<PAGE>
As filed with the Securities and Exchange Commission on March 4, 1997
Registration No. 333-18711
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 2
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 MARCH 4, 1997
SUBJECT TO COMPLETION
[LOGO]
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, 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
trading day prior to the day on which the Company gives notice (the "Call
Date") has been at least 150% (currently $7.50, subject to adjustment) of the
then effective exercise price of the Warrants and the Company obtains the
written consent of the Underwriter with respect to such redemption prior to
the Call Date. 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.
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share ......................... $5.00 $.50 $4.50
- -------------------------------------------------------------------------------
Per Warrant ...................... $.10 $.01 $.09
- -------------------------------------------------------------------------------
Total (3) ...,.................... $8,160,000 $816,000 $7,344,000
===============================================================================
<PAGE>
(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 $844,000.
(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 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."
------
LOGO
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.
------
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 1 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. 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 May 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 April 1998 (in addition to the 3 cafes currently
under construction and anticipated to be opened by April 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 one year
following 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 $1,642,986 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 $84,412, the Company
received net proceeds of approximately $725,588 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) ... 4,431,100 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, 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 trading
day prior to the day on which the Company gives
notice (the "Call Date") has been at least
150% (currently $7.50, subject to
adjustment) of the then effective exercise
price of the Warrants and the Company
obtains the written consent of the
Underwriter with respect to such redemption
prior to the Call Date. 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 1,954,055 shares of Common Stock which will be
issued immediately prior to the consummation of this offering, consisting
of: (i) 135,284 shares of Common Stock which will be issued upon exercise
of certain outstanding warrants; (ii) approximately 813,491 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 514,651 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) an estimated 490,629 shares of
Common Stock which will be issued upon conversion of the Company
Financing Notes and accrued interest thereon. 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) 262,000 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)
88,000 shares of Common Stock reserved for issuance upon exercise of
options available for future grant under the Option Plan; and (vi)
235,294 shares of Common Stock reserved for issuance upon exercise of
other outstanding warrants. 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.
Notice to Ohio Residents: The securities offered hereby may only be sold to
Ohio 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) have 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>
Years Ended December 31,
1995 1996
------------- -------------
<S> <C> <C>
Net sales .......................................... $ 2,488,840 $ 4,552,945
Gross profit ....................................... 992,992 1,459,884
Loss from operations ............................... (1,342,128) (2,796,329)
Net loss ........................................... (1,684,763) (3,120,456)
Pro forma net loss ................................. (1,684,763) (3,097,603)
Pro forma net loss per share(1) .................... (.56) (1.02)
Pro forma weighted average number of shares
outstanding(2) ................................... 3,029,012 3,050,396
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
As
Actual Pro Forma(3) Adjusted(3)(4)
-------------- -------------- ---------------
<S> <C> <C> <C>
Working capital
(deficit) ......... $(3,798,814) $(3,752,813) $ 2,327,285
Total assets ........ 8,125,746 8,016,021 12,499,101
Total liabilities ... 6,797,958 4,997,958 3,497,860
Shareholders' equity 1,327,788 3,018,063 9,001,241
</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) 135,284 shares of Common Stock upon exercise of certain outstanding
warrants, (ii) an estimated 490,629 shares of Common Stock upon
conversion of the Company Financing Notes, (iii) an aggregate of
1,328,142 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 conversion immediately prior to the consummation
of this offering of the Company Financing Notes into 490,629 shares of
Common Stock and a related non-recurring charge of approximately $12,000
and (ii) the issuance immediately prior to the consummation of this
offering of 135,284 shares of Common Stock upon exercise of certain
outstanding warrants for aggregate proceeds of $46,001 (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
the repayment of the principal amount of Bridge Notes and accrued
interest thereon and payments under the line of credit and promissory
note from Seafirst Bank in the aggregate amount of $1,000,000 and (ii) a
non-recurring charge of $496,822 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 $3,120,456 during the
years ended December 31, 1995 and 1996, respectively, resulting in an
accumulated deficit of $5,679,098 at December 31, 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 fiscal quarter in
which this offering is consummated in an aggregate amount of approximately
$508,822 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 December 31, 1996, the Company had a working capital deficit of
$3,798,814) 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 April 1998 (in addition to the 3 cafes
currently under construction and anticipated to be opened by April 1997),
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 December 31, 1996, there was outstanding $4,903,381 of
short-term indebtedness, including approximately $2,000,000 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 April 1997 and the Company is
required to repay $200,000 of indebtedness under the note in each of April
1997 and June 1997. The $1,000,000 balance of the note is due in September
1997. In connection with obtaining the line of credit and loan, certain
directors and shareholders of the Company guaranteed the Company's
obligations to Seafirst. As consideration for such guarantees, the Company,
among other things, granted to the guarantors a security interest in all of
the Company's furniture, fixtures and equipment. The Company's indebtedness
to Seafirst requires the Company to maintain a designated minimum net worth.
The Company has in the past (including at December 31, 1996) 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 achieve compliance with
such covenant or that Seafirst will continue to waive defaults in the future. In
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the event of a default, Seafirst could declare the Company's indebtedness to
become immediately due and payable. In such event, the guarantors could be
required to satisfy the Company's obligations under the line of credit and
note and could foreclose on the Company's assets in which they have a
security interest. Moreover, 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 April 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 53%,
39% and 0%, respectively, during the year ended December, 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 $705,000
(10.9%) of the estimated aggregate net proceeds from this offering has been
allocated to working capital and general corporate purposes. Accordingly, the
Company will have broad discretion as to the application of such proceeds.
See "Use of Proceeds."
20. Benefits to Related Parties. 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 262,000 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 $3.06 per share (or 61.2%) 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 4,431,100 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 2,831,100 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 2,581,989
of the remaining 2,651,100 shares of Common Stock (plus an additional 873,002
shares of Common Stock issuable upon exercise of outstanding warrants and
options) 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 235,294
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 December 31, 1996, the Company had net
operating loss carryforwards ("NOLs") of $5,254,610 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 12 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 $6,500,000 ($7,564,880
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 56.9%
Repayment of indebtedness(2) ............................. 1,920,000 29.5
Remodeling of certain existing Tuscany locations(3) ...... 175,000 2.7
Working capital and general corporate purposes(4) ........ 705,000 10.9
--------------- ---------------
Total .................................................. $6,500,000 100.0%
=============== ===============
</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 April 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 April 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 April 1997,
to repay approximately $407,000 of indebtedness to trade creditors and
for working capital and general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources."
(3) Represents costs to remodel six existing Tuscany locations, including the
installation of bagel ovens at two of these locations. See "Business --
Expansion Strategy."
(4) Includes costs of general corporate overhead and maintaining inventory
and may, to the extent cash flow from operations is insufficient, be used
for the payment of the salaries of executive officers, estimated to
aggregate approximately $245,000 over the twelve months following the
consummation of this offering. See "Management."
If the Underwriter exercises its over-allotment option in full, the
Company will realize additional net proceeds of $1,064,880, which will be
added to the Company's working capital.
If the note to Seafirst is not extended at maturity in September 1997 and
the Company is unable to obtain replacement financing, the Company could be
required to use a portion of the proceeds of this offering to repay the
amounts then outstanding ($1,000,000) and would have less proceeds available
for intended purposes. In such event, the Company's directors and
shareholders which have guaranteed the Company's obligations will receive a
benefit from such use of proceeds as a result of the corresponding reduction
in their liability exposure 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 December 31, 1996, the net tangible book value of the Company was
$929,286 or $.42 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 December 31, 1996 would have been $2,619,561 or $.93 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
$496,822 relating to the Bridge Financing, the adjusted net tangible book
value of the Company as of December 31, 1996 would have been $8,602,739 or
$1.94 per share, representing an immediate increase in net tangible book
value of $1.01 per share of Common Stock to existing shareholders and an
immediate dilution of $3.06 per share (or 61.2%) 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 $ .42
Increase attributable to Pro Forma Adjustments ...... .51
Pro forma net tangible book value before this
offering ............................................. .93
Increase attributable to this offering .............. 1.01
------
Adjusted net tangible book value after this offering .. 1.94
-------
Dilution to investors in this offering. ............... $3.06
=======
</TABLE>
The following table sets forth, with respect to existing shareholders and
new investors in this offering, a comparison of the number of shares of
Common Stock issued by the Company (including shares issuable upon conversion
of the outstanding Series A Preferred Stock and the outstanding Series B
Preferred Stock and giving effect to the Pro Forma Adjustments), the
percentage of ownership of such shares, the total cash consideration paid,
the percentage of total cash consideration paid and the average price per
share.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Paid Average
------------------------ -------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders 2,831,100 63.9% $ 9,371,617 53.9% $3.31
New Investors ....... 1,600,000 36.1 8,000,000 46.1 5.00
----------- --------- ------------- ---------
Total ............. 4,431,100 100.0% $17,371,617 100.0%
=========== ========= ============= =========
</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 39.4% 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 262,000 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 December 31, 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>
December 31, 1996
----------------------------------------------
Actual Pro Forma As Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Short-term debt (including current portion of long-term
liabilities) ......................................... $ 2,664,066 $ 2,664,066 $ 1,163,968
============= ============= =============
Long-term liabilities ................................. $ 1,894,577 $ 94,577 $ 94,577
------------- ------------- -------------
Shareholders' equity:
Common Stock, $.01 par value, 30,000,000 authorized,
877,045 shares issued and outstanding (actual),
2,831,100 shares issued and outstanding (pro forma),
4,431,100 shares issued and outstanding (as
adjusted)(1) ......................................... 463,217 8,664,261 15,037,461
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 ................................ 3,186,570 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 ............................ 3,231,099 0 0
Contributed capital for warrants ...................... 126,000 80,000 206,800
Accumulated deficit ................................... (5,679,098) (5,726,198) (6,243,020)
------------- ------------- -------------
Total shareholders' equity ....................... 1,327,788 3,018,063 9,001,241
------------- ------------- -------------
Total capitalization ........................ $ 3,222,365 $ 3,112,640 $ 9,095,818
============= ============= =============
</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) 262,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options under
the Option Plan; (v) 88,000 shares of Common Stock reserved for issuance
upon exercise of options available for future grant under the Option
Plan; and (vi) 235,294 shares of Common Stock reserved for issuance upon
exercise of other outstanding warrants. 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, 1996 and for the years ended
December 31, 1995 and 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 referring to the substantial
doubt about the ability of the Company to continue as a going concern. The
selected financial data as of December 31, 1995 has been derived from audited
financial statements which are not included herein. 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 assumptions which management
believes are reasonable under the circumstances. See Note 1 to Notes to
Financial Statements.
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Net sales ........................................ $ 2,488,840 $ 4,552,945
Cost of sales .................................... 1,495,848 3,093,061
Gross profit ..................................... 992,992 1,459,884
Operating expenses ............................... 1,540,470 3,196,426
General, administrative and corporate marketing
expenses ....................................... 794,650 1,059,787
Loss from operations ............................. (1,342,128) (2,796,329)
Other expenses ................................... 342,635 324,127
Net loss ......................................... (1,684,763) (3,120,456)
Pro forma net loss ............................... (1,684,763) (3,097,603)
Pro forma net loss per share(1) .................. (.56) (1.02)
Pro forma weighted average number of shares
outstanding(2) ................................. 3,029,012 3,050,396
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Working capital
(deficit) ........ $(2,456,670) $(3,798,814)
Total assets ....... 3,851,153 8,125,746
Total liabilities .. 2,897,874 6,797,958
Shareholders' equity 953,279 1,327,788
</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) 135,284 shares of Common Stock upon exercise of certain outstanding
warrants, (ii) an estimated 490,629 shares of Common Stock upon
conversion of the Company Financing Notes, (iii) an aggregate of
1,328,142 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 $3,120,456 for the
years ended December 31, 1995 and 1996, respectively, resulting in an
accumulated deficit of $5,679,098 at December 31, 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 fiscal quarter in
which this offering is consummated in the aggregate amount of approximately
$508,822 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
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 were $4,552,945, an
increase of $2,064,105 or 82.9%, as compared to $2,488,840 for the year ended
December 31, 1995. The increase in net sales was primarily attributable to
the opening of additional Tuscany locations subsequent to December 31, 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 16 coffee and bagel cafes and 12 coffee bagel
bars open at December 31, 1996, as compared to 4 cafes and 17 bars (of which
5 were subsequently converted to coffee and bagel cafes) open at December 31,
1995. Sales of bagels and other food products increased to approximately 39%
of net sales for the year ended December 31, 1996, as compared to
approximately 25% (none of which was from the sale of bagels) for the year
ended December 31, 1995, while sales of coffee beverages declined to
approximately 53% of net sales from approximately 61% 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 year ended December 31,
1996 were $3,093,061, an increase of $1,597,213 or 106.8%, as compared to
$1,495,848 for the year ended December 31, 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 year ended December 31, 1996 was $1,459,884, or 32.1%
of net sales, as compared to $992,992, or 39.9% of net sales for the year
ended December 31, 1995. The decrease in gross profit as a percentage of net
sales was attributable to an increased number of coffee and bagel cafes
opened during the year ended December 31, 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 year ended December 31, 1996 were
$3,196,426, or 70.2% of net sales, as compared to $1,540,470, or 61.9% of net
sales, for the year ended December 31, 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 year ended
December 31, 1996 were $2,405,920, or 52.8% of net sales, as compared to
$1,146,262, or 46.1% of net sales, for the year ended December 31, 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.
22
<PAGE>
General, administrative and corporate marketing expenses for the year
ended December 31, 1996 were $1,059,787, or 23.3% of net sales, as compared
to $794,650, or 31.9% of net sales for the year ended December 31, 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
year ended December 31, 1995 in anticipation of the Company's proposed
expansion.
Other expenses for the year ended December 31, 1996 were $324,127, a
decrease of $18,508 or 5.4%, as compared to $342,635 for the year ended
December 31, 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 $215,078.
As a result of the foregoing, the net loss for the year ended December 31,
1996 increased to $3,120,456, as compared to $1,684,763 for the year ended
December 31, 1995.
During each of the years ended December 31, 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 year ended December 31, 1996 were $776,955, a
decrease of $36,595, or 4.5%, as compared to $813,550 for the year ended
December 31, 1995.
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 December 31, 1996, the Company had a working capital deficit
of $3,798,814), 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 $1,905,255 for the year ended
December 31, 1996, as compared to $747,971 for the year ended December 31,
1995. The increase in net cash used in operating activities was primarily the
result of the increased net loss and an increase in prepaid expenses which
was partially offset by increased depreciation and amortization, accounts
payable and accrued expenses.
Net cash used in investing activities was $3,690,512 for the year ended
December 31, 1996, as compared to $2,247,580 for the year ended December 31,
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 provided by financing activities for the year ended December 31,
1996 was $6,204,968, as compared to $2,967,820 for the year ended December
31, 1995. The increase in net cash provided by financing activities was
primarily attributable to increases in sales of debt and equity securities
and short-term borrowings under the Company's line of credit from Seafirst.
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."
23
<PAGE>
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 $3,186,570. 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
April 1997 and $200,000 of indebtedness under the note in each of April 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. The Company has in the past
(including at December 31, 1996) 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 135,284 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 $3,231,099. 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 one share of Common Stock for each
$3.74 of indebtedness and accrued interest thereon 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 currently under construction and anticipated to be
opened by April 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
24
<PAGE>
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, other beverages,
coffee beans and merchandise accounted for approximately 61%, 25%, 8%, 4% and
2% of the Company's net sales, respectively, during the year ended December
31, 1995 and approximately 53%, 39%, 8%, 0% and 1% respectively, during the
year ended December 31, 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
Denver, CO 1993 bar 750 24 August 1998
One Mellon December
Pittsburgh, PA 1993 bar 384 (2) November 2003
Renaissance Tower January
Dallas, TX 1994 bar 529 (2) December 2004
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
Pittsburgh, PA 1994 bar 170 (2) August 2004
Society Tower October
Cleveland, OH 1994 bar 356 36 September 1999
Squirrel Hill November
Pittsburgh, PA 1994 cafe(4) 1,612 22 February 2016
Southside November
Pittsburgh, PA 1994 cafe 2,500 60 January 2007
Shadyside November
Pittsburgh, PA 1994 bar 1,000 30 November 2006
NationsBank December
Dallas, TX 1994 bar 1,069 12 November 2004
Park Building January
Cleveland, OH 1995 cafe 1,400 12 December 2003
Meadowlake Village January
Denver, CO 1995 cafe(4) 1,600 24 December 2009
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
St. Louis, MO 1995 cafe 2,700(5) 36(5) April 2010
Central West End October
St. Louis, MO 1995 cafe 2,500 88 September 2010
King of Prussia Mall October
King Prussia, PA 1995 bar 366 (2) September 2003
Mcknight and Siebert
Roads December
Pittsburgh, PA 1995 cafe 2,500 76 December 2004
Sixteenth & Walnut
Streets December
Philadelphia, PA 1995 cafe 2,000 40 March 2010
Westin William Penn February
Pittsburgh, PA 1996 cafe 3,267 87 September 2015
Clayton, MO
Eastgate Mall April 1996 cafe(4) 2,730 66 June 2010
Manfield Heights, OH April 1996 cafe(4) 2,050 46 December 2005
Foxridge Plaza
Denver, CO May 1996 cafe(4) 1,300 15 April 2010
</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
November
Forbes Avenue 1996 cafe(4) 2,500 65 May 2016
Pittsburgh, PA
December
Creve Coeur, MO 1996 cafe(4) 2,020 38 July 2011
March
University City 1997(6) cafe(4) 3,850 65(6) July 2016
St. Louis, MO
April
Wayne Township 1997(6) cafe(4) 2,305 60(6) July 2016
Philadelphia, PA
April
La Due Township 1997(6) cafe(4) 1,040 12(6) August 2016
St. Louis, MO
May
Des Peres 1997(6) cafe(4) 2,424 65(6) February 2017
St. Louis, MO
August
Wildwood Crossing 1997(6) cafe(4) 2,100 45(6) June 2017
St. Louis, MO
</TABLE>
- ------
(1) Includes all option renewal periods.
(2) Common area or public seating is available for use by the Company's
customers.
(3) Owned by Expresso Park Shops Limited Partnership ("Park Shops L.P.") of
which the Company owns a 50% general partner interest and James Milgard,
a director of the Company, owns a 50% limited partnership interest. See
"Certain Transactions."
(4) This location features (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 April 1998 (in addition to
the 3 cafes currently under construction and anticipated to be opened by
April 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,
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<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 May 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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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.
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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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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 245 persons, of whom 10 were
in management and 235 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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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
Executive Vice President -- Real Estate and Business
Mark McDonald .. 37 Development and Director
Chris Mueller .. 38 Executive Vice President -- Finance and Director
John Parkey .... 37 Chairman of the Board
Jerome Alhadeff 64 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. Ladd 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"). In September
1991, Pay 'N Pak filed for protection under Chapter 11 of the United States
Bankruptcy Code. 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, 1996 to Jim Simonson, its current
President and Chief Executive Officer, and Mark McDonald, its President and
Chief Executive Officer until September 1996. No other officer of the Company
received compensation in excess of $100,000 for the fiscal year ended
December 31, 1996.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- -------------------------------------
Awards Payouts
-------------------------- ---------
Restricted
Stock LTIP
Other Annual Award(s) Options/ Payouts All Other
Name and Principal Position Year Salary Bonus Compensation $ SARs (#) ($) Compensation
--------------------------- ------ --------- ------- -------------- ------------ ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jim Simonson(1)
President & Chief
Executive Officer ........ 1996 $36,457 $ -0- -- -- 118,000/-- -- --
Mark McDonald(2)
Executive Vice-President . 1996 48,000 -0- -- -- 25,000/-- -- --
</TABLE>
- ------
(1) Jim Simonson has served as President and Chief Executive Officer of the
Company since September 1996.
(2) Mark McDonald served as President and Chief Executive Officer of the
Company from February 1992 until September 1996.
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 each received options,
issued pursuant to the Option Plan, to purchase 25,000 shares of Common
Stock. 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.
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
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<PAGE>
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 94,000 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 its
shareholders for damages for breach of any duty owed to the Company or its
shareholders, except for liability
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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 .............................................. 311,083(3) 11.0% 7.0%
Mark McDonald .............................................. 283,824(4) 10.0 6.4
James Milgard .............................................. 200,787(5)(6) 7.1 4.5
Ottie Ladd. ................................................ 60,688(5)(7) 2.1 1.4
John Parkey ................................................ 44,115(8) 1.6 1.0
David Cohn. ................................................ 38,322(5)(9) 1.4 *
Keith Grinstein ............................................ 27,403(5)(10) 1.0 *
Jerome Alhadeff ............................................ 14,609(5)(10) * *
Greg Maffei ................................................ 14,059(5)(9) * *
Jim Simonson. .............................................. 5,451(11) * *
All directors and executive officers as a group (10
persons). ................................................. 1,000,341(12) 35.3% 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 2,831,100 shares of Common Stock outstanding prior to this
offering (including the approximately 1,954,055 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 4,431,100 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) 78,682 shares of Common Stock issuable upon
exercise of Company Financing Warrants or (ii) 206,000 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 such guarantors
warrants to purchase 11,764 shares of Common Stock (an aggregate of 105,876
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 7,352 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.
During the twelve months following the consummation of this offering, the
Company will not grant to officers, directors, employees and persons
beneficially owning 5% or more of the Company's outstanding Common Stock, or
any affiliate of any such person, options and warrants (not including options
and warrants granted to all of the securityholders of the Company on a pro
rata basis) in excess of 15% of the number of shares of Common Stock
outstanding upon the consummation of this offering.
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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 877,045
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 2,831,100 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, 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 (the "Call Date") has
been at least 150% (currently $7.50, subject to adjustment) of the then
effective exercise price of the Warrants and the Company obtains the written
consent of the Underwriter with respect to such redemption prior to the Call
Date. The Warrant Holders shall have the right to exercise their Warrants
until the close of business on the date fixed for
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<PAGE>
redemption. The Warrants will be issued in registered form under a warrant
agreement by and among the Company, Continental Stock Transfer & Trust
Company, as warrant agent, and the Underwriter (the "Warrant Agreement"). The
exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at prices below
the exercise price of the Warrants. Reference is made to the Warrant
Agreement (which has been filed as an exhibit to the Registration Statement
of which this Prospectus is a part) for a complete description of the terms
and conditions therein (the description herein contained being qualified in
its entirety by reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate
during the exercise period at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent
for the number of Warrants being exercised. The Warrant Holders do not have
the rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has a current registration statement that 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 Articles 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 one year
following the consummation of this offering. After payment of fees and
expenses incurred in connection with the Company Financing, the Company
received net proceeds of $1,642,986 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 $84,412, the
Company received net proceeds of $725,588 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 370,578 shares of Common
Stock at an exercise price of $.34 per share. It is anticipated that warrants
to purchase 135,284 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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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 4,431,100
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 2,831,100 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 2,831,100
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
Commission has approved but not yet adopted changes to Rule 144 reducing the
foregoing two-year period and three-year period to one year and two years,
respectively.
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 2,581,989 of the
remaining 2,651,100 shares of Common Stock (plus an additional 873,002 shares
of Common Stock issuable upon exercise of outstanding warrants, including the
Company Financing Warrants, and options) 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 Underwriter has represented to the
Company that it will not be consenting to the sale of any securities
purchased in the Company Financing and Bridge Financing during the first
twelve months of the foregoing lock-up periods.
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/or 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
47
<PAGE>
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 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
48
<PAGE>
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.
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 180,000 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 investors in the Company
Financing and the Company's other securityholders (other than holders of
69,111 shares of Common Stock) and 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 represented
to the Company that it will not be consenting to the sale of any securities
purchased in the Company Financing and the Bridge Financing during the first
twelve months of the foregoing lock-up periods.
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
49
<PAGE>
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 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 sheets .................................. F-3
Consolidated statements of operations ........................ F-4
Consolidated statements of shareholders'
equity ..................................................... F-5
Consolidated statements of cash flows ........................ F-6
Notes to consolidated financial statements ................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Tuscany, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Tuscany, Inc.
and subsidiary (the Company) as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years ended December 31, 1995 and 1996. 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 December 31,
1996, and the results of its operations and its cash flows for the years
ended December 31, 1995 and 1996, 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, working capital deficiency, 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.
/s/ DELOITTE & TOUCHE LLP
February 14, 1997
(February 28, 1997, as to Notes 1, 5, 6 and 8)
F-2
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS pro forma
-------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................... $ 691,394 $ 737,395
Accounts receivable .......................................... 78,944 78,944
Inventory .................................................... 101,182 101,182
Deferred offering costs ...................................... 196,642 196,642
Prepaid expenses and other current assets .................... 36,405 36,405
------------- -------------
Total current assets .................................... 1,104,567 1,150,568
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS:
Equipment and fixtures ....................................... 3,057,932 3,057,932
Leasehold improvements ....................................... 3,603,710 3,603,710
Construction in progress ..................................... 251,874 251,874
------------- -------------
6,913,516 6,913,516
Less accumulated depreciation and amortization ............... (705,267) (705,267)
------------- -------------
Total equipment and leasehold improvements .............. 6,208,249 6,208,249
GOODWILL, net of accumulated amortization of $53,305 .............. 317,875 317,875
INTANGIBLE ASSETS, net of accumulated amortization of $31,481 ..... 80,627 80,627
OTHER ASSETS ...................................................... 414,428 258,702
------------- -------------
TOTAL ............................................................. $ 8,125,746 $ 8,016,021
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 1,227,265 $ 1,227,265
Checks drawn in excess of bank balances ...................... 622,878 622,878
Accrued expenses ............................................. 389,172 389,172
Bank borrowings .............................................. 1,993,000 1,993,000
Short-term notes payable, net of discount of $399,902 ........ 500,098 500,098
Notes payable to officers .................................... 48,016 48,016
Current portion of long-term obligations ..................... 122,952 122,952
------------- -------------
Total current liabilities ............................... 4,903,381 4,903,381
LONG-TERM OBLIGATIONS, less current portion ....................... 1,894,577 94,577
------------- -------------
Total liabilities ....................................... 6,797,958 4,997,958
COMMITMENTS (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value -- Authorized, 30,000,000 shares;
issued and outstanding, 877,045 shares, pro forma 2,831,100
outstanding ................................................ 463,217 8,664,261
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) pro forma none outstanding ............... 3,186,570
Series B, $2 stated value -- Authorized, issued and
outstanding, 1,750,000 shares, (preference in liquidation
of $3,500,000) pro forma none outstanding ............... 3,231,099
Contributed capital for stock warrants ....................... 126,000 80,000
Accumulated deficit .......................................... (5,679,098) (5,726,198)
------------- -------------
Total shareholders' equity ......................... 1,327,788 3,018,063
------------- -------------
TOTAL ............................................................. $ 8,125,746 $ 8,016,021
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
NET SALES .......................................... $ 2,488,840 $ 4,552,945
COST OF SALES AND RELATED OCCUPANCY COSTS .......... 1,495,848 3,093,061
-------------- --------------
Gross profit ................................... 992,992 1,459,884
OPERATING EXPENSES:
Store ......................................... 1,146,262 2,405,920
Depreciation and amortization ................. 210,253 526,130
Other ......................................... 183,955 264,376
GENERAL, ADMINISTRATIVE, AND CORPORATE MARKETING ... 794,650 1,059,787
-------------- --------------
Loss from operations ........................... (1,342,128) (2,796,329)
OTHER EXPENSES:
Interest expense, net ......................... 76,477 291,555
Loss on sale of equipment and leasehold
improvements ................................ 199,134
Other ......................................... 67,024 32,572
-------------- --------------
NET LOSS ........................................... $(1,684,763) $(3,120,456)
============== ==============
UNAUDITED PRO FORMA INFORMATION (Note 1):
Pro forma net loss ............................ $(1,684,763) $(3,097,603)
Pro forma net loss per share .................. (0.56) (1.02)
Pro forma weighted average shares outstanding . 3,029,012 3,050,396
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 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 882,361 $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 .............. 909,714 133,114 2,756,000 3,174,125 91,250 168,682 36,000 (2,558,642) 953,279
Common stock issued
for services ..... 22,625 7,692 7,692
Surrender of common
stock by certain
officers ........ (235,294)
Common stock issued in
conjunction with
short-term notes
payable ......... 180,000 322,411 322,411
Issuance of Series A
Preferred stock . 10,000 12,445 12,445
Issuance of Series B
Preferred stock . 1,658,750 3,062,417 3,062,417
Contributed capital
for stock warrants 90,000 90,000
Net loss .......... (3,120,456) (3,120,456)
----------- --------- ---------- ----------- ---------- ----------- ------------ -------------- ------------
BALANCE, December 31,
1996 .............. 877,045 $463,217 2,766,000 $3,186,570 1,750,000 $3,231,099 $126,000 $(5,679,098) $ 1,327,788
=========== ========= ========== =========== ========== =========== ============ ============== ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................. $ (1,684,763) $ (3,120,456)
Adjustments to reconcile net loss to net cash used by operating
activities
Depreciation and amortization ..................................... 210,253 526,130
Noncash interest expense .......................................... 10,500 57,424
Bad debt expense .................................................. 30,951 33,174
Loss on sale of equipment and leasehold improvements .............. 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) (18,460)
Inventory ....................................................... (46,448) (18,760)
Prepaid expenses and other current assets ....................... (21,162) (211,885)
Deposits ........................................................ (54,321) (42,431)
Accounts payable ................................................ 522,549 607,440
Accrued expenses ................................................ 97,836 194,877
--------------- ---------------
Net cash used by operating activities ................................ (747,971) (1,905,255)
INVESTING ACTIVITIES:
Advances to partnership .............................................. (141,965) (1,743)
Acquisition of net assets from partnership investment ................ (83,000)
Purchase of equipment and leasehold improvements ..................... (2,022,780) (3,664,526)
Proceeds from sale of equipment and leasehold improvements ........... 22,300
Expenditures for trademark and corporate identity .................... (49,135) (24,243)
--------------- ---------------
Net cash used by investing activities ................................ (2,274,580) (3,690,512)
FINANCING ACTIVITIES:
Checks drawn in excess of bank balances .............................. 76,293 546,585
Net increase in bank borrowings ...................................... 1,533,000 460,000
Principal repayments of notes payable to officers .................... (55,631)
Net proceeds from issuance of convertible promissory notes ........... 1,592,986
Net proceeds from short term notes payable ........................... 403,178
Proceeds from other long-term obligations ............................ 100,000 124,560
Principal repayments of long-term obligations ........................ (471,149) (319,614)
Net proceeds from sale of Series A Preferred stock ................... 1,616,625 12,445
Net proceeds from sale of Series B Preferred stock ................... 168,682 3,062,417
Net proceeds from the issuance of common stock in conjunction with the
short term notes payable .......................................... 322,411
--------------- ---------------
Net cash provided by financing activities ............................ 2,967,820 6,204,968
--------------- ---------------
NET INCREASE (DECREASE) IN CASH ........................................ (54,731) 609,201
CASH:
Beginning of year .................................................... 136,924 82,193
--------------- ---------------
End of year .......................................................... $ 82,193 $ 691,394
=============== ===============
</TABLE>
See notes to consolidted financial statements.
F-6
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 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: The accounts of Expresso Real Estate Corp.,
wholly owned subsidiary of Tuscany, Inc., are insignificant and are included
with the accounts of Tuscany, Inc. in these consolidated financial
statements. Any significant intercompany transactions are eliminated in
consolidation.
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.
Going concern: The Company has experienced operating losses since
inception which have been funded through private placements of equity and
debt securities, loans from shareholders, and through use of the Company's
line-of-credit facility. 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 its common stock and warrants to
purchase common stock. On December 24, 1996, the Company filed for such
offering on Form SB-2. The Company intends to use the proceeds of this
offering 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.
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.
Deferred offering costs: Deferred offering costs represent costs incurred
in the process of completing an initial public offering of the Company's
common stock and warrants to purchase common stock. Such costs will be
charged directly to shareholders' equity upon completion of such offering.
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.
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 over 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.
F-7
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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.
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. It is possible that the Company's
estimate that it will recover such costs could change in the future.
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 accounts receivable, accounts payable, and
short-term and long-term borrowings. All short-term borrowings and long-term
obligations are at currently available rates for such debt instruments with
similar terms and maturities.
Stock-based compensation: 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 accounts 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.
Unaudited pro forma balance sheet: The Company is preparing for an
initial public offering of its common stock and warrants to purchase common
stock which, upon completion, will result in the assumed exercise of certain
common stock warrants (Note 10) and the conversion of presently outstanding
preferred stock and the convertible promissory notes issued in November and
December 1996 (Note 8) into shares of its common stock. The accompanying pro
forma balance sheet, which is unaudited, is presented as if such exercise and
conversion had occurred on December 31, 1996.
Unaudited pro forma net loss and net loss per share: 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
stock options and warrants outstanding and after giving pro forma effect to
the conversion of the Company's outstanding preferred shares, the conversion
of convertible promissory notes and the assumed exercise of certain common
stock warrants, as described above as if such exercise and conversion had
occurred as of the beginning of the periods presented. Pursuant to rules of
the Securities and Exchange Commission, all common shares, warrants, and
options granted by the Company at a price less than the estimated initial
public offering price of $5.00 per share 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 from the beginning of the periods presented, regardless of their
dilutive effect.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest in the amount of $76,753 and $260,605, net of
$17,600 and $20,228 capitalized, for the years ended December 31, 1995 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)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION - (Continued)
<TABLE>
<CAPTION>
<S> <C>
Cash ................................ $ 23,065
Inventory ........................... 4,054
Current assets ...................... 3,345
Receivable from partnership ......... (28,082)
Equipment and leasehold improvements 227,500
Investments in partnerships ......... (132,053)
Deposits ............................ 16,757
Goodwill ............................ 51,180
Current liabilities ................. (7,427)
Notes payable ....................... (66,039)
Common stock ........................ (9,300)
-----------
$ 83,000
===========
</TABLE>
The Company financed $124,503 for the purchase of equipment and leasehold
improvements through capital lease obligations in the year ended December 31,
1995.
On September 1, 1995, in response to certain shareholders guaranteeing the
Company's line of credit, the Company issued 105,876 warrants, 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 for
stock warrants and deferred financing fees, and was 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 29,408 warrants, 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 for
stock warrants and deferred financing fees, and will 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 entitling 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 22,625 shares of common
stock for certain other consulting services received during 1996. The
recorded value of the warrants and shares was determined based on the fair
value of the services rendered.
NOTE 3: OTHER ASSETS
The Company's other assets at December 31, 1996, are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deposits ..................................................... $146,283
Deferred financing fees, net of accumulated amortization of
$46,359 .................................................... 268,145
-----------
$414,428
===========
</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
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.
F-9
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 5: BANK BORROWINGS
At December 31, 1996, the Company's bank borrowings include a loan with an
outstanding balance of $1,400,000, which requires monthly interest payments
and two remaining quarterly principal payments of $200,000 each, on April 1,
1997, and June 1, 1997, 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 April 1, 1997. Aggregate bank borrowings at
December 31, 1996, were $1,993,000, and such borrowings provide for a
variable interest rate at 1.25% above the bank's prime rate (9.5% at December
31, 1996). All bank borrowings are guaranteed by certain shareholders, and
such guarantors have collateralized interest in substantially all of the
Company's assets. The agreement includes restrictive covenants which, among
other things, restrict the level of asset additions, restrict the
distribution of dividends, and require certain tangible net worth levels. As
of December 31, 1996, the Company was not in compliance with certain of the
covenants and has obtained appropriate waivers from the bank.
NOTE 6: SHORT-TERM NOTES PAYABLE
In December 1996, the Company 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 $84,412, the Company received net
proceeds of approximately $725,588 from the sale of the Bridge Units.
The Company has recorded the transaction as $500,098 of short-term notes
payable, net of discount of $399,902 and as $322,411 of common stock, net of
issuance costs of $77,492, as determined by their relative fair values as of
the closing date. In addition, the Company has recorded deferred financing
fees related to the short-term notes payable of $96,920, which is to be
amortized over the term of the notes.
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.
NOTE 7: NOTES PAYABLE TO OFFICERS
At December 31, 1996, the Company held notes payable to certain of its
officers in the aggregate of $48,016. Such notes are unsecured, accrue
interest at 6% and mature on the earlier of April 30, 1998, or 12 months
following an initial public offering of the Company's common stock.
NOTE 8: LONG-TERM OBLIGATIONS
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 proceeds received were
$1,642,986, net of placement costs of $157,014.
The entire $1,800,000 principal amount, plus related 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 one year following the consummation of an initial
public offering.
F-10
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 8: LONG-TERM OBLIGATIONS - (Continued)
The Company has recorded the transaction as $1,800,000 of long-term
obligations. In addition, the Company has recorded related deferred financing
fees of $157,014, which are being amortized over the term of the notes. The
Company recorded no value for the warrants associated with this financing.
As of December 31, 1996, the Company was in default of the Company
Financing Notes, as the required interest payments had not been made.
However, such default was cured by payment of the interest on February 28,
1997.
Long-term obligations, including current portion, consisted of the
following at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Company Financing Notes ........................................ $1,800,000
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 February 29, 2004 ........... 46,590
-------------
1,896,590
Less current portion ........................................... (70,043)
-------------
Long-term obligations .......................................... $1,826,547
=============
</TABLE>
Scheduled principal payments on long-term obligations for the next five
years ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ........................................... $ 70,043
1998 ........................................... 1,811,538
1999 ........................................... 2,370
2000 ........................................... 2,618
2001 ........................................... 2,892
Thereafter ..................................... 7,129
-------------
$1,896,590
=============
</TABLE>
NOTE 9: 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.
Rent expense was as follows for the year ending December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Minimum rentals ... $437,000 $894,300
Contingent rentals 4,700 18,600
----------- -----------
$441,700 $912,900
=========== ===========
</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 $105,800, net of $127,200 accumulated amortization
determined based on the Company's depreciation policies, at December 31,
1996.
F-11
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 9: COMMITMENTS - (Continued)
A summary of the Company's minimum lease obligations for the next five
years ending December 31 is as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------- -------------
<S> <C> <C>
1997 ......................................... $ 80,942 $1,201,000
1998 ......................................... 72,272 1,249,000
1999 ......................................... 7,308 1,116,000
2000 898,000
2001 ......................................... 749,000
Thereafter ................................... 4,398,000
---------- -------------
Total minimum lease commitments .............. 160,522 $9,611,000
=============
Less amounts representing interest ........... (39,583)
----------
Present value of capital lease obligations ... 120,939
Less current portion ......................... (52,909)
----------
Long-term capital lease obligations .......... $ 68,030
==========
</TABLE>
NOTE 10: SHAREHOLDERS' EQUITY
Preferred stock: The Company has two series of Preferred stock
outstanding at December 31, 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 effective registration of Company shares for a public offering.
During 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 $12,445. 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 $255,083, were $3,062,417.
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 December 31, 1996, is $6,957,500.
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.
Warrants: A summary of the warrants outstanding and exercisable at
December 31, 1996, is as follows:
F-12
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 10: SHAREHOLDERS' EQUITY - (Continued)
<TABLE>
<CAPTION>
Number
of warrants Exercise
Warrants issued as consideration for: issued price Expiration date
------------- ---------- ----------------------------------
<S> <C> <C> <C>
September 1995 guarantee of line of credit 105,876 $0.34 The earlier of September 12, 2000, or
the closing of an initial public
offering of the Company's common stock
September 1996 guarantee of line of credit 29,408 0.34 The earlier of September 6, 2001, or
the closing of an initial public
offering of the Company's common stock
September 1996 consulting agreements and
legal services 235,294 0.34 January 31, 2002
November and December 1996 Company
Financing 372,708 5.00 Three years after the closing of an
initial public offering of the
Company's common stock
Total outstanding at December 31, 1996 743,286
=============
</TABLE>
NOTE 11: 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. During 1996, the Company granted
options to purchase 206,000 shares at an exercise price of $5.00 to certain
employees and directors under the Plan. No compensation cost has been
recognized for its stock option plan. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant dates
for awards under those plans with the method of SFAS No. 123, the effect on
the Company's net loss, pro forma net loss and pro forma net loss per share
would have been insignificant.
NOTE 12: INCOME TAXES
At December 31, 1996, the Company had net deferred tax assets of
approximately $1,744,000, which primarily consisted of the tax benefit of net
operating loss carryforwards totalling $5,254,610, 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. Completion of the Company's
planned initial public offering may result in a change in ownership as
defined under Section 382 of the Internal Revenue Code of 1986, which would
impose certain limitations on the Company's ability to utilize such net
operating loss carryforwards.
NOTE 13: SUPPLIER RELATIONSHIP
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.
F-13
<PAGE>
TUSCANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE 13: SUPPLIER RELATIONSHIP - (Continued)
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 December 31, 1996. In December 1996, the Company was forgiven $50,000 in
accounts payable to Boyds Coffee in exchange for one unit of the Company
financing. As of December 31, 1996, the $50,000 convertible promissory note
to Boyds Coffee was still outstanding.
F-14
<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>
=============================================================================
[LOGO]
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 ............................ 85,000.00
Legal fees and expenses .................................... 275,000.00
Accounting fees and expenses ............................... 125,000.00
Blue sky fees and expenses (including legal fees) .......... 30,000.00
Transfer agent, warrant agent and registrar fees and
expenses .................................................. 2,000.00
Miscellaneous .............................................. 4,210.49
------------
Total ................................................. $599,200.00
============
</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 135,284 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
III-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. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the city of Seattle, State of Washington on March 3, 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. 2 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 March 3, 1997
------------------------
Jim Simonson
* Executive Vice President and Director March 3, 1997
------------------------
Mark McDonald
* Executive Vice President, (Principal Financial March 3, 1997
------------------------ Officer and Principal Accounting Officer) and
Chris Mueller Director
* Director March 3, 1997
------------------------
Jerome Alhadeff
* Director March 3, 1997
------------------------
David Cohn
* Director March 3, 1997
------------------------
Keith Grinstein
* Director March 3, 1997
------------------------
Ottie Ladd
* Director March 3, 1997
------------------------
Greg Maffei
* Director March 3, 1997
------------------------
James Milgard
* Director March 3, 1997
------------------------
John Parkey
*By: /s/ Jim Simonson
------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
----------- ----------
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Articles of Incorporation, as amended, of the Registrant.
*3.2 Bylaws, as amended, of the Registrant.
*4.1 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.
<PAGE>
TUSCANY, INC.
a Washington corporation
and
Warrant Agent
and
PARAGON CAPITAL CORPORATION
Underwriter
WARRANT AGREEMENT
<PAGE>
Table of Contents
Section Page
- ------- ----
1. Appointment of Warrant Agent............................ 1
2. Form of Warrant......................................... 2
3. Countersignature and Registration....................... 3
4. Transfers and Exchanges................................. 3
5. Exercise of Warrants; Payment of Warrant Solicitation
Fee..................................................... 4
6. Payment of Taxes........................................ 8
7. Mutilated or Missing Warrants........................... 9
8. Reservation of Common Stock............................. 9
9. Warrant Price; Adjustments.............................. 11
10. Fractional Interest..................................... 18
11. Notices to Warrantholders............................... 18
12. Disposition of Proceeds on Exercise of Warrants......... 20
13. Redemption of Warrants.................................. 21
14. Merger or Consolidation or Change of Name of Warrant
Agent................................................... 21
15. Duties of Warrant Agent................................. 22
16. Change of Warrant Agent................................. 26
17. Identity of Transfer Agent.............................. 27
18. Notices................................................. 27
19. Supplements and Amendments.............................. 29
20. New York Contract....................................... 29
21. Benefits of this Agreement.............................. 29
22. Successors.............................................. 30
Exhibit A - Form of Warrant
-2-
<PAGE>
WARRANT AGENT AGREEMENT dated as of _________, 1997, by and
among Tuscany, Inc., a Washington corporation (the "Company"), Paragon Capital
Corporation (the "Underwriter") and ______________________________, as warrant
agent (hereinafter called the "Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public
up to 1,600,000 shares of the Common Stock of the Company, par value $.01 per
share (hereinafter, together with the stock of any other class to which such
shares may hereafter have been changed, called "Common Stock"), and up to
1,600,000 Common Stock purchase warrants (the "Warrants");
WHEREAS, each Warrant will entitle the holder thereof to
purchase one (1) share of Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth in this Agreement, and the Warrant
Agent hereby accepts such appointment.
<PAGE>
Section 2. Form of Warrant. The text of the Warrants and of
the form of election to purchase Common Stock to be printed on the reverse
thereof shall be substantially as set forth in Exhibit A attached hereto. Each
Warrant shall entitle the registered holder thereof to purchase one share of
Common Stock at a purchase price of $5.00, at any time from __________, 1997 or
such earlier date upon which the Underwriter consents to the exercise of the
Warrants until 5:00 p.m. Eastern time, on _________, 2002 (the "Warrant Exercise
Period"). The warrant price and the number of shares of Common Stock issuable
upon exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrants shall be executed on
behalf of the Company by the manual or facsimile signature of the present or any
future President or Vice President of the Company, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration date of the Warrants
falls on a Saturday or Sunday, or on a legal holiday on which the New York Stock
Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on
the next succeeding business day.
-2-
<PAGE>
Section 3. Countersignature and Registration. The Warrant
Agent shall maintain books for the transfer and registration of the Warrants.
Upon the initial issuance of the Warrants, the Warrant Agent shall issue and
register the Warrants in the names of the respective holders thereof. The
Warrants shall be countersigned manually or by facsimile by the Warrant Agent
(or by any successor to the Warrant Agent then acting as warrant agent under
this Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may, however, be so countersigned by the Warrant Agent (or by its
successor as Warrant Agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee and the surrendered Warrant shall be cancelled by the Warrant Agent.
Warrants so cancelled shall be delivered by the Warrant Agent to the Company
from time to time upon request. Warrants may be exchanged at the option of the
holder thereof, when sur-
-3-
<PAGE>
rendered at the office of the Warrant Agent, for another Warrant, or other
Warrants of different denominations of like tenor and representing in the
aggregate the right to purchase a like number of shares of Common Stock.
Section 5. Exercise of Warrants; Payment of Warrant
Solicitation Fee.
(a) Subject to the provisions of this Agreement, each
registered holder of Warrants shall have the right, which may be exercised
commencing at the opening of business on the first day of the Warrant Exercise
Period, to purchase from the Company (and the Company shall issue and sell to
such registered holder of Warrants) the number of fully paid and non-assessable
shares of Common Stock specified in such Warrants upon surrender of such
Warrants to the Company at the office of the Warrant Agent, with the form of
election to purchase on the reverse thereof duly filled in and signed, and upon
payment to the Company of the warrant price, determined in accordance with the
provisions of Sections 9 and 10 of this Agreement, for the number of shares of
Common Stock in respect of which such Warrants are then exercised. Payment of
such warrant price shall be made in cash or by certified check or bank draft to
the order of the Company. Subject to Section 6, upon such surrender of Warrants
and payment of the warrant price, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
registered holder of
-4-
<PAGE>
such Warrants and in such name or names as such registered holder may designate,
a certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of such Warrants. Such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares of
Common Stock as of the date of the surrender of such Warrants and payment of the
warrant price as aforesaid. The rights of purchase represented by the Warrants
shall be exercisable, at the election of the registered holders thereof, either
as an entirety or from time to time for a portion of the shares specified
therein and, in the event that any Warrant is exercised in respect of less than
all of the shares of Common Stock specified therein at any time prior to the
date of expiration of the Warrants, a new Warrant or Warrants will be issued to
the registered holder for the remaining number of shares of Common Stock
specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Section and of Section 3 of this Agreement
and the Company, whenever requested by the Warrant Agent, will supply the
Warrant Agent with Warrants duly executed on behalf of the Company for such
purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable unless at the time of exercise the Company has filed with
the Securities
-5-
<PAGE>
and Exchange Commission a registration statement under the Securities Act of
1933, as amended (the "Act"), covering the shares of Common Stock issuable upon
exercise of such Warrant and such shares have been so registered or qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder of such Warrant. The Company shall use its best efforts to have all
shares so registered or qualified on or before the date on which the Warrants
become exercisable.
(b) If at the time of exercise of any Warrant after _________,
1998 (i) the per share market price of the Company's Common Stock is equal to or
greater than the then purchase price of the Warrant, (ii) the exercise of the
Warrant is solicited by the Underwriter at such time while the Underwriter is a
member of the National Association of Securities Dealers, Inc. ("NASD"), (iii)
the Warrant is not held in a discretionary account, (iv) disclosure of the
compensation arrangement is made in documents provided to the holders of the
Warrants; and (v) the solicitation of the exercise of the Warrant is not in
violation of Rule 10b-6 (as such rule or any successor rule may be in effect as
of such time of exercise) promulgated under the Securities Exchange Act of 1934,
then the Underwriter shall be entitled to receive from the Company upon exercise
of each of the Warrant(s) so exercised a fee of five percent (5%) of the
aggregate price of the Warrants so exercised (the "Exercise
-6-
<PAGE>
Fee"). The procedures for payment of the warrant solicitation fee are set forth
in Section 5(c) below.
(c) (1) Within five (5) days of the last day of each month
commencing with ______, 1998, the Warrant Agent will promptly notify the
Underwriter of each Warrant Certificate which has been properly completed for
exercise by holders of Warrants during the last month. The Company and Warrant
Agent shall determine, in their sole and absolute discretion, whether a Warrant
Certificate has been properly completed. The Warrant Agent will provide the
Underwriter with such information, in connection with the exercise of each
Warrant, as the Underwriter shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after
receipt by the Warrant Agent from the Company of a check payable to the order of
the Underwriter in the amount of the Exercise Fee. The Warrant Agent shall not
issue the shares of Common Stock issuable upon exercise of the Warrants until
receipt and forwarding of such check to the Underwriter. In the event that an
Exercise Fee is paid to the Underwriter with respect to a Warrant which the
Company or the Warrant Agent determines is not properly completed for exercise
or in respect of which the Underwriter is not entitled to an Exercise Fee, the
Underwriter will promptly return such Exercise Fee to the Warrant Agent which
shall forthwith return such fee to the Company.
-7-
<PAGE>
The Underwriter and the Company may at any time, after
_________, 1998, and during business hours, examine the records of the Warrant
Agent, including its ledger of original Warrant certificates returned to the
Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the
contrary, the provisions of paragraphs 5(b) and 5(c) may not be modified,
amended or deleted without the prior written consent of the Underwriter.
Section 6. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of any certificates of shares of
Common Stock in a name other than that of the registered holder of Warrants in
respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid or that such person has an exemption
from the payment of such tax.
Section 7. Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in
its discretion, issue and the
-8-
<PAGE>
Warrant Agent shall countersign and deliver in exchange and substitution for and
upon cancellation of the mutilated Warrant, or in lieu of and in substitution
for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and
representing an equivalent right or interest, but only upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction and, in case of a lost, stolen or destroyed Warrant, indemnity, if
requested, also satisfactory to them. Applicants for such substitute Warrants
shall also comply with such other reasonable regulations and pay such reasonable
charges as the Company or the Warrant Agent may prescribe.
Section 8. Reservation of Common Stock. There have been
reserved, and the Company shall at all times keep reserved, out of the
authorized and unissued shares of Common Stock, a number of shares of Common
Stock sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the transfer agent for the shares of Common
Stock and every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of any of the rights of purchase aforesaid are
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates of such
shares, validly issued and outstanding, fully paid and non-
-9-
<PAGE>
assessable and listed on any national securities exchange upon which the other
shares of Common Stock are then listed. So long as any unexpired Warrants remain
outstanding, the Company will file such post-effective amendments to the
registration statement (Form SB-2, Registration No. 333- ) (the "Registration
Statement") filed pursuant to the Act with respect to the Warrants (or other
appropriate registration statements or post-effective amendment or supplements)
as may be necessary to permit it to deliver to each person exercising a Warrant,
a prospectus meeting the requirements of Section 10(a)(3) of the Act and
otherwise complying therewith, and will deliver such a prospectus to each such
person. To the extent that during any period it is not reasonably likely that
the Warrants will be exercised, due to market price or otherwise, the Company
need not file such a post-effective amendment during such period. The Company
will keep a copy of this Agreement on file with the transfer agent for the
shares of Common Stock and with every subsequent transfer agent for any shares
of the Company's Common Stock issuable upon the exercise of the rights of
purchase represented by the Warrants. The Warrant Agent is irrevocably
authorized to requisition from time to time from such transfer agent stock
certificates required to honor outstanding Warrants. The Company will supply
such transfer agent with duly executed stock certificates for that purpose. All
Warrants surrendered in the exercise of the rights thereby evidenced shall be
cancelled by the Warrant Agent and
-10-
<PAGE>
shall thereafter be delivered to the Company, and such cancelled Warrants shall
constitute sufficient evidence of the number of shares of Common Stock which
have been issued upon the exercise of such Warrants. Promptly after the date of
expiration of the Warrants, the Warrant Agent shall certify to the Company the
total aggregate amount of Warrants then outstanding, and thereafter no shares of
Common Stock shall be subject to reservation in respect of such Warrants which
shall have expired.
Section 9. Warrant Price; Adjustments.
(a) The warrant price at which Common Stock shall
be purchasable upon the exercise of the Warrants shall be $ per share or
after adjustment, as provided in this Section, shall be such price as so
adjusted (the "Warrant Price").
(b) The Warrant Price shall be subject to adjustment
from time to time as follows:
(i) In case the Company shall at any time after the date
hereof pay a dividend in shares of Common Stock or make a distribution in shares
of Common Stock, then upon such dividend or distribution the Warrant Price in
effect immediately prior to such dividend or distribution shall forthwith be
reduced to a price determined by dividing:
(A) an amount equal to the total number
of shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Warrant Price in effect immediately prior to such
dividend or distribution, by
-11-
<PAGE>
(B) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 9(b)(i), the following
provisions shall be applicable: Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the date following the date
fixed for the determination of stockholders entitled to receive such dividend or
other distribution.
(ii) In case the Company shall at any time subdivide or
combine the outstanding Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination to the nearest one cent. Any such adjustment shall become effective
at the time such subdivision or combination shall become effective.
(iii) Within a reasonable time after the close of each
quarterly fiscal period of the Company during which the Warrant Price has been
adjusted as herein provided, the Company shall
(A) file with the Warrant Agent a certificate
signed by the President or Vice President of the Company and by the Treasurer or
Assistant Treasurer or the Secretary or an Assistant Secretary of the Company,
showing in detail the
-12-
<PAGE>
facts requiring all such adjustments occurring during such period and the
Warrant Price after each such adjustment; and
(B) the Warrant Agent shall have no
duty with respect to any such certificate filed with it except to keep the same
on file and available for inspection by holders of Warrants during reasonable
business hours, and the Warrant Agent may conclusively rely upon the latest
certificate furnished to it hereunder. The Warrant Agent shall not at any time
be under any duty or responsibility to any holder of a Warrant to determine
whether any facts exist which may require any adjustment of the Warrant Price,
or with respect to the nature or extent of any adjustment of the Warrant Price
when made, or with respect to the method employed in making any such adjustment,
or with respect to the nature or extent of the property or securities
deliverable hereunder. In the absence of a certificate having been furnished,
the Warrant Agent may conclusively rely upon the provisions of the Warrants with
respect to the Common Stock deliverable upon the exercise of the Warrants and
the applicable Warrant Price thereof.
(iv) Notwithstanding anything contained herein to the
contrary, no adjustment of the Warrant Price shall be made if the amount of such
adjustment shall be less than $.05, but in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which,
-13-
<PAGE>
together with any adjustment so carried forward, shall amount to not less than
$.05.
(v) In the event that the number of outstanding shares of
Common Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of
this Section by reason of such dividend or subdivision, the number of shares of
Common Stock issuable upon the exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares. In the event that the number
of shares of Common Stock outstanding is decreased by a combination of the
outstanding Common Stock, then, from and after the time at which the adjusted
Warrant Price becomes effective pursuant to this Section 9(b)(b) of this Section
by reason of such combination, the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be decreased in proportion to such
decrease in the outstanding shares of Common Stock.
(vi) In case of any reorganization or reclassification of
the outstanding Common Stock (other than a change in par value, or from par
value to no par value, or as a result of a subdivision or combination), or in
case of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any
-14-
<PAGE>
reclassification of the outstanding Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, the holder of each Warrant then outstanding
shall thereafter have the right to purchase the kind and amount of shares of
Common Stock and other securities and property receivable upon such
reorganization, reclassification, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which the holder of such Warrant
shall then be entitled to purchase; such adjustments shall apply with respect to
all such changes occurring between the date of this Warrant Agreement and the
date of exercise of such Warrant.
(vii) Subject to the provisions of this Section 9, in case
the Company shall, at any time prior to the exercise of the Warrants, make any
distribution of its assets to holders of its Common Stock as a liquidating or a
partial liquidating dividend, then the holder of Warrants who exercises its
Warrants after the record date for the determination of those holders of Common
Stock entitled to such distribution of assets as a liquidating or partial
liquidating dividend shall be entitled to receive for the Warrant Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would
-15-
<PAGE>
have been payable to such holder had he been the holder of record of the Common
Stock receivable upon exercise of its Warrant on the record date for the
determination of those entitled to such distribution.
(viii) In case of the dissolution, liquidation or winding
up of the Company, all rights under the Warrants shall terminate on a date fixed
by the Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants, as
the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(ix) In case the Company shall, at any time prior to the
expiration of the Warrants and prior to the exercise thereof, offer to the
holders of its Common Stock any rights to subscribe for additional shares of any
class of the Company, then the Company shall give written notice thereof to the
last registered holder thereof not less than thirty (30) days prior to the date
on which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription and the right of the
holder
-16-
<PAGE>
thereof to participate in such offer of subscription shall terminate if the
Warrant shall not be exercised on or before the date of such closing of the
books or such record date.
(x) Any adjustment pursuant to the aforesaid provisions
of this Section 9 shall be made on the basis of the number of shares of Common
Stock which the holder thereof would have been entitled to acquire by the
exercise of the Warrant immediately prior to the event giving rise to such
adjustment.
(xi) Irrespective of any adjustments in the Warrant Price
or the number or kind of shares purchasable upon exercise of the Warrants,
Warrants previously or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section 9, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section 9.
(xiii) If at any time, as a result of an adjustment made
pursuant to Section 9(b)(vi) above, the holders of a Warrant or Warrants shall
become entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
-17-
<PAGE>
Warrant and the Warrant Price for such shares shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in Section 9(b)(ii)
through (v).
Section 10. Fractional Interest. The Warrants may only be
exercised to purchase full shares of Common Stock and the Company shall not be
required to issue fractions of shares of Common Stock on the exercise of
Warrants. However, if a Warrant holder exercises all Warrants then owned of
record by it and such exercise would result in the issuance of a fractional
share, the Company will pay to such Warrant holder, in lieu of the issuance of
any fractional share otherwise issuable, an amount of cash based on the market
value of the Common Stock of the Company on the last trading day prior to the
exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and
the number of shares of Common Stock issuable upon exercise of a Warrant, then
and in each such case the Company shall give written notice thereof to the
Warrant Agent, which notice shall state the Warrant Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of a Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based. The Company shall also mail such notice to the holders of
the Warrants at their addresses appearing in the
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<PAGE>
Warrant register. Failure to give or mail such notice, or any defect therein,
shall not affect the validity of the adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable in stock upon
its Common Stock or make any distribution (other than regular cash dividends) to
the holders of its Common Stock; or
(ii) the Company shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale or substantially all of its assets to, another
corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; then in any one or more of such cases,
the Company shall give written notice in the manner set forth in Section 11(a)
of the date on which (A) a record shall be taken for such dividend, distribution
or subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
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<PAGE>
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up as the case may be. Such notice shall be given at
least thirty (30) days prior to the action in question and not less than thirty
(30) days prior to the record date in respect thereof. Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
of the matters set forth in this Section 11(b).
(C) The Company shall cause copies of all
financial statements and reports, proxy statements and other documents that are
sent to its stockholders to be sent by first-class mail, postage prepaid, on the
date of mailing to such stockholders, to each registered holder of Warrants at
his address appearing in the warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of
Warrants.
(i) The Warrant Agent shall promptly forward
to the Company all monies received by the Warrant Agent for the purchase of
shares of Common Stock through the exercise of such Warrants; provided, however,
that the Warrant Agent may retain an amount equal to the Exercise Fee, if any,
until the Company has satisfied its obligations under Section 5(c)(i).
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<PAGE>
(ii) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of Warrants during normal business
hours.
Section 13. Redemption of Warrants. The Warrants are
redeemable by the Company, in whole or in part, on not less than thirty (30)
days' prior written notice at a redemption price of $.10 per Warrant at any time
commencing __________, 1997; provided that (i) the closing bid quotation price
of the Common Stock on all twenty (20) trading days ending on the third trading
day prior to the day on which the Company gives notice (the "Call Date") of
redemption has been at least 150% of the then effective exercise price of the
Warrants (the "Target Redemption Price") and the Company attains the written
consent of the Underwriter to such redemption prior to the Call Date. and (ii)
the Warrants are currently exercisable. The redemption notice shall be mailed to
the holders of the Warrants at their addresses appearing in the Warrant
register. Holders of the Warrants will have exercise rights until the close of
business on the date fixed for redemption.
Section 14. Merger or Consolidation or Change of Name of
Warrant Agent. Any corporation or company which may succeed to the corporate
trust business of the Warrant Agent by any merger or consolidation or otherwise
shall be the successor to the Warrant Agent hereunder without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible to serve
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<PAGE>
as a successor Warrant Agent under the provisions of Section 16 of this
Agreement. In case at the time such successor to the Warrant Agent shall succeed
to the agency created by this Agreement, any of the Warrants shall have been
countersigned but not delivered, any such successor to the Warrant Agent may
adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrants shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrants so countersigned. In all such cases such Warrants
shall have the full force provided in the Warrants and in the Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained
herein and in the Warrants shall be taken as statements of the Company, and the
Warrant Agent assumes no responsibility for the correctness of any of the same
except such as describe the Warrant Agent or action taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants except as herein expressly provided.
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<PAGE>
(b) The Warrant Agent shall not be responsible
for any failure of the Company to comply with any of the covenants in this
Agreement or in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time
with counsel satisfactory to it (who may be counsel for the Company) and the
Warrant Agent shall incur no liability or responsibility to the Company or to
any holder of any Warrant in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with the opinion or the advice of
such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant
Agent reasonable compensation for all services rendered by the Warrant Agent in
the execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including judgments,
costs and reasonable counsel fees, for anything done
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<PAGE>
or omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director,
officer, partner or employee of the Warrant Agent may buy, sell or deal in any
of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend
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<PAGE>
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent and its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise
any of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys, agents or employees, and the
Warrant Agent shall not be answerable or accountable for any such attorneys,
agents or employees or for any loss to the Company resulting from such neglect
or misconduct, provided reasonable care had been exercised in the selection and
continued employment thereof.
(j) Any request, direction, election, order or
demand of the Company shall be sufficiently evidenced by an instrument signed in
the name of the Company by its President or a Vice President or its Secretary or
an Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
-25-
<PAGE>
Section 16. Change of Warrant Agent. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by mailing
such notice to the holders at their addresses appearing on the Warrant register,
of such resignation, specifying a date when such resignation shall take effect.
The Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Warrant Agent or after the
Company has received such notice from a registered holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant
-26-
<PAGE>
Agent without further act or deed and the former Warrant Agent shall deliver and
transfer to the successor Warrant Agent all cancelled Warrants, records and
property at the time held by it hereunder, and execute and deliver any further
assurance or conveyance necessary for the purpose. Failure to file or mail any
notice provided for in this Section, however, or any defect therein, shall not
affect the validity of the resignation or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the
appointment of any transfer agent for the shares of Common Stock or of any
subsequent transfer agent for the shares of Common Stock or other shares of the
Company's Common Stock issuable upon the exercise of the rights of purchase
represented by the Warrants, the Company will file with the Warrant Agent a
statement setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to
be given by the Warrant Agent, or by the registered holder of any Warrant to the
Company, shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another is filed in writing by the Company with the
Warrant Agent) as follows:
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<PAGE>
Tuscany, Inc.
601 Union Street - Suite 4620
Seattle, Washington 98101
Attention: Jim Simonson, Chief Executive
Officer
and a copy thereof to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
Any notice pursuant to this Agreement to be given by
the Company or by the registered holder of any Warrant to the Warrant Agent
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:
Attention:
Any notice pursuant to this Agreement to be given by the
Warrant Agent or by the Company to the Underwriter shall be sufficiently given
if sent by first-class mail, postage prepaid, addressed (until another address
if filed in writing with the Warrant agent) as follows:
Paragon Capital Corporation
7 Hanover Square
New York, New York 10004
Attention: George B. Levine, Chairman
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<PAGE>
and a copy thereof to:
Akerman, Senterfitt & Eidson
One Southeast 3rd Avenue
Miami, Florida 33131-1704
Attention: Alan H. Aronson, Esq.
Section 19. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in order
to cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Warrant Agent may deem necessary or desirable and
which shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the holders of Warrants.
Section 20. New York Contract. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Warrant Agent and the registered holders of the Warrants any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be
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<PAGE>
for the sole and exclusive benefit of the Company, the Warrant Agent and the
registered holders of the Warrants.
Section 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company, the Warrant Agent or the
Underwriter shall bind and inure to the benefit of their respective successors
and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
TUSCANY, INC.
By: ____________________________
Name:
Title:
By: ____________________________
Name:
Title:
PARAGON CAPITAL CORPORATION
By: ____________________________
Name:
Title:
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<PAGE>
EXHIBIT 11.1
Tuscany, Inc
Statement of Computation of Pro Forma Net Loss Per Share
For the Years Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
Year Year
Ended Ended
Description December 31, 1995 December 31, 1996
----------- ----------------- ------------------
<S> <C> <C>
Common Stock Outstanding ...................... 855,661 877,045
Common Stock Equivalents:
Convertible Preferred Stock (as converted)..... 1,328,142 1,328,142
Convertible Debt (as converted) ............... 490,629 490,629
Stock Warrants (as converted) ................. 354,580 354,580
------------- -------------
3,029,012 3,050,396
============= =============
Pro Forma Net Loss ............................ $ (1,684,763) $ (3,097,603)
============= =============
Pro Forma Net Loss attributable to common
stockholders per share ........................ $ (0.56) $ (1.02)
============= =============
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 2 to Registration Statement No.
333-18711 of Tuscany, Inc. on Form SB-2 of our report dated February 14, 1997
(February 28, 1997 as to Notes 1, 5, 6 and 8) (which expresses an unqualified
opinion and includes an explanatory paragraph referring to the substantial
doubt about the ability of the Company to continue as a going concern),
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REGISTRATION STATEMENT ON FORM SB-2 AS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FINANCIAL STATEMENTS INCLUDED THEREIN
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 0 691,394
<SECURITIES> 0 0
<RECEIVABLES> 0 78,944
<ALLOWANCES> 0 0
<INVENTORY> 0 101,182
<CURRENT-ASSETS> 0 1,104,567
<PP&E> 0 6,913,516
<DEPRECIATION> 0 705,267
<TOTAL-ASSETS> 0 8,125,746
<CURRENT-LIABILITIES> 0 4,903,381
<BONDS> 0 1,894,577
0 0
0 6,417,669
<COMMON> 0 463,217
<OTHER-SE> 0 (5,553,098)
<TOTAL-LIABILITY-AND-EQUITY> 0 8,125,746
<SALES> 2,488,840 4,552,945
<TOTAL-REVENUES> 2,488,840 4,552,945
<CGS> 1,495,848 3,093,061
<TOTAL-COSTS> 3,830,968 7,349,274
<OTHER-EXPENSES> 266,158 32,572
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 76,477 291,555
<INCOME-PRETAX> (1,684,763) (3,120,456)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,684,763) (3,120,456)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,684,763) (3,120,456)
<EPS-PRIMARY> (.56) (1.02)
<EPS-DILUTED> (.56) (1.02)
</TABLE>
