<PAGE>
As filed with the Securities and Exchange Commission on January 28, 1997
Registration No. 333-18711
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 1
TO
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
TUSCANY, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<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
<TABLE>
<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(4)
=================================================================================================
</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.
(4) Previously paid.
<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 JANUARY 28, 1997
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>
<TABLE>
<CAPTION>
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $5.00 $.50 $4.50
- -------------------------------------------------------------------------------
Per Warrant ......................... $ .10 $.01 $ .09
- -------------------------------------------------------------------------------
Total (3) ............................ $8,160,000 $816,000 $7,344,000
===============================================================================
</TABLE>
(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 $794,000.
(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.
------
LOGO
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 complement 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 perceived 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 4 additional cafes under construction or in design (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 March 1998 (in addition to the 3 cafes currently
under construction and anticipated to be opened by March 1997), 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 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.
------
Notice to California Investors. Each purchaser of Shares and Warrants in
California must be an "accredited investor," as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act, or satisfy one
of the following suitability standards: (i) minimum actual gross income of
$65,000 and a net worth (exclusive of home, home furnishings and automobiles)
of $250,000; or (ii) minimum net worth (exclusive of home, home furnishings
and automobiles) of $500,000.
Notice to New Jersey Residents: The securities offered hereby may only be
sold to New Jersey residents who have either: (i) a net worth (excluding
home, home furnishings and automobiles) of at least $250,000 and had during
the last taxable year (or estimate that they will have during the current
taxable year) gross income of $65,000, or (ii) a net worth (excluding home,
home furnishings and automobiles) of at least $500,000.
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) $ 3,901,642
Total assets ....... 3,851,153 6,620,643 8,737,437 13,294,644
Total liabilities .. 2,897,874 4,572,779 4,665,877 3,165,779
Shareholders' equity 953,279 2,047,864 4,071,560 10,128,865
</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 and Revenues; Uncertainty of Ability
to Continue as a Going Concern Due to Significant and Increasing Losses. 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 or directors 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
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expansion 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 underdeveloped 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.
Although the Company is currently in compliance with this financial covenant,
the Company has in the past been in default of such covenant and received
waivers of such defaults from Seafirst. There can be no assurance that the
Company will be able to maintain compliance with such covenant or that
Seafirst will continue to waive defaults in the future. In the event of a
default, Seafirst could
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<PAGE>
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, to the
extent that the Company's assets continue to secure such guarantees, such
assets may 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 to the Company's locations
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 is successful in expanding 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
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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 adversely affect consumer
willingness to pay higher prices for the Company's coffee products. The
Company's success will depend in part 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 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 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
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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."
13. Government Regulation of Food Service Establishments. 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, costs of other
employee benefits and unemployment and other taxes. See "Business --
Government Regulation."
14. Franchising Regulation. 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."
15. 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."
16. 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."
17. 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."
18. 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
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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 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."
19. Broad Discretion in Application of Proceeds. Approximately $760,000
(11.6%) of the estimated aggregate net proceeds from this offering has been
allocated to working capital and general corporate purposes. See "Use of
Proceeds."
20. Benefits to Related Parties. 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 in the aggregate amount of
$1,000,000 to be 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 under the guarantees. 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."
21. 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 this
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."
22. 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 currently
prohibited by the terms of the Company's line of credit with Seafirst. See
"Dividend Policy" and "Description of Securities -- Capital Stock."
23. Possible Adverse Effects 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
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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."
24. 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 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 such 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 do 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."
25. Dilution. This offering involves an immediate and substantial dilution
of $2.80 per share (or 56.0%) between the adjusted net tangible book value
per share of Common Stock after this offering and the initial public offering
price of $5.00 per Share in this offering. See "Dilution."
26. 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 or outstanding options or 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 2,585,969
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."
27. 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
14
<PAGE>
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 openings, announcements by the Company or its 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."
28. 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 date of
this Prospectus. 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.
29. 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
15
<PAGE>
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."
30. 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 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."
31. 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.
32. 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."
33. 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 $6,550,000 ($7,614,880
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 56.5%
Repayment of indebtedness(2) ............................. 1,915,000 29.2
Remodeling of certain existing Tuscany locations(3) ...... 175,000 2.7
Working capital and general corporate purposes(4) ........ 760,000 11.6
--------------- ---------------
Total .................................................. $6,550,000 100.0%
=============== ===============
</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 and anticipated to be opened by March 1997), 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 March 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."
<PAGE>
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 under the guarantees.
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 or
directors 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 $9,725,636 or
$2.20 per share, representing an immediate increase in net tangible book
value of $.90 per share of Common Stock to existing shareholders and an
immediate dilution of $2.80 per share (or 56.0%) 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 .............. .90
------
Adjusted net tangible book value after this offering .. 2.20
-------
Dilution to investors in this offering. ............... $2.80
=======
</TABLE>
<PAGE>
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 currently 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 15,057,741
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 80,000 207,800
Accumulated deficit .................................... (4,639,281) (4,643,981) (5,136,676)
------------- ------------- -------------
Total shareholders' equity ........................ 2,047,864 4,071,560 10,128,865
------------- ------------- -------------
Total capitalization ......................... $ 2,177,606 $ 4,701,400 $10,258,607
============= ============= =============
</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>
Nine Months
Year Ended Ended September 30,
December 31, ------------------------------
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
approximately 40% of net sales for the nine months ended September 30, 1996,
as compared to approximately 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.
During each of the nine month periods ended September 30, 1995 and 1996,
the Company operated five coffee and bagel bars during each entire period and
at least six months prior to the beginning of each such period (the "same
stores"). Same stores sales for the nine months ended September 30, 1996 were
$560,162, a decrease of $16,739 or 2.9%, as compared to $576,901 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 in excess of $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 or 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 or 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. Although the Company is currently
in compliance with this financial covenant, the Company has in the past been
in default of such covenant and received waivers of such defaults 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 under the guarantees. 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 Financings."
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 March 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 or directors 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 and 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 Company believes that 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 1993 bar 750 24 August 1998
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 1994 bar 170 ((2)) August 2004
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 1995 cafe 2,700((5)) 36((5)) April 2010
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
Pittsburgh, PA 1996 cafe((4)) 2,500 65 May 2016
Creve Coeur, MO December
1996 cafe((4)) 2,020 38 July 2011
University City February
St. Louis, MO 1997((6)) cafe((4)) 3,850 65((6)) July 2016
Wayne Township March
Philadelphia, PA 1997((6)) cafe 2,305 60((6)) July 2016
La Due Township March
St. Louis, MO 1997((6)) cafe 1,040 12((6)) August 2016
Des Peres April
St. Louis, MO 1997((6)) cafe((4)) 2,424 65((6)) February 2017
Wildwood Crossing August
St. Louis, MO 1997((6)) cafe((4)) 2,100 45((6)) June 2017
</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 (or is expected to feature upon opening) 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 commence in March
1997.
(6) Estimated.
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 4 additional cafes under construction or in design (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,
30
<PAGE>
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 and anticipated to be opened by
March 1997), with a primary emphasis on cafes. The Company intends to direct
its expansion efforts towards establishing additional Tuscany cafes, but will
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 which to open coffee and bagel cafes, 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. The Company also seeks to identify space in which to open
additional coffee and bagel cafes and bars, in lobbies of large office
buildings, airports, hospitals and universities, as well as supermarkets and
bookstore chains.
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,
31
<PAGE>
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.
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.
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<PAGE>
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 products. 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.
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 export 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.
33
<PAGE>
FRANCHISES
The Company's strategy until October 1995 included seeking to attract
franchisees to open coffee bars. The Company franchised three 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.
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 in excess of 1,000
retail coffee shops nationwide which offer coffee beans and beverages, and
each of Einstein/Noah Bagel Corp. and Quality Dining Inc. (Brueggers Bagel
Bakeries) operates or has franchised in excess of 300 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 trademarks and servicemarks "Tuscany Cafe"
and "Tuscany Premium Coffee" with the United States Patent and Trademark
Office. 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.
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<PAGE>
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 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, costs of other employee benefits 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 January 15, 1997, the Company employed 243 persons, of whom 10 were
in management and 233 were in non-management positions at the Company's
coffee and bagel cafes and bars. Approximately 46 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 ... 46 President, Chief Executive Officer and Director
Mark McDonald .. 37 Executive Vice President -- Real Estate and Business
Development and Director
Chris Mueller .. 38 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 has received $36,457 as
compensation for the year ended 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 ended 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 of 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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(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
Prior to December 31, 1994, Mark McDonald, Executive Vice President and a
director of the Company, loaned an aggregate of approximately $96,738 to the
Company. During the years ended December 31, 1993, 1994 and 1995, the Company
repaid $20,292, $62,356 and $5,631 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.
Prior to December 31, 1994, Chris Mueller, Executive Vice President and a
director of the Company, loaned an aggregate of approximately $196,563 to the
Company. During the years ended December 31, 1993 and 1994, the Company
repaid $16,280 and $140,726 principal amount of such loans, respectively, 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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<PAGE>
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 $45,000. 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.
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<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
a current registration statement has been declared effective by 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.
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 2,585,969 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 $7.00 per share (140%
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 $8.25 per
share) at an exercise price of $.14 per Warrant (140% 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 & Hempelmann, 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 consummated 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 a collateralized
interest in substantially all of the Company's assets. The agreement with the
bank 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>
December 31, September 30,
-------------- -----------------------------
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
------
[LOGO]
, 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 ......................................... 10,000.00
Underwriter's consulting fee ............................... 60,000.00
Printing and engraving expenses ............................ 75,000.00
Legal fees and expenses .................................... 225,000.00
Accounting fees and expenses ............................... 100,000.00
Blue sky fees and expenses (including legal fees) .......... 30,000.00
Transfer agent, warrant agent and registrar fees and
expenses .................................................. 2,000.00
Miscellaneous .............................................. 39,210.49
------------
Total ................................................. $549,200.00
============
</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 & Hempelmann, 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 & Hempelmann, 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>
- ------
* Previously filed.
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 Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, in the city of Seattle, State of Washington on January 27, 1997.
TUSCANY, INC.
By: /s/ Jim Simonson
-------------------------------
President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the 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 January 27, 1997
------------------------
Jim Simonson
* Executive Vice President and Director January 27, 1997
------------------------
Mark McDonald
* Executive Vice President, (Principal Financial January 27, 1997
------------------------ Officer and Principal Accounting Officer) and
Chris Mueller Director
* Director January 27, 1997
------------------------
Jerome Alhadeff
* Director January 27, 1997
------------------------
David Cohn
* Director January 27, 1997
------------------------
Keith Grinstein
* Director January 27, 1997
------------------------
Ottie Ladd
* Director January 27, 1997
------------------------
Greg Maffei
* Director January 27, 1997
------------------------
James Milgard
* Director January 27, 1997
------------------------
John Parkey
*By: /s/ Jim Simonson
------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE>
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
EXHIBITS
to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------
TUSCANY, INC.
===============================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
----------- ----------
<S> <C>
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.
4.4 Form of Registrant's Public Warrant Certificate.
5.1 Opinion of Cairncross & Hempelmann, P.S.
10.9 1996 Stock Option Plan.
23.1 Consent of Deloitte & Touche, L.L.P., Independent Certified Public Accountants.
23.2 Consent of Cairncross & Hempelmann, P.S. (will be contained in such firm's opinion filed as Exhibit 5.1).
23.3 Consent of Tenzer Greenblatt LLP
</TABLE>
<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>
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 5.3 of Article 5 is hereby deleted in its entirety.
3. The date of adoption of the amendments was February 6, 1997.
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 ____ day of February, 1997.
TUSCANY, INC.
By:
----------------------------
Print name: ___________________
Title:_________________________
Articles of Amendment to the
Articles of Incorporation Page 1
<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. 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
2
<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.
4
<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.
5
<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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
8
<PAGE>
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
9
<PAGE>
NUMBER SHARES
COMMON STOCK COMMON STOCK
CUSIP 90068R 10 0
TUSCANY, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
TUSCANY, INC.
transferable on the books of the Corporation by the registered holder hereof in
person or by duly authorized attorney, upon surrender of this certificate
properly endorsed.
This certificate and the shares represented hereby are issued and shall be
held subject to all of the provisions of the Articles of Incorporation, as
amended, of the Corporation (a copy of which is on file with the Transfer Agent)
to all of which the holder of this certificate, by acceptance hereof, assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
TUSCANY, INC.
CORPORATE
SEAL
1992
WASHINGTON
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ) TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED OFFICER
<PAGE>
TUSCANY, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS A COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST
MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR
DESTROYED THE COMPANY WILL REQUIRE A BOND OF INDEMNITY
AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT- _____Custodian______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with
right of survivorship Under Uniform Gifts to Minors
and not as tenants in common Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
| |
| |
|_______________________________________|
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint____________________________________________
___________________________Attorney to transfer the said stock on the books of
the within named Corporation with full power of substitution in the premises.
Dated:________________________________
________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
VOID AFTER ______, 2002
REDEEMABLE WARRANT CERTIFICATE TO PURCHASE COMMON STOCK OF
NUMBER CERTIFICATE FOR
RW
TUSCANY, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
WARRANTS
CUSIP 90068R 11 8
This Certifies that FOR VALUE RECEIVED
or registered assigns, is the owner of the number of warrants set forth above.
Each Warrant (subject to adjustments as hereinafter referred to) entitles the
owner hereof to purchase at any time until 5:00 p.m., Eastern Time on _____,
2002 one fully paid and non-assessable share of common stock (the "Common
Stock") of TUSCANY, INC., a Washington corporation (the "Company") (such shares
of Common Stock being hereinafter referred to as the "Shares" or a "Share"),
upon payment of the warrant price (as hereinafter described), provided, however,
that under certain conditions set forth in the Warrant Agreement hereinafter
mentioned, the number of Shares purchasable upon the exercise of this Warrant
may be increased or reduced and the warrant price may be adjusted. Subject to
adjustment as aforesaid, the warrant price per Share (hereinafter called the
"Warrant Price") shall be $5.00 per Share if exercised on or before 5:00 p.m.,
Eastern Time on _____, 2002. As provided in said Warrant Agreement, the Warrant
Price is payable upon the exercise of the Warrant, either in cash or by
certified check or bank draft to the order of the Company.
Under certain conditions set forth in the Warrant Agreement, this Warrant
may be called for redemption at a redemption price of $0.10 per Warrant upon 30
days' written notice.
Upon the exercise of this Warrant, the form of election to purchase on the
reverse hereof must be properly completed and executed. In the event that this
Warrant is exercised in respect to less than all of such Shares, a new Warrant
for the remaining number of Shares will be issued on such surrender.
This Warrant is issued under and the rights represented hereby are subject
to the terms and provisions contained in a Warrant Agreement dated as of
__________, 1997, by and among the Company, Continental Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent") and Paragon Capital Corporation,
all the terms and provisions of which the registered holder of this Warrant, by
acceptance hereof, assents. Reference is hereby made to said Warrant Agreement
for a more complete statement of the rights and limitations of rights of the
registered holders hereof, the rights and duties of the Warrant Agent and the
rights and obligations of the Company thereunder. Copies of said Warrant
Agreement are on file at the office of the Warrant Agent.
The Company shall not be required upon the exercise of this Warrant to
issue fractions of Shares, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
This Warrant is transferable at the office of the Warrant Agent (or of its
successor as Warrant Agent) by the registered holder hereof in person or by
attorney duly authorized in writing, but only in the manner and subject to the
limitations provided in the Warrant Agreement and upon surrender of this Warrant
and the payment of any transfer taxes. Upon any such transfer, a new Warrant, or
new Warrants of different denominations, of this tenor and representing in the
aggregate the right to purchase a like number of Shares will be issued to the
transferee in exchange for this Warrant.
This Warrant, when surrendered at the office of the Warrant Agent (or its
successor as Warrant Agent) by the registered holder hereof in person or by
attorney duly authorized in writing, may be exchanged in the manner and subject
to the limitations provided in the Warrant Agreement, 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 equal to the number of
such Warrants.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or other
securities purchasable upon the exercise of the Warrants are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening of
said transfer books.
The holder of this Warrant shall not be entitled to any of the rights of a
shareholder of the Company prior to the exercise hereof.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
WITNESS the facsimile seal of the Company and the facsimile signature of
its duly authorized officers.
Dated:
TUSCANY, INC.
CORPORATE
SEAL
1992
WASHINGTON
TUSCANY, INC.
By: /s/ Mark McDoniel By: /s/ James F. Simonson
SECRETARY PRESIDENT
Countersigned:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By: Authorized Officer
<PAGE>
TUSCANY, INC.
ELECTION TO PURCHASE
(To be executed if Holder
desires to exercise the Warrant.)
The undersigned hereby irrevocably elects to exercise _____________________
Tuscany, Inc. Warrants represented by this Warrant Certificate to purchase the
shares of Tuscany, Inc. Common Stock issuable upon the exercise of such Tuscany,
Inc. Warrants and requests that Certificates for such shares be issued in the
name of and delivered to:
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
| |
| |
|_______________________________________|
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
If such number of Tuscany, Inc. Warrants shall not be all the Tuscany, Inc.
Warrants evidenced by this Warrant Certificate, a new Warrant Certificate for
the balance remaining of such Tuscany, Inc. Warrants shall be registered in the
name of and delivered to:
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
| |
| |
|_______________________________________|
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
The undersigned represents that the exercise of the within Warrant was solicited
by a member of the National Association of Securities Dealers, Inc. If not
solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by Paragon Capital Corporation.
Dated:_________________________________
_______________________________________ __________________________________
Signature Print Name
(Signature must conform in all respects
to name of holder as specified on the
face of this Warrant Certificate)
Signature Guaranteed:*
<PAGE>
ASSIGNMENT
(To be executed by the Registered Holder if such Holder
desires to transfer the Warrant Certificates)
FOR VALUE RECEIVED, _______________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
| |
| |
|_______________________________________|
Name:__________________________________________________________________________
(Please typewrite or print in block letters)
Address:_______________________________________________________________________
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 the same on the books of the Company,
with full power of substitution in the premises.
Dated:_________________________ X_____________________________________
_______________________________ Signature Guaranteed*
Print name
_______________________________ _______________________________________
Print address
________________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of this Warrant
Certificate in every particular, without
alteration or enlargement, or any change
whatever and must be guaranteed by an
Eligible Institution (as defined in Rule
17Ad-15 under the Securities Exchange
Act of 1934) which may include a
commercial bank or trust company, savins
association, credit union, or a member
firm of the American Stock Exchange, New
York Stock Exchange, Pacific Stock
Exchange or Midwest Stock Exchange.
*In case of assignment, or if the Common Stock issued upon exercise is to be
registered in the name of a person other than the holder, the holder's signature
must be guaranteed by a commercial bank, trust company or an NASD member firm.
<PAGE>
[Letterhead of Cairncross & Hempelmann, P.S.]
January 27, 1997
Holders of Common Stock and Redeemable Common Stock
Purchase Warrants of Tuscany, Inc.
To Whom It May Concern:
Tuscany, Inc., a Washington corporation (the "Company") has requested
that we furnish an opinion, as set forth herein, with respect to certain matters
in connection with the offering of up to 1,600,000 shares of the Company's
common stock (collectively, the "Shares") and 1,600,000 redeemable purchase
warrants (collectively, the "Warrants"), each to purchase one share of the
Company's common stock (the "Underlying Shares"), pursuant to the prospectus
(the "Prospectus") included in the Company's registration statement on Form
SB-2, amended by Amendment No. 1 (the "Registration Statement") being filed with
the U.S. Securities and Exchange Commission ("SEC") on or about January 28,
1997.
We have acted as corporate counsel for the Company in connection with
the sale of the Shares and Warrants. In the course of the representation
described above, our firm participated with the Company in the preparation of
the Registration Statement and related documents and correspondence. This letter
should be read in conjunction with the Prospectus and, unless the context hereof
clearly otherwise provides, all capitalized terms herein shall have the
respective meanings ascribed to them in the Prospectus.
In rendering the opinions expressed herein, we have examined the
Registration Statement and exhibits thereto, and have examined such further
documents, including minutes of meetings of the Board of Directors of the
Company (the "Minutes"), and questions of law as we consider to be necessary or
appropriate for the purposes of this opinion.
On the basis of the foregoing, and subject to the qualifications set
forth herein, upon the SEC's declaration of the effectiveness of the
Registration Statement, we are of the opinion that:
<PAGE>
Holders of Common Stock and Redeemable Common Stock
Purchase Warrants of Tuscany, Inc.
January 27, 1997
Page 2
1. The Company was duly incorporated and is validly
existing under the laws of the State of Washington.
2, Based solely on the Minutes and the Articles of Incorporation,
Bylaws, and form of Warrant Agreement appended to the Registration Statement:
(a) the 1,600,000 Shares have been duly authorized and, when issued and paid for
in accordance with the Registration Statement, will be validly issued, fully
paid and nonassessable in accordance with the Washington Business Corporation
Act (the "Act"); (b) the 1,600,000 Warrants have been duly authorized and, when
issued and paid for in accordance with the Registration Statement, will be
validly issued and exercisable in accordance with their terms; and (c) the
Underlying Shares have been reserved for issuance upon exercise of the Warrants
and, when issued and paid for in accordance with the terms of the Warrants, will
be validly issued, fully paid and nonassessable in accordance with the Act. This
opinion does not address the compliance, or lack thereof, of the offering or
such issuance and sale with any securities laws or any law or statute other than
the Act.
This letter and the opinions expressed herein are solely for the
benefit of the Company and its securityholders, and should not be relied upon by
any other person without the prior written consent of Cairncross & Hempelmann,
except that we hereby consent to the reference to our firm under "Legal Matters"
in the Prospectus and to the inclusion of this letter as Exhibit 5.1 to this
Registration Statement.
Very truly yours,
CAIRNCROSS & HEMPELMANN, P.S.
/s/ Robert C. Seidel
--------------------------------
Robert C. Seidel
<PAGE>
1996 STOCK OPTION PLAN
OF
Tuscany, Inc.
1. Purpose
Tuscany, Inc. (the "Company") desires to attract and retain
the best available talent and encourage the highest level of performance in
order to continue to serve the best interests of the Company, and its
shareholder(s). By affording key personnel the opportunity to acquire
proprietary interests in the Company and by providing them incentives to put
forth maximum efforts for the success of the business, the 1996 Stock Option
Plan of Tuscany, Inc. (the "1996 Plan") is expected to contribute to the
attainment of those objectives.
The word "Subsidiary" or "Subsidiaries" as used herein, shall
mean any corporation, fifty percent or more of the voting stock of which is
owned by the Company.
2. Scope and Duration
Options under the 1996 Plan may be granted in the form of
incentive stock options ("Incentive Options") as provided in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or in the form of
nonqualified stock options ("Non-Qualified Options"). (Unless otherwise
indicated, references in the 1996 Plan to "options" include Incentive Options
and Non-Qualified Options.) The maximum aggregate number of shares as to which
options may be granted from time to time under the 1996 Plan is 350,000 shares
of the Common Stock of the Company ("Common Stock"), which shares may be, in
whole or in part, authorized but unissued shares or shares reacquired by the
Company. The maximum number of shares with respect to which options may be
granted to any employee during the term of the Plan is . If an option shall
expire, terminate or be surrendered for cancellation for any reason without
having been exercised in full, the shares represented by the option or portion
thereof not so exercised shall (unless the 1996 Plan shall have been terminated)
become available for subsequent option grants under the 1996 Plan. As provided
in paragraph 13, the 1996 Plan shall become effective on , 1996, and unless
terminated sooner pursuant to paragraph 14, the 1996 Plan shall terminate on
, 2006, and no option shall be granted hereunder after that date.
3. Administration
The 1996 Plan shall be administered by the Board of Directors
of the Company, or, at their discretion, by a committee which is appointed by
the Board of Directors to perform such function (the "Committee"). The Committee
shall consist of not less than two members of the Board of Directors, each of
whom shall serve at the pleasure of the Board of Directors and shall be a
<PAGE>
"disinterested person" as defined in Rule l6b-3 pursuant to the Securities
Exchange Act of 1934 (the "Act"). Members of the Committee shall not be eligible
to participate in the Plan while a member of the Committee. Vacancies occurring
in the membership of the Committee shall be filled by appointment by the Board
of Directors.
The Board of Directors or the Committee, as the case may be,
shall have plenary authority in its discretion, subject to and not inconsistent
with the express provisions of the 1996 Plan, to grant options, to determine the
purchase price of the Common Stock covered by each option, the term of each
option, the persons to whom, and the time or times at which, options shall be
granted and the number of shares to be covered by each option; to designate
options as Incentive Options or Non-Qualified Options; to interpret the 1996
Plan; to prescribe, amend and rescind rules and regulations relating to the 1996
Plan; to determine the terms and provisions of the option agreements (which need
not be identical) entered into in connection with options under the 1996 Plan;
and to make all other determinations deemed necessary or advisable for the
administration of the 1996 Plan. The Board of Directors or the Committee, as the
case may be, may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Board of Directors
or the Committee, as the case may be, or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with respect
to any responsibility the Board of Directors or the Committee, as the case may
be, or such person may have under the 1996 Plan.
4. Eligibility; Factors to be Considered in Granting
Options
Incentive Options shall be limited to persons who are
employees of the Company or its present and future Subsidiaries and at the date
of grant of any option are in the employ of the Company or its present and
future Subsidiaries. In determining the employees to whom Incentive Options
shall be granted and the number of shares to be covered by each Incentive
Option, the Board of Directors or the Committee, as the case may be, shall take
into account the nature of employees' duties, their present and potential
contributions to the success of the Company and such other factors as it shall
deem relevant in connection with accomplishing the purposes of the 1996 Plan. An
employee who has been granted an option or options under the 1996 Plan may be
granted an additional option or options, subject, in the case of Incentive
Options, to such limitations as may be imposed by the Code on such options.
Except as provided below, a Non-Qualified Option may be granted to any person,
including, but not limited to, employees, independent agents, consultants and
attorneys, who the Board of Directors or the Committee, as the case may be,
believes has contributed, or will contribute, to the success of the Company.
2
<PAGE>
5. Option Price
The purchase price of the Common Stock covered by each option
shall be determined by the Board of Directors or the Committee, as the case may
be, shall not be less than 100% of the Fair Market Value (as defined in
paragraph 15 below) of a share of the Common Stock on the date on which the
option is granted. Such price shall be subject to adjustment as provided in
paragraph 12 below. The Board of Directors or the Committee, as the case may be,
shall determine the date on which an option is granted; in the absence of such a
determination, the date on which the Board of Directors or the Committee, as the
case may be, adopts a resolution granting an option shall be considered the date
on which such option is granted.
6. Term of Options
The term of each option shall be not more then ten years from
the date of grant, as the Board of Directors or the Committee, as the case may
be, shall determine, subject to earlier termination as provided in paragraphs 10
and 11 below.
7. Exercise of Options
(a) Subject to the provisions of the 1996 Plan and unless
otherwise provided in the option agreement, options granted under the 1996 Plan
shall become exercisable as determined by the Board of Directors or Committee.
In its discretion, the Board of Directors or the Committee, as the case may be,
may, in any case or cases, prescribe that options granted under the 1996 Plan
become exercisable in installments or provide that an option may be exercisable
in full immediately upon the date of its grant. The Board of Directors or the
Committee, as the case may be, may, in its sole discretion, also provide that an
option granted pursuant to the 1996 Plan shall immediately become exercisable in
full upon the happening of any of the following events; (i) the first purchase
of shares of Common Stock pursuant to a tender offer or exchange offer (other
than an offer by the Company) for all, or any part of, the Common Stock, (ii)
the approval by the shareholder(s) of the Company of an agreement for a merger
in which the Company will not survive as an independent, publicly owned
corporation, a consolidation, or a sale, exchange or other disposition of all or
substantially all of the Company's assets, (iii) with respect to an employee, on
his 65th birthday, or (iv) with respect to an employee, on the employee's
involuntary termination from employment, except as provided in Section 10
herein. In the event of a question or controversy as to whether or not any of
the events hereinabove described has taken place, a determination by the Board
of Directors or the Committee, as the case may be, that such event has or has
not occurred shall be conclusive and binding upon the Company and participants
in the 1996 Plan.
3
<PAGE>
(b) Any option at any time granted under the 1996 Plan may
contain a provision to the effect that the optionee (or any persons entitled to
act under Paragraph 11 hereof) may, at any time at which Fair Market Value is in
excess of the exercise price and prior to exercising the option, in whole or in
part, request that the Company purchase all or any portion of the option as
shall then be exercisable at a price equal to the difference between (i) an
amount equal to the option price multiplied by the number of shares subject to
that portion of the option in respect of which such request shall be made and
(ii) an amount equal to such number of shares multiplied by the fair market
value of the Company's Common Stock (within the meaning of Section 422 of the
Code and the treasury regulations promulgated thereunder) on the date of
purchase. The Company shall have no obligation to make any purchase pursuant to
such request, but if it elects to do so, such portion of the option as to which
the request is made shall be surrendered to the Company. The purchase price for
the portion of the option to be so surrendered shall be paid by the Company,
less any applicable withholding tax obligations imposed upon the Company by
reason of the purchase, at the election of the Board of Directors or the
Committee, as the case may be, either in cash or in shares of Common Stock
(valued as of the date and in the manner provided in clause (ii) above), or in
any combination of cash and Common Stock, which may consist, in whole or in
part, of shares of authorized but unissued Common Stock or shares of Common
Stock held in the Company's treasury. No fractional share of Common Stock shall
be issued or transferred and any fractional share shall be disregarded. Shares
covered by that portion of any option purchased by the Company pursuant hereto
and surrendered to the Company shall not be available for the granting of
further options under the Plan. All determinations to be made by the Company
hereunder shall be made by the Board of Directors or the Committee, as the case
may be.
(c) An option may be exercised, at any time or from time to
time (subject, in the case of Incentive Options, to such restrictions as may be
imposed by the Code), as to any or all full shares as to which the option has
become exercisable until the expiration of the period set forth in Paragraph 6
hereof, by the delivery to the Company, at its principal place of business, of
(i) written notice of exercise in the form specified by the Board of Directors
or the Committee, as the case may be, specifying the number of shares of Common
Stock with respect to which the option is being exercised and signed by the
person exercising the option as provided herein, (ii) payment of the purchase
price; and (iii) in the case of Non-Qualified Options, payment in cash of all
withholding tax obligations imposed on the Company by reason of the exercise of
the option. Upon acceptance of such notice, receipt of payment in full, and
receipt of payment of all withholding tax obligations, the Company shall cause
to be issued a certificate representing the shares of Common Stock purchased. In
the event the person exercising the option delivers the items specified in
4
<PAGE>
(i) and (ii) of this Subsection (c), but not the item specified in (iii) hereof,
if applicable, the option shall still be considered exercised upon acceptance by
the Company for the full number of shares of Common Stock specified in the
notice of exercise but the actual number of shares issued shall be reduced by
the smallest number of whole shares of Common Stock which, when multiplied by
the Fair Market Value of the Common Stock as of the date the option is
exercised, is sufficient to satisfy the required amount of withholding tax.
(d) The purchase price of the shares as to which an option is
exercised shall be paid in full at the time of exercise. Payment shall be made
in cash, which may be paid by check or other instrument acceptable to the
Company; in addition, subject to compliance with applicable laws and regulations
and such conditions as the Board of Directors or the Committee, as the case may
be, may impose, the Board of Directors or the Committee, as the case may be, in
its sole discretion, may on a case-by-case basis elect to accept payment in
shares of Common Stock of the Company which are already owned by the option
holder, valued at the Fair Market Value thereof (as defined in paragraph 15
below) on the date of exercise; provided, however, that with respect to
Incentive Options, no such discretion may be exercised unless the option
agreement permits the payment of the purchase price in that manner.
(e) Except as provided in paragraphs 10 and 11 below, no
option granted to an employee may be exercised at any time by such employee
unless such employee is then an employee of the Company or a Subsidiary.
8. Incentive Options
(a) With respect to Incentive Options granted, the aggregate
Fair Market Value (determined in accordance with the provisions of paragraph 15
at the time the Incentive Option is granted) of the Common Stock or any other
stock of the Company or its current or future Subsidiaries with respect to which
incentive stock options, as defined in Section 422 of the Code, are exercisable
for the first time by any employee during any calendar year (under all incentive
stock option plans of the Company and its parent and subsidiary corporation's,
as those terms are defined in Section 424 of the Code) shall not exceed
$100,000.
(b) No Incentive Option may be awarded to any employee who
immediately prior to the date of the granting of such Incentive Option owns more
than 10% of the combined voting power of all classes of stock of the Company or
any of its Subsidiaries unless the exercise price under the Incentive Option is
at least 110% of the Fair Market Value and the option expires within 5 years
from the date of grant.
5
<PAGE>
(c) In the event of amendments to the Code or applicable
regulations relating to Incentive Options subsequent to the date hereof, the
Company may amend the provisions of the 1996 Plan, and the Company and the
employees holding options may agree to amend outstanding option agreements, to
conform to such amendments.
9. Non-Transferability of Options
Options granted under the 1996 Plan shall not be transferable
otherwise than by will or the laws of descent and distribution, and options may
be exercised during the lifetime of the optionee only by the optionee. No
transfer of an option by the optionee by will or by the laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished with written notice thereof and a copy of the will and such
other evidence as the Company may deem necessary to establish the validity of
the transfer and the acceptance by the transferor or transferees of the terms
and conditions of such option.
10. Termination of Employment
In the event that the employment of an employee to whom an
option has been granted under the 1996 Plan shall be terminated (except as set
forth in paragraph 11 below), such option may be, subject to the provisions of
the 1996 Plan, exercised (to the extent that the employee was entitled to do so
at the termination of his employment) at any time within three (3) months after
such termination, but not later than the date on which the option terminates;
provided, however, that any option which is held by an employee whose employment
is terminated for cause or voluntarily without the consent of the Company shall,
to the extent not theretofore exercised, automatically terminate as of the date
of termination of employment. As used herein, "cause" shall mean conduct
amounting to fraud, dishonesty, negligence, or engaging in competition or
solicitations in competition with the Company and breaches of any applicable
employment agreement between the Company and the optionee. Options granted to
employees under the 1996 Plan shall not be affected by any change of duties or
position so long as the holder continues to be a regular employee of the Company
or any of its current or future Subsidiaries. Any option agreement or any rules
and regulations relating to the 1996 Plan may contain such provisions as the
Board of Directors or the Committee, as the case may be, shall approve with
reference to the determination of the date employment terminates and the effect
of leaves of absence. Nothing in the 1996 Plan or in any option granted pursuant
to the 1996 Plan shall confer upon any employee any right to continue in the
employ of the Company or any of its Subsidiaries or parent or affiliated
companies or interfere in any way with the right of the Company or any such
Subsidiary or parent or affiliated companies to terminate such employment at any
time.
11. Death or Disability of Employee
6
<PAGE>
If an employee to whom an option has been granted under the
1996 Plan shall die while employed by the Company or a Subsidiary or within
three (3) months after the termination of such employment (other than
termination for cause or voluntary termination without the consent of the
Company), such option may be exercised, to the extent exercisable by the
employee on the date of death, by a legatee or legatees of the employee under
the employee's last will, or by the employee's personal representative or
distributees, at any time within one year after the date of the employee's
death, but not later than the date on which the option terminates. In the event
that the employment of an employee to whom an option has been granted under the
1996 Plan shall be terminated as the result of a disability, such option may be
exercised, to the extent exercisable by the employee on the date of such
termination, at any time within one year after the date of such termination, but
not later than the date on which the option terminates.
12. Adjustments Upon Changes in Capitalization, Etc.
Notwithstanding any other provision of the 1996 Plan, the
Board of Directors or the Committee, as the case may be, may, at any time, make
or provide for such adjustments to the 1996 Plan, to the number and class of
shares issuable thereunder or to any outstanding options as it shall deem
appropriate to prevent dilution or enlargement of rights, including adjustments
in the event of changes in the outstanding Common Stock by reason of stock
dividends, split-ups, recapitalizations, mergers, consolidations, combinations
or exchanges of shares, separations, reorganizations, liquidations and the like.
In the event of any offer to holders of Common Stock generally relating to the
acquisition of their shares, the Board of Directors or the Committee, as the
case may be, may make such adjustment as it deems equitable in respect of
outstanding options and rights, including in its discretion revision of
outstanding options and rights so that they may be exercisable for the
consideration payable in the acquisition transaction. Any such determination by
the Board of Directors or the Committee, as the case may be, shall be
conclusive. Any fractional shares resulting from such adjustments shall be
eliminated.
13. Effective Date
The 1996 Plan shall become effective on , 1996,
the date of adoption by the Board of Directors of the Company, subject to
approval by the shareholder(s) of the Company on or before , 1997.
7
<PAGE>
14. Termination and Amendment
The Board of Directors of the Company may suspend, terminate,
modify or amend the 1996 Plan, provided that any amendment that would increase
the aggregate number of shares which may be issued under the 1996 Plan,
materially increase the benefits accruing to participants under the 1996 Plan,
or materially modify the requirements as to eligibility for participation in the
1996 Plan, shall be subject to the approval of the Company's shareholder(s),
except that any such increase or modification that may result from adjustments
authorized by paragraph 12 does not require such approval. No suspension,
termination, modification or amendment of the 1996 Plan may, without the consent
of the employee to whom an option shall theretofore have been granted, effect
the rights of such employee under such option.
15. Miscellaneous
As said term is used in the 1996 Plan, the "Fair Market Value"
of a share of Common Stock on any day means: (a) if the principal market for the
Common Stock is a national securities exchange or the National Association of
Securities Dealers Automated Quotations System ("NASDAQ), the closing sales
price of the Common Stock on such day as reported by such exchange or market
system, or on a consolidated tape reflecting transactions on such exchange or
market system, or (b) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is not quoted on NASDAQ, the
mean between the highest bid and lowest asked prices for the Common Stock on
such day as reported by the National Quotation Bureau, Inc.; provided that if
clauses (a) and (b) of this paragraph are both inapplicable, or if no trades
have been made or no quotes are available for such day, the Fair Market Value of
the Common Stock shall be determined by the Board of Directors or the Committee,
as the case may be, shall be conclusive as to the Fair Market Value of the
Common Stock.
The Board of Directors or the Committee, as the case may be,
may require, as a condition to the exercise of any options granted under the
1996 Plan, that to the extent required at the time of exercise, (i) the shares
of Common Stock reserved for purposes of the 1996 Plan shall be duly listed,
upon official notice of issuance, upon stock exchange(s) on which the Common
Stock is listed, (ii) a Registration Statement under the Securities Act of 1933,
as amended, with respect to such shares shall be effective, and/or (iii) the
person exercising such option deliver to the Company such documents, agreements
and investment and other representations as the Board of Directors or the
Committee, as the case may be, shall determine to be in the best interests of
the Company.
During the term of the 1996 Plan, the Board of Directors
or the Committee, as the case may be, in its discretion, may offer
8
<PAGE>
one or more option holders the opportunity to surrender any or all unexpired
options for cancellation or replacement. If any options are so surrendered, the
Board of Directors or the Committee, as the case may be, may then grant new
Non-Qualified or Incentive Options to such holders for the same or different
numbers of shares at higher or lower exercise prices than the surrendered
options. Such new options may have a different term and shall be subject to the
provisions of the 1996 Plan the same as any other option.
Anything herein to the contrary notwithstanding, the Board of
Directors or the Committee, as the case may be, may, in their sole discretion,
impose more restrictive conditions on the exercise of an option granted pursuant
to the 1996 Plan; however, any and all such conditions shall be specified in the
option agreement limiting and defining such option.
16. Compliance with SEC Regulations.
It is the Company's intent that the 1996 Plan comply in all
respects with Rule 16b-3 of the Act and any regulations promulgated thereunder.
If any provision of the 1996 Plan is later found not to be in compliance with
said Rule, the provisions shall be deemed null and void. All grants and
exercises of Incentive Options under the 1996 Plan shall be executed in
accordance with the requirements of Section 16 of the Act, as amended, and any
regulations promulgated thereunder.
9
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 1 to Registration Statement No. 333-18711
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.
DELOITTE & TOUCHE LLP
Seattle, Washington
January 27, 1997
<PAGE>
January 27, 1997
Tuscany, Inc.
601 Union Street, Suite 4620
Seattle, Washington 98101
Ladies and Gentlemen:
We hereby consent to the use of our name as your counsel in connection
with the Registration Statement on Form SB-2 (No. 333-18711) and in the
Prospectus forming a part thereof. In giving this consent, we do not thereby
concede that we come within the categories of persons whose consent is required
by the Act or the General Rules and Regulations promulgated thereunder.
Very truly yours,
/s/ Tenzer Greenblatt LLP
---------------------------
TENZER GREENBLATT LLP
