Company's coffee and bagel cafes offer a cafe style menu which
features a wide variety of specialty coffee beverages, including espresso,
cappuccino and latte beverages, hot and iced; up to 16 varieties of fresh
baked bagels, sold individually and by the dozen; sandwiches prepared on
bagels and other breads; cream cheese and other spreads; freshly prepared
salads and soups; beverages such as premium iced teas, Italian sodas,
granitas and bottled waters; and coffee beans. The Company's coffee and bagel
bars offer a limited cafe menu, which includes hot and iced coffee beverages;
bagels; spreads; cold beverages; and coffee beans. Eight of the Company's
current Tuscany cafes have bagel ovens on site, which also accommodate the
daily bagel requirements of most of the Company's other Tuscany cafes and
bars (8 of its bars currently obtain their bagel requirements from local area
bakeries). In addition, pursuant to the Company's current expansion plans,
bagel ovens are to be installed at two additional existing cafes by March
1997 and, in the future, will be installed at most of the Company's proposed
new Tuscany cafes prior to their initial opening. The Company believes that
it is one of the few operators of multiple unit bagel bakeries which offer a
wide variety of high quality specialty coffee beverages.
The markets for specialty coffee and bagels have grown significantly over
the past several years. The American Association of Specialty Coffee (the
"AASC") estimates that sales in the specialty coffee retail
3
<PAGE>
market in the United States increased from $295 million in 1983 to
approximately $2 billion in 1994 and from 3.6% of total coffee sales to 31.0%
of total coffee sales over the same period and that they are expected to
account for 50% of total coffee sales by the year 2000. Similarly, industry
sources estimate that bagel consumption in the United States increased over
the same period by approximately 169% to 3.6 pounds per person per annum in
1994. The bagel industry had estimated sales of $2.5 billion in 1994 and is
experiencing an annual growth rate in excess of 20%. The Company believes
that the reasons for the significant growth in the specialty coffee and bagel
markets are the fact that each is an indulgence which substantially all
consumers can afford; the increasing consumer awareness of and appreciation
for such specialty food products; in the case of bagels, their acceptance as
more than an ethnic or breakfast food; and current trends among consumers to
eat healthy foods and to search for convenient foods that can be eaten
on-the-run.
The Company is currently implementing a strategy to expand its operations,
initially by focusing on the Pittsburgh, Cleveland and St. Louis markets,
where it has already established a presence of 9, 5 and 4 locations,
respectively, and has 2 additional cafes under construction (in addition to
one cafe under construction in Philadelphia). The Company's current business
plan indicates an intent to open approximately 12 to 16 Tuscany cafes and
bars by January 1998 (in addition to the 3 cafes currently under
construction), with a primary emphasis on cafes.
The Company believes that its target markets offer significant
opportunities because, unlike other markets, such as the Seattle coffee
market and the New York City bagel market, they are relatively unsaturated.
Industry sources estimate that over 70% of bagel shops are located in New
York, New Jersey, Florida and California and that the specialty coffee market
is disproportionately concentrated in the Pacific Northwest, particularly
Washington and Oregon. The Company also believes that its early entrance into
its target markets positions it to capitalize on perceived opportunities in
these markets.
The Company commenced operations by opening two traditional coffee bars in
Seattle, Washington in 1992. The Company opened its first coffee bar under
the Tuscany name in Denver, Colorado in September 1993, after which it opened
14, and franchised three (one of which franchises has since been terminated),
additional coffee bars from November 1993 to September 1995. Subsequently,
the Company determined that markets outside of Seattle offered greater
opportunities for expansion in the retail coffee industry and that the bagel
market was, like the coffee market, among the fastest growing segments of the
retail food industry. Consequently, the Company sold its Seattle coffee bars
in December 1993 and June 1994, shifted its focus towards a more coffee-house
style cafe concept and away from franchising in October 1995 and began to
offer bagels at its cafes and bars in March 1996. Accordingly, while the
Company has been in business since 1992, it has a limited relevant operating
history upon which an evaluation of its prospects and future performance can
be made.
The Company's success will be substantially dependent upon, among other
things, achieving significant market acceptance for its Tuscany cafe concept
in relatively underdeveloped specialty food markets, establishing and
operating a sufficient number of successful coffee and bagel cafes in each of
its targeted geographic markets to achieve economies of scale and developing
customer recognition and loyalty for the Tuscany brand name in such areas.
The Company requires proceeds substantially in excess of the proceeds of this
offering to implement its expansion strategy. The Company expects to incur
significant expenditures in connection with implementing its expansion
strategy which will result in continued significant losses for the
foreseeable future. There can be no assurance that the Company will be able
to successfully expand its operations or that the Company will ever achieve
profitable operations. See "Risk Factors."
The Company was incorporated under the laws of the State of Washington in
February 1992 under the name Expresso Incorporated, changed its name to
Expresso Franchise Corp. in August 1992 and changed its name to Tuscany, Inc.
in November 1995. Unless the context requires otherwise, all references to
"the Company" include Expresso Real Estate Corp., a wholly-owned subsidiary
of the Company. The Company's executive offices are located at Two Union
Square, 601 Union Street, Suite 4620, Seattle, Washington 98101 and its
telephone number is (206) 292-1550.
4
<PAGE>
RECENT FINANCINGS
In November and December 1996, the Company completed a $1,800,000 private
placement (the "Company Financing") of 36 units (the "Company Financing
Units"), each $50,000 Company Financing Unit consisting of (i) an unsecured
convertible promissory note of the Company in the principal amount of
$50,000, bearing interest at the rate of 9% per year, payable quarterly
commencing December 31, 1996 (each, a "Company Financing Note") and (ii)
10,353 warrants, each to purchase one share of Common Stock (the "Company
Financing Warrants"). The entire $1,800,000 principal amount of, plus accrued
and unpaid interest on, the Company Financing Notes will automatically be
converted into shares of Common Stock (at the rate of one share of Common
Stock for each $3.74 of indebtedness then outstanding) immediately prior to,
and the 372,708 outstanding Company Financing Warrants will be exercisable at
a price of $5.00 per share for a period of two years commencing upon, the
consummation of this offering. After payment of fees and expenses incurred in
connection with the Company Financing, the Company received net proceeds of
approximately $1,640,000 from the sale of the Company Financing Units.
In December 1996, the Company also completed a $900,000 private placement
(the "Bridge Financing") of 18 units (the "Bridge Units"), each $50,000
Bridge Unit consisting of (i) an unsecured non-negotiable promissory note of
the Company in the principal amount of $50,000, bearing interest at the rate
of 9% per year, payable semi-annually, and maturing upon the consummation of
this offering (each, a "Bridge Note") and (ii) 10,000 shares of Common Stock.
After payment of $90,000 in placement agent fees to the Underwriter, which
acted as placement agent for the Company in connection with the Bridge
Financing, and other offering expenses of approximately $50,000, the Company
received net proceeds of approximately $760,000 from the sale of the Bridge
Units. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of
Securities."
THE OFFERING
Securities offered ............ 1,600,000 Shares and Warrants to purchase
1,600,000 shares of Common Stock. The Shares
and Warrants may be purchased separately and
will be separately transferable immediately
upon issuance. See "Description of
Securities."
Common Stock to be outstanding
after this offering(1)(2) ... 4,421,852 shares of Common Stock
Warrants(3):
Number to be outstanding
after this offering......... 1,600,000 Warrants
Exercise terms ............... Exercisable immediately, each to purchase
one share of Common Stock at a price of
$5.00, subject to adjustment in certain
circumstances. See "Description of
Securities -- Redeemable Warrants."
Expiration date .............. , 2002
Redemption.................... Redeemable by the Company, upon the consent
of the Underwriter, at any time, upon notice
of not less than 30 days, at a price of $.10
per Warrant, provided that the closing bid
quotation of the Common Stock on all 20
trading days ending on the third day prior
to the day on which the Company gives notice
has been at least 150% (currently $7.50,
subject to adjustment) of the then effective
exercise price of the Warrants. The Warrants
will be exercisable until the close of
business on the date fixed for redemption.
See "Description of Securities -- Redeemable
Warrants."
5
<PAGE>
Use of Proceeds................ The Company intends to use the net proceeds
of this offering to construct and open
coffee and bagel cafes and bars; to repay
indebtedness; to remodel certain existing
Tuscany locations; and the balance for
working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors................... The securities offered hereby are
speculative and involve a high degree of
risk and immediate substantial dilution and
should not be purchased by investors who
cannot afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
Proposed Nasdaq symbols ....... Common Stock -- BGEL
Warrants -- BGELW
- - ------
(1) Includes approximately 1,944,815 shares of Common Stock which will be
issued immediately prior to the consummation of this offering, consisting
of: (i) 135,297 shares of Common Stock which will be issued upon exercise
of certain outstanding warrants; (ii) approximately 813,529 shares of
Common Stock which will be issued upon conversion of the 2,766,000
outstanding shares of the Series A convertible preferred stock, par value
$.01 per share, of the Company (the "Series A Preferred Stock"); (iii)
approximately 514,706 shares of Common Stock which will be issued upon
conversion of the 1,750,000 outstanding shares of the Series B
convertible preferred stock, par value $.01 per share, of the Company
(the "Series B Preferred Stock"), and (iv) 481,283 shares of Common Stock
which will be issued upon conversion of the Company Financing Notes. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Certain Transactions" "Description of Securities."
(2) Does not include: (i) 1,600,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 320,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) an
aggregate of 372,708 shares of Common Stock reserved for issuance upon
exercise of the Company Financing Warrants; (iv) 203,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options granted
under the Company's 1996 Stock Option Plan (the "Option Plan"); (v)
147,000 shares of Common Stock reserved for issuance upon exercise of
options available for future grant under the Option Plan; (vi) 235,294
shares of Common Stock reserved for issuance upon exercise of other
outstanding warrants; and (vii) up to 45,000 shares of Common Stock
reserved for issuance in the event the Company fails to satisfy certain
obligations with respect to the registration of the shares of Common
Stock issued in connection with the Bridge Financing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Management -- 1996 Stock Option Plan," "Certain
Transactions," "Description of Securities" and "Underwriting."
(3) Does not include any of the warrants referred to in clause (i) of
footnote 1 above or clauses (ii), (iii) or (vi) of footnote 2 above.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, 1995 Ended September 30,
----------------- ----------------------------
1995 1996
------------ ------------
<S> <C> <C> <C>
Net sales ............................ $2,488,840 $1,678,579 $3,317,272
Gross profit ......................... 992,992 656,216 1,099,961
Loss from operations ................. 1,342,128 904,052 1,875,782
Net loss ............................. 1,684,763 1,178,872 2,080,639
Pro forma net loss per share(1) ...... .69 .48 .80
Pro forma weighted average number of
shares outstanding(2) .............. 2,451,774 2,450,399 2,591,663
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
----------------- --------------------------------------------------
As
Actual Pro Forma(3) Adjusted(3)(4)
-------------- -------------- ---------------
<S> <C> <C> <C> <C>
Working capital (deficit) $ (2,456,670) $(4,179,359) $(1,733,358) $ 4,051,642
Total assets ............ 3,851,153 6,620,643 8,737,437 13,444,644
Total liabilities ....... 2,897,874 4,572,779 4,665,877 3,165,779
Shareholders' equity .... 953,279 2,047,864 4,071,560 10,278,865
</TABLE>
- - ------
(1) Based on the proforma weighted average number of shares.
(2) Gives effect not only to issuances of shares of Common Stock, options and
warrants, and contributions to capital of shares of Common Stock within
twelve months prior to the initial filing of the registration statement
of which this Prospectus is a part, but also gives pro forma effect to
the issuance immediately prior to the consummation of this offering of
(i) 135,297 shares of Common Stock upon exercise of certain outstanding
warrants, (ii) 481,283 shares of Common Stock upon conversion of the
Company Financing Notes, (iii) an aggregate of 1,328,235 shares of Common
Stock upon conversion of the Series A Preferred Stock and Series B
Preferred Stock and (iv) the contribution to the Company's capital by two
officers of the Company of an aggregate of 235,294 shares of Common
Stock. See "Certain Transactions," "Description of Securities" and Note 1
to Notes to Financial Statements.
(3) Gives effect to (i) the Company's sale of 36 Company Financing Units in
November and December 1996 in connection with the Company Financing, the
application of the $1,640,000 in net proceeds therefrom, a related
non-recurring charge of $4,700 and the conversion immediately prior to
the consummation of this offering of the Company Financing Notes into
481,283 shares of Common Stock, (ii) the sale of 18 Bridge Units in
December 1996 in connection with the Bridge Financing and the application
of the $760,000 in net proceeds therefrom, (iii) the issuance immediately
prior to the consummation of this offering of 135,297 shares of Common
Stock upon exercise of certain outstanding warrants for aggregate
proceeds of $46,001 and (iv) the contribution to the Company's capital by
two officers of the Company of an aggregate of 235,294 shares of Common
Stock (collectively, the "Pro Forma Adjustments"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources," "Certain Transactions" and
"Description of Securities."
(4) Gives effect to (i) the sale of the Shares and Warrants offered hereby
and the application of the estimated net proceeds therefrom, including
for the repayment of the Bridge Notes and (ii) a non-recurring charge of
$477,695 relating to the Bridge Financing. See "Use of Proceeds."
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RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Prospective investors should carefully consider the following risk
factors before making an investment decision.
1. Limited Relevant Operating History; Limited Revenues; Significant and
Increasing Losses; Explanatory Paragraph in Independent Auditors' Report.
The Company opened its first Tuscany location in September 1993, introduced
its cafe concept in October 1995 and first began to offer bagels at its cafes
and bars in March 1996. Additionally, 13 of the Company's locations have been
in operation for less than 18 months. Accordingly, the Company has a limited
relevant operating history upon which an evaluation of its prospects and
future performance can be made. Such prospects must be considered in light of
the risks, expenses and difficulties frequently encountered in the operation
and expansion of a new business in the highly competitive specialty and
gourmet segments of the food service industry, which are characterized by a
high rate of failure and an increasing number of market entrants. Since
inception, the Company has generated limited revenues and incurred
significant losses, including losses of $1,684,763 and $2,080,639 during the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively, resulting in an accumulated deficit of $4,639,281 at September
30, 1996. Losses are continuing and increasing through the date of this
Prospectus. The Company intends to incur significant expenditures in
connection with its expansion strategy (including the payment of rent for new
locations prior to their opening) which will result in continued significant
losses for the foreseeable future. The Company will also incur non-recurring
charges in an aggregate amount of $482,395 relating to the Bridge Financing
and the Company Financing. Losses are expected to continue until such time,
if ever, that the Company is able to generate a level of revenues sufficient
to offset its cost structure in addition to reducing its operating costs on a
per location basis. The Company believes that generation of that level of
revenues is dependent upon its Tuscany cafe concept achieving significant
market acceptance in relatively underdeveloped specialty food markets,
establishing and operating a sufficient number of coffee and bagel cafes in
each of its target markets to achieve economies of scale and developing
customer recognition and loyalty for the Tuscany brandname. There can be no
assurance that the Company will achieve significant increased revenues or
profitable operations. The Company's independent auditors have included an
explanatory paragraph in their report on the Company's financial statements,
stating that they have been prepared assuming that the Company will continue
as a going concern and that recurring losses from operations and projected
future cash requirements raise substantial doubt about the Company's ability
to continue as a going concern. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Financial Statements.
2. Significant Capital Requirements; Need for Additional Financing. The
Company's capital requirements have been and will continue to be significant
and its cash requirements have been exceeding its cash flow from operations
(at September 30, 1996, the Company had a working capital deficit of
$4,179,359) due to, among other things, costs associated with development,
opening and start-up costs of new coffee and bagel cafes and bars and
building a corporate infrastructure sufficient to support the Company's
proposed expanded operations. As a result, the Company has been substantially
dependent upon sales of its equity and debt securities (which have raised in
excess of $9,000,000 since September 1994), a line of credit from Seafirst
Bank and equipment financing to finance its working capital requirements, and
upon personal guarantees of directors and shareholders to secure the line of
credit. The Company is dependent upon the proceeds of this offering to
finance its proposed expansion over the twelve months following the
consummation of this offering. Based on the Company's current proposed plans
and assumptions relating to the implementation of its expansion strategy
(including the timetable of opening new coffee and bagel cafes and bars and
the costs associated therewith), the Company anticipates that the net
proceeds of this offering will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change or its assumptions
prove to be inaccurate (due to unanticipated expenses, construction delays or
difficulties or otherwise) or the proceeds of this offering otherwise prove
to be insufficient to fund operations and implement the Company's proposed
expansion strategy, the Company could be required to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to, or potential sources of, additional financing
and it is not anticipated that any shareholders will provide any additional
guarantees for Company obligations. Consequently, there can be no assurance
that any additional financing will be available to the Company when needed,
on commercially reasonable terms, or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, requiring it to curtail its expansion
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efforts. In addition, any additional equity financing may involve substantial
dilution to the interests of the Company's then existing shareholders. See
"Use of Proceeds," "Dilution," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
3. Shift in Business Emphasis; Limited Cafe and Bar Base. The Company's
initial strategy was to operate and franchise traditional coffee bars with
limited food offerings. From April 1992 through September 1995, the Company
opened 16 (two of which it subsequently sold), and franchised three (one of
which franchises was subsequently terminated) such coffee bars. Thereafter,
the Company discontinued seeking franchisees and recently shifted its
business emphasis by introducing its cafe concept in October 1995 and its
combination coffee/bagel bakery concept in March 1996. Currently, the Company
operates 12 bars and 16 cafes, of which 9 locations feature bagel ovens
(which accommodate the bagel needs of all but 8 of the Company's current
locations). The results achieved to date by the Company's relatively small
base of coffee and bagel cafes and bars may not be indicative of the
prospects or market acceptance of a larger number of locations. Moreover, in
light of the Company's small location base and limited number of bagel baking
sites, the lack of success, material interruption in operation or closing of
any of its locations, the unsuccessful operation of a new location or the
break-down of any of its bagel ovens could have a material adverse effect on
the financial condition or results of operations of the Company. See
"Business."
4. Risks Relating to Proposed Expansion; Potential Market Saturation. The
Company is currently implementing a strategy to expand its operations and
will seek to increase significantly the number of Tuscany cafes and bars. The
Company has limited experience in effectuating rapid expansion and in
managing a large number of locations that are geographically dispersed. The
Company's current business plan indicates an intent to open approximately 12
to 16 Tuscany cafes and bars by January 1998 (in addition to the 3 cafes
currently under construction), with a primary emphasis on cafes. The
Company's proposed expansion will be dependent on, among other things, the
proceeds of this offering, achieving significant market acceptance for its
Tuscany cafe concept in relatively undeveloped specialty food markets,
developing customer recognition and loyalty for the Tuscany name, identifying
a sufficient number of prime locations and entering into lease arrangements
for such locations on favorable terms, timely development and construction of
new coffee and bagel cafes and bars, securing required governmental permits
and approvals, hiring, training and retaining skilled management and other
personnel, the Company's ability to integrate new coffee and bagel cafes and
bars into its operations and the general ability to successfully manage
growth (including monitoring cafe and bar operations, controlling costs and
maintaining effective quality controls). There can be no assurance that the
Company will be successful in opening the number of cafes and bars currently
anticipated in a timely manner, or at all, or that, if opened, those cafes
and bars will operate profitably. Moreover, while the Company believes that
its target markets are relatively unsaturated, a significant number of new
market entrants in such markets could have a material adverse effect on the
Company's operating results. A significant number of new market entrants
could also adversely affect the Company's ability to identify and enter into
leases for prime locations for new coffee and bagel cafes and bars.
Currently, the Company believes that its target markets are relatively
underdeveloped in specialty foods and there can be no assurance that such
markets will develop. See "Business -- Expansion Strategy."
5. Significant Outstanding Indebtedness; Security Interests. In order to
finance its capital requirements, the Company has incurred significant
indebtedness. At September 30, 1996, there was outstanding approximately
$4,443,000 of short-term indebtedness, including approximately $2,200,000 of
indebtedness under a $600,000 line of credit and $1,600,000 principal amount
promissory note from Seafirst Bank ("Seafirst"), of which $200,000 was paid
in December 1996. The $600,000 line of credit is due in March 1997 and the
Company is required to repay $200,000 of indebtedness under the note in each
of March 1997 and June 1997. The $1,000,000 balance of the note is due in
September 1997. In connection with obtaining the line of credit and loan,
certain directors and shareholders of the Company guaranteed the Company's
obligations to Seafirst. As consideration for such guarantees, the Company,
among other things, granted to the guarantors a security interest in all of
the Company's furniture, fixtures and equipment. The Company's indebtedness
to Seafirst requires the Company to maintain a designated minimum net worth.
The Company has in the past been in default of this financial covenant and
received waivers from Seafirst. There can be no assurance that Seafirst will
continue to waive defaults in the future. In the event of a default, Seafirst
could declare the Company's indebtedness to become immediately due and
payable. In such event, the guarantors could be required to satisfy the
Company's obligations under the line of credit and note and could foreclose
on the Company's assets in which they have a security interest. Moreover,
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to the extent that the Company's assets continue to secure such guarantees,
such assets will not be available to secure additional indebtedness. Although
the Company has allocated $1,000,000 of the proceeds of this offering to make
the March 1997 and June 1997 payments under the line of credit and note, it
has not allocated any proceeds to repay the $1,000,000 balance due under the
note. If the note is not extended and the Company is not able to obtain
replacement financing, the Company could be required to use a portion of the
proceeds of this offering to repay the amounts then outstanding ($1,000,000)
and would have less funds available for intended purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Certain Transactions."
6. Dependence on Sole Source Suppliers. The Company is dependent upon Boyd
Coffee Company ("Boyd Coffee"), a shareholder of the Company, and Guttenplan
Bakery Incorporated ("Guttenplan") for its supply of coffee and bagel dough,
respectively. In addition, Boyd Coffee purchases all of the coffee beans and
blends, roasts, stores, packages and distributes all of the coffee which the
Company uses in its operations. The Company is substantially dependent upon
the ability of Boyd Coffee and Guttenplan to, among other things, comply with
the Company's quality specifications, as well as devote significant capacity
to meet the Company's scheduled delivery requirements. There can be no
assurance that such suppliers will continue to meet such specifications or
satisfy the Company's requirements, particularly in the event the Company
successfully expands its operations. Failure by Boyd Coffee or Guttenplan to
satisfy the Company's specifications and requirements could have a material
adverse effect on the Company. The Company has not entered into a written
agreement with Boyd Coffee or Guttenplan, and such suppliers provide similar
services to other customers. Boyd Coffee also markets coffee under its own
private label. Either supplier could terminate its arrangement with the
Company at any time. Although the Company developed the recipes for its
coffees and believes that there are alternative coffee blenders and roasters
and bagel dough manufacturers available, the unavailability of Boyd Coffee's
or Guttenplan's services to the Company could result in delays in the
delivery of coffee or bagel dough which would have a material adverse effect
on the Company's operating results. See "Business -- Supply" and "Certain
Transactions."
7. Fluctuations in Availability and Cost of Green Coffee. Coffee prices
are extremely volatile. Boyd Coffee and any other supplier from whom the
Company might purchase coffee are subject to volatility in the supply and
price of green coffee beans. Although most coffee trades in the commodity
market, arabica coffee beans, the quality sought by the Company, tend to
trade on a negotiated basis at a substantial premium above commodity coffee
pricing, depending upon the supply and demand at the time of purchase. Supply
and price can be affected by many factors such as adverse weather conditions,
the number of coffee trees planted, the health of coffee trees, infestation
problems, harvesting practices, and political and economic factors in coffee
producing countries which could result in coffee production limits, price
support programs or expert quotas. At various times, organizations such as
the International Coffee Organization and the Association of Coffee Producing
Countries ("ACPC") have attempted to reach agreements or take actions to
increase the price of green coffee. In July 1994, the ACPC implemented a plan
to restrict the worldwide production of coffee to raise the price of coffee
beans and correct any imbalances of supply which could have resulted from two
frosts in Brazil which killed or damaged many coffee trees. Although the
Company believes that customers will accept reasonable price increases made
necessary by increased costs, significant price increases are likely to
affect the demand for the Company's coffee products. The Company's ability to
raise prices, however, may be limited by competitive pressures if competing
specialty coffee retailers do not raise prices in response to increased
coffee prices. The Company's inability to pass through higher coffee prices
in the form of higher retail prices for coffee beans and beverages could have
a material adverse effect on the Company. Alternatively, if coffee prices
decline to too low a level, there could be an adverse effect on the supply
and quality of coffee beans available from coffee producing countries, which
could have a material adverse effect on the Company. See "Business --
Supply."
8. Consumer Preferences; Factors Affecting the Food Service Industry. The
food service industry in general, and the specialty and gourmet segment in
particular, is characterized by frequent introduction of new products and is
subject to changing consumer preferences, tastes and eating and purchasing
habits, which may adversely affect the Company's ability to plan for future
product introduction. While the markets for specialty coffees and bagels have
grown significantly over the past several years, there can be no assurance
that such markets will continue to grow or that these trends will not be
reversed. Moreover, since prices for specialty coffee are higher than those
for other coffee products, unfavorable national, regional or local economic
factors could
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adversely affect consumer willingness to pay higher prices for the Company's
coffee products. The Company's success will depend on the Company's ability
to anticipate and respond to changing consumer preferences, tastes and eating
and purchasing habits, as well as other factors affecting the food service
industry, including, new product introductions, new market entrants, pricing
strategies of competitors, demographic trends and unfavorable national,
regional and local economic conditions, inflation, increasing coffee, bagel
dough and other food and labor costs. Failure to respond to such factors in a
timely manner could have a material adverse effect on the Company. See
"Business Industry Overview" and "-- Supply."
9. Limited Menu. The Company's cafes and bars currently have a limited
product offering which feature coffee beans, coffee beverages, bagels and
bagel sandwiches. Sales of coffee beverages, bagels and other food products
and coffee beans accounted for approximately 61%, 25% and 4% of the Company's
net sales, respectively, during the year ended December 31, 1995, and 48%,
40% and 3%, respectively, during the nine months ended September 30, 1996.
The Company anticipates that sales of coffee and bagel related products will
continue to account for substantially all of the Company's revenues for the
foreseeable future. Accordingly, a decline in sales of such products, due to
evolving consumer preferences, industry trends, or other reasons, could have
an adverse effect on the Company. The Company could also be adversely
affected by adverse publicity relating to such products, such as perceived
health concerns relating to caffeine. See "Business -- Tuscany Concept-Menu."
10. Geographic Concentration. All of the Company's coffee and bagel cafes
and bars are located in only seven metropolitan areas and the Company's
expansion strategy is focused almost exclusively on three of these markets.
Given the Company's geographic concentrations, adverse publicity relating to
the Company's cafes and bars or other regional or local factors could have a
more pronounced adverse effect on the Company's operating results than might
be the case if the Company's cafes and bars were more geographically
dispersed. See "Business -- Restaurant Locations."
11. Intense Competition; Limited Barriers to Competition. The food service
industry in general, and the specialty and gourmet segment in particular, is
intensely competitive with respect to quality, pricing, service, concept,
convenience, location and value. There are numerous well established
operators of national, regional and local specialty coffee stores and gourmet
bagel shops possessing substantially greater financial, supply, distribution,
marketing, personnel and other resources than the Company, as well as a
continuing significant number of new market entrants. Many of these
competitors have achieved national, regional and local brandname recognition
and product loyalty and engage in extensive advertising and promotional
campaigns, both generally and in response to efforts by competitors to open
new location or introduce new products. The Company competes with gourmet
food stores, supermarkets, convenience stores, bakeries and delicatessens, as
well as specialty coffee retailers and bagel shops. The Company believes that
competition for coffee and bagel products in its target markets will increase
significantly because such markets are relatively unsaturated. Moreover, the
Company believes that the start-up costs associated with opening and
operating a specialty coffee store or bagel shop are not a significant
impediment to enter into the retail coffee or bagel business. There can be no
assurance that the Company will be able to compete successfully. See
"Business -- Competition."
12. Uncertainty of Protection of Proprietary Information. The Company
believes that its trademarks and servicemarks have significant value and are
important to the marketing of its coffee and bagel cafes and bars and
products. There can be no assurance, however, that the Company's marks do not
or will not violate the proprietary rights of others or that the Company's
marks would be upheld, or that the Company would not be prevented from using
its marks, if challenged, any of which could have an adverse effect on the
Company. In addition, the Company relies on trade secrets and proprietary
know-how, and employs various methods, to protect its concepts and recipes.
However, such methods may not afford complete protection and there can be no
assurance that others will not independently develop similar know-how or
obtain access to the Company's know-how, concepts and recipes. Furthermore,
although the Company has and expects to have confidentiality and
non-competition agreements with its executives and key management, the
Company does not maintain such agreements with its suppliers. There can be no
assurance that such agreements will adequately protect the Company's trade
secrets. In the event competitors independently develop or otherwise obtain
access to the Company's know-how, concepts, recipes or trade secrets, the
Company may be adversely affected. See "Business -- Trademarks and Other
Intellectual Property."
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13. Government Regulation. The Company is subject to extensive state and
local government regulation by various governmental agencies, including state
and local licensing, zoning, land use, construction and environmental
regulations and various regulations relating to the sale of food and
beverages, sanitation, disposal of refuse and waste products, public health,
safety and fire standards. The Company's coffee and bagel cafes and bars are
subject to periodic inspections by governmental agencies to ensure conformity
with such regulations. Difficulties or failure in obtaining required
licensing or other regulatory approvals could delay or prevent the opening of
a new restaurant, and the suspension of, or inability to renew, a license at
an existing restaurant would adversely affect the operations of the Company.
Operating costs for the Company's cafes and bars are also affected by other
government actions which are beyond the Company's control, including
increases in the minimum hourly wage requirements, workers compensation
insurance rates, health care insurance costs and unemployment and other
taxes.
In the event the Company seeks to resume franchising activities, it will
become subject to federal and state laws, rules and regulations that govern
the offer and sale of franchises. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state relating to
offers and sales of franchises, the Company will be unable to engage in
offering or selling franchises in or from such state. The Company is subject
to a number of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship, such as termination, cancellation or
non-renewal of a franchise (such as requirements that "good cause" exist as a
basis for such termination and that a franchisee be given advance notice of
and a right to cure a default prior to termination) and may require the
franchisor to deal with its franchisees in good faith, prohibit interference
with the right of free association among franchisees, and regulate
discrimination among franchisees in charges, royalties or fees. See "Business
- - -- Government Regulation."
14. Insurance and Potential Liability. The operation of retail food
service establishments subjects the Company to possible liability claims from
others, including consumers, employees and other service providers, for
personal injury (resulting from, among other things, contaminated or spoiled
food or beverages or accidents). The Company maintains personal injury and
products liability insurance (with coverage in amounts up to $1,000,000 per
occurrence and, with respect to products liability, $2,000,000 per annum,
with $5,000,000 of umbrella liability coverage), including insurance relating
to property insurance, in amounts which the Company currently considers
adequate. Nevertheless, a partially or completely uninsured claim against the
Company, if successful, could have a material adverse effect on the Company.
See "Business -- Insurance."
15. Conflicts of Interest. The Company has, from time to time, entered
into transactions with certain of its officers, directors and shareholders
and/or affiliates of such persons, which could result in potential conflicts
of interest. The Company believes that all of such transactions and
arrangements were fair and reasonable to the Company and were on terms no
less favorable than could have been obtained from unaffiliated third parties.
There can be no assurance, however, that future transactions or arrangements
between the Company and its affiliates will be advantageous to the Company,
that conflicts of interest will not arise with respect thereto, or that, if
conflicts do arise, they will be resolved in a manner favorable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Certain
Transactions."
16. Control by Management. Upon the consummation of this offering, the
Company's current officers and directors will, in the aggregate, beneficially
own approximately 22.6% of the outstanding Common Stock of the Company.
Accordingly, such persons will be able to effectively control the Company and
generally direct the Company's affairs, including electing a majority of the
Company's directors and causing an increase in the Company's authorized
capital or the dissolution, merger, or sale of the Company or substantially
all of its assets. See "Principal Shareholders."
17. Dependence Upon Key Personnel. The success of the Company will be
largely dependent upon the efforts of Jim Simonson, President and Chief
Executive Officer of the Company, Mark McDonald, Executive Vice President of
the Company, and Chris Mueller, Executive Vice President of the Company.
Although the Company has entered into employment agreements with each of such
officers, the loss of the services of any of such officers or other key
personnel would have a material adverse effect on the Company's business and
prospects. The success of the Company will also be dependent on its ability
to attract and retain experienced management and restaurant industry
personnel. The Company faces considerable competition from other food service
businesses
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for such personnel, many of which have significantly greater resources than
the Company. There can be no assurance that the Company will be able to
attract and retain such personnel, and the inability to do so could have a
material adverse effect on the Company. See "Management."
18. Broad Discretion in Application of Proceeds; Benefits to Related
Parties. Approximately $910,000 (13.6%) of the estimated aggregate net
proceeds from this offering has been allocated to working capital and general
corporate purposes. Accordingly, the Company will have broad discretion as to
the application of such proceeds. The Company's directors and shareholders
which guaranteed the Company's obligations under the line of credit will
receive a benefit from payments made to Seafirst (as required under the line
of credit and note) from the proceeds of this offering (as a result of the
corresponding reduction in their liability exposure). In addition, the
Company may use a portion of the proceeds allocated to working capital to pay
the salaries and benefits of its executive officers, estimated to aggregate
approximately $245,000 over the twelve months following consummation of this
offering, to the extent cash flow is insufficient for such purpose. See "Use
of Proceeds," "Management -- Employment Agreements" and "Certain
Transactions."
19. Possible Adverse Effects of Authorization of Preferred Stock. The
Company's Articles of Incorporation authorize the Company's Board of
Directors to issue up to 5,000,000 shares of "blank check" preferred stock
(the "Preferred Stock") without shareholder approval, in one or more series
and to fix the dividend rights, terms, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, and any other rights,
preferences, privileges, and restrictions applicable to each new series of
Preferred Stock. The Company has designated 2,766,000 shares of Series A
Preferred Stock and 1,750,000 shares of Series B Preferred Stock, none of
which will be outstanding upon the consummation of this offering (as a result
of the conversion of currently outstanding shares of Preferred Stock into
shares of Common Stock immediately prior to the consummation of the
offering). The issuance of shares of Preferred Stock in the future could,
among other results, adversely affect the voting power of the holders of
Common Stock and, under certain circumstances, could make it difficult for a
third party to gain control of the Company, prevent or substantially delay a
change in control, discourage bids for the Common Stock at a premium, or
otherwise adversely affect the market price of the Common Stock. Although the
Company has no current plans to issue any shares of Preferred Stock or
designate new series of Preferred Stock, there can be no assurance that the
Board will not decide to do so in the future. See "Description of Securities
Capital Stock -- Preferred Stock."
20. No Dividends. The Company has never paid any dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain all earnings for use in
connection with the expansion of its business and for general corporate
purposes. The declaration and payment of future dividends, if any, will be at
the sole discretion of the Company's Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects, and other factors deemed relevant by the Board of Directors.
Moreover, the payment of cash dividends on the Common Stock is prohibited by
the terms of the Company's line of credit with Seafirst. See "Dividend
Policy" and "Description of Securities -- Capital Stock."
21. Possible Adverse Effect of Outstanding Warrants and Options. Upon the
consummation of this offering, there will be approximately 372,708 shares
reserved for issuance upon the exercise of the Company Financing Warrants at
an exercise price of $5.00 per share, 235,294 shares reserved for issuance
upon the exercise of other outstanding warrants at an exercise price of $.34
per share, an aggregate of 320,000 shares of Common Stock reserved for
issuance upon exercise of the Underwriter's Warrants and the warrants
included therein and 203,000 shares reserved for issuance upon exercise of
options granted under the Option Plan at an exercise price of $5.00 per
share. To the extent that any outstanding warrants or options are exercised,
dilution of the interests of the holders of the Company's Common Stock will
occur and any sales in the public market of the shares underlying such
warrants and options may adversely affect prevailing market prices for the
Common Stock and the Warrants. Moreover, the terms upon which the Company
will be able to obtain additional equity may be adversely affected since the
holders of the outstanding warrants and options can be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain
capital on terms more favorable to the Company than those provided by such
securities. See "Management" and "Description of Securities."
22. Limitation of Liability of Directors and Officers. As authorized by
the Washington Business Corporation Act (the "Washington Act"), the Company's
Articles of Incorporation provide that no director or
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officer of the Company shall be personally liable to the Company or its
shareholders for damages for breach of any duty owed to the Company or its
shareholders, except for liability for any breach of duty based upon an act
or omission that involves intentional misconduct or a knowing violation of
law, conduct resulting in an unlawful distribution of the Company's assets in
violation of the Washington Act or any transaction for which such person will
receive a benefit in money, property or services to which such person is not
legally entitled. The effect of the provision in the Articles of
Incorporation is to eliminate the rights of the Company and its shareholders
(through shareholders' derivative suits on behalf of the Company) to recover
monetary damages against a director or officer for breach of duty of a
director or officer (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described above. This provision
does not omit or eliminate the rights of the Company or any shareholder to
seek non-monetary relief such as an injunction or rescission in the event of
a breach of a director's or officer's duty. In addition, the Articles of
Incorporation provide that if the Washington Act is amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of the directors and officers shall be eliminated or limited to the
fullest extent permitted by the Washington Act as so amended. These
provisions will not alter any liability of directors and officers under
federal securities laws. In addition, the Company has entered into
indemnification agreements with its current directors and executive officers.
The foregoing provisions and agreements may have the practical effect in
certain cases of eliminating the ability of shareholders to collect monetary
damages from directors and may discourage litigation against directors. See
"Management -- Exculpatory Provisions and Indemnification Matters."
23. Dilution. This offering involves an immediate and substantial dilution
of $2.77 per share (or 55.4%) between the adjusted net tangible book value
per share of Common Stock after this offering and the initial public offering
price per Share in this offering. See "Dilution."
24. Shares Eligible for Future Sale. Upon consummation of this offering,
the Company will have 4,421,852 shares of Common Stock outstanding (assuming
no exercise of the Warrants), of which the 1,600,000 shares of Common Stock
offered hereby will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 2,821,852 shares of Common Stock outstanding are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act and will become eligible for sale, pursuant to Rule
144, commencing on various dates commencing 90 days following the date of
this Prospectus, subject to the agreements set forth below. The holders of
the 180,000 Bridge Shares have agreed not to sell such shares for a period of
13 months from the date of this Prospectus without the Underwriter's prior
written consent and the holders of the remaining 2,641,852 shares of Common
Stock (plus an additional 811,002 shares of Common Stock issuable upon
exercise of outstanding warrants) have agreed not to sell such shares for a
period of 18 months from the date of this Prospectus without the
Underwriter's prior written consent. The Company has granted certain demand
and "piggy-back" registration rights to the holders of the securities issued
in connection with the Bridge Financing, to the holders of warrants to
purchase an aggregate of 235,934 shares of Common Stock and to the
Underwriter with respect to the securities issuable upon exercise of the
Underwriter's Warrants. No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or even the availability of such shares
for sale will have on the market prices prevailing from time to time. The
possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect the prevailing market price for the Common
Stock and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
25. No Assurance of Public Market; Arbitrary Determination of Offering
Prices; Possible Volatility of Market Price of Common Stock and Warrants;
Underwriter's Potential Influence on the Market. Prior to this offering,
there has been no public trading market for the Common Stock or Warrants.
There can be no assurance that a regular trading market for the Common Stock
or Warrants will develop after this offering or that, if developed, it will
be sustained. Moreover, the initial public offering prices of the Common
Stock and the Warrants and the exercise price of the Warrants have been
determined by negotiations between the Company and the Underwriter and, as
such, are arbitrary in that they do not necessarily bear any relationship to
the assets, book value or potential earnings of the Company or any other
recognized criteria of value and may not be indicative of the prices that may
prevail in the public market. The market prices of the Company's securities
following this offering may be highly volatile as has been the case with the
securities of other emerging companies. Factors such as the Company's
operating results, new location of servicings, announcements by the Company
or its
14
<PAGE>
competitors and various factors affecting the food service industry generally
may have a significant impact on the market price of the Company's
securities. In addition, in recent years, the stock market has experienced a
high level of price and volume volatility and market prices for the stock of
many companies have experienced wide price fluctuations which have not
necessarily been related to the operating performance of such companies.
Although it has no obligation to do so, the Underwriter intends to make a
market in the Common Stock and Warrants and may otherwise effect transactions
in the Common Stock and Warrants. If the Underwriter makes a market in the
Common Stock or Warrants, such activities may exert a dominating influence on
the market and such activity may be discontinued at any time. The prices and
liquidity of the Common Stock and Warrants may be significantly affected to
the extent, if any, that the Underwriter participates in such market. See
"Underwriting."
26. Possible Delisting of Securities from Nasdaq System; Risks Relating to
Low-Priced Stocks. It is currently anticipated that the Company's Common
Stock and Warrants will be eligible for listing on Nasdaq upon the completion
of this offering. In order to continue to be listed on Nasdaq, however, the
Company must maintain $2,000,000 in total assets, a $200,000 market value of
the public float and $1,000,000 in total capital and surplus. In addition,
continued inclusion requires two market-makers and a minimum bid price of
$1.00 per share; provided, however, that if the Company falls below such
minimum bid price, it will remain eligible for continued inclusion in Nasdaq
if the market value of the public float is at least $1,000,000 and the
Company has $2,000,000 in capital and surplus. Nasdaq has recently proposed
new maintenance criteria which, if implemented, would eliminate the exception
to the minimum bid price of $1.00 per share and require, among other things,
$2,000,000 in net tangible assets, $1,000,000 market value of the public
float and adherence to certain corporate governance provisions. The failure
to meet these maintenance criteria in the future may result in the delisting
of the Company's securities from Nasdaq, and trading, if any, in the
Company's securities would thereafter be conducted in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor could
find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Company's securities.
Although the Company anticipates that its securities will be listed for
trading on Nasdaq, if the Common Stock were to become delisted from trading
on Nasdaq and the trading price of the Common Stock were to fall below $5.00
per share on the date the Company's securities were delisted, trading in such
securities would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks
associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established
customers and accredited investors (generally institutions). For these types
of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in the Company's securities, which could severely
limit the market price and liquidity of such securities and the ability of
purchasers in this offering to sell their securities of the Company in the
secondary market.
27. Potential Adverse Effect of Warrant Redemption. The Warrants are
subject to redemption by the Company, upon the consent of the Underwriter, at
any time upon notice of not less than 30 days, at a price of $.10 per
Warrant, provided that the closing bid quotation of the Common Stock on all
20 trading days ending on the third day prior to the day on which the Company
gives notice has been at least 150% (currently $7.50, subject to adjustment)
of the then effective exercise price of the Warrants. Redemption of the
Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holders to do
so, to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants, or to accept the redemption price, which
is likely to be substantially less than the market value of the Warrants at
the time of redemption. See "Description of Securities -- Redeemable
Warrants."
28. Possible Inability to Exercise Warrants. The Company intends to
qualify the sale of the securities offered hereby in a limited number of
states. Although certain exemptions in the securities laws of certain states
might permit the Warrants to be transferred to purchasers in states other
than those in which the Warrants are
15
<PAGE>
initially qualified, the Company will be prevented from issuing Common Stock
in such states upon the exercise of the Warrants unless an exemption from
qualification is available or unless the issuance of Common Stock upon
exercise of the Warrants is qualified. The Company may decide not to seek or
may not be able to obtain qualification of the issuance of such Common Stock
in all of the states in which the ultimate purchasers of the Warrants reside.
In such a case, the Warrants held by purchasers will expire and have no value
if such Warrants cannot be sold. Accordingly, the market for the Warrants may
be limited because of these restrictions. Further, a current prospectus
covering the Common Stock issuable upon exercise of the Warrants must be in
effect before the Company may accept Warrant exercises. There can be no
assurance the Company will be able to have a current prospectus in effect
when this Prospectus is no longer current, notwithstanding the Company's
commitment to use its best efforts to do so. See "Description of Securities
- - -- Redeemable Warrants."
29. Tax Loss Carryforward. At September 30, 1996, the Company had net
operating loss carryforwards ("NOLs") of $4,020,000 which expire at various
times through 2011. Under Section 382 of the Internal Revenue Code of 1986,
as amended, utilization of prior NOLs is limited after an ownership change,
as defined in Section 382, to an annual amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the ownership
change multiplied by the federal long-term exempt tax rate. The additional
equity obtained by the Company in connection with recent issuances and this
offering will result in an ownership change and, thus, in limitations on the
Company's use of its prior NOLs. In the event the Company achieves profitable
operations, any significant limitation on the utilization of its NOLs would
have the effect of increasing the Company's tax liability and reducing net
income and available cash resources. See Note 9 to Notes to Financial
Statements.
30. Possible Restrictions on Market-Making Activities in the Company's
Securities. Rule 10b-6 under the Exchange Act may prohibit the Underwriter
from engaging in any market-making activities with regard to the Company's
securities for the period from nine business days (or such other applicable
period as Rule 10b-6 may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter may be
unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of
the Company's securities. See "Underwriting."
31. Forward-Looking Statements. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause this possible difference include, but
are not limited to, those discussed in this "Risk Factor" section.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 Shares and
1,600,000 Warrants offered hereby are estimated to be $6,700,000 ($7,764,880
if the Underwriter's over-allotment option is exercised in full). The Company
expects to use the net proceeds over the next 12 months approximately as
follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Dollar Amount
---------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Construction and opening coffee and bagel cafes and
bars(1) ................................................. $3,700,000 55.2%
Repayment of indebtedness(2) ............................. 1,915,000 28.6
Remodeling of certain existing Tuscany locations(3) ...... 175,000 2.6
Working capital and general corporate purposes(4) ........ 910,000 13.6
--------------- ---------------
Total .................................................. $6,700,000 100.0%
=============== ===============
</TABLE>
- - ------
(1) Represents the costs to construct, design and open approximately 12 to 16
Tuscany cafes and bars (in addition to the 3 cafes currently under
construction), with a primary emphasis on cafes. The Company estimates
that the cost to construct and open coffee and bagel cafes will be
between approximately $275,000 to $325,000 per cafe and the cost to open
coffee and bagel bars will be approximately $130,000 per bar. See
"Business Expansion Strategy" and "-- Site Selection."
(2) Represents amounts to (i) repay the entire $900,000 principal amount of
the Bridge Notes and estimated accrued interest thereon and (ii) pay the
aggregate $1,000,000 due to Seafirst in March 1997 and June 1997 under
the line of credit and note, which indebtedness is guaranteed by certain
of the Company's directors and shareholders. The Bridge Notes bear
interest at the rate of 9% per annum and are repayable on the earlier of
the consummation of this offering or December 23, 1997. The Company used
the proceeds of the Bridge Financing (together with the proceeds of the
Company Financing) principally to fund construction costs relating to two
bagel and coffee cafes opened in November and December 1996 and three
additional coffee and bagel cafes anticipated to be opened by February
1997, to repay approximately $407,000 of indebtedness to trade creditors
and for working capital and general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources."
(3) Represents costs to remodel six existing Tuscany locations, including the
installation of bagel ovens at two of these locations. See "Business --
Expansion Strategy."
(4) Includes costs of general corporate overhead and maintaining inventory
and may, to the extent cash flow from operations is insufficient, be used
for the payment of the salaries of executive officers, estimated to
aggregate approximately $245,000 over the twelve months following the
consummation of this offering. See "Management."
If the Underwriter exercises its over-allotment option in full, the
Company will realize additional net proceeds of $1,064,880, which will be
added to the Company's working capital.
If the note to Seafirst is not extended at maturity in September 1997 and
the Company is unable to obtain replacement financing, the Company could be
required to use a portion of the proceeds of this offering to repay the
amounts then outstanding ($1,000,000) and would have less proceeds available
for intended purposes. In such event, the Company's directors and
shareholders which have guaranteed the Company's obligations will receive a
benefit from such use of proceeds as a result of the corresponding reduction
in their liability exposure.
Based on the Company's current proposed plans and assumptions relating to
the implementation of its expansion strategy (including the timetable of
opening new coffee and bagel cafes and bars and the costs associated
therewith), the Company anticipates that the net proceeds of this offering
will be sufficient to satisfy its contemplated cash requirements for at least
twelve months following the consummation of this offering. In the event that
the Company's plans change or its assumptions prove to be inaccurate (due to
unanticipated expenses, construction delays or difficulties or otherwise) or
the proceeds of this offering otherwise prove to be insufficient to fund
operations and implement the Company's proposed expansion strategy, the
Company could be required
17
<PAGE>
to seek additional financing sooner than currently anticipated. The Company
has no current arrangements with respect to, or potential sources of,
additional financing and it is not anticipated that any shareholders will
provide any additional guarantees for Company obligations. Consequently,
there can be no assurance that any additional financing will be available to
the Company when needed, on commercially reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest
bearing investments.
DILUTION
The difference between the initial public offering price per Share and the
adjusted net tangible book value per share of Common Stock after this
offering constitutes the dilution to investors in this offering. Net tangible
book value per share of Common Stock on any given date is determined by
dividing the net tangible book value of the Company (total tangible assets
less total liabilities) on that date, by the number of shares of Common Stock
(including shares of Common Stock issuable upon conversion of outstanding
shares of Series A Preferred Stock and Series B Preferred Stock) outstanding
on that date.
As of September 30, 1996, the net tangible book value of the Company was
$1,644,635 or $.73 per share of Common Stock. After also giving effect to the
Pro Forma Adjustments (see footnote 3 of "Prospectus Summary" "Summary
Financial Information"), the pro forma net tangible book value of the Company
as of September 30, 1996 would have been $3,668,331 or $1.30 per share. After
also giving effect to (i) the sale of the 1,600,000 Shares and 1,600,000
Warrants being offered hereby (less underwriting discounts and commissions
and estimated expenses of this offering) and (ii) a non-recurring charge of
$477,695 relating to the Bridge Financing, the adjusted net tangible book
value of the Company as of September 30, 1996 would have been $9,875,636 or
$2.23 per share, representing an immediate increase in net tangible book
value of $.93 per share of Common Stock to existing shareholders and an
immediate dilution of $2.77 per share (or 55.4%) to new investors. The
following table illustrates this dilution to new investors on a per share
basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price ................................. $5.00
Net tangible book value before Pro Forma Adjustments $ .73
Increase attributable to Pro Forma Adjustments ...... .57
Pro forma net tangible book value before this
offering ............................................. 1.30
Increase attributable to this offering .............. .93
------
Adjusted net tangible book value after this offering .. 2.23
-------
Dilution to investors in this offering. ............... $2.77
=======
</TABLE>
The following table sets forth, with respect to existing shareholders and
new investors in this offering, a comparison of the number of shares of
Common Stock issued by the Company (including shares issuable upon conversion
of the outstanding Series A Preferred Stock and the outstanding Series B
Preferred Stock and giving effect to the Pro Forma Adjustments), the
percentage of ownership of such shares, the total cash consideration paid,
the percentage of total cash consideration paid and the average price per
share.
<TABLE>
<CAPTION>
Total Cash Average
Shares Purchased Consideration Paid Price
--------------------------
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders 2,821,852 63.8% $ 9,327,217 53.8% $3.31
New Investors ....... 1,600,000 36.2 8,000,000 46.2 5.00
----------- --------- ------------- --------- -----------
Total ............. 4,421,852 100.0% $17,327,217 100.0%
=========== ========= ============= =========
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$9,200,000 for 1,840,000 shares of Common Stock, representing approximately
49.7% of the total consideration for 39.5% of the total number of shares of
Common Stock outstanding.
18
<PAGE>
In addition, the table assumes no exercise of other outstanding stock
options or warrants. As of the date of this Prospectus, there are also
outstanding Company Financing Warrants to purchase an aggregate of 372,708
shares of Common Stock at an exercise price of $5.00 per share, other
warrants to purchase an aggregate of 235,294 shares of Common Stock at an
exercise price of $.34 per share and outstanding stock options granted under
the Option Plan to purchase an aggregate of 203,000 shares of Common Stock at
an exercise price of $5.00 per share. To the extent that these options and
warrants are exercised, there will be further dilution to new investors. See
"Management -- 1996 Stock Option Plan," "Description of Securities" and
"Underwriting."
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock, and the
Board does not intend to declare or pay any dividends on its Common Stock in
the foreseeable future. The Board of Directors currently intends to retain
all available earnings (if any) generated by the Company's operations for the
development and growth of its business. The declaration in the future of any
cash or stock dividends on the Common Stock will be at the discretion of the
Board and will depend upon a variety of factors, including the earnings,
capital requirements and financial position of the Company and general
economic conditions at the time in question. The payment of cash dividends on
the Common Stock is prohibited by the terms of the Company's line of credit
with Seafirst. Moreover, the payment of cash dividends on the Common Stock in
the future could be further limited or prohibited by the terms of financing
agreements that may be entered into by the Company (e.g., a bank line of
credit or an agreement relating to the issuance of other debt securities of
the Company) or by the terms of any Preferred Stock that may be issued and
then outstanding. See "Description of Securities -- Capital Stock."
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of September 30, 1996, (i) on an actual basis, (ii) on a pro
forma basis, giving effect to the Pro Forma Adjustments (see footnote 3 of
"Prospectus Summary - Summary Financial Information") and to the conversion
of the outstanding shares of Series A Preferred Stock and the Series B
Preferred Stock which will occur immediately prior to the consummation of
this offering, and (iii) as adjusted to give effect to the sale of the
1,600,000 Shares and 1,600,000 Warrants offered hereby and the anticipated
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------
Actual Pro Forma As Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Short-term debt (including current portion of long-term
liabilities) .......................................... $ 2,387,815 $ 2,387,815 $ 1,387,815
============= ============= =============
Long term liabilities .................................. $ 129,742 $ 629,840 $ 129,742
------------- ------------- -------------
Shareholders' equity:
Common Stock, $.01 par value, 30,000,000 authorized,
932,331 shares issued and outstanding (actual),
2,821,852 shares issued and outstanding (pro forma),
4,421,852 shares issued and outstanding (as
adjusted)(1) .......................................... 140,806 8,635,541 15,204,741
Preferred Stock, $.01 par value, issuable in series:
5,000,000 shares authorized:
Series A Preferred Stock, $1.25 stated value, 2,766,000
shares authorized; 2,766,000 shares issued and
outstanding; no shares issued and outstanding pro forma
and as adjusted ....................................... 3,186,625 0 0
Series B Preferred Stock, $2.00 stated value, 1,750,000
shares authorized; 1,750,000 shares issued and
outstanding actual; no shares issued and outstanding
pro forma and as adjusted ............................. 3,233,714 0 0
Contributed capital for warrants ....................... 126,000 80,000 210,800
Accumulated deficit .................................... (4,639,281) (4,643,981) (5,136,676)
------------- ------------- -------------
Total shareholders' equity ........................ 2,047,864 4,071,560 10,278,865
------------- ------------- -------------
Total capitalization ......................... $ 2,177,606 $ 4,701,400 $10,408,607
============= ============= =============
</TABLE>
- - ------
(1) Does not include (i) 1,600,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 320,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) an
aggregate of 372,708 shares of Common Stock reserved for issuance upon
exercise of the Company Financing Warrants; (iv) 203,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options under
the Option Plan; (v) 147,000 shares of Common Stock reserved for issuance
upon exercise of options available for future grant under the Option
Plan; (vi) 235,294 shares of Common Stock reserved for issuance upon
exercise of other outstanding warrants; and (vii) up to 45,000 shares of
Common Stock reserved for issuance in the event the Company fails to
satisfy certain obligations with respect to the registration of the
shares of Common Stock issued in connection with the Bridge Financing.
See "Management -- 1996 Stock Option Plan," "Description of Securities"
and "Underwriting."
20
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth sets forth certain selected historical and
pro forma financial data of the Company as of and for the dates indicated.
The selected financial data as of December 31, 1995 and September 30, 1996
and for the year ended December 31, 1995 and the nine months ended September
30, 1996 have been derived from the financial statements set forth elsewhere
in this Prospectus that have been audited by Deloitte & Touche LLP,
independent auditors. The report of Deloitte & Touche LLP, which appears
herein contains an explanatory paragraph relating to the Company's ability to
continue as a going concern. The selected financial data for the nine months
ended September 30, 1995 are derived from the Company's unaudited financial
statements for such period set forth elsewhere in this Prospectus, which
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a proper statement of the results for such period. The
financial data set forth below is qualified by reference to and should be
read in conjunction with the Company's financial statements, related notes
and other financial information contained in this Prospectus, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The pro forma financial information is based on certain
transactions which occurred subsequent to September 30, 1996 and certain
assumptions which management believes are reasonable under the circumstances.
See Note 1 to Notes to Financial Statements.
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
----------------------------
1995 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Net sales ............................................. $2,488,840 $1,678,579 $3,317,272
Cost of sales ......................................... 1,495,848 1,022,363 2,217,311
Gross profit .......................................... 992,992 656,216 1,099,961
Operating expenses .................................... 1,540,470 1,020,754 2,246,980
General, administrative and corporate marketing
expenses ............................................. 794,650 539,514 728,763
Loss from operations .................................. 1,342,128 904,052 1,875,782
Other expenses ........................................ 342,635 274,820 204,857
Net loss .............................................. 1,684,763 1,178,872 2,080,639
Pro forma net loss per share(1) ....................... .69 .48 .80
Pro forma weighted average number of shares
outstanding(1) ....................................... 2,451,774 2,450,399 2,591,663
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
----------------- ------------------
<S> <C> <C>
Working capital (deficit) $ (2,456,670) $(4,179,359)
Total assets ............ 3,851,153 6,620,643
Total liabilities ....... 2,897,874 4,572,779
Shareholders' equity .... 953,279 2,047,864
</TABLE>
- - ------
(1) Based on the proforma weighted average number of shares.
(2) Gives effect not only to issuances of shares of Common Stock, options and
warrants, and contributions to capital of shares of Common Stock within
twelve months prior to the initial filing of the registration statement
of which this Prospectus is a part, but also gives pro forma effect to
the issuance immediately prior to the consummation of this offering of
(i) 135,297 shares of Common Stock upon exercise of certain outstanding
warrants, (ii) 481,283 shares of Common Stock upon conversion of the
Company Financing Notes, (iii) an aggregate of 1,328,235 shares of Common
Stock upon conversion of the Series A Preferred Stock and Series B
Preferred Stock and (iv) the contribution to the Company's capital by two
officers of the Company for an aggregate of 235,294 shares of Common
Stock. See "Certain Transactions," "Description of Securities" and Note 1
to Notes to Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since inception, the Company has generated limited revenues and incurred
significant losses, including losses of $1,684,763 and $2,080,639 for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively, resulting in an accumulated deficit of $4,639,281 at September
30, 1996. Losses are continuing and increasing through the date of this
Prospectus. The Company intends to incur significant expenditures in
connection with its expansion strategy (including the payment of rent for new
locations prior to their opening) which will result in continued significant
losses for the foreseeable future. The Company will also incur non-recurring
charges in the aggregate amount of $482,395 relating to the Bridge Financing
and the Company Financing. Losses are expected to continue until such time,
if ever, that the Company is able to generate a level of revenues sufficient
to offset its cost structure in addition to reducing its operating costs on a
per location basis. There can be no assurance that the Company will achieve
significant increased revenues or profitable operations.
The Company's independent auditors have included an explanatory paragraph
in their report on the Company's financial statements, stating that they have
been prepared assuming that the Company will continue as a going concern and
that recurring losses from operations and projected future cash requirements
raise substantial doubt about the Company's ability to continue as a going
concern.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net sales for the nine months ended September 30, 1996 were $3,317,272, an
increase of $1,638,693 or 97.6%, as compared to $1,678,579 for the nine
months ended September 30, 1995. The increase in net sales was primarily
attributable to the opening of additional Tuscany locations subsequent to
September 30, 1995, the shift in the Company's focus to a more coffee-house
style cafe concept in October 1995 and the introduction of bagels at the
Company's cafes and bars in March 1996. The Company had 12 coffee and bagel
cafes and 12 coffee bagel bars open at September 30, 1996, as compared to 15
coffee and bagel bars (of which 3 were subsequently converted to cafes) open
at September 30, 1995. Sales of bagels and other food products increased to
40% of net sales for the nine months ended September 30, 1996, as compared to
23% (none of which was from the sale of bagels) for the nine months ended
September 30, 1995, while sales of coffee beverages declined to 48% of net
sales from 62% for the same periods. The Company anticipates that sales of
coffee and bagel products will continue to account for substantially all of
the Company's revenues for the foreseeable future.
Cost of sales and related occupancy costs for the nine months ended
September 30, 1996 were $2,217,311, an increase of $1,194,948 or 116.9%, as
compared to $1,022,363 for the nine months ended September 30, 1995. The
increase in cost of sales and related occupancy costs is primarily the result
of increased number of locations, increased net sales, higher rental costs
and higher costs relating to coffee beverages.
Gross profit for the nine months ended September 30, 1996 was $1,099,961,
or 33.2% of net sales, as compared to $656,216, or 39.1% of net sales for the
nine months ended September 30, 1995. The decrease in gross profit as a
percentage of net sales was attributable to an increased number of coffee and
bagel cafes during the nine months ended September 30, 1996. Newly opened
locations incur a higher cost of sales and related occupancy costs as a
percentage of sales during the first several months of operation.
Total operating expenses for the nine months ended September 30, 1996 were
$2,246,980, or 67.7% of net sales, as compared to $1,020,754, or 60.8% of net
sales, for the nine months ended September 30, 1995. Such increase as a
percentage of net sales was primarily the result of an increase in store
operating expenses as a percentage of net sales. Store operating expenses for
the nine months ended September 30, 1996 were $1,712,622, or 51.6% of net
sales, as compared to $746,456, or 44.5% of net sales, for the nine months
ended September 30, 1995. Such increase was primarily the result of the
opening of an increased number of cafes which have higher start-up operating
expenses as compared to bars.
General, administrative and corporate marketing expenses for the nine
months ended September 30, 1996 were $728,763, or 22.0% of net sales, as
compared to $539,514, or 32.1% of net sales for the nine months ended
22
<PAGE>
September 30, 1995. The decrease in general, administrative and corporate
marketing expenses as a percentage of net sales was primarily attributable to
increasing the Company's corporate infrastructure and administrative
personnel during the nine months ended September 30, 1995 in anticipation of
the Company's proposed expansion.
Other expenses for the nine months ended September 30, 1996 were $204,857,
a decrease of $69,963 or 25.5%, as compared to $274,820 for the nine months
ended September 30, 1995. Such decrease was primarily attributable to a
$199,134 loss from the sale of equipment and leasehold improvements in
connection with the termination of a franchise arrangement, which was
partially offset by an increase in interest expense of $151,247.
As a result of the foregoing, net loss for the nine months ended September
30, 1996 increased to $2,080,639, as compared to $1,178,872 for the nine
months ended September 30, 1995.
Year Ended December 31, 1995
Net sales for the year ended December 31, 1995 were $2,488,840. Sales of
coffee beverages, bagels and other food products, coffee beans, other
beverages and merchandise accounted for approximately 61%, 25%, 4%, 8% and 2%
of the Company's net sales, respectively.
Cost of sales and related occupancy costs for the year ended December 31,
1995 were $1,495,848. As a result, gross profit for the year ended December
31, 1995 was $992,992, or 39.9% of net sales.
Operating expenses for the year ended December 31, 1995 were $1,540,470,
or 61.9% of net sales. Operating expenses consisted of store operating
expenses of $1,146,262 (which primarily consisted of salaries and related
taxes and benefits of store personnel), depreciation and amortization expense
of $210,253 and other operating expenses of $183,955.
General, administrative and corporate marketing expenses for the year
ended December 31, 1995 were $794,650. Such expenses consisted of office
rent, salaries of executive officers and administrative personnel and other
administrative expenses.
Other expenses for the year ended December 31, 1995 were $342,635. Such
expenses included $76,477 of interest expense relating to the line of credit
with Seafirst and long-term capital leases and a loss of $199,134 relating to
sales of equipment and leasehold improvements in connection with the
termination of a franchise arrangement.
Net loss for the year ended December 31, 1995 was $1,684,763.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations (at September 30, 1996, the Company had a working capital deficit
of $4,179,359), due to, among other things, costs associated with
development, opening and start-up costs of new coffee and bagel cafes and
bars and building a corporate infrastructure sufficient to support the
Company's proposed expanded operations. As a result, the Company has been
substantially dependent upon sales of its equity and debt securities (which
have raised an aggregate of approximately $9,000,000 since September 1994), a
line of credit from Seafirst and equipment financing to finance its working
capital requirements, and upon personal guarantees of directors and
shareholders to secure the line of credit.
Net cash used in operating activities was $566,686 for the nine months
ended September 30, 1996, as compared to $706,037 for the nine months ended
September 30, 1995. The decrease in net cash used in operating activities was
primarily the result of an increase in accounts payable. Net cash used in
operating activities was $747,971 for the year ended December 31, 1995,
resulting primarily from the Company's operating loss.
Net cash used in investing activities was $3,126,347 for the nine months
ended September 30, 1996, as compared to $1,215,907 for the nine months ended
September 30, 1995. The increase in net cash used in investing activities was
primarily attributable to an increase in purchases of equipment and leasehold
improvements. Net cash used in investing activities for the year ended
December 31, 1995 was $2,274,580, consisting primarily of $2,022,780 of
purchases of equipment and leasehold improvements.
23
<PAGE>
Net cash provided by financing activities for the nine months ended
September 30, 1996 was $3,691,594, as compared to $1,819,909 for the nine
months ended September 30, 1995. The increase in net cash provided by
financing activities was primarily attributable to increases in sales of
equity securities and short-term borrowings under the Company's line of
credit from Seafirst. Net cash provided by financing activities for the year
ended December 31, 1995 was $2,967,820, consisting primarily of short-term
borrowings under the line of credit from Seafirst and sales of equity
securities, which were partially offset by repayment of notes payable.
From February 1992 to March 1993, Mark McDonald, Executive Vice President
and a director of the Company, loaned an aggregate of $69,861 to the Company.
During the years ended December 31, 1994 and 1995, the Company repaid $5,771
and $55,631 principal amount of such loans, respectively, to Mr. McDonald.
The remaining $8,459 principal amount of indebtedness due under such loans is
evidenced by a note which bears interest at a rate of 6% per annum and is due
on the earlier of April 30, 1998 and twelve months following the consummation
of this offering. See "Certain Transactions."
During the year ended December 31, 1993, Chris Mueller, Executive Vice
President and a director of the Company, loaned an aggregate of $100,000 to
the Company. During the year ended December 31, 1994, the Company repaid
$60,443 principal amount of such loans to Mr. Mueller. The remaining $39,557
principal amount of indebtedness due under such loans is evidenced by a note
which bears interest at a rate of 6% per annum and is due on the earlier of
April 30, 1998 and twelve months following the consummation of this offering.
See "Certain Transactions."
From September 1994 until May 1995, the Company issued to 91 investors a
total of 2,766,000 shares of Series A Preferred Stock for which it received
aggregate net proceeds of approximately $3,186,625. David Cohn, James Milgard
(and certain members of his family), Keith Grinstein, Ottie Ladd and Greg
Maffei, directors of the Company, purchased 50,000, 400,000, 10,000, 60,000
and 20,000 shares of Series A Preferred Stock, respectively, at the same
price and on the same terms as the other purchasers of Series A Preferred
Stock. See "Certain Transaction" and "Description of Securities -- Capital
Stock."
In September 1995, the Company obtained a line of credit from Seafirst
which had an available borrowing base of $1,600,000. In September 1996, the
line of credit was converted into a note and Seafirst provided a line of
credit for $600,000. The Company repaid $200,000 of indebtedness under the
note in December 1996 and is required to repay the $600,000 line of credit in
March 1997 and $200,000 of indebtedness under the note in each of March 1997
and June 1997. The balance of the note is due in September 1997, bears
interest at the prime rate of Seafirst plus 1 1/4% and requires the Company
to maintain a designated minimum net worth. At September 30, 1996, the
Company was in default of this financial covenant, for which the Company has
received a waiver from Seafirst.
In connection with the initial line of credit, in September 1995, nine
individuals who are directors and/or shareholders of the Company and, in
September 1996, five additional directors and/or shareholders provided
personal guaranties relating to any indebtedness outstanding from time to
time under the line of credit from, and note payable to, Seafirst. In return,
the Company granted to such guarantors a security interest in all of the
Company's furniture, fixtures and equipment and warrants to purchase an
aggregate of 135,297 shares of Common Stock. Such persons will receive a
benefit from payments made to Seafirst (as required under the line of credit
and note) from the proceeds of this offering (as a result of the
corresponding reduction in their liability exposure). See "Certain
Transactions" and "Description of Securities -- Other Existing Warrants."
During the period from December 1995 until August 1996, the Company issued
to 123 investors a total of 1,750,000 shares of Series B Preferred Stock for
which it received aggregate net proceeds of approximately $3,233,714. In
March 1996, in connection with such offering, Mr. Cohn, and John Parkey, a
director of the Company, purchased 12,500 and 125,000 shares of Series B
Preferred Stock, respectively, at the same price and on the same terms as the
other purchasers of Series B Preferred Stock. See "Certain Transactions" and
"Description of Securities -- Capital Stock."
In November and December 1996, the Company completed the Company Financing
pursuant to which it issued an aggregate of (i) $1,800,000 principal amount
of Company Financing Notes and (ii) 372,708 Company Financing Warrants each
to purchase one share of Common Stock. The Company Financing Notes bear
interest at an annual rate of 9%, payable quarterly commencing December 31,
1996, and will be converted at the rate of
24
<PAGE>
one share of Common Stock for each $3.74 of indebtedness immediately prior to
the consummation of this offering. In connection with the Company Financing,
Messrs. Mueller, Milgard, Ladd, Cohn, Maffei, Alhadeff, Grinstein and
Simonson purchased 2, 2, 1, 0.6, 0.6, 0.5, 0.5 and 0.4 Company Financing
Units, respectively, for purchase prices of $100,000, $100,000, $50,000,
$30,000, $30,000, $25,000, $25,000 and $20,000, respectively. See "Certain
Transactions" and "Description of Securities -- Recent Financing."
In December 1996, the Company consummated the Bridge Financing pursuant to
which it issued an aggregate of (i) $900,000 principal amount of Bridge Notes
bearing interest at the rate of 9% per annum and maturing upon the
consummation of this offering and (ii) 180,000 shares of Common Stock. The
Company used the proceeds of the Bridge Financing (together with the proceeds
of the Company Financing) principally to fund construction costs relating to
two Tuscany cafes opened in November and December 1996 and three additional
coffee and bagel cafes anticipated to be opened by February 1997, to repay
approximately $407,000 of indebtedness to trade creditors and for working
capital and general corporate purposes. The Company intends to use a portion
of the proceeds of this offering to repay the entire principal amount of and
accrued interest on the Bridge Notes. See "Description of Securities --
Recent Financings."
The Company is dependent upon the proceeds of this offering to finance its
proposed expansion over the twelve months following the consummation of this
offering. Based on the Company's current proposed plans and assumptions
relating to the implementation of its expansion strategy (including the
timetable of opening new coffee and bagel cafes and bars and the costs
associated therewith), the Company anticipates that the net proceeds of this
offering will be sufficient to satisfy its contemplated cash requirements for
at least twelve months following the consummation of this offering. In the
event that the Company's plans change or its assumptions prove to be
inaccurate (due to unanticipated expenses, construction delays or
difficulties or otherwise) or the proceeds of this offering otherwise prove
to be insufficient to fund operations and implement the Company's proposed
expansion strategy, the Company could be required to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to, or potential sources of, additional financing
and it is not anticipated that any shareholders will provide any additional
guarantees for Company obligations. Consequently, there can be no assurance
that any additional financing will be available to the Company when needed,
on commercially reasonable terms, or at all.
25
<PAGE>
BUSINESS
The Company operates 28 specialty coffee and bagel cafes and bars under
the Tuscany name, all of which offer gourmet and specialty coffee beverages
and coffee beans and 20 of which also offer fresh baked bagels and related
food products. The Company's stores are currently located in the Pittsburgh
and Philadelphia, Pennsylvania; Cleveland, Ohio; St. Louis, Missouri; Denver,
Colorado; and Dallas and Houston, Texas metropolitan areas. The Company
developed its Tuscany cafe concept by combining the relaxed atmosphere of a
coffee house with the warm, inviting environment of a bagel bakery in a
"cafe" style setting to differentiate its Tuscany cafes from other coffee
stores and other bagel bakeries and to appeal to a broad range of customers.
The Company believes that it is one of only a few operators of multiple unit
bagel bakeries which offers a wide variety of high quality, specialty coffee
beverages.
The Company commenced operations by opening two traditional coffee bars in
Seattle, Washington in 1992. The Company opened its first coffee bar under
the Tuscany name in Denver, Colorado in September 1993, after which it opened
14, and franchised three (one of which franchises has since been terminated),
additional coffee bars from November 1993 to September 1995. Subsequently,
the Company determined that markets outside of Seattle offered greater
opportunities for expansion in the retail coffee industry and that the bagel
market was, like the coffee market, among the fastest growing segments of the
retail food industry. Consequently, the Company sold its Seattle coffee bars
in December 1993 and June 1994, shifted its focus towards a more coffee-house
style cafe concept and away from franchising in October 1995 and began to
offer bagels at its cafes and bars in March 1996.
INDUSTRY OVERVIEW
The specialty coffee and gourmet bagel retail businesses in the United
States are growing rapidly. The American Association of Specialty Coffee (the
"AASC") estimates that sales in the specialty coffee retail market in the
United States have increased from $295 million in 1983 to approximately $2
billion in 1994. Industry sources also estimate that coffee cafes, carts and
kiosks, will be the fastest growing distribution channel and that sales by
such outlets in the United States will reach $6 billion by 1999. In addition,
the AASC estimates that the number of coffee cafes, bars and carts have
increased from 200 in 1984 to 5,000 in 1994 and will increase to
approximately 10,000 by 1999.
Similarly, industry sources estimate that bagel consumption in the United
States increased from 1983 to 1994 by approximately 169%, to 3.6 pounds per
person per annum in 1994. The bagel industry had estimated sales of $2.5
billion in 1994 and is experiencing an annual growth rate in excess of 20%.
The Company believes that several factors account for the recent increase
in demand for specialty coffee. Specialty coffees are made from arabica beans
(which are superior to the robusta beans used in instant and canned coffee)
roasted to specifications that produce coffee with more flavor and consumer
appeal. A high proportion of consumers in the United States now recognize and
appreciate the difference in quality between instant and canned coffees and
specialty coffees. The AASC estimates that approximately 31.0% of total
coffee sales in the United States in 1995 were specialty coffee, an increase
from approximately 3.6% of total coffee sales in 1983, and that specialty
coffee will account for an estimated 50% of total coffee sales in the United
States by the year 2000.
Another factor leading to the increase in specialty coffee consumption is
the growing popularity of flavored coffee beverages and specialty coffee
beverages in which coffee or espresso is combined with steamed milk to
produce lattes, cappuccinos and similar beverages. These specialty coffee
beverages are typically served in restaurants and coffee houses using
sophisticated, high-pressure machines. The rapid expansion of Starbucks(R)
and other specialty coffee houses nationwide has also contributed to greater
consumer awareness and appreciation of specialty coffee. With the exception
of Starbucks, however, the specialty coffee retail segment remains relatively
unbranded.
Industry sources have cited several factors which account for the recent
increase in demand for bagels. Americans are switching to healthy foods.
Bagels, which are low in calories, fat and cholesterol, are perceived as
healthy foods, particularly compared to donuts and muffins, which the Company
believes are generally higher in calories, fat and contain more sugar.
Additionally, bagels can be eaten-on-the-run, which the Company believes is
considered a benefit by the many consumers who do not have time for a
complete meal (particularly breakfast and lunch) during the busy work day.
26
<PAGE>
The increase in demand for bagels also can be attributed to the increasing
consumer awareness of bagels and their acceptance as more than an ethnic or
breakfast food. Moreover, consumer awareness of bagels among American
consumers has increased to 75% in 1994 from only 20% in 1983. The wide range
of bagel flavors, such as cinnamon raisin, blueberry, onion and pumpernickel,
have given bagels a great deal of versatility. Consequently, bagels have
become popular as sandwiches and as snacks.
In addition to increased consumer awareness and appreciation of specialty
coffee and gourmet bagels, the Company believes that the rapid growth in the
specialty coffee and gourmet bagel retail businesses is attributable to an
increased desire by consumers for affordable indulgences. Specialty coffee
beverages, bagels and complementary food products offered in a pleasant
environment provide consumers the opportunity to enjoy an affordable
indulgence. Industry sources have also noted that the increasing number of
people seeking a non-alcoholic environment where they can gather as an
alternative to home and work is contributing to the popularity of specialty
coffee houses.
The United States markets for specialty coffee and gourmet bagels are
disproportionately concentrated in selected geographic markets. The specialty
coffee market is highly concentrated in the Pacific Northwest, particularly
Washington and Oregon, and industry sources estimate that over 70% of bagel
shops are located in New York, New Jersey, Florida and California.
TUSCANY CONCEPT
The Company developed its Tuscany cafe concept by combining the relaxed
atmosphere of a coffee house with the warm, inviting environment of a bagel
bakery in a "cafe" style setting to differentiate its Tuscany cafes from
other coffee stores and other bagel bakeries and to appeal to a broad range
of customers.
MENU
The Company's coffee and bagel cafes offer a cafe style menu which
features:
o A wide variety of specialty coffee beverages, including espresso,
cappuccino and latte beverages, hot and iced.
o Up to 16 varieties of fresh baked bagels, including plain, cinnamon
raisin, whole wheat, onion, pumpernickel, garlic and salt, sold
individually and by the dozen.
o Sandwiches prepared on bagels and other breads.
o Cream cheese and other spreads, including strawberry, roasted garlic
and smoked salmon flavored spreads.
o Specialty baked products made from bagel dough, including bagel
focaccia, "balzones" (similar to a calzone), "pizzalis" (a combination
of a personal pizza and a bialy) and "cinnabagels" (similar to a
cinnamon bun).
o Freshly prepared salads and soups.
o Beverages such as premium iced teas, Italian sodas, granitas, fruit
juices and bottled waters.
o Coffee beans, including the Company's own premium and decaffeinated
blends and three popular varietals (single bean coffees).
The Company's coffee and bagel bars offer a limited cafe menu, which
includes hot and iced coffee beverages; bagels (delivered daily from another
regional Tuscany store or a local bakery); spreads; cold beverages; and
coffee beans. The Company continually seeks to refine its coffee and bagel
cafe and bar menus and introduces new sandwiches and creative bagel products
based on perceived consumer preferences and tastes.
Sales of coffee beverages, bagel and other food products, coffee beans,
other beverages and merchandise accounted for approximately 61%, 25%, 4%, 8%
and 2% of the Company's net sales, respectively, during the year ended
December 31, 1995 and 48%, 40%, 3%, 8% and 1% respectively, during the nine
months ended September 30, 1996. The Company anticipates that sales of coffee
and bagel related products will continue to account for substantially all of
the Company's revenues for the foreseeable future.
27
<PAGE>
Design, Decor and Atmosphere
In an effort to increase the Tuscany name recognition and customer
loyalty, the Company has developed a prototypical image for its coffee and
bagel cafes and bars. The Company's coffee and bagel cafes feature the use of
rich woods, custom wall coverings, sconce lighting, tile and hardwood floors
and comfortable seating. The Company's coffee and bagel cafes and bars are
also identified by a common color scheme and exterior Tuscany logo signs.
Customer Purchasing
Customers order food and beverages at a counter cafeteria style, carry
them to the cashier and select their seating. Cafeteria style seating is
typical of specialty coffee stores and bagel shops, including Starbucks
coffee stores and Einstein Bros. Bagels(TR) and Noah's New York Bagels(R)
bagel shops.
Customer Satisfaction
The Company is committed to providing its customers with efficient and
friendly service, rapidly moving lines and to staffing each location with an
experienced management team to help ensure attentive customer service and a
pleasurable experience. The Company's commitment is underscored by its
employee training program which is required for all personnel and by
continual hands-on-training of employees by experienced management.
Pricing
The Company's strategy is to offer high-quality coffee and bagel products
at prices competitive with those offered by national retailers in the
Company's markets.
RESTAURANT LOCATIONS
The Company's stores are currently located in the Pittsburgh and
Philadelphia, Pennsylvania; Cleveland, Ohio; St. Louis, Missouri; Denver,
Colorado; and Dallas and Houston, Texas metropolitan areas. The Company
currently operates 16 coffee and bagel cafes and 12 coffee and bagel bars, of
which 9 locations feature bagel ovens. The Company's cafes generally range in
size from 1,000 to 3,000 square feet and generally have seating capacities
from approximately 20 to 90 customers and its bars, which are targeted
primarily towards the take-out or "on-the-run" customer, range in size from
300 to 1,250 square feet and have limited seating capacities. The Company's
coffee and bagel cafes are primarily located in shopping and retail centers
in upper middle class and affluent suburban residential neighborhoods and are
typically open seven days a week. The Company's coffee and bagel bars are
primarily located in lobbies of large office buildings and are open during
weekdays.
The following table summarizes certain information with respect to the
Company's coffee and bagel cafes and bars currently in operation, under
construction or in design:
<TABLE>
<CAPTION>
Date Opened/
Estimated Type of Square Seating Lease
Location Opening Date Location Footage Capacity Expiration((1))
----------------------- ---------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Norwest Tower September bar 750 24 August 1998
1993
Denver, CO
One Mellon December 1993 bar 384 ((2)) November 2003
Pittsburgh, PA
Renaissance Tower January 1994 bar 529 ((2)) December 2004
Dallas, TX
The Park Shops((3)) March 1994 bar 388 ((2)) January 2004
Houston, TX
First City Tower March 1994 bar 222 ((2)) January 2004
Houston, TX
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Date Opened/
Estimated Type of Square Seating Lease
Location Opening Date Location Footage Capacity Expiration((1))
----------------------- ---------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Two Mellon May 1994 bar 751 12 April 2004
Pittsburgh, PA
Fifth Avenue Place September bar 170 ((2)) August 2004
1994
Pittsburgh, PA
Society Tower October 1994 bar 356 36 September 1999
Cleveland, OH
Squirrel Hill November 1994 cafe((4)) 1,612 22 February 2016
Pittsburgh, PA
Southside November 1994 cafe 2,500 60 January 2007
Pittsburgh, PA
Shadyside November 1994 bar 1,000 30 November 2006
Pittsburgh, PA
NationsBank December 1994 bar 1,069 12 November 2004
Dallas, TX
Park Building January 1995 cafe 1,400 12 December 2003
Cleveland, OH
Meadowlake Village January 1995 cafe((4)) 1,600 24 December 2009
Denver, CO
Chagrin Falls, OH April 1995 cafe((4)) 1,650 26 March 2010
Shopps at Penn August 1995 bar 955 42 July 2005
Philadelphia, PA
Sixth and Olive Streets September cafe 2,700((5)) 36((5)) April 2010
1995
St. Louis, MO
Central West End October 1995 cafe 2,500 88 September 2010
St. Louis, MO
King of Prussia Mall October 1995 bar 366 ((2)) September 2003
King Prussia, PA
Mcknight and Siebert December 1995 cafe 2,500 76 December 2004
Roads
Pittsburgh, PA
Sixteenth & Walnut December 1995 cafe 2,000 40 March 2010
Streets
Philadelphia, PA
Westin William Penn February 1996 cafe 3,267 87 September 2015
Pittsburgh, PA
Clayton, MO April 1996 cafe((4)) 2,730 66 June 2010
Eastgate Mall April 1996 cafe((4)) 2,050 46 December 2005
Manfield Heights, OH
Foxridge Plaza May 1996 cafe((4)) 1,300 15 April 2010
Denver, CO
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Date Opened/
Estimated Type of Square Seating Lease
Location Opening Date Location Footage Capacity Expiration((1))
----------------------- ---------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Shaker Square August 1996 cafe((4)) 2,979 92 January 2011
Shaker Heights, OH
Forbes Avenue November 1996 cafe((4)) 2,500 65 May 2016
Pittsburgh, PA
Creve Coeur, MO December 1996 cafe((4)) 2,020 38 July 2011
January
University City 1997((6)) cafe((4)) 3,850 65 July 2016
St. Louis, MO
February
Wayne Township 1997((6)) cafe 2,305 60 July 2016
Philadelphia, PA
February
La Due Township 1997((6)) cafe 1,040 12 August 2016
St. Louis, MO
</TABLE>
- - ------
(1) Includes all option renewal periods.
(2) Common area or public seating is available for use by the Company's
customers.
(3) Owned by Expresso Park Shops Limited Partnership ("Park Shops L.P.") of
which the Company owns a 50% general partner interest and James Milgard,
a director of the Company, owns a 50% limited partnership interest. See
"Certain Transactions."
(4) This location features a bagel oven for on-site bagel baking.
(5) Includes proposed expansion of 1,420 square feet (including seating
capacity for an additional 12 persons) anticipated to occur in March
1997.
(6) Estimated opening date.
EXPANSION STRATEGY
The Company is currently implementing a strategy to expand its operations,
initially by focusing on the Pittsburgh, Cleveland and St. Louis markets,
where it has already established a presence of 9, 5 and 4 locations,
respectively, and has 2 additional cafes under construction (in addition to
one cafe under construction in Philadelphia). The Company is in various
stages of lease negotiations for several locations in each of the Pittsburgh,
Cleveland and St. Louis metropolitan areas. The Company believes that these
markets offer significant opportunities because, unlike other markets, such
as the Seattle coffee market and the New York City bagel market, they are
relatively unsaturated.
Industry sources estimate that over 70% of bagel shops are located in New
York, New Jersey, Florida and California and that the specialty coffee market
is disproportionately concentrated in the Pacific Northwest, particularly
Washington and Oregon. In addition, the AASC estimates that, in December
1995, in the United States, there were only approximately 2,000 bagel shops
and 5,000 specialty coffee stores, compared to the more than 55,000 pizza
restaurants and more than 10,000 McDonald's restaurants. The Company believes
that its early entrance into its target markets positions it to capitalize on
perceived opportunities in these markets.
The Company's expansion strategy is to become a leading specialty retailer
and to build a strong Tuscany brand recognition for its coffee and bagel
products in its target markets. The Company believes that this strategy will
also enable it to take advantage of economies of scale in distribution,
regional and store management, employee training and marketing and
advertising. The Company's long-term plans also include seeking to capitalize
upon its Tuscany brand recognition by distributing coffee beans initially in
the regional markets in which it operates in upscale supermarkets and other
specialty and gourmet retail stores.
The Company's current business plan indicates an intent to open
approximately 12 to 16 Tuscany cafes and bars by January 1998 (in addition to
the 3 cafes currently under construction), with a primary emphasis on cafes.
The Company intends to direct its expansion efforts towards establishing
additional Tuscany cafes, but will
30
<PAGE>
continue to open additional Tuscany bars, to the extent that desirable
locations become available on commercially reasonable terms. The Company is
utilizing a portion of the proceeds of the Bridge Financing and Company
Financing to complete the construction of, and open, the three coffee and
bagel cafes currently under construction and has allocated $3,700,000 of the
proceeds from this offering to finance the costs to design, construct and
open the other 12 to 16 proposed Tuscany cafes and bars.
The Company also intends to remodel six of its existing Tuscany bars to
enable such locations to increase their bagel offerings and has allocated
$175,000 of the proceeds from this offering for such purposes. Such
remodeling will include the installation of bagel display counters and, in
the case of two locations, a bagel oven. The Company anticipates that the
cost to remodel an existing bar will be between $15,000 and $25,000, and
where a bagel oven will be installed, approximately $50,000.
The Company is currently evaluating its plans for the Denver, Colorado and
Dallas and Houston, Texas markets and does not currently intend to open
additional locations in such markets. The Company is also contemplating
entering into franchising or similar agreements in the future with area
developers with sufficient capital to develop several coffee and bagel cafe
and bar locations in selected geographic markets in which the Company does
not currently operate. See "-- Franchises."
The Company has limited experience in effectuating rapid expansion and in
managing a large number of locations that are geographically dispersed. The
Company's proposed expansion will be dependent on, among other things, the
proceeds of this offering, achieving significant market acceptance for its
Tuscany cafe concept in relatively undeveloped specialty food markets,
developing customer recognition and loyalty for the Tuscany brandname,
identifying a sufficient number of locations and entering into lease
arrangements for such locations on favorable terms, timely development and
construction of new coffee and bagel cafes and bars, securing required
governmental permits and approvals, hiring, training and retaining skilled
management and other personnel, the Company's ability to integrate new coffee
and bagel cafes and bars into its operations and the general ability to
successfully manage growth (including monitoring cafe and bar operations,
controlling costs and maintaining effective quality controls). There can be
no assurance that the Company will be successful in opening the number of
cafes and bars currently anticipated in a timely manner, or at all, or that,
if opened, those cafes and bars will operate profitably.
SITE SELECTION
The Company's ability to select high-traffic, high-visibility neighborhood
locations is critical to its expansion strategy. The Company seeks to
identify locations in areas with high levels of pedestrian and automobile
traffic, such as shopping and retail centers in upper middle class and
affluent suburban residential neighborhoods, in which to open coffee and
bagel cafes. The Company also seeks to identify space in lobbies of large
office buildings, airports, hospitals and universities, as well as
supermarkets and bookstore chains, to open additional coffee and bagel cafes
and bars.
The Company evaluates each potential location to ensure that it has
sufficient seating capacity and, in the case of coffee and bagel cafe
locations, sufficient space for a bagel oven, refrigeration, storage and
preparation areas. The Company generally seeks to lease properties with 1,000
to 3,000 square feet of total space and seating capacity for 50 to 90
customers for its coffee and bagel cafes and 300 to 1,250 square feet of
total space for its coffee and bagel bars. The Company has developed
relationships with experienced rental agents in each of its target markets to
identify locations for potential new Tuscany cafes and bars.
The Company estimates that the cost to construct and open additional
Tuscany cafes (other than lease expenses) will be between $275,000 to
$325,000 per cafe; consisting of contracting ($130,000 to $180,000);
casework, including cabinetry, shelving, tables and counters ($45,000);
equipment, including a bagel oven, walk-in refrigerators, an espresso machine
and coffee grinders ($65,000); furniture ($10,000); inventory ($8,000); and
pre-opening expenses ($17,000). The Company estimates that the cost to
construct and open additional Tuscany bars (other than lease expenses) will
be approximately $130,000 per bar, consisting of contracting ($70,000);
casework ($35,000); and equipment ($25,000). Annual lease costs will vary
significantly depending upon the geographic market, the type of location and
the square footage. Generally, the rental cost per square foot will be lower
for coffee and bagel cafes opened in shopping centers and neighborhood
locations, as compared to coffee and bagel cafes and bars opened in lobbies
of large office buildings where retail rental space is at a premium.
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<PAGE>
Typically, 90 to 120 days are required to construct and open a new coffee
and bagel cafe or bar once a location has been identified.
RESTAURANT OPERATIONS
Management and Employees
The Company currently employs three district managers, each of which is
responsible for the management of the restaurants in his or her respective
market or markets, including management development, recruiting, training,
quality of operations and unit profitability. The Company anticipates that
approximately 2 to 6 additional district managers will be added over the
twelve months following this offering, as the number of locations in selected
markets increase. The staff of a Tuscany cafe typically consists of a
manager, assistant manager and approximately 12 to 15 additional employees,
including food preparers, a "barista" (who operates the espresso machine) and
cashiers. The staff of a Tuscany bar typically consists of a manager and
approximately 2 to 6 additional employees.
Service
The Company believes that achieving customer satisfaction by providing
knowledgeable, friendly and efficient service is critical to its long-term
success. The Company attempts to recruit managers with significant experience
in the retail coffee or other restaurant industries. During a two-week
training program, managers are taught to promote the Company's team-oriented
atmosphere among employees, with emphasis on preparing and serving beverages
and food in accordance with Company-wide standards, and providing friendly,
courteous and attentive service, as well as knowledge of coffee (distinctions
of different coffee blends and characteristics of different coffee beans),
financial reporting systems and equipment maintenance. Cafe and bar staff are
generally trained on-site. The Company believes that the quality and training
of its staff and the ability to retain such personnel results in friendly,
courteous, efficient service and contributes to a pleasurable experience for
the customer.
Coffee and Bagel Preparation
Espresso beverages are made to order by the barista. Filter drip coffee
beverages are pre-made and stored in insulated containers to maintain
temperature and freshness. Filter drip coffee is disposed of if not sold
within two hours after being brewed. The Company offers two different filter
drip coffee blends or varietals (single bean coffees) daily. Coffee beans are
ground by the barista upon order.
Upon receipt of frozen bagel dough, the dough is thawed, proofed (allowed
to rise), retarded (refrigerated to halt the rising process), steamed and
baked. Bagels are baked fresh daily, beginning at 5:00 A.M. Nine of the
Company's current Tuscany cafes have bagel ovens on site, which also
accommodate the daily bagel requirements of most of the Company's other
Tuscany cafes and bars (8 of its bars currently obtain their bagel
requirements from local area bakeries). In addition, pursuant to the
Company's current expansion plans, bagel ovens are to be installed at two
additional existing cafes by March 1997 and, in the future, will be installed
at most of the Company's proposed new Tuscany cafes prior to their initial
opening.
Sandwiches, soups and salads are made to order and specialty baked bagel
dough products (bagel focaccia, balzones, etc.) are pre-made.
Quality Control
The Company's district managers, managers and assistant managers are all
responsible for properly training their cafe and bar staffs and assuring that
the Company's cafes and bars are operated in accordance with strict health
and safety standards. The Company's cafe and bar employees are educated as to
the correct handling and proper characteristics of coffee, bagels and other
food product. Compliance with the Company's quality standards is monitored by
periodic on-site visits and formal periodic inspections by district managers.
The Company believes that its inspection procedures and its employee training
practices help the Company to maintain a high standard of quality for the
coffee and food it serves.
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Cafe and Bar Reporting
The Company maintains financial and accounting controls for each
restaurant through a central accounting system. Sales data, cash
reconciliations and inventory status reports are prepared daily by store
managers. The point-of-sale accounting and cash management system enables
both store-level management and senior management to quickly react to
changing sales trends, better manage food, beverage and labor costs, minimize
theft and improve the quality and efficiency of accounting and audit
procedures.
SUPPLY
Boyd Coffee, a shareholder of the Company, purchases all of the coffee
beans and blends, roasts, stores, packages and distributes all of the coffee
which the Company uses in its operations to the Company's specifications.
Boyd Coffee distributes the roasted coffee to each Company location in
accordance with each location's scheduling and delivery requirements. The
Company pays Boyd Coffee for each pound of coffee delivered based on a
pre-determined price per pound, which is renegotiated from time to time.
Coffee prices are extremely volatile. Boyd Coffee and any other supplier
from whom the Company might purchase coffee are subject to volatility in the
supply and price of green coffee beans. Although most coffee trades in the
commodity market, arabica coffee beans, the quality sought by the Company,
tend to trade on a negotiated basis at a substantial premium above commodity
coffee pricing, depending upon the supply and demand at the time of purchase.
Supply and price can be affected by many factors such as adverse weather
conditions, the number of coffee trees planted, the health of coffee trees,
infestation problems, harvesting practices, and political and economic
factors in coffee producing countries which could result in coffee production
limits, price support programs or expert quotas.
Guttenplan supplies the Company with frozen bagel dough, to bake up to 16
varieties of bagels including plain, cinnamon raisin, whole wheat, onion,
pumpernickel, garlic and salt. Guttenplan ships frozen bagel dough to food
distributors in each of the Company's markets which, in turn, deliver the
frozen bagel dough to the Company's locations up to three times a week.
Coffee and bagel bars which sell only a limited amount of bagels and bagel
products and are not located in close proximity to another Company location,
purchase pre-made bagels from local bakers.
The Company has not entered into a written agreement with Boyd Coffee or
Guttenplan, and such suppliers provide similar services to other customers.
Boyd Coffee also markets coffee under its own private label. Either supplier
could terminate its arrangement with the Company at any time. The Company
developed the recipes for its coffees and believes that there are alternative
coffee blenders and roasters and bagel dough manufacturers available. The
unavailability of Boyd Coffee's or Guttenplan's services to the Company,
however, could result in delays in the delivery of coffee or bagel dough
which would have a material adverse effect on the Company's operating
results.
The Company's cafes and bars obtain supplies of other food products, such
as cream cheeses, meats and produce, beverages and paper products from
regional distributors located in their respective markets.
ADVERTISING AND MARKETING
The Company employs a marketing strategy that seeks continuous visibility
and name recognition through use of newspaper advertisements, direct mail
coupon distributions and promotional product giveaways. Upon establishing a
sufficient number of restaurants in its markets, the Company intends to
explore other means of advertising, including radio advertising.
FRANCHISES
The Company's strategy until October 1995 included seeking to attract
franchisees to open coffee bars. The Company franchised 3 coffee bars from
November 1993 to August 1995, one of which franchising arrangements was
subsequently terminated. The two remaining franchised coffee bars are located
in Denver, Colorado and Philadelphia, Pennsylvania and operate under the
Tuscany name.
Upon entering into the franchise arrangements, each franchisee paid to the
Company a $7,500 franchise fee. Franchisees are not currently required to pay
royalties to the Company. Franchisees are required to comply with certain
guidelines, including store and signage design, product offerings, operating
procedures and financial reporting requirements. The Company has guaranteed
lease payments relating to the two franchised locations.
33
<PAGE>
Although the Company is not currently seeking to franchise additional
locations, the Company may seek to do so in the future. To the extent the
Company seeks to franchise its Tuscany concept in the future, it anticipates
that such efforts will be directed towards entering into franchising or
similar arrangements with area developers with sufficient capital to develop
several coffee and bagel cafe and bar locations in selected geographic
markets in which the Company does not operate.
COMPETITION
The food service industry in general, and the specialty and gourmet
segment in particular, is intensely competitive with respect to quality,
pricing, service, concept, convenience, location and value. There are
numerous well established operators of national, regional and local specialty
coffee stores and gourmet bagel shops possessing substantially greater
financial, supply, distribution, marketing, personnel and other resources
than the Company, as well as a continuing significant number of new market
entrants. In particular, Starbucks Corporation operates approximately 1,000
retail coffee shops nationwide which offer coffee beans and beverages, and
Einstein/Noah Bagel Corp. operates or has franchised approximately 200 retail
bagel stores nationwide. Many of these competitors have achieved national,
regional and local brandname recognition and product loyalty and engage in
extensive advertising and promotional campaigns, both generally and in
response to efforts by competitors to open new locations or introduce new
products. The Company competes with gourmet food stores, supermarkets,
convenience stores, bakeries and delicatessens, as well as specialty coffee
retailers and bagel shops.
The Company believes that competition for coffee and bagel products in its
target markets will increase significantly because such markets are
relatively unsaturated. Moreover, the Company believes that the start-up
costs associated with opening and operating a specialty coffee store or bagel
shop are not a significant impediment to entering into the retail coffee or
bagel business. There can be no assurance that the Company will be able to
compete successfully.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
The Company has registered the trademark and servicemark "Tuscany Premium
Coffee" with the United States Patent and Trademark Office and has filed an
application to register the trademark and servicemark "Tuscany Cafe". The
Company believes that its trademarks and servicemarks have significant value
and are important to the marketing of its coffee and bagel cafes and bars and
products. There can be no assurance, however, that the Company's marks do not
or will not violate the proprietary rights of others or that the Company's
marks would be upheld, or that the Company would not be prevented from using
its marks, if challenged, any of which could have an adverse effect on the
Company.
The Company relies on trade secrets and proprietary know-how and employs
various methods to protect its concepts and recipes. However, such methods
may not afford complete protection and there can be no assurance that others
will not independently develop similar know-how or obtain access to the
Company's know-how, concepts and recipes. Furthermore, although the Company
has and expects to have confidentiality and non-competition agreements with
its executives and key management, the Company does not maintain such
agreements with its suppliers. There can be no assurance that such agreements
will adequately protect the Company's trade secrets. In the event competitors
independently develop or otherwise obtain access to the Company's know-how,
concepts, recipes or trade secrets, the Company may be adversely effected.
GOVERNMENT REGULATION
The Company is subject to extensive state and local government regulation
by various governmental agencies, including state and local licensing,
zoning, land use, construction and environmental regulations and various
regulations relating to the sale of food and beverages, sanitation, disposal
of refuse and waste products, public health, safety and fire standards. The
Company's coffee and bagel cafes and bars are subject to periodic inspections
by governmental agencies to ensure conformity with such regulations.
Difficulties or failure in obtaining required licensing or other regulatory
approvals could delay or prevent the opening of a new restaurant, and the
suspension of, or inability to renew, a license at an existing restaurant
would adversely affect the
34
<PAGE>
operations of the Company. Operating costs of the Company's cafes and bars
are also affected by other government actions which are beyond the Company's
control, including increases in the minimum hourly wage requirements, workers
compensation insurance rates, health care insurance costs and unemployment
and other taxes.
In the event the Company seeks to resume franchising activities, it will
become subject to federal and state laws, rules and regulations that govern
the offer and sale of franchises. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state relating to
offers and sales of franchises, the Company will be unable to engage in
offering or selling franchises in or from such state. There can be no
assurance that the Company will be able to comply with existing or future
franchise regulations in any particular state, any of which could have an
adverse effect on the Company.
The Company is subject to a number of state laws that regulate certain
substantive aspects of the franchisor-franchisee relationship, such as
termination, cancellation or non-renewal of a franchise (such as requirements
that "good cause" exist as a basis for such termination and that a franchisee
be given advance notice of and a right to cure a default prior to
termination) and may require the franchisor to deal with its franchisees in
good faith, prohibit interference with the right of free association among
franchisees, and regulate discrimination among franchisees in charges,
royalties or fees.
INSURANCE
The operation of retail food service establishments subjects the Company
to possible liability claims from others, including consumers, employees and
other service providers, for personal injury (resulting from, among other
things, contaminated or spoiled food or beverages or accidents). The Company
maintains insurance (with coverage in amounts up to $1,000,000 per occurrence
and $2,000,000 per annum, with $5,000,000 of umbrella coverage), including
insurance relating to personal injury, in amounts which the Company currently
believes to be adequate. The Company also maintains property insurance for
each location it operates. Nevertheless, a partially or completely uninsured
claim against the Company, if successful, could have a material adverse
effect on the Company.
PROPERTIES
The Company subleases 2,945 square feet of space in Seattle, Washington
for its executive offices. The current annual rental for this property is
$44,172 and the lease expires on January 1, 1999.
All of the Company's existing cafes and bars are operated on properties
leased from third parties. Each of these leases provides for a minimum annual
rent and certain of these leases require additional rental payments to the
extent sales volumes exceed specified amounts. Generally, the Company is also
required to pay the cost of insurance, taxes and a portion of the landlord's
operating costs to maintain common areas. These leases typically have initial
terms ranging from 5 to 10 years and renewal options ranging from 5 to 15
years.
EMPLOYEES
As of November 1, 1996, the Company employed 224 persons, of whom 10 were
in management and 214 were in non-management coffee and bagel cafe and bar
positions. Approximately 44 of these individuals were employed on a salary
basis. The Company believes its employee relations to be good. None of the
Company's employees is covered by a collective bargaining agreement.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---------------- ----- ---------------------------------------------------
<S> <C> <C>
Jim Simonson ... 45 President, Chief Executive Officer and Director
Mark McDonald .. 37 Executive Vice President -- Real Estate and Business
Development and Director
Chris Mueller .. 37 Executive Vice President -- Finance and Director
John Parkey .... 37 Chairman of the Board
Jerome Alhadeff 63 Director
David Cohn ..... 78 Director
Keith Grinstein 36 Director
Ottie Ladd ..... 60 Director
Greg Maffei .... 36 Director
James Milgard .. 56 Director
</TABLE>
Jim Simonson has been President, Chief Executive Officer and a director of
the Company since September 1996. From 1971 until September 1996, Mr.
Simonson held various positions, most recently as President of the
full-service restaurant division, for Restaurants Unlimited which operates a
chain of full-service restaurants.
Mark McDonald is a co-founder of the Company and has been Executive Vice
President -- Real Estate and Business Development since September 1996 and a
director since inception. Mr. McDonald served as President of the Company
from the Company's inception until September 1996. From 1986 until August
1992, Mr. McDonald owned and operated Regional Properties, a real estate
brokerage and development company.
Chris Mueller is a co-founder of the Company and has been Executive Vice
President -- Finance since August 1992 and a director of the Company since
May 1993. Prior to founding the Company, Mr. Mueller served as a Vice
President with Seafirst Bank in Seattle, Washington from July 1990 until
August 1993. From January 1987 until March 1990, Mr. Mueller was employed by
Kidder Peabody in their capital markets group. From 1981 until 1985, Mr.
Mueller was employed by Chemical Bank in their real estate finance group.
John Parkey has been Chairman of the Board of the Company since October
1996. Mr. Parkey has been a Vice President and Portfolio Manager with the
Portola Group, a regional investment counselling firm, since October 1995.
From February 1988 until September 1995, Mr. Parkey held various marketing
and project management positions with the Microsoft Corporation, most
recently as Program Manager. Mr. Parkey also serves on the board of directors
of MediaZones, an internet related company in Seattle, Washington.
Jerome Alhadeff has been a director of the Company since July 1994. Mr.
Alhadeff has served as President of ABC-Pacific Corporation, a closely held
investment company, since 1971 and served as Chairman of Evergreen Wholesale
Florist, a local distributor of fresh flowers, since 1983. Mr. Alhadeff also
served as President of the Washington Athletic Club from August 1, 1994 until
August 1, 1995.
David Cohn has been a director of the Company since March 1996. Since
1960, Mr. Cohn has served as Chairman of Consolidated Restaurants, a
restaurant holding company. Mr. Cohn served as a Regent of the University of
Washington from 1983 to 1995.
Keith Grinstein has been a director of the Company since July 1994. Since
January 1996, Mr. Grinstein has served as President of McCaw International, a
subsidiary of Nextel Communications, Inc., specializing in international
cellular phone service. From 1988 until December 1995, Mr. Grinstein held
various positions at McCaw Cellular Communications, Inc. ("MCC"), including
Vice President and Assistant General Counsel of MCC; General Counsel of Lin
Broadcasting, a subsidiary of MCC; and Chief Executive Officer of the
Aviation and Communication Division of MCC. Mr. Grinstein is the nephew of
Mr. Alhadeff.
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<PAGE>
Ottie Ladd has been a director of the Company since July 1994. Mr. Ladd
has served as President of Double Oaks, Inc., a real estate development and
investment company, since June 1993. Mr. Ladd has also served as President of
Capital Investment Corporation of Washington, an investment company
specializing in real estate lending, since August 1993. Prior to such time,
Mr. was the owner/operator of 24 Kentucky Fried Chicken franchises in Pierce
County, Washington.
Greg Maffei has been a director of the Company since July 1994. Mr. Maffei
has been employed by Microsoft Corporation since January 1993, most recently
as Vice President -- Corporate Development and Treasurer. From August 1991
until August 1992, Mr Maffei served as Executive Vice President and Chief
Financial Officer of Pay 'N Pak Stores, Inc. ("Pay 'N Pak"). Mr. Maffei also
serves on the Board of Directors of Mobile Telecommunication Technologies
Corp., Citrix Systems and Cort Business Services Corporation.
James Milgard has been a director of the Company since July 1994. Since
1962, Mr. Milgard has served as Secretary and, since October 1979 as
Treasurer, of Milgard Tempering Inc. and Milgard Manufacturing Inc., a
manufacturer and supplier of residential windows.
All directors currently hold office until the next annual meeting of
shareholders and until their successors are duly elected and qualified.
Executive officers of the Company serve at the direction of the Board and
until their successors are duly elected and qualified. The Company reimburses
directors for reasonable travel expenses incurred in connection with their
activities on behalf of the Company but does not pay its directors any fees
for Board participation.
In connection with this offering, the Company has agreed that it will, for
a period of five years following the date of this Prospectus, upon the
request of the Underwriter, nominate and use its best efforts to elect a
designee of the Underwriter (which designee may change from time to time) as
a director of the Company or, at the Underwriter's option, appoint such
designee as a non-voting advisor to the Company's Board of Directors. The
Underwriter has not yet exercised its rights to designate such a person. See
"Underwriting."
The Company has applied for and intends to obtain key man life insurance
on the lives of each of Messrs. Simonson, McDonald and Mueller in the amount
of $1,000,000.
KEY EMPLOYEES
Mark Lower has been employed by the Company since September 1995. Mr.
Lower is responsible for supporting cafe operations, including training and
store development, openings and inspections. Mr. Lower was an operations
manager for Grazzi, Inc., a chain of italian-style cafes from December 1992
to October 1995. From 1982 until December 1992, Mr. Lower was an operations
general manager for Consolidated Restaurants, an operator of a chain of
full-service restaurants in Seattle, Washington.
Mari Mitchell has been employed by the Company since July 1995. Ms.
Mitchell is responsible for supporting cafe operations, including training
and store development, openings and inspections. From July 1993 to July 1995,
Ms. Mitchell was a retail store manager and trainer for Zio Ricco, an
operator of coffee stores in Seattle, Washington. From April 1989 to July
1993, Ms. Mitchell was a retail store manager and trainer for Starbucks
Corporation.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company
during the fiscal year ended December 31, 1995 to Jim Simonson, its current
President and Chief Executive Officer, and Mark McDonald, its President and
Chief Executive Officer during the fiscal year ended December 31, 1995. No
other officer of the Company received compensation in excess of $100,000 for
the fiscal year ended December 31, 1995.
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other Annual
Name and Principal
Position Year Salary Bonus Compensation
-------------------------- ------ -------- ------- --------------
<S> <C> <C> <C> <C>
Jim Simonson(1)
President & Chief
Executive Officer ....... 1995 $ -0- $ -0- --
Mark McDonald(2)
Executive Vice-President 1995 48,000 -0- --
</TABLE>
- - ------
(1) Jim Simonson has served as President and Chief Executive Officer of the
Company since September 1996. Mr. Simonson is receiving $35,000 as
compensation for the year ending December 31, 1996 (an annual salary of
$125,000).
(2) Mark McDonald served as President and Chief Executive Officer of the
Company from February 1992 until September 1996. Mr. McDonald is
receiving an annual salary of $48,000 for the year ending December 31,
1996.
The Company did not grant any options to its executive officers until the
year ended December 31, 1996. See "-- 1996 Stock Option Plan."
EMPLOYMENT AGREEMENTS
The Company has entered into a three-year employment agreement with Mr.
Simonson, effective as of January 1, 1997, which provides for annual base
salaries of $125,000, $150,000 and $175,000, over the term of the agreement.
Mr. Simonson is also entitled to receive a bonus for the fourth fiscal
quarter of 1997 in an amount up to 50% of his quarterly salary if the Company
achieves agreed upon performance goals and annual bonuses, and commencing in
1998 in amounts up to his then-current annual base salary if the Company
achieves agreed upon performance goals. In connection with his entering into
the employment agreement, Mr. Simonson received options, issued pursuant to
the Option Plan, to purchase 118,000 shares of Common Stock. Mr. Simonson's
employment agreement provides for employment on a full-time basis and
contains a provision that prohibits Mr. Simonson, during the term of his
employment agreement and for a period of two years thereafter, from competing
with the Company by engaging, having an interest in or rendering any services
to any business which is competitive with the Company and which operates one
or more specialty or gourmet retail food establishments, primarily offering
coffee beans, coffee beverages, bagels and/or bagel products within 25 miles
of any city in which the Company has a store located or in development or in
which the Company has granted rights to a third party. The agreement with Mr.
Simonson provides that if Mr. Simonson is terminated without cause (as
defined in the agreement) or upon a change of control (as defined in the
agreement), Mr. Simonson will receive severance pay in an amount up to his
then-current annual base salary (depending upon the date of termination).
The Company has entered into three-year employment agreements with each of
Messrs. McDonald and Mueller, effective as of January 1, 1997, which provide
for an annual base salary of $60,000 and $60,000, respectively, and bonuses
in amounts up to 25% of such officer's base salary if the Company achieves
agreed upon performance goals. In connection with their entering into the
employment agreements, Messrs. McDonald and Mueller received options, issued
pursuant to the Option Plan, to purchase 25,000 and 25,000 shares of Common
Stock, respectively. Each of the employment agreements provides for
employment on a full-time basis and contains a provision that prohibits the
officer, during the term of his employment agreement and for a period of two
years thereafter, from competing with the Company by engaging, having an
interest in or rendering any services to any business which is competitive
with the Company's business and, which operates one or more specialty or
gourmet retail food establishments, primarily offering coffee beans, coffee
beverages, bagels and/or bagel products within 25 miles of any city in which
the Company has a store located or in development or in which the Company has
granted rights to a third party. Mr. McDonald's and Mr. Mueller's employment
agreements each provide that if the officer is terminated without cause (as
defined in the agreements) or upon a change of control (as defined in the
agreements) such officer will receive severance pay in an amount equal to
three months salary.
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<PAGE>
1996 STOCK OPTION PLAN
In December 1996, the Company's shareholders approved a stock option plan
(the "Option Plan") pursuant to which 350,000 shares of Common Stock have
been reserved for issuance upon the exercise of options designated as either
(i) options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code") or (ii) nonqualified
options. ISOs may be granted under the Option Plan to officers and employees
of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.
The purpose of the Option Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and other persons
instrumental to the success of the Company. The Option Plan is intended to
qualify under Rule 16b-3 under the Securities Exchange Act of 1934, and is
administered by a Committee of the Board of Directors, which currently
consists of Messrs. Parkey, Cohn and Ladd. The Committee, within the
limitations of the Option Plan, determines the persons to whom options will
be granted, the number of shares to be covered by each option, whether the
options granted are intended to be ISOs, the duration and rate of exercise of
each option, the option purchase price per share and the manner of exercise,
and the time, manner and form of payment upon exercise of an option.
ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting
stock of the Company). The aggregate fair market value of shares for which
ISOs granted to any employee are exercisable for the first time by such
employee during any calendar year (under all stock option plans of the
Company and any related corporation) may not exceed $100,000. Non-qualified
options granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant. Options
granted under the Option Plan will expire not more than ten years from the
date of grant (five years in the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company). All options granted under the
Option Plan are not transferable during an optionee's lifetime but are
transferable at death by will or by the laws of descent and distribution. In
general, upon termination of employment of an optionee, all options granted
to such person which are not exercisable on the date of such termination
immediately terminate, and any options that are exercisable terminate 90 days
following termination of employment.
In November 1996, the Company granted options under the Option Plan to
purchase an aggregate of 168,000 shares. Of such options, options to purchase
118,000, 25,000 and 25,000 shares were granted to Messrs. Simonson, McDonald
and Mueller, respectively, at an exercise price of $5.00 per share. All of
such options are exercisable upon vesting and expire ten years from the date
of grant, subject to earlier expiration upon termination. The options granted
to Mr. Simonson vest as to 50% of the shares covered thereby one year after
the date of grant and 25% of the shares covered thereby on each of the second
and third anniversaries of the date of grant. The options granted to Messrs.
McDonald and Mueller vest as to one-third of the shares covered thereby on
each of the first three anniversaries of the date of grant. Upon termination
of Mr. Simonson, Mr. McDonald or Mr. Mueller without cause options granted to
such officer which otherwise vest at the end of the employment year become
immediately vested, and all options granted to each officer vest upon a
change of control.
The Company has also granted options under the Option Plan, effective as
of the date of this Prospectus, to purchase an aggregate of 35,000 shares of
Common Stock. Of such options, options to purchase 20,000 shares of Common
Stock have been granted to Mr. Parkey, the Chairman of the Board of the
Company, and options to purchase 3,000 shares of Common Stock have been
granted to each of the other five non-employee directors of the Company. All
of such options are exercisable at a price of $5.00 per share, vest one year
from the date of grant and expire ten years from the date of grant. The
Company also intends to grant options under the Option Plan to purchase
20,000 shares of Common Stock to the Company's Chairman of the Board and
options to purchase 3,000 shares of Common Stock to each non-employee
director of the Company upon their re-election by the Company's shareholders
at each annual meeting of the Company's shareholders. All of such options
will be exercisable at the market value of the Common Stock on the date of
grant.
EXCULPATORY PROVISIONS AND INDEMNIFICATION MATTERS
As authorized by the Washington Business Corporation Act (the "Washington
Act"), the Company's Articles of Incorporation provide that no director or
officer of the Company shall be personally liable to the Company or
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its shareholders for damages for breach of any duty owed to the Company or
its shareholders, except for liability for any breach of duty based upon an
act or omission that involves intentional misconduct or a knowing violation
of law, conduct resulting in an unlawful distribution of the Company's assets
in violation of the Washington Act or any transaction for which such person
will receive a benefit in money, property or services to which such person is
not legally entitled.
The Company has also entered into agreements to indemnify its directors
and executive officers. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any
such person in any action or proceeding, including any action by or in the
right of the Company, arising out of such person's services as a director or
executive officer of the Company or any other company or enterprise to which
the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, immediately prior to
the consummation of this offering and as adjusted to reflect the sale by the
Company of the 1,600,000 Shares offered hereby (based on information obtained
from the persons named below), relating to the beneficial ownership of shares
of Common Stock by: (i) each person or entity who is known by the Company to
own beneficially five percent or more of the outstanding Common Stock, (ii)
each of the Company's directors and (iii) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned(2)
Number of Shares --------------------------
Name and Address of Beneficial Beneficially Before After
Owners(1) Owned Offering Offering
------------------------------------------------------------ ---------------- ---------- ----------
<S> <C> <C> <C>
Chris Mueller .............................................. 310,562(3) 11.0% 7.0%
Mark McDonald .............................................. 283,824(4) 10.1 6.4
James Milgard .............................................. 200,268(5)(6) 7.1 4.5
Ottie Ladd. ................................................ 60,428(5)(7) 2.1 1.4
John Parkey ................................................ 44,118(8) 1.5 1.0
David Cohn. ................................................ 38,168(5)(9) 1.4 *
Keith Grinstein ............................................ 27,272(5)(10) * *
Jerome Alhadeff ............................................ 14,478(5)(10) * *
Greg Maffei ................................................ 13,903(5)(9) * *
Jim Simonson. .............................................. 5,348(11) * *
All directors and executive officers as a group (10
persons). ................................................. 998,369(12) 35.4% 22.6%
</TABLE>
- - ------
* Less than 1%
(1) Unless otherwise indicated, the address for each named individual or
group is in care of Tuscany, Inc., 601 Union Street, Suite 4620,
Seattle, Washington 98101.
(2) Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them. A person is deemed to
be the beneficial owner of securities that can be acquired by such
person within 60 days from the date of this Prospectus upon the exercise
of options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants or
convertible securities that are held by such person (but not those held
by any other person) and which are exercisable within 60 days of the
date of this Prospectus have been exercised and converted. Assumes a
base of 2,821,852 shares of Common Stock outstanding prior to this
offering (including the approximately 1,944,815 shares to be issued
immediately prior to the consummation of this offering upon exercise of
warrants issued to certain guarantors of the Company's line of credit
and upon conversion of the outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Company Financing Notes) and a base
of approximately 4,421,852 shares of Common Stock outstanding
immediately after this offering, before any consideration is given to
other outstanding options or warrants. See "Description of Securities."
(3) Does not include (i) 20,706 shares of Common Stock issuable upon
exercise of Company Financing Warrants or (ii) 25,000 shares of Common
Stock issuable upon the exercise of options issued under the Option Plan
at a price of $5.00 per share. See "Certain Transactions."
(4) Does not include 25,000 shares of Common Stock issuable upon exercise of
options granted under the Option Plan at a price of $5.00 per share.
(5) Does not include 3,000 shares of Common Stock issuable upon exercise of
options granted under the Option Plan at a price of $5.00 per share.
(6) Includes 23,529 shares of Common Stock owned by James A. Milgard, Mr.
Milgard's son and 23,529 shares of Common Stock owned by James Milgard as
custodian for Allison Milgard, Mr. Milgard's daughter. Does not include
20,706 shares of Common Stock issuable upon exercise of Company Financing
Warrants at a price of $5.00 per share. See "Certain Transactions."
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<PAGE>
(7) Does not include 10,353 shares of Common Stock issuable upon exercise of
Company Financing Warrants at a price of $5.00 per share. See "Certain
Transactions."
(8) Does not include 20,000 shares of Common Stock issuable upon exercise of
options granted under the Option Plan at a price of $5.00 per share.
(9) Does not include 6,212 shares of Common Stock issuable upon exercise of
Company Financing Warrants at a price of $5.00 per share. See "Certain
Transactions."
(10) Does not include 5,176 shares of Common Stock issuable upon exercise of
Company Financing Warrants at a price of $5.00 per share. See "Certain
Transactions."
(11) Does not include (i) 4,141 shares of Common Stock issuable upon exercise
of Company Financing Warrants at a price of $5.00 per share and (ii)
118,000 shares of Common Stock issuable upon exercise of options granted
under the Option Plan at a price of $5.00 per share. See "Certain
Transactions."
(12) Does not include (i) 74,541 shares of Common Stock issuable upon
exercise of Company Financing Warrants or (ii) 203,000 shares of Common
Stock issuable upon exercise of options granted under the Option Plan at
a price of $5.00 per share. See "Certain Transactions."
CERTAIN TRANSACTIONS
From February 1992 to March 1993, Mark McDonald, Executive Vice President
and a director of the Company, loaned an aggregate of approximately $69,861
to the Company. During the years ended December 31, 1994 and 1995, the
Company repaid $5,771 and $55,631 principal amount of such loans,
respectively, to Mr. McDonald. The remaining $8,459 principal amount of
indebtedness due under such loans is evidenced by a note which bears interest
at a rate of 6% per annum and is due on the earlier of April 30, 1998 or
twelve months following the consummation of this offering.
During the year ended December 31, 1993, Chris Mueller, Executive Vice
President and a director of the Company, loaned an aggregate of approximately
$100,000 to the Company. During the year ended December 31, 1994, the Company
repaid $60,443 principal amount of such loans to Mr. Mueller. The remaining
$39,557 principal amount of such loans is evidenced by a note which bears
interest at a rate of 6% per annum and is due on the earlier of April 30,
1998 or twelve months following the consummation of this offering.
In January 1994, the Company and James Milgard, a director of the Company,
entered into a partnership agreement pursuant to which Expresso Park Shops
Limited Partnership ("Park Shops L.P.") was formed. The Company contributed
$1.00 and the right to operate under the Tuscany name, and Mr. Milgard
contributed $100,000, to Park Shops L.P. as capital investments. The Company
serves as general partner and owns a 50% equity interest in Park Shops L.P.
Mr. Milgard is the sole limited partner and owns a 50% equity interest in
Park Shops L.P. Mr. Milgard is entitled to receive the first $100,000 of
profits of Park Shops L.P. and, thereafter, profits are divided equally
between the two partners. Park Shops L.P. has not yet achieved profitable
operations. The Company is required to fund the operating losses of Park
Shops L.P. until Mr. Milgard's initial investment is repaid. Park Shops L.P.
operates the Tuscany coffee bar located at The Park Shops, Houston, Texas.
The Company has, from time to time, advanced an aggregate of $70,986 to Park
Shops L.P.
In July 1994, Ottie Ladd, a director of the Company, loaned the Company
$50,000. As partial consideration for such loan, the Company issued to Mr.
Ladd 17,647 shares of Common Stock. The Company repaid the loan plus accrued
interest thereon at an annual rate of 15% in July 1995.
From September 1994 through April 1995, David Cohn, James Milgard, Keith
Grinstein, Mr. Ladd and Greg Maffei, directors of the Company, purchased
50,000, 400,000, 10,000, 60,000 and 20,000 shares of Series A Preferred
Stock, at a price of $1.25 per share, at the same price and on the same terms
as shares purchased by the other purchasers of such offering.
In March 1994, the Company, Jerome Alhadeff, a director of the Company,
and Mr. Alhadeff's daughter formed Expresso Union Trust Limited Partnership
("Expresso L.P."), to operate a coffee bar. The Company contributed $1.00 and
the right to use the Tuscany name and Mr. Alhadeff and his daughter
contributed an aggregate of $130,000 to Expresso L.P. as capital investments.
The Company served as general partner and
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owned a 50% equity interest in Expresso L.P. and Mr. Alhadeff and his
daughter, together, owned a 50% limited partnership interest in Expresso L.P.
From March 1994 to August 1995, Mr. Alhadeff and his daughter received
distributions in the aggregate amount of $35,000. In August 1995, Expresso
L.P. was dissolved and the Company purchased Mr. Alhadeff's and his
daughter's interest for an aggregate of $33,000 and 15,588 shares of Common
Stock.
In September 1995, Messrs. Cohn, Ladd and Milgard entered into guaranties
with Seafirst, each to guarantee $200,000 of the Company's obligations under
the line of credit. In consideration therefor, the Company entered into a
security agreement with the guarantors pursuant to which the Company granted
the guarantors a security interest in all of the Company's furniture,
fixtures and equipment. The Company also issued to each of the guarantors
warrants to purchase 11,765 shares of Common Stock (an aggregate of 105,885
shares) at an exercise price of $.34 per share. Such warrants are all being
exercised immediately prior to the consummation of this offering. Such
persons will receive a benefit from payments made to Seafirst (as required
under the line of credit) from the proceeds of this offering (as a result of
the corresponding reduction in their liability exposure).
In March 1996, Mr. Cohn and John Parkey, a director of the Company,
purchased 12,500 and 125,000 shares of Series B Preferred Stock from the
Company for $25,000, and $250,000 respectively. Such shares were purchased at
a price of $2.00 per share, at the same price and on the same terms as shares
purchased by the other purchasers in such offering.
In August 1996, Mr. Parkey entered into a guaranty with Seafirst to
guarantee $200,000 of the Company's obligations under the line of credit and
note. In consideration therefor, the Company entered into a security
agreement with Mr. Parkey pursuant to which the Company granted Mr. Parkey a
security interest in all of the Company's furniture, fixtures and equipment.
The Company also issued to Mr. Parkey warrants to purchase 7,353 shares of
Common Stock at an exercise price of $.34 per share. Such warrants are being
exercised immediately prior to the consummation of this offering. Mr. Parkey
will receive a benefit from payments made to Seafirst (as required under the
line of credit) from the proceeds of this offering (as a result of the
corresponding reduction in his liability exposure).
In connection with the Company Financing, Messrs. Mueller, Milgard, Ladd,
Cohn, Maffei, Alhadeff, Grinstein and Jim Simonson, President and Chief
Executive Officer of the Company, purchased 2, 2, 1, 0.6, 0.6, 0.5, 0.5 and
0.4 Company Financing Units, respectively, for purchase prices of $100,000,
$100,000, $50,000, $30,000, $30,000, $25,000, $25,000 and $20,000,
respectively. Each Company Financing Unit consists of a $50,000 Company
Financing Note, convertible into 13,369 shares of Common Stock immediately
prior to the consummation of this offering, and 10,353 Company Financing
Warrants.
In November 1996, Messrs. McDonald and Mueller each contributed to the
Company's capital 117,647 shares of Common Stock and the Company cancelled
all of such shares.
The Company believes that all of the foregoing transactions and
arrangements were fair and reasonable to the Company and were on terms no
less favorable than could have been obtained from unaffiliated third parties.
There can be no assurance, however, that future transactions or arrangements
between the Company and affiliates will continue to be advantageous to the
Company, that conflicts of interest will not arise with respect thereto, or
that if conflicts do arise, they will be resolved in a manner favorable to
the Company. Any such future transactions will be on terms no less favorable
to the Company than could be obtained from unaffiliated parties and will be
approved by a majority of the independent and disinterested members of the
Board of Directors, outside the presence of any interested directors and, to
the extent deemed appropriate by the Board of Directors, the Company will
obtain shareholder approval or fairness opinions in connection with any such
transaction.
43
<PAGE>
DESCRIPTION OF SECURITIES
CAPITAL STOCK
GENERAL
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, there are approximately 877,037
shares of Common Stock outstanding, 2,766,000 shares of Series A Preferred
Stock outstanding and 1,750,000 shares of Series B Preferred Stock
outstanding. Immediately prior to the consummation of this offering, there
will be approximately 2,821,852 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any
Preferred Stock outstanding at the time, are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of
liquidation or dissolution of the Company, the holders of Common Stock are
entitled to receive all assets available for distribution to the
shareholders, subject to any preferential rights of any Preferred Stock then
outstanding. The holders of Common Stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby
upon issuance and sale will be, fully paid and non-assessable. The rights,
preferences and privileges of the holders of Common Stock are subject to, and
may be adversely affected by, the right of the holders of any shares of
Preferred Stock which the Company may designate in the future.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock. Of
such shares, 2,766,000 have been designated as Series A Preferred Stock and
1,750,000 have been designated as Series B Preferred Stock, all of which will
be converted into Common Stock, at a ratio of one share of Common Stock for
each 3.4 shares of Preferred Stock, immediately prior to the consummation of
this offering.
The authorized but undesignated shares of Preferred Stock may be issued
from time to time in one or more series upon authorization by the Company's
Board of Directors. The Board of Directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
and other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, prevent or
substantially delay a change of control, discourage bids for the Company's
Common Stock at a premium or otherwise adversely affect the market price of
the Common Stock. The Company has no current plans to issue any Preferred
Stock.
REDEEMABLE WARRANTS
Each Warrant offered hereby entitles the registered holder thereof (the
"Warrant Holders") to purchase one share of Common Stock at a price of $5.00,
subject to adjustment in certain circumstances, at any time until 5:00 p.m.,
Eastern Time on , 2002. The Warrants will be separately transferable
immediately upon issuance.
The Warrants are redeemable by the Company, upon the consent of the
Underwriter, at any time upon notice of not less than 30 days, at a price of
$.10 per Warrant, provided that the closing bid quotation of the Common Stock
on all 20 trading days ending on the third day prior to the day on which the
Company gives notice has been at least 150% (currently $7.50, subject to
adjustment) of the then effective exercise price of the Warrants. The Warrant
Holders shall have the right to exercise their Warrants until the close of
business on the date fixed for
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<PAGE>
redemption. The Warrants will be issued in registered form under a warrant
agreement by and among the Company, Continental Stock Transfer & Trust
Company, as warrant agent, and the Underwriter (the "Warrant Agreement"). The
exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at prices below
the exercise price of the Warrants. Reference is made to the Warrant
Agreement (which has been filed as an exhibit to the Registration Statement
of which this Prospectus is a part) for a complete description of the terms
and conditions therein (the description herein contained being qualified in
its entirety by reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate
during the exercise period at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent
for the number of Warrants being exercised. The Warrant Holders do not have
the rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has declared effective a current registration statement with the Commission
covering the shares of Common Stock issuable upon exercise of such Warrant
and such shares have been registered or qualified or deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of such Warrant. The Company will use its best
efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement.
While it is the Company's intention to do so, there can be no assurance that
it will be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant Holder exercises all Warrants then owned of record by
him, the Company will pay to such Warrant Holder, in lieu of the issuance of
any fractional share which is otherwise issuable, an amount in cash based on
the market value of the Common Stock on the last trading day prior to the
exercise date.
WASHINGTON ANTI-TAKEOVER LAW
The Company's Article of Incorporation and Bylaws include provisions which
may have the effect of discouraging nonnegotiated takeover attempts by
delaying or preventing changes in control of management of the Company. These
provisions include, in addition to the provision for Preferred Stock, no
cumulative voting and a denial of the ability of shareholders to call special
meetings of shareholders.
The Company will also be subject to the Washington Act which contains
provisions that have the effect of discouraging nonnegotiated takeover
attempts. Chapter 23B.19 of the Washington Act prohibits a corporation, with
certain exceptions, from engaging in certain significant business
transactions with an "Acquiring Entity" (defined as a person who acquires 10%
or more of the corporation's voting securities without the prior approval of
the corporation's board of directors) for a period of five years after such
acquisition. The prohibited transactions include, among others, a merger
with, disposition of assets to, or issuance or redemption of stock to or
from, the Acquiring Entity, or allowing the Acquiring Entity to receive any
disproportionate benefit as a shareholder. An Acquiring Entity is further
prohibited from engaging in significant business transactions with the target
corporation unless the per share consideration paid to holders of outstanding
shares of Common Stock and other classes of stock of the target corporation
meet certain minimum criteria. These provisions may have the effect of
delaying, deterring or preventing a change in control of the Company.
RECENT FINANCINGS
In November and December 1996, the Company completed the Company
Financing, a $1,800,000 private placement of 36 Company Financing Units. Each
$50,000 Company Financing Unit consisted of (i) a Company Financing Note in
the principal amount of $50,000 bearing interest at an annual rate of 9%,
payable quarterly commencing December 31, 1996, and (ii) Company Financing
Warrants to purchase 10,353 shares of Common Stock. The entire $1,800,000
principal amount of, plus accrued and unpaid interest on, the Company
Financing Notes will automatically be converted into shares of Common Stock
(at the rate of one share of Common Stock
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for each $3.74 of indebtedness) immediately prior to the consummation of this
offering. The 372,708 outstanding Company Financing Warrants are exercisable
at a price of $5.00 per share for a period of two years commencing upon the
consummation of this offering. After payment of fees and expenses incurred in
connection with the Company Financing, the Company received net proceeds of
approximately $1,640,000 from the sale of the Company Financing Units.
In December 1996, the Company completed the Bridge Financing, a $900,000
private placement of 18 Bridge Units. Each $50,000 Bridge Unit consisted of
(i) an unsecured non-negotiable Bridge Note in the principal amount of
$50,000, bearing interest at the rate of 9% per year, payable semi-annually,
and maturing on the consummation of this offering and (ii) 10,000 shares of
Common Stock. After payment of $90,000 in placement agent fees to the
Underwriter, which acted as placement agent for the Company in connection
with the Bridge Financing, and other offering expenses of approximately
$50,000, the Company received net proceeds of approximately $760,000 from the
sale of the Bridge Units. See "-- Registration Rights."
OTHER EXISTING WARRANTS
There are currently outstanding warrants (in addition to the Company
Financing Warrants) to purchase an aggregate of 370,591 shares of Common
Stock at an exercise price of $.34 per share. It is anticipated that warrants
to purchase 135,297 shares of Common Stock will be exercised immediately
prior to the consummation of this offering. The balance of such warrants are
exercisable at various times commencing February 1, 1997 for a period of five
years. See "-- Registration Rights."
REGISTRATION RIGHTS
In connection with the Bridge Financing, the Company agreed to file with
the Commission a registration statement which includes the Bridge Shares (the
"Bridge Registration Statement") within nine months following the date of
this Prospectus and use its best efforts to have the Bridge Registration
Statement declared effective so as to permit the public trading of the Bridge
Shares within twelve months following the date of this Prospectus, subject to
the holders' agreements not to sell or otherwise dispose of such shares
without the Underwriter's prior written consent for a period of 13 months
following the date of this Prospectus. Once the Bridge Registration Statement
is declared effective by the Commission, the Company has agreed to use its
best efforts to keep it effective until the earlier of (i) the date that all
of the Bridge Shares have been sold pursuant to such Bridge Registration
Statement and (ii) the date that the holders of the Bridge Shares receive an
opinion of counsel that the full amount of such securities may be freely sold
by such holders without registration under the Securities Act. If the Company
defaults in its obligations to maintain the Bridge Registration Statement
effective or otherwise fails to comply with certain other registration rights
obligations of the Bridge Financing, the Company may be obligated to issue up
to an additional 45,000 shares of Common Stock to the investors which
participated in the Bridge Financing.
The Company has granted the holders of warrants to purchase 235,294 shares
of Common Stock certain demand and piggyback registration rights with respect
to such warrants. The holders of such warrants have agreed not to exercise
any registration rights for a period of 18 months from the date of this
Prospectus, without the Underwriter's prior written consent.
In connection with this offering, the Company has agreed to grant to the
Underwriter certain demand and piggyback registration rights in connection
with the 320,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants or the warrants underlying the Underwriter's Warrants.
See "Underwriting."
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the warrant agent for the
Warrants is Continental Stock Transfer & Trust Company, Two Broadway, New
York, New York 10004.
REPORTS TO SHAREHOLDERS
The Company intends to file a registration statement with the Securities
and Exchange Commission to register its Common Stock and Warrants under the
provisions of Section 12(g) of the Exchange Act prior to the
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<PAGE>
date of this Prospectus and has agreed with the Underwriter that it will use
its best efforts to continue to maintain such registration. Such registration
will require the Company to comply with periodic reporting, proxy
solicitation and certain other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,421,852
shares of Common Stock outstanding (assuming no exercise of the Warrants).
All 1,600,000 of the Shares being offered hereby will be immediately tradable
without restriction or further registration under the Securities Act. The
remaining 2,821,852 shares of Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, in that such shares were acquired by the
shareholders of the Company in transactions not involving a public offering,
and, as such, may only be sold pursuant to a registration statement under the
Securities Act, in compliance with the exemption provisions of Rule 144, or
pursuant to another exemption under the Securities Act. The 2,821,852
restricted shares of Common Stock will become eligible for sale under Rule
144, subject to the volume limitations prescribed by the Rule, on various
dates commencing 90 days following the date of this Prospectus.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who
has owned restricted shares of Common Stock beneficially for at least two
years is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or, if the common stock is quoted on the Nasdaq, the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for a least three
months immediately preceding the sale and who has beneficially owned shares
of Common Stock for at least three years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
The holders of the 180,000 Bridge Shares have agreed not to sell such
shares for a period of 13 months from the date of this Prospectus without the
Underwriter's prior written consent and the holders of the remaining
2,641,852 shares of Common Stock (plus an additional 811,002 shares of Common
Stock issuable upon exercise of outstanding warrants, including the Company
Financing Warrants) have agreed not to sell such shares for a period of 18
months from the date of this Prospectus without the Underwriter's prior
written consent.
Prior to this offering, there has been no market for the Common Stock or
Warrants and no prediction can be made as to the effect, if any, that public
sales of shares of Common Stock or the availability of such shares for sale
will have on the market prices of the Common Stock and the Warrants
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and the Warrants and could
impair the Company's ability in the future to raise additional capital
through the sale of its equity securities.
UNDERWRITING
Paragon Capital Corporation (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,600,000 Shares and 1,600,000 Warrants offered hereby from the Company. The
Underwriter is committed to purchase and pay for all of the Shares and
Warrants offered hereby if any of such securities are purchased. The Shares
and Warrants are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares and Warrants to the public at the public offering prices set forth on
the cover page of this Prospectus. The Underwriter may allow to certain
dealers who are members of the National Association of Securities Dealers,
Inc. (the "NASD") concessions, not in excess of $ per Share and $ per
Warrant, of which not in excess of $ per Share and $ per Warrant may be
reallowed to other dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 240,000 additional
shares of Common Stock and/or 240,000 additional Warrants at
47
<PAGE>
the public offering prices set forth on the cover page of this Prospectus,
less the underwriting discounts and commissions. The Underwriter may exercise
this option in whole or, from time to time, in part, solely for the purpose
of covering over-allotments, if any, made in connection with the sale of the
Shares and/or Warrants offered hereby.
The Company has agreed to pay the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $50,000 has
been paid as of the date of this Prospectus. The Company has also agreed to
pay all expenses in connection with qualifying the Shares and Warrants
offered hereby for sale under the laws of such states as the Underwriter may
designate, including expenses of counsel retained for such purpose by the
Underwriter.
The Company has agreed to sell to the Underwriter and its designees for an
aggregate of $176, warrants (the "Underwriter's Warrants") to purchase up to
160,000 shares of Common Stock at an exercise price of $6.00 per share (120%
of the public offering price per share) and up to 160,000 Warrants (each
exercisable to purchase one share of Common Stock at a price of $6.00 per
share) at an exercise price of $.12 per Warrant (120% of the public offering
price per Warrant). The Underwriter's Warrants may not be sold, transferred,
assigned or hypothecated for one year from the date of this Prospectus,
except to the officers and partners of the Underwriter and members of the
selling group and are exercisable at any time and from time to time, in whole
or in part, during the four-year period commencing one-year from the date of
this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise
Term, the holders of the Underwriter's Warrants are given, at nominal cost,
the opportunity to profit from a rise in the market price of the Common
Stock. To the extent that the Underwriter's Warrants are exercised, dilution
to the interests of the Company's shareholders will occur. Further, the terms
upon which the Company will be able to obtain additional equity capital may
be adversely affected since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided in the Underwriter's Warrants. Any profit
realized by the Underwriter on the sale of the Underwriter's Warrants, the
underlying shares of Common Stock or the underlying warrants, or the shares
of Common Stock issuable upon exercise of such underlying warrants may be
deemed additional underwriting compensation. The Company has agreed, at the
request of the holders of a majority of the Underwriter's Warrants, at the
Company's expense, to register the Underwriter's Warrants, the shares of
Common Stock and warrants underlying the Underwriter's Warrants, and the
shares of Common Stock issuable upon exercise of the underlying warrants
under the Securities Act on one occasion during the Warrant Exercise Term and
to include the Underwriter's Warrants and all such underlying securities in
any appropriate registration statement which is filed by the Company during
the seven years following the date of this Prospectus.
The Company has also agreed, for a period of five years from the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and
shareholders have agreed to vote their shares of Common Stock in favor of
such designee. The Underwriter has not yet exercised its right to designate
such a person.
In addition, the Company has agreed to enter into a consulting agreement
to retain the Underwriter as a financial consultant for a period of two years
from the consummation of this offering at an annual fee of $30,000, the
entire $60,000 payable in full, in advance. The consulting agreement will not
require the consultant to devote a specific amount of time to the performance
of its duties thereunder. In the event that the Underwriter originates a
financing or a merger, acquisition, joint venture or other transaction to
which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this
Prospectus), to pay to the Underwriter a fee of 5% of the exercise price for
each Warrant exercised; provided, however, that the Underwriter will not be
entitled to receive such compensation in Warrant exercise transactions in
which (i) the market price of Common Stock at the time of exercise is lower
than the exercise price of the Warrants; (ii) the Warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not
made, in addition to the disclosure provided in this Prospectus, in documents
provided to holders of Warrants at the time of exercise; (iv) the exercise of
the Warrants is unsolicited by the Underwriter; or (v) the solicitation of
exercise of the Warrants was in violation of Rule 10b-6 promulgated under the
Exchange Act.
48
<PAGE>
The Underwriter acted as placement agent for the Company in connection
with the Bridge Financing and was paid a placement fee of $90,000,
constituting 10% of the gross proceeds of the Bridge Financing.
Rule 10b-6 may prohibit the Underwriter from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants
until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may
have to receive a fee for the exercise of Warrants following such
solicitation. As a result, the Underwriter may be unable to continue to
provide a market for the Company's securities during certain periods while
the Warrants are exercisable.
The investors in the Bridge Financing have agreed not to sell or otherwise
dispose of the shares of Common Stock purchased in the Bridge Financing for a
period of 13 months from the date of this Prospectus without the
Underwriter's prior written consent. The Company's other securityholders and
all of its officers and directors have agreed not to sell or otherwise
dispose of any securities of the Company beneficially owned by them for a
period of 18 months from the date of this Prospectus, without the prior
written consent of the Underwriter.
The Underwriter has advised the Company that it does not expect sales made
to discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public trading market for the
Common Stock or Warrants. Consequently, the initial public offering price of
the Common Stock and Warrants and the exercise price of the Warrants have
been determined by negotiations between the Company and the Underwriter.
Among the factors considered in determining these prices were the Company's
financial condition and prospects, market prices of similar securities of
comparable publicly-traded companies and the general condition of the
securities market.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Cairncross & Hemplemann, P.S., Seattle, Washington.
Certain legal matters with respect to this offering will be passed upon by
Tenzer Greenblatt LLP, New York, New York. A partner of Tenzer Greenblatt LLP
beneficially owns warrants to purchase 132,353 shares of Common Stock.
Akerman, Senterfitt and Eidson, P.A., Miami, Florida, has acted as counsel to
the Underwriter in connection with this offering.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors as stated in
their report appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to the substantial doubt
about the ability of the Company to continue as a going concern). The
financial statements have been included herein in reliance upon the report of
said firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the securities offered
by this Prospectus. This Prospectus, filed as a part of such Registration
Statement, does not contain all of the information set forth in, or annexed
as exhibits to, the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulation of the Commission. For
further information with respect to the Company and this offering, reference
is made to the Registration Statement, including the exhibits filed
therewith, which may be inspected without charge at the Office of the
Commission, 450 Fifth Street, N.W., Washington D.C. 20549; and at the
following regional offices: Midwest Regional Office, Northwestern Atrium
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511, and the
Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of the Registration Statement may be obtained
49
<PAGE>
from the Commission at its principal office upon payment of prescribed fees.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, where the contract or other
document has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the applicable
document filed with the Commission. The Commission maintains an Internet web
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission.
The address of that site is http://www.sec.gov.
50
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Consolidated balance sheet as of September 30, 1996 ....................................... F-3
Consolidated statements of operations for the year ended December 31, 1995, and for the
nine months ended September 30, 1995 (unaudited) and 1996 ............................... F-4
Consolidated statements of shareholders' equity for the year ended December 31, 1995, and
for the nine months ended September 30, 1996 ............................................ F-5
Consolidated statements of cash flows for the year ended December 31, 1995, and for the
nine months ended September 30, 1995 (unaudited) and 1996 ............................... F-6
Notes to consolidated financial statements ................................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Tuscany, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheet of Tuscany, Inc.
and subsidiary (the Company) as of September 30, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the nine months ended September 30, 1996, and the year ended December 31,
1995. 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 audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30,
1996, and the results of its operations and its cash flows for the nine
months ended September 30, 1996, and the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's
recurring losses from operations and projected future cash requirements,
which require additional capitalization or other external financing, raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are described in Note 1. These
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Deloitte & Touche LLP
Seattle, Washington
December 23, 1996
F-2
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash .......................................................................... $ 80,754
Accounts receivable ........................................................... 34,141
Inventory ..................................................................... 112,858
Prepaid expenses and other current assets ..................................... 35,925
-------------
Total current assets ..................................................... 263,678
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and fixtures ........................................................ 2,858,183
Leasehold improvements ........................................................ 2,848,285
Construction in progress ...................................................... 642,225
-------------
6,348,693
Less accumulated depreciation and amortization ................................ (550,694)
-------------
Total equipment and leasehold improvements ............................... 5,797,999
GOODWILL, net of accumulated amortization of $46,498 ............................... 324,682
INTANGIBLE ASSETS, net of accumulated amortization of $26,844 ...................... 78,547
OTHER ASSETS ....................................................................... 155,737
-------------
TOTAL .............................................................................. $ 6,620,643
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................................. $ 1,620,134
Checks drawn in excess of bank balances ....................................... 151,827
Accrued expenses .............................................................. 283,261
Short-term borrowings ......................................................... 2,198,000
Notes payable to officers ..................................................... 48,016
Current portion of long-term obligations ...................................... 141,799
-------------
Total current liabilities ................................................ 4,443,037
LONG-TERM OBLIGATIONS, less current portion ........................................ 129,742
-------------
Total liabilities ........................................................ 4,572,779
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value -- Authorized, 30,000,000 shares; issued and
outstanding, 932,331 shares ................................................. 140,806
Preferred stock, $.01 par value -- Authorized, 5,000,000 shares:
Series A, $1.25 stated value -- Authorized, issued, and outstanding,
2,766,000 shares (preference in liquidation of $3,457,500) ............... 3,186,625
Series B, $2 stated value -- Authorized, issued, and outstanding, 1,750,000
shares (preference in liquidation of $3,500,000) ......................... 3,233,714
Contributed capital for stock warrants ........................................ 126,000
Accumulated deficit ........................................................... (4,639,281)
-------------
Total shareholders' equity ............................................... 2,047,864
-------------
TOTAL .............................................................................. $ 6,620,643
=============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995, AND
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1995 1995 1996
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
NET SALES ................................... $ 2,488,840 $ 1,678,579 $ 3,317,272
COST OF SALES AND RELATED OCCUPANCY COSTS ... 1,495,848 1,022,363 2,217,311
--------------- --------------- ---------------
Gross profit ...................... 992,992 656,216 1,099,961
OPERATING EXPENSES:
Store .................................. 1,146,262 746,456 1,712,622
Depreciation and amortization .......... 210,253 143,625 359,462
Other .................................. 183,955 130,673 174,896
GENERAL, ADMINISTRATIVE, AND CORPORATE
MARKETING ................................. 794,650 539,514 728,763
--------------- --------------- ---------------
Loss from operations .............. (1,342,128) (904,052) (1,875,782)
OTHER EXPENSES:
Interest expense, net .................. 76,477 38,070 189,317
Loss on sale of equipment and leasehold
improvements ......................... 199,134 199,134
Other .................................. 67,024 37,616 15,540
--------------- --------------- ---------------
NET LOSS ............................... $(1,684,763) $ (1,178,872) $ (2,080,639)
=============== =============== ===============
PRO FORMA LOSS PER SHARE INFORMATION
(Note 1):
Pro forma net loss per share ........... $ (0.69) $ (0.48) $ (0.80)
=============== =============== ===============
Pro forma weighted average shares
outstanding .......................... 2,451,774 2,450,399 2,591,663
=============== =============== ===============
</TABLE>
F-4
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995, AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Common stock Series A Preferred stock Series B Preferred stock
--------------------- ------------------------- ------------------------
Contributed Accumulated
Shares Amount Shares Amount Shares Amount capital deficit Total
--------- ----------- ----------- ------------- ----------------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1995 ............. 882,353 $123,814 1,246,000 $1,557,500 -- $ -- $ -- $ (873,879) $ 807,435
Issuance of
common stock . 27,353 9,300 9,300
Issuance of
Series A
Preferred
stock ...... 1,510,000 1,616,625 1,616,625
Issuance of
Series B
Preferred
stock ...... 91,250 168,682 168,682
Contributed
capital for
stock
warrants ... 36,000 36,000
Net loss ..... (1,684,763) (1,684,763)
--------- ----------- ----------- ------------- ----------------------- ----------- -------------- ----------
BALANCE, December 31,
1995 ............ 909,706 133,114 2,756,000 3,174,125 91,250 168,682 36,000 (2,558,642) 953,279
Issuance of
common stock . 22,625 7,692 7,692
Issuance of
Series A
Preferred
stock ...... 10,000 12,500 12,500
Issuance of
Series B
Preferred
stock ...... 1,658,750 3,065,032 3,065,032
Contributed
capital for
stock
warrants ... 90,000 90,000
Net loss ..... (2,080,639) (2,080,639)
--------- ----------- ----------- ------------- ----------------------- ----------- -------------- -----------
BALANCE, September
30, 1996 ........ 932,331 $140,806 2,766,000 $3,186,625 1,750,000 $3,233,714 $126,000 $(4,639,281) 2,047,864
========= =========== =========== ============= ======================= =========== ============== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995, AND
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1995 1995 1996
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................... $ (1,684,763) $ (1,178,872) $ (2,080,639)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ....................... 220,753 145,125 375,962
Bad debt expense .................................... 30,951 23,213 41,198
Loss on sale of equipment and leasehold improvements 199,134 199,134
Provision for issuance of common stock and warrants
as consideration for consulting services .......... 87,692
Cash provided (used) by changes in operating assets
and liabilities:
Accounts receivable ............................... (12,500) (91,043) 26,343
Inventory ......................................... (46,448) (9,580) (30,436)
Prepaid expenses and other current assets ......... (21,162) (8,221) (14,763)
Deposits .......................................... (54,321) (44,306) (32,885)
Accounts payable .................................. 522,549 185,700 950,311
Accrued expenses .................................. 97,836 72,813 110,531
--------------- --------------- ---------------
Net cash used by operating activities .................. (747,971) (706,037) (566,686)
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Advances to partnership ................................ (141,965) (94,652) (9,767)
Acquisition of net assets from partnership investments . (83,000) (33,000)
Purchase of equipment and leasehold improvements ....... (2,022,780) (1,063,048) (3,098,957)
Proceeds from sale of equipment and leasehold
improvements ........................................ 22,300 22,300
Expenditures for trademark and corporate identity ...... (49,135) (47,507) (17,623)
--------------- --------------- ---------------
Net cash used by investing activities .................. (2,274,580) (1,215,907) (3,126,347)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Checks drawn in excess of bank balances ................ 76,293 118,109 75,534
Net increase in short-term borrowings .................. 1,533,000 408,000 665,000
Principal repayments of notes payable to officers ...... (55,631) (55,631)
Borrowings under notes payable ......................... 100,000 100,000 50,000
Principal repayments of notes payable .................. (471,149) (367,194) (176,472)
Proceeds from sale of Series A Preferred stock ......... 1,616,625 1,616,625 12,500
Proceeds from sale of Series B Preferred stock ......... 168,682 3,065,032
--------------- --------------- ---------------
Net cash provided by financing activities .............. 2,967,820 1,819,909 3,691,594
--------------- --------------- ---------------
NET DECREASE IN CASH ..................................... (54,731) (102,035) (1,439)
CASH:
Beginning of period .................................... 136,924 136,924 82,193
--------------- --------------- ---------------
End of period .......................................... $ 82,193 $ 34,889 $ 80,754
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Operations: Tuscany, Inc. and subsidiary (the Company) was incorporated in
the State of Washington in 1992 for the primary purpose of operating coffee
roaster and bagel bakery stores. Such stores are located in the states of
Pennsylvania, Ohio, Missouri, Colorado, and Texas.
Principles of consolidation: Effective August 1, 1996, the Company
accepted assignment of all shares of Expresso Real Estate Corp. The accounts
of this wholly owned subsidiary are insignificant and are included with the
accounts of Tuscany, Inc. in these consolidated financial statements. Any
significant intercompany transactions are eliminated in consolidation.
Going concern: The Company has experienced operating losses since
inception which have been funded by the sales of stock, loans from
shareholders, and through use of the Company's line-of-credit facility. In
December 1996, the Company consumated a private placement of unsecured
subordinated convertible debt with detachable warrants and a separate private
placement of bridge notes with shares of the Company's common stock. In
addition, the Company plans to file for an initial public offering of its
common stock on Form SB-2. The Company intends to use the proceeds of these
financings for repayment of indebtedness, construction and opening of coffee
and bagel cafes and bars, sales and marketing expenses, working capital, and
general corporate purposes. The Company's recurring operating losses, its
working capital deficiency, and capital expenditure requirements raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that may be necessary if
the Company is unable to continue as a going concern.
Dependence on sole source suppliers: The Company is dependent upon two
suppliers for its supply of coffee and bagel dough. The coffee supplier
purchases all of the green coffee beans and blends, roasts, stores, packages,
and distributes all of the coffee which the Company uses in its operations.
Although the Company has developed the recipes for its coffees and believes
that there are alternative coffee blenders and roasters and bagel dough
manufacturers available, the unavailability of the existing suppliers'
services to the Company could result in delays in the delivery of coffee or
bagel dough which would have a material adverse effect on the Company's
operating results. Significant fluctuations in coffee bean prices could also
have a significant impact on operations.
Use of estimates in financial statements: 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 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.
Cash management: The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not presented for payment to the bank are reflected as
checks drawn in excess of bank balances in the accompanying financial
statements.
Inventory: Inventories consist of whole bean coffees, beverages, bakery
products, coffee making equipment and accessories and are stated at the lower
of cost (determined on a first-in, first-out basis) or market.
Store preopening costs: The Company expenses store preopening costs when
incurred.
Equipment and leasehold improvements: Equipment and fixtures are
depreciated using the straight-line method over ten years. Leasehold
improvements are amortized over the shorter of ten years or the lease term.
Construction in progress: Costs associated with acquiring leasehold
improvements, fixtures and equipment while a store is under construction are
recorded as construction in progress. Additionally, the Company capitalizes
interest on debt incurred during the construction of a new store. When a
store opens, all costs are then transferred to the appropriate property
account and depreciated accordingly.
F-7
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (unaudited) AND 1996
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Goodwill and intangible assets: The Company has capitalized amounts
relating to organizational expense, trademark costs, and goodwill. The
Company amortizes organizational expenses and trademark costs for ten years
and five years, respectively. Goodwill is amortized over the expected useful
life of the individual asset, which ranges from ten to 15 years.
Long-lived assets: The Company periodically reviews long-lived assets,
including identified intangible assets and goodwill, for impairment to
determine whether any events or circumstances indicate that the carrying
amount of the assets may not be recoverable. Such review includes estimating
expected future cash flows. No impairment loss provisions have been required
to date.
Fair value of financial instruments: The fair value of the Company's
financial instruments for which the recorded amount is a reasonable estimate
of the fair value include cash, accounts receivable, accounts payable, bank
debt, and notes payable. The bank debt and notes payable are at currently
available rates for such debt instruments with similar terms and maturities.
Adoption of new accounting principle: During 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, for the purpose of recording equity instruments
issued to nonemployees. The Company will account for stock-based compensation
under its employee stock-based compensation plan in accordance with
Accounting Principles Board (APB) Opinion No. 25. The effect of adopting SFAS
No. 123 was not material. It is possible that the Company's estimate that it
will recover such costs could change in the future.
Unaudited Pro Forma Information: Pro forma net loss per share is based on
the weighted average number of shares outstanding during the period after
consideration of the dilutive effect, if any, of warrants issued, and after
giving pro forma effect to the conversion of the Company's outstanding
preferred stock, the conversion of the Company financing units issued in
December 1996, and the surrender of 235,294 shares of common stock by two
officers of the Company in connection with the Company financing transaction
completed in December 1996. Pursuant to rules of the Securities and Exchange
Commission, all common stock, warrants, and options issued by the Company at
a price less than the estimated initial public offering price during the 12
months preceding the offering date (using the treasury stock method until
shares are issued) have been included in the calculation of common and common
equivalent shares outstanding for the periods presented.
Interim financial information: The interim financial information for the
nine-month period ended September 30, 1995, was prepared by the Company in a
manner consistent with the audited consolidated financial statements and
pursuant to the rules and requirements of the Securities and Exchange
Commission. The unaudited information, in management's opinion, reflects all
adjustments that are of a normal recurring nature and that are necessary to
present fairly the results for the periods presented.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest in the amount of $76,753, $37,230, and $189,317,
net of $17,600, $-0-, and $17,624 capitalized, for the year ended December
31, 1995, and the nine months ended September 30, 1995 (unaudited) and 1996,
respectively.
During 1995, the Company acquired the net assets of two partnerships, in
which it was a 50% owner, for $83,000. Each partnership operated a coffee
store, one located in Dallas, Texas and one located in Pittsburgh,
Pennsylvania. Following is a summary of assets and liabilities recorded and
removed as a result of the partnership purchases:
F-8
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (unaudited) AND 1996
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION - (Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
-------------- ---------------
(unaudited)
<S> <C> <C>
Cash ............................... $ 23,065 $ 2,670
Inventory .......................... 4,054
Current assets ..................... 3,345 2,951
Receivable from partnership ........ (28,082)
Equipment and leasehold improvements 227,500 130,667
Investments in partnerships ........ (132,053) (79,870)
Deposits ........................... 16,757 6,258
Goodwill ........................... 51,180 49,090
Current liabilities ................ (7,427) (7,427)
Notes payable ...................... (66,039) (66,039)
Common stock ....................... (9,300) (5,300)
-------------- ---------------
$ 83,000 $ 33,000
============== ===============
</TABLE>
The Company financed $55,258 and $124,503 for the purchase of equipment
and leasehold improvements through capital lease obligations in the nine
months ended September 30, 1995, and the year ended December 31, 1995,
respectively.
On September 1, 1995, in response to certain shareholders guaranteeing the
Company's line of credit, the Company issued 105,885 warrants with an
expiration date of September 12, 2000, which entitle the holders to purchase
shares of the Company's common stock for $.34 per share. The value of such
warrants was recorded as contributed capital of $36,000 and was capitalized
as deferred financing fees and amortized over the one-year term of the line
of credit agreement.
On September 1, 1996, in response to certain shareholders guaranteeing the
Company's line of credit, the Company issued 29,412 warrants with an
expiration date of September 6, 2001, which entitle the holders to purchase
shares of the Company's common stock for $.34 per share. The value of such
warrants was recorded as contributed capital of $10,000 and has been
capitalized as deferred financing fees to be amortized over the six-month
term of the line of credit agreement.
During 1996, the Company entered into certain consulting contracts and
contracted for certain legal services which required the Company to issue
235,294 warrants, which entitle the holders to purchase shares of the
Company's common stock for $.34 per share. Such warrants have an expiration
date of January 31, 2002. Additionally, the Company issued 22,624 shares of
common stock for certain other consulting services received during the first
nine months of 1996. The fair value of the warrants was determined based on
the fair value of the services rendered.
NOTE 3: OTHER ASSETS
The Company's other assets at September 30, 1996, are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deposits .................................................... $136,737
Deferred financing fees, net of accumulated amortization of
$27,000 ................................................... 19,000
----------
$155,737
==========
</TABLE>
NOTE 4: INVESTMENT IN PARTNERSHIP
Tuscany, Inc. has a general partnership interest in a partnership which
operates a Tuscany store in Houston, Texas. The limited partner is also a
shareholder and member of the Board of Directors of Tuscany, Inc. The
F-9
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (unaudited) AND 1996
NOTE 4: INVESTMENT IN PARTNERSHIP - (Continued)
partnership agreement states that after the limited partner has received 100%
of his invested capital of $100,000, all net income is to be allocated
equally between the general partner and the limited partner. Any deficits to
partnership capital are to be borne 100% by the general partner; however, the
general partner is not liable to the limited partner for the return of his
capital contribution other than through profitable operations of the store.
Based on the Company's lack of control of the partnership, the investment has
been accounted for on the equity method.
NOTE 5: SHORT-TERM BORROWINGS
At September 30, 1996, the Company's bank financing includes a loan in the
amount of $1,600,000, which requires monthly interest payments on outstanding
borrowings and three consecutive quarterly principal payments of $200,000
each, beginning December 1, 1996, with the remaining balance due on September
1, 1997. In addition, the bank financing provides a line of credit of
$600,000, subject to an available borrowing base. The line of credit requires
monthly interest payments and matures on March 1, 1997. The bank debt
provides for a variable interest rate at 1.25% above the bank's prime rate
(9.5% at September 30, 1996). All borrowings under the bank debt are
guaranteed by certain shareholders, and such guarantors have collateralized
interest in substantially all of the Company's assets. The agreement includes
restrictive covenants which, among other things, restrict the level of asset
additions, restrict the distribution of dividends, and require certain
tangible net worth levels. As of September 30, 1996, the Company was not in
compliance with certain of the covenants and has obtained appropriate waivers
from the bank.
NOTE 6: NOTES PAYABLE
Notes payable consisted of the following at September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
Notes payable to officers, unsecured, accruing interest at 6%, maturing on the earlier of
April 30, 1998, or 12 months following an initial public offering of the Company's
common stock .......................................................................... $ 48,016
Note payable to shareholder, unsecured, accruing interest at 10%, maturing June 15, 1997 $ 50,000
Long-term notes payable, unsecured, payable in monthly installments of varying amounts
plus interest at rates ranging from 8% to 11%, maturing through December 1, 1998 ...... 88,063
----------
$186,079
==========
</TABLE>
Scheduled principal payments on notes payable for the next five years
ending September 30 are as follows:
1997 $ 90,200
1998 71,816
1999 10,800
2000 2,600
2001 2,800
Thereafter 7,863
---------
$186,079
=========
NOTE 7: COMMITMENTS
Leasing agreements: The Company leases its retail store locations and
office space under operating leases which range in term from one to ten years
with renewal options ranging from five to ten years. Store leases generally
require a fixed monthly rental and contingent rents based upon gross sales.
F-10
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (unaudited) AND 1996
NOTE 7: COMMITMENTS - (Continued)
Rent expense was as follows:
<TABLE>
<CAPTION>
September 30,
December 31, ------------------------------
1995 1995 1996
------------- ----------- ----------
(unaudited)
<S> <C> <C> <C>
Minimum rentals .. $437,000 $325,800 $619,300
Contingent rentals 4,700 2,700 13,200
------------- ----------- ----------
$441,700 $328,500 $632,500
============= =========== ==========
</TABLE>
The Company has entered into capital leases for acquisition of equipment
and fixtures under agreements which range in term from 24 to 60 months at
imputed interest rates ranging from 7.9% to 33.2%. Assets under capital lease
obligations aggregated $118,100 (net of $114,900 accumulated amortization) at
September 30, 1996.
A summary of the Company's minimum lease obligations for the next five
years ending September 30 is as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------- ------------
<S> <C> <C>
1997 $ 84,000 $1,140,000
1998 77,000 1,251,000
1999 21,856 1,151,000
2000 967,000
2001 770,000
Thereafter 4,584,000
---------- ------------
Total minimum lease commitments 182,856 $9,863,000
============
Less amounts representing interest (49,378)
----------
Present value of capital lease obligations 133,478
Less current portion (51,599)
----------
Long-term capital lease obligations $ 81,879
==========
</TABLE>
NOTE 8: SHAREHOLDERS' EQUITY
The Company has two series of Preferred stock outstanding at September 30,
1996, having specific rights and preferences. The Preferred stock is
convertible at a rate of one share of common stock for 3.4 shares of
Preferred stock and may be converted at any time by the holder, and at
certain other times by the Company. Conversion by the Company is dependent
upon 51% or more of the shares voting for such conversion to common stock or
the registration of Company shares for a public offering.
During the first nine months of 1996, the Company issued 10,000 shares of
Series A Preferred stock at an issuance price of $1.25 per share. The
proceeds received from this issue were $12,500. The Company also issued
1,658,750 shares of Series B Preferred stock at an issuance price of $2.00
per share. The proceeds received from this issue, net of issuance costs of
$252,468, were $3,065,032.
In the event of liquidation of the Company, the holder of each share of
Preferred stock is entitled to receive, out of the assets of the Company
available for distribution to shareholders, a liquidation preference before
any distribution of assets to the holders of common stock. The liquidation
preference is $1.25 per share and $2.00 per share for Series A and B,
respectively. The priority liquidation rights attributable to holders of
Series B Preferred stock are superior to the liquidation rights attributable
to holders of Series A Preferred stock. The aggregate liquidation preference
of Series A and B Preferred stock at September 30, 1996, is $6,957,500.
F-11
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (unaudited) AND 1996
NOTE 8: SHAREHOLDERS' EQUITY - (Continued)
In connection with various financing transactions, the Company issued
warrants which entitle the holders to purchase shares of the Company's common
stock at $.34 per share. A summary of the warrants outstanding and
exercisable at September 30, 1996, is as follows:
<TABLE>
<CAPTION>
Number
of warrants
issued Expiration date
------------- --------------------------------
<S> <C> <C>
September 1995 guarantee of line of credit 105,885 September 12, 2000, with forced
exercise immediately prior to an
initial public offering of the
Company's common stock
September 1996 guarantee of line of credit 29,412 September 6, 2001, with forced
exercise immediately prior to an
initial public offering of the
Company's common stock
September 1996 consulting agreements and
legal services 235,294 January 31, 2002
-------------
Total outstanding at September 30, 1996 370,591
=============
</TABLE>
NOTE 9: INCOME TAXES
At September 30, 1996, the Company had net deferred tax assets of
approximately $1,362,000, which primarily consisted of the tax benefit of net
operating losses available to offset future income tax obligations totalling
$4,020,000, which expire through 2011. A valuation allowance in the full
amount of the net deferred tax asset balance has been established, as there
is no assurance that the Company will be able to realize such tax assets in
the future.
NOTE 10: RELATED PARTY TRANSACTION
The Company received a $100,000 advance from Boyds Coffee Company, a
preferred shareholder and the Company's major supplier of roasted coffee
beans, which was repaid through the purchase of 110,000 pounds of coffee from
Boyds at a $1 per pound premium. The Company completed such repayment prior
to September 30, 1996.
NOTE 11: SUBSEQUENT EVENTS
Company financing: In November and December 1996, the Company consummated
a private placement (the Company Financing) of 36 units (the Company
Financing Units), each Company Financing Unit consisting of (i) a convertible
promissory note of the Company in the principal amount of $50,000, bearing
interest at an annual rate of 9%, payable quarterly commencing December 31,
1996 (each, a Company Financing Note) and (ii) 10,353 warrants, each to
purchase one share of common stock (the Company Financing Warrants). The
entire $1,800,000 in principal amount of, plus accrued and unpaid interest
on, the Company Financing Notes will automatically be converted into shares
of common stock (at the rate of one share of common stock for each $3.74 of
indebtedness) immediately prior to the consummation of an initial public
offering of the Company's common stock. The outstanding Company Financing
Warrants are exercisable at a price of $5.00 per share for a period of two
years commencing upon the consummation of an initial public offering.
Related party transaction: In November 1996, two of the Company's officers
each surrendered 117,647 shares of common stock to the Company for
cancellation.
F-12
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 1995, AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 (unaudited) AND 1996
NOTE 11: SUBSEQUENT EVENTS - (Continued)
Initial public offering: In November 1996, the Company's Board of
Directors entered into a letter of intent with an underwriter for the purpose
of completing an initial public offering of the Company's common stock.
Bridge financing: In December 1996, the Company also consummated a private
placement (the Bridge Financing) of 18 units (the Bridge Units), each $50,000
Bridge Unit consisting of (i) an unsecured nonnegotiable promissory note of
the Company in the principal amount of $50,000, bearing interest at the rate
of 9% per year, payable semi-annually, and maturing at the earlier of
December 23, 1997, or upon the consummation of an initial public offering of
the Company's common stock (each, a Bridge Note) and (ii) 10,000 shares of
common stock. After payment of $90,000 in placement agent fees to the
underwriter, which acted as placement agent for the Company in connection
with the Bridge Financing, and other offering expenses of approximately
$50,000, the Company received net proceeds of approximately $760,000 from the
sale of the Bridge Units.
In the event the Bridge Notes are not paid in full when due, the interest
shall accrue on the unpaid amount from the initial date of nonpayment to the
date of payment at the rate of 18% per annum. In addition, in the event the
Company fails to repay the Bridge Notes in full on or prior to their maturity
date, each holder of a Bridge Note will receive, on the next business day
following the maturity date and again at the end of each successive six-month
period following the maturity date, an additional 5,000 shares of common
stock for each $50,000 in principal amount then outstanding under the
holder's Bridge Note.
In the event that the Company fails, under certain circumstances, to
maintain an effective registration statement with respect to the shares of
common stock sold in the Bridge Financing during the applicable registration
period, the Company will be required to issue up to 45,000 additional shares
of common stock.
Stock option plan: In December 1996, the Company's shareholders approved a
stock option plan which provides for the award of a maximum of 350,000 stock
options at fair market value on the date of grant to certain employees and
nonemployees. The options vest over a period as determined at the date of
grant and generally expire ten years from the date of grant. The Company
granted options to purchase 203,000 shares at an exercise price of $5.00 to
certain employees and directors under the Plan.
Reverse stock split: In December 1996, the Company's shareholders approved
a resolution to effect a 1-for-3.4 reverse stock split. The reverse stock
split has been given retroactive recognition in all periods presented in the
accompanying financial statements.
Tax loss carryforwards: As a result of the completion of the Company's
planned initial public offering, the Company may incur a change in ownership
as defined under Section 382 of the Internal Revenue Code of 1986. Such
change in ownership would impose certain limitations on the utilization of
the Company's net operating loss carryforwards.
F-13
<PAGE>
=============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any security other than the securities offered by this
Prospectus, or an offer to sell or a solicitation of an offer to buy any
securities by anyone in any jurisdiction in which such offer or solicitation
is not authorized or is unlawful. The delivery of this Prospectus shall not,
under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ............................................ 3
Risk Factors .................................................. 8
Use of Proceeds ............................................... 17
Dilution ...................................................... 18
Dividend Policy ............................................... 19
Capitalization ................................................ 20
Selected Financial Data ....................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................... 22
Business ...................................................... 26
Management .................................................... 36
Principal Shareholders ........................................ 41
Certain Transactions .......................................... 42
Description of Securities ..................................... 44
Shares Eligible for Future Sale ............................... 47
Underwriting .................................................. 47
Legal Matters ................................................. 49
Experts ....................................................... 49
Additional Information ........................................ 49
Index to Financial Statements. ................................ F-1
</TABLE>
------
Until , 1997, (25 days after the date of this Prospectus), all dealers
effecting transactions in the shares of Common Stock or Warrants offered
hereby, whether or not participating in this distribution may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
=============================================================================
<PAGE>
=============================================================================
TUSCANY, INC.
1,600,000 SHARES OF COMMON STOCK
AND
REDEEMABLE WARRANTS TO PURCHASE
1,600,000 SHARES OF COMMON STOCK
------
PROSPECTUS
------
PARAGON CAPITAL CORPORATION
, 1997
=============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.510 and 23B.08.570 of the Washington Business Corporation
Act (the "WBCA") contain provisions entitling the Registrant's directors and
officers to indemnification from judgments, settlements, penalties, fines,
and reasonable expenses (including attorney's fees) as the result of an
action or proceeding in which they may be involved by reason of having been a
director or officer of the Registrant. In its Articles of Incorporation, the
Registrant has included a provision that limits, to the fullest extent now or
hereafter permitted by the WBCA, the personal liability of its directors to
the Registrant or its shareholders for monetary damages arising from a breach
of their fiduciary duties as directors. Under the WBCA as currently in
effect, this provision limits a director's liability except where such
director breaches a duty based upon an action or omission that involves
intentional misconduct, or a knowing violation of law, conduct resulting in
an unlawful distribution of the Registrant's assets in violation of the WBCA
or any transaction for which such person will receive a benefit in money,
property or services to which such person is not entitled. This provision
does not prevent the Registrant or its shareholders from seeking equitable
remedies, such as injunctive relief or rescission. If equitable remedies are
found not to be available to shareholders in any particular case,
shareholders may not have any effective remedy against actions taken by
directors that constitute negligence or gross negligence.
The Articles of Incorporation also includes provisions to the effect that
(subject to certain exceptions) the Registrant shall, to the maximum extent
permitted from time to time under the law of the State of Washington,
indemnify, and upon request shall advance expenses to, any director or
officer to the extent that such indemnification and advancement of expenses
is permitted under such law, as may from time to time be in effect. In
addition, the Articles of Incorporation require the Registrant to indemnify,
to the full extent permitted by law, any director or officer of the
Registrant.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. See Item 28.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's nonaccountable
expense allowance) are as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee ........ $ 5,631.51
NASD filing fee ............................................ 2,358.00
Nasdaq listing fee ......................................... *
Underwriter's consulting fee ............................... 60,000.00
Printing and engraving expenses ............................ *
Legal fees and expenses .................................... *
Accounting fees and expenses ............................... *
Blue sky fees and expenses (including legal fees) .......... *
Transfer agent, warrant agent and registrar fees and
expenses .................................................. *
Miscellaneous .............................................. *
------------
Total ................................................. $399,200.00
============
</TABLE>
- - ------
* To be filed by amendment.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1993, the Registrant has issued securities without
registration under the Securities Act of 1933, as amended (the "Act") in the
following transactions (in each case giving retroactive effect to the
subsequent stock splits):
1. In July 1994, the Company issued an aggregate of 61,765 shares of
Common Stock to two directors for $.001 per share.
2. In July 1994, the Company issued an aggregate of 17,647 shares as
partial consideration to a director for making a loan to the Company.
3. From September 1994 to June 1995, the Registrant issued 2,766,000
shares of Series A Preferred Stock to 91 investors at $1.25 per share.
4. From August 1995 to September 1995, the Company issued an aggregate of
27,353 shares of Common Stock to three persons as partial consideration in
connection with the dissolution of two limited partnerships.
5. From September 1995 to September 1996, the Registrant issued warrants
to purchase an aggregate of 135,297 shares of Common Stock at an exercise
price of $.34 per share, to eleven persons in consideration for their
guarantying certain of the Company's obligations.
6. From December 1995 to August 1996, the Registrant issued 1,750,000
shares of Series B Preferred Stock to 123 investors at $2.00 per share.
7. In August 1996, the Registrant issued warrants to purchase 132,353
shares of Common Stock at an exercise price of $.34 per share to an
individual in exchange for legal services rendered.
8. In August 1996, the Registrant issued warrants to purchase 102,941
shares of Common Stock at an exercise price of $.34 per share to an
individual in exchange for consulting services rendered.
9. In November 1996, the Registrant issued 22,624 shares of Common Stock
to five persons for services rendered pursuant to agreements entered into in
January 1996.
10. From November to December 1996 the Registrant issued 36 Company
Financing Units, each Company Financing Unit consisting of (i) an unsecured
subordinated convertible promissory note in the amount of $50,000 and (ii)
warrants to purchase 10,353 shares of Common Stock. The Company Financing
Units were purchased by 60 investors at a price of $50,000 per Company
Financing Unit.
11. In December 1996, the Registrant issued 18 Bridge Units, with each
Bridge Unit consisting of 10,000 shares of Common Stock and a promissory note
in the principal amount of $50,000. The Bridge Units were purchased by 23
investors for $50,000 per Bridge Unit.
The sales and issuances of the Series A Preferred Stock, Series B
Preferred Stock, Company Financing Units, Bridge Units, Warrants and Common
Stock described above were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(2) thereof as transactions not
involving a public offering. The purchasers in such private offerings
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof and appropriate legends were
affixed to the stock certificates issued in such transactions. All purchasers
had adequate access, through their employment or other relationships, to
sufficient information about the Registrant to make an informed investment
decision.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation, as amended, of the Registrant.
3.2 Bylaws, as amended, of the Registrant.
*4.1 Form of Registrant's Common Stock Certificate.
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.3 Form of Public Warrant Agreement among the Registrant, Paragon Capital Corporation, as Underwriter and Continental
Stock Transfer & Trust Company, as Warrant Agent.
*4.4 Form of Registrant's Public Warrant Certificate.
*5.1 Opinion of Cairncross & Hemplemann, P.S.
10.1 $1,600,000 Promissory Note issued by Registrant to Seafirst Bank, dated August 30, 1996.
10.2 $600,000 Promissory Note issued by Registrant to Seafirst Bank, dated August 30, 1996.
10.3 Business Loan Agreement between the Registrant and Seafirst Bank, dated August 30, 1996.
10.4 Security Agreement among the Company and certain guarantors, dated September 13, 1995.
10.5 Security Agreement among the Company and certain guarantors, dated September 13, 1996.
10.6 Form of Employment Agreement between Registrant and Jim Simonson, dated January 1, 1997.
10.7 Form of Employment Agreement between Registrant and Mark McDonald, dated January 1, 1997.
10.8 Form of Employment Agreement between Registrant and Chris Mueller, dated January 1, 1997.
*10.9 1996 Stock Option Plan.
11.1 Statement of Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche, L.L.P., Independent Certified Public Accountants.
*23.2 Consent of Cairncross & Hemplemann, P.S. (will be contained in such firm's opinion filed as Exhibit 5.1).
*23.3 Consent of Tenzer Greenblatt LLP
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages
of this Registration Statement.
27.1 Financial Data Schedule.
</TABLE>
- - ------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) include any additional or changed material information on the
plan of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide
offering; and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
II-3
<PAGE>
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby under writing agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser; (2) that for
the purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this Registration Statement as of
the time the Securities and Exchange Commission declares it effective; and
(3) that for the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of Prospectus
as a new Registration Statement for the securities offered in the
Registration Statement therein, and treat the offering of the securities at
that time as the initial bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
city of Seattle, State of Washington on December 23, 1996.
TUSCANY, INC.
By: /s/ Jim Simonson
-------------------------------
President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Jim Simonson, Mark McDonald and Chris
Mueller, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities (until revoked in writing) to sign
any and all amendments (including pre-effective amendments and post-effective
amendments and amendments thereto) to this Registration Statement on Form
SB-2 of Tuscany, Inc. and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone or his substitute, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
----------------------- ---------------------------------------------- ---------------------
<S> <C> <C>
/s/ Jim Simonson President, Chief Executive Officer and Director December 23, 1996
----------------------
Jim Simonson
/s/ Mark McDonald Executive Vice President and Director December 23, 1996
----------------------
Mark McDonald
/s/ Chris Mueller Executive Vice President, (Principal Financial December 23, 1996
---------------------- Officer and Principal Accounting Officer) and
Chris Mueller Director
/s/ Jerome Alhadeff Director December 23, 1996
----------------------
Jerome Alhadeff
/s/ David Cohn Director December 23, 1996
----------------------
David Cohn
/s/ Keith Grinstein Director December 23, 1996
----------------------
Keith Grinstein
/s/ Ottie Ladd Director December 23, 1996
----------------------
Ottie Ladd
/s/ Greg Maffei Director December 23, 1996
----------------------
Greg Maffei
/s/ James Milgard Director December 23, 1996
----------------------
James Milgard
/s/ John Parkey Director December 23, 1996
----------------------
John Parkey
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
----------- -------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation, as amended, of the Registrant.
3.2 Bylaws, as amended, of the Registrant.
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.3 Form of Public Warrant Agreement among the Registrant, Paragon Capital Corporation, as Underwriter and
Continental Stock Transfer & Trust Company, as Warrant Agent.
10.1 $1,600,000 Promissory Note issued by Registrant to Seafirst Bank, dated August 30, 1996.
10.2 $600,000 Promissory Note issued by Registrant to Seafirst Bank, dated August 30, 1996.
10.3 Business Loan Agreement between the Registrant and Seafirst Bank, dated August 30, 1996.
10.4 Security Agreement among the Company and certain guarantors, dated September 13, 1995.
10.5 Security Agreement among the Company and certain guarantors, dated September 13, 1996.
10.6 Form of Employment Agreement between Registrant and Jim Simonson, dated January 1, 1997.
10.7 Form of Employment Agreement between Registrant and Mark McDonald, dated January 1, 1997.
10.8 Form of Employment Agreement between Registrant and Chris Mueller, dated January 1, 1997.
11.1 Statement of Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche, L.L.P., Independent Certified Public Accountants.
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages
of this Registration Statement.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
TUSCANY, INC.
1,600,000 Shares of Common Stock
(Par Value $.01 Per Share)
and
Warrants to Purchase 1,600,000 Shares of Common Stock
UNDERWRITING AGREEMENT
Paragon Capital Corporation , 1997
7 Hanover Square
New York, New York 10004
Ladies and Gentlemen:
Tuscany, Inc., a Washington corporation (the "Company"),
proposes to issue and sell to Paragon Capital Corporation (the "Underwriter") an
aggregate of one million six hundred thousand (1,600,000) shares of common stock
of the Company, par value $.01 per share (the "Offered Shares"), which Offered
Shares are presently authorized but unissued shares of the common stock, par
value $.01 per share (individually a "Common Share" and collectively the "Common
Shares"), of the Company, at a price of Five Dollars ($5.00) per Offered Share,
and one million six hundred thousand (1,600,000) Common Share purchase warrants
(the "Offered Warrants"), at a price of Ten Cents ($.10) per Offered Warrant,
entitling the holder of each Offered Warrant to purchase, during the five (5)
year period commencing __________, 1997, one (1) Common Share, at an exercise
price of $5.00 per share (subject to adjustment in certain circumstances). The
Company shall have the right, upon the consent of the Underwriter, to call each
Offered Warrant for redemption upon not less than thirty (30) days' written
notice at any time after becoming exercisable at a redemption price of Ten Cents
($.10) per Offered Warrant provided that the closing bid quotation of the Common
Stock has been at least 150% (currently $7.50) of the then-effective exercise
price of the Warrants on all twenty (20) trading days ending on the third day
prior to the day on which the Company gives notice. In addition, the
Underwriter, in order to cover over-allotments in the sale of the Offered Shares
and/or Offered Warrants, may purchase an aggregate of not more than two hundred
forty thousand (240,000) Common Shares (the "Optional Shares") and/or two
hundred forty thousand (240,000) Common Share purchase warrants (the "Optional
Warrants") entitling the holder of each Optional Warrant to purchase one (1)
Common Share on the same terms as the Offered Warrants. The Offered Shares and
the Optional Shares are hereinafter sometimes collectively referred to as the
"Shares";
<PAGE>
and the Offered Warrants and the Optional Warrants are hereinafter collectively
referred to as the "Warrants." The Warrants will be issued pursuant to a Warrant
Agreement (the "Warrant Agreement") to be dated as of the Closing Date (as
hereinafter defined) by and among the Company, the Underwriter and
__________________________________________, as warrant agent (the "Warrant
Agent").
The Company also proposes to issue and sell to the Underwriter
for its own account and the accounts of its designees, warrants (the
"Underwriter's Warrants") to purchase up to an aggregate of one hundred sixty
thousand (160,000) Common Shares (collectively, the "Underlying Shares") and/or
one hundred sixty thousand (160,000) warrants similar, but not identical to, the
Warrants (collectively, the "Underlying Warrants"), which sale will be
consummated in accordance with the terms and conditions of the form of
Underwriter's Warrant Agreement filed as an exhibit to the Registration
Statement (as hereinafter defined). The Underlying Shares and the Common Shares
issuable upon exercise of the Warrants and the Underlying Warrants are
hereinafter sometimes referred to as the "Warrant Shares". The Shares, the
Warrants, the Underwriter's Warrants, the Underlying Warrants and the Warrant
Shares (collectively, the "Securities") are more fully described in the
Registration Statement and the Prospectus, as defined below.
The Company hereby confirms its agreement with the Underwriter
as follows:
1. Purchase and Sale of Offered Shares and Offered Warrants.
On the basis of the representations and warranties herein contained, but subject
to the terms and conditions herein set forth, the Company hereby agrees to sell
the Offered Shares and Offered Warrants to the Underwriter, and the Underwriter
agrees to purchase the Offered Shares and Offered Warrants from the Company, at
a purchase price of $4.50 per Offered Share and $.09 per Offered Warrant. The
Underwriter plans to offer the Offered Shares and Offered Warrants to the public
at a public offering price of $5.00 per Offered Share and $.10 per Offered
Warrant.
2. Payment and Delivery.
(a) Payment for the Offered Shares and Offered Warrants
will be made to the Company by wire transfer or certified or official bank check
or checks payable to its order in New York Clearing House funds, at the offices
of the Underwriter, 7 Hanover Square, New York, New York 10004, against delivery
of the Offered Shares and Offered Warrants to the Underwriter. Such payment and
delivery will be made at or about 10:00 A.M., New York City time, on the third
business day following the Effective Date as defined below (the fourth business
day following the Effective Date in the event that
-2-
<PAGE>
trading of the Offered Shares commences on the day following the Effective
Date), the date and time of such payment and delivery being herein called the
"Closing Date." The certificates representing the Offered Shares and Offered
Warrants to be delivered will be in such denominations and registered in such
names as the Underwriter may request not less than three full business days
prior to the Closing Date, and will be made available to the Underwriter for
inspection, checking and packaging at the office of the Company's transfer agent
or correspondent in New York City, _____________________________________________
________________________________, not less than one full business day prior to
the Closing Date.
(b) On the Closing Date, the Company will sell the
Underwriter's Warrants to the Underwriter or to its designees. The Underwriter's
Warrants will be in the form of, and in accordance with, the provisions of the
Underwriter's Warrant attached as an exhibit to the Registration Statement. The
aggregate purchase price for the Underwriter's Warrants is One Hundred Seventy
Six Dollars ($176.00). The Underwriter's Warrants will be restricted from sale,
transfer, assignment or hypothecation for a period of one (1) year from the
Effective Date, except to officers and partners of the Underwriter and members
of the selling group and/or their officers or partners. Payment for the
Underwriter's Warrants will be made to the Company by check or checks payable to
its order on the Closing Date against delivery of the certificates representing
the Underwriter's Warrants. The certificates representing the Underwriter's
Warrants will be in such denominations and such names as the Underwriter may
request prior to the Closing Date.
3. Option to Purchase Optional Shares and/or Optional
Warrants.
(a) For the purposes of covering any over-allotments in
connection with the distribution and sale of the Offered Shares and Offered
Warrants as contemplated by the Prospectus, the Underwriter is hereby granted an
option to purchase all or any part of the Optional Shares and/or Optional
Warrants from the Company. The purchase price to be paid for the Optional Shares
and Optional Warrants will be the same price per Optional Share and Optional
Warrant as the price per Offered Share or Offered Warrant, as the case may be,
set forth in Section 1 hereof. The option granted hereby may be exercised by the
Underwriter as to all or any part of the Optional Shares and/or the Optional
Warrants at any time within 45 days after the Effective Date. The Underwriter
will not be under any obligation to purchase any Optional Shares or Optional
Warrants prior to the exercise of such option.
(b) The option granted hereby may be exercised by the
Underwriter by giving oral notice to the Company, which must be confirmed by a
letter, telex or telegraph setting forth the
-3-
<PAGE>
number of Optional Shares and Optional Warrants to be purchased, the date and
time for delivery of and payment for the Optional Shares and Optional Warrants
to be purchased and stating that the Optional Shares and Optional Warrants
referred to therein are to be used for the purpose of covering over-allotments
in connection with the distribution and sale of the Offered Shares and Offered
Warrants. If such notice is given prior to the Closing Date, the date set forth
therein for such delivery and payment will not be earlier than either two full
business days thereafter or the Closing Date, whichever occurs later. If such
notice is given on or after the Closing Date, the date set forth therein for
such delivery and payment will not be earlier than five full business days
thereafter. In either event, the date so set forth will not be more than 15 full
business days after the date of such notice. The date and time set forth in such
notice is herein called the "Option Closing Date." Upon exercise of such option,
the Company will become obligated to convey to the Underwriter, and, subject to
the terms and conditions set forth in Section 3(d) hereof, the Underwriter will
become obligated to purchase, the number of Optional Shares and Optional
Warrants specified in such notice.
(c) Payment for any Optional Shares and Optional Warrants
purchased will be made to the Company by wire transfer or certified or official
bank check or checks payable to its order in New York Clearing House funds, at
the office of the Underwriter, against delivery of the Optional Shares and
Optional Warrants purchased to the Underwriter. The certificates representing
the Optional Shares and Optional Warrants to be delivered will be in such
denominations and registered in such names as the Underwriter requests not less
than two full business days prior to the Option Closing Date, and will be made
available to the Underwriter for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less than
one full business day prior to the Option Closing Date.
(d) The obligation of the Underwriter to purchase and pay
for any of the Optional Shares or Optional Warrants is subject to the accuracy
and completeness (as of the date hereof and as of the Option Closing Date) of
and compliance in all material respects with the representations and warranties
of the Company herein, to the accuracy and completeness of the statements of the
Company or its officers made in any certificate or other document to be
delivered by the Company pursuant to this Agreement, to the performance in all
material respects by the Company of its obligations hereunder, to the
satisfaction by the Company of the conditions, as of the date hereof and as of
the Option Closing Date, set forth in Section 3(b) hereof, and to the delivery
to the Underwriter of opinions, certificates and letters dated the Option
Closing Date substantially similar in scope to those specified in Section 5,
6(b), (c), (d) and (e) hereof, but with each reference to "Offered Shares,"
"Offered Warrants" and
-4-
<PAGE>
"Closing Date" to be, respectively, to the Optional Shares, Optional Warrants
and the Option Closing Date.
4. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Washington, with
full power and authority, corporate and other, to own or lease and operate its
properties and to conduct its business as described in the Registration
Statement and to execute, deliver and perform this Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement and to consummate the
transactions contemplated hereby and thereby. The Company is duly qualified to
do business as a foreign corporation and is in good standing in all
jurisdictions wherein such qualification is necessary and failure so to qualify
could have a material adverse effect on the financial condition, results of
operations, business or properties of the Company. The Company has no
subsidiaries other than Expresso Real Estate Corp., a Washington corporation,
which is inactive.
(b) Each of this Agreement and the consulting agreement
described in Section 5(r) hereof (the "Consulting Agreement") has been duly
executed and delivered by the Company and constitutes the valid and binding
obligation of the Company, and each of the Warrant Agreement and the
Underwriter's Warrant Agreement, when executed and delivered by the Company on
the Closing Date, will be the valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms. The
execution, delivery and performance of this Agreement, the Consulting Agreement,
the Warrant Agreement and the Underwriter's Warrant Agreement by the Company,
the consummation by the Company of the transactions herein and therein
contemplated and the compliance by the Company with the terms of this Agreement,
the Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time, or
both, (i) result in any violation of the Articles of Incorporation or By-Laws,
each as amended, of the Company; (ii) result in a breach of or conflict with any
of the terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company pursuant to any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which the Company is a party or
by which the Company or any of its properties or assets are or may be bound or
affected; (iii) violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over
-5-
<PAGE>
the Company or any of its properties or business; or (iv) have any effect on any
permit, certification, registration, approval, consent, order, license,
franchise or other authorization (collectively, "Permits") necessary for the
Company to own or lease and operate its properties and to conduct its business
or the ability of the Company to make use thereof, which, in the case of clauses
(ii), (iii) and (iv) of this Section 4(b), would have a material adverse effect
on the financial condition, results of operations, business or properties of the
Company (a "Material Adverse Effect").
(c) No Permit of any court or governmental agency or body,
other than under the Securities Act of 1933, as amended (the "Act"), the
Regulations (as hereinafter defined) and applicable state securities or Blue Sky
laws, is required for the valid authorization, issuance, sale and delivery of
the Shares and Warrants to the Underwriter, and the consummation by the Company
of the transactions contemplated by this Agreement, the Consulting Agreement,
the Warrant Agreement or the Underwriter's Warrant Agreement.
(d) The conditions for use of a registration statement on
Form SB-2 set forth in the General Instructions to Form SB-2 have been satisfied
with respect to the Company, the transactions contemplated herein and in the
Registration Statement. The Company has prepared in conformity in all material
respects with the requirements of the Act and the rules and regulations (the
"Regulations") of the Securities and Exchange Commission (the "Commission") and
filed with the Commission a registration statement (File No. 333-______) on Form
SB-2 and has filed one or more amendments thereto, covering the registration of
the Securities under the Act, including the related preliminary prospectus or
preliminary prospectuses (each thereof being herein called a "Preliminary
Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was
endorsed with the legend required by Item 501(c)(5) of Regulation S-B of the
Regulations and if applicable, Rule 430A of the Regulations. Such registration
statement including any documents incorporated by reference therein and all
financial schedules and exhibits thereto, as amended at the time it becomes
effective, and the final prospectus included therein are herein, respectively,
called the "Registration Statement" and the "Prospectus," except that, (i) if
the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations
differs from the Prospectus, the term "Prospectus" will also include the
prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement
is amended or such Prospectus is supplemented after the effective date of the
Registration Statement (the "Effective Date") and prior to the Option Closing
Date, the terms "Registration Statement" and "Prospectus" shall include the
Registration Statement as amended or supplemented.
-6-
<PAGE>
(e) Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
(f) The Registration Statement when it becomes effective,
the Prospectus (and any amendment or supplement thereto) when it is filed with
the Commission pursuant to Rule 424(b), and both documents as of the Closing
Date and the Option Closing Date referred to below, will contain all statements
which are required to be stated therein in accordance with the Act and the
Regulations and will in all material respects conform to the requirements of the
Act and the Regulations, and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, on such dates, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company in connection with the Registration Statement or Prospectus or any
amendment or supplement thereto by the Underwriter expressly for use therein.
(g) The Company had at the date or dates indicated in the
Prospectus a duly authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus. Based on the assumptions stated in
the Registration Statement and the Prospectus, the Company will have on the
Closing Date the adjusted stock capitalization set forth therein. Except as set
forth in the Registration Statement or the Prospectus, on the Effective Date and
on the Closing Date, there will be no options to purchase, warrants or other
rights to subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell shares of the Company's capital
stock or any such warrants, convertible securities or obligations. Except as set
forth in the Prospectus, no holders of any of the Company's securities has any
rights, "demand," "piggyback" or otherwise, to have such securities registered
under the Act.
(h) The descriptions in the Registration Statement and
the Prospectus of contracts and other documents are accurate and present fairly
the information required to be disclosed, and there are no contracts or other
documents required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement under the
Act or the Regulations which have not been so described or filed as required.
-7-
<PAGE>
(i) Deloitte & Touche, the accountants who have certified
certain of the financial statements filed and to be filed with the Commission as
part of the Registration Statement and the Prospectus, are independent public
accountants within the meaning of the Act and Regulations. The financial
statements and schedules and the notes thereto filed as part of the Registration
Statement and included in the Prospectus present fairly the financial position
of the Company as of the dates thereof, and the results of operations and
changes in financial position of the Company for the periods indicated therein,
all in conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved except as otherwise stated in
the Registration Statement and the Prospectus. The selected financial data set
forth in the Registration Statement and the Prospectus present fairly the
information shown therein and have been compiled on a basis consistent with that
of the audited and unaudited financial statements included in the Registration
Statement and the Prospectus.
(j) The Company has filed with the appropriate federal,
state and local governmental agencies, and all appropriate foreign countries and
political subdivisions thereof, all tax returns, including franchise tax
returns, which are required to be filed or has duly obtained extensions of time
for the filing thereof and has paid all taxes shown on such returns and all
assessments received by it to the extent that the same have become due; and the
provisions for income taxes payable, if any, shown on the financial statements
filed with or as part of the Registration Statement are sufficient for all
accrued and unpaid foreign and domestic taxes, whether or not disputed, and for
all periods to and including the dates of such financial statements. Except as
disclosed in writing to the Underwriter, the Company has not executed or filed
with any taxing authority, foreign or domestic, any agreement extending the
period for assessment or collection of any income taxes and is not a party to
any pending action or proceeding by any foreign or domestic governmental agency
for assessment or collection of taxes; and no claims for assessment or
collection of taxes have been asserted against the Company, the adverse
determination of which would have a Material Adverse Effect.
(k) The outstanding Common Shares, outstanding options and
warrants to purchase Common Shares have been, or upon conversion will be, as the
case may be, duly authorized and validly issued. The outstanding Common Shares
are fully paid and nonassessable. The outstanding options and warrants to
purchase Common Shares constitute the valid and binding obligations of the
Company, enforceable in accordance with their terms, except as enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws nor or hereafter in effect relating to creditors' rights
generally and general principles of equity and the discretion of the court
before which
-8-
<PAGE>
any proceeding therefor may be brought. None of the outstanding Common Shares,
or options or warrants to purchase Common Shares has been or will be, as the
case may be, issued in violation of the preemptive rights of any shareholder of
the Company. None of the holders of the outstanding Common Shares is subject to
personal liability solely by reason of being such a holder. The offers and sales
of the outstanding Common Shares, and outstanding options and warrants to
purchase Common Shares were at all relevant times either registered under the
Act and the applicable state securities or Blue Sky laws or exempt from such
registration requirements. The authorized Common Shares and outstanding options
and warrants to purchase Common Shares conform to the descriptions thereof
contained in the Registration Statement and Prospectus. Except as set forth in
the Registration Statement and the Prospectus, on the Effective Date and the
Closing Date, there will be no outstanding preferred shares, Common Shares,
debentures, options or warrants for the purchase of, or other outstanding rights
to purchase, Common Shares or securities convertible into Common Shares.
(l) No securities of the Company have been sold by the
Company or by or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common control with the Company within the
three years prior to the date hereof, except as disclosed in the Registration
Statement.
(m) The issuance and sale of the Shares and the Warrant
Shares have been duly authorized and, when the Shares and the Warrant Shares
have been issued and duly delivered against payment therefor as contemplated by
this Agreement or by the Warrant Agreement, as the case may be, the Shares and
the Warrant Shares will be validly issued, fully paid and nonassessable. The
holders of the Securities will not be subject to personal liability solely by
reason of being such holders and none of the Securities will be subject to
preemptive rights of any shareholder of the Company.
(n) The issuance and sale of the Warrants, the
Underwriter's Warrants and the Underlying Warrants have been duly authorized
and, when issued, paid for and delivered pursuant to the terms of this Agreement
or the Underwriter's Warrant Agreement, as the case may be, the Warrants, the
Underwriter's Warrants and the Underlying Warrants will constitute valid and
binding obligations of the Company, enforceable as to the Company in accordance
with their terms. The Warrant Shares have been duly reserved for issuance upon
exercise of the Warrants, the Underwriter's Warrants and the Underlying Warrants
in accordance with the provisions of the Warrants, the Underwriter's Warrants
and the Underlying Warrants. The Warrants, Underwriter's Warrants and Underlying
Warrants will conform to the descriptions thereof contained in the Registration
Statement and Prospectus.
-9-
<PAGE>
(o) The Company is not in violation of, or in default
under, (i) any term or provision of its Certificate of Incorporation,
Memorandum, Articles or By-Laws, as amended, as the case may be; (ii) any
material term or provision or any financial covenants of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or any of its property or business is or may be bound or
affected, except for such defaults for which it has received a waiver; or (iii)
any existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or any of the Company's properties or business, which, in the case of
clauses (ii) and (iii) of this Section 4(o), would have a Material Adverse
Effect. The Company owns, possesses or has obtained all governmental and other
(including those obtainable from third parties) Permits necessary to own or
lease, as the case may be, and to operate its properties, whether tangible or
intangible, and to conduct any of the business or operations of the Company as
presently conducted and all such Permits are outstanding and in good standing,
and there are no proceedings pending or, to the best of the Company's knowledge,
threatened (nor to the Company's knowledge is there any basis therefor) seeking
to cancel, terminate or limit such Permits.
(p) Except as set forth in the Prospectus, there are no
claims, actions, suits, proceedings, arbitrations, investigations or inquiries
before any governmental agency, court or tribunal, domestic or foreign, or
before any private arbitration tribunal, pending, or, to the best of the
Company's knowledge, threatened against the Company or involving the Company's
properties or business which, if determined adversely to the Company would,
individually or in the aggregate, result in any Material Adverse Effect or which
question the validity of the capital stock of the Company or this Agreement or
of any action taken or to be taken by the Company pursuant to, or in connection
with, this Agreement; nor, to the best of the Company's knowledge, is there any
basis for any such claim, action, suit, proceeding, arbitration, investigation
or inquiry. There are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal naming the Company and enjoining the
Company from taking, or requiring the Company to take, any action, or to which
the Company, or the Company's properties or business, is bound or subject.
(q) Neither the Company nor any of its affiliates has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
(r) The Company owns or possesses adequate and enforceable
rights to use all trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of their businesses as described in the Prospectus
-10-
<PAGE>
(collectively, the "Intangibles"); to the best of the Company's knowledge, the
Company has not infringed or is infringing upon the rights of others with
respect to the Intangibles; and the Company has not received any notice that it
has or may have infringed or is infringing upon the asserted rights of others
with respect to the Intangibles which could, singly or in the aggregate,
materially adversely affect its business as presently conducted, financial
condition or results of operations of the Company and the Company knows of no
basis therefor; and, to the best of the Company's knowledge, no others have
infringed upon the Intangibles of the Company.
(s) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and the Company's latest
consolidated financial statements, the Company has not incurred any material
liability or obligation, direct or contingent, or entered into any material
transaction, whether or not in the ordinary course of business, and has not
sustained any material loss or interference with its business from fire, storm,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree; and since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, there have not been, and prior to the Closing Date
referred to below there will not be, any changes in the capital stock or any
material increases in the long-term debt of the Company or any change which has
or could result in a Material Adverse Effect, otherwise than as set forth or
contemplated in the Prospectus.
(t) The Company does not own any real property. The
Company has good title to all personal property (tangible and intangible) owned
by it, free and clear of all security interests, charges, mortgages, liens,
encumbrances and defects, except such as are described in the Registration
Statement and Prospectus or such as do not materially affect the value or
transferability of such property and do not interfere with the use of such
property made, or proposed to be made, by the Company. The leases, licenses or
other contracts or instruments under which the Company leases, holds or is
entitled to use any property, real or personal, are valid, subsisting and
enforceable only with such exceptions as are not material and do not interfere
with the use of such property made, or proposed to be made, by the Company and
all rentals, royalties or other payments accruing thereunder which became due
prior to the date of this Agreement have been duly paid, and neither the Company
nor, to the best of the Company's knowledge, any other party is in default
thereunder and, to the best of the Company's knowledge, no event has occurred
which, with the passage of time or the giving of notice, or both, would
constitute a default thereunder, in each case which would have a Material
Adverse Effect. The Company has not received notice of any violation of any
applicable law, ordinance, regulation, order or requirement relating to its
owned
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or leased properties. The Company has insured its properties against loss or
damage by fire or other casualty and maintains, in amounts which it deems, in
good faith, to be adequate, such other insurance including, but not limited to,
liability insurance as is usually maintained by companies engaged in the same or
similar businesses located in the geographic areas in which the Company's
properties and/or operations are located.
(u) Each contract or other instrument (however
characterized or described) to which the Company is a party or by which its
properties and business is or may be bound or affected and to which reference is
made in the Prospectus, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, and none of such contracts or instruments has been
assigned by the Company, and neither the Company nor, to the best of the
Company's knowledge, any other party, is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder, which,
in each case, would have a Material Adverse Effect.
None of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court having jurisdiction over the
Company or any of their respective assets or businesses.
(v) The employment, consulting agreements between the
Company and its officers and employees, described in the Registration Statement,
are binding and enforceable obligations upon the respective parties thereto in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium or other similar laws
or arrangements affecting creditors' rights generally and subject to principles
of equity.
(w) Except as set forth in the Prospectus, the Company has
no employee benefit plans (including, without limitation, profit sharing and
welfare benefit plans) or deferred compensation arrangements that are subject to
the provisions of the Employee Retirement Income Security Act of 1974.
(x) To the best of the Company's knowledge, no labor
problem exists with any of the Company's employees or is imminent which could
result in a Material Adverse Effect.
(y) The Company has not, directly or indirectly, at any
time (i) made any contributions to any candidate for political office, or failed
to disclose fully any such contribution in violation of law or (ii) made any
payment to any state, federal or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other
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<PAGE>
than payments or contributions required or allowed by applicable law. The
Company's internal accounting controls and procedures are sufficient to cause
the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(z) The Shares, Warrants and Warrant Shares have been
approved for listing on the Nasdaq SmallCap Market ("NASDAQ").
Any certificate signed by an officer of the Company and
delivered to the Underwriter or to Underwriter's Counsel shall be deemed to be a
representation and warranty by the Company to the Underwriter as to the matters
covered thereby.
5. Certain Covenants of the Company. The Company covenants
with the Underwriter as follows:
(a) The Company will not at any time, whether before the
Effective Date or thereafter during such period as the Prospectus is required by
law to be delivered in connection with the sales of the Shares and Warrants by
the Underwriter or a dealer, file or publish any amendment or supplement to the
Registration Statement or Prospectus of which the Underwriter has not been
previously advised and furnished a copy, or to which the Underwriter shall
reasonably object in writing.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective and will advise the Underwriter
immediately, and, if requested by the Underwriter, confirm such advice in
writing, (i) when the Registration Statement, or any post-effective amendment to
the Registration Statement or any supplemented Prospectus is filed with the
Commission; (ii) of the receipt of any comments from the Commission; (iii) of
any request of the Commission for amendment or supplementation of the
Registration Statement or Prospectus or for additional information; and (iv) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use of
any Preliminary Prospectus, or of the suspension of the qualification of the
Shares and/or the Warrants for offering or sale in any jurisdiction, or of the
initiation of any proceedings for any of such purposes. The Company will use its
best efforts to prevent the issuance of any such stop order or of any order
preventing or suspending such use and to obtain as soon as possible the lifting
thereof, if any such order is issued.
(c) The Company will deliver to the Underwriter, without
charge, from time to time until the Effective Date, as many copies of each
Preliminary Prospectus as the Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to the Underwriter, without charge, as soon as the
Regis-
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<PAGE>
tration Statement becomes effective, and thereafter from time to time as
requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as the Underwriter may
reasonably request. The Company has furnished or will furnish to the Underwriter
two signed copies of the Registration Statement as originally filed and of all
amendments thereto, whether filed before or after the Registration Statement
becomes effective, two copies of all exhibits filed therewith and two signed
copies of all consents and certificates of experts.
(d) The Company will comply with the Act, the Regulations,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder so as to permit the continuance of sales of and
dealings in the Offered Shares and Offered Warrants, in any Optional Shares and
Optional Warrants which may be issued and sold, and in the Warrant Shares
underlying such Warrants. If, at any time when a prospectus relating to such
Securities is required to be delivered under the Act, any event occurs as a
result of which the Registration Statement and Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it shall be
necessary to amend or supplement the Registration Statement and Prospectus to
comply with the Act or the regulations thereunder, the Company will promptly
file with the Commission, subject to Section 5(a) hereof, an amendment or
supplement which will correct such statement or omission or which will effect
such compliance.
(e) The Company will furnish such proper information as
may be required and otherwise cooperate in qualifying the Securities for
offering and sale under the securities or Blue Sky laws relating to the offering
or for sale in such jurisdictions as the Underwriter may reasonably designate,
provided that no such qualification will be required in any jurisdiction where,
solely as a result thereof, the Company would be subject to service of general
process or to taxation or qualification as a foreign corporation doing business
in such jurisdiction.
(f) The Company will make generally available to its
security holders, in the manner specified in Rule 158(b) under the Act, and
deliver to the Underwriter and Underwriter's Counsel as soon as practicable and
in any event not later than 45 days after the end of its fiscal quarter in which
the first anniversary date of the effective date of the Registration Statement
occurs, an earning statement meeting the requirements of Rule 158(a) under the
Act covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement.
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<PAGE>
(g) For a period of five years from the Effective Date,
the Company will deliver to the Underwriter and to Underwriter's Counsel on a
timely basis (i) a copy of each report or document, including, without
limitation, reports on Forms 8-K, 10-C, 10-KSB (or 10-K) and 10-QSB (or 10-Q)
and exhibits thereto, filed or furnished to the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. (the "NASD") on
the date each such report or document is so filed or furnished; (ii) as soon as
practicable, copies of any reports or communications (financial or other) of the
Company mailed to its security holders; (iii) as soon as practicable, a copy of
any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company from
time to time; (iv) monthly statements setting forth such information regarding
the Company's results of operations and financial position (including balance
sheet, profit and loss statements and data regarding outstanding purchase
orders) as is regularly prepared by management of the Company; and (v) such
additional information concerning the business and financial condition of the
Company as the Underwriter may from time to time reasonably request and which
can be prepared or obtained by the Company without unreasonable effort or
expense. The Company will furnish to its shareholders annual reports containing
audited financial statements and such other periodic reports as it may determine
to be appropriate or as may be required by law.
(h) Neither the Company nor any person that controls, is
controlled by or is under common control with the Company will take any action
designed to or which might be reasonably expected to cause or result in the
stabilization or manipulation of the price of the Shares or Warrants.
(i) If the transactions contemplated by this Agreement are
consummated, the Underwriter shall retain the Fifty Thousand Dollars ($50,000)
previously paid to it, and the Company will pay or cause to be paid the
following: all costs and expenses incident to the performance of the obligations
of the Company under this Agreement, including, but not limited to, the fees and
expenses of accountants and counsel for the Company; the preparation, printing,
mailing and filing of the Registration Statement (including financial statements
and exhibits), Preliminary Prospectuses and the Prospectus, and any amendments
or supplements thereto; the printing and mailing of the Selected Dealer
Agreement; the issuance and delivery of the Shares and Warrants to the
Underwriter; all taxes, if any, on the issuance of the Shares and Warrants; the
fees, expenses and other costs of qualifying the Shares and Warrants for sale
under the Blue Sky or securities laws of those states in which the Shares and
Warrants are to be offered or sold, the cost of printing and mailing the "Blue
Sky Survey" and fees and disbursements of counsel in connection therewith,
including those of such local counsel as may have been retained for such
purpose; the filing fees incident to securing any required review by the NASD;
the cost of furnishing to the Underwriter copies of the Registration
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<PAGE>
Statement, Preliminary Prospectuses and the Prospectus as herein provided; the
costs, up to $16,000, of placing "tombstone advertisements" in any publications
which may be selected by the Underwriter; and all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section 5(i).
In addition, at the Closing Date or the Option Closing
Date, as the case may be, the Underwriter will deduct from the payment for the
Offered Shares and Offered Warrants or any Optional Shares and/or Optional
Warrants purchased three percent (3%) (less the sum of Fifty Thousand Dollars
($50,000) previously paid to the Underwriter) of the gross proceeds of the
offering, including the over-allotment option, as payment for the Underwriter's
non-accountable expense allowance relating to the transactions contemplated
hereby, which amount will include the fees and expenses of Underwriter's
Counsel.
(j) If the transactions contemplated by this Agreement or
related hereto are not consummated because the Company decides not to proceed
with the offering for any reason, or the Underwriter decides not to proceed with
the offering because of a breach by the Company of any representation, warranty
or covenant contained in this Agreement or as a result of adverse changes in the
affairs of the Company, then the Underwriter may retain only an amount equal to
its accountable out-of-pocket expenses up to the sum of Seventy-Five Thousand
Dollars ($75,000) (including the Fifty Thousand Dollars ($50,000) previously
paid to it); provided, however, that if the Underwriter shall terminate this
Agreement for any other reason, than the Company need only reimburse the
Underwriter for its actual accountable out-of-pocket expenses up to a maximum of
Fifty Thousand Dollars ($50,000), inclusive of the Fifty Thousand Dollars
($50,000) previously paid to it. In no event, however, will the Underwriter, in
the event the offering is terminated, be entitled to retain or receive more than
an amount equal to its actual accountable out-of-pocket expenses.
(k) The Company intends to apply the net proceeds from the
sale of the Shares and Warrants for the purposes set forth in the Prospectus.
Except as described in the Prospectus, the Company will not use any portion of
the proceeds derived from the sale of the Shares and Warrants to repay any
indebtedness, without the prior written consent of the Underwriter. The Company
will file with the Commission all required reports on Form S-R in accordance
with the provisions of Rule 463 promulgated under the Act and will provide a
copy of each such report to the Underwriter and its counsel.
(l) During the eighteen (18) months following the date
hereof, (i) with the exception of the holders of the 240,000 shares of Comon
Stock (the "Bridge Shares") purchased in the Bridge Financing (as defined in the
Prospectus), none of the
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<PAGE>
Company's officers, directors or securityholders will offer for sale or sell or
otherwise dispose of, directly or indirectly, any securities of the Company, in
any manner whatsoever, whether pursuant to Rule 144 of the Regulations or
otherwise, and (ii) no holder of registration rights relating to the securities
of the Company (except for the holders of the Bridge Shares) will exercise any
such registration rights, in either case, without the prior written consent of
the Underwriter. The restrictions provided in (i) of this Section 5(l) shall
apply to the holders of the Bridge Shares for a period of thirteen (13) months
from the date hereof.
(m) The Company will not file any registration statement
relating to the offer or sale of any of the Company's securities, including any
registration statement on Form S-8, during the eighteen (18) months following
the date hereof without the Underwriter's prior written consent, provided, that
the Company may file a registration statement relating to the 240,000 Bridge
Shares nine (9) months after the Effective Date.
(n) The Company maintains and will continue to maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that: (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
in order to permit preparation of financial statements in accordance with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(o) The Company will use its best efforts to maintain the
listing of the Shares and Warrants on NASDAQ for so long as the Shares and
Warrants are qualified for such listing.
(p) The Company will, concurrently with the Effective
Date, register the class of equity securities of which the Shares are a part
under Section 12(g) of the Exchange Act and the Company will maintain the
registration for a minimum of five (5) years after the Effective Date.
(q) Subject to the sale of the Offered Shares and Offered
Warrants, the Underwriter and its successors will have the right to designate a
nominee for election, at its or their option, either as a member of or a
non-voting advisor to the Board of Directors of the Company, and the Company
will use its best efforts to cause such nominee to be elected and continued in
office as a director of the Company or as such advisor until the expiration of
five (5) years following the Effective Date. Each of the Company's current
officers, directors and securityholders agrees to vote all of the Common Shares
owned by such person or
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<PAGE>
entity so as to elect and continue in office such nominee of the Underwriter.
Following the election of such nominee as a director or advisor, such person
shall receive no more or less compensation than is paid to other non-officer
directors of the Company for attendance at meetings of the Board of Directors of
the Company and shall be entitled to receive reimbursement for all reasonable
costs incurred in attending such meetings including, but not limited to, food,
lodging and transportation. The Company agrees to indemnify and hold such
director or advisor harmless, to the maximum extent permitted by law, against
any and all claims, actions, awards and judgments arising out of his service as
a director or advisor and, in the event the Company maintains a liability
insurance policy affording coverage for the acts of its officers and directors,
to include such director or advisor as an insured under such policy. The rights
and benefits of such indemnification and the benefits of such insurance shall,
to the extent possible, extend to the Underwriter insofar as it may be or may be
alleged to be responsible for such director or advisor.
If the Underwriter does not exercise its option to
designate a member of or advisor to the Company's Board of Directors, the
Underwriter shall nonetheless have the right to send a representative (who need
not be the same individual from meeting to meeting) to observe each meeting of
the Board of Directors. The Company agrees to give the Underwriter notice of
each such meeting and to provide the Underwriter with an agenda and minutes of
the meeting no later than it gives such notice and provides such items to the
directors.
(r) The Company agrees to employ the Underwriter or a
designee of the Underwriter as a financial consultant on a non-exclusive basis
for a period of two (2) years from the Closing Date, pursuant to a separate
written Consulting Agreement between the Company and the Underwriter and/or such
designee, at an annual rate of Thirty Thousand Dollars ($30,000) (exclusive of
any accountable out-of-pocket expenses), payable in full, in advance, on the
Closing Date. In addition, the Consulting Agreement shall provide that the
Company will pay the Underwriter a finder's fee in the event that the
Underwriter originates a merger, acquisition, joint venture or other transaction
to which the Company is a party. The Company further agrees to deliver a duly
and validly executed copy of said Consulting Agreement, in form and substance
acceptable to the Underwriter, on the Closing Date.
(s) Subject to the provisions of applicable law, the
Underwriter shall be entitled to receive a warrant solicitation fee of five
percent (5%) of the aggregate exercise price of the Warrants for each Warrant
exercised during the period commencing one year after the Effective Date;
provided, however, that the Underwriter will not be entitled to receive such
compensation in Warrant exercise transactions in which (i) the market price of
the Common Shares at the time of exercise is
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<PAGE>
lower than the exercise price of the Warrants; (ii) the Warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not made
in the Registration Statement and in documents provided to holders of Warrants
at the time of exercise; (iv) the holder thereof has not confirmed in writing
that the Underwriter solicited the exercise of the Warrants; or (v) the
solicitation or exercise of the Warrants was in violation of Rule 10b-6
promulgated under the Exchange Act.
(t) The Company shall retain a transfer agent for the
Common Shares and Warrants, reasonably acceptable to the Underwriter, for a
period of five (5) years from the Effective Date. In addition, for a period of
five (5) years from the Effective Date, the Company, at its own expense, shall
cause such transfer agent to provide the Underwriter, if so requested in
writing, with copies of the Company's daily transfer sheets, and, when requested
by the Underwriter, a current list of the Company's securityholders, including a
list of the beneficial owners of securities held by a depository trust company
and other nominees.
(u) The Company hereby agrees, at its sole cost and
expense, to supply and deliver to the Underwriter and the Underwriter's Counsel,
within a reasonable period from the date hereof, two bound volumes, including
the Registration Statement, as amended or supplemented, all exhibits to the
Registration Statement, the Prospectus and all other underwriting documents.
(v) The Company shall, as of the date hereof, have applied
for listing in Standard & Poor's Corporation Records Service (including annual
report information) or Moody's Industrial Manual (Moody's OTC Industrial Manual
not being sufficient for these purposes) and shall use its best efforts to have
the Company listed in such manual and shall maintain such listing for a period
of five (5) years from the Effective Date.
(w) For a period of five (5) years following the Effective
Date, the Company shall provide the Underwriter, on a not less than annual
basis, with internal forecasts setting forth projected results of operations for
each quarterly and annual period in the two (2) fiscal years following the
respective dates of such forecasts. Such forecasts shall be provided to the
Underwriter more frequently than annually if prepared more frequently by
management, and revised forecasts shall be prepared and provided to the
Underwriter when required to reflect more current information, revised
assumptions or actual results that differ materially from those set forth in the
forecasts.
(x) For a period of five (5) years following the Effective
Date, or until such earlier time as the Common Shares and Warrants are listed on
the New York Stock Exchange or the American Stock Exchange, the Company shall
cause its legal counsel to provide the Underwriter with a list, to be updated at
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least annually, of those states in which the Common Shares and Warrants may be
traded in non-issuer transactions under the Blue Sky laws of the 50 states.
(y) For a period of five (5) years from the Effective
Date, the Company shall continue to retain Deloitte & Touche LLP (or another
nationally recognized accounting firm acceptable to the Underwriter) as the
Company's independent public accountants and shall promptly, upon the Company's
receipt thereof, submit to the Underwriter copies of such accountants'
management reports and similar correspondence between such accountants and the
Company.
(z) For a period of five (5) years from the Effective
Date, the Company, at its expense, shall cause its then independent certified
public accountants, as described in Section 5(aa) above, to review (but not
audit) the Company's financial statements for each of the first three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-QSB (or 10-Q) quarterly report and the mailing of
quarterly financial information to shareholders.
(aa) So long as any Warrants are outstanding, the Company
shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act as shall
be necessary to enable the sale of the Common Shares underlying the Warrants and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant as they request and as otherwise required by law and, to
furnish to the Underwriter and dealers as many copies of each such Prospectus as
the Underwriter or dealer may reasonably request. In addition, for so long as
any Warrant is outstanding, the Company will promptly notify the Underwriter of
any material change in the financial condition, business, results of operations
or properties of the Company.
(ab) For a period of twenty-five (25) days from the
Effective Date, the Company will not issue press releases or engage in any other
publicity without the Underwriter's prior written consent, other than normal and
customary releases issued in the ordinary course of the Company's business or
those releases required by law.
(ac) For a period of three (3) years from the Effective
Date, the Company will not offer or sell any of its securities pursuant to
Regulation S promulgated under the Act without the prior written consent of the
Underwriter.
(ad) For a period of five (5) years from the Effective
Date, the Company will provide to the Underwriter ten day's written notice
prior to any issuance by the Company or its subsidiaries of any equity
securities or securities exchangeable for or convertible into equity securities
of the Company, except for (i) shares of Common Stock issuable upon exercise of
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currently outstanding options and warrants or conversion of currently
outstanding convertible securities and (ii) options (and shares issuable upon
exercise of such options) available for future grant pursuant to any stock
option plan in effect on the Effective Date.
(ae) The Company will not increase or authorize an
increase in the compensation of its five (5) most highly paid employees greater
than those increases provided for in their employment agreements with the
Company in effect as of the Effective Date and disclosed in the Registration
Statement, without the Underwriter's prior written consent, for a period of
three (3) years from the Effective Date.
(af) The Company will not increase or authorize an
increase in the compensation of its five (5) most highly paid employees greater
than those increases provided for in their employment agreements with the
Company in effect as of the Effective Date and disclosed in the Registration
Statement, without the Underwriter's prior written consent, for a period of
three (3) years from the Effective Date.
(ag) For a period of three (3) years from the Effective
Date, the Company will retain a financial public relations firm reasonably
acceptable to the Underwriter.
(ah) For a period of five (5) years from the Effective
Date, the Company will promptly submit to the Underwriter copies of accountants'
management reports and similar correspondence between the Company's accountants
and the Company.
6. Conditions of the Underwriter's Obligation to Purchase the
Offered Shares and Offered Warrants from the Company. The obligation of the
Underwriter to purchase and pay for the Offered Shares and Offered Warrants
which it has agreed to purchase from the Company is subject (as of the date
hereof and the Closing Date) to the accuracy of and compliance in all material
respects with the representations and warranties of the Company herein, to the
accuracy of the statements of the Company or its officers made pursuant hereto,
to the performance in all material respects by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement will have become effective
not later than 10:00 A.M., New York City time, on the day following the date of
this Agreement, or at such later time or on such later date as the Underwriter
may agree to in writing; prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement will have been issued and no
proceedings for that purpose will have been initiated or will be pending or, to
the best of the Underwriter's or the Company's knowledge, will be contemplated
by the Commission; and any request on the part of the Commission for additional
information
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<PAGE>
will have been complied with to the satisfaction of Underwriter's Counsel.
(b) At the time that this Agreement is executed and at the
Closing Date, there will have been delivered to the Underwriter signed opinions
of Tenzer Greenblatt LLP and Cairncross & Hemplemann, P.S., counsel for the
Company (collectively, "Company Counsel"), dated as of the date hereof or the
Closing Date, as the case may be (and any other opinions of counsel referred to
in such opinion of Company Counsel or relied upon by Company Counsel in
rendering their opinion), reasonably satisfactory to Underwriter's Counsel.
(c) At the Closing Date, there will have been delivered to
the Underwriter a signed opinion of Underwriter's Counsel, dated as of the
Closing Date, to the effect that the opinions delivered pursuant to Section 6(b)
hereof appear on their face to be appropriately responsive to the requirements
of this Agreement, except to the extent waived by the Underwriter, specifying
the same, and with respect to such related matters as the Underwriter may
require.
(d) At the Closing Date (i) the Registration Statement and
the Prospectus and any amendments or supplements thereto will contain all
material statements which are required to be stated therein in accordance with
the Act and the Regulations and will conform in all material respects to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; (ii)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there will not have been any material adverse
change in the financial condition, results of operations or general affairs of
the Company from that set forth or contemplated in the Registration Statement
and the Prospectus, except changes which the Registration Statement and the
Prospectus indicates might occur after the Effective Date; (iii) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall have been no material transaction, contract or
agreement entered into by the Company, other than in the ordinary course of
business, which would be required to be set forth in the Registration Statement
and the Prospectus, other than as set forth therein; and (iv) no action, suit or
proceeding at law or in equity will be pending or, to the best of the Company's
knowledge, threatened against the Company which is required to be set forth in
the Registration Statement and the Prospectus, other than as set forth therein,
and no proceedings will be pending or, to the best of the Company's knowledge,
threatened against the Company before or by any federal, state or other
commission, board or adminis-
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<PAGE>
trative agency wherein an unfavorable decision, ruling or finding would
materially adversely affect the business, property, financial condition or
results of operations of the Company, other than as set forth in the
Registration Statement and the Prospectus. At the Closing Date, there will be
delivered to the Underwriter a certificate signed by the Chairman of the Board
or the President or a Vice President of the Company, dated the Closing Date,
evidencing compliance with the provisions of this Section 6(d) and stating that
the representations and warranties of the Company set forth in Section 4 hereof
were accurate and complete in all material respects when made on the date hereof
and are accurate and complete in all material respects on the Closing Date as if
then made; that the Company has performed all covenants and complied with all
conditions required by this Agreement to be performed or complied with by the
Company prior to or as of the Closing Date; and that, as of the Closing Date, no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or, to the best
of his knowledge, are contemplated or threatened. In addition, the Underwriter
will have received such other and further certificates of officers of the
Company as the Underwriter or Underwriter's Counsel may reasonably request.
(e) At the time that this Agreement is executed and at the
Closing Date, the Underwriter will have received a signed letter from Deloitte &
Touche LLP dated the date such letter is to be received by the Underwriter and
addressed to it, confirming that it is a firm of independent public accountants
within the meaning of the Act and Regulations and stating that: (i) insofar as
reported on by them, in their opinion, the financial statements of the Company
included in the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable Regulations;
(ii) on the basis of procedures and inquiries (not constituting an examination
in accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim financial statements of the Company, if any,
appearing in the Registration Statement and the Prospectus and the latest
available unaudited interim financial statements of the Company, if more recent
than that appearing in the Registration Statement and Prospectus, inquiries of
officers of the Company responsible for financial and accounting matters as to
the transactions and events subsequent to the date of the latest audited
financial statements of the Company, and a reading of the minutes of meetings of
the shareholders, the Board of Directors of the Company and any committees of
the Board of Directors, as set forth in the minute books of the Company, nothing
has come to their attention which, in their judgment, would indicate that (A)
during the period from the date of the latest financial statements of the
Company appearing in the Registration Statement and Prospectus to a specified
date not more than three business days prior to the date of such letter, there
have been any decreases in net current
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assets or net assets as compared with amounts shown in such financial statements
or decreases in net sales or increases in total or per share net loss compared
with the corresponding period in the preceding year or any change in the
capitalization or long-term debt of the Company, except in all cases as set
forth in or contemplated by the Registration Statement and the Prospectus, and
(B) the unaudited interim financial statements of the Company, if any, appearing
in the Registration Statement and the Prospectus, do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations or are not fairly presented in conformity with generally
accepted accounting principles and practices on a basis substantially consistent
with the audited financial statements included in the Registration Statement or
the Prospectus; and (iii) they have compared specific dollar amounts, numbers of
shares, numerical data, percentages of revenues and earnings, and other
financial information pertaining to the Company set forth in the Prospectus
(with respect to all dollar amounts, numbers of shares, percentages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(f) There shall have been duly tendered to the Underwriter
certificates representing the Offered Shares and the Offered Warrants to be sold
on the Closing Date.
(g) The NASD shall have indicated that it has no objection
to the underwriting arrangements pertaining to the sale of the Shares and
Warrants by the Underwriter.
(h) No action shall have been taken by the Commission or
the NASD the effect of which would make it improper, at any time prior to the
Closing Date or the Option Closing Date, as the case may be, for any member firm
of the NASD to execute transactions (as principal or as agent) in the Shares or
Warrants, and no proceedings for the purpose of taking such action shall have
been instituted or shall be pending, or, to the best of the Underwriter's or the
Company's knowledge, shall be contemplated by the Commission or the NASD. The
Company represents at the date hereof, and shall represent as of the Closing
Date or Option Closing Date, as the case may be, that it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD.
(i) All proceedings taken at or prior to the Closing Date
or the Option Closing Date, as the case may be, in connection with the
authorization, issuance and sale of the
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Shares or Warrants shall be reasonably satisfactory in form and substance to the
Underwriter and to Underwriter's Counsel.
(j) On or prior to the Closing Date, the Company will have
delivered to the Underwriter the undertakings of its officers, directors and
securityholders, as the case may be, to the effect of the matters set forth in
Sections 5(l) and (q) hereof.
If any of the conditions specified in this Section 6 have
not been fulfilled, this Agreement may be terminated by the Underwriter on
notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter, each officer, director, partner, employee and agent of the
Underwriter, and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and
against any and all losses, claims, damages, expenses or liabilities, joint or
several (and actions in respect thereof), to which they or any of them may
become subject under the Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Underwriter
and each such person, if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions, whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in the Registration Statement, in any Preliminary Prospectus or in the
Prospectus (or the Registration Statement or Prospectus as from time to time
amended or supplemented) or (ii) in any application or other document executed
by the Company, or based upon written information furnished by or on behalf of
the Company, filed in any jurisdiction in order to qualify the Shares and
Warrants under the securities laws thereof (hereinafter "application"), or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances under which
they were made, unless such untrue statement or omission was made in such
Registration Statement, Preliminary Prospectus, Prospectus or application in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by the Underwriter or any such person through
the Underwriter expressly for use therein; provided, however, that the indemnity
agreement contained in this Section 7(a) with respect to any Preliminary
Prospectus will not inure to the benefit of the Underwriter (or to the benefit
of any other person that may be indemnified pursuant to this Section 7(a)) if
(A) the person asserting any such losses, claims, damages, expenses or
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liabilities purchased the Shares and/or Warrants which are the subject thereof
from the Underwriter or other indemnified person; (B) the Underwriter or other
indemnified person failed to send or give a copy of the Prospectus to such
person at or prior to the written confirmation of the sale of such Shares and/or
Warrants to such person; and (C) the Prospectus did not contain any untrue
statement or alleged untrue statement or omission or alleged omission giving
rise to such cause, claim, damage, expense or liability.
(b) The Underwriter agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions in respect thereof), to which they or any of them may
become subject under the Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Company and
each such director, officer or controlling person for any legal or other
expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application (including any application for registration of the Shares and
Warrants under state securities or Blue Sky laws), or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, in light of the circumstances under which they were made, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by the Underwriter expressly for use therein.
(c) Promptly after receipt of notice of the commencement
of any action in respect of which indemnity may be sought against any
indemnifying party under this Section 7, the indemnified party will notify the
indemnifying party in writing of the commencement thereof, and the indemnifying
party will, subject to the provisions hereinafter stated, assume the defense of
such action (including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of expenses) insofar as such action relates to
an alleged liability in respect of which indemnity may be sought against the
indemnifying party. After notice from the indemnifying party of its election to
assume the defense of such claim or action, the indemnifying party shall no
longer be liable to the indemnified
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party under this Section 7 for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that if, in the reasonable
judgment of the indemnified party or parties, it is advisable for the
indemnified party or parties to be represented by separate counsel, the
indemnified party or parties shall have the right to employ a single counsel to
represent the indemnified parties who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the indemnified parties
thereof against the indemnifying party, in which event the fees and expenses of
such separate counsel shall be borne by the indemnifying party. Any party
against whom indemnification may be sought under this Section 7 shall not be
liable to indemnify any person that might otherwise be indemnified pursuant
hereto for any settlement of any action effected without such indemnifying
party's consent, which consent shall not be unreasonably withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including, for this purpose, any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed the Registration Statement and any controlling person of
the Company) as one entity and the Underwriter (including, for this purpose, any
contribution by or on behalf of each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and each officer, director, partner, employee and agent of the
Underwriter) as a second entity, shall contribute to the losses, liabilities,
claims, damages and expenses whatsoever to which any of them may be subject, so
that the Underwriter is responsible for the proportion thereof equal to the
percentage which the underwriting discount per Share and per Warrant set forth
on the cover page of the Prospectus represents of the initial public offering
price per Share and per Warrant set forth on the cover page of the Prospectus
and the Company is responsible for the remaining portion; provided, however,
that if applicable law does not permit such allocation, then, if applicable law
permits, other relevant equitable considerations such as the relative fault of
the Company and the Underwriter in connection with the facts which resulted in
such losses, liabilities, claims, damages and expenses shall also be considered.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission or
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alleged omission relates to information supplied by the Company or by the
Underwriter, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement, alleged statement,
omission or alleged omission. The Company and the Underwriter agree that it
would be unjust and inequitable if the respective obligations of the Company and
the Underwriter for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages and expenses or
by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 8. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and each officer, director, partner, employee and
agent of the Underwriter will have the same rights to contribution as the
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8. Anything in
this Section 8 to the contrary notwithstanding, no party will be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 8 is intended to supersede, to the
extent permitted by law, any right to contribution under the Act or the Exchange
Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Underwriter, the Company or any of its directors and officers, or any
controlling person referred to in said Sections, and shall survive the delivery
of, and payment for, the Shares and the Warrants.
10. Termination of Agreement.
(a) The Company, by written or telegraphic notice to the
Underwriter, or the Underwriter, by written or telegraphic notice to the
Company, may terminate this Agreement prior to the earlier of (i) 10:00 A.M.,
New York City time, on the first full business day after the Effective Date; or
(ii) the time when the Underwriter, after the Registration Statement becomes
effective, releases the Offered Shares and Offered Warrants for public offering.
The time when the Underwriter "releases the Offered
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Shares and Offered Warrants for public offering" for the purposes of this
Section 10 means the time when the Underwriter releases for publication the
first newspaper advertisement, which is subsequently published, relating to the
Offered Shares and Offered Warrants, or the time when the Underwriter releases
for delivery to members of a selling group copies of the Prospectus and an
offering letter or an offering telegram relating to the Offered Shares and
Offered Warrants, whichever will first occur.
(b) This Agreement, including without limitation, the
obligation to purchase the Offered Shares and the Offered Warrants and the
obligation to purchase the Optional Shares and/or Optional Warrants after
exercise of the option referred to in Section 3 hereof, are subject to
termination in the absolute discretion of the Underwriter, by notice given to
the Company prior to delivery of and payment for all the Offered Shares and
Offered Warrants or such Optional Shares and Optional Warrants, as the case may
be, if, prior to such time, any of the following shall have occurred: (i) the
Company withdraws the Registration Statement from the Commission or the Company
does not or cannot expeditiously proceed with the public offering; (ii) the
representations and warranties in Section 4 hereof are not materially correct or
cannot be complied with; (iii) trading in securities generally on the New York
Stock Exchange or the American Stock Exchange will have been suspended; (iv)
limited or minimum prices will have been established on either such Exchange;
(v) a banking moratorium will have been declared either by federal or New York
State authorities; (vi) any other restrictions on transactions in securities
materially affecting the free market for securities or the payment for such
securities, including the Offered Shares and Offered Warrants or the Optional
Shares and Optional Warrants, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment of the Underwriter, has had a material adverse effect
upon the market or potential market for securities in general; or (xi) the
market for securities in general or political, financial or economic conditions
will have so materially adversely changed that, in the judgment of the
Underwriter, it will be impracticable to offer for sale, or to enforce contracts
made by the Underwriter for the resale of, the Offered Shares and Offered
Warrants or the Optional Shares and Offered Warrants, as the case may be.
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(c) If this Agreement is terminated pursuant to Section 6
hereof or this Section 10 or if the purchases provided for herein are not
consummated because any condition of the Underwriter's obligations hereunder is
not satisfied or because of any refusal, inability or failure on the part of the
Company to comply with any of the terms or to fulfill any of the conditions of
this Agreement, or if for any reason the Company shall be unable to or does not
perform all of its obligations under this Agreement, the Company will not be
liable to the Underwriter for damages on account of loss of anticipated profits
arising out of the transactions covered by this Agreement, but the Company will
remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this
Agreement.
11. Information Furnished by the Underwriter to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(g), 7(a), 7(b) and
8 hereof, the only information given by the Underwriter to the Company for use
in the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, the statement appearing in the last paragraph on
the inside front cover with respect to stabilizing the market price of Shares
and Warrants, the information in the second paragraph of the "Underwriting"
section with respect to concessions and reallowances, and the information in the
penultimate paragraph of the "Underwriting" section with respect to the
determination of the public offering price, as such information appears in any
Preliminary Prospectus and in the Prospectus.
12. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Underwriter, to Paragon Capital Corporation, 7
Hanover Square, New York, New York 10004, Attention: Mr. George B. Levine,
Chairman, with a copy to Akerman, Senterfitt & Eidson, P.A., One Southeast 3rd
Avenue, Miami, Florida 33131-1704, Attention: Alan H. Aronson, Esq.; if to the
Company, addressed to it at Tuscany, Inc., Two Union Square, 601 Union Street,
Suite 4620, Seattle, Washington 98101, Attention: Mr. Chris Mueller, with a copy
to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405 Lexington
Avenue, New York, New York 10174.
This Agreement shall be deemed to have been made and
delivered in New York City and shall be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of New York. The Company (1) agrees that any legal suit, action or proceeding
arising out of or relating to this Agreement shall be instituted exclusively in
New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (2) waives any objection
which the Company may have
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<PAGE>
now or hereafter to the venue of any such suit, action or proceeding, and (3)
irrevocably consents to the jurisdiction of the New York State Supreme Court,
County of New York, and the United States District Court for the Southern
District of New York in any such suit, action or proceeding. The Company further
agrees to accept and acknowledge service of any and all process which may be
served in any such suit, action or proceeding in the New York State Supreme
Court, County of New York, or in the United States District Court for the
Southern District of New York and agrees that service of process upon the
Company mailed by certified mail to the Company's address shall be deemed in
every respect effective service of process upon the Company, in any such suit,
action or proceeding.
13. Parties in Interest. This Agreement is made solely for the
benefit of the Underwriter, the Company and, to the extent expressed, any person
controlling the Company or the Underwriter, each officer, director, partner,
employee and agent of the Underwriter, the directors of the Company, its
officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares or
Warrants from the Underwriter, as such purchaser.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
TUSCANY, INC.
By:_________________________________
Name:
Title:
Confirmed and accepted in
New York, N.Y., as of the
date first above written:
PARAGON CAPITAL CORPORATION
By: ________________________
Name:
Title:
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<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
TUSCANY, INC.
ARTICLE 1
Name
The name of the corporation (the "Corporation") is TUSCANY, INC.
ARTICLE 2
Shares
2.1 Authorized Capital. The aggregate number of shares which
the Corporation shall have authority to issue is 30,000,000 shares of Common
Stock, which shall have a par value of $0.01 per share, and 20,000,000 shares of
Preferred Stock, which shall have a par value of $0.01 per share, of which
2,766,000 shares have been designated as Series A Preferred Stock and 1,750,000
have been designated as Series B Preferred Stock, in accordance with Section 2.2
of these Articles.
2.2 Issuance of Preferred Stock in Series. Authority is hereby
vested in the Board of Directors of the Corporation to divide and issue the
Preferred Stock in series and, within the limitations set forth in the
Washington Business Corporation Act and in this Article, to fix and determine or
to amend the relative rights and preferences of the shares of any series of
Preferred Stock that is wholly unissued or to be established. In order for the
Board of Directors to establish or amend a series of Preferred Stock, the Board
of Directors shall adopt a resolution setting forth the designation or amendment
of the series and fixing and determining or amending the relative rights and
preferences thereof. Within the limits stated in the resolution of the Board of
Directors establishing the series of Preferred Stock, the Board of Directors
may, after the issuance of shares of a series whose number it is authorized to
designate, amend the resolution establishing the series to decrease (but not
below the number of shares of such series then outstanding) the number of
authorized shares of that series, and the number of shares constituting the
decrease shall thereafter be deemed to constitute authorized and unissued shares
of undesignated Preferred Stock. The holder of any such series shall have such
voting rights, if any, as may be provided in the resolution or resolutions of
the Board of Directors establishing or amending the series of Preferred Stock.
2.3 Consideration for Stock. Common Stock and Preferred Stock
may be issued by the Corporation from time to time for such consideration,
including without limitation cash, promissory notes, services performed,
contracts for services to be performed or any other tangible or intangible
property, as may be authorized by the Board of Directors establishing a price
(in money or other consideration) or a minimum price or formula or method by
which the price will be determined, except in transactions that do not require
consideration under the Washington Business Corporation Act.
<PAGE>
2.4 Preferences, Limitations and Relative Rights of Preferred
Stock. Except as otherwise specifically provided in this Article 2 or in the
resolution of the Board of Directors establishing a series, all Preferred Stock
shall have the following preferences, limitations and relative rights:
2.4.1 Dividends. The holders of record of shares of
Preferred Stock shall be entitled to receive the same cash dividends, if any,
declared on shares of Common Stock, when and as declared by the Board of
Directors, out of funds legally available therefor on such dates as may from
time to time be determined by the Board of Directors, as if the holders of
Preferred Stock had exercised their privilege in accordance with Section 2.6 to
convert all of their shares of Preferred Stock into shares of Common Stock.
2.4.2 Liquidation. In the event of a liquidation,
dissolution or winding up of the Corporation, out of the assets of the
Corporation, the holders of shares of Series A Preferred Stock shall be entitled
to receive an amount equal to $1.25 per share, the holders of shares of Series B
Preferred Stock shall be entitled to receive an amount equal to $2.00 per share,
and the holders of shares of other series of Preferred Stock shall be entitled
to receive the amount paid for such shares or such other amount as determined in
the resolution of the Board of Directors establishing the series, which shall be
in preference to and in priority over any distribution upon the Common Stock of
the Corporation. If the assets of the Corporation are not sufficient to pay such
amounts in full to the holders of all series of Preferred Stock of the
Corporation, then such assets shall be distributed ratably to the holders of all
series of Preferred Stock together, based upon the respective aggregate dollar
amounts of their investments.
2.4.3 Redemption.
(a) Shares of Preferred Stock of all series
may be redeemed, in whole or in part, at the option of the Corporation
by resolution of its Board of Directors, at a redemption price per
share, which shall be based on the fair market value of the shares
being redeemed, which shall be determined by the Board of Directors and
shall be based upon the recommendation of an independent appraiser, who
shall be chosen by the Board and shall have no family or other material
relationship with any Shareholder that, in the sole opinion of the
Board, could prejudice the judgment of such appraiser.
(b) In the event that less than the entire
number of the shares of a series is at any one time redeemed by the
Corporation, the shares to be redeemed shall be selected in a manner
determined by the Board of Directors.
(c) Not less than thirty nor more than
ninety days prior to the date fixed for any redemption of any Preferred
Stock, a notice specifying the time and place of such redemption shall
be given by first-class mail, postage prepaid, to the holders of record
of the shares selected for redemption at their respective addresses as
the same shall appear on the books of the Corporation, but no failure
to mail such notice or any defect therein or in the mailing thereof
shall affect the validity of the proceedings for redemption. Any notice
which was mailed in the manner herein provided shall be conclusively
presumed to have been duly given whether or not the holder receives the
notice.
<PAGE>
(d) After the giving of any notice of
voluntary redemption and prior to the close of business on the date
fixed for such redemption, the holders of the shares called for
redemption may convert such stock into Common Stock of the Corporation
in accordance with the conversion privileges set forth in Section 2.6.
After the date fixed for such redemption, the holders of shares
selected for redemption shall cease to be shareholders with respect to
such shares and shall have no interest in or claims against the
Corporation by virtue thereof and shall have no voting or other rights
with respect to such shares, except the right to receive the monies
payable upon such redemption from the Corporation, without interest
thereon, upon surrender of their certificates, and the shares
represented thereby shall no longer be deemed to be outstanding. The
Corporation may, at its option, at any time after a notice of
redemption has been given, deposit the redemption price for all shares
designated for redemption and not yet redeemed with the transfer agent
or agents, as a trust fund for the benefit of the holders of the shares
designated for redemption.
2.4.4 Voting Rights. Each holder of Preferred Stock:
(a) shall be entitled to one vote for each
of the largest whole number of shares of Common Stock into which the
shares of Preferred Stock could then be converted;
(b) shall have full voting rights and powers
equal to the voting rights and powers of the holders of Common Stock;
(c) shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Corporation;
and
(d) shall be entitled to vote, together with
the holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Except as provided in
Section 2.5 or unless otherwise inconsistent with the provisions of the
Washington Business Corporation Act, the holders of shares of Preferred
Stock shall not be entitled to vote as a class on any matter.
2.5 Changes in Preferred Stock Terms. The preferences, rights
or powers of any series of Preferred Stock may, from time to time, be altered or
changed, by resolution of its Board of Directors or as otherwise permitted by
law; provided that no such alteration or change shall be made which adversely
affects the preferences, rights or powers of the shares of one or more series of
outstanding Preferred Stock of the Corporation, after the issuance of shares of
such series, without the unanimous written consent or the affirmative vote of
the holders of at least two-thirds of the outstanding shares of all series so
affected by such alteration or change, voting as a single class. The holders of
shares of any such series shall not be entitled to participate in any such class
vote, if at or prior to the time when any such alteration or change is to take
effect, provision is made pursuant to Subsection 2.4.3 for the redemption of all
shares of the series at the time outstanding. Nothing in this Subsection shall
require a class vote or consent in connection with the authorization,
designation, increase or issuance of any shares of any class or series of stock
which ranks junior to existing series of Preferred Stock as to dividends and
liquidation rights, or in connection with the authorization, designation,
increase or issuance of any bonds, mortgages, debentures or other obligations of
the Corporation, or because of any adjustment in the provisions of a series made
pursuant to Subsection 2.6.6.
<PAGE>
2.6 Conversion. Preferred Stock shall be convertible into
shares of Common Stock of the Corporation at a ratio of one nonassessable share
of Common Stock for each share of Preferred Stock being converted ("Conversion
Ratio"), as follows:
2.6.1 Shareholder Conversion. The holders of shares
of Preferred Stock shall have the right, at their option, at any time after the
date of issuance of such shares, to convert their shares of Preferred Stock into
shares of Common Stock of the Corporation ("Shareholder Conversion"). In case
shares of Preferred Stock are called for redemption by the Corporation pursuant
to Subsection 2.4.3, the right to convert such shares shall cease and terminate
at the close of business on the date fixed for redemption by the Corporation.
2.6.2 Corporation Conversion. The Corporation may
convert shares of Preferred Stock into shares of Common Stock of the Corporation
at any time after the first to occur of the following events:
(a) Fifty-one percent (51 %) or more of a
series of Preferred Stock has been converted into Common Stock; or
(b) The holders of fifty-one percent (51 %)
or more of a series of Preferred Stock then outstanding vote to convert
such shares into shares of Common Stock; or
(c) Any of the Common Stock or Preferred
Stock of the Corporation has been registered for a public offering
pursuant to federal or state law regulating the sale of securities and
are transferable without the necessity of complying with a private
placement or isolated transaction exemption.
2.6.3 Conversion Procedure.
(a) In order to convert shares of Preferred
Stock into Common Stock, the holder shall surrender at the office of any
transfer agent designated for that purpose by the Board of Directors, or at any
such other office as may be designated by the Board of Directors, the
certificate or certificates therefor, duly endorsed or assigned to the
Corporation or in blank, and, in the case of a Shareholder Conversion, shall
give written notice to the Corporation at said office of the election to convert
such shares. Shares of Preferred Stock surrendered for conversion during the
period from the close of business on any record date for the payment of a
dividend on the shares to be converted to the opening of business on the date of
payment of such dividend shall (except in the case of shares which have been
called for redemption by the Corporation pursuant to Subsection 2.4.3 on a date
within such period) be accompanied by payment to the Corporation of an amount
equal to the dividend payable on such dividend payment date on the shares being
surrendered for conversion. Except as provided in the preceding sentence, no
payment or adjustment shall be made upon any conversion on account of any
dividends accrued on the shares surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion.
<PAGE>
(b) Shares being surrendered for conversion
shall be deemed to have been converted immediately prior to the close of
business on the day of the surrender of such shares for conversion in accordance
with the foregoing provisions and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the recorded holder or holders of such Common Stock at such time. As promptly as
practicable after receipt by the Corporation or the designated transfer agent of
the certificate or certificates for the converted shares, the Corporation shall
issue and shall deliver a certificate or certificates for the number of full
shares of Common Stock issuable upon such conversion, together with a payment in
lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same.
2.6.4 No Fractional Shares. No fractional shares of
Common Stock shall be issued upon conversion, but, instead of any fraction of a
share which would otherwise be issuable, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the market price per share of Common Stock at the close of business on the
day of conversion.
2.6.5 Reservation of Shares Issuable Upon Conversion.
The Corporation shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of shares of Preferred Stock, the full
number of shares of Common Stock then deliverable upon the conversion of all
shares of Preferred Stock then outstanding.
2.6.6 Adjustment of Conversion. Rights to convert
shall be subject to adjustment from time to time as follows:
(a) Adjustment for Stock Splits and
Combination. If the Corporation shall at any time or from time to time after the
date of issuance of a series of Preferred Stock ("Issue Date"), effect a
subdivision or split of the outstanding Common Stock, the Conversion Ratio then
in effect for such series of Preferred Stock immediately before that subdivision
shall be proportionately decreased. Conversely, if the Corporation shall at any
time or from time to time after an Issue Date combine the outstanding shares of
Common Stock, the Conversion Ratio then in effect for such series of Preferred
Stock immediately before the combination shall be proportionately increased. Any
such adjustment shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(b) Adjustments for Certain Dividends and
Distributions. In the event the Corporation at any time or from time to time
after an Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation other than shares of
Common Stock, then and in each such event provision shall be made so that the
holders of Preferred Stock shall receive upon conversion thereof in addition to
the number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation which they would have received had their Preferred
Stock been converted into Common Stock on the date of such event.
<PAGE>
(c) Adjustment for Reclassification,
Exchange and Substitution. If the Common Stock issuable upon the conversion of
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend provided for above), or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Subsection 2.6.6,
then and in each such event the holder of each share of Preferred Stock shall
have the right thereafter to convert such share into the kind and amount of
shares of stock and other securities and property receivable upon such
reorganization, reclassification or other change, by holders of the number of
shares of Common Stock into which such shares of Preferred Stock might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided herein.
(d) Mergers and Certain Other
Reclassifications of Common Stock. In case of the consolidation or merger of the
Corporation with and into another corporation or the conveyance of all or
substantially all of the assets of the Corporation to another corporation, each
holder of Preferred Stock shall thereafter be entitled to convert such shares
into that number of shares of stock or other securities or property which would
have been deliverable to such holder upon such consolidation, merger or
conveyance if such holder had converted the shares of Preferred Stock into
Common Stock immediately prior to such consolidation, merger or conveyance. In
any such case, the Board of Directors shall by resolution make any appropriate
adjustment in the provisions of the Preferred Stock to the end that such
provisions shall thereafter be applicable, as nearly as reasonably possible, in
relation to any shares of stock or other securities or property deliverable
after such consolidation, merger or conveyance upon the conversion of shares of
Preferred Stock.
ARTICLE 3
Directors
The number of directors of the Corporation and the manner in
which such directors are to be elected shall be as set forth in the Bylaws of
the Corporation.
ARTICLE 4
Shareholders' Rights
4.1 Shareholders of the Corporation have no preemptive rights
to acquire additional shares issued by the Corporation.
4.2 Upon dissolution of the Corporation, any assets of the
Corporation remaining after distributions to the holders of Preferred Stock, as
provided in Section 2.4, shall be distributed ratably among all stockholders
(including holders of both Common and Preferred Stock) based on the number of
shares held on an as-converted basis.
<PAGE>
ARTICLE 5
Voting Rights
5.1 Except as otherwise provided in these Articles or the
Washington Business CorporatIon Act, holders of Common and Preferred Stock shall
at all times vote as one class. Holders of Common Stock shall have unlimited
voting rights and shall have the voting rights set forth in Subsection 2.4.4,
except as otherwise provided in the resolution of the Board of Directors
establishing a series of Preferred Stock.
5.2 At each election of directors, every shareholder entitled
to vote at such election has the right to vote the number of shares of stock
held by such shareholder for each of the directors to be elected. No cumulative
voting for directors shall be permitted.
ARTICLE 6
Contracts in which Directors, Officers
and Shareholders Have an Interest
This Corporation may enter into contracts and otherwise
transact business as vendor purchaser, or otherwise, with its directors,
officers, and shareholders and with corporations associations, firms, and
entities in which they are or may become interested as directors offIcers,
shareholders, members, or otherwise, as freely as though such interest did not
exist. In the absence of fraud, the fact that any director, officer,
shareholder, or any Corporation assocIatIon, firm or other entity of which any
director, officer, or shareholder is in any way interested in any transaction or
contract shall not make the transaction or contract void or voidable, or require
the director, officer, or shareholder to account to this Corporation for any
profits therefrom if the transaction or contract is or shall be authorized
ratified, or approved by (i) the vote of a majority of a quorum of the Board
excluding any interested director or directors, (ii) the written consent of the
holders of a majority of the shares entitled to vote, or (iii) a general
resolution approving the acts of the directors and officers adopted at a
shareholders meeting by vote of the holders of the majority of the shares
entitled to vote. Nothing herein contained shall create any liability in the
events described or prevent the authorization, ratification or approval of such
transactions or contracts in any other manner.
ARTICLE 7
Limitation on Liability of Directors
A director shall have no liability to the Corporation or its
shareholders for monetary damages for conduct as a director, except for acts or
omissions that involve intentional misconduct by the director, or a knowing
violation of law by the director, or for conduct violating RCW 23B.08.310, or
for any transaction from which the director will personally receive a benefit in
money, property or services to which the director is not legally entitled. If
the Washington Business Corporation Act is hereafter amended to authorize
corporate action further eliminating or limiting the personal liability nf
directors, then the liability of a director shall be eliminated or limited to
the full extent permitted by the Washington Business Corporation Act, as so
amended. Any repeal or modification of this Article shall not adversely affect
any right or protection of a director of the Corporation existing at the time of
such repeal or modification for or with respect to an act or omission of such
director occurring prior to such repeal or modification.
<PAGE>
ARTICLE 8
Indemnification of Directors and Officers
8.1 Right to Indemnification. Each person who was, or is
threatened to be made a party to or is otherwise involved (including, without
limitation, as a witness) in any actual or threatened action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was a director or officer of the Corporation
or, while a director or officer, he or she is or was serving at the request of
the Corporation as a director, trustee, officer, employee or agent of another
Corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
trustee, officer, employee or agent or in any other capacity while serving as a
director, trustee, officer, employee or agent, shall be indemnified and held
harmless by the Corporation, to the full extent permitted by applicable law as
then in effect, against all expense, liability and loss (including attorney's
fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid
in settlement) actually and reasonably incurred or suffered by such person in
connection therewith, and such indemnification shall continue as to a person who
has ceased to be a director, trustee, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that except as provided in Section 8.2 of this Article with
respect to proceedings seeking to enforce rights to indemnification, the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding thereof was authorized by the Board. The right to
indemnification conferred in this Section 11.1 shall be a contract right and
shall include the right to be paid by the Corporation for expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that the payment of such expenses in advance of the final disposition
of a proceeding shall be made only upon delivery to the Corporation of any
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under this Section 8.1 or otherwise.
<PAGE>
8.2 Right of Claimant to Bring Suit. If a claim under Section
8.1 of this Article is not paid in full by the Corporation within sixty (60)
days after a written claim has been received by the Corporation, except in the
case of a claim for expenses incurred in defending a proceeding in advance of
its final disposition, in which case the applicable period shall be twenty (20)
days, the claimant may at any time thereafter bring suit against the Corporation
to recover the unpaid amount of the claim and, to the extent successful in whole
or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. The claimant shall be presumed to be entitled to
indemnification under this Article upon submission of a written claim (and, in
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition, where the required undertaking
has been tendered to the Corporation), and thereafter the Corporation shall have
the burden of proof to overcome the presumption that the claimant is not so
entitled. Neither the failure of the Corporation (including its Board,
independent legal counsel or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstances nor an actual determination by the Corporation (including its
Board, independent legal counsel or its shareholders) that the claimant is not
entitled to indemnification or to the reimbursement or advancement of expenses
shall be a defense to the action or create a presumption that the claimant is
not so entitled.
8.3 Nonexclusivity of Rights. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation, Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise.
8.4 Insurance Contract and Funding. The Corporation may
maintain insurance, at its expense, to protect itself and any director, trustee,
officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the
Washington Business Corporation Act. The Corporation may, without further
shareholder action, enter into contracts with any director or officer of the
Corporation in furtherance of the provisions of this Article and may create a
trust fund, grant a security interest or use other means (including, without
limitation, a letter of credit) to ensure the payment of such amounts as may be
necessary to effect indemnification as provided in this Article.
8.5 Indemnification of Employees and Agents of the
Corporation. The Corporation may, by action of its Board from time to time,
provide indemnification and pay expenses in advance of the final disposition of
a proceeding to employees and agents of the Corporation with the same scope and
effect as the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation or pursuant
to rights granted pursuant to, or provided by, the Washington Business
Corporation Act or otherwise.
<PAGE>
ARTICLE 9
Amendment of Articles
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation, in the manner
now or hereafter prescribed by law, and all rights and powers conferred herein
on shareholders and directors are subject to this reserved power.
IN WITNESS WHEREOF, the undersigned submits these Restated
Articles of Incorporation this 22nd day of December, 1995.
TUSCANY INC.
By: Chris Mueller
Its: Secretary
<PAGE>
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF
TUSCANY, INC.
Pursuant to the Washington Business Corporation Act, Tuscany, Inc., a
Washington corporation (the "Corporation"), hereby adopts the following
amendments to its Articles of Incorporation.
1. The name of the Corporation is Tuscany, Inc.
2. The text of each amendment as adopted is as follows:
(a) Section 2.1 of Article 1 shall be amended, superseded and replaced
in it entirety to read as follows:
"2.1 Authorized Capital. Effective on the filing of this Amendment
each three and four-tenths (3.4) shares of the Corporation's Common
Stock shall be and hereby is automatically changed without further
action into one (1) fully paid and nonassessable share of the
Corporation's Common Stock; provided that no fractional shares shall be
issued pursuant to such change (the "Reverse Split"). Each shareholder
who is otherwise entitled to a fractional share after the Reverse Split
shall receive one whole share of Common Stock. The aggregate number of
shares which the Corporation shall have authority to issue after
effecting the Reverse Split is 30,000,000 shares of Common Stock, which
shall have a par value of $0.01 per share, and 5,000,000 shares of
Preferred Stock, which shall have a par value of $0.01 per share, of
which 2,766,000 shares have been designated as Series A Preferred Stock
and 1,750,000 have been designated as Series B Preferred Stock in
accordance with Section 2.2 of these Articles."
(b) A new Section 5.3 shall be added to Article 5 as follows:
"5.3 To the extent consistent with the Washington Business
Corporation Act, shareholders of this Corporation shall have no right to
call special meetings of the shareholders."
(c) Article 9 shall be amended, superseded and replaced in its
entirety to read as follows:
"ARTICLE 9
Amendment of Articles; Amendment of Bylaws
------------------------------------------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the
manner now or hereafter prescribed by law, and all rights and powers
conferred herein on shareholders and directors are subject to this
reserved power. The board of directors shall have the power to adopt,
amend, or repeal the bylaws. Bylaws shall not be adopted, amended,
repealed or altered by the
Articles of Amendment to the
Articles of Incorporation Page 1
<PAGE>
shareholders of the Corporation except by the affirmative vote of not
less than two-thirds (2/3) of the total votes of all the outstanding
shares of voting stock in the Corporation."
3. The date of adoption of the amendments was December 2, 1996.
4. The amendments were adopted and approved by the shareholders, in
accordance with the provisions of RCW 23B.10.030 and RCW 23B.10.040.
EXECUTED this 3rd day of December, 1996.
TUSCANY, INC.
By: /s/ Chris Mueller
Print name: Chris Mueller
Title CFO/Exec. VP, Finance
Articles of Amendment to the
Articles of Incorporation Page 2
<PAGE>
BYLAWS
OF
TUSCANY, INC.
ARTICLE I.
Registered Office and Registered Agent
The registered office of the corporation shall be located in
the state of Washington at such place as may be fixed from time to time by the
board of directors upon filing of such notices as may be required by law, and
the registered agent shall have a business office identical with such registered
office. Any change in the registered agent or registered office shall be
effective upon filing such change with the office of the Secretary of State of
the state of Washington.
ARTICLE II.
Shareholders' Meetings
Section 1. Annual Meetings. The annual meeting of the
shareholders of the corporation shall be held at the registered office of the
corporation, or such other place as may be designated by the notice of the
meeting, during the month of May each year, for the purpose of election of
directors and for such other business as may properly come before the meeting.
Section 2. Special Meetings. Special meetings of the
shareholders of the corporation may be called at any time by the president, or
by a majority of the board of directors, or by the holders of at least ten
percent (10%) of all the votes entitled to be cast on any issue proposed to be
considered at a proposed special meeting; provided that upon qualification of
the corporation as a "public company" under the Washington Business Corporation
Act, the shareholders of the corporation shall have no right to call a special
meeting of shareholders. No business shall be transacted at any special meeting
of shareholders except as is specified in the notice calling for said meeting.
The board of directors may designate any place as the place of any special
meeting called by the president or the board of directors, and special meetings
called at the request of shareholders shall be held at such place as may be
determined by the board of directors placed in the notice of such meetings.
Section 3. Notice of Meetings. Written notice of annual or
special meetings of shareholders stating the place, day, and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the secretary or persons
authorized to call the meeting to each shareholder of record entitled to vote at
the meeting. Such notice shall be given not less than ten (10) nor more than
sixty (60) days prior to the date of the meeting, except that notice of a
meeting to act on (i) an amendment to the Articles of Incorporation, (ii) a plan
of merger or share exchange, (iii) a proposed sale, lease, exchange or other
disposition of substantially all of the assets of the corporation other than in
<PAGE>
the usual or regular course of business, or (iv) the dissolution of the
corporation shall be given no fewer than twenty (20) days nor more than sixty
(60) days before the meeting date. Notice may be transmitted by mail, private
carrier or personal delivery; telegraph or teletype; or telephone, wire or
wireless equipment which transmits a facsimile of the notice. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at the shareholder's address as it appears on the
stock transfer books of the corporation.
Section 4. Waiver of Notice. Notice of the time, place, and
purpose of any meeting may be waived in writing (either before or after such
meeting) and will be waived by any shareholder by the shareholder's attendance
at the meeting in person or by proxy, unless the shareholder at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting. Any shareholder so waiving shall be bound by the proceedings of any
such meeting in all respects as if due notice thereof had been given.
Section 5. Quorum and Adjourned Meetings. A majority of the
outstanding shares of the corporation entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of shareholders. A majority of
the shares represented at a meeting, even if less than a quorum, may adjourn the
meeting from time to time without further notice. At such reconvened meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified. The
shareholders present at a duly organized meeting may continue to transact
business at such meeting and at any adjournment of such meeting (unless a new
record date is or must be set for the adjourned meeting), notwithstanding the
withdrawal of enough shareholders from either meeting to leave less than a
quorum.
Section 6. Proxies. At all meetings of shareholders, a
shareholder may vote by proxy executed in writing by the shareholder or by the
shareholder's duly authorized attorney in fact. Such proxy shall be filed with
the secretary of the corporation before or at the time of the meeting. No proxy
shall be valid after eleven (11) months from the date of its execution, unless
otherwise provided in the proxy.
Section 7. Voting Record. After fixing a record date for a
shareholders' meeting, the corporation shall prepare an alphabetical list of the
names of all shareholders on the record date who are entitled to notice of the
shareholders' meeting. The list shall be arranged by voting group, and within
each voting group by class or series of shares, and show the address of and
number of shares held by each shareholder. A shareholder, shareholder's agent,
or a shareholder's attorney may inspect the shareholder's list, beginning ten
days prior to the shareholders' meeting and continuing through the meeting, at
the corporation's principal office or at a place identified in the meeting
notice in the city where the meeting will be held during regular business hours
and at the shareholder's expense. The shareholders' list shall be kept open for
inspection during such meeting or any adjournment.
Section 8. Voting of Shares. Except as otherwise provided in
the Articles of Incorporation or in these Bylaws, every shareholder of record
shall have the right at every
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<PAGE>
shareholders' meeting to one vote for every share standing in the shareholder's
name on the books of the corporation. If a quorum exists, action on a matter,
other than election of directors, is approved by a voting group of shareholders
if the votes cast within the voting group favoring the action exceed the votes
cast within the voting group opposing the action, unless the Articles of
Incorporation or the Washington Business Corporation Act require a greater
number of affirmative votes.
Section 9. Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders, or
any adjournment thereof, or entitled to receive payment of any dividend, the
board of directors may fix in advance a record date for any such determination
of shareholders, such date to be not more than seventy (70) days prior to the
date on which the particular action requiring such determination of shareholders
is to be taken. If no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the day before the date on which
notice of the meeting is mailed or the date on which the resolution of the board
of directors declaring such dividend is adopted, as the case may be, shall be
the record date for such determination of shareholders. When a determination of
shareholders entitled 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, which it must do
if the meeting is adjourned more than one hundred twenty (120) days after the
date fixed for the original meeting.
ARTICLE III.
Directors
Section 1. General Powers. All corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of, the board of directors
except as otherwise provided by the laws of the state of Washington or in the
Articles of Incorporation.
Section 2. Number. The number of directors of the corporation
shall be seven. The number of directors can be increased or decreased from time
to time by the vote of the directors or shareholders to amend this Section 2,
provided that the number of directors shall be not less than one, and provided
further that no decrease shall shorten the term of any incumbent director.
Section 3. Tenure and Qualifications. At the first annual
meeting of shareholders and at each annual meeting thereafter, the shareholders
of the corporation shall elect directors. Each director shall hold office until
the next succeeding annual meeting and until his or her successor shall have
been elected and qualified. Directors need not be residents of the state of
Washington or shareholders of the corporation.
Section 4. Election. The directors shall be elected by the
shareholders at their annual meeting each year; and if, for any cause, the
directors shall not have been elected at an annual
3
<PAGE>
meeting, they may be elected at a special meeting of shareholders called for
that purpose in the manner provided by these Bylaws.
Section 5. Vacancies. Vacancies in the board of directors,
including vacancies resulting from an increase in the number of directors, may
be filled by the shareholders, the board of directors, or a majority of the
remaining directors if they do not constitute a quorum.
Section 6. Resignation. Any director may resign at any time by
delivering written notice to the board of directors, its chairperson, the
president or the secretary of the corporation. A resignation shall be effective
when the notice is delivered unless the notice specifies a later effective date.
Section 7. Removal of Directors. At a meeting of shareholders
called expressly for that purpose, the entire board of directors, or any member
thereof, may be removed, with or without cause, by a vote of the holders of a
majority of shares then entitled to vote at an election of such directors.
Section 8. Meetings.
(a) The annual meeting of the board of directors shall be held
immediately after the annual shareholders' meeting at the same place as the
annual shareholders' meeting or at such other place and at such time as may be
determined by the directors. No notice of the annual meeting of the board of
directors shall be necessary.
(b) Special meetings may be called at any time and place upon
the call of the president, secretary, or any director. Notice of the time and
place of each special meeting shall be given by the secretary or the persons
calling the meeting, by mail, private carrier, radio, telegraph, telegram,
facsimile transmission, personal communication by telephone or otherwise at
least two (2) days in advance of the time of the meeting. The purpose of the
meeting need not be given in the notice. Notice of any special meeting may be
waived in writing or by telegram (either before or after such meeting) and will
be waived by any director by attendance thereat.
(c) Regular meetings of the board of directors shall be held
at such place and on such day and hour as shall from time to time be fixed by
resolution of the board of directors. No notice of regular meetings of the board
of directors shall be necessary.
(d) At any meeting of the board of directors, any
business may be transacted, and the board may exercise all of its
powers.
Section 9. Quorum and Voting.
(a) A majority of the directors shall constitute a quorum, but
a lesser number may adjourn any meeting from time to time until a quorum is
obtained, and no further notice thereof need be given.
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<PAGE>
(b) If a quorum is present when a vote is taken, the
affirmative vote of a majority of the directors present at the meeting is the
act of the board of directors.
Section 10. Compensation. By resolution of the board of
directors, the directors may be paid their expenses, if any, of attendance at
each meeting of the board of directors and may be paid a fixed sum for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
Section 11. Presumption of Assent. A director of the
corporation who is present at a meeting of the board of directors at which
action on any corporate matter is taken shall be presumed to have assented to
the action taken unless:
(a) The director objects at the beginning of the
meeting, or promptly upon the director's arrival, to holding it
or transacting business at the meeting;
(b) The director's dissent or abstention from the
action taken is entered in the minutes of the meeting; or
(c) The director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the corporation within a reasonable time after adjournment of
the meeting.
The right of dissent or abstention is not available to a
director who votes in favor of the action taken.
Section 12. Committees. The board of directors, by resolution
adopted by a majority of the full board of directors, may designate one or more
committees from among its members, each of which must have two or more members
and, to the extent provided in such resolution, shall have and may exercise all
the authority of the board of directors, except that no such committee shall
have the authority to: authorize or approve a distribution except according to a
general formula or method prescribed by the board of directors; approve or
propose to shareholders action that the Washington Business Corporation Act
requires to be approved by shareholders; fill vacancies on the board of
directors or on any of its committees; amend any Articles of Incorporation
requiring shareholder approval; adopt, amend or repeal Bylaws; approve a plan of
merger requiring shareholder approval; or authorize or approve the issuance or
sale or contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares, except that
the board of directors may authorize a committee, or a senior executive officer
of the corporation, to do so within limits specifically prescribed by the board
of directors.
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ARTICLE IV
Special Measures for Corporate Action
Section 1. Actions by Written Consent. Any corporate action
required or permitted by the Articles of Incorporation, Bylaws, or the laws
under which the corporation is formed, to be voted upon or approved at a duly
called meeting of the directors, committee of directors, or shareholders may be
accomplished without a meeting if one or more unanimous written consents of the
respective directors or shareholders, setting forth the actions so taken, shall
be signed, either before or after the action taken, by all the directors,
committee members, or shareholders, as the case may be. Action taken by
unanimous written consent is effective when the last director or committee
member signs the consent, unless the consent specifies a later effective date.
Action taken by unanimous written consent of the shareholders is effective when
all consents are in possession of the corporation, unless the consent specifies
a later effective date.
Section 2. Meetings by Conference Telephone. Members of the
board of directors, members of a committee of directors, or shareholders may
participate in their respective meetings by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time; participation in a meeting by
such means shall constitute presence in person at such meeting.
ARTICLE V
Officers
Section 1. Officers Designated. The officers of the
corporation shall be a president, a secretary and a treasurer, each of whom
shall be elected by the board of directors. Such other officers and assistant
officers as may be deemed necessary may be elected or appointed by the board of
directors. Any two or more offices may be held by the same person.
The board of directors may, in its discretion, elect a
chairperson and one or more vice chairpersons of the board of directors; and, if
a chairperson has been elected, the chairperson shall, when present, preside at
all meetings of the board of directors and the shareholders and shall have such
other powers as the board may prescribe.
Section 2. Election. Qualification and Term of Office. Each of
the officers shall be elected by the board of directors. None of said officers
need be a director. The officers shall be elected by the board of directors at
each annual meeting of the board of directors. Except as hereinafter provided,
each of said officers shall hold office from the date of his or her election
until the next annual meeting of the board of directors and until his or her
successor shall have been duly elected and qualified.
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Section 3. Powers and Duties.
(a) President. The president shall be the chief executive
officer of the corporation and, subject to the direction and control of the
board of directors, shall have general charge and supervision over its property,
business, and affairs.
(b) Secretary. The secretary shall: (1) keep the minutes of
the shareholders' and of the board of directors' meetings in one or more books
provided for that purpose; (2) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; (3) be custodian of
the corporate records and of the seal of the corporation and affix the seal of
the corporation to all documents as may be required; (4) keep a register of the
post office address of each shareholder which shall be furnished to the
secretary by such shareholder; (5) sign with the president, or a vice president,
certificates for shares of the corporation, the issuance of which shall have
been authorized by resolution of the board of directors; (6) have general charge
of the stock transfer books of the corporation; and (7) 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 or her by the president or by the board of
directors.
(c) Treasurer. Subject to the direction and control of the
board of directors, the treasurer shall have the custody, control, and
disposition of the funds and securities of the corporation and shall account for
the same; and, at the expiration of his or her term of office, he or she shall
turn over to his or her successor all property of the corporation in his or her
possession.
Section 4. Assistant Secretaries and Assistant Treasurers. The
assistant secretaries, when authorized by the board of directors, may sign with
the president, or a vice president, certificates for shares of the corporation,
the issuance of which shall have been authorized by resolution of the board of
directors. The assistant treasurers shall, respectively, if required by the
board of directors, give bonds for the faithful discharge of their duties in
such sums and with such sureties as the board of directors shall determine. 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.
Section 5. Removal. The board of directors shall have the
right to remove any officer whenever in its judgment the best interests of the
corporation will be served thereby.
Section 6. Vacancies. The board of directors shall fill any
office which becomes vacant with a successor who shall hold office for the
unexpired term and until his or her successor shall have been duly elected
qualified.
Section 7. Salaries. The salaries of all officers of the
corporation shall be fixed by the board of directors.
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ARTICLE VI
Share Certificates
Section 1. Issuance, Form and Execution of Certificates. No
shares of the corporation shall be issued unless authorized by the board. Such
authorization shall include the maximum number of shares to be issued, the
consideration to be received for each share, the value of noncash consideration,
and a statement that the board has determined that such consideration is
adequate. Certificates for shares of the corporation shall be in such form as is
consistent with the provisions of the Washington Business Corporation Act and
shall state:
(a) The name of the corporation and that the
corporation is organized under the laws of this state;
(b) The name of the person to whom issued; and
(c) The number and class of shares and the
designation of the series, if any, which such certificate represents. They shall
be signed by two officers of the corporation, and the seal of the corporation
may be affixed thereto. Certificates may be issued for fractional shares. No
certificate shall be issued for any share until the consideration established
for its issuance has been paid.
Section 2. Transfers. Shares may be transferred by delivery of
the certificate therefor, accompanied either by an assignment in writing on the
back of the certificate, written assignment separate from certificate, or
written power of attorney to assign and transfer the same, signed by the record
holder of the certificate. The board of directors may, by resolution, provide
that beneficial owners of shares shall be deemed holders of record for certain
specified purposes. Except as otherwise specifically provided in these Bylaws,
no shares shall be transferred on the books of the corporation until the
outstanding certificate therefor has been surrendered to the corporation.
Section 3. Loss or Destruction of Certificates. In case of
loss or destruction of any certificate of shares, another may be issued in its
place upon proof of such loss or destruction and upon the giving of a
satisfactory indemnity bond to the corporation. A new certificate may be issued
without requiring any bond when in the judgment of the board of directors it is
proper to do so.
ARTICLE VII
Books and Records
Section 1. Books of Account, Minutes and Share Register. The
corporation shall keep as permanent records minutes of all meetings of its
shareholders and board of directors, a record of all actions taken by the
shareholders or board of directors without a meeting, and a record of all
actions taken by a committee of the board of directors exercising the authority
of the board
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of directors on behalf of the corporation. The corporation shall maintain
appropriate accounting records. The corporation or its agent shall maintain a
record of its shareholders, in a form that permits preparation of a list of the
names and addresses of all shareholders, in alphabetical order by class of
shares showing the number and class of shares held by each. The corporation
shall keep a copy of the following records at its principal office: the Articles
or Restated Articles of Incorporation and all amendments to them currently in
effect; the Bylaws or Restated Bylaws and all amendments to them currently in
effect; the minutes of all shareholders' meetings, and records of all actions
taken by shareholders without a meeting, for the past three years; its financial
statements for the past three years, including balance sheets showing in
reasonable detail the financial condition of the corporation as of the close of
each fiscal year, and an income statement showing the results of its operations
during each fiscal year prepared on the basis of generally accepted accounting
principles or, if not, prepared on a basis explained therein; all written
communications to shareholders generally within the past three years; a list of
the names and business addresses of its current directors and officers; and its
most recent annual report delivered to the Secretary of State of the state of
Washington.
Section 2. Copies of Resolutions. Any person dealing with the
corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the board of directors or shareholders, when certified
by the president or secretary.
ARTICLE VIII
Amendment of Bylaws
The board of directors shall have the power to adopt, amend or
repeal the bylaws or adopt bylaws. Bylaws shall not be adopted, amended,
repealed or altered by the shareholders of the corporation except by the
affirmative vote of not less than two-thirds (2/3) of the total votes of all
the outstanding shares of voting stock in the corporation.
I hereby certify the foregoing to be the Bylaws of Tuscany,
Inc., which were adopted on November 30, 1995.
/s/ Chris Mueller
--------------------------
Chris Mueller, Secretary
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EXHIBIT 4.2
WARRANT AGREEMENT dated as of _________, 1997 between Tuscany,
Inc., a Washington corporation (the "Company"), and Paragon Capital Corporation
(hereinafter referred to as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter
160,000 warrants (the "Warrants") to purchase up to 160,000 shares (as such
number may be adjusted from time to time pursuant to Article 8 of this Warrant
Agreement) (the "Shares") of Common Stock of the Company, par value $.01 per
share (the "Common Stock", of the Company, and up to 160,000 (as such number may
be adjusted from time to time pursuant to Article 8 of this Warrant Agreement)
Common Stock purchase warrants (the "Underlying Warrants"); and
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _________, 1997
between the Underwriter and the Company, to act as the underwriter in connection
with the Company's proposed public offering (the "Public Offering") of 1,600,000
shares of Common Stock (the "Public Shares") at an initial public offering price
of $5.00 per Public Share and 1,600,000 warrants (the "Public Warrants") at an
initial public offering price of $.10 per Public Warrant; and
WHEREAS, the Warrants issued pursuant to this Agreement
are being issued by the Company to the Underwriter or its
<PAGE>
designees who are directors, officers and partners of the Underwriter or to
members of the selling group participating in the distribution of the Public
Shares and Public Warrants to the public in the Public Offering and/or their
respective directors, officers or partners (collectively, the "Designees"), in
consideration for, and as part of the Underwriter's compensation in connection
with, the Underwriter acting as the Underwriter pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter or its designees to the Company of One Hundred Seventy Six
Dollars ($176.00), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Underwriter, and/or the Designees hereby
granted the right to purchase, at any time from _________, 1998 until 5:00 P.M.,
New York time, on _________, 2002 (the "Warrant Exercise Term"), up to 160,000
fully-paid and non-assessable Shares at an initial exercise price (subject to
adjustment as provided in Articles 6 and 8 hereof) of $____ per Share and up to
160,000 Underlying Warrants at an initial exercise price (subject to adjustment
as provided in Articles 6 and 8 hereof) of $___ per Underlying Warrant. The
Underlying Warrants are each exercisable to purchase one (1) fully-paid and
non-assessable share of Common Stock at a price of $____ per
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share (the "Underlying Warrant Shares"). The Underlying Warrants are exercisable
commencing __________, 1998 or such earlier date as the Underwriter consents to
the exercise of the warrants issued pursuant to the Public Warrant Agreement (as
hereinafter defined) until 5:00 P.M., New York City time on _________, 2002. The
Holder may purchase, upon exercise of this Warrant, either the Shares or the
Underlying Warrants or both. Except as provided in Article 13 hereof, the Shares
and the Underlying Warrants are in all respects identical to the Public Shares
and Public Warrants being sold to the public pursuant to the terms and
provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates delivered
and to be delivered pursuant to this Agreement (the "Warrant Certificates")
shall be in the Warrants exercisable for the purchase of Underlying Shares in
the form set forth in Exhibit A attached hereto and made a part hereof, and, for
the Warrants exercisable for the purchase of Underlying Warrants, in the form of
Exhibit B attached hereto and made a part hereof, each with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrant.
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $____ per Share purchased and $___ per Underlying
Warrant purchased, payable in cash or by check to the order of the Company, or
any combination thereof, subject to
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<PAGE>
adjustment as provided in Article 8 hereof. Upon surrender of the Warrant
Certificate(s) with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
Shares and Underlying Warrants purchased, at the Company's principal offices in
Washington (currently located at 601 Union Street - Suite 4620, Seattle,
Washington 98101) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Shares so purchased and/or a certificate or certificates for the Underlying
Warrants so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder hereof, in whole or in
part (but not as to fractional Shares or fractional Underlying Warrants). In the
case of the purchase of less than all the Shares or Underlying Warrants
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Shares or Underlying
Warrants purchasable thereunder.
3.2. Cashless Exercise. At any time during the
Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in
whole or in part, the Warrants represented by such Holder's Warrant Certificate,
which are exercisable for the purchase of Shares (a "Warrant Exchange"), into
the number of Shares and Underlying Warrants determined in accordance with this
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Section 3.2, by surrendering such Warrant Certificate at the principal office of
the Company or at the office of its transfer agent, accompanied by a notice
stating such Holder's intent to effect such exchange, the number of Warrants to
be so exchanged and the date on which the Holder requests that such Warrant
Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place
on the date specified in the Notice of Exchange or, if later, the date the
Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the Shares issuable upon such Warrant Exchange and, if
applicable, a new Warrant Certificate of like tenor representing Warrants which
were subject to the surrendered Warrant Certificate and not included in the
Warrant Exchange, shall be issued as of the Exchange Date and delivered to the
Holder within three (3) days following the Exchange Date. In connection with any
Warrant Exchange, the Holder shall be entitled represent the right to subscribe
for and acquire (i) the number of Shares (rounded to the next highest integer)
which would, but for such Warrant Exchange, then be issuable pursuant to the
provisions of Section 3.1 above upon the exercise of the Warrants specified by
the Holder in its Notice of Exchange (the "Total Share Number") less (ii) the
number of Shares equal to the quotient obtained by dividing (a) the product of
the Total Share Number and the existing Exercise Price per Share (as hereinafter
defined) by (b) the Market Price (as hereinafter defined) of a Public Share on
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<PAGE>
the day preceding the Warrant Exchange. "Market Price" at any date shall be
deemed to be the last reported sale price or, in case no such reported sales
takes place on such day, the average of the last reported sale prices for the
last three (3) 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 as reported in the NASDAQ National Market System, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the NASDAQ National Market System, the closing bid price as
furnished by (i) the National Association of Securities Dealers, Inc. through
NASDAQ or (ii) a similar organization if NASDAQ is no longer reporting such
information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased and certificates for the Underlying
Warrants purchased, and upon the exercise of the Underlying Warrants, the
issuance of certificates for the Underlying Warrant Shares purchased shall be
made forthwith (and in any event within three (3) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Article 5 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the
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<PAGE>
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the
Shares and the Underlying Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company. Warrant Certificates and certificates representing the
Underlying Warrants shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares and the Underlying Warrants purchased, and
upon exercise, in whole or in part, of the Underlying Warrants, certificates
representing the Underlying Warrant Shares purchased (collectively, the "Warrant
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<PAGE>
Securities"), shall bear a legend substantially similar to the following:
"The securities represented by this certificate and
the other securities issuable upon exercise thereof
have not been registered for purposes of public
distribution under the Securities Act of 1933, as
amended (the "Act"), and may not be offered or sold
except (i) pursuant to an effective registration
statement under the Act, (ii) to the extent applicable,
pursuant to Rule 144 under the Act (or any similar
rule under such Act relating to the disposition of
securities), or (iii) upon the delivery by the
holder to the Company of an opinion of counsel,
reasonably satisfactory to counsel to the Company,
stating that an exemption from registration under
such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof [the Effective Date], except to the Underwriter or to the Designees.
6. Price.
6.1. Initial and Adjusted Exercise Price. The
Warrant's initial exercise price of each Warrant shall be $____ per Share and
$_____ per Underlying Warrant. The adjusted exercise price per Share and the
adjusted exercise price per
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<PAGE>
Underlying Warrant shall be the prices which shall result from time to time from
any and all adjustments of the initial exercise price per Share or per
Underlying Warrant, as the case may be, in accordance with the provisions of
Article 8 hereof.
6.2. Exercise Price. The term "Exercise Price"
herein shall mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. Registration Rights.
7.1. Registration Under the Securities Act of
1933. None of the Warrants, the Shares, the Underlying Warrants, or the
Underlying Warrant Shares have been registered for purposes of public
distribution under the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the
term "Registrable Security" means each of the Warrants, the Shares, the
Underlying Warrants, the Underlying Warrant Shares and any shares of Common
Stock issued upon any stock split or stock dividend in respect of such Shares or
Underlying Warrant Shares; provided, however, that with respect to any
particular Registrable Security, such security shall cease to be a Registrable
Security when, as of the date of determination, (i) it has been effectively
registered under the Act and disposed of pursuant thereto, (ii) registration
under the Act is no longer required for subsequent public distribution of such
security, or (iii) it has ceased to be outstanding. The term "Registrable
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<PAGE>
Securities" means any and/or all of the securities falling within the foregoing
definition of a "Registrable Security." In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of "Registrable Security" as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time
during the seven years following the effective date of the Public Offering, the
Company proposes to prepare and file one or more post-effective amendments to
the registration statement filed in connection with the Public Offering or any
new registration statement or post-effective amendments thereto covering equity
or debt securities of the Company, or any such securities of the Company held by
its shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form) (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
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<PAGE>
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register ("Piggyback Registration"), at the Company's sole cost and
expense and at no cost or expense to the Requesting Holders; provided, however,
that if, in the written opinion of the Company's managing underwriter, if any,
for such offering, the inclusion of all or a portion of the Registrable
Securities requested to be registered, when added to the securities being
registered by the Company or the selling shareholder(s), will exceed the maximum
amount of the Company's securities which can be marketed (i) at a price
reasonably related to their then current market value, or (ii) without otherwise
materially adversely affecting the entire offering, then the Company may exclude
from such offering all or a portion of the Registrable Securities which it has
been requested to register.
If securities are proposed to be offered for sale pursuant to
such Registration Statement by other security holders of the Company and the
total number of securities to be offered by the Requesting Holders and such
other selling security holders is required to be reduced pursuant to a request
from the managing underwriter (which request shall be made only for the reasons
and in the manner set forth above) the aggregate number of Registrable
Securities to be offered by Requesting Holders
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<PAGE>
pursuant to such Registration Statement shall equal the number which bears the
same ratio to the maximum number of securities that the underwriter believes may
be included for all the selling security holders (including the Requesting
Holders) as the original number of Registrable Securities proposed to be sold by
the Requesting Holders bears to the total original number of securities proposed
to be offered by the Requesting Holders and the other selling security holders
If, subsequent to exercise of the demand registration right
referred to in Section 7.4 below, any Registrable Securities requested to be
included in a Piggyback Registration are not so included because of the
operation of the proviso of the first paragraph of this Section 7.3, then the
holders of such excluded Registrable Securities shall have the right to require
the Company, at its expense, to prepare and file another Registration Statement
under the Act covering such Registrable Securities, provided that, if the
underwriter so requests, such Registrable Securities shall not be sold until the
expiration of 90 days from the effective date of the offering that gave rise to
the piggyback registration rights that are the subject of this Section 7.3.
Nothing contained in the foregoing sentence shall require the Company to undergo
an audit, other than in the ordinary course of business.
Notwithstanding the provisions of this Section 7.3, the
Company shall have the right at any time after it shall
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<PAGE>
have given written notice pursuant to this Section 7.3 (irrespective of whether
any written request for inclusion of Registrable Securities shall have already
been made) to elect not to file any such proposed Registration Statement, or to
withdraw the same after the filing but prior to the effective date thereof.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of
the Registrable Securities shall have the right (which right is in addition to
the piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") on one occasion, at the sole expense of the
Company (except as provided in Section 7.5(b) hereof), a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder) in
order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable Securities by the holders thereof. The
Company shall use its best efforts to cause the Registration Statement to become
effective under the Act, so as to permit a public offering and sale of the
Registrable Securities by the holders thereof. Once effective, the Company will
use its best efforts to maintain the
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<PAGE>
effectiveness of the Registration Statement until the earlier of (i) the date
that all of the Registrable Securities have been sold, or (ii) the date that the
holders thereof receive an opinion of counsel to the Company that all of the
Registrable Securities may be freely traded without registration under the Act,
under Rule 144(k) promulgated under the Act or otherwise. Nothing herein
contained shall require the Company to undergo an audit, other than in the
ordinary course of business.
(b) The Company covenants and agrees to
give written notice of any Demand Registration Request to all holders of the
Registrable Securities within ten (10) business days from the date of the
Company's receipt of any such Demand Registration Request. After receiving
notice from the Company as provided in this Section 7.4(b), holders of
Registrable Securities may request the Company to include their Registrable
Securities in the Registration Statement to be filed pursuant to Section 7.4(a)
hereof by notifying the Company of their decision to have such securities
included within ten (10) days of their receipt of the Company's notice.
(c) In addition to the registration rights
provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, at
any time during the Warrant Exercise Term, any Majority Holder (as defined below
in Section 7.4(d)) of Registrable Securities shall have the right, exercisable
by written request to the Company, to have the Company prepare and
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file with the Commission, on one occasion in respect of all holders of
Registrable Securities, a Registration Statement so as to permit a public
offering and sale of such Registrable Securities for nine (9) consecutive
months, provided, however, that all costs incident thereto shall be at the
expense of the holders of the Registrable Securities included in such
Registration Statement. If a Majority Holder shall give notice to the Company at
any time of its or their desire to exercise the registration right granted
pursuant to this Section 7.4(c), then within ten (10) days after the Company's
receipt of such notice, the Company shall give notice to the other holders of
Registrable Securities advising them that the Company is proceeding with such
registration and offering to include therein the Registrable Securities of such
holders, provided they furnish the Company with such appropriate information in
connection therewith as the Company shall reasonably request in writing.
(d) The term "Majority Holder" as used in
Section 7.4 hereof shall mean any holder or any combination of holders of
Registrable Securities, if included in such holders' Registrable Securities are
that aggregate number of shares of Common Stock (including Shares already
issued, Shares issuable pursuant to the exercise of outstanding Warrants,
Underlying Warrant Shares already issued and Underlying Warrant Shares issuable
pursuant to the exercise of outstanding Underlying Warrants) as would constitute
a majority of the aggregate number
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of shares of Common Stock (including Shares already issued, Shares issuable
pursuant to the exercise of outstanding Warrants, Underlying Warrant Shares
already issued and Underlying Warrant Shares issuable pursuant to the exercise
of outstanding Underlying Warrants) included in all the Registrable Securities.
7.5. Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) In connection with any registration
under Section 7.4 hereof, the Company shall file the Registration Statement as
expeditiously as possible, but in any event no later than twenty (20) days
following receipt of any demand therefor, shall use its best efforts to have any
such Registration Statement declared effective at the earliest possible time,
and shall furnish each holder of Registrable Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees
and expenses (other than indemnity fees, discounts and nonaccountable expense
allowance applicable to the Registrable Securities and fees and expenses of
counsel retained by the holders of Registrable Securities) in connection with
all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, and blue sky fees and expenses.
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(c) The Company will take all necessary
action which may be required in qualifying or registering the Registrable
Securities included in the Registration Statement, for offering and sale under
the securities or blue sky laws of such states as are requested by the holders
of such securities; provided that the Company shall not be obligated to execute
or file any general consent to service of process to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration Statement
and any underwriter or person deemed to be an underwriter under the Act and each
person, if any, who controls such holder or underwriter or person deemed to be
an underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter as set forth in Section 7 of the Underwriting
Agreement and to provide for just and equitable contribution as set forth in
Section 8 of the Underwriting Agreement.
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(e) Any holder of Registrable Securities to
be sold pursuant to a registration statement, and such Holder's successors and
assigns, shall severally, and not jointly, indemnify, the Company, its officers
and directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such holder, or
such Holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Underwriter has agreed to indemnify the Company as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any holder to exercise the Warrants or the
Underlying Warrants held by such Holder prior to the initial filing of any
registration statement or the effectiveness thereof.
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(g) If the Company shall fail to comply
with the provisions of this Article 7, the Company shall, in addition to any
other equitable or other relief available to the holders of Registrable
Securities, be liable for any or all incidental, special and consequential
damages sustained by the holders of Registrable Securities, requesting
registration of their Registrable Securities.
(h) The Company shall promptly deliver
copies of all correspondence between the Commission and the Company, its counsel
or auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the Registration Statement to each holder of Registrable
Securities included for such registration in such Registration Statement
pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such
correspondence and memoranda and to the managing underwriter, if any, of the
offering in connection with which such Holder's Registrable Securities are being
registered, and shall permit each holder of Registrable Securities and such
underwriter to do such reasonable investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the Registration
Statement as it deems reasonably necessary to comply with applicable securities
laws or rules of the National Association of Securities Dealers, Inc. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the
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Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such holder of
Registrable Securities or underwriter shall reasonably request.
(i) Upon the written request therefor by
any holders of Registrable Securities, the Company shall include in the
Registration Statement covering any of the Registrable Securities any other
securities of the Company held by such holders of Registrable Securities as of
the date of filing of such Registration Statement, including, without
limitation, restricted shares of Common Stock, options, warrants or any other
securities convertible into shares of Common Stock.
8. Adjustments of Exercise Price and Number of
Securities. The following adjustments apply to the Exercise Price of the
Warrants with respect to the Shares and the number of Shares purchasable upon
exercise of the Warrants. In the event the Exercise Price per Share and/or the
number of Shares so purchasable is adjusted, then the Exercise Price of the
Warrants relating to the Underlying Warrants and the number of underlying
Warrants purchasable hereunder shall, be adjusted in the same proportion.
8.1. Computation of Adjusted Price. In case the
Company shall at any time after the date hereof pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, then upon such
dividend or distribution the Exercise Price
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per Share in effect immediately prior to such dividend or distribution shall
forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Exercise Price in effect immediately prior to
such dividend or distribution, by
(b) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 8.1, the Common Stock
issuable by way of dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the opening of business on
the date following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution.
8.2. Subdivision and Combination. In case the
Company shall at any time subdivide or combine the outstanding shares of Common
Stock, the Exercise Price shall forthwith be proportionately decreased in the
case of subdivision or increased in the case of combination.
8.3. Adjustment in Number of Securities. Upon
each adjustment of the Exercise Price pursuant to the provisions of this Article
8, the number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full
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number by multiplying a number equal to the Exercise Price in effect immediately
prior to such adjustment by the number of Shares issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price provided, however that if an event
occurs that results in an adjustment of the number and/or price of the shares of
Common Stock issuable upon exercise of the Public Warrants pursuant to Section 9
of the Warrant Agreement by and among the Company, the Underwriter and [Transfer
Agent] dated as of , 1997 ("Public Warrant Agreement"), resulting in
automatic adjustment in the number and/or price of the Underlying Warrant Shares
issuable upon exercise of the Underlying Warrants pursuant to Section 8.5
hereof, then the adjustment provided for in this Section 8.3 shall not, in such
instance, result in any further adjustment in the aggregate number of shares of
Common Stock ultimately issuable upon exercise of the Underlying Warrants.
8.4. Reclassification, Consolidation, Merger,
etc. In case of any reclassification or change of the outstanding shares of
Common Stock (other than a change in par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in the
case of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation and which does not result in
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any reclassification or change of the outstanding shares of Common Stock, except
a change as a result of a subdivision or combination of such shares or a change
in par value, as aforesaid), or in the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holders shall
thereafter have the right to purchase the kind and number of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owners of
both the Shares and the Underlying Warrant Shares immediately prior to any such
events, at a price equal to the product of (x) the number of shares of Common
Stock issuable upon exercise of the Holders' Warrants and the Underlying
Warrants and (y) the exercise prices for the Warrants and Underlying Warrants in
effect immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance as if such Holders had exercised the
Warrants and the Underlying Warrants.
8.5. Determination of Outstanding Common Shares.
The number of Common Shares at any one time outstanding shall include the
aggregate number of shares issued and the aggregate number of shares issuable
upon the exercise of options, rights, warrants and upon the conversion or
exchange of convertible or exchangeable securities.
8.6. Adjustment of Exercise Price and Securities
Issuable Upon Exercise of Underlying Warrants. With respect to
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any of the Underlying Warrants, whether or not the Warrants have been exercised
and whether or not the Warrants are issued and outstanding, the exercise price
for, and the number of, Underlying Warrant Shares issuable upon exercise of the
Underlying Warrants shall be automatically adjusted in accordance with Section 9
of the Public Warrant Agreement, upon the occurrence of any of the events
described therein. Thereafter, until the next such adjustment or until otherwise
adjusted in accordance with this Section 8, the Underlying Warrants shall be
exercisable at such adjusted exercise price and for such adjusted number of
Underlying Warrant Shares.
8.7. Dividends and Other Distributions with
Respect to Outstanding Securities. In the event that the Company shall at any
time prior to the exercise of all Warrants make any distribution of its assets
to holders of its Common Stock as a liquidating or a partial liquidating
dividend, then the holder of the Warrants who exercises its Warrants after the
record date for the determination of those holders of Common Stock entitled to
such distribution of assets as a liquidating or partial liquidating dividend
shall be entitled to receive for the Warrant Price per Warrant, in addition to
each share of Common Stock, the amount of such distribution (or, at the option
of the Company, a sum equal to the value of any such assets at the time of such
distribution as determined by the Board of Directors of the Company in good
faith) which would have been payable to such
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<PAGE>
holder had he been the holder of record of the Common Stock receivable upon
exercise of his Warrant on the record date for the determination of those
entitle to such distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this Subsection 8.7.
8.8. Subscription Rights for Shares of Common
Stock or Other Securities. In the case that the Company or an affiliate of the
Company shall at any time after the date hereof and prior to the exercise of all
the Warrants issue any rights, warrants or options to subscribe for shares of
Common Stock or any other securities of the Company or of such affiliate to all
the shareholders of the Company, the Holders of unexercised Warrants on the
record date set by the Company or such affiliate in connection with such
issuance of rights, warrants or options shall be entitled, in addition to the
shares of Common Stock or other securities receivable upon the exercise of the
Warrants, to receive such rights, warrants or options shall be entitled, in
addition to the shares of Common Stock or other securities receivable upon the
exercise of the Warrants, to receive such rights at the time such rights,
warrants or options that such Holders would have been entitled to receive had
they been, on such record date, the holders of record of the number of whole
shares of Common Stock then issuable upon exercise of their outstanding Warrants
(assuming for purposes of this Section 8.8), that the exercise of the Warrants
is permissible immediately upon issuance).
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<PAGE>
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon
the surrender thereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of Shares or fractions of Underlying Warrants upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional
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<PAGE>
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Shares and Underlying Warrants.
11. Reservation and Listing of Securities.
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 the exercise of the Warrants and the Underlying Warrants, such
number of shares of Common Stock 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 issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any shareholder. The Company further covenants and agrees
that upon exercise of the Underlying Warrants and payment of the respective
Underlying Warrant exercise price therefor, all Underlying Warrant Shares
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any shareholder. As
long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Warrants and the Underlying Warrants and all Underlying Warrants to be listed on
or quoted by NASDAQ or listed on such national securities exchange, in the event
the Common Stock is listed on a national securities exchange.
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<PAGE>
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the
holders of its shares of Common Stock for the purpose of
entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) 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; or
(c) a dissolution, liquidation or winding up of
the Company (other than in connection with a consolidation
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or merger) or a sale of all or substantially all of its
property, assets and business as an entirety shall be
proposed; or
(d) reclassification or change of the
outstanding shares of Common Stock (other than a change in par
value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), consolidation of
the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result
in any reclassification or change of the outstanding shares of
Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of
the property of the Company as an entirety is proposed; or
(e) The Company or an affiliate of the
Company shall propose to issue any rights to subscribe for
shares of Common Stock or any other securities of the Company
or of such affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the
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date of closing the transfer books for the determination of the shareholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, options or warrants, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Underlying Warrants.
The form of the certificates representing the Underlying
Warrants (and the form of election to purchase shares of Common Stock upon the
exercise of the Underlying Warrants and the form of assignment printed on the
reverse thereof) shall be substantially as set forth in Exhibit "A" to the
Public Warrant Agreement; provided, however, (i) each Underlying Warrant
issuable upon exercise of the Warrants shall evidence the right to initially
purchase one (1) fully paid and non-assessable share of Common Stock in respect
of the Underlying Warrant at an initial purchase price of $6.00 per share
commencing __________, 1998 or such earlier date as the Underwriter consents to
the exercise of the warrants issued pursuant to the Public Warrant
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Agreement until _________, 2002 and (ii) the Target Redemption Price (as defined
in the Public Warrant Agreement) of the Underlying Warrants is 150% of the then
effective exercise price of the Underlying Warrants. As set forth in Section 8.5
of this Agreement, the exercise price of the Underlying Warrants and the number
of shares of Common Stock issuable upon the exercise of the Underlying Warrants
are subject to adjustment, whether or not the Warrants have been exercised and
the Underlying Warrants have been issued, in the manner and upon the occurrence
of the events set forth in Section 9 of the Public Warrant Agreement, which is
hereby incorporated herein by reference and made a part hereof as if set forth
in its entirety herein. Subject to the provisions of this Agreement and upon
issuance of the Underlying Warrants, each registered holder of such Underlying
Warrants shall have the right to purchase from the Company (and the Company
shall issue to such registered holders) up to the number of fully paid and
non-assessable Underlying Warrant Shares (subject to adjustment as provided
herein and in the Public Warrant Agreement), free and clear of all preemptive
rights of shareholders, provided that such registered holder complies, in
connection with the exercise of such holders' Underlying Warrants, with the
terms governing exercise of the Public Warrants set forth in the Public Warrant
Agreement, and pays the applicable exercise price, determined in accordance with
the terms of the Public Warrant Agreement. Upon exercise of the Underlying
Warrants, the Company shall forthwith
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issue to the registered holder of any such Underlying Warrants, in such holder's
name or in such name as may be directed by such holder, certificates for the
number of Underlying Warrant Shares so purchased. The Underlying Warrants shall
be transferable in the manner provided in the Public Warrant Agreement, and upon
any such transfer, a new Underlying Warrant shall be issued promptly to the
transferee. The Company covenants to, and agrees with, each Holder that without
the prior written consent of all the Holders, the Public Warrant Agreement will
not be modified, amended, cancelled, altered or superseded, and that the Company
will send to each Holder, irrespective of whether or not the Warrants have been
exercised, any and all notices required by the Public Warrant Agreement to be
sent to holders of the Public Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants,
to the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth
in Section 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.
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15. Supplements and Amendments.
The Company and the Underwriter may from time to time
supplement or amend this Agreement without the approval of any Holders of the
Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem not to
adversely affect the interests of the Holders of Warrant Certificates.
16. Successors.
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at the close of business on
_________, 2005. Notwithstanding the foregoing, this Agreement will terminate on
any earlier date when all Warrants and Underlying Warrants have been exercised
and all Warrant Securities have been resold to the public; provided, however,
that the provisions of Section 7 shall survive any termination pursuant to this
Section 17 until the close of business on _________, 2008.
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18. Governing Law.
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the laws of said
State.
19. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Underwriter and any other
registered holder or holders of the Warrant Certificates or Warrant Securities
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriter and any other holder or holders of the Warrant Certificates or
Warrant Securities.
20. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] TUSCANY, INC.
By:__________________________________
Name:
Title:
Attest:
PARAGON CAPITAL CORPORATION
By:__________________________________
Name:
Title:
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<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR COMMENCING __________, 1998
UNTIL 5:00 P.M., NEW YORK TIME, _______, 2002
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________
_____________________________ or registered assigns, is the registered holder of
__________ Warrants to purchase, at any time from _______, 1998 until 5:00 P.M.
New York City time on _______, 2002 ("Expiration Date"), up to _______
fully-paid and non-assessable shares (the "Shares") of the common stock, par
value $.__ per share (the "Common Stock"), of Tuscany, Inc., a Washington
corporation (the "Company"), at an initial exercise price, subject to adjustment
in certain events (the "Exercise Price"), of $____ per Share, upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in the
warrant agreement dated as of _______, 1997 between the Company and Paragon
Capital Corporation (the "Warrant Agreement"). Payment of the Exercise Price may
be made in cash, or by certified or official bank check in New York Clearing
House funds payable to the order of the Company, or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to
<PAGE>
the Warrant Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to in a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 1997 TUSCANY, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
_________________________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares of
Common Stock and herewith tenders in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of Tuscany, Inc. in the amount of $_______, all in accordance with the
terms hereof. The undersigned requests that a certificate for such securities be
registered in the name of ________________, whose address is __________________,
and that such Certificate be delivered to
___________________, whose address is _____________.
Dated: Signature:__________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________________________________
hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:_________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
__________________________________
__________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING _______, 1998
UNTIL 5:00 P.M., NEW YORK TIME, _______, 200__
No. W- _________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________
____________________, or registered assigns, is the registered holder of
___________________________ (_______) Warrants to purchase, at any time from
_______, 1998 until 5:00 P.M. New York City time on _______, 200__ ("Expiration
Date"), an aggregate of up to ___________________________ (_______) common stock
purchase warrants, each common stock purchase warrant entitling the holder
thereof to purchase [one] share of common stock, par value $.01 per share
(collectively, the "Underlying Warrants"), of Tuscany, Inc., a Washington
corporation (the "Company"), at an initial exercise price, subject to adjustment
in certain events (the "Exercise Price"), of $____ per Underlying Warrant, upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the warrant agreement dated as of _______, 1997 between the Company and
Paragon Capital Corporation ("Paragon") (the "Warrant Agreement"). Payment of
the Exercise Price may be made in cash, or by certified or official bank check
in New York Clearing House funds payable to the order of the Company, or any
combination thereof.
The Underlying Warrants issuable upon exercise of the Warrants
will be exercisable at any time from _______, 1997 until 5:00 P.M. Eastern Time
_______, 2002 each Underlying Warrant entitling the holder thereof to purchase
one fully-paid and non-assessable share of common stock of the Company, at an
initial exercise price, subject to adjustment in certain events,
<PAGE>
of $____ per share. The Underlying Warrants are issuable pursuant to the terms
and provisions of a certain agreement dated as of _______, 199__ by and among
the Company, Paragon and _______________ (the "Public Warrant Agreement"). The
Public Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to (except as otherwise provided in
the Warrant Agreement) for a description of the rights, limitations of rights,
manner of exercise, anti-dilution provisions and other provisions with respect
to the Underlying Warrants.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that, upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate
<PAGE>
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, and of any distribution to the
holder(s) hereof, and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 1997_ TUSCANY, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
_______________________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Underlying
Warrants and herewith tenders, in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to
the order of Tuscany, Inc. in the amount of $_______, all in accordance with the
terms hereof. The undersigned requests that a certificate for such securities
be registered in the name of _________________, whose address is ______________,
and that such Certificate be delivered to ___________________, whose address is
____________________.
Dated: Signature:_______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________________________________
hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:_______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
_____________________________________
_____________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
TUSCANY, INC.
a Washington corporation
and
Warrant Agent
and
PARAGON CAPITAL CORPORATION
Underwriter
WARRANT AGREEMENT
<PAGE>
Table of Contents
Section Page
- - ------- ----
1. Appointment of Warrant Agent............................ 1
2. Form of Warrant......................................... 2
3. Countersignature and Registration....................... 3
4. Transfers and Exchanges................................. 3
5. Exercise of Warrants; Payment of Warrant Solicitation
Fee..................................................... 4
6. Payment of Taxes........................................ 8
7. Mutilated or Missing Warrants........................... 9
8. Reservation of Common Stock............................. 9
9. Warrant Price; Adjustments.............................. 11
10. Fractional Interest..................................... 18
11. Notices to Warrantholders............................... 18
12. Disposition of Proceeds on Exercise of Warrants......... 20
13. Redemption of Warrants.................................. 21
14. Merger or Consolidation or Change of Name of Warrant
Agent................................................... 21
15. Duties of Warrant Agent................................. 22
16. Change of Warrant Agent................................. 26
17. Identity of Transfer Agent.............................. 27
18. Notices................................................. 27
19. Supplements and Amendments.............................. 29
20. New York Contract....................................... 29
21. Benefits of this Agreement.............................. 29
22. Successors.............................................. 30
Exhibit A - Form of Warrant
-2-
<PAGE>
WARRANT AGENT AGREEMENT dated as of _________, 1997, by and
among Tuscany, Inc., a Washington corporation (the "Company"), Paragon Capital
Corporation (the "Underwriter") and ______________________________, as warrant
agent (hereinafter called the "Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public
up to 1,600,000 shares of the Common Stock of the Company, par value $.01 per
share (hereinafter, together with the stock of any other class to which such
shares may hereafter have been changed, called "Common Stock"), and up to
1,600,000 Common Stock purchase warrants (the "Warrants");
WHEREAS, each Warrant will entitle the holder thereof to
purchase one (1) share of Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth in this Agreement, and the Warrant
Agent hereby accepts such appointment.
<PAGE>
Section 2. Form of Warrant. The text of the Warrants and of
the form of election to purchase Common Stock to be printed on the reverse
thereof shall be substantially as set forth in Exhibit A attached hereto. Each
Warrant shall entitle the registered holder thereof to purchase one share of
Common Stock at a purchase price of $5.00, at any time from __________, 1997 or
such earlier date upon which the Underwriter consents to the exercise of the
Warrants until 5:00 p.m. Eastern time, on _________, 2002 (the "Warrant Exercise
Period"). The warrant price and the number of shares of Common Stock issuable
upon exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrants shall be executed on
behalf of the Company by the manual or facsimile signature of the present or any
future President or Vice President of the Company, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration date of the Warrants
falls on a Saturday or Sunday, or on a legal holiday on which the New York Stock
Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on
the next succeeding business day.
-2-
<PAGE>
Section 3. Countersignature and Registration. The Warrant
Agent shall maintain books for the transfer and registration of the Warrants.
Upon the initial issuance of the Warrants, the Warrant Agent shall issue and
register the Warrants in the names of the respective holders thereof. The
Warrants shall be countersigned manually or by facsimile by the Warrant Agent
(or by any successor to the Warrant Agent then acting as warrant agent under
this Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may, however, be so countersigned by the Warrant Agent (or by its
successor as Warrant Agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee and the surrendered Warrant shall be cancelled by the Warrant Agent.
Warrants so cancelled shall be delivered by the Warrant Agent to the Company
from time to time upon request. Warrants may be exchanged at the option of the
holder thereof, when sur-
-3-
<PAGE>
rendered at the office of the Warrant Agent, for another Warrant, or other
Warrants of different denominations of like tenor and representing in the
aggregate the right to purchase a like number of shares of Common Stock.
Section 5. Exercise of Warrants; Payment of Warrant
Solicitation Fee.
(a) Subject to the provisions of this Agreement, each
registered holder of Warrants shall have the right, which may be exercised
commencing at the opening of business on the first day of the Warrant Exercise
Period, to purchase from the Company (and the Company shall issue and sell to
such registered holder of Warrants) the number of fully paid and non-assessable
shares of Common Stock specified in such Warrants upon surrender of such
Warrants to the Company at the office of the Warrant Agent, with the form of
election to purchase on the reverse thereof duly filled in and signed, and upon
payment to the Company of the warrant price, determined in accordance with the
provisions of Sections 9 and 10 of this Agreement, for the number of shares of
Common Stock in respect of which such Warrants are then exercised. Payment of
such warrant price shall be made in cash or by certified check or bank draft to
the order of the Company. Subject to Section 6, upon such surrender of Warrants
and payment of the warrant price, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
registered holder of
-4-
<PAGE>
such Warrants and in such name or names as such registered holder may designate,
a certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of such Warrants. Such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares of
Common Stock as of the date of the surrender of such Warrants and payment of the
warrant price as aforesaid. The rights of purchase represented by the Warrants
shall be exercisable, at the election of the registered holders thereof, either
as an entirety or from time to time for a portion of the shares specified
therein and, in the event that any Warrant is exercised in respect of less than
all of the shares of Common Stock specified therein at any time prior to the
date of expiration of the Warrants, a new Warrant or Warrants will be issued to
the registered holder for the remaining number of shares of Common Stock
specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Section and of Section 3 of this Agreement
and the Company, whenever requested by the Warrant Agent, will supply the
Warrant Agent with Warrants duly executed on behalf of the Company for such
purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable unless at the time of exercise the Company has filed with
the Securities
-5-
<PAGE>
and Exchange Commission a registration statement under the Securities Act of
1933, as amended (the "Act"), covering the shares of Common Stock issuable upon
exercise of such Warrant and such shares have been so registered or qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder of such Warrant. The Company shall use its best efforts to have all
shares so registered or qualified on or before the date on which the Warrants
become exercisable.
(b) If at the time of exercise of any Warrant after _________,
1998 (i) the per share market price of the Company's Common Stock is equal to or
greater than the then purchase price of the Warrant, (ii) the exercise of the
Warrant is solicited by the Underwriter at such time while the Underwriter is a
member of the National Association of Securities Dealers, Inc. ("NASD"), (iii)
the Warrant is not held in a discretionary account, (iv) disclosure of the
compensation arrangement is made in documents provided to the holders of the
Warrants; and (v) the solicitation of the exercise of the Warrant is not in
violation of Rule 10b-6 (as such rule or any successor rule may be in effect as
of such time of exercise) promulgated under the Securities Exchange Act of 1934,
then the Underwriter shall be entitled to receive from the Company upon exercise
of each of the Warrant(s) so exercised a fee of five percent (5%) of the
aggregate price of the Warrants so exercised (the "Exercise
-6-
<PAGE>
Fee"). The procedures for payment of the warrant solicitation fee are set forth
in Section 5(c) below.
(c) (1) Within five (5) days of the last day of each month
commencing with ______, 1998, the Warrant Agent will promptly notify the
Underwriter of each Warrant Certificate which has been properly completed for
exercise by holders of Warrants during the last month. The Company and Warrant
Agent shall determine, in their sole and absolute discretion, whether a Warrant
Certificate has been properly completed. The Warrant Agent will provide the
Underwriter with such information, in connection with the exercise of each
Warrant, as the Underwriter shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after
receipt by the Warrant Agent from the Company of a check payable to the order of
the Underwriter in the amount of the Exercise Fee. The Warrant Agent shall not
issue the shares of Common Stock issuable upon exercise of the Warrants until
receipt and forwarding of such check to the Underwriter. In the event that an
Exercise Fee is paid to the Underwriter with respect to a Warrant which the
Company or the Warrant Agent determines is not properly completed for exercise
or in respect of which the Underwriter is not entitled to an Exercise Fee, the
Underwriter will promptly return such Exercise Fee to the Warrant Agent which
shall forthwith return such fee to the Company.
-7-
<PAGE>
The Underwriter and the Company may at any time, after
_________, 1998, and during business hours, examine the records of the Warrant
Agent, including its ledger of original Warrant certificates returned to the
Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the
contrary, the provisions of paragraphs 5(b) and 5(c) may not be modified,
amended or deleted without the prior written consent of the Underwriter.
Section 6. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of any certificates of shares of
Common Stock in a name other than that of the registered holder of Warrants in
respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid or that such person has an exemption
from the payment of such tax.
Section 7. Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in
its discretion, issue and the
-8-
<PAGE>
Warrant Agent shall countersign and deliver in exchange and substitution for and
upon cancellation of the mutilated Warrant, or in lieu of and in substitution
for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and
representing an equivalent right or interest, but only upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction and, in case of a lost, stolen or destroyed Warrant, indemnity, if
requested, also satisfactory to them. Applicants for such substitute Warrants
shall also comply with such other reasonable regulations and pay such reasonable
charges as the Company or the Warrant Agent may prescribe.
Section 8. Reservation of Common Stock. There have been
reserved, and the Company shall at all times keep reserved, out of the
authorized and unissued shares of Common Stock, a number of shares of Common
Stock sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the transfer agent for the shares of Common
Stock and every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of any of the rights of purchase aforesaid are
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates of such
shares, validly issued and outstanding, fully paid and non-
-9-
<PAGE>
assessable and listed on any national securities exchange upon which the other
shares of Common Stock are then listed. So long as any unexpired Warrants remain
outstanding, the Company will file such post-effective amendments to the
registration statement (Form SB-2, Registration No. 333- ) (the "Registration
Statement") filed pursuant to the Act with respect to the Warrants (or other
appropriate registration statements or post-effective amendment or supplements)
as may be necessary to permit it to deliver to each person exercising a Warrant,
a prospectus meeting the requirements of Section 10(a)(3) of the Act and
otherwise complying therewith, and will deliver such a prospectus to each such
person. To the extent that during any period it is not reasonably likely that
the Warrants will be exercised, due to market price or otherwise, the Company
need not file such a post-effective amendment during such period. The Company
will keep a copy of this Agreement on file with the transfer agent for the
shares of Common Stock and with every subsequent transfer agent for any shares
of the Company's Common Stock issuable upon the exercise of the rights of
purchase represented by the Warrants. The Warrant Agent is irrevocably
authorized to requisition from time to time from such transfer agent stock
certificates required to honor outstanding Warrants. The Company will supply
such transfer agent with duly executed stock certificates for that purpose. All
Warrants surrendered in the exercise of the rights thereby evidenced shall be
cancelled by the Warrant Agent and
-10-
<PAGE>
shall thereafter be delivered to the Company, and such cancelled Warrants shall
constitute sufficient evidence of the number of shares of Common Stock which
have been issued upon the exercise of such Warrants. Promptly after the date of
expiration of the Warrants, the Warrant Agent shall certify to the Company the
total aggregate amount of Warrants then outstanding, and thereafter no shares of
Common Stock shall be subject to reservation in respect of such Warrants which
shall have expired.
Section 9. Warrant Price; Adjustments.
(a) The warrant price at which Common Stock shall
be purchasable upon the exercise of the Warrants shall be $ per share or
after adjustment, as provided in this Section, shall be such price as so
adjusted (the "Warrant Price").
(b) The Warrant Price shall be subject to adjustment
from time to time as follows:
(i) In case the Company shall at any time after the date
hereof pay a dividend in shares of Common Stock or make a distribution in shares
of Common Stock, then upon such dividend or distribution the Warrant Price in
effect immediately prior to such dividend or distribution shall forthwith be
reduced to a price determined by dividing:
(A) an amount equal to the total number
of shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Warrant Price in effect immediately prior to such
dividend or distribution, by
-11-
<PAGE>
(B) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 9(b)(i), the following
provisions shall be applicable: Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the date following the date
fixed for the determination of stockholders entitled to receive such dividend or
other distribution.
(ii) In case the Company shall at any time subdivide or
combine the outstanding Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination to the nearest one cent. Any such adjustment shall become effective
at the time such subdivision or combination shall become effective.
(iii) Within a reasonable time after the close of each
quarterly fiscal period of the Company during which the Warrant Price has been
adjusted as herein provided, the Company shall
(A) file with the Warrant Agent a certificate
signed by the President or Vice President of the Company and by the Treasurer or
Assistant Treasurer or the Secretary or an Assistant Secretary of the Company,
showing in detail the
-12-
<PAGE>
facts requiring all such adjustments occurring during such period and the
Warrant Price after each such adjustment; and
(B) the Warrant Agent shall have no
duty with respect to any such certificate filed with it except to keep the same
on file and available for inspection by holders of Warrants during reasonable
business hours, and the Warrant Agent may conclusively rely upon the latest
certificate furnished to it hereunder. The Warrant Agent shall not at any time
be under any duty or responsibility to any holder of a Warrant to determine
whether any facts exist which may require any adjustment of the Warrant Price,
or with respect to the nature or extent of any adjustment of the Warrant Price
when made, or with respect to the method employed in making any such adjustment,
or with respect to the nature or extent of the property or securities
deliverable hereunder. In the absence of a certificate having been furnished,
the Warrant Agent may conclusively rely upon the provisions of the Warrants with
respect to the Common Stock deliverable upon the exercise of the Warrants and
the applicable Warrant Price thereof.
(iv) Notwithstanding anything contained herein to the
contrary, no adjustment of the Warrant Price shall be made if the amount of such
adjustment shall be less than $.05, but in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which,
-13-
<PAGE>
together with any adjustment so carried forward, shall amount to not less than
$.05.
(v) In the event that the number of outstanding shares of
Common Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of
this Section by reason of such dividend or subdivision, the number of shares of
Common Stock issuable upon the exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares. In the event that the number
of shares of Common Stock outstanding is decreased by a combination of the
outstanding Common Stock, then, from and after the time at which the adjusted
Warrant Price becomes effective pursuant to this Section 9(b)(b) of this Section
by reason of such combination, the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be decreased in proportion to such
decrease in the outstanding shares of Common Stock.
(vi) In case of any reorganization or reclassification of
the outstanding Common Stock (other than a change in par value, or from par
value to no par value, or as a result of a subdivision or combination), or in
case of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any
-14-
<PAGE>
reclassification of the outstanding Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, the holder of each Warrant then outstanding
shall thereafter have the right to purchase the kind and amount of shares of
Common Stock and other securities and property receivable upon such
reorganization, reclassification, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which the holder of such Warrant
shall then be entitled to purchase; such adjustments shall apply with respect to
all such changes occurring between the date of this Warrant Agreement and the
date of exercise of such Warrant.
(vii) Subject to the provisions of this Section 9, in case
the Company shall, at any time prior to the exercise of the Warrants, make any
distribution of its assets to holders of its Common Stock as a liquidating or a
partial liquidating dividend, then the holder of Warrants who exercises its
Warrants after the record date for the determination of those holders of Common
Stock entitled to such distribution of assets as a liquidating or partial
liquidating dividend shall be entitled to receive for the Warrant Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would
-15-
<PAGE>
have been payable to such holder had he been the holder of record of the Common
Stock receivable upon exercise of its Warrant on the record date for the
determination of those entitled to such distribution.
(viii) In case of the dissolution, liquidation or winding
up of the Company, all rights under the Warrants shall terminate on a date fixed
by the Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants, as
the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(ix) In case the Company shall, at any time prior to the
expiration of the Warrants and prior to the exercise thereof, offer to the
holders of its Common Stock any rights to subscribe for additional shares of any
class of the Company, then the Company shall give written notice thereof to the
last registered holder thereof not less than thirty (30) days prior to the date
on which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription and the right of the
holder
-16-
<PAGE>
thereof to participate in such offer of subscription shall terminate if the
Warrant shall not be exercised on or before the date of such closing of the
books or such record date.
(x) Any adjustment pursuant to the aforesaid provisions
of this Section 9 shall be made on the basis of the number of shares of Common
Stock which the holder thereof would have been entitled to acquire by the
exercise of the Warrant immediately prior to the event giving rise to such
adjustment.
(xi) Irrespective of any adjustments in the Warrant Price
or the number or kind of shares purchasable upon exercise of the Warrants,
Warrants previously or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section 9, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section 9.
(xiii) If at any time, as a result of an adjustment made
pursuant to Section 9(b)(vi) above, the holders of a Warrant or Warrants shall
become entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
-17-
<PAGE>
Warrant and the Warrant Price for such shares shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in Section 9(b)(ii)
through (v).
Section 10. Fractional Interest. The Warrants may only be
exercised to purchase full shares of Common Stock and the Company shall not be
required to issue fractions of shares of Common Stock on the exercise of
Warrants. However, if a Warrant holder exercises all Warrants then owned of
record by it and such exercise would result in the issuance of a fractional
share, the Company will pay to such Warrant holder, in lieu of the issuance of
any fractional share otherwise issuable, an amount of cash based on the market
value of the Common Stock of the Company on the last trading day prior to the
exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and
the number of shares of Common Stock issuable upon exercise of a Warrant, then
and in each such case the Company shall give written notice thereof to the
Warrant Agent, which notice shall state the Warrant Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of a Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based. The Company shall also mail such notice to the holders of
the Warrants at their addresses appearing in the
-18-
<PAGE>
Warrant register. Failure to give or mail such notice, or any defect therein,
shall not affect the validity of the adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable in stock upon
its Common Stock or make any distribution (other than regular cash dividends) to
the holders of its Common Stock; or
(ii) the Company shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale or substantially all of its assets to, another
corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; then in any one or more of such cases,
the Company shall give written notice in the manner set forth in Section 11(a)
of the date on which (A) a record shall be taken for such dividend, distribution
or subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
-19-
<PAGE>
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up as the case may be. Such notice shall be given at
least thirty (30) days prior to the action in question and not less than thirty
(30) days prior to the record date in respect thereof. Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
of the matters set forth in this Section 11(b).
(C) The Company shall cause copies of all
financial statements and reports, proxy statements and other documents that are
sent to its stockholders to be sent by first-class mail, postage prepaid, on the
date of mailing to such stockholders, to each registered holder of Warrants at
his address appearing in the warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of
Warrants.
(i) The Warrant Agent shall promptly forward
to the Company all monies received by the Warrant Agent for the purchase of
shares of Common Stock through the exercise of such Warrants; provided, however,
that the Warrant Agent may retain an amount equal to the Exercise Fee, if any,
until the Company has satisfied its obligations under Section 5(c)(i).
-20-
<PAGE>
(ii) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of Warrants during normal business
hours.
Section 13. Redemption of Warrants. The Warrants are
redeemable by the Company upon the consent of the Underwriter, in whole or in
part, on not less than thirty (30) days' prior written notice at a redemption
price of $.10 per Warrant at any time commencing __________, 1997; provided that
(i) the closing bid quotation price of the Common Stock on all twenty (20)
trading days ending on the third day prior to the day on which the Company gives
notice of redemption has been at least 150% of the then effective exercise price
of the Warrants (the "Target Redemption Price") and (ii) the Warrants are
currently exercisable. The redemption notice shall be mailed to the holders of
the Warrants at their addresses appearing in the Warrant register. Holders of
the Warrants will have exercise rights until the close of business on the date
fixed for redemption.
Section 14. Merger or Consolidation or Change of Name of
Warrant Agent. Any corporation or company which may succeed to the corporate
trust business of the Warrant Agent by any merger or consolidation or otherwise
shall be the successor to the Warrant Agent hereunder without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible to serve
-21-
<PAGE>
as a successor Warrant Agent under the provisions of Section 16 of this
Agreement. In case at the time such successor to the Warrant Agent shall succeed
to the agency created by this Agreement, any of the Warrants shall have been
countersigned but not delivered, any such successor to the Warrant Agent may
adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrants shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrants so countersigned. In all such cases such Warrants
shall have the full force provided in the Warrants and in the Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained
herein and in the Warrants shall be taken as statements of the Company, and the
Warrant Agent assumes no responsibility for the correctness of any of the same
except such as describe the Warrant Agent or action taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants except as herein expressly provided.
-22-
<PAGE>
(b) The Warrant Agent shall not be responsible
for any failure of the Company to comply with any of the covenants in this
Agreement or in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time
with counsel satisfactory to it (who may be counsel for the Company) and the
Warrant Agent shall incur no liability or responsibility to the Company or to
any holder of any Warrant in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with the opinion or the advice of
such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant
Agent reasonable compensation for all services rendered by the Warrant Agent in
the execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including judgments,
costs and reasonable counsel fees, for anything done
-23-
<PAGE>
or omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director,
officer, partner or employee of the Warrant Agent may buy, sell or deal in any
of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend
-24-
<PAGE>
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent and its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise
any of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys, agents or employees, and the
Warrant Agent shall not be answerable or accountable for any such attorneys,
agents or employees or for any loss to the Company resulting from such neglect
or misconduct, provided reasonable care had been exercised in the selection and
continued employment thereof.
(j) Any request, direction, election, order or
demand of the Company shall be sufficiently evidenced by an instrument signed in
the name of the Company by its President or a Vice President or its Secretary or
an Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
-25-
<PAGE>
Section 16. Change of Warrant Agent. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by mailing
such notice to the holders at their addresses appearing on the Warrant register,
of such resignation, specifying a date when such resignation shall take effect.
The Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Warrant Agent or after the
Company has received such notice from a registered holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant
-26-
<PAGE>
Agent without further act or deed and the former Warrant Agent shall deliver and
transfer to the successor Warrant Agent all cancelled Warrants, records and
property at the time held by it hereunder, and execute and deliver any further
assurance or conveyance necessary for the purpose. Failure to file or mail any
notice provided for in this Section, however, or any defect therein, shall not
affect the validity of the resignation or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the
appointment of any transfer agent for the shares of Common Stock or of any
subsequent transfer agent for the shares of Common Stock or other shares of the
Company's Common Stock issuable upon the exercise of the rights of purchase
represented by the Warrants, the Company will file with the Warrant Agent a
statement setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to
be given by the Warrant Agent, or by the registered holder of any Warrant to the
Company, shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another is filed in writing by the Company with the
Warrant Agent) as follows:
-27-
<PAGE>
Tuscany, Inc.
601 Union Street - Suite 4620
Seattle, Washington 98101
Attention: Jim Simonson, Chief Executive
Officer
and a copy thereof to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
Any notice pursuant to this Agreement to be given by
the Company or by the registered holder of any Warrant to the Warrant Agent
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:
Attention:
Any notice pursuant to this Agreement to be given by the
Warrant Agent or by the Company to the Underwriter shall be sufficiently given
if sent by first-class mail, postage prepaid, addressed (until another address
if filed in writing with the Warrant agent) as follows:
Paragon Capital Corporation
7 Hanover Square
New York, New York 10004
Attention: George B. Levine, Chairman
-28-
<PAGE>
and a copy thereof to:
Akerman, Senterfitt & Eidson
One Southeast 3rd Avenue
Miami, Florida 33131-1704
Attention: Alan H. Aronson, Esq.
Section 19. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in order
to cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Warrant Agent may deem necessary or desirable and
which shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the holders of Warrants.
Section 20. New York Contract. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Warrant Agent and the registered holders of the Warrants any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be
-29-
<PAGE>
for the sole and exclusive benefit of the Company, the Warrant Agent and the
registered holders of the Warrants.
Section 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company, the Warrant Agent or the
Underwriter shall bind and inure to the benefit of their respective successors
and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
TUSCANY, INC.
By: ____________________________
Name:
Title:
By: ____________________________
Name:
Title:
PARAGON CAPITAL CORPORATION
By: ____________________________
Name:
Title:
-30-
<PAGE>
EXHIBIT 10.1
LOGO SEAFIRST BANK
PROMISSORY NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$1,600,000.00 09-01-1997 2699654871 88105
- - -----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Borrower: TUSCANY, INC. DBA TUSCANY COFFEE ROASTER Lender: BANK OF AMERICA NW NA D/B/A SEAFIRST BANK
AND BAGEL BAKERY METROPOLITAN COMMERCIAL TEAM 1
500 UNION STREET, SUITE 920 c/o CLSC-W (DOC'S)
SEATTLE, WA 98101 800 FIFTH AVE (FAB-13)
SEATTLE, WA 98104
===============================================================================================================================
</TABLE>
Principal Amount: $1,600,000.00 Date of Note: August 30, 1996
PROMISE TO PAY. TUSCANY, INC. DBA TUSCANY COFFEE ROASTER AND BAGEL BAKERY
("Borrower") promises to pay to BANK OF AMERICA NW NA D/B/A/ SEAFIRST BANK
("Lender"), or order, in lawful money of the United States of America, the
principal amount of One Million Six Hundred Thousand & 00/100 Dollars
($1,600,000.00), together with interest on the unpaid principal balance until
paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in accordance with the following payment schedule:
11 consecutive monthly Interest payments, beginning October 1, 1996, with
interest calculated on the unpaid principal balances at an interest rate of
1.250 percentage points over the Index described below; 3 consecutive quarterly
principal payments of $200,000.00 each, beginning December 1, 1996, with
interest calculated on the unpaid principal balances at an interest of 1.250
percentage points over the Index described below; and 1 principal and interest
payment in the initial amount of $1,008,180.55 on September 1, 1997, with
interest calculated on the unpaid principal balances at an interest rate of
1.250 percentage points over the index described below. This estimated final
payment is based on the assumption that all payments will be made exactly as
scheduled and that the index does not change; the actual final payment will be
for all principal and accrued interest not yet paid, together with any other
unpaid amounts under this Note.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
mutiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs and late charges.
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender to automatically deduct
from Borrower's checking/savings account number 68399104 or such other Seafirst
account as may be authorized in the future, the loan payment according to the
amount and terms of this Note. If the funds in the account are insufficient to
cover any payment, Lender shall not be obligated to advance funds to cover the
payment. At any time and for any reasons, Borrower or Lender may voluntarily
terminate Automatic Payments. Our business days are Monday through Friday.
Payments that come due on a Saturday, Sunday or legal bank holiday, will be
deducted on the following business day.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an Index which is the Lender's publicly
announced prime rate (the "Index"). The interest rate change will not occur more
often than each day the prime rate changes. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The Interest rate change will not occur
more often than each day. The interest rate or rates to be applied to the unpaid
principal balance of this Note will be the rate or rates set forth above in the
"Payment" section. Subject to any specific Note provisions to the contrary, any
variable interest rate tied to the index will be calculated as of, and will
begin on, the commencement date indicated for the applicable payment stream.
NOTICE: Under no circumstances will the interest rate on this Note be more than
the maximum rate allowed by applicable law.
<PAGE>
PREPAYMENT FEE. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments under the payment schedule. Rather, they will reduce the principal
balance due and may result in Borrower's making fewer payments.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $20.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any of the events described in this default
section occurs with respect to any guarantor of this Note. (g) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (h) Lender
in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note by 2.000 percentage points, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). The
interest rate will not exceed the maximum rate permitted by applicable law.
Lender may hire or pay someone else to help collect this Note if Borrower does
not pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will pay
any court costs, in addition to all other sums provided by law. This Note has
been delivered to Lender and accepted by Lender in the State of Washington. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts situated in King County, the State of Washington.
This Note shall be governed by and construed in accordance with the laws of the
State of Washington.
<PAGE>
PROMISSORY NOTE
(Continued)
================================================================================
STATUTE OF FRAUDS PROVISION. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew, extend (repeatedly and for any length of time) or modify this loan,
with the consent of Borrower, or release any party or guarantor; or impair, fail
to realize upon or perfect Lender's security interest in the collateral; and
take any other action deemed necessary by Lender without the consent of or
notice to anyone.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
TUSCANY, INC. DBA TUSCANY COFFEE ROASTER AND BAGEL BAKERY
By: 8-30-96
----------------------------- ------------------
===============================================================================
Variable Rate, Irregular. LASER PRO, Reg. U.S. Pat. & T.M. Off.,
Ver. 2.20(c) 1996 CFI ProServices, Inc.
All rights reserved. (WA-D20JB0829TU.LN G2OVL)
<PAGE>
EXHIBIT 10.2
LOGO SEAFIRST BANK
PROMISSORY NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$600,000.00 03-01-1997 2699654871 88105
- - -----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Borrower: TUSCANY, INC. DBA TUSCANY COFFEE ROASTER Lender: BANK OF AMERICA NW NA D/B/A/ SEAFIRST BANK
AND BAGEL BAKERY METROPOLITAN COMMERCIAL TEAM 1
500 UNION STREET, SUITE 920 c/o CLSC-W (DOC'S)
SEATTLE, WA 98101 800 FIFTH AVE (FAB-13)
SEATTLE, WA 98104
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Amount: $600,000.00 1.250% Over the Index Date of Note: August 30, 1995
</TABLE>
PROMISE TO PAY. TUSCANY, INC. DBA TUSCANY COFFEE ROASTER AND BAGEL BAKERY
("Borrower") promises to pay to BANK OF AMERICA NW NA D/B/A/ SEAFIRST BANK
("Lender"), or order, in lawful money of the United States of America, the
principal amount of Six Hundred Thousand & 00/100 Dollars ($600,000.00) or so
much as may be outstanding, together with interest on the unpaid outstanding
principal balance until paid in full.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on March 1, 1997. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning October 1,
1996, and all subsequent interest payments are due on the same day of each month
after that. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
acutal number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender to automatically deduct
from Borrower's checking/savings account number 68399104 or such other Seafirst
account as may be authorized in the future, the loan payment according to the
amount and terms of this Note. If the funds in the account are insufficient to
cover any payment, Lender shall not be obligated to advance funds to cover the
payment. At any time and for any reasons. Borrower or Lender may voluntarily
terminate Automatic Payments. Our business days are Monday through Friday.
Payments that come due on a Saturday, Sunday or legal bank holiday, will be
deducted on the following business day.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an Index which is the Lender's publicly
announced prime rate (the "Index"). The interest rate change will not occur more
often than each day the prime rate changes. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The Interest rate change will not occur
more often than each day. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 1.250 percentage points over
the Index. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
<PAGE>
PREPAYMENT FEE. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments under the payment schedule. Rather, they will reduce the principal
balance due and may result in Borrower's making fewer payments.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment of $20.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any of the events described in this default
section occurs with respect to any guarantor of this Note. (g) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness in impaired. (h) Lender
in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 3.250 percentage points over the Index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
This Note has been delivered to Lender and accepted by Lender in the State of
Washington. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts situated in King County, the State of
Washington. This Note shall be governed by and construed in accordance with the
laws of the State of Washington.
<PAGE>
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority:
and . Borrower agrees to be liable for all sums
either: (a) advanced in accordance with the instructions of an authorized person
or (b) credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a) Borrower
or any guarantor is in default under the terms of this Note or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note: (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
STATUTE OF FRAUDS PROVISION. ORAL, AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew, extend (repeatedly and for any length of time) or modify this loan,
with the consent of Borrower, or release any party or guarantor; or impair, fail
to realize upon or perfect Lender's security interest in the collateral; and
take any other action deemed necessary by Lender without the consent of or
notice to anyone.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
TUSCANY, INC. DBA TUSCANY COFFEE ROASTER AND BAGEL BAKERY
By: 8-30-96
----------------------------- ------------------
===============================================================================
Variable Rate, Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off.,
Var 5.20(c) 1996 CFI ProServices, Inc.
All rights reserved. (WA-D20JB0829TI.LN G2OVL)
<PAGE>
Exh 10.3
SEAFIRST BANK [LOGO] BUSINESS LOAN AGREEMENT
PART A
This Business Loan Agreement ("Agreement") is made between TUSCANY, INC. DBA
TUSCANY COFFEE ROASTER AND BAGEL BAKERY ("Borrower") and BANK OF AMERICA NW,
N.A., doing business as SEAFIRST BANK (Including its successors and/or assigns
"Bank") with respect to the following:
1) Loan. Subject to the terms of this Agreement, Bank agrees to lend to Borrower
as follows:
(a) Total Amount Available: $1,600,000.
(b) This loan matures on: September 1, 1997
(c) Interest Rate: Bank's publicly announced prime rate plus 1.25
percent of the principal per annum, adjusted on the date of
any Bank prime rate change.
(d) Interest Rate Basis: All interest will be calculated on the
basis of actual number of days elapsed over a year of 360
days.
(e) Repayment: At the times and in amounts as set forth in note(s)
required under Part B Article 1 of this Agreement.
(f) Loan Fee: $8,000 payable upon closing via a direct debit to
account #68399104.
(g) Collateral. This revolving line of credit shall be unsecured.
2) Line of Credit. Subject to the terms of this Agreement, Bank will make
loans to Borrower under a revolving line of credit as follows:
(a) Total Amount Available: $600,000.
(b) Availability Period: Advances are available through March 1,
1997. However, if loans are made and/or new promissory notes
executed after the termination date, such advances will be
subject to the terms of this Agreement until repaid in full
unless a written statement signed by Bank and Borrower
provides otherwise, or a replacement loan agreement is
executed. The making of such additional advances alone,
however, does not constitute a commitment by Bank to make any
further advances or extend the availability period.
(c) Interest Rate: Bank's publicly announced prime rate plus 1.25
percent of the principal per annum, adjusted on the date of
any Bank prime rate change.
(d) Interest Rate Basis: All interest will be calculated on the
basis of actual number of days elapsed over a year of 360
days.
(e) Repayment: At the times and in amounts as set forth in note(s)
required under Part B Article 1 of this Agreement.
(f) Loan Fee: $3,000 payable upon closing via a direct debit to
account #68399104.
(g) Collateral: This revolving line of credit shall be unsecured.
INITIALS: TUSCANY PREMIUM COFFEES
SEAFIRST BANK
<PAGE>
PART B
1. Promissory Note(s). All loans shall be evidenced by promissory notes in
a form and substance satisfactory to Bank.
2. Conditions to Availability of Loan/Line of Credit. Before Bank is
obligated to disburse/make any advance, or at any time thereafter which
Bank deems necessary and appropriate, Bank must receive all of the
following, each of which must be in form and substance satisfactory to
Bank ("loan documents"):
2.1 Original, executed promissory note(s);
2.2 Original executed security agreement(s) and/or deed(s) of
trust covering the collateral described in Part A;
2.3 All collateral described in Part A in which Bank wishes to
have a possessory security interest;
2.4 Financing statement(s) executed by Borrower;
2.5 Such evidence that Bank may deem appropriate that the security
interest and liens in favor of Bank are valid, enforceable,
and prior to the rights and interests of others except those
consented to in writing by Bank;
+2.6 The following limited guaranty(ies) in favor of the Bank in
support of Facility #1 at $200,000 each: John A. McMillan,
Ronald G. Neubauer, Alvin I. Goldfarb, Ken F. Chamberlin,
David L. Cohn, Geoffrey A. Boguch, James A. Milgard, Solomon
D. Menashe, Ottie A. Ladd. In support of Facility #2: Ronald
G. Neubauer ($100,000), John Parkey ($200,000), John A.
McMillan ($200,000), Todd Rosenberg ($100,000) and Ken F.
Chamberlin ($200,000);
+2.7 Subordination agreement(s) in favor of Bank executed by: N/A;
2.8 Evidence that the execution, delivery, and performance by
Borrower of this Agreement and the execution, delivery, and
performance by Borrower and any corporate guarantor or
corporate subordinating creditor of any instrument or
agreement required under this Agreement, as appropriate, have
been duly authorized;
2.9 Any other document which is deemed by the Bank to be required
from time to time to evidence loans or to effect the
provisions of this Agreement;
2.10 If requested by Bank, a written legal opinion expressed to
Bank, of counsel for Borrower as to the matters set forth in
sections 3.1 and 3.2, and to the best of such counsel's
knowledge after reasonable investigation, the matters set
forth in sections 3.3, 3.5, 3.6, 3.7, 3.8 and such other
matters as the Bank may reasonably request;
2.11 Pay or reimburse Bank for any out-of-pocket expenses expended
in making or administering the loans made hereunder including
without limitation attorney's fees (including allocated costs
of in-house counsel);
3. Representations and Warranties. Borrower represents and warrants to
Bank, except as Borrower has disclosed to Bank in writing, as of the
date of this Agreement and hereafter so long as credit granted under
this Agreement is available and until full and final payment of all
sums outstanding under this Agreement and promissory notes that:
+3.1 Borrower is duly organized and existing under the laws of the
state of its organization as a:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
General Limited Sole dba Tuscany Coffee
Corporation Partnership Partnership Proprietorship Roaster and Bagel
Bakery
</TABLE>
Borrower is properly licensed and in good standing in each
state in which Borrower is doing business and Borrower has
qualified under, and complied with, where required, the
fictitious or trade name statutes of each state in which
Borrower is doing business, and Borrower has obtained all
necessary government approvals for its business activities;
the execution, delivery, and performance of this Agreement and
such notes and other instruments required herein are within
Borrower's powers, have been duly authorized, and, as to
Borrower and any guarantor, are not in conflict with the terms
of any charter, bylaw, or other organization papers of
Borrower, and this Agreement, such notes and the loan
<PAGE>
documents are valid and enforceable according to their terms;
3.2 The execution, delivery, and performance of this Agreement,
the loan documents and any other instruments are not in
conflict with any law or any indenture, agreement or
undertaking to which Borrower is a party or by which Borrower
is bound or affected;
3.3 Borrower has title to each of the properties and assets as
reflected in its financial statements (except such assets
which have been sold or otherwise disposed of in the ordinary
course of business), and no assets or revenues of the Borrower
are subject to any lien except as required or permitted by
this Agreement, disclosed in its financial statements or
otherwise previously disclosed to Bank in writing;
3.4 All financial information, statements as to ownership of
Borrower and all other statements submitted by Borrower to
Bank, whether previously or in the future, are and will be
true and correct in all material respects upon submission and
are and will be complete upon submission insofar as may be
necessary to give Bank a true and accurate knowledge of the
subject matter thereof;
3.5 Borrower has filed all tax returns and reports as required by
law to be filed and has paid all taxes and assessments
applicable to Borrower or to its properties which are
presently due and payable, except those being contested in
good faith;
3.6 There are no proceedings, litigation or claims (including
unpaid taxes) against Borrower pending or, to the knowledge of
the Borrower, threatened, before any court or government
agency, and no other event has occurred which may have a
material adverse effect on Borrower's financial condition;
3.7 There is no event which is, or with notice or lapse of time,
or both, would be, an Event of Default (as defined in
Section 7) under this Agreement;
<PAGE>
3.8 Borrower has exercised due diligence in inspecting Borrower's
properties for hazardous wastes and hazardous substances.
Except as otherwise previously disclosed and acknowledged to
Bank in writing: (a) during the period of Borrower's ownership
of Borrower's properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or hazardous
substance by any person in, on, under or about any of
Borrower's properties; (b) Borrower has no actual or
constructive knowledge that there has been any use,
generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or hazardous
substance by any person in, on, under or about any of
Borrower's properties by any prior owner or occupant of any of
Borrower's properties; and (c) Borrower has no actual or
constructive notice of any actual or threatened litigation or
claims of any kind by any person relating to such matters. The
terms "hazardous waste(s), "hazardous substance(s),"
"disposal," "release," and "threatened release" as used in
this Agreement shall have the same meanings as set forth in
the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, 42 U.S.C. Section 9501, et
seq., the Superfund Amendments and Reauthorization Act of
1986, as amended, Pub. L. No. 99-499, the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, as amended,
49 U.S.C. Section 6901, et seq., or other applicable state or
federal laws, rules or regulations adopted pursuant to any of
the foregoing.
+3.9 Each chief place of business of Borrower, and the office or
offices where Borrower keeps its records concerning any of the
collateral, is located at: 500 Union Street, Suite 920,
Seattle, Washington 98101.
4. Affirmative Covenants. So long as credit granted under this Agreement
is available and until full and final payment of all sums outstanding
under this Agreement and promissory note(s) Borrower will:
+4.1 Use the proceeds of the loans covered by this Agreement only
in connection with Borrower's business activities and
exclusively for the following purposes: General corporate
purposes including funding of new store development.
+4.2 Maintain current assets in an amount at least equal to N/A
times current liabilities, and not less than $ N/A. Current
assets and current liabilities shall be determined in
accordance with generally accepted accounting principles and
practices, consistently applied;
<PAGE>
+4.3 Maintain a tangible net worth plus convertible subordinated
debt of at least $2,000,000 through Dec. 30, 1996, at least
$4,000,00 as of Dec. 31, 1996, and thereafter. "Tangible net
worth" means the excess of total assets over total
liabilities, excluding, however, from the determination of
total assets (a) all assets which should be classified as
intangible assets such as goodwill, patents, trademarks,
copyrights, franchises, and deferred charges (including
unamortized debt discount and research and development costs),
(b) treasury stock, (c) cash held in a sinking or other
similar fund established for the purpose of redemption or
other retirement of capital stock, (d) to the extent not
already deducted from total assets, reserves for depreciation,
depletion, obsolescence or amortization of properties and
other reserves or appropriations of retained earnings which
have been or should be established in connection with the
business conducted by the relevant corporation, and (e) any
revaluation or other write-up in book value of assets
subsequent to the fiscal year of such corporation last ended
at the date of this Agreement;
+4.4 Upon request Borrower agrees to insure and to furnish Bank
with evidence of insurance covering the life of Borrower (if
an individual) or the lives of designated partners or officers
of Borrower (if a partnership or corporation) in the amounts
stated below. Borrower shall take such actions as are
reasonably requested by Bank, such as assigning the insurance
policies to Bank or naming Bank as beneficiary and obtaining
the insurer's acknowledgment thereof, to provide that in the
event of the death of any of the named insureds the policy
proceeds will be applied to payment of Borrower's obligations
owing to Bank;
Name: N/A Amount: N/A
Name: N/A Amount: N/A
+4.5 Promptly give written notice to Bank of: (a) all litigation
and claims made or threatened affecting Borrower where the
amount is $ 50,000 or more; (b) any substantial dispute which
may exist between Borrower and any governmental regulatory
body or law enforcement authority; (c) any Event of Default
under this Agreement or any other agreement with Bank or any
other creditor or any event which become an Event of Default;
and (d) any other matter which has resulted or might result in
a material adverse change in Borrower's financial condition or
operations;
+4.6 Borrower shall as soon as available, but in any event within
90 days following the end of each Borrower's fiscal years and
within 45 days following the end of each quarter provide to
Bank, in a form satisfactory to Bank (including audited
statements if required at any time by Bank), such financial
statements, which will include a covenant compliance
certificate signed by the Borrower's Chief Financial Officer,
and other information respecting the financial condition and
operations of Borrower as Bank may reasonably request;
4.7 Borrower will maintain in effect insurance with responsible
insurance companies in such amounts and against such risks as
is customarily maintained by persons engaged in businesses
similar to that of Borrower and all policies covering property
given as security for the loans shall have loss payable
clauses in favor of Bank. Borrower agrees to deliver to Bank
such evidence of insurance as Bank may reasonably require and,
within thirty (30) days after notice from Bank, to obtain such
additional insurance with an insurer satisfactory to the Bank;
4.8 Borrower will pay all indebtedness taxes and other obligations
for which the Borrower is liable or to which its income or
property is subject before they shall become delinquent,
except any which is being contested by the Borrower in good
faith;
4.9 Borrower will continue to conduct its business as presently
constituted, and will maintain and preserve all rights,
privileges and franchises now enjoyed, conduct Borrower's
business in an orderly, efficient and customary manner, keep
all Borrowers properties in good working order and condition,
and from time to time make all needed repairs, renewals or
replacements so that the efficiency of Borrower's properties
shall be fully maintained and preserved;
4.10 Borrower will maintain adequate books, accounts and records
and prepare all financial statements required hereunder in
accordance with generally accepted accounting principles and
practices consistently applied, and in compliance with the
regulations of any governmental regulatory body having
jurisdiction over Borrower or Borrower's business;
4.11 Borrower will permit representatives of Bank to examine and
make copies of the books and records of Borrower and to
examine the collateral of the Borrower at reasonable times;
<PAGE>
4.12 Borrower will perform, on request of Bank, such acts as may be
necessary or advisable to perfect any lien or security
interest provided for herein or otherwise carry out the intent
of this Agreement;
4.13 Borrower will comply with all applicable federal, state and
municipal laws, ordinances, rules and regulations relating to
its properties, charters, businesses and operations, including
compliance with all minimum funding and other requirements
related to any of Borrower's employee benefit plans;
4.14 Borrower will permit representatives of Bank to enter onto
Borrower's properties to inspect and test Borrower's
properties as Bank, in its sole discretion, may deem
appropriate to determine Borrower's compliance with section
5.8 of this Agreement; provided however, that any such
inspections and tests shall be for Bank's sole benefit and
shall not be construed to create any responsibility or
liability on the part of Bank to Borrower or to any third
party.
+4.15 Borrower in addition to scheduled quarterly principal payments
under Facility #1, will apply a minimum of 25% of all equity
and convertible subordinated debt net proceeds raised, first
to fully repay Facility #1, and thereafter to repay
outstandings remaining under Facility #2.
+4.16 Borrower to provide monthly schedule detailing the capital
(equity and convertible subordinated debt) raised for the
month and paydown the applicable credit line.
5. Negative Covenants. So long as credit granted under this Agreement is
available and until full and final payment of all sums outstanding
under this Agreement and promissory note(s):
+5.1 Borrower will not, during any fiscal year, expend or incur in
the aggregate more than $N/A for fixed assets, nor more than
$N/A for any single fixed asset whether or not payable that
fiscal year or later under any purchase agreement or lease;
5.2 Borrower will not, without the prior written consent of Bank,
purchase or lease under an agreement for acquisition, incur
any other indebtedness for borrowed money, mortgage, assign,
or otherwise encumber any of Borrower's assets, nor sell,
transfer or otherwise hypothecate any such assets except in
the ordinary course of business. Borrower shall not guaranty,
endorse, co-sign, or otherwise become liable upon the
obligations of others, except by the endorsement of negotiable
instruments for deposit or collection in the ordinary course
of business. For purposes of this paragraph, the sale or
assignment of accounts receivable, or the granting of a
security interest therein, shall be deemed the incurring of
indebtedness for borrowed money;
+5.3 The total of salaries, withdrawals, or other forms of
compensation, whether paid in cash or otherwise, by Borrower
shall not exceed the following amounts for the persons
indicated, nor will amounts in excess of such limits be paid
to any other person:
Name: N/A Amount: N/A
Name: N/A Amount: N/A
5.4 Borrower will not, without Bank's prior written consent,
declare any dividends on shares of its capital stock, or apply
any of its assets to the purchase, redemption or other
retirement of such shares, or otherwise amend its capital
structure;
+5.5 Borrower will not make any loan or advance to any person(s) or
purchase or otherwise acquire the capital stock, assets or
marketable general obligations of the United States or a
State, or marketable obligations fully guarantied by the
United States, (c) short-term commercial paper with the
highest rating of a generally recognized rating service, (d)
other investments related to the Borrower's business which,
together with such other investments now outstanding, do not
in the aggregate exceed the sum of $100,000 at any time;
5.6 Borrower will not liquidate or dissolve or enter into any
consolidation, merger, pool, joint venture, syndicate or other
combination, or sell, lease, or dispose of Borrower's business
assets as a whole or such as in the opinion of Bank constitute
a substantial portion of Borrower's business or assets;
5.7 Borrower will not engage in any business activities or
operations substantially different from or unrelated to
present business activities or operations; and
5.8 Borrower, and Borrower's tenants, contractors, agents or other
parties authorized to use any of Borrower's properties, will
not use, generate, manufacture, store, treat, dispose of, or
release any hazardous substance or hazardous waste in, on,
under or about any of Borrower's properties; and
<PAGE>
any such activity shall be conducted in compliance with all
applicable federal, state and local laws, regulations and
ordinances, including without limitation those described in
section 3.8.
6. Waiver, Release and Indemnification. Borrower hereby: (a) releases and
waives any claims against Bank for indemnity or contribution in the
event Borrower becomes liable for cleanup or other costs under any of
the applicable federal, state or local laws, regulations or ordinances,
including without limitation those described in section 3.8, and (b)
agrees to indemnify and hold Bank harmless from and against any and all
claims, losses, liabilities, damages, penalties and expenses which Bank
may directly or indirectly sustain or suffer resulting from a breach of
(i) any of Borrower's representations and warranties with respect to
hazardous wastes and hazardous substances contained in section 3.8, or
(ii) section 5.8. The provisions of this section 6 shall survive the
full and final payment of all sums outstanding under this Agreement and
promissory notes and shall not be affected by Bank's acquisition of any
interest in any of the Borrower's properties, whether by foreclosure or
otherwise.
7. Events of Default. The occurrence of any of the following events
("Events of Default") shall terminate any and all obligations on the
part of Bank to make or continue the loan and/or line of credit and, at
the option of the Bank, shall make all sums of interest and principal
outstanding under the loan and/or line of credit immediately due and
payable, without notice of default, presentment or demand for payment,
protest or notice of non payment or dishonor, or other notices or
demands of any kind or character, all of which are waived by Borrower,
and Bank may proceed with collection of such obligations and
enforcement and realization upon all security which it may hold and to
the enforcement of all rights hereunder or at law:
7.1 The Borrower shall fail to pay when due any amount payable by
it hereunder on any loans or notes executed in connection
herewith;
<PAGE>
7.2 Borrower shall fail to comply with the provisions of any other
covenant, obligation or term of this Agreement for a period of
fifteen (15) days after the earlier of written notice thereof
shall have been given to the Borrower by Bank or Borrower or
any Guarantor has knowledge of an Event of Default or an event
that can become an Event of Default;
7.3 Borrower shall fail to pay when due any other obligation for
borrowed money, or to perform any term or covenant on its part
to be performed under any agreement relating to such
obligation or any such other debt shall be declared to be due
and payable and such failure shall continue after the
applicable grace period;
7.4 Any representation or warranty made by Borrower in this
Agreement or in any other statement to Bank shall prove to
have been false or misleading in any material respect when
made;
7.5 Borrower makers an assignment for the benefit of creditors,
files a petition in bankruptcy, is adjudicated insolvent or
bankrupt, petitions to any court for a receiver or trustee for
Borrower or any substantial part of its property, commences
any proceeding relating to the arrangement, readjustment,
reorganization or liquidation under any bankruptcy or similar
laws, or if there is commenced against Borrower any such
proceedings which remain undismissed for a period of thirty
(30) days or, if Borrower by any act indicates its consent or
acquiescence in any such proceeding or the appointment of any
such trustee or receiver;
+7.6 Any judgment attaches against Borrower or any of its
properties for an amount in excess of $50,000 which remains
unpaid, unstayed on appeal, unbonded, or undismissed for a
period of thirty (30) days;
7.7 Loss of any required government approvals, and/or any
governmental regulatory authority takes or institutes action
which, in the opinion of Bank, will adversely affect
Borrower's condition, operations or ability to repay the loan
and/or line of credit;
7.8 Failure of Bank to have a legal, valid and binding first lien
on, or a valid and enforceable prior perfected security
interest in, any property covered by any deed of trust or
security agreement required under this Agreement;
7.9 Borrower dies, becomes incompetent, or ceases to exist as a
going concern;
7.10 Occurrence of an extraordinary situation which gives Bank
reasonable grounds to believe that Borrower may not, or will
be unable to, perform its obligations under this or any other
agreement between Bank and Borrower; or
7.11 Any of the preceding events occur with respect to any
guarantor of credit under this Agreement, or such guarantor
dies or becomes incompetent, unless the obligations
<PAGE>
arising under the guaranty and related agreements have been
unconditionally assumed by the guarantor's estate in a manner
satisfactory to Bank.
8. Successors; Waivers. Notwithstanding the Events of Default above, this
Agreement shall be binding upon and inure to the benefit of Borrower
and Bank, their respective successors and assigns, except that Borrower
may not assign its rights hereunder. No consent or waiver under this
Agreement shall be effective unless in writing and signed by the Bank
and shall not waive or affect any other default, whether prior or
subsequent thereto, and whether of the same or different type. No delay
or omission on the part of the Bank in exercising any right shall
operate as a waiver of such right or any other right.
9. Arbitration.
9.1 At the request of either Bank or Borrower any controversy or
claim between the Bank and Borrower, arising from or relating
to this Agreement or any Loan Document executed in connection
with this Agreement or arising from any alleged tort shall be
settled by arbitration in King County Washington. The United
States Arbitration Act will apply to the arbitration
proceedings which will be administered by the American
Arbitration Association under its commercial rules of
arbitration except that unless the amount of the claim(s)
being arbitrated exceeds $5,000,000 there shall be only one
arbitrator. Any controversy over whether an issue is
arbitrable shall be determined by the arbitrator(s). Judgment
upon the arbitration award may be entered in any court having
jurisdiction. The institution and maintenance of any action
for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of either
party, including plaintiff, to submit the controversy or claim
to arbitration if such action for judicial relief is
contested.
For purposes of the application of the statute of limitations
the filing of an arbitration as provided herein is the
equivalent of filing a lawsuit and the arbitrator(s) will have
the authority to decide whether any claim or controversy is
barred by the statute of limitations, and if so, to dismiss
the arbitration on that basis. The parties consent to the
joinder in the arbitration proceedings of any guarantor,
hypothecator or other party having an interest related to the
claim or controversy being arbitrated.
9.2 Notwithstanding the provisions of Section 9.1, no controversy
or claim shall be submitted to arbitration without the consent
of all parties if at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation
secured by real property;
9.3 No provision of this Section 9 shall limit the right of the
Borrower or the Bank to exercise self-help remedies such as
setoff, foreclosure or sale of any collateral, or obtaining
any ancillary provisional or interim remedies from a court of
competent jurisdiction before, after or during the pendency of
any arbitration proceeding. The exercise of any such remedy
does not waive the right of either party to request
arbitration. At Bank's option foreclosure under any deed of
trust may be accomplished by exercise of the power of sale
under the deed of trust or judicial foreclosure as a mortgage.
<PAGE>
10. Collection Activities, Lawsuits and Governing Law. Borrower agrees to
pay Bank all costs and expenses (including reasonable attorney's fees
and the allocated cost for in-house legal services incurred by Bank),
to enforce this Agreement, any notes or any Loan Documents pursuant to
this Agreement, whether or not suit is instituted. If suit is
instituted by Bank to enforce this Agreement or any of these documents,
Borrower consents to the personal jurisdiction of the Courts of the
State of Washington and Federal Courts located in the State of
Washington. Borrower further consents to the venue of this suit, being
laid in King County, Washington. This Agreement and any notes and
security agreements entered into pursuant to this Agreement shall be
construed in accordance with the laws of the State of Washington.
+11. Additional Provisions.
Borrower agrees to the additional provisions set forth immediately
following this Section 11 or on any "Exhibit N/A" attached to and
hereby incorporated into Agreement. This Agreement supersedes all oral
negotiations or agreements between Bank and Borrower with respect to
the subject matter hereof and constitutes the entire understanding and
Agreement of the matters set forth in this Agreement.
11.1 If any provision of this Agreement is held to be invalid or
unenforceable, then (a) such provision shall be deemed
modified if possible, or if not possible, such provision shall
be deemed stricken, and (b) all other provisions shall remain
in full force and effect.
11.2 If the imposition of or any change in any law, rule, or
regulation guideline or the interpretation or application of
any thereof by any court of administrative or governmental
authority (including any request or policy whether or not
having the force of law) shall impose or modify any taxes
(except U.S. federal, state or local income or franchise taxes
imposed on Bank), reserve requirements, capital adequacy
requirements or other obligations which would: (a) increase
the cost to Bank for extending or maintaining any loans and/or
line of credit to which this Agreement relates, (b) reduce the
amounts payable to Bank under this Agreement, such notes and
other instruments, or (c) reduce the rate of return on Bank's
capital as a consequence of Bank's obligations with respect to
any loan and/or line of credit to which this Agreement
relates, then Borrower agrees to pay Bank such additional
amounts as will compensate Bank therefor, within five (5) days
after Bank's written demand for such payment, which demand
shall be accompanied by an explanation of such imposition or
charge and a calculation in reasonable detail of the
additional amounts payable by Borrower, which explanation and
calculations shall be conclusive, absent manifest error.
11.3 Bank may sell participations in or assign the loan in whole or
in part without notice to Borrower and Bank may provide
information regarding the Borrower and this Agreement to any
prospective participant or assignee. If a participation is
sold or the loan is assigned the purchaser will have the right
of set off against the Borrower and may enforce its interest
in the Loan irrespective of any claims or defenses the
Borrower may have against the Bank.
<PAGE>
12. Notices. Any notices shall be given in writing to the opposite party's
signature below or as that party may otherwise specify in writing.
13. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
This Business Loan Agreement (Parts A and B) executed by the parties on
19 Borrower acknowledges having read all of the provisions
of this Agreement and Borrower agrees to its terms.
BANK OF AMERICA NW., N.A. doing business as SEAFIRST BANK
<TABLE>
<CAPTION>
<S> <C>
Metro Commercial Banking Term #1
(Division/Branch)
By: /s/ Michael J. Collum Name & Title: Michael J. Collum, Vice President
--------------------------------------- ----------------------------------------
Address: 801 Fifth Avenue City, State, Zip: Seattle, WA 96111
Phone: (206) 358-3739 Fax: (206) 358-3110
Tuscany, Inc. dba Tuscany Coffee Roaster and Bagel Bakery
(Borrower)
By: /s/ Chris Mueller Name & Title: Chris Mueller, Executive Vice President & CFO
--------------------------------------- ----------------------------------------------
Address: 500 Union Street, Suite 920 City, State, Zip: Seattle, WA 98101
Phone: (206) 292-1550, Ext. 13 Fax: (206) 292-5161
</TABLE>
<PAGE>
EXHIBIT 10.4
SECURITY AGREEMENT
THE UNDERSIGNED, EXPRESSO FRANCHISE CORP. (hereinafter called
"Debtor"), hereby grants to the following individuals:
Geoff Boguch
Ken Chamberlin
David L. Cohn
Alvin I. Goldfarb
Ottie Ladd
John McMillan
Solomon Menashe
James Milgard
Ronald G. Neubauer
(hereinafter cumulatively called "Secured Party"), a security interest in the
following described property; together with all increases therein and
improvements therefor, together with all proceeds of all such property, to-wit:
All furniture, fixtures, equipment, supplies, inventory of other
merchandise, accounts receivable, goodwill, (including all rights to
the name "Tuscany Premium Coffee'), and all other tangible or
intangible property owned by Debtor and used in connection with its
business conducted at each of the premises described in Exhibit A
attached hereto, including all of Debtor's rights or interest under any
lease or other rental agreement for occupancy of said premises.
All of said property is hereinafter referred to as the "Property."
This Security Agreement is given to secure the payment and performance
of all indebtedness and obligations of Debtor to Secured Party presently
existing and hereinafter arising, direct or indirect, and interest thereon. In
particular, this Security Agreement is given in consideration for the Secured
Party's execution of a Commercial Guaranty ("the Guaranty"), guaranteeing the
Debtor's compliance with the terms of its Loan, Line of Credit, Note or other
indebtedness with Seattle-First National Bank ("the Indebtedness"). Regardless
of the adequacy of any security which the Secured Party may at any time hold
hereunder, and regardless of the adequacy of any other security which Secured
Party may obtain with any other transactions, any deposits or any other moneys
owing from Secured Party to Debtor shall (as collateral in the possession of
Secured Party) constitute additional security for, and may be set off against,
obligations secured hereby even though said obligations may not then be due.
DEBTOR HEREBY REPRESENTS, COVENANTS AND AGREES, WITH SECURED
PARTY AS FOLLOWS:
1. Use of Property. Debtor agrees to comply with any governmental regulation
affecting the use of the Property and will not waste, injure nor destroy the
Property, nor use nor permit the use of
<PAGE>
the Property in any unlawful manner. Debtor represents and agrees that the
primary use of the Property is and will be for business use.
2. Debtor and Collateral Location. The address appearing next to the Debtor's
signature below is the address of Debtor's chief executive office.
Collateral is located at the Debtor's address appearing below, and at the
addresses listed on Exhibit A attached hereto.
Debtor will give Secured Party prior written notice of any change in either the
Debtor's chief executive office or the location of its collateral.
3. Notice. Debtor will give Secured Party written notice of any default with
respect to the Indebtedness, receipt of any notice of default from Seattle-First
National Bank with respect to the Indebtedness, or any other document indicating
that Debtor is not in compliance with respect to any matter that may result in
the Secured Party's liability to Seattle-First National Bank under the terms of
the Guaranty, within twenty-four (24) hours of the occurrence of the default or
receipt of the aforementioned notice of said default.
4. Ownership and Liens. Debtor owns the property and the same is free and clear
of all security interests and encumbrances of every nature. Any certificate of
title now or hereafter existing on any of the Property will be delivered to the
Secured Party and will recite the interest of Secured Party.
5. Taxes. Debtor will pay before delinquency all taxes or other governmental
charges that are or may become a lien or charge on the Property and will pay any
tax which may be levied on any obligation secured hereby.
6. Repairs and Inspection. Debtor will keep the Property in good repair. Secured
Party may inspect the Property at reasonable times and intervals and may for
this purpose enter the premises upon which the Property is located.
7. Insurance. Debtor will keep the Property continuously insured by an insurer
approved by Secured Party against fire, theft and other hazards designated at
any time by Secured Party, in an amount equal to the full insurable value
thereof or to all sums secured hereby, with such form of loss-payable clause as
designated by and in favor of Secured Party, and will deliver the certificates
of insurance showing maintenance of said insurance policies to the Secured
Party. In the event of loss, Secured Party shall have full power to collect any
and all insurance upon the Property and to apply the same at its option to any
obligation secured hereby, whether or not matured, or to the restoration or
repair of the Property. Secured Party shall have no liability whatsoever for any
loss that may occur by reason of the omission or lack of coverage of any such
insurance.
8. Removal or Sale. Without the prior written consent of Secured Party, Debtor
will not remove the Property is located and Debtor will not sell nor lease the
Property or any interest therein.
9. Expenses Incurred by Secured Party. Secured Party is not required to, but may
at its option,
<PAGE>
pay any tax or other charge or expense payable by Debtor and any filing or
recording fees and any amounts so paid shall be repayable by Debtor upon Demand.
Debtor will also repay upon demand all of Secured Party's expenses incurred in
collecting, insuring, conserving or protecting the collateral or in any
inventories, audits, inspections or other examination by Secured Party in
respect of the collateral. All such sums shall bear interest at the lesser of
one and one-half percent (1.5%) per month or the maximum rate permitted by law
from the date of payment by the Secured Party until repaid by Debtor and such
sums and interest thereon shall be secured hereby. The rights granted by this
paragraph are not a waiver of any other rights of Secured Party arising from
breach of any of Debtor's covenants.
10. Waivers. This Security Agreement shall not be qualified or supplemented by
course of dealing. No waiver or modification by Secured Party of any of the
terms or conditions hereof shall be effective unless in writing signed by
Secured Party. No waiver nor indulgence by Secured Party as to any required
performance by Debtor shall constitute a waiver as to any subsequent required
performance or other obligation of Debtor hereunder. Debtor hereby waives any
counter claims or defense hereunder against any assignee for value.
11. Default. Time is of the essence in this Security Agreement, and in any of
the following events, hereinafter called "Events of Default," to-wit:
a. Any failure by Debtor to comply with any of the terms of the
Indebtedness;
b. Issuance by Seattle-First National Bank of any notice of
default with respect to the Indebtedness;
c. Issuance by Seattle-First National Bank of any notice
indicating its intent to recover from the Secured Party
pursuant to the Guaranty;
d. Any failure to perform as required by any covenant or
agreement herein (subject to the right to cure any
non-monetary default described herein other than as described
in sub-sections (a), (b), and (C) of Section 11 within ten
(10) days after receipt of written notice of said default from
Secured Party); or
e. If the property should be seized or levied upon under any
legal or governmental process against Debtor or against the
property; or
f. If Debtor becomes insolvent or is the subject of a petition in
bankruptcy, either voluntary or involuntary, or in any other
proceeding under the federal bankruptcy laws; or makes an
assignment for the benefit of creditors; or if Debtor is named
in or the property is subjected to a suite for the appointment
of a receiver; or
g. Dissolution or liquidation of Debtor.
Then and in any of such events of a default, the Secured Party shall
have an immediate right to pursue the remedies set forth in this Security
Agreement.
<PAGE>
12. Remedies. In the event of a default hereunder, Secured Party shall have
remedies provided by law; and without limiting the generality of the foregoing,
shall be entitled as follows:
a. Debtor agrees to put Secured Party in possession of the
Property on demand; and
b. Secured Party is authorized to enter any premises where the
Property is situated and take possession of said Property
without notice or demand and without legal proceedings; and
c. At the request of Secured Party, Debtor will assemble the
Property and make available to Secured Party at a place
designed by Secured Party which is reasonably convenient to
both parties; and
d. Debtor agrees that a period of ten (10) days from the time
notice is sent, by first-class mail or otherwise, shall be a
reasonable period of notification of a sale or other
disposition of the Property; and
e. Debtor agrees that any notice or other communication by
Secured Party to Debtor shall be sent to the address of the
Debtor stated herein; and
f. Debtor agrees to pay on demand the amount of all expenses
reasonably incurred by Secured Party in protecting or
realizing on the Property. In the event that this Security
Agreement or any obligation secured by it is referred to an
attorney for protecting or defending the priority of Secured
Party's interest or for collection or realization procedures,
Debtor agrees to pay a reasonable attorney's fee, including
fees incurred in both trail and appellate courts, or fees
incurred without suit, and expenses of title search and all
court costs and costs of public officials. The sums agrees to
be paid in this subparagraph shall be secured hereby; and
g. If Secured Party disposes of the Property, Debtor agrees to
pay any deficiency remaining after application of the net
proceeds to the Indebtedness secured hereby.
13. Applicable Law. This Security Agreement shall be governed by the laws of the
State of Washington.
<PAGE>
14. Execution of Counterparts of Agreement. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original and
all of which shall constitute one and the same Agreement. A true and correct
photocopy of this Agreement, as executed by all parties hereto, may be used in
lieu of the original for all purposes.
DATED this 13th day of September, 1995.
"DEBTOR" "SECURED PARTY"
Expresso Franchise Corp.
<PAGE>
/s/ MARK MCDONALD /s/ GEOFF BOGUCH
- - ----------------------------------- ------------------------------------
MARK MCDONALD GEOFF BOGUCH
President 10900 NE 4th St., Suite 1510
601 Union Street, Suite 4620 Bellevue, WA 98004
Seattle, Washington 98101
/s/ KEN CHAMBERLIN
------------------------------------
KEN CHAMBERLIN
/s/ DAVID L. COHN
------------------------------------
DAVID L. COHN
/s/ ALVIN I. GOLDFARB
------------------------------------
ALVIN I. GOLDFARB
/s/ OTTIE LADD
------------------------------------
OTTIE LADD
/s/ JOHN MCMILLAN
------------------------------------
JOHN MCMILLAN
/s/ SOLOMON MENASHE
------------------------------------
SOLOMON MENASHE
/s/ JAMES MILGARD
------------------------------------
JAMES MILGARD
/s/ RONALD G. NEUBAUER
------------------------------------
RONALD G. NEUBAUER
315 Second Avenue South
Seattle, WA 98104
<PAGE>
Store Collateral For Seafirst Guarantors
CURRENTLY OPEN ADDRESS
1. Norwest Tower 1700 Lincoln Street, Denver, CO
2. Meadowlake Village 12650 West 64th Avenue, Arvada, CO
3. NationsBank 901 Main Street, Dallas, TX
4. First City Tower 1001 Fannin Street, Houston, TX
5. Society Tower 127 Public Square, Cleveland, OH
6. Chagrin Village 54 Chagrin Plaza, Chagrin Falls, OH
7. Park Building 140 Public Square, Cleveland, OH
8. One Mellon Tower 500 Grant Street, Pittsburgh, PA
9. Fifth Avenue Tower 120 Fifth Avenue, Pittsburgh, PA
10. Southside 101 E. Carson St., Pittsburgh
11. Shadyside 733 Copeland Street, Pittsburgh
12. Squirrel Hill 5887 Forbes Avenue, Pittsburgh
13. University of Pennsylvania 123 S. 34th St., Philadelphia
14. Sixth & Olive 515 Olive Street, St. Louis, MO
UNDER CONSTRUCTION
15. Central West End 4753 McPherson, St. Louis, MO
16. 16th & Walnut 220 S. 16th Street, Philadelphia, PA
17. King of Prussia Mall 234 Mall Blvd., King of Prussia
18. McKnight Siebert McKnight/Siebert, Pittsburgh, PA
19. Eastgate South Center Rd., Mayfield, OH
20. Foxridge S. County Line Rd., Denver, CO
LEASES AWAITING DESIGN
21. Clayton 41 N. Central, Clayton, MO
22. Fashion Center Rt. 17/Ridgewood, Paramus, NJ
23. Shaker Square 13221 Shaker Ave, Cleveland, OH
24. Westin Wm Penn Grant St., Pittsburgh, PA
<PAGE>
EXHIBIT 10.5
SECURITY AGREEMENT
THE UNDERSIGNED, TUSCANY, INC. (hereinafter called "Debtor"), hereby
grants to the following individuals:
Ken Chamberlin
John McMillan
Ronald G. Neubauer
John Parkey
Todd Rosenberg
(hereinafter cumulatively called "Secured Party"), a security interest in the
following described property; together with all increases therein and
improvements therefor, together with all proceeds of all such property, to-wit:
All furniture, fixtures, equipment, supplies, inventory of other
merchandise, accounts receivable, goodwill, (including all rights to
the name "Tuscany Premium Coffee'), and all other tangible or
intangible property owned by Debtor and used in connection with its
business conducted at each of the premises described in Exhibit A
attached hereto, including all of Debtor's rights or interest under any
lease or other rental agreement for occupancy of said premises.
All of said property is hereinafter referred to as the "Property."
This Security Agreement is given to secure the payment and performance
of all indebtedness and obligations of Debtor to Secured Party presently
existing and hereinafter arising, direct or indirect, and interest thereon. In
particular, this Security Agreement is given in consideration for the Secured
Party's execution of a Commercial Guaranty ("the Guaranty"), guaranteeing the
Debtor's compliance with the terms of its Loan, Line of Credit, Note or other
indebtedness with Seattle-First National Bank ("the Indebtedness"). Regardless
of the adequacy of any security which the Secured Party may at any time hold
hereunder, and regardless of the adequacy of any other security which Secured
Party may obtain with any other transactions, any deposits or any other moneys
owing from Secured Party to Debtor shall (as collateral in the possession of
Secured Party) constitute additional security for, and may be set off against,
obligations secured hereby even though said obligations may not then be due.
DEBTOR HEREBY REPRESENTS, COVENANTS AND AGREES, WITH SECURED
PARTY AS FOLLOWS:
1. Use of Property. Debtor agrees to comply with any governmental regulation
affecting the use of the Property and will not waste, injure nor destroy the
Property, nor use nor permit the use of the Property in any unlawful manner.
Debtor represents and agrees that the primary use of the Property is and will be
for business use.
2. Debtor and Collateral Location. The address appearing next to the Debtor's
signature below is the address of Debtor's chief executive office.
<PAGE>
Collateral is located at the Debtor's address appearing below, and at the
addresses listed on Exhibit A attached hereto.
Debtor will give Secured Party prior written notice of any change in either the
Debtor's chief executive office or the location of its collateral.
3. Notice. Debtor will give Secured Party written notice of any default with
respect to the Indebtedness, receipt of any notice of default from Seattle-First
National Bank with respect to the Indebtedness, or any other document indicating
that Debtor is not in compliance with respect to any matter that may result in
the Secured Party's liability to Seattle-First National Bank under the terms of
the Guaranty, within twenty-four (24) hours of the occurrence of the default or
receipt of the aforementioned notice of said default.
4. Ownership and Liens. Debtor owns the property and the same is free and clear
of all security interests and encumbrances of every nature. Any certificate of
title now or hereafter existing on any of the Property will be delivered to the
Secured Party and will recite the interest of Secured Party.
5. Taxes. Debtor will pay before delinquency all taxes or other governmental
charges that are or may become a lien or charge on the Property and will pay any
tax which may be levied on any obligation secured hereby.
6. Repairs and Inspection. Debtor will keep the Property in good repair. Secured
Party may inspect the Property at reasonable times and intervals and may for
this purpose enter the premises upon which the Property is located.
7. Insurance. Debtor will keep the Property continuously insured by an insurer
approved by Secured Party against fire, theft and other hazards designated at
any time by Secured Party, in an amount equal to the full insurable value
thereof or to all sums secured hereby, with such form of loss-payable clause as
designated by and in favor of Secured Party, and will deliver the certificates
of insurance showing maintenance of said insurance policies to the Secured
Party. In the event of loss, Secured Party shall have full power to collect any
and all insurance upon the Property and to apply the same at its option to any
obligation secured hereby, whether or not matured, or to the restoration or
repair of the Property. Secured Party shall have no liability whatsoever for any
loss that may occur by reason of the omission or lack of coverage of any such
insurance.
8. Removal or Sale. Without the prior written consent of Secured Party, Debtor
will not remove the Property is located and Debtor will not sell nor lease the
Property or any interest therein.
9. Expenses Incurred by Secured Party. Secured Party is not required to, but may
at its option, pay any tax or other charge or expense payable by Debtor and any
filing or recording fees and any amounts so paid shall be repayable by Debtor
upon Demand. Debtor will also repay upon demand all of Secured Party's expenses
incurred in collecting, insuring, conserving or protecting the collateral or in
any inventories, audits, inspections or other examination by Secured Party in
respect
<PAGE>
of the collateral. All such sums shall bear interest at the lesser of one and
one-half percent (1.5%) per month or the maximum rate permitted by law from the
date of payment by the Secured Party until repaid by Debtor and such sums and
interest thereon shall be secured hereby. The rights granted by this paragraph
are not a waiver of any other rights of Secured Party arising from breach of any
of Debtor's covenants.
10. Waivers. This Security Agreement shall not be qualified or supplemented by
course of dealing. No waiver or modification by Secured Party of any of the
terms or conditions hereof shall be effective unless in writing signed by
Secured Party. No waiver nor indulgence by Secured Party as to any required
performance by Debtor shall constitute a waiver as to any subsequent required
performance or other obligation of Debtor hereunder. Debtor hereby waives any
counter claims or defense hereunder against any assignee for value.
11. Default. Time is of the essence in this Security Agreement, and in any of
the following events, hereinafter called "Events of Default," to-wit:
a. Any failure by Debtor to comply with any of the terms of the
Indebtedness;
b. Issuance by Seattle-First National Bank of any notice of
default with respect to the Indebtedness;
c. Issuance by Seattle-First National Bank of any notice
indicating its intent to recover from the Secured Party
pursuant to the Guaranty;
d. Any failure to perform as required by any covenant or
agreement herein (subject to the right to cure any
non-monetary default described herein other than as described
in sub-sections (a), (b), and (C) of Section 11 within ten
(10) days after receipt of written notice of said default from
Secured Party); or
e. If the property should be seized or levied upon under any
legal or governmental process against Debtor or against the
property; or
f. If Debtor becomes insolvent or is the subject of a petition in
bankruptcy, either voluntary or involuntary, or in any other
proceeding under the federal bankruptcy laws; or makes an
assignment for the benefit of creditors; or if Debtor is named
in or the property is subjected to a suite for the appointment
of a receiver; or
g. Dissolution or liquidation of Debtor.
Then and in any of such events of a default, the Secured Party shall
have an immediate right to pursue the remedies set forth in this Security
Agreement.
12. Remedies. In the event of a default hereunder, Secured Party shall have
remedies provided by law; and without limiting the generality of the foregoing,
shall be entitled as follows:
<PAGE>
a. Debtor agrees to put Secured Party in possession of the
Property on demand; and
b. Secured Party is authorized to enter any premises where the
Property is situated and take possession of said Property
without notice or demand and without legal proceedings; and
c. At the request of Secured Party, Debtor will assemble the
Property and make available to Secured Party at a place
designed by Secured Party which is reasonably convenient to
both parties; and
d. Debtor agrees that a period of ten (10) days from the time
notice is sent, by first-class mail or otherwise, shall be a
reasonable period of notification of a sale or other
disposition of the Property; and
e. Debtor agrees that any notice or other communication by
Secured Party to Debtor shall be sent to the address of the
Debtor stated herein; and
f. Debtor agrees to pay on demand the amount of all expenses
reasonably incurred by Secured Party in protecting or
realizing on the Property. In the event that this Security
Agreement or any obligation secured by it is referred to an
attorney for protecting or defending the priority of Secured
Party's interest or for collection or realization procedures,
Debtor agrees to pay a reasonable attorney's fee, including
fees incurred in both trail and appellate courts, or fees
incurred without suit, and expenses of title search and all
court costs and costs of public officials. The sums agrees to
be paid in this subparagraph shall be secured hereby; and
g. If Secured Party disposes of the Property, Debtor agrees to
pay any deficiency remaining after application of the net
proceeds to the Indebtedness secured hereby.
13. Applicable Law. This Security Agreement shall be governed by the laws of the
State of Washington.
<PAGE>
14. Execution of Counterparts of Agreement. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original and
all of which shall constitute one and the same Agreement. A true and correct
photocopy of this Agreement, as executed by all parties hereto, may be used in
lieu of the original for all purposes.
DATED this 13th day of September, 1996.
"DEBTOR" "SECURED PARTY"
TUSCANY, INC.
/s/ MARK MCDONALD /s/ KEN CHAMBERLIN
- - -------------------------------------- --------------------------------
MARK MCDONALD KEN CHAMBERLIN
President
601 Union Street, Suite 4620
Seattle, Washington 98101
/s/ JOHN PARKEY
--------------------------------
JOHN PARKEY
/s/ RONALD G. NEUBAUER
--------------------------------
RONALD G. NEUBAUER
315 Second Avenue South
Seattle, WA 98104
/s/ JOHN MCKILLEN
--------------------------------
JOHN MCKILLEN
/s/ TODD ROSENBERG
--------------------------------
TODD ROSENBERG
<PAGE>
Store Collateral For Seafirst Facility Guarantors
CURRENTLY OPEN ADDRESS
1. Norwest Tower 1700 Lincoln Street, Denver, CO
2. Meadowlake Village 12650 West 64th Avenue, Arvada, CO
3. NationsBank 901 Main Street, Dallas, TX
4. First City Tower 1001 Fannin Street, Houston, TX
5. Society Tower 127 Public Square, Cleveland, OH
6. Chagrin Village 54 Chagrin Plaza, Chagrin Falls, OH
7. Park Building 140 Public Square, Cleveland, OH
8. One Mellon Tower 500 Grant Street, Pittsburgh, PA
9. Fifth Avenue Tower 120 Fifth Avenue, Pittsburgh, PA
10. Southside 101 E. Carson St., Pittsburgh
11. Shadyside 733 Copeland Street, Pittsburgh
12. Squirrel Hill 5887 Forbes Avenue, Pittsburgh
13. University of Pennsylvania 123 S. 34th St., Philadelphia
14. Central West End 4753 McPherson, St. Louis, MO
15. 16th & Walnut 220 S. 16th Street, Philadelphia, PA
16. Sixth & Olive 515 Olive Street, St. Louis, MO
17. King of Prussia Mall 234 Mall Blvd., King of Prussia
18. McKnight Siebert McKnight/Siebert, Pittsburgh, PA
19. Eastgate South Center Rd., Mayfield, OH
20. Foxridge Plaza S. County Line Rd., Denver, CO
21. Clayton 41 N. Central, Clayton, MO
22. Two Mellon 501 Grant Street, Pittsburgh, PA
23. Shaker Square 13221 Shaker Ave, Cleveland, OH
24. Renaissance Tower 1201 Elm Street, Dallas, TX
25. The Park Shops 1200 McKinney, Houston, TX
Under Construction (est. open)
26. Oakland Forbes Ave, Pittsburgh (9/96)
27. Wayne Lancaster Ave, Philadelphia (9/6)
28. Creve Coeur Heritage Place, St. Louis (10/96)
29. Del Mar 6600 Delmar, St. Louis (10/96)
30. Des Peres University City, St. Louis (11/96)
<PAGE>
EXHIBIT 10.6
TUSCANY, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
January 1, 1997, by and between Tuscany, Inc. ("Employer"), and Jim Simonson
("Employee").
For good and valuable consideration, the receipt and sufficiency of
which we hereby acknowledge, the parties agree as follows:
1. Term of Agreement. Employer and Employee agree that the Employee
will be employed by Employer until December 31, 1999, unless employment is
sooner terminated as provided herein. This Agreement shall be automatically
renewed for succeeding terms of one (1) year, unless at least ninety (90) days
prior to the expiration of any term, either party gives written notice to the
other of that party's intention not to renew this Agreement.
2. Position and Duties
2.1 Employer and Employee agree that Employee will be employed as
the Chief Executive Officer and President of Employer and that, in this
capacity, Employee's responsibilities will include providing overall leadership
and management of Employer, subject to the approval and oversight of the Board
of Directors.
2.2 It is further agreed and understood that, as the Chief Executive
Officer and President of Employer, the hours which Employee is required to work
will vary considerably and will sometimes be more than forty (40) hours per
week. It is understood and agreed that such work in excess of forty (40) hours
per week is a regular and normal part of Employee's responsibilities for which
he is compensated, and does not in any way constitute overtime for which
Employee is entitled to receive additional compensation.
2.3 In addition to his employment responsibilities, Employee agrees
to serve as a member of the Employer's Board of Directors according to the terms
and conditions set forth in Employer's Articles of Incorporation and By-Laws.
Nothing in this Agreement shall be deemed to limit in any way the right of the
shareholders of Employer to take an action or exercise any right in accordance
with such instruments or applicable corporate law.
2.4 Employee agrees to devote his full-time efforts to his duties
with Employer and further agrees that Employee will not directly or indirectly
engage or participate in any activities while employed with Employer that would
conflict with the best interests of Employer.
<PAGE>
2.5 Employee's obligation to devote his full-time attention and
energy to the business of Employer shall not be construed as preventing Employee
from investing his assets so long as any such investment will not require any
services on the part of Employee in the operation of the affairs of the
company(ies) or business(es) in which such investment(s) is (are) made.
3. Employer's Covenants
3.1 Employer agrees to furnish Employee with such equipment,
employees and services as are necessary to perform Employee's obligations under
this Agreement.
3.2 Employer agrees to reimburse Employee for all reasonable
business expenses incurred by Employee while on Employer's business. Employee
shall maintain such records as will be necessary to enable Employer to properly
deduct such items as business expenses when computing Employer's federal income
tax.
3.3 Employers shall provide disability insurance to Employee, which
insurance shall pay 80% of Employee's annual compensation (as of the date of
disability) for at least two (2) years after the date of disability.
4 Compensation
4.1 For all services rendered by Employee under this Agreement
(exclusive of directors' fees, if any), Employer shall pay Employee a salary of
One Hundred Twenty Five Thousand Dollars ($125,000) per year for calendar year
1997, One Hundred Fifty Thousand Dollars ($150,000) for calendar year 1998 and
One Hundred Seventy Five Thousand Dollars ($175,000) for calendar year 1999.
Employee shall be paid this salary on the same basis as other employees of
Employer, minus all lawful and agreed upon payroll deductions.
4.2 Employer and Employee may, from time to time, mutually agree to
increase or decrease Employee's annual salary by modifying section 4 in the
manner provided in section 11.1 of this Agreement. Any change in regular
compensation shall be effective as of the date said Supplemental Agreement is
signed by both Employer and Employee or as otherwise provided in such
Supplemental Agreement.
4.3 Employer shall, effective on the date hereof, grant options
("Options") to purchase 118,000 shares of Employer Common Stock at an exercise
price equal to the price common shares are offered to the public in Employer's
contemplated initial public offering in the first quarter of 1997. The Options
will vest 50% at December 31, 1997; an additional 25% at December 31, 1998 and
the remainder at December 31, 1999 and will be exercisable for ten years. The
Options are exercisable for 180 days after termination of employment and if
termination is without cause, or by the Employee for good reason or upon a
change of control (as those terms are defined herein) options will vest for the
year in which termination of employment occurs.
5. Bonuses
5.1 Bonuses. It is understood that Employer's earnings depend
largely upon the performance and productivity of Employee. Therefore,
<PAGE>
Employer shall periodically, but not less frequently than annually, review
Employee's services rendered and Employer, shall award cash bonuses as set forth
on Exhibit A which will recognize Employee's meeting and exceeding goals set by
Employee and the Employer. Cash bonuses, if any, will be paid within 30 days
after the end of each period, unless calculations required by goals set require
a longer period.
6. Fringe Benefits
6.1 Incentive Compensation. Employer and Employee agree that, during
the term of this Agreement, Employee shall be entitled to participate in all
fringe benefits and incentive compensation plans as may be authorized and
adopted from time to time by the Employer and for which Employee is eligible,
including, for example, any pension plan, profit sharing plan, disability plan,
medical plan, group life insurance plan, or other employee benefit plans.
6.2 Sick Leave. Employee shall be entitled to a reasonable number of
paid sick leave days during each calendar year of employment, which number shall
be no less than any other employee of Employer. In determining what is a
reasonable number of days, the Employer shall take into consideration previous
periods of disability, the number of days of sick leave taken in the current
year and preceding years, and other factors it deems pertinent. Employer shall
be the sole party to determine the reasonableness of Employee's number of sick
leave days.
6.3 Parking. Employee shall be provided with a parking space at
Employer's expense.
6.4 Insurance. In the event this Agreement is terminated, Employer,
upon the request of Employee, shall assign to Employee any insurance policy
owned by Employer under which Employee is the insured and which is assignable by
the policy terms; provided, however, that if any such policy has a cash
surrender value, Employee shall pay the then cash surrender value of such policy
to Employer in exchange for its assignment to Employee under this section. Any
conversion rights which Employee may have under the terms of any such insurance
policy shall survive any termination of this Agreement.
6.5 Vacation. Employee shall be entitled to four (4) weeks' paid
vacation per calendar year, which shall roll over into subsequent years.
7. Confidential Information. It is understood and agreed that as a
result of Employee's employment with Employer, Employee will be acquiring and
making use of confidential information about Employer's business as well as
financial information about Employer. Employee agrees that he will respect the
confidences of Employer and will not at any time during or within three (3)
years following the period of his employment with Employer, directly or
indirectly divulge or disclose for any purpose whatsoever or use for his own
benefit, any confidential information that has been obtained by or disclosed to
Employee as a result of his employment with Employer. Employee may also have
signed or be asked to sign an additional agreement regarding confidential
<PAGE>
information, including trade secrets and inventions. In the event that the
provisions of this agreement conflict with the provisions of that additional
agreement, Employee understands that he must adhere to the more restrictive
agreement.
8. Covenant Not to Compete. In view of the unique value to Employer
of Employee's services and because of the confidential information to be
obtained by or disclosed to Employee as described above, Employee agrees as
follows:
8.1 That during his employment with Employer, and for a period of
two (2) years after termination of such employment by Employee, Employee will
not directly or indirectly, within any Area (as hereinafter defined) within the
United States or outside the United States in which the Company is engaged in
business during the period of the Employee's employment or on the date of
termination of the Employee's employment, engage, have an interest in or render
any services to any business, which operates one or more specialty or gourmet
retail food establishments, primarily offering coffee beans, coffee beverages,
bagels and/or bagel products (whether as owner, manager, operator, licensor,
licensee, lender, partner, stockholder, joint venturer, employee, consultant or
otherwise) and is competitive with the Company's business activities. For
purposes of this Section 8.1, "Area" shall mean any city in which the Company
operates, as of the date of termination of employment, a retail food
establishment (i.e., a coffee and bagel cafe or coffee and bagel bar), has such
an establishment under construction or in design or has granted franchise, area
developer or other similar rights to a third party and, in each case, a 25-mile
radius from the center of such city.
8.2 That during his employment with Employer, and for a period of
one (1) years after termination of such employment by Employee, he will not
directly or indirectly solicit for employment or employ any employee of
Employer.
<PAGE>
9. Termination. Employee's employment may be terminated before the
expiration of this agreement as follows, in which event Employee's compensation
and benefits shall terminate except as otherwise provided below:
9.1 By Employer Without Cause. Employer may terminate Employee's
employment at any time, with or without cause or advance notice. If Employer
terminates Employee's employment when neither cause nor permanent disability
exists, however, and provided that Employee releases Company and its agents from
any and all claims in a signed written release satisfactory in form and
substance to Employer, Employer shall pay to Employee termination payments as
set forth on Exhibit B hereto. These termination payments shall be paid out at
Employee's normal salary rate on regular payroll days subject to normal payroll
deductions. Employee shall not be required to mitigate the amount of these
termination payments by seeking other employment or otherwise, and no income to
Employee of any kind shall reduce the termination payments.
9.2 By Employer for Cause. Employer may terminate Employee's
employment for cause. If Employer wishes to terminate Employee's employment for
cause it shall first given Employee 30 days' written notice of the circumstances
constituting cause and an opportunity to cure, unless the circumstances are not
subject to being cured. Following the notice and opportunity to cure (if cure is
not made), or immediately if notice and opportunity to cure are not required,
Employer may terminate Employee's employment for cause by giving written notice
of termination. The notice may take effect immediately or at such later date as
Employer may designate, provided that Employee may accelerate the termination
date by giving five business days' written notice of the acceleration. Any
termination of Employee's employment for cause must be approved by a majority of
the Board other than Employee. Employee must be given reasonable advance notice
of the meeting at which termination is to be considered, and a reasonable
opportunity to address the Board.
For purposes of this agreement "cause" means and is limited to
dishonesty, fraud, commission of a felony or of a crime involving moral
turpitude, destruction or theft of Employer property, physical attack to a
fellow employee, intoxication at work, use of narcotics or alcohol to an extent
that materially impairs Employee's performance of his or her duties, violation
of law in the course of employment that has a material adverse impact on
Employer or its employees.
<PAGE>
9.3 By Employee Without Good Reason. Employee may terminate
Employee's employment at any time, with or without good reason, by giving 90
days' advance written notice of termination.
9.4 By Employee for Good Reason or Upon a Change of Control.
a. Employee may terminate Employee's employment for good reason,
in which event Employee shall be entitled to the same rights under this
agreement as if Employer had terminated Employee's employment without cause. If
Employee wishes to terminate employment for good reason Employee shall first
give Employer 30 days' written notice of the circumstances constituting good
reason and an opportunity to cure, unless the circumstances are not subject to
being cured. Following the notice and opportunity to cure (if cure is not made),
or immediately if notice and opportunity to cure are not required, Employee may
terminate employment for good reason by giving written notice of termination.
The notice may take effect immediately or at such later date as Employee may
designate, provided that Employer may accelerate the termination date by giving
five business days' written notice of the acceleration.
For purposes of this agreement, "good reason" means and is
limited to the occurrence without cause and without Employee's consent of a
material reduction in the character of Employee's duties, level of work
responsibility or working conditions, a reduction in Employee's salary below the
level initially established at the commencement of this agreement, Employer's
failure to provide compensation or benefits owed to Employee, Employer requiring
<PAGE>
Employee to be based anywhere other than the greater Seattle area, except for
reasonable travel on Employer's business, or any material breach by Employer of
its duties or obligations to Employee that results in material harm to Employee,
but shall not include changes to Employee's title which does not include any of
the occurrences above.
b. Employee may terminate Employee's employment in the event of
a "Change of Control," in which event, Employee shall be entitled to the same
rights under this Agreement as if Employer had terminated Employee's employment
without cause. For purposes of this Agreement, a "Change of Control" shall be
deemed to occur, unless previously consented to in writing by the Employee, upon
(a) the actual acquisition or the execution of an agreement to acquire 20% or
more of the voting securities of the Employer by any person or entity not
affiliated with the Employee (other than pursuant to a bona fide underwriting
agreement relating to a public distribution of securities of the Employer), (b)
the commencement of a tender or exchange offer for more than 20% of the voting
securities of the Employer by any person or entity not affiliated with the
Employee, (c) the commencement of a proxy contest against the management for the
election of a majority of the Board of the Employer if the group conducting the
proxy contest owns, has or gains the power to vote at least 20% of the voting
securities of the Employer, (d) a vote by the Board to merger, consolidate, sell
all or substantially all of the assets of the Employer to any person or entity
not affiliated with the Employee, or (e) the election of directors constituting
a majority of the Board of Directors who have not been nominated or approved by
the Employee.
9.6 Death. Employee's employment shall terminate automatically upon
Employee's death.
9.7 Permanent Disability. Employer may terminate Employee's
employment immediately if Employee becomes permanently disabled. For purposes of
this agreement Employee will be considered "permanently disabled" if, for a
continuous period of 180 days or more, Employee has been unable to perform the
essential functions of the job (even with reasonable accommodation) because of
one or more mental or physical illnesses and/or disabilities, provided that
Employer shall grant additional unpaid leave to the extent required by law.
10. Effect of Termination. Upon termination of Employee's employment
with Employer, Employer agrees to pay Employee all salary, fringe benefits,
bonuses or other remuneration which are due and owing to Employee as of the date
of termination, less legal deductions or offsets Employee may owe to Employer,
as agreed upon in writing signed by Employee, for such items as salary
advances or loans. Employee agrees that his signature on this Agreement
constitutes his authorization for all such deductions, upon termination of
Employee's employment with Employer. Upon the termination of Employee's
employment with Employer, Employee agrees to return to Employer all of
Employer's property of any kind which may be in Employee's possession. In the
event of termination of this Agreement, the noncompetition and confidentiality
provisions provided in sections 7 and 8 above, shall continue in full force and
effect according to their terms.
<PAGE>
11. Construction of Agreement
11.1 Essential Terms and Modification of Agreement. It is
understood and agreed that the terms and conditions described in this Agreement
constitute the essential terms and conditions of the employment arrangement
between Employer and Employee, all of which have been voluntarily agreed upon.
Employer and Employee agree that there are no other essential terms or
conditions of the employment relationship that are not described within this
Agreement, and that any change in the essential terms and conditions of this
Agreement will be written down in a supplemental agreement which shall be signed
by both Employer and Employee before it is effective.
11.2 Severability. The invalidity of all or any part of any section
of this Agreement shall not render invalid the remainder of this Agreement or
the remainder of such section. In the event a court of competent jurisdiction
should decline to enforce any provision of any section of this Agreement, such
section shall be reformed to the extent necessary in the judgment of such court
to make such provision of such section enforceable to the maximum extent which
the court shall find enforceable.
11.3 Notices. Any notice hereunder shall be sufficient if in
writing and delivered to the party or sent by certified mail, return receipt
requested and addressed as follows:
a. If to Employer:
Tuscany, Inc.
601 Union Street - Suite 4620
Seattle, WA 98101
b. If to Employee:
Jim Simonson
1718 41st Ave. S.W.
Seattle, WA 98116
Either party may change the address herein specified by giving to the other,
written notice of such change.
11.4 Governing Law. This Agreement is made and shall be construed
and performed under the laws of the State of Washington.
11.5. Venue and Attorneys' Fees. A breach of any of the terms of
this Agreement shall entitle the aggrieved party to sue for breach of the
Agreement. In such case, venue shall be in King County, Washington. In the event
it is necessary for either party to institute suit in connection with this
Agreement or its breach, the prevailing party in said suit or proceeding shall
be entitled to reimbursement for its reasonable costs and attorney's fees
incurred.
<PAGE>
11.6 Waiver of Agreement. The waiver by Employer or Employee of a
breach of any provision of this Agreement by the other party hereto shall not
operate or be construed as a waiver by such party of any subsequent breach by
the other party.
11.7 Captions. The captions and headings of the sections of this
Agreement are for convenience and reference only and are not to be used to
interpret or define the provisions hereof.
11.8 Assignment and Successors. The rights and obligations of
Employer under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of Employer. The rights and obligations of Employee
hereunder are nonassignable. Employer may assign its rights and obligations to
any entity in which Employer, or a company affiliated to Employer, has a
majority ownership interest.
Executed on the date first written above and effective your approval or
ratification of the Board of Directors of Employer as evidenced by corporate
resolution.
EMPLOYEE: EMPLOYER:
Jim Simonson Tuscany, Inc.
- - -------------------------------- -------------------------------------
By John Parkey, Chairman of the Board
170026.M57
<PAGE>
Exhibit A
Period Cash Bonus Amount Bonus Basis
------ ----------------- -----------
Fourth quarter 1997 Up to 50% salary during period Meeting agreed-upon goals
Each calendar year Up to 50% salary during year Meeting agreed-upon goals
commencing 1998
Up to additional 50% of Exceeding agreed-
salary during year upon goals
Exhibit B
Time of Termination Amount of Termination Payment
- - ------------------- -----------------------------
Before 3/15/97 2 weeks' salary (at time of termination)
3/16/97 - 9/15/97 3 months' salary (at time of termination)
9/16/97 - 9/15/98 6 months' salary (at time of termination)
After 9/16/98 1 year salary (at time of termination)
<PAGE>
TUSCANY, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
January 1, 1997, by and between Tuscany, Inc. ("Employer"), and Mark McDonald
("Employee").
For good and valuable consideration, the receipt and sufficiency of
which we hereby acknowledge, the parties agree as follows:
1. Term of Agreement. Employer and Employee agree that the Employee
will be employed by Employer until December 31, 1999, unless employment is
sooner terminated as provided herein. This Agreement shall be automatically
renewed for succeeding terms of one (1) year, unless at least ninety (90) days
prior to the expiration of any term, either party gives written notice to the
other of that party's intention not to renew this Agreement.
2. Position and Duties
2.1 Employer and Employee agree that Employee will be employed
as the Executive Vice President - Real Estate and Business Development and
Secretary of Employer and that, in this capacity, Employee's responsibilities
will include providing overall leadership and management of Employer, subject to
the approval and oversight of the Board of Directors.
2.2 It is further agreed and understood that, as the Executive
Vice President - Real Estate and Business Development and Secretary of Employer,
the hours which Employee is required to work will vary considerably and will
sometimes be more than forty (40) hours per week. It is understood and agreed
that such work in excess of forty (40) hours per week is a regular and normal
part of Employee's responsibilities for which he is compensated, and does not in
any way constitute overtime for which Employee is entitled to receive additional
compensation.
2.3 In addition to his employment responsibilities, Employee
agrees to serve as a member of the Employer's Board of Directors according to
the terms and conditions set forth in Employer's Articles of Incorporation and
By-Laws. Nothing in this Agreement shall be deemed to limit in any way the right
of the shareholders of Employer to take an action or exercise any right in
accordance with such instruments or applicable corporate law.
2.4 Employee agrees to devote his full-time efforts to his
duties with Employer and further agrees that Employee will not directly or
indirectly engage or participate in any activities while employed with Employer
that would conflict with the best interests of Employer.
<PAGE>
2.5 Employee's obligation to devote his full-time attention
and energy to the business of Employer shall not be construed as preventing
Employee from investing his assets so long as any such investment will not
require any services on the part of Employee in the operation of the affairs of
the company(ies) or business(es) in which such investment(s) is (are) made.
3. Employer's Covenants
3.1 Employer agrees to furnish Employee with such equipment,
employees and services as are necessary to perform Employee's obligations under
this Agreement.
3.2 Employer agrees to reimburse Employee for all reasonable
business expenses incurred by Employee while on Employer's business. Employee
shall maintain such records as will be necessary to enable Employer to properly
deduct such items as business expenses when computing Employer's federal income
tax.
4. Compensation
4.1 For all services rendered by Employee under this Agreement
(exclusive of directors' fees, if any), Employer shall pay Employee a salary of
Sixty Thousand Dollars ($60,000) per year. Employee shall be paid this salary on
the same basis as other employees of Employer, minus all lawful and agreed upon
payroll deductions.
4.2 Employer and Employee may, from time to time, mutually
agree to increase or decrease Employee's annual salary by modifying section 4 in
the manner provided in section 11.1 of this Agreement. Any change in regular
compensation shall be effective as of the date said Supplemental Agreement is
signed by both Employer and Employee or as otherwise provided in such
Supplemental Agreement.
4.3 Employer shall, effective on the date hereof, grant to
Employee Non-Qualified Options ("Options") to purchase 25,000 shares of Employer
Common Stock at an exercise price equal to the price common shares are offered
to the public in Employer's contemplated initial public offering in the first
quarter of 1997. The Options will vest in equal amounts over three years and
will be exercisable for ten years. The Options are exercisable for 90 days after
termination and if termination is without cause, options will vest for year in
which termination occurs. In addition, all Options will vest in the event of a
Change of Control (as defined herein.)
2
<PAGE>
5. Bonuses
5.1 Discretionary Bonuses. It is understood that Employer's
earnings depend largely upon the performance and productivity of Employee.
Therefore, Employer shall periodically, but not less frequently than annually,
review Employee's services rendered and, in the sole discretion of the Board of
Directors of Employer, may award cash bonuses of up to 25% of Employee's annual
salary which will recognize Employee's meeting and exceeding goals set by
Employee and the Employer.
6. Fringe Benefits
6.1 Incentive Compensation. Employer and Employee agree that,
during the term of this Agreement, Employee shall be entitled to participate in
all fringe benefits and incentive compensation plans as may be authorized and
adopted from time to time by the Employer and for which Employee is eligible,
including, for example, any pension plan, profit sharing plan, disability plan,
medical plan, group life insurance plan, or other employee benefit plans.
6.2 Sick Leave. Employee shall be entitled to a reasonable
number of paid sick leave days during each calendar year of employment. In
determining what is a reasonable number of days, the Employer shall take into
consideration previous periods of disability, the number of days of sick leave
taken in the current year and preceding years, and other factors it deems
pertinent. Employer shall be the sole party to determine the reasonableness of
Employee's number of sick leave days.
6.3 Parking. Employee shall be provided with a parking space
at Employer's expense.
6.4 Insurance. In the event this Agreement is terminated,
Employer, upon the request of Employee, shall assign to Employee any insurance
policy owned by Employer under which Employee is the insured and which is
assignable by the policy terms; provided, however, that if any such policy has a
cash surrender value, Employee shall pay the then cash surrender value of such
policy to Employer in exchange for its assignment to Employee under this
section. Any conversion rights which Employee may have under the terms of any
such insurance policy shall survive any termination of this Agreement.
6.5 Vacation. Employee shall be entitled to three (3) weeks'
paid vacation per calendar year.
7. Confidential Information. It is understood and agreed that as a
result of Employee's employment with Employer, Employee will be acquiring and
making use of confidential information about Employer's business as well as
financial information about Employer. Employee agrees that he will respect the
confidences of Employer and will not at any
3
<PAGE>
time during or within three (3) years following the period of his employment
with Employer, directly or indirectly divulge or disclose for any purpose
whatsoever or use for his own benefit, any confidential information that has
been obtained by or disclosed to Employee as a result of his employment with
Employer. Employee may also have signed or be asked to sign an additional
agreement regarding confidential information, including trade secrets and
inventions. In the event that the provisions of this agreement conflict with the
provisions of that additional agreement, Employee understands that he must
adhere to the more restrictive agreement.
8. Covenant Not to Compete. In view of the unique value to Employer of
Employee's services and because of the confidential information to be obtained
by or disclosed to Employee as described above, Employee agrees as follows:
8.1 That during his employment with Employer, and for a period
of two (2) years after termination of such employment by Employee, Employee will
not directly or indirectly, within any Area (as hereinafter defined) within the
United States or outside the United States in which the Company is engaged in
business during the period of the Employee's employment or on the date of
termination of the Employee's employment, engage, have an interest in or render
any services to any business, which operates one or more specialty or gourmet
retail food establishments, primarily offering coffee beans, coffee beverages,
bagels and/or bagel products (whether as owner, manager, operator, licensor,
licensee, lender, partner, stockholder, joint venturer, employee, consultant or
otherwise) and is competitive with the Company's business activities. For
purposes of this Section 8.1, "Area" shall mean any city in which the Company
operates a retail food establishment (i.e., a coffee and bagel cafe or coffee
and bagel bar), has such an establishment under construction or in design or has
granted franchise, area developer or other similar rights to a third party and,
in each case, a 25-mile radius from the center of such city.
8.2 That during his employment with Employer, and for a period
of two (2) years after termination of such employment by Employee, he will not
directly or indirectly solicit for employment or employ any employee of
Employer.
8.3 That during his employment with Employer, and for a period
of two (2) years after termination of such employment by Employee, he will not,
directly or indirectly, solicit business from any customers or account holders
of Employer.
8.4 That if Employee violates any of the provisions of this
Section 8 or section 7, Employer and Employee both realizing the difficulty in
establishing the amount of actual damages incurred by Employer as the result of
such a breach, Employer shall be entitled to liquidated damages in an amount
equal to Employee's then current yearly salary if still employed by Employer, or
if no longer employed by Employer, the amount of Employee's yearly salary at the
time of his termination, plus any bonus paid during the previous twelve (12)
months, plus interest at the rate of twelve percent (12%) per annum from the
date of the breach of any of these subsections or section 7 until payment is
received by Employer. It is understood and agreed that
4
<PAGE>
this remedy is in addition to, and not a limitation on, any injunctive relief or
other rights or remedies to which Employer is or may be entitled to under law.
9. Termination. Employee's employment may be terminated before the
expiration of this agreement as follows, in which event Employee's compensation
and benefits shall terminate except as otherwise provided below:
9.1 By Employer Without Cause. Employer may terminate
Employee's employment at any time, with or without cause or advance notice. If
Employer terminates Employee's employment when neither cause nor permanent
disability exists, however, and provided that Employee releases Company and its
agents from any and all claims in a signed written release satisfactory in form
and substance to Employer, Employer shall pay to Employee termination payments
equal to three (3) months of Employee's salary. If Employer gives Executive at
least a full month's advance notice of termination, however, the termination
payments shall be reduced by one month's salary for each full month of advance
notice given; provided that this reduction shall not exceed three months'
salary. These termination payments shall be paid out at Employee's normal salary
rate on regular payroll days subject to normal payroll deductions. Employee
shall not be required to mitigate the amount of these termination payments by
seeking other employment or otherwise, and no income to Employee of any kind
shall reduce the termination payments.
9.2 By Employer for Cause. Employer may terminate Employee's
employment for cause. If Employer wishes to terminate Employee's employment for
cause it shall first given Employee 30 days' written notice of the circumstances
constituting cause and an opportunity to cure, unless the circumstances are not
subject to being cured. Following the notice and opportunity to cure (if cure is
not made), or immediately if notice and opportunity to cure are not required,
Employer may terminate Employee's employment for cause by giving written notice
of termination. The notice may take effect immediately or at such later date as
Employer may designate, provided that Employee may accelerate the termination
date by giving five business days' written notice of the acceleration. Any
termination of Employee's employment for cause must be approved by a majority of
the Board other than Employee. Employee must be given reasonable advance notice
of the meeting at which termination is to be considered, and a reasonable
opportunity to address the Board.
For purposes of this agreement "cause" means and is limited to
dishonesty, fraud, commission of a felony or of a crime involving moral
turpitude, destruction or theft of Employer property, physical attack to a
fellow employee, intoxication at work, use of narcotics or alcohol to an extent
that materially impairs Employee's performance of his or her duties, willful
malfeasance or gross negligence in the performance of Employee's duties,
violation of law in the course of employment that has a material adverse impact
on Employer or its employees, Employee's failure or refusal to perform
Employee's duties, Employee's failure or refusal to follow reasonable
instructions or directions, misconduct materially injurious to Employer,
5
<PAGE>
neglect of duty, poor job performance, or any material breach of Employee's
duties or obligations to Employer that results in material harm to Employer.
For purposes of this agreement, "neglect of duty" means and is
limited to the following circumstances: (i) Employee has, in one or more
material respects, failed or refused to perform Employee's job duties in a
reasonable and appropriate manner (including failure to follow reasonable
directives), (ii) a representative of the Board has counseled Employee in
writing about the neglect of duty and given Employee a reasonable opportunity to
improve (this written counseling and opportunity to improve shall satisfy the
requirement of 30 days' written notice described above), and (iii) Employee's
neglect of duty either has continued at a material level after a reasonable
opportunity to improve or has reoccurred at a material level within one year
after Employee was last counseled.
For purposes of this agreement, "poor job performance" means
and is limited to the following circumstances: (i) Employee has, in one or more
material respects, failed to perform Employee's job duties in a reasonable and
appropriate manner, (ii) a representative of the Board has counseled Employee in
writing about the performance problems and given Employee a reasonable
opportunity to improve (this written counseling and opportunity to improve shall
satisfy the requirement of 30 days' written notice described above), and (iii)
Employee's performance problems neither have continued at a material level after
a reasonable opportunity to improve or the same or similar performance problems
have reoccurred at a material level within one year after Employee was last
counseled.
9.3 By Employee Without Good Reason. Employee may terminate
Employee's employment at any time, with or without good reason, by giving 90
days' advance written notice of termination.
9.4 By Employee for Good Reason or Upon a Change of Control.
a. Employee may terminate Employee's employment for
good reason, in which event Employee shall be entitled to the same rights under
this agreement as if Employer had terminated Employee's employment without
cause. If Employee wishes to terminate employment for good reason Employee shall
first give Employer 30 days' written notice of the circumstances constituting
good reason and an opportunity to cure, unless the circumstances are not subject
to being cured. Following the notice and opportunity to cure (if cure is not
made), or immediately if notice and opportunity to cure are not required,
Employee may terminate employment for good reason by giving written notice of
termination. The notice may take effect immediately or at such later date as
Employee may designate, provided that Employer may accelerate the termination
date by giving five business days' written notice of the acceleration.
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For purposes of this agreement, "good reason" means and is
limited to the occurrence without cause and without Employee's consent of a
material reduction in the character of Employee's duties, level of work
responsibility or working conditions, a reduction in Employee's salary below the
level initially established at the commencement of this agreement, Employer's
failure to provide compensation or benefits owed to Employee, Employer requiring
Employee to be based anywhere other than the greater Seattle area, except for
reasonable travel on Employer's business, or any material breach by Employer of
its duties or obligations to Employee that results in material harm to Employee,
but shall not include changes to Employee's title which does not include any of
the occurrences above.
b. Employee may terminate Employee's employment in
the event of a "Change of Control," in which event, Employee shall be entitled
to the same rights under this Agreement as if Employer had terminated Employee's
employment without cause. For purposes of this Agreement, a "Change of Control"
shall be deemed to occur, unless previously consented to in writing by the
Employee, upon (a) the actual acquisition or the execution of an agreement to
acquire 20% or more of the voting securities of the Employer by any person or
entity not affiliated with the Employee (other than pursuant to a bona fide
underwriting agreement relating to a public distribution of securities of the
Employer), (b) the commencement of a tender or exchange offer for more than 20%
of the voting securities of the Employer by any person or entity not affiliated
with the Employee, (c) the commencement of a proxy contest against the
management for the election of a majority of the Board of the Employer if the
group conducting the proxy contest owns, has or gains the power to vote at least
20% of the voting securities of the Employer, (d) a vote by the Board to merger,
consolidate, sell all or substantially all of the assets of the Employer to any
person or entity not affiliated with the Employee, or (e) the election of
directors constituting a majority of the Board of Directors who have not been
nominated or approved by the Employee.
9.6 Death. Employee's employment shall terminate automatically
upon Employee's death.
9.7 Permanent Disability. Employer may terminate Employee's
employment immediately if Employee becomes permanently disabled. For purposes of
this agreement Employee will be considered "permanently disabled" if, for a
continuous period of 180 days or more, Employee has been unable to perform the
essential functions of the job (even with reasonable accommodation) because of
one or more mental or physical illnesses and/or disabilities, provided that
Employer shall grant additional unpaid leave to the extent required by law.
10. Effect of Termination. Upon termination of Employee's employment
with Employer, Employer agrees to pay Employee all salary, fringe benefits,
bonuses or other remuneration which are due and owing to Employee as of the date
of termination, less legal deductions or offsets Employee may owe to Employer
for such items as salary advances or loans. Employee agrees that his signature
on this Agreement constitutes his authorization for all such
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<PAGE>
deductions, upon termination of Employee's employment with Employer. Upon the
termination of Employee's employment with Employer, Employee agrees to return to
Employer all of Employer's property of any kind which may be in Employee's
possession. In the event of termination of this Agreement, the noncompetition
and confidentiality provisions provided in sections 7 and 8 above, shall
continue in full force and effect according to their terms.
11. Construction of Agreement
11.1 Essential Terms and Modification of Agreement. It is
understood and agreed that the terms and conditions described in this Agreement
constitute the essential terms and conditions of the employment arrangement
between Employer and Employee, all of which have been voluntarily agreed upon.
Employer and Employee agree that there are no other essential terms or
conditions of the employment relationship that are not described within this
Agreement, and that any change in the essential terms and conditions of this
Agreement will be written down in a supplemental agreement which shall be signed
by both Employer and Employee before it is effective.
11.2 Severability. The invalidity of all or any part of any
section of this Agreement shall not render invalid the remainder of this
Agreement or the remainder of such section. In the event a court of competent
jurisdiction should decline to enforce any provision of any section of this
Agreement, such section shall be reformed to the extent necessary in the
judgment of such court to make such provision of such section enforceable to the
maximum extent which the court shall find enforceable.
11.3 Notices. Any notice hereunder shall be sufficient if in
writing and delivered to the party or sent by certified mail, return receipt
requested and addressed as follows:
a. If to Employer:
Tuscany, Inc.
601 Union Street - Suite 4620
Seattle, WA 98101
b. If to Employee:
Mark McDonald
--------------------------
--------------------------
Either party may change the address herein specified by giving to the other,
written notice of such change.
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<PAGE>
11.4 Governing Law. This Agreement is made and shall be
construed and performed under the laws of the State of Washington.
11.5. Venue and Attorneys' Fees. A breach of any of the terms
of this Agreement shall entitle the aggrieved party to sue for breach of the
Agreement. In such case, venue shall be in King County, Washington. In the event
it is necessary for either party to institute suit in connection with this
Agreement or its breach, the prevailing party in said suit or proceeding shall
be entitled to reimbursement for its reasonable costs and attorney's fees
incurred.
11.6 Waiver of Agreement. The waiver by Employer of a breach
of any provision of this Agreement by Employee shall not operate or be construed
as a waiver by Employer of any subsequent breach by Employee.
11.7 Captions. The captions and headings of the sections of
this Agreement are for convenience and reference only and are not to be used to
interpret or define the provisions hereof.
11.8 Assignment and Successors. The rights and obligations of
Employer under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of Employer. The rights and obligations of Employee
hereunder are nonassignable. Employer may assign its rights and obligations to
any entity in which Employer, or a company affiliated to Employer, has a
majority ownership interest.
Executed on the date first written above and effective your approval or
ratification of the Board of Directors of Employer as evidenced by corporate
resolution.
EMPLOYEE: EMPLOYER:
Mark McDonald Tuscany, Inc.
- - -------------------------------- -------------------------------------
By John Parkey, Chairman of the Board
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EXHIBIT 10.8
TUSCANY, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
January 1, 1997, by and between Tuscany, Inc. ("Employer"), and Chris Mueller
("Employee").
For good and valuable consideration, the receipt and sufficiency of
which we hereby acknowledge, the parties agree as follows:
1. Term of Agreement. Employer and Employee agree that the
Employee will be employed by Employer until December 31, 1999, unless employment
is sooner terminated as provided herein. This Agreement shall be automatically
renewed for succeeding terms of one (1) year, unless at least ninety (90) days
prior to the expiration of any term, either party gives written notice to the
other of that party's intention not to renew this Agreement.
2. Position and Duties
2.1 Employer and Employee agree that Employee will be employed
as the Executive Vice President - Finance and Treasurer of Employer and that, in
this capacity, Employee's responsibilities will include providing overall
leadership and management of Employer, subject to the approval and oversight of
the Board of Directors.
2.2 It is further agreed and understood that, as the Executive
Vice President - Finance and Treasurer of Employer, the hours which Employee is
required to work will vary considerably and will sometimes be more than forty
(40) hours per week. It is understood and agreed that such work in excess of
forty (40) hours per week is a regular and normal part of Employee's
responsibilities for which he is compensated, and does not in any way constitute
overtime for which Employee is entitled to receive additional compensation.
2.3 In addition to his employment responsibilities, Employee
agrees to serve as a member of the Employer's Board of Directors according to
the terms and conditions set forth in Employer's Articles of Incorporation and
By-Laws. Nothing in this Agreement shall be deemed to limit in any way the right
of the shareholders of Employer to take an action or exercise any right in
accordance with such instruments or applicable corporate law.
2.4 Employee agrees to devote his full-time efforts to his
duties with Employer and further agrees that Employee will not directly or
indirectly engage or participate in any activities while employed with Employer
that would conflict with the best interests of Employer.
<PAGE>
2.5 Employee's obligation to devote his full-time attention
and energy to the business of Employer shall not be construed as preventing
Employee from investing his assets so long as any such investment will not
require any services on the part of Employee in the operation of the affairs of
the company(ies) or business(es) in which such investment(s) is (are) made.
3. Employer's Covenants
3.1 Employer agrees to furnish Employee with such equipment,
employees and services as are necessary to perform Employee's obligations under
this Agreement.
3.2 Employer agrees to reimburse Employee for all reasonable
business expenses incurred by Employee while on Employer's business. Employee
shall maintain such records as will be necessary to enable Employer to properly
deduct such items as business expenses when computing Employer's federal income
tax.
4. Compensation
4.1 For all services rendered by Employee under this Agreement
(exclusive of directors' fees, if any), Employer shall pay Employee a salary of
Sixty Thousand Dollars ($60,000) per year. Employee shall be paid this salary on
the same basis as other employees of Employer, minus all lawful and agreed upon
payroll deductions.
4.2 Employer and Employee may, from time to time, mutually
agree to increase or decrease Employee's annual salary by modifying section 4 in
the manner provided in section 11.1 of this Agreement. Any change in regular
compensation shall be effective as of the date said Supplemental Agreement is
signed by both Employer and Employee or as otherwise provided in such
Supplemental Agreement.
4.3 Employer shall, effective on the date hereof, grant to
Employee Non-Qualified Options ("Options") to purchase 25,000 shares of Employer
Common Stock at an exercise price equal to the price common shares are offered
to the public in Employer's contemplated initial public offering in the first
quarter of 1997. The Options will vest in equal amounts over three years and
will be exercisable for ten years. The Options are exercisable for 90 days after
termination and if termination is without cause, options will vest for year in
which termination occurs. In addition, all Options will vest in the event of a
Change of Control (as defined herein.)
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5. Bonuses
5.1 Discretionary Bonuses. It is understood that Employer's
earnings depend largely upon the performance and productivity of Employee.
Therefore, Employer shall periodically, but not less frequently than annually,
review Employee's services rendered and, in the sole discretion of the Board of
Directors of Employer, may award cash bonuses of up to 25% of Employee's annual
salary which will recognize Employee's meeting and exceeding goals set by
Employee and the Employer.
6. Fringe Benefits
6.1 Incentive Compensation. Employer and Employee agree that,
during the term of this Agreement, Employee shall be entitled to participate in
all fringe benefits and incentive compensation plans as may be authorized and
adopted from time to time by the Employer and for which Employee is eligible,
including, for example, any pension plan, profit sharing plan, disability plan,
medical plan, group life insurance plan, or other employee benefit plans.
6.2 Sick Leave. Employee shall be entitled to a reasonable
number of paid sick leave days during each calendar year of employment. In
determining what is a reasonable number of days, the Employer shall take into
consideration previous periods of disability, the number of days of sick leave
taken in the current year and preceding years, and other factors it deems
pertinent. Employer shall be the sole party to determine the reasonableness of
Employee's number of sick leave days.
6.3 Parking. Employee shall be provided with a parking
space at Employer's expense.
6.4 Insurance. In the event this Agreement is terminated,
Employer, upon the request of Employee, shall assign to Employee any insurance
policy owned by Employer under which Employee is the insured and which is
assignable by the policy terms; provided, however, that if any such policy has a
cash surrender value, Employee shall pay the then cash surrender value of such
policy to Employer in exchange for its assignment to Employee under this
section. Any conversion rights which Employee may have under the terms of any
such insurance policy shall survive any termination of this Agreement.
6.5 Vacation. Employee shall be entitled to three
(3) weeks' paid vacation per calendar year.
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<PAGE>
7. Confidential Information. It is understood and agreed that as
a result of Employee's employment with Employer, Employee will be acquiring and
making use of confidential information about Employer's business as well as
financial information about Employer. Employee agrees that he will respect the
confidences of Employer and will not at any time during or within three (3)
years following the period of his employment with Employer, directly or
indirectly divulge or disclose for any purpose whatsoever or use for his own
benefit, any confidential information that has been obtained by or disclosed to
Employee as a result of his employment with Employer. Employee may also have
signed or be asked to sign an additional agreement regarding confidential
information, including trade secrets and inventions. In the event that the
provisions of this agreement conflict with the provisions of that additional
agreement, Employee understands that he must adhere to the more restrictive
agreement.
8. Covenant Not to Compete. In view of the unique value to
Employer of Employee's services and because of the confidential information to
be obtained by or disclosed to Employee as described above, Employee agrees as
follows:
8.1 That during his employment with Employer, and for a period
of two (2) years after termination of such employment by Employee, Employee will
not directly or indirectly, within any Area (as hereinafter defined) within the
United States or outside the United States in which the Company is engaged in
business during the period of the Employee's employment or on the date of
termination of the Employee's employment, engage, have an interest in or render
any services to any business, which operates one or more specialty or gourmet
retail food establishments, primarily offering coffee beans, coffee beverages,
bagels and/or bagel products (whether as owner, manager, operator, licensor,
licensee, lender, partner, stockholder, joint venturer, employee, consultant or
otherwise) and is competitive with the Company's business activities. For
purposes of this Section 8.1, "Area" shall mean any city in which the Company
operates a retail food establishment (i.e., a coffee and bagel cafe or coffee
and bagel bar), has such an establishment under construction or in design or has
granted franchise, area developer or other similar rights to a third party and,
in each case, a 25-mile radius from the center of such city.
8.2 That during his employment with Employer, and for a period
of two (2) years after termination of such employment by Employee, he will not
directly or indirectly solicit for employment or employ any employee of
Employer.
8.3 That during his employment with Employer, and for a period
of two (2) years after termination of such employment by Employee, he will not,
directly or indirectly, solicit business from any customers or account holders
of Employer.
8.4 That if Employee violates any of the provisions of this
Section 8 or section 7, Employer and Employee both realizing the difficulty in
establishing the amount of actual damages incurred by Employer as the result of
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<PAGE>
such a breach, Employer shall be entitled to liquidated damages in an amount
equal to Employee's then current yearly salary if still employed by Employer, or
if no longer employed by Employer, the amount of Employee's yearly salary at the
time of his termination, plus any bonus paid during the previous twelve (12)
months, plus interest at the rate of twelve percent (12%) per annum from the
date of the breach of any of these subsections or section 7 until payment is
received by Employer. It is understood and agreed that this remedy is in
addition to, and not a limitation on, any injunctive relief or other rights or
remedies to which Employer is or may be entitled to under law.
9. Termination. Employee's employment may be terminated before
the expiration of this agreement as follows, in which event Employee's
compensation and benefits shall terminate except as otherwise provided below:
9.1 By Employer Without Cause. Employer may terminate
Employee's employment at any time, with or without cause or advance notice. If
Employer terminates Employee's employment when neither cause nor permanent
disability exists, however, and provided that Employee releases Company and its
agents from any and all claims in a signed written release satisfactory in form
and substance to Employer, Employer shall pay to Employee termination payments
equal to three (3) months of Employee's salary. If Employer gives Executive at
least a full month's advance notice of termination, however, the termination
payments shall be reduced by one month's salary for each full month of advance
notice given; provided that this reduction shall not exceed three months'
salary. These termination payments shall be paid out at Employee's normal salary
rate on regular payroll days subject to normal payroll deductions. Employee
shall not be required to mitigate the amount of these termination payments by
seeking other employment or otherwise, and no income to Employee of any kind
shall reduce the termination payments.
9.2 By Employer for Cause. Employer may terminate Employee's
employment for cause. If Employer wishes to terminate Employee's employment for
cause it shall first given Employee 30 days' written notice of the circumstances
constituting cause and an opportunity to cure, unless the circumstances are not
subject to being cured. Following the notice and opportunity to cure (if cure is
not made), or immediately if notice and opportunity to cure are not required,
Employer may terminate Employee's employment for cause by giving written notice
of termination. The notice may take effect immediately or at such later date as
Employer may designate, provided that Employee may accelerate the termination
date by giving five business days' written notice of the acceleration. Any
termination of Employee's employment for cause must be approved by a majority of
the Board other than Employee. Employee must be given reasonable advance notice
of the meeting at which termination is to be considered, and a reasonable
opportunity to address the Board.
For purposes of this agreement "cause" means and is limited to
dishonesty, fraud, commission of a felony or of a crime involving moral
turpitude, destruction or theft of Employer property, physical attack to a
fellow employee, intoxication at work, use of narcotics or alcohol to an extent
that materially impairs Employee's performance of his or her duties, willful
-5-
<PAGE>
malfeasance or gross negligence in the performance of Employee's duties,
violation of law in the course of employment that has a material adverse impact
on Employer or its employees, Employee's failure or refusal to perform
Employee's duties, Employee's failure or refusal to follow reasonable
instructions or directions, misconduct materially injurious to Employer, neglect
of duty, poor job performance, or any material breach of Employee's duties or
obligations to Employer that results in material harm to Employer.
For purposes of this agreement, "neglect of duty" means and is
limited to the following circumstances: (i) Employee has, in one or more
material respects, failed or refused to perform Employee's job duties in a
reasonable and appropriate manner (including failure to follow reasonable
directives), (ii) a representative of the Board has counseled Employee in
writing about the neglect of duty and given Employee a reasonable opportunity to
improve (this written counseling and opportunity to improve shall satisfy the
requirement of 30 days' written notice described above), and (iii) Employee's
neglect of duty either has continued at a material level after a reasonable
opportunity to improve or has reoccurred at a material level within one year
after Employee was last counseled.
For purposes of this agreement, "poor job performance" means
and is limited to the following circumstances: (i) Employee has, in one or more
material respects, failed to perform Employee's job duties in a reasonable and
appropriate manner, (ii) a representative of the Board has counseled Employee in
writing about the performance problems and given Employee a reasonable
opportunity to improve (this written counseling and opportunity to improve shall
satisfy the requirement of 30 days' written notice described above), and (iii)
Employee's performance problems neither have continued at a material level after
a reasonable opportunity to improve or the same or similar performance problems
have reoccurred at a material level within one year after Employee was last
counseled.
9.3 By Employee Without Good Reason. Employee may terminate
Employee's employment at any time, with or without good reason, by giving 90
days' advance written notice of termination.
9.4 By Employee for Good Reason or Upon a Change of Control.
a. Employee may terminate Employee's employment for
good reason, in which event Employee shall be entitled to the same rights under
this agreement as if Employer had terminated Employee's employment without
cause. If Employee wishes to terminate employment for good reason Employee shall
first give Employer 30 days' written notice of the circumstances constituting
good reason and an opportunity to cure, unless the circumstances are not subject
to being cured. Following the notice and opportunity to cure (if cure is not
made), or immediately if notice and opportunity to cure are not required,
Employee may terminate employment for good reason by giving written notice of
termination. The notice may take effect immediately or at such later date as
Employee may designate, provided that Employer may accelerate the termination
date by giving five business days' written notice of the acceleration.
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<PAGE>
For purposes of this agreement, "good reason" means and is
limited to the occurrence without cause and without Employee's consent of a
material reduction in the character of Employee's duties, level of work
responsibility or working conditions, a reduction in Employee's salary below the
level initially established at the commencement of this agreement, Employer's
failure to provide compensation or benefits owed to Employee, Employer requiring
Employee to be based anywhere other than the greater Seattle area, except for
reasonable travel on Employer's business, or any material breach by Employer of
its duties or obligations to Employee that results in material harm to Employee,
but shall not include changes to Employee's title which does not include any of
the occurrences above.
b. Employee may terminate Employee's employment in
the event of a "Change of Control," in which event, Employee shall be entitled
to the same rights under this Agreement as if Employer had terminated Employee's
employment without cause. For purposes of this Agreement, a "Change of Control"
shall be deemed to occur, unless previously consented to in writing by the
Employee, upon (a) the actual acquisition or the execution of an agreement to
acquire 20% or more of the voting securities of the Employer by any person or
entity not affiliated with the Employee (other than pursuant to a bona fide
underwriting agreement relating to a public distribution of securities of the
Employer), (b) the commencement of a tender or exchange offer for more than 20%
of the voting securities of the Employer by any person or entity not affiliated
with the Employee, (c) the commencement of a proxy contest against the
management for the election of a majority of the Board of the Employer if the
group conducting the proxy contest owns, has or gains the power to vote at least
20% of the voting securities of the Employer, (d) a vote by the Board to merger,
consolidate, sell all or substantially all of the assets of the Employer to any
person or entity not affiliated with the Employee, or (e) the election of
directors constituting a majority of the Board of Directors who have not been
nominated or approved by the Employee.
9.6 Death. Employee's employment shall terminate
automatically upon Employee's death.
9.7 Permanent Disability. Employer may terminate Employee's
employment immediately if Employee becomes permanently disabled. For purposes of
this agreement Employee will be considered "permanently disabled" if, for a
continuous period of 180 days or more, Employee has been unable to perform the
essential functions of the job (even with reasonable accommodation) because of
one or more mental or physical illnesses and/or disabilities, provided that
Employer shall grant additional unpaid leave to the extent required by law.
10. Effect of Termination. Upon termination of Employee's employment
with Employer, Employer agrees to pay Employee all salary, fringe benefits,
bonuses or other remuneration which are due and owing to Employee as of the date
of termination, less legal deductions or offsets Employee may owe to Employer
-7-
<PAGE>
for such items as salary advances or loans. Employee agrees that his signature
on this Agreement constitutes his authorization for all such deductions, upon
termination of Employee's employment with Employer. Upon the termination of
Employee's employment with Employer, Employee agrees to return to Employer all
of Employer's property of any kind which may be in Employee's possession. In the
event of termination of this Agreement, the noncompetition and confidentiality
provisions provided in sections 7 and 8 above, shall continue in full force and
effect according to their terms.
11. Construction of Agreement
11.1 Essential Terms and Modification of Agreement. It is
understood and agreed that the terms and conditions described in this Agreement
constitute the essential terms and conditions of the employment arrangement
between Employer and Employee, all of which have been voluntarily agreed upon.
Employer and Employee agree that there are no other essential terms or
conditions of the employment relationship that are not described within this
Agreement, and that any change in the essential terms and conditions of this
Agreement will be written down in a supplemental agreement which shall be signed
by both Employer and Employee before it is effective.
11.2 Severability. The invalidity of all or any part of any
section of this Agreement shall not render invalid the remainder of this
Agreement or the remainder of such section. In the event a court of competent
jurisdiction should decline to enforce any provision of any section of this
Agreement, such section shall be reformed to the extent necessary in the
judgment of such court to make such provision of such section enforceable to the
maximum extent which the court shall find enforceable.
11.3 Notices. Any notice hereunder shall be sufficient if in
writing and delivered to the party or sent by certified mail, return receipt
requested and addressed as follows:
a. If to Employer:
Tuscany, Inc.
601 Union Street - Suite 4620
Seattle, WA 98101
b. If to Employee:
Chris Mueller
1636 - 34th Street
Seattle, WA 98122
Either party may change the address herein specified by giving to the other,
written notice of such change.
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<PAGE>
11.4 Governing Law. This Agreement is made and shall be
construed and performed under the laws of the State of Washington.
11.5. Venue and Attorneys' Fees. A breach of any of the terms
of this Agreement shall entitle the aggrieved party to sue for breach of the
Agreement. In such case, venue shall be in King County, Washington. In the event
it is necessary for either party to institute suit in connection with this
Agreement or its breach, the prevailing party in said suit or proceeding shall
be entitled to reimbursement for its reasonable costs and attorney's fees
incurred.
11.6 Waiver of Agreement. The waiver by Employer of a breach
of any provision of this Agreement by Employee shall not operate or be construed
as a waiver by Employer of any subsequent breach by Employee.
11.7 Captions. The captions and headings of the sections of
this Agreement are for convenience and reference only and are not to be used to
interpret or define the provisions hereof.
11.8 Assignment and Successors. The rights and obligations of
Employer under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of Employer. The rights and obligations of Employee
hereunder are nonassignable. Employer may assign its rights and obligations to
any entity in which Employer, or a company affiliated to Employer, has a
majority ownership interest.
Executed on the date first written above and effective your approval or
ratification of the Board of Directors of Employer as evidenced by corporate
resolution.
EMPLOYEE: EMPLOYER:
Chris Mueller Tuscany, Inc.
- - -------------------------------- --------------------------------
By John Parkey, Chairman of the Board
-9-
<PAGE>
EXHIBIT 11
Tuscany, Inc
Statement of Computation of Earnings Per Share
For the Year Ended December 31, 1995
And The Nine Months Ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
Year Nine Months Nine Months
Ended Ended Ended
Description December 31, 1995 September 30, 1995 September 30, 1996
----------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
Common Stock Outstanding 675,654 675,654 697,037
Common Stock Equivalents:
Convertible Preferred Stock (as converted) 1,209,729 1,208,354 1,328,235
Convertible Debt (as converted) 121,283 121,283 121,283
Stock Warrants (as converted) 345,388 345,388 345,388
Additional Common Stock 99,720 99,720 99,720
------------- ------------- -------------
2,451,774 2,450,399 2,591,663
============= ============= =============
Net Loss $ (1,684,763) $ (1,178,872) $ (2,080,639)
============= ============= =============
Pro Forma Net Loss attributable to common
stockholders per share $ (0.69) $ (0.48) $ (0.80)
============= ============= =============
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Tuscany, Inc. on Form
SB-2 of our report dated December 23, 1996 (which expresses an unqualified
opinion and includes an explanatory paragraph referring to the substantial doubt
about the ability of the Company to continue as a going concern), appearing in
the Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the headings "Selected Financial Data" and "Experts"
in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REGISTRATION STATEMENT ON FORM SB-2 AS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FINANCIAL STATEMENTS INCLUDED THEREIN
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1995 SEP-30-1996
<CASH> 0 0 80,754
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 34,141
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 112,858
<CURRENT-ASSETS> 0 0 263,678
<PP&E> 0 0 6,348,693
<DEPRECIATION> 0 0 550,694
<TOTAL-ASSETS> 0 0 6,620,643
<CURRENT-LIABILITIES> 0 0 4,443,037
<BONDS> 0 0 129,742
0 0 0
0 0 6,420,339
<COMMON> 0 0 140,806
<OTHER-SE> 0 0 (4,513,281)
<TOTAL-LIABILITY-AND-EQUITY> 0 0 6,620,643
<SALES> 2,488,840 1,678,579 3,317,272
<TOTAL-REVENUES> 2,488,840 1,678,579 3,317,272
<CGS> 1,495,848 1,022,363 2,217,311
<TOTAL-COSTS> 3,830,968 2,582,631 5,193,054
<OTHER-EXPENSES> 266,158 236,750 15,540
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 76,477 38,070 189,317
<INCOME-PRETAX> (1,684,763) (1,178,872) (2,080,639)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (1,684,763) (1,178,872) (2,080,639)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,684,763) (1,178,872) (2,080,639)
<EPS-PRIMARY> (0.69) (0.48) (0.80)
<EPS-DILUTED> (0.69) (0.48) (0.80)
</TABLE>
